The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
THE 1967 ECONOMIC REPORT
OF THE PRESIDENT
HEARINGS
BEFORE TH E
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
N IN E T IE T H CONGEESS
FIRST SESSION
INVITED COMMENTS
PART 5
Printed for the use of the Joint Economic Committee
U.S. GOVERNMENT PRINTING OFFICE
75-314
WASHINGTON : 1967
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402 - Price 35 cents
JO IN T ECONOMIC COM M ITTEE
[Created pursuant to sec. 5 (a ) o f P ublic L aw 304, 79th Cong.]
W IL L IA M P R O XM IR E , W isconsin, Chairman
W R IG H T PATM AN, Texas, Vice Chairm an
SEN ATE
-HOUSE OF R E PR E SE N TA TIV E S
JOHN SPARKM AN, Alabama
J. W. FU LB R IG H T, Arkansas
HERMAN E. TALM ADGE, Georgia
STUART SYMINGTON, M issouri
ABRAHAM RIB IC O FF, Connecticut
JACOB K. JA V ITS, New York
JACK M ILLE R , Iow a
LBN B. JORDAN, Idaho
CHARLES H. PERCY, Illinois
R IC H A R D BOLLING, M issouri
H A L E BOGGS, Louisiana
HEN RY S. REUSS, W isconsin
M A R T H A W . G R IF FIT H S , M ichigan
W IL L IA M S. M OORHEAD, Pennsylvania
THOM AS B. CURTIS, M issouri
W IL L IA M B. W ID N ALL, New Jersey
DONALD RUM SFELD, Illinois
W. E. BROCK 3 d , Tennessee
J o h n R. S t a r k , jExecutive D irector
J a m e s W . K n o w l e s , D irector of Research
E c o n o m is t ,s
W illia m H . M o o r e
J o h n B. H e n d e r s o n
D o n a l d A. W e b s t e r
II
G e o r g e R. I d e n
D a n ie l J. E d w a rd s
(M in o r ity )
CONTENTS
Page
Letter of Senator William Proxmire, chairman of the Joint Economic
Committee, inviting comments on the 1967 Economic Report of the
President; and a listing of organizations to whom letter was sent______
1005
ORGANIZATIONS SUBMITTING STATEMENTS IN
RESPONSE TO COMMITTEE INVITATION
American Bankers Association__________________________________________
Committee for Economic Development: Emilio G. Collado, chairman, Re
search and Policy Committee________________________________________
Communication Workers of America____________________________________
Conference on Economic Progress: Leon H. Keyserling, president_________
Federal Statistic Users’ Conference_____________________________________
Machinery and Allied Products Institute_______________________________
The investment credit— The case for its permanency______________
Lead time and contracyclical tax policy____________________________
The investment credit as an economic control device________________
Government intervention in business decisions affecting private invest
ments abroad___________________________________________________
Announcement 66-58: Integration of pension plans with social
security_________________________________________________________
National Association of Mutual Savings Banks: Dr. Grover W. Ensley,
executive vice president_______________________________________________
National Federation of Independent Business: C. Wilson Harder, president.
National Federation of Independent Unions: Don Mahon, secretary_______
National Grange: Harry L. Graham, legislative representative____________
United Mine Workers of America: W. A. Boyle, president_________________
m
1007
1018
1024
1026
1067
1069
1079
1084
1089
1095
1101
1114
1119
1126
1127
1132
JANUARY 1967 ECONOMIC REPORT OF THE PRESIDENT
The letter appearing below was sent to the following organizations:
American Bankers Association, American Farm Bureau Federation,
Committee for Economic Development, Communication Workers of
America, Conference on Economic Progress, Consumers Union of
U .S., Inc., Cooperative League of the U .S.A ., Federal Statistics Users’
Conference, Independent Bankers Association, Life Insurance A s
sociation of America, Machinery & Allied Products Institute, Na
tional Association of Mutual Savings Banks, National Federation of
Independent Business, National Federation of Independent Unions,
National Grange, National League of Insured Savings Associations,
Railway Labor Executives Association, United Mine Workers of
America, United States Savings and Loan League. These organiza
tions were invited to submit their views or comments on the text and
recommendations contained in the 1967 Economic Report of the
President. Eleven organizations submitted statements and their views
were considered by the Joint Economic Committee in the preparation
of its report on the President’s Economic Report.
F e b r u a r y 10, 1967.
Since our schedule of hearings on the 1967 Economic Report
of the President is very full and time is short, the Joint Economic Committee
once again is calling upon a number of leaders of banking, business, labor,
agriculture and consumer organizations for written statements containing eco
nomic facts and counsel for consideration in the preparation o f its report.
The 1967 Economic Report of the President, including the Annual Report of
the Council of Economic Advisers, is enclosed. We would appreciate having
your comments on the materials and recommendations in this report.
In order that we may have ample time for consideration of these comments,
written statements should be received by March 1,1967. W e will need 30 copies
sent to G-133, New Senate Office Building, Washington, D.C. 20510, for distribu
tion to Committee members and the staff.
Such comments as you care to give us will be made available to the public
in a printed volume o f the invited statements.
Sincerely yours,
W i l l i a m P r o x m i r e , Chairman.
D e a r M r . --------- :
1005
A M ER ICAN B A N K E R S ASSO CIATIO N
C o m m e n ts o n t h e P r e s i d e n t ’s 1967 E c o n o m ic R e p o r t
sum m ary
Briefly stated, the views of the Association on the major issues cov
ered in the Report are as follows:
We agree with the Administration that private demand for goods and services
is likely to be weaker during the first half of 1967 than throughout most of
1966. Accordingly, a shift to marked fiscal restraint in the very near future
would be inappropriate.
We also agree that aggregate demand may rise rapidly in the second half of
1967 and on into 1968; a strong shift toward fiscal restraint may well be ap
propriate during that period. To the extent possible, however, this shift should
consist of reductions in planned nondefense spending rather than increases in
Federal tax rates.
We agree with the Council of Economic Advisers that monetary restraint in
1966 was highly effective in limiting aggregate demand but that its impact was
uneven. We do not agree that the slump in homebuilding calls for significant
structural changes in the financial system, such as Federal chartering of mutual
savings banks.
Although a consistently low level of unemployment is a desirable social
objective, we believe that, given today’s level of skills and organization in labor
markets, the Council is incorrect in assuming that unemployment levels of 4
percent or below are compatible with reasonable price stability. We are con
vinced this highly desirable goal is attainable only if efforts to reduce structural
unemployment are intensified, and we applaud the Council's discussion of this
problem.
The apparent progress toward evolutionary improvement in the international
monetary system is gratifying. But we also believe that efforts to achieve equi
librium in our international accounts are inadequate and, to the extent market
processes have been warped or thwarted, in the long run inappropriate.
We do not agree that Administration economic policies in 1966 were success
ful in promoting the Nation’s major economic goals. Inappropriate policies in
1965 and 1966 created significant problems for 1967, problems that greatly com
plicate the task of achieving noninflationary, sustainable growth in the period
ahead.
TH E SETTING FOR ECONOMIC POLICY I N 1 9 6 7 : TH E ECONOMY I N 1 9 6 6
The administration may continue to argue that the question of ap
propriate policy mix and degree of fiscal restraint in 1966 is an open
one; the record of economic performance is not. The general price
stability of the preceding 8 years was disrupted. Credit conditions
tightened precipitately and interest rates rose to their highest levels
since the 1920’s. Unit labor costs, after 6 years of stability, rose sharp
ly. The U .S. trade surplus deteriorated seriously.
The major positive achievements in 1966 were a drop in unemploy
ment to an average of less than 4 percent for the first time since 1953
and a real increase in gross national product of almost 5y2 percent.
These real gains are impressive, but we question whether they were
worth the current and possible future costs.
1007
1008
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
One current cost in 1966 is the inequity of inflation, with its espe
cially severe impact on those with fixed or lagging incomes. Another
current cost resulted from the effect of tight money on State and local
governments, which found their borrowing activities seriouslv cur
tailed, and on those industries which rely heavily on credit to finance
their operations and/or sale. Homebuilding is an important, although
not the sole, example of this latter group. Still another current cost
is the $3 billion increase in Federal spending in fiscal 1967 which, ac
cording to Government officials, was a result of stringent monetary
conditions in 1966.
It is clear in retrospect that the period beginning in mid-1965, when
the war in Vietnam began to escalate sharply, and extending well into
1966 involved a variation of “ forced saving” in the classical inflation
ary sense. Federal tax revenues were not large enough to command
the transfer of real resources necessary for the war effort. Deficit
financing had to be used and, with near-full employment, price infla
tion was the result. This inflation, coupled with the impact of tight
money on groups vulnerable to tightening credit conditions, “forced”
the real saving necessary to release resources sought by the Federal
Government.
These can be viewed as the current costs of inappropriate policies
in 1966. The future costs, although less easy to identify, may be even
more significant for the performance of the economy. They stem
directly from the imbalances generated by the demand-pull inflation
of an overheated economy.
OUTLOOK FOB 1967
These imbalances have led to more than the usual disagreement
among economists concerning the outlook for 1967. Although a
“standard forecast” of “weak first half, strong second half” appears
to be developing, there is still a significant minority of observers who
expect, if not recession, at least a distinct pause in tne pace of economic
growth this year. This view, bolstered by the clear diminution in the
strength of private demand in recent months, calls for caution in carry
ing out economic policies in the months ahead.
The American Bankers Association believes 1967 will be a year of
rising economic activity, but with perhaps much greater strength of
private demand in the final 6 months than in the first half. Still, the
arguments of those who foresee the end of the long economic advance
should not be ignored. In part, their position reflects concern with the
most significant short-run imbalance of 1966; namely, the high rate
of inventory accumulation, which reached its peak in the final quarter.
I f the inventory situation were the only factor, the continued strong
uptrend in Government spending (barring an end to the Vietnam con
flict) could be expected to soften and shorten any adjustment. This
view supports the standard forecast.
But there are in addition deep-seated imbalances which, if not cor
rected, will continue to threaten the longrun sustainability of the eco
nomic advance. The most important of these imbalances is reflected in
the tendency for total labor compensation to rise much faster than
output per man-hour. Stability in unit labor costs of production— the
mathematical result of equal percentage increases in total labor com
pensation and output per man-hour— has been a major factor account
TH E
1967
ECONOMIC REPORT OF THE PRESIDENT
1009
ing for the strength and durability of the 6-year-old economic advance.
This experience stands in sharp contrast to earlier postwar expansions;
in those instances, sharply rising unit labor costs are generally viewed
as having been important factors in stopping expansions.
The reasons for this are not difficult to identify. Rising unit labor
costs, if absorbed by industry, reduce profit margins and diminish the
attractiveness of new investment in plant and equipment; this curtails
aggregate demand in the short run and economic growth in the long
run. Rising unit labor costs can be fully passed on to customers only
if Federal economic policies (fiscal and monetary) facilitate an increase
in aggregate demand for the products of industry as a whole.
But this latter approach means more inflation, which not only re
sults in the inequities noted earlier but tends to reinforce the wage-costprice spiral ana intensify the problem of stabilizing such costs. This is
because the demand-pull pressures of an overheated economy are the
basic cause of excessive wage settlements. Demand-pull pressures
break out in inflation when labor becomes relatively scarce; additional
overheating, therefore, simply adds to pressures in labor markets as
business firms bid for additional workers in order to increase output
and meet rising demand for their products. In addition, the accom
panying rise in consumer prices encourages unions to strive for wage
increases which, in addition to covering national productivity gains,
offset at least in part the shrinking purchasing power of their work
ers’ take-home dollars. Indeed, with rising consumer prices, the na
tional productivity trend is likely to become a floor to which cost-ofliving increases are added for obtaining, in labor’s view, equitable wage
settlements.
TH E WAGE-PRICE GUIDEPOSTS
Before turning to comments on economic policies for 1967, it should
be noted that the wage guideposts have proved ineffective, if not
perverse, as an approach to “incomes policy” in an overheated economy.
They have been largely ineffective because market pressures in a fully
employed economy are simply too strong to be overcome by exhorta
tion A perverse impact may have occurred if, as seems likely, reliance
on the guideposts helped to delay the administration’s shift toward
economic restraint in 1965 and 1966. W hat may be more important in
the long run is that, to be effective, wage as well as price guideposts
must be implemented through some sort of de facto control such as
the use (or threat of use) of Executive power. Surely this type of
approach works against the strength and viability of a market econ
omy. From a longrun standpoint, it would be far preferable to con
centrate on creating an adequate and workable degree of competition
in both labor and product markets.
Also important from a longrun standpoint are the efforts to reduce
structural unemployment and improve the performance of labor
markets in general. The Council’s discussion of this problem (pages
100-113) is highly constructive. But until these longer run measures
can take effect, the administration should continue to view 4-percent
unemployment not only as an interim target but also as probably the
lowest level to which unemployment can now be pushed without
stimulating strong inflationary pressures. Experience in recent years
indicates that average levels of unemployment of 4*4 to 4% percent
may be closer to the equilibrium level. To advocate recognition of
1010
THE
1967
ECONOMIC REPORT OF TH E PRESIDENT
this probability, and to recommend that policy be adjusted to it, is
not to suggest that 4- to 41^ -percent unemployment is socially desirable
or acceptable as a permanent target. It is rather a recognition of the
fact that the economic overheating necessary to hold unemployment
below this level may well, in the long run, lead to even higher unem
ployment and a slower rate of economic growth as a result of the
imbalances that result from demand-pull inflation.
One important aspect of structural unemployment is missing from
the report: the effect of Federal minimum wage legislation. On Feb
ruary 1, 1967, the minimum wage was boosted to $1.40 per hour and
is scheduled to increase to $1.60 per hour in 1968. This may explain
much of the high unemployment rates among teenagers. In addi
tion, these wage rates are higher than the rate paid persons in some job
retraining programs, discouraging participation in our primary means
of reducing structural unemployment.
S T A B IL IZA T IO N P O L IC Y FOR 1 9 6 7
W ith these comments as background, what should be the major con
tent and thrust of Federal stabilization policies in 1967 ? “Caution”
and “flexibility” should be the watchwords— caution in applying either
expansive or restrictive measures; flexibility in order to move quickly
in whichever direction events dictate.
Flexibility is especially necessary in order to guard against reemergence of the overheating that is the basic cause of our current
difficulties. If, as seems likely, the current weakness in private de
mand is replaced by marked strengthening later in the year, the case
for additional fiscal restraint will be strong; otherwise, monetary con
ditions are again likely to tighten more than is desirable. But even
under these conditions the American Bankers Association would be
reluctant to endorse a surcharge on personal and corporate income
taxes. Fiscal restraint can be achieved through either an increase in
taxes or a decrease in spending. W e strongly favor the latter ap
proach because of our great concern over the mushrooming of Federal
spending and influence in recent years. O f considerable practical
significance is the fact that taxes, once raised “temporarily,” are some
times very difficult to reduce later.
The avoidance of additional overheating in the months ahead will
not in itself restore balance to the economic advance. As noted earlier,
wage settlements in 1967, as a legacy of 1966, are likely to continue to
exceed productivity gains by a significant margin. The avoidance of
further demand-pull inflation through fiscal restraint will set the stage
for reestablishing such balance later, perhaps in 1968. In the mean
time, we will simply have to bear the costs of our earlier mistakes.
These costs will not have proved so great, on balance, if in the future
they lead to firmer and timelier adjustments of Federal stabilization
policies to changes in economic conditions.
M O N E T A R Y P O L IC Y A N D T H E M ORTGAGE M A R K E T
An additional important reason for avoiding further demand-pull
inflation through appropriate fiscal actions in 1967 is the need to avoid
the extreme reliance on monetary policy that occurred in 1966. Easier
monetary conditions— and considerable easing has occurred— would
TH E
1967
ECONOMIC REPORT OF T H E PRESIDENT
1011
militate against the inequities that tight money gave rise to last year.
Easier money, in particular, should result in a somewhat larger flow of
funds into home mortgages.
To recognize this fact is not to admit that tight money alone was
responsible for housing’s difficulties in 1966. The evidence is persua
sive that overbuilding had reached serious proportions in several parts
of the country. In these instances, the tightening of money can be
viewed as speeding needed and overdue adjustment. In addition, the
strong and steady postwar rise in construction costs should not be
overlooked as a significant factor affecting the course of demand for
housing. Nevertheless, extreme swings in mortgage availability and
housing starts are undesirable, and it is therefore appropriate that the
Council discussed means of remedying this situation.
In this respect, the Council’s suggestion that better access to the
open capital market for the mortgage market is worthy of explora
tion. I f by this suggestion the Council means that the marketability
of mortgages should be improved, with the goal of creating a viable
and active secondary market, then we recommend to the Administra
tion the general outline of a proposal developed by the American
Bankers Association several years ago. This proposal, drafted as a
Mortgage Market Facilities Act, would authorize Federal chartering
of private organizations to insure conventional mortgages; Federal
chartering of private mortgage marketing organizations to provide a
secondary market for conventional and other mortgages; and issuance
of debentures by the mortgage market organizations upon the security
of insured or guaranteed mortgages in their portfolio. This proposal
doubtless needs study and revision, but some adaptation of it could
well provide a practicable means of improving the marketability of
mortgages.
Few would argue with the Council’s contention that better liquidity
and management practices on the part of many savings and loan as
sociations would do much to help stabilize the flow of funds into
mortgages and homebuilding. Noteworthy is the suggestion that the
associations emulate commercial banks by accumulating secondary re
serves in easy money periods that could be used to sustain leading ac
tivities in tight money periods.
After making these reasonable suggestions, however, the Council
goes on to recommend a far-reaching change in the Nation’s financial
system; namely, Federal chartering of mutual savings banks. The
Council states:
Such institutions would have the power to invest in corporate securities and
consumer loans as well as mortgages. While broadened investment privileges of
federally chartered mutual savings banks might initially divert some funds from
the mortgage market, such chartered banks should improve the efficiency of
thrift institutions, strengthen them in competition with banks, and thereby ulti
mately benefit the morgage market [Report, pp. 66-67].
A complete and definitive answer to this argument cannot be pro
vided in the absence of the assumptions on which the Council’s reason
ing is based. On the surface, at least, it seems contradictory to argue
that legislation permitting mortgage lenders to lend more in nonmortgage forms would strengthen the mortgage market. Proponents
of the chartering measure anticipate a substantial number of con
versions from savings and loan associations to the new banking sys
tem. It is clear that a major reason for such a movement would be
1012
TH E
1967
ECONOMIC REPORT OF TH E PRESIDENT
the desire of the associations to escape the present legal requirement
that the bulk of their funds be kept in real estate loans, while still
retaining highly preferential Federal tax treatment. The Council’s
conclusion that there will be a diminished flow of funds into real
estate loans only in the short run may have substantially underesti
mated both the amounts which would be lost to the residential loan
market as well as the time over which such losses would extend.
In any event, the Council should spell out the reasoning underlying
its proposal in greater detail. Thus far it is appropriate to question
how a measure which would encourage lending by thrift institutions
in areas other than home loans would in fact stimulate the flow of
funds into home loans.
This is not the only questionable aspect of the proposal. Implicit
in the Council’s argument is the view that commercial bank competi
tion with other thrift institutions was a major adverse force leading
to the sharp reduction in mortgage lending in 1966. The record
proves otherwise. The major competitor was the securities market,
which attracted large amounts of individual savings in 1966. Accord
ing to the Council’s figures, individuals’ savings in the form of Gov
ernment, corporate, and other securities rose by $14.9 billion in 1966,
three times the 1965 increase and more than twice the expansion in
1964. On the other hand, growth in commercial bank time deposits—
consisting of money market certificates (not individuals’ savings) as
well as savings certificates—was on a percentage basis less than half
the 1965 increase and substantially below the 1964 increment.
Clearly, therefore, in 1966 the securities markets, through the proc
ess known as “ disintermediation,” provided the strongest competi
tion for thrift institutions in 1966—for commercial banks as well as
savings and loan associations and mutual savings banks. Federal
chartering of mutual savings banks will do nothing to prevent this
sort of competition if interest rates again rise to the extremely high
levels of 1966.
The fundamental reason the flow of mortgage funds decreased so
sharply in 1966 was not the securities market; it was not the actions
of commercial banks; nor was it the failure of mortgage-lending
institutions to react properly to emerging conditions. The funda
mental reason was the inadequate fiscal policy of the Federal Govern
ment which, by default, left to monetary policy the greatest part of
the task of restraining inflation. Inevitably, this led to extremely
tight credit conditions and high-interest rates.
Rather than calling for far-reaching structural changes in the finan
cial system, those who want to protect the homebuilding industry
from such sharp drops in credit availability in the future should in
stead insist upon the application of a balanced mix of fiscal and mone
tary policies.
DEBT M A N A G E M E N T A N D T H E IN T E R E ST R A TE C E ILIN G
Debt management is viewed by some as an important aspect of
Federal economic policy; at the least, the economic and financial im
plications of handling a public debt of $330 billion are worthy of
attention and discussion. Consequently, it is extremely disappoint
ing that neither the President nor his Council of Economic Advisers
has discussed the matter in the 1967 report.
TH E
1967
ECONOMIC REPORT OF THE PRESIDENT
1013
This omission is especially disturbing in view of the continued
restrictive impact of the 41,4-percent ceiling applicable to new Treas
ury issues with a maturity in excess of 5 years. The average maturity
of the public marketable debt, now at 4% years, is the shortest since
1960. The 41/4-percent ceiling obstructs an orderly approach to debt
lengthening and should be removed. We urge administration officials
to initiate discussions with congressional leaders in order to resolve
this problem.
BU DGETARY CONCEPTS A N D P R ESE N TA TIO N
We applaud the decision of the President, as announced in his
Budget Message, to seek the advice of a bipartisan group of informed
individuals with respect to budgetary presentation and concepts.
Each of the current budget approaches—administrative, consolidated
cash, and national income accounts—has its strengths and weaknesses,
but none of the three is sufficient in itself to meet the needs of Con
gress and the public.
In view of the President’s decision to seek such advice, we deem
it unfortunate that the administration has, starting this year, adopted
the national income accounts budget as the basic instrument for pres
entation of the Federal program. As the President noted, the NIA
budget is not well suited for an analysis of individual Federal pro
grams. It does not include Federal lending activities, which at times
can be of special economic significance. Moreover, the NIA budget
(as well as other approaches) can be misleading with respect to the
initial impact of Federal spending programs.
Admittedly, both the administrative and cash consolidated budgets
have serious shortcomings. But in view of the impending study, a
strong case could be made for no change in the basic budget concept
at this time. I f the administration deemed such a change manda
tory, the cash consolidated budget, which includes Federal lending
activities, would appear to be superior to the NIA budget.
As for the study group from which the President will seek advice,
development of some measure of Federal Government activities is
likely to be its first order of business. To illustrate the problem,
expenditures for fiscal 1968 are estimated at $135 billion in the ad
ministrative budget; $172 billion in the cash consolidated budget;
and $169 billion in the NIA budget. But each of these budgets
conceals a wide range of Government activities. For example, it is
estimated that in fiscal 1968 expenditures of the Postal Department
will run $6.7 billion and receipts $5.3 billion, leaving a deficit of $1.4
billion. However, only the deficit is entered on the expenditure side
of each of the three budgets, thus understating the dollar total of
Government activities by more than $5 billion. Some indication of
such “netting” is indicated from the official statement of “ Gross Ex
penditures of Government-Administered Funds” which estimates fis
cal 1968 spending at $210 billion. Clearly it will be no easy task for
the study group to determine the best measure of total Federal
activity.
Even if one had an acceptable measure of past expenditures, re
ceipts, and the resulting deficits or surpluses, he could not make infer
ences regarding the fiscal impact of Government activities; i.e.,
whether fiscal policy was restrictive or expansionary. Under the exist
1014
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
ing U.S. tax structure, revenues increase and fall about 10 percent
faster than GNP. Hence a recorded surplus may reflect, not a re
strictive policy, but an expansionary policy under which tax revenues
rose faster than Government spending. To measure the fiscal impact
of Federal activities, additional analytical tools must be developed.
Another important contribution the study group could make would
be to provide a framework for analyzing fiscal impact of all budget
projections, both spending and taxation, on a semiannual basis. This
would not only make short-run or cyclical analysis more meaningful
but would also make it far easier to convert fiscal year estimates to
calendar year estimates. Semiannual estimates become very important
when expenditures and corresponding tax increases take effect in dif
ferent halves of the year. This occurred in the social security pro
gram in fiscal 1966 and is proposed for fiscal 1968. The same is true
of the excise tax cuts in fiscal 1966: some took effect at the beginning
of fiscal year 1966 and others took effect at the beginning of the calen
dar year (midway through the fiscal year).
The American Bankers Association offers its assistance in these ap
proaching studies. They are both timely and necessary.
SELECTED USES OF ECON OM IC G R O W TH
This chapter of the 1967 report treats a wide range of social welfare
problems on which the Council takes no position but attempts to raise
some issues that will require difficult choices. The issues include pov
erty, income maintenance for the poor, public assistance, the proposal
for a negative income tax, education, urban problems, and a discus
sion of the overall relationship between Federal, State, and local gov
ernment finance. The common denominator underlying analysis of
each of these problems is that they raise two emotion-laden issues:
the size of the public versus the private sector, and the relative roles
of Federal, State, and local governments.
It is a mistake to assume that planning with respect to uses of fu
ture economic growth must await the end of the Vietnam conflict, al
though admittedly the necessity for successful prosecution of the war
calls for caution. But the fact is that, barring a greater Vietnam
escalation than now seems likely, Federal defense spending can be ex
pected to level off at or close to the level projected for the coming
fiscal year. Federal revenues, however, should continue to increase
with an expanding gross national product. The extent of this growth
depends on our success in achieving a high and sustained rate of eco
nomic growth. I f reasonably successful, we might expect gross na
tional product to expand by 3 to 5 percent in the years ahead (over
the next 3 or 4 years, about $25 to $35 billion on the basis of 1966 dol
lars) with an accompanying expansion in Federal revenues of up to
$10 billion a year.
Clearly, therefore, it is not too early to begin public discussion and
debate as to policies for using these additional revenues and thereby
preventing excessive fiscal drag. The obvious choice in an overheated
economy, such as occurred last year, would be to use at least a portion
of the growing revenues to retire Federal debt; that is, to create and
maintain as long as necessary a Federal surplus.
From a longer range standpoint, however, other alternatives are
available. Experience in the first half of the 1960’s indicated that
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
1015
broad-based properly structured reductions in Federal tax rates can
help sustain economic activity and utilize the fruits of growth to help
bolster living standards. Another choice—one that has been receiv
ing increasing attention—is to return a portion of Federal tax receipts
to State and local governments. Still a fourth option, of course, is to
increase Federal spending.
The American Bankers Association has studied and commented on
aspects of those alternatives in the past and will continue to do so in
the future. The important point to recognize at this time is that, al
though there is currently a deficit in the Federal budget, long-range
prospects for rapidly increasing revenues call for careful, extensive
research and discussion of these vital matters.
T H E IN T E R N A T IO N A L E C O N O M Y
The apparent progress toward establishing a technique and mech
anism for orderly accretions to international reserve assets is most
gratifying. Hopefully, progress will continue so that, when the need
for additional reserves becomes clear, the new mechanism will be ready
to be put into operation. The American Bankers Association, without
commitment to any given approach, urges continued discussion and
negotiation toward this end.
Still, we cannot view the international economy with complacency
so long as the U.S. balance of payments remains in substantial dis
equilibrium. The adverse effects of the 1965-66 overheating of the
economy were not confined to the domestic economy; the overheating
contributed directly to the surge in imports that was the main factor
in cutting sharply into our trade surplus. The impact of this de
terioration has been obscured by the large inflow of volatile funds,
reflecting the extremely tight money situation here.
While the Vietnam conflict has contributed to an additional foreign
exchange drain of substantial magnitude, this contingency provides
no latitude for dealing with the fundamental problem. Rather, it
adds to the urgency.
The additional avenues for closing the payments gap have been
discussed many times, both by this association and by other observers,
and need not be repeated in detail here. Surely the reestablishment
of balanced, noninflationary economic growth is a prime requisite.
Otherwise it will be difficult to recover the ground lost by shrinkage
of the trade surplus. We cannot share the optimism of the Council
concerning the trade surplus in 1967. Some improvement may well
occur, but the prospects for continued wage and price increases, cou
pled with a less expansionary environment in important economies
abroad, dampen these prospects.
As time goes by—and recalling that since 1949 the U.S. account has
been in deficit every year but one, with truly sizable deficits during
each of the past 10 years—it becomes increasingly clear that funda
mental realignments in free world defense and aid spending will be
necessary before true equilibrium is reached. Informed observers in
the financial community and elsewhere increasingly are questioning
the heavy budget and foreign exchange outlays for the maintenance of
large U S. garrisons in Western Europe. They also believe that our
prosperous free world friends are able to share a larger portion of the
overall defense and aid burden.
1016
TH E
1967
ECONOMIC REPORT OF THE PRESIDENT
It is not sufficient to answer these statements simply by stating that
the defense and aid programs, as now constituted, are overpowering
aims of U .S. foreign policy. Experience in recent years should have
taught us that a nation with a weak currency can be severely handi
capped at the international bargaining table. In fact, foreign policies
relating to defense, aid, and financial matters are inseparately related.
Our concern about the lack of progress in correcting the funda
mental imbalance in our international accounts is greatly heightened
by the heavy reliance on nonmarket devices such as the interest equal
ization tax and foreign lending and investing guidelines. However
necessary these devices may be in the short run— and it should be
remembered that the interest equalization tax, which shows signs of
becoming a permanent appendage to our system, was first recom
mended three and one-half years ago— their long-run retention clearly
is against the interests of this Nation and its citizens. Equilibrium
achieved with these measures still in effect will not be equilibrium in
the true sense of the word.
C ONCL U S I O N
In the preceding pages we have attempted to provide constructive
criticism of the President’s economic messages for 1967. The rupture
of stable economic growth in 1966 was disappointing, but it can be
hoped that the policy inadequacies of 1965 and 1966 will be recognized
by the Congress and the administration and that, as a result, future
policies will be better conceived and executed. A s important as this
consideration is, however, it should not be allowed to obscure certain
fundamental trends that, if continued, can do considerable harm to
our market economy.
The Employment Act of 1946 requires that all measures taken to
promote economic growth and stability be carried out “in a manner
calculated to foster and promote free competitive enterprise.” The
record of recent years indicates that, in the interests of achieving
important short-run goals, this mandate is being violated. W e refer
to heavy emphasis on guideposts, guidelines, and the interest equaliza
tion tax.
The wage-price guideposts were first enunciated in 1962, but only
as “a contribution to public discussion.” In subsequent years they
evolved into a type of “voluntary” incomes policy and, in the current
Report, the Council refers to a “national price policy for 1967”
(p. 132). Reference is made to the many conversations between ad
ministration officials and companies contemplating price increases,
and the Council states its intention to continue such discussions in the
future. Administration intervention in labor-management negotia
tions is a matter of record and no little public attention. In effect,
administration of the guidepost technique has moved at least part way
toward de facto price and wage controls.
The interest equalization tax was first proposed in the summer of
1963 as one means of curtailing the heavy outflow of portfolio invest
ment. It was enacted a few months later and, in 1965, extended until
mid-1967. Now the administration is proposing that the tax be ex
tended for another 2 years and that the President be given discretion
to vary the tax within a range of 0 to 2 percent, or up to twice its
current effective level.
THE
1967
ECONOMIC REPORT OF TH E PRESIDENT
1017
The guidelines for foreign lending and investing by American fi
nancial institutions and business corporations were proposed by Presi
dent Johnson in early 1965. They have since been tightened and
extended in coverage.
This recounting of efforts to deal with pressing short-run problems
raises serious questions about the future of our market economy. The
fundamental danger of guidelines and guideposts as permanent de
vices for influencing crucial decisions in our type of economy is that
proliferation of such programs can seriously undermine the very
strength of the economy itself. The market system’s reliance on
private initiative, self-interest, the profit motive, and competitive
pricing provides the fundamental strength and drive of the system.
Cruideposts and guidelines, however, represent an attempt to induce
market participants to behave in ways other than they would if they
were reacting solely to market pressures and in the best interest of
those whom they represent. Reference here is not to short-run selfinterest, but to long-run, enlightened self-interest.
This is not to argue that competition is pure and perfect in either
product or labor markets; such obviously is not the case. It is to argue
that, rather than responding to pressing short-term problems by
adopting methods which work against market processes, the proper
approach is, whenever possible, to work by and through the market
mechanism. To the extent the mechanism itself is faulty, then atten
tion should be directed to the fundamental factors accounting for that
weakness.
Stated differently, it is far preferable to attempt to correct funda
mental market deficiencies than to try to transform or redirect actions
growing out of market processes. A s noted earlier, the latter course
runs the serious risk of undermining the very strength which accounts
for the superiority of our type of economic organization— a superior
ity which throughout modem industrial history has been demon
strated beyond doubt.
COMMITTEE FOR ECONOMIC DEVELOPMENT
( B y E m il io G . C ollado , C h a ir m a n , R esearch a n d P o l ic y
C o m m it t e e )
We appreciate this opportunity to present the views of the Com
mittee for Economic Development on the Economic Report of the
President and the annual report of the Council of Economic Advisers.
We regard this annual review as important, and we have, I believe,
an uninterrupted record of annual statements to the Joint Economic
Committee since the review was established.
The 1967 Economic Report of the President and the annual report
of the Council of Economic Advisers which accompanies it constitute
a very helpful description and analysis of the economic problems be
fore the country today. These reports present in condensed, readable
form an enormous amount of factual information and a wealth of
instructive argument relating to economic policy. They are valuable
contributions to professional and public understanding of economic
issues.
The report of the Council discusses several disturbing aspects of
the present state of the economy as well as its performance in the
past year. I find myself in agreement with many of the views ex
pressed. The Council is rightly concerned with the future course of
price stability and with the maintenance of high employment. In
deed, I interpret this year’s report as dealing in major part with the
need to construct once again the conditions which were so important
to the prolonged period of price stability which marked the early
parts of the present expansion. To be specific, we agree entirely
with the following assessment made in the report (p. 72).
The public sensed what every economist knows— that a reasonably stable
price level is essential if balanced prosperity and full employment are to be
continued at home and if the strength of the dollar is to be maintained abroad.
Experience proves that rising prices can generate distortions that can eventually
topple an economy from boom to recession. Experience also shows that rapidly
rising prices can quickly erode a country’s competitive position in international
markets. The critical economic problem to be solved in the year ahead is that
of maintaining income growth and full utilization of resources without becoming
trapped in an inflationary price-wage spiral.
I share with the Council a concern for the possible resumption of
the cost push inflation of the 1955-57 period, especially in the light
of the reduced rate of gain in productivity compared with that of
recent years and the increased pace of wage and other cost- increases.
These disturbing developments add emphasis to our own and the
Council’s views on general monetary and fiscal measures of restraint.
S
t a b il iz a t io n
P
o l ic ie s
— 1966
an d
1967
The Council’s report interprets the stabilization policies pursued
in 1986 as appropriate and adequate to the problems which arose. In
1018
THE
1 9 6 7 ECONOMIC REPORT OP THE PRESIDENT
1019
the eyes of the Council, the fact that the Federal budget on “National
income and product account” moved into surplus in the 1st quarter
of 1966 signaled sufficient fiscal restraint. The Council also remarks
that the monetary authorities pursued a complementary policy in
the last half of 1966. While there is concern with the distributional
effects of the monetary restraint and some disappointment with the
rate of price increase, the Report suggests that the stabilization policies
were generally appropriate to the tasks of the year. W e take a dif
ferent view.
A shift of the Federal Budget, in the national income accounts,
from surplus to deficit between the first and second half of 1965, ac
companied by rapid monetary expansion, contributed to converting
vigorous economic growth into an inflationary boom. Perhaps it is too
much to expect that policy, especially fiscal policy, could be so flexible
or so foresighted as to prevent such a development. However, when
fiscal decisions were being made at the beginning of 1966 it was time to
recognize what was happening and to take balanced restraining meas
ures. In fact, partly because of incorrect estimation of the probable
military expenditures, the measures taken were inadequate in total and
left too much of the problem of restraining inflation to monetary pol
icy. The budget did move into surplus at the beginning of 1966, but
this was largely the result of the sharp rise in prices and thus taxable
incomes. Fiscal policy, while it became more restrictive than it had
been, was not sufficiently restrictive to keep the demands of the public
and private sectors within the bounds of our capacity to produce at
stable prices. As demands outstripped capacity, prices and wages rose
rapidly. The monetary authorities found themselves with the major
burden of responsibility for stabilization. The amount of monetary
restriction necessary to keep the rise in prices and costs to the rates
actually realized pushed interest rates up very rapidly to levels not
experienced in 40 years.
The credit stringencies induced b y the anti-inflationary monetary
policy resulted in a very sharp drop in residential construction. The
balance in capacity utilization which the Council commented upon in
its 1966 report deteriorated. A t the end of 1966 the gap between
actual and preferred operating rates was only one percentage point
different from that in the previous year. There was, however, much
wider variation in this gap among industries at the end of 1966 than
was true of 1965. Many industries found themselves operating con
siderably above preferred levels while others were operating substan
tially below their preferred levels. Finally, the last quarter of 1966
saw one of the sharpest rises in inventory accumulation in the postwar
period.
The high interest rates of 1966 attracted extraordinarily large
amounts of private savings to open market instruments including some
of the assets accumulated in savings institutions. Mortgage lending
institutions found themselves with very small net inflows and mort
gage extensions fell sharply. Commercial banks found themselves
under substantial pressures throughout the summer and the Federal
Reserve instituted selective controls over discounting in early Septem
ber further to restrain bank loans to business. These belated actions
together with the elimination of the investment tax credit on machin
ery and equipment and certain of the accelerated depreciation pro
1020
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
visions and along with the cessation of sale of participation certifi
cates, so changed expectations in the financial markets that there was
a marked reduction in interest rates and in the strength of final de
mand (gross national product minus inventory accumulation) as 1966
ended.
It is our view that while the fiscal policy moves taken were in the
appropriate direction, they came too late, were insufficient in amount
and misdirected in form. There was a concern for what was thought
to be “excessive” amounts of investment. There was also increasing
concern that there would be growing upward pressures on wage rates
and a slower growth in productivity as the economy reached full em
ployment. Under these circumstances the most sensible policies to
pursue would have been to restrain total demand by a tighter fiscal
policy while at the same time permitting the mix of demand to contain
more investment, especially in equipment. I f this had been done, total
demand could have been kept within the economy’s potential to pro
duce, and increases in productivity stimulated by the addition of fast
payoff additions to productive capacity.
The actual policies pursued were quite the opposite of these. They
were to reduce investment and limit the extension of business loans by
commercial banks. W hile these policies acted to lessen total demands,
they did it in a way which discouraged the generation of new capacity
in general and therefore unduly discouraged capacity which would
increase productivity.
W e have dwelt at length with an examination of policies pursued
in 1966 because we feel that some of the policies which are suggested
for 1967 expose us once again to many of the same risks we faced at
the outset of 1966. The President’s budget plans, assuming the pro
posed tax increase is enacted and that total demand is at the level o f
$787 billion of gross national product projected by the Council, imply
an economy at rail employment with a deficit on “National income and
product account.” Once again, we are pursuing policies meant to exact
the last ounce of output from the economy though such a policy im
plies the chance that total demand will be too strong and hence infla
tionary.
Once we explicitly recognize that the Council’s economic projections
for 1967, like all economic projections, are uncertain projections, the
appropriateness of their fiscal policy suggestions is open to further
question. For the total private demand in prospect, different levels o f
Federal spending and taxing subject the economy to a chance that
total demands will either exceed or fall short of our capacity to pro
duce at stable prices. The more stimulating the fiscal policy pursued
at any total or private demand, the larger is the chance that aggregate
demand will outrun capacity and the smaller is the chance that it
will fall short.
The choice of the most appropriate role for Federal spending and
taxing requires an estimate of the probable costs associated with ex
cessive total demand and with insufficient total demand. In 1967,
the costs of excessive total demand are clear and substantial. Pres
sures for wage increases are already strong and will only be increased
by further rises in prices. Monetary policy was strained to the ex
treme in late 1966 and it would be unwise to take actions which might
require a very restrictive monetary policy in late 1967. The balance
TH E
1967
ECONOMIC REPORT OF T H E PRESIDENT
1021
of-payments position of the United States would also be adversely af
fected by a renewal of inflationary pressures; exports will tend to fall
and imports will tend again to grow sharply. Moreover, the Council’s
report contains many references to the tact that cost increases— that
is, wage increases, price increases, or interest rate increases— once in
troduced become institutionalized as a permanent part of the economic
structure. For all these reasons excessive demands leading to price
inflation in 1967 would be most detrimental to both our short-run and
long-run objectives.
To be sure, there are also costs associated with a level of Federal
spending and taxing, which results in insufficient total demand. An
obvious and most important cost is that of unemployment of men and
machines. However, if it appeared as the year progresses that total
demand is weak, several options would be open to the stabilization
authorities. Monetary policy could be eased to accelerate the expan
sion, the investment tax credit could be reinstated, and certain of the
Government’s socially desirable programs now being curtailed, could
be expanded. I f a major drop in demand occurred as a result of a
settlement in Vietnam, a general tax reduction could be considered.
Thus, finding the right fiscal policy is a question of balancing the
risks. The costs of too expensive a fiscal policy are clearly substantial.
A t the moment, the costs of potential under-utilization are less, in
large part, because of our ability quickly and effectively to initiate exansionary influences. This strongly suggests that the appropriate
seal policy for 1967 is one which exposes us to only a very small
chance that total demands will exceed our capacity to produce at stable
prices.
A S t a b i l i z i n g B u d g e t f o r 1967
E
For many years the CED had advocated a budget policy designed to
deal effectively with the problem of balancing the demands in the years
ahead with our capacity to produce at stable prices as well as the
problem of developing the incentive and capacity for rapid growth.
The main characteristics of this budget policy which is concerned not
only with economic stability but also economic growth and efficiency
are the following:
Policy should aim for a budget surplus to be used for debt retirement
under conditions of high employment. This is important because the
surplus would add to the funds available for private investment, there
by easing the pressures on monetary policy and promoting steady eco
nomic growth.
The impact of the budget should vary with the condition of the econ
omy as a whole, being more expansive when the economy is depressed
and more restrictive when the economy is booming or inflationary.
The overall impact that the budget exerts upon the economy should
not, when combined with appropriate monetary and other policies,
be so restrictive as to make attainment of high employment unlikely,
or be so expansive as to lead to persistent inflation.
Such a stabilizing budget policy is achieved when the Government
sets its expenditure programs and tax rates so they would yield a
constant, moderate surplus under conditions of high employment and
price stability. Such a policy is independent of conditions at any
particular time and it does not depend on correctly forecasting the
1022
TH E
1967
ECONOMIC REPORT OF THE PRESIDENT
future trend of the economy. But it does require attention to the sur
plus that would result at high employment. The present budget
policy of the Government indicates that the budget will be in deficit
at high employment, a policy that falls short of the stabilizing budget
rule which we believe to have withstood the test of time. A t high
employment— and we now have high employment— there should be
a moderate surplus in the Federal budget.
The built-in flexibility provided in the CED ’s stabilizing budget
rule may not always suffice to avoid inflation or recession, however.
I f further action is needed to deal with these conditions beyond the
swings that the automatic stabilizers generate, deliberate variation of
the balance in the Federal budget supplies the chief tool that is
available.
W e have argued in earlier CED policy statements for agreement in
advance, between the President and both Houses of Congress, on a
method for quickly enacting temporary changes in tax rates as a way
of stopping a recession and promoting recovery, or holding back ex
cess demand and averting inflation. This would require that means
be devised for putting the tax change quickly into effect and for assur
ing its termination at some point.
Time will be wasted in searching for an agreement between the
Executive and Legislative branches of government on continuing au
thority to practice a discretionary fiscal policy. For this reason, in
a statement issued last December “A Stabilizing Federal Budget for
1967,” we expressed our preference for a temporary across-the-board
tax increase for the calendar year 1967 to the extent that it is needed
to provide a surplus in the Federal budget. W e repeat that recom
mendation now.
E x p e n d it u r e R eductions
W ith the economy operating at or near the peak of its capacity as
we enter 1967, it is especially important that the Federal Govern
ment examine its spending plans with extreme care. The total of
Federal expenditures must be such that these demands together with
the total of demands from the private sector as a whole do not exceed
the economy’s potential to produce at stable prices. As we said in our
program statement in December,
This committee believes that holding down the rate of Government expenditure
growth would be preferable to raising taxes as a way of achieving the necessary
surplus; temporary tax increases tend to remain in effect and the revenues they
generate tend to be absorbed in permanent spending programs. But it would not
be realistic to expect the required expenditure reduction in the next 6 to 8 months,
when it is most needed.
The Federal Government must also assure itself that the uses to
which it places resources are at least as productive as the uses to which
they would be put if they were available to the privatee sector. It is
in this connection that the issues raised in chapter 4 of the Council’s
report on the “ Selected ITse of Economic Growth” and by the CED
in its policy statement “Budgeting for National Objectives,” are so
very important. In this latter report, the CED supported President
Johnson’s “planning-programing-budgeting” proposals of August,
1965 and suggested new Congressional procedures for better ways to
define and program the budget in order to meet our national objectives.
A s maintained earlier in this statement to the joint economic com
TH E
1967
ECONOMIC REPORT OF TH E PRESIDENT
1023
mittee and in the Council’s report, inflation has been and continues
to be a major problem for the U .S. economy. The Consumer Price
Index is frequently used in labor contracts embodying a “ cost-ofliving” escalator. Moreover, this index reflects the movements in the
prices of many of the products bought by the vast majority of wageeamers, and thus has substantial impact on wage bargains beyond
those in which it enters directly. Since about one-fifth of the total
index is comprised of farm products, any artificial increases in agri
cultural prices can put pressure on wages and costs.
Five years ago the CED issued a statement entitled “An Adaptive
Program for Agriculture” which outlined the directions in which the
farm support programs ought to move. The objectives of that state
ment and to a considerable extent the directions of subsequent govern
ment policy, were: (1) to cushion the income decline resulting from
a proposed movement toward lower levels of price supports, and
(2) to encourage voluntary acreage reductions in specified crops so
that the then existing excess stocks could be moved into the market.
As we enter 1967 we find conditions in agriculture radically altered,
partially as a result of the success of those programs. Farm income
is the highest in years and the income per farm is at an all-time high.
Dairy surpluses are gone, and the Department of Agriculture has re
quested an expansion of the production of wheat and feed grains, the
prices of which are well above the support levels.
Despite this sharp change in agricultural conditions the proposed
budget for price and income supports includes much of the same in
come supplements that were designed to reduce output and deal with
low farm prices. Payments designed to induce acreage reduction and
bolster income when wheat prices were low and large surpluses exist
ed are being continued when output expansion is requested and market
prices are almost 30 percent above the support level.
W e estimate that $1 billion could be cut from the provisions in
the budget for expenditures on wheat certificates, feed grains and
cotton diversion payments, and price supports for feed grains and
vegetable oils.
T h e B a l a n c e of P a y m e n t s
In its chapter on “Growth and Balance in the W orld Economy”
the economic report expresses many points which are similar to those
expressed in the recent CED policy statement, “The Dollar and the
World Monetary System.” There are two important differences in
emphasis between these documents which deserve comment. Our
stress on the critical importance to our balance-of-payments position
of the pursuit of a stabilizing budget policy appears to be different
from that of the Council.
In addition we feel that, since there is no precise way to determine
the optimal allocation of capital between domestic and foreign invest
ment, free capital markets will insure a better allocation than any
controlled system. Thus we believe that the increased controls now
being imposed on capital movements are undesirable. The capital
account is merely one part of a set of interrelated accounts. To seek
to use inhibitions on capital exports as the device to secure balanceof-payments equilibrium is likely to be a shortsighted policy.
CO M M U N ICATIO N S W ORKERS OF AM ER ICA
The Communications Workers of America commend President
Johnson and the Council of Economic Advisers on the candor and the
fresh approach which characterize much of the Economic Report of
the President for 1967. W e submit that this caliber of economic dia
logue can make a significant contribution to the understanding by the
American people, not only of the nature of the budgetary and fiscal
problems which the President must tackle this year, but of the finely
balanced performance which our economy must achieve— both in the
private and public sectors— if we are to maintain a viable level of
growth in 1967 while fulfilling our commitments at home and abroad.
W e salute, in the President’s budget message and in his Economic
Report, the highlighting of the national income accounts basis for
measuring the import of the Federal Government’s operations. Such
an approach, long advocated by analysts both in and out of Govern
ment, gives a far more realistic— and a more significant— overview of
the revenues and expenditures of government at the Federal level
than does the administrative budget.
By taking account of all Federal transactions which directly affect
private spendable income, including that of State and local govern
ments (the operations of the social security trust fund, for example),
by counting such transactions at the time of their impact on the pri
vate economy (the withholding of income and social secuitry taxes
or the accrual of corporate income taxes), and by excluding loans or
exchanges of assets, the national income accounts budget more ac
curately portrays the total effect of the Federal operation. It also
provides a more meaningful measure of the net “plus” or “minus” of
the Federal operation; for the calendar year 1966, for example, the
N IA budget showed a surplus of $200 million, while the administra
tive budget indicated a deficit of $7.3 billion.
O f prime concern to the labor movement has been the attempt, as
we saw it, to impose a rigid, decimal point ceiling on wage negotia
tions via the— by now— infamous wage-price guidelines. W e railed
against the guidelines, particularly in their 1966 version, both because
of their unrelenting inflexibility, as they were applied to specific col
lective bargaining situations, and because they seemed only to be
applicable to one factor in the economic equation— the wage-cost
item— in their implementation.
W e find most refreshing the approach taken by the Council of Eco
nomic Advisers to a national wage-price policy in their 1967 report—
on several counts. W e were encouraged by the lack of a hard-andfast figure for wage settlements in 1967, and by the recognition that
negotiations in the coming year will take account both of increased
output per man-hour, and of the necessity for closing the gap between
dollar earnings and lagging purchasing power—the most significant
“ drag” on the economy today in the 73d month of this unprecedented
boom in the American economy.
1024
THE
1967
ECONOMIC REPORT OF TH E PRESIDENT
1025
W e commend the Council’s concern with price increases, as evi
denced by their involvement in price rises for some 50 product lines
during 1966— and their firm statement of a continuing “watchdog” role
in this area in 1967. Directly related to price movements is the Coun
cil’s concept of profit measurement for 1967; we strongly support the
approach taken by the Council that evaluation of profit rates must
necessarily be modified in the light of a continuing uptrend to the
economy over an extended period of time— as opposed to the “boom
and bust” approach, which dictated a maximization of profits in good
years, to onset the lower levels of profit in bad times.
C W A notes with concern, however, the Council’s comments on col
lective bargaining provisions which are geared to protecting the pur
chasing power of union members’ wages. W e reject the notion that an
escalator clause is or is likely to create an “engine of inflation,” as im
plied by the Council. W e see such provisions as a necessary under
pinning to the maintenance of that purchasing power base which is the
only viable assurance of continued growth and prosperity. W e de
plore the Council’s unfortunate sense of timing in raising this issue in
an otherwise useful and healthy discussion of wage-price problems in
!967.
Finally, we take special note of the President’s announcement, in his
Economic Report, of his intention to explore proposals now current
for guaranteeing minimum incomes to those being shortchanged or
ignored under our present system for allocating this nation’s affluence.
Such discussion is a natural followthrough to the recommendations of
the National Commission on Technology, Automation, and Economic
Progress; we assure the President of our vital interest in establishing
a “floor committee” for the economic future of this remarkable appa
ratus of ours.
C W A firmly supports the raising of the level of economic and politi
cal discussion which characterizes this year’s Economic Report. W e
pledge our full efforts to the Administration’s objective of a continu
ing narrowing of the gap between our potential and our performance.
CONFERENCE ON ECONOMIC PROGRESS
B y L e o n H . K e y se r l in g ,* P resid e n t
CONTENTS
P a ge
Introduction________________________________________________________
Chapter I. Extending
the
R ecord
Prosperity
op
Unemployment at 4 percent cannot be justified________________________
The Council’s 4-percent economic-growth goal is far too low____________
Council's twisted treatment of productivity issue__ ___________________
Council's erroneous position on fiscal-monetary “ mix” ___________ ______
My additional data___________________________________ ______________
Chapter II. Prices
and
W ages
1028
in
1966
Deficiencies in Council's entire price analysis__________________________
Deficiencies in Council's treatment of wages and labor costs_______ _____
My additional data______________________________________ _________ __
C hapter III. M aintaining P rice Stability
Unemployment
1028
1029
1030
1031
1032
and
1033
1035
1036
R educing
Stable prices is not the top priority.
__ - *_____^ ^ ^______ 1036
Deficiencies in Council’s analysis of unemployment problem___________ _
1037
Needed changes in the structure of demand___________________________
103$
Deficiencies in Council's analysis Of wage-pticfc problems.___ ,________ 1038
Chapter IV. Selected Uses
op
E conomic Growth
Errors in Council's analysis of the poverty problem^*____ _____________ _1040
Inadequate stress upon social welfare programs^_________________ ______1040
Revenue sharing with the States.—__________________ __________ ______ _1040
Council's persistent neglect of any satisfactory model for maximum em
ployment, production, and purchasing power________________________ _1040
My own projections for U.S. economic performance____________________ _1041
C hapter V. Growth
and
Balance
in the
W orld E conomy
Kennedy Round____________________________ ________________________
Council's misplaced emphasis in re balance of payments________________
C omments Upon
the
E conomic R eport
op the
P resident
My exceptions to the President's Economic Report, in brief____________
The 6-percent tax increase is highly undesirable_______________________
The prime responsibility of the Council of Economic Advisers___________
charts
(Appearing at end of testimony)
1. Basic U.S. economic trends, 1953-66.
2. Large national economic deficits.
3. Trends in productivity, entire private economy, 1910-66.
4. Investment in plant and equipment was deficient, 1953-66 as a whole.
5. Comparative growth, various aspects U.S. economy, 1961-66.
•Former chairman, Council of Economic Advisers.
1026
1043
1043
1044
1044
1044
TH E
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
1967
ECONOMIC REPORT OF T H E PRESIDENT
1027
Price, profit, investment, and wage trends during current economic upturn.
Federal budget has shrunk relative to size of economy and needs, 1954-68.
Allocation of tax cuts, 1962-65: investment and consumption purposes.
1964 Tax Act, personal tax cuts.
Taxes paid as percent of income, United States, 1960.
Share of families in total family income by quintiles, 1947, 1953, 1960, and
1965.
Comparative trends in GNP and the fionfederally held money supply, 1955-66.
Relative trends in economic growth, unemployment, and prices, 1952-66.
During period 1929-66, most inflation due to war.
Rates of change in productivity, wages and salaries, total private nonfarm,
1947-66.
Ratio of volume of employment to physical volume of production.
Goals for 1970 and 1975, projected from actual levels, 1966.
Number in United States living in poverty, deprivation, comfort, and afflu
ence, 1964, and goals for 1970 and 1975.
Toward a Federal budget consistent with maximum employment and the
priorities of national public needs.
Goals for a Federal budget geared to economic growth and public needs.
C onference
on
E c o n o m ic P rogress
INTRODUCTION
Once again, I am deeply appreciative of the year-by-year oppor
tunity which the Joint Economic Committee has accorded me to com
ment upon the Economic Report of the President and the Annual
Report of the Council of Economic Advisers.
These two Reports are essentially consistent with each other. And
as the comprehensive Council’s Report provides the facts and eco
nomic analysis upon which the succinct President’s Report is based,
I shall address most of my comments to the Council’s Report. Toward
the end of my statement, I shall deal briefly with the President’s
Report.
In commenting upon the Council’s Report, I shall organize my
comments under each of the five chapter headings in that Report.
C h a p t e r I. E x t e n d i n g t h e R e c o r d o f P r o s p e r it y
I regard the Council’s entire appraisal of current and foreseeable
economic conditions as far too optimistic. Further, I find the
Council’s analysis weak, and its diagnoses off the mark.
Unemployment at 4 percent cannot be justified
The Report opens by hailing a full-time unemployment rate which
reached a 13-year low of 3.9 percent in 1966, and described this as
“essentially full-employment.” The “interim” target of 4 percent
which the Council set in early 1961 has thus become an ultimate goal.
I submit that unemployment in the neighborhood of 4 percent (full
time unemployment, as officially counted) is intolerably high, especially
because it necessarily means a full-time unemployment rate several
times as high among vulnerable groups; and especially when the
enormous burdens placed upon the American economy— both interna
tional and domestic— require that we marshal fully our productive
resources. Under current and forseeable circumstances, I deem full
time unemployment somewhat below 3 percent to be consistent with
maximum employment within the meaning of the Employment Act
of 1946. It would be still better to set a goal of 2 percent.
Moreover, a full-time unemployment rate in the neighborhood of
4 percent means a true level of unemployment in excess of 5y 2 percent.
This takes into account the full-time equivalent of part-time unem
ployment, and the concealed unemployment which results because the
scarcity of job opportunity prevents many from looking actively for
work, in which case they are not officially regarded as being in the
civilian labor force or unemployed. I think that the goal for the true
level of unemployment should be about 4 percent, and preferably
about 3 percent.
1028
THE
1967
ECONOMIC REPORT OF TH E PRESIDENT
1029
The Council's 4 percent economic-grow th goal is far too low
I reject entirely the Council’s thesis that 1966 was “in some respect
too big a year.” From first to fourth quarter 1966, the annual rate of
U .S. economic growth in real terms dropped sharply and dangerously
to 3.3 percent, after averaging 5.1 percent in real terms during 196266, and even that higher rate was not sufficient to bring us even
tolerably close to maximum employment and production. Conse
quently, I reject the Council’s support of the restraining policies
applied during 1966. Correspondingly, the Councils declaration of
determination to prevent “any further slowdown” misses the mark.
W e need immediate and vigorous measures to reverse the current trend
toward economic stagnation, and to accelerate greatly the rate of real
economic growth.
Indeed, the Council’s claims for a “ remarkable uninterrupted ex
pansion” from early 1961 to date are very excessive. A fter the 196061 recession, the upturn 1961-63 started rapidly and then slowed down
greatly, and, with only timid measures of stimulation being applied,
was mainly of an automatic or cyclical variety. Unemployment re
mained very high, and inadequate economic growth, if not stagnation,
marked the second half of this period. For these reasons, and also
because the massive tax reduction— the one really powerful stimula
tive measure applied 1961-67— was not enacted until 1964, it is ex
cessive to claim pridefully a sustained and satisfactory 6-year economic
advance from early 1961 forward.
In consequence of this massive tax reduction, the average annual
growth rate during 1963-66 was very much higher than the growth
rate during 1962-63, but not nearly high enough to restore maximum
employment and production. And while such a potent shot in the
arm as this tax reduction could not fail to stimulate the economy for a
time, the erroneous nature of the diagnosis and remedy (discussed
later on) led to another period of stagnation (as evidence by the very
growth rate from first to fourth quarter 1966, as cited above). In
creasing weaknesses have been appearing in many important sectors of
the economy, and the most responsible forecasts for 1967 are not
reassuring. Whether another recession is in the offing within a year
or so is not yet clear, although the threat is real. Viewing the most
recent 6 years as a whole, there has been no satisfactory solution of
the recurrent pattern of upturns, stagnation, and recessionary dangers
to which I have repeatedly called attention from 1953 forward before
this committee and elsewhere.
Under these circumstances, the Council’s conclusion that a 4-percent
growth rate would be satisfactory and even optimum for 1967 and for
the years immediately thereafter does not track at all. W ith produc
tivity advancing at about 3.5 percent annually and the labor force
growing at about 1.5-1.7 percent annually, we need an average annual
growth rate of at least 5 percent to hold unemployment stable (we
should not be misled by the concealed unemployment and the repressed
productivity growth rate which result when there is excessive economic
slack). And as of now, considering also the excess unemployment,
we need an average annual growth rate of about 6.3 percent to restore
maximum employment by early 1969.
1030
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
CoundVs twisted treatment of productivity issue
The Council’s belated recognition that producitvity gains in the
private economy during 1961-66 averaged annually 3.5 percent, and
even averaged annually 3.8 percent during 1961-64, vindicates fully
the position which I have taken throughout the years that this high
rate of productivity growth was in process. But the Council appears
by now to have become congenitally unable to look at the productivity
facts when it seeks to determine policies (such as the guideposts) or
to set goals (such as the current 4 percent economic growth goal).
For taking into account a labor force growth factor of even 1.5 per
cent, and without regard to reducing unemployment, the 4 percent
economic growth goal must assume a prospective productivity growth
rate of only about 2 ^ percent annually.
How the Council attempts to support a productivity growth rate
figure only somewhere in the neighborhood of 21/2 percent as a factor
in its economic growth rate objective is not made clear because it
cannot be made clear. I f the 2% percent productivity factor is de
rived from data indicating that the productivity growth rate during
1964-66 was very much lower than the 1961-66 annual average, then
the Council cannot explain why it has shifted from a “moving average”
to a 1- or 2-year figure in estimating productivity gains for purposes
of policy. Besides, the very most recent productivity estimates are
preliminary and subject to many uncertainties.
I do not agree at all with the Council’s view that a higher produc
tivity rate is feasible when the economy is moving from very slack
resource use to somewhat slack resource use than when the economy
is moving under conditions of somewhat slack resource use or the max
imum resource use intended by the Employment Act. Substantial
economic slack militates against efficient use of the employed labor
force; a more healthy economy, as experience demonstrates, should
improve efficiency and productivity. The reason why the economic
growth-rate potential is higher when there is large economic slack is
because there are more unused resources to draw upon, not because
the productivity growth potential is higher when there is large eco
nomic slack. I believe that the decline in the productivity growth
rate to just under 3 percent during 1965-66, if verified by the final
date, vindicates my position, because that decline occurred during a
period of slowdown m the rate of economic growth accompanied by
a slackening of capacity use in some important sectors.
As I have insisted many times before this committee and elsewhere,
the economic growth rate goal should factor in the potential produc
tivity growth rate and the potential growth rate in the civilian labor
force as these would be called forth by optimum demand. To relate
the ecnomic growth rate objective to the repressed productivity growth
rate and to the repressed growth rate in the civilian labor force as
affected by inadequate demand is to aggravate the difficulty of moving
to overcome it.
The Council’s statement as to the gap between actual and potential
GNP from 1958 to 1965 is a gross understatement, (1) because it is
predicated upon a productivity growth factor which is much too low,
a.nd a labor force growth rate factor which is also too low, and (2)
because the base year should be 1953 rather than 1958 (because the
pattern of inadequate growth started with 1953, not with 1957-58),
THE
1 9 6 7 ECONOMIC REPORT OF TH E PRESIDENT
1031
and thus the Council grossly underestimates the gap as of 1958. W e
have never returned to the 1947-53 growth rate trend line. The
Council’s estimate of no gap in 1966 is grossly erroneous for reasons
which I have already stated.
The combination of the estimated fiscal 1968 budget deficit and the
proposal for the 6 percent across-the-board tax increase, even allowing
for some loosening of monetary policy, will not provide enough net
stimulus to the economy in terms of the considerations which are set
forth above. My position is indeed reinforced by the fact that the
Council views with equanimity and even positive approval its esti
mated growth rate of about 4 percent, with full-time unemployment
estimated at 3.9 percent for 1967 as a whole.
Council?s erroneous 'position on fiscal-monetary umiw”
The Council’s recognition that the combination of fiscal and mone
tary policies have operated to produce many imbalances in relative
trends during 1966 is very belated recognition of the disequilibrium
which I have long insisted would result from the unwholesome nature
of the fiscal monetary measures. Further, the Council’s analysis at
this point is much too limited, in that it does not deal with the funda
mental issue of the relationship between investment in the plant and
equipment which add to our productivity capabilities and the demand
for ultimate products in the form of consumer outlays and public
outlays combined. The Council’s recognition that proposed policies
will hold the growth in consumer outlays and in disposable personal
income in 1967 somewhat below the gains in 1966 is in my view a
confession of the wrongful diagnosis of our needs and the consequent
inadequacies in actual and proposed national economic policies.
The Council’s very tardy (and still insufficient) recognition that
monetary policy has operated irrationally, in term of its relative
impact upon different parts of the economy, comports with what I
have been saying for many years. But the adverse impact upon resi
dential construction is not the only gross defect in the prevalent mone
tary policy. It prevents adequacy of credit on reasonable terms for
many parts of the economy which are moving too slowly and which
receive deficient incomes by all fair tests, while it does little to restrain
the excesses in other sectors of the economy which are not nearly so
dependent upon credit, if dependent upon it at all. Rising interest
rates during the past ten years have redistributed far more than 100
billion dollars of income from those who have too little to those who
should not receive this form of income supplementation.
The prevalent idea of a new product “mix,” in which fiscal policy
is tightened and money policy loosened, is in my view the ultimate in
confusion. When the economy is too slack, as is now the case, both
policies should be liberalized; when the economy is too tight, both
policies should be tightened. This is the proper way to have each
policy carry part of the load. I f there are two horses to pull a wagon,
the proper method is not to hitch them up to opposite ends of the
wagon and have them pull in opposite directions. The real problem,
thus far neglected, is that both fiscal policies and monetary policies
should be much more selective in their impact, and should serve to
improve equilibrium by restraining some parts of the economy and
simulating others. The excessively aggregative approach of the Coun
cil neglects this whole problem, and results from the Council’s failure
1032
THE
19 67
ECONOMIC REPORT OF THE PRESIDENT
to develop, as I have frequently urged, a long-range balance sheet of
product and income flows in the various sectors, so as to reveal what
types of corrective action are needed.
M y additional data
M y chart 1 depicts the inadequate nature of the economic advance
from 1953 and from 1961 forward, and portrays the effects of this
upon unemployment and upon the production gap. It thus helps to
dispel the unrestrained optimism and excessive claims in the Council’s
report.
M y chart 2 estimates the large national economic deficits during
1953-66, in consequence of the inadequate economic performance. I
have already set forth why the Council’s estimates as to the size of
the production gap are far too low.
Bearing directly upon why the Council’s estimates of our appro
priate growth potential have always been and still are far too low,
my chart 3 sets forth the trends in productivity for the entire private
economy, 1910-66, indicating the clear tendency toward a long-term
acceleration in the rate of productivity gains, except when these gains
are artificially repressed by recessionary or stagnation trends.
My chart 4 depicts a diagnosis which the Council has persistently
and egregiously neglected. This diagnosis shows clearly that the
core reason for economic instability and inadequate growth has been
the tendency during the upturn periods for the investment in plant
and equipment, which adds to our ability to produce, to outrun ulti
mate demand in the form of private consumer expenditures plus total
public outlays for goods and services. The alarmingly serious nature
of this trend from fourth quarter 1965 to fourth quarter 1966 is
depicted on this chart.
The Council’s forecasts that we now are experiencing a sharp decline
in the rate of investment growth is really an implied admission that
the excesses which have been aggravated by national economic policies
to date may now run into a reaction so severe as to repeat the processes
of stagnation and recession depicted on the chart. I have foretold
this from the moment when the massive tax reduction was first
proposed.
M y chart 5 carries this same thesis forward, by showing the com
parative growth rates in various aspects of the economy during 196166, and from fourth quarter 1965 to fourth quarter 1966. The chart
speaks for itself, without need for much additional comment. It is
worthwhile to point out, however, that the stabilization of corporate
profits from fourth quarter 1965 to fourth quarter 1966 is a stabiliza
tion of profits which are still dangerously high relative to other forms
of income.
My chart 6 carries this analysis still further by comparing price,
profit, investment, and wage trends during the current economic up
turn.
M y chart 7 depicts how the long-term shrinkage in the Federal
budget, relative to the size of the total economy and the priorities of
our nationwide needs, has contributed to the deficiency in public out
lays, the consequences of which I have set forth above.
M y chart 8, more relevant now than earlier in the light of additional
experience, shows how the tax cuts of 1962-65 were ill-designed to
encourage economic equilibrium, but instead exacerbated both the
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
1033
excesses in some sectors and the deficiencies in other sectors which
I have already pointed out.
My chart 9, also more relevant now than earlier in the light of
additional experience, shows how the 1964 personal tax cuts were
inequitable and reduced the progressive nature of the Federal tax
system, thus being unsound on economic grounds and indefensible on
social grounds.
My chart 10 illustrates that the unfortunate trends in Federal tax
policy are doubly unfortunate when viewed in the broader perspective
of the regressive and inequitable nature of the entire nationwide tax
burden, taking into account taxes of all types paid at all levels of
government.
My chart 11 reinforces the foregoing analysis by depicting the
maldistribution of income in the United States as of 1965. It also
shows that, in some respects, the maldistribution was worse in 1965
than in 1947.
My chart 12 shows how the errors in fiscal policy have been com
pounded by the sins in the prevalent monetary policy. The chart
shows that, during 1955-66 (going back to 1952 would further confirm
the picture), the average annual growth rate of only 2.1 percent in the
nonfederally held money supply was totally inadequate to support
optimum economic growth. It also shows the direct impact of the
periodic very sharp contractions in the growth rate of the money
supply upon the GNP growth rate. Exceptionally noteworthy is the
only 1.8-percent growth in the money supply during 1965-66, which in
itself indicates that the prevalent monetary policy bears a major
responsibility for the very sharp contraction in the U.S. economic
growth rate from first to fourth quarters 1966 and on into 1967, as
discussed above.
C h a p t e r II. P r ic e s a n d W a g e s i n 1966
The whole discussion in this chapter of the Council’s report, de
spite the display of statistics, strikes me as surprisingly shallow and
lacking in analytical discernment. The Council’s discussion does not
even raise most of the questions which ought to be raised and also
answered.
Deficiencies in GounciVs entire 'price analysis
The Council says that the recent advance in prices was due in large
measure to the acceleration of the growth in demand which began
in mid-1965, and to the particularly rapid increase in the output of
capital goods and defense products. But price-trend analysis needs
to be set in a very much longer-time perspective to be really mean
ingful. For example, how does the Council’s explanation of the
recent price changes square with the very serious price inflation
during 1955-58, when the U .S. economy was afflicted by stagnation
and recession?
Further, the sharp rise in industrial prices in many administered
price sectors might possibly be explained, but cannot be justified,, by
Tiigh or rising demand relative to productive capabilities. W hy
should administered price be raised, when profits even at existing
prices are soaring in consequence of higher demand and excessive
profit margins per unit?
75-314— 67— pt. 5-------3
1034
THE
196 7
ECONOMIC REPORT OF THE PRESIDENT
The price increases and excessive profits which have occurred recently m some of these administered price areas are in themselves a
manifestation of the woeful defects in the Council’s price-wage guideposts from the date of their inception. While considerably effective
pressures were exerted against some important rates of wage increases,
the application of the guideposts on the price side was mostly ineffec
tual from the beginning. No quantitative price guideposts were at
tempted with respect to those industrial sectors where the rates of
productivity advance inevitably and greatly exceeded wage-rate ad
vances, in consequence of the unrealistic nature of the guideposts
themselves.
Moreover, I have offered for many years an entirely different analy
sis of the inflationary problem. I have insisted that, in the long run,
prices tend to increase more rapidly under conditions of inadequate
economic growth and excessive idleness of manpower and other pro
ductive resources than under conditions of economic growth closer
to the optimum with less idle manpower and resources (short of the
many hypertensions during the World War I I and Korean war eras,
to which there have been no recent economic analogies).
The reason for this is that, in the administered price areas, there is
a palpable effort to attempt to compensate for inadequate volume
of business by price increases unjustified in terms of profit margins
per unit. My own analysis from 1953 forward bears this out, and it
is strikingly brought out by the reappearance of these price increases
during the most recent period, at the very time when the economic
growth rate was falling sharply, when weaknesses were appearing
in many sectors of the economy, and when optimism as to the economic
outlook was waning rapidly. These price increases have reflected the
desire to get while the getting is good.
The recent increases in farm price have reflected in part a temporary
trend toward a larger share of the national income for farmers, al
though still a woefully deficient share, and farm income is now de
teriorating again. At other levels, the increases in the price of food
have been due to some of the administered price increases to which I
have referred. They have been also due to the unwise national farm
policy, during many years, of pushing farm acreage and the farm
population drastically downward, failing to recognize (as I have re
peatedly pointed out) that this would confront us with serious short
ages when measured against the industrial and consumer demands
for farm products in a growing economy and a growing population,
plus the demands which would appear if we brought a nutritious and
balanced diet to the millions of American families who still do not
have it, plus the demands which would arise if we made enough of
our food available to the one-third of the world which is confronted
with actual or potential starvation.
The most rapid increases in consumer prices in the service areas
have been in the medical care and financial categories. The increases
in the financial category tie in with the indefensible monetary policy.
The increases in the medical care category are closely connected with
nationwide shortages of hospitals, doctors, nurses, and medical tech
nicians. These shortages have been aggravated by the unwillingness
to increase public outlays enough to meet the great priorities of our
domestic needs, a matter to which I have repeatedly called attention.
THE
1 96 7 ECONOMIC REPORT OF THE PRESIDENT
1035
Deficiencies in Council's treatment of wages and labor costs
The Council’s analysis of labor compenstion and labor costs is faulty
to the Nth degree. It compares changes in productivity or output with
money changes rather than real changes in average hourly compensa
tion, that is, without factoring in the rising cost of living. This is
not only social injustice; it is also economically unsound.
One of the major justfications for rough compatibility between in
creases in productivity and in wage rates is that this will enable the
purchasing power of individual workers to rise pro tanto with the
increase in productivity, and thus help to maintain a balance between
production capabilities and effective demand. For this purpose to
be achieved, it is manifest that real wage-rate gains rather than money
wage-rate gains are relevant.
The other reason for compatibility between productivity gains and
wage-rate gains is from the viewpoint of business costs. It is argued
that, if money wage rates rise more rapidly than productivity, profit
margins and profits will be unduly squeezed. But this argument has
little merit, either in logic or in observation, and almost none in recent
observation. When money wage rates rise more rapidly than real
wage rates in consequence of a cost-of-living adjustment for a rising
general price level, experience shows clearly that the rising general
price level, for many reasons, operates also to increase money profits,
and in fact to increase these sufficiently to expand per-unit profit
returns and to lead to excessive profits in the event of adequate volume
(and to militate against adequate profits only if sales volume is ad
versely affected by inadequate expansion of money wages, among other
factors).
Thus, to oppose cost-of-living adjustments after prices have risen
not only locks the door on workers after somebody else has done the
stealing; it also rewards those who have done the stealing. The
Council should stop and consider the extent to which its stubborn and
wrongful opposition to cost-of-living adjustments has contributed to
the gross imbalances within the economy during recent years and
even now.
Further, in the Council’s analysis of this whole problem, including
the problem of per-unit labor costs, relatively too much emphasis is
placed upon developments within the last year, and not enough rela
tive emphasis is placed upon longer-term trends (due to prevalent
policies) which are far more significant. Viewing the great lag in
wage-rate changes behind productivity gains from 1957 or from 1961
forward, it would be entirely healthy and desirable, as part of a neces
sary catching-up process, for real wage-rate gains to rise somewhat
more rapidly than productivity gains for a time.
The discussion of prices and the distribution of real income by the
Council takes the rather automatic position that no attempts by man
agement or labor to increase its relevant share can be for long success
ful. It is highly doubtful whether this is true. As my demonstrations
have shown, viewing the period from 1961 forward as a whole, man
agement’s share has been greatly increased at the expense of labor and
other consumers; this has been bad for the whole economy; and it has
been due in substantial measure to the price wage guideposts, the fiscal
and monetary policies, and other national economic policies.
In sober fact, the problem of devising national economic policies
which would bring income distribution more into accord with require
1036
the
1967
ECONOMIC REPORT OF THE PRESIDENT
ments for optimum economic growth, sustained maximum employ
ment and production, and social justice, is the core problem of rational
economic policy. The Council’s proud and continuous neglect of this
problem, under a claim of “neutralism,” thus neglects the core econom
ic problem. In reality, no powerful changes in key national economic
policies are “neutral.” They all serve to redistribute income pro
foundly, and the main question is whether they do so in sound or un
sound directions.
My additional data
Many of my charts, to which I have already referred, have a direct
bearing upon my immediately foregoing comments. In addition, my
chart 13 depicts the relative trends in economic growth, industrial
production, unemployment, and prices during 1952-1966. This chart
brings quantitative support to the theory of price change which I set
forth above in general terms. The failure of the Council of Economic
Advisers to undertake this kind of long-term analysis, whether or not
it would leak to exactly the same results as I have obtained, is a vital
gap in the work of the Council which should promptly be corrected.
The Council should also, instead of fanning the nres of excessive
preoccupation with the inflationary danger, take more trouble to point
out how remarkably stable the price level of the U.S. economy has
tended to be in the long run, except under wartime conditions of a
nature not now existent and not foreseeable in the context of the devel
opment of current economic policies. This is shown on my chart 14.
My chart 15 compares the rates of change in productivity and in
wage and salary rates in the total private nonfarm economy during
1947-1966. It depicts, from 1957 or 1961 forward, the serious and even
dangerous lag in wage-rate gains behind productivity gains. The
chronic imperviousness of the Council to this extremely important
problem is both inexplicable and indefensible.
C hapter III. M ain tain in g P rice S tability
R educing U nemployment
and
Stable prices is not the top priority
The very caption of this chapter is unfortunate. It erects into a
datum the unsavory proposition that maintaining price stability and
reducing unemployment are goals of the same nature and are of equal
importance; indeed, it seems to give higher priority to absolute price
stability. Reducing unemployment is an ultimate value goal, not only
for human and social reasons, but also because the larger output which
the reduced unemployment brings means larger capacity to lift living
standards and to service national priorities. Price stability, on the
other hand, is a means rather than an ultimate goal. It is desirable
only insofar as it advances the ultimate goals of growth, priorities, and
justice. Further, all our economic history shows that a stable price
level is not automatically conductive to these ulitmate goals. Except
for falling farm prices, the U.S. economy had a remarkably stable
price level during 1922-1929. And yet, within the environment of this
stable price level, there developed imbalances in incomes and economic
activities which brought on the Great Depression.
I have indicated earlier in my statement why empirical observation
does not support the conclusion that there is a direct correlation be
THE
196 7
ECONOMIC REPORT OF THE PRESIDENT
1037
tween the degree of price stability on the one side, and the amount
of slack resources on the other side. But even if there were that di
rect correlation, it is in my view monstrous to argue in effect that mil
lions of breadwinners and their families should bear the curse of un
employment in order that the comfortable, the affluent, and the rich
may be insured against the small marginal price advance at most which
might be attributed to efforts to bring about a lower level of unem
ployment. Surely, we have reached the state of economic knowledge
and social conscience where we can find fairer ways than this, and
more workable ways, of combating inflation.
In any event, the conclusion of the Council on the first page of this
chapter that 4-percent unemployment is some magical figure, in that
lower employment would ineluctably bring more price inflation, is a
declaratory judgment unsupported by evidence. As I have indicated
earlier, we faced the so-called paradox of very substantial price infla
tion during the 1957-58 recession, when full-time unemployment rose
to almost 7 percent.
The unwarranted bias of the Council on this subject is illustrated on
page 100 of this chapter, when it combines the statement that any
involuntary unemployment is too much with the statement that the
overwhelming majority of Americans would also say that any rise
in prices is too much. This really smacks of the disingenuous, be
cause the Council knows that any rise in price may not be too much, if
related to over valid objectives, and the Council also knows that no
body is arguing for eliminating all involuntary unemployment.
Deficiencies in OounciVs analysis of unemployment problem
The Council argues that the current unemployment is structural,
or due to a failure of the unemployed to match actual job requirements,
rather than being due to deficiencies in aggregate demand. This is
a far step backward from the Council’s earlier position.
The new position is entirely unsound. In the first place, World War
I I experience showed conclusively that recognition by the Nation of
the need to utilize the product of practically the entire labor force
led quickly to useful employment of those who somewhat earlier were
deemed structurally unfit. In the second place, analysis of the differ
ences in personal characteristics and capabilities between the employed
and the unemployed, when total unemployment is too high, does more
to explain why certain people have been selected for unemployment
than to explain the too high level of unemployment. It stands to rea
son, in an efficient industrial system, that those with relatively lesser
qualifications will be denied employment before those with relatively
higher qualifications. I f the full-time unemployment rate rose from
4 to 8 percent, the additional unemployment would strike those less
qualified than those who remained employed. This might help to
explain why they were selected for unemployment; it should not be
used to justify or rationalize the unemployment.
In the third place, and most important of all, no matter what may
be the personal characteristics of the unemployed, and no matter
what may be the best ways to get them employed, it is nonetheless true
that no unemployed person can become employed (without taking a
job away from someone else) without additional money being spent
to employ this person. And as total spending equates with GNP,
additional employment requires more aggregate demand; that is, a
1038
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
higher economic growth rate, by definition. I do not understand how
the Council has overlooked this obvious fact. Not a word of what I
have said argues against appropriate training programs.
Needed changes in the structure of demand
The top problem is not the structure of the unemployed, but rather
needed changes in the structure of total demand. The purely aggre
gative approach of the Council is erroneous, not only in refusing to
recognize that aggregate demand must expand faster to restore maxi
mum employment, but also in failing to recognize that every dollar
spent does not have the same impact upon stimulating employment.
I f production-distribution of one type of product increases by a?, and
productivity in the industry producing that product increases by
a?X2, there will be less employment despite the increase in dollar de
mand. The whole meaning of the new technology and automation
is that we need to restructure the composition of demand, so that more
of it will flow into those sectors where the unmet needs of the Nation
are so huge that to meet them effectively would call for larger in
creases in output in these sectors than the advance of technology and
productivity in these sectors.
The Council has appallingly neglected this whole problem. I f it
paid attention to this problem, it would soon see, among other things,
that the needed restructuring of demand along these lines would in
volve relatively more emphasis upon the public sector where so many
of the unmet needs are so huge. Thus, the very readjustments which
would be best from the viewpoint of the great national priorities and
from the viewpoint of social justice would also be best from the view
point of encouraging maximum employment and optimum economic
growth. The technological considerations which lead me to these con
clusions are clearly revealed on my chart 16.
For these reasons, while there is nothing wrong per se in the em
phasis which the Council places upon manpower training, it is an
exaggerated emphasis when unaccompanied by more fundamental
recognition of the points which I have made just above.
Deficiencies in GounciVs analysis of wage-price problems
The Council’s discussion of wage-price problems in this chapter is
freighted with all the errors which have characterized the Council’s
previous approaches to these same problems.
The Council is theretically correct in its argument that wage-rate
increases in each sector approximating the nationwide average of
productivity gains would be more equitably ideal than wage-rate in
creases in each sector geared to productivity gains in that sector. But
the Council has never come to grips with the point that this ideal
could be pursued in practical terms only if accompanied by a priceprofit policy and a tax policy which prevented the high-productivity
industries from reaping an unjust harvest from the guideposts for
mula. Such a course would also be necessary to help the wage earners
lower down, and other consumers, to get the benefit of the theoretically
equitable policy.
The Council has admitted all along that the attainment of this
policy would require very substantial price reductions in many sectors,
but the Council never established any quantitative or meaningful
guideposts for such price reductions. Worse still, the Council has
THE
196 7
ECONOMIC REPORT OF THE PRESIDENT
1039
equated wages with prices when, from the viewpoint of economic
balance and equity, wage trends should be more closely related to
profit trends. What meaningful standard for profits has the Council
ever attempted to set up ?
The Council’s examination of the effects of the guideposts to date
shows how utterly one-sided the Council’s approach is. It examines
closely the effects of the guideposts upon wage determinations, but
does not examine closely their effects upon profit trends. What kind
of economic analysis is this?
The Council then says, with a spurious showing of evenhanded
impartiality, that the consumer price rises have been due to failure
to observe the guideposts both by organized labor and by business.
Just what examples does the Council cite in support of the proposition
that cost push has justified the recent price increases and the profits
which they have brought ?
Then, the Council says that much of the rise in corporate profits
which has occurred would have occurred even if the guideposts had
been precisely followed. In view of the clear demonstration of how
far profit advances, and the investment stimulated thereby, have got
ten out of line with the rest of the economy in recent years, what
could be a better example of an admission by the Council that the
guideposts in the form written could not deal properly with this
problem ?
The Council then repeats its stubborn and wrongful objection to
allowance of cost-of-living increases in determining wage rates, al
though it is forced to admit that there will be some of this in 1967.
I have already stated fully above the economics of this issue.
Later on in the same chapter, the Council argument really runs
thus: I f wage earners get the wage-rate increases which are justified
by productivity gains, and if these wage-rate increases are also ad
justed to cost-of-living increases—and are also kept in line with
ability to pay—this will not do wage earners much good, and will do
the public much harm, because management will simply resort to still
higher prices. This is a highly circular argument which begs the
whole question. It is tantamount to saying that wage payments in
ratio to profits must remain too low in terms of the good of the
whole economy, and that the only choice is whether they remain
too low by virtue of inadequate wage-rate increases and stable prices,
or remain too low by virtue of wage-rate increases which would be
adequate except that they are followed by unwarranted price in
creases. This type of begging the question does not rise to the dignity
of responsible argument; it does not meet the national problem.
I f the Council wants to establish voluntary standards far pricewage profit behavior, it must deduce these standards from the kind
of long-range economic balance sheet which I have consistently ad
vocated. That is the analytical method used under conditions of fullscale war, and it is an analytical method essential at all times, even
though the current situation does not call for direct controls which
were needed during full-scale war.
The Council’s plea to industry to exercise price moderation is com
mendable, but it is a cry in the dark and does not compensate for the
Council’s errors of omission and commission, to which I have called
attention many times before.
1040
THE
1967
ECONOMIC REPORT OP THE PRESIDENT
C hapter IV. S elected U ses
of
E conomic G rowth
A good deal of what the Council says in this long chapter is un
objectionable, but it does not go nearly far enough. The chapter is
composed mostly of some generalities about what we can do with our
increasing wealth. Instead, the Council should long ago have made
a specific and quantified long-range budget of the great priorities o f
our national needs, and trained all national policies upon their attain
ment in adequate degree year by year, beginning at once.
Errors in CounciVs analysis of the poverty problem
The Council is in error in stating that most poor families are headed
by persons who cannot or should not be in the labor force, at least on
a full-time basis. I have estimated that 60 percent of all U.S. poverty
is directly attributable to unemployment, underemployment, parttime unemployment, and those employed full time or part time, but
at inadequate wages. The other 40 percent of the U.S. poor are in
groups who should not be within the employment stream. My pub
lished study for the Conference on Economic Progress, “ Progress or
Poverty,” develops this fully.
Inadequate stress upon social welfare programs
The Council’s approach to the dismal inadequacy in welfare and
social security programs at all levels is timid and inadequate. It goes
no further than to voice approval of current proposals for improve
ment which are seriously inadequate. I believe the time has come for
the Council to espouse—not merely refer to—a universal floor under
all incomes, that floor being designed to lift all Americans at least
above the poverty-income cellar.
What the Council says about education, health care, and the needs
of our cities, fails to rise to appropriate quantification of the magni
tudes of the problems, and consequently fails to rise to the required
policies.
What the council has to say about the regressive nature of our
nationwide tax system is true. Unfortunately, the Council did not
take account of these considerations in the tax reductions which it
has thus far proposed successfully, nor in those which it is now pro
posing for enactment in 1967.
Revenue-sharing with the States
The Council offers a rather ambivalent discussion of Walter W.
Heller’s proposal for Federal revenue-sharing with the States, without
standards or strings as to how these federally collected revenues are
to be spent by the States. I am against this proposal. We need more,
not less, purposefulness in the deployment of expenditures supported
by Federal taxation. And I can conceive nothing more inimical to
good government than that 50 State governments should spend with
out standards or strings a substantial part of what one Federal Gov
ernment collects. I am developing fully my opposition to this
revenue-sharing plan in some of my coming publications.
CounciVs persistent neglect of any satisfactory model for maximum
employment production, and purchasing power
The Council’s entire discussion in this chapter falls lamentably short
because it ignores what I regard to be the mandate of the Employment
,
THE
1 967
ECONOMIC REPORT OF THE PRESIDENT
1041
Act of 1946 to set both short-range and long-range goals for maximum
employment, production, and purchasing power; because it fails to
develop an equilibrium model on the product and income side; because
it fails, in the absence of such an equilibrium model, to deduce appro
priate national economic policies; and because it neglects specific
projections of the great priorities of our national needs and of policies
to meet these needs within the equilibrium model, and with justice to
all.
Without these efforts, I think that the Council’s long chapter IV
serves to create the impression that the Council is actually doing what
it really is not doing but should be doing. There is no reason w’hy, at
this late date, the Council should be so far behind what has been
done in this regard, during many years past, by the Rockefeller Re
ports on the National Economy, President Eisenhower’s Commission
on National Goals, the National Planning Association studies, and my
own studies for the Conference on Economic Progress.
My own projections for U.S. economic performamce
Merely as an indication of what can and should be done in this direc
tion, my chart 17 projects goals for U.S. economic and social develop
ment through 1970 and 1975, in the perspective of an equilibrium
model which I have usually called an American Economic Perform
ance Budget.
These interrelated goals are not excessive in their aggregates. They
contemplate an average annual U.S. economic growth rate in the
neighborhood of 5 percent after maximum employment production
and purchasing power are restored. This 5 percent rate, as I have
indicated earlier, is really rather conservative m view of our pressing
obligations, both domestic and international, and our current inability
to meet these adequately out of the current product. The 5 percent
average annual growth rate projection is somewhat lower than the
sum of the estimated average annual increase in the civilian labor
force and the estimated average annual increase in productivity in
the private economy during 1961-66. I f the growth rates in produc
tivity and in the civilian labor force in future fall below these esti
mates, it will be only because national economic policies which fail to
provide appropriate incentives to optimum economic growth repress
the actual growth rate in productivity and in the civilian labor force
far below the real potentials.
Further, it is dangerously nondynamic to assume that there are such
rigorous or mechanical limitations as those set forth above, with re
spect to growth in productivity and in the civilian labor force. Many
incentives, the most important of which is a maximum-employment
environment itself, can be brought to bear upon accelerating the
growth rate in the civilian labor force. Many incentives can and
should be used to accelerate productivity growth.
During World War II, we averaged annually an economic growth
rate of 9 percent in real terms. While it is true that in 1941 we had
a vast reservoir of unemployment to draw upon, this reservoir was
much smaller than the numbers drawn into the Armed Forces after
1941, and thus not available for the civilian labor force. While I
would not favor now the forced pressures which could, if need be, again
lift our average annual economic growth rate to anything approximat
1042
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
ing the 9 percent realized during World War II, I think that we should
really try to do considerably better than 5 percent. Of course, we must
pay in some ways for whatever high goals we set. But we also pay in
many ways, and we are paying heavily now, when our goals are too
low and our performance suffers accordingly. An average annual
growth rate ox 6 percent in real terms would in my view be none too
high, under the current and foreseeable burdens confronting us.
In any event, even if satisfied with the 5-percent average annual
growth rate which my chart 17 utilizes after maximum resource use is
attained, the chart is based upon a 6.3 percent growth rate until maxi
mum resource use is attained in early 1969, with 5 percent thereafter.
The Council’s espousal of the 4 percent average annual growth rate, as
I have shown in detail above, cannot be defended on any grounds.
Fortunately, an increasing number of outstanding economists are now
scoring the Council’s position, and indeed censuring it for under
estimating the needed growth rate all along.
My chart 18 sets forth entirely consistent, and therefore entirely fea
sible, goals for the liquidation of poverty in the United States.
And finally, my charts 19 and 20 set forth the composition of a pro
posed Federal budget, as an integral part of my “ American Economic
Performance Budget.” It is significant that these goals for the Fed
eral budget would result in a Federal budget smaller in ratio to total
national production in calendar 1975 than in fiscal 1968 (estimated).
This should dispose of any notion that we cannot meet the great prior
ity of our domestic needs without sacrifice of our international obliga
tions, or without distorting the relative responsibilities of private
enterprise, the States and localities, and the Federal Government.
I f the objectives which I have set forth are vigorously pursued and
substantially achieved—which is well within our potentials without ex
cessive strain—we can create an America by 1975 in which poverty will
have been virtually liquidated, without impairing income progress for
others; in which almost all of the one-fifth of our people who still live
in slums will have been rehoused, and our cities substantially renewed;
in which our obsolete transportation systems will have been restored;
in which adequate educational and health facilities, at costs within
their means, will be made available to all; in which the specially acute
tragedy of private poverty and public neglect in our rural areas will
have been substantially eradicated; and in which our natural resources
will have been properly conserved and replenished, with accent upon
extraction of the poisons from our airs and waters. My charts 19 and
20 show clearly how attainment of these goals would not impair—if
needed—very liberal allowances for expansion of Federal outlays for
defense, space, and international aid to underdeveloped countries.
C hapter V . G rowth
and
B alance
in the
W
orld
E conomy
The plea by the Council for more attention to the grievous problems
of the underdeveloped countries would be more persuasive, if accom
panied by assertion of the need for the United States to devote more
than an infinitesimal portion of its GNP to the economic assistance of
manifold kinds which these underdeveloped countries imperatively
and immediately need. This would do even more good than lecturing
these underdeveloped countries about changes they should make in
THE
1967 ECONOMIC REPORT OP THE PRESIDENT
1043
tlieir own policies, which impresses me as being both knowledgeable
and self-righteous in view of the dearth of more concrete assistance.
Kennedy Round
The reference by the Council to the Kennedy Round should recall
to attention how little has thus far been accomplished by the Trade
Act of 1962, for which (as I said at the time) exaggerated claims were
made.
Council's misplaced emphasis in re balance of payments
I disagree entirely with the Council’s whole approach to the bal
ance- of -payments problems, now and earlier. By definition, all coun
tries of the world cannot simultaneously have a favorable balance
of payments. Many countries desperately need, for their very sur
vival, to improve greatly their unfavorable balance-of-payments
position. The United States is in no such circumstance. To the
contrary, I believe that we should run, for many years ahead, a larger
unfavorable balance of payments than we have been running in re
cent years, with ever-increasing stress upon investment in the under
developed countries. Because the Council misinterprets this funda
mental goal, its entire analysis and policy recommendations fall short*
Even if I were wrong as to the desirability of the United States
increasing its unfavorable balance of payments, this much seems cer
tain : The Council’s long overemphasis upon the need to reduce thia
unfavorable balance, insofar as it has led the Council to sacrifice do
mestic employment and growth, has been utterly pennywise and
pound foolish. And the Council has even selected the wrong means
to achieve its own mistaken aims. To illustrate, differential interest
rates have not been the main explanation of the flow of investment
capital from the United States to developed countries overseas. One
of the main explanations, as I foretold, has been the fiscal policies
which yielded so much more to U.S. domestic investors than they
could use at home that they sought highly profitable investments
overseas. In addition, policies different from those recommended
by the Council, and more conducive to maximum employment and
production and optimum economic growth in the United States, would
have induced more investment capital to be used here—and without
relative overinvestment—than has actually been the case.
The gold supply of the world has been increasing at less than 1
percent a year, while monetary expansion needs to increase at 4 to
5 percent a year to support appropriate expansion of economic ac
tivity. This being the case, we should take gradual but firm steps
to disengage from the extent to which we tie our own credit struc
ture and our international economic and financial policies to the stock
of gold. We must gradually surmount this costly anachronism.
Beyond all this, if set forth in a proper manner, with due weight
to short-range and long-range factors, we are hardly running an un
favorable balance of payments even now.
The urgent need today is for a sufficient improvement in the in
ternational mechanism of finance and exchange to service these vari
ous considerations, somewhat along lines that the Federal Reserve
System was initially brought about improvements on the domestic
scene when first enacted. I am glad to note some improvement in
1044
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
the general thinking on this subject. But I believe that we have
dragged our feet too long, and are not yet moving forward with the
requisite degree of decisiveness and vigor. We cannot make this gain,
so long as we exaggerate the gold and balance-of-payments problems
to the extent that we are now doing, nor so long as we let these exag
gerations interfere with a domestic policy for optimum economic
growth and sustained maximum employment, production, and pur
chasing power.
COM M ENTS
UPON
THE
E CON OM IC
REPORT OF
THE
PRESIDEN T
As I said at the outset of my statement, there is no need for me to
comment extensively upon the Economic Report of the President, be
cause it is entirely consistent with the Annual Report of the Coun
cil of Economic Advisers, which I have treated in detail.
My exceptions to the President's Economic Report in brief
Briefly, I think that the Economic Report of the President is too
optimistic, and therefore stresses restraining rather than stimulative
measures; that it to a degree substitutes identification of all the things
we should be doing for actual dedication of our resources to doing
these things in adequate measure; and that it proposes postponement
to “ after Vietnam” of many things which we ought to be doing now,
which we cannot afford to postpone, and which are well within the
ambit of our current and growing resources, especially if we put first
things first. I do not think that the measures proposed are the best
road toward price stability, and that price stability is accorded too
high a priority relative to reduction of unemployment, accelerated
economic growth, and serving the priorities of our domestic needs.
I think that the balance-of-payments problem is also accorded too high
a priority for the same reasons.
The 6-percent tax increase is highly undesirable
As already stated, I am opposed to the proposal for a 6-percent sur
charge tax increase across the board. Tax increases are highly unde
sirable and risky in view of current and prospective economic condi
tions, assuming proposed levels of Federal outlays. I f tax increases
should prove necessary, and they would be necessary to support the
increases in Federal outlays which I deem to be of vital importance,
these tax increases should be along progressive lines. They should in
clude increases in the corporate income tax, and increases in the taxes
of upper middle and high-income families. The glaring tax loopholes
should be closed in any event, and I am dismayed by the lack of atten
tion to the whole problem and to other aspects of tax reform proposed,
but not achieved, in 1964.
The prime responsibility of the Council of Economic Advisers
In conclusion, I do not want to appear to be blaming the President
for any of what seem to me to be the major deficiencies in his Eco
nomic Report. I feel that President Johnson is making an inspiring
record of expanding the national identification of national respon
sibility. This is the greatest service that any President can render,
and I believe that President Johnson is doing this with superb courage
and discernment.
,
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
1045
I have long held that most of the blame for deficiencies in the
President’s economic program must be placed squarely upon the shoul
ders of the Council of Economic Advisers. It is true that the Presi
dent must and should make political decisions which may not be en
tirely in accord with the advice he receives from his experts. I also
agree—and I have had some experience on this point—that his experts
must in large measure shape what they present to the public in accord
with the policies of the President. All of this is entirely appropriate.
But I have an ever-increasing conviction that the President, the
Congress, and the people are being let down by the extent to which
the Council of Economic Advisers is doing so much less than it should,
and so much in the wrong direction, even within the allowable area of
its scope and discretion. The preponderance of the errors of omission
and commission embodied in the annual report of the Council, as I
have set them forth above, cannot possibly be attributed to any man
date from the President or to any restraints of the political environ
ment. The examples of this are too numerous to list. For one ex
ample : The Council is telling the President, he is not telling it, that
unemployment below 4 percent is necessarily inflationary, and that
a 4-percent economic growth rate is desirably high. If the Council
improved its own performance, the President would be in a better
position to weigh economic against political considerations. The
Council, in my view, is not sufficiently offering the President this
choice.
I believe that the Council has a leadership as well as a followship
role, and that it has moved too far toward guessing what is wanted
rather than asserting what is needed. I believe it has moved too far
in the direction of public relations, rather than struck a fair balance
between public relations and public responsibility. The Employment
Act offers the Council a unique opportunity in world history; that op
portunity, in my view, should be much more fully explored.
Additional note on U.S groioth rate 'potential
My estimate that the U.S. economy, without excessive strain, can
and should grow at an average annual rate of about 5-percent after
restoration of maximum resource use may be challenged on the ground
that the 3.5-percent average annual increase in productivity in the
total private economy during 1961-66, which (along with the
growth in the civilian labor force) yields my 5-percent estimate should
be reduced because it is frequently said that there is no increase in pro
ductivity among public employees. Thus, if there is no increase in the
productivity of public employees, it is argued that the 3.5 percent
productivity-gain figure is reduced to a considerably lower figure. I
do not accept the validity of this argument. I f public programs are
carried forward along the lines which I have recommended above,
these public programs should in many ways add more to the produc
tivity growth rate of the entire economy than are added by equivalent
outlays in other sectors. I f this be true, and I think that it is true,
then from year to year each hour of input in the public sector should
have as beneficial an effect upon productivity gains for the total econo
my as each hour of labor input in the private sector, even though for
technical reasons it is difficult to measure in a conventional way the
productivity gains in the public sector.
.
1046
THE
19 6 7
ECONOMIC REPORT OF THE PRESIDENT
It may also be argued that further reductions in the length of the
workweek, in accord with long-term trends, would reduce from 1.5-1.7percent to 1.2-1.4-percent the average annual increment in labor in
put. Granted that this is so (although it does not allow adequately
for the increased overtime which an optimum-growth environment
should bring about), I feel that the 5-percent average annual economic
growth rate goal is entirely moderate. For under conditions of reason
ably full resource use, as indicated on my chart 3, the average annual
gains in productivity in the entire private economy should accelerate
considerably above the 3.5-percent average annual rate of increase dur
ing 1960-66. And, as I have indicated in the body of my statement,
our domestic and international burdens require that we make special
efforts to induce optimum rates of growth both in productivity and in
the civilian labor force. My chart 1 certainly demonstrates that a 5percent average annual rate of growth, which we achieved during 194753 under conditions much less favorable in terms of technological
progress than those we now enjoy, is entirely feasible in the future,
after maximum resource use is restored.
Chert I
BASIC U.S. ECONOMIC TRENDS. 1953* 1966
ADEQUATE GROWTH HAS NOT BEEN RESTORED
Average Annual Growth Rates in GNP,|I965 Dollars
Period of
Peace and
Limited War
Post Great
Depression and
World War IE
Eras
Needed in
View of New
Technology
and Labor
Force Growth
Post Korean War
For Full
Recovery
6.3% Thereafter
4.5%
5.0%
4.6%
4.8%
3.5%
5.1%
y*
3.3%
2.4%
JH
1922-29 1947-50 1947-53
50%
IM
**;*
1966-196811968-1975
M Am UM EMPLOYMENT:,HAS M l BEEN RESTORED
Unemployment as Percent of Civilian Labor Force ^
Millions of Unemployed in Parentheses
True
Unemployment
(“ l ' Concealed
«/
5^.6^Unemployment =*
(3.2)
4.9%
Full-time
Equivalent of
Part-time Unemployment
(Full-time Unemployment
1953
1955
1957
1959
1961
1963
1964
1965
1966
MAXIMUM PRODUCTION HAS NOT BEEN RESTORED
Production"Gap'As Percent of Maximum Production
In Billions of 1965 Dollars in Parentheses
-/In deriving these percentages, the Civilian Labor Force is estimated as the officially reported
Civilian Labor Force plus concealed unemployment. Full-time unemployment of 2.9% and true
unemployment of 4 .1 % would be consistent with maximum employment.
^/Estimated as the difference between the officially reported Civilian Labor Force and its likely
size under conditions of maximum employment.
1047
1048
the
19 67 ECONOMIC REPORT OF THE PRESIDENT
LARGE NATIONAL ECONOMIC DEFICITS
DURING PERIOD 1953-1966
Dollar Items in i965 Dollars
TOTAL
NATIONAL
PRODUCTION
MAN YEARS
OF EMPLOYMENT
(GNP)
PRIVATE
BUSINESS
INVESTMENT
PRIVATE
AND PUBLIC
CONSUMPTION
(Inet. Net Foreign)
$ 7 2 0 Bil lion
Too Low
35 Million
Too Low
$135 Billion
Too Low
$ 5 8 5 Billion
Too Low
.THESE HAVE LED TO LARGE LOSSES
TO ALL ECONOMIC GROUPS
AVERAGE
FAMILY INCOME
FARM
OPERATORS'
NET INCOME
WAGES AND
SALARIES
UNINCORPORATED
BUSINESS AND
PROFESSIONAL
INCOME
P ljL J
I
$ 9 ,6 0 0
Too Low
t
$110 Billion
Too Low
$497Billion
Too Low
■'Includes personal consumption expenditures plus government (Federal,state,and local)
expenditures($535 and $ 5 0 billion,respectively)
$ 6 2 Billion
Too Low
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
TRENDS IN PRODUCTIVITY FOR THE
ENTIRE PRIVATE ECONOMY, 1910-1966
Average Annual Rate of Growth in Output per M an -ho ur
for the Entire Private Economy
THE- RECORD 1910-1966
INDICATINGA GENERALLYACCELERATINGPRODUCTIVITY
GROWTHRATE
19101920
19201930
19301940
19401950
19501955
19551960
19601966
THE POST-WORLD WAR IP RECORD
INDICATINGA CLOSE CO-RELATION BETWEEN
PRODUCTIVITY GROWTHRATE AND EXTENT OF
UTILIZATION OFAVAILABLE RESOURCES
3 .5 %
2.7%
1947-1953
Period of Reasonably
Full Employment
1953-1961
1961-1966
Period of Recessions
and Increasing
Economic Slack
Period of Economic
Upturn,but Still
Large Economic Slack
Source: Dept.of Labor estimates relating to man-hours worked (Establishment basis).
75—314— 67— pt. 5—t—4
1049
1050
THE
196 7
ECONOMIC REPORT OF THE PRESIDENT
Chort 4
INVESTMENT IN PLANT AND EQUIPMENT WAS
DEFICIENT. 1953-1966 AS A WHOLE
AVERAGE ANNUAL
DEFICIENCY
1953-1966
Billions of 1965 Dollars
!$ 4 .0
BUT INVESTMENT IN MEANS OF PRODUCTION
AT TIMES OUTRAN DEMAND;
HENCE INVESTMENT CUTS AND RECESSIONS
1V////A Investment in Plant and Equipment
^ s i Ultimate Demand: Total Private Consumption Expenditures Plus Total Public Outlays For Goods and Services
1st 3Qtrs.'55Ist3 Qtrs '57
"Boom"
3rdQtr.*573rdQtr'58
"Recession"
1st Half '591st Half *60
"Boom"
1st Half '601st Half *61 (
"Recession"
Up
12.4%
Up
9.5%
Up
2.7%
Up
2 .2 %
1st 0tr.'6l4thQtr.'66
"Boom"
Up
Up
1.7%
A
m
Up
Up
4.9%
1
Down
5.7%
1
Down
22.9%
AVERAGE ANNUAL RATES OF CHANGE
In Uniform Dollars
(Federal.State and local.
"Boom"
10.0%
Up
9.7%
2 .6%
4thQtr.'654th Qtr.'66
I
i
Up
3.0%
THE
1967 ECONOMIC REPORT OF THE PRESIDENT
1051
COMPARATIVE GROWTH IN VARIOUS ASPECTS OF
U.S. ECONOMY 1961-1966^
I uniform Dollars)
TOTAL NATIONAL
PRODUCTION (G.NJ?)
PRIVATE CONSUMER
SPENDING
Up
4.0%
Up
3.0%
4th Qtr 19654 th Qtr 1966
4th Qtr 19654th Qtr 1966
GOV'T. OUTLAYS FOR
GOODS AND SERVICES
PRIVATE INVESTMENT
IN PLANT AND EQUIPMENT
GROSS PRIVATE
INVESTMENT
(INC.NET FOREIGN)
1961-1966
4th Qtr 19654th Qtr 1966
CORPORATE PROFITS
(S IV A )
Up
65.8%
Up
22 .8 %
Up
10.4%
4th Qtr 19654th Qtr 1966
PERSONAL INTEREST
INCOME
4th Qtr 1966
PERSONAL DIVIDEND
INCOME
4th Qtr 19654th Qtr 1966
TRANSFER
PAYMENTS
Up
13.9%
Up
1.0 %
4th Qtr 19654th Qtr 1966
WAGES AND SALARIES
4th Qtr 19654th Qtr 1966
LABOR INCOME
4th Qtr 19654thQtr 1966
FARM PROPRIETORS'
NET INCOME
Up
29.6%
1
Up
Up
5.7%
4th Qtr 19654th Qtr 1966
4th Qtr 19654th Qtr 1966
4th Qtr 19654th Qtr 1966
r~ ~ i
Down
7.5%
-i/Based on preliminary data for fourth quarter 1966; corporate profits for fourth quarter 1966 estimated.
Source: Dept, of Commerce, Office of Business Economics and CEP.
1052
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
PRICE. PROFIT. INVESTMENT. AND WAGE
TRENDS DURING CURRENT ECONOMIC UPTURN
Rates of Change,1960-1966
i l l Prices-!/ f
j Profits after Taxes-57 I K
TOTAL
MANUFACTURING
investment in Plant and Equiwnent ^ I M
PETROLEUM
and COAL PRODUCTS
Wage Rates ^
CHEMICALS
and ALLIED PRODUCTS
UP
129.0%
UP
120.2%
UP
87.9%
UP
73.,5%
I 15.8%
up
UP
16.1%
UP
12. 1%
DOWN
0.2 %
DOWN
2.3%
ELECTRICAL
MACHINERY
IRON and STEEL
^ Data: U.S.Dept, of Labor, wholesale commodity price indexes.
Data: Federal Trade Commission-Securities and Exchange Commission.
Data:U.S. Dept, of Commerce and Securities and Exchange Commission|
& Data: U.S. Dept, of Labor, Bureau of Labor Statistics; Average hourly
earnings of production workers.
MOTOR VEHICLES
and EQUIPMENT
THE 196 7 ECONOMIC REPORT OP THE PRESIDENT
___________________________
.Chart 7____________________________________________________
FEDERAL BUDGET HAS SHRUNK RELATIVE
TO SIZE OF ECONOMY AND NEEDS, 1 9 5 4 -’68
Fiscal Years
BUDGET OUTLAYS AS PERCENT OF TOTAL NATIONAL PRODUCTION
Percent
-^Administration's proposed Budget as of January 1887; GNP estimated by Administration
at $810.0 biiiion as derived from Budget Document.
1053
1054
THE
19 67
ECONOMIC REPORT OF THE PRESIDENT
Chart 8
ALLOCATION OF TAX CUTS, 1962-1965:
INVESTMENT AND CONSUMPTION PURPOSES
(Billions of Dollars)
TOTAL TAX CUTS
ESTIMATED ALLOCATION
TO INVES TM ENT PURPOSES
ESTIMATED ALLOCATION
TO CONSUMPTION PURPOSES
19.2
'W >
EXCISE TAXCUTS,
1965
PERSONAL TAX
CUTS, 1964
10.6
PORTIONOF
EXCISETAX,
CUTS,I965^/
PORTIONOFEXCISE
TAXCUTS 19651/
PORTIONOF
PERSONALTAX
CUTS|I9642/
2.2
TAXCONCESSIONS
TOINVESTORS,
1965?/
TAXCONCESSIONS
TOINVESTORS,
19651/
CORPORATE TAX
CUT, 1964
CORPORATE TAX
CUT, 1964
J TAXCONCESSIONS
I 2.7 m TOINVESTORS,
H 19621/
PORTIONOF
PERSONALTAX
CUTSj 1964§/
PORTIONOF
PERSONALTAX
CUTSjl964§/
_ TAXCONCESSIONS
2.7 EH TOINVESTORS,
19621/
-^Through Congressional ft Executive Action
•£/ Through Executive Action
3 / Estimated portion of personal tax cut,for those with incomes of $10,000 and over,
which they would save for investment purposes.
fi/ Based on estimates of excise tax cuts passed on to consumers through price cuts.
■5/ Personal tax cuts for those with incomes under $10,000.
Estimated portion of personal tax cuts for those with incomes of $10,000 and over, which they would
spend for consumption.
Note: Estimates of excise tax reduction allocation by C.E.R.(amount might be passed on to
consumers by price reductions.)However, a large portion of this did not goto low income consumers.
THE
196 7 ECONOMIC BEPORT OF THE PRESIDENT
1055
_______________________________________ Chort 9___________________________________ .
1964 TAX ACT, PERSONAL TAX CUTS
Percent Tax Cut And Percent Gain In After-Tax Income
Married Couple With Two Children At Various Income Levels
$ 3 ,0 0 0 Income
$ 5 ,0 0 0 Income
^
$ 7 ,500 Income
100.0%
25.7%
20.0%
2.1%
1.6 %
Percent Gain In
After-Tax Income
Percent
Tax Cut
$10,000 Income
$15,000 Income
16.9%
15.7%
15.7%
$100,000 Income
$5Q 000 Income
15.1%
14.4%
3.8%
Percent Gain In
After-Tax Income
$ 2 0 0 ,0 0 0 Income
16.0%
16.0%
Percent
Tax Cut
Percent Gain In
After-Ta* Income
8.3%
6.2%
Percent Gain In
After-Tax Income
Percent
Tax Cut
.Percent Gain In
After-Tax Income
^/Estimated
Note: standard deductions for $ 3,000 income level. Typical itemized deductions
for other income levels.
Percent Gain In
After-Tax Income
$ 2 5 ,0 0 0 Income
Percent Gain In
After-Tax Income
Percent Gain In
After-Tax Income
•^Adjusted gross income levels.
Percent
Tax Cut
2.7%
2.3%
Percent
Tax Cut
Percent Gain In
After-Tax Income
1056
THE
19 67 ECONOMIC REPORT OF THE PRESIDENT
TAXES PAID AS % OF INCOME,U.S.,19 6 0
UNDER $ 2 ,0 0 0
$ 2 ,0 0 0 - $ 3 ,0 0 0
38.4%
38.2%
15.8%
14.8%
Total
Federal
Taxes
(excluding
Social
'Security)
State and
Local
Property
Taxes
S tate and
Local Sales
and Excise
Taxes
Total
Social
Security
Toxes
Total
Federal,
State,and
Local Taxes
Total
Federal
Taxes
(excluding
Social
Security)
$ 3 , 0 0 0 - $ 4 ,0 0 0
State and
Local
Properly
Taxes
State and
Local Sales
an j e xcise
iaxes
Total
Social
Security
Taxes
$ 4 ,0 0 0 - $ 5 ,0 0 0
41.4%
39.8%
17.3%
16.6%
Total
Federal
Toxes
(excluding
Social
Security)
Total
Federal,
State,and
Locol Taxes
State and
Local
Property
' Taxes
State and
Locol Sales
and Excise
Toxes
Total
Social
Security
Taxes
Total
Federal,
State, and
Locol Taxes
Total
Federal
Taxes
(excluding
Social
Security)
State and
Local
Property
Taxes
7.9%
93%
State and
Locol Sales
and Excise
Taxes
Total
Social
Security
Taxes
Total
Federal,
State,and
Local Taxes
$ 7 ,5 0 0 -$ 10,000-^
$ 5 , 0 0 0 - $ 7 ,5 0 0
32jO%
22.3%
14.5%
Total
Federol
Taxes
(excluding
Social
S ecurity)
State and State and
Total
Local
Local Sales Social
Property
and Excise
Security
Taxes Taxes
Taxes
Total
Federal,
State,ond
Local Taxes
Total
Federal
Taxes
(excluding
Social
Security)
State and
Local
Property
Taxes
State and
Local Sales
and Excise
Taxes
Total Federal, State,and Local Taxes for those with incomes $10,000 and over, 31.6%.
Source: Brookings Institution; income equals the Brookings study's " broad income concept"
plus personal transfer payments.
THE
196 7 ECONOMIC REPORT OF THE PRESIDENT
1057
________ ________________________________ Chart II___________________________________________________
SHARE OF FAMILIES IN TOTAL FAMILY INCOME
BY QUINTILES, 1947, 1953, I960,and 1965
( Money Income )
LOWEST SECOND MIDDLE FOURTH
FIFTH
FIFTH
FIFTH
FIFTH
FIFTH
FIFTH
SECOND MIDDLE
FIFTH
FIFTH
FOURTH
FIFTH
FIFTH
LOWEST SECOND MIDDLE FOURTH
FIFTH
FIFTH
FIFTH
FIFTH
FIFTH
FIFTH
FIFTH
1965
I8 6 0
LOWEST SECOND MIDDLE
FIFTH
FIFTH
FIFTH
LOWEST
FIFTH
FOURTH
FIFTH
FIFTH
FIFTH
SHARE OF UNATTACHED INDIVIDUALS IN TOTAL
INCOME OF UNATTACHED INDIV, BY QUINTILES,
1947. 1953. I960, and 1965
1953
LOWEST SECOND MIDDLE
FIFTH
FIFTH
FIFTH
FOURTH
FIFTH
FIFTH
FIFTH
LOWEST SECOND MIDDLE FOURTH
FIFTH
FIFTH
FIFTH
FIFTH
FIFTH
FIFTH
LOWEST SECOND MIDDLE FOURTH
FIFTH
FIFTH
FIFTH
FIFTH
FIFTH
FIFTH
LOWEST SECOND MIDDLE
FIFTH
FIFTH
FIFTH
FIFTH
FIFTH
Data: Bureau of the Census.
FOURTH
FIFTH
1058
THE
19 6 7
ECONOMIC REPORT OF THE PRESIDENT
Chart 12
COMPARATIVE TRENDS IN GNP AND THE
NON-FEDERALLY HELD MONEY SUPPLY, 1955-1966
ANNUAL GROWTH IN GNP
( Uniform 1965 dollars) <
DOWN
-0.9%
THE 196 7 ECONOMIC REPORT OF THE PRESIDENT
Chart 13
RELATIVE TRENDS IN ECONOMIC GROWTH
UNEMPLOYMENT, ft PRICES, 1952-1966
PRICES
m
Consumer Prices
H » Wholesale Prices
Industrial Prices
- 0.2%
1952-1955
1955-1958
1956-1958
1958-1960
1960-1966
1965-1966
Average Annual Rates of Change
PRODUCTION AND EMPLOYMENT
1
I Total National Production in 1965 Dollars, Average Annual Rates of Change
Industrial Production,Average Annual Rates of Change
Unemployment as Percent of Civilian Labor Force, Annual Averages*
1952-1955
1955-1958
1956-1958
1958-1960
1960-1966
1965-1966
These annual averages (as differentiated from the annual rates of change) are based on full-time officiallyreported unemployment measured against the officially reported Civilian Labor Force.
Source: Dept, of Labor, Dept, of Commerce, & Federal Reserve System.
1059
1060
THE
19 67 ECONOMIC REPORT OF THE PRESIDENT
DURING PERIOD & 2 9 -I9 6 6
MOST INFLATION DUE TO WAR
J Consumer Prices
! Wholesale Fvicss
B l l Industrial Prices
1 9 2 9 -1 9 6 6
Excluding I939J48
and 1950-51
>1
01%
1929-1966
1 9 3 9 -1 9 4 8
1950-1951
World Warn
and Reconversion
Peak Korean War
Inflation
™
■
-W h e averages are based upon application of an arithmetic method to the changes from year to year,
rather than upon comparisons of end years with allowances for compounding,in order to facilitate the
exclusions of certain years as shewn on the chart.
THE
1967 ECONOMIC REPORT OF THE PRESIDENT
1061
Chart 15=
RATES OF CHANGE IN PRODUCTIVITY
AND IN WAGES AND SALARIES
TOTAL PRIVATE NONFARM. 1947-1966
Average Annual Rates of Change, in Uniform Dollars
RATES OF CHANGE IN PRODUCTIVITY
AND IN WAGES AND SALARIES
TOTAL MANUFACTU RING,1947-1964^
Average Annual Rates of Change, in Uniform Dollars
1947-1964
1 9 57-1 964
1961-1964
3.9%
2.9%
Output
Wages
and
Salaries
Per Man-hour
Output
Wages
and
Salaries
Per Man-hour
Output
Wages
and
Salaries
Per Man-hour
Latest available year for comparable data.
Data: CEP estimates based on U.S. Dept, of Labor, Establishment data; data from U.S. Dept, of Commerce,Office of
Business Economics; and data from U.S. Dept, of Agriculture
1062
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
Chort 16
RATIO OF VOLUME OF EMPLOYMENT
TO PHYSICAL VOLUME OF PRODUCTION
(1 9 4 7 -1 9 4 9 Ratio of Employment to Production = 100)
MINING
AGRICULTURE
106.8
ALL MANUFACTURING
102.9
99.0
82.9
66.5
h S
85.9
82.2
75.0
65.6
52.9
43.3
38.8
S
1947
1952
1957 1966
IRON AND STEEL
99.7
1947
1952 1957 1966
ELECTRICAL MACHINERY
AND EQUIPMENT
82.5
P
1947 1952
NONELECTRICAL
MACHINERY & EQUIP.
83.3
80.6
85.4
70.8
62.6
1957 1966
1966
100.2
107.8
88.6
1947 1952 1957
54.0
1947
1952 1957 1966
RAILROADS1
MOTOR VEHICLES 8
OTHER TRANSPORTATION
EQUIPMENT
96.6
53.8
1947 1952
1957 1966
STONE,CLAY.AND
GLASS PRODUCTS
102.7
95.8
85.0
^
78.4
77.4
58.3
43.4
1947
1952 1957 1966
1947
J Ratio of volume of employment to traffic volume.
1952 1957 1966
1947 1952 1957 1966
THE
1 967 ECONOMIC REPORT OP THE PRESIDENT
1063
Chart 17
GOALS FOR 1970 AND 1975, PROJECTED
FROM ACTUAL LEVELS IN 1966
Dollar Figures in 1965 Dollars
EMPLOYMENT
(In millions of m an-years)
TRUE UNEMPLOYMENT
1970
1975
Down
Down
0.9
1.0
Up
7.2
TOTAL PRODUCTION
CONSUMER SPENDING
(in millions of m an-years)
* Up
$275 Billion
FULL-TIME RECORDED
UNEMPLOYMENT
1970
1975
Down
Down
0.4
0.6
1970
1975
FAMILY INCOME
WAGES and SALARIES
NET FARM INCOME
TRANSFER PAYMENTS
Up
a
Up
$14 Billion $ 21 Bllllon
Up
Up
$3 4 Billion
$ 19 Billion
(Average)
Up
$1,600
1970
BUSINESS and
PROFESSIONAL
INCOME
1975
GROSS PRIVATE
INVESTMENT
1970
RESIDENTIAL
STRUCTURES
(inc. Net Foreign)
1975
PUBLIC OUTLAYS FOR
GOODS and SERVICES
(Calendar Years)
FEDERAL
Up
Up
$ 13 Billion $ 23 Billion
1970
Up
$ 7 4 Billion
* ^
$16 Billion
Up
$32 Billion
Up
Up
$27 Billion
1970
1975
1975
STATE and LOCAL
Up
Up
$ 52 Billion
$22 Billion
1064
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
Chort 18
NUMBER IN U.S. LIVING IN POVERTY,
DEPRIVATION, COMFORT, AND AFFLUENCE.
1364, AND GOALS FOR 1970 AND 1975
Annual Money Incomes, Before Taxes, in 1964 Dollars
In Millions
J 1964, Actual
SH I 1970, Goal
1975, Goal
9.1
4.5
JLL 0 5
mm
U nder$3,l30^/
POVERTY
$3,1304,999
$5,000$7,000 8
6,999
over
DEPRIVATION- COMFORT a
DEPRIVATION COMFORT AFFLUENCE
UNATTACHED INfilVIDUALS IN
DEPRIVATION,COMFORT,8 AFFLUENCE
In Millions
In Millions
1964, Actual
1970, Goal
1975, Goal
7.0
5 .3
3.1
1.3
0 .4
Under $1,000
0.7
Under $1,5403/
POVERTY
$ 5 ,000 a
over
COMFORT a
DEPRIVATION COMFORT AFFLUENCE
$1,5402,499
$ 2 ,5 0 0 4,999
The average size of families living in poverty is 3.19, so 9.S million families involve about
29.0 million people.
^ The average size of families living in deprivation is about 3.5 .
•^ T h e figures of $3,130 and $1,540 are the most recent estimates of the Office of Economic
Opportunity with respect to the poverty-income ceiling.
Data: 1964:Office of Economic Opportunity and Bureau of the Census; Projections,"Freedom Budget".
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
TOWARD A FEDERAL BUDGET CONSISTENT
WITH MAXIMUM EMPLOYMENT AND THE
PRIORITIES OF NATIONAL PUBLIC NEEDS
Ail Figures in Billions of Fiscal 1968 Dollars
Interest
172.9
General Government^
Commerce
Natural Resources
Agriculture
Labor and Welfare^
Veterans
International Affairs
and Finance
Housing and Community
Development
National Defense
and Space Technology
1967
Estimated^
1968
Proposed &
1970
Goal
Fiscal Years
1975
Goal
Calendar Years
BURDEN OF FEDERAL OUTLAYS IN A
FULLY GROWING ECONOMY WOULD BE
LOWER THAN IN RECENT YEARS
'
TOTAL FEDERAL'OUTLAYS AS MERtENT OF I
TOTAL NATIONAL PRODUCTIONJ GNP) .
NATIONAL. DEBT A s PERCENT OF
TOTAL NATIONAL PRODUCTION (GNP)
(1954-1967; 1968, Fiscal Years;.
Goals 1970 S 1975, Calendar Years.)
(Calendar Years)
56.6%
(CONVENTIONAL BUDGET)
43.3%
38.0%
29.0%
17.2%
1O.f fo
1
1a.\%
,
1954-1967 1968
1970
Av. Annual Proposed Goal
Actual
1975
Goal
1953-1966
Av. Annual
Actual
1966
Actual
■ly Dollars of the purchasing power assumed in the President's Fiscal 1968 Budget.
£ / As of Budget Message of Jan. 24,1967.
Including education and health services.
•1/Including contingencies and less interfund transactions.
75-314— 67— p t {
1970
Goal
1975
Goal
1065
1066
the
196 7
ECONOMIC REPOET OF THE PRESIDENT
Chort 20
GOALS FOR FEDERAL BUDGET GEARED
TO ECONOMIC GROWTH AND P>UBLIC NEEDS
1968, fiscal y<sar; goals for 1970 and 1975, c<alendar years
All figures in fiscal 1968 dollars-
ALL FEDERAL OUTLAYS
/
NATIONAL DEFENSE,
SPACE TECHNOLOGY, 6
ALL INTERNATIONAL
ALL DOMESTIC
PROGRAMS
Y$>\
Year
Total
Expend.
(Bil.$)
Per
Capita
($)
1968^135.033 673.54
% of
GNP
(%
)
Year
Total
Expend.
(Bil.
Per
Capita
% of
GNP
$) ($)
(%
)
t , Total
e
Year
Expend.
(Bil.$)
i * %of
($) GNP
(%
)
Per
Capita
16.67
1968^85.584 426.89
10.57
1968^49.449
246.65
6.10
1970
150.600 726.48 15.69
1970 87.000 419.68
9.06
1970
63.600
306.80
6.63
1975
172.900 772.57
1975 97.400 435.21
7.95
1975
75.500 337.36
6.16
14.11
HOUSING AND
COMMUNITY
DEVELOPMENT
ECONOMIC OPPORTUNITY
PROGRAM
AGRICULTURE; AND
NATURAL RESOURCES
&
Year
Total
Expend.
(Bil.$)
Per
Capita
($)
% of
GNP
(%
)
Year
Total
Expend.
(Bil.$)
%
(%
)
Per
Capita
of
GNP
<$)
Year
Total
Expend.
(Bil.
Per
$) Capita
($)
%
of
GNP
(%)
1968^ 1.860
9.28
0.23
I96817 1.023
5.10
0.13
1968^ 6.691
33.37
0.82
1970
3.300
15.92
0.34
1970
3.700
17.85
0.39
1970
11.200
54.03
1.17
1975
4.500
20.11
0.37
1975
4.300
19.21
0.35
1975
13.400
59.87
1.09
HEALTH SERVICES
AND RESEARCH
EDUCATION
Year
Total
Expend.
(Bil.
Per
% of
$) Capita
($) GNP
(%
)
Year
Total
Expend.
(Bil. $)
Per
Capita
($)
PUBLIC ASSISTANCE;
LABOR, MANPOWER, AND ,
OTHER WELFARE SERVICES
^Expend,
Total
% of
GNP
(%)
Year
(Bil. $)
Per
Capita
($)
% of
GNP
(%)
1968^ 2.816
14.05
0.35
19684.767
23.78
0.59
1968^ 4.677
23.33
0.57
1970
7.600
36.66
0.79
1970
5.400
26.05
0.56
1970
8.400 40.52
0.88
1975
10.600 47.36
0.87
1975
7.900
35.30
0.64
1975
10.700 47.81
0.87
J Dollars of the purchasing power assumed in the President's Fiscal 1968 Bud<jet.
2/Administration's Proposed Budget as olFJan. 24,1967.
1975 of several billion dollars to ttle OASDHI to help
3/Includes a Federal contribution in 1970 cind
1.
J
increase benefit payments to the agec
F E D E R A L S T A T IS T IC S U S E R S ’ C O N F E R E N C E
This statement is submitted on behalf of the Federal Statistics
Users’ Conference which is an association of 158 member companies
and organizations comprised of business firms, labor unions, and non
profit research groups. The conference appreciates the opportunity to
express its views regarding certain statistical information contained
in the President’s Economic Report and the Report of his Council
of Economic Advisers. These statistics serve to measure growth,
progress and change in the economy, and aid in the making of policy
decisions and the implementation of economic programs. Our con
cern is with the adequacy, reliability, need, and potentials for im
provements in the statistical data so that policy decisions can be based
upon the best measures of the economy it is possible to obtain.
FSUC also has an interest in helping to raise the level of under
standing of the public policy issues involved in these documents and
assisting users of them in making more effective use of the information
they contain. To that end, it sponsored a one-day conference on Feb
ruary 14, on the President’s Economic Report and the Report of the
Council of Economic Advisers and on the Federal budget. Speakers
were Gardner Ackley, Chairman of the Council of Economic Advisers,
and Charles Schultze, Director of the Bureau of the Budget. More
than 140 members and guests attended the Conference.
We wish to comment briefly on the following:
W
age-P rice
“G uideposts”
In its comments to this committee 1 year ago, the Federal Statistics
Users’ Conference statement said:
The continuing debate about the Administration’s wage-price ‘guideposts’ is
unlikely to subside in the near future. While statistics on prices and measures
of productivity have been improved over the past several years, the current con
troversy focuses new attention on these data—on their accuracy and reliability.
These new concerns about price and productivity statistics suggest that it would
be timely for the Joint Economic Committee to examine again the factual under
pinnings for these important data—especially of those measures which do not
flow directly from collected factual materials.
FSUC does not repeat its comments in order to claim extraordinary
insight as to the heightened significance of a “ guidepost” policy, nor
even to reiterate that the statistical data underlying this policy are not
as adequate as they need be. Rather, the conference wishes to take a
look forward and share its concerns with the committee.
The conference, and its members, believes that one of the most
paramount economic problems facing the Nation is the continuance
of an effective wage-price stabilization policy. While the conference
claims no competence in the formulation of such policies, it does want
to emphasize that, in its opinion, a greater and more reliable fund of
data may well be necessary to provide more adequate “measuring
sticks” in the wage-price field.
1067
1068
THE
1 9 6 7 ECONOMIC REPORT OF THE PRESIDENT
But it now seems that key data provide an even less firm base than
previously.
P rice D ata
The weekly index of wholesale prices has been abandoned and an
early preliminary release of the monthly index has been substituted.
The conference cannot accept the latter as an adequate substitute.
There will still be a month’s time lapse between early releases. The
conference believes there is need for interim measures of price varia
tion. I f the old weekly index was inadequate, the conference recom
mends that it should be improved and be reinstated.
P roductivity D ata
While more data seem to be available on output per man-hour, their
effectiveness seems limited at this time. The Bureau of Labor Sta
tistics data based on establishments seem to be moving in an opposite
direction from those based on the Household Survey Data (CPS).
The conference would hope that these differences can be reconciled
and if necessary, resources be concentrated on a single measure that
would yield reliable results.
Furthermore, the conference would suggest that more frequently
wage-price decisions may well require productivity measures by major
industry. The conference recommends that initial steps be taken to
develop such measures as soon as possible.
GNP O utlook
In passing, the conference would note an item almost akin to style.
The conference was pleased with and impressed by the implications
of the use of a range in the Council of Economic Advisers forecast
of 1966 gross national product. It regretfully notes that the Council
has not chosen to specify the range within which its gross national
roduct estimate for 1967 may fall. In future reports, the conference
opes that the Council will be more willing to share its vast fund of
economic insight with those who must use such information for eco
nomic decisionmaking.
E
MACHINERY AND ALLIED PRODUCTS INSTITUTE
A T ypical C apital G oods U ser’ s V iew
of F ederal P olicy on the
I nvestment T ax C redit
The Machinery & Allied Products Institute (M API) and its af
filiate the Council for Technological Advancement appreciate the joint
committee’s invitation to present views on the 1967 Economic Report
of the President in connection with the current hearings. We shall
deal almost exclusively with tax policy, in particular the investment
tax credit which is now in suspension, and perhaps in an even more
uncertain state.
These views are offered in behalf of an organization which has not
only followed the development of the credit from its original concept
but has published extensive analyses of this part of the tax system.1
Moreover, our representation of the capital goods and allied equip
ment industries puts us in contact with producers of equipment, and
perhaps even more important, with the wide range of customer indus
tries served by capital goods producers. Further, our comments are
presented against the background of a statement submitted on March
31, 1966, to the Fiscal Policy Subcommittee of this joint committee
entitled “ The Investment Credit—The Case for Its Permanency,” and
statements to cognizant committees in connection with the credit sus
pension legislation.
May we summarize in advance the position of the institute with re
spect to the investment tax credit:
Suspension o f the investment credit was a serious mistake in national policy.
The credit was proposed and intended to be a permanent part of the federal ta x
structure. It is a long-range prerequisite to a modern and dynamic industrial
plant in this country. In the light o f its inherent characteristics and the longrange purpose o f its enactment, it is totally unsuitable fo r contracyclical manip
ulation ; indeed, its use fo r this purpose w ill have perverse effects on the economy
and w ill do a great deal more harm than good.
Corrective action with respect to the suspension o f the credit should be taken
by the Congress promptly. Government should not w ait for the reinstatement
date o f January 1, 1968, now provided in the statute. The most desirable meth
od o f reinstatement o f the credit is to repeal the suspension retroactively to the
beginning date o f the suspension period, October 10, 1966. In any event, the
reinstatement action must avoid the problem o f the “ air pocket” in equipment
orders. The reinstatement action on the credit should be considered on its own
merits and separate from the 6-percent surcharge proposal contained in the state
o f the Union message o f President Johnson.
Prodiicts^Institute
6 1*** Inve8tm €nt— Two A pproaches Compared, Machinery & Allied
M A P I7 l9 6 2 S*meW* In cen tives— The In vestm en t Credit and the New Depreciation System,
the Guideline D epred a tion System, and the
Sep?emberV19 66ent Credit as an E conom ic Control D evice,” Capital Goods Review No. 67,
Also see statements presented to Subcommittee on F iscal P olicy o f the Joint Con^reai«S S ?iiS P l110/ ? 10 c £ ” Mnltte%. M ar* 31, 1966, to Committee on Way® and Means, Sept? 14,
1966, and to Comm ittee on Finance, Oct. 5, 1966.
1069
1070
THE
1 9 6 7 ECONOMIC REPORT OF THE PRESIDENT
We are taking the liberty of casting the principal part of this
presentation in the form of a statement by a typical president of a
medium-sized manufacturing company which in terms of its own busi
ness is a substantial user2 of capital equipment. To pinpoint the
issues and the problems involved in the investment credit hiatus, this
typical business executive speaks for himself:
I am thoroughly confused, even mystified, by the chronology of events relat
ing to the investment tax credit as I recall its original enactment, its period of
application, its suspension, and the present state of limbo in which the credit
and my corporate planning are placed.
Capital expenditures plamvmg.—First let me say a few words about corporate
planning. I have been reading a great deal about government planning and
The New Economics, but I want to talk first about corporate planning, partic
ularly capital expenditure planning.
For many years capital expenditure planning on a long-term basis was almost
nonexistent in my business and in most such businesses. We shot from the
hip, moving our expenditure programs up and down in what economists would
call cyclical fashion and even the cycles were uneven. Then our thinking on
this subject began to sharpen and we tried to make longer-range plans. Capital
budgeting has been coming into its own and more raitionalized systems of invest
ment decision making have been devised and put to work. We also became
aware that business had a tendency to peak its capital commitments at the
wrong phase of the cycle and this phenomenon has been receiving attention in
corporate planning.
From a planning standpoint, therefore, my company, and I believe industry
at large, is committed to long-range capital expenditure planning and sophisti
cated investment analysis techniques. From a company standpoint, and also
from a national policy viewpoint, my company and industry in general are
convinced that domestic and international competition and the challenge of
technological advance require constant modernization of our capital stock on a
company, industry, and national basis. And above all, my company and other
organizations can't plan or expand on an off-and-on basis. As Mr. George
Champion, Chairman, The Chase Manhattan Bank, said in an address on Febru
ary 16, 1967: “The fact is that capital expenditures cannot be turned on and
off like a garden hose. They must flow in a continuous stream, if we are to keep
.our industrial plant and equipment up to date.”
Financial resources for corporate programs.—But determination, planning, and
investment analysis techniques are not ennough. Particularly for a company Qf
our size, financial resources are crucial. Cash flow is critical. After-tax profits
must be maximized to permit dynamic application of our new management tech
niques as to capital investment. In this respect, I don't and shouldn't look
primarily to government. Pre-tax profits are my responsibility and so it is with
all the ingredients of profit improvement: technological innnovation, sound man
ufacturing techniques, aggressive and imaginative marketing, etc. But—and
there is a big but—federal tax policy is government's responsibility and its effect
on my company's corporate planning and overall performance is most significant.
The aggregate effect on the economy takes on much greater importance.
Conception of the investment tax credit.—So, when even before President
Kennedy was inaugurated his advisers in the federal government began to talk
and think about capital investment and long-range planning relating thereto, I
was most encouraged. Then followed introduction of the investment credit
concept and proposed legislation. Some of my businness colleagues—I should say
many of them—were skeptical about the credit because they feared that it
would become a tool of federalized economic manipulation. I felt differently.
2 In order to understand the im pact o f the investm ent credit, one m ust examine the
equipment-using industries, acknow ledging o f course that the equipment producer is also
a user. T he main and broadest impact, o f the credit is on equipment users o r buyers. T he
credit affects practically every product-producing or service industry in the United! States
as well as the farm er. (N ote that the farm er is a prim e beneficiary.) T h e airlines. T he
steel industry. JThe autom obile industry;. (The textile industry. T h e railroads. T h e tool
and die makers. T he p lastics m anufacturer. T h e dairies. CThe newspapers. E tc. E tc.
The main thrust o f the crdeit is n ot to p rop up the m achinery-producing in d u stries; that
is purely incidental in terms o f objective and im pact. iThe real im pact spreads across the
whole e con om y ; as we have said, practically every p roduct o r service-producing industry
Including the farm er is the direct beneficiary when the credit is in effect.
THE
19 6 7 ECONOMIC REPORT OF THE PRESIDENT
1071
I was convinced that government meant what it said—that its proposal was
to be a permanent part of the tax structure—that it was dedicated to support
•through tax policies constant modernization of our industrial plant and
equipment.
I was gratified and reassured when this aspect of the investment credit was
clarified and the permanency feature documented by assurances to Congress
and the business community by top Administration spokesmen. Although there
were dissents, Congress acted in accordance with these assurances and the
investment tax credit was enacted in 1962.
The long-range commitment of government in respect to the credit was further
buttressed when in 1964 the credit statute was liberalized by the repeal of the
basis-adjustment amendment. This action further reassured me that govern
ment meant tvhat it said. And finally, government through official pronounce
ments frequently reminded me of the favorable effect the credit was having on
my company, industry, and the economy at large.
The shock of credit suspension.—Then in 1966 my company and its manage
ment—and I believe industry at large—were given a rude shock!! Suspension
of the credit was proposed and enacted. Some of the same spokesmen who
previously ridiculed the idea of manipulation of the credit for contracyclical
purposes now openly advocated it. Others who supported suspension didn’t fully
embrace contracyclical manipulation but said the suspension would be an extraor
dinary exception to the permanency commitment and at least implied that it
probably wouldn’t happen again.
My state of confusion and disappointment later was compounded by the im
pression created by the Administration that the January 1, 1968, reinstatement
date was not firm in the Administration’s mind; indeed, it was suggested that
maybe it ought to be moved forward or extended depending on economic events.
Further, being a practical businessman, I anticipated even greater uncertainty
as we moved closer to the reinstatement date. How should I plan in the face
of this uncertainty? And thinking beyond my problems, how could my suppliers
of equipment expect me and their other customers to act during the 6 to 9 month
period preceding the scheduled reinstatement date? Needless to say, these un
certainties had never plagued me when I looked upon the credit as a permanent
part of the Code.
Credit caught in vagaries of contracyclical manipulation.—But there seems to
be no end to my uncertainty or bafflement. For now I have been reading news
paper accounts—and some full texts—of statements made before this Committee
by Administration spokesmen and advisers such as Mr. Walter Heller, the for
mer Chairman of the Council of Economic Advisers. These statements clearly
give the impression that government is attempting to engage in “fine tuning” of
its tax and economic planning. Government wants to wait until midyear 1967
and see what the economic indicators say—or what they think they say. Gov
ernment might even wait longer. It is suggested by Mr. Heller that if inflation
resumes the credit should not be reinstated; and if operating rates in most in
dustries are well below preferred rates that might also be a negative signal
against credit reinstatement.
Impact on business psychology and corporate planning.—I must speak frankly
at this point. No businessman, including me, can operate effectively with this
kind of uncertainty. Corporate planning for capital investment is dealt a ter
ribly serious blow. Moreover, I can’t believe that government can expect to
execute such “fine tuning operations” successfully and with beneficial overall
results. I don’t believe that the record of the last 12 to 18 months evidences
that government economic planning is infallible; quite the contrary.
The proposed 6 percent surcharge.—But the picture is even more confused and
muddled and intelligent corporate planning is even more hobbled. In his State
of the Union Message, the President advocated a 6 percent surcharge on cor
porations and individuals. The Administration proposed midyear enactment on
the basis of an economic forecast that the first half would be soft as compared
with 1966 and that the second half would pick up to an important extent. This
is qualified by some current statements by government officials that in effect the
Administration wants to “stay loose,” is not irrevocably committed to the 6
percent surcharge, and will reexamine the question toward midyear. It is
understandable that government would want to take such a “second look” and
economic trends may preclude the tax increase. The sequence of events and
the atmosphere of economic manipulation, however, discourage sound corporate
planning to a serious degree.
1072
THE
196 7
ECONOMIC REPOR1? OF THE PRESIDENT
As I consider all of these developments I become greatly concerned. Above
all, everything points now to the Administration’s growing acceptance of the
credit as a contracyclical tool subject to in-and-out manipulation in complete
contradiction to the original commitment and understanding, not only with busi
ness but with the Congress. Mr. Heller said at one point in his testimony that
“for the long pull, this country is firmly committed to a high-investment policy
and the accompanying investment incentives.” He and the country can't have it
both ways. Government can’t embrace such a long-range, high-investment policy
and at the same time tamper or play with the incentive structure, including the
investment tax credit. Government may over-optimistically try to manipulate
its fine tuning control but if the power source of the instrument—in this case
capital investment—requires steady handling, the system won’t respond
dynamically.
The distinguished Chairman of the Committee on Ways and Means made a
relevant comment in a speech on February 12, 1967:
“Thus, while fiscal policy and economic policy may be, and frequently are,
shifting, and while these may involve variables which either may be planned
or unpremeditated, it is essential that tax policy have a certain degree of sta
bility. . . . Changes must not be made merely for the sake of change and not
merely just to experiment, but must on the contrary result from a demonstrable
need and be carefully and deliberately entered into.
“Let me give an example which the fine ladies in this audience may more read
ily appreciate than the rest of us. We must not let ourselves be put into the
position of raising and lowering the hemline of taxation, from season to season,
merely to make the merchandise more saleable. Ours must be a becoming utili
tarian style which will wear well and continue to serve its purpose in as attrac
tive a design as we are able to create.”
Credit not a practical contracyclical tool.—There is a further very important
factor. ^Knowing my business, disciplines imposed on my business by planning,
and having some knowledge about the investment credit and the serious cut-in
and cut-out problems if it is manipulated, I am convinced that this device does
not lend itself to contracyclical manipulation. Such use will do a great deal
more harm than good.
Current business indicators point down.—Now to a few practical observations.
While the indicators currently present a mixed picture, I am convinced that
probably in late 1966 industrial production passed its peak, The Administration
spokesmen seem to agree but in their guesses are optimistic about the second
half of 1967. As I read government statistics, machinery and equipment orders,
for example, are down 8 to 10 percent from 1966 midyear. There are a growing
number of weakening areas or soft spots clearly discernible to me in business.
It appears that new orders for machine tools crested and turned downward in
the last quarter of 1966; this trend is even more visible from the January 1967
figures just released by that industry.
Construction and construction equip
ment are off. Textiles have clearly softened and in turn are affecting textile
equipment. Automobiles and appliances are off. We are in for an inventory
adjustment The economy overall experienced a marked' slowdown in January
as indicated by a substantial decline in orders for new durable goods (seasonally
adjusted) to thier lowest levels since November 1965. New orders fell below
shipments by some $800 million. iThe overall index of industrial production
(seasonally adjusted) declined by a full point in January (1.2 points in the case
of manufacturing production). (Most if not all indicators are giving us warnings.
And if you want a classic example of the effect of suspension of the credit equip
ment orders, look at the drastic tailspin in railroad equipment orders. (See
Dr. Beryl W. Sprinkel’s testimony before this Committee and the detailed account
in The Wall Street Journal of February 27,1967.)
Now I am not unduly pessimistic. J don’t expect a deep recession but the
economy is experiencing an adjustment overall and so is my company.
Other important economic facts *—I am sure this Committee is aware of the
substantial labor cost increases which almost everyone concedes will be negotiated
in the current year 1967. Statements issuing from AFL-CIO meetings in Miami
confirm that labor is shooting high and will not be restrained by government
pleas for moderation. In a related sense, my attention has been called to the
fact that even before those increases take place, the index of labor cost per unit
of output in American industry has increased at an accelerated rate since
August 1966. The June-December increase in the index from 100.3 to 102.7 was
the sharpest increase for any six months since May-November 1959 and the
THE
1967 ECONOMIC REPORT OF THE PRESIDENT
1073
largest June-December rise since 1957. January data show a further sharp
increase in labor cost per unit of output. This overall trend is being felt in my
business.
The penalizing effect of the increase in labor cost per unit of output which will
be multiplied by the substantial cost increases to be negotiated in 1967 makes
absolutely crucial an accelerated rate of modernization of equipment in our plant.
Otherwise business will simply not be able to sustain the financial burden of
these increases. It is almost incongruous therefore in the face of these facts
to tolerate continued suspension of the investment tax credit.
When this consideration is coupled with the continued difficulty we are experi
encing in our international trade position and the obvious need to supply the
Vietnam war, isn’t it sensible to ask why we shouldn’t be considering special tax
incentives to increase productivity and modernize capacity instead of debating
whether the investment tax credit should be reinstated and when.
What to dot .— Suspension of the investment credit was a mistake. Business
makes mistakes and I believe government makes them too. This mistake could
turn into a blunder—aggravating and deepening a tumown, or converting a
leveling-off into a turndown.
I
believe this mistake should be corrected. Prompt action should be taken to
reinstate the investment tax credit and such action should be taken in a way
to avoid the problem of an air pocket of orders during the period immediately
preceding the reinstatement date. Clearly government should not wait for the
January 1, 1968, cut-in date now provided in the statute. Finally, the reinstate
ment action on the credit should be considered on its own merit and separate
from the 6 percent surcharge proposal.
Reinstatement of accelerated depreciation of real property.—Thus far, I have
commented exclusively on the question of the investment tax credit. At the time
the credit was suspended, on the recommendation of the Administration the
Congress also suspended the accelerated depreciation privileges for real property
granted under the 1954 Revenue Act. It has been my experience in business
that the tax code and tax administration are replete with tax discriminations
against industrial buildings. This discrimination is present in the depreciation
guidelines and in the basic statute on the investment tax credit.
The real target of the suspension of accelerated depreciation privileges was
speculative construction, not industrial buildings, and yet the suspension legisla
tion lumped all buildings and structures together. Obviously, corrective action
should be taken in this area also—and promptly.
Having attempted to present the views of a typical capital goods
user regarding the investment credit issue—views which, based on
Institute experience, discussions, and contacts, are believed to be a
composite ox capital goods opinion—we turn at this point in our state
ment to a technical amplification of certain points made above.
U n suitability
of
I nvestment C redit
for
M anipulative A ction
Since March 1966, before the Presidential proposal to suspend the
credit, as documented in our testimony before a subcommittee of this
committee, M API has underlined the reasons why the investment credit
is not an appropriate device for economic control or contracyclical
action.
A copy of that statement is attached. We reiterated these views
during hearings on H.R. 17607 and in September 1966, MAPI Re
search Director George Terborgh’s Capital Goods Review No. 67,
entitled “ The Investment Credit as an Economic Control Device,”
was published. A copjr of that review is attached. The problems
associated with suspension and restoration of the credit are spelled
out in this document. It is especially timely at this juncture to quote
the review discussion of certain of the perverse reactions which are
attendant to restoration of the credit:
The restoration of the credit after a period of suspension is equivalent to a
general price reduction of 7 percent. This is worth waiting for.
1074
THE
1 9 6 7 ECONOMIC REPORT OF THE PRESIDENT
With suspension to a time certain, there is bound to be a massive deferment
of commitments (if the cut-in is on a commitment basis) or of delivery instruc
tions (if it is on an instaUation basis) as the restoration date approaches. Un
less the cut-in comes at just the right moment (right with this deferment taken
into account), the resultant “air pocket” in equipment activity will be both un
timely and injurious. It will be the more so, of course, the later the cut-in
relative to the correct timing.
The chance that a predetermined suspension period will end at or near the
right time is very slim. So also is the chance that the preceding “air pocket”
in equipment activity will be rightly timed. There is grave risk that the inevit
able wait for restoration will serve to aggravate capital goods recessions.
O t h e r D if f ic u l t ie s i n “ F i n e T u n i n g ” T a x P l a n n i n g
C o n t r a c y c l ic a l P urposes
for
In respect to fine tuning, frequently economists in government who
theorize about the effect of tax actions and even legislators who act
on such recommendations are not fully aware of the practical effects
which flow from such legislation and beyond that of the sometimes
tortuous, cumbersome, and burdensome problems implicit in admin
istration and compliance. This is particularly true in the tax field
because of its inherent complexity and the validity of this conclusion
is further underlined by the delays, inconsistencies, and difficulties in
the administrative process.
Let us comment Tbriefly on some examples, all pertaining to the in
vestment tax credit. Business witnesses warned the Congress that sus
pension of the investment tax credit would involve terribly complex
and administrative burdens, one of these being administration o f the
provision in the suspension legislation referring to “ binding con
tracts.” The Congress recognized this difficulty and attempted to
lay down some guidelines in the congressional reports. Despite this
noble effort, the problems of interpretation and application that will
arise in this area are almost unlimited.
And to date no regulations have issued from the Treasury Depart
ment on the credit suspension. This is not intended to be a captious
comment with respect to the Treasury regulations staff. These are
difficult regulations to write and the Treasury has been carrying an
extraordinarily heavy workload. But the fact is that the regula
tions are not out yet and this is merely one indicator of the adminis
trative difficulties involved in the process.
An even more glaring example is the fact that regulations have
not yet been published under the recapture section of the investment
credit provisions of the original investment credit statute passed in
1962’. Once again a terribly complex problem, but the fact is that
the regulations are not yet available.
The purpose of these comments is to underline the proposition that
it is very difficult, if not impossible, to accurately forecast and prompt
ly achieve fine tuning effects when government is attempting to manip
ulate in the complex tax field a device like the investment tax credit
which simply does not lend itself to the process of manipulation.
A further example. By the time the Congress enacted the sus
pension provision, the capital goods boom had already crested. There
is pretty good evidence that the action intended by its proponents
to have impact in 1966 is having a delayed effect at the wrong time
with the wrong result as far as the general economic picture is
concerned.
THE
1 9 6 7 ECONOMIC REPORT OF THE PRESIDENT
1075
Taking the process in reverse, with respect to the January 1,1968,
reinstatement, not only will there be an air pocket in orders between
now and the January 1 date, but action will have to be taken prompt
ly to move that reinstatement date forward or the adverse elements
in the situation will feed on themselves. In a nutshell, the legislative
process involving enactment of tax laws, the administrative process
related to their administration, and the subleties of business manage
ment decisionmaking, particularly in the field of business investment
policy, do not lend themselves to so-called fine tuning objectives of
government planning.
I nvestment C redit S uspension S eriously A ggravates A dverse
I mpact of O ther T a x D evelopments
A s important as the impact of the suspension of the investment tax
credit is by itself, the severity of this action becomes even more im
portant in the light of related tax developments.
Corporate depreciation accruals.—Particularly with regard to cap
ital expenditures, one should examine the present posture of corporate
depreciation policy in the United States. The institute has been a
close student of depreciation policy for many years. It is clear that
we are now in a period characterized by a fading effect of tax de
preciation accruals on corporate sources of funds and on economic
trends. In a study on this subject, entitled “ The Fading Boom in
Corporate Tax Depreciation,” by George Terborgh, the following
conclusion was reached:
The great postwar surge of corporate tax depreciation is over. From now on,
the increase in accruals will be more closely geared to the long-run growth trend
of corporate capital expenditures.
There is considerable reason to believe, moreover, that the rate of increase
will actually fall below this growth trend. The future of corporate capital
expenditures is of course unpredictable, but if they rise over the next decade
at the average rate of the past 15 years (about 5.5 percent per annum), a short
fall of depreciation growth seems probable. The probability arises principally
from the prospective fadeout of the relative net benefits from the accelerated
writeoff methods of the 1954 Code and from the guideline-life system.
The reserve-ratio test.—Moreover, the depreciation guideline sys
tem is hobbled by an administratively unworkable and technically
deficient reserve-ratio test. Because of some relief measures taken
by the Treasury Department, this test has not yet begun to bite seri
ously. But when the test again becomes fully effective it may sub
stantially limit the favorable effect of the depreciation guidelines.
For the long pull, this situation as to the reserve-ratio test should be
corrected administratively or by legislation if necessary—a subject
worthy of extensive treatment on its own merits. Here we refer to
it primarily to indicate that there are problems other than the invest
ment credit issue which affect the health of plant and equipment in
the United States.
Contraryclical tax action and leadtime.—Moving beyond the in
vestment tax credit as such, the serious problems o f leadtime in con
nection with the manipulation of personal and corporate income taxes
received attention in M API Capital Goods Review No. 68. The con
clusion from that Eeview is quoted below:
We are interested here in the technical aspects of corporate and personal in
come taxes as instruments of contracyclical action, not in their political aspects.
We are glad to leave the latter to politicians.
1076
the
1967
ECONOMIC REPORT OF THE PRESIDENT
From a technical standpoint, it is evident that the personal income tax offers
distinct advantages. In view of the recognition and legislative lags, of which
we spoke earlier, it is highly probable that contracyclical tax action will be taken
late—at least in relation to the optimal timing. It can normally be expected to
await the actual realization of the conditions it is intended to combat. Under
these circumstances there are obvious gains from the use of a tax instrument
that minimizes the response lag.
Since it takes several months for corporate tax changes to generate a sub
stantial production response in the capital goods area, and the better part of
a year for a complete response, these changes should lead by a substantial in
terval the attainment of the target conditions. If they do not—and there is
practically no chance they will—there is considerable risk that the impact will
come too late.
This may not be serious in the case of stimulative action (there should be
time to turn around before the next capital goods boom), but it certainly can be
so when the action is restrictive. If it comes in the mature phase of a boom,
when capital goods commitments have started down spontaneously or are about
to do so, it will only aggravate the subsequent decline in production. Even if
the action is reversed as soon as the decline becomes evident (and this is un
likely), it is bound to be too late to prevent unnecessary liquidation.
The moral of this discourse, at the very least, is that contracyclical tax action
should not be employed without careful regard for the lead time involved.
It should be conceded th^t the administration apparently views its
6 percent surcharge recommendation as a tax to finance the Vietnam
war and contain the budget deficit, and perhaps only secondarily in
a contracyclical context. However, the effects of such tax action on
the economic picture cannot be ignored and we are sure the adminis
tration will weight economic indicators heavily in its final judgment
on whether to push for the 6-percent surcharge.
The prospect of aggravating a capital goods decline and perhaps
a general recession is therefore a very real problem.
The whole is greater than the sum of the parts.—Turning to more
general tax questions, either deliberately or by happenstance, govern
ment takes tax actions on a piecemeal basis. This blurs the effect on
the viability and resources of business. Some of these actions are quite
significant by themselves, but cumulatively they take on an even more
deadly significance. It is frequently overlooked in this connection
that, for example, a further social security tax rate increase went into
effect on January 1, 1967, the new rate being 4.4 percent each for
employees and employers and further increases are already scheduled
by law. In addition, it is generally conceded that a substantial rate
increase and/or enlargement of base will be enacted by the Congress
in response to the President’s recommendations made in January. It
clearly is illusory to treat the social security tax as anything but a part
of our total tax burden.
This committee is of course familiar with the substantial accelera
tion of corporate income tax payments so that in 1967 under the law
passed in 1966 corporations are required to be on a current basis,
paying taxes quarterly against an estimate for the current calendar
year. Now the President proposes an increase from 70 to 80 percent
in the relationship the corporation’s estimated tax for any year must
bear to its final tax liability. In an action with similar effect, in 1966
corporations were required to pay over to the Government on a semi
monthly basis rather than a monthly basis withheld employee income
taxes and social security taxes. Other proposals such as the question
of integration of pension plans with social security, an increase in
the costs of the unemployment compensation system, and of course
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
1077
the 6-percent surcharge, would further impinge on the ability of
American business to operate in a dynamic fashion, to provide jobs,
and to maintain a strong industrial base in this country.
The point of this broader review is to emphasize to the committee
that the action to suspend the investment tax credit, and the present
hiatus with regard to its status and the uncertainty as to reinstate
ment, take 011 even more serious implications when viewed in the light
of other developments limiting the resources, the flexibility, and the
strength of business.
S p e c i f ic R
e c o m m e n d a t io n s a s to
C r e d it R
e in s t a t e m e n t
We have suggested above that the credit should be promptly re
instated; Government should not wait for the January 1,1968, cut-in
date, action should be taken as to the credit on its own merits and
separate from congressional consideration of the 6-percent surcharge,
if indeed that surcharge should be considered at all.
Turning to the latter point first, as we have repeatedly pointed out,
the investment credit was proposed and enacted as a permanent part
of the tax structure to facilitate long-term growth of the economy.
It does not lend itself to contracyclical manipulation. It should be
treated separately from any rate changes to meet war or other emer
gency conditions and should be undertaken on its own merits. I f
there are political problems involved in such separate treatment we
are sure the administration has the courage and statesmanship to face
up to such political complications.
We should not adhere to the January 1 reinstatement date for
several reasons. It is our strong feeling that suspension was a mis
take in the first place; in correcting that error there is no point in
waiting for the present statutory reinstatement date. Furthermore,
economic indicators point to the need for immediate rather than
delayed action.
Finally, as to the mechanics of the reinstatement, there are several
alternatives, but only one clear-cut practical solution. In the spirit
of full correction of a mistake and in view of administrative difficulties
in merely moving the suspension date forward, the suspension should
be retroactively revoked to the original suspension date, October 10,
1966. Moving the date forward will merely retime the administrative
problems of restoration including the air pocket in new orders. Other
alternatives such as provision for partial retroactivity or the imme
diate termination of suspension are conceivable. The latter would
call for an earlier reinstatement date such as the date of introduction
of a bill or an earlier date set forth in the bill itself. But this tech
nique is not as clean and forthright as complete and retroactive nega
tion of the suspension back to October 10, 1966. Further, if the
administration should immediately make a recommendation in line
with our suggestion, even the fastest possible congressional action will
involve some delay; and every day’s delay compounds the problem and
the economic risk.
This concludes the comments of the Institute to the Joint Congres
sional Economic Committee with particular reference to the invest
ment tax credit, its suspension, and reinstatement. In a separate
presentation, M API offers some general comments on certain other
1078
THE
1 9 6 7 ECONOMIC REPORT OF THE PRESIDENT
economic issues including (1) government intervention in business
decisions-affecting private investment abroad and (2) trends in social
security policy including proposals regarding integration of pension
plans with social security. These are separately fued because of the
concentration of our principal statement on the investment tax credit.
THE INVESTMENT CREDIT—THE CASE FOR ITS PERMANENCY*
By
C h a r le s
S te w a rt,
P r e s id e n t
We appreciate the opportunity extended by your letter of March 11, 1966
to present the views of the Machinery and Allied Products Institute and our
affiliate, the Council for Technological Advancement, on the issues and problems
involved in alternative approaches to short-run economic stabilization. Our
comments will be directed to the role of the investment credit in the economy
and to a consideration of its appropriateness as a countercyclical device. The
reason for this concentration is threefold:
1. We believe the Investment tax credit as applicable to productive equipment
was an imaginative and sound proposal. Further, we believe the credit has
worked and has proven its merits as a permanent part of our tax structure.
2. The investment credit is the subject of one of the recommendations of
the full Joint Economic Committee in its 1966 Joint Economic Report. To wit:
“We should immediately suspend the 7-percent investment credit provision in
view of the extraordinary exuberance indicated by investment programs. This
is one of the major inflationary threats of this year. This action should be
accompanied by a provision that the 7-percent credit would go back into effect
at a fixed future date unless Congress acts to extend the <suspension.”
3. As a national organization representing the capital goods and allied equip
ment industries, the Institute speaks on behalf of firms who have the unusual
vantage point of being at one and the same time both the producers and major
users of the productive equipment subject to the investment tax credit. This
vantage point also includes familiarity with the impact of the credit on the
wide range of customer industries served by capital goods producers. Finally,
from the original conception of the credit, the Institute has studied it closely.
We turn first to a brief discussion of the investment credit in relation to the
goals of our economy.
G oals— O n e T
hem e
W
it h
D
if f e r e n t
A
rrangem ents
After twenty years under the Employment Act of 1946 its goals of “maximum
employment, production, and purchasing power” have come to be generally
interpreted as full employment, economic growth, price stability, and balance
of payments equilibrium. iSince it is impossible to maximize everything at once—
and since conditions change as well—the individual goals have been given differ
ent priorities at different times. Currently, the goal of stability is receiving the
most attention and, becauses of this, there is a strong tendency to analyze and
pass judgment upon a particular measure only in terms of its contribution (or
lack of it) to this one goal. We make two observations in this connection:
1. There is a great danger that in attempting to avoid inflation and maximize
price stability we will sacrifice the progress we have made in achieving present
levesl of full employment, economic growth, and balance of payments equilib
rium.
2. The investment credit has played—and can continue to play—a major role
in achieving the essential economic goals of full employment, economic growth,
and balance of payments equilibrium. Further, it is not without merit in its
contribution to reasonable price stability as well.
T
he
P
o s it iv e
R
ole of t h e
I n v e s t m e n t C r e d it
The rationale of the credit.—In the current dialogue on the investment credit
it is frequently overlooked that there was a basic and long-run consideration in
enacting the investment credit upon the recommendation of President Kennedy.
.♦Statement presented by M achinery and A llied Products Institute and Council for Tech
nological Advancem ent to Subcom m ittee on F iscal P olicy o f the Joint Congressional E co
nom ic Committee in Connection w ith H earings on Short-Run Stabilization T ax Changes,
M arch 31, 1966.
® ’
1079
1080
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
This was brought out at the time by then Secretary of the Treasury Dillon in
testimony before the House Ways and Means Committee: 1
“As we look back over the past century we see that our record of economic
growth has been unmatched anywhere in the world. But of late we have fallen
behind. . . . In the last five years Western Europe has grown at double or
triple our recent rate and Japan has grown even faster. While there is some
debate as to the precise annual growth rate of the Soviet economy, CIA esti
mates that their GNP grew at a rate of 7 percent in the 50’s. Clearly, we must
improve our performance, otherwise we cannot maintain our national aspirations.
The pressing task before us, then, is to restore the vigor of our economy and to
return to our traditionally high rate of economic expansion and growth. I am
confident this can be accomplished. But it will require a major effort by all of us.
“I fc^ve been impressed during recent travels abroad by the great progress
our friends overseas have made in reconstructing their economies since World
War II and by the highly modern and efficient plants they now have at their
disposal. . . . All the information we have indicates that their plant and equip
ment are considerably younger than ours. Although this difference reflects the
rebuilding of the shattered European economies, I think it is important to em
phasize that It was due in good part to the vigorous policies of the European
governments. Tax incentives for investment played a significant role, including
accelerated depreciation, initial allowances and investment credits.”
This same point was made even more directly in the statement of the Council
of Economic Advisers before the Joint Economic Committee: 2
“Measures to stimulate business investment directly will contribute to our
recovery from the present recession, but that is not their main purpose. All
who have confidence in the American economy must look ahead to the day when
the slack will be taken up and high levels of output and employment will again
be the rule. The full benefit of our decision to supplement increases in consumer
demand now with a higher rate of capital expansion and modernization will then
be realized.”
The message is clear. There are long-run advantages to the investment credit
for productive equipment that outweigh any use it might have as a device to
offset cyclical changes in the economy. What are these advantages?
The case for the credit.—In essence, the investment tax credit is vital to
economic health in that it provides an incentive to continued growth of the
nation’s productive capacity and the modernization and replacement of its exist
ing equipment. In so doing it provides the assurance the economy can—
1. Provide the goods necessary to meet its domestic needs—civilian and
defense—and, in so doing, combat inflation;
2. Provide the additional jobs and equipment required by an expanding
labor force; 8
3. Enable the economy to provide wage increases in accordance with
productivity without inducing price increases;
4. Fulfill our international obligations; and
5. Meet the competition for world markets and thus contribute to the
solution of our balance of payments problem.
To make its proper contribution to the performance of these 'tasks, the invest
ment credit should be—as it was originally considered to be—a permanent part
of our tax structure. To convert the credit to meet the requirements of a coun
tercyclical tool—i.e., that it be used on an on-again, off-again basis—would run
the risk of sacrificing its effectiveness in fulfilling the vital goals for which it is
uniquely designed. But even assuming that serious consideration should be
given to its use as a countercyclical tool, how will the credit function in that role ?
T h e C r e d it a s a C o u n t e r c y c l ic a l T ool
It is generally agreed that the criteria that should be met by any tax used
as a countercyclical tool include the following: (1) it must be promptly effective
and its economic results consistent with desired effects; (2) it must be equitable;
and (3) it must not create uncertainty in business planning, investment, and out
put. We conclude that the investment tax credit fails on all three grounds and
as we understand Assistant Secretary of the Treasury Surrey’s testimony before
this Subcommittee on March 30, he makes the same judgment.
1“President’s 1961 Tax Recommendations,” 87th Cong., let Sess., Mav 3 1961 dd 21 22
1“The American Economy in 1961: Problems and Policies,” March 6, 1961 d 49 ’
* Capital Goods Review No. 01, “ Labor Force Growth and Business Capital Formation ”
MAPI, March 1965.
’
THE 196 7 ECONOMIC REPORT OF THE PRESIDENT
1081
Delayed effects.—Uncfer present circumstances, there is an average lag of nine
or ten months between the go-ahead decision (appropriation or authorization)
and the installation4 of credit-eligible equipment. This means that the major
part of the equipment to be installed during the remainder of 1966 is already
in the pipeline. Denial of the credit at this juncture might have some effect
on projects authorized but not yet committed, but it would not affect signifi
cantly those already on order. It follows that the restrictive effect on capital
goods activity would be largely deferred. Most of it would come in 1967,®
Perverse reactions on suspension.—Unless the effective date of the credit
suspension is definitely and convincingly in the past, the legislative considera
tion of the proposal will trigger a frantic rush to obtain deliveries of csrediteligible equipment before the deadline. This will aggravate the pressure on
the equipment producer that it is the object of the suspension to abate.
It appears to be the view of leading proponents of suspension that equipment
orders outstanding at the time of suspension must necessarily be exempt from
its application on grounds of equity. In this case, the legislative consideration
of the proposal—unless again the cut-in date is convincingly in the past—would
lead to an orders stampede. This might not be as harmful as a deliveries stam
pede, but it could be very disturbing to capital goods suppliers, and is certainly
not calculated to relieve the pressure on them in the near term.
Perverse reactions on restoration.—If the restoration of the cjredit were either
dated in advance or anticipated by industry, it would obviously provide a power
ful inducement for the deferment of new equipment installations until after the
deadline. If the restoration applied to orders placed after the deadline, it
would have a even more retarding effect. On either basis, the arrangement would
produce an artificial depression in capital goods markets at the wrong time and
contrary to the intention of its sponsors.
Timeliness.—In view of the delayed impact of a credit suspension on capital
goods activity, the question arises whether the move is timely. There are
powerful forces of restraint already at work in this area—falling corporate
liquidity, increased pressure on internally generated funds, reduced credit avail
ability and higher interest rates, rising costs of capital projects, severe shortages
in skilled manpower, etc.—and there is informed opinion that the peak of new
authorizations has already been reached. If this is correct, the effect of suspen
sion—especially if delayed for two or three months—would come too late to be
of much value. It would have its chief impact after the squeeze is over, and
would aggravate any subsequent correction.
Inequity .—In addition to the problem of long “leadtimes” mentioned above,
capital expenditures also involve a good deal of preplanning and preparatory
expenditures for such items as plant design, engineering work, etc. Any removal
of the credit forcing a change in plans obviously results in certain losses or
penalties to the company. Further, many such commitments are not only
planned long in advance, but are contracted for. Where this is the case a change
in plans is no longer feasible and this raises questions of the government’s keep
ing good faith with the taxpayer.
There is another matter of equity that merits attention here. The credit is
a vital and necessary part of our tax system as long as industry is subject to
the present extremely high corporate rates whicjh have such a penalizing effect
on investment.6
Uncertainty.—Frequent reversals of tax policy tend to destroy incentives.
Under such conditions there is a reluctance to make capital expenditures when
there is uncertainty as to the character and timing of congressional action.
This is an important consideration at a time when industry is increasingly
* Note the significance o f the “ installation” test under the investm ent tax credit p rovision s.
A s A ssistant Secretary Surrey said, “ A ctually, I think p eople who have advocated sus
pension o f the credit really have an im age o f its operation that w ould have it turn on
orders rather than installations as it now does. T h is p ossibility was explored a t the tim e
the credit was originally set up and fou nd n ot to be feasible.”
6 Senator W illiam Proxm ire made this same p oin t in his supplem entary view s in the
“ 1966 Joint Economic R eport” at page 2 3 :
“ Because there is a considerable ‘leaaitime’ in carryin g out investm ent p r o je c t s ; because
the investment credit becomes available when assets are put in service and hence present
contracts are being undertaken in reliance on the availability o f the cred it when the p roject
is com pleted; because suspension o f the credit wouldi have to p rov id e an exception fo r
p rojects already under commitment, but w hich w ill be com pleted in the fu tu r e ; it follow s
that suspension o f the investment credit w ould generally not alter investm ent expenditures
or tax revenues fo r a substantial period o f tim e.”
0 E ffect o f Corporate Incom e Tax on In vestm en t, George Terborgh, M achinery and A llied
Products Institute, M arch 1959.
75—314— 67— pt. 5—
6
1082
THE
1967
ECONOMIC REPORT OP THE PRESIDENT
engaging in long-range planning and that planning with respect to expenditures
on production equipment takes the investment credit into consideration. Thus,
to the extent that the investment credit becomes an on-and-off device is use
fulness will be severely impaired.
Summary.—The moral is clear. The investment credit, potent as it is as a de
vice to support and facilitate capital investment, does not lend itself readily to
manipulative application because of its inherent limitations as a countercyclical
tool.
T
he
C r u c ia l E l e m e n t
of
T
im in g
The proper tools.—Unquestionably, the practice of economics has become more
sophisticated in recent years. We believe that through the efforts of economists
in government, academe, and industry we know a great deal more about the
economy and we are hopeful that government itself has become somewhat more
astute and sophisticated in the use of economic tools. However, at this time
it must be admitted that there still remains a good deal to be done in improving
our analytical techniques and until this is accomplished we are not in a posi
tion to proceed with a great deal of reliability into the niceties of countercyclical
fiscal policy.
Where are we nowt —There are some who believe that the forces of inflation
are severe and will grow much worse There are others, with whom we are in
clined to join ourselves, who feel that although there are some significant in
flationary signs, it is unlikely that we confront a runaway situation; indeed, it
is very likely that we are near the top of the cycle and may be leveling off. As
noted above, there are powerful forces of restraint already at work. These
include the tight money situation both as to availability and rates, declining pro
fit margins, and the decline in common stock prices in heavy trading. In terms
of capital expenditures, this does not necessarily mean that we are about to face
a recession, but rather a significantly slower rate of growth in physical output
and a growth rate in plant and equipment expenditures closer to that of the econ
omy as a whole.
Forces at work .—In addition to the “straws in the wind” we have mentioned
there are a number of basic forces at wonk which will increasingly exert a
restraining hand on the economy. President Johnson himself has identified these
factors. These of course include the Tax Adjustment Act of 1966 which it is
estimated will raise some $6 billion in federal revenue over the next 15 months,
the increase in Social Security and Medicare taxes of some $6 billion at annual
rates which went into effect on January 1, 1966, and the recent action of the
Federal Reserve Board in raising the discount rate. In addition, it must not be
over-looked that Congress can, and we think should, assert a firmer control over
federal expenditures and the Executive Department has leeway in certain of its
actual spending decisions.
Beyond these factors, there is one other that to our knowledge has been over
looked by commentators on this subject; namely, the fading boom in corpo
rate tax depreciation. Since the Institute has documented this at length else
where7 we will simply excerpt the relevant portion of the conclusion of that
study:
“The great postwar surge of corporate tax depreciations is over. From now
on, the increase in accruals will be more closely geared to the long-run growth
trend of corporate capital expenditures.
“There is considerable reason to believe, moreover, that the rate of increase
will actually fall below this growth trend. The future of corporate capital ex
penditures is of cousre unpredictable, but if they rise over the next decade at the
average rate of the past 15 years (about 5.5 percent per annum), a shortfall of
depreciation growth seems probable. The probability arises principally from the
prospective fadeout of the relative net benefits from the accelerated writeoff
methods of the 1954 Code and from the guideline-life system.”
Summary.—In light of the “margin of error” that exists in the application
of macroeconomics, the relatively crude state of our analytical tools at this time,
and the forces for restraint that have yet to reach their full potential, it would
appear precipitous to take action to suspend the investment credit at this time
on these grounds alone.
Su m
m a r y and
C o n c l u s io n
The investment tax credit was enacted by the Congress upon recommenda
tion by the Kennedy Administration in order to stimulate sound capital invest
Institute. l°965.0r<,#e
Depreciatlon> Qeor« « Terborgh, M achinery and
THE 1 967 ECONOMIC REPOET OF THE PRESIDENT
1083
m ent as a means o f both increasing our rate o f econom ic grow th and making
U.S. industry more efficient and thus m ore com petitive a t hom e and abroad.
It w as later liberalized in the same spirit. The objectives o f the A c t are ju st as
vital today as when the law w as enacted despite some changes in econom ic con
ditions.
W hen the investment credit w as proposed and enacted it w as in the spirit o f
permanency. There is a clear legislative record to this effect. T o attem pt to
use the credit as purely a countercyclical tool on an in-and-out basis w ould be
a breach o f faith, in addition to interfering w ith the longer-range goals to w hich
i t is addressed.
M ost persuasive in term s o f the applicability o f the credit as a countercyclical
device is that it simply would not be effective. T h e credit is not w ell suited
to such use both because o f the “ cut-out” an d “ cut-in” problem and th e fa c t that
i t w ill lead to perverse reactions due to the effect o f anticipated changes in the
credit on behavior o f industry.
Frequently the arguments in fa v o r o f suspending the investm ent credit seem
to assume that success or failure in the fight against inflation turns on this
.single proposal. This obviously is n ot the case. The T a x Adjustm ent A ct o f
1966, the increase in Social Security and M edicare taxes w hich w ent into effect
in January o f this year, and the recent action o f the Federal R eserve B oa rd in
raising the discount rate all have a restraining effect— both directly and in
directly— on capital expenditures and have not yet attained their potential im
pact. In addition, the supply o f corporate funds w ill be adversely affected by
the passing o f the postwar boom in corporate tax depreciation, and the prospect
o f a deteriorating relation between capital requirem ents and financial avail
abilities.
The great economic challenge to the U.S. today rem ains the achievem ent and
maintenance o f the most m odem technology and industrial plant in the w orld.
It is only in this w ay that w e can conserve the progress w e have made, protect
our national security and our international com petitive position, and insure
the highest level o f job creation.
This concludes our comments on the role o f the investm ent credit in the
economy and its appropriateness as a countercyclical device both in the current
econom ic context and as a general principle. W e should like to express again
our appreciation o f your kindness in perm itting us to present the view s o f the
Institute on this subject. I f the Institute and its staff can be o f assistance to
the Committee in its studies w e hope you w ill not hesitate to call on us.
LEAD TIME AND CONTRACTCLICAL TAX POLICY*
In the preceding Review we discussed the implications of lead time for one
instrument of contracyclical policy, manipulation (suspension and restoration)
of the investment credit.1 We did not, however, discus® its implications for the
manipulation of personal and corporate income taxes. This is the subject of
the present inquiry. Specifically, we propose to consider the bearing of lead
time on the choice of instruments for contracyclical tax action.
By contracyclical tax action, we refer to ad hoc measures taken in response to
current or immediately anticipated economic conditions. It is true that budgeting
is done nowadays on assumptions as to economic conditions during the forth
coming fiscal year, and that in this sense some degree of contracyclical action may
be implied in the budget proposals. But since these are submitted six months
before the beginning of the year covered, they are necessarily based on tenuous
and remote estimates and do not constitute ad hoe action in the sense used here.
Only when current or proximate conditions are deemed to call for contracyclical
tax measures at the time the budget is enacted do we have such action as a part
of the regular fiscal routine. Otherwise it calls for special legislation.
Since we are dealing with ad hoc tax action, it may be superfluous to observe
that we are not concerned with the automatic compensatory effects of the tax
structure itself, reflecting the “built-in stabilizers.’’ (Owing to the progressivity
of the personal income tax, and the volatility of corporate profits, federal revenues
tend to rise relative to national income during economic expansions and to decline
relatively in contractions.) These stabilizers are very powerful, and serve
greatly to reduce the need for special action, but they do not always suffice to
obviate it. In any case, they are taken for granted here.
1. C ontracyclical T a x A ction
in th e
P ostwar P eriod
Before we launch on the main discussion, it may be worthwhile, by way of
background, to sketch in a few words the record of special contracyclical tax
action since World War II.
During the four completed postwar business cycles, 1946-49, 1949-54, 1954-58,
and 1958-61 (measuring from lows), there appear to have been no tax increases
for the purpose of restraining booms2and (with one possible exception) no reduc
tions for the purpose of combating recessions.8 Some of the tax changes turned
out to be timely for stabilization policy, some untimely, but they were motivated
predominantly, if not wholly, by other considerations. Their cyclical effects were
largely incidental and haphazard.
After a careful review of antirecession fiscal policy in these four cycles, Lewis
comments as follows:
“. . . [I]t is frequently difficult—sometimes impossible—to decide definitely
whether or not the motive in particular actions was primarily to counter reces
sion. But, insofar as a distinction is possible, those actions which appear to have
been primarily counterrecessionary have been on the expenditure side of the
budget.” 4
As for the present cycle, still incomplete, the story is considerably different.
Thanks in part to the growing acceptance of the idea of compensatory fiscal
policy, in part to the intensive efforts of the Kennedy Administration to popu
larize the expanded version of that policy now known as the New Economics,
♦Reprinted from M achinery and A llied Products Institute, Capital Goods R eview , Decembei ‘"The investm ent Credit as an E conom ic Control Device,” Capital Goods R eview No. 67,
S^T h e^ K orean^ w ar taxes may possibly be construed as restraints on an anticipated boom,
but «*e m ore realistically considered noncyclical in nature.
*
T he possible exception is the reduction o f excise taxes in 1954, described by Lewis as a
menhir#* “ fo r w hich the recession was a frequently advanced but not the only argum ent.”
W ilfre d Lewis, Jr., F ed eral F isca l P o licy in the P ostw ar Recessions, p. 18. T he Brookings
Instlt'n tion, 1962.
‘ Ibid.
1084
THE
1967 ECONOMIC REPORT OF THE PRESIDENT
1085
there have been this time several tax actions with avowed economic objectives—
the investment credit and liberalized depreciation allowances (1962), reductions
of personal and corporate rates (1964), excise rate reductions (1965), and, more
recently, tax increases embodied in the Tax Adjustment Act of 1966 and the invest
ment credit suspension.5
Notwithstanding the absence of contracyclical tax action in the first four
postwar cycles, it is a practical certainty that it will be forthcoming in some
fashion from now on. This makes it important to consider problems incident to
its application. As already indicated, the one we are concerned with here is
the effect of lead time (or, looked at the other way, of time lags) on the operation.6
2. T hree L ags
There are three time lags to be considered, which we may call the “recognition
lag,” the “legislative lag,” and the “response lag.” The first results from delay
in official recognition and acknowledgement of the need for tax action. The
second reflects the time required to get congressional approval after such recog
nition. The third arises from the delayed response of the economy after enact
ment. Suppose we say a few words about each.
RECOGNITION
LAG
Actual experience with tax increases to restrain booms is very limited (there
having been none in the first four postwar cycles, as indicated). It is a safe bet,
however, that they will rarely come before the conditions they attempt to combat
are fully realized. Repressing booms is a politically painful operation, and can
hardly be done on the basis of forecasts, especially when, as usual, the forecasters
are divided. Action must await the development of consensus as to its necessity,
and this matures only in the presence of conclusive evidence—tight credit, rising
prices, labor shortages, fat wage settlements, capacity squeezes, etc. Certainly
this has been true in the present boom, when the first identifiably contracyclical
tax action (a limited one) was presented to Congress in January 1966, and the
second (also limited) in September.7
The recognition lag applies also in the reverse operation, combating recessions.
Due in part to delay in the availability of figures, in part to mixed indicators in
the early stages of recession, it is usually impossible to be sure of a downturn
until two or three months after it has started. But this is not all. The incum
bent Administration may be reluctant to admit its existence until forced by over
whelming evidence. This is not a mere possibility; delays in official recognition
of the turn have characterzed to some degree all of the postwar recessions.8
LEGISLATIVE
LAG
Once the Administration has decided to move contracylically on the tax front,
it is necessary to get a bill through Congress. This adds a second, or legislative,
lag to the process.
There are not enough precedents in the record to establish the probable length
of this lag. The only clear instances of contracyclical tax action, the Tax Adjust
ment Act of 1966 and the recent investment credit suspension, are of interest,
however. The former took two months from introduction to enactment (sig
nature by the President); the latter, eight weeks. Whether these intervals are
5 Am ong other things, the T ax Adjustm ent A c t raised and extended certain excises, fu r
ther accelerated corporate tax payments, and im posed graduated w ithholding o f personal
taxes. M ore recently, by adm inistrative action, there has been a step-up in the tunin g o f
the paym ent o f withheld Social Security taxes.
6 It w ill be noted that onl.Vj the last tw o o f the tax actions in the present cycle were contracyclical, the earlier ones being nt © cyclical—designed to a ccelera te an expansion already
underw ay. The New Econom ics rationalizes both. W hile both w ill doubtless be em ployed
in the future, we shall conduct the discussion in term s o f contra cyclical action alone. T h is
n ot only because o f its presumptively greater frequency and im portance, but also because
the associated tim ing problems are likely to be m ore acute.
7 T he Tax Adjustment A ct o f 1966 on January 24 and the investm ent credit suspension
on September 8.
8 See W ilfred Lewis, Jr., op. cit., pp. 101—2, 148, 195—7, 24 2 -4 . W hile the only stim u
lative actions in these recessions were on the expenditure side o f the budget, and were
implemented largely through adm inistrative measures, they cam e late. L ew is concludes
that “ [d is c re tio n a ry actions have not been in effect before the trough m onth so that, except
fo r possible anticipatory effects, they have not been a fa cto r in cushioning the decline o r in
causing turning points.” Ibid., p. 19.
1086
THE
1967
ECONOMIC REPORT OP THE PRESIDENT
indicative for the future, it is impossible to say with certainty.® In both of these
cases controversy in Congress was not widespread, and the substance of the
changes was less complicated than might be the case at other times.
We can be sure, in any event, that unless special procedures are set up for the
legislative processing of contracyclical tax actions (several of which have been
suggested, but none accepted), a substantial legislative lag will be added to the
recognition lag, the two together entailing a serious retardation of timing.
RESPONSE LAG
The object of contracyclical tax action is to restrain or stimulate the economy
by varying the after-tax income of the affected taxpayers. It is assumed that:
reductions in such income will curtail demand for goods and services, hence will
ease pressures on production, and that increases will expand demand, with
stimulative effect.
This assumption may be correct, but it tells us nothing about the timing of theproduction response to the tax action. This can vary widely. It can be immedi
ate, slightly delayed, or long delayed, depending on a number of factors, chief of
which is the length of the production period or, as it is commonly called, produc
tion lead time. When this period is very short, as with directly consumed serv
ices (haircuts, for example), the response of production to changes in demand’
can be virtually instantaneous. For most nondurable commodities, the period is
short enough for a substantial, if not a complete, response in a matter of days or
weeks. But when lead time runs to months, or even years, as it often does for
capital goods, the response develops very gradually.
Suppose, for example, we have an item with a production period of one year.
Suppose further that orders have been running 1,000 units a month and that there
are 12,000 units in process. Suppose finally that as a result of restrictive tax ac
tion demand is reduced by 10 percent, to 900 units a month. If productive
activity is applied to individual items evenly over the one-year period, the overall
production response in successive months after the reduction will be the follow
ing fractions of the reduction itself: %2,
s/i 2 , %2, %2, %2 , etc.10 Thus it will
take six months to curtail total activity by one-half of the reduction in demand
and an entire year (the production period itself) to develop a full response."
For stimulative tax action, the lag is similar, but in reverse.
When we consider the substantial volume of long-lead-time production in the
economy, it is evident that the response lag can have a significant bearing on the
effectiveness of contracyclical tax action.
3. C omparative R esponse L ags
Since the response lag is so important, it is pertinent to compare the principal
instruments of tax action—the corporate income tax, the personal income tax,
and the investment credit—with respect to their associated lags.
Since the last-named instrument, the investment credit, was considered in the
preceding Review , we need not discuss it here. Suffice it to say that the long
response lag to changes in the credit (suspension and restoration) was one of the
principal factors in the negative conclusion reached in that analysis:
“The moral of this discussion is clear. The investment credit is not suited to
manipulative application. It is not, therefore, an appropriate device for economic
control purposes. It was not intended for this use in the first place and should
not be so employed.”
With this verdict on the contracyclical use of the investment credit, we turn to
the other instruments of tax action, corporate and personal income taxes.
CORPORATE INCOM E T A X
Contracyclical -changes in the corporate income tax are intended to generate
a production response through their effect on after-tax profits. If profits are
9 A s noted earlier, there have been three p rocyclical tax adjustments during the present
cycle, the investm ent cred it o f 1962, the incom e tax reduction o f 1964, and the excise re
duction o f 1965. (The legislative lags w ere 18 months, 13 months, and 1 month, respectively.
Since tim ing is less im portant fo r such adjustm ents than fo r the contracyclical variety, these
lags are probably not in d icative o f w h at to expect fo r the latter.
10 Assum ing each m onth's orders are placed in fu ll at the beginning o f the month. On the
the m ore realistic assum ption that they flow through the month, the progression becomes
% * t % 4 , % 4 » % 4 , % 4 , 1:l/24, 1% 4 , e t c .
11 If, as usual, production is applied m ore heavily around the middle o f the period, the
overall response w ill be even slow er at the start.
THE
1 967 ECONOMIC REPORT OF THE PRESIDENT
108T
reduced by a tax increase, this is supposed to curtail productive activity by a
like amount; if they are increased by a tax reduction, the opposite effect is
expected.12
Even granted that these effects are realized eventually, the question is, how
soon? The timing of the production response depends on the way the corporate
system reacts to the tax change. If it adjusts its inventory position, by varying
the flow of commitments for materials and components, the lag should be rela
tively brief. But if it adjusts its fixed-asset position, by varying in this case the
flow of commitments for plant and equipment, the lag is likely to be an extended
one. This because of the long lead time involved.
This lead time consists of two components: (1) the production period itself;
(2) the period between commitment and the beginning of production. Since
there is very little of the second component in the recession phase of the busi
ness cycle (there is little “waiting in line” for production to start), total lead
time tends to be coincident with production time. In the boom phase, however,,
it can be considerably longer.
A rough idea of lead time in the present boom may be conveyed by a few
figures. The Treasury recently estimated the average order-to-completion period
for investment-credit-eligible equipment at 9-12 months.18 This excludes build
ings and structures for which the period is presumably longer. Commerce sur
veys (for plant and equipment combined) indicate an average interval between
commitment and payment of 8 months for manufacturing and 13 months for
public utilities.14 NICB surveys (also for plant and equipment) show an average
of 9-10 months between appropriations and expenditures in manufacturing.15
These indications are rather fragmentary, to be sure, but they suggest that the
overall average lag of completions behind commitments may be around 10 months.
On this assumption, it would take around five months for a corporate tax in
crease, even if reflected immediately and completely in a reduction of fixedasset commitments, to build up a production response one-half as large as the
increase itself. In all probability it would proceed even more slowly, becauseof the present backlog of commitments waiting to be put into production.
(Where this situation exists, the production response to a curtailment of new
orders awaits the prior absorption of this backlog.)
While the absence of a backlog of orders not yet in work might make the pro
duction response to antirecession tax action (a tax reduction) somewhat more
prompt, it would nevertheless take months to develop substantial magnitude.
As far as capital goods activity is concerned (the control of which is presumably
the principal end sought in the contracyclical manipulation of the corporate
tax), the response lag is a long one either way.
There is another point to be made in connection with this lag. Corporate
capital investment programs often comprise a mixture of items with long and
short lead times. For example, they may include a building and the equipment
that goes into it. In such cases the construction contract may be let before the
equipment orders are placed. It goes without saying that these orders are likely^
to be unresponsive to contracyclical tax action; they are in effect mandatory.
This contributes, of course, to a further delay in the production response.16
PERSONAL INCOME TAX
When we come to the personal income tax, we find a different picture. The
overwhelming bulk (around 95 percent) of the disposable income of individuals
is spent for consumption. The bulk of this expenditure in turn (around 85 per
M T his is the “ first round” effect, w ithout reference to the subsequent “ m ultiplier,” a con
cept with which we are not concerned here.
18 Quoted by Senator Proxm ire from a T reasury com m unication to him. C ongression al
Record, August 23, 1966, p. 19421. I t is estim ated fu rther th at 40 percent o f eligible
equipment has an order-io-delivery period o f less than six m onths, 40 percent between six
months and a year, and 20 percent over a year (th e average fo r the la st group being about
tw o years).
14 Departm ent o f Commerce, OBE Releases 6 6 -1 4 and 66 -54, M arch 10 and September 8,
1966. O ur computation, based on the relation o f the “ carry-over” to expenditures in the
first h a lf o f 1966.
“ N ational Industrial Conference Board, Capital A pp ropria tions, Second Q uarter 1966,
p. 15. Our computation, based on the first h a lf o f 1966.
16 I t may be appropriate before leaving the subject to m ention an incidental effect o f
restrictive corporate tax action. Because o f the large backlog o f fixed-asset com m itm ents
in the production pipeline when the action is taken, the consequent reduction o f corp orate
fund® may put additional pressure on credit facilities until the deliveries from these com
m itments are paid for, thus com plicating the task o f the -credit m anagers.
1088
THE
1 9 6 7 ECONOMIC REPORT OF THE PRESIDENT
cent) goes for services and nondurable goods, for which the production response
is generally prompt.17
Even for durables (automobiles, appliances, furniture, etc.), the response lag
averages only a fraction of the lag for producers’ equipment. In contrast to the
latter—produced largely by job-shop methods, much of it specially engineered to
the customer’s order—consumers’ durables are mass-produced in vast numbers,
and on short lead times. The feedback from changes in demand is prompt, and
the production response relatively rapid.
We shall not attempt a specific estimate of the overall production response lag
to tax-induced changes in disposable income, but there can be no doubt that it is
but a fraction of the lag for similarly induced changes in the after-tax profits of
corporations. By comparison, personal tax changes are quick-acting medicine.18
4. C onclusion
We are interested here in the technical aspects of corporate and personal in
come taxes as instruments of contracyclical action, not in their political aspects.
We are glad to leave the latter to politicians.
From a technical standpoint, it is evident that the personal income tax offers
distinct advantages. In view of the recognition and legistlative lags, of which
we spoke earlier, it is highly probable that contracyclical tax action will be taken
late—at least in relation to the optimal timing. It can normally be expected to
await the actual realization of the conditions it is intended to combat. Under
these circumstances there are obvious gains from the use of a tax instrument
that minimizes the response lag.
Since it takes several months for corporate tax changes to generate a sub
stantial production response in the capital goods area, and the better part of a
year for a complete response, these changes should lead by a substantial interval
the attainment of the target conditions. If they do not—and there is practically
no chance they will—there is considerable risk that the impact will come too
late.19
This may not be serious in the case of stimulative action (there should be time
to turn around before the next capital goods boom), but it certainly can be so
when the action is restrictive. If it comes in the mature phase of a boom, when
capital goods commitments have started down spontaneously or are about to do
so, it will only aggravate the subsequent decline in production. Even if the ac
tion is reversed as soon as the decline becomes evident (and this is unlikely), it
is bound to be too late to prevent unnecessary liquidation.
The moral of this discourse, at the very lease, is that contracyclical tax action
should not be employed without careful regard for the lead time involved.
17 An exception occurs in the case o f farm production, where the response may await the
next grow ing or livestock breeding season. The response in the processing and distribution
o f existin g farm products is o f course independent o f these lags.
38 See Joseph A. Peehman. F ed era l Tax P olicy, p. 60. T h e B rookings Institution, 1966.
W e have not m entioned the effect o f personal income tax changes on new housing construc
tion (w here lead1tim e is longer than fo r consumers’ goods and services), chiefly because this
is an area o f production dom inated by credit policy. Compared w ith the effects' o f such
policy, any variation in disposable incom e due to contracyclical tax action (plus or minus
2 or 3 percent) is likely to be o f small consequence.
19 We may add that this risk attaches in substantial degree to the recent suspension o f
the investm ent tax credit.
THE INVESTMENT CREDIT AS AN ECONOMIC CONTROL DEVICE*
In the election campaign of 1960, both presidential candidates expressed dis
satisfaction with the progress of the American economy and a determination to
accelerate its future growth by providing additional incentive® for business
investment.
The nature of this concern is evident from the remarks of Secretary of the
Treasury Dillon in presenting the first incentive proposal of the new Administra
tion, the investment credit.
As we look back over the past century we see that our record of economic
growth has been unmatched anywhere in the world. But of late we have fallen
behind . . . . In the last five years Western Europe has grown at double or triple
our recjent rate and Japan has grown even faster. While there is some debate as
to the precise annual growth rate of the Soviet economy, CIA estimates that
their GNP grew at a rate of 7 percent in the 50’s. Clearly, we must improve our
performance, otherwise we cannot maintain our national aspirationa The press
ing tasks before use, then, is to restore the vigor of our economy and to return
to our traditionally high rate of economic expansion and growth. I am confident
this can be accomplished. But it will require a major effort by all of us.
I have been impressed during recent travels abroad by the great progress our
friends overseas have made in reconstructing their economies since World War
II and by the highly modern and efficient plants they now have at their dis
posal . . . . All the information we have indicates that their plant and equipment
are considerably younger than ours. Although this difference reflects the re
building of the shattered European economies, I think it is important to em
phasize that it was due in good part to the vigorous policies of the European gov
ernments. Tax incentives for investment played a significant role, including ac
celerated depreciation, initial allowances and investment credits.1
ORIGINAL CONCEPT
This statement was made during the recession of 1960-61, following several
years of relatively low business capital investment (after 1957). It is obvious,
however, that the Administration was concerned not simply with the cyclical
recovery of investment, but with the broader objective of raising its general level
over the long run. The main goal was a higher economic growth rate through in
creased investment in productive facilities.
This view was well expressed by the Council of Economic Advisers in a report
to the Joint Economic Committee:
“Measures to stimulate business investment directly will contribute to our
recovery from the present recession, but that is not their main purpose. All
who have confidence in the American economy must look ahead to the day when
the slack will be taken up and high levels of output and employment will again
be the rule. The full benefit of our decision to supplement increases in con
sumer demand now with a higher rate of capital expansion and modernization
will then be realized.” 2
It is interesting to note that this concept appears to have been shared by the
fiscal committees of Congress:
“The tax credit provided by this bill is a complement to the Administration’s
plans for revising the guidelines for the tax lives of property subject to de
preciation. It is believed that the investment credit, coupled with the liberalized
depreciation, will provide a strong and lasting stimulus to a high rate of
economic growth and will provide an incentive to invest comparable to those
available elsewhere in the rapidly growing industrial nations of the free world.8
♦'Reprinted from Machinery and A llied P roducts, Capital Goods R eview , Septem ber 1966.
* Testim ony o f the Secretary before the H ouse W ays and M eans Comm ittee, M ay 3, 1961.
2 The A m erican E conom y in 1961: Problem s and P olicies, M arch 6, 1961, p. 49.
* R eport o f the House W ays and M eans Comm ittee on the Revenue A c t o f 1962, p. 8.
1089
1090
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
“Realistic depreciation alone, however, is not enough to provide the essential
economic growth. In addition, a specific incentive must be provided if a higher
rate of growth is to be achieved. . . . The objective of the investment credit
is to encourage modernization and expansion of the Nation's productive facilities
and thereby improve the economic potential of the country, with a resultant
increase in job opportunities and betterment of our competitive position in the
world economy.” *
Q UESTION OF M AN IPU LATIO N
It will be recalled that the initial reaction to the investment credit proposal was
critical, and even hostile, in many quarters. There were a variety of reasons,
only one of which concerns us here. It was charged that once in effect the
credit would inevitably be manipulated for economic control purposes.
This charge was indignantly denied by the Administration. Its spokesmen
Insisted that the credit was designed to be a permanent feature of the tax
system, that its purpose was to raise the average level of investment over the
long pull, and that there was no intent to employ it as a contracyclical device.
As for the Congress, the legislative history strongly suggests that it concurred in
the Administration position.6
At the time the credit was proposed (1961), and enacted (1962), no one was
worrying about excessive capital investment. The whole drive was for expan
sion. Any possible need for restrictive action was obviously far in the future,
and except for the Administration assurances just referred to the problem was
treated as academic.
RECENT DEVELOPMENTS
We cite this historical record to indicate the original concept and purpose of
the investment credit. But conditions have changed radically since then, and the
question is now before us of withdrawing or suspending the credit as a means
of curbing a capital goods boom in an overheated economy.
Last January Senator Gore introduced a bill (S. 2806) calling for the out
right repeal of the credit. Later he proposed an amendment to the Tax Adjust
ment Act of 1966 suspending it for two years (rejected by the Senate on March
8). Shortly thereafter, the Joint Economic Committee recommended immediate
suspension to a future date prescribed by Congress. Numerous economists, in
cluding three former chairmen of the Council of Economic Advisers, have joined
in urging suspension, usually for a one-year period. Several bills directed to
this objective have been introduced in Congress. Recently the Chairman of the
Senate Finance Committee, Senator Long, proposed an amendment to the Foreign
Investors Tax Act of 1966 (H.R. 13103), providing for indefinite suspension.6
Still more recently, the Administration has proposed suspension for 16 months
(H.R. 17607).
PRESENT
PROJECT
In view of this altered situation, it is an appropriate time to consider the basic
question of the merits of the investment credit as any economic control device.
Is it suitable for on-ahd-off application? This question is the subject of the
present inquiry.
It is a safe guess that most of the proponents of on-and-off application have not
thought through the problems to which it gives rise, if indeed they are even
aware of them. They involve questions of fairness, administrative feasibility,
timing, and effectiveness. We suggest that until these questions have been con
fronted it is irresponsible to urge manipulation, whether by temporary suspen
sion or otherwise.
Since temporary suspension appears to be the most favored form of manipula
tion, we propose to consider the difficulties associated with that form. Because
they are somewhat different at the suspension (cut-out) phase of the operation
than at restoration (cut-in), we shall discuss the two phases separately, begin
ning with suspension.
1. P roblem s
A s s o c ia t e d
W it h
S u s p e n s io n
As a rule, capital equipment has a long production period. Moreover, a large
proportion is produced on order. This means that customers must wait during
its fabrication, and that there is normally an extended period between the placei 5£?ort °f, the Senate Finance Committee on the Revenue A ct o f 1962
5 W itness the com m ittee reports quoted earlier.
’
« Cong. R ec., A ugu st 30, 1966, p. 20321.
d
11
THE 1 9 6 7 ECONOMIC REPORT OF THE PRESIDENT
1091
:ment of orders and their delivery. The interval between orders and the comple
tion of installation (the point at which the credit can be claimed) is of course
longer still.
No one knows within a wide margin the current overall average of this orderto-completion period for credit-eligible equipment, but Treasury estimates place
it in the range of 9-12 months.7 Even if we take the lower limit of this range, we
are dealing, obviously, with a very long lead time, the existence of which has
important implications for the problem in hand.
FA IR N E SS
As just noted, the investment credit is claimable on the completion of installa
tion and the placement of the equipment in service. This means that if the sus.pension is on the same basis industry will lose the benefit of the credit on out
standing commitments representing say three-quarters of a year’s investment in
eligible equipment—commitments entered into in good faith in expectation of
.that benefit.
The unfairness of denying the credit to such commitments was recognized in
the Gore amendment, to which we referred earlier, by a provision protecting the
eligibility of equipment for which firm contracts had been entered into prior to
the effective date. It has been recognized also in subsequent suspension pro
posals, including the Long amendment and the Administration bill.
To afford complete protection of outstanding commitments, it is necessary, of
course, to allow time for them to work through the production pipeline. The
Gore amendment allowed one year, a period sufficient for most, but not all, of
them to clear. The Long amendment, on the other hand, allowed only four
months. This is grossly inadequate and would leave a substantial proportion of
the carry-over unprotected. The Administration proposal is better in this re
spect : it imposes no time limit at all.
While the complete protection of outstanding commitments eliminates a con
siderable part of the inequity at the suspension stage, it does not remove all of
:it. Industry often makes a heavy investment in the planning and engineering of
-equipment programs before firm contracts are entered into. To the extent that
this investment is conditioned on the availability of the credit, the suspension
destroys its value and usefulness. Moreover, there is a large element of chance
-in the impact of the suspension. The commitment flow of individual companies
is extremely “lumpy.” The cut-out date is certain to catch some of them with
■large placements just inside the line and others with similar placements just
outside. (For example, the Administration proposal for a cut-out on September
1 finds a large airline with an order dated September 2 for $410 million worth of
equipment.)8
Although a partial equity can be secured by putting the credit suspension on a
commitment basis, given a sufficient workout period, unfortunately this creates
difficult administrative problems.
ADM INISTRATIVE
DIFFICULTIES
The completion of the installation of a piece of equipment is ordinarily a clear
ly identifiable event, but the timing of a “firm contract” for its procurement may
not be. For this reason the switch from an installation to a commitment basis
presents administrative problems.
This was pointed out by Senator Long in the debate on the Gore amendment:
“This rule will open up difficult areas of dispute between the Internal Revenue
Service and business firms over what constitutes a binding commitment. I doubt
if any mechanical rule can be followed here. Each case will have to be examined
•on its own merits.” 9
When is a “firm contract” entered into? Is it on the date a purchase order
Is sent, or when confirmed by the equipment producer? Must the order be
noncancellable? If not, what kind of cancellation penalties are required to
make it “firm” ? Must the delivery date be fixed, or can it be indefinite? What
about supplements and amendments? Do they take the date of the original
7 Quoted by Senator Proxm ire from a T reasury com m unication to him. C ongressional
R ecord, August 23, 1966, p. 19421. I t is estim ated fu rth er th a t 40 percent o f eligible
equipment has an order-to-delivery period o f less than 6 m onths, 40 percent between 6
months and a year, and 20 percent over a year ( the average fo r th e la st group being about
2 years).
0 W all S treet Journal, September 9, 1,966, p. 2.
®Cong. R ec., M arch 7, 1966, p. 4972.
1092
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
order, or must they be broken out? These and other vexing questions are
bound to bedevil both industry and tax administrators, giving rise to uncer
tainty, controversy, and litigation.
There is another aspect of the matter. Suspension on a commitment basis
will give rise to deplorable pressure on equipment suppliers for the redating of
orders that fall on the wrong side of the line, the shifting of items from later
to earlier orders, etc. No one will contend that this is desirable, least of all
the suppliers themselves.
As a matter of fact, the Administration explored very thoroughly the possi
bility of putting the credit on a commitment basis at the time it was first
proposed. In the words of Assistant Secretary of the Treasury Surrey, “It was
found not to be feasible.” 10 If it was not feasible to introduce it on that basis,
can it be feasible to suspend it in the same fashion?
TIM IN G
Because of the long lead time between orders and delivery, the cutoff of the
investment credit at the ordering stage would obviously have a delayed effect
on equipment production. Senator Proxmire recently commented on the point
as follows:
“Because the suspension of the credit would have to provide an exception
for projects already under commitment, but completed in the future, it follows
that suspension would generally not alter investment expenditures or tax reve
nues for a substantial period of time. . . . If we repeal the credit today or
tomorrow, it would be at least the middle or the end of 1967 before the real
effect would be felt. If we acted next March or April, it would have no decisive
effect until 1968.” 11
This means that the suspension should occur long "before capital investment
attains the level at which restraint is deemed desirable. It requires action on
the basis of predictions and forecasts. This is not necessarily a prohibitive
requirement, but past experience with the application of restrictive measures
in a political environment (especially in election years) is not reassuring. The
chances are that the suspension will come late, in response to current, rather
than anticipated, conditions. In some cases, certainly, this will lock the barn
door after the horse is gone. Indeed, there is always the risk that the delayed
effects will fall in the receding phase of the capital goods cycle, thus aggravating
the decline.
PERVERSE REACTIONS
In a parliamentary system, the minister of finance can guard the secrecy of
his budget proposals until they are formally presented to the legislature. More
over, the budget, once disclosed, is practically certain to go through. (If it
doesn’t, the government falls with it.) In this setup, a measure like the sus
pension of the investment credit can be imposed as of a date already past, and
there is nothing industry can do about it.
In the American system, things do not happen this way. Proposals can be
tossed into the hopper by any member of the Congress at any time, and it is
often difficult, if not impossible, to assess their chances. Even if they progress
in the legislative machinery, they are likely to be pending for months, and no
one can be sure whether, or in what form, they will finally emerge. Proposals
of the Administration must run the same legislative gauntlet, and even if ac
ceptable in principle are commonly exposed for extended periods to discussion
and amendment. On many crucial details the final result is often uncertain up
to the moment of enactment.
This makes it extremely difficult to suspend the investment credit without
triggering perverse reactions on the part of industry. Since the effect of sus
pension is an across-the-board increase of 7.5 percent in the cost of eligible
equipment, the moment of suspension bill is introduced there is an incentive to
rush the placements of commitments.12 Even though the cut-out date is already
past, there is no certainty that it will stick; hence prudence calls for protective
action. Some other bill with a later cut-out may supersede the first one. Even
if the original proposal eventually goes through, it may be some months hence,
and the final effective date is unpredictable. The response to these uncertainties
1(>H earings B efore the Subcom m ittee on Fiscal P olicy o f the Joint E conom ic Committee,
M arch 1 6 -3 0 , 1966, p. 242.
11 C ong. R ec., A ugust 23, 1966, pp. 19421, 19422.
12 T he 7.5 percent applies to equipm ent with a service life o f 8 years or over. F or shorterlived item s, the credit is scaled down.
THE 1 96 7 ECONOMIC REPORT OF THE PRESIDENT
1093
can only aggravate the pressure on capital equipment suppliers which it is the
purpose of the suspension to abate.
But this is not all. If the practice of manipulating the credit becomes estab
lished, industry will take anticipatory action even before there are overt moves
for suspensions. (This would occur, of course, even under a parliamentary sys
tem. ) As soon as capital goods activity rises to a level suggesting the imminence
of such moves, protective commitments are in order.
These observations assume suspension on a commitments basis, with sufficient
time allowed to work off the outstanding backlog. Where this allowance is cut
short, as in the Long amendment mentioned earlier (four months), there is an
additional incentive for perverse reactions. If the threat of enactment is taken
seriously by industry, such a proposal is bound to touch off a stampede for the
acceleration of equipment deliveries scheduled after the deadline (itsi enactment
would of course have the same effect). Again the result will be the opposite of
that intended.
These considerations raise grave doubt® about the effectiveness of credit sus
pension as a means of restraint, quite apart from the administrative difficulties
to which it gives rise. It may well prove counterproductive.
2. P r o b l e m s A s s o c ia t e d W i t h R e s t o r a t io n
It is obvious that the restoration, or cut-in, phase of the temporary-suspension
cycle raises in reverse some of the same problems confronted at cut-out. There
is again the question of basis: should the cut-in be by installation or by com
mitment? There is the question of timing: how can anyone tell at suspension
whether the scheduled restoration will be timely ? There is also the problem of
anticipatory reactions: with the cut-in date known in advance, how can perverse
effects be avoided?
b a s is
While the average lead time between the commitment and installation of
eligible equipment is likely to be somewhat shorter at restoration than at sus
pension, it is bound to be at least 6 months, and probably longer. This means
that if the restoration is on an installation basis it will apply to commitments
made long before the cut-in date. If on the other hand, it is on a commitment
basis, it will present the difficult administrative problems described earlier in
connection with the suspension phase. (In either case it will generate perverse
reactions, about which more in a moment.)
Most of the temporary-suspension proposals we have seen contemplate restora
tion on an installation basis, though in the Administration plan it turns on
commitments. Here it is a question of balancing the administrative simplicity
of the installation-basis cut-in against the windfall gains conferred on thenoutstanding commitments. With a fixed cut-in date, such gains are certain to
.be far smaller than the windfall losses from the exclusion of existing commit
ments at the suspension stage. For since the cut-in date is known in advance,
most of these commitments will have been made in expectation of the credit.
(Where the restoration date is indefinite, more of them will have been entered
into without reference to the credit.)
TIMING
If there are timing problems at the suspension stage, they appear also, though
in different form, at restoration. No one can tell at the time of suspension
how long the period should last. Should it be one year, two years, or tTiree?
If the cut-out is likely to come, as we have suggested, near the end of the capital
goods boom, even one year may be too long. In other cases it may not be long
enough.
Some temporary-suspension schemes allow the President to extend (but not
to shorten) the period by proclamation. This give® one-way flexibility, but it in
troduces an undesirable element of uncertainty in business planning. Until
it is known whether the scheduled cut-in date will be deferred, capital budget
ing must proceed in the dark. A similar climate of uncertainty will exist, of
course, if the suspension is for an indefinite period in the first place.
PERVERSE REACTIONS
It is here that the greatest difficulty arises. The restoration of the credit
after a period of suspension is equivalent to a general price reduction of 7 per
cent.18 This is worth waiting for.
18Again with the exception noted earlier for equipment with a life of less than 8 years.
1094
THE
1967
ECONOMIC REPORT OF THE PRESIDENT
With suspension to a time certain, there is bound to be a massive deferment,
of commitments (if the cut-in is on a commitment basis) or of delivery instruc
tions (if it is on an installation basis) as the restoration date approaches..
Unless the cut-in comes at just the right moment (right with this deferment
taken into account), the resultant “air pocket” in equipment activity will be
both untimely and injurious. It will be the more so, of course, the later the
cut-in relative to the correct timing.
The chance that a predetermined suspension period will end at or near the
right time is very slim. So also is the chance that the preceding “air pocket”
in equipment activity will be rightly timed. There is grave risk that the inevita
ble wait for restoration will serve to aggravate capital goods recessions.
But what if the restoration date is indefinite, subject to the future action of
Congress or the President? In this case the basis for the anticipatory defer
ment of orders or deliveries is uncertain, and the affair turns into a guessing
game. Industry will guess when the cognizant authority is going to move and
will regulate its capital programs accordingly. The “air pocket” will be less
sharply defined than when the cut-in date is known (there will be differences of
opinion on the prospects), but it will be present nevertheless. The pendency
of the restoration will exert a drag on the recovery of investment (or will,
aggravate its decline) until the effective date is passed.
3. C o n c l u s io n
The moral of this discussion is clear. The investment credit is not suited to*
manipulative application. It is not, therefore, an appropriate device for economic
control purposes. It was not intended for this use in the first place and should
not be so employed.
The practical alternative that confronts policy makers is either to maintain
the credit as a permanent feature of the tax system or to abolish it. As to this
choice, we entertain no doubt. It is still as important to accelerate the long-run
growth of the American economy as it was when Secretary Dillon made the
statement quoted earlier. There are now, moreover, two additional factors^
that did not obtain at that time: the accelerated growth of the labor force, and
the declining growth of tax depreciation deductions!. A word on each.
We estimated in an earlier Review that the stepped-up growth of the labor force*
(which began around 1965) will require an annual investment in productive
facilities $5 billion to $8 billion larger than would be needed with a continuation
of the labarnforce growth rate obtaining previously.14 Obviously, these expanded*
requirements will have to be financed somehow.
It is here that the second factor come® in. Over the 20 years 1945-65, the tax
depreciation deductions of American corporations rose at an average rate of'
nearly 11 percent per annum, a rate far more rapid than the expansion of’
depreciable assets (7 percent). But this situation has now come to an end:
“The great postwar surge of corporate tax depreciation is over. From now on,
the increase in accruals will be more closely geared to the long-run growth trend
of corporate capital expenditures. There is considerable reason to believe,
moreover, that the rate of increase will actually fall below this trend. The future
of capital expenditures is of course unpredictable, but if they rise over the next
decade at the average rate of the past 15 years (about 5.5 percent per annum),
a shortfall of depreciation growth below this rate seems probable. The
probability arises principally from the prospective fadeout of the relative net
benefits from the accelerated writeoff methods of the 1954 Code and from the
guideline-life system.” 15
Both of these factors conspire to make the investment credit more, rather than
less, urgent than when first proposed. If under present conditions additional
measures of economic restraint are called for—a question we do not considerhere—there are better ways to accomplish this end than manipulation of the
credit. Indeed, if the foregoing analysis is valid, its manipulation is likely to do
more harm than good.
14 “ L abor F orce Grow th and Business Capital Form ation,” Capital Goods R eview No. 61,
M arch 1965.
a T he Fading Boom in C orporate T ax D epreciation, M achinery and: A llied .Products Insti
tute, 1965, pp. 1, 12.
GOVERNMENT INTERVENTION IN BUSINESS DECISIONS
AFFECTING PRIVATE INVESTMENT ABROAD*
The report of the Council of Economic Advisers acknowledges, as,
we all do, that the United States continues to confront a serious prob
lem with respect to the U.S. balance o f payments. Secretary Fowler
has subsequently issued a report on the status of our balance-of-pay
ments situation. There is a central aspect of the situation involving:
the balance of payments, however, which we feel is not receiving suffi
cient attention from a Government policy viewpoint. Once again*
a part of the problem is the fact that national policymaking is under
taken on -a piecemeal basis and only inf requently is the big picture
placed in perspective.
The fact is that partly on the grounds o f balance-of-payments con
siderations, and in the judgment of the institutepartly because of what
appears at times to be a predilection o f the Government to employ
controls in this area, this country has been drifting toward a policy
of Government intervention in business decisions affecting private in
vestment abroad and the flow of capital on an international scale.
T h e I n terest E q u a l iz a t io n T a x A c t
It is perhaps most illustrative to deal with this question in terms o f
the Interest Equalization Tax Act, for a proposal for extension o f that
law and enlargement of its penalty provisions is now before the Con
gress. The President and the Treasury have asked Congress for
legislation to extend the Interest Equalization Tax Act for 2 years
(until July 31,1969) and to authorize the President, when conditions
warrant, to vary the statutory rates between zero and a rate double
the existing rates. This proposal of an interest equalization tax was
first made m 1963 on the basis that it would be a temporary one-shot
legislative action. This was not only the basis upon which it was
introduced; there were clear and unambiguous assurances from the ad
ministration that it was a temporary measure and would not require
extension.
To he sure, sophisticated observers of the Federal scene are some
what skeptical of such assurances because temporary legislation—e.g.,
excise taxes, renegotiation, etc.—has a way of becoming laid in con
crete in our statutory structure. So, the interest equalization tax was
extended for 2 years beyond 1965 and the Congress is now being asked
to extend it for another 2 years—not only to extend it but to make
its bite more severe.
To suggest that the enactment and continuation of an interest equal
ization tax is inconsistent with the national policy o f this country
toward free and uninhibited movement of trade and capital is to state
the obvious. Moreover, it appears that through this measure, coupled
♦Supplemental statement of Machinery & Allied Products Institute on certain additional
economic issues.
1095
1096
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
with certain other actions of Government to be discussed in a moment,
we are well on our way to controlling private flows of trade and capital
across international borders. It is ironic, of course, that at the very
time that this country contemplates a further extension of the Interest
Equalization Tax Act, it is frustrated and discouraged by the futile
performance of the Kennedy Round of negotiations for further tariff
reductions. When in this country are we going to pull the pieces
together from the standpoint of national policymaking and decide
that the United States on any given issue or national goal cannot march
off in several directions at the same time ?
But if the interest equalization tax were the only element in this
picture of interference with movement of trade and capital across
international borders, one could take comfort in the proposition that
Government must be flexible and exceptions to a fundamental policy
may at times become necessary because of such a sensitive and im
portant problem as the balance of payments. The fact is, however,
that the Interest Equalization Tax Act is only a symptom of a much
more serious condition. Let’s examine the other symptoms briefly.
F o reig n S ource I ncom e T a x a t io n
The foreign earnings provisions of the Revenue Act of 1962 rep
resent the most punishing step that this country recently has taken
toward free international trade movements. At the time of enactment,
it was taken on the premise that foreign investment contributed ma
terially to our unfavorable balance of payments; a proposition which
we feel has been largely debunked since that date. The provisions
of the 1962 act impose direct taxation on certain types of foreign
subsidiary income but permit a deferral of taxation on manufacturing
income. The law discriminates between investment in developed and
underdeveloped countries, giving favored treatment to the latter.
There is no question that both negatively and affirmatively the foreign
earnings provisions of the Revenue Act of 1962 impinge upon private
business decisions; indeed, they are intended to restrict private invest
ment abroad through influencing the relative profitability of different
investments. Further, since the enactment of the law, American busi
ness has been confronted with the problems o f administ ration of these
provisions including the issuance of a series of restrictive regulations.
V o l u n t a r y P rogram of D e p a r t m e n t of C o m m e rc e
There is another aspect of the tendency^ toward a desire on the part
of the Federal Government to meddle in international business trans
actions and in international business decisionmaking. Once again the
trigger seems to be the balance-of-payments problem. We now have
in the United States and have had for some time a so-called voluntary
program with respect to investment abroad administered by the De
partment of Commerce. One can, of course, look upon this program
as something better than we might have had as an instrument of na
tional policy; for example, the voluntary program obviously is con
siderably preferable to a formal system of exchange and investment
controls. But that hardly is the way to look at national policy ques
tions. The fundamental question is whether we should have it at all.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1097
And more importantly in this context, whether it is another part of
the fabric of control or international trade which has been woven over
the last several years. Certainly it is to the credit of Government that
this program has been developed with some flexibility; that in large
measure it has been administered on a voluntary basis, at least as to
corporations, although the Federal Reserve controls on banks in this
area are hardly voluntary. But there must be some recognition of
the fact that the fine line between voluntarism and compulsion in a
system where the Federal Government’s influence is as pervasive as it
is today is hard to draw. The fact that the program has been tightened
in terms of criteria from year to year, has been extended from year to
year, and the further fact that the Federal Government does not seem
to have any substantial program which would lead to abandonment
of this restriction on private investment abroad, voluntary as it may
be, should be o f concern.
It is also somewhat incongruous that a government which continues
to preach the seriousness of the balance-of-payments problem at the
same time refuses to depart from the proposition that we must draw
an artificial line between developed and developing countries, in terms
of balance-of-payments policy. Beyond the Vietnam war, which ob
viously has balance-of-payments implications and on which the Insti
tute completely defers with respect to Presidential judgment, the
United States seems to tend in the direction of committing itself fur
ther as to international economic ventures some of which may have an
unfavorable effect on our balance of payments.
These latter points are recounted, not for the purpose of implying
or expressing a disagreement with any particular policy attached to
any particular point. We wish to emphasize the fact that there are
so many handles for engaging the issue o f balance of payments that
to date have been relatively untouched or ignored that one begins to
wonder whether the problem is as serious as it is sometimes said to be
and whether private investment and the free flow of international capi
tal are absorbing more that their share of burden in dealing with bal
ance of payments. As a matter of fact, we suggest affirmatively that
international business and private investment and international flow
of capital are indeed carrying too much of the load. Something else
needs attention and some further realization of this growing tendency
toward control of international trade transactions should be on the
high-priority list of Federal policy review.
T rends i n S o cia l S e c u r it y P o l ic y I n c l u d in g P roposals R egarding
I n t e g r a tio n of P e n s io n P l a n s W i t h S o c ia l S e c u r it y
As indicated at the beginning of this presentation, the institute is
addressing itself primarily to tax matters, with emphasis on the in
vestment tax credit. It is, however, our feeling that some additional
points deserve to be raised, at least in a limited fashion, beyond the
very important investment credit issue. Having commented on the
matter of international trade and restrictions with respect to its free
movements, we now turn to the question of social security develop
ments including a highly complicated proposal of the Department of
the Treasury regarding integration of pension plans with social
security.
1098
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
We have previously suggested that it is illusory to think of the
social security tax structure as something apart from the total tax
burden borne by corporations and individuals in the United States.
Yet for an extended period of years this separation of thinking in
terms of impact on the part of the public and perhaps at times in
terms of Government policymaking has existed. In justice to national
goals and national policy making, we can no longer afford such illogic.
One reason is the weignt of the financial burden. As of January 1,
1967, including the medicare portion, the individual and the corpora
tions each pay 4.4 percent on a wage base of $6,600 in social security
taxes. The law has already scheduled further increases and President
Johnson in his recent message on this subject and in the administra
tion’s bill (H.R. 5710) advocates a program which would go substan
tially beyond this both in terms of rates and the base to which these
rates are to apply.
Perhaps more important than the question of sheer financial bur
den is the fact that by extending the present structure, the built-in
inequities (between individuals become increasingly aggravated. For
example, current contributors pay something more than the discounted
value of their own retirement benefits in order to finance the retire
ment benefits of those who have already retired but who paid less than
these benefits would call for.1 There is the further question as to
whether the United States in terms of its social security policy is
departing or has already departed from the proposition that this is
truly a contributory or earned benefit system. To put the matter in
reverse, aren’t we now engaged, if the President’s program is adopted
or the present trend of social security changes continues by other
means, m a system of guaranteeing annual income to elderly people
without benefits being tied, or even related, to the contribution by
the individual. Perhaps to sharpen the proposition even further,
isn’t the United States now facing up to the question as to whether
the social security system is on the verge of being converted into a
welfare program of old-age assistance without any tie-in to the tax
mechanism; i.e., the payroll tax concept.
We don’t believe that these issues should be taken lightly and we
think it is incumbent upon the Joint Economic Committee to complete
its study, the outline of which was presented in the joint committee
print, “ Old-Age Income Assurance: An Outline of Issues and Alterna
tives,” November 4,1966.
There is another aspect of current trends in respect to social security
which because of its sheer complexity may not receive sufficient atten
tion. This relates to the question of integration of pension plans with
social security. Announcement 66-58 of the Internal Revenue Service
issued on September 19, 1966, offered some tentative suggestions with
regard to new rules for integrating pension, annuity, profit-sharing
and stock bonus plans with social security. These suggestions include
the proposal that an employer who has a noncontributory plan of the
excess type in order to have it qualified for tax purposes may not pro
vide for a benefit of over 24 percent of compensation in excess o f the
new wage base of $6,600, the former percentage being 37y 2 percent.
1 See comm ents by James M. Buchanan and Colin D. Campbell entitled “ Voluntary Social
Security,” T he W all Street Journal, Dec. 20, 1966.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1099
The result of such a requirement if it were to be placed into effect
would be either to cause reduction of benefits to higher wage employees
or increase the benefits to lower wage employees. The estimated cost
impact would be quite substantial.
The institute has filed an extensive brief with the Internal Revenue
Service with respect to the issues involved in this proposal and, in all
fairness, the Internal Revenue Service and the Treasury Department
have made it clear that the proposal contained in announcement 66-58
was one for comment rather than a frozen position. But whatever may
be the status of Government thinking in this matter in the executive
department, it is clear that some rather fundamental questions relating
to the social security system and the private pension plan system in the
United States are involved. Notably, the direction of the proposal in
announcement 66-58 reflects a disposition on the part of the executive
department to push Federal regulation against private pension plans
ana in favor of an enlarged Federal system of social security. It
seems rather obvious that if by integration rules or by other means pri
vate pension plans become so costly to corporations and mandatory
social security costs continue to spiral that the inevitable result will be
curtailment or displacement o f private pension plans.
These points are developed in some detail in the statement filed by the
institute with the Internal Revenue Service referred to above. We en
close a copy of that statement either for inclusion in the record or study
by the staff at the committee’s discretion.
In any event, we urge that the Joint Economic Committee concern
itself with these fundamental questions including the overriding issue
as to whether the social security system can maintain its integrity if it
continues to be the subject of periodic political sweetening over ail ex
tended period of years. It is perfectly clear to use that if the theory of
integration between social security and pension plans is to prevail, this
sweetening trend must be halted.
Having earlier discussed at some length the question of contracyclical manipulation, we are constrained to observe that it now appears
that even the social security system and changes therein are being re
cruited for economic manipulative purposes. It is pointed out, for
example, by administration spokesmen that it is proposed that the in
crease in benefits recommended by the President under the social se
curity system will take place in midyear 1967 while the tax impact of
the increased rates will be postponed until January 1968. This in turn
is related to the fact thait the 6-percent surcharge is designed to take
effect midyear so that to some degree there will be a wash between the
increase in income taxes and the increase in benefits for the balance of
the calendar year. In the same context, one recalls the manner in
which payments of veteran dividends under national service life insur
ance policies have been changed as to timing for purposes of business
cycle considerations. Will the Government next begin dragging its
feet in reference to certain payments under Government contract obli
gations for fiscal year budgetary considerations ? Where is the end to
this kind of legerdemain ?
For what it is worth, our judgment is that no human system even
with the aid of computers can possibly engage in this kind of manip
ulative game in a country which is dedicated in large part to the free
market system without endangering the mechanism and above all
1100
the
1967 ECONOMIC REPORT OF THE PRESIDENT
without running grave risks of miscalculation and seriously perverse
results. The unknowns are too great, the forecasting is too uncertain,
and the cost of mistakes too severe.
Returning to the specific proposition o f social security and the cur
rent proposals for substantial enlargement in its benefits and in its
costs, and to the very important but technical question of integration
of social security with private pension plans, we strongly urge this
committee to take a deep interest in these matters.
ANNOUNCEMENT 66-58: INTEGRATION OF PENSION PLANS W ITH
SOCIAL SECURITY*
In accordance with Announcement 66-58 appearing in the Internal Revenue
Bulletin of September 19, we are pleased to offer our views and comments as
“background information” in developing proposed rules for integrating pension,
annuity, profit-sharing, and stock-bonus plans with Social Security. The Insti
tute is especially pleased that the Service is taking this careful approach to the
difficult issue of the appropriate rule for integration, and we commend you for it.
Before proceeding to an examination o f the issues spelled out in Announce
ment 66-58, we would like to indicate briefly our approach in analyzing the prob
lem. We turn first to a quick look at the private pension plan system and its
needs; second to a review of what the Social Security system is today and may
become in the future; and third, to an examination of the goal or purpose o f the
integration rule being reviewed. Following this background discussion, we turn
to an analysis o f the specific issues involved and offer some suggestions for
additional areas of inquiry in the form o f possible alternatives. Throughout our
review, we refer to pension plans, but we would like to make it clear that the
use o f this term is intended to cover annuity, profit-sharing, and stock-bonus plans
insofar as they are comparable and affected by the integration rules.
One further general comment before proceeding. As representatives o f the
capital goods and allied products industries, we have always taken what we feel
has been understandable pride in the leadership role played by the manufactur
ing sector of the economy in the establishment and development o f the private
pension plan system. In this light, we welcome an opportunity to provide our
thinking “ toward developing constructive ideas and furnishing helpful data.”
We certainly agree with what we assume to motivate this approach o f seeking
background information before issuing a proposed rule. Only an open-minded
approach will help achieve the mutual goal o f industry and government—the
growth and development of these private plans which are so important to the
general welfare of the nation.
P r iv a t e P e n s i o n s i n B r o a d O u t l i n e
Key to the narrow discussion o f a tax regulation governing permissible Social
Security integration with private pension plans for tax qualification purposes is
the bigger picture—namely, the raison d'etre o f the private pension plan system.
In broad outline, the reasoning behind the establishment o f a retirement income
or pension program starts with the employer’s concern for his employee’s welfare.
More specifically, it is the employer’s intention to provide monetary security for
the employee’s future and, in a sense, provide a retirement-oriented long-range
savings program. From the employee’s point o f view, the plan provides him with
income replacement in future years and thus is a m ajor building block in his
personal financial plans.
FUNDAMENTAL PREMISES
This brings us to the first major premise in our look at the integration rule.
A private pension plan provides neither the minimum nor the maximum o f an
individual’s financial security after retirement. The floor is the Social Security
system. The ceiling lies with individual thrift and what people put aside for
tomorrow’s wants, e.g., home ownership, bank savings, investments, life insur
ance, etc.1
It is the total financial support which is all important. Since in most cases
Social Security and private savings are not likely to be adequate in themselves,
(♦Contents o f letter sent to Commissioner o f Internal Revenue, by Charles Stew art, presi
dent, Machinery and A llied Products Institute, Nov. 30, 1966.
1 A 4th aspect logically would be o f a charitable nature— g ifts, public old-age assistance,
etc. These are, however, in the nature o f safeguardisi as contrasted w ith earned rewards.
1101
1102
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
it is clear that there is a public need served in the encouragement o f the develop
ment and growth o f the private pension plan system.
A second significant premise from which we proceed is that a private pension
plan is hut one of many forms o f compensation. To grasp the philosophy behind
the installation o f a particular plan, it is important to recognize that its primary
purpose is as a reward and/or an incentive to employees for a contribution to
the success o f the firm. Because it is compensatory in nature, it follows that
the absolute amounts in terms of levels of benefit will vary according to an
individual’s input or contribution. In fact, o f course, the absolute amounts
under a pension plan do vary, the levels usually being related to such factors as
earnings and length o f service. W e raise these points because the integration
rule has the understandable goal o f preventing “ discrimination” ; yet compen
sation in any customary form is inherently discriminatory and rightly so under
a free enterprise system.
Related to the points noted above, there is a third obvious conclusion; namely,
that a private pension plan should and will vary according to (1) the needs or
wants o f the employees and (2) the cost or ability o f the employer to pay for a
particular benefit. When plans are first installed, it is normal to find an em
phasis on providing benefits for those approaching retirement age and those
with long service who w ill soon be eligible. As a given plan matures, however,
history shows that along with increases in basic retirement pension payment
new features are added. For example, we have seen in recent years such new
benefits as early retirement, widow’s benefits, etc. I f history is a guide, such
features will multiply and new ones will be introduced.
In terms o f impact this means private plans today contain almost a myriad
of differing provisions which reflect widely varying purposes. All o f these
provisions may fit into a pattern for a given employer but only in the light of
his entire compensation scheme and the needs of his various groups o f em
ployees. An example o f this latter point is the development o f what amounts
to a supplementary pension plan fo r selected groups of employees. In the con
text o f the “ integration” rule, these plans are often considered appropriate
because Social Security old-age benefits comprise a larger fraction o f the retire
ment income o f lower-paid than o f higher-paid employees and this “ imbalance”
can be corrected only by making additional pension benefits available to these
higher-paid workers. The “goal” of both the supplementary plan and the basic
plan is tw ofold: (1) to meet the needs o f employees both collectively and in
terms o f groups and (2) ito serve as a recognized reward and/or incentive.
From this, we draw at least one obvious conclusion in terms of pensions in
general; namely, that it is vital to the employer that there be flexibility in the
design o f any given plan.
TYPES OP PENSION PLANS
As a final general observation to complete this brief discussion o f private
plans, in perspective, it seems clear to us that the existing variety in plans
employed to achieve a few basic goals makes exact comparisons between types
o f plans somewhat like comparing apples and pears and plums. To generalize,
there are at least three basic formulas—with numerous variations—for de
termining the amount o f pension to which an employee will be entitled. First,
there is the unit-benefit method which provides a definite amount o f pension
per year o f credited service. This type of plan obviously provides differing
amounts o f final pension depending on length of service.
Second, there is the flat-percentage method which provides a percentage of
average compensation over a specified period o f time. Here it is common to
set a minimum qualification fo r service such as 15 years and to emphasize salary
or wage levels by taking a percentage o f final years o f pay. The aim o f this
design is to tie pension levels to income achieved just before retirement, pre
sumably the high point fo r most employees.
A third approach is the money-purchase method in which costs determine the
level o f benefit rather than the other way around. With this as their primary
emphasis, such plans then utilize the concepts o f length o f service and level of
pay to varying degrees.
Since an “ integration” rule must fit the variety of plans used, it seems clear
that any “certainty” in insuring a goal of reasonable relationship between Social
Security benefits and those paid under a private pension plan is made more
difficult and perhaps to some extent impossible.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1103
To sum up, a private pension plan is a compensation tool oriented toward the
specific retirement needs of the employee. A key aspect in its growth and
development is plan flexibility to meet changing employee needs and the em
ployer’s ability to pay. Finally, the design o f these plans significantly turns
on a number o f differing considerations including reasonable costs, length of
service, and level of pay.
T h e “ I ssu es” a n d t h e G oal
The “ integration” rule has its genesis in the Internal Revenue Code which
bans a tax-qualified plan from discriminating in favor o f higher-paid employees.
This ban, however, gives way in logic and equity to an exception so that em
ployers will not be considered to discriminate if they “ properly” take into
account the pension provided under the Social Security system. A t this point
the integration rule becomes the vehicle for equating the values under different
types o f benefit systems for the purpose o f establishing factor® for comparison.
Two questions are raised. What is the nature o f the Social Security system
which is to be compared to private pension plans? What is the nature o f the
discrimination being banned?
A LOOK AT SOCLAL SECURITY
To examine these issues in order, it is apparent at once that the Social Security
system is quite unlike the private pension system in many o f its particulars.
Importantly, for example, it has certain aspects of a public assistance project
financed by means of a payroll tax. While the right to benefits is tied to a work
history, the benefits received by those over 65 are financed almost exclusively
from taxes on the currently employed and their employers. One interesting
analysis o f the system along these lines is as fo llo w s:
“ That the Old-Age and Survivors Insurance scheme is a current transfer is
apparent also. Annual benefits are financed from annual receipts o f OASI taxes
and interest earnings on the trust fund. Interest on the Federal securities held
by the fund is paid out o f general revenues. Thus, annual benefits of OASI
recipients, whether financed from OASI taxes or interest earnings on the trust
fund, are transfers o f income from the currently active.
“ A number of rationalizations have been invented fo r the purpose of obscuring
the implication o f a current transfer. One is the social compact. It is argued
that right to benefits is earned by making contributions. However useful this
argument may be in political debate it does not alter the simple economic
fact of a current transfer. The suggestion that participation in OASI is analo
gous to the purchase of an annuity is very doubtful. Pension benefits are too
loosely related to contributions for the annuity analogy to hold in any meaningful
sense. Nor is the program properly insurance. As a consequence o f the earned
means test, OASI promotes the occurrence o f that event against which it “ in
sures,” the loss of earned income due to retirement. Should we not recognize
OASI for what it i s : an acceptance o f collective responsibility fo r the aged” ? 2
Expressed differently but in effect arriving at a similar conclusion is the fo l
lowing colloquy on the proposal leading to Medicare from the House W ays and
Means Committee Executive Hearings on Medical Care for the Aged, 1st sess.,
89thCong. (1965),p a r t i ,p .20:
Mr. Byrnes. So that fundamentally what we are doing here is not prepaying,
but what we are doing here is having the people who are currently working
finance the benefits of those currently over 65 ?
Mr. Myers. I think it can be viewed that way, just as the old-age and sur
vivors insurance trust fund can, or else you can also view that it is prepayment
in advance on a collective group basis, so that the younger contributors are
making their contributions with the expectation that they will receive the bene
fits in the future—and not necessarily with the thought that their money is being
put aside and earmarked for them, but rather that later there will be current
income to the system for their benefits.
Viewed in this light, a number of factors in terms of the “ integration” rule can
be deduced. First, the actual contribution that a given employee makes in his
own dehalf is zero. Second, the ‘‘value” o f the system which becomes most read
ily equated to private plans is the work relationship promise o f future benefits—
2 “ Old Age Income A ssu ra n ce: An Outline o f Issues and A ltern atives,” Subcom m ittee on
F iscal P olicy o f the Joint Econom ic Committee, 2d sess., 89th Cong. (1 9 6 6 ), pp. 7 -8 .
1104
THE 1967 ECONOMIC REPORT OP THE PRESIDENT
i.e., the benefits and years o f service requirements written into law. Third, the
employment relationship itself is a device of only incidental significance to the
goal o f taking care o f the a ged ; it is the absolute level o f benefits which is of
critical importance, not the limits on a payroll tax or the actuarial computations
as to projected returns fo r contributions by the mythical “ average” employee.
The essence of the Social Security system.—Whether or not one accents in
whole the theory posited above— intended by the author o f the congressional
study simply to raise some questions—there are some facets of the system upon
which there can be general agreement. First, the system relies on the pay-asyou-go approach as contrasted to a funding arrangement. In effect this means
actuarial soundness must be achieved only on a short run basis: i.e., tax revenues
collected this year must be sufficient to pay promised benefits for the current
year. When the plan is projected into the future, there is an immediate im
ponderable; namely, the attitude of Congress which has consistently increased
benefit payments— and, as a consequence, tax payments—in the system ever since
it was first established. In short, this pay-as-you-go approach depends upon
short-range soundness; its long-range position is based on congressional intentions.
Second, OASI, in concept, provides both a floor in terms of a minimum sub
sistence benefit and a schedule o f benefits designed to replace some faction of
earnings for the beneficiaries o f the system. With respect to the replacement
aspect, the system provides disproportionate benefits for the lower-paid as con
trasted with higher-paid employees. Thus, when viewed in the context of a
pure replacement o f income scheme, Social Security “ discriminates” in favor of
these lower-paid employees.
Mr. Byrnes. In other words, on the theory that if I am going to be asked to
pay for a tax today fo r a benefit that is available to people over 65, then when
I get to be 65 somebody who is then working ought to do the same thing for me?
Is that it?
Mr. Myers. Y e s ; I would say that is the way it is, and this is a reasonable
group prepayment basis, I think you can call it, because of the compulsory
nature of the tax for now and fo r all time to come on people in covered employ
ment.
Third, the payroll tax device is a technique to tie the benefits to periods of
gainful employment. Justification for this normally includes the following
reasons:
1. The tax encourages fiscal responsibility on the part of people who are eligible
for the benefits.
2. It appears to be an essential element in a system that relates benefits to
earnings and bases the right to benefits on the performance o f work.
3. The payroll tax makes available to the program a source of financing related
directly to a benefit weighted in favor of the low-income taxpayer and visible in
terms o f its relationship to a contribution to the system.
The maintenance o f the purity o f the payroll tax device turns on the relationship
between work and earned benefits. Based on the 1965 amendments and assump
tions similar to -those underlying the suggestions in Announcement 66-58, if we
project we can see at least some individuals contributing more than they can
presently expect in benefits in return. Should this occur, the justification for
the system then, as noted earlier, must be in part that the program is a public
assistance program, and total reliance on a payroll tax would no longer seem
to be a key part o f the rationale.
Fourth, a common view o f the Social Security program, as noted above, is that
it is a basic building block or cornerstone for old-age security. As stated by
Wilbur J. Cohen, the then Assistant Secretary of Health, Education and Welfare,
before congressional hearings:
“ . . . [T ]h e concept underlying the philosophy of social security is that it is
basic protection to which individuals, employers, unions, private people, can add
or should supplement with such additional protection as they wish.
“ . . . The concept . . . is that you provide w dollars for old-age retirement,
then a private employer adjusts his private retirement system to be on top of that.
The private pension is the second layer. The third layer is whatever the indi
vidual wants to do on his own.” 8
This concept is significant in the present context in the sense that government
at least anticipates that the normal response of employers will be to integrate—
in the nontechnical sense— private plans with the public one.
3 H ouse W ay s and Means Com m ittee Executive Hearings on M edical Care for the Aged,
1st ses®., 89th Cong. (1 9 6 5 ), part 1, p. 31.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1105
Fifth, the Social Security program has undergone significant changes since it
was first enacted; and if history provides a lesson, it will be changed in the future
and probably significantly. The past, of course, needs no clarification; the future
prospects on the other hand are not at all certain, but there is today discussion of
improved benefits, revision of the wage base, subsidizing benefits from general
revenues, tying benefits to cost-of-living indices, and so forth.4 Indeed, if there
is anything certain about the Social Security program, it is that it will be changed
by future Congresses. From both a theoretical and practical point of view, these
prospective changes are of great significance. For example, if Congress greatly
increases benefits disproportionate to private benefits, the role of private plans
will be changed. I f general revenues are tapped, the program loses a little more
of its “insurance” aspect. This imponderable of future changes makes at least
one point obvious— that the task o f integrating private pensions with Social
Security is not a one-shot problem, nor has it been in the past.
To try to sum up the above views, Social Security is clearly a kind of a hybrid
affair which combines some o f the elements o f a government public assistancewelfare program (i.e., general revenues allocated to the needy in terms of
subsistence benefits) and certain o f those of a private annuity or insurance
program where identifiable contributions or costs add up to specific future
benefits. We conclude from this that comparability of Social Security to private
plans is not only difficult in practical terms but is difficult conceptually as well.
However, there is one basic facet of Social Security that is relevant in the design
of private plans without reference to the hybrid character of Social Security;
this is the level of benefits provided by law.
WHAT IS DISCRIMINATION
The purpose of the integration rule is to prevent discrimination, but before we
can prevent it we should know what we mean by the term. In one context, as
noted above, all compensation schemes are discriminatory. Pension plans being
work-related income replacement schemes are no different; as presently con
structed, they discriminate. But this discrimination is not forbidden by the la w ;
in fact it is fostered in the sense that we deliberately encourage the orientation
of both public and private plans as rewards for work performance. At the
minimum then we start with the fact that discrimination does not mean simply
providing retirees different absolute amounts of pension.
The next inquiry i s : What is discrimination under the pertinent IRS regula
tions? The tax rules raise the question with respect to two categories—“classi
fication of employee’s” and “ contributions or benefits”—providing that there
must not be discrimination in favor of employees who are officers, shareholders,
supervisors, or highly compensated. It would appear then that if a plan favors
these select groups it is discriminatory.
This leads to still another question which is particularly pertinent: How do
we define a highly compensated employee? It would seem from the language of
the law that these higher-paid employees might include anyone who is on the
payroll at a high salary with undefined responsibilities as well a$ the recogniz
able “ top brass” of a company who simply do not fit the other designations of
officers, shareholders, or supervisors. On the other hand, it could be interpreted
to include all those who earn more than the median or average wage or salary
level for a given company. However, it would seem that the intent of the rule
is far removed from employees earning at or a little above the Social Security
wage base such as $6,000 to $7,000 and the rule should not be read to mean
just “ higher paid” employees.5 At any rate, it is certain these employes would
argue that they are not highly compensated.
As a point of fact the “ highly compensated” employee will vary from company
to company. Nonetheless, if we divide a company’s employees into three com
pensation categories, some pertinent observations can be made. The lowerincome employees, such as those earning less than the maximum Social Security
wage base, are provided a “protection” against discrimination under Social
Security by means of (the disproportionate weighting in favor of lower-paid
employees built into the system. The higher-paid employees of the firm—the
top echelon—have protection outside the pension program since they are pro
4 Another example o f suggested change was put forth by Secretary o f Labor W irtz in a
recent speech on November 16, 1966. in which he suggested that perhaps “ earned” benefits
under Social Security m ight be utilized in advance by beneficiaries to pay fo r training.
5 T h is view seems to be in keeping with the legislative history o f the 1942 Revenue A ct
by which this discrim ination ban was established.
75-314r—67— pt. 5— ■
—8
1106
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
tected by an economic system which provides that compensation be discrimina
tory in that it is based on the contribution o f the individual. The third group,
however, the middle income group, appears to fall short with respect to each
of these protections. Indeed, a case could be made that this group should be
afforded special “ discriminatory” protections under the tax laws to offset the
discrimination built into the Social Security system for lower-paid people;
otherwise, companies will not be able to provide them with adequate retirement
income, particularly when the rule we are dealing with seems to categorize them
as highly compensated employees.
To sum up our discussion o f discrimination, we think there is a clear danger
of overstating that which is discriminatory by assuming that a rule prescribing
benefit limits defines per se what is discriminatory.6 We think this is an over
simplification; while any rule which is developed along these lines may tend
to prevent a discriminatory result, it is not certain to prevent it and, as in the
case of the middle income group, may even aggravate it. In short, all the
goal can ever be is to provide a very rough measure of equity and in a sense
create a “ball park” test for rough justice as a means of keeping faith with the
generally accepted principle that the tax laws should not be used to further
“discrimination” o f any kind.
T h e C u r ren t R u le a n d a M a t h e m a t ic a l A pp r o a c h in G en e r a l
Since 1943 the Internal Revenue Service has provided a rule or set o f rules
setting out the limits governing integration o f private plan’s with Social Security
for tax qualification purposes. As Announcement 66-58 indicates, all the
current rules stem from a mathematical formula devised to provide a means
for comparing Social Security pensions with proposed private pensions. The first
question then concerns the sufficiency o f this test, currently the 37y2-percent test.
To provide a basis for the comparisons that are the subject o f the discussion
which follows, the factors entering into determination o f the current rule are
outlined here:
1. Wage base o f Social Security tax— $4,800.
2. Maximum average monthly compensation under the Act—$400.
3. The maximum “primary benefit” amount— $127.
4. Total OASI benefits for an employee as a percent of the primary benefit (the
former reflects disability, dependents’ allowances, etc.)—150 percent.
5. Since the employee’s and employer’s contributions under the Act are equal,
it could be assumed that an employee’s contribution would approximate half the
cost of the OASI benefits. However, most employees on retirement will have con
tributed less than half the cost o f their own OASI benefits because of in
creases in OASI benefits since they came under the plan. Hence, an estimate
must be made as to “actual” average employee contributions. This currently is 22
percent, making the employer’s contribution 78 percent.
Using these “ factors,” calculation of the formula thus proceeds along the follow
ing lines:
1. $127
.
= 32 percent.
2. 32 percent x 150 percent= 4 8 percent.
3. 48 percent x 78 percent=37.4 percent.
Rounded up, this is 37y2 percent—the percentage o f earnings above the Social
Security wage base to which benefits under the integrated pension plan are limited
if the plan is to be tax qualified. It is the rate which has prevailed using similar
calculations since the Social Security wage base was at $3,600. The principal
change being suggested in the formula approach in Announcement 66-58 is that
the employee contribution percentage be deemed to be 50 percent as opposed to
the current 22 percent. Using this figure and basically the same formula approach
as above, the rate becomes 24 percent. Although pension and actuarial expertise
6 W hile such a solution has serious drawbacks, the discrim ination problem might also be
handled on a case-by-case basis w ithout an integration rule. Further, in searching fo r
simplicity, one m ight turn to the classification rules and argue that i f a group receiving a
certain level o f contributions or benefits is not a discrim inatory group under the classi
fication test it should not be discrim inatory to provide it with special benefits under a
pension plan. IThese suggestions, however, are not com pletely satisfactory answers be
cause they are sim ply another w ay o f saying “ forget the integration rule.” Such a -course
would be inequitable to those who have retired or w ill retire shortly under plans limited bv
the current rules. Perhaps more im portantly, these thoughts are not w holly responsive
to the issue to which the Service is directing its inquiry.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1107
may be necessary in order to fully comprehend this calculation, we believe some
general comments are appropriate. As noted above, the formula which has been
used to derive this 37%-percent rule has the following elements:
1. The relationship o f the “primary” Social Security pension benefit to the
Social Security base.
2. An adjustment factor to reflect the fact that “ ancillary” Social Security bene
fits are provided along with the retirement benefit.
3. A second adjustment factor to reflect the fact that wage and salary deduc
tions in the form o f a tax run to individuals as well as employers in order to pro
vide the fund for paying Social Security benefits.
It is, of course, the adjustment factors that provide much of the controversy
because they are the variables subject to the widest fluctuation depending on the
assumptions from which one proceeds. However, the first aspect of the formula
is of great importance and our discussion starts with it.
R e l a t io n s h ip of B e n e f it to Co m p e n s a t io n
The first factor is the percentage ratio of the benefits under the public system
to the compensation on which such benefits apply. This first factor has been
relatively stable ever since the wage base was at $3,600. Specifically, this rela
tionship has been as follow s:
1. (Wage base at $3,600)
Primary Insurance Amount (P IA )
__ 80 _
Monthly Maximum Wage Base (M W B)
008
~ peicent
2. (Wage base at $4,200)
PIA
108.50
M W B = ~ 3 5 0 -=31perCent
3. (Wage base at $4,800)
PIA
127
00
= -TX77 = 32 percent
MWB
400
4. (Wage base at $6,600)
A?8=3lDercent
MWB
550 61 PerC8nt
Indeed, proposals before the 89th Congress would, for whatever the reason,
maintain this stability. For example, H.R. 18420, introduced by Congressman
Burke and apparently designed with the President’s proposals for the 90th Con
gress in mind, would provide as follow s:
(Wage base at $7,800)
PIA
208
00
= ■ ^ = 3 2 percent.
MWB
650
Another more far reaching proposal put forth by Senator R. Kennedy would show
a similar result notwithstanding the fact his measure would raise benefits an
average of 50 percent and take the wage base to $15,000, as follow s:
(W age base at $15,000)
ll§=ilHlpercentThis stability is, o f course, of considerable significance. First, the ratio re
flects a benefit-related approach and is a kind o f results test or analysis. Second,
it is this primary insurance benefit that is the building block for private plan
designers. Third, iit appears to be a controllable relationship in the sense that
in the way Congress has view'ed the benefits there is an implicit long-range “ob
jective” of about 30 percent of the Wage base. Fourth, of all the factors in
the formula, this is the most understandable and simplest to work out. We
stress these points because in just about any formula approach that might be
selected this relationship would peem to be appropriate.7
However, the suggestion put forth in Announcement 66-58 would seem to
unduly complicate this relationship. Specifically, the 1966 relationship (P IA /
MWB=132.70/385=34.5 percent) is averaged with the 1965 change in the law
7 A s w e u n d e rsta n d it, u n til 19i51 th e in te g r a tio n r a le w a s entirelyi benefit oriented! a lo n g
these lines.
1108
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
which will not be fully effective until 2004 (PIA /M W B =168/550=30.5 percent)
with the result being a figure o f 32.6 percent. It is our feeling that the aver
aging technique simply implies too much. For example, it implies that the
year 2004 is meaningful in terms of action taken by Congress effective in 1965.
As noted above, it is difficult to accept any assumption positing no further
change in the law until 2004. Further, it begs the queisition raised in the An
nouncement as to mathematical soundness. We do not really see how it can
be argued, or even logically posited, that a precise mathematical calculation
will lead to the goal sought by the ban on discrimination. In short, while fully
aware of the meaningfuilness o f the relationship being reduced to percentage
term®, the averaging approach seems to us to be an attempt at preciseness in
an area where it is neither needed nor possible.
THE SUPPLEMENTARY BENEFIT ADJUSTMENT FACTOR
The second element in the formula is an adjustment factor to reflect the value
of the supplemental benefits as compared to the value of the retirement benefits.
Since 1943 this has been 50 percent, and the Announcement indicates this rela
tionship would continue, notwithstanding the changes made in the 1965 amend
ments.
While it is not our intention to be quarrelsome, the rigidity o f this adjust
ment factor following the 1965 Amendments gives us a good deal of trouble.8
Certainly the package o f benefits tied to Social Security has increased— e.g.,
the hospital insurance benefit, the changes in the disability provisions, etc.
Further, the factor would appear to turn on the correctness of certain assump
tions such as a separation of disability and the like from pure old-age assistance
benefits. While this approach can be taken, it implies a certainty to the rela
tionship which we feel is bottomed on debatable assumptions. For example,
we wonder whether the hidden values of Social Security should not be weighted
in connection with this calculation. Specifically, under Social Security there
is a degree o f portability to the benefits which would be quite unusual for a
private plan. We think this portability factor might make the total package,
say, a quarter or a third more valuable than the face amounts indicate. And
what of disability and medicare? Do they not add both tangibly and intangibly
to the value of the Social Security package? Assuming that some weighting
has been, or at least will be, given to the tangible impact, what of this intangible
value? Is it sound to argue that the value o f medical protection at a time when
medical needs are most critical can be reduced to a monthly premium figure?
Juist the fact that it is added on means a kind o f foot4n-thte-door which should
lead to further benefits as has been the case with the disability insurance which,
for example, in the last go-round was improved. Might it not be fair to say
the intangible value is worth 10 to 30 percent o f the total value of the Social
Security package?
To sum up, on the grounds that any factor in the formula must be based upon
sound and reasonable premises beyond being arithmetically correct, we con
clude that there just does not seem to be any mathematical precision possible
with regard to this adjustment factor. Logic o f course indicates that the
primary retirement figure as a percentage o f a base wage or salary under
states the total old-age security. However, in seeking precision for this cal
culation, we think the rule becomes a numbers game where the merit of the
adjustment factor gets lost because the alternative basic assumptions are sub
ject to question and not conclusive. What might make more sense would be
to use a base of 100 precent and simply state that a 50-percent wife’s benefit
plus other tangible and intangible benefits means the primary insurance amount
should be adjusted by a 200-perdent factor. While this approach would be
controversial, it would follow the logic of the 50-percent tetet for employee con
tributions in that it is a “ ball-park” figure. Its frailty, as we see it, is that
the two adjustments are offsetting. We will deal with this problem later on.
ADJUSTMENT FOR EMPLOYEE’ S SHARE
As is certainly not unexpected, the one aspect of the current formula which
more than any other is the center of controversy is the measure o f an employee’s
contribution towards his own Social Security benefits. This figure was set at
8 Indeed as we piece together the history o f these rules, this adjustm ent has alwavs re
mained static fo r unaccountable reasons.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1109
6*4 percent when the wage base was $3,600, at 20 percent when the wage base
was $4,200, and at 22 percent when the wage base was $4,800. Announcement
66-58 suggests that, using the calculations applied in the past, with the wage
base at $6,600, this figure should now be 50 percent.
While we think a “ theoretical” justification can be made for a 50-percent test,
so can a case be made for zero percent or even a hundred percent. In more de
tail, one argument for a zero-percent (in effect, no adjustment) factor was noted
earlier in another context; namely that Social Security is an old-age assistance
program with no employee having contributions earmarked for himself in the
future. Another argument is that the contribution is employment related; i.e.,
but for the job there would be no Social Security benefits. In this case it is the
employer who is really paying all the tax. This argument is further buttressed
by the observation that it is take-home pay which is the yardstick employees use
to measure their compensation. When taxes o f any kind bite into take-home
pay, pressures build and employers inevitably are pushed to replace the tax bite
with take-home dollars. In sum, considering Social Security taxes as an employ
ment cost, it might be fair to say that the entire burden is on the employer.
On the other hand, a position might be taken that in the final analysis the
employee pays the entire sum because the tax can be considered as a legitimate
labor cost which normally would be included in the price of the product or
service.
From the layman’s point of view, in terms of ready comprehension the 50percent test is deceptively simple. While, as noted, we think a case can be made
for it theoretically, the practical aspects o f it do not seem to make much sense.
For example, if we accept the theory that the tax is split evenly between the
employer and the employee, how do we account for the fact that employers do
not get refunds while employees do? To be specific, since a certain proportion
of the work force changes jobs during a calendar year, a particular employee
may pay more than the maximum and obtain a refund; employers have no such
option. A similar situation could occur when the employee holds more than one
job at one time.
Further, to arrive at 50 percent, the Announcement looks ahead to 1900—at
least 3 new Presidents and 12 Congresses away. Is there any realism in working
up the mathematics for Social Security projections this far out? Surely the
secret o f the system (which is really not a secret) is that the benefit program
must trend upward in the future as it has in the past. I f we assume also that
the rule we are concerned with must be examined periodically, why then make
projections to 1990? As we see it, this “average” worker accumulation approach
is the least valid o f the methods of determining employee contributions. A more
realistic method is the “near future retirement” approach or to simply look
ahead until 1970 and average out the percentage o f contributions for 1965 and
1970. For example, IRS might establish a moving annual index or “ average”
cost of providing Social Security benefits attributable to employee contributions.
If we did this, our guesstimate would be the current figure is in the neighbor
hood o f 10 to 25 percent.
A more basic question is whether there is some usefulness in deriving this
figure. We conclude that there really cannot be, principally because the basic
assumptions behind it are neither immutable nor even free of controversy. In
short, you cannot tree a posisum if you cannot agree to what a possum is.
We have alluded to a number o f theoretical problems above, but beyond these
are some other important ones. For example, how can we account for “interest”
on a contribution when no such interest is in reality earned? To do this as
sumes a system which is equivalent to a funded pension plan which Social Secu
rity is not. Another doubtful starting point in the finding that an employee pays
for 50 or more percent o f his “ retirement benefit” based on his contribution is
the failure o f this approach to credit the employer with provided contributions
for such “extras” as administrative costs and so forth. At the same time this
approach seems to require acceptance o f the proposition that government con
tributions from general revenues can be equated to employee contributions.
Finally, another puzzling aspect of the mathematics is the fact that there seems
to be a need for a methodology which will push the contribution percentage up
ward. Historically, we have gone from 6^4 percent to the current 22 percent and
the Announcement indicates we now should go to 50-plus percent. Apparently
one basic ajssumption behind this is that with a static Social Security system
this percentage could go up and up and eventually exceed 100 percent! Indeed,
it is somewhat ironic that some opponents o f further Social Security expansion
have demonstrated this possibility mathematically by taking the situation o f
1110
THE 1967 ECONOMIC REPORT OP THE PRESIDENT
a new labor force entrant and projecting out until his retirement assuming a
mature Social Security system, with interest rates, etc. We think all would
agree that at this point the “mathematics” have become irrational and must be
discarded for a more meaningful solution to the problem o f discrimination.
A broader point raised by all these observations is that perhaps today we are
in danger if we attempt to translate into mathematics the simple and under
standable proposition that to some degree an employee contributes towards his
Social Security retirement. Spelled out, this mathematics calculation tends
towards a “no integration” rule because the underlying assumptions seem to
demand a growing “carve out” for purposes of recognizing the employee’s input.
What we are therefore doing in this exercise is neglecting the discrimination
issue to accommodate this concept. In sum, we might well be letting the tail
of the dog wag the dog.
THE SPECIFICS OF THE CURRENT FORMULA
We think that the basic relationship o f benefit amounts compared to base wage
should be the “ exclusive” mathematical consideration in the rule. From this
point any adjustments made might most appropriately be designated “ tinkering,”
not mathematical calculations. Such “tinkering” could perhaps be justified
either to preserve other rules such as the requirement for downward adjustment
because o f a death benefit, early retirement, etc., or to reflect some indisputable
facts. In this latter category we would include the follow ing:
1. The Social Security benefit is tax free, and the primary insurance amount
understates the real worth to an individual.
2. To some, perhaps undefinable, degree the primary insurance benefit does
understate the value of the pension.
Finally, we would use the theory o f employee contributions as a rationale for
“a rule of caution.” As long as it is possible to make a theoretical case that an
employee contributes to his Social Security pension, we would tend to be con
servative in estimating benefits; and where high or low alternatives exist, it
might be fair to consider only the low ones to reflect this theoretical factor.
A “ T r a n s it io n ” R u le
In the past when changes were made in the integration test, the rule with
respect to existing plans was simple. I f the plan was qualified, the prior favor
able determination letter continued applicable unless withdrawn or modified, or
“new regulations” required a change. For the past 15 years, this “grandfather
clause” approach has been justified on the grounds that the basic rule—the 37%percent test—has not changed. Announcement 66-58, however, suggests that
transition rules might be in order in light o f any possible downward revision
to presumably offset any “ inequity” created by a drastic change in the rules.
We find some merit in the theory of a transition rule should a drastic new
test such as the 24-percent rule be adopted. However, we wonder whether the
approach taken really does what it seems to be intended to do. F or example,
as we understand the application o f the transition rule, employers with integrated
plans would immediately face the prospect o f a gradual reduction o f retirement
benefits in future years. Certainly, it seems clear that many employers accept
ing this result would rightly presume that the employees would place the blame
for the reduction on the government. In the practical sense then, the approach
being suggested amounts to a retroactive reduction o f benefits, even though from
a technical point of view it does not.
The problem, as we see it, is from the practical viewpoint, and we suggest that
a transition rule should be avoided unless it is so obviously necessary it cannot
be avoided. Further, in the justification o f such a change, it seems only reason
able that minor inequities be ignored. There would seem to be no need to clamp
down on the problems of minor variations in benefit amounts for income between
the levels o f $4,800 to $6,600 simply on the basis that there can be no “ discrimina
tion” whatsoever. What, in effect, we are suggesting is that consideration should
be given to some sort o f rough test— e.g., a stretchout to 1970—as opposed to the
strict test suggested in the Announcement.
To repeat, however, we think it is clear that the only time a transition rule
would ever be necessary is in the case o f a drastic change in the basic rule. At
this time, we do not see where a case is made for such a change and. therefore,
conclude that at the present no transition rule is necessary at all. In sum, w e
suggest the old “grandfather clause” is the answer once again.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1111
T h e F o rm u la A pproach in G eneral
As noted above, we do not think the adjustment factors have the degree of
mathematical certainty that they were perhaps intended to have. With one
biasing the result upward and the other downward, an immediate factor of
“push and pull” is introduced. I f certain assumptions cannot be agreed upon, the
result becomes a massive numbers game. W e are sure, for example, that having
asked for mathematical alternatives the IRS will find a considerable number of
letters on its desk providing ingenious formula approaches. Further, we dare
say the vast majority will have one thing in common, the result will be close to
37% percent, almost as if the mathematical world has found the magic all
purpose number. Not that there are not good reasons for this. In fact, we think
this result is inevitable because notwithstanding the frailties inherent in the
construction of this rule it has been accepted for a long period of time. Further,
insofar as it is already benefit oriented— i.e., close to the percentage relationship
of the primary insurance benefit and the base wage—it is no worse than a “ball
park” figure. Also from the practical standpoint the 37% percent test may be
a fair estimate as to what the average employer can afford to pay even though
“ discrimination” might not exist if the test were 40-50 percent or even higher.
Finally, setting aside debatable assumptions— or as the Announcement implies,
inadequate ones—the fact that the result has been long-range stability seems to
indicate at least in part that the government has recognized his real need in
terms of the sound development o f private pensions.
All o f these observations seem to us to suggest one very significant conclusion.
The current 37%-percent test, good, bad, or indifferent, does provide a result—
a result which has had the virtue o f exposure for 15 years. I f we measure it
simply as a result, what do we find? Has the test prevented discrimination?
A BUREAU OF LABOR STATISTICS STUDY OF PRIVATE PLANS
A recent BLS study seems to indicate that the result is in keeping with the
goal. More specifically, the Bureau in studying over 25,000 private pension
plan reports for 1963 filed with the U.S. Department of Labor’s Office of LaborManagement and Welfare-Pension Reports concludes in p a rt:
“ Since the social security payment represents a larger proportion of preretire
ment earnings for workers with low earnings than for those with high earnings
and since private plans also tended in the same direction, lower paid workers
clearly received a larger total benefit in relation to previous earnings than higher
pa4d workers.” 9 [Emphasis added.]
While the study is much more detailed and does not directly address the issue
o f the results o f the 37%-percent test as applied at the $6,600 level, the finding
above seems to eliminate any great need for concern— a least as to what the test
has accomplished in the past. What is more, it suggests; to us that perhaps a
study o f results would be much more meaningful than the acturial estimating
game Which is played when the formula itself is the issue every five years. We
think all would agree that if the object is to prevent discrimination, however
defined, the test o f success should be the degree to which such discrimination
does or does not exist.
RESULTS OF A MAPI SURVEY
Besides the discrimination impact, we think it appropriate to indicate in brief
other likely results o f the proposal as suggested in the Announcement First,
as you know, the complexities o f the integration rule are such that quick
answers as to potential effects are just about impossible, tout we have polled our
member companies to determine what their initial findings were as to the impact
of a 24-percent test.
One clear conclusion resulting from this survey is that the transition rules
being suggested would mean that virtually all plans would have to be reviewed
in detail by experts in the pension field at no small cost to the employers. Fur
ther, there will be a tremendous burden on both the government and the same
employers because many o f these plans, perhaps the vast majority, will have to
make some adjustment and be subject to the IRS clearance procedures. Many
of these plans are, o f course, the result o f collective bargaining and required
9 “ P rivate Pension P lan Benefits," B ulletin No. 1485, Bureau o f Labor Statistics, U.S.
Departm ent o f Labor, June 1966, pp. 13-14.
1112
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
changes here would be costly, time consuming, and burdensome. Finally, and
perhaps most importantly, the confusion that would exist would be equally
staggering, not only on the part of individual employers, but also among em
ployees who would find that their benefit expectations are being or could be
adversely affected.
The changes which would be required as a result o f a 24-percent test itself
would also be extensive. At this time, most employers who would be affected
are not sure which course o f action they would take. Their alternatives appear
to be to (1) increase benefits at an added cost or (2) decrease benefits to
maintain present costs with a consequent loss o f pension benefits to current em
ployees or (3) strip away some o f the fringe benefits or plan “ extras” such as
death or widow’s benefits. While it is still too early for the results of our poll
to provide much in the way o f cost figures, we think it is a very conservative
estimate to state that the cost potenial of the proposal is many millions of dollars.
Obviously, a more modest downward revision— say to 30 percent—would bring
about a less severe impact but one inevitable result of such a revision, even if a
“grandfather’s clause” were maintained, would be great uncertainty on the
part o f employers and their pension experts as to the future and a new-born
reluctance to initiate changes, such as new employee benefits, fo r fear o f future
downward revisions. It takes little imagination, we think, to see that this could
really hurt the growth and development of private plans and work to the longrange detriment to the nation as a whole. Even those integrated plans which
would not be greatly affected by this particular proposal might suffer from this
hangover impact insofar as the employer believes his future flexibility is
threatened as, for example, would certainly seem to be the case if the precedent
of a “ transition” rule were established.
To sum up the results of this poll o f our member companies, we think the
proposal as put forth would have a dear and far-reaching impact on integrated
plans. Further, this impact would be costly both in terms o f current expendi
tures necessary to change plans to meet the new rule and also with regard to
the future o f private pension plans in general. Finally, we would like to stress
again that this impact does not even deal with the basic question—namely,
whether or not the change is necessary to prevent discrimination. We, there
fore, reach the conclusion that unless a case can be made that a change is neces
sary in terms o f the purpose o f the rule any adverse impact is sufficient reason
to withdraw the proposal.
MAPI’s S u g g e s t io n s
One of the difficulties in looking at a formula approach as we have indicated
above is the fact that there is a degree of unreality attached to it because o f the
variable assumptions from which one might logically proceed. Indeed, the
principal difficulty in providing a simple answer to Announcement 66-58 is that
much of the analysis is like chasing a ghost or some equally nonexistent quarry.
However the current rule in broad perspective has some attributes on which
all can probably agree. First, it is very complicated and, from the businessman’s
or anyone’s standpoint, unduly so. Second, a pension plan is a very significant
feature of a company’s long-range planning and thus there is a recognizable
need for a reasonable degree of certainty. Third, the potential stability of the
rule is quite limited if every time Congress amends the Social Security program
it becomes incumbent upon IRS to review its rules for integration. Fourth, the
significance of the rule is the result it accomplishes, not the “nicety” o f its under
lying assumptions nor its mathematical precision.
While we might expand on these points, our judgment sense has already led
us to some general conclusions. First, we think the “formula” can only be
justified on the pragmatic basis of its actual impact. We do not feel it is neces
sary to change it because mathematically it may appear to be called for. By
the same token we would not preserve the status quo if a results-oriented exam
ination indicated it should be so changed. To expand on this point, if the
regulations simply incorporated the 37 ^-percent basic rule absent its involved
justification, its permanence or lack of it would obviously be related to its pur
pose, i.e., whether it prevents “ discrimination,” and not turn on the elusive issues
of ancillary benefit and employee contribution adjustments.
Second, we would tend to keep the status quo unless it was clearly inappro
priate because certainty and stability are vitally important to potential benefi
ciaries whose financial planning is based on current expectations. Moreover, any
downward revision o f the rule is certain to be costly both in terms o f dollars
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1113
and as a precedent in tending to restrict the growth and development of new
plans and benefit provisions.
Third, we would try to find some clear, but basic, ground rules to guide ad
ministrators in the future. Specifically, if it were made clear that the central
relationship of importance in the design of the rules was a comparison of the
maximum monthly benefit with base wages, much of the mystery, confusion,
and complexity of the present rules would be eliminated. Further, if it were
understood that the “ grandfather clause” arrangement would be kept, there
would also be a good deal more certainty. At the minimum what should be
avoided is new elements in a formula approach which cannot but be construed
as signposts that there will be frequent further changes in the basic rules.
Fourth, to some degree “ the monkey is on the wrong back” because Congressi
makes the changes in the law that lead to the reconsideration of the integration
rule. Not so many years ago Congress, o f course, was involved in consideration
of the rule and perhaps it is time to return the problem from whence it came.
We have no fixed view on how this should be handled, but it seems certain
that the basic purpose o f the rule to prevent discrimination needs review and
probably this review should be legislative in nature.
Finally, we think the starting point should be agreement on the principle that
the rule should not be changed solely because “ the formula” is based on de
batable assumptions which in their very nature are not subject to “proof.”
In concluding, we would like to say again that we appreciate this opportunity
to comment as part o f the Service’s background review before any proposed
rule is issued. I f the Institute and its staff can be of any further help in this
connection, you have only to call on us.
NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS
B y D r. G r o v e r W. E n s l e y , E x e c u t i v e V i c e P r e s id e n t
In this brief statement on the President’s and the Council’s 1967 re
ports, it is necessary to be highly selective in one’s commentary. And
at the outset, I would like to single out what I consider to be a most
significant observation of the Council’s report and its implications for
policy. The observation is that:
This year, the risks are on both sides, demand could grow too sluggishly or too
strongly. A balance of risks is a necessary feature of a full employment economy
moving ahead essentiaUy in line with potential.
This is not to say that uncertainty itself is a unique element of the
1967 forecast. It is, of course, an integral part of any forecast, but
to varying degree. A year ago, for example, the signs of continued
economic growth were quite clear, as was the danger of overexuber
ance. In my statement on the 1966 report, I pointed out that while a
further reduction in unemployment from the “interim” 4-percent tar
get was an appropriate goal of public policy:
This goal must be approached gradually, in view of the increased danger o f
inflation. In the period ahead, the basic task of economic policy will be to re
strain the overall rise in demand, in order to keep it in line with the economy’s
growth in aggregate capacity.
Surprises did develop in the 1966 economy, most particularly the
degree of stimulus provided by our Vietnam effort. Overall eco
nomic expansion was thus greater than most forecasters had expected.
But few were fooled by the actual direction the economy took.
This year, however, there is great uncertainty even as to the direc
tion of the economy. Such a high degree of uncertainty calls for the
greatest degree of flexibility in Government stabilization policies.
The Council has rightly stressed the need for flexibility in its report.
The President’s surtax proposal, therefore, and other fiscal restraints,
should be regarded not as rigid recommendations but rather as con
tingency plans to be reviewed in the light of business conditions at
midyear.
The need for maximum short-run flexibility in fiscal policies em
phasizes the importance of providing some form of discretionary
executive authority over tax rates. Such a proposal is not new, but
the need for it is greater than ever in a “ full employment” economy
where the margin for error in Government policy is so narrow. I
recognize, of course, that such a proposal would continue to face
formidable political obstacles. But as the Council so rightly points
out in its report, continuous pursuit of an active fiscal policy would
probably result in relatively small adjustments in tax rates at any
particular time.
Furthermore, the Congress could retain its ultimate power over
taxes by reserving the right to approve any executive tax action
within a stated period of time. In any even, a timely and flexible fiscal
1114
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1115
response to changing economic conditions is so imperative that limited
discretionary executive authority over taxes, in one form or another,
is a question for serious and prompt congressional consideration.
In the midst of uncertainty for the year as a whole, the Council has
rightly recognized the value of a stimulative fiscal policy in the first
half of 1967. In view of the perceptible slowing and crosscurrents
now visible in the economy, the projected first-half deficit of more
than $5 billion in the national income accounts budget, at annual
rates, will provide a welcome stimulus. Incidentally, the emphasis on
the NIA budget concept both in the Council’s annual report and the
President’s 1967-68 budget is to be commended. This concept needs
to be impressed upon the public as a more useful measure of the Fed
eral Government’s economic impact than either the “ cash” or “ ad
ministrative” budgets.
The Council’s overall view of 1967 prospects corresponds closely
with our own NAMSB staff forecast published last December. Given
an appropriate mix of Federal economic policies—and reasonably good
fortune—was anticipate that GNP will rise in 1967 by 6 percent or so
in current prices and by slightly less than 4 percent in constant prices.
We agree with the Council that the rate of growth in the first half of
the year will be retarded, primarily by reduced accumulation of busi
ness inventories. But further increases in Government spending and
in business capital outlays, and a continued high level of consumer
incomes and spending, should keep the economy moving forward.
Later in the year, support will be afforded by a strong recovery in
housing and related industries. Indeed, recent data suggest that the
housing recovery—as we have forecast—is proceeding at a more rapid
pace than most observers had anticipated.
As the Council notes, price pressures this year are likely to come more
from the cost side than from the demand side, in contrast with the
1966 experience. In this regard, I strongly agree with the Council’s
recognition that, given the present structure of the economy, policies
designed to expand demand cannot lower unemployment much below
4 percent without generating strong inflationary pressures. The
proper prescription in these circumstances, as the Council notes, is to
direct efforts toward improving the structure of labor markets and the
efficiency of manpower training programs. I also strongly agree with
the Council’s reaffirmation of “the productivity principle” as “the only
valid and noninflationary standard for wage advances,” and with its
opposition to automatic wage increases tied to the consumer price
index. It is to be regretted, however, that some of the Council’s lan
guage regarding wage-price policy in 1967 seems to accept the inevita
bility of wage increases in excess of productivity gains.
The President’s program for increased fiscal restraint and greater
monetary ease in 1967 recognizes the desirability of restoring a better
balance m the fiscal-monetary policy mix. This balance was lacking
in 1966. It is true, as the Council points out, that fiscal policy was
used to restrain the economy in early 1966 and that the NIA budget
was in surplus during this period. But the surplus should have been
larger and the degree o f fiscal restraint greater. It is perhaps an
understatement that, in the Council’s words, “ the question of whether
a different timing or different magnitude of fiscal actions might have
produced a more favorable balance in 1966 will long interest and
challenge analysts of economic policy.”
1116
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
Lacking adequate fiscal restraints, monetary policy was forced to
shoulder the major burden of restraining inflationary pressures in
1966, with the well-known and not soon-to-be-forgotten results. As the
Council note®, the impact of severe monetary stringency, soaring open
market interest rates and intensified commercial bank competition for
high-yielding savings certificates “ fell heavily on thrift institutions,”
sharply reducing the availability of mortgage funds and causing a
drastic decline in new housing activity. One result of these develop
ments, of course, was the imposition of across-the-board ceilings on
savings interest rates, for the first time in history.
Looking back at the experience of 1966, it seems clear that monetary
policy should never again be f orced to assume such a disproportionate
role in restraining inflationary pressures in a high-level economy.
Hopefully, the painful lesson of 1966 has been learned and fiscal policy
will assume an increased and more flexible role in Government stabili
zation programs.
The 1966 experience has also dramatized the need for other basic
changes to improve the long-run stability of the economy. Foremost
among these, as the Council states, is the need for structural changes in
the financial area that would lessen the vulnerability of thrift institu
tions and housing markets to the uneven impact of monetary policy.
Moreover, as the Council points out, the sharply increased competition
for savings from commercial banks since 1957 has “gradually tended
to curtail the flow of funds to the mortgage market,” adding to the
long-run need to strengthen mortgage-oriented thrift institutions. In
this regard, I strongly agree with the Council’s assessment that “there
is every reason to believe that thrift institutions will continue to feel
strong competition from banks, and must hereafter operate in a very
different environment from that prior to 1957.”
Given the short-run vulnerability of mortgage flows to cyclical dis
turbances and the long-run diversion of funds from the mortgage mar
ket resulting from increased commercial bank competition for savings,
the Council has correctly emphasized the need for developing new
avenues through which the general capital market could be tapped for
mortgage funds, and for strengthening the long-run ability of mort
gage-oriented thrift institutions to compete for individuals’ savings.
In this regard, it is gratifying that the President in his 1967 Economic
Report has renewed his recommendation, first made in his 1966 Eco
nomic Report, that Federal charters be provided for mutual savings
banks, in order “ to enlarge and strengthen our system of thift
institutions.”
Similarly, the Council has noted in its report that “ while broadened
investment privileges of federally chartered mutual savings banks
might initially divert some funds from the mortgage market, such
chartered banks would improve the efficiency of thrift institutions,
strengthen them in competition with banks, and thereby ultimately
benefit the mortgage market.” Moreover, through its conversion pro
visions, the Federal charter bill would provide the most expeditious
means for sayings and loan associations to achieve investment flexi
bility. In this regard, it should be noted that conversion into feder
ally chartered mutual savings banks was the route specifically recom
mended by President Kennedy’s Committee on Financial Institutions
for savings and loan associations desiring broader and more flexible
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1117
investment powers. As the Council indicates in its report, increased
investment flexibility would permit thrift institutions to compete
more effectively for savings during periods of rapidly rising interest
rates, such as 1966, and result in a more stable flow of mortgage funds
over all stages of the business cycle.
The need for strengthened thrift institutions and structural im
provements in mortgage markets becomes even more urgent in the
light of other trends noted by the Council in its report. As the Coun
cil indicates, a sharply rising rate of household formation in the years
ahead will result in substantial increases in the rate of new home con
struction and in demands for mortgage funds. Additional heavy de
mands for private mortgage financing will be generated by expand
ing Federal programs in the housing area. Recent evidence of im
proved savings and mortgage flows at thrift institutions should not be
allowed to obscure the very real danger of long-run inadequacy in the
supply of mortgage funds in the years ahead. Should the economy
continue to operate not too far below its potential, as seems likely,
yields on capital market investments will probably remain attractive
to many savers. Moreover, competition from commercial banks can
be expected to intensify, as they increasingly exploit the advantages
of “ one-stop” banking and begin to institute the electronic money
transfer services of the “ checkless society.” In this environment,
thrift institutions may be increasingly hard pressed to meet sharply
rising mortgage demands, unless they are able to compete more effec
tively for individuals’ savings.
The need to strengthen mutual savings banks is particularly appar
ent in view of their leading role in financing Federal housing programs
and the steadily widening Federal Government role in meeting
national housing needs and stimulating urban revitalization. Despite
their narrow geographic confinement to only 18 States, mutual savings
banks rank either first or second, nationwide, among private institu
tional holders of FHA-insured mortgages under each of the following
major programs: (1) regular owner-occupied housing; (2) rental
housing; (3) urban home redevelopment and relocation; (4) coopera
tive housing; and (5) servicemen’s housing. In addition, savings
banks have been major participants in financing other important
housing programs in recent years.
As the problems of our urban centers multiply, the leading role of
mutual savings banks in these areas assumes increased importance and
emphasizes the broad public-interest benefits of nationwide extension
of the mutual savings bank system.
In launching its expanded urban effort, it will be crucial for the
Federal Government to keep its role in balanced perspective, relative
to that of the private sector. In this regard, it is gratifying to see the
Council’s emphasis upon the need to enlist private enterprise in this
effort. It is equally essential, I believe, for private enterprise to
recognize that the Federal Government does have a key function to
perform in the building and rebuilding of our urban environment.
What we must establish, in essence, is a creative partnership between
the private and public sectors, parallel to the “ creative federalism”
envisioned with respect to Federal and State and local governments.
Such a partnership will seek the realization of broadly accepted public
goals through maximum use of private means.
1118
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
The objective of maximizing the participation of the private sector
in the revitalization of our cities is more than a basic tenet of a private
market system. It is a realistic approach to the massive task involved.
It recognizes the practicality of using existing private institutional
arrangements, funds, and skills. It recognizes that major reliance on
the public sector for needed funds would severely strain the Federal
budget and administrative structure.
The broad, basic goal of Federal policy must, therefore, be to
encourage and to supplement—not to preempt—the use of private
resources. This broad policy goal must also bear allegiance to the
basic cost/benefit principle of public finance. Stated simply, this
principle requires Federal financial assistance to be openly recognized
and disbursed so that costs incurred may be measured directly against
benefits achieved. In view of savings banks’ leading role in Federal
housing programs, enactment of the Federal savings bank bill would
be one of the most effective means of insuring substantial private
participation in rebuilding a modern, urban America.
NATIONAL FEDERATION OF INDEPENDENT BUSINESS
B y C . W il so n H arder , P re sid e n t
We appreciate your kind invitation to comment, from the small
business standpoint, on the President’s 1967 Economic Report and the
Annual Report of the Council of Economic Advisers.
We have studied both documents closely. Much of the Council’s
data is not news to us. It has been reflected for some time in
indicators based on our economic surveys. The President’s recom
mendations, based on the Council’s findings, equally are not new.
Unfortunately and apart from that which indicates thought must be
given to contingency plans for peace—a recommendation which we
made to Mr. Gardner Ackley on April 12,1966—we find much in these
recommendations which may well harm rather than help future
economic growth.
First, however, as to the Federation and its surveys. With a mem
bership of almost a quarter of a million smaller, independent enter
prisers the Federation has as a member more than 1 of every 20 small
businesses in our country. This membership is broadly representative
of all small business, by vocation, size, and geographic distribution.
Our surveys are based on responses received from about 1 of every
60 small businesses yearly, and from about 1 of every 240 small busi
nesses quarterly. Samples from quarter to quarter are comparable.
In any case, the Council pictures strong economic growth to the end
of 1965, which, it claims, had to be dampened down. It states that
restraining measures undertaken “began to take effect in the spring
(of 1966) ” and that “By the closing months of 1966, it was clear that
the brakes had worked.”
Our indicators for 1966 1st Quarter showed the restraining meas
ures taking effect, particularly in the Contract-Construotion industry.
We are happy to enclose a copy of our April 8, 1966 analysis which
reflected our findings. Copies of this report were furnished to your
Joint Committee as well as to other Committees and Executive Branch
agencies.
As 1966 progressed, and as our 80,000 responses for the year accumu
lated, indications became increasingly clear that the brakes were in
fact working. The question suggested was whether their application
had been too uneven or harsh, resulting in a threat to throw the small
business vehicle off the road into the ditch of recession.
1119
1120
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
The trends we found, and which we reported, appeared broadly as
follows (we include as yet unpublished indicators for January 1967):
[In percent]
1966
Percentage respondents indicating—
Business volume same as 1 year earlier.................
Business volume higher than 1 year earlier..........
Business volume lower than 1 year earlier...........
Inventories higher than 1 year earlier...................
Building construction within past year.............. .
Purchase of new equipment within last year.......
Accounts receivable higher than 1 year earlier.
Usually able to generate capital from own earn
ings___ _______ __ _________________________
Difficulties with collections....... ...... .....................
Dependence on banks when outside funds
needed................................................................
1st
quarter
2d
quarter
3d
quarter
4th
quarter
January
1967
30
51
17
40
23
55
43
31
48
18
39
22
54
41
31
48
19
39
23
53
41
32
47
20
36
22
52
40
54
30
51
30
51
34
53
32
8
66
63
62
60
(l)
0
V)
i1)
23
21
48
20
1 Question not part of 1967 survey.
With fewer respondents reporting sales volume higher than 1 year
earlier, and more reporting it same or lower—with an increasing per
centage reporting difficulties with collections—with a decreasing per
centage reporting ability to generate from earnings the working capi
tal needed for operations—as opposed to a decreasing percentage
indicating confidence in ability to depend on banks for outside financ
ing, the suggestion was strong that small business was being subjected
to an increasingly severe economic squeeze. Judging by indicators
available for January, this squeeze has not abated.
Of course, “tight money” contributed to the squeeze. Of all re
spondents to our survey in January 1967, 46 percent indicated they
had applied at banks for loans during the past year—64 percent for
working capital purposes, and 37 percent for capital equipment and
construction purposes. O f all who applied, 72 percent indicated that
their needs had been met in full, 12 percent partially, and 8 percent
not at all. O f those whose needs had been met only partially or not
at all, 16 percent indicated resort to insurance companies, 16 percent
to finance companies, 18 percent to suppliers, and 6 percent to Small
Business Administration.
Among those who reported needs met fully by banks, there was a
reported average interest charge of 6.6 percent in 1966 against 6.1
percent in 1965. Those who resorted to insurance companies re
ported the charges as 6.3 percent against 5.8 percent. In the finance
company category the reported average charge was 7.5 percent against
6.1 percent; in the supplier category 6.6 percent against 5.9 percent;
and in the SB A category (due, no doubt, to a combination of SB A and
other help) 6.5 percent against 5.9 percent.
One important effect of this squeeze is seen in trends in small busi
ness new job formation. This effect is important because of the
fact that small business provides well over 40 million jobs for our
country (source: Report by the Library of Congress to the House
Small Business Committee) and, according to Senator Winston
Prouty, provides a source of livelihood for more than 60 percent of
our people.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1121
Throughout this peroid (and in a measure possibly reflecting also
increased tightness in the labor market) there was a steady decline in
small business additional job formation. In January 1966, among
those small businesses reporting employment levels different from 1
year earlier, the net change reported was +3.5 jobs per respondent.
In the following periods, comparable figures were: First quarter
+2.7; second quarter +2.5; third quarter +2.2; and fourth quarter
+ 1.8. The figure for January 1967, is +0.9.
Equally, if not more important is the change which has taken place
in the mix of respondents reporting their employment the same as, or
higher or lower than, 1 year earlier:
Percentage of respondents reporting each vocation
Employment
Professional
Higher:
1967— ................................
1966.......... .......................
Lower:
1967.......... .........................
1966....................................
Unchanged:
1967................................1966..................... ..............
Retail
Wholesale
Manufac
turing
Services
Construc
tion
13
20
13
18
19
27
30
36
15
21
18
28
9
6
13
8
15
9
13
9
13
10
24
13
78
74
74
74
64
66
57
55
72
69
58
59
While many factors other than “tight money” are responsible for
the current plight of small business, it is interesting to reflect for a
moment the description by the Honorable Wright Patman, formerly
cochairman of your committee, of how a financial squeeze affects
independents. In his print “A Primer on Money,” Mr. Patman states
that in such climate 44(small firms), which would be normally adding
to the country’s economic growth, not only cannot grow, but must
retrench on their inventories, work forces, and so on . . . ”
Frankly, we see little in our economic indicators, and in the Presi
dent’s proposals, that will change these trends.
First, Federal spending in fiscal 1968 is planned to be higher than
for fiscal 1967. It is proposed, in order to offset the prospective
deficit, that there be enacted a 6 percent temporary surtax on business
and individual income.
This surtax can but further reduce small business profits already
under an intensifying squeeze. At the same time, it seems clear that
it will cut into consumer disposable income, with correspondent effects
on small business sales volume (which was trending level-down
throughout 1966).
Second, adding to this squeeze would be the proposed increase in
social security tax rates and the applicable tax base (the cost of which
is borne 50 percent by employers) and the proposed increase in unem
ployment compensation taxes (the cost of which is borne 100 percent
by employers).
Third, the council suggests that “private demand is not likely to be
particularly bouyant in the first half o f 1967” and asserts that “ a stimu
lative stabilization policy is appropriate to support steady expansion
during this period.” It observes that such stimulus will be supplied
by “ special costs of Vietnam and further increases in transfer pay
75- 314— 67— pt. 5-------9
1122
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
ments for medicare.” Neither of these areas directly affect the bulk
of small business.
Fourth, the Council anticipates that employment (now at the “ full’*
figure) should remain essentially the same as in 1966. It is interesting
to observe the affects felt by small business while employment, in 1966,
was building to its present levels. Among the 8,283 responds to our
survey in January 1967, 59 percent stated that in order to hold needed
employees, as well as to secure the services of additional employees, it
had been necessary for them, during the past 12 months, to increase
their wage scales by 5 percent or more (some far more than this).
In connection with the foregoing, in May 1966 we analyzed responses
received from 7,246 members to a question whether they expected to be
affected by the then proposed (and now coming on stream) increases
in the Federal minimum wage and its coverage. Some 55 percent of
our respondents, particularly in the South Atlantic, the East and
West South Central, answered “ Yes.”
In other words, increasing labor costs have been, are, and are likely
to continue contributing to the squeeze on small business.
Fifth, in what has been obviously an effort to compensate for rising
costs through purchase of new equipment, a high (though steadily
declining) percentage of our members in 1965 and 1966 indicated pur
chases in this area. These same members used the 7 percent invest
ment credit heavily. In fact, of the 48 percent of our January 1967
respondents who indicated equipment purchases during the past year,
80 percent indicated that they had used the credit. The average tax
saving reported amounted to $873.
As you know, Congress in October suspended the credit, at least to
December 31,1967. It is true that in so doing it provided an exemp
tion for the first $20,000 of equipment purchased. This is certain to
be helpful. It must be pointed out, however, that indications are that
in manufacturing many purchases appear to have been in excess of this
figure. The same appears to have been the case in the depressed contract-construction industry. For the length of suspension of the full
credit, therefore, there is bound to be higher than former costs to inde
pendents needing to modernize.
Sixth, in its report the Council implies hope that action to ease the
pressure on money will act as a stimulus to the economy. There is no
question but that to a certain extent it will. However, we would point
out that even in 1965, when as the Council says, Federal Reserve policy
permitted a sufficient expansion of credit to accommodate expanding
demands for funds at only moderately rising interest rates, inde
pendents in some parts of the country were paying as much as 6.9 per
cent interest. Obvious1
ction to ease the pressure on money,
resolve the financial pressures on
while helpful, would
independents.
Frankly, study of the trends pointed up by our indicators, study of
the President’s recommendations, and reflection on the conclusions
reached above, suggest strongly that small business has been all but
overlooked in current economic planning.
I f this is so, then a serious miscalculation has been made.
We have already pointed out the importance of small business as a
job provider, as well as a provider o f livelihood for our people. Indi
cators from both the 1965 and 1966 surveys show that small business,
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1123
by expansion and modernization, contributed significantly to the crea
tion of the additional jobs which helped reduce our unemployment
rate from 6 percent in 1960 to 3.9 percent in 1966. Ability to maintain
current jobs and provide additions for our growing population will
become increasingly important as the Nation emerges, hopefully, from
the present Vietnam involvement.
Moreover, in the floor speech already referred to, Senator Prouty
also pointed out that small business retail sales constitute 73 percent
of national retail sales, that its wholesale sales constitute 73 percent
of national wholesale sales, that it constitutes 82 percent o f our con
struction activity, 80 percent of our service function, and that it pro
vides 34 percent of the manufactured value added to the economy
each year.
Clearly what affects small business affects vitally the entire fabric
of our economy, and the lives and hopes of each and every one of our
citizens.
For this reason, and in view of the facts previously indicated, we
recommend a course of economic action as follows to maintain the
strength of this base of our economy, and to build for further needed
expansion in the years ahead:
1. That Government adopt spending policies which will permit the
country to get by without proposed tax increases.
2. That there be delayed until after the extraordinary demands
being made by the Vietnam involvement any action to increase the
taxloads for various social programs, including social security and
unemployment compensation.
3. An end—at least to completion of the job in Vietnam—of pro
grams of social experiment which have failed, so far, to fulfill the
needs for which they were designed.
4. The earliest possible restoration of the full 7 percent investment
credit, coupled with action to extend its principle to both increases
in inventories and accounts receivable, as well as investments in plant
and equipment.
5. Continued independence for the Small Business Administration,
coupled with action so far denied by both Houses of Congress, to secure
legislative power for the House and Senate Small Business Com
mittees, to assure small business proper recognition in both the execu
tive branch and the Congress.
6. Vigorous enforcement of the antitrust laws to combat, in the
words of the Council, “ practices which strengthen market power
through reducing the number of firms in an industry, which erect
artificial barriers to the entry o f potential competitors, which delay
the introduction of superior products of cost-reducing techniques, or
which serve to blunt the effectiveness of competitive price changes.55
We are confident that, freed from the enervating cost squeeze to
which it is currently being subjected, the Nation5s small business
community will be able to move ahead, furnishing jobs and purchasing
power to our people, and assuring the manufacture and distribution
of goods in adequate quantities at reasonable prices—thereby doing
its part to build for a greater United States in the years ahead.
P o w e r f u l C r o s s -C u r r e n t s R u n n i n g D e e p U n d e r S u r f a c e of N a t i o n ’ s S m a l l
B u s in e s s E c o n o m y — T h e y D e m a n d Ca r efu l C h a r t in g
(This is the second o f a series o f special studies to be released this year on
responses by Federation members to our 1966 Fact-Finding Survey which will
cover our more than 200,000 members in smaller, independent business and the
professions. Other special studies, involving other survey areas, will be re
leased in later months.)
Powerful cross-currents are running deep under the sunny surface o f the
nation’s small business community. Unless they are charted accurately, safe
passage of the nation through what could be perilous straits ahead may be dif
ficult, if not impossible.
This is the m ajor conclusion reached in the analysis o f the 23,000 signed
responses received from Federation members to the current fact-finding survey,
“Independent Business Employment, Investment, E x p a n s i o n (sample copy en
closed) during 1966 First Quarter.
Although there are encouraging signs of small business continued growth dur
ing the past year, there are strong indications that much damage may be done
should the 7 percent Investment Incentive be repealed, as suggested by some
authorities.
For instance, while 32.6 percent of all respondents during 1966 First Quarter
(statistical analysis attached) reported that they had engaged in what they
described form ally as expansions or modernizations, 55 percent reported they
had spent money on purchase o f new equipment. Against this, as indicated in
other analyses not reported here, only a little more than 20 percent reported
they had increased their employment.
These facts indicate a marked probability that small business may be at
tempting desperately to increase productivity to survive increasing cost and
competitive pressures, to hold employment levels, and to move ahead. Ob
viously, to independents new and more modern machinery is the key to survival
and growth.
As to the 7 percent Investment Incentive, this conclusion is extremely signifi
cant. The Federation’s 1965 Survey proved conclusively that the Incentive—
which is machinery oriented—has been of greatest help to small business o f all
the independent-enterprise tax revisions since 1957. Clearly, repeal o f the In
centive would deal a body-blow to the nation’s small business structure—with
potentially disastrous implications to the economy in the future. Following
is the back-drop against which this must be viewed:
Again in 1966 First Quarter, as in the year-long report on the 1965 Survey,
and the report for 1965 First Quarter, small business showed itself a major
factor in the creation o f additional job openings for our growing population.
In fact, the rate o f new job production indicated during 1966 First Quarter by
those who formally reported expansions or modernizations was exactly the
same as that reported during 1965 First Quarter—2.0, but below the average
2.7 new job openings creation reported for all 1965 responses.
In today’s economy, with its tight skilled labor situation, creation of new
job openings is considered by many as a problem rather than a boon. Yet as
recently as two years ago the reverse was decidedly the case. Within another
two years, granted a settlement in Vietnam or in the cold war generally, the
pressing need could be once more for the creation of job openings. Without
a vital small business economy, whose continued health depends so directly on
continued availability o f the Investment Incentive, joblessness could become an
extremely grave national problem.
In any case, with coverage generally the same as one year earlier, through
First Quarter 1966 some 36.2 percent of all resopndents reported formally that
they had expended or modernized their operations during the preceding year.
This figure compares with an average 33.1 percent expand or-modernization
rate reported throughout entire 1965 in last year’s survey, and with an average
32.6 percent rate reported in 1965 First Quarter.
1124
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1125
Furthermore respondents during 1966 First Quarter reported having spent
an average $23,000 on each expansion-modernization. This compares with a
$20,000 average reported last year fo r the preceding 12-month period, and with
an average $17,100 reported in 1965 First Quarter to last year’s survey. How
much, if any, of this difference is due to price firming or price increases was
not asked, and is not known.
But even here, the promising surface masks other deep running currents—
for small businesses obviously have shared very unevenly in the nation’s eco
nomic upsurge. For instance, while almost 70 percent o f those who reported
having expanded or modernized indicated they were enjoying higher business
volume than one year earlier, the same report was made by only 40 percent
of the much larger proportion which failed to report modernizations or expan
sions. While it is not contended that in a free competitive economy all business
units may be expected to be moving upward, failure of such a large segment o f
the small business community to generate additional volume to compensate for
rising costs or slimming profit margins raises another cautionary signal.
Indications are that almost all of the firms reporting expansions or moderniza
tions purchased new equipment during the preceding year, that over half of
them invested in construction o f new plant or remodelling o f older structures,
and that over half increased their investments in inventories and accounts
receivable.
Generally, respondents who reported expansions or modernizations indicated
less ability to generate funds needed out of earnings, and greater reliance on
outside sources (including the Small Business Administration) for capital re
quired than was the case with respondents who did not expand or modernize.
This fact, plus the higher rate o f inventory and accounts receivable increase,
undoubtedly explains their heavier preference—academic as it may be from the
standpoint of immediate action—for future congressional enactment of a plowback allowance.
In answer to the question whether trained labor is available in case additional
employees are needed, a little over one-quarter o f all respondents answer in the
affirmative, but well over half in the negative. In answer to the further ques
tion whether they could and would take unskilled people into their operations
and train them for vacant positions, from one-half to three-quarters o f respond
ents replied “Yes,” while just about one in five responded in the negative.
In summation, the results o f the 1966 First Quarter responses lend but further
strength to conclusions reached on basis o f the Federation’s 1965 Survey: that
small business is a segment of our economy with tremendous vitality, critically
important to the economic strength o f our country, and therefore deeply deserving
of close, constructive attention and action on the part o f all in Government.
This is particularly true today because as always it is good “to prepare for
peace in time of war.” While all effort today is to keep the economy from boiling
over, the day is bound to come when, as was the case as recently as 1964, efforts
will be directed to heating it up. It is against such day that recommendations
for action to maintain the 7 percent Investment Incentive, and to supplement
it with a plow-back enactment, as well as in the fields o f wage minima, social
taxation, antitrust enforcement are directed.
NATIONAL FEDERATION OF INDEPENDENT UNIONS
B y D on M a h o n , S e c r e t a r y
Our concern with the Economic Report of the President is centered
on the section titled “ International Economic Policies.” Under the
heading “ Trade” it states: “ This administration is committed to re
ducing barriers to international trade, as demonstrated by my recent
action terminating the 1954 escape clause action on watches, . .
We oppose this policy and action as not in the best interests of our
country for the following reasons:
Concessions on import rates on watches, watch movement and parts
were granted by our Government in a trade agreement with Switzer
land in 1936. Thereafter, the domestic watch industry, admittedly
efficient, was very seriously injured by imports and in 1954 increases
in rates of duties for such articles were increased, permitting the in
dustry to subsist on a minimum level of operations. But m Janu
ary 1967, the 1954 rates were reduced to those existing in 1936, plac
ing the industry on the threshold of extinction.
In freeing up trade, we have lost valuable production facilities
which take 15 years to reestablish. Of 33 integrated plants, there re
mains only three integrated jeweled watch plants and no fully inte
grated pin level plants. Only the hard core of a production capability
is left o f an industry important to our defense.
As stated by the subcommittee of the Senate Armed Services Com
mittee, at stake is an important and efficient industrial capability
which contributes very substantially to the military, space, and mis
sile programs; advances the state of the art; and provides a unique
pool of skills for industrial and defense needs. Without it, we must
rely on the Swiss cartel for our needs; and we have no means o f con
trolling the source of production.
In the Trade Expansion Act of 1962, the Congress provided safe
guards to prevent elimination of any industry which we need. More
particularly, the Congress considered this problem did riot intend that
the watch industry be sacrificed in the cause of free trade, and con
tinued its escape clause protection. No such efficient industry as this—
which leads the world in technological progress—with electric and
electronic watches, the most important development in the art over
the past 500 years—should be killed off in contravention o f the stand
ards set by the Congress. Administrative action reducing tariffs
should be nullified until such time as the Congress changes its mind.
1126
NATIONAL GRANGE
B y H a r r y L . G r a h a m , L e g isla tiv e R e p r e se n ta tiv e
The Economic Report of the President and the Annual Report o f the
Council of Economic Advisers transmitted to the Congress in
January of 1967 is of particular interest to the agricultural sector
because it reveals the discrepancy between the return farmers receive
for their inputs and that received by other segments of the economy,
and because the report appears to find satisfaction from the reduction
or stabilization o f farm prices while it makes various rationalizations
for the increase of the wages and profits, ultimately transferred to the
farmer in terms of his costs of production.
The importance of agriculture is pointed up in a number of ways.
One of them is that of the total of $28,961 billion o f merchandise
exported from the U.S. during 1966, $6.7 billion of this was for
agricultural products—some 23 percent of all exports. Indeed, almost
20 percent of the total exports for dollars were from agriculture alone.
The disparity between agriculture and the nonagricultural sectors
shows that out of a $42.7 billion realized gross income from farm
sources, the net to farmers was $16.3 billion, and when the reduction
in inventory was considered, this dropped to $16.1 billion.
Despite the fact that the last figure is the highest net farm income
in history, we should compare it to corporate profits, showing an
increase of 68 percent—$51.6 billion to $86.6 billion from 1960 through
1966—while net income was increasing 33 percent.
While the net Federal Government and agency indebtedness in
creased from $241 billion in 1960 to $274 billion in 1966, an increase
of $33.6 billion, farm indebtedness during the same period o f time
increased from $25.1 billion to $42.5 billion, for a total o f $17.1 billion
or more than half the increase of the national debt.
Again it should be noted that in output per man-hour in the private
economy, 1960 to 1966, farm output rose from 110.7 to 155.8 while
nonfarm output rose from 104.4 to 125.3, less than half thait of the
farm sector. While gross hourly earnings in manufacturing were
increasing $2.26 per hour to $2.71 an hour from 1960-66, a total of
45 cents an hour; gross hourly earnings in agriculture were increasing
from 81 cents to $1.03 an hour, or a total of 22 cents per hour for the
same length of time.
There are many other comparisons that might be made from the
tables which are a part of the report, but all of them arrive at the same
conclusion; namely that no aspect of farm income has kept pace with
the nonfarm segment of our economy. In 1960 we began with an
80 percent of parity figure and ended 1966 with a preliminary estimate
of exactly the same amount. However, this does not indicate a sharp
drop sustained since September 15, when the parity ratio dropped
from 80 to the present 74—the lowest point in 34 years.
1127
1128
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
The report of the Council, page 74, states:
Prices on most farm products and o f many industrial raw materials move more
or less freely in both directions. The same is true, though to a lesser degree,
of many products at early stages of fabrication, but it is unlikely that past price
increases in most other parts o f the economy will be reversed as long as the
economy remains strong. Moreover, price advances for such items as metals
and industrial equipment tend to fan out and become built into the structure
of industrial costs. And even temporary increases in farm and food prices,
through their impact on consumer prices, materially affect the pattern of wage
negotiations. The resulting higher wage settlements also tend to be permanently
built into the cost structure.
Consequently, the return to price stability can only be gradual. However,
as 1966 grew to a close, there were signs o f progress. Prices of farm products
and some raw materials had leveled off. Thanks to the enormous strength and
adaptability o f the economy and skill and ingenuity of workers and management,
many of the industrial pressure points have been alleviated.
The statement that prices of farm products and some materials had
leveled off, when in fact they had declined by some 11 percent, was used
as the basis of deciding there were signs of progress, makes the farm
sector raise a question about the intent of the fiscal policy of the
Government. The implied or stated approval of the desirability of
reducing farm prices is before us again on page 87:
The rise in farm prices was due to the strong expansion of domestic and export
demand, combined with only slightly increased or in some cases reduced supplies
of important farm commodoties . . . To be sure, for some highly-labor intensive
products— particularly dairy products and some fruits and vegetables—rising
prices may be necessary to attract or hold the necessary labor services. But this
is the exception rather than the rule.
We are reminded that there was “corrective action” taken at the
highest levels to reduce farm prices during the early part of 1966.
Every newspaper, when it made its monthly report of the economic
indexes, pointed out that farm prices were rising again, disregarding
the fact that they had remained constant for 4 straight years while
the rest of the economy was on the rise.
Another area which received increasing attention during 1966 was that of
Government procurement. Intensive efforts were made to phase procurement
and adjust ’specifications for both miUtary and civilian purchases so as to mini
mize the impact on productive facilities and product markets. Arrangements
were worked out to ithis end fo r the closest possible cooperation and consultation
between the Department o f Defense and the Departments o f Commerce and
Agriculture.
Liet me quote again for the council report on page 89:
Changes in food prices at subsequent levels o f processing and distribution
generally follow changes in the costs o f raw farm products. These costs, how
ever, account for only 40 percent o f the price of delivered food with the remainder
reflecting costs o f transportation, processing, distribution, and marketing. Over
a time, these latter costs have risen steadily reflecting, in part, increases in labor
costs, in part, higher quality and better packaging. As a result, even when
farm prices are stable, food prices, especially a!t retail, tend to rise.
Following the decline in farm prices, processed food prices ended the year
only slightly above the levels o f December 1965. But retail prices remained
3.8 percent above the level a year earlier. The spread between farm and retail
food prices narrowed during 1965, but then widened late in 1966. On the average,
there is little evidence o f an increase in processing and distribution margins.
In the months ahead there may be some further decline in retail prices, but
the rising trend in intermediate costs suggests that a full reversal cannot be
expected.
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1129
What the report seems to say is that there cannot be a significant
decline in retail unless there is an unusually large decline in farm
prices. I f stable retail prices are the objective of the council, then it
necessarily follows that reduced farm prices are an essential part of
this equation.
The council speaks with approval on page 93 of the overall profit
record in manufacturing, stating:
During the first three quarters of 1966, after-tax profits for all manufacturing
averaged 5.6 percent of sales, the same as in the first three quarters o f 1965.
As a percentage of equity, however, they were higher—13.4 percent fo r the first
three quarters of 1966 against 12.7 percent a year earlier.
Again we would point out that this was taking place while farm
equity was declining by about the same percentage.
Quoting from the report which indicates that stable farm prices is
the desirable goal for the country, we note on page 97:
Average wholesale prices in the farm and food sector should be relatively
stable, if weather is normal, with advances for some items approximately bal
anced by reductions for others. However, retail food prices will probably
continue to rise, although more slowly than in 1966.
A further inconsistency is revealed in the council’s wage-price guideposts beginning on page 120:
The Council proposed a set o f standards fo r this purpose as a contribution to
public discussion.
The'se standards—like those more generally described in the statements quoted
above—are based on certain arithmetical relationships among output per manhour (productivity), wage rates, and prices. These relationships show that, if
wage rates increase in line with output per man-hour, prices can be stable while
the distribution o f income between labor and others contributing to production
remains unchanged.
On page 121, the report states the exception to the council’s 1962
guideposts.
The Report proposed as a general rule that hourly labor compensation should
advance in accordance with the trend increase in productivity in the entire
economy. No specific estimate was given o f that trend, ^although a summary
o f statistical evidence on the long-run growth o f output per man-hour was
provided.
The general guidepost rule was subject to various exceptions— some explicitly
stated and others only suggested. The stated exceptions were these: In the
interest o f equity, wages o f workers who are underpaid because o f weak bar
gaining power (or other reasons) should rise faster than the average, while
wages o f workers who are overpaid because o f exceptionally strong bargaining
should rise more slowly than the average. In the interest o f efficiency, wages
should rise somewhat faster than the average in industries with a rapidly grow
ing employment (in order to aid recruitment), and more slowly in industries
with labor surpluses. Moreover, workers who contributed to an extra rise in
their own productivity—for example, by consenting to the relaxation or removal
o f restraints on the freedom o f their employers to change work rules or introduce
new methods—should be allowed to share in the benefits o f that extra pro
ductivity gain.
The Grange respectfully suggests that the action o f the Government
in relationship to farm prices was in direct violation o f the principles
laid down by the 1962 guideposts. Not only were f arm prices, which
had lagged far behind the rest o f the prices for the nonfarm sector,
not allowed to rise more rapidly in order to be able to obtain some
equity, but they were in fact deliberately depressed by economic man
1130
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
agement so that exactly the opposite of the stated goals was attained—
a drop in farm prices.
At the same time, the council justifies the rise in automobile prices
and in cotton textiles, even though “ a sharp decline” in the cost of
raw cotton would have suggested price reductions.
This was justified on the basis of the excess demand for these con
sumer goods, precisely the factor pushing up the price of bacon and
steaks to such unreasonable heights so rapidly in the early part of
1966. A t the same time it admits that “ in general terms, the greatest
failure of observance of price guideposts lies in the failure to reduce
prices on a considerable number of the product lines of a large num
ber of industries.” As chapter 3 has indicated, “ a number of the price
increases that have occurred in manufacturer and the mining industries
undoubtedly had some justification in higher costs. But offsetting
price decreases have been far too few” (page 125).
We would close these comments on the direct statements of the coun
cil by using only two more. On page 128, they stated in relationship
to “ recognition o f higher living costs” :
The only valid and noninflationary standard for wage advances is the pro
ductivity principle. I f price stability is eventually to be restored and main
tained in a high-employment U.S. economy, wage settlements must once again
conform to that standard.
And on page 129:
But the higher minimum wage effective in 1967 will have its principal impact
on wages in the unorganized sectors, and in the largely unorganized low-wage
segments of manufacturing. Thus there will be some continued pressure on
costs and prices originating in wage increases outside of the organized sectors.
This, to us, means agriculture.
The thrust of our argument should be apparent by now. Agricul
ture has not kept pace with -the rest of the economy, except for a very
short period of time during 1965-66. The depressing effects o f gov
ernmental policy on agricultural prices was not matched by equally
effective policy in the nonagricultural sector.
Stable farm prices, even in the midst of highly and rapidly increas
ing farm costs, seems to be a desirable objective in terms o f the council’s
report. The equality o f income principle, permitting low-income
groups to increase their prices (wages) faster -than the high-income
groups is denied to the agricultural sector. The reduced purchasing
power o f American farmers places them in a less competitive position
in bidding for, not only labor, but for the land upon which they live,
with a direct threat to our owner-operator type of agriculture.
No suggestions were made by the council for alleviating the economic
problems facing agriculture, even the recognition of the place that
farm programs have had in maintaining income at a level which it has
been for -the last few years.
In the midst o f a growing drive toward the removal of exceptions
which have protected agriculture from increased costs, it is increasingly
imperative that agriculture share equally in the returns of the Amer
ican economic system. To weaken the financial stability o f agricul
ture and to weaken the American system of agricultural production
by a change into a corporate farm or a socialistic structure which has
basically the same results for those working on the land, that is the
denying of a share o f the profits they create, poses a grave threat to
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1131
the national welfare and to the stability o f the free world depending
on American agricultural production.
We hope that future reports of the council will give increasing atten
tion to the means that may be found within the market system or within
Government programs for further reducing the inequality between the
farm and nonfarm sector in terms of returns for the same factors of
production.
This commentary on the report of the council is not to be interpreted
as an indictment of the council or question of their good faith. It is
rather a question of whether or not adequate consideration has been
given to the importance of the agricultural sector in terms of our own
national prosperity, in terms of our relationship to a hungry world and
in terms of the dependence of the markets of the free world upon the
markets of American agricultural products. The enormous amount of
our agricultural exports must have a decisive effect on world prices, and
the fact that we are also the largest importer of agricultural products
means that we have the possibilities of great good or evil in terms of the
markets of those who depend upon us and other nations similar to us
for the markets for their products.
We believe that the time is far past when the relative importance of
the agricultural plant and producer must be recognized and that the
superiority of the American system which we already have established
in this country has been adequately proven which in turn would direct
our efforts toward the preservation of the best of American agricul
ture, the adequate protection which it needs being promptly and quick
ly afforded to it, and the day hastened when our agricultural producers
can become a vital and integral part of our American economic life,
free from the obligations that come from special favors, and fully able
to require and receive for their services, a comparable return to those
of the rest of our economic society.
UNITED MINE WORKERS OF AMERICA
By
W. A.
B o y l e , P r e s id e n t
As we enter the year 1967 we are plagued by the same problems that
existed in 1966.
Inflation is still a very real factor of our economic life. Price in
creases continue to occur, raising the cost of living for the average
citizen and hitting hard at the purchasing power of those on fixed
incomes.
The cost of the conflict in Vietnam continues to be a terrible burden
upon our Nation, not only from the standpoint of human misery, but
the drain on our economic resources which we are committing to its
prosecution.
Unemployment among the poor, the handicapped, and the disen
franchised remains at a high level in a Nation with the lowest unem
ployment in many years.
Education—the one real answer to poverty—has not been given
the resources which it needs to bring to all Americans an educational
level required in our modern society.
The rehabilitation of our cities and the eradication of our pockets
of poverty have not kept pace with the growth of the economy so that
a growing gulf separates Americans of means from those who live
in destitution and want.
Manpower development is a critical national need, with shortages
of skilled persons impeding national progress.
But, the unsolved problems of 1966 are not the only ones which we
face in 1967.
Soft spots are beginning to appear in the economy. A decline in
auto production, an alarming increase in inventories, and a leveling
of activity in the private sector point to the possibility of a flattening
of the business cycle.
Political decisions in the field of national resources—most notably
in air and water pollution—threaten economic dislocation in the energy
industries and retardation in the progress of those American industries
dependent upon cheap and abundant energy resources.
Postwar reconversion following the Vietnam conflict portends a
period of readjustment which could become serious if not handled
with care.
Decisions in the wage-price field could do much to turn America
away from the freedom of the marketplace which has made this Nation
great.
Fiscal decisions based upon questionable economic logic could well
hinder the advance of the national economy.
We, of course, must view all of these things against the backdrop
of American economic strength. Our Nation’s economic capability
is beyond the imagination of man and the progress we have made is
1132
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1133
without parallel in the history of the world. But, w7e must continue to
progress—to build upon the mighty economic structure which cur
rently exists.
It is essential that we grow without the accompanying inroads of
inflation. This can be most effectively done by encouraging the fullest
development of the economy and the increased productivity of the
American worker. With the most modern tools and the incentive to
produce our Nation can achieve forward economic momentum and
stable price levels. This has been proven in the coal industry which
has the highest paid industrial workers and a price level which has
been stable for more than a decade.
In the same vein, we reiterate our rejection of governmental wageprice guidelines, whether they are of the type recently imposed by
Executive fiat or drawn up by the Congress. To our minds the guide
lines serve merely to impose unacceptable restraints upon the private
sector and, in the long run, mitigate against the most efficient work
ing of the economy.
We recognize that it is the prevailing practice in certain quarters
to look to national wage and price standards as the answer to the up
ward movement of our price structure. Yet, it has been our experi
ence and the experience of history that such interference in the free
market economy can only lead to an improper allocation of economic
resources, restrictive governmental programs and the stagnation of
the economic machinery upon which so much depends.
Within the past several years a great deal of activity in the field
of air and waiter pollution has been carried out by the Federal Gov
ernment and at the State and local levels. Most recently, the Pres
ident of the United States transmitted to the Congress a strongly
worded appeal for legislation on the subject and sudh legislation is
currently being considered. Certainly, the United Mine Workers
of America is in accord with the objectives of such legislation. Our
union has for many years fought to better the living standards of
the coal miners of the United States and in effect to improve the
environment of all Americans.
On the other hand, there is a tendency for those charged with air
pollution control to ignore the economic consequences of their action
on other segments of the economy and upon the general citizenry who
must bear the cost of pollution abatement. Presently, proposed reg
ulations for air pollution control on the Federal level would exclude
the use of large reserves of bituminous coal. This would have disas
trous effects 011 the coal industry in many of our States. It would mean
unemployment and privation for coal miners in these areas and for
the families of coal miners who depend upon the production and sale
of coal for a livelihood. Further, the ill-timed regulations would
mean that the Nation would not have access to large energy resources.
This, in a nation so dependent upon energy, is hardly in the public
interest.
Obviously, there must, be a reconciliation o f the twin objectives of
pollution abatement and resource utilization. Pursuit of one to the
exclusion of the other means economic chaos and wasted resources.
Fortunately, there are such avenues open to the Nation. The magic
words are “ research and development”—research and development
which will permit the growth of technology to use all of our natural
1134
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
resources and yet. prevent the further despoilment of our environ
ment. Thus, research becomes an evil more important part of the
conomic fabric of the Nation. We will have more to say on this
subject subsequently.
The pressing problems of manpower development occupied much
of the Nation’s attention in 1966. This preoccupation was divided
into two parts.
On the one hand, we were confronted with the familiar specter of
unemployment and human need. Programs aimed at correcting the
blight o f unemployment have been undertaken, although a great deal
more remains to be done. It seems a paradox to see pockets of un
employment—in our city slums—in the mountain of Appalachia—in
the arid regions o f Indian reservations of the West—when our Nation
as a whole is enjoying the greatest period of prosperity in its history.
It is a national disgrace to see young men and women of minority
groups falling further behind the rest of America because they lack
the skill, the initiative, and the opportunity to cope with the com
plexities of modem industry. Surely, it is to us—all of us—that
these people look and it is evident that we must not fail them.
At the same time, the demand for men with a high level of skill
went unsatisfied in many industries. In coal, for example, a real
manpower shortage is developing and steps are already being taken
to alleviate the shortage. We feel that an intensification of existing
governmental efforts in the manpower area is warranted. For,
whether we are attacking structural unemployment in the slums or
training a highly skilled coal miner, we are improving upon our most
important resource—our people. We must never lost sight of this.
Nor should we rest content until very person with the desire to work
can find a job which utilizes the full extent of his talents and desire.
The question of Vietnam has been much on our minds in the past
months and years. Apart from the losses in lives and the large num
ber of injuries caused by the conflict, the economic effect has been
great. In our opinion, much of the dislocation in the economy can be
traced to the burden of Vietnam. Further, as the war goes on and
becomes more intense, these burdens are certain to grow.
In his state of the Union address, the President asked for an addi
tional tax to take effect around midyear. In our opinion, the only
justification for such a tax increase is the financial burden imposed by
the war. Surely, if the war were not being waged, the current status
of the economy would indicate liberalization rather than a tightening
of the Nation’s fiscal policy.
As we have pointed out previously, there are several soft areas in the
economy. It is difficult for us to fully assess the impact of a tax in
crease at this time. But we do believe that caution should be exercised
before such a tax is imposed, so that the private sector will not be
forced into a period of contraction as will it might be. Naturally, if
the tax increase is necessary to help finance the war effort, we will, as
good Americans, support it% On the other hand, if, in fact, the impo
sition of the tax will result in a downturn in the private sector, it will
be self-defeating and only lead to larger budget deficits than originally
anticipated.
But the Vietnamese conflict is troublesome from another standpoint.
Some day, hopefully soon, the war will be over. Then the Nation will
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
1135
face the painful task of reconversion in its economy. At that time
steps to cushion the blow will become necessary. We are hopeful that
such steps can be taken and that undue hardship to the economy and
our people will be avoided. It is our hope that the Joint Economic
Committee, as well as the Council of Economic Advisors, will look into
the postwar period with a view toward developing sound national
policy. In this endeavor they should call upon the leaders in the busi
ness community, the labor movement and the academic world. Surely,
the United Mine Workers of America will assist in any such program
to permit the orderly growth of the American economy.
Growth is the key to our national progress and prosperity. The
history of our Nation is the story of growth—of reaching for the prize
and securing it by sacrifice, ingenuity, and struggle. Its cornerstones
has been resource development. Our Nation is rich in natural re
sources and we have grown economically, socially, and politically by
developing those resources to the fullest extent. Today, as before,
resource development is the key to future growth; and research and
development is the key to total resource utilization. America is the
center of technological progress. From our laboratories comes a con
stant flow of new products. Such scientific endeavor has made us the
envy of the world and has permitted our industry to remain competi
tive with other nations not so blessed.
But, to our minds a great deal of our research and development
work is not properly channeled. Over 60 percent of research and
development in the United States is financed by Government. O f that
total, over 90 percent is devoted to atomic energy, space, and military
applications. We recognize that much of such work is necessary and
in the national interest. Conversely, the preponderance of scienti
fic effort in relatively unproductive fields seems inadvisable and detri
mental to the development of our resuorces. We do not refer here
solely to the money involved. I f that were the only problem it would
not be of such importance. But research money employs skilled scien
tists—men and women who are in extremely short supply and whose
talents are vital to the success of any research effort. It is this misallocation of scientific manpower that disturbs us greatly and hinders,
we believe, the future growth of the United States of America.
It is true that we need weapons of defense. It is probably true that
we require a space program. There may—may—be justification for
an effort directed toward the further use of the atom. But, by the
same token we also need clean air. Eesearch can provide it. We
must use all of the resources available to us. Research can show the
way. Our coal, for example, contains treasure awaiting only the
genius o f the scientist to make it available. It would seem to us that
those charged with the formulation of national economic policy would
look into this area. From them should come proposals to properly
allocate our scientific resources so that they will be truly responsive
to our national needs. What is needed, in our opinion, is the applica
tion of a cost-benefit analysis to the overall research program by
officials with the objectivity and knowledge to make such determina
tions. Economic criteria are o f prime importance for such policy
decisions.
We have no doubt that the future of our Nation will be as productive
as our past and that we will solve those economic problems which
1136
THE 1967 ECONOMIC REPORT OF THE PRESIDENT
currently confront us. In moving forward to such solutions, we will
have fashioned a better life for all Americans and preserved the
economic base upon which is built our free society.
In conclusion, we appreciate the opportunity to present this state
ment and to express the views of the United Mine Workers of Amer
ica on the state o f the U.S. economy.
o
i
@FedFRASER