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THE 1967 ECONOMIC REPORT
OF THE PRESIDENT
HEARINGS
BEFORE) T H E
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
N IN E T IE T H C O N G R E SS
F IR S T SESSION
F E B R U A R Y 20, 21, A N D 23, 1967
PART 4
Printed fo r the use o f the Joint Econom ic Committee
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1967
75-314
F o r sale b y th e S up erintenden t o f D o cu m e n ts , U .S . G o v e rn m e n t P rin tin g Office
W a sh in gton , D .C . 20402 - P rice 70 cents
JO IN T ECONOMIC COM M ITTEE
[Created pursuant to sec. 5(a ) of Public Law 304, 79th Cong.]'
WILLIAM PROXMIRE, Wisconsin, Chairman
WEIGHT PATMAN, Texas, Vice Chairman
SENATE
HOUSE OF REPRESENTATIVES
JOHN SPARKMAN, Alabama
J. W . FULBRIGHT, Arkansas
HERMAN E. TALMADGE, Georgia
STUART SYMINGTON, Missouri
ABRAHAM RIBICOFF, Connecticut
JACOB K. JAVITS, New York
JACK MILLER, Iowa
LEN B. JORDAN, Idaho
CHARLES H. PERCY, Illinois
RICHARD BOLLING, Missouri
HALE BOGGS, Louisiana
HENRY S. REUSS, Wisconsin
MARTHA W. GRIFFITHS, Michigan
WILLIAM S. MOORHEAD, Pennsylvania
THOMAS B. CURTIS, Missouri
W ILLIAM B. WIDNALL, New Jersey
DONALD RUMSFELD, Illinois
W . E. BROCK 3 d , Tennessee
J o h n R . S t a r k , Executive Director
J a m e s W . K n o w l e s , Director of Research
E c o n o m is t s
W il l ia m H . M oore
J o h n B . H enderson
(Bb o r g b R . I d e n
D a n ie l J . E d w a r d s
D o n a l d A. W e b s t e r (Minority)
II
CONTENTS
STATEMENTS
February 20, 1967
Reuther, Walter P., president, Industrial Union Department, AFL-CIO,
and United Automobile Workers (UAW), accompanied by Nat Wein
berg, director of special projects department, United, Automobile
Workers____________ ________________________________________________
Hagedorn* George G., vicc president and ohief economist, National Asso
ciation of Manufacturers (NAM )___________________________________
Roosa, Robert V., general partner, Brown Bros., Harriman & Co--------Kindleberger, Charles P., Department of Economics, Massachusetts
Institute of Technology______________________________________________
717
792
830
833
February 21f 1967
Wallich, Henry C., Department of Economics, Yale University________
Colm, Gerhard, chief economist, National Planning Association________
Lekachman, Robert, professor of economics, State University of New
York at Stony Brook________________________________________________
875
883
895
February 23, 1967
Auerbach, Carl A., professor of law, University of Minnesota__________
Backman, Jules, professor of economics, New York University__________
928
957
ADDITIONAL INFORMATION AND SUBMISSIONS
Reuther, Walter P.:
Article from Wall Street Journal, February 7, 1967, re gasoline price
rise_____________________________________________________________
Article from Wall Street Journal, February 8, 1967, re asphalt price
raise____________________________________________________________
Data comparing changes in income, requested by Representative
Widnall_________________________________________________________
Information relating to UAW profit sharing plan, requested by Repre
sentative Reuss_________________________________________________
Outline of provisions of bill to require hearings on administered price
increases in order to make private economic decisions more re
sponsive to public need, requested by Senator Miller____________
Excerpt from “Technology and the American Economy,” report of
the National Commission on Technology, Automation, and Eco
nomic Progress, February 1966, requested by Representative
Rumsfeld________________ ______________________________________
Excerpt from BLS publication “Labor Development Abroad,”
requested by Representative Rumsfeld___________________________
Questions and answers:
Senator Miller to Mr. Reuther________________________________
Senator Proxmire to Mr. Reuther______________________________
Representative Widnall to Mr. Reuther________________________
Prepared statement________________________________________________
in
722
723
730
732
738
743
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752
753
755
756
AD DITION AL IN FORM ATION AND SUBMISSIONS— C o n t i n u e d
Jteuther, Walter P.— Continued
Charts:
Unit labor costs in manufacturing since 1948___________________
Employee compensation lagged far behind nonlabor income_____
U.S. unemployment still high compared with other countries____
General Motors hourly rated worker and General Motors stock
holder_______________________________________________________
Ford hourly rated worker and Ford stockholder________________
Hagedorn, George C.:
Prepared statement________________________________________________
Study: Report on the Federal budget for 1968______________________
Roosa, Robert V .:
Prepared statement________________________________________________
Comment on Aschinger article submitted by Senator Symington____
Responses to questions by Representative Brock____________________
Symington, Senator Stuart:
Article: The Building of an International Money Machine, by F. E.
Aschinger________________________________________________________
Kindleberger, Charles P.:
Comment on Aschinger article submitted by Senator Symington.___
Responses to questions by Representative Brock____________________
Colm, Gerhard:
Prepared statement________________________________________________
Letter responding, to question by Senator Javits____________________
LeKachman, Robert:
Prepare statement__________________________________________________
Wallich, Henry C .:
Response to Senator Javits' question on tax rate change discretionary
power___________________________________________________________
Auerbach, Carl A.:
Prepared statement________________________________________________
Backman, Jules:
Prepared statement________________________________________________
Percy, Senator Charles H.:
Statement by Dr. Paul W. McCracken, excerpted from Joint Economic
Committee hearings, February 23, 1966---------------------------------------Proxmire, Senator William:
Letter from Seymour Harris, chairman of the Department of Eco
nomics of the University of California at San Diego-----------------------
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THE 1967 ECONOMIC REPORT OF THE PRESIDENT
MONDAY, FEBRUARY 20, 1967
,
C o n g r e ss o f t h e U n i t 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.6.
The joint committee met at 10 a.m., pursuant to recess, in room
1202, New Senate Office Building, Hon. William Proxmire (chairman
o f the joint committee) presiding.
Present: Senators Proxmire, Symington, Jordan, Miller, and Percy;
and Representatives Reuss, Moorhead, Rumsfeld, and Brock.
Also present: John R. Stark, executive director; James W. Knowles,
director o f research; and Donald A. Webster, minority economist.
Chairman P r o x m i r e . The committee will come to order.
A t this time o f the year the committee faces an extremely difficult
problem. For the period o f about a month we have had to examine
the entire range o f economic issues. W e have had many witnesses,
and the next very brief period we have nine witnesses before us, so
I am going to ask members o f the committee this morning to limit
their questioning to 5 minutes. W e can take whatever turns time
permits.
I am going to ask our witnesses to limit their statements to 20 min
utes. We hope we can cover more ground by doing this.
Our witness this morning is a very distinguished, eloquent, able
spokesman for the labor movement. W e are very proud and happy
to have Mr. Walter Reuther appear before us. Mr. Reuther has a
detailed statement, and without objection that statement will be
printed in the record as if read.
Mr. Reuther, go right ahead.
TESTIMONY OF WALTER P. REUTHER, PRESIDENT OF THE INDUS
TRIAL UNION DEPARTMENT, AFL-CIO, AND OF THE UNITED
AUTOMOBILE WORKERS (UAW); ACCOMPANIED BY NAT WEIN
BERG, DIRECTOR OF SPECIAL PROJECTS DEPARTMENT, UNITED
AUTOMOBILE WORKERS
Mr. R e u t h e r . Thank you, Mr. Chairman. You have been more
than generous.
Members o f the committee, I want first to express my very sincere
appreciation fo r the opportunity of appearing before your committee
and being given the chance to discuss the general state o f the American
economy.
I appear this morning in a dual capacity, first as the president o f
the United Automobile Workers Union, representing roughly one and
a half million members, and also as president of the Industrial Union
717
718
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1967
ECONOMIC REPORT OF THE PRESIDENT
.^Department o f the A F L -C IO , representing roughly 7 million mem
bers. W ith respect to broad economic policy questions I will be
speaking for both organizations, but with respect to more specific
collective bargaining questions I will be speaking only for the U AW .
As one American I share the view that the American economy is
freedom’s greatest material asset. I believe that how effectively we
mobilize its economic potential, how responsibly and rationally we
allocate resources to meet our private and public needs, and how equi
tably we share the increasing abundance that the tools o f science and
technology give us, are the keys to the improvement o f the quality
o f our society at home and will determine our success in meeting our
responsibilities whenever freedom is challenged in the world.
That is why I put great emphasis upon the importance o f what we
do in the American economy and how intelligently we use the new
tools o f science and technology.
I am disturbed by the fact that we are the richest Nation in the
world, yet have permitted many basic and urgent human needs to go
unmet. W e all realize that more than 30 million Americans live in
poverty in a land o f plenty, that our urban centers have become social
cesspools, scarred with decay and blight; that our educational system
is inadequate; that while we have achieved high levels o f medical com
petence, America, the richest Nation in the world, ranks 11th in the
rate o f infant mortality.
Our cities are paralyzed with congestion. W e are polluting our air
and our water, and we are destroying our living environment. I share
the view, Mr. Chairman, that we have the know-how and the resources
to solve these problems, and that what we need is the sense o f national
purpose, and the will to commit ourselves and our resources in a meas
ure equal to the dimensions o f these problems.
I believe that what we need to do is to work out a list o f priorities in
which we put first things first, and then allocate our resources to the
practical implementation o f those priorities.
I would put very high on the list o f those priorities the achievement
of the purposes o f the Employment Act o f 1946. For 20 years we
have failed to achieve the purposes o f that act. W e have averaged
more than 5 percent unemployment throughout those 20 years. We
have had a higher rate o f unemployment than any democratic indus
trial nation in the world.
Now I am encouraged by the fact that under the Kennedy and
Johnson administrations we have made meaningful progress in re
ducing the levels o f unemployment. W e are now down to 3.9 percent.
But that is not good enough.
In 1962, when Mr. Heller was the Chairman o f the Council o f
Economic Advisers, the Council came out with an interim unemploy
ment goal o f 4 percent. W e raised at that time a warning, saying we
wanted to be certain that this 4-percent interim goal did not become
a definition for full employment. And we believe that our fears were
well founded, because in Mr. Ackley’s most recent report—and this
deeply disturbed us—he now takes the 3.9-percent unemployment rate,
and describes it as “ substantially full employment.” And he pro
jects it into 1967, saying that it will mean substantially full employment.
We reject this concept vigorously, because it will continue to deny a
great many Americans the opportunity for meaningful employment
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
719
and it will place a disproportionate burden o f the tragic cost of unem
ployment upon the youth o f America and on minority groups.
We believe that we must move forward with courage and with deep
national commitment to provide every American able and willing to
work a socially meaningful and rewarding job. Until that is possible,
until every American has that opportunity, this goal ought to be one
o f the top priority items on our agenda.
I would like to urge Congress to give serious consideration to the
unanimous recommendation o f the Automation Commission, which
I had the privilege o f serving on. That commission, composed of in
dustry representatives, labor, and people from the academic com
munity, after a year o f intensive study, recommended that the Fed
eral Government be the employer o f last resort, if market forces fail
to create employment opportunity for all who are able and willing to
work.
W e pointed out that there were more than 5 million potential jobs
available in public service employment, if we were to do the things
that need doing in American society.
As we come together this morning, I am deeply concerned about
what we believe to be some very serious soft spots developing in the
American economy. W e all know that the housing industry has been
in a depression. There are serious layoffs in the automotive industry.
Capital expenditures are tapering off. The decline in durable goods
orders is very significant. And there is an excessive inventory
buildup. I think it has increased approximately $16 billion during
the last quarter, and in the face of these uncertainties, it is our judg
ment, Mr. Chairman, that a tax increase at this time would not be
justified.
W e have no assurance that a tax increase, in the face of these eco
nomic developments, will yield greater revenue. In the 1958-59 fiscal
period, Mr. George Humphrey was so obsessed with balancing the
budget that he unbalanced both the economy and the budget and we
wound up in that period with a $12.4 billion deficit, the largest peace
time deficit in the history of America, with unemployment as high as
7.5 percent and averaging 6.2 percent for the fiscal years.
And so we have no assurance that a tax increase will yield greater
revenue, if it compounds negative forces that may reduce the overall
level o f economic activity.
We would recommend instead that the Congress give the President
discretionary authority on the tax front, and that the President then
use that authority based upon the economic developments as they
evolve. I f the economy grows stronger and these weak spots are
overcome, then one course o f action may be justified. If, on the other
hand, you have a compounding o f tnese weaknesses, then another
course of action would be suggested.
We have not yet found a satisfactory answer to the basic question:
How does a free society go about achieving the purposes o f the Em
ployment Act o f 1946, achieving maximum employment, maximum
production, and maximum purchasing power within the framework of
a stable price structure?
In Europe they have done a better job on the employment front, at
the cost o f a great degree o f price instability. We have had the
greatest stability in our price structure, but we have paid a tragic
price in intolerable levels of unemployment.
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THE
1967
ECONOMIC REPORT OF THE PRESIDENT
We believe that in broad outline the philosophy behind the wageprice guidelines is sound. The idea is that if the overall level o f in
crease in productivity is x percent, the worker can share proportion
ately in that general overall increase in productivity. In those in
dustries where the tools o f production are not as efficient, such wage
increases may require price increases. These price increases would be
offset by price decreases in industries where the increase in produc
tivity is abnormally high. That is the theory o f it.
It is a sound theory, but it breaks down in practice, not on the wage
front, but on the pricing policy front, because giant corporations
which are immune to the forces o f the marketplace, which really have
an administered price structure, have been keeping a disproportionate
share o f the increase in productivity and both wage earners and con
sumers have been shortchanged.
This is where it has broken down. Now if you take the automotive
industry, with which I am very familiar, we are using the fantastic
tools ol automation and the new technology. Labor productivity has
f one up very fast, much faster than the average in the whole economy,
►t what has happened to that tremendous increase in productivity ?
u
The workers have gotten some of that increase, but they have not
gotten their equity, and the consumers have not gotten their equity.
We believe that what we need to do to achieve the dynamic qualities
of expansion and growth and full employment is to establish equity
among investors, workers, and consumers. When any group is short
changed, you begin to feed the forces of imbalance into the economy.
I f you look at the Big Three as an example, in 1965, which was
our peak production year, the B ig Three together had an earning rate
after taxes o f 24.1 percent on net worth or almost double the earning
rate for industry generally. General Motors made 28-percent re
turn on its net investment after taxes. Ford made 17.5 percent. Chrys
ler made 20.8 percent.
We have advocated, and continue to advocate, that corporations
enjoying an abnormally high increase in productivity, because o f the
tools of science and technology, share their gains with American con
sumers by meaningful price reductions. W e advocated a $100-per-carprice reduction in the auto industry. This would have made a tre
mendous contribution toward the stabilization of our price structure.
It would have helped to offset the upward price pressures in the service
industries, where technology has not improved productivity as much.
And we pointed out that the General Motors Corp. could have cut
the price of every U.S.-made car in 1965 by $100, and still would have
made a profit o f $3.6 billion before taxes, or $1.9 billion after taxes,
after the $100 price reduction.
General Motors profits in 1966 have come down slightly, but they
were still the second highest profits in the history of the corporation,
and they yielded a return on investment after taxes of 21.8 percent.
We will be sitting at the bargaining table, Mr. Chairman, in a few
months. In 1967, I, along with my colleagues in the leadership of
the U AW , will be representing at the bargaining table roughly 850,000
to 900,000 wage earners and their families, and we say now, not for
public relations purposes, but because we believe American consumers
have been shortchanged, we now urge the automobile industry to cut
the price o f its cars. W e have written the Chairman of the Council
of Economic Advisers urging him to spend more o f his time trying
TH E
1967
ECONOMIC REPORT OP TH E PRESIDENT
721
to get the industry to cut prices, and we are prepared to bargain in
1967 within the economic framework o f what results from a meaning
ful price reduction in the prices of cars and trucks.
I think if we are going to try to make sense about how we go about
achieving a more stable price structure, we need to get away from
propaganda and look at the basic economic facts. We are in trouble
not because wage earners are exerting tremendous pressure on the
E rice structure. We are in trouble because large corporations have
een getting a disproportionate share of the increase in productivity.
This chart, which we think is a very significant chart, indicates
that starting at the peak of the last business cycle and projecting
unit labor cost for the period o f this cycle—the 72 months o f the
present business cycle—you find, as this heavy line indicates, that
unit labor cost, excepting at the very end, has been lower. It was
lower in 1961 and 1962 and 1963 and 1964 and 1965 and in the largest
part o f 1966 than it was in 1960 when this cycle began. So the pres
sure on prices did not derive from wage increases that exceeded the
increase in productivity, because the unit labor cost was actually going
down in that period. And we did not break above the line until
workers began the fight to catch up with the increase in the cost of
living. Now this is the Council o f Economic Advisers’ chart.
Unit Labor Costs in Manufacturing Since 1948
PREVIOUS PEAK x 100-1/
12
24
36
48
M O N T H S FRO M C Y C U C A l T R O U G H
P -C Y C LIC A L PEAK : JU L Y WSJ, JU L Y MS7, AND HAY WM>
^PREVIOUS PEAKS ARE NOVEMBER » 4 » . JU L Y 1953, J U L Y W » , AND MAY ISM .
^ C Y C LIC A L TROUGHS ARE OCTOBER 1949, AUGUST 1»M , APRIL 1«S», AND FEBRUARY tM f.
W T E -P E R IO D S COVERED ARE NOVEMBER 1941-AUGUST WS4, JU L Y 1953-APRIL 1931, JU LY 19S7-FEBRUARY
m i . AND MAY IM t-O EC EM B ER IM t (LATEST DATA AVAILAB LE).
SOURCES: DEPARTMENT O F COMMERCE AND BOARD OP GOVERNORS O F T H E FEO ER A L RESERVE SYSTEM.
722
THE
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ECONOMIC REPORT OF THE PRESIDENT
Here are the real culprits in this situation. This is the story from
the Wall Street Journal dated February 7, 1967, and the headline
says “ Gasoline Prices Eise Unseasonably” and it talks about “ Stand
ard of Indiana” boosting prices. On February 8, another story in
the Wall Street Journal, “ Standard o f Indiana Eaises Asphalt
Prices.” And then in the Wall Street Journal on February 13 is a
full page ad by Standard o f Indiana, and it says “ 1966 earnings
break all records at Standard Oil Co. o f Indiana. Profits rise 17
percent 8th straight year.”
(Items referred to are reprinted herein:)
[From the Wall Street Journal, Feb. 7, 1967]
G a s o l in e P r ic e s R is e U n s e a s o n a b l y a s D e m a n d G r o w s — I n d ia n a S t a n d a r d
U n it L if t s D e a l e r a n d J o bber Q u o t e s , F o l l o w in g O t h e r P r o d u c e r s
GENERAL RETAIL BOOST SOUGHT
(A Wall Street Journal News Roundup)
Prices of gasoline are increasing unseasonally in the wake of rising demand.
In Chicago, American Oil Co., a subsidiary of Standard Oil Co. (Indiana),
announced it is increasing gasoline prices to dealers by 0.6 cent a gallon and to
jobbers by *4 cent a gallon, effective today. American said it also is suggesting
to its dealers that pump prices in the states affected be increased by one cent
a gallon from previous suggested retail price levels.
The action by American in boosting tank wagon prices to both dealers and
jobbers follows similar moves by several other companies, including Phillips
Petroleum Co., Sunray DX Oil Co. and Continental Oil Co.
“There’s a lot of skirmishing among the major companies who are trying to
put into effect a one-cent increase in the retail price of gasoline,” said one
Midwestern marketer of motor fuel, “but the increases can’t be termed general
until most of the major companies succeed in getting dealers to go along.”
Midcontinent petroleum refiners also are apparently readying a general boost
in the wholesale prices of gasoline processed for shipment to the North by pipe
line. Some marketers reported the refinery price for 92-octane (regular grade)
branded gasoline is fluctuating at least % cent above the posted quote of
12% cents a gallon. Some suppliers are said to be advancing wholesale prices
by as much as % cent a gallon. A year ago, the refinery quote for gasoline
processed in the Midcontinent area was generaUy 12 cents a gallon.
NORMAL PATTERN IS DOWN
Gasoline prices at this time of the year normally go down instead of up.
Wintry weather slows driving, and this leads to a buildup of inventories of
motor fuel.
According to the American Petroleum Institute, stocks advanced seasonally
some three million barrels in the week ended Jan. 27 and now are about 10
million barrels above year-ago inventories. But demand has been climbing.
One industry source puts consumption of gasoline at more than 4.6 million
barrels daily, or more than 4.5% above a year ago.
Oil companies also insist that gasoline prices both at tank wagon and whole
sale levels are below those of the late 1950s.
‘‘Price increases at this time will bring the price of gasoline—which has lagged
behind rising prices for other commodities for some time—a little more into line
with the economy as a whole,” an American spokesman said. “In addition, they
will reflect recent wage increases in the petroleum industry.”
In view of the increase in dealer and jobber operating costs, which have risen
significantly in the past year, he added, the suggested increase in pump prices
will enable dealers and jobbers to maintain adequate manpower and station
operating hours and provide the service the public expects and should receive.
VARYING BY AREA
In Michigan, tank-wagon price adjustments will vary by area, although the
Detroit tank-wagon price will be increased by the 0.6 cent figure. In Alabama,
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
723
the established dealer tank-wagon price will be 17.5 cents a gallon, statewide; in
Mississippi, established dealer tank-wagon price will be 17.4 cents a gallon,
statewide; and in Georgia, established dealer tank-wagon prices will be 17.3
cents a gallon, statewide.
Consumer tank-wagon prices will be increased or adjusted by the same amounts
as the dealer prices.
Temporary dealer tank-wagon prices will be removed in all of the above men
tioned states except Florida, where current discounts will remain in effect.
“While we believe the increase is justified because of increasing costs, it is rec
ognized that the duration of the more realistic price level will be contingent upon
the action taken by the industry as a whole as well as the overall economic
condition of the petroleum industry,” the American Oil spokesman said. Fur
ther, he said, “if this increase doesn’t hold, we’ll have no choice except to revert
to previous price levels.”
[From the Wall Street Journal, Feb. 8, 1967]
I n d ia n a S t a n d a r d U n it R
a is e s
A
sph alt
P r ic e s
AM ERICAN OIL S A Y S R ISE REFLECTS H IG H ER COSTS FROM CUTBACKS OF CRUDE OIL
IMPORT QUOTAS
(By a Wall Street Journal Staff Reporter)
American Oil Co. increased the price of paving asphalt at four
East Coast shipping points to reflect “increased costs resulting from government
cutbacks of crude oil import quotas,” W. C. Marquis, marketing manager said.
American is a subsidiary of Standard Oil Co. (Indiana).
The increase involves a price rise of about 25 cents a ton and an elimination of
discounts which have been running between $1.50 to $2 a ton, he said.
The new prices become effective today and apply to sales at refineries in Balti
more and Savannah and terminals in Norfolk and Wilmington, N.C.
A price revision, Mr. Marquis said is needed “to justify using reduced quotas
for the importation of heavier asphalt crudes compared with importing lighter
cudes for the manufacture of gasolines, jet fuels and similar higher value light
products.”
C h i c a g o .—
[From the Wall Street Journal, Feb. 13, 19671
1966
E a r n in g s B
reak
A ll R
ecords a t
S t a n d a r d O i l C o. ( I n d ia n a )
PROFITS R ISE 1 7 PERCENT; 8 T H STRAIGHT YEAR OF IN C R E A SE ; DIVIDEND RAISED
Consolidated net earnings for the year reached $225,900,000. This was up
17% from the $219,800,000 earned in 1965.
Per share earnings increased to $3.62 per share, based on 70,646,823 shares
outstanding at year-end. This compares with $3.10 per share on 70,794,742
shares at the end of 1965.
Total revenues rose to $3,351,000,000 compared with $3,063,000,000 a year
earlier.
Per share dividends were again increased. They totaled $1.70 compared with
$1.55 the preceding year.
PRODUCTION AND SALES CONTINUE TO CLIMB
John E. Swearingen, Chairman and Chief Executive Officer, attributed the
record results to new peaks in the production of crude oil and natural gas
liquids, natural gas, and in refined product sales, and sales of chemicals.
Production of crude oil and natural gas liquids averaged 491,000 barrels a
day, up 8%. Refined product sales averaged 895,000 barrels a day, an increase
of 7%. Sales of gasoline rose 9% at generally steady prices for the year.
Refinery runs, at 829,000 barrels a day, were up 7%. Natural gas sales increased
8% to average 2.4 billion cubic feet a day. Chemical sales rose 23% to $158,000,000.
OUTLOOK BRIGHT FOR 1 9 6 7
Mr. Swearingen looked ahead to a further earnings increase in 1967, despite
a rise in wages and suspension of the investment tax credit.
Our annual report will be available in March 1967. If you would like a copy,
please write.
724
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Stan dard O h * C o m p a n y
( I n d ia n a )
910 S. Michigan Ave.,
Chicago, Illinois 60680
Mr. R e u t h e r . This company since 1960 has increased its dividends
16 percent per year on the average, and yet they turn around and raise
the price o f gasoline and other petroleum products to the American
consumer. W hy? Not because unit costs have gone up, but because
they want to inflate their profits so that they can continue to increase
dividends 16 percent a year.
Now you measure a 16 percent yearly dividend increase against
the 3.2 wage formula, and you begin to understand where the basic
inequity comes in. I should like to suggest respectfully that this is
the front on which the Council Chairman ought to be expending his
time and his energy, rather than trying to put the burden o f higher
prices upon the backs o f the American wage earners.
When you look at what has been happening to the relative com
pensation o f various economic groups in America, you can see that
the wage earner has been on the short end o f it, and here again these
are from the Department o f Commerce records. Total employee com
pensation—wages, fringe benefits, social security payments, salaries,
everything—went up in this period 45.1 percent. Corporate profits
before taxes went up 59.8 percent. Corporate profits after taxes went
up 75.2 percent. Dividends went up 56.3 percent. And personal in
terest income went up 81.5 percent. So the wage earner has gotten the
short end o f the distribution o f the national income during this period.
(The following chart was later supplied by the witness:)
EMPLOYEE COMPENSATION LAGGED
FAR BEHIND NONLABOR INCOME
( PERCENT INCREASES. SECOND QUARTER I96010 SEUTO OUWIB) 1966]
''
■
■
‘ i * d.''il'ii111 'I i
COMPENSATION
c o r p o r a t e pr o fit s
BEFORE TAXIS
m om s
AFYtR TAXIS
corporate
DATA', dept . Of COMMIRC*
Chairman P r o x m i r e . I f I could interrupt just for a minute, Mr.
Keuther, you have had almost 20 minutes and I would appreciate it if
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
725
you could summarize in a minute or so and then we will start with our
5-minute period o f questions.
Mr. R e u t h e r . Very good. I would just like to say that in a free
society you cannot achieve harmonious labor-management relations
on the same basis that you can in a totalitarian society. There you can
get it in the absence o f justice, but in a free society it can only rest upon
the foundation o f economic and social justice. We believe that what
we need in America is not a decimal point guidepost system, but a na
tional income policy through which we can place the burden of
stability upon all forms o f income, and not just upon that one sector,
that o f the American wage earners’ income.
W e in the U A W have also suggested the creation o f a public pricewage review board. W e believe that this represents a rational ap
proach to a middle ground. I f we rely upon the irresponsible forces
o f the marketplace, and Standard Oil o f Indiana and other corpora
tions behave as irresponsibly as they have, that puts us in jeopardy.
On the other hand, we don’t think anybody in Washington has the
wisdom to be able to make all of these economic decisions. We have
therefore proposed the creation o f a public review board in which only
the major corporations in the price-administered industries, which de
termine the general price trends, would be obligated to defend the
economics behind their contemplated price adjustments.
And if their demands were such that they would necessitate a price
increase, a labor union would be obligated to defend the economics of
its demands before the same public review board.
W e believe that this would bring to bear upon the private decision
making process, both in the pricing area and in the collective-bargain
ing area, the leverage o f enlightened public opinion, and make private
decisions more publicly responsible.
One other point; I will take a minute and then I will conclude. I
have sat at bargaining tables now, Mr. Chairman, for some 32 years.
There are many things on which I cannot speak with authority, but I
do know something about the collective-bargaining process. And what
is the basic problem ? It has bothered me for a long time.
I believe when I sit at the bargaining table representing U A W mem
bers that I obviously have a responsibility to them. And the man
agement people who face me across the bargaining table have a respon
sibility to the stockholders. But I believe that together we share a
joint responsibility which transcends our separate responsibilities, and
that joint responsibility is to all o f the people o f this Nation.
Now the basic problem is that too often economic decisions at the
bargaining table are based upon economic power and not economic
facts, because we bargain in the absence o f the facts. If, when I sit
down next July with the General Motors Corp., and they expect us to
sign a 3-year contract—and we don’t know what the term o f the con
tract is going to be—we are not talking about 1965 or 1966. W e are
talking about 1968,1969, and 1970. How can we rationally determine,
3 years in advance o f the fact, what the relative equity o f a worker
and a stockholder and a consumer is? W e are only guessing. And
since we are guessing, what happens is that the economic facts do not
determine the decisions, but rather you get a play o f economic power.
726
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
I believe that what we need to do at the collective bargaining table
is to bring in some fundamental new concepts. W e ought to work it
out so that a wage earner would get his basic wage as the first part
o f his equity. W e would say to that wage earner, “ That is all we
can give you now” and that basic wage ought to reflect along with other
relevant factors, the general level o f increase in productivity, because
that we can measure in advance.
But also say to him:
If we have a good year, and if the economic pie that our joint effort makes
possible is large, then you will get a second, supplementary increment of your
equity based upon your right to share in the profits of the company.
Now this is not a revolutionary idea that we dreamed up. This is
exactly how GM has done it for their executives all these years. They
get their basic salary. That is the first increment o f their equity.
And at the end o f the year, when the profit pie is baked, they get a
very healthy slice o f that profit pie in bonuses, and in most cases
bonuses for the top executives are bigger than their salaries. And so
what we say is that that makes a lot o f sense for corporation executives
because they get then their full equity after the facts and not before the
facts.
The same ought to apply to wage earners. It applies to stockhold
ers. They get their basic dividend and they get a special dividend
based upon the size o f the pie. W e believe that it is this kind o f idea
that we have got to begin to introduce into the collective bargaining
process to make it more rational, so that these decisions can be more
publicly responsible because they reflect economic facts after the facts
become available and are not essentially the result o f the play of
economic power.
Chairman P r o x m i r e . Thank you very, very much, Mr. Eeuther, for
a forceful, vigorous, and extremely interesting statement. I would
like to ask you this. Our overall program calls, as I understand it,
for no tax increase, although the Congress might see fit in your view
to give the President some discretion in this area. You didn’t mention
any reduction in spending, although presumably you have not advo
cated that, as I understand it, in your statement.
You favor an easier money policy than we have had in the past,
and you would favor as far as wages are concerned, as I see it, in
creased pay for productivity plus a cost-of-living escalator. In other
words, an income policy. Ana in addition to this, you would compen
sate workers in those areas where profits are high with some profit
sharing.
Now in order to hold down inflation you would rely primarily upon
wage boards who work in the administered price industries. My
reaction to this is that I am still very much concerned about the pos
sibility o f inflation for these reasons: (1) The increase in prices has
not primarily been in the administered price industries in the last
3 or 4 years. Steel prices didn’t go up very much. Automobile prices
went up some but certainly not as much as many other prices did.
The prices in these other nonadministered areas would be subject to
the kind o f fiscal and monetary inflation we might suffer under these
circumstances. I would feel we might get an unbalanced situation
THE
1967
ECONOMIC REPORT OF TH E PRESIDENT
727
without the kind o f control o f inflation that we would need i f we are
going to prevent a maldistribution of income.
Mr. R e u t h e r . To begin with, I think we need to treat the infla
tionary pressures for what they are. They are not classical infla
tionary pressures that would grow out o f an excessive demand over
supply capability. W e are utilizing our productive capabilities some
where around 88 percent, so that there is an underutilization situation.
W e have a great deal ox unemployment. And we do not, therefore,
have the classical pressures that normally create inflation when the
demand exceeds supply.
What we have got is a selective kind o f inflationary pressures and
they have to be dealt with as such. Now if you are to be able to offset
the pressures o f wage and price increases in the service industries,
for example, where productivity may not have gone up as much as in
the automotive industry, if you are to be able to offset that so you
can maintain a stable price situation, then it is not enough to say to
the automobile industry “ Well, you have not been so irresponsible,
you haven’t raised prices.”
The auto industry has to cut prices. The Standard Oil Co. has to
cut prices. I f the industries where abnormally high productivity
increases are possible just maintain a stable price situation, and do
not cut their prices, then you are going to have inflationary pressures.
But if they offset the pressures in other sectors o f the economy by
meaningful price reductions, then I believe you can have a stable price
situation.
This is where the wage-price review board comes in. In a free
society, what are the leverages that influence the private decision
making processes? And I want to keep it as broad and as free of
Government control as possible.
Chairman P r o x m i r e . Would you go as far under these circum
stances as providing a tax penalty for price increases, for example,
and some kind o f a tax incentive for a price cut? Tnat kind o f a
proposal has been made in the Senate, suggested by the staff o f the
Antitrust and Monopoly Subcommittee o f the Judiciary Committee.
You see, the thing is we have never had a situation, to my knowledge,
where we actually directed an industry to cut their prices. We have
had a policy— theoretically we have had it, we haven’t really tried it—
we have attempted to keep them from raising their prices, but to re
quire them to reduce their prices is something else.
Mr. R e u t h e r . I believe we have got to develop a lot of new tools,
if we are going to find the answers to these problems. This is why we
came up with a price-wage review board.
Just take General Motors. General Motors, I think, today perhaps
is more sensitive to public reaction than they have ever been. They
had some very bad experiences in the last year in this town. And I
would think that if the General Motors Corp. knew that ultimately
it would face the day when it would have to make an accounting to the
American people on economic justification o f its price policy, GM
would behave much more responsibly on the price front than if it
didn’t have to make that public accounting; and what is true o f in
dustry is true o f labor.
728
THE 196 7 ECONOMIC REPORT OF THE PRESIDENT
I don’t ask the General Motors Corp. to be obligated to do anything
in terms of their public accounting that I am not willing to do as the
President of the UAW, because I think we both must be publicly re
sponsible and our decisions must first reflect the needs of the American
people.
This idea of a tax penalty, I think, is worth exploring, because when
an industry operating in terms of market forces puts the whole eco
nomy in jeopardy, the American people have a right to protect them
selves against that kind of irresponsible action by any legal procedure
that they choose, and the tax penalty certainly ought to be explored.
Chairman Proxmire. My time is up.
I might say for the members that just came in, we are following a
5-minute rule this morning. We are going to have another witness
coming up.
Mr. Widnall?
Representative W id n a ll. Thank you, Mr. Chairman.
Thank you, Mr. Reuther, for coming before us again today and giv
ing us some very substantial testimony on a subject that is of great
interest to all of us.
In your statement you say:
Nevertheless, as a Nation we cannot escape the fact that the United States still
has the highest rate of unemployment of any democratic industrialized nation in
the world.
We had some testimony last week that indicated that other nations
compile their unemployment figures on a different basis than we do.
Has this been taken into account by you ?
Mr. Reuther. Yes. I serve, Mr. Charman, as a member of the
President’s Labor-Management Advisory Committee. This was set up
originally under President Kennedy, and Mr. Goldberg was the Secre
tary of Labor, and when we were wrestling with these comparative
figures of the rate of unemployment in the United States and the
European countries and Japan, the question came u p : Are they using
the same measuring sticks; are we talking about the same thing % And
a study was made, and the result was that when unemployment was
measured by our definition in some of these other countries, the dis
crepancy was even greater.
Here is a chart based upon the most reliable Government figures
that we can get, the BLS, and the comparable agency in the Dominion
of Canada, which indicates unemployment here in the United States
in 1965, and you can see its relationship to Canada, Italy, France,
Great Britain, Sweden, Japan, and West Germany. So that there
is no question about it that by any definition of what constitutes un
employment, the United States has had a level of unemployment much
higher than any other democratic industrial nation in the free world.
(Chart referred to follows:)
UNEMPLOYMENT
RATE
50 r
.%
4.0%
3.9
r ^
1 ;jb
3.9
3.0%
2J8
2. %
0
t£
1 %
.0
im§
1965
1966
UNITED STATES
_£/
1965
CA NADA
1965
1965
ITALY
FR A N C E
GREAT
BRITAIN
1m
1 onths.
Note; Data for countries except. U.S. and Canada are preliminary
and are adjusted to U-S. definitions of unemployment.
DT;
AA
19 67 ECONOMIC REPORT O THE PRESIDENT
F
7 5 -314— 67— pt. 4-
U.S. UNEMPLOYMENT STILL HIGH
COMPARED WITH OTHER COUNTRIES
Bureau of Labor Statistics except Canada, Dominion Buieau of Statistics
•!
<
to
zo
730
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
Representative W id n a ll. The question was raised in my mind by
Professor Hansen, I believe, who was testifying before us last week.
He said that in Great Britain a 2-percent unemployment figure would
be the same as a 3- to 4-percent figure here in the United States. This
certainly is at variance with what you have just said.
Mr. R euther. But in this chart, the adjustment that he was refer
ring to is already reflected.
Representative W id n a ll. Now, you had another chart which re
ferred to the imbalance between the rise in wage and fringe benefits as
against price increases and other increases within the economy. Do
you have any figures for the years 1955 to 1960 ? It is my recollection
that at that time the wage and fringe benefits were increasing by a
greater percentage than the other components.
Do you have any figures on that ?
Mr. R euther. I don’t have them at hand, but this chart was chosen
for this period, the second quarter of I960 to the second quarter of
1966 because we thought we were starting at a point that was com
parable to the point where we were ending up, from the peak of one
cycle to the peak of another cycle. We think, therefore, that this is
a valid comparison of the movement of the compensation of these
groups.
Representative W id n a ll. Could you furnish for the record the
prior 5 years?
Mr. R euther. Yes; we would be happy to provide the committee
with any specific information that we may not have with us today.
(Information requested by Representative Widnall and later sup
plied by Mr. Reuther, appears below:)
In the course of my testimony, Congressman Widnall asked for data com
paring changes in various forms of income from 1955 to 1960. The figures are
presented below for whatever they may be worth; however, I do not believe
they are worth very much. The period is a wholly inappropriate one for com
parison because 1955 was a year of extraordinarily high profits and the second
half of 1960 was a period of recession. Total corporate profits before taxes in
1955 had jumped 26.9 percent over the preceding year to a new all-time record
and were 14.0 percent higher than the up-to-then record level of 1950 when
profits were ballooned by the speculative, inflationary boom arising out of the
Korean War. In consequence, use of 1955 as a base period for comparison of
the movement of profits with that of wages obviously distorts the results—
especially when the other end of the comparison is a year that was half recession.
It would therefore be misleading to present the figures requested without first
putting them into perspective. They follow:
Percent
change
Total employee compensation___________________________________________ 31.0
Corporate profits before taxes---------------------------------------------------------------- 2.3
Corporate profits after taxes__________________________________________ 1.1
Dividends _____________________________________________________________ 27. 6
In tere st_______________________________________________________________ 64.8
Representative W idnall. H ow would you evaluate the contribution
of public training programs toward reducing unemployment ?
Mr. R euther. I am very much in support of public training pro
grams that are directed toward improving skills and upgrading work
ers, so that they cannot only qualify for a higher paying job, but can
make a greater economic contribution to the overall community.
I do believe, however, that training programs in themselves will
not create more employment. It will only determine who is unem
ployed and who is employed.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
731
I think the history of the period since 1960 indicates that the ex
pansion of aggregate demand, accompanied by job training, is the
most effective means of providing work for the unemployed.
Representative W idn all. Would you look with favor on a tax credit
for business investment in additional worker training ?
Mr. Reuther. No. First of all, American industry throughout its
history has taken on the task of training people on the job to meet
their own job requirements, and they do a very effective job of that.
I believe that industry does not need tax relief to carry on that nor
mal function and responsibility. I would favor the approach that the
.British have made.
The British have established what they call an Industrial Training
Act. Every employer is obligated to make a small tax contribution to
the funds that finance that training program, and then there are very
high standards of training performance worked out, and if an em
ployer meets those high standards, he gets his taxpayment as a rebate.
H i an employer is not making a contribution to training or doing a
mediocre job, then he doesn’t get his rebate. I think that approach
would give you the highest possible standards of training. Those
standards are not just giving a worker a limited skill doing a specific,
limited job for a single employer, but trying to elevate the broader
skills and competence of that worker so that he has greater flexibility,
greater mobility in the total work force, and so that he is a more useful
economic citizen in terms of the overall economic needs of the economy.
This is, I think, a much sounder approach than just giving a tax
credit to an employer without standards, without any knowledge of
what kind of a job he is doing.
I can tell you from firsthand experience that we have a relationship
with employers who are doing really a first-class training job, and we
have other employers who couldn’t care less about training workers,
and I don’t want to put them all in the same boat. I think the British
approach says to an employer, “ I f you do a creditable job, if you meet
these high standards, you get your tax rebated,” and somebody else,
who is doing a mediocre job, pays for it.
Representative W id n all. Thank you, Mr. Reuther. My time is up.
Chairman Proxmire. Congressman Reuss?
Representative Reuss. Thank you, Mr. Chairman.
Mr. Reuther, you recently resigned from the executive board o f
the AFL-CIO. Do your economic views as presented here this
morning differ in any particular from those of tne A F L -C IO ?
Mr. Keuther. I am really not in a position to give you a definitive
answer. I think in general, certainly with respect to the question of
putting emphasis upon the need to continue to move forward in re
ducing the levels of unemployment and these kinds of broad economic
questions, there is no fundamental difference in the American labor
movement.
The difference that I have with the A F L-C IO is in a different area.
I happen to share the view that the labor movement cannot act as
a narrow pressure group, that it has to take on broader social respon
sibilities in terms of the whole community, and it is in this broad area
that I think the American labor movement is failing to meet its re
sponsibilities. But this is neither the time nor the place to discuss
that.
732
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
Representative Reuss. In your discussion of income policy, you
indicated that you thought labor should get not only the productivity
increase trend adjustment, but some sort of profit sharing. In that
event, what happens to the consumer in terms of his price ?
Mr. R euther. In 1958 the U AW made a serious collective-bargaining proposal to General Motors and the other auto corporations for
profit sharing. We proposed in that document that the General Mo
tors Corp., after it had met all of its fixed operating costs, its payroll,
its taxes, et cetera, and had paid its investors a certain fixed amount,
which would have been a very liberal amount in terms of their basic
dividend, would then share the excess profits beyond that basic divi
dend with the stockholders through a special dividend, with the
workers through shares in the profits, either in stock or a combination
of stock and cash payments, and, through a rebate, with the Ameri
can consumer.
Representative Reuss. On a one-third, one-third, one-third basis?
Mr. Reuther. I don’t recall the exact details, but at the breaking
point it was on a one-third basis. I don’t recall, specifically, the exact
breaking point where we would draw the line of demarcation, but we
can get that information for you.
Representative Reuss. I would appreciate it if you could.
Mr. R euther. We will get that.
(The information referred to was subsequently furnished by the
witness and follows:)
The profit sharing plan proposed to the major automotive corporations by the
UAW in 1958 was, in part, an adaptation of the bonus plans provided by those
corporations for their executives. The Ford Motor Company, for example, pro
vided (and still provides) that 6 percent of all profits before taxes in excess
of an amount equivalent to 10 percent on net capital would be available for
payment of bonuses to executives. (The General Motors bonus formula was
calculated on an after-tax basis but yielded essentially the same results.)
The UAW proposal, similarly, provided that a basic 10 percent of net capital
must be earned for stockholders before others would share in the profits. Profits
in excess of 10 percent on net capital were to be shared three ways. Half of
that excess was to be retained by the corporation for the benefit of its stock
holders and managers; it would be available for additional dividends, execu
tives’ bonuses, and reinvestment in any proportions decided upon by the corpo
ration. One-fourth would go to wage and salary workers employed by the
corporation (excluding salaried personnel covered by the executives* bonus
plan) to be used for wage increases and fringe benefits. UAW members were
to decide by democratic vote on the allocation of their share of the profits as
among wage increases and various types of fringe benefits. The remaining
fourth was to go to consumers who had bought the corporation’s products dur
ing the year in the form of a rebate on the prices they had paid. (The first
Henry Ford had once paid profit sharing rebates to buyers of Ford cars.)
The share of the corporation in the excess of profits over 10 percent on net
capital was fixed at 50 percent, as compared to 25 percent for workers and con
sumers, respectively, in recognition of the fact that amounts paid out in divi
dends or reinvested (but not the amount paid in executives’ bonuses) would be
subject to the corporate profits tax which was then 52 percent. Thus, the end
result would have been approximately an equal three-way sharing among stock
holders, workers and consumers.
Eepresentative Reuss. Is that your proposal today? This was true
in 1958. Is that what you mean by profit sharing today ?
Mr. R euther. No. I raised the profit-sharing concept in this testi
mony this morning not as it relates to that specific proposal that we
made in 1958. I raise it with respect to a broader consideration.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
733
I am disturbed about the collective bargaining process. I think it
has to be a responsible and rational process, but I don’t see how it can
be responsible and rational except as it works within the framework
of the known facts, and when you are making a contract 3 years in
advance of the fact, how can anyone know? All the wisdom o f a
thousand Solomons can’t tell me or the president of the General
Motors Corp. what the equity of a GM worker will be in 1970 when
we are sitting together in 1967.
The genius of America is that we are always looking and searching
for new ideas and new concepts, new tools, to solve new problems.
You can’t solve tomorrow’s problems with yesterday’s tools and yester
day’s concepts. And so with the profit-sharing idea. Historically it
was opposed by the labor movement, because of a narrow class struggle
concept. You know, the employers over here, and the workers over
here. I think that this is all a part of ancient history.
I think that the basic interests of workers and employers and the
public are so interwoven that the only answers are total answers. The
problem is to find these common answers. There are no isolated an
swers in little pigeonholes.
We believe that the profit-sharing concept brings into the bargain
ing process a means to give the worker equity. Just look at these
charts. You can understand what the problem is.
This is the chart of the relative incomes of a General Motors hourly
rated worker as compared to a GM stockholder, starting in 1947, pro
jected through December 1955. The average GM worker, if he
worked 2,000 hours, earned roughly $3,000 in 1947, if he worked every
year without layoffs—and he didn’t because there were so many lay
offs. We assumed a stockholder who owned sufficient stock to have
received in dividends from General Motors in 1947 an amount equal to
the worker’s wage. What happened? Well, the worker moved up,
and he got a total in that period of $110,000 by working 2,000 hours
every year. But the stockholder who started out with a comparable
income got $623,000, a 6-to-l ratio.
(Chart referred to above follows:)
JANUARY 2,1947-DECEMBER 31,1966
ANNUAL WAGES AMD ANNUAL DIVIDENDS
T O T A L E A R N IN G S O F WORKER
COMPARED WITH DIVIDENDS PLUS
CAPITAL GAIN OF STOCKHOLDER
(ASSUMING BOTH WERE EQUAL IN I9 H 7 *)
*32,000*
-*600,000
28.000
2 .O O
HO
-500,000
20,000
*3**,O O
0
£ A t*ifA L
& A t*f
400.000
*623.000
16.000•
TOTAL
-300,000
100
20
-mm
8,000
100.000
HO
.O O
i9H7 49
*!50 *...
■ ■
'
52
5
^
56
58
60
* STOCKHOLDER IS A SSU M F Q TO HAVE PURCHASED 1003 SH A R E S
OF 0 M STOCK JAN, 2,1947
MOTE W o rk e r* etrnings do n ot include non wage frinqe benefits.
Fourth quarter 1966 earntngs estim ated.
l 62J - ’1, -^ "f 66
,
6<+
'
W O RKER S
E A R N IN G S
STOCKHOLDERS
G A IN S
D T '. G A REPORTS TO STO K O E S
AA A
C H LD R
A D WAIL STREET JOURNAL
N
THE 1967 ECONOMIC REPORT O THE PRESIDENT
F
GENERAL MOTORS HOURLY RATED WORKER
AND GENERAL MOTORS STOCKHOLDER
FORD HOURLY RATED WORKER
AND FORD STOCKHOLDER
D E C E M B E R 31,1966
TOTALEARHINGS OF WORKER CO M PARED
WITH DIVIDENDS PLUS CAPITAL G AINS OP
STOC KH OLDER
ANNUAL EARNINGS AND ANNUAL DIVIDENDS
*80
0,000
( ASSUMING BOTH WERE EQUAL IN 19*9 *)
-700,000
*32.000
# 5/
28,000
•60
0,000
2*1,000
■500,000
X
20,000
/
<$>♦'.....
s*v
HO O
O .O O
16,0
00
300,000
1,00
20
8,000
WO
O
WORKERS
*
STOCKHOLDER IS A S S U M E D TO HAVE H ELD 6 ,8 0 0 S H A R E S OF FORO STOCK JAN. 1,1949.
1966 E o m in g e e s t im a t e d
STOCKHOLDERS
G A IN S
DATA’ F O R D ANNUAJ. REPORTS AND PRESS RELEASES
.
735
* * CAPITAL GAIN B A SE D ON IN C R E A S E IN STOCKHOLDER'S EQUITY PER SH A R E .
fJOTE'. W orker's e a r n in g s do n o b include nonwaqe fnncje b e nefits.
e a r n in g s
1967 ECONOMIC REPORT O THE PRESIDENT
F
JAN U ARY I
736
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
When you take the Ford Motor Co., the comparison is for a shorter
period, because the Ford Motor Co. didn’t become a publicly owned
stock company and its figures weren’t published until more recently.
From 1949 through 1966, you find that a Ford worker earned $106,000,
but a stockholder who started out with the same equity in 1949 got
$784,000.
Now, this is what is happening, and this is why it is not just a
propaganda slogan to say that the rich are getting richer and the
poor are getting poorer. I f you look at the income distribution, you
see that it is being distorted very dangerously. This is not just a
matter of economic justice. The economy won’t work, it will break
down, if we don’t find a more equitable way to share the abundance
of our new technology.
The lowest 40 percent of family groups in 1960 had 16 percent of the
national family income, and in 1964 it dropped to 14 percent, a drastic
shift. The highest 10 percent got 27 percent in 1960 and in 1964 they
they got 30 percent.
I sit across the bargaining table with the highest paid corporation
executives in the world, and I keep saying to them, “ I don’t under
stand what mental and moral gymnastics you go through to tell us
that if you are getting $500,000 a year and you are working to get
$600,000 as an executive, that that is a reward for individual initiative
and incentive, it is not inflationary, it is superpatriotic. But if you
are getting $5,000 a year and you are trying to get $6,000 a year that
is dangerous economics, it is highly inflationary, and it is a little bit
subversive.”
This is nonsense, and it is incompatible with the values of a free
society.
Representative Reuss. My time is up.
Chairman Proxmire. Senator Miller?
Senator M ille r. Thank you, Mr. Chairman.
Mr. Reuther, in connection with the guideposts for the full employ
ment—or the Employment Act of 1946, is this concept of purchasing
power. I take it from what you have been saying, that you would say
that the stability of the price structure is an inseparable part of that
concept, is that correct ?
Mr. R euther. Obviously the important thing when you are dealing
with purchasing power is not the number of dollars you take home.
It is what you can buy, and this is our whole argument with Mr.
Ackley.
American wage earners are not concerned with the number of dol
lars they take home in their pay envelope. They are concerned about
their real wages.
Senator M ille r. I couldn’t more thoroughly agree with you. In
other words, the stability of the purchasing power of the dollar would
be a part of this concept of economic and social justice, would it not?
Mr. Reuther. Exactly.
Senator M ille r. All right. Now, in your statement you say that
we have become unduly alarmed “by exaggerated fears of inflation.”
I would like to point out to you that I am advised that last year real
wages in this country were down over the year before. That we had
$29 billion of inflation last year representing taking the purchasing
power away from the people more than half what the Federal income
tax does.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
737
My own State’s share of that $29 billion was the same as a 10-percent
sales tax. My guess is that the people of Michigan had the equivalent
loss of purchasing power of around a 10-percent, possibly a 12-percent
sales tax.
Inflation last year amounted to 47 percent of our increased gross
national product. You stated here that the workers had been fight
ing to keep up with the increased cost of living. It must say that
I don’t understand why, in the light of that, you would refer to
exaggerated fears of inflation.
Mr. R euth er . What I was trying to say was that I believe that
the fear of both the problem of inflation and the balance-of-payments
problem is exaggerating. They are both very real problems. I think
we have to deal with them.
I think we have to take steps to try to counteract the pressures that
create these problems. But I don’t believe that they ought to in
fluence us to the point where we forget about the fact that reducing
the levels of unemployment ought to be a priority item.
I think that if unemployment is allowed to continue at the present
level, because you think that that is the way to fight inflation, then
you are putting the burdens of inflation upon the very income groups
who are least able to carry them.
What we are trying to say is that we think that there is a problem
of inflation. It is selective in character. It is not classical, as I said
earlier, and therefore it has to be approached in a different way than
it is being approached. We have to deal with it on a selective basis
rather than on a broad basis.
Mr. Ackley, for example, is against the worker getting an escalator
clause, and I suppose he thinks that that is because it will feed the
fires of inflation, as he says.
Well, a lot of people had something to do with escalator clauses
before Mr. Ackley came to Washington; Mr. C. E. Wilson, for ex
ample. I had the privilege of working with Mr. Wilson for many
years when he was the president of the General Motors Corp.
He made a great contribution to elevating the whole concept of
collective bargaining of how a worker in a free society gets his equity.
Mr. Wilson was one of the pioneers in developing the escalator clause,
which protects the GM worker, if the cost of living goes up. And
he was attacked by other people saying “ well, doesn’t this give you
a mechanism to build in inflation, if you get an adjustment?”
He wrote an article in the Reader’s Digest, September 1952 issue,
in which he said, and I quote:
I contend that we should not say the wage-price spiral. We should say the
spiral, for it is not primarily wages that push up prices. It is
primarily prices that pull up wages.
price-wage
And so what we say is don’t t r y to find the answer by riding the
back of the wage earner. Deal with the problem o f pricing policy,
where the culprits really are.
This is the fundamental difference we have with Mr. Ackley.
Senator M iller . May I say that I happen to agree with that state
ment. However, I feel that you have not told us what should^ be
done to stop inflation. What should Congress do to stop inflation.
You have talked about cutting prices somewhere along the line. We
can’t cut prices here. What can the Congress do to stop inflation?
738
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
Mr. Eeuther. Well, I would like first of all to suggest that you
give consideration to the establishment of the wage-price review
board, and I would like to put a more detailed description of that
into the record if I may.
Chairman Proxmire. Without objection, that will be printed in
the record.
(The material referred to was subsequently filed for the record and
follows:)
O
o f P r o v is io n s
I n c r e a se s in O rder T
to P u b l ic N eed
u t l in e
B i l l T o R e q u ir e H e a r in g s o n A d m in i s t e r e d P r ic e
M a k e P r iv a t e E c o n o m ic D e c is io n s M o re R e s p o n s iv e
of
o
1. Purpose
To bring an informed public opinion to bear upon price policy in administered
price industries as a substitute for the price-restraining influence of competition
which is lacking in such industries.
■ . Administrative machinery
2
(a) A Price-Wage Board of Review to conduct hearings on price increases
proposed by certain corporations.
(b) A Consumer Counsel to represent the consumer and public interest in
43uch hearings.
The relationship between the Board and the Consumer Counsel might be
similar to that between the National Labor Relations Board and the General
Counsel of the NLRB.
8. Coverage
The legislation should apply permanently to corporations in a position to act
as “price leaders” in their respective industries. Specific and objective criteria
should be devised to determine the corporations that fall into the “price leader”
category. Total coverage should be limited to the minimum number of corpora
tions required to accomplish the basic purposes of the bill. One possible criterion
for coverage could be: all corporations accounting for 25 percent or more of
total sales in a major industry. (Such corporations could be identified from
data in the files of the Census Bureau, the SEC and FTC.) Under this criterion,
only a limited number of giant corporations in major industries would be cov
ered on a permanent basis. In addition, the President should be authorized
to extend application of the legislation temporarily to other firms if he believes
that a price action taken or about to be taken by such firms threatens over-all
price stability.
4* Advance notification of proposed price increases
Covered corporations should be required to notify the Price-Wage Board of
Review of intention to increase a price, and should be prohibited from putting
such a price increase into effect for a specified minimum period (perhaps 60 or
90 days) sufficiently long to permit the Board to hold hearings on the proposed
price increase and to issue its findings concerning such increase. The corpora
tions should be required to supply to the Board, simultaneously with their filing
of the notice, all data which they consider pertinent to the proposed price
increase. The Board should publish the fact that notice has been received and
make available for examination by groups listed below under “Other Appear
ances” the data filed with such notice.
5. Waiver of hearings
Upon analysis of the data submitted with the notice, and after a reasonable
time has been allowed for examination of the data by all interested parties,
the Board, with the consent of the Consumer Counsel, should be empowered to
waive hearings and permit the proposed price increase to go into effect im
mediately. In such cases, however, the Board should be required to publish
promptly a report setting forth the reasons for so doing.
6. Emergency price increase
Upon a claim that an increase in production costs creates an emergency re
quiring the corporation to raise its prices prior to expiration of the notice period,
THE 1967 ECONOMIC REPORT OP THE PRESIDENT
739
the corporation should be permitted to raise its prices within that period. In
such case, however, the Board, in addition to its other findings, would be re
quired to make a finding as to whether or not such an emergency in fact existed
and whether or not the price increase exceeded the amount required to meet
increased production costs.
If it found that the claim of emergency was not supported by the facts, the
corporation would be required to rebate to every customer who paid the price
increase damages equal to three times the amount of such price increase for
products shipped during the notice period. In the event the ultimate purchaser
o f the products in question could not be ascertained, the corporation would
be subject to a fine equal to the triple damages specified above. If an emergency
were found to exist but it was also found that the price increase exceeded the
cost increase, the triple damages rebate or fine would apply to the excess.
7. Price reduction hearings
The Consumer Counsel should be empowered to initiate hearings when, in his
judgment, there is reason to believe that a corporation permanently or tem
porarily subject to the legislation should reduce the price of any of its products.
This procedure is essential in order to assure the price reductions in high-productivity industries which are essential to offset unavoidable price increases in lowproductivity industries. If a corporation responded to the notice of a hearing
with an acceptable price reduction, the hearing could, of course, be cancelled.
8. Subpoena power
The Consumer Counsel would have power to subpoena witnesses, to examine
them fully, and to require production of all pertinent books and records.
9. Involvement of unions
If a corporation claims that its proposed price increase would be required as
a result of granting union demands, the Consumer Counsel would be empowered
to subpoena and examine representatives of the union. Union and corporation
representatives would be permitted to cross-examine each other.
10. Other appearances
Representatives of unions, of consumer organizations, of corporations pur
chasing products affected by the proposed price increase, and of interested gov
ernment agencies (federal, state, or local) should be allowed to participate in
the hearings voluntarily, subject to permission granted by the Board. Such
voluntary witnesses would be required to submit to cross-examination and
would be permitted to cross-examine corporation witnesses. All testimony taken
at the hearings would be under oath.
11. Openhearmgs
All hearings should be open to the public, the press, and radio and television.
(The matter of possible “confidentiality” of certain types of data should be
considered in drafting the proposed legislation. It should be kept in mind in
this connection, however, that the legislation is premised on the absence of price
competition in the industries affected; that, therefore, there are not apt to be
genuine “competitive secrets” related to costs and prices; and that the public
interest is as deeply involved as in public utility rate hearings in which all per
tinent facts are publicly available. If, nevertheless, it should be decided that
certain types of information required for purposes of the hearings should be
treated as “confidential” the Board might be empowered to go into executive ses
sion while such information was being presented and considered with the par
ticipants in such executive sessions subject to penalties for public disclosure of
such information.)
12. Findings and recommendations
After obtaining all the pertinent facts, the Board should publish a report
of its findings and recommendations, together with the facts supporting such
recommendations. To assist the Board in this task, each party to the hearings—
the corporation, the Consumer Counsel, and the union, customer corporations,
consumer organizations and government agencies, if any are involved—might
submit to the Board at the conclusion of the hearings a list of proposed findings
and recommendations which the Board would consider in framing its own find
ings and recommendations. The Board’s findings and recommendations should
be published before the expiration of the notice period.
740
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
IS. Standards for recommendations
In framing its recommendations, the Board would be required to apply stand
ards carefully devised to assure both equity to all parties concerned and reason
able stability of the over-all price level. The President’s Advisory Committee
on Labor-Management Policy might be called upon to develop and propose the
standards to be included in the legislation initially. The standards should be
subject to review at regular and frequent intervals by the appropriate Congres
sional Committees with a view to making such amendments as experience may
show to be necessary.
14. Penalties
Penalties should be provided for failure to give the required notice of a pro
posed price increase, for failure to respond to subpoenas, for taking reprisals
against any person who testifies, and for perjury. The penalties should be
severe enough (particularly in the case of failure to give notice) to deter viola
tions. In the event of failure to respond promptly to subpoenas or to requests
for production of books, records, etc., or if the corporation is found to be en
gaging in other dilatory tactics, the Board should be empowered to extend the
period during which no change in prices would be permitted.
15. No price or wage control
Regardless of any finding or recommendation that the Board may make, upon
expiration of the notice period (or any extension of it), the corporation would
be free to determine its own prices (to the extent specified in its original notice
or to any lesser extent), and the union would be free to pursue its demands.
The only restraint on the corporation and the union would be the restraint of
enlightened public opinion.
This procedure, of course, would not rule out the possibility of Presidential
intervention in a case where a corporation insisted on imposing a price increase
which the hearings had shown to be clearly unjustifiable. In that case, the
President would then be in the position of having a fully informed public opinion
from which to mobilize support.
In the great majority of cases, however, it can be anticipated that no company
would be prepared to face the unfavorable publicity bound to rise from such
an action. In most cases a price increase would not even be proposed, when the
company knew a public hearing was likely to result, unless it was sure that the
economic facts did justify an increase.
Mr. R e u t h e r . N o w we think that that is a very meaningful step,
because, in a free society, what is the pressure that can persuade peo
ple to make their private decisions more responsible to the public
need ? The only pressure is government pressure, which is coercion,
which is compulsion, and we are trying to avoid that. The funda
mental distinction between a totalitarian society and a free society,
is that in the former the government makes all the decisions, and then
dictates to its citizens, and we want to have the broadest area in which
private decisions can function freely.
We believe that public opinion can be an effective disciplinary force
under these circumstances. This is an attempt to bring that to bear
upon pricing and wage policies. We think that would be very impor
tant.
We also believe that there are monetary and fiscal policies on a se
lective basis that ought to be carried out. I f the Government does
these various things, we believe that while there will always be, per
haps inescapably some slight edging up in terms of the price structure,
we can maintain price movements within manageable bounds, and
we can meet the problems within that framework.
Chairman P r o x m i r e . Congressman Rumsfeld?
Representative R u m s f e l d . Mr. Reuther, you made the statement
that aggregate demand and improved job training must go together, if
we are going to solve the problems of unemployment. In your pre
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
741
pared statement you urge this committee to recommend that the Gov
ernment coordinate and utilize all of its plans, functions, and re
sources to reduce unemployment to no more than 3 percent by the
end of this year or by mid-1968 at the least Obviously you are not
satisfied with the Council of Economic Advisers’ apparent acceptance
of a higher rate.
You also indicated your support and approval of public job train
ing programs, such as vocational education and manpower training
and development, which I also support.
Yet in your response to Mr. Widnall, you seem to indicate that you
did not favor the concept he mentioned of a tax credit for job train
ing, and instead you referred to your proposal for a fund for assist
ing displaced workers. I think this is the same proposal you wrote
Chairman Mills about last year when a suspension of the tax credit
was under discussion.
Possibly we are haying some language difficulties, but your pro
posal as I understand it, is in fact a tax credit for partial costs o f job
training, is it not? As I understood your letter to Chairman Mills
and your response to Mr. Widnall, it would go into a fund, and in the
event they met the standards and in the event the job training was
performed, they would, in fact, receive this money back. Is this cor
rect?
Mr. R e u t h e r . That is correct. I think there is a fundamental dif
ference between a general tax credit—a windfall which everyone gets,
unrelated to their past performance—and one that says if you do a
good job and meet the standards, then you would get the tax rebate.
I think that is the fundamental difference.
Representative R u m s f e l d . Well, I don’t believe that Mr. Widnall’s
approach or the so-called Human Investment Act, would necessarily
not require standards. This is apparently an assumption in your part.
Mr. R e u t h e r . I am only stating that if you make the proposal of
a general tax credit without standards, then I think that you are
giving employers help who haven’t earned the right to get help,
whereas if there were standards, then I wouldn’t have any argument.
Representative R u m s f e l d . In other words, if there were standards,
you would agree with the Human Investment Act tax credit approach
to solving some of the job training problems.
Mr. R e u t h e r . I f it had the basic standards that an employer had
to perform, and that meant not just training a fellow to do one little
limited job to meet his own production requirements, but to try to
make a contribution in raising and upgrading the overall skills o f
that worker so that he would be a more useful economic citizen, then
it seems to me that I would not have a great disagreement with that
proposal.
Representative R u m s f e l d . In your statement a minute ago to Mr.
Widnall, as I recall, you said that you didn’t feel that business needed
the tax credit that he was suggesting.
Mr. R e u t h e r . I personally think that most of the corporations
really don’t need that kind of help. But I do believe that the concept
that the British Industrial Training Act implements is a sound one,
and it does make a contribution towards increasing and improving
skills, and I would be in favor of that approach, or any other approach
which in effect made a comparable contribution. I am not familiar
742
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
with the details of the bill that you are referring to, but if it were in
this direction, and it set adequate standards, then I would think that
it would be a constructive approach.
Representative Rumsfeld. Mr. Chairman, I ask permission to in
sert a summary of the Human Investment Act in the record at this,
point.
Chairman Proxmire. Without objection.
(The material referred to follows:)
T
he
H
um an
I
n vestm en t
A
ct,
90 t h C ongress
Purpose.—“To
provide an incentive to American business to invest in the
improvement of the Nation’s human resources by hiring, training, and employing
presently unemployed workers lacking needed job skills, and by upgrading the*
job skills of and providing new job opportunities for workers presently em
ployed.”
Method.—The Act offers employers a tax credit toward certain specified ex
penses of programs designed to train prospective employees for jobs with the*
company or retrain current employees for more demanding jobs with the company..
Amount of tax credit.— 10% of the allowable employee training expenses with
a maximum of $25,000 plus 50% of the taxpayer’s tax liability in excess of
$25,000. This credit would be in addition to credits provided for by other
sections of the tax code, and in addition to the regular deduction as a trade or
business expense under section 162 of the code.
Allowable employee training expenses:
1. Wages and salaries of registered apprentices.
2. Wages and salaries of enrollees in On-the-Job Training programs under
the Manpower Development and Training Act.
3. Wages and salaries of employees participating in cooperative education*
programs.
4. Tuition and course fees paid or reimbursed by the taxpayer to a college,,
business, trade or vocational school.
5. Home study course fees paid to or reimbursed by the taxpayer to a.
college or an accredited home study school.
6. Expenses to the taxpayer of his organized job training programs.
7. Expenses to the taxpayer of organized job training programs con
tracted by him to another taxpayer.
8. Expenses to the taxpayer of organized job training programs conducted
by a trade association, joint labor-management apprenticeship committee*
or other similar group.
Other provisions:
1. Allowable expenses must be tax deductible under section 162 of the Tax
Code.
2. The tax credit may be carried back three years and carried forward
seven years.
3. No credit is allowed for the training of managerial, professional, or ad
vanced scientific employees; or for reimbursable expenses; or for a vocational
or recreational courses.
The intent of the Act is to help workers advance up the “skill ladder”, thus
opening vacancies at the bottom for the presently unskilled and unemployed. Its
major premise is that private business has, over the years, learned how to obtain
the most results per training dollar, and should now be encouraged to expand its
training programs to meet the national demand for labor skills. In addition, the
Act seeks to encourage training by business because, unlike so much institutional
training, training by business leads directly to a better job for the trainee.
Legislative history.—The original Human Investment Act was introduced on
February 17, 1965 by Senator Winston Prouty (R.-Vt.) The second-generation
version was introduced by Senator Prouty and Rep. Thomas B. Curtis (R.-Mo.)
on September 9, 1965, and eventually claimed 109 Congressional sponsors. The
present bill is a refined third-generation version, a product of over a year of
research and consultation with businessmen, labor leaders, economists, and tax
lawyers.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
743
Representative Rumsfeld. The point that bothers me about this is
that your proposal to Chairman Mills and to Mr. Widnall is a more
modest one than than the Human Investment Act. We have been
going along for a great many years with a high level of unemploy
ment, not really coming to grips with the problem of structural un
employment, and not really helping to see that the skills that the hard
core unemployed lack are in fact provided. I would like to see the
Congress of the United States and this Government go beyond voca
tional education, go beyond manpower training and development, and
see that if we can’t possibly do better than the Council of Economic
Advisers’ 4-percent level of unemployment. You have been talking
about new concepts and new approaches. Here is one. Here is a chance
for us to do more in this area and try to solve it, and it disappoints
me to have Mr. Goldfinger of the AFL-CIO come before this com
mittee last week and oppose it, and have you in your response to Mr.
Widnall not be enthusiastic.
Mr. Reuther. A s I say, if it meets these standards, I can be en
thusiastic. But the thing you are referring to that we proposed to
Congressman Mills is a different matter. That proposal was a more
limited thing to take care of people who were displaced for techno
logical reasons or other reasons, to tide them over until they got other
employment.
Representative Rumsfeld. Wasn’t job training included in that?
Mr. Reuther. N o. Well, only in a very limited way. It was pri
marily an income maintenance program for laid-off workers, a differ
ent thing. But I think the most valuable resources we have are human
resources. I am for doing everything humanly possible to facilitate
the maximum growth and development of every human potential we
have.
Representative Rumsfeld. Mr. Reuther, my time is up. Am I cor
rect that you are going to include some specific information about the
pi
1
'* led to Mr. Widnall in the record?
(Material in reference to above was later supplied for the record
and is reprinted herein:)
[Source: “Adjusting to Change,” Appendix Volume III of Technology and the
American Economy, the Report of the National Commission on Technology,
Automation, and Economic Progress—February 1966.]
U
se of
I n v e s t m e n t T a x C r e d it
To
F
a c il it a t e
A
d ju stm e n t
BASIS FOR PROPOSAL
There is universal agreement that management, labor, and government should
cooperate in an effort to assure that technological progress is achieved without
sacrificing human values. The President’s Advisory Committee on Labor-Management Policy, for example, in its report on automation dated January 11,1962,
said:
There is unanimous agreement among the members on these fundamental
points:
1. Automation and technological progress are essential to the general welfare,
the economic strength, and the defense of the Nation.
2. This progress can and must be achieved without the sacrifice of human
values.
3. Achievement of technological progress without sacrifice of human values
requires a combination of private and governmental action consonant with the
principles of a free society.
744
THE 1967 ECONOMIC REPORT OP THE PRESIDENT
While there is agreement on these fundamental points, no working mechanism
has yet been created to implement them.
The report of the Commission states in still more specific terms the principle
involved. Thus the report includes among the “basic requirements,, for in
dividual adjustment situations that:
* * * the displaced individual must have adequate financial security while
searching for an alternative job or while undertaking training.
and that:
* * * the displaced person should not have to suffer the loss of earned security
rights such as vacation, retirement, insurance, and related credits to his total
worklife account.
Such a forthright statement of principle deserves to be backed up by concrete
proposals for its implementation. The following proposal is put forward with
that end in view.
pro po sal
The investment tax credit under the Internal Revenue Act would be an appro
priate vehicle for implementing the principle, since it is designed to stimulate
modernization, and to the extent that it serves that end, it also adds to the human
problems resulting from technological change. The investment credit can be used
both to provide the incentive for employers to establish programs to meet the
problems of workers dislocated from their jobs by reason of technological change,
and to provide the necessary resources.
Financing
It is proposed that in each year, one-half of the investment credit to which
each firm is entitled would be paid to it directly, and the other half would be
placed in reserve in a Government trust fund where it would be held available
for a period of 5 years to meet the needs resulting from disemployment of the
employees of that firm resulting from technological change. At the end of 5
years, any amounts not so used would be returned to the firm.
If there is any fear that temporary diversion of part of the investment credit
in this manner might weaken its effectiveness in serving the basic purpose
of stimulating new investment, this problem could be met by raising the credit
figure from the present 7 percent to, say 10 percent. The suggested figures are
illustrative only. The purpose of this proposal is not to reduce the stimulus to
investment, but to incorporate with it an additional stimulus to meet the human
problems of employees which may result from that investment. There is no
reason why the program cannot be so devised that an average firm which does
meet such problems would end up in the same financial position as it would be
under the present investment credit provision—and the company which by con
structive and imaginative measures succeeds in finding means of meeting the
human problem with less than average costs would end up in an improved
situation.
Benefits to displaced workers
The funds set aside with respect to any given firm could be used to provide
the following forms of assistance to laid-off employees of that firm (the details
as to amounts, periods of time, etc., are purely illustrative):
1. They would supplement unemployment compensation or retraining al
lowances up to 80 percent of the displaced worker’s wages, for a length of
time equal to his period of employment with the firm (time-for-time) up
to a maximum of, say, 5 years.
2. If the worker accepted a new job at lower wage®, his earnings would
be supplemented up to 100 percent of his former earnings on the same timefor-time, 5-year maximum basis.
3. If the worker accepted a job with inferior protection in the areas of
heialth services and life insurance—or with none—such protection would be
supplemented up to the level of that on his former job on the same timefor-time basis.
4. Starting on a new job, the worker’s vacation pay entitlement would
probably be less than on his former job. The funds would supplement his
vacation pay on the same time-for-time basis up to the level to which he
would have been entitled if he had kept his former job.
5. If he had not been employed on the former job long enough to vest his
pension credits, or if there were no vesting provision, the fund would pur
chase an annuity equivalent to the value of the service credits he has lost.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
745
If he finds employment on a new job which provides no pension, or an in
ferior pension, an additional annuity could provide an appropriate equivalent
on the same time-for-time basis indicated above.
6. If the worker obtained a new job in another community during the
same time-for-time period, the funds would pay his costs of relocation.
Eligibility requirements
Appropriate eligibility qualifications would have to be worked out. For ex
ample, the worker might be required to have had at least 1 year of employment
with the responsible employer.
Since it would be impracticable administratively to distinguish in individual
cases between loss of employment caused by technology and that caused by other
factors, objective criteria would have to be developed which would roughly ac
complish the purpose. For example, all permanent separations (e.g., resulting
from a plant closing, or where the employer certifies that a laid-off worker’s
recall was improbable) would be covered. In addition, continuous layoffs or
short-time work for specified periods would establish eligibility for benefits ret
roactively to the beginning of the period. These periods should not be too long.
Otherwise, loss of income, even if retroactively made up, would defeat the pur
pose of safeguarding the worker and his family against harm. In this connec
tion, the layoff and short-time provisions of the new British Redundancy Pay
ments Act, which provides for separation pay (also in the context of stimulating
modernization of industry) may be relevant. The act provides that a worker
becomes eligible if he is laid off or on short time (i.e., receives less than one-half
of his normal weekly pay) “either (a) for 4 consecutive weeks, or (b) for a
series of 6 weeks (of which not more than 3 are consecutive) within a period of
13 weeks.”
Operation of trust fund
The monies in the trust fund would be invested in Government bonds, in the
same way as with the Social Security Trust Fund. The interest would be pooled
to pay the excess of the costs charged to any one company over the amount of
investment credit reserved with respect to that company. If at any time the
total sum of such excess costs was in excess of the amount of interest available,
the difference would be made up by the Treasury out of general revenues. In no
event would an amount in the fund reserved with respect to one employer be
used to pay costs attributable to another employer. For reasons shown below,
such costs to the Treasury would proba'bly be small.
Where a company has established programs to pay any of the benefits provided
under the plan, the amount reserved from its investment credit would be reduced
by the lesser of the amounts actually paid to is employees under such programs,
or the amounts paid by it during the year into a trust fund to provide for such
payments. (Benefits paid under such programs would be taken into account
in computing benefits under this proposal.) This provision would encourage em
ployers to establish such programs, since they would then benefit by the interest
on the amounts by which their investment credit reservation would be decreased.
Effect of proposal
The effect of this proposal would be to encourage firms to minimize disloca
tions resulting from technological change. The company would have a strong
financial incentive to plan its changes so as to avoid dislocations, to find alterna
tive jobs for workers disemployed, to train them for other jobs it may have to
offer, and so on, since success in such efforts would increase the amount of re
served funds that would eventually be returnable to it. This encouragement to
keep the costs attributable to technological change at a minimum would in turn
minimize the possibility that there would be excess costs chargeable to the
Treasury.
(The following summary description of the British Industrial
Training Act, excerpted from the June 1964 ssue of the BLS publica
tion “Labor Development Abroad,” is submitted in response to Con
gressman Rumsfeld’s request:)
'The Industrial Training Act of March 12,1964, is intended to improve existing
arrangements for the industrial and commercial training of persons over the
compulsory school age . . . and to overcome the shortage of skilled manpower
which has prevailed since World War II in the United Kingdom. By imposing a
75-314— 67— pt. 4------- 3
746
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
levy on firms having no training program of their own, the legislation represents
the first Government effort to spread more equitably the cost of training workers.
3?he planning and direction of individual industrial plans has now become the
responsibility of the Government—through Industrial Training Boards to be set
up under the law. In addition, the new law provides for the formation of a Cen
tral Training Council and Appeal Tribunals . . .
Before this act, industrial training was chiefly the responsibility of individual
firms . . .
Under the 1964 act, Industrial Training Boards are to be created by order
of the Minister of Labour after consultation with representative organizations of
employers and employees. Each board will be composed of a chairman, educa
tional personnel, and an equal number of employer and employee representatives,
all appointed by the Minister. Industry jurisdiction will also be defined in the
order establishing a board . . .
iThe Minister of Labour has general direction over the boards, which must
periodically submit a general plan of operation for his approval. The duties
of a board are (1) to determine the job skills needed by industry and the nature
and length of training to provide these skills, and (2) to make provisions for
courses and other facilities (including residential accommodations) for the train
ing of persons now employed or planning to be employed in the industry. The
boards must also determine the qualifications of trainees and their instructors
and publish recommendations concerning both standards to be attained through
training and methods of ascertaining whether the standards have been met.
For these purposes, a board may not only establish industrial training centers
but may also approve the courses and facilities provided by other agencies and
firms within its jurisdiction. It may subsidize the training programs of these
firms by extending them loans and grants.
Firms without training programs of their own will be penalized; they are
subject—with the right of appeal—to orders issued by the Labour Minister at
a board’s initiation to pay a levy.
Individuals become trainees either by entering into a contract of service or
apprenticeship with a board or working with a firm having a board-approved
plan. Trainees will be entitled to maintenance and traveling allowances and
may also be subsidized if they take more advanced training given or approved
by a board.
The boards will operate under grants and loans made to them by the Minister
of Labour and approved by the Treasury. Initially, the law set aside £50 million
(US $140 million) for this purpose. The boards will also be permitted, with
the Minister’s consent, to borrow from other sources.
The Central Training Council, an advisory body to the Minister of Labour,
has yet to be formed. Of its 32 members, 6 each will be appointed from em
ployers and employees by the Minister of Labour, 2 from nationalized industries,
not more than 6 chairmen of Industrial Training Boards, and 12 other members,
6 of whom will be appointed after consultation with the Minister of Education
and the Secretary of State for Scotland. The Council must submit an annual
report on its activities to the Minister, who will present it to Parliament.
The act provides that any firm may appeal the levy order imposed on it for
lack of a training program to special tribunals established by the Ministry of
Labour for that purpose. A tribunal will have the power to rescind a levy order
or to reduce the amount levied. .[Emphasis added.]
Chairman P roxmire . Senator Percy?
Senator P ercy . Mr. Reuther, may I say I have found this morning
at least one case of what is good for General Motors would be good
for the country? I share your enthusiasm for profit sharing, and
I like your term “ democratization of industry.” My own experience
in seeing over 15 years of profit sharing build up for a company in
dicates that people become enthusiastic about capitalism when they
are capitalists, and not just in theory but in actual practice.
In your prepared statement at the beginning, you declare: “ Our
urban cities are blighted by decay and spreading slums.”
I would like to ask you whether we could not democratize our
cities by seeing that more ownership of property is made available
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
747
to low-income families. Do you not think that the pride taken in
property ownership in the suburbs contributes to their beautification
as opposed to the deterioration in our slum areas, where low-income
families have allegiance only to the slumowners, the landlord, or
perhaps the public housing project, but with no feeling of owner
ship themselves in the city itself ?
Mr. Reuther. I want to thank you, first of all, for saying these
kind things about profit sharing. I think American industry ought
to recognize that, i f we are going to have something that can be called
people’s capitalism, then we have to do something about the fact that
1 percent of American families own 70 percent of the stock of America.
Profit sharing would give you a broad democratic base of ownership
and participation in American industries, and that is the way to
make the American people be enthusiastically in support of our ireeenterprise system.
With respect to American cities, I think that the point you make
is well taken, and I share that point. I believe that the more Ameri
can families we can have owning their own homes, the sooner we will
change the basic character of our cities. I think, whether it is an
absentee slum owner or whether it is the Federal Government, the re
lationship is bad, and I believe that the key to this is to come up with
some bright new ideas of how we can apply modem technology to
the total rebuilding of our cities.
We have got to get the cost of decent housing down so that millions
of American families who live in slums can afford decent housing.
I think if you can apply the most advanced technology to the auto
industry and to the space industry, there ought to be enough courage
and ingenuity to apply it to the housing industry.
Senator Percy. I f we have a softness in our economy this year,
would you say, in your judgment, that rehabilitation of existing hous
ing structures could develop into a growth industry?
Mr. Reuther. I think that there is no question about it, that any
time this country thinks it is running out of work, the housing field,
education, medical facilities, and many other areas of need offer
enough work to keep America busy for a long time.
Let me say, as one labor leader, at the risk that I may be criticized
and that a lot of people may think I am soft, that I have never gotten
very excited about the fight for the short workweek, because I think
we have got too much work to do in America.
When we get all of these slums cleared so that every family has a
decent house and every child has the kind of education opportunities
to facilitate its maximum growth and development, when we have
enough hospitals and all these other things, then I think a shorter
workweek will make a lot of sense, because then the question will be,
“ Do you want more leisure or more gadgets?” and I would vote for
more leisure.
But that is not our problem now, and the building of America and
housing of America, I think, is a tremendous challenge and a good
opportunity in terms of employment in the future.
Senator Percy. Mr. Reuther, last year I proposed the establish
ment by the Congress of a national homeownership foundation.
You proposed in your testimony before the Ribicoff committee a
national nonprofit housing corporation.
748
th e
1967 ECONOMIC REPORT OF THE PRESIDENT
There may be some differences between them; there may be some
similarities. Would you think the Congress this year should place
high priority on working out a practical means to get the private
enterprise system deeply involved in rehabilitation of existing
housing?
Mr. Reuther. I very much favor that, and I would hope that the
Congress would act on it at a very early date.
Senator Percy. Mr. Reuther, I understand you have created a
citizens’ crusade against poverty. I am also trying to find a way to
get poor people involved in this process.
Do you think the involvement of the poor in the rehabili fcation of the
city, in their own neighborhood, and in their own housing units, is
important ?
Mr. Reuther. I think it is absolutely essential. I do not believe
that you can change the basic character of a community without in
volving the active participation of the people who make up that com
munity. In our Citizens’ Crusade, of which I have the privilege of
being the national chairman, we are working to develop that active
participation. We have set up two training centers and the UAW has
put money into it, the Ford Foundation has given us a grant, and we
are going to try to train a thousand community leaders from the slums
to go into their neighborhoods and to help mobilize and generate the
forces to do exactly what you are talking about—to involve the people
themselves.
This can’t be something from above that you hand down. They
need economic help, they need guidance, they need leadership training,
they need all this kind of assistance, but you have to give these people
a sense of participating, in shaping their own lives, in rebuilding their
own communities. This is not only a democratic idea, it is an essential
idea if the j ob is going to be done.
Senator Percy. Mr. Chairman, may I have permission to ask one
more question?
Chairman Proxmire. Yes, indeed.
Senator Percy. I will precede this question, Mr. Reuther, with a
statement, that discrimination within industry by management has,
in the past, contributed to the “nonemployment” of members of minor
ity groups.
Do you feel that there can be a real involvement of the poor, a large
part of the poor being nonwhite, until such time as we tear down the
racial barriers that exist within certain craft unions ?
How can you expand rehabilitation into a growth industry, if you
can’t get the very people who are now unemployed into the craft
unions, and train them to become members of the working force in the
great rebuilding job we face today ?
Mr. Reutiier. I might say that, in 11 years of the AFL-CIO
merger, there have been many disappointments that I have shared,
but among the most important of those disappointments is the failure
of the American labor movement to demonstrate both the courage and
the compassion to do something more meaningful about the problem
that you pose.
I think that our democratic credentials will be in question as long
as we try to hide behind pious declarations on paper. People are going
to evaluate our commitment in terms of what we do to implement our
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
749
belief in the equality of everyone in the right to share equal employ
ment opportunities; not by convention declarations and eloquence but
by what we do about the practical job of tearing down the barriers
that deny millions of Americans the right to have access to job op
portunities in certain areas of American industry.
Senator Percy. Thank you, sir. I will join that crusade.
Mr. Reuther. We will be very happy to have you.
Chairman Proxmire. Congressman Brock ?
Representative Brock. I share the feelings of the Senator from
Illinois but I can’t help but say I am not sure which one has changed
the most, but I find in the area at present we are in more areas of
agreement than disagreement today, and I appreciate that.
I, as Senator Percy, am particularly interested in profit sharing.
I can’t think of anything that is more important to maintaining of ex
panding that concept of participating in democracy than this idea.
I have one question along this line.
In your idea of profit sharing I find myself in some disagreement
in that I don’t see ownership tied in, and I wonder if you in your
proposal have included some way in which the Federal Government
can give greater incentive toward stock ownership on the part of wage
earners ?
Mr. Reuther. You see, the stock ownership thing arises out of the
fact that a large percentage of the earnings of American industry is
being invested, plowed back in, and this is part of a whole growth
process of American industry, which gives the stockholder a share of
a bigger and growing corporation. We don’t want to slow down that
process of growth ana expansion.
We want the worker to share in it. I f a company says, “We are
going to put X percent of our earnings this year into capital expan
sion, new factories and new capacity,” then they may say, “ If we have
to give the worker a cash payment, then we won’t be able to do that.”
We want the worker to share in that expansion. It can be done by
giving him stock.
We would work out the creation of a fund, so that under certain
emergency circumstances the worker could cash in his stock equity and
realize it in cash, but I believe that, overwhelmingly, the American
workers would like to share in the ownership of the corporations that
they work for, share in the growth of those corporations, have a sense
that they don’t just have a timeclock-card relationship, that there is a
different relationship.
I think industry has to make up its mind. Ten years from now,
what kind of workers do you think GM will be employing? They
aren’t going to be immigrants out of Ellis Island coming over here
with a loaf of pumpernickel bread stuffed in their jeans. They are
going to be fellows with a 2- and 3-year college education. Their
whole relationship with their employer is going to be quite different.
We keep looking backward when we talk about tomorrow. We have
to look ahead.
This is why, in 1967, we are going to abolish the hourly rate system
in the automobile industry. This idea of paying the worker by the
10th of the hour is an old concept that came out of the early begin
nings of the industrial revolution. We are going to put everybody
750
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
on a salary, because dignity demands it, the whole relationship has
got to change, and we are gomg to do it.
Profit-sharing is a part of that whole evolution in the status and
dignity of the worker and in his relationship with the employer.
Representative Brock. I think I agree in looking ahead, but what I
am concerned about is that if you have just a pure profit-sharing pro
gram, that you are still piecemeal, that it is still on the profits of a
given year for a given worker, and I am concerned that we expand the
opportunity for workers to themselves invest in this growth, and you
can’t have a share of the growth, long-term growth, unless you own the
stock itself.
And today your Federal income tax precludes the purchase of stock
at less than 85 percent of the value. Is this an area that we might
address ourselves to in the Congress, to give a greater inducement or
opportunity for workers, with the assistance of management, to par
ticipate in stock ownership programs ?
Mr. Reuther. I am encouraging that wherever possible, so I would
be in favor of Congress doing anything that would encourage it.
Some years ago the General Motors Corp. proposed a stock purchase
plan. We rejected it because the lowest income worker with the largest
iamily would in effect have been excluded, and we thought that that
would have compounded inequity. Our approach would give each
worker his proportionate equity, quite unrelated to whether or not his
family situation enabled him to save.
I f a worker had eight kids and he was having a hard time sending
them to school and he couldn’t accumulate anything, we wouldn’t
want him to be deprived of the right to share in the profits, hence our
approach. Now, we should be most happy to furnish the committee the
specific collective bargaining profit-sharing plan that we submitted
to General Motors in 1958. At the present time we have no detailed
proposal that we are submitting to any employer. I raise this only as
a broad concept.
(See p. 732 for material referred to above.)
Representative Brock. I personally feel that a human being, worker
or management, has a greater sense of involvement if he has to invest
something in, if he has to participate. I am trying to encourage this
from our end as you are from yours.
One final question. On this question you said you weren’t con
cerned, and that we shouldn’t make it a major crisis. I am interested
in what you suggested about the wage-price committee. Then you say
“ selective and monetary fiscal policies ought to be adopted.”
Now, there aren’t very many monetary and fiscal policies that
haven’t been tried. We can have a higher interest rate. You have
already said you don’t like that. We could have higher taxes. You
have opposed that. Or we could reduce spending. That is the third
category. As I understand it, you oppose that category. I don’t see
what specific suggestions you have proposed to us to combat this re
duction in the real worth of wages for the workers.
Mr. Reuther. Well, to begin with, as I say, I think that we must
understand that the basic problem flows from the pricing policies of
certain corporations who have failed to share their abnormally high in
crease in productivity with consumers through meaningful price
reductions.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
751
I f we had gotten those price reductions there would be no infla
tionary problem of any magnitude in the American economy, and
we wouldn’t be worried about it. I f you put all the pressure on the
wage front, you are working on the wrong end of the problem. You
won’t find the answer until we get those price reductions. This is why
Mr. Ackley is unrealistic and why his whole attitude on the escalator
clause is unworkable.
He doesn’t have to sit at any bargaining table. He is very fortunate
in that respect. He leads a very cloistered, sheltered life. But I can
tell him that wage earners are not going to say, “ It is too bad, we are
going to have to take a 50-percent loss in our real wage position be
cause of inflation.”
They are going to fight to make it up. That is what happened in
the airline strike. The fight there was about catchup money. It is
unrealistic to believe that wage earners are going to look at the dis
tribution of national income and see everybody else going through the
stratosphere and then settle for only 50 percent of their catchup
money through escalation.
The Federal Reserve Board has got to be more responsible when
they tell the banks around the country the conditions upon which they
are prepared to give them access to new money. The Federal Re
serve Board has got to act as though it is a part of the American sys
tem instead of something apart from the American system.
There are many other things we can do on a selective basis. But
the main point we try to make is that we should not let the problem
of inflation and the balance-of-payments problem, both of which are
real problems, unduly influence us with respect to continuing to do
those things which are necessary to reduce the levels of unemploy
ment. That is the point I am trying to make.
Chairman Proxmire. Thank you very, very much, Mr. Reuther,
for an excellent performance and for a great deal of most useful in
formation. I think maybe some people are surprised at the consensus
here, but it indicates that when men of good will get together on the
facts we find a very, very wide area of agreement. You have done a
splendid j ob. We are mighty grateful to you, Mr. Reuther.
Thank you.
Senator M iller. Mr. Chairman, I have a few questions.
Chairman Proxmire. Fine. I think with Mr. Reuther’s permission
we can put those in the record.
Senator M iller. I will submit them and ask that Mr. Reuther
supply the answers for the record, because I know we have a time
problem.
Chairman Proxmire. Yes, indeed; and I have a few questions
myself.
Mr. Reuther. I should be most happy to try to cooperate in re
sponding to any questions.
Representative W id n a ll. Mr. Chairman, may I have that privilege ?
Chairman Proxmire. It will apply to all members; yes, indeed.
Thank you very much.
Mr. Reuther. Thank you very much, Mr. Chairman.
(The questions of Senator Miller, Chairman Proxmire and Repre
sentative Widnall and answers supplied by Mr. Reuther were subse
quently received for the record and appear on the following pages:)
752
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
Q u e s t io n s
by
Senator M
il l e r
Question. In your testimony, you criticized former Treasury Secretary
Humphrey for his “obsession with a balanced budget,” which resulted in un
balancing the economy to the extent of a $12 billion deficit for 1959.
Does this statement mean that you fail to recognize that it was the Demo
cratically controlled Congress which had the power to pass the revenue, appro
priations, and other laws needed to prevent an unbalanced economy?
Answer. I was attempting to make an economic rather than a political point:
namely, that misguided attempts to achieve balance in the budget can unbalance
the economy with the result that the actual budget deficit can be vastly greater
than the deficit sought to be avoided or reduced. It is pertinent to note, how
ever, that under our system of government the leadership in budget-making is in
the hands of the Executive and that Congress tends to follow that lead fairly
closely regardless of whether the majority of its members are from the same
Party as the President or from a different Party.
Question. Do you believe it is more fair for the Federal Government to take
purchasing power away from the people by increased income taxes than by
inflation?
Answer. Inflation is inequitable in its impact, disadvantaging some and
benefiting others. In general, the disadvantages tend to fall most heavily on
those least able to bear them, while the advantages tend to accrue to those who
least need them. (This point is documented by some of the data in my pre
pared statement.)i [Unlike inflation, taxes on incomes based upon ability to pay
can promote rather than impede equity and social justice.
Question. I invite your attention to the close relationship between deficits of
the Federal Government and inflation. It has now reached the point that for
every $1 billion of deficit under the Administrative Budget, there will be an
accompanying inflation of $2 billion or more. Would you not therefore favor
reduction, if not elimination, of these budget deficits—and, if so, what specific
action by Congress should be taken to do so? (E.g., specific taxes to be increased
or Federal expenditures to be reduced.)
Answer. As my prepared statement shows, there is no general excess of demand
which needs to be soaked up either through tax increases or reduced govern
ment spending in order to avoid inflation. There is a substantial unused margin
of idle human and physical resources which a budget deficit can help to employ
productively. Such inflationary pressures as exist are selective and sectoral
and should be combated by selective measures rather than by the blunt instru
ment of an overall fiscal policy aimed at reducing demand at a time when the
objectives of the Emplyoment Act call for increased demand.
Question. What is your definition of “living in poverty” in the context of your
statement that 32.5 million Americans continue to live in poverty?
Answer. The definitions are those developed by the Social Security Admin
istration after careful and detailed study. A household is classified as poor if
its total money income falls below $1,570 for an unrelated individual, $2,030 for
a couple, $3,200 for a family of four, and comparable figures for families of other
sizes. In 1965, there were 32.7 million persons in households having incomes
below those levels. They certainly fit within any reasonable definition of poverty
since, in the words of the Council of Economic Advisers, their incomes clearly
are “inadequate to provide even the basic essentials of a decent life in our
society.”
Question. Of the 800,000 members of the U.A.W., how many are covered by
escalation clauses covering increases in the cost of living?
Answer. There are currently approximately 1,400,000 employed members of
the UAW. Of these, we estimate that 85 to 90 percent are covered by cost-ofliving escalator clauses. The 800,000 figure refers, in round numbers, to those
who will be involved in negotiations with major automotive, agricultural imple
ment, and parts supplier corporations this year.
Question. Of those covered, how much have these clauses meant in increased
wages during each of the last five years?
Answer. While there are some variations, most UAW escalator clauses are the
same as or closely similar to those in our contracts with the major automotive
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
753
corporations. Under these contracts, increases in the cost-of-living allowance
during each of the last 5 years have been as follow s:
Cents
Year:
verhour
196 2
----------- ------------------------------------------------3
196 3
------------------------------------------------------ ---------------3
196 4
____________________________ _____ _____ _______
3
4
196 5 .............................................................. - ---------------------- -----------—
196 6
_____ - -----------------------------------------------— ..........
11
It is important to keep in mind that the above adjustments in the cost-ofliving allowance (a) came in response to prior increases in the price level, and
(b) did not increase the buying power of the workers’ wages but merely helped
to protect their families’ living standards against erosion by higher prices.
Question. In connection with wage-price guidelines, should there not be some
account given in wage increase patterns between plants having different increases
in productivity? For example, if Plant A has increased productivity of 1 % in
a given year, should the workers be given an increase of 3% ?
Answer. Since advances in productivity are socially generated, all members
of society should share equitably in their fruits. Moreover, to relate wage
increases directly to the rate of productivity advance in individual industries
would have highly undesirable consequences. It would tend to make secondclass citizens, suffering relatively depressed living standards, of those workers
unfortunate enough to be employed in industries whose productivity increased
slowly. It would also distort the national wage structure in an economically
unworkable direction by confining skilled workers in slowly advancing industries
to wages lower than those paid to unskilled workers in industries whose pro
ductivity rises rapidly. In general, the basic philosophical approach of the
guideposts to this problem is sound. Under that philosophy, price increases re
quired in slowly advancing industries to pay for wage increases related to
national productivity gains should be offset by price decreases in industries with
above-average productivity progress, thus preserving the stability of the general
price level. In practice, the price decreases have not been forthcoming. Cor
porations with rapid productivity increases have tended instead to monopolize
the resultant gains for the exclusive benefit of their stockholders and managers
rather than to share them with consumers in price reductions. P?hat failure to
pass on cost savings in lower prices generates excessive profits. Workers em
ployed by such corporations will inevitably insist on wage and fringe benefit
gains commensurate with the profits. After all, as the Council has noted:
. . there is no justification, on either economic or equity grounds, for dis
tributing above-average gains in productivity exclusively through the profits
channel.”
Question. I have long favored a stepped-up program of federally assisted trade
and technical schools to give underprivileged young people a skill with a future.
Would you comment on this proposal?
Answer. The UAW has been an active supported of legislative and private pro
grams aimed at providing the disadvantaged with skills that would enable
them to compete more effectively in the labor market. We initiated and are
operating a number of training programs with government financial assistance.
Among them are on-the-job training programs and a program to enable members
of minority groups to meet the requirements for entrance into formal appenticeship in the skilled trades. In addition, we have pressed and continue to press
the corporations with which we bargain to improve their training programs.
Q u e s t io n s
by
S e n a t o r P r o x m ir e
(Question. In your statement you criticized the guidelines as inadequate and
unfair and you recommend instead an incomes policy, pointing out that all
European countries have moved to that approach. However, isn’t it true that
Britain, when faced with emergency conditions, reverted again to wage limi
tations. Isn’t this indicative of weakness in incomes policy when the chips
are down?
754
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
Answer. As noted in the question, Britain acted in response to emergency
conditions. The emergency may reasonably be attributed, in part, to failure
to adopt an incomes policy earlier. Because of the seriousness of the situation
that Britain faced last summer, the government was unable to rely on the
voluntary incomes policy that it had previously contemplated and that is still
intended for the long run. As of July 20, 1966, a “prices and incomes standstill”
was imposed which took the form of a “freeze” until the end of 1966, followed
by the current 6-month “period of severe restraint”. The standstill, however,
is not confined to wage limitations, as the question suggests. It is far broader
in its application to incomes than the U.S. guideposts which cover only wages
fixed through collective bargaining. The approach taken, in fact, is that of an
incomes policy. The White Paper on the “freeze” (Cmnd. 3073), for example,
deals not only with wages and prices but also with rents for both housing
and business premises, “scales of charges and fees for self-employed persons,
including all sorts of professional fees”, salaries and other forms of remuner
ation not fixed by collective bargaining “including that of company directors
and executives”, and “all company distributions, including dividends paid by
companies”. In addition, the White Paper notes, “The Government have al
ready pledged themselves to use their fiscal powers or other means to prevent
any excessive growth in aggregate profits.”
Question, The incomes policy that you favor concentrates, as I understand
it, on the relative shares of real income that go to labor and the other factors
of production. Elsewhere in your statement you indicated that labor and
capital should be free to bargain over the shares of income that each shall
receive. Aren’t these contradictory? Doesn’t an income policy tend to stabilize
the share of income going to labor? We would be interested in hearing how
you reconcile these two.
Answer. Perhaps the best way to answer this question is to quote from the
British White Paper on “Prices and Incomes Policy” issued in April 1965 (Cmnd.
2639). (This White Paper later was attached to the Prices and Incomes Act
adopted in August 1966 as a “schedule” setting forth the considerations to be
taken into account in the administration of that Act.) The pertinent para
graph says: “The requirement that total money incomes should rise in line
with the growth of real national output does not mean that all forms of income
should increase at the same rate. It is necessary not only to create the condi
tions in which essential structural readjustments can "be carried out smoothly
but also to promote social justice. The general review of money incomes of all
kinds to be carried out by the National Economic Development Council will
involve not only the assembly of the facts about the movement of the main
categories of income—wages, salaries, income from self-employment, profits
(distributed and undistributed) and rent—but also an appraisal of the way the
distribution of the national income is developing under the impact of the prices
and incomes policy. The Government have pledged themselves to use their
fiscal powers or other appropriate means to correct any excessive growth in
aggregate profits as compared with the growth of total wages and salaries, after
allowing for short-term fluctuations.” /[Italic added.]
One of the problems with the guideposts is that the Council, in applying
them, has tended to forget its own statement th at:
“. . . there is nothing immutable in fact or in justice about the distribution
of the total product between labor and nonlabor incomes.”
The Council, in practice, has attempted to apply its wage guidepost in a
manner that would freeze the labor income share in the unlikely event of an
absolutely stable price level and that reduces the labor share when prices
increase.
There are important economic considerations, as well as equity and social
justice considerations, for not freezing the shares going to labor and nonlabor
incomes. The increasing productivity of capital, noted in my prepared state
ment, calls for a long-term increase in the labor share. Other factors that
should be taken into account have been summarized by Professor Neil Chamberlain of Yale University as follow s:
“. . . the distribution of income affects the balance between consumption and
investment. Under changing circumstances this balance too may have to change
if the economy is to make full use of its assets. The balance may have to
swing more toward savings and away from consumption when more private
investment is needed to satisfy rising household demand; more toward private
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
755
consumer expenditure when investment goods become more productive and less
saving is required to keep pace with wants; more toward public expenditure
with higher tax rates when private demand is still strong but needs balancing
with more ‘infrastructure’; and more toward public expenditure with lower tax
rates when private demand is weak and social investment can lay the basis for
future expansion. An ‘incomes policy’ becomes a significant element in eco
nomic planning by helping to steer GNP into the channels appropriate to the
given circumstances.”
An incomes policy is therefore thoroughly consistent with changing income
shares. It can help to assure that the changes that do take place are in the
direction of equity, social justice, and the requirements of the economy as a
whole. Collective bargaining over income shares has a vital role to play in that
process.
Q u e s t io n s
by
R
e p r e s e n t a t iv e
W
id n a l l
Question. Do you foresee an increase in unemployment this year?
Answer. The many signs of weakness already apparent in the economy
suggest
at least a strong possibility that unemployment will increase this year. My
prepared statement mentions some of the reasons for concern. The discussion
under the subhead “Signs of Weakness” is particularly pertinent.
Question. How do you stand on pushing forward with the development of a
new statistical series on job vacancies? Would such a series help in the place
ment of the unemployed and in tailoring our training programs for actual job
openings? Why has organized labor opposed this in the past?
Answer. A complete answer to this question would require much more space
than I can reasonably take. Permit me to note, however, that comprehensive
quantitative and qualitative data on job vacancies would be available if a
measure long urged by the ITAW were now in effect. We have proposed re
peatedly that employers be required to list job vacancies to be filled by new hires
with the public Employment Service as a condition for eligibility for so-called
“experience rating” reductions in their unemployment compensation contribu
tions. Comprehensive listing of job vacancies with the Employment Service
would provide direct help in the placement of the unemployed, whereas purely
statistical surveys of vacancies would have, at best, only a remote relationship
to placement. Many employers, including some of the largest in the country,
presently refuse to list their vacancies with the Employment Service.
If there were a financial penalty on such refusal, the Employment Service
would have a far more complete listing of and far more detailed information
on the nature of actual job vacancies (information usable not only for place
ment but also for statistical, analytical, administrative and policy purposes)
than could possibly be obtained by the kind of job vacancy surveys that have
been proposed.
While some who propose such surveys do so in good faith, others who ad
vocate them are obviously hoping to develop propaganda rather than factual
information. It is evident from expressions by the latter group that they seek
global figures on job vacancies to set alongside the unemployment figures in
order to minimize the seriousness of the unemployment problem. They would
obviously like to buttress their callous charges—proved baseless every time de
mand rose high enough to provide work opportunities for the jobless—that
“the unemployed do not want to work.” To blame unemployment on the unem
ployed is both easy on the conscience and a useful argument against effective
government action to reduce unemployment.
Job vacancy data can properly be matched up with unemployment data only
if there is enough detailed information on the vacancies to compare with simi
larly detailed information on the characteristics and geographical location of
the unemployed. A statistical survey of job vacancies based upon a sample suf
ficiently large to provide the detailed information required for that purpose
would be impossibly expensive. Moreover, employers would be unwilling to
accept the burden of the clerical work that would be involved.
Among those who urge job vacancy surveys in good faith, there is confusion
as to the purpose which they should be designed to serve. Vacancy surveys have
been proposed, among other reasons, in order to provide information (a) for
placement, (b) for training, (c) to serve as an overall economic indicator, and
(d) to make labor market supply-demand comparisons either on an overall
756
th e
1967 ECONOMIC REPORT OF THE PRESIDENT
basis or by occupation, by area, or both. Each of these purposes would require
a different survey design and sample size.
All of the purposes could be served, and served better, on the basis of the
data the Employment Service would be able to generate if employers were in
duced to list their job vacancies with it.
Question. What is your position on Federal revenue sharing with the states
and localities?
Answer. My position on this matter is spelled out in my prepared statement
under the heading “Tax Sharing and Social Responsibility.”
(The prepared statement of Mr. Reuther, submitted to the Joint
Economic Committee in advance of his appearance, follows:)
P repared S t a t e m e n t
of
W
alter
P. R
euther
The fundamental question to which our nation has not as yet found a satisfactor or acceptable answer is: What is the purpose of a free society and how
does it intend to harness the full potential of the Twentieth Century Technologi
cal Revolution and commit this potential to the advancement of human and
democratic values.
Our nation is more richly blessed than any other nation in the world. We
possess tremendous economic resources, a highly developed technology, a skilled
and industrious work force. Yet, despite all these advantages, we are still
failing to satisfy many urgent and basic human needs. Thirty-two and a half
million Americans continue to live in poverty in a land of plenty. Our urban
centers are blighted by decay and spreading slums. Our education and medical
facilities are inadequate; we are polluting our air and our water; we are stran
gled in traffic congestion; we are destroying the beauty which was our great
national heritage and are creating a living environment unworthy of citizens
in a free society.
We have the resources and we have the technical know-how to overcome all
these problems. We have lacked the will, however, to match these resources
and this know-how to our needs.
We must make up our mind as to what we feel is important within the frame
work of our value system, declare a list of national priorities, and commit our
selves and our resources to the achievement of those national priorities.
Achieving and maintaining full employment and the maximum utilization of
our human resources must continue to be at the top of our list of national pri
orities. The Employment Act of 1946 committed our nation to the achievement
of maximum employment, production, and purchasing power. Twenty years after
the enactment of this legislation we are still short of achieving these objectives.
Since 1960 we have made steady and meaningful progress in reducing un
employment, moving from 5.6 percent to 3.9 percent. Presidents Kennedy and
Johnson deserve enormous credit for pursuing policies and programs that made
this progress possible. Nevertheless, as a nation we cannot escape the fact that
the United States still has the highest rate of unemployment of any democratic,
industrialized nation in the world.
During the Eisenhower Administration, the obsession with balancing the budget
unbalanced both the economy and the budget. In recent years we have also
been unduly alarmed by exaggerated fears of the balance of payments deficit
and of inflation, and have permitted our concern over these two problems to
prevent fulfillment of the mandate of the Employment Act of 1946, to which our
nation is and must be committed.
Today I would like to discuss steps which can be taken to further reduce un
employment and ameliorate the hardships and economic losses that flow from
it, and to discuss ways and means to contain inflation.
In that connection, I will discuss such subjects as:
the mandate of the Employment A ct;
the balance of payments;
the guideposts and the manner in which they have fostered inequities at
the expense of workers;
cost-of-living wage escalator provisions;
bargaining over income shares, with particular reference to the automobile
industry;
the need for a comprehensive incomes policy applying equitably to all forms
of income;
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
757
profit sharing and its relationship to incomes policy, to democratization of
the ownership of industry, and to collective bargaining;
a proposed price-wage review procedure both for immediate implementation
and as an instrument of incomes policy;
the proposed tax increase in relation to the state of the economy, inflation,
monetary policy and selective credit controls;
an employment target for 1967; and
the proposal that the government act as “employer of last resort.”
In addition, I will discuss a number of other matters—poverty, guaranteed
minimum incomes, proposals to share federal revenues with the states, and Great
Society goals.
THE MANDATE OF THE EMPLOYMENT ACT
In his first Economic Report in 1962, President John F. Kennedy emphasized
the importance of the principles of the Employment Act, under which is Report
and that of the Council of Ecomonic Advisers were made. He said:
“My first Economic Report is an appropriate occasion to re-emphasize my
dedication to the principles of the Employment Act. As a declaration of national
purpose and as a recognition of Federal responsibility, the Act has few parallels
in the Nation’s history. In passing the Act by heavy bipartisan majorities, the
Congress registered the consensus of the American people that this Nation will
not countenance the suffering, frustration, and injustice of unemployment, or let
the vast potential of the world’s leading economy run to waste in idle manpower,
silent machinery, and empty plants.
“The framers of the Employment Act were wise to choose the promotion of
‘maximum employment, production, and purchasing power’ as the keystone of
national economic policy. They were confident that these objectives can be effec
tively promoted ‘in a manner calculated to foster and promote free competitive
enterprise and the general welfare.’ They knew that our pursuit of maximum
employment and production would be tempered with compassion, with justice,
and with a concern for the future. But they knew also that the other standards
we set for our economy are easier to meet when it is operating at capacity. A
full employment economy provides opportunities for useful and satisfying work.
It rewards enterprise with profit. It generates saving for the future and trans
forms it into productive investment. It opens doors for the unskilled and un
derprivileged and closes them against want and frustration. The conquest of
unemployment is not the sole end of economic policy, but it is surely an indis
pensable beginning.”
Four-percent unemployment was an interim target
The Council of Economic Advisers in its 1962 Report set 4 percent unemploy
ment as an “interim” target, to be achieved by mid-1963. The temporary nature
of this goal, however, was strongly emphasized. The Council said:
“We must not forget, however, that any practical unemployment goal is only a
temporary compromise, and its attainment must never be an occasion for relax
ation, but rather an incentive to search out ways to achieve a still lower rate.”
Even more specifically, the Council forecast that if structural obstacles were
removed, unemployment could be reduced well below 4 percent. It said:
“If we move firmly to reduce the impact of structural unemployment, we will
be able to move the unemployment target steadily from 4 percent to successively
lower rates.”
As it turned out, the structural obstacles which so deeply concerned some econ
omists in 1961 and 1962 proved in large part illusory. Gardner Ackley, Chair
man of the Council, emphasized that point in testimony before this committee last
year.
He pointed out, for example, that in 1961 there were only 160,000 technical
and professional workers unemployed, yet in the four succeeding years employ
ment of such workers increased by 1,178,000—the difference being represented by
new entrants into the labor force and by formerly unemployed or employed
workers who had been trained or upgraded into technical and professional jobs.
Mr. Ackley continued:
“In September 1961, 25 major labor market areas had unemployment rates of
7.0 percent or more. Many seemed to be areas of permanent distress, which no
amount of general prosperity could erase. By September 1965, only two areas
(both in Puerto Rico) had rates in excess of seven percent.. . .
“ The lesson seems clear. The millions of excess unemployed were indeed em
ployable, and the great flexibility and mobility of our labor force, and the ingenu
758
THE 1967 ECONOMIC REPORT OP THE PRESIDENT
ity of our employers permitted their reemployment without severe strains or tot-
tlenecks .” [emphasis added]
The Council rejects its mandate
The structural obstacles to full employment having been to such an extent dis
solved, we might have expected the Council this year to have come forward with
programs designed to “move the unemployment target steadily from 4 percent to
successively lower rates.” Unfortunately, the Council has chosen another course.
It has rejected the mandate imposed upon it by the Employment Act to “use all
practicable means” to promote “maximum employment, production and purchas
ing power.” It has done so in the face of clear evidence that the mandate is still
far from having been carried out. At the end of 1966, manufacturing industry
was operating, according to McGraw-Hill, at only 88 percent of capacity.1 This
compares with 89Vi percent a year earlier, because capacity has grown faster
than output, and was well below the preferred rate of 93 percent. There were
still nearly three million unemployed, nearly two million more working only parttime for economic reasons, and an estimated 500,000 to a million “discouraged
workers” who are not even counted in the labor force because they are not active
ly seeking work. Yet in the face of these shortfalls from the goal of “maximum
employment, production and purchasing power,” the Council of Economic Ad
visers announces that full employment has been achieved, and advises us that in
the light of the programs it recommends we cannot expect any further reduction
in the average unemployment rate this year.
Just to make sure that its position will be understood, the Council states it in
the opening words of its Report. It commences:
“The United States in 1966 enjoyed the benefits of the fullest employment in
more than a decade. The unemployment rate reached a 13-year low of 3.9 per
cent. At that level, demand finally matched supply in most labor markets, a
situation which most economists define as essentially ‘full employment*.”
Subsequently, in discussing the economic outlook for 1967, the Council said:
“Finally and most important, the Nation should continue to experience sub
stantially full employment in 1967. The unemployment rate should be essen
tially the same as in 1966, when it averaged 3.9 percent.”
This attitude of complacent self-satisfaction must be rejected by the Congress
and by the Administration. For what does it mean? If there is to be no decline
in the unemployment rate, there will continue to be 1.2 million unemployed
workers below the age of 25. If there is to be no drop in total unemployment,
then there will continue to be 625,000 Negroes unemployed.
On the basis of the new definitions of unemployment adopted by BLS, un
employment rates in 1966 averaged 7.6 percent for Negroes, and 11.7 percent for
teen-agers (aged 16-19). Similar figures based on the new definitions are not
available for Negro teen-agers separately, but on the basis of the old definitions
their unemployment averaged 21.2 and 31.1 percent for Negro boys and girls
respectively (aged 14-19). We must put an end to the human wastage of our
young people and the continuing denial of real equality of opportunity for
Negroes which these figures indicate. To permit them to continue would be an
act of immoral and dangerous folly. Yet if the employment forecasts of the
Council are realized on the basis of the programs which the Council recom
mends, then there is no realistic hope that the jobless rates of either teen-agers
or Negroes can be substantially reduced.
In fact, if the employment forecasts of the Council prove overoptimistic, then
these groups will be among the first to suffer rising unemployment.
BALANCE OF PAYM EN TS
The pressure for restrictive fiscal and monetary policies in the face of con
tinued high unemployment and serious signs of weakness in the economy arises
out of an unwarranted concern with the deficit in the balance of payments and
fear that it may be worsened by inflation.
No one would be foolish enough to argue that either inflation or persistent
payments deficits are desirable. But the fear of both, and the panicky retreat
into repressive economic measures which it inspires, is in strange contrast to the
refusal to apply more direct solutions less costly in human hardship and economic
*The McGraw-Hill figures are used here rather than the FRB figures used elsewhere in
this statement because the McGraw-Hill utilization figure is comparable with the “preferred
rate” figure.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
759
waste than unemployment, and less inequitable than policies that seek to hold
the rise in real wages below the increase in productivity.
Until relatively recently, the main reason usually advanced in support of price
stabilization policies was that inflation is inequitable in its impact, unfairly en
riching some groups in the population at the expense of others. For some years
now, equity has been receding into the background and the adverse effects of
price increases on the balance of payments have replaced it as the main reason
for combating inflation. In fact, there has been an increasing tendency to sacri
fice equity in order to protect the balance of payments. The tendency is evident
in the promulgation of and adherence to a wage guidepost applied to money
rather than real wages which, in the face of rising prices, disadvantages work
ers and benefits other groups at their expense. The sacrifice of equity is even
more starkly evident in the adoption of restrictive fiscal and monetary policies
to curb inflation which inflicts the ultimate economic inequity—unemployment—
on the least favored groups in the population.
That these sacrifices are wholly unnecessary should be readily apparent to
anyone who takes the trouble to look at the facts. To begin with, it must be
remembered that wages have relevance to the balance of payments only insofar
as they may affect prices; and prices, in turn, are relevant only to the trade
component of the balance of payments. The facts show that wage movements
in this country, relative to those of the other industrialized countries with which
we compete on the world market, far from being adverse, have been favorable
to the competitive position of the United States. A recent BLS study showed
that U.S. unit labor costs in manufacturing rose less between 1957 and 1965 than
those of all eight other countries examined, except Canada, by a wide margin.
Even the comparison with Canada would have been favorable if not for that
country’s devaluation of its dollar. As BLS said:
“From the standpoint of labor cost per unit of output, American manufacturers
in the mid-1960’s have achieved a better competitive position relative to foreign
producers than they held in the late 1950,s. This conclusion emerges clearly from
an inspection of the time series indexes in all nine countries, taking account of
changes in the exchange rates in four of the countries.”
Money wages and fringe benefit costs per hour increased somewhat faster in
1966 than in earlier years because of prior increases in consumer prices, and
there was a small increase in unit labor costs in manufacturing. The Council of
Economic Advisers noted, however:
“Even so, unit labor costs in manufacturing have risen less rapidly in the
United States during 1966 than in most other industrial countries.”
Secretary of the Treasury Fowler was able to testify in these hearings that
“on the export side, the U.S. competitive position was maintained” in 1966. He
pointed out that “unit value of U.S. exports in the second quarter of last year
showed a decline from the comparable quarter of 1965, whereas the movement
was upward for most advanced countries.”
U.S. exports actually rose during 1966. The Council’s Report notes that they
“were more than 10 percent greater than in 1965, even after adjustment for the
effects of the 1965 dock strike.” (Particularly significant with respect to the
influence of labor costs is the fact that exports of manufactured goods also rose
10 percent during 1966. The decline in the U.S. trade surplus last year was the
result of a number of special and temporary factors which caused a sharp in
crease in imports which, as Secretary Fowler said “can be expected to taper off.”
He mentioned a number of those factors in his testimony, including “additional
imports resulting from higher defense spending at home.”
tThe Council’s Report calls attention to the increase of 50 percent in imports
of capital goods which accounted for more than 20 percent of the total increase
in imports in 1966. Foreign-made capital goods were in such heavy demand,
obviously, because the spectacular rise in profits fueled an investment boom that
strained the capacity of U.S. producers of such goods.
Inflated imports of capital goods inspired by and financed out of grossly inflated
profits, however, are only one element in the contribution of corporations to the
payments deficit—a deficit which workers are called upon to correct by the sacri
fice of job opportunities and their equitable share in the fruits of the nation’s
growing productivity. A far bigger factor is the sizable and continuing export
of U.S. capital to already developed countries in total disregard of the payments
deficit.
It is possible that the so-called “voluntary controls” program has had some
effect on some forms of capital outflows. But there is little statistical evidence of
760
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
any effect on direct investment (excluding funds raised abroad) of American
capital in other countries. In 1964, direct investment was not quite equal to the
total payments deficit (on the liquidity basis). In 1965 and during the first three
quarters of 1966 (annual rate), the total payments deficit was less than half as
large as in 1964, but direct investment had increased, so that in both years it
was more than 2y2 times as large as the deficit. The pertinent figures are as
follows:
[Dollars in millions]
Direct in
vestment of
U.S. capital
in other
countries
(net capital
outflow)
1964.................................... ............................ .............. ......
1965.......................................................... ................ ...........
1966 i ...................................................................................
Balance-ofpayments
deficits
(liquidity
basis)
$2,416
3,371
3,151
$2,798
1,337
1,213
Ratio of
direct in
vestment to
deficit
0.86
2.52
2.60
i Average for 1st 3 quarters on a seasonally adjusted annual rate basis.
In other words, had direct investment been reduced by as little as two-fifths
in 1965 and 1966—which would have brought it less than one-fifth below the
1964 level—the payments deficit would have been wiped out in each of those
years. Such a reduction could have been accomplished without damage to the
developing countries since only about one-fifth of all U.S. direct investment goes
to such countries—in 1965 the proportion was 21.3 percent.
Other industrial countries protect their international payments positions by
various forms of controls over capital exports. The IUD and the UAW have
long advocated similar controls over U.S. capital exports to developed countries.
Direct controls, with appropriate discretion vested in the controlling agency,
would afford an opportunity to consider each proposed investment in the light
of the national interest.
Another approach has recently been suggested by a member of the Board of
Governors of the Federal Reserve System, Sherman Maisel. He proposed that
the principle of the interest equalization tax, enacted to restrain other forms of
capital outflow, be adapted to apply to direct investment of American capital
in developed countries. According to press reports, Mr. Maisel posed a question
very much like that which has long been on the minds of many in the IUD and
the UAW. He asked: “. . . are lower incomes, unemployment, and excess ca
pacity justifiable in order to avoid direct fiscal methods of adjusting the balance
of payments?”
Whether the proper answer is fiscal methods or direct controls, it should be
apparent that an answer must be found and put into effect promptly. The
interests of the nation as a whole must be assured priority over the narrow,
selfish and irresponsible pursuit of profits by the small number of large corpor
ations engaged in overseas operations. We urge that this Committee examine
the alternatives and recommend action to curb direct investment m developed
countries by American corporations so as to eliminate the pressures toward a
restrictive economic policy which arise out of the payments deficit.
GUIDEPOSTS
The IUD and the UAW unreservedly support sound, equitable, courageous and
vigorous action to achieve price stability. But we refuse to permit a balance
of payments deficit created essentially by croporate investment policies in pur
suit of maximum profits to panic us into accepting an inequitable wage policy
that results in enriching those same corporations at the expense of their work
ers. That is why we oppose the guideposts and call for their replacement by a
comprehensive incomes policy that bears equitably upon all forms of income—
property income as well as employment income, managerial and professional
income as well as workers’ income.
THE 1967 ECONOMIC REPORT OP THE PRESIDENT
761
Some of the inequities which developed under the guideposts, and the process
by which they developed, are described below. In certain instances, the second
quarter of 1960 will be compared with the second quarter of 1966. The second
quarter of 1960 was chosen because it represented the peak of the previous
business cycle, so that the comparisons are between two periods of relative
prosperity. The second quarter of 1966 was chosen because subsequently the
pressure of rising living costs finally broke the dams and forced wages up at a
faster pace. The essential points are that (a) it was a prior increase in living
costs for which wage increases were not responsible which finally compelled
money wages to begin rising faster than the rate of productivity advance and
(b) the faster pace of wage increase was required to correct the income distor
tions and inequities that had developed.
1. Compensation per employee man-hour has closely paralleled productivity
In a statement presented by the Council of Economic Advisers to a Subcom
mittee of the House on September 12, 1966, productivity in the total private
economy was shown to have increased at an annual rate of 3.8 percent from
1960 to 1965 (Table A of the statement) while total compensation per employee
man-hour, including overtime, in the private economy was shown to have in
creased during the same period at an annual rate of 3.7 percent (Table 1 of the
same statement)—or less than the increased in productivity.1
2. Thus, increases in employee compensation per man-hour cannot be said to have
contributed to upward pressure on the price level
Since hourly employee compensation rose at approximately the same rate as
productivity, it obviously was not the cause of increases in the general price
level. Given the fact that corporate market power had been used to maintain
some prices at excessive levels at the beginning of the 1960-65 period, the close
tracking of productivity by hourly employee compensation would have permitted
some reduction of the general price level.
8. Nevertheless, prices rose
The Consumer Price Index increased by 6.6 percent from 1960 to 1965, an
average rate of 1.3 percent annually.
4. Real hourly compensation, in consequence, lagged far behind increases in
productivity
The rise in real total compensation per employee man-hour from 1960 to 1965
was in the neighborhood of 2.4 percent annually—two-thirds as fast as the
increase in productivity. Wage and salary earners were deprived of a third
of their proportionate share of the gains from increased productivity.
5. As a result, the distribution of the national income was distorted in favor of
property income to the disadvantage of employment income
Percent increase
1960 to 1965
Employment income:
Total employee compensation_____________________________________
Employee compensation in the private economy_____________________
Property income:
Corporate profits before taxes_____________________________________
Corporate profits after taxes______________________________________
Dividends_________________________ ___________________________
Personal interest income_________________________________________
11-1960 to
11-1966
33.5
31.3
45.1
42.5
52.3
66.7
43.3
64.1
59.8
75.2
56.3
81.5
1 The productivity figure was subsequently revised by BLS to 3.6 percent because of an
upward adjustment in the man-hours figures; comparable revised! employee compensation
data have not yet been published. It is evident, however, that hourly employee compensa
tion closely paralleled productivity. Differences between the two sets of data might be
accounted for entirely by statistical error. It is known that there are important errors of
understatement in the productivity index which/ probably significantly outweigh the fewer
and generally less serious errors in the opposite direction.
75-314— 67— pt. 4-------4
762
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
6. The distribution of income within the corporate sector, similarly, changed to
the disadvantage of wage and salary earners
Percent increase
All
corporations
I960
to
1965
Compensation of corporate employees—....... ..................................... .
Profits before taxes_____________________________________________
Profits after taxes______________________________________________
Dividends___________________________________________________
Nonfinancial
corporations
11-1960
to
11-1966
1960
to
1965
31.9
151.7
166.5
140.5
42.5
i 58.9
174.5
i 54.8
11-1960
to
11-1966
42.2
65.1
82.9
53.8
31.6
58.6
75.2
39.7
i “ Corporate gross product” data used in this table, unlike data in Pt. 5above, excludeproduct originating
in the rest of the world.
7.
The increase in the property income share was achieved at the expense of
lower-income families
From 1960 to 1964 (the latest available), the University of Michigan Survey
of Consumer Finances shows that the shares of total income going to the lowest-
income 40 percent of all families and the highest-income 10 percent changed as
follow s:
1964
1960
Lowest income 40 percent___________________________________________
Highest income 10 percent___________________________________________
14
30
16
27
The highest income received by any of the families in the 40 percent at the
bottom of the income structure increased approximately half as fast as the lowest
income received by any family in the top income 10 percent:
1960
Highest income of bottom 40 percent_____________________
Lowest income of top 10 percent_________________________
$4,599
11,090
1964
$5,199
13,700
Percent
increase
13
24
While other causes may also have been at work in bringing about the above
results, the disproportionate growth of property income and the corresponding
lag of employment income were undoubtedly major factors. Nearly three-fifths
(59 percent) of all income from capital went to families in the top-income tenth
in 1964, and only one-eighth (12 percent) to those in the four-tenths of all
families at the lower end of the income structure.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
763
Income increases for families headed by managers and officials were far
greater than for families of other groups of nonfarm employees, white collar and
blue collar.
Percent increase from 1960
to 1964 in—
Occupation of family head
Median
income
Managers, officials __
__ _____
__
_______________
Clerical, sales______ _________________________________________________
Craftsmen, foremen _ ___________________________________________________
Operatives.
_
_________________________________________________
Laborers, service w orkers__________________________________________________
Incom e at
third quartile
p o in t 1
31
14
21
18
11
88
4
22
25
15
1 Lowest income received by any family in the 25 percent of the group with the highest incomes.
Property income undoubtedly played a significant part in the sharp increases
in incomes of managers’ and officials’ families. Disproportionately large in
creases in their salaries, quite likely, helped to heighten the contrast with the
lesser gains of other nonfarm employees.
8. From December 1965 to December 1966 the Consumer Price Indew rose 8.8
percent with the result that workers limited to 8.2 percent guidepost wage in
creases suffered declining living standards in the face of rising productivity.
During the months from January to August 1966, the Consumer Price Index
rose at an annual rate of more than 4 percent. It was only after August that
wage rates (as reflected in the index of hourly earnings in manufacturing exclud
ing overtime and inter-industry shifts) began to accelerate their previously creep
ing rate of increase.
9. Contrary to widespread impression, prices charged for manufactured goods
have contributed substantially to the increase in living costs.
•The Council of Economic Advisers, in its September 12, 1966, statement and
elsewhere, has fostered the impression that prices of manufactured goods have
had little to do with rising living costs. It has put major emphasis on increases
in farm income and on the wage gains of workers in the low-wage service indus
tries and in other nonmanufacturing industries where unions exercised “market
power.” However, wholesale prices of finished manufactured goods other than
foods increased 3.1 percent from the second quarter of 1960 to the same quarter
of 1966. iThis increase in wholesale prices contributed materially to the rise in
living costs, directly and indirectly, although increases in retail markups may
also bear part of the responsibility. (Consumer prices of all commodities except
food, which consist overwhelmingly if not entirely of manufactured goods, in
creased 4.1 percent during the same period.1) Manufactured goods, excluding
food, accounted for 43.5 percent of the total weight in the CPI as of December
1963, when the index was last revised.
10. The increase in wholesale prices of manufactured goods occurred despite
a decrease in unit labor costs which, under the guideposts, should have led to
price reductions.
As late as July 1966, unit labor costs in manufacturing industry were still
below the 1960 average. Had the decrease in unit labor costs been reflected
in price reductions, a significant proportion of the rise in the Consumer Price
Index would not have occurred. If, in addition, excessive prices had been re
duced, the rise in the CPI would have been even smaller.
11. Rising prices of manufactured goods in the face of declining unit labor
costs raised the ratio of wholesale prices to unit labor costs to the highest level
since the speculative inflationary boom set off by the Korean war.
The index of that ratio (1957-58=100) rose almost steadily from 100.4 in
November 1963 to 105.8 in July 1966, the highest level reached since June 1951.
This index shows indisputably that labor costs provided no excuse for price
increases.
* Information obtained by telephone from BLS ,* the published CPI figures for “Commodi
ties Less Food” include home purchase costs since 1964. Such costs were excluded in
computing the above figure.
764
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
12.
While the index of labor cost per unit in manufacturing declined, profit*
per unit increased.
As of 1965, profits before taxes per unit were approximately 25 percent higher
than in 1960. As of the second quarter of 1966, profits per unit were approxi
mately 20 percent higher than in the second quarter of 1960—the peak of the
last business cycle. (These figures are given as approximations because erratic
fluctuations in corporate profits per unit suggest that the available data do not
permit precision.)
18. The increased ratio of profits to sales confirms the fact shown by estimated
profits per unit that costs other than labor costs did not justify the increases
that had been made in the prices of manufactured goods.
Profits as percent of sales1
Before taxes
Year:
1960............................................................................................................
1965......................................... ..................................................................
Second quarter:
1960............................................................................................................
1966............................................................................................................
After taxes
8.0
9.4
4.4
5.6
8.4
9.9
4.6
5.9
i FTC-SEC data.
H.
Manufacturing corporations* rates of profits on net worth showed, simi
larly, that their price increases were not necessitated by higher costs but rather
were designed to increase profits.
Profits as percent of ne
worth 1
Before taxes
After taxes
Year:
1960...................................................... - ...................................... - .......
1965............. ........ ............................ .................... ..............................
17.2
22.8
9.5
13.5
1960....... ..................................... ................ .........................................
1966....... ...............................................................................................
18.5
25.7
10.2
15.3
Second quarter (annual rates):
1FTC-SEC data; profits divided by net worth as of end of preceding year.
The rate of profit on net worth, after taxes, increased
second quarter of 1960 to the same quarter of 1966.
50 percent
from the
15. Ijf manufacturing wage and salary earners had, been compensated (in addi
tion to their actual gains in wages ami fringe benefits) for the increase in the
cost of living from the second quarter of 1960 to the second quarter of 1966,
manufacturing corporations would still have had a rate of return on net worth
significantly higher than in the earlier period.
The Consumer Price Index increased by 9.4 percent from the second quarter
of 1960 to the same quarter of 1966. Compensation of manufacturing employees
in the latter quarter was at the rate of $143 billion per year. Adjustment for
the 9.4 percent increase in living costs would therefore have cost $13.4 billion.
Manufacturing corporation profits before taxes in the second quarter of 1966
were $14,014 million—equal to an annual rate of $56.1 billion. The assumed
cost-of-living wage increase would have reduced such before-tax profits to $42.7
billion. Based upon the 40.2 percent effective tax rate implicit in the FTC-SEC
data, profits after taxes would have been $25.5 billion—56.4 percent higher than
in the second quarter of 1960. Profits in that amount would represent a rate
of return on net worth (as of the beginning of 1966) of 11.7 percent compared
to the 10.2 percent actual rate in the second quarter of I960.1
1 These calculations are subject to some error since the FTS-SEC profit data used are
not seasonally adjusted and are not strictly comparable with the Commerce Department’s
employee compensation figures. (Quarterly Commerce Department data on manufacturing
profits are not available without adjustment for inventory valuation and there are no
Commerce Department data on the net worth of manufacturing corporations.) Neverthe
less, the calculations undoubtedly present a reasonably good reflection of the facts.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
765
The above calculations on the ability of manufacturing corporations to absorb
cost-of-living wage increases were originally made to check the validity of an
assertion made by the Council in the statement of September 12,1966, previously
mentioned. At that time, as noted, the Council contended that the increase in
the consumer price level was due largely to gains made by farmers and by lowwage service workers which, it argued, were desirable from a policy standpoint,
as well as by certain nonmanufacturing workers exerting their “market power.”
(It mentioned, but played down, the role of price increases by corporations which
liad no basis in the levels of costs or profits.) The Council argued that the
gains of farmers and low-wage workers were desirable from a policy standpoint—
which they were2—and then, in effect, concluded that higher-wage workers
should pay for those gains. (The Counciml apparently assumed, contrary to
some of its own earlier statements, that farmers and low-wage workers can
make gains only at the expense of other workers.) It then went on to sa y :
“The import of all this for the strongly organized workers in manufacturing
is clear: If workers in manufacturing attempt to catch up with the past rise
in consumer prices in order to achieve real wage gains equal to the trend in
overall productivity, a sharp rise in manufactwring prices can be avoided only
by an appreciable squeeze of manufacturing profitsf . .
[emphasis in the
original]
This statement is contradicted by the figures cited above. They show that if
manufacturing workers—wage and salary alike—had caught up with the cost
of living, profits would have been reduced from extraordinarily high levels re
sulting from unjustifiable price increases and refusals to reduce excessive prices,
but, far from being “squeezed”, they would still have represented, in the second
quarter of 1966, rates of return significantly higher than in the peak quarter of
the last business cycle. Even if that were not the case, there would still be a
question as to whether the living standards of manufacturing workers’ families
or profits should bear the adverse effects of the increase in the price level.
Effect on workers’ standards
As the inequities described above evolved, workers inevitably became more
restless with them. The Council notes that wage settlements tended to increase
as the year progressed, particularly in the second half of the year. However,
all wages changes effective under major collective bargaining agreements in 1966,
including those due under contracts negotiated in earlier years, averaged 3.3 per
cent. This was exactly equal to the increase in consumer prices from December
1965 to December 1966. Obviously, even after allowance is made for increases
in fringe benefits that may have been somewhat higher in percentage terms, the
average worker’s share in the economy’s productivity gains last year was
negligible, and for many workers the year brought a reduction in living
standards.
In four of the five industry divisions for which the Bureau of Labor Statistics
produces data on real spendable weekly earnings, the buying power of the aver
age worker’s take-home pay, expressed in dollars of 1957-59 buying power, was
less than it had been a year earlier. Between December 1965 and December
1966, for a worker with three dependents, real spendable average weekly earn
ings in mining fell from $102.32 to $101.20; in manufacturing they fell from
$89.75 to $88.13; in wholesale and retail itrade, from $64.63 to $64.17; and in
finance, insurance, and real estate, from $74.59 to $73.23. Only in contract con
struction did real spendable weekly earnings rise a few cents, from $111.77 in
December 1965 to $112.35 in December 1966.
It is true that take-home pay levels were affected by the increase in the Social
Security tax, but even gross real weekly earnings dropped in two of the in
dustry groups, manufacturing and finance, insurance and real estate, and in a
third group, wholesale and retail trade, rose by only 24 cents per week.
•Cost-of-living escalators
The year 1966 thus demonstrated to millions of workers the need for cost-ofliving wage escalator provisions in their contracts in order to protect their fam
ilies’ living standards against the inequities^ illustrated above. The evidence is
clear—workers’ wage and fringe benefit gains did not initiate the rise in price®.
3 The gains to farmers, however, apparently went disproportionately to those operating
large farms rather than to impoverished small farmers.
766
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
Workers, rather, were the innocent victims of it. Escalator clauses would have
prevented erosion of the buying power of their wages.
In the face of these facts, the Council nevertheless decided this year, for the
first time, to make a direct attack on the cost-of-living escalator principle. It
said:
Although the Council recognizes that some allowance will frequently be made
for higher living costs in 1967 settlements, it continues to believe that arrange
ments which automatically tie wage rates to changes in consumer price indexes
will contribute to inflation. One union may be able to protect its members in
this way against any deterioration in its real wage or any real impact from
increased indirect taxes. But it does so only by imposing more of the burden
on others. And if all unions—and other groups in society—were to succeed in
tying compensaton to consumer prices, the arrangement would become a vast
engine of inflation, which, once it began to roll, would continue to gain speed.
We reject this conclusion for it flies in the face of the economic facts.
As has been demonstrated above, manufacturing industries, to give one example,
could very well have afforded to compensate their workers out of profits for
increases in the cost of living, and would still have had profits at very high
levels. All the above-quoted paragraph says is that if the employers had so
compensated their workers, but had then used their market power to regain that
money from consumers by driving up prices, and so protect their already inflated
profits, prices would have gone up further. In short, if groups other than work
ers achieve gains for themselves by causing inflation, the workers have no right
to try to restore equity.
The UAW’s position
The UAW has had provision for quarterly adjustment of wages in accordance
with changes in the Consumer Price Index in its contracts with General Motors
since 1948, and with other major corporations since 1950. These clauses have
provided for UAW members and their families a measure of equity for which
those not so protected have all too often had to fight on the picket line. The
members of the UAW are of no mind to surrender their escalator clauses and
see their living standards eroded.
I tried to make that clear—to the Council, to the auto corporations, and to
the nation—on the day the Council released its Report. I said:
“The families of UAW members in the automobile, aerospace and agricultural
implement industries have had the protection of cost-of-living escalator clauses
for many years—in some cases since 1948. Such clauses are a basic part of
the wage structures of the industries involved and an essential precondition for
industrial relations stability in those industries. The UAW in the past has
successfully resisted all efforts to tamper with cost of living protection for its
members and it does not intend to permit any tampering in 1967 by the corpo
rations or by anyone else. We will not depart from the escalator principle in
this year’s negotiations nor will we tolerate any weakening of its implementa
tion.
“The UAW has consistently followed the policy of negotiating gains for its
members out of the rapid technological progress and the profitability of the
major corporations for which its members work without causing any necessity
for price increases. We have adhered in practice to the principle that UAW
members and their families should make progress with the community and not
at the expense of the community.
“The major auto corporations have not shared the fruits of their great gains
in productivity with consumers in lower prices. The UAW has demonstrated
time and time again that these corporations could, at the same time, reduce
prices to consumers, provide increased wages and improved benefits to their
workers, and still earn more than satisfactory profits for their stockholders.
“The Council of Economic Advisers should remember that escalator clauses
remain inoperative—no worker gets a penny out of them—unless prices rise
first.
“The Council, therefore, would better serve the interests of the national
economy and the American people by focusing its attention upon the price-profit
policies of the major corporations in America rather than by seeking to place
the major burden of avoiding inflation upon workers and their families.”
Escalator is not inflationary
The Council’s position on escalator clauses is not only indefensible from the
standpoint of equity; it is poor economics. The economic defense of cost-of-
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
767
living wage escalation has been made many times. It is enough for purposes
of this statement to quote one leading industrialist and one outstanding econo
mist. The late C. E. Wilson, who subsequently became Secretary of Defense
under President Eisenhower, and who, as president of General Motors, pioneered
with the UAW in establishing the escalator-improvement factor wage formula,
was quite sure that he was not, by so doing, establishing an engine of inflation.
Indeed, adressing the National Press Club on June 8, 1950, and discussing the
new five-year agreement signed with the UAW he said: “The cost-of-living
formula by which wages are adjusted every three months is a continuation of
the same principle used in the 1948 agreement, applied in the same way. This
provision protects our employees against inflation but in itself is neither infla
tionary nor deflationary, but follows what other pressures have forced on the
national economy.” (emphasis added)
In much the same vein he wrote in Reader’s Digest for September 1952: “I
contend that we should not say ‘wage-price spiral’. We should say ‘the pricewage spiral’. For it is not primarily wages that push up prices. It is primarily
prices that pull up wages.” [emphasis in the original]
A much more recent defense of the escalator principle was made by one of
America’s great economists, Professor Alvin H. Hansen of Harvard University,
in the magazine Challenge, November-Deeember, 1966.
What he had to say on the subject is well worth quoting at length:
“Inflation-proof arrangements need not necessarily exert an upward push on
costs. Escalator wage contracts prevent inmmediate wage demands based on
anticipated cost-of-living increases.
“Such arrangements redistribute rather than add to aggregate income. By
and large, they take income from the inflation-advantaged group and give it to
the inflation-disadvantaged group. But these measures are not inflationary per
se. And they will become increasingly necessary in a high-pressure, full-employment economy.
“Living, as the whole Western world does, in an age of creeping inflation, the
impact of this fact upon expectations becomes obviously a crucial matter. As
I have already noted, there appears to be no evidence in advanced countries
that creeping inflation necessarily leads to runaway inflation. How can one
account for this fact?
“In a perfectly fluid free market we should expect a rapid escalation of any
inflationary movement. But the price system, fortunately, is not perfectly fluid.
If it were, any movement away from equilibrium would rapidly cumulate. Not
only is the system far from being fluid, it is in fact a network of contracts,
partly legal and partly behavioristic. Inertia plays a big role. Any movement
away from equilibrium makes headway against a sticky mass. The result,
fortunately, is a lagged adjustment to change.
“What implications do these considerations have for the commonly held view
that cost-of-living escalator clauses in collective bargaining contracts tend to
accelerate creeping inflation? In my opinion, this view is a mistaken one.
“Take the recent abortive contract (the one turned down by the membership)
between the airlines and the machinists union. Aware of the continuous, though
moderate, upward trend of consumer prices throughout the past 18 years, the
union demanded a cost-of-living escalator clause. The airlines stood firm against
this. The union, fearful that a consumer price rise of, say, 2.5 per cent or more,
might largely nullify any intended increase in real wages, demanded, and was
granted, still higher wages as compensation for surrendering the escalator clause.
The revised (and finally accepted) contract was far more generous than the
first. It provided both higher wage rates and an escalator clause, and crashed
right through the Administration’s wage guideposts. Thus, with or without
the escalator clause, the expectation of creeping inflation affected the proposed
settlement.
“Higher wages, paid in anticipation of price increases, come immediately into
play, and so at once operate to intensify inflationary pressures. Future wage
increases, paid in accordance with an escalator clause, come after consumer
prices have risen. Escalation validates a price increase that has already taken
place, but is not the cause of the price increase that has already occurred.
“The lag is highly important. Stability in a market economy is largely a
function of lagged adjustments. At all events, there is no escape from the per
fectly reasonable demand of workers that the Consumer Price Index must some
how be taken account of in wage contracts. It makes more sense to make the
adjustment after the event than to force the issue before the event.
768
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
“Clearly, the modern inflation problem presents many conflicting and often
irreconcilable factors. What then? Should we abandon the wage-price guideposts? I think not. We do need a thorough overhaul of the statistical founda
tions upon which the guideposts rest, and we need to clarify our concepts, and
our goals, with respect to price stability. But as broad-gauge directives, the
guideposts do point to basic relationships which cannot be ignored. The guideposts should be perfected, not abandoned.
“Improved guideposts, Presidential authority to raise or lower taxes within
specified limits and, finally, monetary policy working in tandem with fiscal policy,
could give us full employment and ‘reasonable price stability.’ In the mean
time, let us not blame our inflationary pressures on the New Economics.”
[emphasis in the original]
While I would not presume to speak for Professor Hansen, I have a strong
feeling that when he refers to “improved guideposts” in the last paragraph of
his article, he is thinking of some form of incomes policy rather than anything
as inequitable as the guideposts. Earlier in the same article, after mentioning
price increases resulting from food shortages, he wrote:
More serious is the recent rapid rise in the prices of manufactured goods despite
continued stability in unit labor costs.
The reason for these prices hikes is quite simple. Profits soared in 1966 beyond
the wildest dreams. And a guidepost policy is always in deep trouble when profits
in relation to wages get out of line.
Bargaining over income shares
In past years, the Council’s Reports have invariably repeated in one form or
another a point to which it attached so much importance that it was stated and
restated at three separate places in its original 1962 presentation of the guideposts. The 1962 Report said :
On page 186:
“ * * * there is nothing immutable in fact or in justice about the distribution of
the total product between labor and nonlabor incomes.”
On page 188:
“The proportions in which labor and nonlabor incomes share the product of
industry have not been immutable throughout American history, nor can they be
expected to stand forever where they are today. It is desirable that labor and
management should bargain explicitly about the distribution of the income of
particular firms or industries. It is, however, undesirable that they should bar
gain implicitly about the general price level.” [emphasis added]
On page 190:
“Finally, it must be reiterated that collective bargaining within an industry
over the division of the proceeds between labor and nonlabor income is not neces
sarily disruptive of over-all price stability. The relative shares can change
within the bounds of noninflationary price behavior.”
That point, which seems to me to spring from the most fundamental principles
of a free society, is, for some unaccountable reason, missing from this year’s
Report. Yet, bargaining over income shares is not only an essential attribute
of a free society; it can also serve valuable economic purposes. There has been
discussion in these hearings on the question of whether the existing distribution
of income in the U.S. economy is consistent with sustained full employment.
There are reasons to believe it is not, and that the inconsistency has been
worsened by the distortions in income shares resulting from recent price in
creases. Collective bargaining can be a powerful instrument for dealing with
that problem.
From a longer-run standpoint, it is desirable that income shares should change
to offset the effect on total demand of the increasing productivity of capital.
As was pointed out in a recent Brookings Institution study, with technological
progress reducing the capital required per unit of output, business fixed invest
ment demand will tend to be smaller in the future in relation to any given
level of output than with today’s technology. The resulting deficiency of demand
will have to be made up either by increased government spending, or increased
consumption, or a combination of both. Collective bargaining over income shares
can help to provide the required increases in consumption.
Particular importance attaches to bargaining over income shares in 1967
because, as the Council’s Report sa ys:
“To assume fsic; probably intended to be ‘assure’] steady movement toward
price stability in 1967, the public interest requires that producers absorb cost
THE 1967 ECONOMIC REPORT OP THE PRESIDENT
769
increases to the maximum extent feasible, and take advantage of every oppor
tunity to lower prices.” [Emphasis added.]
Among the cost increases that corporations obviously should absorb, although
the Council refrains from saying so explicitly, are the cost of wage increases re
quired to restore equity for workers in the face of rising prices and inflated
profits. As the Council says, profits of manufacturing corporations:
“* * * were higher for the entire year [1966]—at least as a percentage of
equity—than in any prior year since the highly inflationary year of 1950.”
These profits, result, to the extent that they are not the consequence of other
forms of abuse of administered pricing power, from the refusal of the corpora
tions to share the gains from rising productivity with consumers and workers.
The Council, in this connection, repeats from its 1964 Report a point that is highly
pertinent to negotiations this year in the automobile and many other industries:
“* * * there is no justification, on either economic or equity grounds, for
distributing above-average gains in productivity exclusively through the profits
channel.”
If the corporations refuse to share their productivity gains with consumers in
reduced prices, and the Council is unable to persuade them to do so, there is no
basis in justice or morality to stand in the way of workers who seek to share
in them.
The Council laments that extra gains in wage increases and fringe benefits,
although legitimate under such circumstances, “might tend to spread to other
industries.” That is most unlikely if the other industries’ profits do no permit
absorption of the costs involved. But one way out of the “unattractive dilemma”
which the Council poses—since the other, price reduction, has not materialized—
is to encourage profit sharing in such situations.
The auto industry example «
The automobile industry is the most persistent and flagrant violator of the
principle that there is no justification for “distributing above-average gains in
productivity exclusively through the profits channel.”
Table B-68 on page 292 of the Council’s Report shows ratios of profits after
taxes to stockholders’ equity for 22 manufacturing industries for the 19 year
period 1947 through 1965, inclusive, plus quarterly data for part of 1966. In
13 of those 19 years, the “motor vehicles and equipment” industry, as it is called
in the table, showed a higher profit rate than any other industry—often by a
substantial margin over the next highest. (The relatively low rate shown for
the third quarter of 1966 reflects the prolonged model change shutdowns in that
quarter. The industry’s third-quarter profits normally dip because of model
changes.)
The automobile industry’s Big Three—General Motors, Ford and Chrysler—
account for 87.6 percent, $3,064 million out of the $3,496 million, of the total
profits, including those of the auto parts corporations, reported for the industry in
1965 by the Federal Trade and Securities and Exchange Commissions which
compile the data on which the Council’s table is based. The Big Three*s com
bined after-tax rate of return in 1965 on their aggregate net worth as of the be
ginning of the year was 2 hl percent—not far from twice the 12.9 percent average
J
of all U.S. manufacturing corporations other than those in the auto industry.
General Motors’ rate was 28.0 percent; Ford’s 17.5 percent; and Chrysler’s, 20.8
percent.
Time and time again, in meetings and in correspondence, the UAW has urgently
pressed the Council to use it influence to persuade the auto industry to reduce
car prices, which were and are clearly in violation of the guideposts. All such
efforts have been unavailing.
In fact, the Council’s Chairman has come close to publicly defending the indus
try’s profits. On a “Face the Nation” program broadcast September 26, 1966, he
was asked about the price increases which the auto corporations had just an
nounced. He said, “We are disappointed.” But then he went on to add:
“I would point out that the ’67 models are different cars from the ’66 ones, and
that one can’t compare the prices directly. In particular there are a lot of new
safety items on the new models.”
Asked about the possibility that the industry might be able to cut prices and
still maintain “a pretty good profit level”, Mr. Ackley confined his reply to
the folowing:
“Well, the automobile indu'stry is a highly profitable industry, although its
profits in 1966 are running below those of 1965” [emphasis added]
770
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
I would hope that the government’s economic experts would always be careful
to give the public a carefully balanced presentation on all important issues.
I submit, however, that Mr. Ackley’s statement of the auto industry’s side of the
case was out of balance witth the inadequacy of his statement of the public
interest side of the case.
This year, for the first time in any of its Reports, the Council has fiinaly taken
public notice of price abuses by the auto corporations. It says:
“It is clear that some significant price reductions which the guidepost would
have suggested have not occurred. Automobile prices are doubtles such a case.”
[emphasis added]
The UAW will welcome and support any action the Council takes to bring
about reduction of auto prices. Reductions of auto prices would not only be a
contribution to overall price stability. They would result in increased sales
and production of cars and thus in increased employment not only for auto
workers but for others in the steel, rubber, glass, electrical, copper, aluminum,
plastic and many other industries that supply the auto corporations.
The Council notes also that “automobile wages advanced at a rate much above
the guideposit.” But, it fails to note that, not only were part of the auto wage
increase needed to protect the industry’s workers against the rise in the price
level; the additional above-guidepost amounts gained by the workers were fully
in accord with the CounciPs own principle that the auto corporations had “no
justification on either economic or equity grounds” for distributing their aboveaverage productivity gains “exclusively through the profits channel.”
In 1965, the automobile industry, including the parts supplier, could have
increased the wages, salaries and fringe benefits of all its employees by a
staggering 29.1 percent and it would stil have had profits after taxes equal to
the 12.9 percent reported by all U.S. manufacturing corporations other than those
in the auto industry.1
The UAW has repeatedly committed itself publicly to take account in negoti
ations of price reductions that might be put into effect by the auto corporations
and to confine its demands to amounts that could be paid without creating any
necessity for restoration of such price cuts, and without reducing profits below
a reasonable level. That commitment is still in effect
Income policy
It is apparent that the guideposts have ceased to be of any practical value.
An examination of the causes of their breakdown may be useful in the formu
lation of a new, sounder, more equitable, and therefore more viable stabilization
policy. For a policy there must be. While fears o finflation in the United States
have been grossly exaggerated and have led the Nation inito unduly restrictive
actions, the fact remains that the United States is not immune to the problems
that beset all other industrialized nations as they try to reconcile full employmen
and price 'stability.
The guideposts broke down, in my opinion, primarily for three reasons:
1. The manner of their inception was unsound. Instead of being formulated
with the active participation of the parties who were expected voluntarily to
comply with them, they were promulgated from on high by the Council of
Economic Advisers. Secretary of Labor Wirtz has aptly described them as
“stabilization without representation.”
2. The wage guidepost has been interpreted and applied rigidly and inflexibly
without regard to the facts of the specific situation. As the President’s Advisory
Committee on Labor-Management Policy found it necessary to remind the
Council in a statement adopted August 18, 1966, the original presentation of the
guideposts included numerous qualifications and exceptions based upon consider
ations of equity and flexibility. In practice, 3.2 percent became the magic
touchstone by which al wage settlements were judged, evoking from the Presi
dent's Committee the obvious but necessary comment th at:
“ * * * it is impartical if not impossible to translate the goals reflected in
the guideposts into formulae for application to every particular price or wage
decision.”
1The Commerce Department employee compensation data and the FTC-SEC profit and
net worth data on which these calculations are based are not strictly comparable but the
result shown above is undoubtedly reasonably within range of the facts. Figures for 1966
are not yet available.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
771
(The comment clearly is more applicable to the manner of implementation of
the wage than of the price guidepost)
3. The guideposts have given rise to intolerable inequities because they were
not symmetrical either in concept or in application. For example:
(a) Only one form of income—wages—is covered directly by the guideposts, and then only when determined through collective bargaining. Wage
and salary increases put into effect unilaterally by nonunion employers are
not covered. Certain other forms of income—e.g., interest, professional in
come, capital gains, executives’ salaries and bonuses—are completely un
touched. The attempt to restrain still other forms of income—profits and
dividends—is indirect and based on vague criteria concerning prices.
(b) The wage guidepost has been translated in practice into rigid, decimalpoint arithmetic. In contrast, the industry productivity figures which are
supposed to guide price decisions are nonexistent for many important in
dustries and are known only to the experts where they do exist. Thus, the
public, which is asked, in the language of the Council’s 1962 Report, “to
judge whether a particular wage-price decision is in the national interest”,
has been told all to explicitly—and in grossly oversimplified terms—when
it should frown upon a wage settlement. But that same public has no basis
for judgment with respect to specific price increases or refusals to reduce
excessive prices. The Council admits in its 1967 Report that even it—let
alone the public—“ordinarily does not have the detailed information which
would permit a clear judgment as to the appropriateness of the proposed
price change on either the basis of the guidepost standards or other relevant
considerations.”
(c) Wage-setting through collective bargaining is a bilateral process while
price-setting is unilateral. Wage negotiations are often conducted in the
glare of publicity, with the employer able to gain public and government
support in resisting union demands in excess of the guidepost percentage.
Price-setting, on the other hand, is not only unilateral but private, with the
consuming public and, in most cases, the government aware of the pricing
decision only after it has been made.
(d) The wage guidepost has been interpreted by the Council of Economic
Advisers to apply to nominal rather than real wages. The Council’s Chair
man has said, “The guidepost arithmetic doesn’t change simply because
prices have been going up.” The Council’s 1967 Report, as noted, criticizes
escalator clauses which protect workers’ living standards (after a lag)
against the effects of prior price increases. In contrast, an escalator clause
is explicitly provided for corporations; the price guidepost allows an excep
tion for increases in unit material costs that “significantly impair gross
profit margins.” Impairment of the living standards of workers’ families
is apparently considered less serious than impairment of profit margins.
The effect of applying guidepost arithmetic to nominal wages is to penalize
workers for corporation price decisions that violate the guideposts. During
1966, living costs rose 3.3 percent, which means that workers confined to
guidepost wage increases suffered declining Iwing standards in the face of
rising national productivity. The families of the nation’s wage and salary
earners were asked to forego their share of the gains from rising produc
tivity while those who violated the price guideposts were permitted to enjoy
undisturbed the fruits of their irresponsibility.
(e) The Council has not hesitated to condemn publicly specific collective
bargaining settlements alleged to violate the guideposts. While a few price
increases have been criticized, and some rolled back, the Council has never
singled out for similar public condemnation any corporation whose exces
sive prices and profits were clearly in violation of the guideposts and should
have been reduced. In its 1967 Report the Council states, “In general terms,
the greatest failure of observance of the price guidepost lies in the failure
to reduce prices on a considerable number of the product lines of a large
number of industries.” Nevertheless, while the same Report says the Coun
cil became involved during 1966 in approximately 50 cases of price increases,
it makes no mention of any instance in which it has sought reduction of an
existing price.
The lack of symmetry as between wages and prices and as between income
from employment and income from property fostered the development of serious
inequities, some of which are documented in an earlier section of this statement.
Ironically, as that documentation shows, wages—the only form of income to
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which the guideposts directly apply—made no significant contribution to the
upsurge of prices that began at the wholesale level in late 1964 and at the con
sumer level early in 1965. As illustrated by the course of unit labor costs in
manufacturing, wages, salaries and fringe benefits began to outpace productivity
—in money but not in “real” terms—only in response to previous price increases
that had deprived workers and their families of their share of the fruits of
advancing productivity. The irony is compounded by the fact that the objective
is price stabilization—wages are covered only as a means to that end.
The foregoing diagnosis of the causes of the breakdown of the guideposts
indicates what must be done if a new and workable stabilization policy is to be
developed. The parties chiefly responsible for adherence to the policy must be
actively involved in formulating i t ; the policy must be flexible enough to allow
reasonably for the almost infinite variety of the specific situations to which
it will apply; and, above all, it must deal equitably and impartially with all
forms of income. As the President’s Labor-Management Committee said in
the August 18, 1966, statement previously mentioned:
“We believe that in a free society any policy to achieve price stability will
be acceptable and effective only if it bears equitably on all forms of incomes.”
From wage policy to incomes policy
The experience of the United States with the guideposts is by no means unique.
Other democratic countries have attempted—and similarly failed—to stabilize
their price levels through the application of policies aimed primarily at wages.
They have found it necessary to place increasing emphasis on nonwage incomes.
They have moved from wage policy toward “incomes policy.” Instead of focusing
upon the relationship between wages and productivity, they have come to stress
the relationship between total money incomes and real national output.
The Organization for Economic Cooperation and Development (OECD), of
which the United States is a member, has had a Working Party on Costs of
Production and Prices studying stabilization policy in its member nations. One
of the Working Party’s principal conclusions is directly pertinent to the current
situation in the United States:
“* * * experience shows that whatever may be the mechanism of cost inflation,
wage earners will ask for some quid pro quo in return for any agreement to accept
a more moderate increase in wages. As the Trade Union Advisory Committee
has put it:
‘An argument can be made out for planning or guiding incomes; an argu
ment can also be made for leaving them unplanned and unguided; but there
it nothing at all to be said for planning or guiding half the incomes and
leaving the other half unguided and unplanned and subject to market forces
or varying degrees of monopoly control.’
“The existence of a policy for wages clearly gives this argument considerable
weight. Those whose incomes are subject to restraint will naturally demand
the establishment of criteria by which the inflationary or noninflationary be
haviour of other incomes can be clearly established, and the assurance that action
w ill be taken if the assumption that—discounting short period fluctuations—other
incomes will follow the development of wages, turns out to be wrong. In other
words, it is not enough for justice to be done—it must be seen to be done: and
it must be seen that the government has the abiilty to intervene effectively in
cases where intervention would be justified.”
An appropriate representative body—including labor, industry and the public
—should undertake the task of developing a sound and equitable incomes policy.
I have suggested that the President’s Advisory Committee on Labor-Management
Policy set up a special task force of technical experts to explore this matter.
Incomes policy and profit sharing
As other democratic nations wrestle, individually and through OECD and
the International Labor Organization (ILO), with the problems involved in
developing and implementing an incomes policy, they are confronted insistently
with the role of profits in the inflationary process. The Chairman of the OECD
Working Party mentioned above, in introducing a study prepared for his group,
w rote:
“During the preparation of its second report, the Working Party had sev
eral discussions on the role of profits in the process of cost inflation. It con
cluded that ‘While it is difficult to disentangle the role of different elements
in total costs, it seems probable that the failure of cost reductions to be re
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
773
fleeted fully or immediately in prices is an important feature of the process
by which costs and prices are levered up under conditions of cost inflation/
As a result of the work of the Experts, the Working Party feels that it should
have been rather more positive about the role of profits. In this connection,
the evidence presented in Chapter VI of the Report suggesting a quite strong
relationship between profits and changes in profits, and wage movements, is
both interesting and significant. While this evidence is open to alternative
interpretations, it seems to provide further support for the view that a suc
cessful incomes policy must cover prices, profits, and other non-wage incomes
as well as incomes from employment.” [Emphasis added.]
When workers see profits soar while they are asked to limit their wage gains,
it is inevitable that they will raise questions of equity. The equity problem
is aggravated by the heavy reliance of corporations on self-financing of their
expansion through retained profits. If there were effective price competition,
prices would be held close to costs, profits would be small, and funds for expan
sion would have to be raised in the capital market. The successful firm would
be one whose rate of return on investment was high enough to attract new
capital supplied voluntarily by savers, but not so high as to attract new
competitors.
In practice, oligopoly and price leadership have replaced price competition,
and the entry of new competitors is a virtual impossibility in many modern
industries. Thus it becomes possible for corporations to set prices at levels that
yield profits so high that resort to the capital market for financing is the ex
ception rather than the rule. The real sources of capital become the consumer
who is compelled involuntarily to supply investment capital by paying excessive
prices and the worker whose wages are a smaller share of the firm’s total reve
nues than he would have had if prices were competitively determined.
The automobile corporations provide glaring illustrations of this type of in
voluntary investment. The book value of stockholder equity in the General
Motors Corporation, for example, increased by $7.2 billion from the beginning
of 1947 to September 30, 1960. Of this enormous increase, only 10.6 percent
was financed through the sale of stock. The remaining 89.4 percent or $6.4
billion represents profits retained in the business, the involuntary contribution
made by consumers and workers. The Ford Motor Company’s net worth in
creased by more than $3.9 billion in the same period. Only 2.2 percent—less
than $100 million—was financed by the sale of stock. Workers and consumers
contributed 97.8 percent of the new investment.
In such circumstances, neither the worker nor the consumer is given any
recognition for his investment in the form of an equity in the firm or an income
on the funds he has involuntarily provided. The stockholders obtain capital
gains based upon the added net worth per share contributed by workers and
consumers, and profits from the increased output made possible by that aug
mented net worth increase their dividend income. This is what makes “growth
stocks” so attractive; they grow in value and in the size of dividends they pay
based upon monies provided by persons other than their owners. They grow
far faster than the wages of the workers employed by the “growth corporations.”
Here again the auto industry offers illuminating examples which can be fol
lowed by comparing the incomes over a period of years of a stockholder and a
worker who start out with equal incomes from the same corporation, the one
from dividends and the other from wages. In 1947, at the wages then paid, the
average General Motors worker would have received $3,009 in wages if he were
fully employed 52 weeks in the year. A stockholder who held 1,003 shares of
GM stock at the beginning of 1947 would have received an identical $3,009 in
dividends that year.
By the end of 1966, the GM worker would have received a total of $110,000 in
wages, assuming that he was fully employed—never laid off—throughout the
20-year period. The investor, on the other hand, would have received $278,000 in
cash dividends, an amount more than two and one-half times as great as the
worker’s earnings. In addition, the investor would have had a $345,000 gain
in the market value of his investment as of the end of 1966. His total gain
would have amounted to $623,000, nearly six times the amount of the GM work
er’s earnings.
At Ford, a similar comparison can be made for the period from 1949 through
1966. An investor who at the beginning of 1949 held sufficient shares of Ford
stock to yield a dividend income of $3,536, an amount equal to the earnings of
a fully-employed Ford worker in that year, would by the end of 1966 have re
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THE 1967 ECONOMIC REPORT OP THE PRESIDENT
ceived a total of $309,000 in dividends on these shares. This would be nearly
three times as much as the wages of a fully-employed Ford worker, totaling
$106,000 during the 18-year period. In addition, the investor would have bene
fited from a $475,000 increase in the “book” value of his share holdings. (Book
value is used in this case because there was no market for Ford stock in 1949.)
In all, the investor’s gain would have been $784,000, an amount nearly seven and
one-half times as great as the worker’s earnings. Inclusion of the value of the
hypothetical worker’s fringe benefits, which would be difficult to calculate pre
cisely, would change the figures somewhat but not nearly enough to affect the
validity of the point involved.
In recognition of the practical facts of modern economic life illustrated by the
above examples, increasing attention is being paid in Western Europe, in con
nection with incomes policy, to the development of some method that would
permit workers to participate equitably in the profits and the growing net worth
of the corporations that employ them. (It is generally agreed that the theoreticle alternative—a return to effective price competition and to reliance upon
the capital market for investment funds—is not a realistic possibility.)
A recent publication of the ILO posed the issue as follows:
“* * * precisely in periods of high employment, when the pressures for trade
union moderation are strongest, profits are at their highest and may indeed in
crease further by restraint on the unions’ part.
“As noted above these high profits are, of course, used to a large extent for
investment and thus contribute to a faster rise in average living standards. But
this is not an adequate answer, because the process of reinvesting undistributed
profits entails an increase in private wealth on the part of business owners and
managers {but not of workers) which in several countries has been very fast
indeed during the post-war period. In so far as the justification for wage re
straint and high profits lies in the need for providing investable resources, it
should be possible to achieve this result without the ownership of all the new
capital accruing to shareholders, managers and directors.” [emphasis added]
After discussing various profit-sharing proposals and problems connected with
them, the ILO publication went on to say:
“On the other hand, distribution of profits among both sides of industry would
appear less inequitable than their appropriation by one side alone. The existing
distribution of income is by no means self-evidently just, and it would seem
doubtful that any lasting system of wage policy could be acceptable to the trade
union movement if it did not come to grips—whether through collective profit
sharing or otherwise—with the grosser existing inequalities.”
Profit sharing, in cash, or partly or wholly in the form of investment certificates
or shares of stock to be issued to workers, is now beginning to be discussed in
the United States as a noninflationary means of responding to the upward pull
on wages exerted by inflated profits. Only a few days ago, an eminent American
economist, Professor Neil Chamberlain of Yale University, was reported as
saying:
“If we seek to hold wage increases to something In the vicinity of the national
average increase in productivity, and if we are realistic enough to expect that
the most we can expect from business on the price front is no price increases,
but not actual price decreases, then we have a sure-fire recipe for above-average
profits in those companies where there has been above-average productivity im
provement. We can scarcely expect a successful hold-the-line policy on wages
in such instances, and some form of profit share or investment share or savings
share may make good sense.” [emphasis added]
If workers had definite assurance of equitable shares in the profits of the cor
porations that employ them, they would see less need to seek an equitable balance
between their gains and soaring profits through augmented increases in basic
wage rates. This would be a desirable result from the standpoint of stabilization
policy because profit sharing does not increase costs. Since profits are a -resi
dual, after all costs have been met, and since their size is not determinable until
after customers have paid the prices charged for the firm’s products, profit shar
ing as such cannot be said to have any inflationary impact upon costs and prices.
Democratization of ownership
Profit sharing in the form of stock distributions to workers would help to
democratize the ownership of America’s vast corporate wealth which is today
appallingly undemocratic and unhealthy. The Federal Reserve Board recently
published data from which it is possible to estimate the degree of concentration
in the ownership of publicly traded stock held by individuals and families as of
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
775
December 1962. Preliminary analysis of these data indicates that, despite all
the talk of a “people’s capitalism” in the United States, little more than 1 percent
of all consumer units owned approximately 70 percent of all such stock . Fewer
than 8 percent of all consumer units owned approximately 97 percent—which
means, conversely, that the itotal direct ownership interest of more than 92 per
cent of America’s consumer units in the corporation-operated productive wealth
of this country was approximately 3 percent. Profit sharing in a form that
would help to correct this shocking maldistribution would be highly desirable
for that reason alone.
The UAW and profit sharmg
It may be of interest in this connection that the UAW formally proposed
profit sharing to the major automobile corporations as early as 1958. In addition
to profit sharing for workers, the proposal included a provision for profit shar
ing rebates to consumers on the prices they paid for the corporations’ products.
In essence, the UAW proposed that, after meeting their basic wage costs and
basic salary costs, and after paying basic dividends to stockholders, the cor
poration share the remaining before-tax profits, with one-half to go to stock
holders and executives, one-fourth to go to wage and salary workers, and onefourth to be rebated to consumers.
The UAW pointed out at the time that its proposed method for compensating
workers was already being applied to executives and stockholders. The amount
available for payment of executives’ bonuses, in addition to their basic salaries,
was and is determined by applying a percentage figure to profits in excess of a
specified basic rate of return on investment. Stockholders received and continue
to receive basic “regular” dividends which, in profitable years, are augmented
by “extra” dividends.
It is certainly reasonable to ask : Why should this method of compensation not
be applied to workers as well as to stockholders and executives? Why should not
workers receive, in addition to their basic compensation reflecting the factors
normally considered in negotiating wages and fringe benefits, a share in the
profits that their labor helps to create?
The UAW was unable to persuade the corporations to agree to profit sharing
in 1958. Their top management spokesmen reacted to the proposal hysterically
and ideologically although they participated lavishly in the profit sharing plans
for executives maintained by their respective corporations. General Motors
described the UAW proposal as “foreign to the concepts of the American free
enterprise system”—which, perhaps, explains why it has for years provided
profit sharing for GM blue collar workers in Great Britain but not for those
in the Corporation’s home country.
The UAW did, however, negotiate a profit-sharing agreement with American
Motors Corporation in 1961. Anticipating recent discussions in Europe, that
agreement provided for part of the workers’ share of the profits to be paid to
them in the form of stock in the corporation. That American Motors) is cur
rently suffering losses rather than enjoying profits is neither attributable to
profit sharing nor a reflection on its merits.
I commend profit sharing to the consideration of this Committee, the Congress,
and the public as a potentially valuable feature of a sound -and equitable in
comes policy. This Committee might want to explore the possibility of develop
ing legislation to encourage the negotiation of collective bargaining agreements
providing for profit sharing.
Profit sharing and collective bargaining
If profit sharing is to be an element in stabilization policy, it will take on that
role through collective bargaining.
At the same time, acceptance of the profit-sharing principle could greatly
facilitate the collective bargaining process.
One of the most serious problems with which collective bargaining must con
tend—particularly now that long-term contracts are a common phenomenon—
is uncertainty about the future. The parties to negotiations attempt to divide up
a pie whose actual size cannot be known until after the end of the two, three or
more years during which the contract will be effective.
The economic environment in which negotiations take place may provide a
temporary advantage to one side or the other which it feels necessary to press
to the limit, knowing the other party would do the same if the situation were
reversed. Thus, if a contract is negotiated at the peak of prosperity, the workers
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THE 1967 ECONOMIC REPORT OF THE PRESIDENT
may be able to obtain gains that will impose heavy costs on the firm if the mar
ket for its products slackens. Conversely, a contract negotiated at the trough
of a recession may saddle the workers for three years with wage and fringe
benefit gains far smaller than those the company will actually be able to afford,
and should in justice and reason provide, as recovery brings expanded volume,
reduced unit costs, and greatly increased profits. Efforts of both sides to maxi
mize long-term gains on the basis of purely temporary factors do not make
either for healthy relations between the parties or for economically sound
results.
Although not discussing profit sharing, Mr. Henry Ford, in a recent speech,
put his finger on the heart of the problem which it would help to solve. He noted
that present union contracts in the automobile industry will expire this year
and that negotiations will take place in an atmosphere of declining sales accom
panied by management expectations of increases in nonlabor costs. He went on
to say:
“Management must necessarily focus mainly upon what is likely to happen
during the next contract period, rather than the past.
“On the other hand, employee expectations have been formed—so far, at
least—in an atmosphere of strong sales, rising employment to the point of labor
market shortages, and rising living costs.”
Profit sharing would resolve the conflict between management apprehensions
and worker expectations on the basis of the solid economic facts as they mate
rialize rather than on the basis of speculation as to what the future might hold.
The actual size of the pie, rather than guesses about what its size will turn out
to be, would determine how big the slices are that go respectively to stockholders,
managers and workers (and, if a rebate feature is included, to consumers). All
groups would be assured that none would be unfairly advantaged or disad
vantaged for years to come merely because of the purely accidental fact that the
economic climate at the time of negotiations happened to favor one or the other.
Price-Wage Review Board
The Price-Wage Review Board mechanism which the UAW has advocated
for many years would be a useful instrument for the implementation of an equi
table incomes policy. But its creation need not and should not wait upon the
formulation of an incomes policy. There is a great deal of work for such a Board
to do right now—as anyone knows who reads newspaper reports of price in
creases being put into effect by corporations already making record-breaking
profits.
Two alternative methods could be considered for bringing such a mechanism
into operation—legislation or executive action similar to that which brought
about the cooperation of designated corporations in the so-called “voluntary
controls” program for capital exports.
Legislative approach
Under the legislative approach, any corporation holding a dominant position
which could be expected to give it price leadership in a key industry—for
example, controlling 25 percent or more of the industry’s sales—would have to
give at least 60 days* notice to the Price-Wage Review Board of any intended
price increase. The Board would have authority to call the company before
it for a public hearing.
At such a hearing the Board would have the power to subpoena witnesses,
company books and other pertinent documents and examine witnesses under
oath so as to obtain all the pertinent facts, and following the hearing to publish
its findings and recommendations and the facts supporting such recommenda
tions.
The recommendations would be based upon a set of standards carefully
designed to assure both equity to all affected parties and reasonable stability
of the general price level.
The Board’s recommendations would not take the form of binding deter
minations, however, and once the Board’s report was published, the corporation
would be free to act as it saw fit. But if the public were informed with facts
and figures which made it clear that the price increase was not justified, it is
highly doubtful that the corporation would attempt to effectuate such a price
increase in the face of enlightened public opinion, which in a free society must
more and more be mobilized to discipline voluntary decisions and make them
publicly responsible. Indeed, just the knowledge that such an investigation
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
777
w as probable would deter most large corporations from even proposing price
increases unless they could in fact be justified.
The number of corporation® that would be subject to such hearings pro
cedures is relatively small, probably less than 100, for it would need to apply
only to the one dominant company—the “price leader”—in each major admin
istered price industry. If that company were restrained from raising its
prices, the smaller ones would have to follow suit.
Office of Consumer Counsel
It has been suggested, as an argument against similar proposals, that under
«uch a system corporations would never reduce a price because of the difficulties
In the way of restoring the price cut if that should become necessary. And,
in any case, a procedure that could be triggered only by a threatened price
increase would fail to meet the problem posed by industries with above-average
productivity gains which refuse to grant the price cuts they could well afford.
Both of these objections are met by the UAW proposal which calls for estab
lishment also of an Office of Consumer Counsel. The Consumer Counsel would
liave two main functions. He would represent the interest of consumers in all
hearings before the Price-Wage Review Board. And he would be authorized
to initiate hearings when he had reason to believe that prices of any corporation
subject to the procedure were already too high.
Unions also subject
Unions would also be subject to the hearings procedure when appropriate.
Whenever a corporation subject to the procedure claimed that it would have
to raise prices if it gave in to union demands, it could so notify the Board, and
both the union and the corporation would then be summoned to a hearing and
required to produce the relevant facts.
Account would have to be taken, of course, of circumstances which justify
a wage increase even if it does require a price increase. If this were the
situation in a given industry, the hearing would reveal it. But if the union’s
demands were not justified, that would be revealed. If, on the other hand,
the company could well afford to grant them without raising prices, that
fact would be made apparent. As in the case of a hearing involving a corpora
tion alone, the Board would publish a report containing its findings and recom
mendations and the supporting facts. Both sides would then go back to the
bargaining table free to act as they saw fit, but with the knowledge that the
public had the facts, and was equipped to pass an informed judgment on the
result of their negotiations. The union and the corporation alike would be
subject to the same discipline—the need to accept full public responsibility
for private, voluntary decisions which affect the public interest.
Voluntary approach
Under the voluntary approach, the President would designate existing agencies
to perform the roles of Review Board and Consumer Counsel, respectively.
Their functions would be the same as under the legislative approach except that
they would lack subpoena power.
A list of perhaps a hundred corporations holding positions of price leader
ship in key industries would be drawn up, and they would be asked to notify
the Board of any intention to raise prices. In this connection, it should be
noted that the Council of Economic Advisers reports that some large companies
liave already agreed to give the Council advance notice of their intention to
change prices. Or if the Consumer Council presented to the Board sufficient
evidence to suggest that an existing price was too high, the corporation affected
would be asked to appear at a hearing. If the demands of a union were involved
in either case, the union would also be requested to appear. The hearings and
Teport procedures would be the same as those outlined above.
One problem would have to be faced under the volunteer procedure. As
previously noted, the Council of Economic Advisers implies in its Report that in
the system of private meetings with companies which it has been using, it has
experienced some difficulty in getting all the information it needs for evaluation
of price decisions.
The difficulties of obtaining adequate information from reluctant and unco
operative witnesses under a voluntary system are obvious., However, the gov
ernment has succeeded in obtaining pertinent data under the capital exports
“voluntary controls” program, and we believe that an Administration which
acted with sufficient determination could be equally successful in the area of
75-314—67—pt. 4------5
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THE 1967 ECONOMIC REPORT OF THE PRESIDENT
price-wage review. If in any individual case it were not, if a corporation simply
refused to produce the data which would permit an informed judgment of its
price proposals or current price levels, the administering agency would make
this refusal known to the public, which would be able to draw its own con
clusions as to the reason for such refusal.
Advantages are obvious
Either system would have obvious advantages over the guidepost approach.
It would meet the problem raised by the President’s Labor-Management Com
mittee, 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.” It would permit, instead, a case-by-case approach in which recom
mendations would be based on the particular facts of each case, and would per
mit the application of the “subtleties, sophistication, experience, wisdom and re
sponsibility” which, as the Secretary of Labor pointed out in these hearings, are
required in making intelligent wage and price decisions.
The procedure would have one other far-reaching benefit insofar as it applied
to situations arising out of union bargaining demands. It would go far to re
store public confidence in the democratic process of collective bargaining—a con
fidence that is too often shaken when negotiations are broken by a damaging
strike over issues which the public does not clearly understand, or when they
end in a settlement that is then denounced as inflationary. In both situations,
the public’s only information may come through the conflicting claims and argu
ments of the two parties, with no opportunity to get at the real facts. Given the
facts people would be able to pass rational judgment on the actions of both
sides—and the knowledge of that would lead to more responsible actions at the
bargaining table.
The advantage of this procedure is that it can stabilize prices without the
necessity of imposing any form of governmental control. Price and wage actions
would still be voluntary; they would be based on the free decisions of free men
in a free society. But the privilege of being a free man in a free society is ac
companied by the responsibility of making decisions that are compatible with the
well-being of society. In the area of prices and wages, the price-wage review
procedure would enable an informed public opinion to bring a persuasive in
fluence to bear on those who might otherwise be prepared to disregard their
responsibilities in the service of their personal or corporate interests.
Full employment, inflation a/n taxes
d
The Administration has proposed an increase in personal and corporate income
taxes to take effect July 1, 1967. The arguments for and against this proposal
deserve sierious and responsible consideration on their m erits; for it arises out of
a complex background that presents difficult problems. No one can predict with
certainty the precise course of economic activity in the months ahead; yet it
is the state of the economy that will determine whether or not it will be advis
able to raise taxes. It is our judgment, however, that current weaknesses in
the economy could be compounded by a tax increase, causing increased unem
ployment, an unnecessary slowing down of the economy and, quite possibly, a
budget deficit larger than would result if there were no tax increase.
T ie proposal to increase taxes has evoked a barrage of criticism of the
Administration’s tax policies past and present. On the one hand, the Administra
tion is attacked for not having raised taxes last year. On the oher hand, it is
urged not to increase taxes this year but to curtail government spending for
civilian purposes. Determination of a sound fiscal course for 1967 requires sober
examination of these criticisms and of the pertinent facts in the light of the
goals of «the Employment Act.
The argument that taxes should have been raised last year ignores the fact
that the rise in total demand during 1966 was significantly restrained by a
variety of tax actions. Payroll taxes were increased, some excise taxes were
restored, graduated withholding was introduced, corporate tax payments were
accelerated, and the investment tax credit was suspended. Had fiscal policy
in 1966 been more restrictive, one of the greatest economic and social gains of
the year, the reduction of unemployment to 3.9 percent from 4.6 percent in 1965,
would not have been achieved. In fact, as Secretary Fowler testified in these
hearings, additional fiscal restraint would “have involved the risk of a recession
in 1966 or early 1967.” Higher taxes undoubtedly would have aggravated the
many weaknesses that began to appear in the economy during 1966 despite the
sharp increases in government spending arising out of the Vietnam War—
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
779
weaknesses that must be taken into account in efforts to evaluate the effects of
the tax increase proposed for 1967.
The Administration has already cut government civilian spending in several
areas. Many of those who now urge further cuts in preference to tax increase
argue that higher taxes would cause a serious slowdown in economic growth
or even a recession. This argument ignores the fact that the effect of reduced
government spending on the level of demand and of economic activity is precisely
the same as that of a tax increase. In addition, the proponents of spending cuts
seem to overlook the point made by President Johnson in his budget message
that only 11 percent of total administrative budget expenditures (14.2 percent if
pay increases for government employees and the effect of the sale of assets are
excluded) consists of what may be considered “controllable” civilian expenditures.
Even among these, the degree of controllability is lim ited; and although some
of the programs involved might be stretched out without social damage, a sharp
reduction in the total of such expenditures would retard progress toward the
Great Society. It would hit with disproportionate impact the same disadvantaged
groups who would be the main sufferers from an economic slowdown or a reces
sion caused by a cut in government spending.
Proposals to increase taxes must be evaluated on the basis of their probable
effects on both employment levels and our national goals. We in the IUD and
the UAW are prepared to give our enthusiastic support to tax increases designed
to reallocate economic resources from less important private uses to more urgent
public needs. We would not only support, we would urge, any equitable tax
increases that might be required to transfer from the private to the public sector
more adequate resources for education, urban redevelopment, elimination of
environmental pollution, the poverty program, and similar high-priority purposes.
Similarly, we would support selective tax increases designed to rechannel re
sources within the private sector from low-priority to higher-priority purposes
or to diminish sectoral inflationary pressures. Selective taxation, for example,
could be used under appropriate circumstances to discourage inventory specula
tion and an unsu&tainahly high rate of business investment and to encourage diver
sion of the resources involved into housing. Suspension of the investment tax
credit is a form of selective taxation.
Effect on employment
Tax increases do more than reallocate resources, however, Depending upon
the relationship between the amounts of revenue raised by government and the
amounts spent, tax increases also affect employment levels. This Committee,
functioning as it does under the Employment Act, is obligated to ask: What
bearing will a tax increase have on the goals of maximum employment, produc
tion and purchasing power? Is there any danger that it will perpetuate or cause
an increase in present levels of unemployment? Will it, in combination with gov
ernment spending, promote or retard fuller use of our productive resources?
The answers are apparent from the Council of Economic Advisers* Report.
Basing its projections on the assumption that the proposed tax increase will be
enacted, the Council, as previously noted, says that the unemployment rate in 1967
“should be essentially the same as in 1966, when it averaged 3.9 percent.” It fol
lows that, assuming the Council*s projection is otherwise valid, the unemployment
rate would drop below 3.9 percent if there were to be no taw increase. The Direc
tor of the Bureau of the Budget acknowledged that in these hearings.
It is clear from the Council's Report that the purpose of the proposed tax
increase is not primarily to promote a better allocation of resources but rather
to restrain the growth of demand. The Council calls for “a shift toward restraint
in fiscal policy [as of mid-1967] . . . to assure that demand does not outrun
capacity.” The premise, obviously, is that by mid-year the economy will be
“overheated” and will need “cooling off.” In our view, there is serious ques
tion about the wisdom of the Council’s position for we believe that the result
will be to halt further progress on the unemployment front for fear of inflation.
As is evident from the current unemployment rate as well as from the capacity
utilization rate noted later in this statement, however, the economy is not now
operating at capacity. There are no persuasive reasons to believe that it will be
doing so in the second half of 1967, even if there were no tax increase. Certainly,
full utilization of capacity would be accompanied by an unemployment rate very
substantially below the approximately 4 percent projected by the Council.
The ability of a modern industrial economy to reduce unemployment substan
tially below 4 percent and keep it consistently below that level has been estab
lished by the success of other free world countries in doing so. The table on the
780
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
following page shows unemployment rates, adjusted to conform to U.S. defini
tions of what constitutes unemployment, for seven other countries and the United
States since 1959. Of the seven, only Canada has had a rate which even remotely
parallels ours, and even it has been below ours for the past four years. France
has had a rate below 3 percent for every year but one, when it rose to 3.1. West
Germany has kept unemployment substantially below 1 percent since 1960. Un
employment in Great Britain has exceeded 3 percent in only two years out of
seven. Italy has had a rate well below ours from 1960 through 1965, the latest
year for which data are available. Japan has had a rate below 2 percent through
out, and at or near 1 percent for the latest four years. Sweden has also kept
its rate consistently well below 2 percent. Public opinion in all of these countries
would undoubtedly be shocked and revolted if it were suggested to them that 4
percent unemployment was acceptable.
Unemployment rates adjusted to U.S. definitions
[In percent]
Country
United States._____________ -____
Canada________________________
France_________________________
West Germany__________________
Great Britain___________________
Italy___________________________
Japan._________________________
Sweden.._______________________
1959
1960
5.5
6.0
2.8
1.6
3.1
5.7
1.9
(*)
5.6
7.0
2.7
.7
2.4
4.3
1.4
(*)
1961
6.7
7.2
2.4
.4
2.3
3.7
1.3
1.5
1962
5.6
5.9
2.5
.4
2.9
3.2
1.1
1.5
1963
5.7
5.5
3.1
.5
3.4
2.7
1.1
1.7
1964
5.2
4.7
2.5
.4
2.5
2.9
1.0
1.6
19654.6
3.9
2.8
.4
2.2
3.9
1.0
1.2
1966
3.9
*3 .7
(*)
(a)
(3)
(*)
(*)
(*)
1Data for countries other than United States and Canada are preliminary.
* Average, 11 months.
* Not available.
Source: Bureau of Labor Statistics; except for 1966 Canadian figure which is from Dominion Bureau of
Statistics.
Because the Council calls last year’s unemployment rate “substantially full
employment” does not alter the fact that it is much too high and, under the
mandate of the Employment Act, should (be reduced. In our opinion, the Coun
cil’s failure to chart a path toward a lower unemployment rate is an abdication of
its primary responsibility under the Employment Act.
Monetary policy and a tax increase
Another argument advanced for a tax increase is that it would facilitate
relaxation of monetary restraints. It is pointed out that the impact of tight
money and high interest rates is highly uneven, with adverse effects falling most
heavily on some of the nation’s most urgent unmet needs. Housing, as the
current depression in residential construction shows, is particularly vulnerable.
The building of schools and of state and local government facilities, which are
debt-financed in substantial part, is also made more costly and can be severely
restricted by tight money.
While the identification of the victims of a restrictive monetary policy is
accurate, the conclusion that a tax increase is the proper remedy is, to say the
least, questionable. In the first place, the premise—the need for either monetary
or fiscal restraint—is open to challenge so long as we remain as far from full
employment as we are.
In the second place, there is no assurance that a tighter fiscal policy will lead to
an easier monetary policy. The Wall Street Journal headline on the testimony
of the Chairman of the Federal Reserve Board in these hearings said, “Easier
Credit Wouldn’t Necessarily Follow A Tax Boost, Martin Warns”. The balance
of payments might well serve as an excuse for keeping interest rates high or
even raising them.
In the third place, the argument assumes that monetary policy must foe used
as a blunt instrument—'that it cannot be applied selectively in accordance with
national priorities.
In the fall of 1966, the Federal Reserve Board demonstrated that its vast
powers enable it to control not only the total volume of credit but the directions
in which credit flows. In the well-known letter of September 1, 1966, the
presedents of the regional Federal Reserve Banks told member banks that they
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
781
would get short shrift at the discount window if they failed to “cooperate in the
system’s efforts to hold down the rate of business loan expansion.” The action
was taken pursuant to a Board regulation under which lending to member
banks is to be made w ith :
* * * aUe regard to the purpose of the credit and to its probable effects upon
the maintenance of sound credit conditions, both as to the individal institution
and the economy generally.
The same power, so far as we have been able to determine, can be applied
positively as well as negatively to encourage as well as to discourage the exten
sion of credit for specified purposes. The Federal R eserve System could have
,
, ,
told its member banks and can still tell them today that they will be given no
consideration at the discount window unless they increase or attain some target
level with respect to the proportion o f their assets held in housing mortgages and
in school board , state and municipal bonds. If the requirements were made
,
stringent enough, the member banks woud be impelled to compete for such se
curities with the result that their interest rates would be markedly reduced.
Protection of national priorities dependent upon credit, therefore, does not
require a tax increase but rather steps to assure that the Federal Reserve System
will respect those priorities through selective application of its monetary powers.
The shibboleth of Federal Reserve Board “independence” must not be permitted
to be translated into veto power over national goals or national economic policy
as expressed in the Employment Act.
E ffect on budget
It is argued, also, that a tax increase—or a cut in government civilian spend
ing—is necessary to reduce the size of the expected budget deficit. An effort
to achieve a greater degree of balance in the budget, however, could unbalance
the economy with the result that the actual budget deficit would be vastly greater
than the one sought to be reduced. The Eisenhower Administration, ignoring
serious weaknesses in the economy, submitted a budget for fiscal 1959 designed
to yield a surplus of half a billion dollars. The restrictive nature of that budget
retarded recovery from the 1957-58 recession. Unemployment rose as high as
7.5 percent and averaged 6.2 percent for the fiscal year. Reduced revenues and
increased expenditures turned the anticipated half-billion surplus into a deficit
of $12.4 billion or approximately 2% percent of GNP—equivalent to $20 billion
in terms of today’s GNP. Current signs of weakness in the economy suggest at
least a possibility that a tax increase or a cut in spending could produce a simi
lar result in the period ahead.
Signs o f weakness
It is fortunate that the proposed tax increase is not intended to take effect
before the middle of 1967. There are already many signs of weaknesses in the
economy that suggest at least a distinct possibility that by mid-year stimulus
may be called for rather than restraint. The proposed effective date for the
tax increase allows time for careful evaluation of developments to minimize
the danger that the wrong remedy may be applied to the wrong ailment at the
wrong time.
The danger of an increase in unemployment is very real. Such a development
would not require a downturn in the economy to bring it about—a slowing up
would be quite sufficient. As the Council points out, about 1% million addi
tional job-seekers will be in the labor market this year. On top of that, pro
ductivity advance will require the creation of another 2 to 2 y2 million jobs at
least. Thus, any slowdown in the rate of economic growth that would result in
the creation of much less than 3% to 3% million jobs overall would probably
mean rising unemployment.
The Council is already planning for a substantially smaller increase in Gross
National Product (GNP) for 1967 than in 1966. Taking into effect the con
sequences of a proposed tax increase, the Council estimates that GNP will rise
from $740 billion in 1966 to $787 billion in 1967—an increase of just under 6.4
percent. But of that, 2.5 percent or more will be the result of price increases,
leaving only about 3.8 percent of real growth. This will be sharply down from
last year’s real growth rate of 5.4 percent. The Council describes it as “nearly
in line with the 4 percent growth of potential” which would be necessary to
keep unemployment from rising. Leaving aside the arguable point as to whether
the growth in potential is not more than 4 percent, the difference between 3.8
and 4.0 could in itself mean rising unemployment.
782
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
The Councirs forecast, and its recommendation for a tax increase in tlie
second half of 1967, are based on its belief that overall private demand will
be significantly strengthened in the second half of the year. The $1% billion
increase in payroll taxes which went into effect the first of the year will be
nearly offset by the reduction in personal income tax payments to be made in
April as a result of the graduated withholding system instituted last year. An
increase in Social Security benefits is proposed to take effect at midyear, with
no increase in revenue from payroll taxes until 1968. With money less tight,
construction should be recovering just as inventory investment starts levelling
off. That is in brief the basis of the Council’s belief that “A shift toward re
straint in fiscal policy is appropriate at that time.”
A look at some of the figures gives less reason to believe that the economy
by midyear will be receiving as much stimulus as the Council anticipates. Its
forecast is based in part, for example, on the assumption that real personal
disposable income will increase by as much in 1967 as in 1966. But if it does
so, it will be reversing a four-year trend. As the following table shows, real
disposable personal income, both in aggregate and per capita, has increased
by a smaller amount each year since 1963, in part a reflection of the lag in real
wages referred to elsewhere in this statement. With an anticipated GNP growth
less than that from 1965 to 1966, there is no strong reason to believe this trend
will be reversed.
Disposable personal income, 1968-66
Total i
Amount
1963
................................
1964....................................................................
1965...................................... ..................... .......
1966....................................................................
$381.3
406.5
430.8
451.5
Per capita *
Increase
from
previous
year
$25.2
24.3
20.7
Amount
$2,013
2,116
2,214
2,294
Increase
from
previous
year
$103
98
80
i Billions of 1958 dollars.
* 1958 dollars.
Source: Council of Economic Advisers report.
In other respects the consumption picture looks less than bright. Retail
sales are lagging. Recent surveys of consumer buying plans also suggest a
tapering off in the rise in consumer spending. The rise in the personal savings
rate in the fourth quarter of 1966 may be another sign of increasing consumer
caution. Automobile sales are at disappointingly low levels. Production
schedules have been cut back repeatedly during the past two months, and auto
workers have suffered short workwteeks and week-long layoffs, yet inventories
remain disconcertingly high and may still rise higher, and further cutbacks in
production seem not unlikely. Appliance production is also being cut back, and
the lowered production of these two industries is beginning to be reflected in
faltering demand for steel.
The Council’s own figures on investment plans do not justify the optimism
it displays for a pickup in the second half of 1967. It estimates that business
fixted investment “should show a rise of about $3 billion from 1966 to 1967.”
Business fixed investment in 1966 was $60.56 billion, so the average for 1967
should be about $63% billion. But the Commerce-SEC estimates for the first
two quarters of 1967 are $63.45 and $64.05 billion respectively. If the average
for the year is to be $63% billion, that leaves no room for any increase in the
second half at all.
Another factor may actually tend to reduce the level of business fixed invest
ment in the second half of 1967. The suspension of the investment tax credit
last year did not immediately affect the rate of investment to any significant
degree, because it did not apply to commitments already made. By the middle
of this year, however, the bulk of those investments will probably have been
completed, and, in view of the restoration of the investment tax credit in 1968,
new commitments will be withheld until after the end of the year whenever
possible.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
783
Inventories, according to the Council, are expected to level off in the sfecond
half of the year after a decline in the rate of accumulation during the first
half. But, if other parts of the economy show unexpected softness, vigorous
efforts will undoubtedly be made to reduce inventories in the second half.
Residential construction is expected by the Council to increase by about $5to $6 billion between the fourth quarter of 1966 and the fourth quarter of 1967,
but even so it will be about $1 billion below 1966 for the year as a whole.
Some doubt is cast on the reliability of the Council’s estimate by a forecast made
by the Department of Commerce in its “U.S. Industrial Outlook 1967” to the
effect that private housing starts for 1967 as a whole may only be in the
1,050,000 to 1,150,000 unit rangte. This would allow for little or no growth over
the year-end rate, which stood at 1,102,000, seasonally adjusted, in December
1966. The Commerce forecast does admit of some upward trend in the second
half of 1967, but not in very encouraging tones. It points out:
“The time factor involved in the translation of a shift of money resources
to the housing sector into new housing starts appears under present circum
stances to militate against a major change in 1967.”
Other signs of softn'ess are apparent. The industrial production index de
clined in both November and December. In fact, of the 30 “leading indicators”
which the Department of Commerce uses as weathervanes in its monthly pub
lication, “Business Cycle Developments”, 23 had a downward direction as of
the January 1967 issue (representing largely data for November 1966) and 29
of the 30 were below their previous peaks.
In addition, while Vietnam spending is to increase in 1967, barring a muchhoped-for end of hostilities, the rate of increase will be tapering off in the second
half of the year.
As noted previously, even on the basis of the Council’s forecast, the best the
economy will do will be to maintain the 1966 rate of unemployment during 1967.
And if, as appears very likely, the amount of stimulus given the economy from
nonfiscal sources in the second half of 1967 is less than anticipated, while at
the same time a tax increase drains off additional consumer buying power, the
rate of unemployment will inevitably rise.
Unemployment too high a price
Unemployment is too high a price to pay for price stability. As has been
noted in these hearings, unemployment is grossly uneven in its impact. The
burden falls disproportionately on members of minority groups, teen-agfcrs, dis
placed older workers, and unskilled 'blue collar workers. These groups, who
are least able to bear it, would be called upon, if taxes are increased, to carry
the major burden of the cost of combating inflation.
We in the IUD and the UAW share the view expressed by the National Com
mission on Technology, Automation, and Economic Progress (Automation Com
mission) that:
“* * * the toleration of unnecessary unemployment is a very costly way to
police inflation. It deprives the country of valuable output, and it sacrifices
the poorest and least privileged among our citizens. It is preferable to press
carefully ahead with the expansion of total production and employment, and
simultaneously to redouble private and public efforts in the manpower field to
relieve shoratges in skilled and trained labor as they arise and develop effective
means of combating other causesi of inflation.” [emphasis added]
In considering fiscal policy for 1967 and the period beyond, full account must
be taken of the fact that the dangers flowing from unemployment and a slow
down in Great Society programs are far more serious than the danger of some
further increase in the price leVel.
This nation cannot afford the further aggravation of racial tensions and the
detonation of the social dynamite in the nation’s ghettos which are inevitable
if unemployment is not further reduced and if promised help to the victims
of poverty is deferred. With the long-dormant hopes of the disadvantaged at last
aroused, we can never again have peace of mind or peace in our cities until
assurance is provided of prompt and certain fulfillment of those hopes.
The danger on the price front is of an entirely different order. The price
problem, as will be shown, is not generalized ibut sectoral. It is not the kind
of problem that is appropriately dealt with by measures to restrain expansion of
total demand. Such measures would block further reduction of unemployment
and current weakness in the economy suggest that even moderate restraints on
the growth of demand might well increase unemployment sharply and possibly
784
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
cause recession. In any case, increases in the price level are decelerating and,,
as spelled out later in this statement, the remaining sources of upward price*
pressures are to a large degree manageable.
I therefore believe that fiscal policy in 1967 should:
Be designed to promote economic growth at a rate that will bring about a
further significant reduction of unemployment; and
Assign first priority in nonmilitary government spending to adequate funding
of Great Society programs even if that should require stretching out of the space
program, highway construction and other activities that do not directly affect
human welfare and the quality of life in America.
No general excess of demand
Measures to reduce total demand, such as a tax increase or a cut in government
spending, can Jbe justified as weapons against inflation only when demand is
excessive in relation to potential supply. Under those circumstances, unemploy
ment need not result from lowered demand.
Demand, reducing measures are not appropriate, however, to combat price
increases which occur while productive resources are not fully utilized. The
cause of such price increases may be abuse of administered pricing power or a
mismatch between the composition of demand and the goods and services Which
the unused resources are capable of producing, or a combination of both. Price
rises that occur in the face of unemployment and unused physical capacity call
for rifle-shot solutions aimed precisely at the particular problems involved rather
than the blunderbuss approach of a reduction in the general level of demand.
The latter is wasteful, in that it deprives the economy of the goods and services
which the unused resources are capable of producing, and it is cruel because it
inflicts the hardships of unemployment upon the most vulnerable groups of the
population.
Clearly, there is currently no general excess of demand. Secretary Fowler
attested to that In his testimony in these hearings he said :
“Our problem during most of last year was not primarily one of overall excess
demcmd or insufficient total restraint . . . Rather the problems were those of
selective imbalance and the financial strains that can develop with a sharply
increasing degree of monetary restraint.” [emphasis added]
As will be shown, the imbalances, although very definitely selective, were not
all attributable to monetary restraint. The absence of any general excess of
demand is apparent from the January 1967, unemployment rate which, although
substantially reduced since 1961, was still 3.7 percent (on the new basis)—ap
proximately twice as high as the rest of the industrialized free world has averaged
in recent years. Physical resources, as well as workers are available to increase
production. According to the Federal Reserve Board, manufacturing output in
the fourth quarter of 1966 was only 90 percent of capacity—down from 91 percent
in the preceding three quarters. Moreover, capacity is increasing rapidily—at
an annual rate of approximately 7 percent.
Price increases not inevitable
Price increases are by no means inevitable if currently idle resources are put
to work. Higher rates of capacity utilization and lower rates of unemployment
than those presently prevailing can be compatible with reasonable price stability.
That is evident from the experience of the 12-month period from the fourth
quarter of 1952 through the third quarter of 1953. Utilization rates during
this period ranged between 95 and 96 percent. The unemployment rate during
the same period ranged between 2.6 and 3.0 percent. Yet, even the removal of
Korean War price controls in March 1953 resulted in no major upsurge in prices.
During the entire 12-month period, the increase in the index of wholesale prices,
other than farm products and foods, was only 1.3 percent. The Consumer Price
Index increased by only 1.0 percent.
There is no danger of generalized inflation until demand presses much more
closely on the limits of labor and physical resources than it does at present.
Remaining price pressures manageable
The remaining major sources of upward pressure on the price level are by
no means so serious or unmanageable as to justify (if such a policy can ever be
justified) the deliberate maintenance of the present level of unemployment in
order to combat them. There are tools available which, even if they do not func
tion perfectly, can be effective in holding the rate of increase in prices well within
tolerable limits.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
785
1. It is feared, for example, that corporations may use wage increases as the oc
casion and excuse for raising prices. But profits generally are at levels high
enough to permit absorption, without price increases, of wage increases consid
erably larger than those likely to be negotiated in 1967. In fact, profits in many
industries are at levels which would permit reductions in prices even after meet
ing the cost of substantial wage increases. Attempts by corporations to pass
on the cost of wage increases which they can afford to absorb out of profits, re
fusals to reduce excessive prices, and other abuses of corporate market power
can and should be dealt with by creation of the price-wage review machinery
previously discussed. That machinery would also serve to minimize any danger
that union demands might adversely affect the Price level.
2. Shortages of skills—which, fortunately, are confined to a very limited num
ber of occupations—can be overcome, with varying degress of speed, by such
measures as stepped-up training and worker relocation programs, tax and other
incentives to industry to locate new plants in areas of relatively high unemploy
ment, and the great ingenuity that management has repeatedly displayed in
adapting jobs to the qualifications of the available workers. In the longer run,
a rounded and equitable incomes policy such as is proposed elsewhere in this
statement would serve to restrain increases in the price level resulting from dis
proportionate increases in the incomes of professionals in short supply. Physi
cians' fees reflected in the Consumer Price Index rose 7.8 percent between De
cember 1965 and December 1966—more than twice as much as the 3.3 percent
increase in the Consumer Price Index as a whole.
3. Selective tax and monetary measures can be used both to rechannel de
mand away from those areas of the economy where pressures of demand on
bottlenecks might give rise to inflationary pressure and to encourage the par
ticular investments and other actions needed to open up the bottlenecks.
Recent price rises sectoral
Such price increases as we have thus far experienced are clearly not the result
of an overall excess of demand but rather can be traced to special factors oper
ating in particular sectors of the economy. For example:
1. Prices of certain agricultural products rose because of shortages.
2. In the service component of the Consumer Price Index, shortages of
professional personnel are a significant factor in rising medical care costs;
tight money and rising interest rates have raised housing costs.
3. In manufacturing, abuses of market power contribute to the increase in
the general price level as corporations (a) raise prices even though their
profits are ample and their capacity not fully utilized, and (b) refuse to
pass on in reduced prices gains from rapidly rising productivity and in
creased volume.
4. Excessive profits obtained through such price practices have fueled an
investment boom which has given rise to sectoral inflationary pressure and
to labor shortages in the capital good industries.
Some of these upward pressures on prices are now beginning to abate and
price decreases are replacing price increases. Prices of farm products and
processed foods are already down at the wholesale level and the reductions are
starting to be reflected an retail food stores. The industrial crude materials
component of the BUS Wholesale Price Index is already down more than 4%
percent from the peak reached in March 1966, and the industrial intermediate
materials component has fluctuated within a narrow range since May 1966.
The seasonally adjusted index of wholesale prices except farm products and
foods, after rising at an annual rate of 3.7 percent between January and July
1966, remained practically level from July to December.
An easier monetary policy is beginning to be reflected in lower interest charges
on home mortgages.
Inflationary pressures in the capital goods industries can be expected to taper
off as the expected slowdown in the growth rate of capital investment ma
terializes.
The essential point, to repeat, is that there is no general excess of demand that
must be drained off by a tax increase. Such inflationary pressures as exist are
selective in character and should be attacked selectively. The selective ap
proach would enable us to press forward vigorously on the road toward genuine
full employment and the achievement of the Great Society. Measures to reduce
total demand—whether they be tax increases or reductions in government civilian
spending—would seek to buy price stability with unemployment. They would
786
th e
1967 ECONOMIC REPORT OF THE PRESIDENT
be in conflict with the intent of the Employment Act, would inflict needless hard
ship on the families of the unemployed, would intensify racial friction, and
would waste in idleness human and material resources that can help to build
the Great Society.
Employment target for 1967
At the very least, selective measures of the type urged above would substan
tially lower the threshold level of unemployment beyond which expansionary
fiscal and monetary policies would tend to raise the price level. The degree to
which that threshold would be lowered depends upon the imagination and de
termination brought to bear in devising and applying the selective measures.
No precise figure can therefore be suggested as to the unemployment rate that
would be attainable with reasonably stable prices within any given time span.
But that should not prevent us from setting a target rate and designing policies
to achieve it. The 4 percent “interim” goal was determined through something
less than rigorous application of scientific method. Comparably rough-andready methods can be used now to set the next target.
The economy has now had a year to make the adaptations associated with an
unemployment rate averaging less than 4 percent. The recent abatement in the
rate of price increases shows that those adaptations have largely been made.
The argument that growth was proceeding too fast no longer applies. Real
growth from the fourth quarter of 1965 to the same qurater of 1966 was only
4.1 percent. In addition, we now have the benefit of several years* operations—
although not on as large a scale as would have been desirable—of the manpower
and toher programs that were initiated for the purpose of making it possible to
reduce unemployment below 4 percent without generating inflationary pressures.
It should therefore be feasible now to move below the 3.7 percent rate reached
in January 1967 even without use of selective anti-inflationary tools. It is not
unreasonable—in fact, it is probably overly conservative—to suggest that appli
cation of even a few of such tools would make a 3 percent unemployment rate
consistent with reasonable price stability sometime between the end of this year
and mid-1968. It is pertinent in this connection that, when the mid-1963 dead
line was set for the 4 percent “interim” goal, the latest unemployment figure
available was 6.1 percent, which reflected a sharp reduction from a 6.8 percent
rate only two months earUer.
Starting from a higher level, it is true, made reduction of unemployment
considerably easier in 1962 than at present. But the 0.7 percentage point fur
ther reduction envisioned by the proposed 3 percent goal is only a third as large
as the 2.1 percentage point objective set in 1962 and is premised upon the use
of more refined, selective measures than the gross fiscal and monetary policies
that were sufficient under 1962 conditions.
On behalf of the IUD and the UAW, I strongly urge this Committee, in accord
ance with the spirit and intent of the Employment Act, to recommend that the
government “coordinate and utilize all its plans, fuctions, and resources9 to
9
reduce unemployment to no more than 3 percent by the end of this year or by mid1968 at the latest.
Tax revenues would obviously be greater with the economy on the road to
reasonbly prompt attainment of a 3 percent unemployment rate than they would
be with unemployment at present levels. The added revenues, of themselves,
would provide more funds for financing of Great Society programs—but still
short of amounts that should be provided for that purpose. It is therefore the
position of the IUD and the UAW that, within the framework of an overall fiscal
policy aimed at further significant reduction of unemployment, we would whole
heartedly support equitable taw increases designed to divert substantial addi
tional resources to Great Society programs.
EMPLOYER OF LAST RESORT
Even a 3 percent unemployment rate would be only a way station on the road
to full employment. It would fall far short of fulfilling the commitment of the
Employment Act to provide “useful employment opportunities for all those able,
willing, and seeking to work.”
As the Automation Commission noted, use of expansionary fiscal and monetary
policy to reduce unemployment helps those among the unemployed who are most
attractive to employers—in terms of education and training and, all too fre
quently, also in terms of age, sex, color, and religion. Until we have raised
demand sufficiently to push unemployment down to the irreducible frictional
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
787
minimum, there will remain the problem of fulfilling the promise of the Employ
ment Act for those least able to compete in the labor market.
Their number will be smaller if we continue the progress thus far made in
reducing unemployment; it will be greater if Congress accepts the standstill em
ployment policies advocated by the Council of Economic Advisers. But, in
either case, it will be all too large for some time to come. In either case, the
individuals involved should not be permitted to suffer the demoralizing hard
ships of unemployment nor should the nation suffer the loss of their potential
contribution to its wealth.
The Automation Commission proposed a way to provide such persons with
productive employment without risking the inflationary pressures that might
arise if gross fiscal and monetary measures were used for that purpose. It rec
ommended a program of public service employment under which the government
would act as “employer of last resort” for those able to work but otherwise unable
to find work. The Commission estimated that there was a potential of 5.3 million
jobs in six areas of the economy “where important social needs are now inade
quately met, if indeed they are met at all.” The areas of need covered by the
Commission’s estimate are medical institutions and health services, educational
institutions, national beautification, welfare and home care, public protection,
and urban renewal and sanitation. To this list we could add programs to elimi
nate air and water pollution.
To permit those needs to go unmet while unemployed workers able to meet
them search vainly for work is both immoral and senseless.
Jobs can be provided for the unemployed by the government as employer of
last resort without generating inflationary pressures. I urge this Committee
to give serious consideration to legislation that would implement the unanimous
recommendation of the Automation Commission to establish the government as
the employer of last resort.
TA X SH ARING AND SOCIAL RESPONSIBILITY
If we are to move more effectively under our federal system to meet urgent hu
man needs, it will be necessary to give more substance to the flexible, pragmatic,
creative Federalism which President Johnson advocates. One of the most urgent
problems in this whole area is that of ways and means by which the federal
government should assist the states and local units of government, most of which
are burdened by social responsibilities which they are far from being able to me£t
without federal assistance.
The President’s approach to this question, as defined in his State of the Union
and Budget messages, calls for evolution of the federal system. He emphasizes
that the grant-in-aid programs, through which federal assistance to the states
and local governments is now channeled, are evolving in order more effectively
to meet state and local needs, and that this evolution will continue. This evi
dence of the adaptability of the grant-in-aid approach and of the Administration’s
intention to improve such programs deserves more attention than it is getting from
advocates of other forms of tax sharing which would involve, as some put it, “a
minimum of strings attached” as to how states would spend federal revenues.
The President states in his Budget message:
“At the national level the Federal Government has a responsibility to examine
and improve the grant-in-aid system, making it more flexible and responsive to
State and local fiscal realities. Last year we began a new partnership in health
programs through which numerous separate grant programs are being brought
together. The model cities legislation enacted last year will also help to integrate
the wide range of Federal aids available to communities. In the coming year we
will examine other areas of Federal aid to determine whether additional cate
gorical grants can be combined to form a more effective tool for intergovernmental
cooperation.”
Here, then, is a primary element neglected by the opponents of grants-in-aid:
the flexibility of the grants-in-aid approach.
Another weakness in the case of grant-in-aid opponents is their studied myopia
with respect to governmental inefficiencies at the state and local levels, inefficien
cies which argue against the proposition that these units of government can at the
present time effectively use federal funds in the absence of federal guidelines and
standards. In his State of the Union message, President Johnson declares:
“Each State, county and city needs to examine its capacity for government in
today’s world. Some will need to reorganize and reshape their methods of ad
788
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1967 ECONOMIC REPORT OF THE PRESIDENT
ministration—as we are doing. Others will need to revise their constitutions
and their laws to bring them up to date—as we are doing. Above all, we must
find ways in which the multitudes of small jurisdictions can be brought together
more efficiently.”
The President, indeed, courteously understated the magnitude and urgency
of these problems of governmental fragmentation and inefficiency. State gover
nors themselves, in recent inaugural addresses, have stressed the degree of
obsolescence and disorganization in state after state. {Time, January 20, 1967).
Governor Harold Hughes of Iowa declared:
“I think we need to pay less attention to states’ rights and more attention to
states’ responsibilities.”
Governor Love of Colorado attacked his state’s :
“crazy-quilt development of overlapping, duplicating, and sometimes competing
groups of governmental jurisdictions”
and warned that future challenges could not be met with the ‘‘organizational
patterns of the 19th century.”
Governor Winthrop Rockefeller called for basic revisions in Arkansas’ 1874
constitution and called for a new look at state operations, hindered, according
to Time, “by an incredible total of 187 boards and commissions.”
Governor Daniel Evans of Washington summed up the states’ predicament in
these words:
“State governments are unquestionably on trial today. If we are not willing
to pay the price, if we cannot change where change is required, then we have
only one recourse. And that is to prepare for an orderly transfer of our re
maining responsibilities to the Federal government.”
Senator Muskie, who was himself governor of Maine and who as chairman of
a Senate subcommittee on intergovernmental relations has been holding hearings
on the administration of federal grants, confirms this general view of state gov
ernmental inadequacies. He agreed {New York Times, February 7, 1967) that
some governors were trying to generate new life into state government, but added:
“* * * they still need legislative and constitutional reform, and they have
a long way to go to establish their own leadership over the planning and ad
ministration of state programs.”
Under such circumstances, it would appear, at the very least, to be untimely
for the federal government to relinquish to the states and local governments
present federal controls over the use of federal revenues.
It is important to note in this connection that the mayors of our big cities—
where so many of our major social ills and needs are concentrated—apparently
have little confidence in the capacity of the states to administer federal revenues
fairly under a no-strings tax-sharing approach. Mayor Harold Tollefson of
Tacoma, Washington, speaking as President of the National League of Cities,
(New York Times, February 7, 1967) told the Muskie subcommittee that state
governments could not be trusted to respond to urban needs. He said that
cities would welcome help from the states but that “the past leaves too many
doubts.”
In view of these doubts and the widely shared reservations regarding the
effectiveness of state and local governments, reason would seem to counsel against
an abdication of federal responsibility in efforts to lighten local and state fiscal
burdens. What is truly pernicious about some of the current campaigns to render
the federal role in revenue sharing more passive, is that they do more than
merely distort the realities of the situation: they reverse the priorities attd they
call for abdication of federal leadership precisely at a time when the nation
cannot meet its mounting human needs and expectations without greater federal
expenditures and greater federal leadership in the federal system.
What happens when the federal government fails to assert its proper author
ity and carry out its proper responsibility in deference to a loose definition of
states’ rights is nicely illustrated in the matter of air pollution. President
Johnson states the problem in the following passage:
“Under the d ean Air Act of 1963, we have attempted to encourage states to
develop effective regional control programs. The act offered three federal dol
lars for every local dollar spent to develop and support regional interstate air
pollution control programs. Despite this incentive, no effective regional pro
grams have been developed under the act.”
The passage is from the President’s message, “Protecting Our National Herit
age”, in which he asks for passage of an “Air Quality Act of 1967”, which would
provide for more vigorous federal enforcement powers.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
789
Advocates of tax sharing with a minimum of strings attached are not true
friends of state and local government or of the people back home who would
allegedly benefit from such an approach. For one thing, they imply that the
federal system should be or could be a partnership of equals, a concept which
sows confusion. The Articles of Confederation provided for a partnership of
equals. When that partnership inevitable went bankrupt, we founded thi»
nation on a Constitution which provides for a more perfect union by making:
the federal government preeminent within the federal system and charging
it with direct responsibility for promoting the general welfare. It is also mis
leading to imply, as they do, that the powers of government within the federal
system are a fixed quantity and that the exercise of federal leadership in
Washington involves a derogation of the powers of the states. This nation
is faced by problems of such complexity and magnitude that government on all
levels is challenged to assume greater initiative and become more resourceful.
The question is not, as the partisans of untied grants assume, to take away
from the powers of Washington in order to augment the powers of the states.
It is rather that Washington and the states both should exercise their respective
powers to the full, within a system in which all partners acknowledge the
necessarily preeminent position of the federal government.
Advocates of tax sharing without strings also fail to take account of the
fact that too many states have not put forth enough tax effort and too few
have been enough concerned with tax equity. The fact the 17 states have
no income tax is relevant with respect to both effort and equity. What as
surance is there that states which presently neglect such important sources
of revenue will not use federal monies made available on a no-string basis
either to reduce existing state taxes or to avoid tax increases necessary, in
addition to federally provided funds, to assure an adequate level of services
for their citizens? The inequity inherent in the heavy dependence of state
and local governments on regressive sales and property taxes, which impose
a disaproprortionate burden on the poor and less affluent, is one of the chief
reasons why state and local tax burdens should be eased by increases in federal
grants. The grant-in-aid approach can help to assure that the inequities re
sulting from state and local taxes are offset to some degree by federally financed
services for the victims of those inequities.
The fact remains, however, that the chief reason why the states are in trouble
is that the federal government has failed to assume its proper responsibilities
If the federal government, for example, were to establish a national guaranteed
minimum income program, the $3.2 billion which the state and local governments
are currently spending for public assistance and relief would be freed for use—
without strings—as these governments saw fit. And this is just a single exam
ple : Washington could free additional billions of dollars of state and local expen
ditures through exercising similar initiative in many fields where the national
interest calls for federal action.
Along with full assumption by the federal government of its direct responsi
bilities, the best hope of state and local governments lies in increased federal
appropriations for grant-in-aid programs, and in the extension of such programs
into other categories of need where state and local burdens need to be lightened.
There is no reason why the present evolution of such programs cannot continue
to make them more responsive to state and local needs, including the need to find
regional solutions for many problems, such as water and air pollution.
The main thrust of the united revenue sharing advocates, on the other hand,
is not toward increases in federal assistance but toward budget cutting. The
chairman of the House Republican Conference was presumably reflecting a wide
spread sentiment within his party when he said (Congressional Quarterly, Jan.
20, 1967) that of several tax-sharing plans being drafted, the final Republican
choice was expected to propose “that no strings be attached to the money and
that federal grants-in-aid programs be eliminated or phased out.” Illustrative
of tax-sharing measures being introduced is one whose proponent told the House
that it would return to the states $2.2 billion of federal funds, less than the $3.2
billion the states and local governments are now spending for public assistance
and relief under that grant-in-aid program—and which they would be free to
spend as they chose for other purposes if we had a national guaranteed minimum
income. The Congressman apparently conceives of his revenue sharing plan as
an eventual substitute for grants-in-aid, since he states that much of President
Johnson’s contemplated $2 billion increase in grant-in-aid programs “could be
directed toward a federal tax-sharing program.” It is pertinent, therefore, to
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ECONOMIC REPORT OF THE PRESIDENT
observe that the federal government turned $11.2 billion over to state and local
governments for grants-in-aid in calendar 1965, or over 15 percent of total state
and local government expenditures.
All of which is not to argue that there should never be some form of revenuesharing in addition to grants-in-aid. First, however, direct federal responsi
bilities should be squarely met and grant-in-aid programs should be adequately
funded and their potentialities fully realized. A n d states and local governments
should bring a m u c h greater degree of order and equity into their affairs. Then
it might make sense to offer state and local governments a certain amount of
federal revenue, over and above sums distributed through grants-in-aid. This
additional revenue would go to states prepared to increase their spending in
certain broad areas, which would be defined by the Federal government in order
to assure that funds raised nationally would be spent for national purposes; and
in these general areas they would be free to experiment. State and local efforts
to increase their tax collections to a specified amount in relation to per capita
income should be a factor in determining the allocation of funds. A n d in order
to encourage tax equity as well as tax effort, substantially more credit should be
given for revenue derived from personal and corporate income taxes than for
that collected from sales and property taxes. M a n y states and localities have
feared to increase their tax collections and make their taxes more progressive
in the face of business threats to move elsewhere. Such federal inducements
would serve to offset these fears. Care should also be taken to assure that the
funds would not be used on a racially discriminatory basis; and there should
obviously be other safeguards to assure compliance with proper wage and other
standards.
That time has clearly not come. Meanwhile, an effort should be made to im
prove state and local performance by including such standards and incentives
in grant-in-aid programs.
PR IO R IT IE S FOR G REA TN ESS
The Great Society is not a transient slogan but rather a continuing commit
ment to make the quality of American life more worthy of our power, our
wealth, and our democratic professions. W e look around us at the state of our
cities, our air, our water; at the poverty and deprivation and discrimination
that persist among us; at the unemployment, disaffection and delinquency that
affect so m a n y of our young people; at the insecurity, loneliness and needless
suffering that afflict so m a n y of our elderly. W e cannot believe, with all due
allowance for the exceptional strains and demans of this period in our history,
that w e are doing nearly as m u c h as w e can comfortably do, with our great
and growing means, to cope with these domestic dangers and challenges. W e are
convinced that despite all our other commitments, w e can take and w e should be
taking longer strides toward that society that is more concerned with the
quality of its goals than with the quantity of its goods.
W e are also convinced that doing more n o w is the best preparation w e can
make for the massive forward movement toward a greater society that w e must
be ready to make when the Vietnam W a r is ended. W e must recover a sense
of the urgency of getting on with the great tasks of peace.
W e sense that despite evident concern and the best of intentions in Washing
ton, spirits have been chilled and the will to move forward has given w a y to a
marking of time, a treading of water, a spinning of wheels. And, w e fear that
this dispirited mood will favor the active campaign of retrenchment and retreat
on the part of those w h o see in our Asian involvement a prime opportunity for
placing all our clocks on slower and slower time.
W e find this dispirited mood understandable against the recent sorry record
of authorizations voted and then reduced in the actual funding, a process that
has weakened dozens of Great Society programs and virtually or completely
destroyed others. While understandable, however, w e believe it is a mood that
must be resisted out of the knowledge that to indulge it is to pile up greater
troubles for the country and the government in coming months and years.
Therefore w e say that the time is n ow to break this mood and to resolve again
to move resolutely forward. The limitations on our movement and initiative
are not as great as w e have lately supposed. W e are not condemned, for exam
ple, to be victims of old priorities when changing circumstances require a shift
to new priorities and enable us to make greater, more significant progress in
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791
achieving other goals. There is no reason, for example, to continue to act as if
any fundamental national interest dictates that w e put an astronaut on the
moon by 1970. N o citizen will suffer if it takes a few years longer; but many
Americans can be helped to greater hope, health and material well-being if by
stretching out the space and highway programs w e mobilize more funds for
getting on with the work of building the Great Society.
Those funds should be concentrated on the heart of the problem, which is
the existence of 32.7 million poor people in this most affluent of nations, a scandal
and tragedy which, as the Economic Report so rightly says, indirectly afflict
every American.
To put an end to poverty, three operations are absolutely essential:
(1) W e must create jobs for all w ho can w o r k ;
(2) W e must lift the mini m u m wage to higher levels for those w h o work
at wages that keep them poor;
(3) W e must provide adequate incomes for those w h o can’ work.
t
W e have dealt with the problem of creating job opportunities elsewhere in
this statement
To help those w h o work but remain poor, w e must lift the minimum wage
higher faster. To do that, w e must first have taken to heart these words that
appeared in the Social Security Bulletin for January 1965:
“That a m a n risks poverty for his family when he does not or cannot work
all the time might be expected, but to end the year with so inadequate an income,
even when he has worked all week every week, must make his efforts seem
hopeless.”
A n d w e must reckon with the fact that in 1964 there were 2,100,000 heads of
family, with 6,060,000 children, living in poverty despite the fact that the head
of family was employed the whole year; and that 570,000 single persons were
in the same predicament.
The working poor— farm workers are a notable example— need more, however,
than a higher mini m u m wage. They need the benefits of collective bargaining
and such forms of economic protection as workmen’ and unemployment com
s
pensation.
For those w h o are poor because they or the head of their household cannot
work, w e must provide adequate incomes. W e should begin by improving public
assistance along the lines recommended by the President in his Economic Report,
by requiring that each state’ payments at least meet its o w n definition of need,
s
and that the definition evolve with changing conditions. A n d w e strongly sup
port the President’ request that Congress put an end to the 100 percent tax on
s
the earnings of those on public assistance in order that they will have an incen
tive to accept part-time work; for as the Council says, the poor cannot be
expected to work without pay, any more than can the rich.
W e should be moving more rapidly toward some form of a national guaranteed
m inimum income, to which every American would be entitled as a matter of
right and h u m a n dignity, out of the vast wealth and constantly expanding pro
ductive capacity of this nation. Such a guaranteed income is essential to meet
the basic needs of those w h o cannot work. A n d the Federal government, as we
have indicated elsewhere in this statement, should also act as employer of last
resort for those w h o are unable to find jobs in the regular labor market. Pend
ing establishment of such a program, w e need a national general assistance plan
covering all those in need. W e support the President’ initiative in forming a
s
commission to study the various m i nimum income proposals; but w e earnestly
hope that the study will not take as long as the two years no w contemplated,
and that prompt action will be taken to set up a guaranteed minimum income
program as soon as the study commission reports. With the advent of the guar
anteed minimum, Americans would have three compatible forms or layers of
income, and those w h o worked would have all three: the m i n i m u m ;wage-related
Social Security programs (which need just improvement); and other benefits, in
addition to wages, derived through collective bargaining.
W e must recognize that there is a serious lag in this country between our an
nouncements of good works intended and their realization; and that great social
and economic dangers breed in the interval between our democratic professions
and our performance.
The last few years have been years of great beginnings tinder the leadership
of President Johnson. H e has clearly set forth the goals of the Great Society,
and he has taken the initial steps to move the nation toward the achievement
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of those goals. The resources are available, w e have the technical capability,
and, if w e demonstrate the will and the sense of national purpose, w e can bring
the promise of the Great Society into practical fulfillment W e must not fail in
this great endeavor, for the cost of our failure will be incomparably higher than
the cost entailed in moving vigorously forward toward Great Society goals now.
Chairman Proxm ire. Our next witness is M r. George G . Hagedorn,
vice president and chief economist o f the National Association o f M an
ufacturers. M r. H agedom is an old friend o f the committee. H e is
an excellent economist.
W e are m ight happy to have you here, M r. H agedom , with your
concise statement.
TESTIMONY OF GEORGE G. HAGEDORN, VICE PRESIDENT AND
CHIEF ECONOMIST, NATIONAL ASSOCIATION OF MANUFAC
TURERS (NAM)
M r. Hagedorn. Thank you, M r. Chairman.
Chairman Proxmire. The rales will be the same. I think we do
have time now. M r. Euether took 25 minutes for his presentation.
W e will be happy to have you take 25 minutes, and then we will have
a 5-minute limitation on the questions. You go right ahead.
Incidentally, may I say that you have a statement which is rather
concise. I f you want to skip over some of it, the entire statement will
be printed in the record, as well as the tables, and so forth.
M r. Hagedorn. I would like, M r. Chairman, to file the statement
for the record and speak extemporaneously. Y ou gentlemen have
heard a great deal of testimony, and perhaps the best thing I can do is
to try to emphasize some o f the points where I think perhaps I might
make a contribution to your thinking.
Chairman Proxm ire. I am sure you w ill. That w ill be done. Y our
statement w ill be filed in the record at this point.
(The prepared statement of M r. Hagedorn follow s:)
P repared S t a t e m e n t
of
G eoroe G . H
agedorn
I appreciate this opportunity of appearing, on behalf of the National Associa
tion of Manufacturers, before your committee to discuss the 1967 Economic
Reports of the President and his Council of Economic Advisers. These annual
hearings, and your deliberations, help to establish the essential framework of
economic understanding within which Congress will carry on its work during
the year. All of us w h o appear before you have the duty of presenting our best
thinking on the economic situation and the government policies it m a y call for.
As always, the Administration’ Economic Reports provide the starting point
s
for your o w n appraisal and for the comments of the witnesses you hear. Over
the years these reports have done a good job of presenting the factual background,
stating the important current issues, and raising the considerations which bear
on them. But i is surely not being hypercritical to point out, with our advantage
t
of hindsight, that past reports have sometimes fallen short of infallibility in their
appraisal of economic trends. A n d there would be no point in these hearings if
there were not room for some disagreement on the value judgments which underlie
some of the economic policy recommendations in the Reports.
Summary of Comments
At this point, let m e summarize briefly the major comments w e have to make
on the Economic Reports. The analysis underlying our reaction to them will be
set forth in greater detail in subsequent sections. The final section will state
our own recommendations to you on 1967 economic policy.
Our conclusion, after examining the 1967 Economic Reports, is that they have
misread the implications of current economic trends and of the economic measures
THE
1967
ECONOMIC REPORT OF TH E PRESIDENT
793
proposed by the Administration. Their error is not by a wide margin, but by one
sufficient to make their recommendations in the fiscal area inappropriate for deal
ing with the economic problems of 1967.
It will be recalled that the forecast of 1966 gross national product set forth in
the Economic Reports of a year ago fell about $10 billion short of what actually
occurred. This does not seem a very large error in a $740 billion economy. Yet
it made an important difference in the tone and character of the economy in 1966,
and in the fiscal policies appropriate for i . Instead of the anticipated stable
t
non-inflationary growth, w e had a sharp spurt of unsustainably rapid growth
through most of the year followed by a noticeable slow-down toward the end.
The Administration’ failure to perceive the need at an early stage for a posture
s
of greater fiscal restraint contributed to making 1966 an inflationary year.
This is mentioned only because w e fear that the Administration’ expectations
s
for 1967 m a y be similarly in error, but in the opposite direction. Our reasons for
this conclusion will be presented in greater detail later. It does carry the impli
cation that a year in which the economy will have to adjust to a slower rate of
growth is not the year in which it is wise to impose a general increase in income
tax burdens.
But there is a larger question to be raised in regard to fiscal policy. It is not
merely a device for making short-term adjustments in the economy. It is the
means through which fundamental choices are expressed— choices as to h o w much
government, and what kind of government programs, the nation will have. It is
a matter of establishing priorities, both as between the government and the
private sector and as between various government activities.
The Council of Economic Advisers discusses this matter of priorities, but with
out ever quite bringing their analysis to a head. A n d none of us should approach
this subject in a doctrinaire way, since value judgments are involved that only
the American people as a whole are entitled to make.
Nevertheless, w e find it hard to believe, in examining the fiscal record of recent
years, that it can possibly represent the true priorities of the American people.
W e do not believe that the large expansion of federal nondefense programs is in
line with the deliberate choices the population would m a k e in allocating the pro
ductive resources of the nation to government purposes. W e fear that a tax
increase in 1967 would validate and confirm this past trend and encourage its
continuance in the future. Our specific reasons for this conclusion will be ex
plained later.
In the area of wage-price developments the Council points out that, in 1965 and
1966, inflation resulted from the adjustment to a rapid increase in demand. It
goes on to say that, although this is over, “. . . forces were set in motion which
will continue to push up prices for a time.” In other words, the inflationary
problem in 1967 will be of the cost-push variety.
In this we believe that they are right. But it raises the question of whether
a tax increase is the proper means of checking such an inflation. Ta x increases
seem more likely to strengthen the cost-push factors than to weaken them or
offset them.
It might be thought that this would be the year, above all others, in which the
“guidepost” approach would be most necessary. The Council has chosen this year
to make a partial retreat from its former position. It reiterates its view that
productivity growth still establishes the non-inflationary limits on the upward
trend in wages, but in a context that suggests that it cannot be taken too seri
ously in 1967.
The N A M has viewed a setting-forth of the wage-productivity relationship as a
helpful educational tool in promoting public understanding of the effects of wage
settlements. W e have always had reservations as to the desirability of using
wage and price “guideposts” as a basis for various forms of government inter
vention. W e hope that the retreat of the Council in this field will not too seri
ously impair the educational value of the productivity criterion. W e also hope
that i signals an intention to use whatever remains of the “guidepost” approach
t
in an advisory rather than a coercive manner.
Additionally, the Council’ urging that industry reduce its profit margins on a
s
wide scale seems to us unrealistic and uncalled for. It is an arbitrary judgment
rather than a conclusion drawn from any basic principle.
One economic objective of the Administration, which is emphasized more than
any other in its economic reports, is the further reduction of interest rates. This
is an aim with which w e can sympathize— manufacturers do not like to pay high
interest costs any more than anyone else. But it is an objective that must be
considered from all sides.
75-814— 67— pt. 4------- 6
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L o w interest rates are better than high interest rates in the same sense that
lower prices are better than higher prices. W e welcome low prices if they reflect
a plentiful supply of goods and w e welcome low interest rates if they reflect an
abundant supply of savings for investment. But if low prices result from insuffi
cient demand for goods they are not a sign of economic health, and neither are
low interest rates if they reflect an absence of advantageous opportunities to use
capital. A n d low interest rates are not cause for much satisfaction if they result
from excessive expansion of money and credit, thus encouraging inflation at home
and weakening the dollar internationally.
The economic program of the Administration might indeed contribute to the
lowering of interest rates, but in ways that would yield little gratification. The
tax increase might slow down growth and reduce the demand for funds. It,
together with guidepost policy, might reduce profit margins and hence the oppor
tunities for using capital profitably. O n the other hand, if w e assume that
these undesirable effects will somehow be avoided, the tax increase will con
tribute to higher rather than lower increase rates. It will reduce the internal
sources of business capital and the savings of individuals, both of which are
alternatives to drawing on bank credit. Hence, the tax increase, under these
assumed circumstances, would increase the demand for bank credit and thus
tend to raise interest rates.
Economic Outlook— 1967
In 1967 it is becoming clear that the economy will have to adjust itself to the
termination, or reversal, of certain trends which have given it strong support
until recently. The developments of this character which can be anticipated are
as follows:
1. A leveUng-off of the capital-goods boom.— Several factors would lead us to
expect this trend— which would be a radical shift from the 1 6 % expansion of
capital outlays between 1965 and 1966. First, the growth rate of the economy
generally will slow down in 1967. This is expected by practically everyone in
cluding the O E A and it is probably inevitable. But capital expenditures are,
in practice, a means of providing additional facilities for an expanding economy.
Hence a slowing of the rate of growth can mean an actual decline in the level
of capital spending.
Second, the suspension of the investment credit and accelerated depreciation
will act as a deterrent to capital spending in 1967. This is only beginning to
have that effect since m u c h of the spending in the latter part of 1966 was the
result of orders placed prior to the suspension date. The investment credit and
accelerated depreciation were conceived as normal and permanent parts of the
tax system. They were suspended only because it was thought that demand
for capital goods would be excessive in 1967. The matter obviously has to be
reconsidered. Meanwhile, w e list this among the factors which will depress
capital spending this year.
Third, the expected reduction of profit margins, to be discussed later, will
reduce both the profit incentive and the funds available for capital spending.
Finally, the proposed 6 percent surcharge on income taxes would further
depress profit margins, and intensify the problem of maintaining capital expan
sion. It is surely undesirable to add this on top of all the other factors tend
ing to reduce the level of business capital spending.
Compilations of business plans for capital spending would indicate that 1967
plans exceed actual 1966 levels by a small percentage. But in the last half of
1966 spending fell well below the previously announced plans for that period, as
is c o m m o n close to a turning point. W e conclude that a most optimistic
assumption would be that business expenditures on fixed investment will be as
high as in 1967 as in 1966. This would mean that capital spending would fall
below its level as of the last quarter of 1966.
2. A topping-off of the defense boom.— This is a matter on which he statistics
customarily consulted m a y be misleading. For that reason w e attach a table
(Table 1), comparing the trends as measured in various ways. All the figures
are derived from the official compilations in the budget document.
Usually w e appraise the economic impact of government defense spending in
terms of the amount indicated under that head in the national income accounts.
As seen on the table, this portrays a continuing upward trend in fiscal 1968.
The increase is expected to be about $12 billion between fiscal 1966 and fiscal
1967, and an additional $6 billion between fiscal 1967 and fiscal 1968. But the
national income accounts record defense spending at the time the goods and serv
ices are delivered. Thus it measures the completion of economic activity related
THE
1 9 6 7 ECONOMIC REPORT OF TH E PRESIDENT
795
i o defense, rather than its initiation. W e get closer to a true indicator of the
t
economic impact of defense outlays if w e look at the trend in the “obligations
incurred” by the federal government w h e n it places its orders and starts the
process going.
O n the “obligations incurred” basis (see line 5, Table 1) the trend appears
quite different. A large increase is indicated between fiscal 1966 and fiscal
1967, but the total remains almost level between the current fiscal year and
the one that begins in about four months.
These estimates m a y have to be revised, depending on political and military
developments. But the revision could as well be downward as upward. W e
conclude that it is reasonable to assume that the nation is at, or close to, the
peak of business activity related to the defense effort.
3. A reduction in the rate of inventory accumulation. Goods added to in
—
ventories are as much a part of the annual output as those sold to final pur
chasers. In 1966 the nation produced $11 billion for that purpose.
It is universally agreed that production for inventory will be m u c h less in
1967 than in 1966, although there m a y be room for disagreement as to the
amount. The leveling-off of the defense and capital-goods booms will reduce
the need for adding to goods-in-process.
The C E A estimates that inventory accumulation will be only half as great in
1967 as in 1966, but even this seems optimistic. W e conclude that the reversal
of the inventory boom will reduce national output by between $5 and $10 billion
between 1966 and 1967.
4. A reduction in profits and profit margins.— O n general considerations, it will
be difficult to increase, or even maintain profit levels in 1967. A strong upward
thrust of labor costs is anticipated. It m a y be expected that this will partly
he passed on in prices, supporting an inflationary trend, but (as is usually
the case) it will also partly be absorbed, reducing profit margins.
The Administration's estimates of before-tax profits in 1967 indicate only
a nominal rise— about 1% — over 1966. Since an increase of 6 % % in the gross
national product is assumed, this implies a reduction of about 5 % in before-tax
profit margins. A n d if a tax surcharge of 6 % were imposed in the middle
of the year, after-tax margins would be reduced by close to 9%.
This i , of course, a matter of immediate concern to manufacturers. It should
s
also be a matter of concern to the nation generally. The profitability of busi
ness operations is the chief determinant of the willingness of business to
produce, invest, and employ people. Table 2, appended, shows the close inverse
connection between profit margins and unemployment rates. Unemployment
reached its lowest levels when profit margins were at or near their peaks. With
only one exception among the 13 years listed, unemployment never fell below
a 5 % rate in years when profit margins were under 5%. The process of re
ducing unemployment to the 4 % goal during the past 6 years has been achieved
through a steady rise in the profitability of business activity.
W e conclude that, in the interests of maintaining a high employment economy,
it is undesirable for the government to take deliberate steps to reduce profit
margins— whether through a tax increase or through jaw-bone techniques.
There will he enough of a problem without that.
Some of the other aspects of economic activity in 1967 are less foreseeable
than those discussed above. Automobile sales have been sluggish, and no one
expects the industry to have anything better than its “second-best” year in
1967. Consumer non-durables and services will certainly show an increase in
volume but there is no reason to expect it to be exceptionally great Thus it
appears that the economy will have a serious burden in 1967 in adjusting to the
new, less favorable trends w e have described.
The Administration evidently hopes for a substantial expansion of the hous
ing industry to take up the slack. But this is a slender reed to lean upon. The
housing industry accounts for only about 3% of total economic activity. It is
only about % as great in dollar volume as capital goods expenditure, or defense
expenditure. This makes it hard to see h o w even a major recovery in housing
could offset the less favorable trends in those two areas.
The Council of Economic Advisers foresees a period of slow growth in the
first half of 1967, to be followed by a period of renewed economic strength in
the second half. This assumed pattern is their chief justification for recom
mending a tax increase to take effect on July 1. But the assumption of a pro
nounced upward change in trend to start at that time seems unconvincing. It
is based largely on the hope of an expansion of housing activity in the second
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ECONOMIC REPOET OF THE PRESIDENT
half. Even if this occurs it would seem unlikely to be sufficient to change the
general picture.
Fiscal trends and national priorities
Fiscal policy has an immediate impact on short-term economic developments.
But it must also be considered in a larger context. Fiscal policy is the means by
which w e decide h o w m u c h of the national productive resources will be devoted
to collective purposes through government, and ho w much will be left at the dis
posal of private parties for their individual purposes.
There is no formula by which the proper division m a y be decided. It is a mat
ter of priorities— whether an additional dollar spent by government will yield
more of value to the citizenry than that same dollar left in their hands to be
spent as they individuality see f t
i.
It is easy to compile a long list of needs that might be supplied by additional
government action— in the fields of health, education, civic improvement, etc.
The Report of the Council of Economic Advisers supplies an impressive discus
sion along these lines. But this doesn’ decide the issue since any individual
t
can compile an equally long list of his unsatisfied private needs and desires.
There are unsolved problems in the area of government responsibility, but
there are likewise individual problems that w e would like to solve.
Thus w e are left with the question: Assuming that we are not going to abol
ish our society of individual responsibility, and devote 100% of the national
income to collective efforts for social purposes, how do w e decide the proper
division of resources between government and the private sector?
This is not a question on which anyone, including the N A M , should speak
dogmatically. But an inspection of fiscal trends in recent years leads to at least
a prima facie presumption that the expansion of government activities has ex
ceeded anything that can be justified by a reasonable appraisal of the priorities
in the minds of the American people.
A summary of the relevant data since 1959 is presented in Table 3, appended.
The results are interesting and in some respects startling.
First, over the nine-year period between fiscal 1959 and 1968 the growth in
expenditures has been 87%. But this is not, to any important degree, the result
of military needs arising from the Viet N a m War. Defense expenditures over
this interval will have increased by 59%, as compared with a 115% increase
in non-defense spending. In this perspective, the proposed tax surcharge can
not realistically be regarded as necessitated by the growth of military needs,
which everyone will concede have a high priority.
A n even more startling result is observed if the nine-year span is divided into
three-year intervals. Apparently, in the latest of these three-year intervals, the
growth of government will have greatly accelerated if the Administration’ pro
s
grams are carried out. One might have expected that the sudden surge of mili
tary needs since 1965 might have restricted the growth of other government ac
tivities. Instead, non-defense government outlays have been increasing at a
substantiality greater rate than in the earlier periods. It is hard to believe
that this can be in accord with a genuine ranking of national priorities.
A third significant fact revealed in Table 3 is that in the middle period, 1962
to 1965, federal expenditures grew at a somewhat slower rate than either before or
since. This seems to be a reflection of the slower growth of revenues in that
period, which is the one in which the tax reduction of 1964 was enacted. I a m
sure that you will recall the general satisfaction in the country with the results
of that tax reduction and with the retardation in the growth of federal expendi
tures which made it possible. Apparently, the priorities of the population were
such that they welcomed an opportunity to spend more of their money individually
and somewhat less through government. It is difficult to believe that they would
take an opposite position at this time and accept a higher level of government
non-defense activity as a fair return for a tax increase.
Throughout the period there has been a rough but noticeable correspondence
between the rates of increase in revenues and in expenditures. This creates a
reasonable presumption that the expansion of government spending is the result
of the effectiveness of our tax system in providing the necessary revenues, rather
than a reflection of carefully-weighed national priorities.
W e do indeed, as the Council of Economic Advisers points out, have a highly
efficient revenue-producing engine in the federal tax system. But it is important
to remember the nature and purpose of that engine. It is a pump, which draws
funds out of the private economy and makes them available to government. But
THE
1967
ECONOMIC REPORT OF TH E PRESIDENT
797
the efficiency of the p u m p is no reason for expanding government activities to
match its output. An d there do not seem to be good grounds for increasing the
capacity of the pu m p by 6 % in 1967.
Wage and Price Trends
There are, as is recognized in the Economic Report of the Council of Economic
Advisers, strong forces tending to raise labor costs in 1967.
If a general rise in costs of production should materialize, it would be unfortu
nate. Apparently the major justification claimed for raising wages faster than
productivity in 1967 is the past increases in the cost of living. These reflected
chiefly price rises outside the area of industrial goods— farm products and serv
ices. But the impact of the resulting cost rises would be felt mainly in the in
dustrial area. It would tend to spread and to perpetuate inflation, rather than
to offset its effects.
Yet w e should not take a fatalistic view that such cost increases are inevitable
in 1967. A n attitude of this type on the part of responsible persons would en
courage the very cost increases that concern us here, and weaken any resistance
to them.
For that reason w e are gratified that the Council of Economic Advisers resisted
the temptation to revise its basic concept of the wage guidepost, and to include
a cost of living allowance on top of the trend increase in productivity. But, even
if one believes that wage increases in excess of productivity growth are very
likely in 1967, there is no reason for an official body to endorse or encourage
them.
It remains true, as the Council of Economic Advisers reminds us, that: “The
only valid and non-inflationary standard for wage advances is the productivity
principle. If price stability is eventually to be restored and maintained in a
high-employment U.S. economy, wage settlements must once again conform to
that standard.”
There have been suggestions that Congress should involve itself directly in
the process of establishing guideposts and in activities designed to promote ad
herence to them. It has been proposed that Congressional responsibilities in
this area should be set forth concretely in law.
W e urge you most emphatically not to take such a step. If the guideposts are
to be voluntary standards, and if they are intended for the information of the
general public and of the price and wage decision makers, they should not be
given the status of inclusion in the law of the land. Since they are necessarily
loose standards, to which man y exceptions must be recognized, they should not
be formalized by any act of Congress.
One would have to view with great concern an annual process of hearings
before a Congressional Committee, designed to settle upon the proper guideposts
for that year. Presumably both labor and management representatives would be
heard— in fact, most of the proposals of this nature call specifically for their
participation in the guidepost-setting process. Thus, in effect, the hearings
would become a form of labor-management negotiations. They might be the
most important labor-management negotiations of the year, since they would
set the framework for subsequent bargaining between employers and unions.
The adoption of these procedures would be a long step toward the system
followed in some other countries— where a national framework for labor settle
ments is established by bargaining between a national employers’ association and
a national employees’ association. And, worse, Congress would have put itself
in the position of being the mediator or arbitrator in these high-level labormanagement negotiations.
Furthermore, if Congress, or one of its Committees, were subsequently to
assume the task of applying the guideposts to particular cases, it would be assum
ing an inappropriate and impossible judicial function. If the Joint Economic
Committee were to do this, it would sadly impair its effectiveness in performing
the constructive role it has played in the past.
One other aspect of the wage-price situation should be mentioned— the effect
of increases in corporate and personal income tax rates. A tax increase seems
more likely to stimulate than to restrain the type of inflationary pressures that
are to be feared in 1967. A rise in corporate taxes m a y simply increase the de
m a n d for borrowed funds by corporations. A n increase in personal taxes m a y
simply increase the pressure for wage increases to offset i .
t
798
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1967
ECONOMIC REPORT OF THE PRESIDENT
Summary of recommendations
Based on the foregoing analysis of the current economic situation w e make
the following recommendations for economic policy in 1967:
1. Congress should enact no general increase in personal and corporate
income taxes in 1967. The economy will have to adjust to other changes
in trend this year, and the additional burden of a tax increase should not
be placed on i . Such an increase would validate the undesirably-rapid
t
growth of non-defense spending of recent years and permit its continuance.
2. Congress should start on a program to restrain the growth in federal
spending which has been occurring. Even if the whole job can’ be done in
t
1967,a move can be started in that direction. It can take the form of stretch
ing out some programs without necessarily abandoning them.
3. Congress should restore the investment credit and accelerated depre
ciation provisions of the tax law as promptly as possible. This should not
be regarded as a tax cut since these provisions have been accepted as a
normal and natural feature of the tax system.
4. Congress should not attempt to assume a formal role, prescribed by
statute, in the establishment or enforcement of wage-price guideposts. The
Joint Economic Committee should of course continue to have the privilege
of reporting its views in that subject area to Congress.
Table 1.— National defense outlays, as reported in various ways in the budget for
fiscal 1968
[Billions of dollars]
Fiscal 1966
actual
(1)
(2)
(3)
(4)
(5)
Administrative budget expenditures—national defense___
Cash payments to the public—national defense..................
Federal expenditures, N IA —national defense.....................
New obligational authority—national defense...................
Obligations incurred, net—Department of Defense,
military____________________________________________
Fiscal 1967
estimated
$57.7
58.5
56.5
67.4
$70.2
71.3
68.3
75.1
$75.5
76.8
74.1
77.9
61.8
73.5
74.8
Fiscal 1968
estimated
Source: Transcribed from “ The Budget of the U.S. Government—Fiscal year ending June 30, 1968” ’'
as follows: (1) Table 1, p. 41; (2) table 2, p. 42; (3) table 3, p. 43; (4) table 4, p. 44; and (5) table 9, p. 50.
T
able
2 .—
Trends in profit margins compared with unemployment rates
Aftertax
profits of
manufac
turers cor
porations as
percent of
1954.
1955.
1956.
1957.
1958.
1959.
1960.
1961.
1962.
1963.
1964.
1965.
1966.
4.5
5.4
5.3
4.8
4.2
4.8
4.4
4.3
4.5
4.7
5.2
5.6
15.6
Unemploy
ment rate
(percent)
5.64.4
4.2T
4.3
6.8
5.5
5.6
6.7
5.6
5.7
5.2
4.6
1Average of first three quarters.
Source: Federal Trade Commission and Security and Exchange Commission, U.S. Department of Labor.
THE
19 6 7
T
ECONOMIC REPORT OF TH E PRESIDENT
able
3 .—
799
Federal fiscal trends since 1959
[Receipts and expenditures in billions, based on national income accounts]
Expenditures
Receipts
Defense
Total
Nondefense
Fiscal year:
1959................................ ...................... .........
1962._............................................................
1965.......................................................... .
1968 (estimated).............................................
$85.4
104.2
120.6
167.1
$90.9
106.4
118.3
169.2
$46.6
50.2
48.5
74.1
$44.3
56.2
69.8
95.1
Percent increases:
1959-68....... ....................................................
1959-62............................................................
1962-65....... .......................................... .........
1965-68........................... ................................
96
22
15
39
87
17
11
43
59
7
-1
53
115
27
24
36
Source: U.S. Department of Commerce.
table 3.)
(For fiscal 1968—Budget of the United States, summary
M r. Hagedorn. Thank you.
The central question, the most important question, before economic
policymakers this year is the fiscal policy that the Government should
pursue, and let me get right into it.
To summarize the views of the N A M , we believe that the Govern
ment should not increase the tax rate, as proposed, in the middle o f
this year. It should, instead, make every effort to control and reduce
the level of Federal spending. This isn’t a new thought to you, but
let me bring out some aspects o f it that perhaps haven’t been em
phasized enough in previous discussion.
First of all, in discussing the economic impact o f fiscal policy, I
find, and perhaps you have observed, too, a tendency to feel that it’s all
summed up in the one figure, the deficit or surplus on the national in
come accounts. Thus, the total level o f spending doesn’t seem to
count very much, and the total level of revenues doesn’t seem to count
very much. I t ’s the difference between the two that is regarded as
having the important impact.
I mention this fact because I think some o f the witnesses before you
have urged that if, through fear o f weakness in the economy, you
forbear to increase taxes during this year, the same logic would urge
that you not reduce spending either. I don’t think that conclusion
is valid because taxes and spending are not sim ply the counterbalance
to each other. You can’t sum up the impact or a tax program and a
spending program simply by one figure which states the differences
between revenues and expenditures on the national income accounts
basis. Taxation has an impact on incentives, for example, and on
the whole tone and feeling o f the economy. That isn’t sim ply a re
flection of the amount of purchasing power withdrawn by the tax
system, and its replacement by purchasing power put out into the
economy by the Government spending. Y ou have to look much
deeper than that into the real concrete impact o f the various taxes
and proposed taxes on what people do.
Furthermore, the function o f fiscal policy is not merely to regulate
the economy, to act as a balance wheel to take away from , or add to,
the total level of demand in the economy. The fiscal system is much
more important than that. It is the concrete way in which you decide
800
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1967
ECONOMIC REPORT OF THE PRESIDENT
how much Government you are going to have in the country, what
Government programs we are going to have, how much resources will
be allocated to Government uses, as compared with private uses. So,
you have to look at fiscal policy much more than merely as the balance
wheel for keeping the economy going.
Now , during this year o f 1967, we can see a number of growing
weaknesses in the economy, at least developments that will call for
some readjustments in the economic system, readjustments that will
involve difficulties. F or example, we are very close to, if we are not
aty a peak in the capital goods boom. W e had a 16-percent increase
in capital goods expenditures last year over the previous year. Some
o f the more optimistic forecasts have indicated 4 or 5 percent increase
this year, but even those are very doubtful.
It is notable in the past that when you were close to the turning
point in capital expenditures, you found that the actual level of
realized capital expenditures in any quarter fell below the previously
compiled plans for such capital expenditures. That happened in the
last two quarters of 1966, and that is an indication that we probably
are very close to the peak level of capital expenditures.
This is to be expected, because every one agrees, including the Coun
cil o f Economic Advisers, that the real growth rate in the economy
in 1967 has to be less than what it has been in the past 4 or 5 years. W e
can’t continue indefinitely this 5y2 percent real growth rate.
W e have been drawing resources into economic use that were nor
m ally considered standby resources, and we have reached the end of
that process. W e have to depend on the demographic growth in popu
lation and the normal growth in productive capacity, and that won’t
perm it more than something like a 4-percent growth from here on.
Now that in itself is not something to be concerned or worried
about, but it does have a bearing on the capital goods picture, because
the production o f capital goods is itself determined, at least partly, by
the need to provide additional facilities for meeting the needs of
growth. A s the labor force increases, you need capital expenditures
to provide them with the tools and equipment that they work with.
So that when the economy generally decreases its growth rate, you
find that the actual level o f capital spending may decrease, at least
the level o f the part o f capital expenditure that is for expansion of
capacity.
A second adjustment that we will have to make during this year is
to a leveling off o f the defense boom. This is somewhat concealed by
the usual figures we see in the national income accounts. These indi
cate about a 20-percent increase in defense spending between fiscal
1966 and fiscal 1967, and a 10-percent increase between 1967 and 1968.
But actually, in the national income accounts, defense spending is
counted at the time when the goods are delivered to the Government.
The economic activity is all over by that time.
I f you look at the actual obligations incurred in the Government,
you find that what is planned for fiscal 1968, is only about 1 or 2 per
cent above what is expected in fiscal 1967. In other words, the figures
that indicate the economic activity arising out o f defense orders will
about level off between the current fiscal year and the one to come.
There is very little growth there, so we have another factor to which
the economy has to adjust, a leveling off of that growth.
THE
1967
ECONOMIC REPORT OF TH E PRESIDENT
801
A s you know, the inventory increase was very large in 1966, far
larger than we can expect it to be in 1967. There was $11 billion
added to inventories in 1966.
The Council of Economic Advisers expects the 1967 figure to be
about half that, but I think even that is optimistic, because we have to
have some reversal, some period o f using up o f those inventories that
have been accumulating. So you have something between $5 and $10
billion decline in demand from cessation o f inventory buildup.
Finally, another thing that is leveling off is profits— profits and
profit margins. The estimates o f the Government used in preparing
the revenue estimates in the budget, indicated that between calendar
1966 and calendar 1967 there would about about a 1-percent increase
in the actual dollar profits. A t the same time they are anticipating a
6%-percent increase in the dollar gross national product. This sug
gests there will be something like a 5- or 5^-p ercent decline in profit
margin, which is the ratio between dollar profits and the dollar volume
of business.
Then, if in the middle of the year you impose a 6-percent surcharge
on corporation taxes, that would further cut this, and you would have
perhaps as much as a 10-percent reduction in profit margins during
the year.
This is something that it would be very hard for the economy to ad
just to, because profits and profit margins determine the profitability o f
undertaking various business enterprises, the profitability o f hiring
people, the profitability of investing in new plant, the profitability o f
producing goods for various markets. A nd, when you cut down that
profit margin, you have effects on employment, production, and every
thing else.
This is indicated rather clearly, if you just put profit margins and
unemployment rates down in parallel columns. I have done this in a
supplementary table. (See p. 798.)
Just to summarize this very quickly, if you w ill look down the line,
you find that the unemployment rate gets below 5 percent when the
profit margin rate— this is after-tax profit margins for manufactur
ers— gets over 5 percent.
Now after 1957, we had a long period in which we couldn’t seem to
get the unemployment rate down ibelow 5 percent. W e all remember
that. That is on our mind. A nd it wasn’t until we got profit margins
above 5 percent that we began to get the unemployment rate down
close to this 4-percent objective.
So reducing profit margins during the coming year m ight be one o f
the worst things we could do, if our real effort is to maintain unemploy
ment down at the low level that it has reached.
In 1966, for the first three quarters, the profit margin was 5.6 per
cent, and if you cut that by about 10 percent, you see you are down
close to that lim it o f 5-percent profit m argin, which seems to be about
the breaking point where you get unemployment above 4 percent.
W hen you get the profit margin down below 5 percent, you tend to
raise unemployment above 4 percent.
These are several factors to which the economy has to adjust in 1967,
and it is our opinion that you shouldn’t add another factor o f adjust
ment in the form of a 6-percent surcharge on income taxes.
Now, from the point or view o f concern about inflation, I think you
802
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1967
ECONOMIC REPORT OF THE PRESIDENT
reach the same conclusion. In the past couple of years, in 1965
through much o f 1966, the inflation seemed to originate from supply
and demand factors, and largely outside the industrial sector of the
economy, in the food and in the service area. This was a reflection, I
think, o f supply and demand in those sectors of the economy. I t looks
as though that phase o f inflation is about over, especially if the econ
omy has the weight o f adjusting to the several negative factors that I
mentioned.
The strength o f markets isn’t going to put inflationary pressure on
consumer prices generally. B ut the inflationary pressure is quite
likely to come this year from the cost side, the cost-push side, which is
a quite different situation. W hen there is a heavy upward pressure on
costs, what usually happens, and what I think is likely to happen in
this year, is that part o f the increased cost gets passed on in higher
prices. Part o f it has to be absorbed in profit margins. This reduc
tion o f profit margins is something that is just as bad as the inflation,
because the reduction in profit margins is a thing that prevents you
from realizing your objectives as far as employment is concerned. A
part o f it w ill be reflected in higher prices. But you are not going to
stop that sort o f cost-push inflation by increased taxes. I think you
8re likely to make it worse, because the tax increase is itself an increase
l
in costs.
Furthermore, the tax increase on individuals is likely to increase
their efforts to get wage increases that would compensate them for the
increase in taxation. That would again add to the cost pressures dur
ing the year. Thus we don’t see that the tax increase during the year
is going to be a very effective way o f controlling inflation during
the year.
Now, I would like also to look at fiscal policy from a broader
perspective. H as the course o f fiscal policy, the growth o f Govern
ment expenditures in the past few years, really reflected the priorities
o f the Am erican people ?
T his is a very difficult subject to talk on. I can find no formula
that says such-and-such is the proper level for Government expendi
ture; that some given figure is the proper percentage of the national
income that should be taken by the Government and channeled through
Government for the purposes o f Government.
Obviously, that percentage is not going to be zero; there are things
that have to be done by Government. Obviously, it’s not going to be
100 percent; we still want to preserve a generally individualistic
society. Thus you have the question: W here do you put the level of
Government spending? A s I said, I can find no way o f deriving a
form ula for answering this question. It has to come down to a matter
o f what are the priorities o f the American people. They have their
own personal desires that they expect to satisfy through the part of
the national income that is left to them after taxes. They have certain
collective desires that they want the Government to pursue for them.
I can’t reduce it to a form ula, but I can show you some figures. They
are in table 3 at the end o f the study, which I think corrects some
misapprehensions. They lead me to draw at least the prima facie
conclusion that what has happened in recent years can’t possibly
represent a genuine appraisal o f what the American people want in
THE
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803
the way of Government service as contrasted with the amount that
they want to keep for themselves out o f the national income.
I have just compiled the figures on receipts and expenditures, the
total expenditures as divided between defense and nondefense ex
penditures, over the fiscal years from 1959 through 1968.
The first point I would make is that, if you look at the whole period,
the growth in expenditures has occurred chiefly in the nondefense field.
The growth in defense expenditures over this period, taken as a whole,
lias been quite modest, and if we had held nondefense expenditures
down to the same level, we certainly wouldn’t be suggesting that a tax
increase might be necessary at this time. So that we shouldn’t have
the illusion that the basic reason that a tax increase is being con
sidered at this time is the sudden increase in the past couple o f years
in defense expenditures. W hen you look at it in the longer perspective,
it is the nondefense growth that has been much greater.
Now if you divide this whole period into three 3-year periods, there
are some interesting facts revealed there, too. The growth in spend
ing and in nondefense spending in the most recent 3-year period has
T>een the most rapid o f all. W e have been accelerating the growth in
nondefense spending. You m ight have expected to find that in a period
when we were running into m ilitary difficulties and needed more of our
national income for that purpose, we would have been holding down on
the growth of nondefense spending. Instead, it accelerated in the most
recent period.
You notice that the period in which the growth in expenditures was
held down is the middle of these three periods, the period 1962 to 1965.
T hat, o f course, is the period when the 1964 tax reduction was being
discussed and was being finally enacted. In that period, when the
American people and you, their representatives, were considering the
relative advantage o f more spending as against leaving more income
in the hands o f the people as individuals, you decided that the best
thing to do was to leave more income in their hands and to reduce the
rate of Government spending if that was the price you had to pay for
such a tax reduction.
I think my time is running out, so I want to get on to another aspect.
Chairman Proxmire. You have about 2 more minutes, M r. H age
dorn. W ould you like to summarize?
M r. Hagedorn. There is one more important thing I wanted to say,
and I will have to reduce it greatly. In the field o f price-wage policy,
the most important lesson that I think has to be put across in the way
o f educating the American people and the participants in the pricewage determining process is that the greatest enemy o f fu ll employ
ment is the forces that would push wages up too fast and price labor
out o f the market. I f this fact is learned, we have a greater hope o f
maintaining fu ll employment without inflation in the country. I f this
lesson is not learned, if we pretend that you can push wages up faster
than productivity, without suffering in employment, why then the
country is going to be faced indefinitely with the choice between infla
tion and unemployment.
I would like to say just one thing more because I know it has been
on your minds, and I feel this very deepy. I would urge you gentle
men in Congress not to enact a price-wage guidepost system that would
draw yourselves into either the derivation o f price-wage guideposts
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or their enforcement. I will expand on that if you wish me to, Senator.,
Chairman Proxm ire. I would like to ask you, M r. Hagedorn, direct
ing your attention to the proposal that M r. Keuther made. You heard
it, his national income policy proposal; that is, that you have a pro
ductivity increase for wages and in addition an escalator to reflect the
rise in the cost o f living, with possibly a profit sharing added on to th at
A nd then in order to prevent inflation, he proposes review boards with
possibly some kind o f a tax system that would provide for penalties for
price increases that aren’t justified. W hat is your feeling about this
kind of a proposal ?
M r. Hagedorn. I don’t think that incomes policy, the way it is
generally understood, and certainly this proposal for a review board,
is either workable or desirable, Senator. The difficulty with the pricewage guideposts has been that they correctly define the way we would
like to see the economy move in its largest aspects. W e would like
to see wage increases average out in line with productivity, and we
would like to see price stability be the result of the averaging out o f
price reductions and price increases.
But I don’t think you can apply such a rule as a method o f ad
m inistering the price system.
Chairman Proxm ire. L et’s start right at the beginning. You indi
cated that we have to worry very much about a cost-push inflation..
Y ou know that there are a number of important labor-management
contracts that have to be settled this year including the auto workers
as represented this morning, including the Teamsters, and so forth,
involving 3 m illion people, much more than last year. Under these
circumstances— and labor feels that they have some catching up to do..
M r. Hagedorn. That is right.
Chairman Proxm ire. Now , if there is no wage-price guideposts, I
m ight point out that if you took the Reuther proposal and made the
assumption as the Council does that the rise in the cost of living this
year would be a 5.7-percent guidepost, most of the estimates I have
seen indicate that they expect settlements to be higher than that.
So that in this sense the Eeuther proposal might tend to hold down
wage increases, and, therefore, exert less pressure on prices than you
m ight have if you don’t have any guideposts at all.
'Furthermore, you have no effective discipline, if you walk away
from this, on prices in the administered price area.
M r. H agedorn. I understand, Senator, and I have to confess I
have ambivalent feelings about the wage-price guidepost system. In
sofar as it is a way o f bringing out the importance of the relationship
between productivity and wages, and its connection with the whole
area o f employment and inflation, I think perhaps the guideposts
have made an important contribution. But they have broken down
because they can’t be applied in detail to the specifics of the economy.
They give a good picture o f what ought to occur to the economy when
it’s viewed from a distance in perspective, but not what you should ex
pect to occur in every detail in the economy.
The proposal o f M r. Reuther for adding a factor recognizing the
increases that have occurred during the past couple o f years in the
cost o f living would------Chairman Proxm ire. A s I understand it, there would be a cost
escalator in it rather than recognizing what has happened in the past
THE
1967
ECONOMIC REPORT OF TH E PRESIDENT
805
I would agree with you if you recognize what has happened in the
past, you would have an enormously high guideposts, but if you
simply do as A lvin Hansen proposed the other day, and as I under
stood M r. Reuther to propose— I may have misinterpreted it— you
would have 3.2 for productivity, 2.5 for the cost o f living expected this
year, whatever it turns out to be, you would sim ply recognize the cur
rent expectation of a rise in the cost o f living.
This way labor would get its real increase in productivity. In other
words, the real income would depend on the productivity, corrected
io r cost-of-living increases.
M r. H agedorn. Yes.
Chairman P roxmire. The productivity o f the whole work force
throughout the economy.
M r. H agedorn. I don’t think you have a workable system there that
can be applied in every area o f the economy. Now if people reach
an agreement like that in collective bargaining, I see nothing wrong
with it. I f the company figures that it can live with it, and it’s desira
ble, and it gets a reasonable return in collective bargaining for this, I
see no reason to oppose this on principle, when it is done individually
in collective bargaining.
But to impose it as a national income-policy system has other im pli
cations. I thought that is what you were referring to, Senator.
Chairman P roxmire. Let me ask you something else. Y ou said
that the real growth rate should be 4 percent from now on. Now
in saying this, you differ from almost every witness we have had. The
Council said it should be 4 percent this year, but not 4 percent in
definitely. The Labor Department projected a 4.3 or 4.4 percent in
crease in growth in real terms, and said that this would be sustainable
within inflation. Some economists quarrel with the Council for this
year, but no other economists to my knowledge has said that we should
settle for a 4-percent growth rate.
On what basis do you think that this is the best we can do ?
M r. H agedorn. W ell, I should say, Senator, that I don’t feel quali
fied to pin down the last decimal place in such a calculation, and
frankly I am not sure that anybody else is either.
Chairman P roxmire. Y ou understand how important this is to us
because we want to have a policy which on the basis of the best esti
mates and statistics we can get provides for maximum growth con
sistent with price stability. I understand your position. Y ou say
approximately 4 percent.
M r. H agedorn. I t’s a lot different from the 5 y2 percent we have had
in the past 4 or 5 years in any case. I think I would be prepared
to argue 4 percent against 4 % , but something in the m iddle, 4.2, 4.3
is too fine a distinction for the type o f analysis we can make.
Chairman P roxmire. M y time is up. Senator M iller.
Senator M iller. Thank you, M r. Chairman.
M r. Hagedorn, M r. Reuther seemed to emphasize the role o f price
increases by major corporations as the fundamental cause of inflation.
I believe he made the statement, and I am sure you heard him , that if
there had not been price increases by the major corporations, we would
not have had inflation. Do you agree with that statement ?
M r. H agedorn. N o . It is obviously wrong on the face o f it. I f
you look at the components o f the Consumer Price Index, it is food
806
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ECONOMIC REPORT OF THE PRESIDENT
and services that have been the chief forces of pushing up the level
o f consumer prices. The price o f finished manufactured goods has
not been rising, at least not rising nearly as much as the cost of food
or o f services. A nd the price o f finished, durable manufactures has
actually been about level for the past several years, amazingly so.
Senator M iller . Then do you think that the operations or the Fed
eral Government, especially in connection with deep and m ultibilliondollar budget deficits, have a role to play in this inflation problem?
M r. H agedorn. O h, o f course, and this is tied in with the whole
question o f fu ll employment, Federal fiscal policy and monetary policy.
W hen you get uneconomic excessive increases in labor costs, the
initial impact is to reduce employment. I t is just the same thing as
when you raise the price o f onions, you are going to sell fewer onions.
W hen you raise the cost o f employing somebody, fewer people will
be employed.
But now one way o f offsetting that is to use an inflationary fiscal
policy or an inflationary monetary policy. In a way you are trick
ing people out o f the increases they thought they got. You are nulli
fyin g them by reducing their real wages through price increases, so
that the unemployment creating effect o f the original cost increase is
then nullified. This is the progress o f events: you get the cost increase
and you get the inflation because you are trying to counteract the
unemployment creating effects o f that cost increase.
Senator M iller . I have noted that during the last few years, that
there is a definite relationship between inflation and deep multibilliondollar deficits o f the Federal Government under the administrative
budget. I believe in recent years that we have had a billion dollars o f
deficit, that has been accompanied by two or more billion dollars o f
inflation.
I take it that you are suggesting that it would be helpful in dealing
with the inflationary problem for the Federal Government to avoid
these deep m ultibillion-dollar deficits.
M r. H agedorn. Y es, sir.
Senator M iller . A ll right. Now how should we avoid having
these deficits ? On the one hand we could have a tax increase. On the
other hand, we could have a cutback in spending, or we might try a
middle road and do some of each. Do you have any suggestions?
M r. H agedorn. I think you should operate on the spending side.
Reduce spending as a way o f controlling inflation, for the reasons that
I gave.
I f you try to control inflation by raising taxes, you are likely to
make it worse under the situation that exists here in the year 1967.
Senator M iller . H ow are we going to cause a problem if, as M r.
Reuther pointed out, the profits after taxes in the big three are so
apparently large compared to the normal? W ould it not be feasible
to have a tax increase o f some kind which would not particularly
affect the production and the operations o f some of these corporations ?
M r. H agedorn. W e ll, I don’t see how you can have any kind of a
tax increase that wouldn’t affect their operations.
Senator M iller . W ell, would it affect them to the extent that there
would be a reduction in their production ? Suppose that— I don’t recall
the figures, but suppose that— there was, in General Motors’ case, a
billion dollars more profit after taxes than normally would be the
THE
1 9 6 7 ECONOMIC REPORT OF TH E PRESIDENT
807
case. Suppose further that now that was plowed back into plant, but
only a very small part o f that was plowed back into plant. W ould a
small tax increase particularly aggravate that situation, do you think ?
M r. H agedorn. W ell, I can’t answer for General M otors and even
if I could, you can’t design a tax system with a view only to its sup
posedly desirable effects on General M otors. It has to be a tax system
that is going to affect everybody else, too. The effect o f a tax increase
is bound to be to discourage production to a degree.
Now there may be times in the country’s history when that is ex
actly what you want to do. W hen we are in an all-out war, you cer
tainly have to increase taxes because you are trying to discourage
civilian production and to move the resources o f the country into the
defense field. I don’t think that is the situation we are in now.
Senator M uller. O f course, the difficulty is that we are in a middle
area here. However, when we are faced with a $20 to $30 billion a
year cost o f the war in Vietnam , it seems to me that it would be very,
very difficult to reduce Federal domestic spending sufficiently to offset
that, so that there would be no tax increase at all.
I am willing to listen and I certainly would advocate taking a look
at expenditures in order to avoid a tax increase, but I must say that I
fear that the amount o f the reduction o f expenditures w ill not be suffi
cient to enable us to come out with a reasonably balanced budget to
avoid inflation, and if that is the case, then it seems to me that a tax
increase is indicated, and we have to make up our minds what we are
going to do.
A re we going to take purchasing power away from the American
people by inflation, or by taxes. A nd I think most o f us would agree
that taking it away by taxes would be more fair than by inflation.
That is why I am wondering if you wouldn’t agree that we m ight reach
a point in this cutback in Federal domestic spending beyond which it
would be undesirable, which would in turn require a tax increase o f
some kind.
M r. H agedorn. W ell, I am sure that you can’t accomplish everything
that you perhaps would like to accomplish in the w ay o f reducing
Federal expenditures in one year. B ut I think a good start can be
made if you look at the spending programs and decide maybe there is
something here that can be postponed to a later year.
It may be a matter o f stretching out various programs. Instead
o f doing everything as presently laid out, delay things a little bit.
The American people would probably view such a program o f stretch
ing out expenditures and delaying some o f your programs as a good
price to pay for not getting a tax increase this year.
Senator M iller. May I say that I agree with you. I am wondering
if your association has come up with any suggestions, specific sug
gestions o f what programs to stretch out, what programs to reduce,
and how much. Have you any suggestions specifically ?
M r. H agedorn. Not specifically, sir.
Senator M iller. I wonder if you could furnish them to this com
mittee?
M r. H agedorn. W e have some general discussion o f the ^
important
areas in the budget and what their fate has been and what is involved
in them, and if you wish, M r. Chairman, I would like to submit that
study for the record.
808
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1967
ECONOMIC REPORT OF THE PRESIDENT
Chairman P roxmire. Y es, without objection.
M r. H agedorn. It is prepared by the Government expenditures
committee o f the N A M .
Chairman P roxmire. H ow big a study is that?
M r. H agedorn. About 30 mimeographed pages.
Senator M iller . I think, M r. Chairman, if these contain specific
pronosals, that it m ight be useful to have something like this.
Chairman P roxmire. Does this study declare the N A M position on
reducing spending?
M r. H agedorn. I t contains the reaction of our Government expendi
tures committee to the budget that was submitted by the President.
Chairman P roxmire. W ithout objection, it will be included in the
record at this point.
(The study referred to follow s:)
T
he
G overnm ent E
x p e n d it u r e s
M
C o m m it t e e
of
the
N a t io n a l A
s s o c ia t io n
of
anufacturers
REPO RT ON T H E FEDERAL BUDGET FOR 1 9 6 8
This m e m o r a n d u m on the President’ budget for fiscal 1968 deals with
s
budgetary factors involving policy issues in which N A M ’ Government E x
s
penditures Committee has particular interest.
It covers the fiscal and economic premises of the budget: the “three-budget”
complex; the program-funding requests in the budget with which Congress deals;
and trends in the level and components of non-defense expenditures.
Appended to the text are tables covering both administrative budget expendi
tures and spending authority— first by the organization units of government
and second by the broad purposes for which expenditures are made. A table
of civilian employment figures is also added.
A final tabulation shows the detailed composition of Great Society programs
and the gross level of spending for those purposes— welfare, health, education,
employability, housing and community development, and economic development.
Major premises o f the 1968 administrative "budget
The international and domestic premises of the spending budget for 1968
involve the President’ intent to press forward in defense of freedom and in
s
search for peace, to improve the quality of American life and to guard against
any interruption of our prosperity. Although the President acknowledges that
prosperity is everywhere evident, he qualifies this by pointing out that the
economic progress achieved “still left far too man y behind.” H e indicated this
was one of the problems met in 1966, and that its solution is one of the tasks
of 1967.
The President’ intention regarding “those left behind” is clear: he is re
s
questing Congress to provide him with $5.2 billion more in regular spending
authority than it did in 1966, and, additionally, he is anticipating $2.1 billion
more than in 1966 of proceeds from the sale of loans, which would be used for
expenditures. This is a $7.3 biUion increase of financing for such purposes as
health, labor and welfare, education, housing and community development over
the amounts provided in the fiscal year ending only last June.
B y contrast, for defense and international purposes together the 1968 re
quests for funds are only $10.1 billion above the amounts provided in 1966.
Another indication of the relative emphasis on forwarding domestic spending
is its contrast to an apparent plateauing of defense. This is seen in the re
spective amounts of deferred spending in these two general areas.
Deferred spending can be estimated by showing the relationship between ex
pected expenditures for a given year and the obligations which will be incurred
in that year— which will all ultimately have to be met. Here are such indica
tions of future spending based on current estimates:
THE
1 9 6 7 ECONOMIC REPORT OF THE PRESIDENT
809
IIn billions of dollars]
1968
All other
Department
of Defense, departments,
military
etc.
___ ___________________________________
_
_________________________ _________
74.8
72.3
68.3
62.7
Deferred spending. ________________________ ___ ______________________
2.5
5.7
Obligations incurred -Expenditures (deduct)
Total.
_
________________________ - _______ __ ______ ________
8. 2
!
1
It is interesting to note that this total of $8.2 billion in deferred payment
of 1968 obligations is almost an exact equivalent of the rise in budgeted ex
penditures from 1967 to 1968. That increase in spending is $8.3 billion. H o w
ever, a more significant point lies in the components of the deferred payment.
The commitments no w being made for non-military purposes will entail in
future almost $6 billion of expenditures not n o w included in the budget. This
amount compares with a $6 billion “deferral” in 1966 and $5.6 billion n ow esti
mated for 1967.
Military spending, on the other hand, is more full anticipated within the
presented budget estimates. However, this $2.5 deferral is substantially less
than the $7.4 billion deferred in 1966 and the $6.5 billion deferral now estimated
for 1967.
This contrast of the 1968 military estimate is especially significant because
a long-lead is normally required, due to the time lag needed for delivery of
defense hardware. There are two interpretations of the low deferred military
spending as estimated. First, it could be simply a substantial underestimate—
as the $10.5 billion expenditure estimated last January for the 1967 Vietnam
spending turned out to be a gross underestimate. (The 1967 spending is now
estimated at $19.4 billion). Second, it could be a genuine levelling o f, a real
f
assessment that the basic investment in high-cost hardware is fairly complete.
The latter contention receives hopeful support in the evidence of intensified
attention around the world to peace potentials, and in a cryptic sentence from
the President’ Economic Message:
s
“. . . peace will return . . . and it could be sooner than w e dare expect.”
The economic premise of the 1968 budget is that the economy needs a little
nudge from fiscal policy. The deficit positions (all three budget deficits are,
after a l interrelated) are justified on the basis of not being restrictive—
l,
because the President is seeking a 7th year of uninterrupted growth.
The mildly stimulative charatcer or the budget is the net result of two
somewhat opposing forces which it puts into motion. The first influence comes
from the stimulate of high spending and a high administrative deficit. This is
the particular deficit which indicates the amount of debt to be monetized and
is thus the source of a fillip of inflation. The countervailing influence comes from
the increased resources to be taken out of the economy via the President’ tax
s
proposals.
A first point to note is that the tax proposals1 would bring in $5.5 billion
in 1968. which would slightly more than offset the $5.3 billion rise in spending
for national defense over the 1967 expenditures— a coincidence which serves as
an appealing and compelling basis for the tax increases.
A second point to note is that 1968 budget receipts, even without the proposed
tax increases, are expected to be $7.4 billion higher than in 1967— within a
billion of the parallel rise in spending.
A nd a third point is that the rise of $8.3 billion in spending for 1968 over 1967
is roughly equivalent to the administrative deficit of $8.1 billion— which, without
the proposed new revenue, would be $13.6 billion.
Clearly the nature of this tax increase is for revenue purposes only. It
is not to calm down an over-buoyant economy; for, the acknowledged economic
aim of the 1968 budget is to offset suspected sluggishness with slightly stimulative
fiscal action. The President has said “a more restrictive fiscal program would
1 $4.7 billion from the proposed surcharge and $800 m illion from further acceleration o f
corporate tax payments.
75 -314— 67— pt. 4------- 7
810
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
be unwarranted and self-defeating under present economic conditions . . . could
depress economic activity . .
Thus, there is no “new-economics” purpose for the tax increase, but simply
the “old-economics” purpose of reducing a potentially massive deficit— one
reached more through long-term snowballing of non-defense ©pending than by
heavy military requirements or a retreat of revenue. The 1968 non-defense
spending is doubled over 1960; is 5 6 % above 1963; and nearly 2 5 % over last year.
These being the facts, control of the deficit level and the economic stimulant
sought by the President could be accomplished equally well through a 1968
budget in which overall spending, particularly on the domestic programs, was held
to a level low enough to avoid any need of revenue through increased taxes.
The three-budget complex
For years federal finances have been reported and accounted for by several
different sets of figures. Depending on w h o is talking, and to what purpose,
one of the three “budgets” is cited. Here are the three sets of totals:
[In billions of dollars]
1968 estimate
Expenditures____________________________________________
Receipts_________________________________________________
Deficit__________________________________________________
NIA
169.2
167.1
2.1
Administra
tive
135.0
126.9
8.1
Cash basis
172.4
168.1
4.3
The President, as Chief Executive, the heads of his department and agencies,
and others concerned with management costs of the branches of national govern
ment, speak in terms of the administrative budget.
Accountants and others interested in full accounting of government funds
will refer to government finance figures reported on the consolidated cash basis,
the record of receipts from and payments to the public, or the so-called “cash
budgets”.
Economists and analysts evaluating the impact of federel fiscal policy on the
nation’ economy deal with government finance figures reported in the national
s
income accounts— sometimes called the N I A budget.
All three sets of figures are regularly presented in the budget document.
Since they have different purposes and significance, reference to one or the other
is used when it is most appropriate for the point or argument being made.
For example, currently the President wants to explain that the federal deficit
is not so high as to be unduly stimulative to the economy, or so low as to be a
restrictive, he refers to the $2.1 billion deficit for 1968 in the “N I A Budget”
rather than the $8.1 billion deficit in the administrative budget, or the $4.3
billion deficit in the cash budget.
One major area where these accounts differ in composition involves federal
loans, their repayments and proceeds from their sale— excluded from N I A
accounts.
These accounts intend to show the volume of income and production in the
economy, and they therefore use the same measures of receipts and expenditures
as business does. Because business does not count loans or the proceeds of loansales as income or expenditures, the national income accounts do not include
these either.
Most loans and proceeds of sales are, however, included in the so-called “cash
budget”. Excluded would be only loans or sales between governmental funds
such as selling participation certificates to the trust funds.
In the administrative budget, the effect of loans, repayment and proceed is
somewhat complicated. Most loan activities are carried on in “public enter
prise accounts”, the gross operations of which are outside the administrative
budget. Only their deficits or surpluses affect the administrative budget— in
which those net figures become respectively expenditures or offsets to expendi
tures. Also in the administrative budget would be an initial loan made by the
government, which then becomes an asset whose sale brings proceeds credited
as receipts to the public enterprise accounts not to the administrative budget.
To assure that budget expenditures more fully reflect program costs, N A M
has recommended that they be included as non-tax receipts in that budget, and
TH E
1967
ECONOMIC REPORT OF THE PRESIDENT
811
not accounted for simply as reductions of expenditures which would otherwise
be made.
It is quite probable that any budgetary restructuring to consolidate the ad
ministrative and casli accounts into a single working whole would have the
effect of implementing this recommendation.
A n d such a consolidation m a y ultimately be forthcoming, if certain implica
tions of the President's Budget Message are brought to logical conclusion. H e
frankly admits that “the traditional administrative budget is becoming an in
creasingly less complete2 and less reliable measure of the government’ activ
s
ities ...”
A n d he further says:
While the national income accounts budget is the most appropriate meas
ure of the overall economic impact of the Federal budget, a discussion of
individual Federal programs is best carried out in terms of the more con
ventional administrative budget and the various Federal trust funds.
(emphasis added)
In that word “and” lies a substantial practical difficulty to presenting, under
standing, or appraising the full story of federal finance.
With the present budget composition, expenditures of the trust funds must
be added to those of the administrative budget in order to show the total dollars
that the Treasury pays out. The budget document always computes these
combinations for tables especially designed to show the overall federal spending
for given functions. But this is only an informative section. There is a com
plete separation of the administrative and trust accounts in the basic tables of
the budget. Here are summary figures showing the combined expenditure totals
for 1968.
> fin billions]
Function
Administra
tive budget
National defense_________________________________________
International affairs______________________________________
Space___________________________________________________
Agriculture______________________________________________
Natural resources_________________________________________
Commerce and transportation_____________________________
Housing and community development..___________________
Health, labor, welfare_____________________________________
Education__________________________
________________
Veterans_______________________________ ________________
Interest____________________________
_ ______________
General government______________________________________
$75.5
2 4.8
5.3
3.2
3.5
3.1
1.0
11.3
2.8
6.1
14.2
2.8
Total.................................................................................. .
135.0
Trust
funds
Adjusted
totals *
$1.4
.2
<>
*
(<)
1.2
.1
3.7
.9
37.1
.6
(6
)
44.5
$76.8
4.9
5.3
4.1
3.5
6.9
1.8
46.6
2.7
6.7
5 10.5
2.7
172.4
1 Since the cash consolidated concept involves only payments to the public, intragovemmental funds are
deducted, along with other adjustments.
2 Includes $1.9 billion for “ Food for Freedom.”
3 $2 million.
* Offset of $31 million.
5 Reflects deductions of $3 billion for interest paid to the trust funds and an excess of $630 million in interest
accrued over interest paid.
•$29 million.
Payments to the public, or the cash budget, thus combine the administrative
and trust accounts. The ramifications of these two sets of figures have long
been recognized by those knowledgeable in budgetary ways. But their concepts
are often questioned by serious 'students and their totals have always been con
fusing to the public. A n d when the N I A budget figures3 are also used, the threebudget complex presents a package truly formidable to understanding.
The President's proposal for an objective review of budgetary concepts is
therefore most welcome— N A M supports this proposal and hopes that the bi
2 T h is developm ent is largely the result o f having transferred out, o f the regular budget
to the trust funds large amountsi o f spending (highw ays fo r exam ple) and o f having gross
loan operations accounted fo r in the public enterprise funds.
8 The national incom e accounts are not a budget, though they are often referred to as
such. They are a series o f econom ic interpretations o f federal finance figures developed
by the Departm ent o f Commerce.
812
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
partisan group to be formed for this purpose will, indeed, as the President hopes
“recommend an approach to budgetary presentation which will assist both
public and congressional understanding of this vital document.” That method
would quite logically be a single budget representing the consolidation of ad
ministrative and other accounts, presented under acceptable accounting prin
ciples, rules of disclosure, etc.
The "budget Congress deals with
The “three-budget” complex, which so often confuses rather than clarifies pub
lic understanding becomes a four-headed monster when the aspects dealt with
by the Congress are segregated.
Congress acts on the legislation that funds the thousands of accounts for the
administration’ programs. This series of figures represents the spending au
s
thority or money “requests” of the President. A n d these might be called the ap
propriations "budget.
It is these figures in the budget document that are translated into the items in
appropriations bills. The Congressional Appropriations Committees and their
various subcommittees evaluate the President’ requests, first in the House of
s
Representatives and then in the Senate. Differences between the amounts passed
separately by each House are settled in conference committees. The conferees’
bills go back to each House, and final action is an appropriation bill enacted into
law. There are about a dozen regular appropriations bills each year.
It is at this stage of the total budgetary process that the opinions of concerned
parties can have influence on the ultimate level of government spending. This
is when— and w h y — the advice to “write your Congressman” is so often heard.
And Congressmen themselves often plea for mail. Chairman George H. Mahon
(D-Tex.) of the House Appropriations Committee has pointedly said, “A letter,
I tell you, like a vote, can make a difference— perhaps the difference.”
It is practically impossible, however, for the ordinary citizen or businessman
to get sufficiently acquainted with the technical details to write his Congressman
on specifics. This undoubtedly explains a number of things: the reason there is
a lack of mail received by Congressmen on h o w to curb spending, the reluctance
of people to express themselves at all when it must be in general terms only, a
pervasive public sense of defeatism and frustration on high spending and high
taxes, and the subsequent continuing increase of central government power over
the economy and the communities of the country.
The size of the budget that Congress acts on has risen from $102 billion in
1963 to $144 billion for the ne w fiscal year 1968. A large part of this increase—
$17.5 billion— represents the rise from June 30, 1966. Table 3 indicates h o w
much of the rise goes to non-defense activities. For example, funds for the
Department of Housing and Urban Development are up 6 2 % from 1966— to $3.2
billion. A n d this does not take into account the additional $2.4 billion of pro
ceeds from the sale of loans and mortgages which are expected to be applied
directly to departmental programs. Money for the Department of Health, Edu
cation and Welfare, a third higher than in 1966, is a massive total of $13.3 billion.
The total of the President’ request for 1968 funds is up only 3.2% from the
s
present estimate for 1967; but 1 8 % above the original estimate for 1967; and
nearly 1 4 % above the funds provided for 1966.
[I n billions]
1966
1967 original estimate.
1967 current estimate-.
1968 estimate_______
$126.4
121.9
139.6
143.9
Although Congress acts on the President’ requests by organization units, de
s
partments, agencies, bureaus— that i , the line item accounts for program activi
s
ties— the amounts representing the allocation of these funds by government
functions is helpful information. These totals illuminate trends of spending by
kinds of expenditures, and the relative emphasis given to certain areas of gov
ernment effort. Table 4 presents this view of government financing.
These figures by function m a y be more helpful than dollar data by agency for
the ordinary citizen or businessman wanting to express his general view to Con
gress. It is not only relatively easy, but quite understandable, for a businessman
to say to his Congressman, for example—
Requests for defense funds are increased only 3.7% over 1967— is it really
necessary to increase funds for education by 13%, when the war is our
priority job now?
THE
1967
813
ECONOMIC REPORT OF THE PRESIDENT
Funds for veterans’ benefits are only 3.1% higher than 1967— w h y is 1 2 %
more needed for health and welfare benefit programs, especially when
employment and wages are so high?
Interest costs are up 5.2% from 1967; w h y can’ you defer some spending
t
so as to cut the $8.1 billion deficit, prevent a rise of $7 billion in the public
debt and leave less of it to pay interest on in 1968?
In both his State of the Union and Budget Messages, the President stressed
that he welcomed a searching examination by Congress of his budget program.
Congress in turn needs, and always welcomes, the views of constituents.
In the interest of aiding Congress to do its job effectively, members of the
business and industrial community and civic leaders should acquaint themselves
with the President’ budget enough to make known to Congress their general
s
views on current federal fiscal policy and their relative preference for either
the proposed tax increase or sufficient spending reduction to obviate any call
for tax increases. In the absence of a national equivalent to local referenda
on spending and taxing issues, communications to Congress become the only
practical w a y of registering pertinent taxpayer opinion.
“Backdoor financing”
W h e n authority to spend is given through the “backdoor” of permission to
make contracts or to spend debt receipts, the regular appropriation process is
circumvented and the control that Congress can exert on spending, by way of
that process, is by-passed.
These two methods of financing government expenditures have been held in
relative control since the early sixties, but the immediate trend seems to be
opening up that door again:
Backdoor authority in billions (excludes permanent authorizations)
1964
$0. 7
1965
^___________________________ 1.8
1966
1.9
1967 orginal estimate______________________________________________ — .2
1967 current estimate______________________________________________
2 7
.
1968 estimate_____________________________________________________
.3
The rising trend since 1964, and the jump of $3 billion from the original to
the present estimate for 1967, suggest that the minimal estimate now being
made for 1968 m a y well be revised upward by next year.
Increased use of these doors is a tendency to be fought again, as it was in the
late f
ifties, by the Congress itself as well as by thoughtful appraisers of federal
budgetary practices. This “backdoor” should not be opened wider, but closed.
There is a side door to which very large resort has recently been given,
especially since passage of the Participation Sales Act of 1966. This side door
is using the proceeds from sale of federal loans and mortgages for direct financ
ing of public enterprise activities, bypassing the regular budget. This artificially
reduces the expenditures presented in the budget accounts and accordingly lowers
the administrative budget’ deficit. This sale-of-assets technique i , in effect,
s
s
a form of borrowing to finance federal programs. As such, it qualifies as another
form of backdoor authority and spending. Here is the record of the increased
use of such proceeds:
Receipts from sales of credit assets
Total sales
1964.............. ...................................................................... - ____ _____________
1965................................................... ....................................................................
1966........
....................- ......... ........................... - ............................................
1967 original estimate___________________________________________________
1967 current estimate___________________________________________________
1968 estimate__________________________________________________________
1,077
1,564
2,961
4,739
3,922
5,275
Participa
tions in
pooled
assets
(1>
750
2,601
4,205
3,580
5,000
1Not separable. At this time only the Export-Import Bank had authority to sell participations in
pooled loans. The Banks total loan sales in 1964 were $436,000,000.
814
TH E
1967
ECONOMIC REPORT OF THE PRESIDENT
N A M ’ established policy attitudes regarding these forms of backdoor financing
s
are: f r t disapproval of by-passes of the appropriation process; and second,
is,
belief that proceeds from sale of assets should be treated as non-tax receipts in
the budget, rather than as offsets to expenditures.
Trends in non-defense spending
To show the full level of the financing of federal programs, the gross expendi
tures of activities carried out in the public enterprise funds, any transfers of
cost to trust funds, and the programed level of administrative budget accounts
or obligations must be pulled together. None of the “three” budgets do this.
The consolidated cash basis comes closest, but only by rather summarized items.
In order to show this full scope and cost development of Great Society pro
graming, a tabulation of the various budget accounts involved is presented here
with sub-totals by broad categories. (See the summary tables and detailed tables
I-VII immediately following this commentary.)
Here are key figures covering the development period of the Great Society:
[Dollar amounts in millions]
Number
1963
1968
estimate
Welfare oriented programs_________________________________
Health programs_________________________________________
Education programs______________________________________
program s_______________________________
Economic development,
Employment opportunity programs_______________________
Community development_________________________________
Miscellaneous programs___________________________________
21
10
16
22
8
26
3
$3,853
509
602
226
161
423
321
$7,914
1,724
4,116
514
830
1,583
557
Total.............. ....................................................................
105
6,081
117,238
1 Up by 184 percent.
Last year at this time program costs of the various Great Society accounts
totalled $15.1 billion. The spending authority requested to cover these program
costs is $17.4 billion. But the administrative budget totals from them are only
$12.6. The difference represents program costs carried outside the regular
budget in enterprise or trust accounts.
The hard-core programs of the Great Society are intergovernmental in nature.
They provide funds by grant or loans to states and communities to carry out
programs. These programs are more and more being initiated and controlled
by the federal government.
The trend is toward centralized planningprograming-financing by the federal government with dollars and directives to
the agencies carrying out the programs at the community level. The multiplicity
of these programs in itself tends to minimize potential for greater control and
responsibility at state level. There is generally no single focus at state level for
coordination of responsibility. The m a n y direct federal-local program®, which
in effect by-pass the states, also work against a stronger or independent state
position.
Indication of this trend is especially clear in the area of public assistance.
The budget detail says:
Legislation will be proposed to assure that public assistance payments
more nearly meet the economic needs of recipients, to require all States to
provide assistance to families with children w h o are impoverished because
of unemployment of a parent, to provide incentives for employment, and
to improve work and training programs to help restore recipients to in
dependence. (emphasis added)
Further evidence comes in the President’ Economic Message— which is
s
worth quoting at length:
Completely new proposals for guaranteeing m inimum incomes are now
under discussion. They range from a “negative income tax” to a complete
restructuring of Public Assistance to a program of residual public employ
ment for all wh o lack private jobs. Their advocates include some of the
sturdiest defenders of free enterprise. These plans m a y or m a y not prove
to be practicable at any time. A n d they are almost surely beyond our
means at this time. But w e must examine any plan, however uncon
ventional, which could promise a major advance. I intend to establish a
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
815
commission of leading Americans to examine the m a n y proposals that have
been put forward, reviewing their merits and disadvantages, and reporting
in 2 years to m e and the American people.
1 State standards of need are miserably low. It is time to raise pay
.
ments toward more acceptable levels. As a first step, I ask the Congress to
require that each State’ payments at least meet its own definition of need;
s
and that its definition should be kept up to date annually as conditions
change.
2. With minor exceptions, payments under public assistance are reduced
dollar for dollar of earnings by the recepient. It is time to put an end to
this 100 percent tax on the earnings of those on public assistance. I shall
therefore ask Congress to enact payment formulas which will permit those
on assistance to keep some part of what they m a y earn, without loss of
payments.
3. M a n y recipients of public assistance are capable of receiving training
which would ultimately make them self-supporting. I therefore urge the
Congress to make permanent the Unemployed Parent and Community W o r k
and Training programs and to require all States receiving Federal support
under A F D C to (make this) available for the unemployed parents of de
pendent children.
One further indication of ovarall federal planning in the welfare field merits
reference here. The Department of Health, Education and Welfare has re
printed a summary of the report and recommendations of the Advisory Council
on Public Welfare called “National Blueprint for Public Welfare”. The Council’
s
full report was entitled, “Having the Power, W e Have the Duty”. H E W ’ cover
s
letter distributing the reprint says.
The Council’ National Blueprint for public Welfare provides a workable
s
solution for dealing with man y of the Nation’ unresolved social problems.
s
The Council’ major recommendations are:
s
A national minimum standard for public assistance payments below which
no State m a y fall
A nationwide comprehensive program of public assistance based upon a
single criterion: Need
A uniform, simple plan for Federal-State sharing in costs of all public
welfare programs which provides for equitable and reasonable fiscal effort
among States, and recognizes the relative fiscal effort among States, and
recognizes the relative fiscal capacity of the Federal and State Governments
Comprehensive social services readily accessible, as a right, at all times to
all w h o need them
All welfare programs receiving Federal funds administered consistent with
the principle of public welfare as a right.
The Council’ proposal for comprehensive social services envisions “provision
s
of essential services to all individuals and families without regard to income”
(emphasis added) Provision would be through public welfare agencies.4 H E W
staff and resources would be enlarged to implement the entire program, includ
ing resources “to strengthen ( H E W ’ role in international social welfare pro
s)
grams.”
It is becoming apparent that a massive public framework for social and eco
nomic opportunity is being centered in Washington. The 1968 budget would
strengthen much of i without pause for essential review, consolidations or
t
spin-offs.
It is to this area of the Great Society programs that Congress should direct
especially searching examination— to achieve substantial reductions in and de
ferrals of financing.
C o n c l u s io n s
The President’ budget for 1968 involves hard-made decisions for increasing
s
support, of both military and non-defense programs, on which he has asked for
the searching examination and evaluation of the Congress. The Congress should
accept this as a literal challenge and act upon it promptly. The purpose of
such action should be to reduce the spending authority n o w sought by amounts
sufficient to void any reason for additional taxes.
*
The im plications o f this fo r the support and continuance o f the private agencies in the
country are profound.
816
TH E
1967
ECONOMIC REPORT OF THE PRESIDENT
From a fiscal viewpoint, Congress should defer consideration of the proposed
tax increase until it has first acted upon— and appreciably cut— the funds re
quested in the 1968 Budget. The accumulated increases of non-defense spending
in recent years are so great as to require critically sober appraisal of both cur
rent and proposed levels. Furthermore, evidence indicates that the people prefer
to meet any necessary defense increase by postponing or reducing non-defense
spending not by reducing their personal spending through a tax rise.
From an economic viewpoint, the impact of a further tax claim on the country’
s
resources in a period of already slowing growth should be avoided. The mild
economic stimulation sought by the President through a budget deficit could as
well be achieved by a lower spending level without a tax increase.
The level of federal spending and taxing is being paid thoughtful and increas
ing public attention. Such constructive and encouraging response to federal
fiscal policy should be aided; but the variations of figures in the “three-budgets”
complex prevents really adequate public understanding. In order that the people
m a y know the full burden of federal finances, and more intelligently appraise
them, a single consolidated budgetary concept and method of presentation should
be sought.
T a b l e A .-—“ The Great Society,” summary of program costs
[Millions of dollars]
1967
1968
estimate estimate
Percent
change
1963-68
Program identity
1963
1966
Welfare-oriented..................................... ..............
Health......... ...................................................... .
Education_________________________________
Manpower training and employment oppor
tunities___________________________________
V. Community development and renewal________
VI. Area and regional economic development_____
VII. Miscellaneous_______________________________
3,853.2
509.0
602.3
5,673.6
958.5
3,214.0
6,950.1
1,491.3
3.673.8
7.913.7
1,724.3
4.115.7
+105.4
+238.8
+583.3
160.9
422.8
225.5
320.8
454.5
758.8
331.6
468.2
755.1
1.453.8
451.5
506.7
829.6
1, 583. 2
513.9
557.3
+415.6
+274. 5
+127.9
+73.7
Program costs, total *_______________________
For comparison: New spending authority........
Budget expenditures: Total for same items___
6.080.9
6.138.9
4,982.2
11,859.2
13,005. 5
9,234.9
15, 282.3
14,306.0
11,331.9
17,237. 7
17,409. 2
12,582.0
+183. 5
+183.6
+152. 5
I.
II.
III.
IV.
1These figures are not the equivalent of budget expenditures; they are the “ gross” levels of resources
called for by program scope.
T able
B .— “ The Great Society,” summary of administrative budget expenditures
[Millions of dollars]
1967
1968
Percent
estimated estimated change
1963-68
Program identity
1963
1966
Welfare-oriented....................................................
Health_____________________________________
Education__________________________________
Manpower training and employment oppor
tunities___________________________________
V. Community development and renewal..............
VI. Area and regional economic development-.........
VII. Miscellaneous_______________________________
3,359.1
380.1
542.8
5.387.3
606.9
1.861.4
6,402.1
830.4
2,252.3
6,967.9
1,168.1
1,759.2
+107.4
+207.3
+224.1
156.1
236.2
101.5
206.4
489.1
445.7
74.7
369.8
617.2
606.9
219.3
403.7
699.4
1,043.6
473.5
470.3
+348.0
+341.8
+366.5
+127.9
4,982.2
9,234.9
11,331.9
12,582.0
+152.5
6.138.9
6.080.9
13,055.5
11,859.2
14,306.0
15,282.3
17,409.2
17,237.7
+183.6
+183.5
I.
II.
III.
IV.
Administrative budget e x p e n d i t u r e s ,
TO T A L i.................................................... 1
For comparison:
New spending authority...................................
Total program costs_______________________
1 As explained in the text, these figures include many " net” components, and do not reflect the total cost
level of programs.
THE
1967
ECONOMIC REPORT OF TH E PRESIDENT
T
able
817
I — Welfare-oriented 'programs
.
[Millions of dollars]
1967
1968
estimate estimate
1963
1966
Grants for public assistance, health SArvicAS for figftd_
Bureau of Family Services______________________________
Grants for maternal and child welfare____________________
Children’s Bureau______________________________________
Juvenile delinquency and youth offenses_________________
Cooperative research or demonstration projects___________
Office of Commissioner of Welfare, . . . ....... ................ ......
Administration on Aging________________________________
Foster grandparents program _
Office of Secretary, Health, Education, and Welfare; salaries
and expenses______________ ____ ______________________
2,706.8
3.8
76.3
2.9
5.6
1.1
.6
.5
3,528.7
6.1
179.5
5.4
5.9
1.7
1.2
7.3
.1
2.7
2.0
6.5
9.3
Subtotal, items 1 to 10_____________________________
2,800.3
13,737.8
4,249.1
i 4,591.2
966.3
33.7
1,619.9
36.6
2,085.4
36.1
Program
1.
2.
3.
4.
5.
6.
7.
8.
ft.
10.
11. Office of Economic Opportunity_________________________
________________________
12. Economic opportunity loan fund
3,981.5
4,265.0
8.6
7.6
277.3
225.9
6.0
6.5
7.4
2.9 .......... 4 0
.’
1.5
1.9
18.5
9.6
.2
.2
-------------
1,000.0
1,656.5
2,121.5
13. Special milk program.T _ _ _ _ _ _
__
_
___
_
14. School lunch program___________________________________
15. Fod stamp program___________________________________
94.4
169.1
20.2
97.4
201.2
70.1
104.0
213.6
139.5
104.0
243.7
195.0
Subtotal, items 13 to 15____________________________
283.7
368.7
457.1
542.7
85.9
.3
1.3
426.0
53.7
6.0
41.4
2.3
1.5
469.9
66.2
4.0
36.0
6.2
2.0
526.6
83.5
Subtotal, items 11 and 12............ ........ ..................... .
16.
17.
18.
19.
20.
'M
.
Rural housing, domestic farm labor______________________
Rural housing direct loans______________________________
Rent supplement program____ __________________________
Low income housing demonstration______________________
Low rent public housing programs_______________________
Housing for elderly or handicapped______________________
.1
566.6
19.1
Subtotal, items 16 to 21____________________________
769.0
1 567.1
587.3
1658.3
Total, welfare programs___________________________ 13,853.2
15,673.6
16,950.1
7,913.7
183.2
1 Total does not coincide with sum of individual items due to rounding.
T
able
II.— Health programs
[Millions of dollars]
Total program costs
1.
2.
3.
4.
5.
6.
7.
8.
Health manpower. ............................. ........................
Disease prevention and environmental control.........
Health services__________________________________
Regional medical programs______________________
Environmental health sciences_____ ______ ____
Grants, construction health research facilities______
Community mental health centers________________
Construction, mental health neurological research
facilities______________________________________
9. Comprehensive health planning services (present
and proposed expansion)_______________________
10. Federal Water Pollution Control Administration. __
Total, health_________________________________
1963
16.0
106.4
217.9
2.0
50.0
1966
164.6
129.7
274.5
2.6
7.5
56.3
55.0
1967
estimate
342.1
187.6
388.1
34.3
13.3
41.0
125.2
1968
estimate
384.3
222.7
385.4
85.3
20.6
50.0
100.2
0.1
2.6
4.7
2.6
116.6
102.1
163.6
123.6
231.4
168.6
304.6
1509.0
958.5
1,491.3
1,724.3
1 This is a higher figure than was shown in last year’s analysis of 1963 health programs because the grouping
of accounts somewhat changed the “ mix” of health programs included.
818
THE
1967
ECONOMIC KEPORT OF THE PRESIDENT
T
able
III .— Education programs
[Millions of dollars]
Program
1963
1. Elementary and secondary school activities...___________
________________________________
2. National Teacher Corps
3. Higher education activities______________________________
4. Expansion and improvement of vocational education______
5. Libraries and community services_______________________
6. Educational improvement for handicapped_______________
7. Research and training_____________ ___________________
8. U.S. Office of Education, salaries and expenses___________
9. Civil rights educational activities________________________
10. Arts and humanities education activities_________________
11. National Defense Education Act activities_______________
12. Student loan insurance.________________________________
13. Higher education (construction) loans............................ ......
14. Higher education for international understanding_________
15. Educational television............ .......................... .............. ........
16. College housing loans.. _
Total, education programs_________________________
1968
estimate
1966
1967
estimate
201.2
1,276.6
6.3
1,029.8
237.1
108.8
26.8
66.9
26.4
5.5
.9
C)
1
1,438.5
20.0
1,162.5
266.4
147.0
36.0
75.0
32.3
7.1
1.0
0)
(2
)
339.1
13.2
13.2
402.3
14.4
16.5
9.1
448.0
1,707.0
36.0
1,173.2
267.9
166.0
53.4
118.6
40.3
26.2
1.0
0)
.9
49.9
36.5
20.3
418.6
602.3
* 3,214.0
3,673.8
9 4,115.7
34.7
7.4
2.5
5.2
12.2
1 Distributed among other accounts.
2 Less than $60,000.
* Total does not coincide with sum of individual items due to rounding.
T
able
IV.— Manpower training and employment opportunities
[Millions of dollars]
Program
Office of Manpower Administration, salaries and expenses.........
Manpower development and training activities_______________
Area redevelopment training activities_______________________
Subtotal__ __________________________________________
Vocational Rehabilitation Administration:
Salaries and expenses___________________________________
Grants for services and facilities________________________
Research and training__________________________________
Grants, correctional rehabilitation_________ ____________
Subtotal__________________________________________
Equal Employment Opportunities Commission..
Total, manpower training and employment opportunities.
1963
0.8
51.9
8.3
1967
estimate
1968
estimate
17.2
215.7
31.8
392.6
36.8
401.9
61.0 | 1232.8
I
1424.3
1438.6
5.2
260.1
59.5
.8
6.0
311.6
65.5
.8
2.4
72.1
25.5
3.5
161.8
52.7
.5
100.0
i 218.6
3.1
161.0
1454.5
i Total does not coincide with sum of individual items due to rounding.
1966
325.6 1
5.2
i 755.1
1383.8
7.2
1829.6
TH E
1967
819
ECONOMIC REPORT OF THE PRESIDENT
T a b l e V . — Community development and renewal
[In millions of dollars]
Program
1963
1966
1967
1968
estimate estimate
Grants for neighborhood facilities___________________________
Renewal and housing assistance, salaries and expenses...............
\Trb»n renewal grants ....
Urban renewal loans_________________________ _____________
Rehabilitation loan fund ......
.........
(9
2 335.7
(2
)
27.7
320.4
292.6
1.8
8.0
31.9
364.5
640.2
11.8
27.0
32.8
450.0
379.3
23.6
Subtotal (renewal and housing assistance).........................
335.7
642.5
1,056.4
912.7
12.4
20.1
22.0
.3
7.9
5.7
28.5
150.0
0)
12.5
36.4
3.9
16.2
41.1
5.3
20.5
62.1
30.0
7.0
57.8
175.0
.2
6.4
19.1
65.6
61.6
3 94.8
288.4
3 361.2
6.0
Urban planning grants ..
..........
....
Metropolitan development incentive grants__________________
Open Spa^-fi land programs _ ,
Grants for basic water and sewer facilities
...................... ............
Grants, advance acquisition of land_________ ____ ___________
Metropolitan development, salaries and expenses........................
Public works planning fund______________________________
Public facility loans________________________________________
Subtotal (metropolitan development).................................
Comprehensive city demonstration programs______________
Urban information and planning assistance________________
Community development training programs________________
Fellowships, city planning and urban studies________________
Urban research and technology 4..................................... .......... .
Housing, zoning, building code study_______________________
Salaries and expenses, demonstrations and intergovernmental
relations________________________________________________
Subtotal (Department of Housing and Urban Develop
ment)_____________________________________________
Rural water and waste disposal..___________________________
Rn»*al renewal ............... ........... , ..
..... ,
Rural community development service program.........................
.7
.6
.5
1.7
5.9
.8
3 9.1
166.6
18. d
56.5
110.3
.2
0)
Subtotal (demonstrations and intergovernmental rela
tion)______________________________________________
Urban mass transportation fund..................... .............................
Department of Housing and Urban Development, salaries and
expenses________________________________________________
.3
149.5
1.5
1.3
.3
7.5
.8
.2
(2
)
25.2
0)
(9
(*)
422.7
*756.9
1,410.4
* 1,550.7
.1
.1
1.1
.7
40.9
1.9
.7
30.0
2.0
.5
Subtotal (rural development and renewal, Department
of Agriculture)___________________________ __________
.1
* 1.8
*43.4
32.5
Total, community development and renewal___________
422.8
*758.8
*1,453.8
*1,583.2
1 New accounts to parallel programs; salaries and expenses for 1963 of Department of Housing and Urban
Development.
2 Grants, loans and funds for urban mass transportation demonstrations were grouped together in 1963.
8 Total does not coincide with sum of items due to rounding.
* Urban studies and housing research in 1963.
820
TH E
1967
T able
ECONOMIC REPORT OF THE PRESIDENT
V I. — Area and regional economic development
[Millions of dollars]
Program
1963
Appalachian programs:
1. Region conservation program_
_
2. Development highways system..
3. Regional commission_____ ____ _
4. Fish and wildlife restoration.......
5. Mining area restoration...............
6. Timber development loans.........
7. Supplemental grants-in-aid........ .
6.6
12.0
1.1
0)
.5
0)
(2
)
Subtotal, items 1-7 Appalachian redevelopment.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
1968
1967
estimate estimate
1966
*20.3
Area Redevelopment Administration..... ................
Development facilities grants and loans...................
Industrial development loans and guaranties_____
Planning, technical assistance and research_______
Operations and administration__________________
Economic development revolving fund_____ _____
Development assistance grants______ ___________
Technical and community assistance________ ____
Economic development...........................................
Economic center assistance___________ ____ _____
Grants, local development districts.............. ..........
Regional economic planning............ ........................
(2
)
70.6
248.2
44.4
2.8
10.7
1.5
8
8
S
Subtotal items 8-19 economic development assistance—
70.6
20. Public works acceleration___ ______ _________________
21. Transportation research, including high-speed ground
transportation....... .................................................. .
22. Highway beautification.......... ...........................................
154.8
1.1
1.3
12.3
.2
(2
)
60.4
(2
)
256.9
57.1
21.6
15.9
1.6
(2
)
(2
)
(2
)
(2
)
(2
)
(2
)
307.6
3.1
3.0
80.9
.8
.9
10.8
.7
(2
)
97.1
(2
)
211.6
57.9
29.7
22.7
22.7
(2
)
(2
)
(2
)
(2
)
(2
)
<>
*
*344.7
(2
)
(2
)
(2
)
(2
)
(2
)
(2
)
451.5
*513.9
3.7
8 331.6
* 225.5
Total, area and regional economic development..
3.2
42.3
38.0
* 72.1
* Less than $60,000.
2 No obligations listed for these years, although funds for these programs are included in new spending
authorization and/or expenditures comparisons.
* Total does not coincide with sum of individual items due to rounding.
* Legislation to be proposed to transfer financing of this program to beauty-safety trust fund.
T able
VII. — Miscellaneous
[Millions of dollars]
Total program costs
1963
1967
estimate
1968
estimate
320.8
Total, miscellaneous...............................................
320.8
466.4
490.3
538.6
1.5
.3
1. National Science Foundation....... .............................2. National Foundation on the Arts and Humanities
and National Council on the Arts_____ __________
3. President’s Committee on Consumer Interests..........
1966
16.1
.3
18.4
.3
468.2
506.7
557.3
THE
1967
ECONOMIC REPORT OF TH E PRESIDENT
821
T a b l e 1 . — Federal administrative budget expenditures by agency
[Dollar amounts in millions]
1963
Department and agency
1966
1967
esti
mate
1968
esti
mate
Percent change
1967-68 1966-68'!
J/AgislativA branp-h .
_
_
The judiciary_____________________________________
Executive Office of the President___________________
Funds appropriated to the President_______________
Agriculture_______________________________________
Dnmmftrftfl
Defense—Military_________________________________
Defense—Civil____________________________________
Health, Education, and Welfare____________________
Housing and Urban Development. - ________________
Interior__________________________________________
Justice___________________________________________
Labor________________________________________ - __
Post Office_______________________________________
State____________________________________________
Transportation___________________________________
Treasury_________________________________________
Atomic Energy Commission_______________________
General Services Administration_
_ ,
National Aeronautics and Space Administration_____
Veterans’ Administration__________________________
Other independent agencies________________________
District of Columbia______________________________
Allowance for:
Pay increases_________________________________
Short full in asset sales_________________________
Contingencies_________________________________
Interfund transaction adjustment__________________
$147
63
23
2,247
7,735
1632
49,973
1,128
4,909
*410
11,030
317
257
770
408
11,068
UO, 731
4,758
464
2,552
5,173
1292
66
-513
$232
79
26
4,324
5,949
673
54,409
1,309
7,552
767
1,437
372
503
888
407
1,276
13,055
2,403
601
5,933
5,070
275
71
$263
90
31
4,806
5,751
746
66,950
1,345
10,746
586
1,456
426
500
1,208
424
1,471
14,460
2,270
695
5,600
6,400
1,052
119
—635
100
-766
$270
+2.7
96
+6.7
28
—
9.7
5,418 +12.7
6,047
+5.1
997 +33.6
72,300
+8.0
1,415
+5.2
+9.2
11,739
—102 —117.4
1,692 +16.2
445
+4.5
+5.4
527
544 —55.0
420
—0.9
1,375
—6.5
15,116
+4.5
2,330
+2.6
710
+2.2
5,300
—5.4
6,121
—
4.4
651 —
38.1
127
+6.7
+16.4
+21.5
+7.7
+25.3
+1.6
+48.1
+32.9
+8.1
+55.4
—113.3
+17.7
+19.6
+4.8
-38.7
+3.2
+7.8
+15.8
—3.0
+18.1
—10.7
+20.7
+136.7
+78.9
1,000
750
400
-682
Total.............. ..................................... ................. 92,642 106,978 126,729 135,033
+6.6
+26.2
1 1963 figure lor Department of Transportation derived by transferring expenditures for functions now
in the Department—Coast Guard, Federal Aviation Agency, Bureau of Public Roads, Transportation
Research, Alaska Railroad, and St. Lawrence Seaway.
2 Housing and Home Finance Agency.
T
able
2 . —Federal
administrative budget expenditures by function
[Millions of dollars]
Function totals with selected components
1960
1963
National defense total..................................................... 45,691 52,755
DOD military......... .................... ............................ 41,215 48,252
1,721
Military assistance................................................... 1,609
4,412
International total_________________________ _______ 3,195
1,826
Economic assistance........... .............. — .................. 1,381
2,040
Food for freedom...... ......... ................. ................... 1,458
401
2,552
5,050
Agriculture total.............................................................. 3,475
3,693
Farm income stabilization.............. .......... ............ 2,239
2,506
National resources total____________ _______________ 1,798
1,853
Land and water....................................................... 1,319
220
303
Forest_____ __________ ____ _____ ________ _____
74
Recreation........ .......... ................. ..........................
112
2,843
Commerce and transportation total......... ..................... 1,963
568
Air transportation........................ ......... .................
808
Water transportation............. ...... ................... ........
508
672
265
366
Advancement of business........................................
Area development_____________________________
101
122
-6 7
Housing and community development1
____________
134
178
Public housing___________________ _______ _____
222
Urban renewal and facilities____ _______________
130
4,715
Health, labor, and welfare total......... ........................... 3,650
774
1,437
Health_________________________ ______ _______
Public assistance.................... ................................ 2,061
2,631
Economic opportunity.._______________________
1,244
Education_____ _______ _____ ___________ ____ _____
866
Veterans______________ ____ _____________ ______
5,266
5,186
Interest____________ ______ ______________ ____ ____
9,266
9,980
General Government______________________________ 1,542
1,979
1966
1967
esti
mate
1968
esti
mate
57,718 70,222 75,487
54,409 66,950 72,300
968
1,000
800
4,191
4,608
4,797
1,864
2,321
2,403
1,784
1,710
1,799
5,933
5,600
5,300
3,307
3,035
3,173
1,925
2,368
2,467
3,120
3,226
3,518
2,235
2,218
2,443
406
463
449
152
199
246
2,969
3,495
3,089
879
946
890
708
757
806
193
182
407
156
207
323
347
1,023
890
233
263
282
446
561
982
7,574 10,389 11,304
2,523
4,265
4,767
2,797
2,942
3,036
1,018
1,580
1,860
2,834
3,304
2,816
5,023
6,394
6,124
12,132 13,508 14,152
2,464
2,781
2,725
Per
cent
change
1966-68
+30.8
+32.9
-17.4
+14.5
+28.9
+1.0
-10.7
-4 .1
+28.2
+12.8
+9.3
+10.6
+61.8
+4. ft
+ 1.3
+13.8
+110.9
+107.1
+194.8
+21.0
+120.2
+49.2
+88.9
+8.5
+82.7
-.6
+21.9
+16.7
+12.9
1 Federal Savings and Loan Insurance Corporation, FNMA operations frequently result in offsets to
budget expenditures rather than additions to them, thus the net effect for this function as a whole is a total
smaller than the expenditures for some of the subfunctions above.
822
TH E
1967
ECONOMIC REPORT OF THE PRESIDENT
T a b l e 3.— New spending authority by agency
[Millions of dollars]
Percent change
Enacted
Department and agency
1967
1968
estimate estimate
1963
Legislative branch....... .....................................
The judiciary................................ — ........... ...
Executive Office of the President______ ____ _
Funds appropriated to the President-.............
Agriculture---------------------------- -------------- ...
Commerce............... —.............. - ......................
Defense, military........................ ......................
Defense, civil-------------- ---------------- ------------Health, Education and Welfare................... ...
Housing and Urban Development..................
Interior..............................................................
Justice.................................... .............. ............
Labor................................ —........... .................
Post Office.........................................................
State_______ _________________ ____________
Transportation...................................... ...........
Treasury........... .......... .....................................
Atomic Energy Commission............................
General Services Administration_______ ____
National Aeronautics and Space Administra
tion...............................................................
Veterans' Administration..................................
Other independent agencies................... .........
District of Columbia............— ........................
Allowance for:
Civilian and military pay increases...........
Contingencies.............................................
1966
160
64
24
5,663
8,032
750
51,120
1,092
5,333
1785
1.134
319
362
840
423
1,123
10,742
3.135
237
83
27
5,894
7,571
948
63,892
1,399
9,966
1,961
1,617
389
704
962
403
1,479
13,102
2,366
90
29
5,045
7,763
1,066
72,034
1,382
12,317
2,025
1,704
410
638
1,227
398
1,826
14,479
2,199
275
96
28
5,431
6,001
1,160
74,674
1,370
13,264
3,179
1,859
467
650
651
415
1,308
15,125
2,493
3,673
5,534
1,285
70
5,175
6,003
1,543
118
4,968
6,479
2,261
141
5,050
6,649
1,320
159
150
102,283
Total 2..
126,439
139,562
1967-68 1966-68
4 - 2.2
+6.7
—
3.4
+7.7
-2 2.7
+8.8
+3.7
+16.0
+15.7
+ 3.7
-7 .9
-2 0.7
+22.4
+16.9
-.9
+7.7
+57.0
+9.1
+13.9
+1.9
-4 6.9
+4.3
-2 8 .4
+4.5
+13.4
-1 4 .0
-
2.1
+33.1
+62.1
+15.0
+20.1
-7 .7
-3 2 .3
+3.0
-
11.6
+15.4
+5.4
- 4 .5
+1.7
+2.6
-4 1.6
+10.8
+12.8
-1 4.5
+34.7
- 2 .4
+3.2
+13.9
1,000
800
143,994
1 Housing and Home Finance Agency.
* Individual items may not add to totals due to rounding.
T a b l e 4 .— New spending authority by function
[Billions of dollars]
Administrative budget
National defense.............................. .......
International affairs and finance........... .
Space research and technology________
Agriculture and agricultural resources...
Natural resources....................................
Commerce and transportation...............
Housing and community development..
Health, labor, and welfare......................
Education............................ ...................
Veterans benefits and services................
Interest.................. ................................
General government.................... ..........
Allowances for:
Pay increases.....................................
Contingencies....................................
Total.
1963
54.3
5.7
3.7
7.1
2.4
4.0
.6
5.4
1.4
5.5
10.0
2.2
1966
67.4
5.5
5.2
5.0
3.4
3.9
1.8
9.3
4.3
6.0
12.1
2.5
1967
estimate
1968
estimate
75.1
4.8
5.0
5.1
4.5
4.3
77.9
5.1
5.0
3.1
3.6
3.3
3.0
12.4
5.2
6.7
14.2
2.7
2.2
11.1
4.6
6.5
13.5
2.7
1.0
Percent change
1967-68
+3.7
+6.3
-39.2
-20.0
-23.3
+36.4
+11.7
+13.0
+3.1
+5.2
.8
102.3
126.4
139.6
+3.2
+15.6
-7 .3
-3 .8
-3 8.0
+5.9
-1 5.4
+66.7
+33.3
+20.9
+11.7
+17.4
+8.0
+300.0
144.0
1966-68
+13.9
THE
T a b le
5 .—
1967
ECONOMIC REPORT OF TH E PRESIDENT
823
Permanent, full-time civilian employment in the executive branchy by
agency
[Thousands]
Department and agency
1966
1967
estimate 1 estimate
Subtotal8...........................................
Defense, military and military assistance.
T ota l8..................... - ..........................................
84.1
25.1
30.3
91.7
14.0
59.4
33.1
9.2
489.9
24.6
14.9
84.4
25.1
32.3
95.9
14.2
60.2
33.1
9.3
525.0
25.0
16.8
85.8
26.8
33.0
99.8
15.4
62.1
33.7
9.8
539.3
25.4
17.5
52.9
80.2
7.0
36.0
33.5
147.6
53.9
80.9
7.0
36.6
33.6
149.3
7.0
3.9
11.5
14.1
11.5
30.8
6.3
4.1
11.8
14.6
11.9
31.7
1.9
6.3
4.8
12.3
14.9
12.0
32.9
4.8
1,366.0
1,180.5
2,366.3
2,546.5
1967-68
55.8
83.2
7.2
37.5
34.0
154.2
1,313.3
1,053.0
Agriculture..............- ........................
Commerce.........................................
Defense-Civil...........................- .......
Health, Education, and Welfare___
Housing and Urban Development..
Interior................................. ............
Justice................................................
Labor.................................................
Post Office.........................................
State..
Agency for International Development..........
Peace Corps.......................................................
Transportation.........................................................
Treasury................................ .............................. .
Atomic Energy Commission..................................
General Services Administration...........................
National Aeronautics and Space Administration..
Veterans’ Administration........................................
Other:
Selective Service System.................. ................
Small Business Administration.......................
Tennessee Valley Authority.............................
Panama Canal....................... ...........................
U.S. Information Agency____________ ______
Miscellaneous............................................................
Contingencies2.............. - ........................................
Difference
1.2
1.2
1966-68
+1.4
+1.7
+ .7
+3.9
+1.2
+1.9
+1.7
+1.7
+2.7
+8.1
+1.4
+2.7
+14.3
+49.4
+ .8
+2.6
+. 4
+2.9
+3.0
+.6
+.5
+.4
+.7
+.4
1.6
+1.9
+2.3
+.2
+.4
+ .9
+4.9
+.7
+.5
+ .3
+•1
+.6
+.6
+.2
+1.5
+. 5
+6.6
-.7
+ .9
+ .8
+ .8
+.5
+1.2
+2.1
1,410.1
1,204.9
+44.1
+24.4
+96.8
+151.9
2,615.0
+68.5
+248.7
+2.9
i Year ago and current estimates for 1967; selected contrasts.:
[Thousands of dollars]
For 1967
Year ago
Total....... ............. ...................... ......
Military................ ..................... ......
Other.................... ............................
Selected agencies:
Post Office....... ...........................
Agriculture..................................
Commerce...................................
Health, Education, and Welfare.
Treasury__________ __________
Veterans’ Administration..........
Current
Change
!, 416.5
, 073.0
,343.5
2.546.5
1.180.5
1,366.0
+130.0
+107.5
+22.5
500.0
82.9
31.8
99.0
525.0
84.4
25.1
95.9
80.9
149.3
+25.0
+1.5
-6 .7
-3 .1
-5 .3
86.2
150.9
-
1.6
2 Subject to later distribution.
3 Individual items do not add to exact total because of rounding.
Chairman P r o x m i r e . Congressman Eeuss ?
Eepresentative E e u s s . I was particularly interested in your table 2
“ Trends and profit margins compared with unemployment rates,”
and would ask that you refer to it. (See p. 798.) It’s interesting to
note that in 1961, the unemployment rate was 6.7 percent, and as your
chart shows, it has gone steadily downward so that in 1966 it was 3.9
percent, and conversely the after tax profits of manufacturing cor
porations as a percentage o f sales back in 1961 was 4.3 percent, and
it has gone steadily upward, year after year, until in 1966 it was at
5.6 percent.
824
THE
1967
ECONOMIC REPORT OF THE PRE.SIDENT
Doesn’t this suggest that the economic policies of the period of 1961
and thereafter have been successful in reducing unemployment, and
that the economic growth inherent in that reduction in unemployment
has redounded to the benefit of manufacturers, as shown by the steady
increase in their after tax profits ?
M r. H a g e d o r n . I sort o f draw the opposite conclusion, Congress
man. Y es, the policies that have been pursued have had good results,
both on the profit side and on the employment side. The train of
causation in my mind is that the general policies pursued have per
mitted a rise in profit margins, and that rise in profit margins has
caused employers to hire more people and to relieve the unemployment
problem. That would be my analysis of the train of cause and effect.
M ay I explain why ?
Representative R e u s s . Surely.
M r. H a g e d o r n . First of all, on the general principle that people
are hired because it is profitable for somebody to hire them. This is
the basic fact you have to recognize on the question of how big unem
ployment is going to be in a free economy.
Representative R e u s s . People hire them, though, depending on the
level of total demand.
Mr. H a g e d o r n . W ell, it has to be a demand that makes it profitable
for you to hire them. Y ou are not going to hire people just to satisfy
a vague demand that exists out there, if the cost level is such that you
lose money satisfying that demand. It has to be demand under con
ditions that makes it profitable to supply the demand.
Second, I don’t know whether I can illustrate it from this chart.
I f you look at the fine detail, you find that the unemployment rate
tends to turn up somewhat after the profit margin turns down. For
example, the profit margin actually reached its peak in 1956, but the
peak of the business cycle itself you will recall was in 1957, and unem
ployment didn’t start rising until the end of 1957.
This point could be illustrated better with monthly figures or with
quarterly figures. But if you look at the fine detail, you find that the
profit margin is one of the first things to turn in business turns, whereas
employment is one of the last things.
Representative R e u s s . W hat we have had is policies since 1961
which have obviously been successful in reducing the unemployment
rate. Equally, the after tax profits of manufacturers have gone up
percentagewise. Now I would have thought, very frankly, that the
pleasing performance of the after tax profits of manufacturers was
due to the greater use of the economy, as indicated by the reduction
in unemployment.
You aren’t suggesting the exact opposite, are you, that it should be
the task o f Government to concentrate on increasing the after tax
profits of manufacturers, and then that w ill then tend to bring down
unemployment ?
M r. H a g e d o r n . W ell, I think I am suggesting that you should move
very cautiously in doing things that obviously would reduce those
after tax profit margins, because it will have a repercussion on employ
ment. Y es, sir, I am saying that.
Representative R e u s s . W ell, it’s an interesting position, and I sup
pose it is the “chicken and the egg” school.
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M r. Hagedorn. Perhaps I have oversimplified it.
Representative Reuss. I am much more impressed, I must say, by
what actually happened, where the governmental attack was on unem
ployment, and unemployment did go down, and where the after tax
profits went up for what seems to me the logical reason that with
greater production, manufacturers’ fixed costs could be spread over a
larger number of units and their profits went up.
I should think, equally, that one could increase manufacturers’
profits, in the first period at least, by wiping out the corporate income
tax, just to take an absurd example. Yet, I wouldn’t be at all sure
that this would have a healthy result on the unemployment figure, and
I don’t think you would either.
M r. Hagedorn. No. I have been oversim plifying here, because what
economists should be talking about is the marginal profit rate, and the
marginal rate of employment. Profits at the margin— does it pay
you to undertake the next bit of business that would draw so many
people into the labor market. However, this would get us into a
complicated discussion.
Generally, I think this is a very important principle, that you can
operate to increase employment only by first creating profitable oppor
tunities for people to hire others. That is, unless the Government is to
hire the people, hire the whole labor force itself.
Representative Reuss. Thank you very much. M y time is up.
Chairman Proxmire. M r. Hagedorn, in looking over this Govern
ment expenditures committee study that you have here, even this
committee specifically organized to study expenditures, does seem to
be unfortunately generalized in their recommendations as to where
we should specifically cut, but they seem to zero in on what is called
“the massive public framework for social and economic opportunity,”
and you go on to have a series of analyses showing that 21 welfare
oriented programs are up $3.8 billion in 1963 to $7.9 million— health
programs have tripled, education programs have gone up sevenfold,
and so forth.
Now, many economists who appeared here argue that education
programs represent a good economic investment in general. The
one area it would seem to me that represents a very large dollar
increase at all comparable with the increase in defense spending would
be the proposed increase in social security benefits.
I f we are going to be realistic about it, if we are going to really cut
spending— I mean if we are going to reduce the spending on the basis
you have proposed here— that is, not cut public works or the space
program very much, or some o f these other programs, it would seem to
me we have to think very carefully about the President’s suggestion of
a 20-percent increase in social security benefits.
Do you think we should not increase social security by 20 percent,
that we should keep it down to an 8-percent increase, or something of
that kind?
M r. Hagedorn. I can’t give you any official view of the National
Association o f Manufacturers on that question, sir.
Chairman Proxmire. You see, we look to the N A M because the
N A M has been a very strong conservative bulwark and a very thought
ful group too, I think.
75-314— 67— pt. 4— 1 8
—
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M r. Hagedorn. Thank you, sir.
Chairman Proxm ire. B ut, you know when we look in the area of
cutting spending, and you fellows don’t come up with any specific
recommendations, it makes it hard for those of us who are Members
o f Congress, who have to run for reelection and have to stand or fall
on somebody cutting spending— you fellows don’t have to worry about
that.
M r. Hagedorn. I understand your position, Senator. A ll I can say
is that if the N A M were to make a list o f the specific things they would
like to have cut out o f the budget, they would in effect be exhibiting
that their priorities are different from somebody else’s priorities, and
as I said, and it was a very heartfelt statement, there is no formula that
anybody can derive that w ill enable you to put something through a
computer and say “ This is worthwhile, that isn’t worthwhile.”
Chairman Proxm ire. That is what we have got to do.
M r. Hagedorn. That is what you have to do.
Chairman Proxm ire. Y ou have manufacturers in aerospace and
they are members o f your organization.
M r. Hagedorn. That is right.
M r. Proxm ire. They don’t want to see the space program cut. M ay
be they do. I doubt it. Y ou have people who are in the road building
and in road construction and who work at producing the materials
for these big reclamation projects and I can see why they would be
concerned.
But that is the whole trouble, you know, with cutting spending. I f
we are going to cut it, we have to establish priorities, and if this great
organization o f American business can’t give us any specific advice,
it is difficult, as I say, for us to establish the priorities over the
President.
M r. Hagedorn. I know it is, Senator, and I have to admire you, and
I say I am sure you have the courage to do it. But I don’t have any
set of priorities of my own to offer you.
Chairman Proxm ire. Let me asK— referring to your very inter
esting table which Congressman Reuss mentioned before— if you could
give us the statistics for 1952 and 1953, 1953 especially ? 1952 was a
price control year, so that wouldn’t be quite as appropriate.
M r. Hagedorn. I think you can find that.
Chairman Proxm ire. I have got your figure for after tax profits of
manufacturing corporations as a percent of sales. That particular
statistic was one that was not in the council’s tables, but the price
increase was very interesting. I mean the unemployment rate that
year was the lowest we have had since------M r. Hagedorn. That was during the Korean war period.
Chairman Proxm ire. W e ll, it was after the Korean war. In 1953
when the Korean war ended, unemployment was 2.9 percent, and
the price controls expired in A pril. Prices rose less than 1 percent.
I would be interested to know whether after-tax profits of manufac
turers as a percentage o f sales were very high. According to your
thesis, they should be. I am not so sure they were.
M r. Hagedorn. That was also a year of excess profits tax. I be
lieve it was still in effect in that year, reducing the profit margins in
that year.
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Chairman Proxm ire. W ell, that may be, but that would argue, on
the other hand, that either you are going to have prices go up, which
we didn’t have, or you are going to have unemployment develop, which
we didn’t have. In other words, the Government adopted a policy of
reducing profits deliberately.
M r. Hagedorn. Yes.
Chairman Proxm ire. And unemployment stayed down.
M r. Hagedorn. W ell, in a wartime situation like that— you still
had the Korean war.
Chairman Proxm ire. It was over. Furthermore, we have a war
time situation now.
M r. Hagedorn. But a much smaller percentage o f the national
product is being devoted to war.
Chairman Proxm ire. It is sm aller; yes.
M r. Hagedorn. A t this time.
Chairman Proxm ire. Yes. W e ll, it’s an interesting thesis and I
think there is a lot to be said for the notion that if you do stimulate
business to expand and grow, this obviously can provide jobs. I think
that thesis makes sense from a logical standpoint. Senator M iller?
Senator M ille r . Thank you, M r. Chairman.
M r. Hagedorn, I share with you the desire to have a reasonably bal
anced Federal budget as a means o f avoiding further inflation. I
invite your attention to the fact that for the coming fiscal year, 1968,
which we are now involved with in our appropriations and our revenue
estimates, the President’s budget forecasts an $8 billion deficit.
Now in order to hold it down to $8 billion, he estimated a $5 billion
sale of participation certificates, a $5 billion tax revenue from the 6percent surcharge, and $700 m illion from a postal rate increase.
I don’t know whether you favor a postal rate increase or not, but
that is relatively small in the overall picture, but I would point out to
you that all of these added together, in other words, a $8 billion deficit
estimate, and if the Congress does not go along with the postal rate
increase, and if it does not go along with the tax increase, and if the
participation sales are not accomplished, this would bring us to a
deficit o f $18.7 billion.
Now let me ask you first, do you favor this participation certificates
sale o f $5 billion?
M r. Hagedorn. Let me answer that question this way. The sale
of participation certificates is not necessarily wrong, but the extent
to which it should be done depends on the situation in monetary m ar
kets. W hat shouldn’t be done is to pretend that this is offset to spend
ing. I t ’s a form of Federal debt, and has the same impact on using
up capital resources of the country as the sale of Federal debt. W e
shouldn’t be deceiving ourselves, by pretending that this is a reduction
o f expenditures.
Senator M ille r . I agree, but the point I am making is that if you
are interested in avoiding a pressure on the capital market, which
will result in an increase in interest rates, then you are interested, I
presume, in not having the sale of participation certificates.
M r. Hagedorn. W ell, if you didn’t sell the participation certificates
as a result of not needing to because o f curtailment in other forms
of Government spending, why yes, that would be something accom
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plished. But if instead of selling the participation certificates you
sold ordinary Treasury notes or bills, then it doesn’t really make an
important difference.
Senator M iller . I agree. So what we are talking about really is
a cutback o f $18.7 billion of domestic spending so that we won’t have
inflation. Now, if we could reduce domestic spending by $18.7 billion,
we wouldn’t have to have a postal rate increase of $700 million. W e
wouldn’t have to have a tax increase of $5 billion, and we wouldn’t
have to have a sale o f participation certificates of $5 billion, and we
wouldn’t have an $8 billion deficit forecast by the President.
Now I must say that I have very deep doubts whether or not do
mestic spending should be cut back by $18.7 billion, but what I would
like to have, I would like to have you furnish this committee with
some suggestions along this line, and add them up, and then if you are
short o f the $18.7 billion, then give us a suggestion on whether a tax
increase should be enacted, and if so, what kind, or whether you
prefer to have inflation, which will inevitably follow, if we have that
deficit.
I think it would be meaningful to us, and I think this is something
that I think many people have completely dodged since the Presi
dent’s budget message. I think it might be a good place to start, to
have your association give us some recommendations on this, giving
us your own views on it.
M r. H agedorn. I can’t promise you anything of that sort.
Senator M iller . 12 you can, I would invite you to do so, because
I think you represent a very important sector of the economy, and
I think that your views on this should be made known, and I think
they m ight be helpful to us in evaluating what to do.
R eferring to table 2 in your statement, may I ask what percent of
the total industry in this country, which now has Department of De
fense contracts or subcontracts would your association represent, do
you suppose?
M r. H agedorn. I can’t give you a percentage figure offhand, but
a good many o f the companies with Defense contracts would be
members of our association.
Senator M iller . W ould you say 75 percent?
M r. H agedorn. I t m ight be roughly somewhere in there. I don’t
know. I haven’t seen any compilation on that.
Senator M iller . W ould you be able to get that figure?
M r. H agedorn. I am not sure that we would have information on
our membership that goes into that detail. W hat is your point,
Senator?
Senator M iller . M y point is this. Suppose you can check this out
and concluded that roughly 75 percent of the businesses in this country
which now have or have been having Defense Department contracts
or subcontracts is involved in your membership. Perhaps you could
then isolate those members o f your association which do have those
contracts, and give us the picture of their employment for say the
years 1963,1964, 1965, and 1966. I am very interested in finding some
fairly good estimates of how much employment has been increasing in
these plans that have Defense contracts or subcontracts over the last
4 years.
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829
M r. H a g e d o r n . I believe the Bureau o f Labor Statistics has com
piled figures on defense-oriented industries.
Senator M i l l e r . I understand.
M r. H a g e d o r n . Y o u can’t pick out particular people who are work
ing on defense jobs.
Senator M i l l e r . I am not talking about that. I am talking about
the total employment. For example, manufacturer A , which happens
to be a member of your association, and is a Defense contract type
plant, let’s say in 1963 they had a thousand employees. Today they
have 4,000 employees. I would like to see how you come out and com
pare this to the Bureau of Labor Statistics’ information.
M y guess is that this favorable unemployment rate, which is shown
especially for the last 2 years, would be very substantially affected by
the numbers of people who have been added to the payrolls o f defenseoriented plants, and I don’t know where else to go to get this inform a
tion, unless it is to your association, outside o f the Bureau o f Labor
Statistics.
Do you have a feeling that the favorable unemployment rate shown
in this last column in the last 2 or 3 years is attributable in some meas
ure to the increased employment in Defense plants ?
M r. H a g e d o r n . Oh, undoubtedly this has been one factor among
m any; yes.
Senator M i l l e r . I am very interested in knowing how big that
factor is. I have reason to believe it’s quite substantial, but I don’t
know where to get that verification unless it would be as I say from
the Bureau of Labor Statistics or some association such as yours.
M r. H a g e d o r n . W ell, I would think the Bureau of Labor Statistics
would be able to provide you more detailed information than I could,
Senator, because most of our members cooperate with the Bureau of
Labor Statistics in providing them with monthly figures on employ
ment, and so forth.
Senator M i l l e r . Y o u are saying that we w ill have to rely exclu
sively on the Bureau of Labor Statistics and I w ill. I thought you
miglit possibly be able to get some information together.
M r. H a g e d o r n . I don’t think we could get anything more detailed
than what they have on the defense-oriented industries. Incidentally,
I see no reason for any lack o f faith in the figures that they have
prepared.
Senator M i l l e r . I have no reason to doubt the veracity o f what
they are putting out. M y only question would be the coverage that
they have, how accurate that is. I t ’s like employment statistics. N o
body is questioning the truth o f the unemployment statistics. W e
question the depth in which they go to arrive at the unemployment
statistics. W e have had extensive hearings under Senator Proxm ire’s
leadership a couple of years ago.
M r. H a g e d o r n . I recall them, sir.
Senator M i l l e r . W hich showed a lot o f softness in unemployment
statistics, and I am concerned about how hard these figures on in
creased employment in defense plants are. But m y point is— and if
you can shed any light on it, I would appreciate it— m y point is that
for somebody to trot out an unemployment statistics table and show
that in the last 2 or 3 years we have had a very substantial decline in
unemployment statistics, and then to jump from that observation to
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ECONOMIC REPORT OF THE PRESIDENT
the conclusion that this means, automatically, that the policies of the
Federal Government have been so wonderful in arriving at this
statistic, does not impress me very much when I realize that there are
hundreds of thousands more people working in defense plants because
o f a war.
M r. H agedorn. W h at you mean is that there might have been better
ways of getting unemployment down to this low level.
Senator M iller . W ell, I don’t know, I would hope that there would
be ways o f getting it down to a low level, but if there is a wartime
factor involved, which has had a major impact in increasing employ
ment in defense plants, I don’t like to see that forgotten when some
body talks about wonderful policies of the Federal Government in
reducing unemployment rates.
That is my point. I f you have any light you can shed on it for the
committee by a separate memorandum I would appreciate it. I have
no further questions, M r. Chairman.
Chairman P roxmire . Thank you, Senator Miller.
Thank you very much, M r. Hagedorn, for your usual very helpful
and enlightening appearance. I appreciate it a great deal.
Our witnesses this afternoon will be Robert Roosa, general partner
of Brown Bros., Harrim an, former Under Secretary of the Treasury;
and Charles Kindleberger, a very distinguished professor of economics
at M IT , on the balance of payments.
The committee w ill stand in recess until 2 o’clock.
(W hereupon, the committee recessed until 2 p.m. of the same day.)
A FTE R N O O N SESSION
Chairman P roxmire. The committee will come to order.
W e are very happy and fortunate to have as our witnesses today two
of the most distinguished experts in the world on the balance of pay
ments, and two men who have the admiration of this committee.
Our first witness is the former Under Secretary of the Treasury for
M onetary A ffairs, a man who has found particular esteem throughout
Am erica. I have talked to so many people in the financial business
who are very much impressed by your brilliance, M r. Roosa, and we
are very happy to have you here. You are now, I believe, the partner
o f Brown Bros., Harrim an & Co.
M r. R oosa. Yes.
Chairman P roxmire. Y ou have an amazingly short statement. In
all the years I have been on this committee, I have never seen a shorter
statement, but we will have to go after you in the questioning period
pretty hard. Y ou go right ahead.
TESTIMONY OF ROBERT V. ROOSA, GENERAL PARTNER,
BROWN BROS., HARRIMAN & CO.
M r. R oosa. M r. Chairman, as I indicated in the statement, I have
been impressed this year particularly with the wide range of issues
that seem to me to be appropriate for this committee’s attention. A s
I attempted in a cursory way to follow what has already proceeded in
the hearings that you have been having, I have found it quite difficult
THE
1 9 6 7 ECONOMIC REPORT OF THE PRESIDENT
831
to decide where I could appropriately try to make some contribution,
particularly because I have, for 2 years, learned what it means to live
without an official “in” basket, and without a staff. Therefore, since
I am flying solo, I thought it would be more constructive from your
point of view if we could, after this very brief introductory comment,
turn in whichever direction— in the areas that I m ight try to comment
on— that appears promising to the members of the committee, and in
that way maximize your use of this time.
I t does seem to me that in the year ahead, we are going to have to
face, as a number of members o f the Senate have already in a very
telling way suggested, another appraisal of our foreign commitments,
and one that takes into account the economic dimensions that our own
economy is capable of supporting.
I think this means, without going into again, as you have heard so
often, the background in the balance-of-payments performance of
1966, it does mean that we have this additional motive, the motive of
lim iting our own outflow of dollars on Government account, to rein
force what are in their own right valid and I think compelling reasons
for reviewing the entire posture of the United States and its allies in
maintaining an appropriate m ilitary presence in Europe.
Alongside that, and I just hinted at this in some o f the questions I
posed in the statement, I think it is also going to be appropriate to
ask some questions about the continued sustainability or viability of
some of our own domestic programs. I don’t here refer to the poverty
programs at all, but instead to those that we may have lived with for
so long that we are losing sight now o f the fact that they are not
only perhaps out of phase with the historical stage our economy has
reached, but perhaps also not going to permit us to make the kind of
contribution over the next 10 or 20 years that we should be considering.
I refer particularly here to our agricultural program, where I think
it is, broadly speaking, an anachronism that we continue, although
in reduced amount to be sure, to have to appropriate and spend sub
stantial amounts this year in the proposed budget, to be sure only in
the magnitude of something over $2 billion, but still substantial
amounts for the limiting of crops, for the restraint o f what is, in a
competitive sense in the world economy, our most productive enter
prise, the agricultural sector of the economy.
I think perhaps the time has come for a reconsideration there o f the
gains that might be achieved, if we could make more rapid progress
toward a freeing and an opening to the free market o f the potentials o f
our agricultural economy.
A nd I think, too, in order to continue to maintain the growth that
the economy needs, not just for this year but for the long term, I
regret very much that there was a suspension of the investment credit
last year.
I would have much preferred to have seen a comparable or appropri
ate degree of restraint effected through overall tax measures, out since
that stage has been passed, I think given the present phase that the
economy has entered, it is going to be appropriate prom ptly to con
sider— from the standpoint not just o f the moment, not just o f the
phase o f the cycle we are in, but in terms of the longrun needs o f the
economy to maintain its price competition, and in a competitive world
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ECONOMIC REPORT OF THE PRESIDENT
where our balance-of-payments position has certainly been slipping—
to restore the investment credit as an incentive to the deepening of the
productivity base o f the American economy, particularly in the manf acturing-distributive sectors.
These, M r. Chairman, are some of the observations that I made in
initial comment, but only as a way of suggesting in this specific form
that I was probably right in my first presumption, that the areas that
can be covered here are so wide, and certainly the capacity I would
have is so limited in any o f them, I would rather not pretend to choose,
but instead follow in whatever direction your own questioning is likely
to lead.
(The complete statement of Robert V . Roosa follow s:)
P repared St a te m e n t
of
R
obert
V. R
oosa
Mr. Chairman, it is a privilege to appear once more before this distinguished
committee. It is here that the array of governmental economic programs can be
brought together, in order to appraise their combined impact on the performance
of the economy as a whole. It is here that the Congress can step aside from the
immediate urgencies of legislation to appraise as well the implicit, and perhaps
otherwise unnoticed, implications of m a n y Government activities that are not
ordinarily viewed in an economic context. This is indeed the place where the
testing can take place, to determine whether and ho w the potentials inherent
in all forms of governmental action m a y be used to reinforce the main lines of
explicit governmental economic policy.
It is that kind of reappraisal— to assure adequate consideration of the eco
nomic dimensions of the entire array of public policies— that m a y have a domi
nating importance within the scope of this committee’ responsibilities for the
s
coming year. For speaking broadly, and without for a moment questioning the
Administration’ aims in defense and diplomacy, I think it is fair to say that
s
the American economy would at this moment be enjoying sturdier expansion
at homel and a sustainable viability abroad, had not additional distortions and
pressures been imposed by the Vietnam effort. In setting the sights n o w for
the economy in 1967, and beyond, the Legislative branch, it seems to me, can
appropriately ask not only “W h a t do our military and foreign affairs commit
ments imply for the American economy,” but also “What do the priorities and
potentials for our o w n economy’ health imply for the dimensions and scope of
s
our undertakings abroad.”
It does not seem to m e to be an impairment of our dignity or prestige to take
stock of the two-way interactions between our economic capabilities and the
responsibilities w e wish to assume in world affairs. M y own very modest at
tempts at that kind of appraisal, within the limitations that are inherent for any
private citizen, have led m e to a number of tentative conclusions with respect
to the programs and prospects for the American economy this year.
Because I cannot presume to bring the comprehensive background needed for
an adequate appraisal, my. participation today can only be that of an anxious
questioner. For that reason, I a m not presuming to present a brief in support
of a fully developed position. I do welcome very much however, your Chair
m a n ’ invitation to discuss with you a number of compelling questions— though
s
by no means, of course, covering the full range of relevant inquiry. First, m a y I
suggest several questions of a broad analytical nature; and then second, several
of more specific immediacy.
I The general nature of our problems:
.
1. Is the economy n o w entering a cyclical recession, or is i instead in a
t
hesitation phase induced mainly by the mix of governmental economic poli
cies of 1966?
2. W h y did our foreign trade and payments position deteriorate in 1966
and what is the prognosis for 1967?
3. W h y have no dollars been added on balance to the official monetary
reserves of other countries for the past two years? Is there a weakening
underway in the world economy as a whole, or in the United States position
within the world economy?
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1 9 6 7 ECONOMIC REPORT OF TH E PRESIDENT
833
II. Some more specific questions:
1. Should a surcharge be mad e on Federal corporate and individual in
come taxes?
2. Is there scope for changing the impact of Federal Government expendi
tures upon the economy, including defense expenditures?
3. Wh a t can be done through a harmonization of monetary policy, debt
management, and the borrowing and lending activities of Federal credit
agencies?
4. Should the investment credit promptly be restored?
5. Should the Interest Equalization Ta x be renewed? Are there other
sectors of the balance of payments that need comparable selective treatment?
6. Has the time come to promote agricultural production via the free
market, rather than to limit that production and pay heavy subsidies?
7. Are there alternative monetary techniques, not yet tried, which could
insulate the American economy? Could these be consistent with American
foreign policy objectives?
Mr. Chairman, the agenda of your committee is so extensive, and the docu
mentation already presented to your members is so lengthy, that I have not
presumed to elaborate on any of these questions in advance. F r o m among them,
I would hope, the various members of the committee m a y find some which they
would like to pursue, while undoubtedly discarding others which they have al
ready explored to their full satisfaction.
Chairman P roxmire. Thank you very much, M r. Roosa. W e w ill
have the statement from M r. Kindleberger, and then we w ill question
you. I should introduce our other distinguished guest, incidentally,
who as I say has been a well-known monetary authority for years.
H e comes from the Massachusetts Institute of Technology. W e are
very honored and delighted to have you here, M r. Kindleberger.
STATEMENT OF CHARLES P. KINDLEBERGER, DEPARTMENT OF
ECONOMICS, MASSACHUSETTS INSTITUTE OF TECHNOLOGY
M r. K indleberger. Thank you, M r. Chairman.
I am honored in being asked to comment on the balance-of-payments
passages in the Economic Report of the President and the Annual
Report of the Council of Economic Advisers. M ay I refer at the same
time to a somewhat wider discussion of the subject in recent weeks,
including the speech to the Economics Club o f New Y ork on January
18 of my distinguished colleague today, form er Under Secretary of
the Treasury Robert V . Roosa ?
W hat follows on the U .S . balance of payments and choices for policy
is idiosyncratic. In particular, I do not think the balance o f payments
is in bad shaj>e, or that there is need for further steps to improve it.
I oppose taking measures solely for balance-of-payments reasons,
such as bringing home troops from Europe, raising or maintaining
high interest rates here, or seeking to cut the United States still further
off from the international capital market through higher taxes on
international capital movements, as recomemnded by the President
and supported by the Council. The international capital market is
a highly flexible and efficient instrument for transferring liquidity
internationally which saved this country from a serious banking crisis
last August. The world needs it and we need it.
M y observations are presented under three headings: (1 ) The bal
ance o f payments o f the United States in 1966; (2) the impact o f the
balance <of payments on domestic monetary policy; and (3 ) the im
portance o f the international capital market to the world economy.
834
THE
1967
T
h e
ECONOMIC REPORT OF THE PRESIDENT
U .S . B
a l a n c e of
P
a y m e n t s in
1966
The balance of payments o f the United States improved in 1966.
I t is true that the “ oVerall balance” showed little or no gain, but that
Department o f Commerce definition of equilibrium is not aceptable
to me. It is true, further, that there was a worrying decline in the
balance-of-payments surplus on current account as a result o f the rise
in imports and the increase in overseas expenditures owing to Vietnam.
Moreover, M r. Roosa is right in not 'being cheered by the improvement
in the balance on official transactions— the so-called Bernstein balance.
That definition loses significance when it is realized that the $2 to $3
billion which was borrowed or brought back from the Euro-dollar
market last summer is not a permanent movement of capital to the
United States. The loans have to be repaid, and the repatriated funds
owned by U .S . banks will be replaced abroad. The basis for stating
that the balance of payments improved is that we lost less gold. Our
gold losses, which rose from $100 million in 1964 to $1.7 billion in 19653
declined to $571 m illion in 1966. This amount represented a loss o f
$600 million to France, offset by a small net gain otherwise. And the
improvement extends into 1967 since the French balance o f payments
has turned from surplus to deficit last September.
This judgment o f the balance ,of payments solely by gold losses is
not based on the theories o f Jacques Rueff, nor does it ignore the fact
that the monetary authorities have wide latitude in which they can
adjust the figure to their public purpose. The position is in fact some
what wt rse than $571 m illion, since there was a reduction of $700 m il
o
lion in our gold tranche position at the International Monetary Fund,
offset to the extent of $500 million in holdings of convertible cur
rencies, both during the first 9 months of the year. Moreover, there
may be need for further adjustments on account of changes in official
swap positions, Eoosa bonds, et cetera.
This view is not then based on a naive interpretation o f the gold
standard. On the contrary, it rests on the belief that the liquidity and
official-transactions criteria for judging the balance of payments o f the
United States are thoroughly misguided, since they treat the United
States as a firm when it is in fact a bank. A firm typcially wants a
current ratio o f quick assets to demand liabilities o f something like 3
to 1, because it must meet and pay off its demand liabilities. A bank
on the other hand is in the business of having its liabilities used as
money. It is in the business o f lending long and borrowing short,
continuously. Under normal conditions its liabilities run on indefi
nitely. A nd a bank is in good shape so long as its depositors have
confidence in it, and its assets are sound, if it has a quick-asset ratio
of, say 1 to 5. This ratio for the United States as a bank is roughly
1 to 2 if you measure sold and convertible currencies o f the Govern
ment against demand liabilities, or virtually 1 to 1, as calculated by M r.
Roosa in his New Y ork address, if vt u add in short-term liquid claims.
o
The real questions then turn on the character of our assets and the
con fi dence of our depositors.
Alm ost no one questions the soundness of the assets which U .S . in
vestors are acquiring abroad. In a little-noticed speech on December 8,
1965, before the U .S . Council of the International Chamber of Com
merce in New Y ork, however, Secretary of the Treasury Henry H .
THE
19 6 7
ECONOMIC REPORT OF TH E PRESIDENT
835
Fowler observed that rates of growth were leveling off in Europe and
profits were declining. This should make direct investment there less
attractive, although some investment may continue at a high level be
cause of plans laid down earlier, or because of investment in Europe
continues fashionable. To a certain extent, new investments take time
to pay off. Nonetheless, it is somewhat disconcerting to observe large
losses on some investments— General Electric in Machines B ull m
France and Chrysler in Rootes in England. On the whole, there is no
reason to doubt that the profitability o f the U .S . foreign investment in
general, but the academic economist can express surprise that it is not
more sensitive to profit prospects.
The big change, however, has occurred in the confidence o f the fo r
eign depositors in the U .S . bank. The m ajor depositor which had
strongly negative views on the U nited States as a bank— France— is no
longer m a position to exert pressure by converting dollars into gold.
Countries like India, the Philippines, South Korea, Taiwan, and
Thailand, mentioned by M r. Roosa as gaining dollars in 1966, need and
want to hold dollars. The counterpart o f the French, Italian, and
Dutch deficits in 1966 was the German surplus, which follows on the
heels of a substantial German deficit in 1965.
Here two points can be made. F irst, in common with other countries
of Europe, Germany now understands that large swings in the balance
of payments occur because of differences in cyclical tim ing. France
had large surpluses in 1964 and 1965, when it was relatively depressed;
it is having deficits in 1966 and 1967 now that it has gotten growth
going again. Germany had a deficit in 1965; now that it has gotten
its inflationary spending under control, it has a surplus in 1966 and
1967. There is no European surplus as a whole against the United
States, and the large swings of the separate countries are best settled in
dollars rather than in gold.
In the second place, Germany and the world have learned a lot more
about international financial transactions. The report o f the Common
Market on “The Development o f a European Capital M arket” (the
so-called Segre report) of the European Common Market observed
that in the period 1960-65 the net import of private medium- and long
term capital by the Community amounted to slightly more than $6.5
billion which was more or less offset by the net export o f official capital
and short term funds. The surpluses of the continental European
countries are therefore not earned but borrowed. A study by the
Bundesbank last November of the external assets and liabilities o f 700
domestic German business enterprises shows these to have net external
liabilities at the end of September 1966 of more than $1 billion each on
short-term and long-term account. Some of these liabilities have been
incurred by foreign-owned firms, to be sure, and $800 m illion o f the
Community inflow represented direct investment which can be re
garded as permanent. Nevertheless, the point is dawning in Europe
that a country is not in a real surplus when it borrows long and lends
short. Soon it will be seen that the United States is not in real deficit
when, within limits, it lends long and borrows short.
In my view, then, confidence in the dollar and the utility o f dollar
reserves improved in 1966 and this is an improvement in the balance
o f payments of the United States which no rule o f thumb can measure.
836
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1967
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I therefore disagree with M r. Roosa when he says, “A ll of us should
give the highest priority in 1967 to closing the gap in the basic balance
of payments,” and I disagree with the New York Times editorial on
January 23 entitled “ The Persistent Deficit,” which applauded M r.
Roosa’s remarks and criticized the President for not playing up the
balance o f payments in his state of the Union message. The President
was right. The war in Vietnam and poverty in the United States are
far more important issues today than the balance o f payments.
T
he
I
m pact
of
the
B
alance
of
P aym ents
on
M
onetary
P o l ic y
M r. Roosa foresaw the need to keep short-term interest rates high
in the months ahead as a means of holding foreign short-term funds in
this country. I disagree. Part of the reason is the different view of
the balance o f payments already set forth. In addition, however, we
have a different interpretation of how the international capital market
works. M y view is given in a submission to the Joint Economic Com
mittee’s compendium entitled “ Contingency Planning for U .S . Inter
national Monetary Policy,” 1 especially pages 60 to 62, and I can be
brief. In general, the view is that monetary policy in the United
States operates over the Atlantic Community as a whole, with certain
exceptions like Great Britain, where dealing m the Euro-dollar market
on an uncovered basis is restricted. Just as the action of the Federal
Reserve System is tightening interest rates in November 1965 and
July 1966 raised interest rates in Europe, so the reversal of Federal
Reserve policy in September reduced them. The recent reductions
of the discount rates in Germany and Belgium were required by the
fa ll in market rates brought about by a reduction o f negative reserves
o f member banks in the United States.
W ith joined capital markets, and even with capital markets im
perfectly joined, somewhat separated as they are by the interest equal
ization tax, Gore amendment, V .C .R .P ., and restrictions in Europe,
monetary policy should be made jointly. Secretary Fowler’s partici
pation in the meeting of January 22, at Chequers with other finance
ministers to lower interest rates is to be applauded— although there
is something to be said for using the regular O E C D machinery of
W orking Party N o. 3 and not leaving out important parties to the
decision. In the long run we need an Atlantic Open-Market Commit
tee rather than a Federal one. But at the same time, the interna
tional capital market remains dominated by New York. I f foreign
central banks raise interest rates, it affects the spread between New
Y ork and their m arket; if New York changes its rate, it alters the
whole level. W ithout denigrating the importance o f Chicago or the
European financial capitals, the same asymmetrical relationship ob
tains between New Y ork and Europe as between New York and Chi
cago, although in lesser degree. The link, of course, is the Euro-dollar
market.
F or this reason, the United States has much more freedom than
European countries to adjust its level of interest rates to its domestic
needs. W e should set these rates, as I have suggested, cooperatively.
1 “Contingency Planning for U.S. International Monetary Policy,” statements by private
economists submitted to the Subcommittee on International Exchange and Payments of the
Joint Economic Committee, December 1966.
THE
1967
837
ECONOMIC REPORT OF TH E PRESIDENT
I am persuaded, moreover, that Europe, where growth outside of
France is slowed down, needs lower rates. T o hold U .S . interest rates
high for the sake o f the balance of payments would be a double error.
It would not help the balance o f payments much, and it would wrongly
tighten interest rates in Europe, as in the U nited States.
T
he
I m portance
of
the
I n t e r n a t io n a l C a p it a l M
W o r ld E c o n o m y
arket
in
the
The Economic Report of the President recommends an increase in
the interest equalization tax and the Report o f the Council o f Eco
nomic Advisers on pages 189 and 190 provides the analytical basis of
that recommendation. A much stronger statement o f this position,
however, was set forth by Gov. Sherman J. M aisel o f the Federal Re
serve System in a speech at Portland, Oreg., on February 1,1967. H e
argued that capital movements from the United States are excessive
because they are inadequately taxed, and that we should apply a
tax like the interest equalization tax to all capital outflows, not just
the bonds and long-term bank loans now subject to interest equaliza
tion tax, varying the level of the tax to regulate capital movements in
ways required by domestic goals, and particularly the appropriate mix
of monetary and fiscal policy. I must respectfully disagree on all
counts.
First with respect to the inadequate taxation o f foreign investment.
Governor Maisel, I take it, regards the tax credit on corporate in
come taxes paid abroad as a subsidy to foreign investment. W ithout
taking up the question of taxing retained earnings abroad after ad
justment for the tax credit, which is only a small issue in Europe
where corporate income taxes are on the whole at the U .S . level, but
where I incline to agree with the Kennedy administration’s position in
the revenue proposals for 1962, I infer that Governor Maisel wants
it both ways. It seems unlikely that he wants to shift from tax on
income produced to one on income received, which would require the
United states as well as other countries to give up corporate income
on foreign-owned firms within their borders and hardly seems prac
tical. H e must then believe in double taxation, which implies that
foreign-earned income is somehow inferior to domestically earned in
come and should be discriminated against. This comes close to an
isolationist position. Does he want to collect a national income tax
on profits earned on imports, as well as the income tax we now collect
on profits on exports, putting a special tariff on all imports because
their producers do not pay U .S . income taxes? Adm ittedly, the ques
tion of how to share taxation between jurisdictions is a complex one,
but most analysts have abandoned the position that the solution is to
reduce or eliminate international transactions through double
taxation.
Second, with respect to increasing the interest equalization tax and
extending it to all foreign lending. The argument o f the Council
that the interest equalization tax has been successful is not compelling.
It stopped lending through new bond issues in New Y ork, but the
capital outflow changed to other channels, first bank lending, then
direct investment, and then the Canadian gap, the pension fund
838
TH E
1967
ECONOMIC REPORT OF THE PRESIDENT
gap, the foreign-securities gap, etc. W ould the interest equalization
tax be applied to foreign sales of U .S . securities already owned ? I f
so, how ? I f not, it must be remembered that there are $56 billion of
foreign investment in this country which can be withdrawn to Europe
if returns there become sufficiently more favorable than those in this
country. W h at about the $1 billion or so in unrecorded capital move
ments (errors and om issions). To extend the interest equalization
tax involves in practice foreign-exchange control. I oppose escalation
on this front and favor withdrawal.
Third, Governor M aisel and many other critics are concerned that
if the United States remains joined to an international capital
market, it w ill lose the use o f monetary policy for domestic purposes
and be forced to rely exclusively on fiscal policy. This fear, fed by
inadequate analysis, is excessive. It is true that monetary policy has to
be operated differently in an open than in a closed economy, and
likewise fiscal policy. But it is not true that in an open economy
with close financial ties to abroad monetary policy works solely on
the balance o f payments and fiscal policy solely on domestic employ
ment and stability. Monetary policy can be set internationally on an
agreed basis to meet the domestic employment and stabilization goals
of the group of countries as a whole. In this process, the United
States carries great weight because of its size and importance in
capital markets, and retains its sovereignty in the event of inability
to agree. Fiscal policy has to cover only a short distance between
the agreed overall policy and the particular national domestic stabi
lization requirement. In a world o f many nations, there must be
coordination o f national policies, and compromise between national
objectives and international constraints. Those who put domestic
policy first and international economic policy nowhere are falling
into an isolationist way of thoug;ht.
The fact is that much as an international capital market is needed
abroad— to provide liquidity and perhaps capital to Europe, and to
provide capital and perhaps liquidity to Canada, Australia, New
Zealand, M exico, Taiwan, Peru, and other developing countries as
they establish their credit standing— it is not without its relevance
for the United States. Severe as was the banking squeeze last
summer, the $2 to $3 billion which American banks borrowed in
Euro-dollar market or brought home prevented a real crisis and even
collapse. The Federal Reserve System may object to having its
control o f the domestic money market tempered by access to the
international money market. In the absence of more perfect knowl
edge o f the breaking points in the system, however, it has been helpful.
Italy was saved In 1963 and 1964 from a devaluation which was un
necessary and would have upset the Common Market by private
borrowing of $1.5 billion or more in the Euro-dollar market. A
further official line o f credit was needed in 1964 to quiet down the
speculation.
M y point is that the international capital market is not only an
effective instrument for providing longrun capital for economic
development. Supported by joint officiaf arrangements of the Basleagreement type, it is a highly efficient and flexible means o f providing
liquidity internationally, far superior in my judgment to the plans
THE
1967
ECONOMIC REPORT OF TH E PRESIDENT
839
for a new international reserve unit. T o kill the international capital
market and to create a new reserve unit is to seize the shadow and
throw away the substance.
More than th is: the group of experts who wrote the Common
Market report on the development of European capital market make
the point very strongly that with fixed exchange rates, which they
advocate for the Common Market, the freedom for transactions in
goods and services, freedom of capital movements is necessary to make
the balance-of-payments adjust. I agree. W here I would disagree
is in the importance they attach to freedom o f capital movements
among the various constituent parts o f the Common Market. So
long as each country is joined after a fashion to the Euro-exchange
market, largely the Euro-exchange market, largely the Euro-dollar
market, and so long as New York is similarly joined, the international
capital market can provide a mechanism for matching international
payments. It will be a world loss and a national loss if our Govern
ment continues in its policy o f escalating barriers between the United
States and the international capital markets.
Thank you, sir.
Chairman P r o x m i r e . Thank you very much.
M r. Roosa, every economist and every witnees who has appeared
here, including Chairman M artin o f the Federal Eeserve Board, has
said that we need a somewhat easier money policy, prescribing that
we get interest rates down, especially long-term interest rates down.
W e are all fam iliar with the speech that you made, to which M r.
Kindleberger referred, in which you called the payments deficit com
ing up crucial to the dollar, and in which as I understand it, your
position was that one reason for the great improvement, or the im
provement that we may have had, was because of the tight money and
high interest rates that we had in 1966.
How serious do you think the restraint the balance o f payments
places on our domestic monetary policy is ? How serious do you think
that is?
M r. R o o s a . For myself I don’t believe the restraint that is neces
sary for the balance of payments is going to affect, necessarily, at all
the kind of ease that I would consider appropriate in the monetary
policy for the whole economy.
First I should clarify a little the implication o f my old commanding
officer’s remarks. He suggested that in my proposal, or at least seemed
to imply in my appraisal, that I was arguing for------Chairman P r o x m i r e . I s M r. Kindleberger your former commanding
officer?
M r. R o o s a . Yes.
M r. K i n d l e b e r g e r . Yes, indeed. I keep trying to preserve my au
thority, but it doesn’t always work.
Chairman P r o x m i r e . T ry harder.
M r. R o o s a . The only way he got me out o f a pup tent onto a cot was
to get me commissioned when we were in different circumstances, so
you see I have to be very careful when I make any comment now.
But at any rate, what I am afraid he was im plying was that I felt
it was necessary to maintain high interest rates, regardless o f the
differentials or relationships which prevailed between New Y ork and
840
th e
1967
ECONOMIC REPORT OF THE PRESIDENT
Europe. On the contrary, I join him in applauding the efforts that
are being made to gain greater harmonization between countries.
I don’t think that it is going to prove possible, because it is an inter
national capital market, for our shorter term rates to fall to the levels
that we used to identify with a really easy money policy, the 1-, 2 -, 2 y2percent, short-term money rates.
I think that is partly because the worldwide demand, both for longand short-term money, would create a tremendous outpouring from
the United States, if we tried to bring the whole world capital market,
follow ing the Kindleberger framework, down to consistency with a
2-percent Treasury bill rate let’s say. I think this is the kind o f con
straint on the structure of interest rates resulting from monetary
policy that we have to take into account.
Chairman P r o x m i r e . I want to try and bring you former service
buddies together a little more. You say a 2-percent Treasury bill rate,
which I don’t think is M r. Kindleberger’s point.
M r. R o o s a . N o, no.
Chairman P r o x m i r e . A nd at the same time he implied that this
country pretty much settles international interest rates. Once he
said we had a sovereignty in interest rates, and then again he implied
we had a domination, that what New York did was more important
to Europe than what Europe did as far as New York is concerned.
I take it that you would not necessarily disagree with his position on
our domination— or would you— in international monetary affairs?
M r. R o o s a . W ell, in the sense that one may at any given time say
that either the supply side or the demand side dominates an equation,
I think you have to recognize here that both sides are important, and
that the European pull on our market will be great enough so that
we would have, in m y view, a very large outflow of short-term money
o f the magnitude that we had coming in last year, if we tried to get
our short-rate structure down, and to pull short rates down as K indle
berger has implied we m ight be able to do.
A ll I am trying to stress is that the interrelations are there, and I
am trying to keep them in view, but we have to be a little more creative
about the way in which the entire impact of monetary policy is exerted
on interest rates as a whole. In my view, and here I am disagreeing
with respect from views expressed by Governor Brimmer I guess just
a day or two ago, but in my view it is entirely possible to maintain
rates that w ill hold roughly a balance------Chairman P r o x m i r e . A n international interest rate balance?
M r. R o o s a . Y es, between markets between Europe and the United
States, and at the same time have conditions of genuine ease in the all
around capital markets in the United States, and I don’t really see
that this is an impossible technical goal.
Chairman P r o x m i r e . H ave we had much success with that, though ?
D idn’t we try that ? W h at you are saying as I understand it, for the
record, is that you would favor perhaps a drop in long-term rates, and
less of a drop in short-term rates.
M r. R o o s a . Yes.
Chairman P r o x m i r e . I f the short-term rates, however, are high,
relative to long-term rates, doesn’t the capital flow to short-term rates ?
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
841
M r. R o o s a . That depends on the pattern o f expectations set up, and
whether the short rate is maintained for any considerable period above
the long rate.
I don’t expect to see— even if policy were followed just as I would
like to apply to it— I wouldn’t expect to see the short rate maintained
above the long rate very long.
But it could go above from time to time, that is quite possible. Even
to the extent of easing that has occurred in monetary policy already
there is a spreading through into the longer sector.
It takes time after the kind of blow that the financial institutions
suffered last year, because there is liquidity position to be built up
in the institutions that have to distribute the longer term funds around
the economy.
But I don’t accept the implication of Professor Kindleberger’s re
mark suggesting that because there is a close relationship between the
European and the American capital markets, that we can set the entire
level of interest rates without any concern then for the flow of funds
in or out of the country that would occur. I t just doesn’t seem to
me that that is possible. It isn’t possible because we are a bank, and
I just see the implications of our being a bank differently from the
way in which he has expressed them.
Chairman P r o x m i r e . Let me pursue this a little further. Maybe
Professor Kindleberger can give us his feeling on this.
Supposing, Professor Kindleberger, your optimism is not well
founded. Supposing we do have a deterioration in our balance of
payments this year, and supposing we continue to have a deterioration.
Supposing we continue to lose gold. W hen does this really become
very serious in your view, or does it ever?
M r. K i n d l e b e r g e r . W ell, I think the time that it becomes serious
is when it becomes clear that the world is not ready to operate this
kind of a system.
Chairman P r o x m i r e . The world is not what?
M r. K i n d l e b e r g e r . Ready to operate on a dollar system at all. I
think that the world is having doubts about it, but my suggestion
has always been that they don’t understand it. I f they understood
it, they would realize it is a very good system indeed.
Chairman P r o x m i r e . S o what you would pay attention to is the
confidence in the dollar?
M r. K i n d l e b e r g e r . Yes.
Chairman P r o x m i r e . And you think regardless of what the sta
tistics may show in one year or another------M r. K i n d l e b e r g e r . Exactly.
Chairman P r o x m i r e . H o w would you measure the confidence in
the dollar?
M r. K i n d l e b e r g e r . W ell, sir, I am impressed by the extent of the
use of dollars in Europe. For international transactions, the dollar
is the unit of account, the medium of exchange, and the store of value
in which Europeanwide bonds are issued, and the market for short
term capital operated.
I am impressed by the fact that the Electricite de France, which
is the big public utility, issued a dollar bond in Europe, and this must
have caused a certain twinge on the part of French nationalists. This
75 -314— 67— p t. 4—
9
842
THE
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ECONOMIC REPORT OF THE PRESIDENT
is the currency which people use for international transactions, just
as people speak English all over the world when they are trying to
carry out international communication.
Chairman P r o x m i r e . But you see what concerns us, many people
in Congress and throughout the country, if you assume this is im
portant at all, is that for so many years we have had a steady adverse
balance of payments where we have had a steady loss o f gold.
The momentum seems to be against us. W e seem to be losing con
trol to some extent as the years do go on. And if you think o f this
as significant, 1 just wonder why you aren’t concerned when we con
tinue to suffer adverse balances in spite of all these devices to over
come it, including the interest equalization tax, which may be doubled.
Tie our aid stringently at some sacrifice in efficiency and we still
continue to have this adverse balance of payments. W hat we would
like to get maybe is some reassurance that this determination is not
significant if we can get it, or if we can’t get it, the recommendations
as to what we can do to reverse this.
M r. K i n d l e b e r g e r . S o long as international markets are joined, or
are imperfectly separated by such devices as the interest equalization
tax, and so long as there are differences in liquidity preference between
Europe and the United States, with Europe having a much higher
demand for liquidity than this country, there will be a strong tendency
for the United States to lend long, and borrow short, and for Europe
to borrow long and lend short. This is what may be called interna
tional financial intermediation.
Apart from capital, what Europe needs typically is liquidity, which
the international capital market can provide them. This means, if
this continues until Europe’s liquidity preference gets back to some
thing like ours, that with freer capital markets, or with capital mar
kets no more tight than they are now, you can expect for us to lend
long and borrow short for a long time.
Mr. Roosa’s “ Operation Tw ist” will accentuate this. I f you lower
long-term interest rates any more, then Europe will want still more
to borrow here. I would say that Operation Twist worsens the bal
ance of payments in the Department o f Commerce definition, a defi
nition which I don’t accept.
I think we have been mesmerized by a Department o f Commerce
definition. The Chase Bank has had a deficit every year since it got
started in these terms, that is, its deposits and assets have grown. I
don’t call it sensible to regard a bank, if its deposits and assets grow,
as in deficit.
That is why the Department o f Commerce definition o f the deficit,
which you seem to worry about and which many people worry about,
is not the appropriate definition. The United States is a bank, and
on that definition, any bank which is growing year by year is in deficit
year by year.
Chairman P r o x m i r e . M y time is up. M r. Roosa is anxious to
comment.
Mr. R o o s a . I would just like to make a quick comment if I may, M r.
Chairman.
It seems to me that what Professor Kindleberger is saying is th is:
I f the rest o f the world will always have faith in the dollar as he
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
843
thinks they should, the system is safe. But in order to prove to them
that they should have faith in the dollar, let’s break the system first.
L et’s let it go bust by creating more and more short-term liabilities
to the point where they will pull out every short asset we have when
there is a moment of fright, and then afterward they will say, “Aren’t
we sorry.” A nd the question is whether we can sit here and say we
are ready to run that experiment because we are so sure we are right,,
that it will all come back in place afterward, or whether we have tobe seriously concerned about the threat in advance, because we have
the primary responsibility to maintain confidence in the dollar fromi
the beginning.
Chairman P roxmire. Congressman W idnall ?
Representative W idnall . Thank you, M r. Chairman.
M r. Roosa, you suggested that an avenue of inquiry might be with
respect to the interest equalization tax. Do you believe it should be
renewed ?
M r. R oosa. Y e s; I do. A s you know, I appeared before the various
committees o f the Congress when the interest equalization tax was
being first considered, and when I did, I said with all the capability
that I then possessed that I considered it as a temporary measure.
I still consider it as a temporary measure, and I certainly realize
the awkwardness of having to come again to support its renewal. But
I believe the renewal is necessary because, as you have seen, the sepa
ration in the capital markets is not all that secure.
There is a real danger that there will be an outflow of investment
funds to Europe, or around the world for that matter, at a time when
we are under continuous balance-of-payments strain. It seems to me
that the measure has worked.
This is something which we could explore in the statistics at great
length, and it is a rather circumlocutious process, but the essential
point, as I see it, is that the loopholes that Professor Kindleberger
implies were there, indeed were there. W e knew that when the interest
equalization tax was first being proposed. But you have to have some
evidence that these risks of outflows really exist, before anything can
be done about them in the context that will assure public support or
understanding.
W e knew that the next risk was that there would be an outflow o f
banking funds, and that one way or another, through a voluntary
program or a Gore amendment or both, something would have to be
done about that, once you put a barrier against this particular part of
the capital flow structure.
W e also knew that if that were ever done, there would then be
another loophole, the potential for a substantial further outflow of
funds through the direct investment window. You would move from
portfolio over to the bank loans, and then to direct invesfpient.
These had to be taken up one by one, as they became important.
The way in which to do it effectively, because the administrative probr
lems and exchange control are so obnoxious, as Professor Kindleberger
says, is through a demonstration of need which can then be met through
a program which is essentially voluntary in its enforcement rather
than through detailed regulation. That is the pattern that has been
followed.
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W e went from the interest equalization tax to, of course, the impo
sition of the Gore amendment, which I think is relatively unnecessary,
as long as a voluntary bank credit program is effective, and then
we had to have along with that a voluntary restraint on overseas
direct investment.
A ll of this is indeed regrettable, but it is necessary in order to slow
down the total outflow o f investment and to keep some kind of brake
on this, valuable as it is to us in the long run, because even a bank as
strong as ours can’t afford to expand beyond its immediate present
capacity. That capacity is indicated by what our balance of payments
will bear.
Representative W i d n a l l . A s I understand your views, you do feel
a material impact, if interest rates are materially lowered here in this
country. Professor Kindleberger, on the other hand, doesn’t seem to
fear that. A s I understand his testimony, he thinks that the economy
and the balance, such as they are today are in a far healthier state
than most people seem to acknowledge.
^ It isn’t clear in my mind why there is such a great variance in op
timism and pessimism between the two of you. W e have such a good
opportunity under one tent to understand each other.
M r. K i n d l e b e r g e r . I do want to make one remark, which is that I
demur rather strongly from M r. Roosa’s interpretation o f my views
in his last answer to the chairman, but since the chairman’s time was
up, I didn’t get a chance to demur. I think that is the appropriate legal
word. I just disagree with everything he said. That is demurring.
I f I may go back to M r. Roosa’s latest remark, which is to say that
the interest equalization tax has slowed down capital outflows, I have
before me page 183 of the Economic Report of the President and the
Report of the Council of Economic Advisers, and it is a little hard to
see it.
In fact, the U .S . private capital flow net, 1961, 3 .2; 1962, 3 .9 ; 1963,
3 .4 ; 1964, 3 .5; 1965, 6.4, after the interest equalization tax, to be sure
and then it comes down again to 3.7 and 3.6. I have a very difficult
time seeing overall that the interest equalization tax has helped much.
I would add one more th in g: that the reason for raising the interest
equalization tax now is that the administration is worried that people
may pay the tax and use the New York bond market.
This is intended to be a prohibitive tax, as in tariff discussion, and
this means that you have got to police the market, to make sure nothing
happens, not that you collect the tax, but nothing happens. This means
in effect you must apply foreign exchange control if you try to apply
the tax beyond maj or issues.
But to take your question, sir, as to why we differ: reasonable men
differ, as is well known as some reasonable men from unreasonable
men. I can further recall when I was in Government my irritation
with professors from outside the Government, free from the pressure,
men who did not have their feet to the fire, the fire in many cases com
ing from the Congress, criticizing economists in Government for not
being sufficiently classical in the application o f economic principles.
This was particularly true in Agriculture where professors of agricul
ture from the universities would object to the interference with the
price system and attack the Department of Agriculture economists for
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845
failure to be pure. The latter has responsibilities for running a real
program, and would naturally become irritated with the irresponsible
outside criticism.
The tables are now turned, and I am a professor without responsibil
ity. Y ou may well hold that my views are irresponsible, but I think
I have a responsibility to provide a truthful analysis, as truthful as I
can. I am inclined to thmk that we got off on the wrong foot in the
Government in interpreting the balance of payments.
W e got off on the foot o f saying that no short-term asset besides
gold was any good, and that every short-term claim was about to be
presented, and that if we had a gain in short-term assets and a gain in
short-term liabilities, we were worse off.
Once you get this idea in your head, it is very easy to apply it by
rote, to get the journalists all thinking in these terms, get, if I may
sav so, the Congress thinking in these terms, and it is very difficult to
effect a change.
Europeans think in these terms too, but as I said in my testimony,
I think their views are changing. I think they are beginning to see
that they are not really in surplus to the extent that they have borrowed
a good deal of the increase in short-term assets, just as we are not al
together in deficit as we have good assets against our increased
liabilities.
Representative W i d n a l l . I take it you believe the balance-of-pay
ments outlook is far more favorable than most o f the economists do,
who have appeared before this committee ?
M r. K i n d l e b e r g e r . Yes, sir.
Representative W i d n a l l . There is a greater worry on their part.
M r. K i n d l e b e r g e r . There is a small coterie o f us, one of whom ap
peared before you in September, Despres. W e are distinguished by
our smallness in number.
Representative W i d n a l l . I would like to have answers from both
o f you with respect to your own views on the proposed surcharge tax,
as to whether or not you think it would be helpful at this time, or
detrimental.
W e certainly have great areas o f difference of opinion in the Con
gress and outside of the Congress on this. W alter Reuther testified
this morning that he thought it would be a mistake, with the state
that the economy is in today, to impose a surcharge tax. That it would
be detrimental to the economy.
M r. R o o s a . Yes, I would have to disagree with M r. Reuther and
a good many other people. ^I do feel that the surcharge is appropriate.
I think the tim ing is wisely selected, since we are at this present
moment undergoing the aftermath of adjusting to the way in which
the brakes had to be put on the economy last year. It was running
ahead too fast. It wasn’t possible to sustain it: Whether it was
braked just in time or not, we won’t know for awhile yet, but I am
inclined to think it was.
Therefore, I think what we are doing is readjusting through a
hesitation phase that will take only a few short months to complete,
and I think that the resumption of expansion needs two things. It
needs first an easier money position because of the need to repair quite
a lot of fracturing that went into the internal structures of many
lending institutions last year.
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W e need easy money for awhile for that reason, relatively easy
money, not throwing it out at all comers, but relatively easy money,
and I think at the same time we need, on the stimulative side, the im
mediate restoration of the investment credit. On the other side, in
order that as this stimulation and the continuing effect o f the growing
Government expenditures seeps through the economy, I think it is
entirely logical and reasonable to expect that we will need a little
restraint on the fiscal side.
Now, it is a very modest restraint which is proposed.
I certainly don’t disagree with those who would try to find a com
parable result in total fiscal impact through spending reduction, but
I would start with the assumption that something in the order o f $5
billion ought to be found, and if it isn’t found through expenditure
change, it ought to come through the surcharge, and I further say
that it is important enough to do it, that Congress should be consider
ing new techniques.
I Irnow it is repugnant to one end o f the Avenue to think about giving
discretion to the other, but there is nothing wrong with the Congress
giving discretion to itself. I t seems to me that enactment could be
effective the first of July as proposed, along with the provision— if it
isn’t constitutionally barred— that this effective date could be deferred
if necessary by a calendar quarter, and from quarter to quarter, by
joint resolution without the entire apparatus o f congressional hearing
aiid full review. This, I think, would be entirely appropriate.
W hat I am saying is that we are undergoing now a period in the
economy when the immediate impact of a surcharge at this moment
might be unduly heavy, because we are not yet clear on the ingredi
ents, all the ingredients^ of the adjustment taking place.
My own expectation is that this will have worked out and that the
economy will be back on an expanding phase or can be by midyear. I
think the greatest threat to that is the mvestment credit, not because
there aren’t, as M cG raw -H ill shows us, a fair amount of capital ex
penditures coming through in the rest of this year, but what has hap
pened is that all the orders have stopped. There have been no orders
to speak o f, in terms o f the scale o f capital investment that we need
for expansion, since last October-November and the impact on the
flow of capital expenditures needed for the economy will be tremen
dous in 1968.
It seems to me that is the delayed effect o f the investment credit
that we ought to be very concerned about. W e don’t want to get that
impact by that time. I f we don’t want that slump in 1968, we should
restore the investment credit now, or restore it at least at the same time
that the surcharge is imposed. That is a long answer to a simple ques
tion, M r. W idnall.
Eepresentative W i d n a l l . M r. Chairman, my time is up, but may we
have an answer from Professor Kindleberger to the same question?
M r. K i n d l e b e r g e r . This is a question, sir, that I really have no
claim at all to expertise on. M y intuition tells me, and it is not very
useful in these matters necessarily, that it m ight be well to have it on
the W alter Heller-Eobert Eoosa sort o f conditions that you would be
able to get rid o f it quickly if the economy should take a turndown
sharply, either because of a cutback in m ilitary expenditures through
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847
a change in the situation in Vietnam, or a downturn in business. Since
it takes so long to get it on the books, it is useful to go to work to get
it on, even though you may want to take it off rapidly, if conditions
change.
I do feel some little concern about the Federal Reserve Production
Index for January, which leveled off a bit for the first time in how
many months— 70 months— but that doesn’t seem to me yet enough of
an indication that it is unwise to put it on at all.
Chairman P r o x m i r e . Congressman Reuss?
Representative R e u s s . Thank you, M r. Chairman.
I want to express our appreciation to both o f you gentlemen, not only
for your appearance here today but for the help you have given our
International Exchange and Payments Subcommittee for many years,
officially and unofficially.
I would like to leapfrog over the immediate argument between you
two gentlemen to ask a question which is very much in my mind.
Currently, the United Kingdom is renewing its effort to join the
Common Market. The Kennedy Round trade negotiation deadline
is approaching. And it remains to be seen whether the international
monetary reform, which is targeted for next September at the IM F
meeting, will in fact come off. I take it there is general agreement on
all three o f those propositions that the future is very cloudy.
I f there is failure on these things, if the United Kingdom doesn’t
enter the Common Market, and if the Kennedy Round does not
achieve a meaningful lowering of tariffs, and most important of all,
if there is no agreement as to an international monetary reform
which would take some o f the weight off the dollar and substitute
some new form o f international currency, if as I say there is failure
on these things, and if there appears to be a continued propensity on
the part of some people to demand gold for their dollar holdings in
excess of what you would expect them to demand, in view of their
reasonable needs for holding dollars for their interest and for the
reserve future, what would you gentlemen respectively think of the
suggestion which has beben made that the United States ought then,
(1 ) to repeal the remaining portions of the gold cover and, (2) to
invite those countries which have shown in the negotiations a coopera
tive attitude, and here I am thinking, I guess, o f Canada, Japan,
Australia, and the E F T A countries as opposed to the Common Mar
ket ; what would you think of inviting the countries which have shown
a cooperative disposition to, one, enter into some from o f agreement,
either under the IM F or under some new international monetary
organization, to form what might be called a dollar bloc; that is, that
the participants agree not to make damaging demands on our gold,
and (3 ) instead to hold dollars?
Accompanying this could well be an agreement to give those coun
tries that cooperate free access to our capital markets, while continu
ing some sort of an interest equalization tax, perhaps of a prohibitive
nature, on other countries and, (4 ) in the trade fields to consider the
organization o f something like a free trade area within that bloc, which
would have the effect I suppose o f having a fixed exchange Bretton
W oods type system within the dollar bloc, but letting the exchange
rate float between such a dollar bloc and whoever the others were,
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probably as I have hinted, the Common Market, or at least some
members of it.
I don’t know if I have given you anything that you can sink your
teeth into, but roughly, what do you think o f that kind o f con
tingency plan, on the assumptions I make that we are not successful ?
M r. R o o s a . Yes, I would like to precede any response, by indicating
that this is based on all three assumptions, the British failure in the
Common Market, the failure of the Kennedy Round, and failure o f
any promising progress of monetary reform by the end o f this year.
This, I think, has a lot to do with the approach you take to any kind
o f selective isolationism, which is what the dollar bloc concept is.
It is selective in that you are inviting a few to share with you, but
it is restrictive in the very ways in which you have outlined it. I would
say just as a preface on your first question, that in any case the gold
cover should be repealed. That is necessary in any event.
Representative R euss. M ay I interrupt you at that point, just
briefly?
M r. R o o s a . Yes.
Representative R e u s s . W ouldn’t it be an excellent idea if we re
pealed that any day now ?
M r. R o o s a . Y e s; it would. I regretted the apparently tactical
decision to only do half o f it when it was up a year and half ago, and
I think it should just be done quickly and preferably without too
much sounding o f alarm.
I think if we are going to get, or have a chance o f getting, the kind
o f understanding that Professor Kindleberger is quite sure will be
forthcoming, we at least have to have evidence that the gold is there.
This is the only way we can be sure of having a chance at all that it
won’t be taken.
Otherwise, with only roughly $3 billion o f margin remaining, it
doesn’t take too long before you reach a crucial point, and if we don’t
enact the legislation we m ight indeed be forced to improvise some
thing of the kind you have outlined here, something which I would
very much regret to see.
I think, with Professor Kindleberger, that the dollar is and w ill
remain the best currency in the world, that most people will continue
to use it as they do the English language, when they are dealing in
international affairs, but that this is not going to be encouraged, nor
are the conditions that we seek in our foreign policy at large going
to be fulfilled, if we acquiesce in the sort of sense o f defeat implied
by saying we will just pull our few friends around us and create a
new set of economic arrangements.
# It is possible, and D r. Schacht did it, and with advantage, for some
time. I don’t want to seem to be just name calling here. It was an
economic achievement, the way in which he did it, and there is much
to be learned from it. I f , for example, the Kindleberger formula
were to be followed, and we were to relax and enjoy the withdrawals
that may occur if we don’t worry about our balance o f payments, we
might end up having to resort to some combination of methods of
this kind to give ourselves a semblance of orderliness in some of our
world trade. But I would surely hate to come to that, and I think
far short o f that, there are a good many other things that we could do.
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That hasn’t answered specifically your three points, the notion of
creating a dollar bloc, the question of relating that to free access to
our capital markets, and then around that building a free trade area.
I think if we come to any extremity of this kind, and I repeat it re
quires not only your three premises but even more in the way of balance-of-payment failure to necessitate it, it does seem to me that all
three would want to come together.
W e would not want to think in terms o f only any one of them. W e
would need a kind o f an exchange control net outside a dollar bloc— I
am speaking here as a technician and not as an advocate— and to make
that work, we would have to give free access to our capital markets to
everyone inside the bloc, and we would have to move towad a free
trade area.
Representative R euss. Thank you.
M r. Kindleberger?
M r. K indleberger. I am happy to agree almost entirely with M r.
Roosa, except that I would demur a little bit when he implied agree
ment with your suggestion that the most important of these three was
international monetary reform.
I am not impressed by international monetary reform. I have tried
to indicate that it is much better to have effectively functioning inter
national capital market which does the job, than monetary reform, a
sort o f Rube Goldberg international monetary machine, with the three
kinds of m oney: gold, dollars, and then the funny stuff. Three sorts
o f money are going to make the Gresham law problem much worse
than it is now with two, but that is a separate issue.
But let me go back to your positive remarks. A n economist who
has been before your committee, Harry Johnson, said once some time
ago, and it was food for thought, that if the Kennedy Round were to
collapse, there would be a movement against one of the two aspects
o f it. The Kennedy Round and the Reciprocal Trade Agreements
A ct of the United States going back to 1934, have two underlying
principles. One is reciprocity and the other is nondiscrimination.
A nd he said one of these is going to collapse, and it is going to be non
discrimination. W e are going to discriminate. But any economist
would say that if you have to choose you should forget reciprocity
and cling to nondiscrimination.
In 1963 when De Gaulle closed the door to the Common Market in
the British face, I heard many people say, let’s join Britain in a
common market right away. But it is not clear that the British want
to. W e are industrially more powerful than they. Nor do the
Canadians want the kind o f free trade area you speak of.
Whether we could effectively operate a closed dollar bloc with, as
M r. Roosa says, a fairly elaborate foreign exchange control is a ques
tion. I f Latin-Am erica were in it, if this were a Monroe Doctrine sort
o f thing, you would find that there would be a Latin-American gap of
some size, as there is now in the Bahamas, and so on.
I don’t think this is very feasible. I don’t think it is very attractive.
I don’t think, in other words, that the United States in its foreign
policy is ever going to turn inward to the point where it forgets what
goes on in A sia, A frica, and Europe; and I don’t think it is appro
priate in our economic affairs that we should try to achieve the same
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sort of tidying up which is more comfortable perhaps, but which I
think fails to reckon with serious world problems.
I would rather hope we went the other way and kept on trying to
build a non-discriminatory world, letting go on the reciprocity if we
had to. There are lots of tariffs in this country we ought to lower
for ourselves and not for the Kennedy Round, not for some concession
we get over in Europe, not for outlets for wheat.
I want, for example, lower prices in certain commodities. I think
we should prevent price rises in steel. Five years ago, the President
should have said:
“I don’ care what you do in steel, but you are never going to get an increase
t
in tariffs for this. Whatever you do, mak e up any deal on wages and prices
you want, but w e are going to maintain competition from abroad.
I would rather let reciprocity go, if it has to go, and cling to non
discrimination. Obviously in the long run we have got to live with
all the countries of the world, not just with some. That is a pretty
histrionic reply. I am sorry.
Representative R e u s s . Thank you. M y time is up.
Chairman P r o x m i r e . Senator Jordan?
Senator J o r d a n . Thank you, M r. Chairman.
Mr. Roosa, you apparently are concerned because you raise the
question that our foreign trade position on payments deteriorated in
1966.
I detected concern in your statement when the question was raised.
On the other hand, Professor Kindleberger, while he agreed there
is evidence o f deterioration due to a rise in imports and increase in
our expenditures in Vietnam, and then he goes on to point out that the
loans of $2 and $3 billion have to be paid, and the repatriated funds
owned by the U .S . bank will be replaced abroad.
M r. Kindleberger goes on to say at another point in his statement
that, “ Severe as was the banking squeeze last summer, the $2 to $3
billion which American banks borrowed in the Euro-dollar market
prevented a real crisis and even a collapse.”
Y et I can’t understand your lack of concern, Professor Kindle
berger, in recognizing the near collapse, as you have stated it here,
and the fact that balance o f payments is pretty much a matter of
confidence in the dollar. I wish you would elaborate on that a little
bit, please.
M r. K i n d l e b e r g e r . W hat I was really talking about was the pres
sure that the Federal Reserve System put on the domestic money
market by squeezing down negative reserves to the point where they,
I think, hit $450 m illion last August.
Now, there was, as is well known, very severe pressure in the mort
gage market, in the savings and loan associations in California and
elsewhere. The Congress took cognizance of this, and tried to provide
money for F N M A , and so on. But that crisis was not really limited.
In August we looked the possible collapse of the savings and loan
associations squarely in the iace, and took steps. W hat I am saying
is that if it hadn’t been for the $2 or $3 billion which U .S . banks
brought home or borrowed from London, there might really have
been more trouble elsewhere. It is very hard to predict what would
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851
have been. W e can’t run the experiment over again without it, un
happily, or happily.
W hat I am suggesting is that the Federal Reserve System doesn’t
really know with any great care exactly where the breaking points
are, what straw breaks the camel’s back, and here is a machine, if I
may pursue the analogy a little further, which removes some of the
weight off of the camel at the time when the camel’s knees were be
ginning to look wobbly.
Senator J o r d a n . Y o u are not concerned so long as confidence re
mains in the dollar ?
M r. K i n d l e b e r g e r . N o , sir. In this particular case we were bring'
ing back dollars that were abroad. These dollars are useful to us. In
our Department of Commerce accounting, we say that assets abroad
are not useful to us. W e say they are lost. They are not counted
against any liabilities we owe. W e say every asset is frozen and every
liability is about to be presented tomorrow. So that if we have an
increase in assets and an increase in liabilities, this is regarded as a
deficit. Now, I say that is absurd, and the fact that these dollars are
useful to us is illustrated by the fact we brought $2 to $3 billion home
in a month. That suggests that the system works pretty well, that
these dollars we had abroad were not frozen. They were available.
The Euro-dollar market was an effective means of tempering an excess
of domestic monetary deflation i f you like.
Now, M r. M artin m ight have properly claimed— and by the way
central bankers all over the world claim it— that the existence of in
ternational short-term capital flows means that they lack control o f
their monetary policies, and that is true. But sometimes if their con
trol is exercised without the perfect knowledge of where all the break
ing points are, this may be a good thing. I say we are lucky to have
had this money to bring back home.
Senator J o r d a n . D o you agree, M r. Roosa ?
M r. R o o s a . I can’t give a “yes” or “no” answer, Senator. The fact is
as Professor Kindleberger indicated that the inflow of those dollars at
that time, provided relief from a strain that was otherwise at that time,
I believe, becoming unbearable. I f that supply had not been avail
able, I suspect that the way in which Federal Reserve policies were
formulated and imposed would have also differed, so that the inter
actions are a little hard to sort out.
I would go one step further though to say I think it will always be
true that short-term money flows have to be taken into account in the
formulating of monetary policies. They are going to have to have
something to do with the formulating of monetary policies designed to
accomplish their purpose within any country. That is the meaning
that I attach to what I call operation twist in the present circumstances,
which I think does make some sense as a technical proposition. So
that I won’t go all the way with Kindleberger, I would say that these
flows at some time relieve some strain. The outflow, as is occurring
now, will not impose any great domestic strain, because monetary pol
icy is itself easier, providing the offset for that loss of reserves. It w ill,
however, show up, or some o f it w ill, in a rather sharp reversal o f balance-of-payments figures, and while all the figures are not necessarily
alarming, and Professor Kindleberger is right in putting some cau
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tion around that, nonetheless the fact is that we will be witnessing a
return flow of dollars to Europe where in many cases the likelihood is
greater that there will be a flow into central bank hands.
Professor Kindleberger, don’t be misled, by the way, about
Electricite de France. The whole notion of borrowing in dollars by
an agency of the French Government, at a time when they are not gain
ing dollars through their central bank in any other way, has two
interpretations.
Senator J o rd an . Thank you.
To what extent would the continuous year after year lack of balance
of the Federal budget have to do with the undermining confidence in
the dollar, and thus affect the balance of payments? Professor
Kindleberger.
Mr. Kindleberger. Well, sir, I think on the whole this is not a
major factor. There was a time when European countries through
the Working Party Np. 2 of the OECD in Paris were urging that we
pursue the tax reduction, which finally occurred in 1964. This was
at the working level if you like. They were all technical economists
and they thought we ought to have had a bigger budget deficit at that
time. But whether private bankers are moved by this kind of consid
eration I don’t kniow, since while my acquaintance is positive it is not
widespread, but I think we are all Keynesians now and I think that
wise policies, applied at the right time, such as a tax reduction in 1964,
but a tax increase in 1966, this is the kind of policies which gains
respect in the international capital markets, and with foreign govern
ments. I think that it is not really so much the appearance of a defi
cit in 1966 that worries them. It is the fact that we were so slow in re
acting to the inflationary strain on the economy, in one way or another.
Senator J ordan. D o you agreee in substance ?
M r.Roosa. Yes; I do.
Senator J ordan. Thank you, Mr. Chairman.
Representative Reuss. Senator Symington ?
Senator Symington. Thank you, Mr. Chairman. Mr. Secretary,
it is good to see you again. I would ask, do you think repeal of the
25 percent gold reserve would improve international respect for the
dollar?
Mr. Roosa. I think it will improve confidence in the U.S. commit
ment to maintain a fixed $35 price for gold, which is an undergirding
for the entire world monetary system as we have it now. In that sense
it improves respect.
I think it must be coupled with the recognition that anything that
has brought us to the point where this becomes necessary is in itself
evident that we have been at fault, and we are not going to reacquire
full respect easily. It is a little like the position of the property poor
wealthy man, who has gotten deeper and deeper into debt without
having the liquidity to go along with it. He has finally reached a point
where he says, “All right, I will take a major step. I am going to—
in that analogy—I am going to borrow $100,000 to make sure I have
really got something in the checking account,” and people say, “Well,
thank goodness he is beginning to do something. He can meet his
bills. He isn’t going to be a kind of property p,oor deadbeat. But on
the other hand he has not yet reached the stage of providing secure
confidence.”
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853
Senator Symington. Thank you, sir. Dr. Kindleberger, I ask this
with respect and in no sense in snide fashion. In reading your state
ment and your later disagreements with Mr. Eoosa, would you say
that the more gold we lose the more respect there will be for the dollar?
Mr. Kindleberger. No, sir. I don’t take that line at all. What
I was trying to suggest was that the big loss of gold we had in 1965,
was in fact brought about by a determined policy of the French to
put pressure on the dollar, to discipline the United States. The
French were doing it very openly. Now their capacity to do that is
stopped. This means that our loss of gold is going to decline, and I
think that is on the whole, a strength.
Senator Symington. Then would you say the more gold we obtain
the more respect there would be for the dollar ?
Mr. Kindleberger. Well, I have a hard time thinking that we
ought to adopt the Midas philosophy and to try to acquire lots of gold.
I would think we may be a little more comfortable with a little more
but on the other hand I wouldn’t want to say there was a linear rela
tionship, one for one, between dollars of gold and increases of respect.
Senator Symington. Thank you. Mr. Secretary, if you were a
member of the Outer Seven, would you rather join a proposed dollar
bloc in an effort to get out of this growing jam, or if on good terms
with France, would you rather join the Common Market based on your
knowledge of the situation as it is today.
Mr. Eoosa. Given the present pattern of trade o f most of the mem
bers of the Outer Seven—and there is a little different story for each
one—the choice would probably be to get into the Common Market.
Senator Symington. Thank you.
Dr. Kindleberger, in your statement on page 3 there are some re
marks I don’t quite understand. You stress the difference between a
“ firm,” and a “bank.” To me, and I say this as a former member of
bank executive committees, also one who has been involved in business,
a bank is a firm and a firm is a bank. You present some ratios like 3
to 1 for industrials. Some I have operated, I only wish were half that
good. Now it looks to me as if you say a bank is in good shape only
as long as its depositors have confidence. But isn’t that also true of a
business?
Mr. Kindleberger. Well, sir, business on the whole does not like
short-term liabilities.
Senator Symington. A business like General Motors, that is a bank,
too. I am thinking about the average business in the United States.
I know a company that did about $1 billion of business with about
$20 million in cash. So it seems to me your distinction between what
constitutes confidence in a firm as against confidence in a bank is a
little theoretical.
Mr. Kindleberger. It can be overdone. I am talking about typical
cases—typologies if you like.
Senator Symington. You could say, could you not, that a country,
or an individual, or a firm, or a bank, can only improve its living
standards so long as it is trusted by its lenders.
Mr. Kindleberger. Well, sir, that is entirely true, but in the case
let’s say of the International Bank for Eeconstruction and Develop
ment, they have a project basis for loans. They will make a loan on
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the basis of a project and they will take what they call a hard bank
ing attitude. They look at the project rather than what J. P. Morgan
used to look at, I take it, which was character. They are interested
in what the country is doing in terms of projects. I would say such a
country, it is highly desirable for it to build character and reputation
and credit standing. I did make reference at one point to countries
needing credit standing and when they get credit standing then they
can turn to the international capital market to borrow in, and we can
stop giving foreign aid or intergovernmental loans.
Senator Symington. I would make this comment: We have been
told for many years that it is important we balance our payments,
but the less we seem to be able to do to that end the less important
it would, appear to become to a lot of people. That worries me.
Now, on page 5, you talk about confidence in the dollar, improving
in 1966. We have been told by other foreign countries that if we
don’t balance our payments pretty soon, they are going to start un
loading dollars just as the French did. At the bottom of page 5 you
say, “ The war in Vietnam and poverty in the United States are of far
more important issues today, than the balance of payments.”
I f by any chance we misfire in our calculations about what is or is
not important in respect to the integrity of the dollar, and you run
into real inflation which then curtails much more sharply that value
you would be creating a type and character of poverty we have not
known in this country for some 35 years, would you not ?
Mr. Kindleberger. Well, sir, I am not at all sure I follow the rea
soning behind what you said.
Senator Symington. We have, as I understand it, over $30 billion
now owed abroad, controlled primarily by the foreign central banks.
I f they begin to sell those dollars for any reason you may think is
logical or illogical to the point where you run into lack of confidence
in the dollar then the fact the dollar itself would be considerably less
valuable than before would in itself be a serious matter, would it not
and would further emphasize the balance of payments problem?
Mr. Kindleberger. N o; I don’t think I agree at all, sir.
Senator Symington. You don’t agree?
Mr. Kindleberger. N o; I don’t think so.
Senator Symington. I have a friend a prominent newspaperman
who says he has just received a paid-up life insurance policy, and he
said to me the other day “My insurance policy is worth so little as com
pared to what I thought it was going to be worth, I wish I had never
taken it in the beginning.” What would be your comment on that?
Mr. Kindleberger. My comment on that would be that it is better
than any insurance policy anywhere in the world. I am not happy
about the price increases in the United States in the last year at all.
This is why I was, say, for a tax increase last spring. But nonetheless
our prices are rising 3 percent a year whereas they are 4 to 5 percent in
France. I f you think the French franc is any bargain as compared
with the dpllar I think you are mistaken in terms of real purchasing
power.
Senator Symington. I s it quite fair to compare everything to the
franc ?
Mr. Kindleberger. Take Britain, Germany.
Senator Symington. There are other people besides the French.
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855
Mr. Kindleberger. German prices are rising 5 percent a year, Brit
ain, 5 percent a year, Italy, they are rising 5 or 6. I can’t see we are
worse off. I am not saying we are well off, but we are certainly not
worse off. Certainly, in general, it would be a mistake for a young
man to buy lot of insurance because there is probably going to be a
trend of prices upward.
Senator Symington. I am not criticizing you in any sense, I just
want to learn. I am uninformed in these matters, and have great re
spect for you. I have heard Secretary Roosa before and have equal
respect for him. But would you say that the more money we lend out
through paper gold in the form of dollars all around the world, the
better off is our own economy ?
Mr. Kindleberger. That has some complications. On the whole, I
think the international capital market helps us a little bit, but much
more important is its help to the economy of the world. I think the
dollar is important to us but also it is important to the world to have
an international monetary system which works, which makes trade
possible, which has gotten us out of the 1930’s. I f I may go back to
your previous remarks, sir, if it turned out that everybody in the world
lost confidence in the dollar, we could get along pretty well with less
foreign trade, and turning inward with foreign exchange control in
the same way that Mr. Roosa said Germany in the 1930’s did. This
would not be a very attractive role for the United States, in the world,
but the isolationist position would be tolerable. I think our role is
much more international than that. My view would be we need to
support the dollar, only partly for ourselves.
By the way, if I may say so, there is an awful lot of talk in the litera
ture about prestige. In the course of reading the Joint Economic
Committee Compendium on Contingency Planning I found two or
three people who said we could not do particular things without humil
iating conditions. This “humiliation” refers to prestige. I am not
interested in prestige. I think prestige is the last thing to go for. I
want a strong dollar, used widely in international trade because it is
efficient, an international capital market spreading capital around the
world partly because it helps the United States but partly because it
makes the world economy go. Prestige is not disregarded by, say,
the French, if I may say so. I use that country again despite your sug
gestion that we should not compare everything with it. I think the
prestige aspects of international monetary arrangements are really
derisory, very unimportant, but the inefficiency is important. The
reason I think English is becoming the international language is not
because of the prestige of the Anglo-Saxons. It is because more peo
ple know it than anybody else. It works. It is a common currency
just as the dollar is a common currency.
Senator Symington. My time is up. Mr. Secretary, would you
comment, also?
Mr. Roosa. I just would add, I think, that insofar as we think of
the dollar’s prestige, it is possible semantically to turn that in various
ways, but I do believe, as Professor Kindleberger has indicated, that
foreign economic strength for a nation is essential, if you are going
to maintain a strong position in diplomacy, defense, or the whole
gamut of international relations.
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I realize there are difficulties of definition, but I do feel a strong
conviction that the weakness of our balance-of-payments position and
its cumulative effect over the last several years has now reached a
oint where our strength as a leading world power has been impaired,
ow, whether that is called the prestige of the dollar or given some
other label is immaterial, but I think there is a very real substance
here that we must weigh very carefully.
Representative Reuss. Congressman Brock?
Representative Brock. I have enjoyed this very much. I share your
quest for a Holy Grail. I am not sure we are going to get it this year.
Just a couple of questions to clear my own mind up.
Professor Kindleberger, in reading your remarks and listening to
the questions that Mr. Reuss asked about limiting the gold cover, am
I correct in assuming that you essentially would just as soon be with
out the gold standard* period ?
Mr. Kindleberger. Well, sir, if I may refer to my paper before the
Joint Economic Committee on Contingency Planning, I tried to dif
ferentiate myself rather sharply from my good colleague and friend,
Emile Despres, who took a much more aggressive position on this. I
would abandon gold with great reluctance—let me scratch the word
“great,”—with reluctance, because I think it is a useful system, but
on the other hand I don’t want it to be made a fetish. I am inclined
to think that the gold standard—the gold exchange standard—is an
excellent standard. You could easily substitute for it a pure exchange
standard. You could not substitute for it a pure gold standard the
way Mr. Rueff and Mr. de Gaulle want. Nonetheless, I would not
move aggressively forward or push to change the gold standard. I
would use gold as long as we can. This means at the same time that
I don’t want to do anything which would be very harmful to the na
tional income of the united States, let’s say, or the national income
of the world in order to protect the gold position.
Representative Brock. I f we were to remove the gold cover behind
the dollar on domestic currency, which would free some $12 billion,
and if 3,4, or 5 years down the road our balance-of-payments position
had not improved, and we had the $3 billion in actual reserve to meet
our international obligations, then you would be again under the
pressure which a gold cover has today of creating some doubt about
the capacity of the United States to meet its obligations; would you
not?
Mr. Kindleberger. Yes. Well, if I may say so, I think that what
the United States really has behind the dollar is its productive ca
pacity—capacity to turn out goods and services, food, machines, and
so on. The value of the dollar is what a dollar will buy, not, an ounce
of gold for every $35. In the long run if we were to lose all our gold,
I would not be distressed. Well, there are some nuances here. I
might be distressed but I would not be desolated.
Representative Brock. Would it be fair to say that you would be
more distressed by the policies which led to that loss than you would by
the loss itself?
Mr. Kindleberger. Well, I would be certainly distressed by our
failure to get agreement in the world as to what a good international
monetary system is, because I think this is the nub of the issue. What,
is the best monetary system for the world? How will we operate it?
S
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857
How will we have enough confidence in each other as countries, so that
we don’t start to discipline each other, get up on our high horse, and
withdraw from discussions because our sovereignties are infringed,
and so on? I think we are in this world. You have got to keep
on going. And what we have got to do is to make the system work.
I am an empiricist rather than an ideologue about this. I want the
system to work and I think the system works best as a gold exchange
system now. I think the system works best in the long run as an
exchange standard, not a gold standard.
Representative Brock:. Isn’t it true that a gold exchange standard
rather than the system we now employ would impose much greater
and important direct restraint upon our domestic economy insofar as
our latitudes adopt expansionary policies at a given time which might
lead to an outflow of currency.
Mr. K indleberger . Well, I would say this. That any system of
international adjustment gives you constraints on your capacity to
operate an independent monetary and fiscal policy. Many academic
economists want a flexible exchange rate to achieve independence.
They want to say that there shall be no limit from the frozen balance,
because the balance of payments would always balance. I think such
a system would be subversive of the kind of world that we are trying
to create, a world with growing trade between countries as well as
growing trade within countries. I think the United States could
stand it well enough, but I would not be happy with it. As one who
perhaps puts a greater emphasis on the international position as
opposed to the national position, I have always opposed flexible
exchange rates which I think are nationalistic.
Representative Brock. Mr. Roosa, if I can interpret broadly Dr.
Kindleberger’s remarks, I think he feels that some of our problems
today are created by some of the legislative restraints that have been
imposed upon us in the past, especially the interest equalization tax.
You came before us before urging the imposition of this tax. You
suggested, as you said earlier, that it be temporary. I am beginning
to wonder if it isn’t about as temporary as the suggested temporary
nature of the corporate surcharge back in World War II, for years
without amendment. How long can we afford to put our short-term
objectives ahead of our long-term interest? I think when we put the
interest equalization tax on previously, we had a positive return 011
previous investments of something around $3.3 billion, and yet we
continue to curtail American development overseas. Aren’t we
reducing our capacity to meet our obligations sometime 5, 10, or 20
years down the road? When do we Sop this process?
Mr. Roosa. I f I may coin a phrase, I am delighted you asked that
question. It gives me a chance also to answer the figures that Pro
fessor Kindleberger used a while ago. The aim of this complex of
things, in which the interest equalization tax is included, was never to
stop altogether all foreign investment. It certainly had the effect of
largely stopping portfolio investment. The complex of all measures
taken together has been, as he indicated, not to pull back the totals
severely. It kept them from rising at a time when a crescendo of
acceleration had been recently underway. And when continuation
of that crescendo would have soon been earsplitting. So that what
75-314—67—pt. 4------ 10
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ECONOMIC REPORT OF THE PRESIDENT
we are looking at in the overseas investment position of the United
States is a position that has, through all of our travail, continued to
increase. The improvement, as noted in your paper, Charlie, the
improvement in our further overseas investment, even in the last 3
or 4 years, has been greater than the average over the previous 15,
so that it is important to distinguish between something that is in its
overall implications completely prohibitive and something which has
the effect of slowing down. There is no question that the more foreign
investment we can have, the more we will in the long run gain through
the balance of payments in future earnings, and yet there is no question
in the minds of General Motors that if they could double their size
each year they would not make a tremendous amount more and sell
all over the world. But there are restraints on size for them as there
are for the United States. Digestion rates will impose some limits.
And that is why it was necessary, through these temporary measures,
to impose some check on the outflow, the rate of outflow of foreign
investment, taken overall.
In reply to your specific question as to how long will the interest tax
have to be continued, I may have to show you how self-serving I can
be. It is fair to say, I believe, that if the voluntary program for the
banks could have been imposed 1 year sooner, we would have had an
actual balance in our overall accounts in 1964 (my last year here).
After all, remember we had a current account surplus of $8 billion in
1964. It was a tremendous outflow of additional bank funds, a great
spurt in direct investment, and a continuation of heavy governmental
payments abroad that used up that surplus, and left us still with a
deficit, although to be sure a deficit smaller than in earlier years.
We have gone through the succession of new events year after year,
each accounting for the major character of the new deficit in each
year, and so long as these recur, until we have reached the stage where
we are able to return to a current account surplus at something like
the magnitude of 1964—at least in the magnitudes of $6 and $7 billion
instead of the present under $4 billion—we won’t be able to free in the
full sense the U.S. capital markets from the present interest equaliza
tion tax or the other restraints. It is not at all impossible to restore
that kind of current account position, but it takes a recognition of the
priorities in other policies to do it.
Eepresentative Brock. I think what I am basically concerned with
is the fact that it seems to me that the old cliche, we need trade not aid,
is pretty applicable in the world today, particularly, with developing
nations, and unless we can find ways of increasing the productivity
by capital and technological talent, that we are going to continue to
have to utilize the route of our neighbors is not in my way of thinking
as productive to the people as the development in productivity.
I would like to ask one question. In the area of the domestic
economy, when you have—as many have described it this year—a costpush situation as opposed to a demand-pull, is it not possible, if that
is a true situation and let me say I am not sure that it is, I think
it is partially true in a way, is it not possible to have an expansion
of our money supply without too much change in the interest rates?
What I am worried about is the inflow of short-term money that
occurred, that I think the professor was talking about last year
THE
1 9 6 7 ECONOMIC REPORT OF TH E PRESIDENT
859
through our interest rate policies, and I am somewhat concerned with
your policies and prospects of a dramatic outflow of this same money
going the other way. Isn’t it possible for the Federal Government to
expand our monetary supply without too much change in the interest
structure ?
Mr. R oosa . Yes. There are two questions there. First, as to the fact
of the situation, and I would quite agree with your appraisal, while
there are many things at work, the principal generating cause of addi
tional inflation this year is on the cost-push side. That, however, hav
ing been set off regrettably by any one single thing, the airline me
chanics settlement last summer, has picked up steam to the point where
now it is a virtual impossibility to conceive of any thing preventing
this spreading through the entire economy for one round. All we can
hope is that the surrounding conditions in terms of the potential for
demand-pull inflation, those surrounding conditions will be kept under
sufficient check so they won’t be creating an environment in which,
once we have gone through one round, we pick up immediately with
another and the spiral goes on further.
I think myself that the Council’s report on the guideposts this
year is a splendid statement, and I think it is the only honest and
honorable statement that could be made in the face o f what was
clearly a failure of economic policies last year. We talk about the
failure o f fiscal policies. The real failure was the failure in incomes
policy. In the United States and we need the three—money, fiscal,
and incomes policy—we need the three going together, if we are going
to really achieve a balanced influence from the Government on the
course of the economy.
I think the Council took the right course in the face of this. Thev
had to back away. They knew it would be silly to try to contrive %
guidepost that could fit what was built in and bound to occur this
year. But they did the best they could to preserve the integrity of a
sound proposition, that productivity on average over time determines
the rate at which the economy can afford wage increases. It is because
I want to see productivity increased in the same way that you do
that I hope, I would like to think, that the one tax change that
would not be temporary was the investment credit, and I sincerely
regret that anything was done about it.
Representative R eu ss . At this time I would like by unanimous
consent to make a part of the record at this point an article submitted
by Senator Symington written by F. E.#Aschinger, “ The Building o f
an International Monetary Machinery,” in the Neue Zurcher Zeitung
of Zurich. Copies of this article will be made available to you gentle
men and Senator Symington asks that you comment on it.
Without objection that will be included.
(The article referred to follows:)
The
B u ild in g
op a n
In te r n a tio n a l
M oney
M a c h in e r y
(By F. E. Aschinger)
The deliberate creation of synthetic international liquidity is currently the
paramount problem in the minds o f those concerned with worldwide monetary
matters. In view of today’s realities, this is somewhat odd, since there is general
agreement that the world is now suffering rather from an excess than from a
shortage of international liquidity. Another widely accepted opinion is that
860
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ECONOMIC REPORT OF THE PRESIDENT
the problem o f creating synthetic reserves will become acute only once the
reserve-currency countries—particularly the United States—have succeeded in
eliminating their balance of payments deficits over the long haul. Hence there
would seem to be no particular hurry to create a system o f synthetic reserves
designed to someday supplement the dollar as a source of international reserve
creation. This is especially true since there is as yet no end in view to the
long series of United States payments deficits; furthermore, the preliminary
technical groundwork fo r the creation of a reserve plan has already progressed
so fa r that, given the necessary political agreement, the actual mechanism itself
could be worked out relatively rapidly.
Hence there are hardly any sound reasons why, during the annual conference
o f the International Monetary Fund in September, many voices were raised
urging all possible haste in setting up such a scheme and demanding that the
project must be fully worked out by next year’s IMF meeting or that else it
would be too late. Even the premise put forward by the IMF administration,
that the establishment o f such a reserve plan could eliminate existing uncer
tainty about the price o f gold, is not very convincing. For the current insecurity
concerning the future of the monetary system comes less from uncertainty about
the creation of a new kind of reserves than from the continuing American
balance-of-payments deficits and the dangers which they create for the present
system of reserve currencies.
Among the industrial nations, it is those countries plagued by chronic payment
gaps which are stressing the urgency of setting up a new reserve system. Rightly
or wrongly, this fact has awakened the suspicion that, despite all their pro
testations to the contrary, those countries regard the creation of synthetic
reserves as an opportunity to at least partially cover their deficits. This explains
why, quite aside from the conflict between France and the United States, there
is a certain mutual distrust among the members of the Group of Ten concerning
the aims of some o f them in pursuing this far-reaching project. Openly stated,
Continental European circles harbor an oft-expressed fear that the Anglo-Saxon
powers together with the developing nations could gain control of the uses to
which such a reserve mechanism might be put, and that as a result the “ money
machine” could easily become an international “inflation machine.” Any attempt
to evaluate the difficulties and prospects of the planned monetary reform must
be based on a recognition o f this situation.
THE TEN AND THE IMF
Until very recently, negotiations on the creation of synthetic reserves were
limited to the Group of Ten nations, with France’s position creating notable
difficulties. The most substantial difference between France and the others is
that the French Government would like to eliminate the dollar’s function as an
international reserve currency, while the rest emphasize that the dollar should
continue to exercise its reserve function alongside the new monetary reserves
to be created. The press conference held by French Minister o f Finance Michel
DebrS on September 30 made it difficult to tell whether the difference of opinion
over the necessity and desirability of a new kind o f reserve units is funda
mental or rather tactical in nature. A few days earlier, in his speech before
the plenary session o f the IMF conference, Debr6 had fired a broadside against
the principle of synthetic reserves per se. But at his subsequent press confer
ence he showed himself more flexible, laconically rejecting an increase in the
price of gold and indicating that his country would, if necessary, consider the
question o f a new reserve project. In the light of these statements, it would
appear that France is interested in playing a moderating role in this matter,
in order to prevent such a system from being too hastily conceived and applied
and thus getting out of hand. I f France would limit itself to this braking
function, its opposition could be useful and constructive. At any rate, in
addition to numerous exaggerations Debra’s speech before the IMF contained
many home truths which needed saying.
Earlier this year, when the Group of Ten held its conference in The Hague,
it stated as a body that it would continue to study the problem of the creation
o f new reserves, and moreover that it would carry on discussions on this subject
with the IMF executive directors. This brought the preparation for a reserve
mechanism into a new phase, in which the developing nations would be included
in deliberations. At the more recent IMF meeting in Washington, the interest
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1 9 6 7 ECONOMIC REPORT OF TH E PRESIDENT
861
and attitudes of the developing countries vis-d-vis the liquidity problem consti
tuted the central theme. There was general consensus that all countries are
interested in seeing a smoothly functioning monetary system and that the in
terests of all countries must be taken into account in the creation o f a new
reserve system. At the same time, the industrialized nations also stressed the
importance of the second principle which had been laid down in The Hague reso
lution: namely, that a reserve mechanism would in the final analysis be de
pendent upon financial cover from a limited number o f countries which play a key
role in the functioning of the world monetary system, and that these countries
must therefore be given a decisive voice in the creation and utilization o f an
international reserve apparatus. The Hague Declaration also stated that this
could be best accomplished by a procedure in which suggestions for the creation
of reserves would be examined both by the limited Group and the Fund. The
required majorities and voting procedures would have to pay adequate heed to
the above-mentioned two principles; this was seen as an essential prerequisite
for agreement on the creation of new reserves.
THE TUG-OF-WAR BEGINS
This view of the matter met with strong resistance among the emergent na
tions at the IMF conference. In more or less sharp form, nearly all the repre
sentatives of these countries insisted that a reserve mechanism must be uni
versal in nature, that no group o f nations must be allowed an overriding voice
in its operation, that all countries must be given equal consideration in the allot
ment of reserves, and that the kind of reserves used must be uniform. The de
veloping nations reject the idea o f a reserve system which would be created and
administered by the Group of Ten, and under which the member nations of the
Ten would channel part o f the assets to the IMF for redistribution to other
IMF members in the form of drawing rights. In the opinion o f these countries,
the new reserve mechanism must be incorporated into the structure o f the IMF
itself and decisions on the creation, operation and periodic review o f such a sys
tem should be made exclusively by the International Monetary Fund’s authori
ties— that is, by representatives o f all countries concerned.
The formula worked out at The Hague, calling for double majorities and vot
ing procedures, received little overt defense from the representatives of the
Ten during the IMF conference. In fact the British Chancellor o f the Exchequer,
who had just returned from a conference o f Commonwealth finance ministers
in Montreal, had been so influenced by the wishes o f the developing countries
that in his speech before the IMF he clearly retreated from The Hague position.
He stated that, instead of establishing criteria and procedures fo r majority vot
ing, efforts should be made to reach informal agreement between the Ten and
the emergent nations on the establishment and application o f a new reserve
system.
The statements by US Treasury Secretary Fowler also lack any reference to
The Hague decisions. Among American circles one may even hear the view ex
pressed -these days that The Hague Declaration went too far in its concern to
institutionalize the key role o f the industrialized nations in a new reserve sys
tem. This same view is held by some circles in the IM F’s administration. The
heads of IMF and various countries, even some o f the Ten, appear to be aiming
for a solution under which the formal decision-making functions in the new re
serve system would go to the International Monetary Fund, while the actual im
portance of the Ten would find its expression on a more informal level. This
trend, however, will probably meet with reservations and opposition on the part
o f those members o f the Ten who want to hold the key to the creation o f a new
monetary reserve mechanism in their pocket.
THE NEED FOR RECIPROCITY
The reluctance to drop the idea of a double majority system has been strength
ened by the attitude which is being displayed by various developing countries
toward a new reserve mechanism. Many emergent nations seem unaware that,
however it is conceived, such a mechanism involves a system o f mutual credit
commitments, in which each partner must be prepared to temporarily place goods
and services at the disposal o f the other on credit, and that such a system can
function only on a reciprocal basis, that is, if the balance-of-payments positions
change. These young countries tend to regard the idea o f a reserve plan as a
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system under which manna would fall from the heavens, an opportunity to ob
tain increased development aid. Although a few of the more advanced emergent
nations have come to realize the need for currency reserves as a kind of equaliza
tion fund for balance-of-payments fluctuations, the majority of them do not yet
understand this.
For years, various industrialized nations have quite correctly promulgated the
principle that the creation of additional monetary reserves must in no way be
tied to the question o f development aid. And there has been loud applause for
the thesis that newly-created reserves must serve only as a temporary equalizer
for balance-of-payments fluctuations, and not for the long-term transfer of goods.
But today there seems to be at least a partial retreat from these principles,
reflected in a consideration o f possible direct participation by the developing
nations in the creation o f new reserves and the admission that these countries
cannot be expected to adhere to the rule o f reciprocity. To the objections that
the granting o f capital aid to the developing nations is not consonant with the
purpose o f deliberately creating additional reserves, and that such a system
cannot function well without sufficient reciprocity, the mollifying argument
is being brought forward that the emergent nations represent merely one-fourth
o f total international liquidity, so that if the industrialized nations adhere to
the rules o f the system, it will be able to operate properly anyway. This dispute
will no doubt be the subject o f much spirited debating in the future, both within
the Group o f Ten and between the Ten and the larger community o f the IMF.
JUST A PRELIMINARY SKETCH
There was notably little discussion during the IMF meeting o f what form
the synthetic reserve should take. This may be partly due to the technical nature
o f the problem. But it is also in part explained by recognition of the fact that
similar results may be obtained whether the reserves are created by granting
additional automatic drawing rights to the IMF or by means of newly created re
serve units, or “ owned reserves.” With few exceptions, most speakers expressed
a clear preference for some form o f reserve units or a mixed system. The admin
istration of the IM F also seems to favor the creation o f special reserve units.
I f any solution is reached at all, it may be assumed that it will to a great extent
be embodied within the IMF.
However, it seems extremely doubtful that a complete reesrve plan will be
ready by next year, in keeping with the wishes and urgent demands heard at
the Washington conference. I f the Group of Ten required so much time just
to set down a few general principles, it may be assumed that the widening
o f talks to include all IM F members will slow down the pace of negotiations
even further and will multiply the abundance of technical and political problems
to be overcome. The projected talks between the Ten and the International
Monetary Fund w ill be merely consultative discussions, during which no decisions
will be made. The Ten and the IMF will have to agree between them in which
direction they wish to move. The construction o f an international money
machine has not yet passed the stage o f preliminary sketches, and it is by no
means certain that the imposing structure dreamed o f by many will ever be built
What is more probable is that, when America’s payments difficulties have
finally been ironed out, thus bringing up an immediate necessity for additional
monetary reserves, gradual pragmatic steps will be taken within the existing
framework o f the International Monetary Fund. This would by no means be
a tragedy. Far more urgent than the problem o f liquidity, which today is at
most a cloud on the horizon, are the problems o f worldwide inflation and the
persistent balance-of-payments disturbances. These most serious matters should
not be overshadowed by excessive emphasis on the question of liquidity.
(Mr. Roosa’s comment on the preceding article was later supplied
and appears below:)
Aschinger’s specific questions and reservations concerning the creation of a
new reserve asset are all well put and, in my view, were broadly valid at the
time he wrote. Enough has happened, or been clarified, in the succeeding four
months, however, to contradict his underlying theme— that this reform is being
pushed ahead too fast.
I believe that a new reserve asset is needed and hope that the major elements
o f a plan can be agreed before the end of this year. I think agreement on the
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863
outlines o f a plan can and should remove one important source o f speculation
against the $35 price—the unrest created by the view that the members of the
IMF will be unable to agree on a plan and that consequently the price of gold
will go up by default. I am convinced, however, that no plan could or should
provide any escape for the United States from the discipline imposed by the
balance of payments. Nor can a new reserve asset be allowed to become a means
of providing aid to emergent countries. The fact that the highest current priority
ought to be given in the United States to our own present balance of payments
deterioriation (as Aschinger stresses) should not, however, alter the desirability
o f pressing forward with monetary reform as rapidly as possible.
(The comment below was subsequently furnished by Professor
Kindleberger:)
Mr. Aschinger makes three points: (1) that there is no need fo r increased
international liquidity; (2) that plans for increased international liquidity
should be kept distinct from aid to the less developed countries; and (3) that
other problems such as worldwide inflation and persistent balance-of-payments
disturbances are far more important than fears o f a shortage o f liquidity. In
general I agree. I would, however, like to qualify my answer.
There are two types of international liquidity: one is the supply o f primary
money, such as gold ; the other is access to credit. Most o f the discussion turns
on the first. It is this question which is unimportant. But the second aspect o f
liquidity is of vital concern. Countries need to be able to borrow to restore their
supply o f international purchasing power, so that there must be an international
capital market to provide liquidity against credit for normal uses; and when
financial crises supervene, as sometimes occurs, there must be facilities fo r
rediscounting to support the country or countries in trouble. The I.M.F. was
designed for the first purpose. It has gradually been converted some distance
toward the second, with the provision o f General Agreement to Borrow, etc. The
Group of 10 discussions aim at the first type o f liquidity. Much more important
in my judgment is the maintenance o f the Basle-type arrangements, and the
Euro-dollar market, which make it possible for countries to get rapid, flexible,
vital access to credit when their liquidity is threatened.
On the second point, it would be useful and important if the world were suffer
ing from unemployment to use international spending as a way to create real
assets in the less developed countries and monetary reserves in the developed.
In a world of full employment, however, it must be recognized that the provision
of real assets to the less developed countries costs real resources. In the second
place, it is useful to recall the important theorem that any clearing mechanism
will break down if the participants divide clearly into persistent creditors on
the one hand and persistent debtors on the other. The proposal to tie new inter
national liquidity to aid to the l.d.cs. involves making the latter persistent debtors,
and the developed countries persistent creditors. After time, the creditors are
unwilling to keep on extending credit to the debtors, or in an international
monetary system, to continue to regard as good money claims on countries that
seem unlikely to be able to repay their debts.
Thirdly, I would tend to agree with Mr. Aschinger that the problem o f inflation
is more important than new means to provide international liquidity. When he
comes to persistent balance-of-payments deficits, however, I would want to with
hold my approval o f his views until I knew better how he measured surpluses
and deficits and whether he makes the distinction which I find critical between
the balance of payments of a producing enterprise, and that o f a bank. Banks,
as I have pointed out, are not in deficit when they increase their financial claimsand their financial liabilities, so long as they have a suitable ratio o f quick assets
to total deposits. The United States in my view is a bank. I do not think it
is in deficit.
Representative Reuss. Mr. Moorhead ?
Representative Moorhead. Thank you, Mr. Chairman. I would
like to state to both witnesses that your presentations were interesting,
stimulating, and helpful matter and I appreciate it very much.
Professor Kindleberger, in your statement, a sentence appears:
“ Surplus of the continental European countries are therefore not
earned but borrowed.” My question, sir, is : Can we turn that sentence
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around and say the deficits of America are therefore not lost but
loaned?
Mr. Kindleberger. Yes, sir. That is in fact my point, that the
United States, in acting as a banker, in lending long and borrowing
short, does not have a real deficit. The Department of Commerce
definition seems to me to be appropriate only to, and here I would
agree with Senator Symington, a very inadequate firm which does not
have much credit and does not get much trust.
Representative Moorhead. Professor, the thing that has always
concerned me, that a bank or a firm usually keeps two sets of account
ing figures, an income sheet and a balance sheet. Now would I be
correct to say that over the past few years if we, the United States,
kept our books the way a business does, that we have been making
money, we have been earning on our income sheet, but the concern
would be that our balance sheet, and this can be disputed, at least this
is the question we should be asking ourselves, whether our balance
sheet is distorted because all of our assets are long term, long payout,
whereas our liabilities are in the short field. Is that it?
Mr. Kindleberger. Yes, exactly. In terms of, say, our balance
sheet, we have been increasing our net worth each year. Our net worth
has been going up in terms of added assets, claims on the rest of the
world, productive assets, and we have lent abroad not only some of our
substance, but also we have borrowed abroad at short term in order
to lend at long term, therefore paying either little or no rates of inter
est, and getting, earning assets. So we have gained as far as that is
concerned on the balance sheet.
As far as the income statement is concerned, you could say that we
are still all right there, because we have a current account surplus. We
are solvent. There is no question about solvency, long-run solvency.
It is a question about short-run liquidity. We present our balance of
payments as if tomorrow all our creditors were going to present their
demands on us immediately.
Representative Moorhead. So is it your judgment that our balance
sheet, although that is where the dispute would be, is sound, and I
would take it, Mr. Roosa, that this is where essentially you would dis
agree with Professor Kindleberger, is that correct?
Mr. Roosa. Not quite. The position that I take is this. First of all,
I think he is wrong in saying that our balance-of-payments accounting
always proceeds on the assumption that all demands are immediately
exercisable.^ On the contrary, the position from a balance sheet point
of view is simply to ask whether the total of our demand liabilities as
they are increasing are so distributed and so held that we as a banker or
a firm have a reasonable likelihood of expecting they will stay there,
or whether there is an increasing chance that the short liabilities we
owe are going to be exercised, in which event we have to have some
thing short and useable with which to make payment. And so the
main point that I am stressing is that we have, in a sense, as if we were
General Motors, invested year after year in long-term investment,
plant, and equipment of a heavy kind, and we have done it against 90day paper, and for a variety of reasons.
I f there is some disturbance among our creditors, and they need the
funds, quite apart from the question of simple confidence in us, there
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865
will be times when that 90-day paper is going to be exercised, and if
General Motors does not have in hand or readily available through
credit the liquidity with which to meet those demands, then the way
in which you prove what Professor Kindleberger said, and it is true,
we are entirely solvent, we are beautifully solvent as a nation, but the
way in which you prove it is to go into bankruptcy and then demon
strate on a declaration of assets. That is the point we can’t reach. We
just don’t dare.
Mr. Kindleberger. I must say that I don’t know why Mr. Eoosa
said I was wrong in saying how we keep our balance of payments. The
Department of Commerce definition of the overall deficit says that any
increase in liability of less than a year is on the deficit side, below the
line, and that any increase in an asset—short-term asset—goes above
the line.
Now, when Mr. Eoosa says that General Motors is building, let’s
say, long-term assets and 90-day notes, for Heaven sake, it is our short
term assets abroad that we are excluding from our definition. It is our
short-term money in London of which there is a lot in the Euro-dollar
market which we say we can’t count on as an asset. That short- term
money we have proven we can bring home because we brought home
$2 to $3 billion of it in a month. And the notion that any balance-ofpayments accounting which says all assets are frozen and all liabilities
are what is the word, boiling, to use a Fahrenheit image, that is absurd,
just silly.
Mr. E oosa. Could I just ask Professor Kindleberger if he will sub
mit for the record a T account analysis in which he would show how
we last year brought home these dollars owned by us in Europe. Those
were borrowed dollars.
Mr. Kindleberger. Borrowed and owned both.
Mr. E oosa . The amount we brought home that was owned of course
was-----Mr. Kindleberger. We can’t separate them.
Mr. E oosa. Was included, but I would certainly like to see a dem
onstration.
Mr. Kindleberger. Look, Eobert, some of the moneys that were
brought home which were borrowed by American banks from Ameri
can corporations which have deposits there. You know what a bank
is like. You worked in one. Banks receive deposits and make loans.
Mr. E oosa. Indeed I do.
Mr. Kindleberger. And we went through the intermediation if
you like of the Euro-dollar market, but most o f that was American
money, an awful lot of it was American money.
Eepresentative Moorhead. Professor Kindleberger, is there any ac
counting internationally kept on this balance sheet and income sheet
statement for the United States ?
Mr. Kindleberger. Well, the Department o f Commerce does put out
something it calls the International Balance of Indebtedness, which
shows the total of assets to total liabilities, and the difference being
net worth. They do that once a year.
Eepresentative Moorhead. Does it break down into short and long ?
Mr. Kindleberger. Yes. They do that once a year.
Eepresentative Moorhead. That would show us better than any
thing else?
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Mr. Kindleberger. On that score we liave $35 billion ahead, net
worth, net claims on the rest of the world, $35 billion, something like
that. But a good deal of that is frozen. I am perfectly prepared to
admit that if you have an oil well in Saudi Arabia, if somebody pre
sents a chit and says he wants his money, you cannot liquidate that.
But in addition to such oil wells and factories and securities of all
kinds, we have also short-term funds, and some of them are bank
funds in London in the Euro-dollar market. Some are corporate funds
there. We have a lot o f them.
Representative Moorhead. Professor Kindleberger, in your state
ment you talk about the question of the new international reserve unit.
Mr. Kindleberger. Yes, sir.
Representative Moorhead. I can understand your position here that
you don’t want to kill the international capital market in order to get
the new reserve unit, but do I understand that even if we maintain
the international capital market, that you would really be opposed to
a new international reserve unit or that you just don’t think that is
important?
Mr. Kindleberger. It is the latter on the whole. I think the real
way to get liquidity in flexible amounts the way you want it is through
the international capital market.
Let me give you an illustration. Suppose there were no access to
the international capital market and Italy wanted to borrow. Italy
needed reserves because it was having a capital outflow the way it
T
did in 1963. I f you have an international reserve unit which adds $1
billion worth of reserves every year, Italy at the most could claim $75
million o f that. This would be rather large, seven and a half percent
o f the total. You expect a very big percentage for the United States,
and a big percentage for Germany, France, and Britain. Italy might
claim seven and a half percent, $75 million. I f in a crisis Itaiy needs
$1.5 billion, the $75 million it would get is derisory, just trival. This
does not solve their problem of meeting a financial crisis.
Now it may well be that the international monetary reserve unit is
ood for longrun banking for trade, but it does not give you the
#exibility and the adaptability and the capacity to amass large amounts
in a short time, which the international capital market does, as evi
denced by the Italian case and by the American case.
Representative M o or h e ad . Yes, M r . Roosa ?
Mr. Roosa. I wrote the same question in the margin that you have
asked. There is absolutely no contradiction nor even a connection
between these two points. I spent all of my life in Washington ar
ranging just the kind o f credit arrangements for the United States
that others and we from time to time have been using, and I have
nothing against them. In fact, I like to think that they are func
tioning better now than they were 5, 6, or 7 years a^o, and there is
absolutely no contradiction between these and their improvement
on the one side, and the entirely separate question wrapped up in the
issues for creating a new international reserve unit. The problem
in terms o f the unit is often disguised by people who look upon it as
a panacea, a solution for all other sorts of things. I don’t disagree
with what Professor Kindleberger said about the Italian illustration
at all. But that isn’t what the idea of a new unit is intended to serve.
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867
Mr. K indleberger . But sir, if I may say so, my attack is of this sort.
Senator S y m in g t o n . It what?
Mr. K indleberger . My attack goes along this line. The Secretary
of the Treasury says we need a correction in the balance of payments
of the United States. The only way to correct the balance of payments
of the United States is to cut off the capital flow. We cut off the
capital flow, then we will not provide enough reserves to the world.
Therefore, we need the international reserve unit. You end up with
the international reserve unit and no capital market, because you have
cut the flow off. That is all I am objecting to.
I f you were to do both that is fine. I have no objection to that.
All I am saying is that creating the international reserve unit strikes
me as being of lesser importance. I don’t quite dare say secondary
importance with my learned friend here, but almost secondary im
portance as compared with preserving the international capital
market.
Representative Moorhead. Thank you, Mr. Chairman. My time
has expired.
Representative Reuss. Mr. Roosa, back on the question of the invest
ment credit tax. Suppose as the months of spring go by that Congress
deems the overall economic situation to be such that there are soft
spots in it, and that it doesn’t want to risk the fall-off in consumer
demand that would ensue from enacting the 6 percent across the board
income tax increase. You have suggested that we ought to do some
thing by about July 1 on the investment credit, because if you just
let it go and you revise it next January 1, there is going to be what
Walter Heller has called an “ air pocket” in back of it.
Mr. Roosa. Yes.
Representative Reuss. On the assumption I give, where the Con
gress feels that it shouldn’t pass an across-the-board tax increase,
would it not make sense to reinstate the investment tax credit as of
July 1, and accompany that by an increase in the corporate income
tax of a level about sufficient to recapture the $1.5 billion which I
believe are lost to the revenues per year by the investment credit?
I f you don’t do that, you are going to cause an interference with
monetary policy, because the Federal Government will have to borrow
$1.5 billion which it otherwise would not have to borrow.
Mr. Roosa. Yes. It depends on what the considerations are that
have led the Congress to feel by that time that no tax increase should
be enacted. And here we are just guessing. I f the soft spots are
found to be quite serious, then it may well be you should do it without
the offset, and accept the deficit, the larger deficit, as essential. You
could then borrow the needed additional money in short-term form to
help avoid risks in the interest rate structure.
But I can also well imagine the situation that you have described.
T can also imagine one in which it would be decided to put the sur
charge on, and in order to assure that there isn’t an implication of dis
parate treatment, there be some slight difference between the corpo
rate rate and the personal rate when the investment credit is rein
stated.
It seems to me that credit itself plays such an important part, not
only in the stimulus that it gives to additional investment, but in the
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stimulus that it gives to additional investment, but in he way in which
it facilitates the cash flow and financing requirements of business
firms, that dollar for dollar I would rather have the investment credit
anil a corresponding increase in the corporate tax.
Maybe you won’t find many corporate treasurers who agree with
that, but I think in economic impact, it is worth it.
Representative Reuss. You think you would get more productivity
increase in dollar of tax bonanza ?
Mr. Roosa. I do.
Representative Reuss. Mr. Brock has another question.
Representative Brock. I f I might pursue the point2Mr. Roosa, that
you raised at the last part of our colloquy, you, I think, agreed with
the premise that we were entering into a period of cost-push inflation
as opposed to demand-pull. Yet you said you feared the swinging
backhand of the other, later on. I think that was your justification
for the tax increase.
We had the Chairman of the Federal Reserve here, Mr. Martin, and
he is tremendously concerned about what he called “ the inventory over
hang,” the tremendous increase in inventory accumulation in the last
year in the sense of needs apparently.
In the light of that inventory overhang, do you honestly think that
the demand-pull is something that we have to concern ourselves too
much with in the next 12 to 18 months ?
Mr. Roosa. I shouldn’t pretend that I know enough really to answer
that question, Mr. Brock, but my own working judgment on it is this.
I have talked about the inventory overhang with Chairman Martin
and a number of others, and I don’t find too much disagreement in
terms of appreciation of its present implications, but I don’t see any
reason yet to think this won’t work itself through at least to the point
where any serious snapback is overcome by the middle of the year, or
perhaps even sooner, and I think that the continuation of increased
income payments, the way they have been going, the present expecta
tion of final sales to consumers projected by most of the people that
I know in the retail trade, all point toward a working off of the in
ventory overhang.
Now the question that no economist can answer, and we all ask, and
hold our breath over, is whether once an adjustment of this kind is
occurring, a series of pervasive reactions may develop, and gain mo
mentum of its own, and then cumulate with more downward pull for
the economy as a whole;
It has to be at this stage a matter of judgment as to whether you
see in the ingredients of it that kind of a buildup. For myself, I
don’t, and I would like to call attention to one thing.
You know the Council’s Report says—and I am sure they are right,
but I am not sure they are right enough—that great attention has been
paid this year to the way in which Government orders were placed,
m order to take account of their impact on the economy.
I am sure that has been done, but I would repeat, not enough, be
cause a considerable part of the inventory overhang now is the tech
nical result of the fact that for perfectly understandable and laudable
reasons, Secretary McNamara has a different idea of how to run the
Defense Department. He just doesn’t want to be caught with a top-
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869
heavy inventory, if there is any kind of change, either in his require
ments or in the whole Vietnam commitment. As a result, the economy
is peppered with last minute priority orders which cause a set-aside
of civilian production, and the building up of excess inventory which
has to be carried and financed, while the priority military purchases
are passed through. There are dozens of such cases around the coun
try, and much has been done to try to offset them. I am not being
critical of them. I am just noting the effect.
It may be that this is an area where there is more that can be done
to so use the real impact of Government spending programs to mini
mize the potential disturbances to the economy as a whole. I f so,
I hope it can be studied and done. At any rate, this accounts for
goodness knows how much. In the nature of the inventory buildup,
we see so little of it as finished goods and so much of it as raw mate
rials and goods in process, that the presumption I think holds that
a considerable part is explained by this and by the sui generis case
of the automobile industry.
Representative Brock. 1 think what I am concerned about is in
stead of the improper mix or balance of monetary and fiscal policy,
but last year when we had the demand-pull inflation we used almost
exclusively monetary policy in this period of imbalance in the credit
sensitive areas of the economy. We got this sponge type of effect
where your defense industry is going up, your housing industry is
going down.
This year when we are shifting into a cost-push type of inflation,
you come in with a tax increase, and I don’t see how a tax increase
is the proper fiscal tool to stop cost-push inflation. I just don’t see the
applicability in the current situation. I am concerned about the
mix of monetary and fiscal policy.
Mr. Roosa. Just as one final comment, the point I stress is that the
cost-push is there. It’s important. And in the absence of an effective
incomes policy, the imposition of the guideposts in some effective way
at this stage is unfortunately, if not paralyzed, at least impaired.
That is no excuse I think for creating an environment in which there
is an opportunity for the initial impulse of the cost-push to be am
plified through the economy by an excess of total spending, total
spending in which a considerable part of the potential excess arises
from defense spending by the Government.
Representative Brock. Thank you very much.
Mr. Chairman, I would like to submit for the record three questions
to each of these gentlemen if they would respond for the record, so
it won’t take too much of their time.
Representative Reuss. Without objection, that may be done.
(The questions above referred to follow :)
1. Former Assistant Secretary of the Treasury Trued has sugested that the United States consider forming a “ dollar bloc.” Memer countries would agree to follow certain rules with regard to their
dollar holdings and, in return, would receive certain rights in the
U.S. capital market not available to nonmembers. How do you
regard this suggestion?
2. Negotiations for international monetary reform are going for
ward. However, do you believe adequate attention is being given
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to the “ overhang” of existing sterling and dollar balances ? Do you
think there should be an effort to get agreement on rules for the con
version of dollar reserves into gold ? What form might such an agree
ment take?
3. How do you regard 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. Roosa’s responses to the questions referred to above follow:)
1. The Trued suggestion, as I understand it, related only to the possibility of
forming a “ dollar block” as a last resort, if all efforts to balance our international
accounts and maintain the dollar price of gold should fail. In that extremity,
which I trust we will never reach, the “ dollar bloc” version of isolationism could
be a plausible possibility. But for the reasons mentioned earlier in replying to
Representative Reuss, I would regard this as an admission of defeat for the
worldwide objectives that American foreign policy has been pursuing since World
W ar II. I hope we can do better than that.
2. The “overhang” thesis rests on a mistaken premise. It assumes that there
are large holdings of sterling and dollars that cause trouble because they are in
short-term form, and that all of this potential for disturbance could be removed by
inducing the holders to transform their holdings into long-term bonds. In fact,
these short term holdings are in that form because the holders need internationally
useable short term assets—they want a “vehicle” currency available for current
use. They react in ways that seem to cause trouble where they think something
risky is happening that might affect the value and ready useability o f the currency
they hold— sterling or dollars. They might be induced to leave a given currency
altogether, but because their needs are for working funds they cannot be “ neu
tralized” by any grand “ conversion” operation that would leave them with only
funded debt.
In connection with the adoption of a new international reserve asset, there will,
quite appropriately, be an opportunity for spelling out the “ rules of the game”
that countries will be expected to follow. There may, in that setting, be a place
for some further clarification of the ways in which other countries can reinforce
the United States’ capability for maintaining the $35 price of gold. The form and
substance of any such guidelines or procedures will be determined in large part by
the nature of the new reserve asset arrangements, and I cannot predict those
now.
3. I think the United States would very soon find that it had no gold left to sell,
if it were to be a rea.dy seller o f gold at $35 and a reluctant buyer. My various
reasons for opposing this approach are summarized in my Monetary Reform for
the World Economy (New York, Harper and Row, 1965), pp. 19-21.
(Professor Kindleberger’s responses follow:)
1. Formation o f a Dollar Bloc.— As I stated in a reply to a question put by
Representative Reuss, I do not favor the formation by the United States o f a
dollar trading or financial bloc. Such a course of action may be necessary. If
other countries turn away from the world economy with an international mone
tary system and capital market, what is left over may be little more than a dollar
bloc. But this is a second- or third-best policy, rather than an optimal one. The
best policy is to operate the gold-exchange standard, based on the dollar, to dis
mantle gradually the I.E.T. and the V.C.R.P., and to make it possible for all
credit-worthy countries to participate in the international capital market, based
on New York and the Euro-issues market. All that this requires in my judgment
is an understanding by Europe and the United States that the balance of pay
ments o f this country is not in meaningful deficit.
2. The “ Overhang” of dollars and sterling. Rules on Conversion of Dollars
into Gold.— A distinction should be made between dollars and sterling. The
dollar is used worldwide as an international currency. Sterling is used inside
the sterling bloc and is held to a considerable extent in the Middle East. As
already explained, I do not think that the dollar reserves o f the world need to
be converted to gold, bancor, I.M.F. deposits, or be funded. The dollar is the
THE
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871
world’s medium of exchange, unit of account and store of value for international
transactions. The French overhang has been removed. In the case of other
countries, the remedy is better understanding of the usefulness of dollars rather
than attempts to reduce their size. It is inefficient to have to convert reserves
into media of exchange when the time comes to use them. The most efficient
system is one in which the medium of exchange and the store of value are the
same. This is the banking function within a country. I assert it is the same
internationally.
As to whether the sterling overhang may usefully be removed, I have no eloar
view. It depends upon the stability of its deposits. There are two reasons why
holders of sterling might draw them down: 1) because they themselves were
running deficits which they needed to meet and chose to meet in sterling, paid
to countries which did not normally hold sterling; 2) because they decide to
hold their reserves in another form, for safety or for greater usefulness. On
the latter point, for example, if Britain joins the Common Market some countries
like Australia will find themselves trading more widely in the Pacific and may
have less need to hold sterling and more need for other currencies.
In sum, therefore, I do not believe dollar overhang exists and needs to be re
moved. I do not have sufficient information to make a judgment on the position
regarding sterling.
The second part of the question regards the desirability for rules on the
proportions of international reserves held in gold and dollars to limit the conver
sion of dollars into gold. The official Treasury position seems to be that this
would be unwise since any maximum agreed on ratio would quickly become a
minimum ratio for other countries which hold now mainly dollars. No agree
ment among the major financial powers could be prevented from spreading to
smaller countries. I f this be the case, agreement should be for the greatest part
informal and tacit. Perhaps such agreements now exist outside France. The
United States, however, should stand ready to pay out gold to the full extent it is
demanded of it, and to the last ounce of gold. It is this readiness to meet the
requirements of the gold-exchange standard which, in the long run, is the best
assurance that the country will not be called upon to do so.
As for the country which has been trying to put pressure on the United States
by deliberately and overtly converting dollars into gold, France, no agreement
would be possible with her, and none is now needed. The French balance of
payments is now in disequilibrium and the French have even been borrowing
dollars, through Electricity de France’s issue of $30 millions of Euro-dollar
bonds, to replenish their dollar stocks.
3.
Proposals for Continuing to Sell Gold, but not to Buy.— May I refer to my
discussion of this question in the Joint Economic Committee’s Compendium on
Contingency Planning for International Monetary Reform? I may summarize
that discussion here by saying that while I would not aggressively seek to change
central-bank and hoarder views of the long-run prospects for gold by lowering
the price or altering our long-standing commitment to buy at $35 an ounce, 1
expect that gold will be demonetized in the long run, and the prospect does not
appall me.
Representative R eu ss . Senator Symington I
Senator S y m in g t o n . Thank you, Mr. Chairman.
Dr. Kindleberger, I think I know your answer, but would like it
for the record. Would you say we have an excess of liquidity, or
shortage of liquidity ?
Mr. K indleberger . In the United States or in the world?
Senator S y m in g t o n . In the world.
Mr. K indleberger . Y ou may know the answer, sir, but I am not
sure that I do.
Senator S y m in g t o n . I think I know what your answer will be.
Mr. K indleberger . There are two criteria by which one chooses in
the literature. One is whether the burden of adjustment is on the
deficit or on the surplus countries. I f it is on the surplus countries
you have too much, on the other it is too little.
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THE 1967 ECONOMIC REPORT OF THE PRESIDENT
Another criterion is whether world prices are rising, stable, or
falling. By that criterion you have too much, because world prices
are rising. I am inclined to say that there isn’t any country that I
know of which is taking very general measures because of lack of
international liquidity. On the other hand, the United States is
taking governmental measures to restrict imports and to tie AID and
to put on the interest equalization tax because of a fear of its lack of
international liquidity. And I suppose on that score you would say
that the United States is suffering from a lack of international
liquidity, or what it thinks to be a lack of international liquidity, but
on the whole, I think I will conform to your expectations and say
that I don’t think there is a serious lack of international liquidity in
the world.
Senator S y m in g t o n . The reason I ask is that the article by the
senior financial editor the chairman was good enough to put^ in the
record said, “ There is general agreement that the world is now
suffering from an excess rather than from a shortage of international
liquidity.”
Mr. Secretary, would you comment on that?
Mr. E oosa. 1 think there has to be a distinction between the
liquidity generated within countries by the combintaion of their own
monetary fiscal policy, and the liquidity that, is useable for settlement
among countries.
I think in the first case, the liquidity generated, or to put it crudely,
the money supply increases, in a good many countries around the world
have been too great. Using the Kindleberger formula, price rises
have occurred, significant price rises. Therefore, there has been
too much liquidity.
But that isn’t, as I see it, quite the end of the story. I don’t believe
that there is an absolute shortage of international liquidity at this
time. But I think there is something very significant in the recent
record. For the past 2 years on balance the central banks of the
world, who still respect dollars as Professor Kindleberger says,
nonetheless did not add to their dollar holdings, nor was there any net
addition to the supply of gold available for monetary reserves.
Yet, year in and year out, there are going to be some countries who
earn surpluses, hopefully more than the others running deficts.
There has to be a supply of internationally usable liquidity so that
the surplus countries can show some net gain from time to time.
Otherwise, you have the process breaking down, countries follow
merchantilist tactics where each ,one beggars his neighbors. So to pro
vide longrun additions to the world reserves, basic official monetary
reserves, we either have to look to a resumption in the holding of dollars
in the future, and that may well occur, or we have to supplement that
with some new means through the international monetary fund.
Up to now through these 2 years, virtually the entire supplement
has come from the monetary fund, and yet in a form that arose be
cause they were financing big deficits of the United Kingdom. We
can’t always count on that source of international liquidity.
Senator S y m in g t o n . Thank you. My next question has to do with
questions asked by Congressman Moorhead, it had to do with balance
sheets and earnings statements, fixed assets and current assets.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
873
On© thing every business and bank has to take into consideration, and
I presume also governments, is def aults.
Based on the history o f financial relationships with Europe after
World War I and World War II, and between those wars our rela
tionship with Japan, and to a lesser extent the record of voluntary or
involuntary defaults in Central and South America, wouldn’t that en
ter into any relative satisfaction about lending long and borrowing
short?
Mr. K ind leberg er . Sir, I tried to discuss this explicitly in my testi
mony and said that you have to worry about the character of the assets
and the confidence in holding the liabilities. I expressed some con
cern, which I really feel, that Americans are tumbling over themselves
rather like sheep to invest in Europe because it is very fashionable.
Profits have been declining for 4 years in Europe, and I see no reason,
when profits have been declining for 4 years, for more and more com
panies to keep on adding to their investment over there. They are
not going to make out on all of these investments.
I cited two cases, Machines Bull which GE bought with serious
losses in the last 3 years and I cited Rootes, where Chrysler is trying
to buy more of Bootes even though Bootes has lost money in the last
couple of years.
I am concerned about the character of these assets, but on the whole
I think we have done very well. The assets are splendid assets but
we are moving into a situation where if we keep this up and keep on
investing funds in long-term situations in Europe, it is not at all clear
that we are not going to pick up a lot of lemons.
Senator S y m in g t o n . Y ou stimulate me to ask whether you think
we have arrived at a point now where we should curtail, if not arrest,
our long-term lendings abroad ?
Mr. K indleberg er . N o, sir. I f you believe in a private market
economy as I do, you simply suggest to the market that maybe it is
going too far, but I think it would be a terrible mistake for the United
States to try to substitute its governmental judgment for the judgment
of these investors.
Nonetheless, I call attention to Secretary Fowler’s speech of De
cember 1965, in which he said profits were declining. It didn’t get
much notice, but that is about as far as you can go.
Senator S y m in g t o n . I was just asking what you felt we should do.
Mr. K indleberg er . I speak my mind, sir.
Senator S y m in g t o n . I certainly wouldn’t want the Government get
too far into such controls.
Mr. Roosa, would you comment?
Mr. R oosa . On the question of risks of default, I think this is very
important in several ways. It is going to be a factor to consider if
and when we try to do something in a multilateral way toward de
veloping a new type of reserve asset, to work alongside the dollar. It
is something we have to protect against.
It’s clearly important in still another sense. That is, I think in
retrospect now, it would be wise to chisel in stone one maxim for the
Congress, since the executive branch never observes it. That is that
no money is ever given as a grant. That it is always a loan, even if
it is with no interest and with no specific maturity date, because there
75-314— 67—pt. 4------ 11
874
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
are too many instances in even my lifetime in which grants have
enabled countries to reach a position of strength, and then we had no
possibility of reversal, of getting something back when it could be most
useful to us.
Contrarywise, I think we should, therefore, recognize that in much
of what is done, governmentally and nongovemmentally abroad, there
will also certainly be defaults and losses, and that much of the foreign
exchange that we talk about as being a potential asset in some of
the less developed countries, arising out of the counterpart of Public
Law 480 and so on, is virtually default money. (The conditions
under which it could be used are so circumscribed.)
So that in tightening up our position, it is not only the defaults
that have occurred but those that may occur, and the protection we
ought to take against them that I feel are very important.
To go on as to whether we ought to impose some check now on
foreign investment because of the risks involved, there I would agree
with Professor Kindleberger. I think cautions have to be stated, and
included in the cautions is one more of which our Canadian experience
is the clearest illustration. We do have to respect as well as recognize
the fact that other countries begin to wonder about their capacity to
influence their own affairs when more than 50 percent of all manu
facturing and extractive industry is owned outside, and it becomes a
matter o f statesmanship for the firm, as well as cost and risk, to take
that into account.
Senator S y m in g t o n . Thank you.
Representative R e u s s . Thank you very much, gentlemen, for being
so patient.
We will now stand adjourned until 10 o’clock tomorrow morning,
when we will reconvene in this chamber.
(Whereupon at 4:30 o’clock p.m., the committee adjourned until
Tuesday, February 21, 1967, at 10 a.m.)
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
TUESDAY, FEBRUARY 21, 1967
C ongress of t h e U n it e d S tates ,
J o in t E c o n o m ic C o m m it t e e ,
W a sh m gton , D .C .
The joint committee met at 10:05 a.m., pursuant to recess, in room
1202, New Senate Office Building, Hon. William Proxmire (chair
man of the joint committee) presiding.
Present: Senators Proxmire and Javits; and Representatives Reuss,
Moorhead, and Rumsfeld.
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 meeting will come to order.
Today we are privileged to hear three more distinguished economists
who will be here to argue what we might call the public policy out
look, that is, the major policy decisions that face us m the year ahead.
Dr. Gerhard Colm is the Chief Economist for the National Plan
ning Association, one of the great pioneers in the economics of full
employment. He has been of tremendous aid to this committee, and
has given us some excellent advice throughout the years.
Dr. Henry Wallich of Yale University is the former member of
President Eisenhower’s Council of Economic Advisers, and likewise
has been most generous and perceptive in his comments, and of course,
has a widely read economics column which I follow avidly.
Our third panelist this morning has not yet arrived. We expect
him momentarily—Dr. Robert Lekachman. Although not so well
known personally to this committee, he is known by reputation for
his insight and for his ability.
Gentlemen, we are delighted to have you here this morning. The
other members of the committee will be along shortly. We would ap
preciate it if you would limit your original statement to 15 minutes,
and we will have more time for colloquy. I am going to ask Dr.
Wallich to begin, followed by Dr. Colm, and Dr. Lekachman when he
arrives.
STATEMENT OF HENRY C. WALLICH, DEPARTMENT OF ECONOMICS,
TALE UNIVERSITY
Mr. W a l l ic h . Mr. Chairman, I appreciate the opportunity to
testify.
The Council of Economic Advisers is to be commended on the
responsible and realistic stand taken in the report on a number of
issues.
With respect to policy in 1966, the Council agrees that monetary
policy was compelled to become too tight, in a year of pronounced
875
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THE 1967 ECONOMIC REPORT OF THE PRESIDENT
inflation. As I read the report, the implication is that fiscal policy
was not tight enough. I would concur in the view that a tax increase
early in 1966 was needed.
With respect to 1967, the Council seems prepared to give up last
year’s ill-advised attempt to push unemployment substantially below
4 percent. The policies the President recommends would keep un
employment approximately at its present level. I regard this conclu
sion, painful though it is, as realistic so far as it goes. In fact, it
probably does not go far enough. The ultimate distressing lesson
that the year 1966 taught us concerning the trade off between unem
ployment and inflation probably has yet to be spelled out.
The Council is to be commended also on its attitude toward the
guideposts on wages and prices. It realizes that, with 3.3-percent
inflation, it is not possible to ask labor to abide voluntarily by a 3.2percent standard. At the same time, the economic truths inherent in
the old 3.2-percent standard have been preserved. No new standard
in excess of productivity gains has been set that would make labor
believe, erroneously, that it could obtain real gains in excess of pro
ductivity growth.
Some parts of the report, on the other hand, invite dissent. The
economic outlook for 1967, in my judgment, is painted in too glowing
colors. The time shape of the outlook, with its expectation of a
strong second half, seems particularly questionable. Since this anal
ysis is the basis for a tax-increase recommendation, a forecasting error
would be particularly serious.
The balance-of-payments problem is underplayed. I f monetary
policy were to become as easy as the President apparently would like
it to be, large gold losses would have to be anticipated. Little is said
about how this dilemma is to be met.
Budget information and budget analysis are seriously defective.
On the basis of last year’s performance, one can only conclude that
the Council of Economic Advisers is not adequately informed by the
Defense Department about the outlook for military spending. This
seems to have been one reason for the wide underestimate that caused
part of our troubles last year. Simultaneously, the administration—
and this comment applies even more to the budget than to the Eco
nomic Report—is placing almost exclusive reliance upon the NIA
budget at a time when the NIA budget has revealed itself to be defec
tive in its appraisal of the economic impact of defense.
I shall now comment in greater detail on these points.
T h e E co n o m ic O u t l o o k
The Council’s estimates of GNP components in 1967 may be con‘
ic on several counts, which however are for the most
range
But the forecast is strongly
implausible in one part
ssumed behavior of inventory.
The Council assumes that excessive inventories will be worked off
in the first half of 1967 and that inventorying thereafter will return
to a normal rate. There is little evidence in past history that inventory
adjustments can be completed in two quarters. Given the relative
sluggishness of the advance that the Council forecasts, correctly in
my view, for the first half of 1967, it is not even certain that much
!
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
877
headway can be made during that period in bringing down the present
excessive rate of inventory accumulation. A postponed adjustment
would have to be all the greater and longer lasting.
Inventory movements are large relative to other changes in spend
ing outside the consumer area. Neither plant and equipment spend
ing nor housing, nor even Federal spending, is likely to experience
quarterly changes in annual rates exceeding $5 billion, but inventory
spending may well do so. Resting as it does upon a questionable ap
praisal of the most volatile factor m the ceonomy, the Council’s GNP
estimate must be regarded with serious misgivings.
A further question relates to the recovery of housing. Substantia]
easing of monetary policy is required to get residential construction
going again. Whether this ease will be forthcoming depends on
capital flows in the balance of payments that are partly dependent
on interest rates abroad. A question mark needs to be entered after
the Council’s housing forecast.
There remains the possibility that Vietnam expenditures will again
be larger than anticipated. I f indeed the pattern of 1966 should re
peat itself, the Council’s forecast will be valid at a minimum and a
tax increase will be needed. There is no way, for an outsider, of ap
praising this prospect.
Adding up the components of the outlook, I am compelled to question
the need for a tax increase even at midyear. Certainly it is wise to
postpone its enactment until close to the beginning of the fiscal year.
On present reading 1 would not believe that it should be enacted even
then.
S pe n d in g C uts
Even if inflationary pressures should mount sufficiently to require
counteraction, expenditure cuts would present an alternative to a
tax increase. Federal expenditures in the NIA budget, including
for Vietnam, are scheduled to reach 21 percent of GNP, contrasted
with 18 percent in recent years. After this as after any other war,
expenditures are unlikely to return to their earlier GNP relationship.
Hence the case for holding them down now is a good one if economic
balance calls for restraint.
The quite unjustified view seems to have gained ground that cuts
must necessarily and virtually exclusively fall upon the new programs
in the areas of space, education, poverty, health, pollution, urban life,
and the like. Clearly, almost all Federal expenditures are capable
of being cut. The fact that a program has been going on without much
change for many years seems more nearly a reason for examining it
closely than for leaving it undisturbed. It may be more diffult to cut
an old program than to block a new one, but it may not be better
economics.
T ig h t M o n e y i n 1966
The Economic Report indicates, correctly in my view, that in 1966
monetary policy went about as far as it could. Interest rates reached
levels not observed for 40 years. The housing industry was seriously
injured. Some observations to qualify these facts nevertheless are
needed. Interest rates must be viewed with respect to changes in the
price level to obtain what economists call the real interest rate.
878
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
Deducting a price increase of over 3 percent from 6 percent, the real
rate for the year is seen to be about 3 percent. For a corporation
deducting a 6-percent interest cost from its taxable income, the cost
of money during the year was in effect zero or less. For a saver in the
50-percent bracket, the return on a bank deposit yielding 5 percent was
negative. Money in 1966 was tight, but not expensive. The same cal
culations would not apply, of course, for those who made long term
commitments at 1966 rates if inflation should let up.
The collapse of the housing industry, which is regarded as an in
dictment of the discriminatory nature of monetary policy, has in part
very different roots. Housing in any event is bound to be more
responsive to interest rates than corporate borrowing, because mort
gage installments are a large fraction of the average family budget.
The demand for mortgage funds thus is bound to be more elastic with
respect to rising interest rates. Credit demands of corporations are
inelastic because interest costs are a small part of total business costs.
These are the facts of the market. It is not monetary policy so much
that discriminates against housing as the nature of the market system.
The housing industry was further hurt by defects in the Nation’s
method of financing mortgages. A large part of home financing is
done with deposits repayable on demand. In a period of high interest
rates these deposits are likely to shift into higher yielding assets,
causing tightness over and beyond the effect of high interest rates.
What is needed to cure this situation is not a constraint on monetary
policy, nor a ceiling on interest rates payable by competing interme
diaries. Needed is a reform that would allow particular savings and
loan associations to pay competitive interest rates in periods of tight
money. The British system of extending maturities and thus raising
the interest components of the monthly installment without changing
the installment itself commends itself as a possible solution.
Very tight money in 1966 had the incidental effect of improving the
balance of payments on the official settlements and probably also the
liquidity basis. The fortuitous nature of these gains and the con
sequences of their possible reversal in 1967 need to be emphasized.
U n em ploym en t
The price experience of 1966 seems to show that unemployment
below 4 perecnt is strongly inflationary. There remains the hope that
the price impact may have been due to the rapid rate of reduction and
the attendant demand shifts rather than the absolute unemployment
level reached. Nevertheless, this is at best a hope. A more plausible
interpretation of this experience is that, with the present price and
wage setting habits of business and labor, even a stable rate of 4 percent
unemployment would not give us even approximately price stability.
This situation confronts the Nation with a task of overriding
urgency: to improve the shortrun trade-off between unemployment
and inflation. The guideposts were an important device directed to
that end. They are largely nonoperative now. Structural improve
ments in labor markets have often been pointed to as an important
means of improving the trade-off. Bather than speculate on what
more could be done, I would like to emphasize the great importance
of making progress in this direction.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
879
Recently it has become fashionable to argue that the short run choice
of buying a little more employment by accepting a little more inflation
is open to us also in the long run. I f that were true, it would be dif
ficult not to vote for less unemployment even at some cost in added in
flation. It has been argued that such a choice need not lead to ac
celerated inflation, because the evidence of industrial countries abroad
does not reveal accelerated inflation.
This is an illusion, encouraged by the fact that industrial countries
restrain inflation whenever it threatens to accelerate seriously. By
taking antiinflationary action, they usually also increase the rate of
unemployment. The economic logic behind this interaction of wages
and inflation is simple, and I hope that this committee, which has seen
far more complex material presented to it, will permit me to sum
marize it. Past presentations before the committee have made ref
erence to the so-called Phillips Curve which shows how wage increases
are related to unemployment, becoming larger as unemployment is
reduced. For making available to employers a very high percentage
of the labor force, labor demands larger annual wage increases.
Unless one is to believe that labor is unconscious of inflation, one
must assume that labor bargains for wage increases in real terms, not
money terms. The real increases that labor can get, however, are
limited by productivity gains plus such reduction of profits as is pos
sible. In the long run, if the share of profits is to remain roughly
stable, real wage increases cannot exceed productivity gains. That
is the principle underlying the guideposts. Hence if nominal wage
increases beyond productivity gains are granted, prices will rise and
will reduce real wage increases back to the level of productivity gains.
Thus the implicit bargain that led labor to make available a very high
percentage of the labor force cannot be kept. Labor then will increase
its demands in nominal terms and, if these cannot be met, reduce the
labor supply offered.
There is thus only one point of long run stability on the Phillips
Curve: that level of unemployment at which wage increases equal
productivity gains. At lower levels of unemployment, profits will be
squeezed or prices will rise. Since they cannot be allowed to accelerate,
they will be halted by restrictive fiscal and monetary policies. To be
effective, these policies will have to raise unemployment back to the
level that equates real wage increases with productivity gains. This
can be achieved at a stable rate of inflation, provided that rate is suf
ficient to reduce money wage increases to the level of productivity
gains. It can also be done by halting inflation altogether, in which
case nominal wage increases will equal productivity gains. In any
event, there is no stable, long run level for unemployment but that
which makes real wage increases equal to productivity gains.
T h e G u ideposts
The guideposts on wage and prices solidly endorse the view that in
the long run labor cannot get real wage increases in excess of produc
tivity gains, which is the principle I have just been trying to spell out.
The best course of action for labor would be to stop trying to get aboveaverage increases. The cause of maximum employment therefore
would best be served if labor would stop trying. I f business then were
880
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
likewise to accept the guidepost rules pertaining to prices, the trade off
between unemployment and inflation would have been reduced to very
favorable terms.
Following the rapid widening of profit margins and increases in the
income share of profits in recent years, labor is sure to feel that some
redress in its favor is in order. Speaking in terms of economics rather
than equity, this proposition is questionable. Income shares, like the
budget surplus, must be viewed at full employment. Below full em
ployment, profits as well as Government revenues are below their nor
mal proportions.
But in any event, the price rise of 1966 makes it unrealistic to ask
labor to abide by a 3.2 percent standard. It is wise that the guideposts were not denatured by escalating them to some arbitrary figure
without economic content. More general forms of counseling volun
tary restraint, both to labor and to business, will have to be employed
by the Government.
We cannot expect labor to accept the 3.2-percent guidepost realis
tically in a year in which the cost of living rose by 3.3 percent. This
raises the question whether we should have moved to a higher guidepost. My view is no, because it would have obscured the economic
truth underlying the guideposts without gaining, I think, very much,
because the guideposts are not a powerful tool to prevent wage in
creases when demand is high.
With respect to the future, however, the possibility should be
examined of making the guideposts more operational. A tax penalty
could be imposed upon corporations that exceed the wage guideposts.
This would make implementation of the guideposts depend on market
factors, not on official suasion. Firms that could make more money
by exceeding them would be free to offer higher wage increases. Since
the tax would be paid by business, it would seem legitimate to apply
it to violations of the wage guideposts alone, without attempting the
administratively prohibitive job of applying it also to the price
guideposts.
B ud get I n f o r m a t io n a n d A n a l y s is
It is urgent to prevent a recurrence of the events of 1966, by now
familiar, that led to the underestimate of the defense impact. Both
the magnitude of spending, and its duration, were inadequately re
flected in the Council’s forecasts. The NIA budget presentation,
moreover, which is the principal basis of fiscal analysis, failed to
reflect properly the impact of the defense buildup. It showed as
increases in business inventories what actually was the processing of
Government defense orders. The consequences are known.
This year’s shift to almost exclusive emphasis on the NIA budget
deserves to be viewed with skepticism. The NIA budget clearly is
superior to the administrative budget as an analytical device. But
its recent record of partial failure, together with the fact that the shift
in emphasis is being made in a year when the administrative budget
shows an embarrassingly large deficit, argues against acceptance of
the NIA budget as our principal fiscal statement. Considerably more
study of the pros and cons is needed before a decision can be made on
this subject.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
881
The NIA budget is seriously defective, and it is a questionable pro
cedure to shift to it as the budget does during a year when it happens
to show the low deficit while the administrative budget happens to
show a large deficit. We ought not to be afraid of large deficits if
they are properly financed. That is an essential condition. And we
should not exalt the NIA budget any year where that happens to
put a spuriously favorable look upon the whole budget situation.
T h e B a l a n c e of P a y m e n t s
In 1966, the United States lost some of the competitive advantages
that relative price stability had been conferring. In 1967, some more
will be lost. It is of little help, even if true, to say that our inflation is
less than that of other major countries. To be fair and efficient, the
automatic mechanism of balance-of-payments adjustment requires
prices in the deficit country to fall while in the surplus countries they
rise. I f that is asking too much, stability in the deficit country is the
minimum to be expected.
Prior to 1965, the United States could allege not only that it was
holding prices stable, but also that it was making sacrifices on be
half of international adjustment in the form of lower income and
higher unemployment. At present, the full employment and rising
prices, the United States is making no economic contribution whatever
to fundamental payments adjustment and is throwing the entire
burden of adjustment upon the surplus countries. High short term in
terest rates, the interest equalization tax, tying of aid are stopgaps, not
means of adjustment.
Thanks to these stopgaps, the balance of payments did not deterio
rate seriously in 1966. It is worth noting, however, that beyond relying
on stopgap devices, it was additionally necessary to employ a long list
of window-dressing measures to make the deficit look smaller than
it is. No less than nine such window-dressing devices, the repercus
sions of some of which already are coming home to roost, are identified
in the Department of Commerce’s balance-of-payments presentation
for the first three quarters of 1966; they “ improve” the results for the
period by $856 million.
If, as seems likely, we are now running out of such devices, and if
short term funds should flow back as interest rates fall, dangerous
new pressures upon the balance of payments must be anticipated. It
is difficult to see how they could be met except by new controls, pre
sumably in the area of private foreign investment, harmful as they
would be in the longer run. What supports foreign confidence in
the dollar now is the conviction abroad that this country will sooner go
to far-reaching controls than to devaluation. But controls undermine
the usefulness of the dollar and in the long run, therefore, its strength
as well.
It is in the nature of a payments deficit, unlike inflation or unem
ployment, that the country experiencing it feels no pain. The pain
comes later, when the consequences must be faced in the form of tight
controls or a devalued currency. For this reason, the payments deficit
attracts little attention. Sacrifices to end it are ruled out as unaccept
able. Even when sacrifices are proposed, such as the 6-percent income
882
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
tax surcharge, they are not defended on balance-of-payments grounds,
although these now present a better justification than does the domestic
outlook.
I believe that the domestic economy will be soft enough, even with
out a tax increase, to bring some improvement in the current account
of the balance of payments. Hence I see no urgency from this point
of view for a tax increase.
The situation is very grave. We have lost some of the benefits that
price stability has been giving to us. It is useless to say that our
prices are rising less rapidly than those of other countries. We are
the deficit country. Our prices properly should fall. That is asking
too much. They ought to at least remain stable.
To say that we are inflating less than others is saying very little
indeed, since at the time we are no longer contributing to balanceof-payments adjustment by keeping the economy under wraps; we
are really making no contribution to adjustment at all except by various
forms of market intervention, such as the interest equalization tax
and a very temporary effect of high interest rates that attracts hot
money. All we are doing now is throwing the principal burden of
adjustment on the surplus countries. This reflects itself in their
refusal to permit us progress toward international monetary reform.
I am concerned about the number of statistical devices we have been
using to dress up the balance of payments. I count nine different types
of devices in the survey of current business alone, and no doubt there
are others. These things conceal the underlying facts without making
them any better. It is basically on balance-of-payments grounds I
would say that a tax increase can still be supported at this time.
I f I, nevertheless, don’t support a tax increase now, it is because I
see the economy sufficiently soft to achieve most of the benefits that
would come from a tax increase, even without one, that is, I see a
slackening of imports and improvement o f exports.
I also see a continuation of relatively high interest rates, in order to
keep the hot money here. That in turn contributes to the prospective
weakness of the economy.
Taking these things together, with interest rates not much lower
than the present and no tax increase, we would probably be doing, on
the inflation and balance-of-payments front, as much as can be done
in a year of cost—push inflation. But I do consider the balance of
payments a primary source of concern, and I have three proposals to
deal with it.
1. Keep short-term interest rates sufficiently high to prevent out
flow of short-term funds, but within this constraint seek to making
interest rates as low as possible. Low interest rates are better than
high.
2. Remove the 25-percent reserve requirement for Federal Reserve
notes in order to make our reserve more maneuverable; and
3. Adopt the complex of measures that will be needed to end
inflation and resume the improvement in competitiveness. Thank you
very much.
Chairman P r o x m ir e . Thank you very much, Mr. Wallich, for an
excellent statement. I must call attention to the fact you exceeded
the time limit by 5 minutes, but I very much appreciate what you have
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
883
said. Mr. Lekachman, as I announced before you came in, we would
appreciate it if you would try to confine your initial statement to 15
minutes if possible. You will follow Dr. Colm, who is our next
witness.
Dr. Colm has a little more detailed statement, and I am sure he will
abbreviate it to some extent.
TESTIMONY OP GERHARD COLM, CHIEF ECONOMIST, NATIONAL
PLANNING ASSOCIATION
Mr. C o l m . Mr. Chairman, indeed, my statement is a little bit longer,
and if I am permitted to-----Chairman P r o x m ir e . Your entire statement will be printed in the
record.
Mr. C o l m . Thank you, Mr. Chairman.
I appreciate very much the invitation to participate in this year’s
hearings. I find it a bit difficult as an economist to diagnose the
situation in a way which could be the basis for policy action. It is
easy to give advice on economic policy when there is a clear threat of
a recession. It is easy when there is a clear threat of inflation. We
have, as everybody recognizes, at the same time recessionary and in
flationary tendencies.
The inflationary tendencies emanate from the budget. Instead of
reading figures, I would like you to take a look at the first table pre
sented to you in the appendix to my statement (see p. 893). That is
the Federal budget in national income accounts terms. It breaks it
down by half calendar years.
Whatever measurement one uses, and this is the national income
accounts, in the movement they are not so different, the table shows
that we had the greatest increase in the second half of 1966, continued
increases during the year 1967, and continued increase also in the first
half of 1968—calendar 1968.
The increase according to the budget figures is declining. But
we have an increase. We have quite a bit of change in composition,
particularly the transfer payments will rise in the second part of the
calendar year 1967 because of the recommended increase in social
security benefits. We have the sharpest decline in national defense
expenditures—pardon me, in the increase in national defense expendi
tures. The increase was from the first to the second half of calendar
1966, almost $8 billion^from the second half of the year 1966 to the
first of 1967 this is projected at $5 billion, $2.5 billion from the first
to the second part of the calendar year 1967.
Here I may pause, coming to the same question raised by Dr. Wallich.
Last year we had the experience that defense expenditures were grossly
underestimated, as the chaiman has repeatedly emphasized. Ap
parently, no such repetition can be expected this year, because there
is no such unrealistic assumption made that the war may end by
the middle of the calendar year 1967.
We have a planning assumption of continued war and continued
present strategies. Taking this assumption, I still—being a layman
in this field—share Henry Wallich’s concern that the increase by
$2.4 billion is a very small one, and under this assumption, I would
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THE 196,7 ECONOMIC REPORT OF THE PRESIDENT
count at least on the possibility that expenditures may turn out to be
larger than now estimated.
1 emphasize this is not a statement o f what will probably happen.
This is a planning assumption. In my personal opinion it is more
probable that over the period of a year and a halt, something will
change, whether it’s escalation, or as I hope, deescalation, but for
planning purposes, it would not be wise to count either on the one
or the other, because if that happends, all bets are off, and different
policies would be needed anyway.
Under this planning assumption, I would ait least keep in mind a
possibility that defense expenditures will turn out higher than are
now estimated.
I f you will look again at table 1, at the deficit figures estimated in
the national income accounts, we see during 1966 the swing from the
substantial surplus to a deficit, from surplus $3 billion to minus $2.5
billion. The deficit will go up in the first half year 1967 to $5 and to
$7 billion, in the second half of calendar year 1967. This means, of
course, a somewhat arbitrary division of the fiscal year estimates in to
two half year periods. I don’t go into the method as to how we did
that, but this assumes smooth development throughout the fiscal year.
This deficit has been estimated without consideration of the income
tax surcharge. The conclusion is that the budget, without that sur
charge, is ox an expansionary nature and would possibly in part offset
recessionary tendencies emanating from the private sector of the
economy.
Henry Wallich made the remark that the N IA budget is not entirely
satisfactory. From the point of view of economic analysis, within the
structure of an accounting system, I think it is great progress that the
President has adopted this as the main system, also giving data on the
other, but pushing this system. Nevertheless, I agree with Mr. Wal
lich that we should look at more data than this.
If you turn to my table 2 (p. 894) you will find various other
measurements there. I f you want to be sure, referring to the credi
bility gap, the budget which is printed for everybody to read has in
point the most honest figure which can be produced, and is called the
gross expenditures. No deduction, no trick is possible here.
I have excluded intragovernmental transactions, but the first time
gives you an absolutely gross figure from which no back door financ
ing can be deducted. It amounts to $205 billion for the fiscal year
1968. The burget has that for everybody to see.
But there are some other items which are not reflected or not fully
reflected in the national income accounts budget. One is the capital
transactions. It is entirely correct not to include the financial capital
transactions right within direct spending. I think it’s an advance to
separate them, but by emphasis on the national income accounts budg
et, we are going to forget that there are these financial capital trans
actions, which ao have an effect on the economy.
You see in table 2, for instance, that in the fiscal year 1967 we have a
very substantial increase in direct loans which is not reflected in the
national income accounts. These are reflected in the consolidated cash
statement which is also given, and I think it is also of significance.
But there is one type of transaction which is not reflected in any
budget: That is the guarantees and insurance of loans. You will see
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
885
from table 2 that in 1968 this figure shows a very substantial increase,
particularly in the field of housing and urban development.
I f we disregard these figures, we just don't get the full picture of
what the Government is doing in stimulating or dampening economic
developments.
I reach the conclusion that the budget in the broader sense will con
tribute to expansion during the rest of the calendar year 1967 and into
1968 calendar year, and even with the enactment of the surtax, I would
guess that there is still a moderate expansionary effect from the budget
on the economy.
I say I guess. Unfortunately, we cannot in any manner add direct
spending, loan transactions and guarantees into one figure and then
give the computation of the total net effect on the economy. We have
to make a separate computation for the effect of each, and the states
ment I have made is of the nature of a probability statement.
We have the fact that from the private sector, in contrast with the
public sector, recessionary tendencies emanate. I f you will look at
table 3 (p. 894), you will see that for the whole period from 1960 to
1965—perhaps you might look at the lower part of the table which
gives index figures—the private demand has increased in real terms,
that means in constant dollars, by 27 percent from 1960 to 1965, and an
increase of 20 percent in the public demand during the same time
period. We had very active fiscal policy increases in expenditures
and tax deduction in this period, but these measures have so stimulated
the economy that the private sector has increased by more than the
public sector.
I f you will now look in table 3 where we are comparing the fourth
quarter of 1966 with the third quarter, you see a reversal. Here the
private demand is virtually stagnating. There is an increase of onehalf of 1 percent, while the public sector in that quarter still increased
by 3 percent.
I don’t want to go into a discussion of the recessionary factors.
They have been discussed at length during these hearings and I have
nothing particularly to add. But I want to point to two different
interpretations that are given to the recessionary factors which are
now visible. The one is the interpretation to which Mr. Wallich re
ferred, which is in a way the basis for making the recommendation of
an increase in taxes in spite of recessionary tendencies; namely, that
the recession is manly caused by the restrictive credit policy. Once
these restrictive policies are relaxed and the budget effect, particularly
of the increase in social security benefits, becomes effective there will
be a turn-around in the economy by the middle of the year, so that
possibly not only recovery but also inflationary pressures would be
resumed.
There is, however, also a more pessimistic interpretation, which
assumes that over the recovery period 1960-65 some imbalance devel
oped in the economy. You will see, for instance, in table 3 that from
1960 to 1965 personal consumption increased by 25 percent; fixed in
vestment excluding residential by 37 or 38 percent. That is inter
preted as an imbalance which sooner or later had to be corrected by
a decline in the increase of capital investment. This adjustment was
aggravated by the effect of credit policy.
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THE 1967 ECONOMIC REPORT OF THE PRESIDENT
I don’t want to go into the merits of these two interpretations be
cause I would like to reserve, with the chairman’s permission, a few
minutes for my policy conclusions. But I want to say that I feel at
this time policies should be formulated on the assumption that either
of these interpretations, or most likely some combination of the two,
may turn out to be right.
I do feel that we are in a situation where it could be hazardous to
base short-term policy decisions on short-term forecasts, as Henry
Wallich has suggested. I think we have to consider the uncertainties
of the situation and whatever assumption we make, we have to calcu
late what the effect would be on policy if our calculation is wrong.
That is the guiding principle, I think, for making policy recom
mendations under conditions of extreme uncertainty.
I will, with the chairman’s permission, make remarks (1), on the
tax recommendation and (2), on the guidelines. On the tax recom
mendation, as I go through the various arguments, I come out in
favor of the President’s recommendation of asking Congress to pre
pare the legislation now. I think that this is the most prudent course
of action.
My main argument is not the economic forecast—it’s the possibility
that defense expenditures turn out to be higher than they are now
estimated. I f somebody tells me, as my friend Henry has suggested,
that we don’t know anything about these future expenditures, because
we are not experts, I say I am not an expert in making a forecast, but
I know that nobody knows, and so I want to do the prudent thing.
I think it will be much easier in June, when the legislation is pre
pared, to say it wasn’t needed and then drop the proposal, than sud
denly be surprised again by increased expenditures—or perhaps by
a stronger economic development than is now anticipated—and start
the process of tax legislation only then.
Therefore, I think it’s very wise to ask for such measures now.
Actually, that gives President Johnson something which President
Kennedy tried to get and Congress didn’t give him—and I think
Congress shouldn’t give the President—namely, discretionary power
to change tax rates. This is one way of getting a certain flexibility
without really surrendering the power of the purse to the executive
branch.
I do think also that once we have the new survey of business inten
tions for plant and equipment in March, that will be the time for taking
another look at the investment tax credit and for making a decision as
to whether or not that credit should be reinstated earlier than under
present legislation. Sometime before the effective date of the tax in
crease I hope there will be a brief period of hearings by the tax-writ
ing committees, and I also repeat the recommendation that at such
hearings, besides the witnesses from the administration and from out
side, there should also be testimony coming from the Joint Economic
Committee.
In this connection I look again at what your Subcommittee on Fiscal
Policy recommended in May 1966 under the leadership of Mrs. Grif
fiths. I am sorry she isn’t here, but I would be happy if she reads the
record. I think the recommendations which her subcommittee of
this committee made stands up very well today.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
887
Second, the price guideposts. I want again to skip most of what I
have in my prepared testimony. I tried to make the case as to why
in my opinion the guideposts are essential in our economy of imperfect
competition, and in which—and here again I differ with my friend,
Henry Wallich—adjustments via unemployment take such a long time
to work themselves out. I f we relied on that mechanism, we would
have unemployment of such a size and duration as I think our society
would not accept as tolerable.
Chairman P r o x m ir e . Thank you very much. Are you through?
Mr. C o l m . Mr. Chairman, if you w ill give me 2 minutes.
Chairman P r o x m ir e . Y ou are such a brilliant economist and you
are such a help to this committee that I hate to interrupt you, but you
are 10 minutes over. So you go ahead and finish up if you can within
2 minutes.
Mr. C o l m . The guideposts in my opinion are essential but I think
the administration had no choice except to drop their numerical aspect.
This means a weakening and a retreat, at least that is the way it has
been interpreted. The administration apparently counts on continu
ing the policy of talking to business and labor. The Council in its
report is proud of the fact that they have been involved in perhaps
50 cases of price increases during the last year.
I believe that shows the need for a more orderly procedure for
implementing the guideposts. I recommend again what I discussed
before Congressman Eeuss5 subcommittee at one time, that we need a
mechanism, for instance, the establishment of a price-wage-productivity board, possibly under the policy direction of the Council, but
with administrative independence, or possibly as is now being dis
cussed, in the Commerce-Labor Department. This board would make
a study whenever the President declares an industry is crucial for
stability, and then submit a factfinding report to the President, who
with his recommendations could submit this to the Congress. Then
possibly a subcommittee of this committee could examine the applica
tion of the guideposts to specific industries and thereby strengthen the
procedure.
I think at the moment the guideposts, in spite of good language in
the report, have become weak. I think only with such an implemen
tation, will it make sense to have no general numerical guideposts, but
something spelled out for individual industries.
Thank you.
(The prepared statement and appendix of Mr. Colm follow:)
PREPARED STATEMENT OF GERHARD COLM1
I appreciate very much that the Chairman of this committee has asked me to
participate in this year’s hearings. In accord with his wishes I shall concentrate
particularly on the public policy issues raised in the 1967 Economic Report of
the President.
It is relatively easy to give advice on economic policy when there is a clear
threat of a recession or when there is a clear threat o f inflation. Ours is pres
ently a situation in which we have at the same time recessionary and inflationary
tendencies. We are in the position of a surgeon whose patient has appendicitis
and heart trouble. I f he operates on the appendix the patient may die of his
heart trouble. I f the surgeon takes care of the heart trouble and does not risk
*D r. Colm is C hief E conom ist o f the National Planning A ssociation, W ashington, D.C.
H is views do not necessarily represent those o f the A ssociation.
888
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1967
ECONOMIC REPORT OF THE PRESIDENT
surgery the patient may die of peritonitis. In using a medical simile to illustrate
a point, let me add that the patient with whom we are concerned enjoys a basi
cally quite good constitution. This we should not forget when considering what
treatment to recommend for his ailments.
In order to evaluate the adequacy of the fiscal and economic policies proposed
in the Budget and Economic Report we should appraise the relative strength of
the inflationary and recessionary forces. In order not to disappoint you, let me
admit right now that we can at best consider certain probabilities and then dis
cuss the fiscal and economic policies which are most appropriate, recognizing the
elements of uncertainty in the evaluation of both the inflationary and recession
ary tendencies.
I . I n f l a t i o n a r y T e n d e n c ie s E m a n a t i n g F r o m t h e B u d g e t
The Budget, as it has been transmitted to Congress, provides for a continued
rise in expenditures, but at a pace which is slowing down. The slowdown is
particularly pronounced in defense expenditures. The annual rate of increase
was $7.8 billion from the first to the second half of calendar year 1966. Accord
ing to the estimates implied in the fiscal 1968 Budget, this rate of increase will
go down to $2.4 billion from the first half to the second half of calendar 1967 (see
Appendix Table 1). This committee has been assured that the defense expendi
tures for fiscal 1968 present a more realistic estimate than the one transmitted a
year ago. This year’s estimate is based on the assumption of continuing the war
in Vietnam and is intended to reflect future military requirements resulting from
present war strategy. Such a planning assumption expresses neither our wishes
nor a probability statement. It is the most useful planning assumption, if at the
same time contingency plans are developed for the case of war escalation and
especially for the, I hope more likely, case of de-escalation of the war. Even
though I am not an expert on the financial requirements of military plans it
appears to me that under the assumption of continued war the projected flatten
ing of the increase in defense expenditures may turn out to be on the low side,
although I do not mean an upward revision of the magnitude which was experi
enced for the fiscal year 1967. I repeat, my impression that the expenditure
estimate for defense may be low relates to the assumption of continued war with
no end in sight, which means continued replacement of used-up materiel.
The revised 1967 Budget shows a substantial upward revision also in the non
defense activities of the Federal Government, especially if measured by the
administrative budget. This is due in part to a failure to sell as many assets as
was estimated, and to the effects of rising interest rates on the Budget, but also
in part to actions of the Congress and administrative changes in various programs.
Several members of the Congress have expressed their conviction that the non
defense budget could and should be substantially reduced. I do not claim to
have any more insight into the political considerations of the Congress than into
military requirements, but in view of the relative tightness of programs with
which I am familiar, and in view of the economic and social significance of the
nondefense programs, I regard it as a prudent assumption that in the final anal
ysis reductions of and additions to proposed nondefense expenditures may offset
each other.
In evaluating the economic impact of these expenditures it should be noted
that the proposed increase in social security benefit payments is likely to be
immediately translated into substantial increases in demand for a great variety
of consumer goods (the recipients being a group which tends to spend almost all
its disposable income). The large increases in military procurement and in the
Medicare programs that made for most of the increase in the fiscal 1967 budget
had a narrower effect which created bottlenecks and had probably a lesser impact
on the growth in total Gross National Product in real terms (see Appendix
Table 1).
Expenditures show the largest over-all increase from the first to the second
half of calendar 1966. It was also during this period that a swing occurred from
a substantial budget surplus to a budget deficit (in NIA terms). Deficits—
without adoption of the proposed income tax surcharge—would continue to rise
from $2^ billion annual rate in the second half of 1966 to $5 and $7.3 billion in
the first and second half of 1967. Thus, looking at projected Federal expendi
tures, revenues (under existing legislation), and deficits it appears that the
THE
1 9 6 7 ECONOMIC REPORT OF TH E PRESIDENT
889
Budget (NIA) would continue to be an expansionary factor, but the increase in
deficits would decline.
The NIA budget is a better instrument for considering the interrelationship
between budgetary and economic developments. Transactions in financial assets,
e.g. purchase or sale of mortgages, are not directly shown. Furthermore, none of
the budget concepts reflects the government insurance and guarantee of private
loans. Financial transactions and insurance and guarantee programs each differ
from direct spending in their economic effect. Their effect is reflected in resi
dential construction or other items appearing in the private sector of the account
ing system. The Government’s role in bringing about these effects is, however,
not indicated in the national income and product accounts. A substantial in
crease in direct loans is estimated for fiscal 1967, an even larger one for fiscal
1968, especially for programs in the field of housing and urban development.
Thus the role of these indirectly stimulating activities of the Federal Govern
ment seems to be on the rise (see Appendix Table 2).
It is not possible to add together direct Government spending, direct financial
capital transactions, and guarantees and insurance programs of the Government.
The economic effect of each of these measures requires different methods of
estimation.
Without going into technical details I conclude that the Federal Government’s
operations as envisaged in the Budget and Economic Report are likely to add to
purchasing power and over-all demand especially during the second half of this
calendar year and the beginning of next year, if the proposed surcharge on income
taxes is not adopted. Even if adopted, I believe there would still be some net
expansionary effect emanating from the Federal Government’s operations.
II. R e c e s s io n a r y T e n d e n c ie s i n t h e P r iv a t e S ec t o r
For judging the appropriate fiscal and economic policies for next year much de
pends on the interpretation that is given to the recessionary tendencies which are
observable in the private sector of the economy. Since they have already been
discussed at great length at these hearings I do not need to repeat the factors of
strength and weakness which are now observable. The level of economic activity
is very high, but the outlook for unemployment is still too large, although low in
contrast with most of the recent period. Nevertheless, the existence of reces
sionary tendencies is generally recognized.
We have experienced an extraordinary period of recovery from 1960 to 1965
with an increase in total production of goods and services by 26% (constant 1958
prices). Actually, the increase in final demand in the private sector was some
what larger than that in the public sector (see Appendix Table 3). In 1966 the
steady recovery growth changed into a boom under the simultaneous impact of a
rapid rise in Federal expenditures, particularly for the war in Vietnam, and in
fixed business investments. The Government used only very mild fiscal restraint
to dampen the boom; the monetary authorities felt that the main responsibility
for preventing inflation and a deterioration of the balance of payments rested on
their shoulders. They stepped hard on the monetary brake. The effect at the
end of 1966 was that growth in final demand in the private sector came to a virtual
halt, while demand in the public sector continued to increase (see Appendix
Table 3).
There are two different interpretations of these recessionary tendencies.
The first attributes the recessionary tendencies mainly, if not exclusively, to the
effect of the restrictive monetary and credit policy. Lack of expansion in private
demand with a simultaneous rise in military procurement in process of produc
tion resulted in a spectacular increase in business inventories. We are in a
period in which the large inventories have a dampening effect on production.
This explains the temporary slowdown in economic activity. However, the re
laxation in credit restraint which is now under way and the expansionary impact
of Government activities will make themselves felt before long. Therefore, an
increase in activity and possibly the pressure of demand inflation are likely to be
resumed, perhaps by the middle of calendar 1967. This appears to be the pro
jected shape of economic development used for rationalizing the July 1, 1967
effective date of the proposed surcharge on the income tax in the face of present
recessionary tendencies.
75-314— 67—pt. 4------ 12
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196.7 ECONOMIC REPORT OF THE PRESIDENT
There is, however, a somewhat more pessimistic interpretation of the re
cessionary forces which assumes that during the long recovery period from
1960 to 1965 some imbalance has been developing within the economy. Outlays
for fixed business investments (excluding residential construction) in 1965 were
38% above the 1960 level (constant 1958 prices) compared with a 25% increase
in consumption. This may suggest a tendency of capacity to be overextended
relative to consumption. (This need not be the case, particularly as the level
of business investments had been relatively low.) The 1966 boom has further
added to the discrepancy between the build-up in capital equipment and the
increase in personal consumption. Thus, these observers say that some setback
in business investments was due sooner or later. In their view, the slowdown
in business investment has been aggravated, but not caused, by the restrictive
credit policy which was pursued throughout most of 1966. This means that
relaxation of credit may not be sufficient to restore the previous long-term rise
in business investment.
I personally believe that at this time policies must be formulated on the
assumption that either one of these interpretations, or, most likely, a combination
of the two may turn out to be right.
III. G o v e r n m e n t F i s c a l a n d E c o n o m ic P o l ic ie s
3. t h e t a x r e c o m m e n d a t io n s
The President’s recommendation for a surcharge on individual and corporate
income taxes appears justified under the following assumptions.
(a) The proposal for a tax increase improves chances of obtaining ap
proval for economically and socially desirable expenditure programs. (This
assumes that there is a choice between a severe cut in the nondefense pro
grams and a tax increase.)
I believe that the relative merits of expenditure programs in contrast with
the demerits of additional taxes can be evaluated only in the perspective of
long-term goals and priority decisions. Such decisions are in the final analysis
a political act. However, the economist can contribute relevant information to
aid in making this political decision. While it is always possible and desirable
to run any organization with less waste and less expense, I do not believe that,
let us say, a $4 billion cut in expenditures could be made in the 1968 Budget
without considerable harm to the nation’s longer-range social and economic
objectives. In this perspective, contributing to the financing of the Vietnam
war by a relatively modest, temporary surcharge on income taxes appears justi
fied to me. I emphasize that this is my personal judgment, which may be only
on the borderline of a statement that could be supported by rigorous economic
reasoning.
(b) The proposed tax increase is justified if the first of the two alternative
interpretations of the current recessionary tendencies discussed before is
correct, and a resumption of economic expansion and inflationary pressure
is likely to occur in the middle of the year.
My personal feeling concerning the present recessionary tendencies would com
bine an element of this first interpretation with the somewhat more pessimistic
second alternative. I am not convinced that relaxation of credit alone would
stimulate resumption of vigorous expansion. Therefore, I believe that some ad
ditional arguments in favor of the tax proposal are needed.
(c) The proposed tax increase can be defended on the ground that this
is the price to be paid for a considerable relaxation of credit.
I believe that credit restrictions were aggravated because of the conviction
of the monetary authorities that the burden of preventing inflation and deteriora
tion of the balance of payments rested mainly on their shoulders. Considering
the harmful effect of the credit restrictions on some particularly vulnerable sec
tors of the domestic economy, e.g. housing, I share the opinion that a better fiscalmonetary mix in the anti-inflation program would be desirable. I do believe that
a policy which includes the relatively mild tax increase plus relaxation of credit
could about offset each other in their impact on the generation of purchasing
power as a whole, with a better balance among component parts. I recognize in
this consideration that the relaxation of credit itself has to be appraised not only
from the point of view of its effect on the domestic situation but also on the
balance of payments.
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1 9 6 7 ECONOMIC REPORT OF TH E PRESIDENT
891
(d) The tax proposal is justified if there is a likelihood that expenditures
for Vietnam during the latter part of calendar 1967 may be larger than
estimated under the policy assumptions made in the Budget.
Under present policy assumptions expenditures for Vietnam may be larger
than estimated or they may be smaller, in case of a de-escalation. Actually, it
takes more time to deliberate the tax proposal, and to prepare legislation and
administrative implementation than to rescind a tax increase. If there is a
considerable chance that expenditure may turn out higher than now estimated
I think it is advisable to prepare now the tax legislation for enactment (or
dropping) at a time when more knowledge is available about the actual financial
requirements for war and the course of economic development. For the case
of de-escalation a more comprehensive program is needed, which I hope is in
process of preparation.
Considering these various aspects, I would recommend that the tax-writing
committees of Congress start working along the lines of the President’s recom
mendation. If the forthcoming surveys on business investment intentions should
bear out the pessimistic expectations of some observers I would also recom
mend that consideration be given to an earlier re-instatement of the investment
tax credit than provided by present law. I would also recommend that the taxwriting committees plan hearings at a time before the tax increase is to become
effective in order to decide whether conditions warrant going ahead with the
tax increase. At these hearings representatives of the Government and the
Joint Economic Committee should be heard.
2. THE PRICE-WAGE GUIDEPOSTS
Price and wage determinations are made by the parties directly concerned in
their particular interest. In a competitive market economy the particular inter
ests of business and labor coincide to a large extent with the general or national
interest. In some cases, however, there may be a conflict. This conflict arises
because we do not have a fully competitive economic system, neither in business
nor in labor. Also, the time lag in the adjustment process is such that relying,
for example, on labor market conditions for correcting cost-raising wage settle
ments would probably require long periods of adjustment and lead to larger and
longer-lasting unemployment than are regarded as socially tolerable.
Here we are concerned with the problem of cost-push inflation, which may start
with some increase in either the price of the basic raw materials or wage costs.
Some people deny the possibility of a cost-push inflation because in their view
no general price rise is possible unless money in circulation increases. This in
my opinion is a truism but does not explain anything about the causal nexus
which sets the price rise into motion. We know there are many events that may
give a stimulus to price rise which in order to affect the general price level have
to be validated by monetary expansion.
Considering cost-push inflation does not mean that every price rise which is
brought about by an increase in costs needs to ibe translated into an increase in
the price level, nor is every such price and cost increase unjustified. Let us
assume a union demanded a substantial increase in wage rates, and manage
ment grants the increase but at the same time increases the prices of the
products—in this case the general public pays the price for the increase in wage
rates. If labor in that particular industry had been receiving submarginal
wages and had been living below what is considered a decent standard of living,
there is justification to raise wages and prices in this industry but to have some
other group get a lesser increase in wages and in the standard of living. Let us
assume, however, that the industry had before an adequate wage level and de
manded an additional increase which would push the cost of production up.
If management grants the increase but at the same time increases the prices
of their products—in this case an action in the interest of the parties directly
concerned would violate the general interest in price stability. The original
idea of the guideposts was to establish criteria for identifying wage increases
which would be the result of market power and would violate the public interest
in reasonable price stability.
The guideposts were formulated on the assumption that demand inflation
would be prevented by fiscal and monetary measures. They were only meant to
deal with a use of market power in violation of the public interest. Price
stability was assumed except for a price rise caused by the exercise of market
892
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196,7 ECONOMIC REPOET OF THE PRESIDENT
power. Therefore, the problem of treating general cost-of-living increases was
not even mentioned.
This assumption of basic price stability has become unrealistic since JL966.
Therefore, it has been suggested that the guideposts should be modifiedlso as
to grant a cost-of-living adjustment in addition to an adjustment for national
productivity gain. Even an allowance for expected cost-of-living increases has
been demanded. The Government has rightly shied away from a general sanc
tioning of this proposal; for a complete and prompt cost-of-living adjustment
tends to compound inflationary pressures. In an inflationary situation equity
considerations make it indeed imperative to allow for some cost-of-living adjust
ment. If, however, the Government’s monetary and fiscal policy fails to promote
a dynamic balance between demand for and potential supply of goods and
services a rise in the price level may be regarded as a crude and undesirable
substitute, say, for a tax increase. A complete and prompt cost-of-living adjust
ment would exempt the protected groups from this tax substitute, and that
would mean a much heavier burden would be imposed on the unprotected
groups.
National programs, including monetary and fiscal policies, antimonopoly poli
cies, foreign economic policies, policies related to Government inventories, should
contribute to reasonable stability of the price level. However, I also believe
that the Government has to issue criteria which help to distinguish between
price and wage determinations which are in accord with the objective of price
stability and those which violate this objective. Thus I am convinced that
the guideposts serve an essential purpose in an economy in which there is
possible conflict between the exercise of market power and the general interest.
I welcome that the Economic Report has forcefully restated the principles
of the guideposts and re-emphasized the need for having them. I agree with
the statement that some cost-of-living adjustment in wages is needed. I also
agree that under present conditions no one figure separating inflationary from
desirable wage-cost increases could be mentioned, be it the old 3.2% or a new
5 or 6%. There are labor groups which have, and other groups which do not
have, automatic cost-of-living adjustments in their contracts. It would be
impossible to have one percentage apply to both groups. Also, the Council
expects now a price rise of 2.5% for the current year over last year. They
would formulate now a new guidepost with that figure in mind. However, if
prices were to rise by more than expected, how soon would the guideposts have
to be modified again? Also, the exceptions in the interests of occupational and
geographical mobility have become much more important now that a high level
of employment has been reached and more scarcities for labor have developed
than were previously the case. Also, in the absence of a numerical criterion
for warranted and unwarranted price increases it would appear that wages are
dealt with differently from prices. For all these reasons I think the Council
was justified in not giving any numerical criterion to separate what would be
regarded as an excessive and a non-excessive increase in wage costs.
The dropping of the numerical wage guidepost criterion has, quite naturally,
been interpreted as a weakening of the guideposts. Also, in the Economic
Report nothing is said about the implementation of the guideposts in the future.
Does the President believe that the present necessarily vague formulation will
really have an effect on any business decision or union demand? Apparently, it
is intended that the present practice will be continued by which the President
and/or the Chairman of the Council talks to business managers and union lead
ers when a price or wage action is threatening or one has been taken which
violates the guideposts. With the present guideposts outlined only in general
terms most of the time of the Council members and a great deal of staff time
could be absorbed by spelling out what the guideposts mean for specific industries,
considering all the factors involved. The Council states in the Economic Report
that they have been involved in the price rise of about 50 separate industries
in 1966. This demonstrates that the guideposts are taken seriously; it demon
strates, to my mind, even more convincingly that there is a need for some more
orderly procedure for the examination of price and wage actions imminent or
taken in specific industries. I feel even more strongly than before that for
the Council to continue this “fire brigade” function would distract the members
and the staff from their other primary functions. Instead, I believe it would
be desirable to set up a price-wage-productivity board—under the policy guidance
of the Council, or possibly in a combined Commerce-Labor Department. The
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893
1 9 6 7 ECONOMIC REPORT OF TH E PRESIDENT
President could declare certain industries as crucial for economic growth and
price stability. Then the price-wage-productivity board might establish special
committees to spell out what the general guideposts mean for these industries.
Fact-finding reports of such special committees would be submitted to the Presi
dent, who, after consultation with the Council, could, if he feels it necessary,
pass the reports on to the Congress. A subcommittee of the Joint Economic
Committee could then examine the interpretation of the guideposts for specific
cases, the actions taken by business and labor, and in extreme cases may recom
mend legislative measures. I recognize why the President would hesitate to
set up a mechanism which by some might be misinterpreted as edging in on price
and wage controls. To avoid this misinterpretation would require an educa
tional effort which should not be an impossible task.
This particular recommendation, which is in line with the proposals that have
been repeatedly recommended by leaders of the National Planning Association
for many years, might not be the best possible solution. I feel, however, that
the dropping of the numerical wage guidepost necessarily appears as a retreat,
just at a time when, for a large number of workers, contracts are coming up for
negotiation, and when cost-push inflation might become critical under conditions
of a weakening economy. An arrangement such as I have proposed, spelling out
the principles stated in the Report, would not weaken—it might even strengthen
—a policy designed to give where necessary a voice to the general interest in
the determination of prices and wages.
In
C o n c l u sio n
As far as I know, every witness from Government or private life appearing
before this Committee has emphasized that we are in a situation of great un
certainty both for political and economic reasons. In such a situation it is
hazardous to determine a definite course of action for a time any distance in
the future. It is much more important, I believe, to make arrangements for
policies which permit a prompt response to conditions as they unfold. I have
discussed from this aspect the recommendations for the surcharge on the income
tax, the relaxation of credit restraint, and price-wage policy. We are moving
at present at a very high level of economic activity, and we need to be ready to
deal with recessionary developments and inflationary developments, either from
the demand side or from the cost side. And we also have to have plans ready for
the case of prolonged war or, hopefully, for the case of a settlement or de-escala
tion of the war in Vietnam.
A p p e n d ix
T a b l e 1.—
Federal budget, national income accounts
[Billions of dollars, annual rate]
Calendar years
1965—
1966—
I
Federal expenditures (total).
Purchase of goods and
services....................
National Defense 2
„
Transfer payments........
Grants to State and
local government........
Net interest paid...........
Subsidies, net.................
Federal receipts *................ .
Surplus (+ ) or deficit ( - ) —
Increase
II
119.9
126.6
I
135.3
1967—
II
I
III
148.8
158.4
166.6
1966II
over
19661
19671
over
1966II
13.5
9.6
8.2
1967II
over
19671
65.0
48.6
31.1
68.6
51.6
33.8
72.9
55.9
35.1
80.7
63.7
38.0
86.5
68.9
41.6
90.1
71.3
45.9
7.8
7.8
2.9
5.8
5.2
3.6
3.6
2.4
4.3
11.0
8.6
4.2
124.5
+4.6
11.3
8.8
4.1
125.3
-1 .3
13.8
9.4
4.1
138.5
+3.2
15.3
9.8
5.0
146.3
-2 .5
14.3
10.2
5.8
153.4
-5 .0
15.9
10.4
4.3
159.3
-7 .3
1.5
.4
.9
7.8
- 5 .7
-1 .0
.4
.8
7.1
-2 .5
1.6
.2
- 1 .5
5.9
- 2 .3
>Assumes steady increase over fiscal year 1968.
2 Allows for adjustment factor consistent with national defense expenditures in national income accounts
budget.
3 Excludes receipts from proposed income tax surcharge.
Source: “ Economic Indicators/’ January 1967.
894
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1967
ECONOMIC REPORT OF THE PRESIDENT
T a b l e 2. —Budget
receipts and expenditures, fiscal years 1965-68
[Billions of current dollars]
Fiscal years
Increase from previous
year
1965
Expenditures:
Gross (excluding intragovemment tra n
sactions)...................................................
National income accounts....... ..................
Consolidated cash.......................................
Loans made directly....................... .................
Loans repaid.......... ............................ ............
Sales of financial assets and participation rates.
Increase in guarantees and loan insurance___
Housing and urban development....... .............
Receipts:
National income accounts..........................
Consolidated cash......... .............................
Income tax:
Proposed surcharge (individual)________
Proposed surcharge (corporate)_________
Accelerated corporate tax_
_
User charges____ _________________ ________
Surplus (+ ) or deficit (—):
National income accounts..........................
Consolidated cash.......................................
1966
1967
1968
145.8
118.3
122.4
8.0
6.2
1.6
91.4
55.7
161.3
132.3
137.8
8.0
7.8
3.0
99.2
62.1
187.1
153.6
160.9
10.7
10.3
3.9
105.5
67.2
204.9
15.5
169.2
14.0
172.4
15.4
10.1
10.8 ‘ "’ T e "
1.4
5.3
115.2
7.8
75.2
6.4
119.6
119.7
132.6
134.5
149.8
154.7
*167.1
1168.1
.2
3.4
1.3
.8
(.3)
+1.3
-2 .7
+ .3
-3 .3
-2 .1
-4 .3
-3 .8
-6 .2
1966
13.0
14.8
1967
1968
25.8
21.3
23.1
2.7
2.5
.9
6.3
5.1
17.8
15.6
11.5
-.6
.5
1.4
9.7
8.0
17.2
20.2
117.3
»13.4
3.4
1.1
.8
(.3)
-.9
-.6
-4 .1
-2 .9
+1.7
+ 1.9
i Includes receipts for proposed surcharge tax.
Source: “ The Budget of the U.S. Government,’ ’ 1967 and 1968.
T a b l e 3. —Gross
national product
[Billions of 1958 dollars]
Calendar years
Seasonally adjusted annual
rates
Item
1960
Personal consumption_______________________
Fixed investment—
Excluding residential____________________
Residential______________________________
Purchase of goods and services:
Federal Government_____________________
State and local__________________________
Change in business inventory________________
Net exports___________________________ ____ _
Domestic final demand:
Private........ ................................. .................
Public______________________ ______ _____
Gross national product______________ ________
1965
3d quarter,
1966
4th quarter,
1966
316.1
396.2
418.3
418.5
47.1
21.9
64.9
24.1
73.0
20.5
73.8
17.9
51.4
43.5
3.5
4.3
57.8
56.3
8.8
6.3
65.5
59.4
9.1
4.2
68.2
60.6
13.2
4.7
388.5
94.9
487.7
494.0
114.1
614.4
520.8
124.9
649.9
523.5
128.8
657.0
THE
1 9 6 7 ECONOMIC EEPORT OF TH E PRESIDENT
895
Index of gross national product
[Constant (1958) prices]
1965 (1960
equals 100)
Personal consumption_____________________________________
Fixed investment—
............ _ _
Excluding residential....................
Residential______________________________________
Purchase of goods and services:
Federal Government__________________________________
State and local________________________________________
Net exports______________________________________________
Domestic final demand:
Private______________________________________________
Public__ ___________ _________________________________
Gross N ational Product-__ _______________________________
3d quarter
1966 (1965
equals 100)
4th quarter
1966 (3d
quarter 1966
equals 100)
125.3
105.6
100.0
137.8
110.0
112.5
85.0
101.1
87.3
112.4
129.4
146.5
113.3
105.5
66.7
104.1
102.0
111.9
127.1
120.2
126.0
105.5
109.5
106.8
100.5
103.1
101.1
N o t e .— Parts may not add up to total due to rounding.
Source: “ Economic Report of the President,” January 1967.
Chairman Proxmire. Thank you, Mr. Colm.
Mr. Lekachman, you have a statement that would probably exceed
the speed limit, too. Let’s see if you can do a little better. At this
rate you will be 15 minutes over and we will have too little time for
questions.
TESTIMONY OP ROBERT LEKACHMAN, PROCESSOR OP ECONOMICS,
STATE UNIVERSITY OP NEW YORE AT STONY BROOK
Mr. Lekachman. I will endeavor to follow a business cycle peak
rather than to continue the ascent. I feel greatly privileged to appear
before this committee whose work I have long respected. This morn
ing I shall speak very briefly about the economic outlook and some
what more extensively about desirable economic policy.
In general I concur with the Council’s forecast, although I have a
sense that it is shaded somewhat toward the optimistic side. I would
prefer to concentrate on the employment situation and some of the poli
cies which are capable of improving it.
I suppose that the optimism of the Economic Eeport was in many
ways justified. The employment situation has in the last year im
proved significantly.
The economic situation as far as employment is concerned has cer
tainly improved, not only in the aggregate, but for most subgroups,
even for most nonwhite subgroups, and the Council almost inevitably
draws an optimistic inference from this. However, it takes the dan
gerous position that a 4-percent rate of unemployment is in effect not
only reasonably consistent with most definitions of full employment,
but one which, if improved upon, will cause painful effects upon
prices.
I would like in particular, on this point, to read one excerpt from
the Economic Eeport which concedes, it appears to me, more than
ought to be considered.
Low unemployment encourages entry into the labor force. Some people,
especially women and teenagers, who would be interested in working if jobs
were plentiful, do not actively search for jobs when they believe none are avail
896
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1967
ECONOMIC REPORT OF THE PRESIDENT
able. At such times, these persons are considered neither as employed nor
unemployed, and are not counted in the labor force. When job opportunities
improve, they enter the labor force, seeking and frequently finding jobs. The
evidence of 1966 suggests that nearly 500,000 of “hidden unemployed” or “dis
couraged workers” entered the labor force.
The Economic Report then adds that:
Probably, additional workers, who did not respond fully to improved job
opportunities last year, will enter the labor market if it remains buoyant.
However, if, as seems most probable, the decline in hidden unem
ployment was made possible only by a decline in general, measured
rates of unemployment, then acceptance of the present level of unem
ployment implies a most disheartening consequence, nothing less than
halting the flow into employment both of persons now officially defined
as out of work and those who belong to the hidden unemployed.
I suggest that we are not quite as devoid of social invention or of
resources as to be unable to do something, partly for the unemployed
who remain and partly for the 32.7 million individuals partially co
incident with the unemployed, who are defined currently as members
o f the poverty stricken. And I summarize my own policy preferences,
which I regard also as economic possibilities, whether or not they are
political possibilities is a rather different question, under these headmgs.
First. In the first half of the year we should continue to ease credit
and supply a modicum of fiscal stimulus to an economy which, the
defense sector aside, is displaying some serious weaknesses. We
should in the second half of the year raise taxes but primarily to fi
nance at adequate levels Great Society programs and desirable fur
ther innovations which I shall specify under the third and fourth
headings.
Second. We should finance at least at the levels authorized by the
89th Congress, model cities, rent supplements, Teachers’ Corps, edu
cation, and poverty programs.
Third. Whether income supplements take the shape of family sup
port allotments or a negative income tax, we should make a start more
substantial than the appointment of a presidential commission toward
the replacement of the present patchwork of public assistance for
mulae by a rational and human system of general assistance to the
poor.
Fourth. We can afford at least to begin in another area, that of
public service employment, with the Federal Government as the em
ployer of last resort. The report last year of the National Commis
sion on Technology, Automation, and Economic Progress estimates
that $2 billion might finance 500,000 public service jobs.
Let me say a word of amplification, particularly about the third
and fourth of the points that I make. TTie decision to alter tax rates
ought to rest very substantially upon how generously we fund Great
Society programs and what progress we make toward the actualiza
tion of the two ideas whose time will surely come. That is to say, in
come maintenance and residual public employment.
I suggest somewhat optimistically conceivably, that most of Great
Society programs enacted in recent years have won a measure of pub
lic acceptance, or at least are on the way to such acceptance, and that
the new thrust of public policy in the immediate future is probably
THE
1967
ECONOMIC REPORT OF TH E PRESIDENT
897
going to center upon income maintenance, Government as a residual
employer, and the third point, which I do not mention here, the issue
of revenue sharing with the States. I shall speak only in fact to the
first two.
Not speaking particularly as an economist, I think that income
maintenance could scarcely have avoided becoming a public issue,
once Americans became sufficiently productive so that the elimination
of the financial component of poverty became possible. The estimate
is common, both in the Economic Report and in last year’s Automa
tion Report, that for about $11 billion or so, we could lift all families
and individuals now below the poverty line above that line.
How can a society capable of totally eliminating financial poverty
at the expense of a redistribution of a mere 1 % to 1% percent of its
gross national product long refrain from doing so ?
Possibly it is this uncomplicated human perception as much as the
specific arguments in favor of income maintenance that has united
such men of usually disparate opinions as the League for Industrial
Democracy’s Michael Harrington, Yale’s and the New Frontier’s
James Tobin, and Chicago’s and Conservatism’s Milton Friedman.
But the rational arguments are exceeding powerful in addition. Of
these, the first and most significant concerns freedom o f choice. A
welfare client may well be a poorer judge of what is good for him
than a trained social worker. This is the inevitable conclusion of the
social work profession. All the same, the welfare client may be a
good deal better pleased with his life if he is permitted to satisfy his
own pattern of preferences. Indeed, a welfare client allowed free use
of his income may arrive in time and of his own volition to a desirable
standard of expenditure, even by the criteria of others. A person
on welfare does not by the fact of his misfortunes cease to be an adult
eager to exercise whatever liberty of choice an exiguous income per
mits him.
By itself the libertarian argument is a sufficient ground for the sub
stitution of income maintenance for the patchwork welfare adminis
tration techniques. And there are two more reasons at the least for
supporting the change of approach. One is the simple fact that trained
social workers are too few in number and too burdened by the admin
istration of complicated, semipenal regulations to offer the assistance
that their clients might conceivably benefit from and that current social
welfare theory believes to be indispensable.
A second argument is related to our good luck in possessing ready at
hand two much more efficient mechanisms for the handling of transfer
payments, the social security system and the Internal Revenue Serv
ice. The social security system could readily administer a scheme
which focused upon family allowances, a version of income main
tenance now in effect in Canada and strongly supported for the United
States by former Assistant Secretary of Labor Daniel P. Moynihan.
Alternatively, the Internal Revenue Service could graft a negative
income tax upon the existing tax structure. Few would advocate
income maintenance primarily upon efficiency grounds. Still, it is
reassuring to realize how neatly efficiency and social compassion here
coincide.
898
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1967
ECONOMIC REPORT OF THE PRESIDENT
Income maintenance, however important as it is for the large group
of individuals who are by reason of age, disability, family situation,
unable to participate usefully in the labor force, is not a full answer
to the problems of the unemployed poor who are capable of work, will
ing to work, but unable by current employment criteria to find accepta
ble jobs. It is here that the appeal of government, the Federal Gov
ernment essentially, but not necessarily only, as an employer of last
resort, is I think very, very strong.
Everybody who has been in a hospital or a park or a school or a
museum is aware how chronically short-handed these institutions are,
how short of service, how unable to meet the needs of the people who
use them. The Automation Commission, what is more, had prepared
for it an analysis of the public service jobs that could be filled using
current criteria o f need, and the total divided among education, na
tional beautification, welfare and home care, medical institutions and
health services, and so on, is over 5 million jobs—5,300,000.
We should all gain from the access of human care and attention,
the sheer increase in the quantity of social kindness that filling these
jobs would entail. The men and women who did the work itself
would regain the dignity and the sense of participation which are in
our society inseparable from the performance of useful work.
Can we afford the $2 billion necessary for the creation of these half
million jobs? No economist could say that we lack the resources.
Whether we also possess the wish is not for an economist to say.
What I have concluded, with a generous use of public funds, is with
the statement of the cost of desirable shifts which I have noted. In
crease of Great Society programs to earlier authorized levels, public
service employment, and an initial movement toward income^ main
tenance—$10 billion, which has inevitably the appeal of a good round
number, and this is the one which I conclude with, pointing out once
more, however, that it is involving a redistribution of only about 1 %
percent of gross national product, or a bit more, and considering also
that $10 billion amounts to half the reduction in taxes that has taken
place in the last 3 or 4 years.
I suggest that we have become, fortunately, accustomed to using
fiscal policy, tax policy, as a means of stabilizing the economy. I
think it is probably desirable that we get used to using the tax system
also, even raising taxes at the Federal level, in order to accomplish
desirable social objectives of which this year the two most desirable
are a further reduction of unemployment and some alleviation of the
amount of poverty.
That does finish my statement.
(The entire statement submitted by Mr. Lekachman follows:)
PREPARED STATEMENT OF DR. ROBERT LEKACHMAN
Whether or not the official forecast of Gross National Product, employment,
price behavior, and balance of payments improvement will turn out to be reason
ably accurate is this year particularly difficult to be certain about. The usual
tribulations involved in estimating the volatile behavior of the market for
capital goods and consumer demand for durable items such as autos and house
hold furnishings are this year aggravated by fluctuations in credit policy,
uncertainty about the time that the investment tax credit will be restored, and
continuing weakness in a number of important markets, notably automobiles.
THE
1 9 6 7 ECONOMIC REPORT OF T H E PRESIDENT
899
We cannot be certain, moreover, that residential construction, a major victim
of 1966’s credit squeeze, will return to something approximating the levels of
the early years of this decade, in the second half of the year. Inevitably the
largest of all unknowns is the scale of our Viet Nam operations. If peace or
substantial de-escalation comes to pass, then the national argument will center
upon the appropriate stimuli to aggregate demand. If further escalation oc
curs instead, then we shall quite probably require much larger tax increases
than the six per cent surcharge sought by the President
In so fluid an economic and political situation, forecasting is a hazardous oc
cupation, to be approached only with trepidation and fear of error. For myself
I find the Economic Report’s forecast in the main plausible, if a bit optimistic
about the behavior of investment and construction markets. Accepting with the
reservation specified the Report’ s framework of expectations, I shall next ad
dress myself to two of the issues which the Economic Report and the President’s
own Message raise: what is an acceptable rate of unemployment, and what
policies should be followed toward the structurally unemployed and the poor—
two partially coincident groups.
Optimism about our recent achievement is not impossible. Indeed one sup
poses that in an official report it is scarcely to be avoided. In 1966 nearly two
million additional men and women found jobs, the largest single year gain of the
current extraordinarily long business cycle expansion. Thus it was that un
employment fluctuated Jbetween 3.7 per cent and 4.0 per cent during the year, and
averaged 3.9 per cent. We have not done as well since 1953. Even the details
have a cheerful ring. The half-million decline in average unemployment im
proved the situation of all races, every age group, and both sexes—with two ex
ceptions only. Nonwhite females between 14 and 19 years of age, and nonwhite
females over 45 years of age failed to participate in the general decline in un
employment rates. By contrast only five years ago, general unemployment
was still averaging 6 percent.
Our progress has been sufficiently substantial so that the Economic Report
can speak of the attainment of full employment. The exact words of the claim
merit quotation: “The unemployment rate reached a 13-year low of 3.9 per cent.
At that level, demand finally matched supply in most labor markets, a situation
which economists define as essentially ‘full employment.’ ” Hence the Economic
advocates “a concentrated attack on the causes of ‘structural’ unemployment
ment in the current year. Although in the longer run, the Economic Report
advocates “a concentratde attack on the causes of ‘structural* unemployment
. . . if we are to move toward continually lower unemployment while maintain
ing reasonable stability of prices”, the writers of the Economic Report assert
that for the time being we have reached maximum employment at tolerably
stable, or, at worst, acceptably rising price levels.
With all respect to the distinguished members of my profession who are
serving as members of the Council of Economic Advisers, I am constrained
to make a much less optimistic judgment of our situation. I am concerned
above all with the continued prevalence of high rates of unemployment among
Negroes and Puerto Ricans. All the nonwhite rates of unemployment remain
at levels which would define a national crisis if they applied to whites as well.
For adult white males 20-44 years of age, 1966’s rate of unemployment was
only 2.3 per cent but for nonwhite males it was 5.3 per cent White male teen
agers suffered 9.9 per cent unemployment but the rate for nonwhite teenagers
was 21.2 per cent. And 31.1 per cent of female nonwhite teenagers were un
employed. It is inadequate comfort that these rates were lower in 1966 than
they were in 1965 because unless general unemployment further declines in
1967, it is unlikely that further improvement in the nonwhite unemployment
situation will occur. In short the implication of general rates of unemployment
consistent with the Council of Economic Advisers* present definition of full
employment is painfully if not intolerably high incidence of unemployment
among some age and color groups.
Worse still it is likely that high as the measured rates of nonwhite unem
ployment are, they still underestimate the full scope of unemployment The
Economic Report itself underlines this probability in these w ords:
“Low unemployment encourages entry into the labor force. Some people,
especially women and teenagers, who would be interested in working if job®
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were plentiful, do not actively search for jobs when they believe none are
available. At such times, these persons are considered neither as employed
nor unemployed, and are not counted in the labor force. When job opportuni
ties improve, they enter the labor force, seeking and frequently finding jobs.
The evidence of 1966 suggests that nearly 500,000 of ‘hidden unemployed’
or ‘discouraged workers’ entered the labor force.”
The Economic Report then adds that “Probably, additional workers, who
did not respond fully to improved job opportunities last year, will enter the
labor market if it remains buoyant.” However, if, as seems most probable, the
decline in hidden unemployment was made possible only by a decline in general,
measured rates of unemployment, then acceptance of the present level of un
employment implies a most disheartening consequence, nothing less than halting
the flow into employment both of persons now officially defined as out of work and
those who belong to the hidden unemployed. It would be sufficiently tragic
to give up on this problem if the limitations of our national resources com
pelled us to do so. It is reckless as well as tragic to surrender when the
means of coping with the problem are securely within our grasp.
APPROPRIATE POLICIES
There are, by official definition, 32.7 million members of the poor in the
United States. Approximately three million persons are unemployed and an un
determined additional number are among the hidden unemployed.
What can we do in 1967 to assist these fellow citizens? I can summarize
my own preferences under four headings:
First: In the first half of the year we should continue to ease credit and supply
a modicum of fiscal stimulus to an economy which, the defense sector aside, is
displaying some serious weaknesses. We should in the second half of the year
raise taxes but primarily to finance at adequate levels Great Society programs
and desirable further innovations which I shall specify under the third and fourth
headings.
Second: We should finance at least at the levels authorized by the 89th Con
gress Model Cities, rent supplements, Teachers’ Corps, education, and poverty
programs.
Third: Whether income supplements take the shape of family support allotments
or a negative income tax, we should make a start more substantial than the ap
pointment of a Presidential Commission toward the replacement of the present
patchwork of public assistance formulae by a rational and humane system of
general assistance to the poor.
Fourth: We can afford at least to begin in another area, that of public service
employment, with the federal government as the employer of last resort. The
Report of the National Commission on Technology, Automation and Economic
Progress estimates that $2 billion might finance 500,000 public service jobs.
Let me offer a brief amplification of my position. It is by now generally agreed
that, whatever their merits, specific programs addressed to the alleviation of
structural unemployment stand a chance of success only when aggregate demand
is high and the economic climate is buoyant. Certainly as I speak before you
the economy seems too precariously poised on the verge of a recession which sev
eral of your witnesses believe already here either to raise taxes or reduce public
spending. Whether in the second half of the year the rate of economic expansion
w ill increase is highly conjectural. Sheer prudence implies the wisdom of the
President’s refusal to seek a tax increase now. Whether in July we should raise
taxes does indeed depend upon the economy’s condition in the middle of the year.
However, it should depend still more upon the level of spending, nondefense as
well as defense, that we judge nationally appropriate.
Or to put the matter in other words, the decision to alter tax rates ought to
rest very substantially upon how generously we fund Great Society programs
and what progress we make toward the actualization of two ideas whose time
will surely come. These two ideas are, to repeat, income maintenance and
residual public employment. We shall make a very grave collective error if
we slow social progress in 1967 either because we exaggerate its financial cost or
underestimate our capacity to meet this cost. The plight of the cities is espe
cially difficult. From New York City downward in scale, city administrations
are yearning for additional revenues which they are ill-equipped to raise by
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901
their own efforts. The Model Cities legislation has stimulated serious efforts
by concerned Mayors to grapple with their communities’ complex problems. It
would be nothing less than a disaster to snatch from the cities the funds and the
hopes so recently held out to them.
Medicare, general aid to education, regional development and manpower re
training : these are for the most part the completion of a generation-old agenda.
One hopes that these and the poverty programs have either won or are on the
way to winning the same community acceptance as social security has achieved
in the last three decades and the New Economics have acquired in the last five
years.
On that possibly optimistic assumption, I shall proceed to the comparative
newcomers, yet to take their place as part of the accepted arsenal of public
policy. Income maintenance could hardly avoid becoming a public issue once
America society became sufficiently productive so that the elimination of the
financial component of poverty became possible. Last year the National Com
mission on Technology. Automation and Economic Progress estimated that a
mere $11-12 billion would raise all individuals and families now below the
poverty line above that line. How can a society capable of totally eliminating
poverty at the expense of a redistribution of a mere 1% per cent of its Gross
National Product long refrain from doing so?
Possibly it is this uncomplicated human perception as much as the specific
arguments in favor of income maintenance that has united such men of usually
disparate opinions as the League for Industrial Democracy’s Michael Harring
ton, Yale’s and the New Frontier’s James Tobin, and Chicago’s and conserva
tism’s Milton Friedman. But the rational arguments are exceedingly powerful
in addition.
Of these the first and most significant concerns freedom of choice. A welfare
client may well be a poorer judge of what is good for him than a trained social
workers. This is the inevitable conclusion of the social work profession. All
the same the welfare client may be a good deal better pleased with his life if
he is permitted to satisfy his own pattern of preferences. Indeed a welfare
client allowed free use of his income may arrive in time and of his own voli
tion to a desirable standard of expenditure, even by the criteria of other. A
person on welfare does not by the fact of his misfortunes cease to be an adult
eager to exercise whatever liberty of choice an exiguous income permits him.
By itself the libertarian argument is a sufficient ground for the substitution
of income maintenance for case-by-case welfare administration of aid. And
there are two more reasons at the least for supporting the change of approach.
One is the simple fact that trained social workers are too few in number and
too burdened by the administration of complicated, semi-penal regulations to
offer the assistance that their clients might conceivably benefit from and that
current social welfare theory believes to be indispensable.
A second argument is related to our good luck in possessing ready at hand two
much more efficient mechanisms for the handling of transfer payments, the
social security system and the Internal Revenue Service. The Social Security
System could readily administer a scheme which focused upon family allow
ances, a version of income maintenance now in effect in Canada and strongly
supported for the United States by former Assistant Secretary of Labor Daniel
P. Moynihan. Alternatively the Internal Revenue Service could graft a negative
income tax upon the existing rate structure. Few would advocate income main
tenance primarily upon efficiency grounds. Still, it is reassuring to realize how
neatly efficiency and social compassion here coincide.
Income maintenance is a nearly ideal approach to the problems of the large
numbers of welfare recipients whose incomes place them below the poverty line
either because age, family situation, or disability excludes them from gainful
employment, or, though they hold jobs, adult male workers are unable to earn
enough to support themselves and their dependents. However, by itself income
maintenance fails to cope with the difficulties and the needs of individuals who,
although eager to work, are by current market definitions unemployable. Here
the notion of the government as employer of last resort has much merit.
The first merit is the concrete social gain realized by the performance of work
in the public sector which badly needs the doing. Hospitals, parks, schools,
museums, and other public institutions are notoriously crippled by the shortage
of human hands. This qualitative, impressionistic judgment is supported by the
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estimates which were prepared for the National Commission on Technology,
Automation and Economic Progress. Their conclusions are summarized in this
table:
Estimate of Potential Source o f New Jobs Through Public Service Employment
m
Source of employment
Job
potential
(millions)
Medical institutions and health servics________________________________ 1.2
Educational institutions________________________________________________ 1.1
National beautification__________________________________________________ 1.3
Welfare and home care_______________________________________________ 0.7
Public protection_______________________________________________________ 0.35
Urban renewal and sanitation__________________________________________ 0.65
T o ta l____________________________________________________________ 5.3
We should all gain from the access of human care and attention, the sheer in
crease in the quantity of social kindness that filling these jobs would entail. The
men and women who did the work itself would regain the dignity and the sense
of participation which are in our society inseparable from the performance of
useful work.
Can we afford the $2 billion necessary for the creation of these half million
jobs? No economist could say that we lack the resources. Whether we also
possess the wish is not for an economist to say.
What I have said implies a financial cost. For the next fiscal year, my
policies would bear these price tags:
Billion
Restoration of Great Society programs to authorized levels--------------------- $3
Public service employment______________________________________________ 2
Initial movement toward income maintenance____________________________ 5
T o ta l____________________________________________________________ 10
Can we afford (this much? $10 billion is a redistribution of only 1% per cent
of GNP. Or again, consider that we have in the last three years reduced taxes
by some $20 billion each year. At worst this program would require tax in
creases of half that amount. If de-escalation or recession requires us to think
once more of major fiscal stimulus, here is a desirable way to apply stimulus
without raising taxes at all.
As a nation we are accustomed to raising our taxes in order to finance our
military security. It is not wild to think that we might acquire if not this year
very soon the equally desirable habit of increasing our taxes in order to meet
our social needs.
Chairman Proxmire. Thank you very much Professor Lekachman. Dr. Wallich, you said in your remarks:
The Council of Economic Advisers is not adequately informed by the Defense
Department on defense spending.
Are you referring to the estimate that was made early in the year of
the cost o f Vietnam for fiscal 1967 and how far they were from the
mark ?
Mr. W a llic h . That is the basic and overt estimate. It is also the
impression from simply reading the newspapers, but I cannot refer
to any particular quotation that neither the Budget Bureau nor the
CEA can say very much about the outlook for expenditures.
Chairman Proxmire. Nor the Congress. The public and the Con
gress are not informed; is that correct ?
Mr. W a llic h . That is correct.
Chairman Proxmire. What can we do about this? We proposed
years ago that there be quarterly budget reports and quarterly esti
mates. It would seem to me that at least in something as uncertain
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903
as the Vietnam war, and, also, these other estimates that were off
by a high percentage, and a very large amount, and this I suppose
was because of the necessary change in monetary policy, or at least
the change in monetary policy, under these circumstances wouldn’t
it be essential or prudent economic policy for the Council, the Budget
Bureau, and the Congress as well as the public to be informed quar
terly ? Can you see any reason why this would be particularly difficult ?
I am not saying that they can estimate it precisely. But they can
make increasingly more accurate estimates as time goes on. They
could come closer to it if they update their estimates. Say you have an
estimate in mid-April and mid-July and mid-October.
Mr. W a llich . I think this certainly can be done after a fashion as
you say, Mr. Chairman. It can’t be done perfectly. It cannot be done
perfectly at any time, even at yearend. Unfortunately, we have
moved in the opposite direction by dropping the usual midyear budget
review last year. The proper direction is to go toward a frequent re
view of the budgetary situation, or some continuing routine updating.
I f I may add this, the Congress itself could help by having some sort
of general overview of the budget rather than an appropriation proc
ess which only at the end of the congressional session pulls together
what really has been voted.
Chairman Proxmire. You see, even in the appropriations process,
this reestimate would have been invaluable to us. If, when we make
our appropriation decisions, which the Senate doesn’t make until late
in the year, and it hasn’t gone to conference, so it hasn’t been resolved,
if we could have an up-to-date estimate of what overall expenditures
are, this would make I am sure a profound difference on many Senators
as to how they feel about appropriations, and often our tax legislation
is postponed until toward the end of the session, and maybe it prop
erly should be, when we have all the facts available to us. The pros
pects of getting a tax increase last year would have been much better
if we had had this realistic estimate.
Mr. W a llich . The Budget Bureau does keep some sort of running
scorecard on what has been voted so far. I don’t see why that can’t
be extended to a statement of just where the next year’s budget now
stands, combined with a reappraisal of revenues in the light of the
latest GNP forecasts.
Chairman Proxmire. You see, their answer to this, and when I
pressed this, both in this committee and also in the Appropriations
Committee, is that they did tell us that their estimates would probably
be off. There probably would be a supplemental. They probably
would come in with some more. But they never gave us a figure.
Without a figure it is very, very hard to make any kind of prudent
decisions on spending and taxes.
Mr. W a llich . A s a former bureaucrat, Mr. Chairman, I suppose
one way of helping this process along is not to blame them too hard
when they make a mistake.
Chairman Proxmire. Let me ask another question. You indicated,
and I am quite shocked as I have the greatest respect for you as an
economist, but I was shocked when you indicated that maybe the
Council of Economic Advisers was even going a little high or being
a little optimistic, let me put it that way, indicating we could have 4-
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percent growth and 4-percent unemployment—close to 4-percent un
employment—without unacceptable inflationary pressures.
I think you are first, or one of the first economists, who has indi
cated that. And at the same time, you couple this with what I think
is a very realistic analysis of our present economic condition; that is,
you say it is quite sort and we have to be concerned about it. You
oppose a tax increase for this reason.
I would like to call your attention to the fact that the latest Eco
nomic Indicators which I just got a minute ago show that in October
we had consumer prices at 114.5; November, 114.6; December, 114.7;
January, 114.7. Wholesale prices were 106.2 in October, they are
106.2 now. You have referred to the various indicators that are soft.
We have unemployment now at 3.7 percent, and we have had unem
ployment on a stable basis for more than a year. It has been much
lower in Europe; it has been much lower in the past in the United
States without much inflation—1953 is a good example.
Why do you feel that we can’t press a little lower without unaccept
able inflation ?
Mr. W a llic h . This puts one in a position of seeming to be anti
social and I hope I am not. I don’t believe the present lull in prices
will last. It is the result of a previous spurt. The demand-pull I think
is largely off. We are moving into the phase of the cost-push.
The Council expects 2.5 price increase. I would think we would be
lucky to get away with that. Three percent seems more plausible. I
base this simply on the assumption that we are going to have 5 to 6
percent wage increases, namely, the normal productivity gains which
may well be less in a year of economic flattering out, plus something
like the price increase. So we will have 3-percent productivity or less,
plus 3-percent price increase, hence wage increase 6-percent. I don’t
see how that can fail to push prices up some.
Chairman Proxmire. But in a cost-push situation, you are arguing
that we have to be careful about having excessive demand exert a pres
sure on prices. You see, it is beyond me to understand how an analysis
of the 1966 situation can come to any kind of firm conclusion that we
can’t get unemployment down much below 4 percent without unac
ceptable inflationary pressures, in view of the nature of the price
increases.
Food was responsible for a great deal of it. Services, and one-third
of the increase in services was because of increased mortgage interest
cost. Medical costs were another aspect not susceptible to monetaryfiscal restraints. I submit that none of these are very sensitive to the
knd of fiscal or monetary policy that would damp down demand, and
within the cost-push situation it would seem to me that the argument
would be weaker.
Mr. W a llic h . I think you are very sound in arguing that we need
not restrain demand in 1967, and that in one reason why I would go
slow on the tax increase. But as far as getting little inflation with 4percent or less unemployment, I would like to go back to some statistics
developed by Professor Samuelson and Professor Solow. They com
puted the trade-off between unemployment and inflation, and they
found that, for the pre-World War I and for the 1920’s, at something
like 4 percent unemployment, we probably had approximate price
stability, if my memory serves me.
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905
They also found that for the period thereafter and for the postwar
period particularly, if we wanted 4-percent unemployment, we would
have a higher rate of price increase. We couldn’t have anything near
stability.
I would add that the belief that we can steadily and stably buy
lower unemployment by tolerating more inflation is not realistic be
cause it assumes that labor is blind to the inflation.
Chairman P r o x m ir e . Isn’t it very important that you pay attention
to the changes in the economy, the rate at which the economy is expand
ing? One of the reasons it seems to me we had very stable prices in
1953 is we had had a low level of unemployment, just as we have had
now for a year.
It would seem to me that under present circumstances where we
have held unemployment down below 4 percent for a year, that we
could proceed to get it down to a goal of maybe Sy2 or perhaps even
lower, and this is so enormously important in terms of providing for
growth, providing for jobs, for people who need jobs. This is such
a vital policy decision that I do w
rant to press you on it.
Mr. W a llic h . There is the hope that what caused inflation last
year w not the level of 4 percent but the speed with which we got to
^as
T
that level, plus the demand shifts from civilian to defense, for in
stance. That always tends to push up prices.
We don’t know. Some years hereafter we will be able to estimate
this. My own suspicion is that we are reaching here for an explana
tion that would be nice if it were true, and it may deceive us. Since
we are under the gun as far as the balance of payments is concerned,
I think we can’t afford to take many chances here.
Chairman P r o x m ir e . I would like to ask Professor Lekachman this.
You came out for a tax increase to pay for a substantial expansion in
the Great Society programs. Many of us are very sympathetic to
many of your suggestions, especially in the area of providing training
opportunities, and so forth. But to be realistic, I frankly don’t think
there is much chance of getting a big jump in these programs this
year.
Now on the assumption we don’t get these additional appropria
tions—supposing we don’t get them, Professor—under these circum
stances would you still favor a tax increase, or would you feel that
in a year when we are increasing social security perhaps by 20 percent
if we follow the President’s recommendations, in a year where because
of the war situation it may be especially difficult to get the Great
Society contributions we need, would it not be wise to forgo the tax
increase, if this could put sufficient pressure on the labor market so that
more people would be pulled in, and as you indicated very properly,
this is the kind of thing that does pull them in, and would provide the
kind of training and the kind of opportunities in employment that
otherwise wouldn’t be there?
Mr. Lekachman. I was speaking, Senator, to what I thought was
desirable. I f I now address myself to what is possible, I think you
are quite correct in inferring that given the probabilities of unlikely
increase in the President’s recommendations, and indeed possible de
crease in these recommendations, that my own position brings me to
oppose a tax increase.
75—
314— 67—pt. 4—
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Chairman Proxmire. Under those circumstances, you would oppose
the tax increase?
Mr. Lekachman. I would oppose a tax increase. I would then
rely upon—as your remarks suggest—I would rely upon a con
tinuation of fiscal stimulus to do some further good in labor markets,
and have some desirable effect in reducing unemployment. And I
would add on that point that insofar as our very real balance of pay
ments are concerned, I should be more inclined to pursue Sherman
Maisel’s suggestion in a speech of a month or so ago, that we should
address ourselves to specific policies aimed at the balance of payments.
What I am suggesting in effect is that if our employment policies do
in fact tend to aggravate our balance-of-payments difficulties, then if
need be, we should impose additional controls on the outflow of capital,
or indeed that widely unpopular notion, some control on the move
ment of tourists abroad.
I think, in other words, that it is possible for us simultaneously to
decrease unemployment and to cope with the balance-of-payment sit
uation, quite possibly using a series of ad hoc measures addressed to
the balance-of-payments situation.
Chairman Proxmire. Thank you. My time is up. Congressman
Reuss?
Representative Reuss. Thank you, Mr. Chairman.
I welcome the general theme that runs through much of your testi
mony, gentlemen, that we ought to do everything we can, and more
than is proposed to be done, to keep prices as stable as possible, not
only for domestic but for international economic reasons.
In that connection, I am struck by two events in the current news
that a number of oil companies, including nottably Standard Oil of
Indiana, which have been enjoying a fantastic profit level—fantastic
enough to cause Standard ox Indiana to take advertisements in the
Wall Street Journal bragging about their unprecedented profit pic
ture—these companies are now in the act of raising the price of gas
oline to the consumer by I believe about a cent a gallon.
Another current item is that American Motors will later on today
lower the price of its American line by $150 a car, which is a very
substantial price decrease.
Chairman Proxmire. I f the Congressman will yield at that point,
it is my understanding it is up to $234 a car—the Rambler American.
Representative Reuss. Is that so ? That is even more public spir
ited. In any event, if the Joint Economic Committee had medal pow
ers, I would certainly award the Medal of Honor to American Motors,
and a booby prize to Standard of Indiana and others that are being
irresponsible.
I would hope that out of these two examples, which happen to oc
cur at the same time, there could be some expression from Washington
that American Motors is moving in the right direction and Standard
of Indiana is moving in the wrong direction. I would hope that this
might induce consumers to buy their gasoline, particularly in the
midwest, at an unheralded filling station which isn’t raising prices,
and I would hope also that consumers would tip their hats to Amer
ican Motors by buying some of these excellent Rambler Americans,
which will shortly be priced at $150 to $240 less a motorcar.
THE
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907
Would you gentlemen put your agile minds on how we might, con
sistent with our free market system, take advantage of this example
of good behavior and bad behavior ?
Mr. Lekachman. I am afraid that the only thought that comes to
my mind is a skeptical one. American Motor’s sales have been in an
unhappy condition for some time, and although I think they have
taken a very realistic step in reducing the prices of the American line
by either of the two numbers referred to here, I would feel a wave of
admiration still greater if General Motors had reduced its prices, or
Ford. I think they can be congratulated on reacting to the realities
of their market position.
Eepresentative E eu ss . Let us hope it will shame the “ Big Three”
into similar action. I note that automobiles is one of the industries
listed by the Council of Economic Advisers last year, when I asked
them about it, as eminently eligible for price decreases, because their
productivity trend has been exceeding the national average. Inci
dentally, the same is true of gasoline.
Mr. Lekachman. Yes.
Eepresentative E e u ss . They both should be reducing. Standard of
Indiana has the gall to increase its price, and I notice the Council of
Economic Advisers is not doing anything about this. It has shoved
it off on the Department of Interior.
Would anybody else like to comment? Mr. Wallich?
Mr. W a llich . I think the guidepost rules are very clear here. A
company is entitled to raise prices when its profits are inadequate or
when it needs capital. I don’t think either case applies here. Unless
we get to a behavior pattern of corporations that disregard an im
mediate market situation that allows them to take advantage of a
temporary scarcity to raise prices, we will never have stable prices.
We have to get a behavior pattern in which companies observe volun
tary restraint in time of strong demand, because they also exert market
power in order to prevent reductions in prices when inadequate de
mand ought to produce a reduction.
The way to get this behavior, if we cannot get it by suasion, is to
encourage excess capacity. What I said about labor applies here, too.
It applies equally to industrial excess capacity if we can get com
panies to operate below what they call the preferred operating rate,
which seems to be the rate at which they can raise prices, we will have
a better chance at stable prices.
Eepresentative E eu ss . Well said. I would hope that the authorities
in Washington could make a dramatic case history out of the oil and
American automobile examples, and thus perhaps, having educated the
public, a stream of consumers would be honoring American by buying
their less-expensive motorcar, and equally beat a path across the street
to the gasoline station which, contrary to Standard of Indiana, was
not raising its prices.
Let me turn to another subject. This is a problem which I think all
of you have touched on, of how we get an adequate money supply and
at as reasonable an interest rate as possible, in order to avoid the terrible
slowdown in housing, and at the same time don’t embarrass our
international balance of payments and even domestically create easier
money than the rest of the economy, other than housing, needs.
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As our institutions are now set up, the only real way you can get
enough money to the housing industry to validate a mortgage rate
structure which people can afford, if they want to buy a house, is by
making money easier, generally, and this does not help our inter
national balance of payments, and it may create easier money than
we need even for domestic purposes, as was evidenced last year and the
year before for a time, when credit was used to build up unnecessary
inventories, and perhaps to validate some capital expenditures which
may not have been particularly necessary, at a time when housing
was being squeezed.
In places like Mexico and France, to name two countries that come
to mind, they don’t go into a decline over this problem. The central
bank simply tells the banking system that the banking system must
devote a minimum—in Mexico’s case, I believe 30 percent of their
credit facilities—to housing, and by doing that, they thereby see that
other elements of the economy not so currently meritorious don’t get
an excess of credit.
The Fed tried the reverse of this in a very timid way last September,
when it sent a letter to the banks saying “ Don’t lend so much to the
wrong people.” They didn’t say who the “ wrong people” were, which
would have been more helpful if they had. But I suppose they meant
people who are building up inventories excessively, or making capital
investments which are socially a lot less desirable than housing.
But what can we do? I think Henry Wallich took a stab at it in
his statement this morning by saying the building and loan associations
ought to get more long-term capital, but one of the difficulties there
is that they have to charge more on their mortgages if they were able
to compete, and that would in and of itself, I am afraid, produce a
chilling of the housing industry.
But I would welcome any comments any of you may have on this,
and specifically what is so awful about what they do in Mexico ?
T
When I was down in Mexico a few months ago, I saw homes being
built all over the place at low cost and not so low cost, at a time when
Mexico had a tight money situation. Why are we so helpless, Mr.
Wallich?
Mr. W a llic h . I think it is probably wise for a government to inter
fere in the structure of credit supply. I f it is a national decision that
housing be subsidized, as we do in effect in many ways, then let us
create that supply structure.
It is another question whether we should have the central bank from
time to time going into the market and saying, “We know better than
the market. We will allocate resources to housing and take away from
something else.” This may sometimes lead to good decisions. Evi
dently, the Fed thought that it knew something about that when it
issued its letter. At times, this ad hoc intervention may not lead to
good decisions. I f we have a market system, I would say, let the
market system do the detail work.
I say this, particularly, because the trouble last year came from a
basic structural defect and not from any particular malfunctioning
of the market. That structural defect ought to be remedied. A pro
posal to that effect is combined in my statement. I don’t think it would
raise mortgage costs per month. It would not even raise them in the
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long run, if interest rates just fluctuate instead of going permanently
to a higher level.
Representative Reuss. By this structural defect, I take it you mean
the inability in the recent past of savings and loan associations, which
are par excellence the contributors to housing, to attract long-term
investments like CD’s, and so on, and I agree this is a structural defect
which ought to be remedied.
But, if you had had that structural reform, I think all you would
have had is the bank and the savings and loans competing to see who
could pay the highest interest rate for this money, which is all right—
I’m for it. But I think you would have priced homebuilding out of the
market, and I think in addition to that—and I don’t sweep that sug
gestion from the table—we really need some method of seeing that
housing, which is certainly regarded as desirable, gets built. And
our existing structure is full of subsidies and good thoughts, but it
doesn’t come to grips with the central $64 question of how much in
terest you have to pay on your mortgage.
Mr. W a l l ic h . Congressman Reuss, housing tends to get stopped
out of the market earliest. It is in the nature of the market that the
party with the most elastic demand loses out. We try to counteract
this by subsidy legislation.
One part of our subsidy legislation actually makes the situation
worse, and that is the ceilings on VA and FHA guarantee and insur
ance. It is designed to be a protection to the homeowner. He isn’t
supposed to pay more interest. The result of this protection is that
he gets no mortgage at all. I f we could make that ceiling more flex
ible, we would have a better flow in times of high interest rates.
As for making credit unavailable, I think if we tied the loan rate to
the deposit rate, then mortgages made at times of very high rates
would come down in interest as the interest rates on deposits declined,
and you would, over the years, bring them down to a more normal
level. So people would be less concerned about making contracts at
times of very high interest rates.
Representative Reuss. My time is up. Perhaps I shall have a
chance to return.
Chairman P roxmire. Senator Javits?
Senator J a v it s . Gentlemen, first let me apologize for not being here
when you made your statements, but I have been brought up to date
on them, and I have just one question I would like to inquire of Mr.
Wallich, and one from Mr. Lekachman.
Mr. Wallich, I regard with the greatest interest the statements you
have made in which you deal with guideposts, to which I have also been
addressing myself.
I notice the suggestion for a tax as a penalty imposed on corpora
tions that exceed wage guideposts. That would contemplate, would it
not, that the guideposts would begin to be mandatory, and that there
fore you would, or I ask therefore would you be espousing a planning
operation really, something which, generally speaking, the American
people have not looked at with favor.
In order to make it one question, I know you are well able to keep
up with it, may I add also the question as to what you think about a
restoration of the system of economic goals for which the Eisenhower
910
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
administration—I think perhaps when you were in office—used the
so-called Wriston Commission.
Mr. W a llic h . Senator Javits? on the guideposts, if my suggestion
in the testimony looks like planning, I am certainly chagrined, because
that was not my intention. On the contrary, I view the present form,
or the recent form of administration of the guideposts, as a kind of
near planning, because it involves confrontations of the Government
with industry, and with labor. It is an ad hoc intervention, not sanc
tioned by legislation.
I f we had a tax, and I visualize a surcharge on the income tax, not
a payroll or production tax which would be passed on in the price,
then the decision to abide by or disregard the guideposts would simply
be a reflection of market factors. I f an industry very badly needs to
attract labor, if it badly needs to avoid a strike, then it will make a
wage offer above the guideposts. The firm knows this will cost it
something, but it will be worth it. In other words, the economic
calculus would prevail.
It would seem to me that that would be closer to a market mechanism
than what we have been doing in the last few years. I realize that
this may be difficult to implement administratively. I am somewhat
encouraged by the apparent fact that during the Korean war period,
when we did have a wage freeze, which was mandatory and which in
normal times one would totally reject, above-ceiling wage increases
apparently were disallowed in some cases for income tax deduction.
On the economic goals, I am of two minds, frankly. I think a nation
is well advised at the legislative and administrative level to know what
it wants to do. I am concerned that the Government might impose
upon 190 million people, or more now, some goals that the majority
likes and the minority not. There are some goals that I would cer
tainly favor.
If, for instance, price stability were to get an adequate representa
tion among these, along with economic growth, full employment,
balance-of-payments stability, I would say that would be a good dis
tribution of goals. We ought to move in that direction.
In the long run, we should move toward a more social conception of
goals, so that we would give people some minimum kind of support.
I would lean toward the negative income tax rather than a fixed mini
mum. That is something in the future toward which we should work.
I f this is the concept of goals, I would certainly favor it.
Senator Javits. Would you then structure into the Government this
guidepost idea?
Mr. W a llic h . I think the guidepost idea, Senator, is what a free
market would do anyway. I f the market were really free and perfect,
labor would move very flexibly. It would not be possible to have
high wage increases in one place and a low wage increase in another.
Wages would rise equally across the board. That is what the guideposts say.
Likewise, prices would behave as the guideposts say. The big
hitch is that we have a business cycle. At times demand is too strong*
and pulls wages and prices up out of kilter with the guidepost rules.
It is the business cycle and market imperfection that make reality
diverge from the guideposts. But I do not despair that we can move
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911
closer toward the ideal by a learning process, not as a result of an
“ arm-twisting” process.
Senator Javits. I think Mr. Colm wished to make a comment.
Mr. Colm. May I be permitted to make comments on both questions
you raised, Senator? When Henry Wallich first mentioned to me
this tax idea, I was very much intrigued by his suggestion, because
we are all seeking some solution which injects the public interest in
reasonable price stability into a process, which does not accomplish this
automatically in a fully desirable manner, and this is certainly an
intriguing idea.
But thinking it over, Henry, I have come in a way to a negative
answer, reluctantly, even though I liked it at first. The reason is that
it makes a tax dependent on an administrative decision.
The guideposts are not and should never be rigid. Even if we didn’t
have an inflationary situation, if we had the 3.2 percent productivity,
we had lots of exemptions in the formulation of the guideposts. In
a way, this tax proposal takes the one numerical figure too seriously.
Now, I would think quite differently if Henry would join forces
with me and agree with me in the establishment of a price-wageproductivity board, which would have hearings, which would have a
procedure for examining the situation of an industry, and then spell
ing out the guideposts for that industry, where we have the public
record as to exactly what the considerations are.
I f you then have something which is geared more to a particular
industry, I think some of my objections would weaken. I am not
sure that they would then entirely disappear.
As we have it now, where we have really no numerical guideposts,
and even if the Council had proposed 5 percent or something, it would
not be effective under present conditions, I do not think it is a feasible
solution.
Second, I would like to respond to the Senator’s reference to the
report of the goals of the Commission which was started under Presi
dent Eisenhower. The National Planning Association, with which
I am connected, has taken this proposal very seriously. We have
picked it up. We have a Committee on National Goals, working on
a quantitative evaluation of the goals which can be quantified.
I do not agree with Mr. Wallich’s answer that even if this were
done by a Government organization, it would impose decisions on the
people. I think one of the big events in the American democracy
over the last decades is—and we owe it in part to the Russians and
I think they should be thanked for that—that we got a public discus
sion going on national goals, and a procedure by which current policy
proposals are related to goals or to what extent they conflict with
other goals.
Let’s say we now have the SST proposal. We have in the Govern
ment a planning and programing and budgeting system; but this is
mainly related to the missions of individual departments, and to the
budgetary costs. In spite of President Johnson’s announcement these
agency goals are not related to national goals as to what private
endeavor is doing and what effect is on private activities—let’s say
what the SST would prevent us from doing—I mean absorbing talent
which otherwise could be available for something else.
912
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ECONOMIC REPORT OF THE PRESIDENT
I am not saying anything pro or con on this particular program. I
just say this is the kind of consideration that would be feasible, if
you have some established alternative goals, and available what the
costs in dollars and manpower of these alternative goals are, both in
the private and the public sectors.
I think personally, Senator Javits, that this is a logical and neces
sary supplementation of the PPB system, which we now have virtually
adopted and that is also being adopted by some State and local
governments.
Senator J a v it s . Mr. Chairman, my time is up, but I think Mr. Lek
achman wanted to pitch in on this. Before he does, Mr. Chairman,
I would like to make a request of the panel. I would like in writing
for the record, and I ask unanimous consent that it may be included,
the opinion of each member of the panel as to whether we ought to
give the President the power to raise or lower the tax to the 6-percent
limit, that is the 6-percent ceiling limit, within a modest period of
time, say for 1 year.
Chairman P r o x m ir e . Without objection that will be answered in
the transcript.
(Responses to the above query were received from witnesses Wallich and Colm and are included in the record at this point.)
(Response of Henry C. Wallich as requested by Senator Javits
concerning discretionary power for the President to make certain
limited changes in tax rates:)
The proposal to give the President limited power to make temporary changes
of a limited kind in income tax rates for anticyclical purposes has always struck
me as a sound one. In past testimony before this Committee, I have supported
it. Nevertheless, two circumstances now compel me to raise a question concern
ing its advisability.
First, the Administration failed to propose a tax increase last year when, in
the view of many economists, it would have been desirable. This suggests that,
even if the President did possess the power to make limited tax changes, he
might not use it. Apparently the political obstacles are of a nature that makes
the action too costly to take unless people have previously been exposed to
rising prices and high interest rates and in this way have come to look upon a
tax increase as a lesser evil. By the same token, the power to cut taxes might
be overused, i.e. it might be instituted in circumstances that do not fully warrant
the conclusion that stimulation is strongly needed.
Second, such tax changes as have been instituted in the last year or so,
including the removal and subsequent reimposition o f excises, the suspension
of the investment tax credit, and also the present proposal for a tax surcharge,
do not accord with the idea o f a simple and uniform anticyclical tax change.
The tax action should be the same whether the move is up or down. In that
case it will be neutral in its distributive effect, so long as there is an even chance
for a rise and a cut in taxes.
Any social group that feels especially injured by a rise will be especially ben
efited by a fall, and vice versa. Moreover, only if tax changes are o f this
simple symmetrical sort can frequent disturbances o f the tax structure as a
whole be avoided. Chairman Mills recently has referred to the inadvisability of
frequent tax changes. This applies eminently to be varied changes that have
recently been made or proposed. They do unsettle the tax structure, thereby
affecting the value of assets and contracts as well as preventing the taxpayer
from gathering stable experience in making out his taxes.
The unsystematic form or recent and proposed tax changes raises a question
also concerning the feasibility of quick tax changes by the Congress. Prior
agreement on such changes, to be implemented quickly when the time comes,
seems a possible alternative to presidential discretion. I would support it pro
vided it could be put on a systematic basis. But that precisely seems difficult
to achieve.
THE
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ECONOMIC REPORT OF THE PRESIDENT
913
As a further alternative, delegation to a nonpolitical body deserves to be
considered. This might be the Federal Reserve, or some other group that would
have to be established with a degree of independence from political pressures.
The usual objection to such procedure, that it is undemocratic, seems to me
beside the point. It is true that tax changes are not purely a technical matter,
but contain a political element. But the same is true of many decisions that
today are made by the regulatory agencies of the Government and even by the
Judiciary. I f the Congress retained a right to veto the action of this group,
it is hard to see how serious damage could be done.
(Letter from Gerhard Colm responding to Senator Javits’ request:)
N a t io n a l
P l a n n in g
A s s o c ia t io n ,
Washington, D.C., February 28,1967.
,
J o in t E c o n o m ic C o m m it t e e ,
Sen ate Office B uildin g,
Washington, D.C.
G e n t l e m e n : The following is my response to the question raised by Senator
Javits as to whether the Congress should authorize the President to raise or
lower the income tax within the limits o f 6 percent for a specific period of time,
e.g. for one year.
I agree with the objective o f this proposal, namely to expedite limited changes
in the income tax in response to actual or expected changes in economic condi
tions. It may well be that delegation o f authority to the President to make such
changes within specific limits is the only feasible solution. However, it appears
preferable to me if a method could be worked out by which the Congress would
share with the President responsibility for such changes without causing un
desirable delay.
My preference is based on the following reasons:
(a) It is politically desirable to have Congress directly share responsi
bility for changes in the tax burden even if they are of limited size and
duration.
(b) If the President has sole responsibility for such action he might hesi
tate or even fail to act for political reasons, particularly when an increase
in taxes is involved.
(c) There are not many cases in which the President recommended a
change in taxes to Congress but in which action was unduly delayed because of
protracted Congressional deliberation.
(d) Not all economic conditions require the identical change in tax meas
ures. There may be situations in which a change in both individual and
corporate taxes, or in only either one, is warranted. In other situations a
change in excise taxes may be desirable. If there is an authority to make
changes only in one particular way the President may use this authority even
though under the circumstances a different type of tax change may be
desirable.
I believe that the recommendation made by the Joint Economic Committee’s
Subcommittee on Fiscal Policy in May 1966 (see pp. 16 f.) suggests one possible
procedure for prompt legislative action.
I suggest that the tax-writing committees consider and propose to the Congress
stand-by legislation providing for up- and downward changes in tax liabilities,
leaving open the effective date and, perhaps, stating only a maximum percentage
of change, leaving the exact ratio of change within these limits open. In case of
need the effective date and the exact ratio of the changes could be adopted by a
Joint Resolution recommended either by the President and/or the Joint Economic
Committee after hearings which should not exceed, say, one week. If the hear
ings are held by the tax-writing committee, separately or jointly, the views of
the Joint Economic committee should be heard at the hearings.
I recommend experimenting with such a method o f Executive/Legislative
cooperation before considering the delegation to the President of the power to
make such changes by decree.
Sincerely yours,
G erhard Co lm .
Senator Javits. I f the Chair desires Mr. Lekachman to address
himself to the questions, it is fine with me.
Chairman Proxmire. You mean the previous question ?
Mr. Lekachman. The previous question, yes.
914
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
I want to make just a comment or two on the guidepost issue rather
than the goals question that was raised.
It seems to me that the record of other countries, besides ourselves,
with formal boards of review, has not been entirely encouraging.
The English record has not been good. The Dutch system, after
some years of success, broke down. And I am not encourajged, in
other words, by proposals to increase the formal administrative ma
chinery for application.
There are two other comments I just want to make very briefly.
One is that as is conceded everywhere, the guideposts have been, prac
tically speaking, inoperative in the downward direction. Corpora
tions don’t reduce their prices when application o f the guideposts
would suggest that they do so, and this is another way of saying that
there is an inflationary bias built into the guideposts, given present
arrangements.
The second comment is simply this: That the guidepost mechanism,
for better or for worse, is a conservative mechanism. It assumes that
the distribution of income between property and labor is a reason
ably satisfactory one and the guideposts in effect sanction that
division.
Chairman P roxmire. Congressman Moorhead ?
Eepresentative M oorhead. Thank you, Mr. Chairman.
First, Senator Javits, I wonder if in the question that you sug
gested be answered in writing about the power to raise and lower
taxes, that we make it very clear that it might be answered in an
either/or situation. In other words, it might be that we grant the
President power to raise taxes, but do not grant him the power to
lower taxes or vice versa.
Senator J avits. Oh, yes. Mr. Moorhead, my office will write a
confirming letter.
Eepresentative M oorhead. Thank you.
Professor Wallich, I would like to continue the discussion that you
were having with Congressman Eeuss about the variable interest rates
on housing mortgages. First, sir, would it be your idea that the
monthly payment would, except in the case of a very wide fluctation,
remain constant, and the amount attributable to interest and principal
would be the thing that would vary ?
Mr. W allich . Yes. That is how they work it in England. A
man finds that if interest rates go down, his mortgage is shortened,
and if they go up, it is lengthened. I f interest rates fluctuate, he
doesn’t much care.
Eepresentative M oorhead. Do you know, sir, if under the present
law the banks and/or the savings and loans in the United States could
make such contracts?
Mr. W allich . Yes, I think they could. I have had some corre
spondence as a result of what I wrote about this, and if it’s an overt
contract and not as in the case of one California savings and loan
association, something that the borrowers didn’t know about, then
there seems to be no reason why this should not be done.
There are some technical problems. One is that the mortgage may
not be easily negotiable. But so far as I can find out, this is not a
serious impediment.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
915
Another question is how one gets the savings and loans to reduce
deposit rates when the time comes, so that rates on mortgages will also
go down and the period can be shortened. One can to some extent rely
on the market. Lenders will not be able to write high-interest-rate
mortgages. But it is conceivable that some kind of legal tie would
r
have to be established between mortgage rates and deposit rates.
No doubt there will turn out to be a lot of special cases, grace periods
on deposits, and so forth, that will require definition to make it equi
table and make it firm.
Representative M oorhead. Professor Lekachman, I was very much
interested in your suggestions in your testimony about the negative
income tax and the Federal Government as the employer of last resort.
I wasn’t quite clear as to the interrelationship of the two ideas. I can
think of it as an either/or proposition. I can think of a combination
where you would say anybody who is employable should be employed
and put to work, and only those people such as let’s say mothers with
small children should be granted the negative income tax. But what
is the interrelationship? Who would come under one program and
who would come under the other ?
Mr. L ek aciim an . I was thinking of two groups, Representative
Moorhead, with some coincidence between them I can see. But the
two groups I had in mind were individuals whose practical chances
or even desirability of offering employment to was not very great.
Many of the elderly, who are getting social security payments, which
leaves them in precarious condition if they accept employment: many
families of small children headed by women; individuals who are
handicapped mentally or physically, not to the point of institutionali
zation. There are other categories. These individuals it seems to me
now get various forms of either social security or welfare payments.
In many cases the amounts are inadequate, and these people would be
natural candidates, it appears to me, for some form of income main
tenance.
Now there is another group of individuals who are currently unem
ployable, that is to say by labor market definitions in effect, market
definitions. They can’t get jobs. And what I among many others,
have been speculating about is the fact that there is coinciding with
this pool of personally unemployable a large number of public service
jobs requiring rather little skill and training, which might readily be
filled, the missing nexus being cash and in fact a program which would
supplement public service employment in a great many areas.
So I don’t think of these programs as substitutes for each other. I
think they are supplements. In one case, one is addressed to the relief
simultaneously of poverty and unemployment; in the other case, to
the relief of poverty alone.
Representative M oorhead. In connection with your testimony, Pro
fessor Lekachman, I certainly want to reecho your sentiments about
the Model Cities Program. I certainly agree with you it would be
nothing less than a disaster to snatch from the cities the funds and the
hopes so recently held out to them.
I think that we have stimulated the mayors into activity, and if wo
deny them this assistance which we almost promised them, why I think
it would be very discouraging to the morale of the city officials and.
more importantly, the city dwellers.
916
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
I notice with some interest that Mr. Colm and Mr. Lekachman gave
relatively little, if any, attention to the problem of the balance of pay
ments, whereas Professor Wallich, I think, stressed this very heavily.
Was this because you wanted to address yourself strictly to domestic
economic problems, or do I infer that the two of you considered the
balance-of-payments problem considerably less serious than does Mr.
Wallich?
Mr. L ek ach m an . I consider them quite serious, Mr. Moorhead, but
at the same time I suppose my difference with Mr. Wallich is primarily
this, that I want to minimize the effect that our balance-of-payments
situation has upon other policies, particularly domestic social pro
grams, and being of this mind, I would be far more inclined to con
centrate on doing something directly upon balance-of-payments situa
tions in the way of specific controls, or enlarge present controls rather
than to allow present domestic policy to be seriously affected. But I
don’t think that I differ with Mr. Wallich with the seriousness of the
problem. It is undoubtedly a great problem.
Representative M oorhead. Mr. Colm?
Mr. C olm. I pretty much agree with what my colleague, Mr. Lekach
man, has been saying. The reason why I didn’t elaborate on that was
in part because I knew Mr. Wallich would be on the panel. He has
given it more thought. It happens not to be my field of specialization.
I agree that it’s a serious problem. I am more concerned with the
long-range problem, with the competitiveness of the American econqmy. Productivity is the basis for our high wage level relative to
other countries. We have the long-term tendency that productivity
travels much faster from country to country than in the past; for ex
ample, in Japan you find steelworks which are as modern as the most
advanced American steelworks. We are only surprised by the sta
tistics. They still employ about three times as many workers relative
to output, and this is probably because of the relatively low wage level.
But I think there are serious problems.
I also agree with Mr. Lekachman that for a short term we may use
more specific devices. I express perhaps more of an emotional feel
ing, but I think I could rationalize it. It doesn’t make sense to me that
we should have mass unemployment in order to solve our balance-ofpayments problem. That would be a sort of admission of inability to
deal with the problem, and I cannot believe that the only solution con
sists in depressing our economy, thereby depressing imports and giv
ing allegedly an incentive to exports.
I cannot agree with that philosophy, though I cannot elaborate on
the technical consequences of that statement.
Certainly as I have stated in my prepared testimony, the balanceof-payments considerations are a restraining factor on credit relaxa
tion, but I think particularly for housing that does not apply. In
part as an answer to the previous question by the Chairman, I think
more money is being made available for housing even though the in
terest rate is still very sticky. Making money available for housing at
lower interest should be possible without any drastic effect on the
balance of payments.
Representative M oorhead. Thank you.
Thank you, Mr. Chairman.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
917
Chairman P roxmire. Thank you, Mr. Moorhead. Congressman
Rumsfeld.
Representative R umsfeld. Mr. Chairman, I apologize to our three
distinguished guests for being tardy. I had a meeting of the Science
and Astronautics Committee.
I understand, Dr. Wallich, that you indicated that you favored
removal or reduction of the gold backing now required on Federal
Reserve notes. Is that correct?
I would also like to have comments from the other two gentlemen
on this question.
Mr. W allich . Yes. That is something I think we ought to do.
The true purpose of the gold reserve is to be used for international
payments and to back the dollar internationally. The domestic back
ing has lost much of its original significance, which was to convert
notes into gold coin.
It serves an indirect purpose in restraining fiscal and monetary
policy, but that same purpose is served by using it exclusively for
international purposes. The Government is 011 notice that when we
run out of this reserve, we will be in a pretty desperate situation with
devaluation or tight exchange control our only alternatives.
I would not say that removing the limit does not take some con
straint off the Government. The fact that they are moving toward
a limit rather than being able to operate against a $13 billion reserve
does create some added pressure to put the balance of payments in
order. I don’t think that that gain is worth the drawbacks that we
have from maintaining the limit. It raises a doubt in the mind of
the world as to what will happen as we approach the limit. Will
we pull the plug on the dollar and devalue, or will we remove the
limit?
Since in practice I feel very confident that we would remove the
limit if we got close to it, we might as well remove it now that we are
still $3 or $4 billion away from it.
Representative R umsfeld. Thank you.
Is that roughly the view of our other guests?
Mr. L e k ach m an . I agree with Mr. Wallich in general and in
particular I think on this issue, an unusual position for one economist
to find himself in with another.
I think that quite rightly Mr. Wallich pointed to the fact that the
limitation has lost its meaning. We don’t have an internal gold
standard. This was one principal meaning of this. And I think also
on the specific point that we would create an unnecessary crisis for
ourselves if we retained the limit as we approached the point where
our flexibility came into question.
It would be a wholly unnecessary financial crisis, and we have
enough unavoidable ones without adding one that we needn’t face at
all.
Mr. C olm . This is a strange case of consensus among three econ
omists.
Representative R umsfeld. Thank you. I would also like, if we
could have in the closing minutes here, another comment from each of
you. We have had testimony from among others, Walter Reuther, to
the effect that escalator clauses are not inflationary. I would like a
918
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
comment from each of you on whether or not you feel that escalator
clauses are or are not inflationary ?
Mr. W allich . I think Mr. Reuther must have been arguing on the
assumption that there are wide profit margins that permit absorption
of above productivity wage increases. Moreover, with respect to his
own industry, productivity increases may well be above average, so
that it would be possible even without reduction in profit margins to
absorb normal wage increases, plus an escalator.
But for the economy as a whole, it seems perfectly clear that escalator
clauses will be inflationary, unless we are to assume that profits can
be continually squeezed. The guideposts made very clear that labor as
a whole, if income shares are to be maintained, cannot get wage in
creases in excess of productivity gains. I f those are 3 percent and we
give labor 7 percent, then the only way to get back to the 3 percent
that labor can get is to have inflation of 4 percent. That would be the
result of escalating.
I f then, we further escalate the 7 percent to 11 percent because of
the 4-percent inflation, what we do is to escalate the inflation as well as
wages. I see no alternative.
Mr. L ek ach m an . I think, in general, I agree with Mr. Wallich once
more on the effect of escalator clauses, but I would stop short of saying
that because they have an inflationary tendency they are necessarily to
be resisted at all cost. They do emt>ody a measure of protection. I f
you like, you can even think of a series of labor contracts containing
escalator clauses as putting some pressure upon the Government to
use the kind of fiscal policies which would make them inoperative.
I don’t think that that is necessarily what Mr. Reuther had in mind,
but it might be indeed an effect of such a widespread writing of
contracts.
Mr. Colm . I don’t know what Mr. Reuther had in mind, but there
is one fact. The way the escalator clauses are written and operated,
they do put a timelag between the price rise and the wage increase. To
that extent, whether they are inflationary or not may be a question of
semantics. They are more inflationary than if there were no wage
increase. But they are a factor slowing down the transmission of the
price rise through the economy.
For instance, the British during the war managed the price index
to make the most use of this price lag, so that actually apparent escala
tion was actually a mechanism designed to slow down inflation. Some
of the unions oppose the automatic escalation because they think by
reopening negotiations they can get more, trying to anticipate future
price increases. This would certainly be more inflationary.
We also should consider why we have price increases. I f we have
a price increase because of lack of fiscal measures, then the price
increase acts in a way as a crude substitute for a tax. And the more
groups are protected, the smaller those are, who find that they have
to carry the burden. In that respect, I would say full cost of living
adjustments add to inflationary pressure. But much depends on the
mechanism of how they operate, the time lag between the actual price
rise, the reporting ox the index, and the application to the next
payment.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
919
There is the factor of slowing down. I must admit I am trying
to make some sense of the statements that Mr. Reuther made, because
I know he is a very intelligent person.
Representative R umsfeld. Thank you, gentlemen; and thank you,
Mr. Chairman.
Chairman P roxmire. Thank you, Mr. Rumsfeld.
Dr. Wallich, I would like to follow up on something that 1 let you
escape from the last time we talked. That is the soundness of follow
ing fiscal and monetary policies for the purpose of restraining infla
tion, that is by keeping the unfortunate consequences which you and
I recognize—that unemployment would remain at a very high level.
When we have no analysis and no agency that I know of in or out
of Government that I know of trying to make analysis of the impact
of this restraint on specific commodity prices. In other words, it
seems to me that we are talking through our hat.
Governor Martin, when he appeared before this committee, said that
they had no idea what restraint, monetary restraint, what effect it
would have on particular commodity prices. His agency made some
kind of a study years ago for the Commission on Money and Bank
ing. Indeed they do have a general feeling that monetary restraint
under demand-pull circumstances will keep prices down, but he
couldn’t give me any documentation, let alone qualitative analysis.
He couldn’t break it down in the food category and in the medical
category, the interest rate category, that would give us any kind of a
precise picture.
Now, isn’t it desirable, if we are going to have a better economic
policy in the future, in view of the enormous importance and the
weight to be placed on restraining inflation, the burden of unemploy
ment that we impose on the country in doing so, that we have at least
an effort to try and get at the effect of these policies on specific com
modity prices?
Mr. W allich . I think this is a very good thought. All I can do
is to respond with what little knowledge there is, which is probably
very familiar to you, Mr. Chairman. As you know, monetary policy
works principally against investment, and there principally against
housing, and, to a smaller extent, against borrowing by small business,
perhaps State and local. It touches least, plant and equipment
spending.
Fiscal policy works principally against consumption. Therefore,
if we are going to talk about the impact on commodities, then I sup
pose fiscal policy is the first thing to study—what happens to prices as
demand is reduced.
This resolves itself, I suppose, into a question such as this. I f a
tax increase were to be introduced now, what are the personal budget
items that consumers are most likely to cut back on? And to that, I
think a competent economist could give quite a few answers, because
we know the behavior of people with respect to their household budget
as their income rises or falls.
Chairman P roxmire. Then we would want to relate that, wouldn’t
we, to the particular situation. We would know, for example, to re
verse it a little bit because this is so clear in my mind, if we do have an
increase in social security benefits, much of which will be spent on
920
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
food, that particular aspect of the expenditure would not necessarily
be inflationary, because at least our assumptions have been that food
prices are not very responsive to increases or decreases in demand.
They are more responsive to production factors, Government policy
factors, and so forth.
Mr. W allich . It seems clear to me that economic analysis increas
ingly will move into this direction of dividing up problems, looking at
specifics, particular sectors, particularly commodities. I haven’t heard
the suggestion made, but it seems to me an eminently sensible one.
Chairman P roxmire. Thank you very much. I would like to pursue
another question that has been raised with you two or three times
today. I would like to pursue it in a different way.
As I listened to your testimony this morning, I got the impression,
which surprised me a little, that you were siding with Walter Reuther
and with Alvin Hansen in accepting incomes policy at least to some
extent, because you—and I think very wisely and properly—talked
about real wages. Not money wages, which is something that most
economists haven’t paid as much attention to as they should, in talking
about wage-price guideposts.
Now, as Hansen argued it, if we had a real wage guideline, we would,
for example, in this year, forgetting about any catching up, and took,
say, the 3.2-percent productivity factor, and then took the assumption
of the Council of Economic Advisers on a 2^-percent increase in the
cost of living, we might have a guideline this year of 5.7 percent.
What this would do would be to keep labor’s real income in line with
its productivity increase, and the argument by Dr. Hansen was that
this would not be inflationary in his view.
At the same time, this is tying wages to a cost-of-living escalator
in a real sense, or at least you might say this, and you would argue
that to do so is inflationary.
Mr. W allich . Well, you are quite right, Mr. Chairman. I lean
toward an incomes policy, and I do think that the guideposts are in
comes policy. It happens to be one that keeps income shares constant.
I think the proper way to read these income shares in history is to
look at periods of high employment rather than low employment,
because shares fluctuate over time. The labor share rises with unem
ployment and falls as unemployment declines—that is in booms it is
lowest. Like the full employment budget, I would like to look at full
employment income shares as the norm.
Now to do as my distinguished teacher, Alvin Hansen, proposes, and
I realize that I disagree with him at my peril, would single out for
protection a single sector. Something happened last year that some
how raised food prices and service prices. These are calamities that
befall everybody. Why escalate one particular sector? Why not
also-----Chairman Proxmire. N o, no, I don’t want to be rude, but I think
you are shifting the scenery on me a little bit. What he talked about
was not past. He wouldn’t take the 3.3 percent increase in the cost o f
living we had last year. He would do one of two things. He would
either take the estimate of what we are going to have this year, or what
he might do consistent with what he said is simply have an escalator
so you would have a reflection of what actually happens this year.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
921
You have the productivity increase of 3.2 percent and then you would
have whatever cost of living you have this year. Therefore, labor
wouldn’t get anything except compensation for its real productivity
increase. In other words, that it would be paid in real wages, not
money wages.
And you are dead right when you pointed out the impossibility, the
perniciousness really, as far as labor is concerned in having a wage
guideline this year that doesn’t have any recognition at all of the cost
of living in it, or having it last year where you had a 3.3 percent rise
in the cost of living, a 3.2 percent guideline, so that labor’s real income
went down, if they abided by the guideline, at a time when their pro
ductivity was increasing.
Mr. W allich . I suspect if we did what Hansen proposes, that is
put in a 5.7-percent guidepost, and it were abided by, it wouldn’t
change anything. Prices would rise sufficiently to reduce the real in
crease to what productivity permits.
That is indeed the meaning of this action. And so labor is likely
to end up no better than it would otherwise be. But what it would do
is to make sure we would get a substantial price increase which then
the following year would again justify a further above productivity
increase in wages, and so on.
Chairman P roxmire. The estimates are that now this year you are
going to have settlements in the area of 5 or 6 percent. Many people
think it is going to be higher. Income guidelines would provide for,
say, a 5.5 or a 5.7-percent increase, which would mean perhaps that the
wages wouldn’t be higher, and also you would have a more equitable
principle involved.
You would have more effective public pressure on those who happen
to have strong unions or weak employers or a situation in the industry
that would permit wages to go up excessively, and you would have
greater equity throughout the economy.
Mr. W allich . H ow would we ever end the inflation then? It
seems to me at this rate the inflation will continue at 3 percent or there
abouts.
Chairman P roxmire. I can’t get it through my thick head why the
wage increase is inflationary as long as it is keyed to real produc
tivity increases. That is what it would be keyed to. Otherwise, it
isn’t related to it.
Mr. W allich . It is keyed to that, but it also assumes that prices
will rise by the difference between the guidepost and productivity
gains. In other words, if the guidepost is 5.7, and productivity were
3.2, which I think is too high, prices will rise 2.5. So we have a 2.5
percent price increase, and we continue next year with wages on the
same basis, and we have another price increase. By what process is
inflation ever going to come down ?
Chairman P roxmire. What we have had in the last 4 or 5 years is a
steady increase in prices, low but modest up until last year, around
1y2 percent or 2 percent. You had a guideline principle that was en
forced by some unions.
The result was that you had wages that conformed increasing far
less than profits. And you had an inequity developing in the econom
ic system because of it. I am not sure that you would necessarily
922
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
have less inflation than you would have had if you had had a modest
escalator.
You would then have been able to preserve the guideline principle
on a sound basis, the basis which I understood you to argue that it
should be keyed to real income and not to money income, because
money income is pernicious.
Mr. W allich . The German Council of Economic Advisers has
struggled with this problem because they have had high rates of in
flation for longer than we have had, and the system they recommend
is to sort of deescalate gradually, not to raise wages by productivity
plus past inflation, but productivity plus some part of the past infla
tion. I f they do this over a period of years they think they can get
down to stability.
Chairman P roxmire. Did you want to comment, Dr. Lekachman ?
Mr. L e k a c h m a n . I f I might for just a moment, Mr. Chairman.
This is the first I heard of Professor Hansen’s proposal, but it seems
to me in listening to the discussion of it, that there is something that
is implicit in this, and that is that there be a much firmer application
of the price guideposts.
Chairman P roxmire. That is exactly right.
Mr. L e k a c h m a n . Than up to now.
Chairman P roxmire. He said we should have administered prices
more effectively controlled than has been done in the past. And if
we didn’t do it, administrative price powers is the element that is go
ing to be unsettling, inflationary, and disturbing.
Mr. L e k a c h m a n . I f we could do that, I am not enormously hope
ful about the administrative possibilities, but if we could do that this
it seems to me would then tend to solve one of the problems of the
existing arrangement.
I f some firms raised their prices and others did not, when prices
were rising in general, in effect, the real prices of some firms would go
down and should go down on the assumption that these are the firms
with exceptionally high productivity experience, and very likely high
profit.
In other words, you can restore some implicit flexibility to the price
system if you could, which is the central question in my mind, if you
could develop the administrative mechanism more firmly to hold prices
to permissible increases.
Chairman P roxmire. I would like to ask Dr. Colm one other ques
tion. Dr. Colm, you indicated you thought it would be wise for the
Congress now to give the President the authority to increase taxes on
July 1. Do I state your position correctly, or did you indicate you
felt we should pass a tax increase as the President suggested ?
Mr. C olm . I did recommend the tax legislation, with an effective
date of July 1, and hearings before the effective date which would
make it possible to reconsider this decision, either at the initiative and
the recommendation of the President to drop it, or by the initiative of
Congress.
Chairman P roxmire. What disturbs me about your proposal is that
these hearings would be by the tax writing committees, and without as
much economic emphasis as they ought to give it. In other words, if
they would rely on what you also refer to, which really disturbs me—
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
923
you refer to the notion of budgetary considerations; that is, if our
expenditures exceed our revenues, that this should be an important
element in determining whether or not we should have the tax increase
in July. I would assume that this would not be the important ele
ment.
The important element would be the state of the economy, because
clearly if the state of the economy is bad, you are going to have a
bigger deficit, and a much worse argument for a tax increase. There
fore, we should not be concerned as far as this particular tax increase is
concerned with the budget deficit.
What you should be concerned with is the impact of the tax increase
on the economy. I f it is soft, we should not have it. And if it is ex
pansionary, as you expect it might be in the second half, we should
have it. Is that right ?
Mr. Colm. Mr. Chairman, I am delighted to hear you argue this
way. That is the way we economists have been arguing for sometime,
and we are happy that so much of this so-called new economics has
found more response.
But I do think there is a difference between a deficit which is caused
by an unexpected increase in expenditures, and a deficit which is the
result of a lower income and therefore a fall in revenues.
You are absolutely right, it would be paradoxical or perverse if
we have a larger than expected deficit because of a fall in economic
activity, then to increase taxes. I mean that was proposed in 1932 and
I thought we have learned something since then.
As your statement has indicated, we all have learned a lot since
then. But what I am concerned with is that if there is the outlook
for defense expenditures much larger than anticipated, then we may
need the tax increase, and I think we agreed, at least Mr. Wallich
agreed with that, and I am not so much-----Chairman P roxmire. Yes, but even still, Dr. Colm, even if there is
a supplemental that comes down and we, find that we are off by $5 bil
lion in the Vietnam war, it is the state of the economy it seems to me
that must be the determining factor, regardless of the expenditures we
have to take into account, whatever impact these expenditures are
going to have on the economy. But even if the expenditures are as you
say greater than we thought they would be, unless we recognize ex
clusively, really exclusively the effect of that tax increase and what it
is going to do to the economy and what it in terms of inflation and
employment, and so forth, is, it seems to me we, will be making a seri
ous error. Isn’t that correct?
Mr. Colm. I couldn’t agree more with your principle, Senator. The
point which I would make is we should be concerned not with the state
of the economy in June 1967 but what it is likely to be during the next
12 months, and if then—I thought I was rather tolerant with respect
to what deficit our economy could absorb. Now with the present de
fense estimate, we expect a national income account deficit of I think
it was something like $6 to $7 billion without a tax increase.
I f we now have on top of that a larger than expected increase in
defense expenditures, I think we would have to expect some oldfashioned demand inflation during the year-----Chairman P roxmire. It has a tendency to increase demand infla
tion, there is no question about it. Why should we not wait then until
924
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
September or October? The situation is so uncertain now. Congress
isn’t to go home until the fall. Wouldn’t it be wise under these cir
cumstances rather than having an effective date of July 1, when
economists do disagree, on what the situation is going to be, and I
think a preponderance of economists before this committee have in
dicated they don’t agree with the Council’s optimism on the last half
of 1967.
Under these circumstances why shouldn’t we wait another 3 or 4
months and take a later look at the economy ?
Mr. C olm . That is an offer to compromise, Senator. Perhaps the
tax legislation should be written with the effective date to be supplied
later by joint resolution of Congress.
What my concern is, Mr. Chairman, is the decision under conditions
of uncertainty. I know if things turn out as they did last year, and
I don’t expect a repetition of that, but even if there is a smaller change
in the defense budget, and the nondefense budget, if that becomes
apparent, and then the forecast is for inflationary pressure—if then
the Congress starts considering a tax bill that takes time. Therefore,
I think it would be prudent to have a tax bill written, and perhaps put
the effective date in later, or if not needed, drop it.
This is only a kind of insurance. In my opinion, it is a better way
of getting the flexibility than the delegation of power about which
Senator Javits asked us to write a statement. I think under present
conditions this would be a substitute for something Congress at this
moment I think would not be willing to give the President; namely,
discretionary power. I don’t think Congress should.
Chairman P roxmire. Dr. Wallich?
Mr. W a l l i c h . The argument of uncertainty on which I agree with
Mr. Colm seems to me to argue both ways. One could also say: let’s
pass a tentative tax reduction in case there is a de-escalation of the
war, since we don’t know what is ahead, and another possible increase.
These two approaches don’t really convince me. I think we ought,
to take advantage of the situation to put tax changes on a permanent
flexible basis. I must say I am profoundly disillusioned by the experi
ence of last year, which seemed to show that had we had presidential
discretion, it would not have helped.
Perhaps it’s asking too much to expect the President to put in a tax
increase before there has been plain and obvious evidence that the
people are hurting from inflation and high interest rates. On these
grounds, the proposals that were evolved by Mr. Griffiths’ committee
seem to me perhaps more hopeful, and I would also weigh rather
highly the point I think made by Mr. Mills, that one shouldn’t tamper
too much with the tax system by too many different kinds of changes.
These are unsettling.
We ought to have one single kind of change that goes up or down,
whatever the situation requires, but avoid the mixture of flexible fiscal
policy plus some kind of reform that we would like to introduce at
the same time. I think that is what Mr. Mills objects to.
Chairman P roxmire. I want to thank you gentlemen very much. I
do have one question that the staff asked that I ask Mr. Colm. On the
wage-price-productivity board, when you appeared before the Reuss
subcommittee their feeling was that you asked for a factfinding board*
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
925
and today you seem to ask for a decision by the board. They would
have hearings and make a decision. Have you changed your view in
the meanwhile?
Mr. C olm. N o, I have not, Mr. Chairman. I may not have made
this clear in my brief—unfortunately not so brief—summary, I still
feel that the board should make a factfinding report, and submit it to
the President.
Chairman P roxmire. Action on the facts would still be voluntary.
Mr. Colm. The President in consultation with the Council then,
if he feels that that is warranted, would make a recommendation to
Congress of his own. The board would make a factfinding report
about how the principles of the guidelines, spelled out by the President
and the Council, do apply to this particular case, and what would
follow from the guidelines.
Chairman P roxmire. Thank you very much, and I thank all of you
gentlemen for a most enlightening and interesting morning. I appre
ciate it.
The committee will resume its hearings on Thursday morning in
room 318, the caucus room of the Senate Office Building at 10 o’clock.
We will hear from two experts on wage-price guidelines.
(Whereupon, at 12:35 p.m., the committee adjourned until Thurs
day, February 23,1967, at 10 a.m.)
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
TH URSDA Y, F E B R U A R Y
23,
1967
C ongress of the U nited S tates,
J oint E conomic C ommittee ,
W a sh in gton , D .C .
The joint committee met at 10: 05 a.m., pursuant to recess, in room
318, Old Senate Office Building, Hon. William Proxmire (chairman
of the joint committee) presiding.
Present: Senators Proxmire, Sparkman, and Percy; and Repre
sentatives Patman, Bolling, and Reuss.
Also present: John R. Stark, executive director; James W. Knowles,
director of research ; and Donald A. Webster, minority economist*
Chairman P roxmire. The Joint Economic Committee will come to
order.
This morning’s hearings will be the last for our extensive and very
profitable inquiry into the President’s Economic Report and the ma
jor current issues in our economy. Let me take this occasion to re
iterate the committee’s profound appreciation and gratitude to the
witnesses for the excellent insights and analyses they have given us.
It has been a most stimulating experience.
Today it is fitting that we close with testimony from two outstand
ing experts on one of the crucial issues of economic policy, that of
wage-price stability. This Nation must resolve the wage-price ques
tion if it is to deal successfully with the requirements of the Employ
ment Act. Our members and the Congress as well as the public are
deeply concerned about this issue and we look forward to this morn
ing’s testimony.
Our first witness will be Prof. Carl A. Auerbach, o f the Law School
of the University of Minnesota, and our second witness will be Jules
Backman, professor of economics at New York University. I f there
is no objection, I shall revert to the practice adopted on Monday of
this week when 1 hour and 15 minutes was allowed to each of the
morning’s witnesses. I f that is agreeable I shall ask that Professor
Auerbach testify first, with the additional request that you limit your
initial statement to 20 minutes. I f you can do so, we can devote
more time to the colloquy.
I f you want to skip over part of it we will put your full statement
in the record, and I might add for the record that Professor Auerbach
is an old friend of the chairman and an old friend of Congressman
Henry Reuss. We have known him as an extraordinarily able and
competent law professor, and as a very fine person, and we are de
lighted to have you here this morning. Go right ahead.
927
928
th e
1967 ECONOMIC REPORT OF THE PRESIDENT
TESTIMONY OF CARL A. AUERBACH, PROFESSOR OF LAW,
UNIVERSITY OF MINNESOTA
Mr. A uerbach . Thank you, Mr. Chairman. It is a pleasure to
appear before this committee, with you as chairman. I hope that the
kind words you have said about me will be repeated after my testimony.
Chairman P roxmire. I am sure they will.
Mr. A uerbach . You have asked me to discuss principally the wageprice policy set forth in the 1967 Economic Report.
Both the President and the Council of Economic Advisers have been
criticized in recent weeks for abandoning the wage-price guideposts.
But this criticism, in my opinion, is too general and, therefore, unfair.
I think the most significant change in the administration’s policy is
not that it has refused to specify a single figure as the wage guidepost
for 1967—neither President Truman who originated the guidepost
policy, nor Presidents Eisenhower and Kennedy, who further elabo
rate it, ever specified such figures. Rather, the most significant change
is that the President has announced that the Government’s weapons of
intervention in private wage and price decisionmaking would be lim
ited to information and persuasion and efforts to apply “ sanctions” to
“ violators” of the guideposts would be abandoned.
I f this is a correct interpretation of administration policy, the
change is to be welcomed, not deplored; and particularly if Congress
now seizes the opportunity to accomplish the objective which Con
gressman Reuss has urged upon it in recent years.
I say this because very serious criticism may be directed at the way
the guidepost policy has been formulated and administered up to now.
To be clear about the problem we face, we must begin with the fact—
which Presidents Truman, Eisenhower, Kennedy, and Johnson, their
Councils of Economic Advisers and, I think, this committee have ac
cepted—that structural characteristics of the American economy are
responsible for the tendency of wages and prices to rise, even before
full employment is achieved. Historical experience has led us to ac
cept this fact. Prices increased rapidly in 1937, despite massive un
employment and under utilization of resources. The defense program
of 1940 and 1941 produced inflation even though the economy was
then operating far below capacity. Events from 1956 to 1958 again
showed that we could have inflation in the absence of excess demand
and, indeed, even in the face of declining demand. The experience of
the last year only adds to the proof.
Experience has also demonstrated that monetary and fiscal policies
alone cannot prevent an inflationary price-wage spiral without sacri
ficing the twin objectives of income growth and full utilization of
resources. In other words, we constantly hesitate to use monetary
and fiscal policies, to the extent necessary to attain these objectives, for
fear of inflation. To eliminate the necessity for such hesitation is the
principal purpose of the guidepost policy. Through this policy, it
is hoped price and wage restraint will come to be practiced in certain
otherwise unregulated sectors of the private economy.
The guidepost policy has been defended as a means of assuring such
private restraint principally on the ground that it is not a policy of
compulsion but one that calls for voluntary compliance with its re
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
929
quirements. It would seem that the advocates of a policy which
depended for its effectiveness upon the voluntary action of labor and
management should have tried to enhance its acceptability by afford
ing these groups an opportunity to participate m its formulation.
Yet, there is no evidence that representatives of labor and manage
ment, or even the President’s Advisory Committee on Labor-Management Policy, participated in the formulation of the original guideposts in 1962 or in their subsequent elaboration.
A s a consequence, both the A F L -C I O and spokesmen for various
industry groups have attacked the guidepost policy. Secretary of
Labor W irtz, before this committee, has said that it seemed to them
to constitute stabilization without representation.
The failure to recognize the necessity for participation of the major
interests affected by the guidepost policy in its formulation is due in
my opinion to the somewhat technocratic attitude of the Kennedy and
Johnson administrations toward the policy. President Kennedy most
clearly expressed this attitude in his celebrated 1962 commencement
address at Yale University when he called for “ more basic discussion
of the sophisticated and technical questions involved in keeping our
mighty economic machine moving steadiljy ahead.” The present
Council is fond of speaking about the “ arithmetic” of the guideposts.
But in truth, the problems of stabilization are not merely “ sophisti
cated” and “technical” and arithmetic alone will not solve them.
The participation of labor and management in the formulation and
administration of a wage-price policy may nevertheless be unneces
sary, if general agreement existed on what this policy should be and
how it should be applied. But I need not tell the members of this
committee that there is no such consensus.
Probably all of us agree that full employment, rapid economic
growth, and price stability are desirable. We may also agree that
uncontrolled inflation of long duration not only will interfere with
the process of production itself and jeopardize the possibility of full
employment, but also will result in inequities that may threaten to
undermine our social and political structure. But there is no agree
ment about how much price instability at any particular time may be
tolerated in the interest of fuller employment or for how long such
price instability may be endured without risking uncontrollable
inflation.
Paul Samuelson and Robert Solow wrote in 1959, and it remains
true today, that the country has a “ menu of policy choices” which
involve the balancing of different levels of employment and output
against varying degrees of price instability. Those o f our people who
live on fixed or relatively fixed incomes, those with secure jobs, savings
depositors, owners of life insurance and mortgagees, wouid like to see
the balance struck in favor of price stability. The unemployed and
all who are troubled about the social costs of unemployment would
like to see the balance struck in favor of still higher levels of pro
duction and employment. A wage-price policy should seek to lessen
the degree of disharmony between full employment and price stability.
But the disharmony cannot be avoided completely. Equally impor
tant, there is no agreement on the ingredients of a desirable wage-price
policy. Technical experts, in time, may be able to resolve to everyone's
930
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
satisfaction, some of the issues on which conflicting opinions have been
expressed before this committee. But any wage-price policy also
raises questions as to what is a “ fair” wage and a “ fair” profit and an
“ equitable” distribution of the national income on which opinions and
interests will remain in sharp conflict.
The conflicts of interest become apparent when we turn to the
burning question whether wage rate increases should be limited by
the trend rate of productivity growth, even in the face of significant
increases in the cost of living. Whether unions whose contracts will
be renegoti ated in 1967 will be satisfied with only a partial and gradual
adjustment for cost of living increases—as in effect the President
urges—may well depend upon whether they are persuaded that the
stabilization program will be applied equitably to all groups in the
population. But obviously, there is no agreement in the country on
what the principle of equality of sacrifice requires under present
circumstances.
When it erected the original guideposts in 1962, the Council recog
nized that, if adhered to, they would perpetuate the existing “ relative
shares of labor and nonlabor incomes in total output.” So it empha
sized that “ there is nothing immutable in fact or in justice about the
distribution of the total product between labor and nonlabor incomes.”
It thought it desirable that labor and management “ should bargain
explicitly about the distribution of income of particular firms or in
dustries,” so long as they did so within the framework of a Stable
price level. In 1964, the Council further explained that such bargain
ing should take place in an industry “ whose trend productivity is
growing more rapidly than the national average” only after prices
were reduced “ enough to distribute to the industry’s customers the
labor-cost savings [the industry] would make under the general wage
guidepost.” But since then the Council has vacillated on the desira
bility o f bargaining about the distribution of income.
This year, for example, the Council warns that “ attempts on the
part of the unions to redistribute income from profits to wages through
excessive wage increases in high-profit industries results primarily in
higher prices in those industries,” and in the redistribution of “ real
income from the rest of the community—who are mostly other wage
earners—to the workers in question, with very little redistribution
from profits to wages.”
But of course, this is true only because management in high-profit
industries has been unwilling to reduce prices and no means have been
found to compel it to do so.
Recognizing that it is unfair to ask workers to restrain their wage
demands if their restraint will only result in higher profits, the Council
appeals for forebearance on the part of management. It asks pro
ducers to “ absorb cost increases to the maximum extent feasible, and
take advantage of every opportunity to lower prices.”
But there is no agreement in the country on any standard of
“ reasonable” profits that would tell us to what extent producers should
absorb cost increases and how much lower profit margins should be.
For this reason, we cannot tell whether a wage increase higher than
that permitted by the wage guideposts should have the effect of re
distributing the industry’s income or should justify a price increase
or a smaller price decrease than the guideposts call for.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
931
Under these circumstances, very little is ! o be gained by asking man
t
agement to adopt a policy of profit minimization, or by scolding it even
for trying to maximize profits. Similarly, labor should not be scolded
for trying to improve its position.
The point I wish to make is that the issues raised by the guideposts,
or any wage-price policy, are the kind that are resolved in our democ
racy only by an accommodation of conflicting claims which all con
cerned mid tolerable. To reach such an accommodation, labor and
management must be given the opportunity to partcipate in the for
mulation of a wage-price policy. Furthermore, since any bargain that
these groups may strike will affect the life of the ordinary citizen more
than much legislation passed by the Congress, Congress must be the
final arbiter.
Accordingly, I urge this committee to institute hearings immedi
ately to determine what our wage-price policy should be in the period
ahead. Representatives of labor, management, the public and, of
course, the administration, should be heard. This committee should
then write a report which would enable the appropriate legislative
committees of Congress, if they approved it, to draft a bill setting
forth the components of an overall wage-price policy.
It has been objected that it is unwise to legislate a wage-price policy,
because that will give it “legal status and a flavor o f compulsion,” and
destroy its voluntary character. But if it is agreed that representatives
of labor, management, and the public should participate in formula
ting the wage-price policy, some way must be provided for settling
controversies that may airse. Only the President or Congress can do
so. I think Congress should do so, but that it should act in a manner
that will require it to run the gauntlet of a possible Presidential veto.
Furthermore, I do not see why congressional formulation of a wageprice policy by itself will destroy the voluntary nature of labormanagement compliance with the policy. No overall wage-price policy
formulated by the President or Congress can be expected to set forth
clear guides to action in every case. The more general and more
flexible the statement of such a policy, the more difficult it will be to
apply it to any particular industry or firm and, therefore, the more
difficult it will be to judge whether a particular wage or price decision
is in accord with the policy. To tailor the overall wage-price policy
adopted by Congress to the circumstances and needs of particular
industries and firms is an administrative task. In my opinion, this
function should not be assumed by Congress, the Joint Economic Com
mittee, or the Council of Economic Advisers. It should be given to an
administrative agency. However, a tripartite committee, represent
ing labor, management, and the consuming public, should be appointed
by the President for each industry, to advise the agency in the formula
tion of a specific wage-price policy for that industry. It is important
that such advisory committees be set up as quickly as possible in those
industries in which wage agreements will be newly negotiated in 1967.
In addition, the agency should be required to hold public hearings
on the wage-price policies proposed for particular industries and to
issue written statements justifying the policies adopted for each in
dustry. In time, this agency should have valuable advice to offer to
all concerned with the formulation of the overall wage-price policy,
which should be under constant review by the Congress.
932
THE 19 67 ECONOMIC REPORT OF THE PRESIDENT
I f there is to be voluntary compliance with the wage-price policies
thus formulated for an industry, and if the force of public opinion is
to be brought to bear to help secure compliance, then labor, manage
ment, and the public must be able to know whether a particular wage
or price decision accords with the policies laid down. The administra
tion of the guidepost policy to date has not assured the availability of
such knowledge. Indeed, the Council of Economic Advisers admits
that when it meets privately with producers about price increase, “ it
ordinarily does not have the detailed information which would permit
a clear judgment as to the appropriateness of the proposed price change
on either the basis of the guidepost standards or other relevant con
siderations.”
To determine whether a particular wage or price decision accords
with the stabilization policies laid down is a task that must be per
formed by an impartial, respected public body. It requires a judicious
approach which should include a full and fair hearing for the inter
ested parties and for public representatives.
I do not think that the Council of Economic Advisers should be
asked to perform this function of hearing and judging. Nor, with all
due respect, do I think that this excellent committee is the appropriate
body to do the job. This task is likely to be accomplished more ex
pertly and fairly outside the Halls of Congress. I would recommend,
therefore, that it 'be given to the agency charged with formulating the
industrywide policies. This agency will thereby gain experience with
particular situations which will help it in formulating these policies.
In turn, its experience in elaborating these policies will help it to
judge specific cases.
Furthermore, because it is always difficult to secure the rescission
of action that has been taken, Congress should require labor and man
agement to give this agency advance notice of any proposed wage or
price increase. The agency should then be relied upon to institute
hearings in those cases in which it thinks that a proposed wage or
price increase may threaten national economic stability. After hear
ing, the agency should be required to publish its findings and recom
mendations in the case.
It is also very important to authorize the agency to initiate hearing
in those cases in which it thinks price decreases are called for by the
stabilization policies, and the failure to make the decreases threatens
national economic stability. The Government’s past interventions to
secure compliance with the guideposts have raised serious questions
of propriety. Too often they have become public tests of strength
between the President of the United States and the executives of
a great industry or a great labor union.
“In any such confrontation with the President,” Alcoa’s President
Harper has said, “there can and should be only one outcome.” But
precisely here is the difficulty. In such a test of strength, the Presi
dent must not lose. But this necessity itself creates the danger that
the outcome may be arbitrary.
Furthermore, whenever, in order to have his way, the President
must resort to means other than persuasion—such as selling stock
piled materials, awarding contracts to producers who have not raised
their prices, instituting tax or antitrust investigations—he will sub
ject himself, inevitably, to criticism for allegedly abusing his
authority.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
933
Equally troublesome, there can be no certainty in this situation that
the President will deal even-handedly with all those who are similarly
situated. Not only is the fairness of this system of enforcement in
question, but the haphazard quality of Presidential intervention also
makes it an ineffective way to enforce stabilization policies.
Finally, in time, labor and management will appreciate that even
the powers of the President are limited and begin to flout the Presi
dent’s policies with impunity. I am afraid that the President’s 1967
Economic Report reflects his estimate that this time has already
come.
The suggestions that I have put before this committee may make
it possible to carry out the overall wage-price policy adopted by Con
gress effectively and equitably without the personal intervention of
the President. I would hope and expect that these suggestions will
maximize the possibility of securing the voluntary cooperation of
labor and management, and, if necessary, of mobilizing public opinion
to induce such compliance.
For this reason I do not recommend that Congress, at this time,
should impose any sanctions for noncompliance with the wage-price
policies that will be elaborated under the authority of the legislation
I have outlined.
I would not object, however, if Congress should decide to impose
such sanctions. I would not object to sanctions because I do not think
that the controls which Congress would then be legislating would dis
place a free market. On the contrary, they would displace the exercise
of private power over the market by the exercise of public authority in
the interest of economic stability.
It is very important, in my view, Mr. Chairman, that we should not
be ruled by a taboo against price and wage controls. They constitute
a way of managing the economy which must be compared and evalu
ated with other ways. We are told by Chairman Ackley that if the
actions of labor and management “ create an inflationary spiral, the
most likely outcome will be restrictive fiscal and monetary policies
which will aim to stop further price increases but will in the process
also reduce output, cut back profits, and reduce employment.” Because
of its impact on our balance of payments, Chairman Ackley adds that
the inflationary spiral will also have to be fought by “ cutting back or
eliminating expenditures on foreign economic assistance, by yielding
to restrictionist pressures in our trade policy, and by further limita
tions on the outflow of capital to friendly nations.”
Certainly, Mr. Chairman, even direct controls deserve the most
serious consideration as an alternative to policies that would have these
disastrous consequences. They may permit us once and for all to
abandon the idea of managing the economy through unemployment.
And they may even eliminate any possible necessity for a tax increase
in 1967.
Thank you, Mr. Chairman.
(The prepared statement of Mr. Auerbach follows:)
PREPARED STATEMENT OF CARL A. AUERBACH
Mr. Chairman, yon have inivited me to discuss the wage-price policies set
forth in the President’s Economic Report and the Annual Report o f the Council
of Economic Advisers. Both the President and the Council have been criticized
934
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
in recent weeks for abandoning the wage-price guideposts. Yet this criticism
is too general and, therefore, unfair. This Committee will come to grips with
the difficult problems o f economic stabilization we face this year only if it is
clear about the specific nature o f the changes in the Administration’s wage-price
policy.
have
the
g u id e p o s t s
been
abandoned?
The President regards the restoration of price stability as “one of our major
tasks.” 1 the accomplishment of which will require “ the responsible conduct of
those in business and labor who have the power to make price and wage deci
sions.” 2 The President is also quite definite about what conduct of business
and labor would be irresponsible. “ I f unions now attempt to recoup in wages all
of the past or anticipated advance in the cost o f living—in addition to the
productivity trend” and “ if businesses now seek to pass along rising costs when
it would be possible to absorb them or do not reduce prices when costs fall,” then,
the President warns, the result will be a wage-price spiral “damaging to business,
damaging to labor, and disastrous to the Nation.” 8
Furthermore, the Council o f Economic Advisers has attempted to define
the affirmative requirements o f responsible conduct on the part of labor and
business. So far as wage policy is concerned, the Council is still firmly of
the opinion that the “ only valid and noninflationary standard for wage advances
is the productivity principle.” 4 Nothing in its Report gives any indication that
the Council has abandoned its position that the trend of productivity which
should govern wage movements is 3.2 percent a year.* “ I f price stability is
eventually to be restored and maintained in a high-employment U.S. economy” ,
the Council insists, “ wage settlements must once again conform to that
standard.” 6
Those who seek a specific wage guidepost figure in the Council’s Report will
find that it continues to be 3.2 percent a year. But as a practical matter, the
Council— and the President—recognize that the 3.3 percent increase in the cost
of living in 1966 and the unusually high profits earned in recent years make “it
unlikely that most collective bargaining settlements in 1967 will fully conform
to the trend increase o f productivity.” 7 And the President obviously thinks
it would be futile for him to try to see that these settlements do so conform.
Since the Council, even under current conditions, adheres to the productivity
principle, it “ sees no useful purpose to be served by suggesting some higher
standard for wage increases, even on a temporary basis.” 8 It calls for “ re
straint in wage settlements” and defines “ restraint” to mean “ wage advances
which are substantially less than the productivity trend plus the recent rise in
consumer prices.” 0 It also calls upon producers to “absorb cost increases to
the maximum extent feasible, and take advantage o f every opportunity to lower
prices.” 1 In like vein, the President appeals “ to business and labor—in their
0
own interest and that o f the Nation—for the utmost restraint and responsibility
in wage and price decisions.” 1
1
HOW H A S ADMINISTRATION POLICY CHANGED ?
In my opinion, the most significant change in the Administration’s policy is
not that it has refused to specify a single figure as the wage guidepost for 1967.
Neither President Truman, who originated the guidepost policy, nor Presidents
Eisenhower and Kennedy, who further elaborated it, ever specified such figures.
It is more significant that President Johnson has apparently abandoned the
policy—which on occasion was also of President Kennedy—of using the influence
and prestige o f the Presidency to assure that particular wage and price deci
sions satisfy the requirements o f the public interest as viewed by the President.
Gone from the President’s 1967 Economic Report are his 1964 and 1965 pledges
that he would “ not hesitate to draw public attention to major actions by either
1 1967 E conom ic R ep ort o f the President, at 11.
2 Id. at 12.
a Ibid.
4 1967 A nnual R eport o f C ouncil o f E conom ic Advisers, at 12K
5 See id. at 123.
6 Id. at 128.
* Ibid.
8 Ibid.
®Id. at 129.
Id. a t 133.
111967 E conom ic R eport o f the President, at K
-5.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
935
business or labor that flout the public interest in noninflationary price and wage
standards” ; 1 or his 1966 declaration that “ it is vitally important” that labor and
2
industry follow the guideposts.1 Instead, we have the presidential “ appeal to
3
business and labor—in their own interest and that of the Nation— for the utmost
restraint and responsibility in wage and price decision.” 1
4
The Council, which has been the President* s executive arm for administering
and enforcing the guideposts, has stated that it will continue to meet privately
with “leaders of business and labor” in order “ to underscore the public interest
factor in wage and price decisions and to solicit the cooperation o f union and
corporate leadership in specific situations.” 1 But it does not state that it will
5
henceforth, as it has on occasion in the past, issue “ formal statements to the
public commenting on particular wage or price decisions.” 1
6
While there is no firm basis for reading into the President’s Economic Report
an espousal of a policy of non-intervention in private wage- and price-decisionmaking, it is fair to interpret it as adopting a policy o f limiting the Government's
weapons of intervention to information and persuasion and renouncing future
efforts to apply “ sanctions” to “ violators” of the guideposts.
If this is a correct interpretation o f administration policy, the change is to
be welcomed—not deplored— and particularly if Congress now meets its obliga
tions and acts to accomplish the objectives which Congressman Reuss has urged
upon it in recent years.
DIFFICULTIES W ITH GUIDEPOST POLICY AND SUGGESTIONS FOR OVERCOMING THEM
Very serious—and legitimate— criticism may be directed at the way the guidepost policy has been formulated and administered to date. It has tended, in
my view, to jeopardize the values which we associate with the rule o f law in
our democracy.
Need for a wage-price policy
To be clear about the problem we face, we must begin with the fact— which
Presidents Truman, Eisenhower, Kennedy and Johnson, their Councils o f Eco
nomic Advisers and, I think, this Committee, have accepted— that structural
characteristics of the American economy are responsible for the tendency of
wages and prices to rise even before full employment is achieved. Historical
experience has convinced us of this fact. Prices increased rapidly in 1937 despite
massive unemployment and under-utilization o f resources. The defense pro
gram of 1940 and 1941 produced inflation even though the economy was then
operating far below capacity. Events from 1956 to 1958 again showed that we
could have inflation in the absence o f excess demand, and indeed, even in the
face of declining demand. The experience o f the last year only adds to the
proof. “ The critical economic problem to be solved in the year ahead” , the
Council tells us, “is that of maintaining income growth and full utilization of
resources without becoming trapped in an inflationary price-wage spiral.” 1
7
Experience has also demonstrated that monetary and fiscal policies alone can
not prevent an inflationary price-wage spiral without sacrificing the twin objec
tives of income growth and full utilization o f resources. In order words, we
constantly hesitate to use monetary and fiscal policies to the extent necessary to
attain these objectives for fear o f inflation. To remove this hesitation, it is
commonly accepted, price and wage restraint will have to be practiced in certain
sectors of the otherwise unregulated private economy. Differences quickly arise
when the discussion shifts to the means of assuring that such private restraint,
in fact, will be practiced.
Stabilization without representation
The guidepost policy is defended as a means of assuring such private re
straint principally on the ground that it is not a policy of compulsion but one
that calls for “ voluntary” compliance with its requirements. As Chairman
Ackley succinctly put it, having “ been exposed to persuasion and willing to risk
121964 Econom ic R eport o f the President, a t 1 1 ; 1965 E con om ic R eport o f the P resi
dent. at 13.
13 1966 Econom ic R eport o f the President, at 12.
1 1967 Econom ic R eport o f the President, at 13.
4
15 1967 Annual Report o f Council o f E conom ic Advisers, at 126-127.
« Id. at 127.
» Id. at 72.
936
th e
1967 ECONOMIC REPORT OF THE PRESIDENT
the censure of public opinion,” labor and management are ‘‘able in the end to
violate the guideposts with impunity.” 1
8
It would seem that the advocates o f a policy which depends for its effective
ness upon the voluntary action o f labor and management should have tried
to enhance its acceptability by affording these groups an opportunity to par
ticipate in its formulation. Yet there is no evidence that representatives of
labor and management— or even the President’s Advisory Committee on LaborManagement Policy—participated in the formulation of the original guideposts
in 1962 or in their subsequent elaboration. It is interesting in this connection
that the only reference to the President’s Advisory Committee on Labor-Management Policy in the current Economic Report is the Council’s statement that its
activities in 1967 included meeting formally with a number of advisory groups,
one of which was the President’s Advisory Committee.1
9
Both the AFL-CIO and spokesmen for various industry groups have attacked
the guidepost policy. Secretary of Labor Wirtz thinks that a “good deal of the
objection to” the guidepost policy “ is that it seemed to constitute ‘stabilization
without represenation’.” 2
0
Lack of consensus about wage-price policy
The failure to recognize the necessity for participation o f the major interests
affected by the guidepost policy in its formulation is due, in my opinion, to
the technocratic attitude o f the Kennedy and Johnson Administration toward
this policy. President Kennedy most clearly expressed this attitude in his
celebrated 1962 Commencement Address at Yale University when he called
fo r “ more basic discussion of the sophisticated and technical questions in
volved in keeping our mighty economic machine moving steadily ahead.” 2
1
The present Coucil is fond o f speaking about the “ arithmetic” of the guideposts.2 But, in truth, the problems of stabilization are not merely “ sophisti
2
cated” and “ technical” and “ arithmetic” alone will not solve them.
The participation of labor and management in the formulation and adminis
tration o f a wage-price policy might nevertheless be unnecessary if general
agreement existed on what this policy should be and how it should be applied.
But I need not tell the members of this Committee that there is no such
consensus.
How much unemployment should be tolerated in the interest of price stability f
There probably is agreement in the country that full employment, rapid eco
nomic growth and price stability are all desirable. Probably there is also agree
ment that uncontrolled inflation o f long duration not only will interfere with the
process o f production itself, thereby jeopardizing the possibility o f full employ
ment, but also will result in inequities that will threaten to undermine our social
and political structure. But there is no agreement about how much price insta
bility at any particular time may be tolerated in the interest of fuller employment
o r for how long such price instability may be endured without risking uncontrol
lable inflation. There is no shared understanding of when employment is “ full”
or how rapidly our economy should grow.
Paul A. Samuelson and Robert M. Solow wrote in 1959 that the country has
a “ menu o f policy choices” which involve the balancing o f different levels of
employment and output against varying degrees of price instability.2 Those of
8
our people who live on fixed or relatively fixed incomes, those with secure jobs,
savings depositors, owners o f life insurance and mortgagees would like to see
the balance struck in favor o f price stability. The unemployed— and all who
are troubled about the social costs of unemployment—would like to see the bal
ance struck in favor o f still higher levels of production and employment. It is
the purpose o f a wage-price policy to “ lessen the degree of disharmony between
full employment and price stability.” 2 But the disharmony cannot be avoided
4
completely.
18 H earings on H.R. 11916 before a subcommittee o f the House Committee on Govern
ment O perations. 89th Cong.. 2d Sess. 67 (1967) (statem ent o f Chairman A ckley).
19 1967 A nnual R eport o f Council o f Econom ic Advisers, at 206.
20 H earings on H .R . 11916 before a subcommittee o f the House Committee on Govern
ment Operations, 89th Cong., 2d Sess. 93 (1966) (statement of Secretary W irtz).
2 W all Street Journal, June 12, 1962. p. 20, col. 1.
1
22 1967 A nnual R eport o f C ouncil o f E conom ic Advisers, at 120 ; Hearings on H .R. 11916
before a subcom m ittee o f the House Committee on Government Operations, 89th Cong.,
2d Sess. 82 (statem ent o f Chairman A ck lev).
** Sam uelson and Solow, Our Menu o f P olicy Choices, in The Battle Against Unemploy
m ent 74 (Okun ed., 19 65).
2 Id. a t 75 -7 6 .
4
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
937
Should wage rate increases "be limited by the rate of increase in productivity;
if so, howt
Equally important, there is no agreement on the ingredients of a desirable
wage-price policy. This Committee has heard testimony that the wage guideposts
should not always tie wage rate increases to the rate of increase in productivity
because the increasing productivity o f capital may require, for a while, that wage
earner gains exceed productivity gains in order to restore economic equilibrium.2
5
It has also heard the wage guideposts criticized because, allegedly, they reinforce
the myth in the public mind “ that everyone is entitled to some average produc
tivity increase in wages annually.” 2
6
Among those who accept the principle that wage rate increases should be tied
to productivity rate increases, there is disagreement as to whether the standard
should be the nation-wide trend rate of productivity-increase or the rate of
productivity-increase in the particular industry in question.2 There is also dis
7
agreement as to how the trend rate of productivity increase, on the one hand,2
8
and employee compensation per man-hour, on the other,2 should be measured.
9
These may be issues which, eventually, technical experts should be able to re
solve to everyone’s satisfaction. But the guidepost policy also raises questions
as to what is a “fair” wage and a “fair” profit and an “equitable” distribution of
the national income on which opinions and interests will remain in sharp
conflict.
Should increases in real, not money, wages be used for guidepost comparisons f
The conflicts of interest become apparent when we turn to the question whether
wage rate increases should be limited by the trend rate o f productivity growth
even in the face of significant increases in the cost of living. The guideposts
assumed that real wages would go up as productivity increased. But this has
not happened because price stability has not been maintained. Under these cir
cumstances I agree with Mr. Gerhard Colm that it is not realistic or equitable to
expect a “ union whose contract is under consideration . . . to pay the penalty for
the failure of government, business and other unions to do their part in the
stabilization effort.” 8 Therefore we should not blame such a union for seeking
0
to improve its position.
Whether particular unions will exercise restraint in this struggle and be satisfied with only a “ partial and gradual adjustment” for cost o f living increases8 —
1
as Mr. Colm recommends—may depend upon whether labor is convinced that the
stabilization program is being applied “ equitably to all groups in the popula
tion.” 3 But obviously there is no agreement in the country on what the princi
2
ple of equality of sacrifice now requires because there is no agreement on what
is an “ equitable” distribution of income.
Bargaining about distribution of income
When it erected the original guideposts in 1962, the Council of Economic Ad
visers recognized that, if adhered to, they would perpetuate the existing “ relative
25 Hearings on 1963 Econom ic R eport o f the President B efore Joint Econom ic Commit
tee, 88th Cong., 1st Sess. 727 (1963) ; Hearings on 1965 Econom ic Report o f the President
B efore Joint E conom ic Committee, 89th Cong., 1 st Sess., pt. 4, at 27 (testimony o f Mr.
Leon K eyserling).
28 Hearings on 1964 Econom ic Report o f the President B efore Joint Econom ic Commit
tee. 88th Cong., 2d Sess. 219 (1964) (testim ony o f Professor W alter D. F ackler).
27 See 1950 Annual E conom ic Review o f Council o f E conom ic Advisers, at 10 1; Hearings
on H.R. 11916 B efore a Subcommittee o f the House Committee on Government Operations,
89th Cong., 2d Sess. 8 2 -83 (statem ent o f Chairman Ackley)_; Joint Econom ic Committee,
R eport on Jan. 1964 Econom ic R eport o f the President, S. Rep. No. 931, 88th Cong.. 2d
Sess. 38 (1964) (m inority views) ; Hearings on 1964 E conom ic Report of the President
B efore Joint E conom ic Committee, 88th Cong., 2d Sess., pt. 2, at 158 (testimony of
Mr. W. A. Boyle, President o f United Mine W orkers) ; N.Y. Times, Aug. 9, 1966, p. 1,
col. 8 (view s o f Secretary o f Commerce John T. C onn or).
28 See fo r example, Hearings on 1966 Econom ic R eport o f the President Before Joint
Econom ic Committee, 89th Cong., 2d Sess. 398 (1966) (testim ony o f Mr. W alter Reuther) ;
icl. at 617-618 (testim ony o f Mr. Leon K eyserling) ; Joint E conom ic Committee, Report
on Jan. 1964 E conom ic R eport o f the President, S. Rep. No. 931, 88th Cong., 2d Sess. 38
(1964) (m inority v iew s).
*
See fo r example, H earings on 1965 Econom ic R eport o f the President Before Joint
E conom ic Committee, 89th Cong., 1st Sess., pt. 3, at 102 (1965) (testimony of Mr. Leon
K eyserling) : H earings on 1966 E conom ic Report o f the President B efore Joint Econom ic
Committee. 89th Cong., 2d Ses®. 444 (1966) (testim ony o f Mr. E lisha Gray I I ).
30 H earings on H.R. 11916 B efore a Subcommittee o f the House Committee on Government Operations, 89th Cong., 2d Sess. 7, 8 (1966) (statem ent o f Mr. Colm)*
81 Id. at S.
32 See statement o f A F L -C IO E xecutive Council, The Am erican Federationist, Sept.
1966, p. 8.
75-314— 67— pt. 4—
15
938
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
shares of labor and nonlabor incomes in total output.” 3 So it emphasized that
3
“there is nothing immutable in fact or in justice about the distribution of the total
product between labor and nonlabor incomes.” 3 It thought it desirable that
4
labor and management “ should bargain explicitly about the distribution of income
of particular firms or industries” , so long as they did so within the framework of
a stable price level.8 However, if such bargaining resulted in price increases, the
5
Council pointed out labor and management would not be redistributing income
within the industry involved; they would be redistributing income “between that
industry and other segments of the economy through the mechanism of
inflation.” 8
9
The Council affirmed this position in 1964, stressing that price behavior in an
industry in which such bargaining was going on must remain consistent with the
general price guidepost. This guidepost, as we know, requires that in an industry
“whose trend productivity is growing more rapidly than the national average,
product prices should be lowered enough to distribute to the industry’s customers
the labor-cost savings it would make under the general wage guidepost.” 3 In
7
effect, the Council was saying that bargaining about the distribution of income in
such an industry should take place only a f t e r prices are reduced to the extent
indicated. Labor might then receive a larger share of the industry’s income if it
won greater wage increases than the productivity standard permitted or a larger
share might go to profits if the workers were granted smaller wage increases than
the productivity standard permitted.
But the Council has vacillated on the desirability of bargaining about the dis
tribution of income. In 1965 it felt constrained to warn that experience during
the 1950’s demonstrated that such bargaining “ proved self-defeating” , that
neither labor nor capital “gained, and both lost through higher prices, weaker
markets, reduced profits, and lower employment.” m In 1966, apparently, it felt
that it had gone too far in advising labor not to bargain collectively for a change
in the distribution of income. So it retreated to the position that “ public policy
is and should remain neutral with respect to wage and price decisions that at
tempt to change the distribution of industry’s income between labor and capi
tal”—so long as such decisions do not produce inflationary pressures.3 This
9
year, however, the Council repeats its warning “ that attempts on the part of
unions to redistribute income from profits to wages through excessive wage in
creases in high-profit industries results primarily in higher prices in those in
dustries” and in the redistribution of “ real income from the rest of the com
munity—who are mostly other wage earners— to the workers in question, with
very little redistribution from profits to wages.” 4
0
But of course this is true only because management in high-profit industries
has been unwilling to reduce prices and no means have been found to require it
to do so. Recognizing that it is unfair to ask workers to restrain their wage
demands if their restraint will only result in higher profits, the Council appeals
for forbearance on the part of management. It asks producers to “absorb cost
increases to the maximum extent feasible, and take advantage o f every oppor
tunity to lower prices.” 4 For the first time, too, the Council states that profit
1
margins appropriate for the boom stage of a boom and bust economy—to which
it likens 1966 average profit margins o f manufacturers which were higher, as a
percentage of equity, than in any prior year since the highly inflationary year
of 1950—are too high for a steadily expanding economy.4 Indeed, the Council
2
maintains that lower profit margins may be essential to maintain a steadily ex
panding economy.4
3
But there is no agreement in the country on any standard of “ reasonable”
profits that would tell us to what extent producers should absorb cost i n c r e a s e s
and how much lower profit margins should be. For this reason, we cannot tell
whether a wage increase higher than that permitted by the wage guideposts
should have the effect of redistributing the industry’s income or should justify a
price increase or a smaller price decrease than the guideposts would call for.
331962 Annual
8* Ibid.
« Id. at 188.
“ Ibid.
37 1964 A nnual
3 1965 Annual
8
3 1966 Annual
9
401967 Annual
" Id. at 133.
« JUd.
4 IMd.
B
R eport o f Council o f E conom ic Advisers, at 186.
R eport o f Council o f E conom ic Advisers, at 119.
Report o f Council o f E conom ic Advisers, at 109.
R eport o f Council o f E conom ic Advisers, at 91.
Report o f Council o f E conom ic Advisers, at 132.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
989
Under these circumstances little is gained by asking management to adopt a
principle of profit minimization or even to blame it for trying to maximize profits.
Yet the fact remains that unless agreement is reached on some standard of
“ reasonable” profits to guide price policy in the administered-price industries, or
ganized labor cannot reasonably be expected to acquiesce in absorbing any part
of the cost o f living increases due to the rise in prices in other sectors of the
economy—in farm products and services, for example. Nor can it be expected to
heed the Council’s advice that it pay for the higher minimum wage by accept
ing lower wage increases than the average permitted by the productivity
standard.4
4
A proposal for congressional formulation of a wage-price policy
I shall not try to suggest answers to the many questions I have raised. The
point I wish to make is that the issues raised by the guideposts—or any wageprice policy—are the kind that are resolved in our democracy only by an accom
modation of conflicting claims which all concerned find tolerable. To each such
an accommodation, labor and management must be given the opportunity to
participate in the formulation of a wage and price policy. Furthermore, since
any bargain that these groups may strike will affect the life of the ordinary citizen
more than much legislation passed by Congress, Congress must be the final
arbiter.
Accordingly, I urge this Committee to institute hearings immediately to deter
mine what our wage-price policy should be in the period ahead. Representatives
of labor, management, the public—and of course the Administration— should be
heard. This Committee should then write a report which would enable the ap*
propriate legislative committees o f Congress, if they approved it, to draft a bill
setting forth the components of an overall wage-price policy.
It has been objected that it is unwise to legislate a wage-price policy because
that will give it “legal status and a flavour of compulsion” and destroy its volun
tary character.4 But if it is agreed that representatives of labor, management
5
and the public should participate in formulating a wage-price policy, some way
must be provided for settling controversies that may arise. Only the President
or Congress can do s o ; I think Congress should do so but that it should act in a
manner that will require it to run the gauntlet of a possible Presidential veto.
Furthermore, I do not see why congressional formulation of a wage-price
policy, by itself, will destroy the voluntary nature of labor-management compli
ance with the policy.
Translating the overall wage-price policy into specific policies for particular
industries
Flexibility was the key to the 1962 formulation o f the guideposts. In addition
to the factors making for flexibility which I have already mentioned, the 19(52
formulation recognized exceptions in the interests of “ efficiency and equity.” 4*
*
Exceptions from the general wage guidepost were envisaged for an industry
which was unable to attract sufficient labor and for one which was unable to
provide jobs for its entire labor force; and for industries in which wage rates
were either exceptionally low or exceptionally high compared with those earned
elsewhere by similar labor.4 Similarly, exceptions from the general price guide7
post were expected in industries in which the level of profits was insufficient to
attract the capital required to finance a needed expansion in capacity or in which
the relation of productive capacity to full employment demand showed the
desirability of an outflow of capital; in industries in which costs other than labor
costs had either risen or fallen; and in which excessive market power had re
sulted in rates of profit substantially higher than these earned elsewhere on
investments o f comparable risk.4
8
In 1964, for the first time, the Council announced that the general guideposts
could “cover the vast majority of the wage and price decisions” and that the
exceptions recognized in 1962 were “ intended to apply to only a relatively few
cases.” 4 The Council affirms this position in its 1967 report. While it con
9
44 Id. at 130.
i 5 Hearings on H.R. 11916 B efore a Subcommittee o f the House Committee on Govern
4
ment Operations, 89th Cong., 2d Se-ss. 91 (1966) (statement o f Chairman Ackley object
ing to the Reuss bill which w ould not go as fa r as the suggestion made above).
46 1962 Annual R eport o f Council o f Econom ic Advisers, at 188.
4 Id. at 189.
7
4« Ibid.
4 1964 Annual Report o f Council o f Econom ic Advisers, at 119.
9
940
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
tinues to recognize exceptions from the general wage guidepost “ that serve an
economic function by assisting in the reallocation of labor toward shortage occu
pations and industries,” it points out that “ the remaining labor shortages this
year will be concentrated in unorganized professional and technical occupa
tions.” 5 The Council also seeks to confine the “ comparable wages” exception
0
from the general wage guidepost.5
1
But the Council’s continuing attempt to prevent the flexibility that must be
part of any wage-price policy from becoming the means to defeat the policy itself
is negated this year by the practicalities o f the situation the Council faces. It
does not believe that any firm rules will or can be applied for the movement of
either wages or prices in 1967.
In fact, no overall wage-price policy formulated by the President or Congress
can be expected to set forth clear guides to action in every case. The more gen
eral and more flexible the statement o f such a policy, the more difficult it will be
to apply it to any particular industry or firm and therefore the more difficult it
will be to judge whether a particular wage or price decision is in accord with
the policy.
A proposal for administrative implementation o f the overall policy adopted by
Congress
To tailor the overall wage-price policy adopted by Congress to the circum
stances and needs o f particular industries and firms is an administrative task,
in my opinion, this function should not be assumed by Congress, the Joint Eco
nomic Committee or the Council o f Economic Advisers. It should be given to an
administrative agency. However, a tripartite committee—representing labor,
management and the consuming public—should be appointed by the President for
each industry to advise the agency in the formulation of a specific wage-price
policy for that industry. It is important that such advisory committees be set
up as quickly as possible in those industries in which wage agreements will be
newly negotiated in 1967. In addition, the agency should be required to hold
public hearings on the wage-price policies proposed for particular industries and
to issue written statements justifying the policies adopted for each industry.
In time, this agency Should have valuable advice to offer to all concerned with the
formulation of the overall wage-price policy, which should be under constant
review by the Congress.
Determining whether a particular price or wage decision accords with the wageprice policies adopted fo r the industry
If there is to be voluntary compliance with the wage-price policies thus formu
lated for an industry—and if the force of public opinion is to be brought to bear
to help secure compliance—then labor, management and the public must be able
to know whether a particular wage or price decision accords with the policies
laid down. The administration of the guidepost policy to date has not assured
the availability o f such knowledge. Indeed, the Coucil of Economic Advisers ad
mits that when it meets privately with producers about price increases, “ it ordi
narily does not have the detailed information which would permit a clear judg
ment as to the appropriateness of the proposed price change on either the basis
o f the guide post standards or other relevant considerations.” 5 Nor has such
2
detailed information been made available even in those cases in which the Coun
cil has issued formal statements to the public commenting on particular wage
or price decisions. Yet in many cases, labor and industry spokesmen have chal
lenged the Council’s application o f the guideposts to their situations. For exam
ple, the steel industry in 1962 and 1966, the aluminum industry in 1966 and the
machinists in the airline industry in 1966 challenged Council conclusions.
A proposal fo r hearings to determine propriety of particular wage or price
decisions
To determine whether a particular wage or price decision accords with the
stabilization policies laid down is a task that must be performed by an im
partial, respected public body. It requires a judicious approach which should
include a full and fair hearing for the interested parties, including public rep
resentatives.
1967 Annual Report o f Council o f Econom ic Advisers, at 130.
si Id. at 130-131.
52 Id. at 126.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
941
I do not think the Council of Economic Advisers should be asked to perform
this function of hearing and judging. Nor, with all due respect, do I think that
this excellent Committee is the appropriate body to do the job. This task is
likely to be accomplished more expertly and fairly outside the halls of Congress.
I would recommend, therefore, that it be given to the agency charged with for
mulating the industry-wide policies. This agency will thereby gain experience
with particular situations which will help it in formulating these policies. In
turn, its experience in elaborating these policies will help it to judge specific cases.
Advance notice o f proposed wage and price actions
Furthermore, because it is always difficult to secure the rescission of action
that has been taken, Congress should require labor and management to give this
agency advance notice of any proposed wage or price increase. This require
ment will apply, it should be recalled, only to those industries in which labor
and management have a substantial measure of discretion in setting wages or
prices. The agency should then be relied upon to institute hearings in those
cases in which it thinks that a proposed wage or price increase may threaten
national economic stability. After hearing, the agency should be required to
publish its findings and recommendations in the case.
The Council of Economic Advisers reports that “ the greatest failure of ob
servance of the price guidepost lies in the failure to reduce prices on a consid
erable number of the product lines of a large number of industries.” 5 For this
3
reason, it is important to authorize the agency to initiate hearings in those cases
in which it thinks price decreases are called for by the stabilization policies and
the failure to make them threatens national economic stability.
Securing compliance with wage-price policies
The government’s past interventions to secure compliance with the guideposts
raise serious questions o f propriety. Too often, they have become public tests
of strength between the President of the United States and the executives of a
great industry or a great labor union. “ In any such confrontation with the
President,” Alcoa’s President Harper has said, “ there can and should be only one
outcome.” 5 Precisely here is the difficulty. In such a test of strength, the
*
President must not lose. But this necessity itself creates the danger that the
outcome may be arbitrary.
Furthermore, whenever, in order to have his way, the President must resort
to means other than persuasion—such as selling stockpiled materials, award
ing contracts to producers who have not raised their prices, instituting tax or
antitrust investigations—he will subject himself, inevitably, to criticism for al
legedly abusing his authority.
Equally troublesome, there can be no .certainly in this situation that the Presi
dent will deal even-handedly with all those who are similarly situated. Not
only is the fairness of this system o f enforcement in question, but the haphazard
quality of president intervention also makes it an ineffective way to enforce
stabilization policies. Finally, in time, labor and management will appreciate
that even the powers of the President are limited and begin to flout the Presi
dent’s policies with impunity. I am afraid that the President’s 1967 Economic
Report reflects his estimate that this time has already come.
The suggestions that I have put before this Committee may make it possible
to carry out the overall wage-price policy adopted by Congress effectively and
equitable without the personal intervention of the President.
At this time, I do not suggest that Congress should impose any sanctions for
non-compliance with the wage-price policies that will be elaborated under the
authority o f the legislation I have outlined. I would hope— and I expect—that
Congressional adoption o f a wage-price policy, subsequent administrative im
plementation o f the policy on an industry-by-industry basis and public hearings to
determine whether particular wage-price decisions accord with the policies
formulated—will maximize the possibility o f securing the voluntary cooperation
o f labor and management and, if necessary, of mobilizing public opinion to induce
such compliance.
I would not object, however, if Congress decides to impose some sanctions; if,
for example, it specifically authorizes and directs the President to manage the
63 Id. a t 125.
54 Harper, A Businessman’s V iew o f Guideposts, in Committee fo r Econom ic Develop
ment, M anaging a Full Employment E conom y 39 (1966).
942
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
country’s stockpiles o f materials so as to help effectuate price stabilization
objectives or to write into every Government contract and subcontract a require
ment that the contractor comply with the wage-price policies formulated for his
industry. I would not object if Congress provides that wage increases in excess
of those permitted by the applicable wage-stabilization policies should not be
recognized as business costs for tax purposes and that net income attributable to
price actions in conflict with applicable price-stabilization policies should be
subject to a tax of 100%; or even if Congress makes available more traditional
civil and criminal penalties. Some sanction may prove to be necessary to assure
compliance with the requirement that advance notice be given of certain proposed
wage or price actions. And it may prove to be impossible, without some sanction,
to bring about the price and profit reductions which the stabilization policies may
call for and without which the structure of voluntary compliance may collapse.
I would not object to sanctions because I do not think that the controls which
Congress would then be legislating would displace a free market. On the con
trary, they would displace the exercise o f private power over the market by
the exercise of public authority in the interest of economic stability.
It is important that we should not be ruled by a taboo against price and wage
controls. They constitute a way o f managing the economy which must be
compared and evaluated with other ways. We are told by Chairman Ackley
that if the actions o f labor and management “ create an inflationary spiral, the
most likely outcome will be restrictive fiscal and monetary policies which will
aim to stop further price increases but will in the process also reduce output,
cut back profits, and reduce employment.” 5 Because of its impact on our bal
5
ance of payments, Chairman Ackley adds that the inflationary spiral will also
have to be fought by “ cutting back or eliminating expenditures on foreign eco
nomic assistance, by yielding to restrictionist pressures in our trade policy, and
by further limitations on the outflow of capital to friendly nations.” 5
8
Certainly, even direct controls deserve the most serious consideration as an
alternative to policies that would have these deleterious consequences. They
may permit us once and for all to abandon the idea of managing the economy
through unemployment.
Chairman P r o x m i r e . Thank you very much, Professor Auerbach.
Let me see if I understand your proposal. You would establish boards
for the various industries which are characterized by administered
price behavior and by large unions. The boards would consist of rep
resentatives of unions, management, and the public. They would
hold public hearings on labor-management policy within the partic
ular industry.
They would then make recommendations. For the time being, you
would not insist on sanctions to carry out those particular recom
mendations. What have I missed here?
Mr. A u e r b a c h . The principal board that I envisage would not be
a tripartite board. It would be an agency in the executive branch of
the Government, preferably answerable to the President—not an in
dependent agency.
The representation of labor, management, and the public would
come through committees that would be advisorv to this public body
which would have the ultimate authority. I do not envisage that
the agency that would be entrusted with the authority would itself be
a tripartite board.
Chairman P r o x m i r e . A tripartite board would be an agency that
would be for the purpose of giving representation.
Mr. A u e r b a c h . Correct.
Chairman P r o x m i r e . The kind of thing that Secretary Wirtz said
was absent in the present stabilization policy.
53 1966 Annual R eport o f Council o f Econom ic Advisers, at 93.
5« Ackley. W hy Stability o f Copper Prices Is So Urgent an O bjective o f U.S. Policy,
No. 14, 1965, p. 3 (unpublished m im eo.).
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
943
Mr. A uerbach. That is right.
Chairman P roxmire. And the agency itself would recommend the
level of wage increases.
Mr. A uerbach. Yes, sir.
Chairman P roxmire. And also recommend whether prices would
be permitted to go up or down in a particular industry.
Mr. A uerbach. Yes, sir. I think that a reasonable argument could
be made that the agency itself should be a tripartite board. But I
react against proposals to give tripartite boards governmental au
thority.
Chairman P roxmire. I think it is most important that it be only
advisory.
Mr. A uerbach. Yes, sir.
Chairman P roxmire. I think that is very important.
Mr. A uerbach. Yes, sir.
Chairman P roxmire. Because if you have a tripartite group of this
kind, it might very well become biased.
Mr. A uerbach. Yes, sir.
Chairman P roxmire. In favor of higher wages, higher prices,
Mr. A uerbach. I agree.
Chairman P roxmire. And accommodation for the industry, and
represent the industry, the industry’s viewpoint. I have seen that
happen sometimes and so have you.
Mr. A uerbach. Yes, sir.
Chairman P roxmire. So that you could then have a situation in
which the educational process, which many say was the principal
purpose of the wage-price guideline, would be enhanced by your ad
visory committees.
Mr. A uerbach. I think so.
Chairman P roxmire. And in addition, you would have a public
agency that would make specific recommendations ?
Mr. A uerbach. Yes, sir.
Chairman P roxmire. Then you say the sanctions would not be
applied at least at first; is that correct ?
Mr. A uerbach. That is correct. I do not envisage that any sanc
tions would be provided at this time.
Chairman P roxmire. What would this do? Take an instant
situation: A day or two ago American Motors announced that they
were reducing prices on their automobiles, some of them very sharply,
and this is a most encouraging development to many of us, not only
those of us living in Wisconsin—we hope it means more jobs there—
but it also means some initiative in the automobile industry itself to get
lower prices.
Wouldn’t the kind of process you propose tend to perhaps dis
courage that sort of initiative, that sort of competition? Wouldn’t it
tend to freeze a pattern, in which companies would be less inclined
to take the initiative ?
Mr. A uerbach. I don’t think so. A similar argument has been
made against the guideposts themselves, that they would create
rigidity by discouraging price decreases for fear that subsequent
increases would have to be justified. But I don’t believe that price
decreases would be so discouraged. The competitive pressures which
944
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
induced American Motors to take this action would continue to operate
even if my proposals were adopted.
Chairman P roxmire. It seems to me you are kind of institutionaliz
ing this more, and making it more formal, and because you establish
this kind of pattern, with a natural tendency for management to push
for higher prices, and labor to push for higher wages, and the feeling
that this is where you get your ultimate wage determination, where
you get your ultimate price determination, I would be somewhat
concerned about that possibility.
Let me ask you—is there any similarity between your proposal and
the experience they have had in Britain, in their attempts to stabilize
wages and prices? Do we gain anything from the results of their
experience?
Mr. A uerbach. Y ou mean the current experience?
Chairman P roxmire. Yes.
Mr. A uerbach . Well, the current experience is with a prices and
incomes freeze—or standstill, as the British call it.
Chairman P roxmire. Yes; but the current experience some critics
say has been the product of the failure of the boards that may be some
what similar at least in objective to what you have recommended here,
to achieve stability. What is your reaction to that?
Mr. A uerbach. I think that it is true that the British National
Board for Prices and Incomes may be similar to the stabilization
agency that I have proposed. I don’t believe, however, that the situa
tions faced by the two countries are essentially the same, because the
problems in Britain are longstanding problems of slow economic
growth.
Chairman P roxmire. I understand that the recent decision by
Britain was very probably independent of any wage-price problem.
It was dependent on their international payments situation.
Mr. A uerbach. Principally so, though the wage-price picture is
part of the larger problem.
Chairman P roxmire. But what I am getting at is whether or not
the experience prior to this that the British have had over a period
of years would suggest this proposal will or will not work.
Mr. A uerbach. I think that, on the whole, the prices and incomes
policy that the Labor Party began to introduce when it came to power
recently was different from the policy followed by its predecessor
government. I don’t think it can be said, definitively, that experience
under this new policy was discouraging.
In fact, Prime Minister Wilson, if he holds to what he has told
Parliament, intends to retain this policy after this period of freeze
is over. His long-range plan is to return to the National Board for
Prices and Incomes and require proponents of wage and price increases
to justify their proposals before this Board.
We don’t have enough experience, Mr. Chairman, to be confident
that such boards are going to work effectively. All Western demo
cratic countries face this problem of reconciling full employment and
economic growth with price stability. It would not be accurate or
helpful to say that any of them has succeeded in solving this prob
lem, or that my proposals are certain to do the job. The verdict is
not yet in.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
945
Chairman P roxmire. Professor Auerbach, you have obviously done
a lot of thinking about the overall principles mvolved in price stabili
zation. How do you resolve something that has come before the com
mittee again and again? Professor Hansen brought it up in a very
convincing way the other day, I thought; and both Walter Reuther
and Mr. Goldfinger also brought it to our attention.
How do you resolve this real income dilemma? The whole prin
ciple as I understand it is that labor should receive an increase in real
income comparable to their productivity increase. You indicate here,
in discussing what Colm said the other day that you think you have
got to compromise with this and give them something half way be
tween their money income and their real income. That is what you
would do, is provide for the increase in productivity and make a par
tial adjustment for the increase in the cost of living.
Now as soon as you do thait, don’t you erode the worker’s benefit ?
Don’t you create a situation in which he is going to get less than his
productivity increase in real terms, and why should workers with a
strong labor union, and with their principle supported by such emi
nent economists as Hansen and others, accept that ?
Mr. A uerbach. Well, Professor Hansen poses a dilemma which we
haven’t resolved and which I would like to comment on briefly.
The suggestion that Professor Hansen made is attractive and just.
But surely labor understands that so long as there are no institutional
means to control prices, any effort to obtain wage-rate increases equal
to the rate of productivity increase plus posit cost-of-living increases
plus anticipated cost-of-living increases will create the threat
of inflation. This is precisely how the wage-price spiral gets started.
Once the spiral gets started, labor as a whole will not benefit. The
less tightly organized, the less fortunate segments of labor are going
to suffer the most; the more tightly organized, the more forunate seg
ments of labor, at best, may hold their own.
In other words, I think that the equitable claim that labor makes
for increases in real income cannot be denied. But those who are
moved by this claim ought to give more attention than they have in
the past to the problem of how you prevent the wage-price infla
tionary spiral from arising. When you begin to concentrate on that
problem, you begin to talk about price control and the equitable dis
tribution of income in the United States.
Chairman P roxmire. Senator Percy ?
Senator P ercy. Good morning, Doctor. I certainly welcome the
comment that you made when you said:
The change in the administration’s policy is a welcome one, whereby formal
statements to the public commenting on particular wage and price decisions
might not be made as freely.
It is unusual for politicians to protect steel companies, but a rise
in the steel price oftentimes is only a reflection of thousands of price
increases and wage increases that the steel companies have already
had. They simply have reflected in their price increase the increase
in costs that they have been forced to absorb and feel that they can’t,
in the long-range good of their own industries—research, develop
ment, plowback of profits—continue to carry on. And yet they are
the ones that are singled out as the whipping-boys and in the industry
946
th e
1967 ECONOMIC REPORT OF THE PRESIDENT
leadership made to appear as though they are not working in the pub
lic interest.
I am less enthusiastic about this concept of a council on prices and
wages from the standpoint of advance notice, unless I have failed to
understand it. How much advance notice would really be required by
you before a price increase goes into effect ? Is it a simultaneous pub
lic announcement?
Mr. A uerbach. No, sir.
Senator P ercy. Of advice to the board, or what ?
Mr. A uerbach. No, sir. I am proposing that a requirement be im
posed on people who exercise great power in our economy to justify
their decisions publicly. This justification must take place before the
action is taken. It ought not to be a post hoc rationalization. It ought
to be a justification pursuant to a procedure which will make the ac
tors—labor and management—receptive to counterargument. The
actors must be able to hear what other people have to say and, in the
light of what they have heard, decide whether they want to go through
with their proposed actions or abandon or modify them.
In order to establish such a procedure, you obviously have to have
a reasonable period of time elapse between the time the proposal is
made and the time when the final decision is made.
Senator P ercy. I know that this problem comes up when the Con
gress gets into a discussion of the removal of or increase of an excise
tax. At the moment it is apparent that there may be a reduction or an
increase, it does affect buying at the marketplace.
Mr. A uerbach. Yes, sir.
Senator P ercy. I f a notification were given by a powerful industry,
such as the automotive industry, or an electronic industry such as tele
vision, that a price reduction was going into effect as of a certain date,
why would anyone buy the product until such time as that price re
duction took effect ?
Mr. A uerbach. I would not contemplate that advance notice of
price reductions would have to be given.
Senator P ercy. Only increases.
Mr. A uerbach . Yes, sir; only increases.
Senator P ercy. I am still not clear as to how much timelag you
would feel would be a requirement between the notification to the
Government Advisory Board, whatever it may be called, and the time
it takes effect in the market.
Mr. A uerbach. Senator, if you were on such a board, how much
time do you think you would need to become acquainted with the is
sues, to hear or read the evidence, to make up your own mind, and
to elaborate the recommendations that you would like to make for the
benefit of the public? I would accept whatever you thought was the
time you needed for these purposes. I don’t know that I can fix it.
If I had that kind of responsibility and sat down with my colleagues
to discuss the problem, I am sure we would be able to agree on how
much advance notice it was reasonable to require.
There have been various periods mentioned in different bills that
have been proposed. Isn’t there a current bill by Congressman Celler
on this point? You may, Senator Percy, know what period of time
for advance notice is specified in the current Celler bill. The times
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
947
mentioned are usually 60 or 90 days. But I don’t think that a precise
figure is vital.
We need to accept or reject the principle underlying my proposal.
If we don’t accept the principle that people who exercise power should
be held publicly accountable for the way they exercise that power,
and ought to justify their actions before they take them, then we don’t
want any advance notice of these actions.
But if we accept this principle, then the problem of deciding how
much advance notice is required to make it work will not be a problem
on which reasonable people will differ very strongly. I think it would
then be a minor problem.
Senator P ercy. Could you name the product, product lines or in
dustries that you would feel would be major enough to have this
impact ?
Mr. A uerbach. The industries may be defined in a number of ways.
They have been defined in some of the bills by reference to the total
value of their output. For example, advance notice may be required
of any industry in which gross sales total $200 million or more a year.
Other bills that I recall have tried to identify these industries in
terms of the percentage of their total output accounted for bj four or
five firms in the industry, generally saying that any industry in which
four or five firms account for 70 percent or more of the product must
give the required advance notice. We are interested in advance notice
only from firms in industries in which labor and management have a
substantial measure of discretion in setting wages or prices and can
take action that pervades the whole economy.
Senator P ercy. Would you say that an industry such as the meat
packing industry, which is a very large industry, would be exempt
because of the nature of the product?
Mr. A uerbach. N o, sir. It is not the nature of the product that is
crucial. It is crucial whether a few sellers in an industry have such
control over the output that they have all of the characteristics of what
the economists call oligopoly and can administer prices. In other
words, do they exercise power over the market or not ?
Senator P ercy. But, Professor, can you conceive that in an industry
such as that, where prices change hourly from one bid to the next,
that it is possible to give 60 or 90 days’ notice on some sort of a price
increase? I think this is theoretically and totally unrealistic as re
lated to the marketplace, and I can name hard goods that are exactly
the same way. In the radio industry, which is subject to tremendous
competition from abroad, transistor radios prices change twice in a
week in retail stores, by manufacturers responding to changes in
market conditions, and yet that is a gigantic industry. Can you
imagine the control for establishing reviews of price increases? It
would be utter chaos.
Mr. A uerbach. There are ways this problem could be handled. It
really isn’t as difficult as it sounds. For example, Senator, the public
agency I propose could simply say that any industry may effectuate
whatever changes it wishes in the relative prices of all the commod
ities it sells, without giving any advance notice, so long as the total
effect of its actions is not to increase its gross revenues. After all, we
are not really concerned about the relative prices of bacon and ham
burger or of the various cuts of meat. We are concerned with overall
948
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
price stability—with the total impact of all the prices of all the com
modities sold by the meatpackers on their profits and, consequently,
on the wage demands which will be presented to them.
Senator P e r c y . Y ou have said that management in high-profit in
dustries is unwilling to reduce prices.
Mr. A u e r b a c h . Yes, sir.
Senator P e r c y . The point is often made that the Consumer Price
Index really overstates the increase in prices, simply because quality
changes that have been introduced have not been fully taken into ac
count. Isn’t your point considerably weakened when quality changes
are taken into account?
Mr. A u e r b a c h . I think the criticism of the Consumer Price Index
which you mention may well be justified. I don’t know to what ex
tent it is justified. But even if it were, I don’t think it would affect
the point that managements in high-profit industries are unwilling to
reduce prices.
This is a serious point because the possibility of success of the
guideposts, the arithmetic of the guideposts to which the Council re
fers, depends upon price reductions in those industries in which productivity-rate increases exceed the trend productivity-rate increase.
These reductions have not occurred and it is precisely this fact that
will give great impetus this spring to demands for higher wages.
Senator P e r c y . Mr. Chairman, Paul McCracken, of the University
of Michigan has written a paper which tests the market power theory
and concludes that the problem is not, I think, nearly as serious as
many people have pointed out. I would like unanimous consent to in
sert this statement in the record.
Chairman P r o x m ir e . Without objection that w ill be done.
(The statement referred to follows:)
Statem ent
fessor op
op
B
D
P a u l W. M c C r a c k e n , E d m u n d E z r a D a y U n i v e r s i t y P r o
A d m in is t r a t io n , G r a d u a te S ch o o l of B u s in e s s A d m in
U n iv e r s it y o f M ic h ig a n *
e.
u s in e s s
is t r a t io n , t h e
PRICE-COST BEHAVIOR AN D EM PLO YM ENT ACT OBJECTIVES
Dr. M c C r a c k e n . Mr. Chairman, the stern strictures of the chairman here in
regard to the time allotted to us has imposed on me, as is true for most o f the
other participants, the painful task o f excising a good many pages o f priceless
prose. I dare say that when this venture is concluded, Grover, we ought to cite
you to the Anti-Vivisection Society.
What is the relevance of the Nation’s price-cost performance to the objectives
of the Employment Act? This question may not be the most fundamental issue
of economic policy before us to day, but it is probably a leading candidate for the
most vexatious piece of unfinished business. The price-cost question naturally
divides itself into about three questions. How important is a reasonably stable
price-cost level to the more fundamental objectives of full employment and rising
levels of living widely shared? Is there a market-power dimension to the pricelevel problem? Third, what are the policy implications o f these matters for the
objectives o f the Employment Act?
I
Certainly the case for attaching high priority to a reasonably stable price level
seems to be a persuasive one for reasons concerned with both our external and
our domestic economic performance. Given the large noncurrent burdens on our
♦Excerpted from ' ‘Tw entieth Anniversary, o f the E m ploym ent A ct o f 1946— An E co
nomic Symposium,” hearings before the Join t Econom ic Committee, Feb. 23, 1966 89th
Cong., 2d sess.
THE 1967 ECONOMIC REPOET OP THE PRESIDENT
949
balance of payments, the sharp recovery in the balance on current account, after
it had dipped into a deficit position in 1959, probably made the difference between
an international dollar crisis and an external payments position that has been
tolerable even if not comfortable. From 1954 to 1959 the U.S. export price index
increased 8 percent compared with 3 percent for other industrial nations as a
whole. During the next 5-year period (1959-64), however, our export prices
rose only 3 percent, a markedly better record than the 8 percent in the first half
of that decade and somewhat better than the average for other industrial coun
tries. The fact that the U.S. price level did perform much better by international
standards is undoubtedly relevant to our improved payments performance on
current account in recent years.
In the domestic economy a reasonably stable price level is desirable in itself
for many obvious reasons. A rising price level does, for example, pose problems
of equity. Some incomes are, if not fixed, at least sticky. The real purchasing
power o f financial assets held by those o f moderate means is more adversely
affected than those held by the affluent. The empirical evidence about the rela
tionship between price increases and rates o f domestic economic expansion is
more complex, but it presents no persuasive case that acceptance of a more
rapidly rising price level enables a country to achieve a more rapid rate of
economic progress. The record of 39 nations for the period 1950 to 1960 and
1960-63 reveals no significant relationship between rates of growth of GNP
(total or per capita) and the rate of increase in the price level. In studies
(largely of developing nations) by the International Monetary Fund there
seems, in fact, to be some evidence of an inverse correlation between rates of
economic growth and the rapidity with which the price level was rising.1 Coun
tries with a relatively stable price level have done somewhat better on the average
than those experiencing strong upward pressures on the price level. There are
persuasive reasons for expecting that things might work out this way. The
pervasive expectation of continuing inflation does disturb economic decisions.
The pattern o f capital formation is distorted. It encourages an outflow of do
mestic capital, and it impedes the inflow of capital from the outside. On all of
these matters there is supporting empirical evidence.
The relationship between the rate of growth of output and the rise in the
price level for more developed nations such as the United States is again in
distinct. For 17 o f these nations in the 1950’s there seems to be no discernible
relationship between the rate of rise in the price level and the rate of growth in
real per capita GNP. For total output there was a faintly perceptible negative
relationship, but too low to be statistically significant. I f we limit ourselves, in
our quest for a price-level target, to the criterion of growth rates, international
experience does not lend support to the view that a moderately rising price level
is essential or inimical to vigorous growth in developed nations.2 The desirability
of a strong position on price-level policy must then rest reavily with such consid
erations as equity or our external economic position.
ii
Suppose we turn now to the second question. Is there more to the problem of
a stable price level than good monetary and fiscal policy? Is there a market
power dimension to the problem? The decision does not automatically go to the
affirmative. From 1909 to 1929 (exculding 1914—
20) there were 14 years of rising
business activity. In eight of these the price level rose, in three there was no
change, and in three the price level declined from that of the preceding year.
On the average the price level rose 1 percent per year for these 14 years. For
1 Cf., fo r example, Graeme Dorrance, “ The E ffect o f Inflation on E conom ic Development,”
staff papers, M arch 1963, pp. 1-47.
2 Computations were made fo r 17 developed nations fo r the period 1950-60. They were :
Australia, Austria, Belgium, Canada. Denmark, France, W est Germany, Italy, Japan,
Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, United Kingdom, and
the United States. T he terms w e r e : G— :rate o f grow th in real total G N P ; G1 rate o f
—
grow th in real per capita G N P ; P— rate o f rise in the cost o f living. GNP growth rates
are from the United Nations Yearbook o f N ational Accounts* 1965, and the rate o f increase
in the cost o f living was computed from data in International Financial Statistics. The
results a r e :
Equations
1950-60
R2
G = 5 .5 —0.30P
0.060
G * = /( P )
950
th e
1967 ECONOMIC REPORT OF THE PRESIDENT
the period 1949-65 there were also 14 years of economic expansion. The aver
age price rise was 2.3 percent for these 14 years, and in only one expansion year
<1955) did the price level recede. The average rise in rising years, however, was
greater in the 1909-29 period than after 1949. The principal difference between
these two periods seems to be the lesser frequency o f any price decline at all,
during expansion years, in the postwar period. The record does not seem to
suggest that the price level now is prone to rise more rapidly during an economic
expansion than in our earlier history. I f anything it may be less so.
Our experience in the late 1950’s was, of course, undeniably disturbing. From
mid-1956 to mid-1958 the price-cost level was rising too rapidly, and after mid1957 it was also a period of subnormal employment. Even that period in retro
spect has its extenuating circumstances. Some o f the wage adjustments that
were pushing our cost level upward were the result of negotiations conducted in
the ebullient climate o f 1955. Moreover there was a swelling wave o f inflationmindedness. The proportion of people, for example, expecting the price level to
continue rising for the long run tripled from 1953 to 1957. Here was a phenom
enon of social psychology bearing perhaps some resemblance to the Salem witch
hunts or the Communist hunts of the McCarthyism era. In retrospect these
ground swells always seem a bit perplexing and inexplicable, but they are real
and influential while they last. These expectations o f inflation, the inflationmindedness, considerably overshot the basic facts o f economic life, of course, but
for a time they were an important force nudging the price-cost level upward.
Business response to union demands was in part reflecting these assumptions.
Union demands for wage adjustments in turn were responsive to this climate.
Each settlement, therefore, was followed by the higher prices that gave another
thrust to the rising price level, seemingly confirming the wisdom of making
decisions on the assumption that an age o f inflation was ahead.
The disinflationary policies of 1957 to 1959 (except for a brief interlude from
mid-November 1957 to about July 1958) were probably too severe, but they did
perform the desirable function o f puncturing this bubble of inflation-mindedness.
And the more moderate pace o f the price level in recent years dates from mid1958—not, as all good things in economic policy are sometimes alleged to do, from
January 1961.
Even so there probably is an element of the market-power phenomenon in the
tendency for our price-cost level to edge higher. Since 1960 the price level
has continued to drift upward at the rate of perhaps 1% percent per year, and
costs per unit of output (in the corporate sector) have shown a comparable rise—
even though unemployment averaged 5.8 percent of the labor force. Moreover,
the rise in both the price level and costs per unit of output were apparently at a
somewhat greater rate in 1965. This is a less impressive performance than, for
example, the 1920’s (1922 to 1929) when unemployment averaged about 4 percent,
and the price level increased at the rate of only 0.2 percent per year.. (The
average annual rate of increase in output from 1922 to 1929 of 4.7 percent was
also higher than the 4.5 percent average from 1960 to 1965.)
hi
What, then, are some of the elements of a price-cost policy for the Nation?
Clearly this has become once more an urgent question. The economy by the
latter part of last year had regained reasonably full employment, and the
tolerances began to narrow sharply. Once again we are in a zone where strength
ening the capability of the economy to resist inflation, always desirable, must
be given even higher priority.
Measures to avoid a rise in aggregate demand that outruns the economy’s
productive capability are now, o f course, fundamental. Whatever differences
may exist about other dimensions o f the price-level problem, there would be a
wide measure of agreement that inflationary pressures cannot be contained in
an overheated economy. The most fundamental and basic requirements for a rea
sonably stable price level is, therefore, fiscal and monetary policies that do not
crowd demand too hard against the economy’s capability to produce. This is
hardly controversial, in principle, and issues o f fiscal and monetary policy have
already been discussed, so we can move on to other matters.
There seems to be some measure of agreement that a modern industrial nation
should have a wages or incomes policy. In the 1961 O.E.E.C. study on “ The
Problem of Rising Prices,” the panel of distinguished economists agreed that
THE 1967 ECONOMIC REPORT OP THE PRESIDENT
951
negotiated wage increases were “ decisive in explaining why some countries have
failed to a far greater extent than others to achieve price stability.” 8 On the
problem of wages their report is quite explicit. “ In the view o f the majority
of the group, the essential element to be stressed, first of all, is that the stabiliza
tion authorities must have a wages policy for dealing with the problem of wages—
just as they have monetary and fiscal policies for dealing with the problem of
demand.” 4
Our own venture into incomes policy has been via the guidelines. It has,
on the whole, been a constructive step. It was the logical sequel to extensive
academic and professional discussion, antedating the 1962 Economic Report,
about the relationship between wages and prices. This ancilliary discussion in
cluded increasing attention to the problem in successive Economic Reports during
the Eisenhower Administration. The articulation of the guidelines has focused
public attention and understanding more squarely on the problem, and in their
absence it is reasonable to suppose that we might have had a somewhat higher
price-cost level today.
We need to recognize, however, that the guideline approach also involves some
important risks. For one thing there is danger that preoccupation with in
evitably only a few highly visible price or wage settlements will cause inattention
to the more fundamental matters o f monetary and fiscal policy in the strategy
for maintaining a reasonably firm cost-price level. The excessive rate of credit
expansion in the closing months of 1965, at a time o f a few highly visible price
controversies, reminds us that this is not an academic matter. There is, in
fact, real danger that an overly expansive policy, as in 1954-55, will force a
sharp reversal, as in 1956-57.
Another danger is that the guideline approach, if it becomes de facto or de jure
a program for extensive price control, would impede the mobility and fluidity
of the economic system. And the more effective (and, therefore, extensive)
the guideline program becomes, the greater is this danger. The trouble funda
mentally is that the articulation o f the guidelines principles largely ignores the
role of changes in demand in our system. Our economy depends for its efficient
operation on extremely complex and sensitively adjusting pricing relationships
that serve as the communications system for promptly reflecting the ever-chang
ing pattern of demand.5 There is not much recognition o f this in the enuncia
tion of the guidelines. “ The general guidepost for prices,” says this year’s
Economic Report, in the strong language of italics, “ is that prices should remain
stable in those industries where the increase of productivity equals the national
trend; that prices can appropriately rise in those industries where the increase
of productivity is smaller than the national trend; and that prices should fall
in those industries where the increase of productivity exceeds the national
tren d ” 6 On the next page we learn that increases above this may be appro
priate to reflect increases in unit material costs, if not otherwise offset, or to
correct an inability to raise capital. This latter exception is quite explicity not
considered to be “widely applicable in the present environment”
Now this simply describes a cost-plus economy. It will not do even as a short
statement o f our pricing system. A rise in prices for industries with a produc
tivity rise below average may be quite inappropriate and inconsistent with
economic efficiency if the industry is declining and should be extinguished. Price
increases may be a desirable means o f signaling for increased production of a
product even when the industry has average or above-average gains in produc
tivity if demand has intensified.
These are not academic matters. An economy whose pricing system operates
according to the guidelines as enunciated would certainly find its capability for
progress weakened.7 H alf o f our gains in output have come from uncovering more
effective ways of utilizing productive resources of labor and capital, and through
open competition diffusing these across the economy generally. A cost-plus
3 P. 45. The authors o f the report were W illiam Fellner, M ilton Gilbert, Bent Hansen,
R ichard Kahn, F riedrich Lutz, and P ieter de W olff.
4 P. 56. Of. also H enry Smith, “ Problems o f Planning Incom es,” Lloyds Bank Review,
January 1966, pp. 30-40.
5 M y colleague, P rof. Charles N. Davisson, pointed out to me the full significance of this
point.
8 E conom ic Rejoort, January 1966, p. 90.
7 Cf. A rthur F. Burns, “ W ages and Prices by Form ula,” Harvard Business Review,
M a rch -A p ril 1945, pp. 55-64.
952
th e
1967 ECONOMIC REPORT OF THE PRESIDENT
economy would tend to prolong the lives of decaying industries, and it would
slow responses to areas o f increasing demand.
The problem here is fairly clear. It is the danger o f attempting to apply an
aggregative macroeconomics rule relevant to the general price level to the everchanging relationships among specific prices in microeconomics. The pricing
system that we would get if this cost-plus pricing were fully implemented would,
to an observer from the University o f Mars, look like a highly primitive and crude
version of what we now have.
Problems o f equity will also inevitably become more difficult if attempts to
apply the guidelines to specific situations become more extensive. Even though
the guidelines recognize exceptions, most situations will actually be measured
against the average. The steel wage settlement is an example. I f it was on the
3.2-percent average, it really exceeded the guidelines because it has been an
industry with more than its share o f unemployment, wage rates were relatively
high already, and profits have been relatively low. These are conditions that,
according to the Council’s articulation o f the guidelines, call fo r a below-average
wage settlement. Yet the settlement was pronounced to be right on target—
because it came out on the average.
The procedures for singling out price and wage candidates for attention will
inevitably be uneven and capricious. Steel would be apt to get the works even
though prices of some other products in the aggregate might be just as important.
The price which, according to the guidelines, ought to go down and does not
would probably be safer from official wrath than the price that ought to stay put
but goes up. And there is the question o f equity as among wage settlements.
The USW or UAW member is apt to find his income more affected by guidelines
than a member of the construction union. And it is almost inevitable that a
larger proportion of the wage area will be under surveillance than o f prices.
An industry that has one major labor contract may have hundreds o f prices.
This is bound to create political strains that either weaken the guidelines or
force the Government in the direction of price control.
Another important dilemma o f the guidelines approach (or any variant that
is some de facto form of direct price or wage control) is that it introduces some
upward biases of its own. Because price increases when needed may involve
some abrasive moments, there would be considerable incentive to resist any price
declines. And there would be strong incentives to take the maximum price rises
that could plausibly be attributed to such exogenous factors as wage settlements
or higher material costs.
There is also an issue o f government here. We have probably gone about as
far down the guideline road as is appropriate in the absence of legislative action.
A form of price-wage control could ultimately come to have the force of law
because of the formidable power that the Federal Government can assemble
against any miscreant in pricing or wagemaking. I f these programs are to be
come significant instruments of economic policy, the Congress should debate
the issue and, if persuaded o f their wisdom, take the necessary legislative steps
to authorize administration action. The come-let-us-get-together approach can
be a device that builds up a power structure in Government which circumvents
the legislative process, and in the private sector which circumvents the normal
market disciplines of competition. This is not desirable in our political system
or in our economy.
The basic reservation about the guideline approach, however, is the evidence
that it is of quite limited practical effectiveness. There has not been much dis
placement in the relationship between our price-level performance and the pace
o f the economy. In their paper before the American Economic Association 5
years ago Professors Samuelson and Solow suggested that to achieve a stable
level of labor costs per unit o f output unemployment might have to be 5 to 6
percent, and to achieve “ the nonperfectionist’s goal” of 3 percent unemployment
the price index might have to rise 4 to 5 percent per year.8 I f we make a simple
linear interpolation between these two points o f their modified Phillips curve,
the 4.6 unemployment rate for 1965 would imply about a l.T-percent rise in the
price Index. The Consumer Price Index actually rose 1.7 percent from 1964 to
1965, and the rise would have been somewhat higher except for the effect on the
index of reduced excise taxes. The guidelines do not seem to have been holding
the rise in the price level to anything markedly different from what would have
been expected, given our volume o f unemployment. Moreover, international
experience also suggests cautious expectations about what guidelines can acconi8 Paul A. Samuelson and R obert M. Solow, “ A nalytical Aspects o f A nti-inflation P olicy ”
American E conom ic Review. Proceedings, May 1960, p. 192.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
953
plish. The trend of wages and prices in European countries does not suggest
that the incomes-policy approach is apt to provide strong defense against infla
tion. The results from the United Kingdom’s policy fo r incomes and prices,
launched just over a year ago, are not auspicious, and the next version will ap
parently be legislation to require advance notice of price change and o f wage
negotiations.9
The articulation of the guidelines, let me repeat, has been useful. It has cer
tainly given the whole subject greater public visibility and understanding, and
that has been helpful. Their job is to make a marginal contribution—to field the
few wild-ball price and wage situations that might occur— under circumstances
where fiscal and monetary policies are the basic defense against inflation. At the
same time the hard evidence here or abroad does not suggest that they are a
strong or highly effective anti-inflationary weapon. And if they divert attention
from more fundamental matters o f fiscal and monetary policy, they could give
the price level an upward bias while they are also reducing the capability of the
economy to sustain vigorous economic progress. At this point they would collide
squarely with any reasonable interpretation o f the Employment Act’s section 2.
It is, however, high time that we move on to other matters. One possible con
tribution to a more stable price level is squarely within the domain of the Federal
Government’s operational activities. The fact is that important Government
programs and actions give a direct and significant upward thrust to the price-cost
level. At a time when rising food prices have been a significant factor in the
higher cost of living, which in turn will influence wages, the Government will
spend on agriculture an estimated $4.3 billion this fiscal year and $3.4 billion in
fiscal year 1967. Proposals to increase the minimum wage are inimical to the
objectives of the Employment Act if we are concerned about price-cost-level prob
lems, and if we are also trying to draw into regular employment those in the labor
force only marginally employable. Secretaries of Labor in their administration
of the Bacon and the Walsh-Healey Acts have usually interpreted prevailing
“minimum” wages for Government contracts to be synonymous with union rates
even in localities where these rates had no real relevance to local situations.1
0
Obviously the rationale that these programs reflect “ political realities” will no
longer do. Political gain is to the political arena what profits and wages are to
the economic arena. A Government requesting unions and managements to rise
above their self-interest on wage and profit decisions can be asked to lead the way
itself in some of these operational programs.
If society decides to channel more o f its national income into the public sector,
and to do so via sales and excise taxes, it makes no sense to have this affect the
Consumer Price Index. In an era where demands in the public sector are going
to be heavy, we have arranged things so that the use of a tax with substantial
popular support would quite directly push upward our most widely used measure
of changes in the price level. During 1965 the Consumer Price Index rose 2 per
cent, but the rise would have been 2% percent except for the reduction o f excise
taxes. And we are in the odd position of increasing excise taxes in 1966 to
counter inflation, though their increase will directly raise the price index— and
directly and indirectly have an effect on wage movements.
It would be in the public interest fo r the Joint Economic Committee to conduct
an exhaustive study of all Federal programs that have direct effect on costs and
prices. They might be found to be consequential.
Few things are more effective in neutralizing the exercise o f power than
availabilty of alternatives. Even our powerful corporations cannot force or
cajole consumers into buying what they do not want. They cannot because the
consumer has alternatives. I f the gas company suffers from delusions of
grandeur, it will be brought back to earth by marginal shifts of energy require
ments to electricity or oil. I f Chevrolet buyers were to feel abused, Ford or
Chrysler would be eagerly ready with alternatives. A part o f our price-cost
policy could usefully be exploration o f ways to widen alternatives further. The
increasing internationalization o f economic life offers a major opportunity.
The alternative of imports has already served as a significant restraint on the dour
ritual o f large increases in wage rates duly succeeded by ample price increases.
®Cf. Ray Vicker, “ H olding the Guidieiines,” W all Street Journal, Feb. 7, 1966, p. 14.
A lso International Financial News Survey, Jan. 14. 1966, p. 10.
10 G ordon F. B loom and H erbert R. N orthrup, “ E conom ics o f L abor R elation s” (Irw in.
19 61), pp. 549-550.
75—
314— 67— pt. 4------- 16
954
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
In some cases it has had a notably therapeutic effect on more aggressive product
development. Further relaxation in constraints on the availability of alterna
tive foreign products and services would make a useful contribution to the
Nation’s price-cost performance, and it would also make for better jobs and a
stronger economy. The administration is to be commended for its insistence on
adjustment assistance for hardship cases as trade barriers are relaxed, rather
than the route of blocking tariff reductions.
Things which might increase the ease with which capital could be substituted
for labor must also be classed in the category of broadening alternatives. It is a
grisly thought, but the labor cost per unit of classroom output might be under less
severe upward pressure if a teaching machine could more readily be substituted
for professors. Capital budgeting came upon the industrial scene belatedly, but
it has made great strides. I f the capital budgeteers and the capital goods en
gineers could increase the substitutability of capital for labor, we would come
close to getting the best of three worlds—an upgrading of jo b s ; a more stable
cost-price level; and an accelerated rate of economic progress.
IV
Suppose that even with appropriate fiscal and monetary policy, supported by
as much marginal help from other policies and programs as it is reasonable to
expect in this world, the price level is still not quite stable. This is probably
a reasonable expectation. The last sustained period of full employment, vigorous
economic growth, and a stable price level was the period from about 1922 to
1929. And for the entire period from 1900 to 1929 (excluding the war periods),
80 percent o f the expansion years saw some rise in the price level.
The objective o f a stable price level is an important one, but it does remain a
facilitating and not a fundamental objective. It is important largely to the
extent that it is essential for full employment, vigorous economic growth, and
high and rising levels o f incomes widely and equitably shared. We must not be
so obsessed by building the bridge over the Kwai that we lose sight of the larger
picture. It would be better to retain the "motility and adaptability o f our
free-market economy, for example, than to contract economic arthritis through
extensive direct intervention into the specifics of economic life—out of zeal for
a flat price index. It is possible, however, that emergent inflation-mindedness
may become a problem. We must in that case contemplate occasional episodes
of disinflation. These might briefly reduce the proportion o f the labor force
employed by perhaps a percentage point. It should, however, be quite possible
to achieve results through short periods of moderately reduced growth, still
avoiding any significant recedence in the economy. Episodic disappointed infla
tionary expectations would probably be enough to serve as a reminder that
caution is appropriate even if the general trend is up because it is also necessary
to survive shorter run contingencies.
It is to be hoped that a stable price-cost level becomes possible with full
employment. The fact is that with the existing state of the arts of economic
policy severe insistence on price-cost stability is a recommendation for the
distortions of suppressed inflation that enervate the economy—and probably for
a lower trend rate of growth. Obviously we cannot close down the economy
until we know more about achieving a stable price level without retarding the
economy’s growth. We therefore face the inevitable problem o f feeling our way
along with a mix of real growth, high employment, and some concession to the
price level—with the mix itself changing a bit from time to time— if we are to
achieve the maximum rise over a long period of time in widely diffused levels
of living.
v
Since the act which we honor today was signed, every President has explicitly
recognized the importance o f a reasonably stable price level to the performance
of our economy and to the quality of our Nation’s economic life. This clearly
continues to be the case, and it is wise. As is true of our objectives for
employment, production, and purchasing power, we sometimes fall short of our
price-level goal, and we shall probably have our shortfalls in the future. We can,
however, say of this goal what Beardsley Ruml said of the Employment Act’s
objectives two decades ago when he told a Senate committee that “ this statement
of the goal of our sincere efforts to attain it will make the reality much closer to
the ideal than if the ideal had never been expressed.”
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
955
Chairman P roxmire. Congressman Bolling?
Representative B olling. Dr. Auerbach, I think perhaps your state
ment and the discussion that followed is the most stimulating that I
have heard or read during this hearing. I say “ read” because I haven’t
been at all of the hearings.
I would take it that your purpose is to attack the problem that all of
us have given lipservice to, or recognition of, that of getting the public
represented at the bargaining table in some fashion or another, rather
than try to develop arguments that would persuade us to do nothing.
I believe that your idea, while not to me an entirely new one, is
better worked out and better supported by the discussion than any I
have heard, and all I will say further is that I note that we plan to
have further hearings of the full committee on this, and I hope that we
will pursue this particular point, because I think you have made a very
important and timely contribution.
Mr. A uerbach. Thank you, Congressman Bolling.
Chairman P roxmire. Congressman Reuss ?
Representative R euss. Thank you, Mr. Chairman.
I want to associate myself with what Congressman Bolling has just
said. I think you have made a real contribution to the thought proc
esses of this committee.
You have sketched out a program for the future which would enable
this country to live with something like full employment without infla
tion. However, this committee and the country now confront a situa
tion where it is very important to keep prices stable in 1967 for both
domestic and foreign reasons, and yet the Economic Report, unfor
tunately, I won’t say throws up its hands at the problem, but doesn’t
really, m my judgment, come to grips with it.
I feel that we are a little in the position of the widower who was
returning from the funeral of his young and beautiful wife, and some
body seeks to console him and pats him on the back and says, “ Joe,
don’t take it so seriously. You will find another wonderful wife in the
next year or two.” And Joe looks at his comforter and says, “ Yes,
but what am I going to do tonight ?”
That is the problem of the economy as I see i t : What are we going to
do in 1967 ? Would you address yourself to an immediate set of actions,
i f you can, which would enable us to keep our prices stable ?
Mr. A uerbach. May I tell you honestly, Congressman Reuss, that
\• story occurred to me as I was writing my statement.
'Ur
Representative R euss. It’s quite an old story.
Mr. A uerbach. Y ou pose a very difficult problem. You have
been one of the men in Congress who, very properly in my view
has been asking the Congress to take greater responsibility in this area.
I f the guideposts constituted a good program for the President of the
United States, they were also good for the Congress and the Con
gress should have said so in some responsible way. I f they did not
constitute a good program of stabilization for the Congress, Congress
should not have permitted the President to administer them.
Nevertheless, in spite of your urgings over the years, nothing was
done to avert the impasse we now confront. It is difficult, in the light
of this past history, to answer your question. “ All right, what
do we do now?” But I acknowledge that you are right in criticizing
956
th e
1967 ECONOMIC REPORT OF THE PRESIDENT
my statement for not directing itself to the immediate problem. In
fact, what we can do about the immediate problem is limited but,
nevertheless, I will venture some suggestions.
It is clear that even if Congress should agree with the proposals I
have made, and frankly I don’t have any real hope that it will, nothing
will happen for quite awhile, at least not before the spring negotiations
begin. A wage-price spiral may get underway before any effective
action can be taken.
It seems to me that the basic principle that I have tried to em
phasize may nevertheless have immediate application; namely, the
principle that labor and management should be held to public ac
countability for decisions they take that affect the public as a whole.
Possibly, the public interest may be served if this committee were to
turn to the administration and say “Don’t give up so soon, we are now
willing to participate and to help” ; if a public review board were cre
ated, composed of administration representatives and representatives
of this committee and the public; if their immediate steps were taken to
get the representatives of labor and management who will be involved
in negotiations in 1967 to appear before this public review board and
justify the actions they propose to take.
Representative R euss. What would you think as a goal for 1967 in
terms of a guidepost ? We don’t have any now really.
Mr. A uerbach . I think that the goal in 1967 ought to be overall
price stability. I would envisage that the public review board would
say to representatives of labor and management appearing before i t :
What we want for 1967 is price stability. Tell us what can and ought to be
done on the assumption that prices are not going to go up, that they are going to
stay where they are for the remainder of 1967.
Representative R euss. In other words, you would invite an industry
which is faced with some sort of a wage demand to indicate what kind
of a wage demand it thinks it can absorb.
Mr. A uerbach . Yes, sir.
Representative R euss. And what kind of a wage demand it asserts
it would have to pass on in the form of higher prices.
Mr. A uerbach. Yes, sir. I would hope that the public review board
would call together the representatives of labor and management well
in advance of the time the collective bargaining agreements are due
to expire and ask them what they contemplate doing, what wage de
mands are going to be made, what kind of settlement will assure price
stability this year, what price reductions will have to be made—so
that no wage-price spiral gets underway.
Representative R euss. In addition to your “hold the line on prices”
policy, and the machinery you have suggested for implementing it,
would you envisage the executive branch exercising more anti-infla
tionary effort than it is now doing, particularly on the supply side ?
Would you think it useful to have someone in the administration,
whether it be an Esther Peterson representing the consumer or some
body, really look at all of these areas, including food prices and agri
cultural policy and services and all the difficult fields, to see what can be
done either by increasing supply or holding dow n cost to keep both the
Wholesale Price Index and the Consumers Price Index just as close
to stability in this crucial year as possible ?
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
957
Mr. A uerbach. I think that is an excellent suggestion, Congress
man Reuss. I would like to see Miss Peterson’s office move more ag
gressively into the price area. But this is a difficult area and yet this
possibility ought not to be neglected.
Representative R e u s s . Thank you. You have certainly given an
answer to my “ what can we do now” question.
Thank you, Mr. Chairman. That is all.
Chairman P roxmire. Thank you very, very much, Professor
Auerbach. You have been an excellent witness this morning—most
stimulating. You challenged whether I would be saying as nice things
about you after you finished as before. I certainly can, and even more
so. As Congressman Bolling indicated, you have brought an extremely
interesting and constructive suggestion to us.
It is one thing to criticize and it is very helpful, very important.
Something else though, it is much harder to make a concrete specific
proposal and make it stand up, so I think you have been a very help
ful witness, and we are mighty grateful.
Mr. A uerbach. Thank you, Senator Proxmire.
Chairman P roxmire. Our next witness is an old friend of the com
mittee and an extremely competent economist—Dr. Jules Backman,
research professor of economics of New York University, who has
quite a different view on the subject. It will be a very stimulating
morning.
We are very happy to have you, Professor Backman.
TESTIMONY OF JULES BACKMAN, PROFESSOR OF ECONOMICS,
NEW YORK UNIVERSITY
Mr. B ackm an . Thank you, Mr. Chairman. It is always a pleas
ure to appear before the committee. While the temptation is very
great to plunge into the discussion that has already taken place, so
that I could register my disagreement with the previous witness on
many of the points, I will try first to outline my basic position and
then hope these questions will be raised later.
The CEA has made a constructive contribution to public under
standing by emphasizing that fringes as well as wages must be con
sidered in measuring worker’s gains, and that regardless of the name
given to a wage increase, whether it be a cost-of-living adjustment or
a productivity increase, it represents a labor cost. However, the
CEA presentation does a disservice to economic education when it
uses erroneous assumption to supply this policy.
The wage-price guideposts were foredoomed to fail to accomplish
the objectives of limiting increases in labor costs and stabilizing the
price level. As is shown by the attached conclusions of an analysis
I made on February 19,1962,1 do not draw this conclusion from the
vantage point of 20-20 hindsight.
There are at least five basic assumptions underlying the guideposts
which in my judgment are in error.
1. The assumption there is a direct relationship between unit labor
costs and prices.
2. The assumption that productivity (output per man-hour) is the
major factor in wage determination.
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THE 1967 ECONOMIC REPORT OF THE PRESIDENT
3. The assumption that the reported increases in private output per
man-hour indicate what is available for distribution.
4. The assumption that real labor income should or could increase
at uniform annual rates.
5. The assumption that unorganized sectors would follow the
leader.
Let me say a few words about each of these assumptions.
The assumption that average labor cost increases equal to average
gains in output per man-hour would result in general price stability
is based on a very crude labor theory of price determination and one
that has support neither in economic theory nor in economic history.
In the short run, prices are not determined by unit labor costs, by
wages, or by total labor costs. And the long run is a composite of
short runs. Labor cost is only one factor in the determination of
total costs. Thus, when we are told that prices are determined solely
or primarily by labor costs, there is omitted from consideration (1)
all factors affecting demand; (2) all factors affecting supply, except
costs; and (3) all elements of cost, except labor.
Economic theories concerning long-term relationships between costs
(note costs, not labor costs alone) and prices are concerned with the
pressures influencing the allocation of resources. Thus, if costs are
greater than prices, profits disappear, marginal facilities may be aban
doned, and some producers may be forced out of the industry. Con
versely, if profits are very high, producers may expand capacity and
new producers may be attracted into the industry, thus increasing
supply and setting the stage for lower prices. Costs and prices must
be out of line to set these corrective actions into operation. The econ
omist is describing tendencies in the economy and the effects of costprice relationships rather than the way in which prices are set by any
company.
Demand is important in the short run when prices and costs may be
and often are quite far apart. The wide fluctuations in profit mar
gins between good times and bad illustrate the lack of relationship
between costs and prices and the importance of volume, a factor recog
nized by the CEA.
Thus, a fundamental assumption underlying the wage-productivityprice formula has no basis in fact. Prices fluctuate independently of
unit labor costs and hence stability in such costs (which would result
from the wage-productivity balance) cannot and does not assure
stable prices.
The CEA proposal that companies with above average gains in
output per man-hour should cut prices in a period of strongly surging
demand and capacity operations was completely unrealistic. Thus,
it is now forced to conclude that the greatest failure of observance of
the price guidepost lies in the failure to reduce prices on a considerable
number of the product lines of a large number of industries. The only
surprising thing about this situation is the surprise of the CEA.
Prices have a rationing function—to allocate limited supplies among
the more urgent users as indicated by their willingness to pay the price,
which is particularly important in periods of shortage. I f price
doesn’t allocate supplies, then this must be done on a first-come, firstserved basis, or by favoritism, or by Government priorities or ration
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
959
ing. Where shortages prevail, a reduction in price is exactly the
wrong prescription and will tend to result in a less efficient use of
resources.
Regarding the assumption that productivity (output per man-hour)
is the major factor in wage determination. The CEA states “ The
only valid and noninflationary standard for wage advances is the
productivity principle.” For some key industries, the rate of change
in output per man-hour nationally is one factor considered in collective
bargaining.
The guideposts attempt to convert a long-term truism, namely, that
the level of living can only increase as the quantity of goods goes up,
into a policy which is effective on a year-to-year basis. Productivity
is considered by negotiators in some industries, but it is neither the
only factor nor the most important one. Other factors include the
general state of the economy, the growth rates of specific companies
and industries, changes in the Consumer Price Index, rival union
leadership, comparative wages and profitability.
In the real world, wage relationships are of critical importance both
to the firm that seeks to hire labor and to the union leadership which
must produce results for its members. It is true, as the CEA notes,
that proper comparisons often are difficult to make. But each party
is more skillful at countering the claims of the other than the CEA
seems willing to recognize so that neither party can arbitrarily select
only comparisons favorable to itself and make them stick.
In discussing prospective settlements, the CEA states that “many
wage settlements in 1967 will exceed the trend increase of productiv
ity.
In effect, it treats changes to compensate for rising living costs
as “ an additional margin” beyond the productivity total. The reality
of collective bargaining will be just the reverse.
The first factor considered by negotiators during periods of rising
living costs is what increase is required to restore real wages to the level
prevailing when the previous contract was negotiated. Then, con
sideration is given to how much more the adjustment should be to
compensate either for anticipated further rises in living costs or to
increase real earnings.
The Council has said, and I heard it repeated here this morning,
that first we get the increase in productivity and then we hope to get
back part of the loss of the cost of living. What really happens in
collective bargaining is the reverse. First they negotiate whether to
restore the living standards which are eroded by a rise in living costs,
and after they have agreed or disagreed upon that point, then they
negotiate upon how much more should be given in a particular nego
tiation. In other words, the first test in a period of rising living costs
is what has been happening to the Consumer Price Index.
I agree with the Council that, if in 1967 labor should attempt to
obtain an increase in wages and other fringe benefits equal to the com
bined effect of the rise in living costs and the so-called productivity
standard, we would have very great pressure on prices. I do not agree
that this large increase in unit labor costs, which will aggregate this
year at least 4 percent and possibly a little higher, will be translated
into any automatic increases in prices. On the contrary, I am con
vinced that in 1967 these increases in unit labor costs will be ac
960
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
companied by a cut in profit margins and by some increase in
unemployment.
Incidentally, 1967 provides an excellent illustration of what is wrong
with the guideposts. The assumption that we can increase real living
standards by some uniform rate from year to year is one from which the
Council departs in this year, and properly so. Historically, living
costs, comparative wages, and other factors have been important cri
teria for wage adjustments. It is a fact that, historically, real wages
over long periods of time have gone up as much as productivity. But
on the short-term basis, this just has not been the situation at all, as 1
will indicate in a moment.
There is another assumption which was contained in the CEA’s
figure of 3.2 percent, namely, that the Council can measure changes
in productivity, and then that they use the right numbers.
A year ago the Council was in the embarrassing position of abandon
ing its own arithmetic. You may recall that when the 5-year average
didn’t work out, the Council sort of walked away from it and said,
“ Oh, yes, it may be 3.6 percent, but we really don’t think that is
important, so we will stick with the 3.2”
I f the Council had stayed with its goal of economic education, it
necessarily would have stated that changes in output per man-hour
cannot be pinpointed, and that only a range o f changes could be
identified. The Council would then have avoided the situation which
increased expectations and may have contributed to the larger in
creases negotiated later in 1966. The Council also would have been
spared the questions raised about its own integritv.
Now why do I raise a question about these figures? Students of
the productivity trend are fully aware of certain limitations in terms
of their usefulness as a standard for wage increases. For example,
about one-half a point of this increase is attributable to the rise in
output per man-hour in the agricultural sector. There has been a
large shift of manpower from agriculture to industry, and when a
worker moves from the farm economy to the nonfarm economy, he
slots into the wage level which already is prevailing in the nonagricultural economy; in effect, he gets the gain in productivity.
In other words, the numbers show a gain m productivity, but since
we have no composite figure for the economy on wages, there is no
wage figure which shows that the average level of wages has gone
up because we have more people working at $2.50 an hour and fewer
at $1 an hour. In other words, the mix in wages has moved in the
same direction as productivity.
In addition to that, we have had an important change in the nonagricultural sector. A smaller proportion of the labor force is now
production workers, and a higher proportion are scientists, profes
sional workers, and others who get higher wages. This mix uses up
part of the gain in productivity, and, in fact, it goes even further
when production workers require greater skills in today’s technology.
As they move up the ladder, they get part of the gains. This is one
of the reasons why the use of such numbers is a mistake.
The recent abandonment of the announced guidepost of 3.2 percent
was a constructive move. The CEA, of course, hasn’t really aban
doned the guidepost. It has only abandoned this exercise in economic
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
961
marksmanship. The CEA reports it is still wedded to the guidepost
approach, and although Mr. Auerbach suggested that the President
and the Council may have abandoned their policy of intervention, I
call your attention to the experience in gasoline in the last few days.
In this situation, the Department of the Interior has indicated that,
at the suggestion of the Council* it is attempting to roll back the
price increase announced for gasoline. There has been an abandon
ment of a number, but not of the process used to implement the
number.
The fourth error, underlying the guideposts is the assumption that
real labor income can or should increase at some uniform annual rate.
I checked the changes in real hourly earnings over the past 46 years.
Now real hourly earnings can increase in one of five ways. The data
are contained in my statement.
You can have no change in wages and a decline in living costs.
You can have no change in the cost of living and a rise in wages, and
this is the combination which the Council has selected. You can
have both going down with the cost o f living going down more, and
you can have both going up with the wages going up more, or you
can have wages going up a little and the Consumer Price Index down
a little.
In the past 46 years there was only 1 year in which the combination
which the Council has chosen was the actual way in which real wages
increased in the economy: in 1929, there was no change in the Con
sumer Price Index, and there was a rise in real hourly earnings
because wages went up a little. And, incidentally, even these figures
don’t tell the whole story, because in 6 years, real wages went down,
which means that in other years we must have larger than long-term
average increases in order to achieve the average.
Incidentally, under the guidepost policy, real labor income has
risen irregularly and has fallen short of the goal of the guideposts.
I f anyone had gotten 3.2 percent a year in each of the years since
1962, although that figure wasn’t in effect for the whole period,
he would have found a significant part of this increase eroded by the
rise in living costs, which was 1.7 percent in 1965 and 2.9 percent in
1966*
The actual increase in real hourly earnings during this period—and
this includes fringes—was approximately 2 percent in manufacturing
and 2.5 percent for trade, or short of the guidepost standards.
Much was said about the control which some companies have of
our economy. In fact, the CEA has assumed, that if the highly vis
ible industries conform to price guideposts, “the average of prices
would also be stable in the other highly competitive industries, includ
ing agriculture and most services, where firms had no discretion.”
This is a naive view of the relationship between prices of agricultural
products and services on the one hand, and those for industrial
products on the other.
The assumption that prices of farm products and, in turn, food,
would maintain a fixed relationship to other prices has not worked
out, nor was there any reason to expect that it would, on the basis of
the history of these price relationships.
The objective of stabilizing the price index could not be attained
because of the inability to control or to prevent a rise in the prices of
962
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
many services, such as hospital care, education, personal care, et
cetera, which represent essentially labor costs.
Incidentally, the Council has also stated that “businesses and unions
can push up prices even when resources are not fully utilized.” That
was stated here again this morning. However, the record shows that
from 1958 to 1964, when the economy operated substantially below
capacity, wages and prices were not pushed up generally. Between
T
those years, capacity utilization averaged between 74 and 86 percent
in manufacturing. The unemployment rate was between 5 and 6
percent. Wholesale industrial prices recorded no change. The Con
sumer Price Index rose slightly more than 1 percent a year. And
unit labor costs in manufacturing industries remained relatively stable,
and for the entire corporate economy rose about 1 percent annually.
The assumption that big business has the market power which can be
used to raise prices excessively is not a new one, and in this connection,
it is instructive to keep in mind that the largest price rises in the past
2 years have been in farm products, foods and services, rather than
in the products of big business.
In the absence of the guidepost policies, it is probable there would
have been somewhat larger increases than actually developed in in
dustrial prices. However, there is no evidence that they would have
been as large as the rise for services or that they would have had an
important impact on the CPI.
The question is not a new one. It was raised by Mr. Kefauver and
the Kefauver committee in the middle 1950’s. I have introduced two
charts into my testimony. One shows the relationship between eco
nomic concentration and the rise in metal prices from May 1955 to
May 1957. That chart showed there was absolutely no relationship
between the extent of economic power as measured by economic con
centration and the magnitude of price rises in those days.
I have just completed very extensive studies of the relationship be
tween so-called market power inherent in intensive advertising and
price changes, and in my statement I reproduce one of the charts which
will be contained in that study scheduled to be published this spring.
(See chart 2 p. 976.) Incidentally, that chart shows a line of regres
sion moving downward slightly rrom left to right. To support the
charge of relationship between market power and price increase it
would have to move upward sharply from left to right on a somewhat
different direction.
My conclusion of that phase of the advertising study was as follows:
The most intensively advertised categories of products have tended to show
smaller increases in price than less heavily advertised categories during the
post-World War price inflation. The postwar record of changes in wholesale
and retail prices for broad groups of products and for selected foods and pro
prietary drugs reveals that there has been no relationship between the intensity
of advertising expenditures and the magnitude of price increases.
These data indicate that heavy advertising expenditures did not create a
degree o f market power which gave the affected industries the freedom to raise
prices substantially during this period of general price inflation.
These studies are cited to illustrate that market power need not
necessarily be translated into higher prices.
I would like to say just a few words about the price and wage out
look for 1967, because these tendencies and trends will play an im
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
963
portant role in terms of what should be done and the consequences of
what we do. There will be two basic pressures for price rise in 1967.
One is the deficit in the Federal budget, and I would like to say at this
point that I support the request for an increase in the surtax of 6
percent, because I find it difficult to believe that we will be able to hold
price inflation under control with a $15 billion deficit in the adminis
trative budget, regardless of what the cash or the national income
budget shows. They have effects upon economic activity, but this
administrative budget has an effect upon inflation.
But secondly, and the most important pressure for price inflation
in 1967 will be the very large increase in labor costs which will take
place this year.
Throughout the entire postwar years, regardless of what the con
sequences may have been—and I now go back to the earlier postwar
years—there was no time in which unions were willing to settle for,
nor management unwilling to give, at least the increase in the cost of
living.
Most of the battles in the early postwar period, and I had the op
portunity to participate in many of those proceedings, were concerned
with how much beyond the cost of living one went. It was almost
viewed as a matter of equity that labor should get at least the rise in
the cost of living.
And so we start with contracts that have been in many cases 2-year
contracts, the one exception is the automobile industry, because auto
workers have received both cost-of-living and the productivity in
creases. In the past 2 years the Consumer Price Index has risen about
4.5 percent. I don’t think there is any union of any size that is going
to accept less than the 4.5 percent as a start.
In fact, and this is not generally realized, automobile workers re
ceived in 1966 a 7-percent increase in wages, which works out to be
tween 5- and 6-percent increase in labor costs. This will be the
minimum target for unions in 1967. And since the probability in
1967 is for a rise in productivity or output per man-hour of about 2
or 2.5 percent, we face the large rise in unit labor costs which I de
scribed earlier. And, as I indicated, I think this rise will be reflected
largely in a cut in profit margins, and in some unemployment, and to
a lesser extent, in higher prices.
What about the indications of stability in prices ? One of the most
important portents of the movement of wholesale prices is what hap
pens to the index of 22 sensitive products. A year ago that index was
115 on a 1957-59 basis. Today it is about 102. The Wholesale Price
Index has shown stability since last July. There has been little or
no change in the comprehensive Wholesale Price Index for the past
7 or 8 months, and one of the very interesting points about this index
is that if we break it down and study what I like to call the anatomy
of prices, we find that every component of the index was rising
through July 1966, but in the last 7 months, from July 1966 to Jan
uary 1967, four of the 13 components have actually gone down.
I
submit that a period when some components of the index are
showing little or no change and others are going down is not the type
of price behavior one expects to find in a period of general price in
flation.
964
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
Second, there are indications that in the absence of a further escala
tion of Vietnam, the rate of increase in economic activity may slow
down or may even come to a halt. The expansion which has lasted 6
years is looking tired, particularly in the civilian sector.
Third, the suspension of the 7-percent investment tax credit and of
accelerated depreciation for buildings combined with tight money
helped to slow down the boom in the plant and equipment. The nar
rower profit margins probable for this year will reduce the incentive
as well as funds available to finance plant and equipment spending.
On balance, a leveling off in plant and equipment spending is probable
even if the investment tax credit is restored. Because we have been
getting increases in capacity which exceed the growth in the economy,
excess capacity is beginning to develop.
I see 1967 as a year in which there will be a slower rate of growth if
the Vietnam war continues, and a moderate recession similar to the
post-Korean one if the Vietnam war ends.
There is one other factor about 1967 that must be emphasized. In
ventories have been accumulating at the rate of in excess of $15 billion
a year. Now what does this mean? It means that if gross national
product is $760 billion and $15 billion is inventory accumulation, we
have only been consuming $745 billion, and it means that if we stop
accumulating inventories, not liquidate them, merely stop the accumu
lation, we take $15 billion out of the economy. That represents many
jobs and a significant reduction of pressure on prices. And if we
should liquidate some of these inventories, we could very easily get a
swing which will take $20 billion out of the gross national product,
and will help to reduce, if not eliminate, the pressures for price rise.
As I see the price outlook, inflationary pressures are still present in
the economy, particularly from higher labor costs. However, on bal
ance there is a strong probability that we have seen the maximum rate
of pressures for price inflation already. Prices should rise at a slower
rate in 1967. Assuming no change in Vietnam, the rise in the Con
sumer Price Index will be 3 percent or less, and that in wholesale prices
2 percent or less. Incidentally, in the last 3 months the Consumer Price
Index has risen about two-tenths of a point, and the Wholesale Price
Index has shown minor changes.
The actual degree of price inflation will be determined to a large
extent by events in Vietnam and by the fiscal and monetary policies
adopted. It will not be determined by the wage-price guideposts.
Further escalation of the war would intensify the pressure for
higher prices, unless fully offset by higher taxes. On the other hand,
a stabilization of the war effort or a cutback would moderate signifi
cantly the pressures for price inflation. Since I have no way of de
termining which of these alternatives will develop, any projection of
prospective price change must be qualified.
Let me conclude. I strongly endorse the educational objectives of
the guideposts as originally described in 1962. It is useful to empha
size there are general limits to rates of gain in real wages, and in the
levels of living that can be realized annually, particularly since public
expectations seems to have far outdistanced the possibilities of even
our affluent society.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
965
However, the Council’s analysis is based on so many erroneous
assumptions that the educational value of the guideposts is open to
serious question. There is little value to a program which educates
the public to believe that unit labor costs determine prices, that only
productivity determine wages, that real wages can increase at a uni
form annual rate, that the general price level can be stabilized by con
trolling increases in labor costs, or that levels of living can be raised
by 3 percent or more annually.
Moreover, educational goals stated in general terms is a far cry
from the establishment of annual objectives expressed in numerical
terms. The guideposts as used prior to this year, unfortunately,
created expectations of steady, annual increases in real labor income
at a 3.2 percent rate, or higher than is realistic and hence higher than
actually developed.
Moreover, such a steady increase in real income each year ignores
the fact that labor payments perform a rationing function as well as
provide a source of purchasing power.
Different rates of change m labor income are appropriate for
periods of recession than for periods of marked economic growth.
The failure of the guideposts to provide for these cyclical variations
is another weakness that usually ! s ignored.
i
W e would be better off with the termination o f this experiment in
economic marksmanship. A s a device to determine acceptable in
creases in wages and guideposts and prices, the guideposts leave much
to be desired.
The implementation by persuasion has really had no administrative
base and appears to be a hit-or-miss affair. I f the objective is to
overcome the market power of labor and business, the guideposts are a
very crude tool, since they seek to contain the exercise of that power in
a few instances rather than to attack it at the source.
I f we desire to contain market power by business, the main instru
mentality is the antitrust laws. Pressures on prices can also be
modified by the timing of Government spending programs, lower
ing barriers to foreign trade and by sales from the stockpile.
It must be recognized that while the latter programs can be helpful
in stabilizing the prices of some products, they cannot stabilize the
general price level.
The elimination of make-work practices and of restriction o f mem
bership in some unions, retraining, training, and mobility programs,
and repeal or modification of the W alsh-Healey A ct and Bacon-Davis
Act could help reduce the pressures on the labor front, but there would
still remain the strong market power of the unions in many industries.
One difficulty is that problems may develop through small unions
strategically located as well as the giant unions which are the usual
targets for antimonopoly proposals.
The most constructive approach would require the mix o f fiscal and
monetary policies which would restrict excessive expansion in the
economy, plus direct attacks on specific abuses of market power.
In the wage-price environment projected for this year, the guideposts can serve no useful purpose. On the contrary, they may
966
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
aggravate what already are certain to be excessively large increases
in labor costs. By emphasizing long-term gains in output per manhour and the accompanying rise in living standards, they encourage
unions to seek increases large enough to cover both the past rise in
the CPI and the so-called normal rise in real wages. This combina
tion would mean labor-cost increases of 7 percent or more, and would
result in a substantial rise in unit labor cost as the Council has warned.
The abandonment of a specific numerical value for labor cost in
creases was unavoidable under these conditions. The quiet burial of
the wage-price guideposts would be equally constructive.
That concludes my statement, Mr. Chairman.
(The prepared statement of Mr. Backman follows:)
PREPARED STATEMENT OF JULES BACKMAN
T H E W A G E -PR IC E GUIDEPOSTS
The wage-price guideposts are now five years old. At the outset, the CEA
emphasized the guideposts were designed to educate the business community,
labor unions, and the public that there are limits within which real incomes can
be expanded annually and that increases in excess of those amounts will be
eroded by price inflation. The guideposts spelled out what the CEA considered
to be noninflationary wage and price behavoir.
I f the wage-price guideposts described only the extent to which labor costs
can rise without adding to unit labor costs, they would represent a simple
exercise in arithmetic. However, they go further and state that if certain com
pensating changes in wages and prices take place, average unit labor costs will
be unchanged and we could attain price stability. Such price stability, in turn,
would convert the indicated rise in money labor income into an identical rise
in real income. These latter conclusions are based upon a faulty understand
ing of the processes o f wage and price determination and provide a completely
wrong prescription for general price stability.
Under conditions o f signflcant idle capacity (as from 1958 to 1964), the guideposts make no contribution to the stability of the price level. In fact, when
there is idle capacity and unemployment, they could have just the opposite effect
by encouraging increases in labor costs which are greater than warranted at
such times. Such a development could impede the reemployment o f idle workers
who are priced out o f the market.
Similarly, in a period of strong demand fueled by federal budgetary deficits
(which still prevail) and an explosive growth in money and credit (which was
finally brought to a halt in 1966), wage-price guideposts could not bring about
price stabUity. At best they may have shaved off a small amount from labor
settlements in a few highly visible major industries. However, they are ineffec
tive in other negotiations as the experience with many settlements, particularly
in the building trades, demonstrated last year.
Although specific situations which have directly experienced the impact of
wage-price guideposts can be identified, the magnitude of the effect can not be
determined. How much more, if at all, would the labor cost have increased in
an industry in which intervention has taken place? How much more did weaker
unions obtain because of the guideposts? How much would the prices of steel,
aluminum, cigarettes, and other prices have risen if producers had not been
aware o f the actual or potential scrutiny of the Government? And would such
increases have had a significant impact on the CPI ?
These questions cannot be answered with any definitiveness. We have no
standards to determine the overall impact, if any, of the guideposts on the gen
eral level o f wages and prices. We have a dynamic economy in which many
forces operate simultaneously and usually cannot be disentangled. However,
the guideposts appeared to have had no impact on the vast majority of prices
throughout the economy and no restraint upon some major segments o f the cost
of living including foods and services.
Overall price stability is mainly a function of fiscal and monetary policy with
wage-price guideposts playing a very subordinate role. Of course, we know
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
967
that governments rarely are willing to make fiscal policy and monetary policy
(restrictive enough to assure an unchanging price level because the attainment
of that objective may conflict with the objective of reducing unemployment.
Some students have in fact concluded that price stability could only be assured
at the cost of high unemployment. In this connection, it will be recalled that
the relative stability of the general price level from 1958 to 1964 occurred during
a period of unemployment and low levels o f capacity utilization and that prices
began to move up as we approached fuller utilization of resources. To the
extent that there is a basic conflict between the two goals of price stability and
reduction of unemployment, public policy might seek to moderate the upward
tendencies o f prices during periods of high level activity rather than to seek
the goal o f price stability.
In any event, if the goal of full utilization of resources is to be attained by
expansionary fiscal and monetary policies, the wage-price guideposts can not
achieve price stability. However, they may act to prevent needed adjustments
in some sectors as when prices are held down under conditions o f severe shortage
(e.g. copper) or to encourage unbalanced increases in wages and prices as
when they are held down in some highly visible industries but not in other
parts of the economy.
Paradoxically, the guideposts may appear to be effective when there is minimal
pressures for price inflation—and hence the guideposts are not needed. How
ever, they cannot prevent increases in the general level o f prices when there are
strong pressures for price rises and the containing forces have been weakened.
Thus, they are an unnecessary appendage when prices are stable and a futile
device to prevent rises when there are strong upward pressures. In any event,
it seems evident that price stability can not be achieved through the guidesposts.
Nevertheless, the hope that the guideposts can be effective may slow up the
implementation of tighter monetary and fiscal policies.
It is practically a truism that for the entire economy the real income o f labor
(wages plus nonwage benefits deflated by the consumer price index) must in
crease over long periods of time about in line with the increase in output per
manhour. In fact, the average level o f living can only increase when a larger
quantity of goods and services is produced per worker. Mass production re
quires mass consumption.
In order to sell millions of automobiles, radios, television sets and huge quanti
ties of other products, they must be bought by a broad cross-section of the con
suming public representing an overwhelming majority of the population. Such
purchases may be made possible, however, either by higher incomes, lower
prices, or some combination o f both. In the past, each of these alternatives has
been important.
Although the general average rise in labor income has been in line with average
gains in output per hanhour, diversity o f change has characterized wages and
non-wage benefits among industries. In the dynamic and expanding American
economy, diverse changes in labor incomes help to play a role in steering avail
able manpower. Expanding areas and industries tend to have larger than aver
age increases in wages in order to attract the additions to the labor force
they require. Conversely, lagging industries should have less than average in
creases since they face a declining need for labor.
The diversity of wage changes is a response to a myriad of pressures, eco
nomic and political, which affect the magnitude and nature of settlements for
different industries and often result in different changes for individual companies
within an industry. These underyling forces are still operating and will con
tinue to do so in the future.
In its initial analysis, the CEA indicated that exceptions could be made from
its general guideposts for the above situations. But in 1964, the CEA stated
that such exceptions should apply to “ only a relatively few cases.” {Economic
Report of the President, January 1964, p. 119) Thus, an important element
of flexibility in the 1962 guideposts was modified since ordinarily the excep
tions have been very numerous.
The CEA has made a constructive contribution to public understanding by
emphasizing that fringes as well as wages must be considered in measuring
labor’s gains and by indicating that regardless o f the name given to a wage
increase, whether it is a cost o f living adjustment or a productivity increase, it
968
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
represents a labor cost. However, the CEA presentation does a disservice
to economic education when it uses erroneous assumptions to support this policy.
GUIDEPOSTS WERE BUILT ON EBBONEOUS ASSUM PTIONS
The wage-price guideposts were foredoomed to fail to accomplish the objec
tives of limiting increases in labor costs and stabilizing the price level. As is
shown by the attached conclusions of an analysis I made on February 19, 1962,
I do not draw this conclusion from the vantage point of 20-20 hindsight.
There are at least five basic assumptions underlying the guideposts which
in my judgment are in error—
1. The assumption there is a direct relationship between unit labor costs
and prices.
2. The assumption that productivity (output per manhour) is the major
factor in wage determination.
3. The assumption that the reported increases in private output per manhour indicate what is available for distribution.
4. The assumption that real labor income should or could increase at
uniform annual rates.
5. The assumption that unorganized sectors would follow the leader.
1.
The assumption there is a direct relationship between unit labor costs and
prices.— The guidepost policy is bottomed upon a false assumption, namely, that
success in stabilizing unit labor costs in major industries would result in a stable
CPI. For example, the CEA states that “if wage rates [total labor costs] in
crease in line with output per man-hour, prices can be stable . .
(p. 120).
The CEA is imbued with a cost theory o f pricing. Thus, it suggests an ex
ception to its price guidepost is permissible if “ costs other than labor costs
had risen.” (p. 123). It notes that “for cotton textiles, a sharp decline in
the cost of raw cotton would have suggested price reductions,” (p. 124) and calls
attention to other prices (e.g. copper, sulphur, machine tools and industrial
equipment) which have risen more than warranted by costs (pp. 124-25). How
ever, it does recognize that demand was very strong for several o f these products.
It also notes that “ some significant price reductions which the guidepost would
have suggested have not occurred” and cites automobile prices as an
illustration (p. 124).
The assumption that average labor cost increases equal to average gains in out
put per manhour would result in general price stability (see p. 131) is based
on a labor theory o f price determination and one that has support neither
in economic theory nor in economic history. In the short run, prices are not
determined by unit labor costs, by wages, or by total labor costs. And the long
run is a composite of short runs. Labor cost is only one factor in the determina
tion of total costs. Thus, when we are told that prices are determined solely
or primarily by labor costs, there is omitted from consideration (1) all factors
affecting demand; (2) all factors affecting supply, except costs; and (3) all ele
ments o f cost, except labor.
Economic theories concerning long term relationships between costs (note
costs, not labor costs alone) and prices are concerned with the pressures in
fluencing the allocation o f resources. Thus, if costs are greater than prices,
profits disappear, marginal facilities may be abandoned, and some producers
may be forced out of the industry. Conversely, if profits are very high producers
may expand capacity and new producers may be attracted into the industry,
thus increasing supply and setting the stage for lower prices. Costs and prices
must be out o f line to set these corrective actions into operation. The economist
is describing tendencies in the economy and the effects of cost-price relationships
rather than the way in which prices are set by any company.
Demand is important in the short run when prices and costs may be and often
are quite far apart. The wide fluctuations in profit margins between good times
and bad illustrate the lack o f relationship between costs and prices and the
importance o f volume, a factor recognized by the CEA. (pp. 128, 132)
Thus, a fundamental assumption underlying the wage-productivity-price
formula has no basis in fact. Prices fluctuate independently o f unit labor costs
and hence stability in such costs (which would result from the wage-productivity
balance) cannot and does not assure stable prices.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
969
The CEA proposal that companies with above average gains in output per
manhour should cut prices in a period of strongly surging demand and capacity
operations was completely unrealistic. Thus, it is now forced to conclude that
“ the greatest failure of observance o f the price guidepost lies in the failure to
reduce prices on a considerable number of the product lines of a large number
of industries.” (p. 125) The only surprising thing about this situation is the
surprise o f the CEA.
Prices have a rationing function—to allocate limited supplies among the more
urgent users as indicated by their willingness to pay the price—which is par
ticularly important in periods o f shortage. I f price doesn’t allocate supplies
then this must be done on a first-come, first-served basis, or by favoritism, or by
government priorities or rationing. Where shortages prevail a reduction in
price is exactly the wrong prescription and will tend to result in a less efficient
use of resources.
2.
The assumption that productivity ( output per mamhour) is the major factor
im wage determination.—The CEA states “ The only valid and noninflationary
standard for wage advances is the productivity principle.” (p. 128) For some
key industries, the rate o f change in output per manhour nationally is one factor
considered in collective bargaining. But it is neither the only factor nor the most
important one. Other factors include the general state of the economy, the
growth rates of specific companies and industries, changes in the consumer price
index, rival union leadership, comparative wages, and profitability.1
Apart from periods o f rising living costs, the most important factor in the
overwhelming number o f wage negotiations is the wage comparison criterion.
Although the CEA pays lip service to this criterion (p. 130), it emphasizes that
“ Very often the wage comparisons in collective bargaining are only part of a
game of follow-the-leader which, at best, is irrelevant to resource allocation and,
at worst, speeds up a wage-price spiral.” (p. 131) It also appears to regret that
in one settlement the “ customary relationship” between different groups of
workers in a company was not destroyed. (p. 131)
Certain key industries such as automobiles and steel have helped to establish
patterns for general increases in wages and fringes in the postwar years. The
CEA has been concerned primarily with such industries although initially it
specifically stated that its guideposts do not constitute “ a mechanical formula
for determining whether a particular price or wage decision is inflationary.”
(Economic Report of the President, 1962, p. 188) However, settlements in other
companies and industries do not always match the “ key wage bargains” .
For smaller companies and industries as well as in local bargaining, the
guideposts have been o f minor importance since the factors peculiar to the
competitive situation, locality, or industry tend to have greater weight in the
minds of the negotiators. It is not surprising, therefore that some of the
largest departures from the guideposts have taken place in local bargaining.
As a result; wage relationships among different sectors o f the local economy are
bound to be distorted.
In the real world, wage relationships are of critical importance both to the
firm that seeks to hire labor and to the union leadership which must produce
results for its members. It is true, as the CEA notes, that proper comparisons
often are difficult to make. But each party is more skillful at countering the
claims o f the other than the CEA seems willing to recognize so that neither party
can arbitrarily select only comparisons favorable to itself and make them stick.
In discussing prospective settlements the CEA states that “ many wage settle
ments in 1967 will exceed the trend increase o f productivity” (p. 128) In effect
it treats changes to compensate for rising living costs as “ an additional margin”
(p. 128) beyond the productivity total. The reality of collective bargaining will
be just the reverse.
The first factor considered by negotiators during periods of rising living costs
is what increase is required to restore real wages to the level prevailing when
the previous contract was negotiated. Then consideration is given to how much
more the adjustment should be to compensate either for anticipated further rises
in living costs or to increase real earnings.
1 For a general discussion see Jules Backman, Wage Determination, D. Van Nostrand Co.,
Inc., Princeton, N.J., 1959, passim.
75—
814— 67— pt. 4------- 17
970
TH E
1967
ECONOMIC REPORT OF TH E PRESIDENT
The CEA warns that if the labor cost increase in 1967 is large enough to
include “ a full allowance for productivity” 'and “to ‘compensate’ for past
increases in living costs, unit labor costs would rise at a rate which would
require living costs to continue their rapid rise.” (pp. 128-29) I agree that such
an increase would probably result in a rise o f 4% or more in unit labor costs.
But this does not mean a comparable rise in prices. It could be partly met by a
cut in profit margins and a reduction in other costs, which means some unemploy
ment. I believe that the 1967 economy will not permit companies to pass on
their higher labor costs in full and that large increases in labor costs will result
in lower profit margins and some increase in unemployment.
Thus, part of the price of lack o f restraint in labor cost increases in 1967 wiU
be unemployment and lower profit margins. The CEA recommends that “ pro
ducers should absorb cost increases to the maximum extent feasible.” (p. 133)
Moreover, 1967 provides an excellent illustration o f a year in which real wages
should not rise as much as output per man-hour because of the large increase
required to achieve this objective. The CEA’s recommendation for a hold
down in total labor costs is a proper objective but it is inconsistent with its basic
guidepost approach, namely, that increases “ in average hourly earnings and
fringes should be steady and smooth, not erratic.” (p. 121)
3.
The assumption that reported increases in private output per mam-hour
indicate what is available for distribution.— In its establishment o f the produc
tivity standard, the CEA utilizes the changes in output per man-hour in the
entire private economy. Initially, it referred to long term gains but soon trans
lated long term to mean five years, because it thought such a period “ was suffi
ciently long to induce both the extraordinarily high productivity gains o f a year
of recovery (1962) and the extraordinarily low productivity gains o f a year o f
recession (I960).” (Economic Report of the President, January 1966, p. 92)
In 1966, after five consecutive years of expansion, the CEA abandoned the
five year average because it no longer included a recession year and hence
reflected “ unsustainable productivity gains” . Although the CEA didn’t identify
the years covered, it concluded that “ the long term trend, independent o f cyclical
swings, is slightly over 3 per cent.” ( Ibid.)
The unfortunate use of a five year moving average prior to 1966 placed the
CEA in the embarrassing position o f being forced to abandon its own arithmetic
when it yielded an average o f 3.6% for the 1961-65 period instead o f 3.2%.
(Ibid.) I f the CEA had stayed with its goal of education, it necessarily would
have stated that changes in output per man-hour cannot be pinpointed and that
only a range o f changes could be identified. The CEA would then have avoided
the situation which increased expectations and may have contributed to the
larger increases negotiated later in 1966. The CEA also would have been
spared the questions raised about its own integrity.
The shift from agriculture
The changes in output per man-hour for the entire \nvate economy, including
agriculture, overstate the average gains that can be attained by workers. Part
of the national increase in output per man-hour reflects the shift from agricul
ture to the non-agricultural economy where the output per man-hour is higher.
The shift away from agriculture has been marked: During the period since
1947, agricultural employment has declined by 4 million while1non-agricultural
employment has increased by some 20 million.
Employment, 1947, 1961, 1966
Total
Agricultural
Thousands
1947....................................................................
1961....................................................................
1966-............................. -___________________
Change, 1947- %____ ____ ___ _
Nonagricultural
Thousands
Thousands
57,813
66,796
74,065
16,252
49,557
61,333
69,859
20,302
8,256
5,463
4,206
-4,050
Percent
14.3
8.2
5.7
Since the value o f output per manhour in the non-agricultural sector is con
siderably higher ($4.26 in 1958 dollars in 1965), than in the farm sector ($2.31),
this shift contributed to an increase in the average national gain in output
per manhour.
THE
1967
ECONOMIC REPORT OF T H E PRESIDENT
971
Real value output per man-hour
[1968 dollars]
1947
Nonfarm_ -_________________________________________
_
Farm .
______
___ .
_ .
Total private____________________________________
$2.59
.77
2.27
1965
$4.26
2.31
4.12
Percent
increase
64.5
20
0 .0
81.5
Source: U.S. Department of Labor, Bureau of Labor Statistics, “ Indexes of Output Per Manhour for the
Private Economy 1947-65,” (mimeo), Washington, D.C., October 1966, table 1A.
From 1947 to 1965 because of the tripling o f the real value output per manhour in the farm sector, the total rise in the entire private sector was 81.5%
as compared with only 64.5% in the non-farm sector.
From 1947 to 1966, output per manhour in the non-agricultural sector o f the
economy increased 2.8% per year as compared with about 3.3% for the entire
private economy. The workers who shifted from farming to the non-agricul
tural sector received the higher wages already prevailing in that area and
hence the part of the gain in private output per manhour resulting from the
shift in the mix o f total employment already has been distributed. Actually,
the maximum amount available for distribution is the increase in outpiit per
manhour recorded in the non-agricultural sector, not in .the entire private sector.
Upgrading of labor force
In recent years, there also has been a shift in the composition o f the labor
force. For example, production workers accounted for 83.7% of total employ
ment in manufacturing in 1947, 75.1% in 1960, and 74.4% in 1966.
The significant expansion in research and development has involved a large
increase in the relative importance o f personnel devoted to those activities;
automation is having a similar effect. To the extent that non-production work
ers receive higher average salaries than production workers, part o f the gains
in output per manhour is required to finance the shift in composition o f the
labor force, and hence is not available for general improvements in wages
and non-wage benefits.
Similarly, an increasing proportion o f production workers is found in the
skilled category. This changing composition of the labor force also results in
a built-in increase in la:bor costs and thus reduces the amount o f productivity
gain available for distribution through general increases in wages or non-wage
benefits, in higher profits, or in lower prices.
The CEA recognized in 1962 that “ . . . it must be borne in mind that average
hourly labor cost® often change through the process o f up-or-down grading,
shifts between wage and salaried employment and other forces. Such changes
may either add to or subtract from the increment which is available for wage
increases under the overall productivity guide.” (Economic Report of the
President, 1962, p. 190). It is probable that on balance these changes have
subtracted from the increment available for distribution.
In the light o f the foregoing factors, it se6ms clear that neither the 3.3%
annual rate of gain in output per manhour for the entire private economy nor
the 2.8% gain for the non-farm economy from 1947 to 1966 is available for dis
tribution. This is one important reason why the rise in real earnings has fallen
short of such “ guideposts” in the postwar period:
Between 1947 and 1965, the latest year fo r which data for wage supplements
are available:
Real average hourly earnings in manufacturing increased at the annual rate
of 2.3%.
Real average hourly earnings plus wage supplements increased at the annual
rate o f 2.7%.
The OEA has been using output per manhour data that are too high and thus
building up expectations for annual rates o f increase in real labor income which
cannot generally be attained continuously over time.
Effect of announcing numerical goal
The high number announced by the Council quickly became the minimum
acceptable target for unions and the maximum that some managements were
972
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
willing to pay. The CEA recognizes this development in its observation that
various statements by the Council “have been interpreted as treating the guideposts as firm, though voluntary, rules, and those who fail to adhere to them as
“ violators.” (P. 123.) This was inevitable and should have been recognized
in advance particularly since the CEA says the guideposts “ were designed to
define more precisely to labor and business” the government policy. (P. 125.)
The recent abandonment o f the announced guideposts of 3.2% was a construc
tive move. It was a mistake to have announced any number in the first place.
The proposed modifications which were supposed to be a part o f the guideposts
were largely ignored except to justify above average increases. Some labor
settlements above the target figure became subject to public criticism by the
Council and the basis for White House intervention. (Illustrations include the
airlines and the New York Transit Authority, p. 127). Similar actions attended
reported price increases, as was illustrated by steel, copper, aluminum, molyb
denum, cigarettes, and gasoline. ( P. 127.)
The CEA hasn’t abandoned the guideposts; it has only abandoned the numeric
cal yardstick which it had established to indicate when selected collective bar
gaining settlement or price actions were in the ballpark. The CEA Report indi
cates that it is still wedded to the guidepost approach. Thus, after discussing
its activities in connection with the price guidepost, it specifically states that
“ this activity will be continued by the Council.” (P. 127.) On February lith ,
the New York Times reported that in line with the guidepost policy, the Interior
Department had requested a rollback o f a 1 cent a gallon increase in gasoline
prices.
4.
The assumption that real labor income should or could increase at uniform
annual rates.— The guidepost approach attempts to substitute relatively uniform
annual increases in real wages for the irregular pattern of growth experienced in
the past. Real wages have reflected a composite of changes in income and in the
consumer price index and necessarily have risen irregularly rather than at an
uniform rate over time. Real labor income can rise in any year as a result of
five combinations o f changes—
(1) No change in labor income and a decline in the CPI.
( 2) An increase in labor income and little or no change in the CPI.
(3) A small rise in labor income and a small decline in the CPI.
(4) A decline in both with the CPI recording the larger decline.
(5) A rise in both with labor income recording the larger rise.
Table 1 shows the annual changes in average hourly earnings and in the CPI
for the 46 years between 1919 to 1966. The number in the last column is related
to the five alternatives noted above. It must be recognized that the exact
relationships shown might have been a little different if fringe benefits could
have been included in the hourly earnings. Nevertheless, it is instructive to note
that:
1. There were no years in which the hourly earnings remained unchanged and
the CPI declined (Alternative 1) (Actually 1949 was such a year but this is
not shown by the annual data because the unchanging earnings in 1949 averaged
higher than in 1948).
2. There was only one year (1929) in which hourly earnings rose and the CPI
remained unchanged (Alternative 2 ).
3. There were six years (1927, 1928, 1938, 1939, 1949, 1955) in which hourly
earnings rose and the CPI declined (Alternative 3).
4. There were four years (1921, 1922, 1931, 1933) when the CPI declined
more than hourly earnings (Alternative 4).
5. There were 29 years (including every year except two between 1948 and
1966) when hourly earnings rose more than the CPI (Alternative 5).
There is a sixth alternative, namely that real labor income may decline in
some years so that the increases obtained under the first five assumptions must
average more than the long term average annually in order to achieve such an
average over time. There have been six such declines since 1919 (1925, 1926,
1932, 1945,1946,1947).
Despite this record, the CEA in its guideposts, relied upon alternative (2), an
unchanged CPI and a rise in labor income. Its success would have imposed
a fixed mold during good times and bad and during periods o f stability and
TH E
1967
ECONOMIC REPORT OP TH E PRESIDENT
973
inflation instead o f the flexibility which has characterized our economy in the
past.
Changes in real income, 1962-66
Real labor income since 1962 has risen irregularly but has fallen short o f the
goal o f the guideposts. In light o f the steady rise in the CPI by a little more
than 1% annually in 1962, 1963 and 1964, 1.7% in 1965, and 2.9% in 1966,
workers who obtained an average increase of 3.2% in money wages and fringe
benefits annually during that period necessarily received a smaller rise in real
income.
It must be kept in mind, as the CEA has pointed out from the start, that all
labor costs including fringe benefits and social security taxes, must be considered
in utilizing the guideposts. For example, the social security tax paid by em
ployers increased from 3% o f wages (up to $4,800) in 1961, to SVs% in 1962,
3 % % in 1963 to 1965, and 4.2% (up to $6,600) in 1966. The increase in the
social security tax averaged 0.2% o f hourly earnings annually from 1961 to 1966.
The changes in money income and in real income are shown in Table 2. The
average rise in hourly earnings plus wage supplements1 in manufacturing in
money terms was 3.3% per year from 1961 to 1965. Somewhat larger annual
increases were recorded in other sectors o f the economy from 1961 to 1965:
construction, 3.1% ; wholesale and retail trade, 3.9%. (See Table 3) However,
after adjustment for the rise in the consumer price index the increase in real
terms averaged only about 2% annually in manufacturing and 2.5% for trade
or short o f the rise postulated in the guideposts.
In interpreting these data, it must be kept in mind that the increases in costs
to employers were somewhat higher because these data do not reflect the cost
o f fringe benefits involving time off with pay. Nevertheless, it is probable that
the increases in real earnings were less than the objectives established by the
CEA. And this is really unavoidable because as was indicated earlier, the CEA
standard is too high.
5.
The assumption that unorganized sectors would follow the leaders.—From
the outset o f the guidepost policy in 1962, the CEA has directed its attention
primarily to the “ important segments o f the economy in which large firms or
well-organized groups o f employees have same discretionary ability to affect
the levels o f their prices and wages.” (p. 120) These may be described as
the highly visible unions and industries.
j
The CEA assumed that “ compensation in unorganized sectors would rise at
the same average rate, equal to the gain in over-all productivity.” (p. 122)
O f course, this unorganized sector includes workers affected by federal minimum
wages which have risen much more tfttm the guideposts as the CEA recognizes
(p. 129) (From $1 in August 1961 to $1.25 in September 1963 and $1.40 in
February 1967) But apart from this development it is o f interest to note that
the largest increases in consumer prices have been in the service sector which is
largely populated by unorganized workers.
The CEA assumed that if the highly visible industries conformed to the price
guideposts, “ the average o f prices would also be stable in the other, highly
competitive industries (including agriculture and most services) where firms
had no discretion.” (p. 123) This is a naive view of relationship between prices
o f agricultural products and services and those fo r industrial products.
Prices o f agricultural products are significantly influenced by supplies here and
abroad and historically have fluctuatedmuch more widely than industrial prices
both in the long run and in short periods. For example, from 1940 to 1948,
agricultural prices rose 184% as compared with the rise of 75% for industrial
prices. In 1958, farm product prices rose 4.4% while industrial prices fell by
2%. In 1959, the trends were reversed. Table 4 shows the diverse annual
changes since 1939.
Thus, the assumption that prices o f farm products, and in turn food, would
maintain a fixed relationship to other prices has not worked out nor was there
any reason to expect that it would.
Similarly, the prices o f services have risen without interruption in the past
quarter o f a century while the prices o f goods in the CPI have recorded declines
1 Data reported for wage supplements include legally required social security and un
employment compensation taxes and negotiated pension and welfare benefits.
75_314— 67— pt. 4—
18
974
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ECONOMIC REPORT OP TH E PRESIDENT
as well as advances. For example, prices o f all commodities in the CPI declined
in 1949,1953,1954, and 1955 and prices of the durable goods component, an area
of great visibility, declined in 1953,1954,1955,1960,1961 and 1965.
The objective of stabilizing the CPI could not be attained because o f the inabil
ity to prevent a rise in the prices o f many services (such as hospital care, educa
tion, personal care, etc.) which represent essentially labor costs. These are
sectors of the economy which have relatively small improvements in output per
man-hour so that higher labor costs tend to be translated more readily into higher
prices. The impossibility o f preventing rises in farm and food prices also was
important. The CEA recognizes that these are “areas to which the guideposts
have no applicability.” (p. 128)
The fact is that the guideposts failed to stabilize the CPI from the outset even
apart from the increases in foods and services, as the figures in Table 5 show.
From 1961 to 1966, the total CPI rose 8.5%. I f it had not been for the rise o f
13.6% for services and 11.3% for food, the overall advance would have been
considerably smaller but there would still have been a rise o f about 5% or an
average of about 1% annually.
Thus, the effort to contain price inflation by confrontation has not been suc
cessful. Criticisms o f price increases in aluminum, steel, and other industries
have held down prices in those areas and undoubtedly has resulted in a more
cautious approach to price increases in other industries. However, the overall
effect on the W PI has been minor and there probably has been little effect on
the CPI.
In this connection, too, it should be noted that the incomes policy—the
parallel approach in such countries As Western Germany and United Kingdom—
has not prevented general increases in prices. In England, for example, the cost
•of living increased almost 5% in 1965 and almost 4% in 1966* The increases
in West Germany were about one-half percentage less in both years.
Market power and prices
The CEA states that “ businesses and unions can push prices up even when
resources are not fully utilized.” (p. 119). However, the record shows that from
1958 to 1964, when the economy operated substantially below capacity, wages and
prices were not “ pushed up” generally. ( See Tables 6 and 7)
Between 1958 and 1964:
For manufacturing industries, capacity utilization averaged between 74% and
86%.
{The unemployment rate was between 5.2% and 6.8%.
Wholesale industrial prices recorded no change with the annual indexes rang
ing between 100.3 and 100.7 (1957-59=100) .
The consumer price index rose slightly more than 1% a year.
. Unit labor costs in manufacturing industries remained relatively stable and
for the entire corporate economy rose about 1% annually.
This period of relatively unimportant changes in tprices and in unit labor
costs includes the 3 years before the guideposts were formulated (1958 to 1961)
and the first three years of their use (1962 to 1964).
In connection with the assumption that big business has market power which
can be used to raise prices excessively, it is instructive to keep in mind that the
largest price rises in the past two years have been in farm products, foods, and
services rather than in the products o f big business. In the absence o f the
guidepost policy, it is probable that there would have been somewhat larger in
creases than actually developed in the latter areas. However, there is no evidence
that they would have been as large as the rise for services or that they would
have had an important impact on the CPI.
Similar charges concerning the effects of market power upon prices were
made in connection with the price rises in the mid-1950’s. To check the factual
basis for such an assumption, I studied the relationship between economic con
centration as measured by the share accounted for by the Big Four in 1954, and
the changes in wholesale prices from May 1955 to May 1957 for 136 groups o f
metals and metal products. Chart 1 shows that there was no relationship be
tween the price change and the degree o f concentration.1
i Jules Backman, Administered Prices, Administered Wages , and Inflation, Current Busi
ness Studies, Society of Business Advisory Professions, New York University, October 16,
1957, pp. 5-24.
TH E
1967
ECONOMIC REPORT OF TH E PRESIDENT
975
C h a r t 1. M e t a l s a n d M e t a l P r o d u c ts C o n c e n t r a t io n V e r s u s P r ic e -Ch a n g e
+ 40
+ 35
+ 30
o
?
tn +20
to
<
£
i> + « 5
U
l
y +10
cc
• •
CL
J + 5
o
2
<
X
o
£
u
i
' 4
-to
■15
-20
to
20
30
40
50
60
70
*0
90
100
1 9 5 4 CONCENTRATION RATIO (4 Lorqest Companies)
S o u r c e : J u les B ack m a n , “ A d m in istered P rices, A d m in iste re d W ages, a n d In fla tio n ,”
C u rre n t Business S tud ies N o . 2 8 , S o cie ty o f B u sin ess A d v is o r y P ro fe s sio n s , In c., p . 13.
S im ila r ly , i t i s f r e q u e n tly s t a t e d t h a t la r g e - s c a le a d v e r t is in g e x p e n d itu r e s
c r e a t e m a r k e t p o w e r . T o d e te r m in e t h e e x t e n t to w h ic h t h i s m a r k e t p o w e r h a s
b een e x e r c is e d I h a v e r e c e n t ly c o m p le te d s t u d ie s o f t h e r e la t io n s h ip b e tw e e n t h e
i n t e n s it y o f a d v e r t is in g , a s m e a s u r e d b y t h e r a t io o f a d v e r t is in g e x p e n d itu r e s to
s a le s , a n d t h e c h a n g e s in p r ic e s fr o m 1 9 4 7 t o 1 9 6 6 .2 C h a r t 2 , w h ic h illu s t r a t e s
o n e o f t h e c o m p a r is o n s m a d e , i s r e p r o d u c e d fr o m t h a t stu d y . ( S e e T a b le 8 )
T h e g e n e r a l c o n c lu s io n o f m y s t u d y i s a s f o l l o w s :
“T h e m o s t in t e n s iv e ly a d v e r t is e d c a t e g o r ie s o f p r o d u c ts h a v e te n d e d t o sh o w
s m a lle r in c r e a s e s in p r ic e t h a n l e s s h e a v ily a d v e r t is e d c a t e g o r ie s d u r in g t h e p ostW o r ld W a r p r ic e in fla tio n . T h e p o s t w a r re c o r d o f c h a n g e s in w h o le s a le a n d
r e t a il p r ic e s f o r b r o a d g r o u p s o f p r o d u c ts a n d f o r s e le c te d f o o d s a n d p r o p r ie ta r y
d r u g s r e v e a ls t h a t th e r e h a s b e e n n o r e la t io n s h ip b e tw e e n t h e in te n s ity o f a d
v e r t is in g e x p e n d itu r e s a n d t h e m a g n itu d e o f p r ic e in c r e a s e s .
“T h e s e d a t a in d ic a t e t h a t h e a v y a d v e r t is in g e x p e n d itu r e s d id n o t c r e a te a
d e g r e e o f m a r k e t p o w e r w h ic h g a v e t h e a ffe c te d in d u s t r ie s t h e fr e e d o m t o r a is e
p r ic e s s u b s t a n t ia lly d u r in g t h i s p erio d o f g e n e r a l p r ic e in fla tio n . I t m a y b e
a s s e r t e d t h a t t h e s e d a t a m e r e ly s h o w t h a t t h e m a r k e t p o w e r w a s u n e x e r te d b u t
* The detailed findings w ill be contained in Advertising and Competition to be published
by New York University Prees in the Spring.
976
TH E
1967
ECONOMIC REPORT OF TH E PRESIDENT
remains a threat in the future. However, the earlier discussion indicated that the
theory that brands create excessive market power is a myth. The price ex
perience reinforces this conclusion.”
These studies are cited to illustrate that market power need not necessarily be
translated into higher prices.
Chart 2. Advertising Outlays Per Dollar of Sales, 1962, and Per Cent Change
in W holesale Prices, 1947-65, for Selected Commodities
Percent
change
7 0 -J
l
0
j
2
j
4
j
6
|
8
A d v e r tis in z /o a le s R atio
j
10
j
----- j
----- 1
12
14
16
in Per cent
Source: Jules Backman* Advertising and Competition, New York University Press, 1967.
TH E
1967
ECONOMIC REPORT OP TH E PRESIDENT
977
PRICES AND WAGES IN 1967
I
should like to examine now the prospective changes in wages and prices this
year. Monetary and fiscal developments have been accompanied by a booming
economy and by a higher rate of price inflation. The consumer price index rose
about 3% in the past year as compared with an annual rate of slightly more
than 1% between 1958 and 1965. Even more important, because there are daily
reminders of its impact, food prices increased 3.8% as compared with an annual
rate o f about 1% in the preceding seven years. And practically all categories
o f foods have risen in price.
Retail prices have advanced across-the-board with every major category rising
2.0% or more. Increases exceeded 6% for public transportation, footwear, and
medical care among the subgroups. ( See Table 9 ).
Industrial wholesale prices increased 2.2% between December 1965, and
December 1966. Most o f this rise had taken place by July, 1966. Prices of
processed foods rose through August and have since recorded a modest decline.
(See Table 10).
A significant change has developed since July, 1966. During the nine months
ending in July, when the index o f industrial wholesale prices rose by 3.2%,
each o f the 13 groups of prices included in this index advanced. ( See Table 11).
In the seven months from July 1966 to January 1967, a markedly different
pattern emerged. The industrial price index rose only 0.6% as declines for four
groups offset in part the increase recorded by nine groups of prices. This is not
the pattern that develops when strong inflationary pressures are operating in the
economy. It is apparent that inflationary pressures have subsided since July,
1966. One of the most important clues to the re-emergence of general infla
tionary pressures will be found in the anatomy o f price changes. This is an
area, therefore, to be watched carefully in the months ahead.
The more important factors to be considered in evaluating price trends in the
year ahead may be summarized as follow s:
Pressures for Price Rise
1. The federal budget will continue in the red even if the proposals to raise
taxes are adopted. Any further escalation in Vietnam would intensify fiscal
inflation unless it is offset by a rise in revenues including higher tax rates. Any
cutback in our Vietnam commitment would virtually eliminate inflationary
pressures from this source.
2. The major pressures for price inflation in 1967 will probably develop from
higher unit labor costa After five years o f nominal increases in unit labor
costs in the economy and small declines in manufacturing industries, we are now
experiencing a rise. The increase in hourly wages and fringes plus higher social
security costs added almost 5% to hourly labor costs in 1966. The net result was
an increase almost 3% in average unit labor costs in manufacturing for 1966
and a rise of 4% for the corporate economy. This has meant increasing pressure
on prices from the cost side. ( See Table 6 ).
The prospect is for an even larger increase in unit labor costs in 1967. Wages
and fringe benefits costs probably will rise more rapidly largely due to the in
creases in the consumer price index and to the relatively low level of unem
ployment. The increase in automobile hourly wages in 1966 will probably be
come a target for other unions. Auto workers received an annual improvement
factor increase of 2.8% (with a minimum o f 7 cents an hour) plus a two cents
across-the-board increase plus cost o f living increases aggregating 11 cents an
hour. This appears to be a wage increase o f about 7% in 1966. However, when
this wage increase is related to total hourly labor costs including fringes, the
rise probably is between 5% and 6%. For all manufacturing industries, hourly
earnings rose by 4.1% in the year ending in December. (See Table 12).
In addition, the increase in the minimum wage from $1.25 to $1.40 an hour
became effective February 1 and social security costs increased from 4.2% to
4.4%. An average increase o f more than 5% in hourly costs is probable
in 1967.
On the other hand, output per man-hour for the nonfarm economy should in
crease at a lower rate than in recent years, probably no more than 2 % -2% % .
The net result will be a rise in unit labor costs o f several percent.
It is not going to be easy to pass on very large labor cost increases in higher
prices. Moreover, other costs will not be cut rapidly enough to provide an offset
to higher labor costs. The result will be a squeeze on corporate profits. It is
978
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1967
ECONOMIC REPORT OF TH E PRESIDENT
already underway. I think we can see this in some industries where mild de
clines in volume are generating an erosion in profits of significant amounts.
So we will have an economy which will have areas o f expanding profits and areas
of declining profits, but on balance corporate profit should decline.
My feeling is that in 1967, higher unit labor costs will be accompanied by a
narrowing of profit margains and by some increase in unemployment. Neverthe
less, there will be some pressure for higher prices from labor costs. Higher labor
costs could be the most inflationary force in 1967.
Indicators of Lower Prices
1. One important portent has been the movement of sensitive raw materials
prices during the past year. Changes in these prices tend to precede those in
the general price level. The raw materials index, which is fairly responsive
to underlying pressures, rose about 11% in the year ending February, 1966, at
which time it averaged 113.8 (1957-59=100), (the actual daily high was about
115). During the past year, despite the public concern with price inflation, this
index has been drifting lower. On February 14, the index was 102.2 or about
10% below the February 1966 level. Every group o f raw materials was below
the level prevailing a year earlier. ( See Table 13)
Wholesale industrial prices have recorded little change since last July.
Moreover, as I noted earlier, four out o f 13 groups o f industrial prices declined
between July 1966 and January 1967. Such behavior does not portend a higher
rate of increase in consumer prices than we have been experiencing. Rather, it
suggests that the increase will be at a lower rate.
2. There are indications that in the absence o f further sharp escalation in
Vietnam, the rate o f increase in economic activity may slow down and may
even come to a halt. The expansion which has lasted six years is looking tired,
particularly in the civilian sector o f the economy. Tighter credit was accom
panied by sharp cutbacks in the building industry and this is affecting related
lines of activity. There have also been reductions in automobile sales. It is
improbable that inventories will continue to rise at the recent rate o f more
than $1 billion a month. Any reduction in the rate o f accumulations would
reduce significantly the pressures for higher prices.
3. The suspension o f the 7% Investment Tax Credit and of accelerated depreci
ation for buildings combined with tight money helped to slow down the boom
in plant and equipment spending. Narrower profit margins, which are probable
for this year, will reduce the incentive as well as the funds available to finance
new plant and equipment. On the other hand, higher labor costs will increase
the incentive to substitute machinery for manpower. On balance, a leveling off
and then a decline in plant and equipment spending are in prospect Such a
development would contribute to the easing o f credit and would act to reduce the
pressure for higher prices.
I don’t think that the restoration o f the 7% tax credit on January 1, 1968, i f
it takes place, will do very much to arrest such a decline which will reflect
fundamental readjustments in our economy.
I f the Vietnam war ends, the level o f real gross national product should decline
from the level prevailing at the end o f the war. I think there would be a swing
in inventories, which alone would eliminate $15 to $20 billion from the national
product.
I see 1967 as a year in which there will be a slower rate of growth if the Viet
nam war continues, and a moderate recession, similar to the post-Korean one,
if the Vietnam war ends.
I do not believe that any recession that develops will be deep and prolonged.
The built-in stabilizers and the developments in federal fiscal policy and monetary
policy would be such as to contain its magnitude, as it has in each of tie postwar
recessions.
4. Plant capacity has been expanding at a faster rate than the demand fo r
goods and services so that excess capacity may develop in some industries in
1967. Such a development would make it difficult to raise prices and, in fact,
would create pressures for price declines in the affected industries. We have
already seen signs o f this tendency in the chemical industry, and I think this
will spread.
Price outlook
Inflationary pressures are still present in the economy, particularly from
higher labor costs. However, on balance there is a strong probability that w e
have seen the maximum rate o f pressures for price inflation. Prices should
TH E
1967
ECONOMIC REPORT OP TH E PRESIDENT
979
rise at a slower rate in 1967. Assuming no change in Vietnam, the rise in the
Consumer Price Index should be 3% or less, and that in industrial wholesale
prices 2% or less.
The degree of price inflation will be determined to a large extent by events in
Vietnam and by the fiscal and monetary policies adopted. Further escalation
o f the war would intensify the pressures for higher prices unless fully offset
by higher taxes. On the other hand, a stabilization o f the war effort or a cutback
would moderate significantly the pressures for price inflation. Since I have
no way to determine which of these two alternatives will develop, any projection
of prospective price changes must be qualified.
TH E FUTURE OF WAGE-PRICE GUIDEPOSTS
I strongly endorse the educational objectives of the guideposts as originally
described in 1962. It is useful to emphasize there are general limits to rates
o f gain in real wages and in the levels o f living that can be realized annually
particularly since public expectations seem to have far outdistanced the possibil
ities o f even our affluent society. However, the OEA analysis is based on so*
many erroneous assumptions that the educational value o f the guideposts is;
open to serious question. There is little value to a program which educates the
public to believe that unit labor costs determine prices, that only productivity
determines wages, that real wages can increase at an uniform annual rate, that
the general price level can be stabilized by controlling increases in labor costs,
or that levels o f living can be raised by 3% or more annually.
Moreover, an educational goal stated in general terms is a far cry from the
establishment of annual objectives expressed in numerical terms. The guideposts as used prior to this year unfortunately created expectations o f steady,
annual increases in real labor income at a 3.2% rate, or higher than is realistic
and hence higher than actually developed. Moreover, such a steady increase
in real income each year ignores the fact that labor payments perform a rationing
function as well as provide a source o f purchasing power. Different rates of
change in labor income are appropriate for periods o f recession than for periods
of marked economic growth. The failure o f the guideposts to provide for these
cyclical variations is another weakness that usually is ignored.
We will be better off with the termination o f this experiment in economic
marksmanship. As a device to determine acceptable increases in wages and
prices, the guideposts leave much to be desired. The implementation by per
suasion has really had no administrative base and appears to have been a hit
or miss affair. I f the objective is to overcome the market power of labor and
business, guideposts are a very crude tool since they seek to contain the exercise
o f that power in a few instances rather than to attack it at the source.
I f we desire to contain market power by business, the main instrumentality
is the antitrust laws. Pressures on prices can also be modified by the timing
of government spending programs, lowering barriers to foreign trade, and by
sales from the stockpile. It must be recognized that while the latter programs
can be helpful in stabilizing the prices of some products they cannot stabilize
the general price level.
The elimination of make-work practices, and of restrictions on membership
in some unions, retraining, training and mobility programs, and repeal or
modification of the Walsh-Healey Act and Bacon-Davis Act could help reduce
the pressures on the labor front but there would still remain the strong market
power of the unions in many industries. One difficulty is that problems may
develop through small unions strategically located as well as the giant unions
which are the usual targets for anti-monopoly proposals.
The most constructive approach would require the mix o f fiscal and monetary
policies which would restrict excessive expansion in the economy plus direct
attacks on specific abuses o f market power.
In the wage-price environment projected for this year the guideposts can
serve no useful purpose. On the contrary, they may aggravate what already
are certain to be excessively large increases in labor costs. By emphasizing
long term gains in output per manhour and the accompanying rise in living
standards, they encourage unions to seek increases large enough to cover both
the past rise in the CPI and the so-called “normal” rise in real wages. This
combination would mean labor cost increases of 7% or more and would result
in a substantial rise in unit labor costs as the CEA has warned (p. 129). The
abandonment of a specific numerical value for labor cost increases was unavoid
980
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1967
ECONOMIC EEPOET OF TH E PRESIDENT
able under these conditions. The quiet burial of the wage-price guideposts
would be equally constructive.
The test of a proper increase in wages and non-wage benefits in any specific
negotiation cannot be some “guesstimate” o f the average national rise in output
per manhour. It is true that the average rise in real labor income for all
industries will be close to the average rise in output per manhour fo r the
national economy over a long period o f time. But this relationship is neither
close nor meaningful on a year to year basis for the entire economy nor for
individual companies or industries. The rate of increase for specific industries,
companies, or groups of workers will and should vary—often markedly—from
the national average. Moreover, increases in money labor costs should not
take place annually and if they do they should not be uniform each year. They
can be larger in periods o f prosperity and smaller or even nothing in periods
of recession. They will tend to be greater in periods of inflation and smaller
at other times. These variations in the magnitude o f changes either annually
or periodically are more in accord with the needs o f a dynamic economy than
any uniform rate of change. It is true that the CEA proposal has an escape
hatch which provides for some exceptions to the productivity standard. I f the
hatch is used, however, the exception will become the rule and the use o f the
productivity standard the exception. And this is how it should be.
There is no simple wage formula which will yield the right answer fo r all
negotiations in one period or fo r negotiations o f any company or industry over
time. The proposal discussed in this paper represents the triumph o f the
productivity criterion and is based upon the assumption that it will yield a stable
price level. However, a proper national wage policy cannot be framed solely
with the objective of preventing inflation. It also must consider the demand
for labor and hence the impact on the volume o f unemployment as well as other
factors. I f the international balance of payments problem becomes intensified,
for example, national policy may have to seek to translate productivity gains
into lower prices and an improved competitive position for our products vis-a-vis
foreign products both here and abroad. Under these circumstances wage
increases could be only minimal.
Nor does the proposed policy assure a stable level o f prices since price levels
are determined by a wide variety of forces of which stability in unit labor costs
is far from being the most important. In fact, the whole underlying theory of
price determination—namely that prices are determined by unit labor costs—has
no basis in fact.
Among the other weaknesses of the proposed guidepost are the follow ing:
part of the gains in output per manhour is not available for general increases
in wages and non-wage benefits because it is being absorbed by the increase in
relative importance of scientific and professional workers and the upgrading
in skills of production workers; the stresses created by equal annual rates o f
Increase in labor income when output per manhour changes with great irregu
larity; the undesirability of freezing labor’s share of national income; the
varying importance o f direct labor costs among different industries with the
differing inflationary impact of relatively uniform increases in labor income;
and the ineffectiveness of exhortation as the method o f implementing the
proposal and the undesirability and impossibility of imposing effective wage
control.
Finally, it should be emphasized that the proposed guidepost is based on the
assumption that gains in output per manhour should be distributed largely in
the form of increases in labor income. The needs of an expanding economy,
the attainment o f high level employment, and our foreign competitive position
would be better served if productivity gains were used to a larger extent to
reduce prices. Lower prices would increase the real incomes of workers as
well as of other groups who contribute directly or indirectly to the increase
in output per manhour. Simultaneously, a price reduction would encourage
an expanding volume o f effective demand for the products directly affected by
rising output per manhour. In the absence of a reduction in prices, volume
does not expand, fewer workers are required to produce the former volume o f
output and hence one result is greater unemployment.
By lowering the price it is often possible to assure a prompter use o f the
released resources. Thus, price reductions help to reduce the threat o f techno
logical unemployment at the point o f impact by expanding the effective demand
TH E
1967
ECONOMIC REPORT OF TH E PRESIDENT
981
for the products which can be produced more efficiently.** Lower prices would
be a more effective route to economic growth and expanding employment oppor
tunities than increases in labor income. Therefore, the use of productivity as
the guidepost for proper increases in wage and non-wage benefits should be
rejected both on grounds of feasibility and economic desirability.
T a b l e 1.— Year-to-year changes in average hourly earnings, manufacturing industries
and in the Consumer Price In d ex , 1 9 1 9 -6 6
[1957-59—100]
Year
1919.
1920.
1921.
1922.
1923.
1924.
1925.
1926.
1927.
1928.
1929 _
1930.
1931.
1932.
1933.
1934.
1935.
1936.
1937.
1938.
1939_
1940..
1941.
1942.
1943.
1944.
1945.,
1946.
1947.
1948..
1949..
1950..
1951.,
1952..
1953.,
1954.,
1955..
1956.,
1957..
1958.,
1959.,
1960.
1961.
1962.
1963.
1964.
1965.
1966.
Average
hourly earn
ings in man
ufacturing
$0,472
.549
.509
.482
.516
.541
.541
.542
.544
.556
.560
.546
.509
.441
.437
.526
.544
.550
.617
.620
.627
.655
.726
.851
.957
1.011
1.016
1.075
1.217
1.328
1.378
1.440
1.56
1. 65
1.74
1.78
1.86
1.95
2.05
2.11
2.19
2.26
2.32
2.39
2.46
2.53
2.61
2.71
Year-to-year
percent
change
+16.3
-7 .3
-5 .3
+7.1
+4.8
0
+.2
+.4
+2.2
+.7
- 2 .5
-
6 .8
-1 3.4
-.9
+20.4
+3.4
+1.1
+ 12.2
+.5
+1.1
+4.5
+10.8
+17.2
+12.5
+5.6
+. 5
+5.8
+13.2
+9.1
+3.8
+4.5
+8.3
+ 5.8
+5.5
+2.3
+4.5
+4.8
+5.1
+2.9
+3.8
+3.2
+2.7
+3.0
+2.9
2.8
+3.2
+3.8
+
Consumer
price index
60.3
69.8
62.3
58.4
59.4
59.6
61.1
61.6
60.5
59.7
59.7
58.2
53.0
47.6
45.1
46.6
47.8
48.3
50.0
49.1
48.4
48.8
51.3
56.8
60.3
61.3
62.7
68.0
77.8
83.8
83.0
83.8
90.5
92.5
93.2
93.6
93.3
94.7
98.0
100.7
101.5
103.1
104.2
105.4
106.7
108.1
109.9
113.1
Year-to-year Relationship
percent
of average
hourly earn
change
ings to C P I1
+15.8
-10.7
-6 .3
+1.7
+.3
+.8
+2.5
-
1.8
-1 .3
0
-2 .5
-8 .9
- 10.2
-5 .3
+3.3
+2.6
+ 1.0
+3.5
-
1.8
-1 .4
+ .8
+5.1
+10.7
+6.2
+1. 7
+2.3
+8.5
+14.4
+7.7
- 1.0
+ 1.0
+8.0
+2.2
+ .8
+.4
-.3
+1.5
+3.5
+2.8
+ .8
+1.6
+1.1
+1.2
+1.2
+1.3
+1.7
+2.9
1 Notes:
2 Average hourly earnings up, CPI unchanged.
3 Average hourly earnings up, CPI down.
4 Average hourly earnings down, CPI down more;
5 Average hourly earnings up more than CPI.
6 Real hourly earnings down.
7 No change in real hourly earnings.
8 I t is recognized, o f course, that the extent to w hich effective demand will increase in
4
response to low er prices will vary fo r different products.
982
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
T a b l e 2.— H ou rly earnings, manufacturing industries , year-to-year percent change
[Percent]
Real
Money
Average
hourly
earnings
plus wage
supple
mental
Average
hourly
earnings
3.0
2.9
2.8
3.2
3.8
12.5
3.0
1962........................................................................
1963.......................................................................
1964............................................................... ........
1965 ....... ......................................................... .
1966............ ...........................................................
1961-1965 total................................................ ......
Per annum_______________ _________________
T able
Average
hourly
earnings
plus wage
supple
mental
Average
hourly
earnings
3.4
3.4
2.9
3.5
1.8
1.8
1.3
1.3
1.3
6.3
1.6
14.0
3.3
3 . — Average
hourly earnings plus wage supplements in
construction , communications , and trade, 1 9 6 1 -6 5
2.0
2.4
1.5
1.9
8.1
2.0
manufacturing ,
M A N U FACTU RIN G
and
salaries
196 1
196 2
196 3
.1964__________________
1965__________________
Percent change, 1961-65.
Supple
ments
Millions
Millions
$89,823
96,662
100,606
107,166
115,509
$9,895
11,496
12,282
13,294
14, 558
Percent
11.0
11.9
12.2
12.4
12.6
Average
hourly
earnings
Supple
ments
$2.32
$2.39
$2.46
$2.53
$2.61
12.5
Total
Year-toyear
percent
change
$2.58
$2.67
$2.76
$2.84
$2.94
14.0
3.4
3.4
2.9
3.5
3.3
CON STRU CTION
196 1
............
196 2
............ .
196 3
...........
196 4
___________
196 5
Percent change, 1961-65.
$15,843
16,842
17,802
19,446
21,105
$1,329
1,435
1,664
1,744
1.859
8.4
8.5
9.3
9.0
8.8
$3.20
$3.31
$3.41
$3. 55
$3.69
15.3
$0.27
.28
.32
.32
.32
$3.47
$3.59
$3.73
$3.87
$4.01
15.6
3.5
3.9
3.8
3.6
3.7
$2.37
$2.48
$2.56
$2.62
$2.70
13.9
$0.26
.29
.29
.33
.35
$2.63
$2.77
$2.85
$2.95
$3.05
16.0
5.3
2.9
3.5
3.4
3.8
$0.11
.13
.14
.14
.14
$1.95
$2.03
$2.11
$2.20
$2.27
16.4
4.1
3.9
4.3
3.2
3.9
COMMUNICATIONS
196 1
.
196 2
........
196 3
..........................
196 4
______ ________
196 5
Percent change, 1961-65.
$4,613
4,816
5,013
5,405
5,764
$514
554
574
686
747
11.1
11.5
11.5
12.7
13.0
WHOLESALE AN D R E TA IL T R A D E
196 1
196 2
196 3
196 4
196 5
Percent change, 1961-65.
$46,211
48,740
51,416
55,132
59,166
$2,872
3,255
3, 544
3, 703
3,935
6.2
6.7
6.9
6.7
6.7
$1.84
$1.90
$1.97
$2.06
$2.13
15.8
THE
T a b le
1967
ECONOMIC REPORT OF THE PRESIDENT
983
4.— Y ea r-to -yea r
percen t change in w holesale p r ic e s: A ll com m odities ,
fa rm prod u cts , processed food s and industria ls , 1 94 0 -6 6
Year-to-year percent changes
A ll
commodities
Farm
products
+ 1 .9
+ 1 1 .2
+ 1 3 .0
+ 4 .6
+ 0 .7
+ 1 .8
+ 1 4 .2
+ 2 2 .8
+ 8 .3
- 5 .0
+ 4 .0
+ 1 1 .4
- 2 .8
- 1 .4
+ 0 .2
+ 0 .3
+ 3 .2
+ 2 .9
+ 1 .4
+ 0 .2
+ 0 .1
—0.4
+ 0 .3
—0.3
+ 0 .2
+ 2 .0
+ 3 .2
1940 ______________________________________________
1941 ______________________________________________
1942_______________________________________________
1943_______________________________________________
1944 _______________________ _____ ____ - ___________
1945 __
__________________________________
1946_______________________________________________
1947_______________________________________________
1948
_______________________________________
1949________ _______________________ __________
1950_______________________________________________
1951_______________________________________________
1952_______________________________________________
1953_______________________________________________
1954_______________________________________________
1955_______________________________________________
1956_______________________________________________
1957_______________________________________________
1958_______________________________________________
1959_______________________________________________
1960_______________________________________________
1961___________________________________ _______ ____
1962________________________________ _______________
1963____________________________ ________________
1964......................................... ..........................................
1965............................................................................ ..........
1966............................................. ..................................... ..
Processed
foods
+ 3 .5
+ 2 1 .3
+ 2 8 .9
+ 1 5 .8
+ 0 .7
+ 4 .0
+ 1 5 .7
+ 2 0 .4
+ 7 .3
—13.5
+ 5 .0
+ 1 6 .4
- 5 .7
-9 .3
—1.4
—6.2
—1.3
+ 2 .7
+ 4 .4
- 6 .2
- 0 .3
—0.9
+ 1 .8
—2.0
-1 .5
+ 4 .3
+ 7 .3
+ 0 .5
+ 1 5 .6
+ 1 7 .3
+ 4 .4
- 2 .2
+ 0 .7
+ 27.1
+ 27.1
+ 8 .0
-9 .8
+ 4 .3
+ 1 1 .6
-2 .3
-3 .9
+ 0 .6
-3 .4
0
4-3.8
+ 5 .1
-3 .6
+ 0 .8
+ 0 .7
+ 0 .5
- 0 .1
-0 .1
+ 4 .1
+ 6 .1
Industrials
hi. 7
-7.5
-7.2
-1.5
-1.6
-1.3
1-9.6
+ 2 2 .0
+ 8 .5
-2 .1
+ 3 .6
4-10.4
-2 .3
+ 0 .8
+ 0 .3
+ 2 .2
4-4.4
+ 2 .8
+ 0 .3
4-1.8
0
-0 .5
0
-0 .1
+ 0 .5
+ 1 .3
4-2.1
Source: U.S. Department of Labor, Bureau of Labor Statistics.
T a b le
5. — Consumer prices, 1961-66
[1957-59=100]
Total CPI
1961..............................................................
1962______ ___________ ________________ _
1963__________________ _________________
1964____________________________ _______
1965___________________________________
1966_________________________ ________
Percent increase 1961-66_________________
104.2
105.4
106.7
108.1
109.9
113.1
8.5
Food
102.6
103.6
105.1
106.4
108.8
114.2
11.3
All services
except rent
110.0
112.1
114.5
117.0
120.0
125.0
13.6
Bent
104.4
105.7
106.8
107.8
108.9
110.4
5.7
Commodi
ties less food
102.0
102.8
103.5
104.4
105.1
106.4
4.4
984
TH E
1967
ECONOMIC REPORT OF THE PRESIDENT
T a b l e 6 .—
Unit labor costst 1957-66
[1957-59=* 100]
Labor cost
per dollar of
real corporateGNP
98.7
1957.................
1958................
195 9
196 0
196 1
196 2
196 3
1964.. .
1965................ .
1965:
100.8*
100.7
103.2
103.7
103.3
104.0’
104.5
105.1
February..
May...........
August___
November.
104.5
105.3
105.3
105.4
February..
May.............
August___
November.
December.
106. &
108.4
109.6
1966:
0)
0)
1 Not available.
Source: U.S. Department of Commerce, Bureau of the Census, Business Cycle Developments.
T a b l e 7 . — Trends
of capacity utilization, unemployment, prices, and hourly
earnings, 1957-66
Capacity
utilization
rate manu
facturing
(percent)
1957.......................
1958.......................
1959.......................
1960.......................
1961.......................
1962.......................
1963.......................
1964.......................
1965.......................
1966........... ..... ....
84
74
82
81
79
82
84
86
89
91
Consumer
Unemploy
Wholesale
ment
price
price
rate
index
index
(percent)
[1957-59=100] [1957-59=100]
4.3
6.8
5.5
5.6
6.7
5.6
5.7
5.2
4.6
3.9
98.0
100.7
101.5
103.1
104.2
105.4
106.7
108.1
109.9
113.1
Wholesale
industrial
prices
99.0
100.4
100.6
100.7
100.3
100.6
100.3
100.5
102.5
105.8
Source: Economic Report of the President, Jan. 1967, pp. 236, 245,253,262,264.
99.2
99.5
101.3
101.3
100.8
100.8
100.7
101.2
102.5
104.7
Average
hourly
earnings
$2.05
2.11
2.19
2.26
2.32
2.39*
2.46
2.53
2.61
2.71
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
985
T a b l e 8 . — A dvertising-sales ratio, 1962, and changes in wholesale prices, selected
periods, 1947-66
[In percent]
Advertis Weights
ing out in whole
lays per sale price
dollar of
index
sales, December
1962
1962
1 Toilet preparations___________________
2 Soap, detergents______________________
3 Drugs 1
______________________________
5 Clocks and watches___________________
6 Tobacco 8____________________________
7 Wines, brandy_______________________
8 Confectionery 4
_______________________
9 Cutlery, hand tools, hardware_________
10 Grain-mill products8________________
11 Photographic equipment_____________
12 Canning •
___________________________
13 Appliances__________________________
14 Bakery 7____________________________
15 Distilled liquor________ ______________
16 Tires and tubes______________________
17 Paints and varnish *_________________
18 Dairy products 9_____________________
19 Footwear___________________________
20 Radio and television 1 _______________
0
21 Household furniture_________________
22 Floor coverings______________________
23 Knit goods__________________________
24 Men’s, youths’ and boys’ apparel_____
25 Women’s, misses and children’s cloth
ing_______________________________
26 Motor vehicles_____________ _________
27 Motorcycles and bicylces 1 ___________
1
28 M eats____ __ _ ___________________
29 Petroleum refining 1 _________________
2
30 Sugar__________________________ ____
Changes in wholesale prices
1947
to 1965
1957-59
1957-59
1957-59
to 1965 to Decem- to June
1965
1966
14.72
12.55
2 9.39
6.89
5.45
5.28
4.58
4.22
3.28
3.18
3.11
2.72
2.48
2.48
2.18
2.09
1.65
1.57
1.43
1.37
1.25
1.18
1.07
.97
0.355
.563
.859
.674
.126
.752
.103
.099
.593
.449
.142
1.023
.953
1.397
.269
.533
.312
2.594
.786
.454
.957
.228
.082
1.182
21.6
5.7
—16.2
38.0
10.4
48.4
—2.8
20.7
77.4
3.1
28.8
9.3
—3.6
48.2
-3 .3
34.7
36.5
27.5
43.2
-17.0
37.5
34.9
—
32.9
11.6
4.2
4.5
-5 .6
0.9
-4 .2
5.8
11.4
-0 .7
5.9
13.3
7.3
2.1
—10.8
7.9
—2.8
-10.0
5.4
8.5
10.7
—14.8
6.2
—5.6
—8.4
8.7
4.8
4.4
-5 .4
1.6
-4 .2
5.6
11.6
-6 .6
7.0
15.3
7.4
5.1
—11.2
10.4
-2 .8
-8 .9
5.9
11.3
13.8
—11.5
6.7
-6 .0
—16.5
10.1
6.6
4.2
-5 .5
1.4
-3 .0
10.0
9.7
-6 .6
9.5
22.8
6.8
4.8
—10.6
12.4
—2.8
—5.6
6.8
17.0
19.1
—16.5
8.9
—2.9
—20.4
11.3
.96
.74
.67
.56
.49
.28
1.499
3.923
.072
3.579
4.044
.383
0.4
53.7
NA
6.1
26.5
24.0
2.2
0.7
-4 .3
0.8
—4.1
11.0
2.6
0.5
-4 .2
12.1
—1.6
12.8
2.7
0.7
—
2.9
8.6
0.2
11.0
26.2
2.5
4.1
5.7
Total wholesale price index________
N o te .—The price data used are indicated by the following footnotes.
I Drugs and pharmaceuticals.
2 1961.
8 Cigarettes, nonfilter tip, regular size.
4 Candy bars; solid chocolate.
6 Includes flour and flour base cake mix.
« Canned and frozen fruits and vegetables.
7 Includes white bread, cookies and crackers.
8 Prepared paint.
9 Dairy products and ice cream.
1 Television, radio receivers, and phonographs.
0
II Bicycles.
1 Petroleum products, refined.
2
Sources: Advertising outlays per dollar of sales are from the Internal Revenue Service and published in
Advertising Age, July 6,1964, p. 59 and June 7,1965, pp. 101-2 and U.S. Department of Labor, Bureau of
Labor Statistics. Jules Backman, ‘ ‘ Advertising and Competition” , New York University Press, 1967.
986
TH E
T a b le
1967
ECONOMIC REPORT OF TH E PRESIDENT
9. — Changes in consumer price index, December 1966-December 1966
(1957-1959=100)
December
1965
All itftms
Food______________________________ - __________________________
Food at home____________________ _________________________
Food away from home______________________________________
Housing_______________________________________________________
Shelter................................. ...................................... ....................
Rent______________________________________________________
Fuel and utilities___________________________________________
Household furnishings and operation_________________________
Apparel and upkeep___________________________________________
Men's and boys’ ____________________________________________
Women’s and girls’ _________________________________________
Footwear__________________________________________________
Transportation____________________________________ ____________
Private____________________________________________________
Public_____________________ _______________________________
Health and recreation__________________________________________
Medical care_______________________________________________
Personal care______________________________________________
Reading and recreation_____________________________________
Other goods and services____________________________________
December
1966
111.0
110.6
108.9
119.9
109.4
111.8
109.5
108.1
103.6
108.1
109.3
104.3
115.6
111.6
110.1
122.0
116.6
123.7
110.0
115.4
113.4
114.7
114.8
112.6
126.3
113.0
116.4
111.3
108.4
106.7
112.3
112.6
108.1
122.9
113.8
111.7
129.8
121.0
131.9
113.7
118.4
115.9
Percent
increase
3. a
3. 8
r
3.4
5.3
3.3
4.1
1.6
.3
3.0
3.9
3.0
3.6
6.3
2.0
1.5
6.4
3.8
6.6
3.4
2.6
2.2
f Source: Bureau of Labor Statistics.
T a b le
10. — Wholesale price indexes,
by months, October 1966-January 1967
(1957-1969=100)
All com
modities
Farm
products
Processed
foods
Commodi
ties other
than farm
products
and foods
1965
October
November______________________________.__________
Dfipftmhftr
103.1
103.5
104.1
09.4
100.3
103.0
106.9
107.6
109.4
102.8
103.2
103.2
1966
Jarmarv
February__________________________________________
March_____________________________________________
April_____ ________________________________________
May______________________________________________
June____ __________________________________________
July______________________________________________
August __________________________________________
September_________________________________________
October___________________________________________
November_________________________________________
____ _ ____
December ___
104.6
105.4
105.4
105.5
105.6
105.7
106.4
106.8
106.8
106.2
105.9
105.9
104.5
107.4
106.8
106.4
104.5
104.2
107.8
108.1
108.7
104.4
102.5
101.8
110.3
111.8
111.5
110.6
110.5
110.6
111.7
113.8
113.8
112.4
110.7
110.6
103.5
103.8
104.0
104.3
104.7
104.9
105.2
105.2
105.2
105.3
105.5
105.5
106.2
102.8
110.7
105.8
Januarv
1967
Source: U.S. Department of Labor, Bureau of Labor Statistics.
THE
T a b le
11.—
1967
ECONOMIC REPORT OF THE PRESIDENT
987
Wholesale Price Index, October 1964, October 1965, J u ly 1966 and
January 1 96 7 (1 9 5 7 - 6 9 = 1 0 0 )
Percent
change,
October October October
19641964
1965
October
1965
Percent
change,
October
1965July
1966
July
1966
January
1967
Percent
change,
July
1966January
1967
All commodities.........................
100.8
103.1
+2.3
106.4
+3.2
106.2
-0 .2
Farm products.................... ................
Processed foods....................................
All commodities other than farm
products and foods............ ..............
Textile products and apparel_______
Hides, skins, leather and leather
products............................................
Fuels and related products and
power...................... ..........................
Chemicals and allied products______
Rubber and rubber products..............
Lumber and wood products................
Pulp, paper and allied products.........
Metals and metal products..................
Machinery and motive products.........
Furniture and other household dur
ables....... .......................... ................
Nonmetallic mineral products............
Tobacco products and bottled bever
ages....................................................
Miscellaneous products........................
93.8
101.7
99.4
106.9
+6.0
+5.1
107.8
111.7
+8.5
+4.5
102.8
110.7
-4 .6
-0 .9
101.5
101.4
102.8
102.0
+1.3
+0.6
105.2
102.4
+2.3
+0.4
105.8
102.0
+0.6
-0 .4
105.9
113.3
+7.0
122.7
+8.3
117.6
-4 .2
96.6
96.9
92.1
100.3
99.1
103.8
103.0
99.4
97.0
93.4
101.6
100.5
106.3
103.9
+2.9
+0.7
+1.4
+1.3
+1.4
+2.4
+0.9
101.4
97.9
95.1
106.6
103.2
108.8
106.0
+2.0
+0.3
+1.8
+4.9
+2.7
+2.4
+2.0
102.2
98.4
95.5
102.3
103.1
109.4
108.3
+0.8
+0.5
+0.4
-4 .0
-0 .1
+0.S
+2.2:
98.6
101.8
97.8
101.6
-0 .8
-0 .2
99.0
102.7
+1.2
+1.1
100.5
103.7
+1.5+ 1.0
107.6
100.0
107.7
111.2
+0.1
+11.2
110.0
120.5
+2.1
+8.4
110.3
121.2
+0.3
+0.6
Source: U.S. Department of Labor, Bureau of Labor Statistics.
T a b le
12.— Average
hourly and weekly earnings , manufacturing industries , 1 9 5 5 -6 6
Average hourly earnings
Average weekly earnings
Year-to-year change
Dollars
Cents
1955 .........................................
1956...........................................
1957...........................................
1958...........................................
1959..........................................
1960...........................................
1961...........................................
1962...........................................
1963...........................................
1964...........................................
1965...........................................
1966..........................................
December.................................
Year-to-year change
Dollars
$1.86
1.95
2.05
2.11
2.19
2.26
2.32
2.39
2. 46
2.53
2. 61
2. 71
2.77
Percent
9
10
6
8
7
6
7
7
7
8
10
11
Dollars
$75. 70
78.78
81.59
82.71
88.26
89. 72
92.34
96.56
99.63
102.97
107.53
112.19
114.68
4.8
5.1
2.9
3.8
3.2
2.7
3.0
2.9
2.8
3.2
3.8
4.1
$3.08
2.81
1.12
5.55
1.46
2.62
4.22
3.07
3.34
4.56
4. 66
3. 76
Percent
4.1
3.6
1.4
6.7
1.7
2.9
4.6
3.2
3.4
4.4
4.3
3.4
Source: U.S. Bureau of Labor Statistics.
T a b le
13.—
Spot market prices, 1 9 6 6 -6 7
[1957-59=100]
February
1966
All items
____________ ______ ___________
Foodstuffs
..... .............................
Raw industrials _
___________________
Livestock and products__________________
Metals _
______________________ ___
Textiles and fibers______________________
Fats and oils
______________________
Source: U.S. Bureau of Labor Statistics.
113.8
101.9
122.9
120. 7
147.3
113.0
109.5
October
1966
103.7
100.1
106.3
97.4
128.4
100.7
102.5
December
1966
102.8
98.6
105.8
94.9
125.3
100.6
96.4
Feb. 14, 1967
102.2
97.6
105.6
94.4
124.2
101.0
92.6
988
TH E
1967
ECONOMIC REPORT OF TH E PRESIDENT
Chairman Proxmire. Thank you, Dr. Backman, for a very provoca
tive and stimulating paper, and one that finds me in disagreement on
many scores, although I must say you have made a very powerful case
for your position.
There are a number of contradictions that appear here and I am
sure that you can straighten many of them out. You make a strong
case for a “tired” economy, and I think I can document that case in a
couple of minutes here even more, not only a tired economy, but the
Mna of economy -that seems to be close to a degree o f price stabiliza
tion in the last few months.
I would point out to you, for example, that as you say, wholesale
prices have been stable since October at 106.2 percent of the 1957-59
average. The Consumer Price Index went up from 114.5 in October
to 114.6 in November to 114.7 in December, and then remained stable
at 114.7 in January, so that that is most encouraging.
W e had a dropoff in new orders for durable goods from $25.3 to
$22.7 billion at an annual rate, in the most recent figure in January.
W e have had an increase at the same time, as you said, but a very,
very sharp increase in manufacturers’ inventories at exactly the same
time when we have this dropoff in new orders.
W e have a continued deterioration in new construction. It was $72
billion in September; it is now down to $69 billion. W e have a drop
off in steel production though it has stabilized somewhat in the last
couple of weeks, but it has stabilized at a substantially lower level than
it was which is not encouraging for a dynamic, growing economy such
as ours.
W e have a sharp dropoff in the hours of work from 45.1 hours in
September to 40.9 hours in January. W e have a stabilization of un
employment that some people think: is a satisfactory rate though I
don’t, and I think many other people don’t regard 3.7 percent, 3
million people out of work, as satisfying, especially with all the
emphasis we are trying to put on manpower training.
W e have a very much slowed down rate of increase in manufac
turer’s investment in plant and equipment, which I think you point to.
And we have a decrease in corporate profits, which I think is one that
should concern us very much.
You put all these things together, and you find that there are almost
no indicators that are pointing the other way, and you come in and
tell us what we need is a tax increase, and restraint in fiscal and mone
tary policy as the solution for what you say is likely to be a costpush situation in wages. I am puzzled as to this kind of conclusion.
Mr. Backman. The question is not unexpected. Let me see if I can
clarify my position. W e have gone through a period now of about 30
years in which “compensatory fiscal policy” has been emphasized. I
must confess that for many years I have been defining “compensatory
fiscal policy” as a policy under which you spend more than you take
in in bad times but in good times you spend more than you take in.
I think we have to look at the general level of the economy. W e
are talking about an economy in 1967 which the Council in my judg
ment mistakenly expects to average $787 billion. Even if we reduce
this estimate by $10 billion, it is still a rather significant increase over
last year. It is not an economy that has moved or is moving down
ward.
THE
1967
ECONOMIC REPORT OF TH E PRESIDENT
989
W e are talking about an economy that was moving forward at a
"very frenetic pace through last summer. I think your summary
o f those figures is an excellent one. I agree with it. But the economy
is still up in that stratosphere despite these weaknesses.
Now it wpuld seem to me that at this level of economic activity, one
could talk about a balanced budget. But I wasn’t even talking about
that. I am concerned about a $15 billion deficit, because when we
liear about the $9 billion deficit, it is after the effects of the tax increase.
And may I go a step further and point out that the deficit prior to
the sale of participation certificates is even larger.
Now we are going to have to get that $15 billion someplace, and
what bothers me basically is this: It isn’t a question of the surtax
or nothing; it’s a question of the surtax or something else. I f we
don’t get part of this $15 billion deficit through the tax route, how
do we get it? Do we get it by a price rise? I f we have a 1-percent
rise in prices, that is $7.5 billion. The economic costs of that kind
of price rise, I think, are worse than the economic consequences of
the so-called surtax.
By concentrating only upon the effect of a tax increase upon eco
nomic activity generally, and ignoring its effect upon the role of
monetary policy and the other pressures in the economy toward price
inflation, means that we only look at part of the picture. In fact,
I think I have been one of the few outside of Government who has
been calling attention to this leveling off and have been concerned
about it. Nevertheless, I still believe that at this level of economic
activity, with a war being fought, it should be ]>aid for. We must
pay the price somehow. I am prepared to pay it in the form of a
tax increase.
Chairman P r o x m i r e . Yes, but are you paying for it in the form
of a tax increase, if many of us feel the tax increase may be counterproductive in terms of revenue alone. I f you have a tax increase
of $5 billion at this time the psychological impact plus the very real
impact of taking this much out of the economy could very well result
in a lower, not a higher, amount of revenue.
Dr. Backman, don’t you feel that we should pay attention to the
trend of the economy ?
Mr. B a c k m a n . Y es; as one factor.
Chairman P r o x m ir e . I was one of those who voted against the tax
cut in 1964, because I felt with an expanding economy, with unem
ployment dropping, with conditions improving, it was a mistake at
that time for us to, what I thought would be overstimulate the economy.
But, similarly, at this time when we are standing still and it seems
to me moving down in many indicators, it would seem to be the worst
time to increase taxes.
In other words, the important thing it would seem to me for this
committee as an economic committee to pay attention to and for the
Congress as a group of sensible men would be not whether the budget
would be in balance necessarily, but whether the impact of fiscal policy
and monetary policy in the economy would be appropriate in view
of what we anticipate the state of the economy.
I f you say the economy is sick, if you say you are worried about
the economy, if you say you are one of those who called attention to
75-314— 67— pt. 4------ 19
990
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
the difficulties in the economy, I don’t see how at the same time you
can say we should adopt policies that are going to make it a little
sicker.
Mr. B a c k m a n . Let me make this clear, Mr. Chairman. I don’t
think the economy is sick.
Chairman P r o x m ir e . Maybe that is too strong a word, I would
agree, but if you say that the economy is one which is tired------Mr. B a c k m a n . Yes, it is tired, it is advancing a little more slowly,
and I think it should move along a little more slowly than it has. I
am not concerned about the adverse impact of a tax rise on the econ
omy to the same degree that you suggest you are concerned. I am
concerned about that as only one factor, but I am also concerned about
creating tinder boxes of inflation for which we must pay tomorrow.
Chairman P r o x m ir e . Yes, but have we inflationary tinder boxes,,
or are we creating under present circumstances, when the pressure on
prices seems to have abated from the overall demand situation, and
when you have a real tinder box of a different kind ? You have very
heavy unemployment right now among minority groups. You have
a situation in our cities Where Negro teenagers, ror example, are look
ing for work in large numbers.
You have a situation that has been documented again and again
by the Secretary of Labor and by many other economists, showing
that where you have pressure to hire people, because the economy is*
growing and developing and moving ahead, that under these circum
stances, business is going to find ways of finding jobs for these*
minority groups, these people who are out of work.
Mr. B a c k m a n . This is both true and false.
Chairman P r o x m ir e . I t is true in the sense that it has worked in
the past, isn’t that right, and it is also true in the sense that if the*
economy is not growing and unemployment is increasing, you are
going to have a situation in our cities that this summer it could be
really explosive.
Mr. B a c k m a n . In the first half of 1966, despite an economy rising
at a rate that could not be sustained, we still had 7 or 8 percent un
employment among these minority groups because it was impossible to
absorb all of the unemployed merely by expanding the economy. A t
the same time there were major shortages of skilled workers. This
is the area where retraining and education are so important.
Chairman P r o x m ir e . Yes, but the area of retraining and educa
tion is something that the Government does maybe 5 or 10 percent
of and private industry does maybe 90 to 95 percent of and private
industry isn’t going to do it unless they have a market to do it.
Mr. B a c k m a n . But if we follow through completely on that sug
gestion, Senator Proxmire, last year, instead of having the great
pressures we had, we would have probably blown the roof off of the
economy in an effort to really pull the unemployment figure down
much further.
Chairman P r o x m ir e . It depends upon what time last year you are
talking about.
Mr. B a c k m a n . Let’s talk about the early part.
Chairman P r o x m ir e . I think you are right; if you are talking
about the latter half of the year I don’t think you are right. In talking
THE
1 9 6 7 ECONOMIC REPORT OF TH E PRESIDENT
991
about the prospects for 1967, it seems to me that I take a different
position.
Mr. B a c k m a n . In the early part of the year we still had large un
employment among these groups, despite the high rate at which the
economy was operating. I merely call attention to that to indicate
that there are limits beyond which you can’t solve this unemployment
problem by stepping up the rate of economic activity.
Chairman P r o x m ir e . N o w let me get into something here with
regard to the wage-price guideposts, because I have been a strong
believer in this. 1 have argued many times on the floor of the Senate
and around the country mat the wage-price guideposts have been
a great contribution, and you admit in the course of your testimony
that they did hold down prices, although you seem to think there is
some price that we pay in having had them.
Mr. B a c k m a n . Pardon me, I think my testimony will show that
I said that in the 3 years before we enunciated the truism involved
in the wage-price guideposts, there was stability of prices, and in the
first 3 years afterward, there was stability, but these were also periods
of idle capacity and unemployment.
Chairman P r o x m ir e . W hat I understood you to say was this. In
the absence of guideposts, we would have had bigger increases in
prices in these particular areas, but you didn’t think they would have
contributed very greatly.
Mr. B a c k m a n . That is right, there would have been somewhat
larger increases for some products.
Chairman P r o x m ir e . 1 think that is an element, an admission,
particularly in view of the fact that we were having something oi
a demand-pull inflation at that time.
In your summary you say “There is little value to a program which
educates the public to believe that unit labor costs determine prices.”
I am certain that Gardner Ackley and Duesenberry and Okun would
all disagree that unit labor cost determines price, only productivity
determines wages, real wages can increase at a uniform annual rate,
the general price level can be stabilized by controlling increase in labor
costs. They don’t make statements of that kind. This is a strawman.
I ask you to show me any place in here where they don’t qualify
greatly their references to wage-price guideposts saying this is only
one part of stabilization policy. It is a limited part. It is an impor
tant part.
Mr. B a c k m a n . Senator, I give the citations throughout my pre
pared statement. In every one of the Council’s reports, the essence of
the guideposts has been that if you can stabilize unit labor costs, you
won’t have a price rise. This is what they mean when they say “I f you
have an increase in wages and labor costs equal to productivity, you
will have no change in unit labor costs, hence price stability.”
This is what they mean when they say “I f you get above average
increases in some places, you must get offsetting below average in
creases in others.” This is the essence of what they have been talking
about for 4 or 5 years.
Chairman P r o x m ir e . I want to call your attention to the qualifica
tions later, but my time is up. Senator Percy ?
Senator P e r c y . I f you want to carry on, you go right ahead.
992
TH E
1967
ECONOMIC REPORT OF TH E PRESIDENT
Chairman P r o x m ir e . N o , thank you, Senator Percy; you may go
ahead.
Senator P e r c y . Dr. Backman, I would like to preside over “ burial”
o f wage-price guidelines with you and just simply say “ amen,” be
cause as I recall my economics some years back at the University of
Chicago, the term I always heard my professors use was “ other things
remaining equal,” and then they go on to some theoretical dissertation.
I never found in the economy tilings did stay equal, and the price
guidelines assumed a uniform condition in every part of the country,
uniform demand for labor without any change. In a dynamic econ
omy you have the forces and pressures of that marketplace which
constantly have to respond, and in a totally and entirely different way.
I, many times, would like to have just had a simple slide rule solution
to wages. It is easy to figure 3.2. You wouldn’t need management.
You wouldn’t need labor leadership. You would just need a clerk
who could compute out what these increases should be each year. And
I think the totally unrealistic concept we had there was that 3.2 was
the magic formula that applied to everything.
It constantly pushed wages up to that level that didn’t belong up
there, and tended to hold down others that should have gone well above
that, because of changing conditions.
I would like, however, to get your view on the previous testimony
as to how you would stand on the establishment of a price-wage review
board established by industries with a prior notification by any basic
industry or any major industry or an industry that had a major
impact on the economy, o f 60 to 90 days before they could raise any
prices, and what effect this would have on the economy.
Mr. B a c k m a n . I think this is a highly unrealistic proposal. Your
earlier illustration of meat is a good one. I f we were to require pre
notification o f 60 to 90 days or any other period, even ‘i f it’s 2 weeks,
the first effect on the part of customers would be to rush in and buy,
so they could get the benefit of the lower price still prevailing.
The distortion such buying patterns could create are rather
apparent.
Is this an area on which prior approval or prior notification is one
that is desirable? I don’t think it is. I think that the market power
has been tremendously overexaggerated and I will tell you why.
Much of this reasoning and many of the conclusions are based upon
our earlier postwar experience which was significantly affected and
confused by the effects of inflation. Let me illustrate in an area
about which I testified recently before another committee, the question
of price leadership.
Up through about 1959, whenever any big company raised the price,
they were followed by other companies and this was viewed as an
indication, of what has been called tacit collusion. However, between
1959 and 1964, time and again large companies raised prices, and when
other companies didn’t follow, they were forced to rescind the in
creases. Now why were the leaders followed in the earlier periods?
Because of market power? No. The main reason was a period of
inflation.
TH E
1967
ECONOMIC REPORT OF TH E PRESIDENT
993
During a period of inflation, everyone is anxious to raise prices be
cause of increases in costs and other pressures to which they are subject
and because demand is strong enough to make it possible to raise prices*
However, most companies are waiting until M r. B ig does it, because
they are afraid there may be adverse effects in terms of loss of
market to other companies if they have any idle capacity
Aiid so the minute the leaders in an industry raise prices, other com
panies which were anxious to raise prices follow. In fact, there is
ample testimony of this experience before many congressional com
mittees. The Oeller committee, for example, in 1949 heard the testi
mony from Jones & Laughlin officials that they were severely critical
of the delay in raising steel prices, and when they were asked— I think
it was $6 or $8 a ton at that time— was that adequate, they said “N o,
we would have raised it $14 but we couldn’t.”
In other words, I think we must separate the effects o f an inflation
from the exercise of market power before we can really have a firm
conclusion that it is market power that explains price leadershipfollowership.
Senator P e r c y . Could I ask you this question? I f you were a
s
businessman, and you were establishing a price on a new product line,
say bringing out colored television for the first time, and you knew
that you could reduce your prices any time, but you knew under this
system that you would have to give advance notice and justify any
increase in price, then wouldn’t you tend to establish your price as
high as possible, so that you wouldn’t get stuck, rather than as low as
possible, which might be the tendency of a businessman trying to
broaden his market for a new product ?
Mr. B a c k m a n . I think there would be that tendency, but it is sub
ject to one extremely important qualification, and that is that he
doesn’t have all of the freedom you suggest in setting his price. In
other words, if he establishes the price too high under those circum
stances, he is going to pay a penalty m loss of sales.
It seems to me there is inherent in the question the assumption he
can set the price any place he wants. He can’t. H e is forced by the
pressures of the marketplace, not in the sense of classical economics
in a perfectly competitive market, which has never existed except in
textbooks, but in terms of the real pressures of the marketplace, in
cluding substitute products, the alternatives available, the competitors;
available, and today the other large companies, who would love to
come into his industry if they found that a big profit was possible at
this high price. In other words, the businessman doesn’t have the
power to do what you have suggested he might do.
Senator P e r c y . That has been my experience also, but I would like
your verification of the faith in the pricing system ox the marketplace.
Mr. B a c k m a n . Senator Percy, I have participated in the pricing o f
many products and I can tell you I still have to find the situation
where people sat around the table and in effect were able to set prices
without regard to market forces. The usual questions are “W hat can
we get, will customers pay these prices, what volume can we anticipate,
what will our competitors do, what substitute products will be im
portant, what imports will come in,” and so on and so on.
994
TH E
1967
ECONOMIC REPORT OF THE PRESIDENT
Senator P e r c y . D o you know of any European countries where
price-wage boards have actually worked and proved to be a con
structive force in the economy ?
Mr. B a c k m a n . In every European country where they have had an
income policy the price increases have been greater than in this
•country. This is true in England, West Germany and in other coun
tries where they have attempted this. I have a couple of citations in
my testimony.
Senator P e r c y . I think it is also interesting to note that in recent
years the index of durable goods, the price index has actually declined
slightly. Now, these are certainly durable goods industries that have
power and impact on the economy, and we have had a very strong
economy, and yet their prices have actually declined. Doesn’t this
then in your judgment conflict with the thought that market power is
the main reason why wages and prices rise before we have full
employment?
Mr. B a c k m a n . This is a very important observation, because the
centers of so-called market power are largely in the heavy goods in
dustries, and it is true that at the retail level the prices of appliances
and other durable goods have not gone up as much as other prices, and
in some years have gone down. There are at least a half a dozen years
(1953,1954,1955,1960,1961,1965) in the postwar period when durable
goods prices actually went down. In 1965 and 1966, despite the rise
o f almost 5 percent in the Consumer Price Index, durable goods prices
recorded practically no change.
Senator P e r c y . Mr. Chairman, even though I may disagree with
you occasionally, I would like to commend the Chair once again for
bringing two very provocative witnesses, and for balancing out these
meetings, so that we have a chance, in the same meeting, to hear oppos
ing points of view, which I think is the essence of seeking the truth
in these complex matters.
Chairman P r o x m ir e . Thank you very much, Senator Percy, and I
would certainly agree that Dr. Backman has done a fine job; I have
some other questions for you.
You seem to refer, and Senator Percy did, too, to the so-called 3.2
percent guideline. I would agree that that was very badly misstated.
It was grossly unjust. It was unfair. It couldn’t be sustained, and
I certainly wouldn’t favor that at the present time.
On the other hand, you say in your prepared statement that:
By emphasizing long-term gains in output per manhour, and the accompanying
rise in living standards, they encourage unions to seek increases large enough to
equal the past rise in CPI and the rise in real wages. This combination means
increase in labor costs o f 7 percent or more and would result in a substantial rise
in unit labor costs.
I would agree with your inveighing against a 7 percent guideline. I
don’t know anybody, though, who has ridden on that tired dead horse
and said we ought to have a 7 percent increase, or made proposals that
would result in that. W alter Reuther didn’t, Goldfinger didn’t, and
certainly Alvin Hansen didn’t. His position was that we ought to for
get about the past, that if you try to catch up, you are in trouble, and
that seemed to be the position supported by the labor people who are
here.
THE
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M r . B a c k m a n . I suspect, though, Senator, that-----Chairman P r o x m ir e . A s far as the Hansen suggestion or guidepost
might work out. His suggestion was that you would take the produc
tivity increase, let’s say that is 2.8, add on to that the cost of living
that we expected this year, we doii’t know what it would work out to if
you made it on an escalator basis, but assume it is 2 ^ , that may be
wrong, that would be a 5.3 percent guidepost.
Now you say the minimum labor is going to hit at with these militant
unions this year is about Sy2, and it is going to be higher. Well, on
the basis of that analysis, I submit that a 5.3 guidepost would be a very
moderating influence in a cost-push situation, it would be very helpful
and particularly because you could document that on labor’s own terms.
You could point out that it includes labor productivity increase and
the rise in the cost of living. It is at a moderate level. It seems to me
it could have a very salutary effect in holding down this kind of pres
sure that would otherwise push up prices and enable us to have fiscal
and monetary policies that might Keep the economy growing better.
Mr. B a c k m a n . Senator Proxmire, I must say that in all my experi
ence in wage negotiations, which has included most of the major in
dustries in this country, I have never heard of a settlement based on
prospective increases in the Consumer Price Index, and ignoring past
.increases. I can tell you what will happen at the bargaining table.
“We made an agreement in June of 1965,” Mr. Labor Leader will
say, “and since then there has been an increase in consumer prices of
let us say 5 percent. Now, the first demand is that we want to be made
■whole, that is we want a wage increase to compensate for the rise in the
C P I since the last agreement.”
Mr. Reuther isn’t a good illustration because Mr. Reuther’s workers
Tiave had no deterioration in real wages during this period. He has an
automatic improvement factor plus a cost of living clause. Under this
•contract auto workers last year received an increase of 7 percent in
wages alone, 7 percent. So they didn’t experience any deterioration
in levels of living. And if he comes into collective bargaining this
year, and I have no way of knowing what is in Mr. Reuther’s mind, of
■course, but if he comes in and says, “I want my 2.9 percent again plus
cost of living,” all he is doing in effect is saying, “I am going to get the
5 percent that Mr. Hansen or Senator Proxmire outline on top of the
gains we have had under the old contract.”
But you take all the unions which don’t have cost of living clauses,
and incidentally, very few do. They come in and the first thing they
want to do is be made whole, and I will go a step further-----Chairman P r o x m ir e . This is exactly the purpose of the guideline.
In the absence of the guideline, you bet that is what they are going to
do, and it is going to have considerable effect. It is going to D hard
e
to resist. I f you have the guideline, then you can say what we are try
ing to do is productivity plus the cost of living this year, and you
don’t have to do it prospectively on the basis of an estimate. You
can do it through an escalator.
It is true that few of the contracts have the escalator now. They have
had it many times in the past.
It depends upon the particular
economic situation. The escalator technique could be encouraged or
discouraged. The policy of the executive branch now is to discourage
it emphatically. I am not so sure that is right.
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Mr. Backman. I happen to agree it is a good idea to discourage
labor cost increases of that magnitude. However, I will merely say
what will happen in terms of the realities of collective bargaining, not
theory.
There isn’t an arbitration board, nor a fact finding board that won’t
start with a consideration of the deterioration in living levels resulting
from the rise in the Consumer Price Index. They haven’t ignored this
factor in the last 20 years. And they won’t start now.
W e can improvise, we can issue numbers in Washington. The pres
sure on the union leaders from their membership, the desire on the
part of industry to do what industrialists think may be right will all
start with what is required to make their workers whole, and that is
the expression that is used. W hat is required to restore the position
to where they were.
I just participated in the hearings before the fact finding board in
New York involving New York City and the policemen and firemen,
and this was a critical factor. They want increases much beyond
that amount. But the first point was “Look how much we have
lost.” And this is exactly what will be stated in negotiations
throughout the country.
Chairman Proxmire. That is what you want to turn around. That
is what I have been trying to get away from.
M r. Backman. But you can’t turn it around.
Chairman Proxmire. You indicated that the Council of Economic
Advisers have put all their emphasis on wage-price guideposts and
have ignored these other factors. I quote to you a statement on page
119 when they say:
When demand outruns the growth of productive resources, prices and wages
wiU rise, even in the most highly competitive markets. Indeed they may rise
faster and farther than where large firms and long-term labor contracts give
sbme degree of stability. That kind of demand-pull inflation can be held in
check by fiscal and monetary policies which keep demand in line with produc
tive capabilities. If labor markets are efficient, control of demand-puU inflation
will not require restraints in demand that will lead to a high unemployment rate.
They always say monetary and fiscal are the most important ele
ments of stabilization policy, but they do put emphasis on these rela
tively few industries but extremely important Industries. What I
would like to call your attention to are two things.
No. 1. W hat happened in this very period that you cite, the most
important and interesting period, when you say that from 1959 to 1964
or 1965, when one company, the big companv, would increase prices,
the little boy didn’t always follow and the big boy would rescind prices.
W ell, from 1962,1963, and 1964, which is the period that I remember
this taking place, it was because the Government followed a vigorous
policy------Mr. Backman. Oh, no.
Chairman Proxmire (continuing). Of going after the big boy when
he couldn’t justify his price increase. The most spectacular example
was in 1962 when Mr. Blough came to the White House and told the
President he was going to increase steel by $6 a ton, and the Presi
dent used all the power he had to discourage nim and won out.
I submit that that historic action by President Kennedy had a very
profound effect on the relative price stability we had between 1961 and
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997
1965, and we did have, and I think you would have to concede prices
arose much less during that period than they had in an earlier period,
although during that period there was some strain on resources.
W e were moving ahead. W e were expanding. W e were
^growing. But because steel didn’t have the push in prices, and be
cause this affected, and the President followed up on many other
prices and President Kennedy and President Johnson also worked
hard to keep down prices of primary metals, they had some muscle
there, I submit that this is part of the reason why prices didn’t go up
as they had in the past with more demand pushing.
Mr. Backman. Senator Proxmire, early in my statement I call at
tention to the fact that “in a period of strong demand * * * wageprice guideposts could not bring about price stability,” and point out
this is one reason why you can’t expect uniform increases annually as
the Council postulates.
Chairman P r o x m ir e . That is in your statement ?
Mr. Backman. No. 2. I did not include basic steel or automobiles
among the almost 50 different illustrations I cited to the H art com
mittee of prices that were rolled back.1
I took areas where the Government was not intervening, and also
showed that during that period there were many illustrations of price
cutting from list price in other industries where the Government was
doing nothing, paper, office equipment, chemicals.2
I could run down the line. The few cases you have cited I don’t
consider roll-backs because of competition. 1 consider them roll
backs because the Government intervened. I agree they had an
impact.
Chairman Proxmire. But that had an impact on the cost of living
and an impact on prices.
Mr. Backman. It didn’t really have much of an impact on the Con
sumer Price Index.
Chairman Proxmire. Not only a technical impact on prices, but a
strong phychological impact on the country and on labor union per
formance and on labor recognition.
Unions are very sensitive, especially with the Democratic adminis
tration, though they would be with any sympathetic administration,
a Percy or Johnson or Komney administration, they are sympathetic
to what the President of the United States calls for and asks for, es
pecially when he can justify it on some kind of principle.
So to say, “W ell, this happened and it was a mistake because there
were some prices that had to be paid,” I would say you would have to
look at this. You would have to say that prices did not go up as you
have said, and as I have documented in these areas, and have had some
effect on the Consumer Price Index. Now, you will have to show to
me what price we had to pay for this. W hy did this hurt the economy ?
W hat was wrong with it ?
Mr. Backman. Senator Proxmire, let me make sure that we have
the proper perspective.
First, I did not say that the Consumer Price Index would have
gone up. A few years ago I made a study in connection with the
i See “Economic Concentration/’ hearings before the Subcommittee on Antitrust and
Monopoly, pt. 2, March 1965, pp. 568-891, 890-895.
•IblcL* pp. 571-572, 896-898.
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steel price increase in 1957 of $6 a ton. I reached the conclusion that
that had less effect upon the Consumer Price Index than either a 1cent increase in the price of bread or a 1-cent increase in a package o f
cigarettes or a 1-cent increase in a gallon of gasoline or a 1-cent in
crease in a quart of milk.
A t the same time, the Commissioner of Labor Statistics, after
analyzing the same increase, announced that its impact upon the Con
sumer Price Index was, and I use his word “negligible,” which, o f
course, was accurate. I think we have to recognize the nature of this
Consumer Price Index.
The overall areas where steel or other products can have an effect
are rather small. I agree with you that there may be some psy
chological effects. I wouldn’t argue whether the overall Wholesale
Price Index might have been up another point or so in the absence o f
the guideposts. I don’t think it would have gone up much beyond that
amount. But I do not agree that there would have been any per
ceptible effect upon the Consumer Price Index. I am not so sureabout the restraint to which you refer in connection with the labor
unions.
It seems to me that the 5-percent figure that emerged in the latter
part of 1966 emerged despite the guideposts, and may I call attention
to what is a fact; namely, that the largest departures from the guideposts took place not among the big unions, but by the relatively smaller
unions. The building trades were a conspicuous illustration, despite*
various remonstrations from Washington and elsewhere. It con
tinued to be an exception. And this I think is always the case.
There is an assumption inherent in the guidepost that if you hold
Mr. B ig either on the union line or on the price line, this automatically
holds others. This is highly unrealistic.
Chairman P r o x m ir e . I would certainly agree that it has only a
partial effect, a limited effect. The effect on the Consumer Pricer
Index you can show technically that that immediate increase in steel
would not have been significant.
Mr. B a c k m a n . That is right.
Chairman P r o x m ir e . But on the other hand you can certainly also
argue that this effect has a rippling effect, that when steel prices go*
up, appliance prices go up, automobile prices go up, and ultimately
and eventually if you follow it through far enough, even if you dis
regard psychological and pattern price increases throughout the
economy, disregarding that, it would seem to me logical that you could
expect some significant increase in the cost of living.
Mr. B a c k m a n . But let’s take a look at that. The steel industry, to
use that illustration, accounts for about 2 percent of the economy.
Let’s say we have a 5-percent increase in steel prices. I haven’t heard
an increase of that amount proposed, but let’s assume it is. A
5-percent increase is equal to one-tenth of 1 percent of the economy.
Now, what do you want to do, double, triple, or quadruple its effects ?
^ Chairman P r o x m ir e . N o , I think it would increase many, many
times more than that before the effect is ultimately felt throughout,
when you consider the add-ons and the percentage. My own ex
perience in business was that we always determined our prices on the
basis of cost.
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999
Mr. B a c k m a n . S o what do you do, double the increase?
Chairman P r o x m ir e . The increase grows many times.
Mr. B a c k m a n . D o you double the increase ? Do you want to take
it five times? W e are talking about extremely small numbers, even
if you take multiples which in my judgment aren’t realistic.
Chairman P r o x m ir e . And also I would say that the actual increase
the steelworkers get and the auto workers get has an influence, maybe
not immediately.
Mr. B a c k m a n . I agree with that.
Chairman P r o x m ir e . It has a significant influence in either the
wages that are set or the compensation that is paid in other industries.
Mr. B a c k m a n . I agree with that.
Chairman P r o x m ir e . S o I think from that standpoint there is an
element of instability in excessive settlements that can be favorably
influenced by Government policy to indicate what guideline will be
fair and equitable throughout the economy.
Mr. B a c k m a n . I agree that they have an effect, and therefore what
are we going to say when other unions find that last year the auto
workers received an aggregate increase of at least 20 cents an hour,
which happened to be roughly 7 percent of their wage rate, as I
said earlier, or between 5 and 6 percent of their total labor cost. That
is the actual increase in wages, wage rates in the automobile industry
last year.
Chairman P r o x m ir e . Let me say this: That when Reuther came
before us, he had some interesting counterargument on that. It is very
difficult when we have a highly productive industry like automobiles,
where you have a basis for paying high wages, and yet achieving
better profits, especially if it is expanding as it was last year.
Mr. Reuther said that he tried hard to negotiate in a situation, in
which the productivity increase would be shared directly by a price
reduction and a profit sharing with the workers, and a distribution to
capital on a one-third, one-third, one-third basis. He wasn’t successful
in getting that adopted.
Mr. B a c k m a n . But he didn’t offer to forego the 2.8 percent pro
ductivity increase for that cut in prices.
Chairman P r o x m ir e . Y o u select the toughest kind of a case when
you take the automobile industry, because it is hard to roll back prices.
It is hard to get prices reduced. I hope that the action by American
Motors is precedent setting.
Are you through, Senator Percy ?
Senator P e r c y . Have you one more minute?
Chairman P r o x m ir e . Oh, sure.
Senator P e r c y . This is a subject of great interest to me, Mr. Chair
man. I have been concerned, Doctor, about the proposed tax increase
as a depressant, on a potentially soft economy. But I was quite inter
ested in a comment made by Ralph Lazarus, a member of the Business
Council. He is the chairman of their domestic economy section, and
as one of our largest retailers in the country knows a great deal about
consumer buying habits.
He maintains that the tax increase will take dollars out of people’s
pockets, and therefore cause them to cut back their purchases, which
would almost appear to be a axiomatic and automatic. He maintains
1000
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th is: That in his judgment retail sales are based more on credit than
on present dollars, and credit is based on confidence, and that con
fidence can be destroyed by a number of psychological factors. He
ieels that if the people of this country, who are some of the best in
formed people in the world, see that there is a huge deficit, a big war
to pay for, and the Government fails to do what it should, particularly
now that the President has said do it, that it could be that there would
be only one conclusion they could come to as to why the Government
wouldn’t do it.
They would be fearful of the future, fearful of the economy, and
therefore this destruction of public confidence and of the credibility
of its own Government for doing something that it knows it should do,
might be more of a depressant on retail sales than it would be if you
just went ahead and did what you should do and raised taxes.
Now, this caused me to go back once again and let me take another
look at this whole tax increase picture and I have asked Mr. Lazarus
to write me in greater detail so that I can discuss it with the chairman,
whom I know is earnestly seeking a right answer on this, also.
W ould you care to comment ?
Mr. B a c k m a n . I think that is an interesting reaction in terms of
alternatives. Despite the fact that it would support my position, I
don’t think I can go along with it completely. The history of retail
sales is one of close relationship to consumer disposable income with
temporary aberrations, for whatever the psychological forces may be,
and when I say temporary, it might be 3 to 6 months. The reason
why economists are concerned about any rise in tcxes is that dispos
able income after taxes would be a little less and therefore the amount
that could be bought presumably would be a little less.
On the other hand, if this reduces the pressures on the money
markets because that $5 billion must be obtained in some way— it is
not the $5 billion or nothing, it is the $5 billion or something. I f the
overnment must come into the money market to borrow another $5
illion and create pressure on interest rates, the peak of which I think
already has been seen, then this also costs the consumer something.
So I think one must look at the whole picture.
I am inclined to feel that a continuation over time of large deficits
without doing something about it in a period even like 1967, can under
mine confidence. You have to say to yourself, if the Government can’t
come closer to paying for the things it must buy, when we have a
gross national product of $770, $780 billion, when are we going to do
it? And I think the answer under those circumstances almost becomes
it looks like never, and if it is never, then you can have a serious impact
on confidence.
Chairman P r o x m ir e . May I just ask you, Mr. Backman, if it isn’t
true, under the circumstances, if the economy is tired and there is
slack in the economy, resources available, people looking for work,
what you simply do is to finance that $5 billion by open market opera
tions by the Federal Reserve Board. In other words, to put it bluntly,
the Federal Reserve Board buys $5 billion worth of securities. I
would agree that that would be the worst possible kind of------
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1001
Mr. B a c k m a n . That is the most inflationary approach.
Chairman P r o x m ir e . In a tight economy it is inflationary, but in
a slack economy it is not inflationary, and it doesn’t increase interest
rates, and it is something that can be done, and I am not sure that
this wouldn’t be the prescription, depending on the status of the
economy.
Furthermore, if you talk about inflation, what is going to happen
to these taxes? No. 1, the increase in the corporation income tax is
going to be pushed onto the consumer to some extent. Certainly the
increase in the corporate income tax in the regulated industry is going
to be completely pushed onto the consumer, which is going to increase
his cost of living and in other industries to a lesser extent but to some
extent. It increases the cost of living of the stockholder, too,
incidentally.
In the second place, unless we want to go to jail, we have to pay our
taxes, and that is part of the price of living, to pay our taxes, so our
cost goes up. I submit, I think you probabaly agree, the most desir
able thing, if we can do it, is to cut spending.
Mr. B a c k m a n . That I would agree with completely. I would say
that a cut in spending is the No. 1 approach. I can’t identify where
it can be cut, out out of $135 billion, there must be some things we
can defer, whether it be in a highway construction program, the
farm area, or be in any of the other areas where many billions go out.
This would be my first choice.
But let me note, Mr. Chairman, that the effect of a cut in spending
is almost exactly the same as the tax increase in terms of narrowing the
spread of how much the Government is contributing to the economy.
Chairman P r o x m ir e . That is right.
Mr. B a c k m a n . S o I am happy to see you agree that if we do some
thing in this area we can do it despite the prospect of a leveling off
in the economy. I don’t like the word “slack,” because it implies a
whole lot more than what you and I are talking about. I think slack
to most people means large amounts of idle resources. W hat we are
talking about is a small margin below the top, a relatively small
margin.
We are in a war. W e have costs in connection with this war. W e
must pay for it in some manner and it seems to me that the American
people are willing to pay for it.
Do I like a tax increase? # Not personally. But I am afraid that
this isn’t the test. The test is how long can the Federal Government
go along in the red at $10 billion, $15 billion, or $20 billion a year even
at this level of economic activity ?
I think we have become over-preoccupied with whether the produc
tion index is going to go down several points. I am afraid I am stuck
with the recommendation of a tax increase, unless we can work out
a large cut in expenditures or unless a significant downturn takes
place.
Chairman P r o x m ir e . Thank you very, very much for a most
stimulating presentation. You certainly have nelded these questions
beautifully.
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I would like to ask unanimous consent that a letter by Seymour
Harris in the Washington Post pertaining to our hearings, and our
monetary policy especially, be included in the record at this point.
(The letter referred to follows:)
A Communication1
( The author of the following letter is Ghairmm of the Department of Eco
nomics of the University o f California at San Diego, and a form er adviser to
President Kennedy.)
IN CALENDAR YEAR 1966 the Government did not introduce a general tax
increase. But it was concerned over the large military outlays and inflationary
pressures. Hence early in the year the government acknowledged that the
stimulation o f the economy as required in 1961-65 was no longer necessary.
By removing $9 billion from the economy in early 1966 through new taxes and
acceleration o f collection o f some taxes; and in addition through the later
suspension o f the Investment Credit, the Government showed it was aware o f
the need o f restraint.
In the first quarter o f 1966 a number o f outstanding economists urged the
Government to introduce a general income tax rise as an anti-inflationary move.
In January, Walter Heller suggested a temporary tax increase. At a Chamber
o f Commerce meeting o f February 9, Paul Samuelson proposed a tax increase as
well as other anti-inflationary measures. In conversations with the press after
wards he still seemed hesitant, however. Arthur Burns also expressed dis
approval o f anti-inflationary polices; but did not at this time suggest a general
tax increase. In February the Chase Manhattan Bank and the New York
Reserve Bank, though critical o f anti-inflationary policy, did not propose an antiinflationary tax increase. The emphasis of the more conservative elements was
a reduction o f spending or a more restrictive monetary policy rather than a rise
o f taxes.
IN A LATH FEBRUARY 1966 column, Hobart Rowen of The Washington
Post welcomed Samuelson into the tax-rise camp, but complained o f the silence
o f the others o f the New Economics school. Soon after the New York Reserve
Bank jumped aboard the tax rise caravan. By March the Executive Director
o f the American Bankers Association joined the tax brigade. By March 9,1966,
Murray Rossant o f the New York Times welcomed as supporters o f additional
taxes, Heller, Samuelson, and Tobin, three of the top economists in the country
and as knowledgeable in this area as any economist. But the orthodox business
economists still tended to favor spending cuts rather than tax rises. Bums
was now ready to accept a tax increase as weU as push for reduced spending.
In March Rowen questioned 30 economists. Twenty-two urged a general tax
rise. The New York Times also joined in the clamor for a tax rise. In May, 40
percent o f the economists questioned approved a general tax rise ; by late Novem
ber only 12 out o f 52 (23% ) were for a tax increase.
Apparently March was the peak month of acceptance to tax policy as an antiinflationary weapon. Now Heller would only get reddy for a tax increase if
needed; and Samuelson was .worried that a very strong deflationary policy would
be a mistake. Burns, Cary Brown, Buchanan and R. A. Gordon, however, still
supported tax increases. Business Week still favored a tax rise as the best of
three alternatives. And on March 22, Senator Jacob Javits would raise taxes
modestly.
IN APRIL, the bankers who spoke out still seemed to be for tax increases and
Samuelson in late April still adhered to the tax-anti-inflation view.
But defections were beginning at this time. Leading indicators increasingly
began to point downwards. The Times reported on April 27 that the economists
were turning against tax policy as an anti-inflationary weapon. The Adminis
tration had waited too long. Samuelson still supported a tax rise in late May
but seemed to be wavering. Rowen now (April 27) reported that only some
liberal economists were for tax increases, whereas labor, business and politicians
were now opposed. It is o f some interest that none o f the Treasury’s panel of
25 outstanding economists at their June meeting with the Secretary urged a
rise o f taxes. Apparently the signs o f economic deterioration and the political
1 R eprinted from W ashington Post, Feb. 19, 1967.
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ECONOMIC REPORT OF TH E
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1003
difficulties of getting a tax bill through expeditiously resulted in a loss o f
enthusiasm.
I t was clear that the adherents o f tax increases were deserting in the second
quarter o f 1966. The President’s Business Council in May seemed to be 3-1 or
2-1 against a rise o f taxes.
RANKS OF THOSE favoring tax rises would have been depleted much more
had not the Fed introduced a dear money policy which began to bite in May 1966,
and its extent not anticipated nor even wanted by the Fed. The bankers now
largely joined the tax increase group. They much preferred a tax increase
which would allocate the burdens on the whole population to a severely restrictive
monetary policy, which especially threatened them.
At various times the Republican leadership expressed views on anti-inflation
ary policy. As a rule they urged restrictive monetary policy and reduced fed
eral spending. Congressman Melvin Laird speaking for the Republican Confer
ence, in mid-April espoused a cut in spending ; but not a rise o f taxes. Senator
Javits in May still was for the tax increase as was Dirksen in July, though
reluctantly. A poll o f Congressmen late in 1966 revealed 80 percent against a
ta x increase.
It was not easy to get the proper mix o f monetary and fiscal policy. With
monetary policy highly and dangerously restrictive, the Treasury was most
hesitant in pushing through large tax increases in the last 8 months o f 1965.
The movement o f leading indicators pushed the Treasury in the same direction.
,ONCE MONEITARY policy had eased greatly the Treasury could recommend
t o the President a tax increase though one that might be postponed or withdrawn
i f the economy faltered in the first half o f 1967 or even later.
The Treasury was up against a mass o f uncertainties as was almost everyone
else. How much would Vietnam expenditures rise? How much would prices
rise in response to wage escalation, reduced increases in productivity, and general
reduction of excess capacity? How to weigh the decline suggested by the leading
indicators against the uncertain rise o f military outlays?
Government pronouncements reflected these uncertainties. Late in 1965 there
w ere rumors from Paris that Secretary Fowler favored a rise o f taxes. In
February Fbwler was considering all alternatives but emphasizing tax policy.
But at the Joint Economic Committee hearings he would not press down on the
brakes vigorously. He hoped that the Congress would be ready for a tax increase
if needed. By March, Fowler announced that a modest tax rise may be necessary
The President apprised o f the direction o f the Leading Indicators in the latter
part o f March, was not convinced o f a need o f a tax increase. Much would
depend on the spending of the Government. Fowler also wanted more data. A
few days later the President would accept a rise o f taxes if more restraint was
needed. He might even ask for a tax increase in April if adequate economies
were not to be achieved. In May Mr. Ackley agreed that a temporary tax rise
many be necessary; but he would wait. And to Fowler the situation was not
clear. Should the deficits rise greatly and prices and demand continue to rise,
Arthur Okun of the Council feared that a rise in taxes would be triggered. The
•economic prospects still seemed uncertain to the President and the Secretary
o f the Treasury in June. But August the Treasury seemed more receptive to
a tax increase as a means of achieving a better mix o f monetary and fiscal policy.
Ackley in August would reduce interest rates and increase taxes.
A VIEW HELD in some quarters was that had the Government introduced
a general anti-inflationary tax policy in early 1966 many o f our 1967 problems
would have been solved. But there were serious obstacles. Not only the Con
gress but the public also were heavily against a general tax increase. The
Congress favored a cut in spending at home which was not to be achieved. In
this same period the financial groups stressed monetary rather than fiscal policy.
Had the Government put a tax program into the works in late March ( say) then
assuming acceptance by the Congress by June-July—a bold assumption indeed—
then a tax increase on top of the dangerous monetary situation might well have
greatly damaged the economy. The only safe thing to do was to introduce a tax
bill once the Fed had shown an inclination to end its costly restrictive monetary
policy and also to ask for a tax increase— as it did in early 1967—that would
be recalled should the economy falter.
In the light of the great advances in 1961-1966 in GNP, stability, employment,
unemployment, standards o f living, growth o f assets both fo r business and the
fam ily—the disequilibria in 1967 which Senator Javits and others emphasize seem
1004
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ECONOMIC REPORT OP TH E PRESIDENT
rather unimportant. The great mistake o f 1966 was the costly monetary policy, ,
a setback for which the Independent Fed, not the Government, will have to as
sume responsibility.
The error was to introduce a dear money policy in December, 1965 without the
cooperation o f the Government. Had the Government, without a guarantee o f
monetary ease—which they could not get—have introduced a general income tax
rise 1966, then the health o f the economy would have been jeopardized. It would
take time, even if the Fed cooperated, for an easing to have its impact. In the
meanwhile two potent weapons would have helped deflate the economy. The
lag in effects of monetary changes is evident in a decline o f 15 out o f 23 Leading;
Indicators in October and 15 out o f 19 in November, 1966.
Setmoub E. Harris, San Diego, Calif.
February 16,1967.
Chairman P r o x m ir e . This concludes the hearings this committee
will hold on the President’s Economic Report. W e will have a number
of other hearings this year, but this ends our formal public review.
The Joint Economic Committee stands adjourned.
(Whereupon, at 12:25 p.m., the committee adjourned.)
O
@FedFRASER