Full text of The 1979 Economic Report of the President : Hearings Before the Joint Economic Committee, Congress of the United States, Ninety-Sixth Congress, First Session : Part 4 : Invited Comments

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

THE 1979 ECONOMIC REPORT OF
THE PRESIDENT

HEARINGS
BEFORE THE

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
NINETY-SIXTH CONGRESS
FIRST SESSION

PART 4
INVITED COMMENTS

Printed for the use of the Joint Economic Committee

U.S. GOVERNMENT PRINTING OFFICE
48-005 0

WASHINGTON: 1979

For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402

JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.)
LLOYD BENTSEN, Texas, Chairman
RICHARD BOLLING, Missouri, Vice Chairman
SENATE
HOUSE OF REPRESENTATIVES
WILLIAM PROXMIRE, Wisconsin
HENRY S. REUSS, Wisconsin
ABRAHAM RIBICOFF, Connecticut
WILLIAM S. MOORHEAD, Pennsylvania
EDWARD M. KENNEDY, Massachusetts
LEE H. HAMILTON, Indiana
GEORGE McGOVERN, South Dakota
GILLIS W. LONG, Louisiana
PAUL S. SARBANES, Maryland
PARREN J. MITCHELL, Maryland
JACOB K. JAVITS, New York
CLARENCE J. BROWN, Ohio
WILLIAM V. ROTH, JR., Delaware
MARGARET M. HECKLER, Massachusetts
JAMES A. McCLURE, Idaho
JOHN H. ROUSSELOT, California
ROGER W. JEPSEN, Iowa
CHALMERS P. WYLIE, Ohio
JOHN R. STARK, Executive Direedor
Louis C. KRAUTHOFF II, Assistant Director-Director,SSEC
RICHARD F. KAUFMAN, Assistant Director-GeneralCounsel
CHARLES H. BRADFORD, MinoritlY Counsel
(II)

CONTENTS
Letter of Senator Lloyd Bentsen, chairman of the Joint Economic Ccmmittee, inviting comments on the 1979 Economic Report of the Presiclor.t;
preceded by a listing of organizations from whom statements or com_--ments were received -

Page

1

ORGANIZATIONS RESPONDING
_
American Bankers Association
American Council of Life Insurance
Federal Statistics Users Conference --National Association of Manufacturers _
_
National Farmers Union
National Urban Coalition
United States League of Savings Associations
Voorhis, Jerry, former Member of Congress
(III)

_---

------61
-

-

-

-

3
6
31
34
41
50
64

THE 1979 ECONOMIC REPORT OF THE PRESIDENT
The following seven organizations and individual were invited by
the Joint Economic Committee to submit their views anti comments
on the 1979 Economic Report of the President: American Bankers
Association, American Council of Life Insurance, Federal Statistics
Users Conference, National Association of Manufacturers, National
Farmers Union, National Urban Coalition, United States League of
Savings Associations, and Jerry Voorhis, former member of Congress.
The statements received in response to this invitation were considered by the committee in the preparation of its annual report to
the Congress and are printed here as part of the record of the committee's hearings on the 1979 Economic Report of the President.
The text of the committee's letter of invitation appears below:
CONGRESS OF THE UNITED STATES,
JOINT ECONOMIC COMMITTEE,
Washington, D.C. February 1X, 1979.
: Under the Employment Act of 1946, the Joint Economic
DEAR
Committee has the responsibility of filing each year a report containing its findings
and conclusions with respect to the recommendations made by the President
in his Economic Report. Because of the limited number of clays available for
hearings, the committee is requesting a number of leaders of business and finance,
labor, agriculture, consumer and other organizations to submit statements for
the record on economic issues facing the Nation. These statements will be made
a part of our hearings on the Economic Report in a printed volume containing
such invited comments.
Accordingly, as chairman, I invite your comments on the economic issues
which concern the Nation and your organization. We would welcome any specific
recommendations for economic policy which you would like to see adopted by the
Federal Government, including recommendations for spending and tax reductions
or increases. Under separate cover I am sending you a copy of the Economic
Report of the President, filed January 25, 1979.
We would like to distribute copies of your statement to the members of the
committee and the staff, and would therefore appreciate your sending 30 copies
by Wednesday, March 14, 1979, to Mark Borchelt, administrative assistant,
room G-133, Dirksen Senate Office Building, Washington, D.C.

Sincerely,

LLOYD BENTSEN, Chairman.
(1)

Views of the Economic Advisory Committee of the American Bankers Association on
the Economic Report of the President and the State of the Economy

The Economic Advisory Committee commends the President and the Council of
Economic Advisors for their recognition that "a political consensus exists in
our country today that inflation is the Nation's most serious economic problem,
and that fiscal and monetary discipline is needed if inflation is to be reduced,"
(p. 78, Economic Report). Moreover, we strongly concur with the viewpoint that
"the inflationary problem can be dealt with most successfully by persisting with
the discipline of anti-inflation policies for an extended period even if economic
growth for a time should fall below the path that is now forecast ."
Inflation is a long-term problem that requires steady and cautious implementation of long term solutions. The time period required to implement these
solutions extends beyond the course of a normal business cycle. It is well
known that the roots of our current inflationary problems go back at least as
far as the middle 60's. Abandonment of a policy of gradual and prudent imposition of restraint at any time in the near future will only further delay the
ultimate achievement of price stability.
Economic forecasting is fraught with a large degree of difficulty and
uncertainty which renders attempts to fine tune the economy over the course of
a business cycle extremely hazardous. Current economic conditions and policies
do portend the possibility if a slowdown or even a mild recession. Should a
recession occur, it is important that resort to increased government spending
and rapid money creation be avoided. Such stimulus would result in acceleration
of inflation, and in turn, a more serious recession in the future accompanied
by still higher unemployment.
In our own view, economic health would best be served by even more fiscal
restraint than is currently indicated in the President's budget. In this
regard, the committee felt it was important to recognize the difficulties that
large and continuing budget deficits create for the implementation of effective
monetary policy. To the extent that these deficits are not monetized through
the creation of additional money, upward pressure on interest rates will occur
through large sales of government securities to the public. If the deficits
are monetized, the result will be more inflation and, ultimately, higher interest
rates. The Economic Report correctly indicates that the current high level of
interest rates is a result and not a cause of inflation, and that the substantial
economic benefits that would accrue from lower interest rates are only realizable
through a reduction in the long-term rate of inflation.
The Administration has stated that its program of voluntary wage and price
guidelines and real wage insurance are important parts of its anti-inflation
program. The stated purpose of these programs is to facilitate the achievement
of a political consensus that will permit the gradual implementation of the fiscal
and monetary restraint needed to control inflation. This is a laudable goal, but
we urge both the Congress and the Administration to maintain a proper perspective
on the efficacy of guidelines. Indeed, the anti-inflation program would be
severely damaged by a program of voluntary or mandatory wage and price guidelines
which came to be viewed as a substitute for prudent fiscal and monetary restraint.
If adherence to voluntary wage and price guidelines is not achieved, an attempt
to make them mandatory, or to supplement them with some form of credit controls
would be self-defeating.

(3)

4
The committee is skeptical about the efficay and usefulness of the proposed
real wage insurance program. The stated purpose of this program is to "reduce
inflation directly by inducing cooperation with the pay and price standards of
the anti-inflation program" (Economic Report, p. 84) The proposal,however is
based on an untested assumption which could prove detrimental to the monetary
and fiscal restraint that is fundamental to the anti-inflation program. Specifically, it is implicitly assumed that the insurance program will induce employees
to accept wages sufficiently below the levels that would otherwise occur to offset
the inflationary effects of the additional transfer payments should the inflation rate exceed seven per cent. We know of no evidence to support this assumption, and suggest that programs based on untested assumptions are not appropriate
for the difficult and uncertain conditions we are facing. Also, the program
has the potential for distorting the relative price mechanism in labor markets
and the efficient allocation of resources that this mechanism produces.
Both the Administration and the Congress have recognized that one of the
causes of our current economic difficulties has been the poor performance of
productivity and the limited amount of capital our workers have to assist them
in the production process. Several factors have contributed to this problem.
Our tax system has discouraged saving and investment, and encouraged consumption.
Regulatory burdens have added substantially to the cost of productive capital
goods. Finally, erratic stop-go economic policies and the resultant extremes
in the business cycle have added substantially to the perceived risks associated with long-lived investments. We are pleased to see that both Congress and
the Administration are addressing these problems. The Revenue Act of 1978
provided for three significant tax changes which should stimulate investment--the
the reduction in the corporate tax rate, the end of the temporary status of
investment tax credit, and a reduction in the capital gains tax. This latter
change should prove particularly useful in promoting the accumulation of badly
needed risk capital.
The increasing study and analysis being given to the effects of social
and economic regulation should help place the usefulness of these government
activities in proper perspective. As pointed out in the President's Economic
Report, regulation, in many instances, has been as costly and inflationary as
drect governmental expenditures, yet these effects are not measured directly
fares
by the Federal budget. The Administration's program to deregulate airline
is most nctcworthy, and we hope there will be continuing efforts along these
lines in other areas. Constructive attempts at deregulation are a useful and
necessary supplement to the Administration's emphasis on a gradual winding
down of inflation through appropriate monetary and fiscal policies over the
long term. One area we think deserves particular attention is the unreasonable
burdens being placed on small savers at a time when saving in all sectors of
our economy should be encouraged. Nbre creative interest rate regulation is
one way to respond to this problem.
We fully endorse the Administration's efforts to reduce the proportion of
GNP accounted for by government spending. The Economic Advisory Committee also
discussed proposals to place legislative and/or constitutional limitations on
at
government spending and to force the government to balance the budget or with
least create strong incentives for it to do so. We find no difficulties
a constitutional limitation on the amount of government spending relative to
GNP and would support the adoption of such an amendment. Proposed constitutional amendments to force the government to adopt a balanced budget are,

5
laudable in purpose, but raise complicated procedural questions which are
beyond our expertise. Given the fact that the government does not have direct
control over its revenue intake in the short run, it is unclear to us whether
a constitutional amendment or further reforms in the legislative process is
the best way to create additional incentives for fiscal responsibility. This
is an important question that deserves immediate study by constitutional experts.
We believe effective additional incentives for fiscal responsibility would
prove very useful in helping us achieve our ultimate goal of price stability.

48-005 0 - 79 - 2

Statement on Economic Policy Issues of 1979

Submitted to the Joint Economic Committee of the Congress
by the
American Council of Life Insurance
23

March Air, 1979

This statement is submitted on behalf of the American
Council of Life Insurance, a national trade association with a
membership of 481 life insurance companies which account for
95 percent of the legal reserve life insurance in force and 97 percent of the total assets of all U. S. life insurance companies.
At the end of 1978, the total assets of the life insurance business
aggregated about $390 billion, representing the funds that have
been entrusted to our business by millions of individual policyholders and employee benefit plans.

We welcome the opportunity to

present the views of our business to the Joint Economic Committee.
The Council's Anti-Inflation Study
A year ago, in our statement to the Joint Economic Committee, we indicated that our deep concern over the problem of inflation had led the life insurance business to undertake a wideranging study of the causes and possible solutions to the problem
of inflation.

It was our view that the search for effective solu-

tions required the involvement of a broad spectrum of American
society -- not only academic specialists in the economic aspects
of inflation, but also trade union leaders, corporate executives,
government officials, leaders of urban organizations and minority

(6)

7
groups, and even homemakers who must cope with rising prices as a
daily problem of family life.
As a first step in our inflation study, the Council last
spring established a guiding committee which identified for detailed
study four major areas of policy interest:

(a) monetary and fiscal

policies, (b) productivity and supply management,

(c) governmental

operations and structure, and (d) wage and price relationships.
The committee then organized four workshop conferences to explore
each of these designated areas in greater detail.

These two-day

workshops were held in Washington on four successive weekends last
fall, in which the Council invited the participation of a cross section of leaders from business, trade unions, government and adademic
life.

Background papers for each of these workshops were commis-

sioned, drawing upon academic specialists in various facets of the
inflation problem.
The outcome of these workshops was a series of task force
reports which presented preliminary recommendations for inflation
control policies, based on the background papers and the discussion
at the workshops.

Additional background papers were commissioned,

in the interest of completeness, to examine special topics that
the workshops had not been able to cover.

These materials then

formed the basis for a larger conference, the Williamsburg Assembly,
held over a three-day period in late February at Williamsburg,
Virginia, involving more than 80 participants representing a cross
section of groups within our economy and the varying points of view
that they reflect.

Z
I.

8
After three days of intensive discussion of the causes
of inflation and the policies required to decelerate the present
high inflation rate, the culmination of the Williamsburg Assembly
was the preparation of a final report representing the consensus
views of the participants.

Appended to this statement is the text

of the Williamsburg Assembly Report, along with a list of those who
participated in this final phase of the inflation study.
Immediately following the close of the Williamsburg
Assembly, life insurance executives who serve on the policy committees of the American Council of Life Insurance met to review the
results of the conference.

It was agreed that the Council should

endorse the recommendations that had emerged from the Williamsburg
Assembly and to build upon that foundation in the formulation of
more specific policy recommendations for submission to the Joint
Economic Committee of the Congress.

These recommendations are

particularly concerned with appropriate anti-inflation policies in
the areas of government spending and budgetary policy, monetary
policy, efforts to improve productivity, and the government regulatory process.

In addition, we offer views on the Administration's

voluntary wage and price standards, including the proposal for real
wage insurance.
Beyond the specific recommendations on current governmental policy, the life insurance business wishes particularly to
endorse the final recommendation of the Williamsburg Assembly with
regard to the need for communicating to all segments of our society
the causes of inflation and the decisions that must be made if

9
effective long-term solutions are to be found.

As stated below,

we believe that new forums should be established in which major
national groups can meet to discuss the problem of inflation and
evolve solutions to this critical problem.
Specific Recommendations
Federal Budget Policy.

Closely linked to the rising in-

flation trend has been the large increase in federal spending over
recent years, currently accounting for 22 percent of our gross
national product.

We heartily endorse the goal set forth by

President Carter in his annual Budget Message to the Congress to
reduce budget outlays as a share of the GNP to 20 percent in 1982.
We are also encouraged by the Administration's intention to reduce
the size of the federal budget deficit to $29 billion in fiscal
year 1980, down from $37 billion estimated for the current fiscal
year.

We believe that this reduced fiscal stimulus will help to

overcome inflationary pressures and we encourage further reductions
in subsequent fiscal years to achieve eventual balance.
We are in agreement with the philosophy expressed by
President Carter in his Economic Report to the Congress, in which
he said:

"Reducing inflation will require budget austerity and

moderation of economic growth."

According to the economic assump-

tions set forth in the annual Budget Message and the Economic Report of the President, the projected federal budget for fiscal 1980
is associated with an expected unemployment rate just over 6 percent, a moderate rise from the current level.

All too often,

10
policymakers have been panicked into unwise stimulative policies
when the unemployment rate has stood above 5 percent, thereby adding
to the strength of inflationary forces in the economy.

This policy

attitude has proven too costly in the past and must be modified in
the future if we are to gain control over inflation.

In this con-

nection, we are encouraged to read on page 65 of the Economic Report
the following analysis by the Council of Economic Advisers:
"The evidence suggests that under
current labor market conditions the
danger of accelerating wages begins
to mount as the rate of unemployment
falls significantly below 6 percent.
During 1978 the unemployment rate
moved into the top of the range. The
economy also underwent an acceleration
of wages."
The.need for better understanding of budget policy in relation to
unemployment levels was one of the points emphasized in the
Williamsburg Assembly, which urged "a new budget ethic" that would
limit and reduce federal deficits.

We support the conclusion of

the Williamsburg Report that stated:
"Acceptance of the new budget ethic
may compel us to accept temporarily
higher unemployment rates and lower
capacity utilization."
Monetary Policy.

Effective reduction of inflationary

forces also calls for restraint of monetary expansion.

We strongly

endorse the monetary goals for 1979 set forth recently by Federal
Reserve Board Chairman G. William Miller, calling for a marked deceleration from recent years in the pace of monetary growth.

Specif-

ically, the Federal Reserve has projected monetary growth ranges
through the fourth quarter of 1979 of 1½ to 4½ percent for Ml,

11
5 to 8 percent for M2, and 6 to 9 percent for the broader measure
of M3.

At the same time, past experience has demonstrated that

the monetary goals too often are exceeded in interim periods.

If

this occurs during the current year, we urge that compensatory
tightening be undertaken to correct for such departures, so that
the course of monetary growth will return to the target path indicated for the 12 months ending in the fourth quarter of 1979.

In a

broader vein, we agree with the attitude expressed on page 78 of
the Economic Report:

"Restrained fiscal and monetary policies are

an essential ingredient of the Administration's strategy for combating inflation."
Setting Inflation Goals.

There appears to be consider-

able merit in setting numerical goals as part of the process of
decelerating inflation,

as in the case of the federal spending goal

and the monetary growth targets.

This approach exposes to public

view the means by which government policy will be applied toward
reaching the goal of lower inflation.

But we also believe that the

inflation target itself should be widely emphasized in public discussion,

not only to bring down the level of inflationary expecta-

tions but also to increase the determination of public officials to
deliver on the promised target.

In this connection, we are encouraged

that the recently-enacted Full Employment and Balanced Growth Act
provides not only for employment goals, but also for an inflation
goal of 3 percent by 1983.
Improving Productivity Growth.

In the Williamsburg

Assembly, one of the areas identified as contributing to the inflation

12
trend is the decline in productivity growth in recent years.

We

note with interest the attention given to this important topic in
the Economic Report of the President, but the outlook from that
analysis is quite discouraging.

The Report states on page 76:

"Studies by the Council of Economic Advisers indicate that the
range of estimates of productivity growth per hour lies between
1¼ and 2¼ percent annually over the next 5 years."

To reverse the

slowdown in productivity and to help decelerate inflation, the
Williamsburg Assembly urged policies to improve the rate of return
on capital investment, to stimulate outlays on research and development, and to expand job training programs in the private sector.
The Economic Report documents the need for improved productivity,
noting the depressing influence of low rates of investment, shifts
in the age-sex composition of the work force, increased economic and
social regulation, and higher costs of compliance with environmental
and safety standards.
Reviewing the Regulatory Process.

Related to the decline

in productivity is the impact of government regulation of business
and industry, which too often stifles competition and/or increases
production costs.

These problems have received fresh attention in

public discussion in recent months.

The Administration's decisions

to deregulate the airline industry and to support legislation for
the deregulation of surface transportation in the trucking industry
and the railroads represent important steps forward.

We applaud

these new directions in regulatory philosophy and urge that further
moves are still needed, such as closer attention to the relationships

13
between the benefits and costs of regulations, including their
effects on prices.

We support the concept of semi-annual agendas

of forthcoming regulatory proposals, as ordered by the President
last year.

Also, costs and benefits of both new and existing regu-

lations should be periodically analyzed with a view toward prompt
elimination where appropriate.
In broader terms, it is becoming increasingly recognized
that many forms of government regulation carry significant cost
burdens which are ultimately borne by the American public in the
price of the products they buy.

A comprehensive review of our en-

tire regulatory structure appears to offer significant benefits not
only in improving the competitive environment of our economy, but
also in lowering production costs in ways that would benefit the
fight against inflation.
Wage and Price Standards.

A major new initiative in the

fight against inflation was the program of voluntary wage and price
standards inaugurated by the Administration last October.

We believe

that such a program can contribute importantly to the deceleration
of inflation.

But it should be considered as a supplement to, not

a substitute for, fiscal and monetary policies which represent our
most fundamental policy weapons against inflationary forces.

Wage-

price guidelines can only be viewed as transitional since they will
not correct inflation over the long term; they have the advantage
of providing more time for fiscal and monetary restraints to take
hold.
The voluntary nature of the present program is of critical importance.

We are opposed to mandatory wage and price controls

48-005 0 - 79 - 3

14
because of the rigidities they introduce into the market system and
the distortions they produce in economic decision-making.

The

history of mandatory controls demonstrates that they do more harm
than good.
A new element of the Administration's wage and price program is the proposed system of real wage insurance.

This approach

represents the first effort to bring the tax system to bear on the
'incomes policy" approach to holding down inflation.

If the admin-

istrative feasibility of the real wage insurance proposal could be
demonstrated, we would urge the Congress to give positive consideration to real wage insurance, which appears to provide a useful
underpinning for the voluntary program of wage and price standards.
New Forms of Communication
Perhaps the most significant contribution of the Williamsburg Assembly was to highlight, in its final recommendation, the
need to establish new lines of communication and forums for discussion of the inflation issue by the American people themselves.
Such a communications effort should emphasize the long, hard battle
that lies ahead to bring inflation under control and the need for
patience in leaving time for anti-inflation policies to do their
work.

We in the life insurance business endorse the conclusions of

the Williamsburg Assembly that a communications program to broaden
public understanding of inflation must include the following points:
(a) the issues must be expressed in terms
such that people can readily understand what is involved;.

15
(b) the issues should be presented in such
a way that people recognize the need for
painful decisions which may be at some
cost to themselves;
(c) a period of time must be allowed for
debate on the issues and their remedies;
and
(d) communication about the inflation fight
should be conducted through various
forums, including existing organizations.
The American Council of Life Insurance is taking this recommendation most seriously and contemplates cosponsorship of Williamsburg
Assembly-type programs at major universities and working with
various channels of communication,

including groups like The Public

Agenda Foundation.
Moreover, we endorse the further recommendations of the
Williamsburg Assembly that a forum be established within which
major national groups can discuss the inflation problem and evolve
common solutions that are acceptable to the many diverse elements
in our society.

By functioning outside the glare of publicity and

pejorative political debate, a forum such as this could be useful
in reducing inflation by helping to reconcile economic differences
among these groups.

Such a forum could be structured along the

lines of the Conference of National Organizations which operated
successfully during World War II.

16
REPORT
OF THE
WILLIAMSBURG ASSEMBLY
ON
ANTI-INFLATION POLICY

Williamsburg, Virginia
February 21-24, 1979

Sponsored by the American Council of Life Insurance

17
FOREWORD
Early in 1978, the American Council of Life Insurance,
recognizing the urgency of the problem of inflation, embarked on
a major study of anti-inflation policies. As a first step, the
Council last spring established a guiding committee which identified four major areas of policy interest for detailed study:
(a) monetary and fiscal policies, (b) productivity and supply
management, (c) governmental operations and structure, and (d) wage
and price relationships. The committee then organized workshop conferences to explore each of these designated areas in greater detail. These two-day workshops were held in Washington on four successive week-ends last fall, in which the Council invited the participation of a cross section of leaders from business, labor,
government and academic life. Background papers for each of these
workshops were commissioned, drawing upon academic specialists in
various facets of the inflation problem.
Based on these papers and extensive discussion, the outcome was four task force reports which presented preliminary recommendations for inflation control policies. Additional background
papers were commissioned in the interest of completeness, to examine
special topics that the workshops had not been able to cover. These
materials formed the basis for a larger conference, the Williamsburg
Assembly, held on February 21-24 at Williamsburg, Virginia, involving
more than 80 participants representing a cross section of groups
within our economy and the varying points of view that they reflect.
The recommendations below represent the consensus of participants in the Williamsburg Assembly and should not be attributed
to any individual or to the organizations with which the participants
are associated. The full proceedings of the Assembly, including the
consultants' papers and other background materials, will be published
by the Academy of Political Science.

J. Edwin Matz
Chairman
Williamsburg Assembly on
Anti-Inflation Policy

18
REPORT OF THE WILLIAMSBURG ASSEMBLY
ON ANTI-INFLATION

POLICY

Preamble

Inflation is rapidly becoming a socially and economically
destructive force which, unless counteracted firmly and promptly,
will drive the nation to accept extreme measures threatening to our
freedoms.

The roots of inflation are entwined not simply in econom-

ic factors, but in the social, psychological and political layers
of American life.

Particularly to be noted is the dramatic rise in

expectations which is often described as the "psychology of entitlement" and has been institutionalized in both the public and private
sectors.

These expectations are translated into ever-rising government expenditures which have outrun revenues and have led to deficits
that contribute to inflation.

Pressures on the Federal Reserve Board

to support these deficits, while simultaneously holding down interest
rates, have led to excessive growth in the money supply. During the
past decade other factors have also contributed to inflation, including such outside "shocks" to the economic system as the OPEC oil
monopoly, widespread crop failures and raw material shortages.
Among the number of long-term changes being fed into the
present malaise the following bear special scrutiny:

(1) widespread

expectations of continued inflation have been built into such economic decisions as wage and price determination, with the result

19
that wages and prices accelerate in boom periods but show little
deceleration during recession;
rate of productivity growth;

(2) a slowdown has occurred in the

(3) increases in the extent and cost

of government regulation have been large; and (4) the rate of savings and capital investment has declined.
In a fundamental sense, everyone is hurt by inflation -some groups much more than others.

There is critical damage to the

social fabric; uncertainty clouds economic and financial transactions,
thrift is penalized, tax laws become more complicated.

The net effect

is to poison the political and social atmosphere.
In light of these obvious evils, Americans wonder why
prompt and forthright solutions have not been applied.
multiple reasons.

There are

One is fear of recession, and with it greater

unemployment -- especially among minorities and youth.

Another is

fear that essential social services will be curtailed.

Another is

structured rigidity within the system.
thing is certain --

Amidst the uncertainty one

since inflation has been long in the making, it

cannot be halted quickly.

We need the patience to give inflation

remedies the time to become effective.

Recommendations
The following recommendations are addressed to both shortterm and long-term solutions to the inflation problem:
1.

Federal Budget Policy
The massive budget deficits of the past decade, which have

piled up even in prosperous years, must not be permitted to go on

20
indefinitely.
these deficits.
of GNP.

A new budget ethic is required to limit and reduce
Federal spending should be reduced as a proportion

Sufficient flexibility must be provided to handle inevitable

fluctuations in the economy and in employment.

Acceptance of the

new budget ethic may compel us to accept temporarily higher unemployment rates and lower capacity utilization.
2.

Monetary Policy
To advance the goal of lower inflation, monetary policy

should seek to decelerate the growth rate of the money supply.
Money supply growth should be reduced to a rate consistent with
price stability and economic growth.

This goal of monetary policy

should be considered more important than short-term interest rate
variations.
To help the Federal Reserve achieve such goals and avoid
"credit crunches," federal government deficits must be reduced.
Lower interest rates will follow the easing of federal credit demands and private inflation-related credit demands.
3. Equitable Burden Sharing
The burden of fighting inflation should be shared as
equitably as possible.

While stabilization of the price level and

satisfactory employment rates are not incompatible in the long run,
we recognize that anti-inflation policies risk stimulating temporary increases in unemployment in the short run.

Since some groups

may be affected more severely than others, we recommend retention
of employment training programs and of transfer payments to the
unemployed,

but we urge thoroughgoing reforms to assure more efficient

21
and responsible design and operation of such programs.

We would

emphasize the need for government assistance to the unemployed to
alleviate substantial hardship on individuals who are not at all
responsible for painful policies which affect them.
4.

Government Support Programs
Government actions which raise incomes by artificially

elevating prices or wages are both inflationary and inefficient.
Americans pay for subsidies through taxation and are entitled to know
the costs and benefits of these programs.

The best way to achieve

action on inflation-producing subsidies is by raising the level of
public awareness through broad discussion and debate.

Therefore we

affirm that in general, subsidy programs should be operated through
direct payments to the targeted population.

Specifically we urge:

(a) elimination of agricultural crop restrictions as one example of
a desirable subsidy change;

(b) that restrictions on foreign trade

be reduced or eliminated through international negotiations because
such restrictions raise domestic prices and thereby contribute to
inflation.

If workers and investors are to be provided with transi-

tional assistance to adjust to foreign competition, it should be in
the form of direct payments; and (c) that government wage support
programs (including the minimum wage, the Davis-Bacon Act and similar acts) be re-examined.

The minimum wage should not be increased

further since its effect is to increase prices and to raise unemployment of the unskilled, including teenagers.

We are persuaded

that the principle of a minimum wage should be re-examined because
there are better ways to help low-income families.

48-005 0 - 79 - 4

22
5.

Regulatory Improvements
We believe that excessive regulation has impaired producWhenever possible, market

tivity growth and should be reversed.

incentives should be used rather than regulations.

This means that

our necessary regulatory systems should be examined critically to
determine if they are operating efficiently in the public interest.
To further this objective, we support:

(a) a requirement that each

regulatory agency produce cost/benefit analyses for those of its
regulations that have major impact on the economy;

(b) establishment

of mechanisms for external review of proposed new regulations, with
a proviso that such reviews be placed in the public record; and
(c) a comprehensive review of major regulations and agencies and
prompt elimination where appropriate.
6.

Productivity
Productivity improvements are the responsibilities of both

the public and the private sectors.

To reverse the marked slowdown

in productivity growth of the past decade and to help decelerate inflation, we recommend policies to improve the rate of return on investment in new plant and equipment, to stimulate outlays on research
and development, and to expand job training programs with emphasis
on the private sector.
To increase investment incentives, we urge that consideration be given to (a) broadening investment tax credits to include
private R&D and new construction outlays;
support for R&D in real terms;

(b) increasing federal

(c) increasing the investment tax

credit; (d) accelerating tax depreciation allowances;

(e) reducing

23
corporate income tax rates;

(f) reducing or eliminating double
All

taxation of dividends; and (g) reducing the capital gains tax.

tax relief should depend upon progress toward appropriate overall
budget targets.
Further study should be given to restructuring the tax
system to reduce or eliminate its bias against saving and investment.
We also favor innovative measures to improve productivity
in those industries characterized by declining or lagging productivmining, construction, and the service sector

ity:

(especially health

care and education).
To reduce unit costs and improve efficiency, we recommend
that more private firms institute (a) quality-of-working-life
programs,

and (b)

joint labor-management productivity committees

linked to shared cost-savings with employees.
7.

Incomes Policies
To bring down the rate of inflation, primary reliance

should be placed on appropriate fiscal and monetary policies.

The

use of an incomes policy, such as the present wage-price standards,
can be a useful supplement.

Voluntary wage-price guidelines can be

used to decelerate inflation by allowing more time for fiscalmonetary restraint to take hold, but they can only be viewed as
transitional since they will not correct inflation over the long
term.
We oppose mandatory wage-price controls because they do
more harm than good by introducing rigidities into the system and
distortions into the economy.

Incomes policies that are based on

24
the tax system warrant further study to determine whether they are
administratively feasible and sufficiently flexible to avoid the
harmful rigidities of controls.
8.

Indexation
Since indexation may be counterproductive in combating in-

flation, no new forms should be encouraged.
9.

The Special Case of Health Care
Effective solutions to inflation will have a beneficial

effect on most sectors of the economy.

However, since the normal

forces of supply and demand do not apply to the subsector of health
care (with its acute inflationary tendencies), additional solutions
will have to be sought as alternatives to conventional market forces.
We need to prevent creation and operation of non-essential health
facilities, limit unnecessary surgery or hospitalization, emphasize
cost awareness including preventive health measures, and stimulate
competition by health care providers at every level.
10.

International Value of the Dollar
The most effective way to stabilize the international

value of the dollar is to decelerate domestic inflation.

Some in-

tervention by the Federal Reserve and the Treasury may be desirable
to promote orderly foreign exchange markets.

In the longer run,

some restructuring of7the international monetary system may be
needed, but controlling domestic inflation would be the most effective means of checking the depreciation of the U. S. dollar and improving our international economic and financial position.

25
ii. The Challenge to Communicate
Americans are deeply troubled by inflation, but there is
some question as to how well they understand its causes and what is
required for its solution.

Such understanding is vital if progress

is to be made in changing the social, psychological and political
factors contributing to inflation.
We recommend that a program be undertaken promptly to
communicate this understanding, including these reference points:
(a) the issues must be expressed in terms such that people can
readily understand what is involved;

(b) the issues should be pre-

sented in such a way that people recognize the need for painful
decisions which may be at some cost to themselves;

(c) a period of

time must be allowed for debate on the issues and their remedies;
and (d) communication about the inflation fight should be conducted
through various forums, including existing organizations.
As a special measure, the Williamsburg Assembly recommends
that a forum be established within which major national groups can
discuss the problems of inflation.

A forum such as this could be

very useful in discussing the evolving common solutions to many of
our inflation issues because they can operate outside the glare of
publicity and pejorative political debate.

Such a forum could be

structured along the lines of the Conference of National Organizations which operated successfully during World War II.
#

i

26
Participants in
The Williamsburg Assembly

Kenneth R. Austin
Equitable Life Insurance Company of Iowa
John H. Auten
U. S. Department of the Treasury
Martin J. Bailey
University of Maryland
Anatol B. Balbach
Federal Reserve Bank of St. Louis
Joan Bannon
U. S. Conference of Mayors
Ernest T. Baughman
Federal Reserve Bank of Dallas
Morrison H. Beach
The Travelers Insurance Company
Bharat B. Bhalla
The Continental Group
Coleman Bloomfield
Minnesota Mutual Life Insurance Company
*Barry P. Bosworth
Council on Wage and Price Stability
Kenneth E. Boulding
University of Colorado
J. W. Brakebill
Provident Life and Accident Insurance Company
William H. Branson
Princeton University
Roger E. Brinner
Data Resources, Inc.
Phillip D. Cagan
Columbia University
A. Michael Collins
International Union of Operating Engineers
* Speaker on Thursday evening,

February 22

27
-eorge T. Conklin, Jr.
The Guardian Life Insurance Company
Robert H. Connery
Academy of Political Science
Robert W. Crandall
The Brookings Institution
John J. Creedon
Metropolitan Life Insurance Company
Fred DeLuca
American Council of Life Insurance
Larry L. Dildine
U. S. Department of the Treasury
Alfred S. Eichner
State University of New York
Marten Estey
The Wharton School
Edgar R. Fiedler
The Conference Board
Richard I. Fricke
National Life Insurance Company
Paul Gallant
American Council of Life Insurance
Walter B. Gerken
Pacific Mutual Life Insurance Company
K. Edwin Graham
American Council of Life

Insurance

Edward M. Gramlich
University of Michigan
William C. Greenough
Teachers Insurance and Annuity Association
William B. Gross
Pacific Mutual Life Insurance Company
Serge Grosset
Duquesne University

28
Melvin A. Hinick
Virginia Polytechnic Institute and State University
Frank J. Hoenemeyer
The Prudential Insurance Company of America
James R. L. Holdsworth
American Council of Life Insurance
A. Linwood Holton, Jr.
American Council of Life Insurance
Edward R. Irvin
Integon Life Insurance Company
Dean W. Jeffers
Nationwide Life Insurance Company
Donald E. Jondahl
Northwestern National Life Insurance Company
John W. Kendrick
The George Washington University
William E. Kingsley
American Council of Life Insurance
Thomas H. Langevin
Capital University
Hartzel Z. Lebed
Connecticut General Life Insurance Company
Arthur Lifson
The Equitable Life Assurance Society of the United States
Sandra Linck
Mansfield, Pennsylvania
William R. Ludwick
Pilot Life Insurance Company
Barbara Lynch
Demarest, New Jersey
James B. McIntosh
Midland Mutual Life Insurance Company
Paul E. Martin
Ohio National Life Insurance Company

29
J. Edwin Matz
John Hancock Mutual Life Insurance Company
William F. May
American Can Company
Richard V. Minck
American Council of Life Insurance
Melvin Mister
U. S. Conference of Mayors
Blake T. Newton, Jr.
American Council of Life Insurance
William K. Paynter
American Council of Life Insurance
Louis B. Perry
Standard Insurance Company
Joel Popkin
Joel Popkin & Company
Robert A. Quietmeyer
Newark, Delaware
George G. Radcliffe
The Baltimore Life Insurance Company
Robert A. Rennie
Nationwide Life Insurance Company
Cynthia Ricketts
Montpelier, Vermont
Philip Saunders, Jr.
John Hancock Mutual Life Insurance Company
Francis H. Schott
The Equitable Life Assurance Society of the United States
Leslie P. Schultz
United Services Life Insurance Company
Laurence Seidman
University of Pennsylvania
Richard Selden
University of Virginia
Harry P. Seward
Bankers Life Insurance Company of Nebraska

48-005 0 - 79 - 5

30
Courtenay M. Slater
U. S. Department of Commerce
Armand C. Stalnaker
General American Life Insurance Company
Robert E. Stevens
Connecticut Mutual Life Insurance Company
Robert H. Stewart
Gulf Oil Corporation
Catherine D. Sveikauskas
Federal Home Loan Bank Board
John R. Taylor
Bankers Life Insurance Company
Paul Wachtel
New York University
Robert A. Wallace
Joint Economic Committee
Harvey D. Wilmeth
Northwestern Mutual Life Insurance Company
*Daniel Yankelovich
Yankelovich, Skelly & White
Conrad S. Young
United Benefit Life Insurance Company
James Zabel
First National Tennessee Corporation

Project Director:

Clarence C. Walton

Administrative Staff:

Milton Amsel
George A. Bishop
Kenneth M. Wright

*Speaker on Wednesday evening, February 21

STATEMENT TO THE JOINT ECONOMIC COMMITTEE
by
J. R. PETERSON, ASSOCIATE DIRECTOR,
MISSISSIPPI RESEARCH ANDDEVELOPMENT CENTER,
AND IMMEDIATE PAST CHAIRMAN OF THE BOARD OF TRUSTEES,
FEDERAL STATISTICS USERS CONFERENCE
The major economic problems facing the Nation are inflation,

lagging
The lagging investment is aggravating the
inflation by restricting the amount of goods and services produced. It has
led to lagging employment and will lead to an economic slowdown this year.
investment, and productivity.

The investment lag is

likely to be with us for a while. Moreover, the
reported investment we do have is, to a large degree, not production investment. Some is for pollution control; some is for energy reduction; and some
is replacement of transportation equipment. Much of it does not add
employment -- does not increase productivity.
This is not to say that if investments were proceeding at the normal rate
unemployment would not be a problem. It would - but it would be less of a
problem. Likewise, if we were producing the energy in the United States that
we are importing, unemployment would be less of a problem. I did not list
unemployment as a major problem because the part of it that can be corrected
is a result of the low investment rate. It is a result -- not a cause. The
government's attempt to deal directly with unemployment is treatment of a
symptom.

It creates very few jobs and those jobs it does create can only
marginally be described as producing services. They do, however, produce
inflation.
Part of the current unemployment rate has occurred because during the
recent recession companies became more efficient. Part of the current unemployment is with us because we have had during this decade a surge in the
number of young people entering the work force without a corresponding increase
in the population to be served. The baby boom of the fifties led to the work
force of the seventies. The unemployment is not 7 percent overall, but 17 percent of the young.
In my own state, just a few years ago those looking for jobs with the
Employment Service tended to be in the 45- to 60-year-old group. Today, an
unemployed person in that age group is rare. The unemployed are the
inexperienced. Employers feel that this young group is both unproductive and

(31)

32
unstable -- therefore expensive.
minimum wages.

The problem was not helped by the change in

Moreover, many of these young unemployed will not accept jobs

they think are beneath them.
It is probable that full employment today means a much higher unemployment
rate than it
still

has in the past, as suggested by Herbert Stein; but there are

large numbers of unemployed who could be put to work if business could

be persuaded to invest.
in August,

1977,

Senator Hatch,

listed the needs:

in his article in "National Review"

reduce taxes, reduce spending, reduce

regulation.
Admittedly, a general reduction in taxes at this time would be inflationary
but a reduction in corporation taxes and in taxes on the upper income brackets
would encourage the investment that is needed.

Another factor in favor of

reducing the tax rates on the upper income brackets is that such action has
historically increased taxes collected from the rich.

In the 1920's, when

taxes on the highest incomes were reduced from 55 percent to 25 percent, taxes
from those with incomes equivalent to $1 million or more a year more than
tripled in two years.

In the 1960's,

dropping the tax rate from 91 percent in

1963 to 70 percent in 1965 almost doubled the tax collections from those making
more than $1 million a year.

Puerto Rico demonstrated the same principle last

year and plans further cuts this year.

The cuts I have described will not

only bring in additional taxes from the rich but also from the employees who
are added because of the increased investment.

The government needs such

additional taxes to help balance the budget -- the second important need.
Inflation will not be contained without it.
I do not believe that the required investment will be brought about,
however, even with the tax changes and a concerted effort to reduce spending,
without a 180 degree turn in the trend in regulation.

Government regulation

of business has gotten completely out of hand because of an army of bureaucrats
who have no other job.

My own experience on an advisory committee for the

Department of Transportation demonstrated that regulation did not derive from
need but from the job descriptions of the bureaucrats.
because it

was their job to regulate.

they were kept on the payroll and told to do nothing.
if

they were told to deregulate.

They were regulating

The country would be much better off if
It would be even better

Without a doubt they would make mistakes in

deregulation and abolish some regulations that are needed, but they would do
endless good at the same time.

33
If we get the added investment, we will also improve the productivity.
These are definite needs.

If these three tasks could be accomplished soon,

the economy would recover and generate even more taxes than were previously
collected.
But business must be convinced that these are not just grudging gestures;
that the federal government acknowledges profit as a legitimate motive.
Business must also be convinced that the government is aware of what it is
doing.

This awareness was not at all obvious when all in one day last year

the Administration proposed a tax break for investment and also proposed cancelling the capital gains tax break.
there were two front page stories.

Moreover, on February 13 of last year,
Secretary Blumenthal told about tax cuts

designed to encourage the private sector to invest.

Senator Kennedy backed

an Administration plan to increase taxes on those making more than $50,000 a
year -- the people Secretary Blumenthal was trying to persuade to invest.
In the same newspaper was a paragraph on proposed additional regulation
of business.
Today the economy is made in Washington.

If all the steps taken hence-

forth are correct ones, it is still too late to prevent the slowdown.

Invest-

ment decisions made today won't have any effect on production for several
years.

But the steps outlined will improve business confidence.

The invest-

ment decisions will not be made if the business climate in Washington does
not improve.

Improvement is more than giving tax cuts with one hand and

increasing taxes with the other.
March,

1979

Statement of
George G. Hagedorn, Vice President & Chief Economist
National Association of Manufacturers
to the
Joint Economic Co3-mmittee of Congress
May 18, 1979

The Joint Economic Committee deserves a great deal of praise
for its success in preparing an excellent report on the January
1979 Economic Report of the President.

The endorsement of both

the Majority and Minority members of the Committee represents an
emerging awareness throughout the country that the economic problems
we face must be confronted with a bipartisan, unified effort.

It

is thus a pleasure to be able to comment on some of the thoughts
expressed in the Joint Economic Report.

Widespread recognition of inflation as the nation's most
serious economic challenge represents the first step towards arresting the process which has been draining the U.S. of its economic
vitality.

The second step requires the realization that the current

surge of double-digit inflation is the cumulative effect of four
years of macroeconomic stimulation.

It is the result of large

federal deficits and rapid monetary expansion created in order to
induce continued economic expansion in the years
1974-75 recession.

following the

Because this inflation is the product of more
(34)

35
than four years of high-growth policies, we must not delude ourselves by searching for simple answers and "quick fixes.'

Instead

we must look to policies which will conquer inflation rather than
merely cope with it.

In what follows, a number of economic policy

options will be discussed.

Each is examined with the understanding

that hard choices, perhaps involving painful periods of readjustment, need to be made if we are to attack what is increasingly
being considered an intractable problem.
By 1978 business and consumer reactions to the apparently
chronic

nature of the inflation problem had combined with stimula-

tive monetary and fiscal actions to create an overheated economy
and its natural concomittant -- an accelerated inflation rate.
economy is one in which the incentive

Today's

to save and invest is overwhelmed

by the attractions of credit acquisition and consumption.

This

demand-derived inflation will continue to expand unless actions are
taken to slow down the rate of economic growth.

The ultimate goal

must be to achieve the desired deceleration in the rate of growth
while causing the least possible amount of economic hardship.
Acceptance of that goal is not suggestive of the belief that
the economy can be turned around without great effort and perhaps
even sacrifice.

We know that the economy is not the fine-tuned

instrument that it is often thought to be.

Not only are its reac-

tions to economic policy moves at times sluggish, but its response

36
is not always precisely as intended.
Given the complexities

in manipulating the economy, slowing

down the rate of economic growth runs the risk of recession.

Recog-

nition of that possibility is not to suggest that moderation
in growth should not be sought.

In fact,

the alternative of con-

tinuing indefinitely present policies is certainly less attractive.
The likelihood is that without steps to curb economic growth we will
enter into a period of stagflation -- a time in which there will be
simultaneous increases in the price level and unemployment.

It is

probably too late to avoid this economic mire, at least for an
interim period of many months.
A longer-term program to overcome inflation calls for a mix of
policy tools which will get at the fundamental roots of inflation.
This necessarily requires that fiscal and monetary restraint be the
mainstay of our nation's economic policy.

Other actions deserve

serious attention and can be effective additions to the anti-inflation
fight, but only primary reliance upon fiscal and monetary restraint
can bring about a long lasting inflation solution.
Monetary policy was actually tightened during 1978, but the
exact degree of constriction is somewhat unclear.

As noted in the

Joint Economic Report, the first months of 1979 revealed "conflicting signals with respect to the the direction in which montetary
policy is moving."

The vacillation is the cause of great concern.

37
Businessmen and consumers have found cause to question the extent
of the Administration's commitment to tough monetary policy.

The

consumers are wary of reining back their brisk consumption patterns
in the fear that if they do so, and inflation remains unchecked,
they will find even higher prices when they resume purchasing.
This uncertainty can only serve to damage the confidence of the public
and cause a questioning of the sincerity of the government's intention to truly combat inflation.
Congress must make it clear that it is willing to support
responsible, consistent, and persistent restrictions of the growth
of the money supply.

It is crucial that it be clear to all that

this is a staunch commitment

--

one which will not be abandoned

at the first sign of an economic downturn.

Only by holding fast

to a course of restraint can restrictive monetary policy be given
the opportunity to bring lasting relief.
Congress must also exercise its leadership role by adopting
a fiscal policy which is truly austere.

It is important that

budgetary policies be pursued which will reduce the deficit and
the federal government's share of the gross national prouduct.

The

stimulative budgetary policies instituted to bring about economic
recovery from the recession of 1974-75 are inappropriate and
actually dangerous in today's (or tomorrow's) economic climate.
The tandem use of fiscal and monetary tools provides the

38
opportunity to capitalize upon their complimentary relationship.
Benefits can be derived by using fiscal changes because although
such shifts can not be made speedily, their effects are widely
felt.

On the other hand, while monetary policy is more accessible

and flexible than fiscal policy, its impact is less predictable.
Used in

conjunction, fiscal and monetary policy can work to

dampen inflation.
In recognition of the inherent limitations of fiscal and
monetary tools, voluntary wage-price standards were established.
By enlisting private sector restraints, not only wasa modicum of
additional restraint sought, but the Administration expressed the
severity of the inflation problem and provided an avenue for the
private sector to communicate its willingness to join in the antiinflation fight.
What we must vigilently guard against is the wage-price
standards program degenerating into a weapon for allocating blame
for problems with the anti-inflation program.

At the root of our

current inflationary predicament are deep-seated economic factors,
not greedy groups of individuals abusing the system.

Neither in-

creasing corporate profits or compensation to employees is at the
source of our recently frustrating lack of progress in controlling
inflation.

Finding scapegoats and pointing an accusatory finger

is simply not the answer.

39
The answer does not lie in invoking mandatory controls.
Not only would such an act eventually be self-defeating, but the
mere knowledge of or fear that controls may be instituted leads
to inflationary responses from the private sector.

The President

and Congress must continue to abide by the knowledge that mandatory controls will not work, even when short-term political gains
are to be made by setting those beliefs aside.
With a view towards longer run economic stability, Congress
can aid restrictive fiscal and monetary efforts by promoting policies which will increase productivity.

Congress can tend to the

supply side of the picture by pursuing policies which lead to a
higher rate of capital formation.

If we are to restore an accept-

able productivity rate, congressional consideration needs to be
given to reform of established procedures for dealing with such
features of the tax system as capital recovery and corporate tax
income liability.

Reforms in these areas would go a long way to

spurring productivity growth, offsetting the negative impact that
inflation has on capital formation, and create additional employment.
Congress can also make great strides in improving productivity
by getting a handle on excessive regulatory costs.

Business re-

sources are being detoured in ever increasing amounts into efforts

40
to deal with regulatory requirements.

It is essential that Congress

strive to assess the cost-effectiveness of actions being contemplated whenever possible.
Finding the proper policy mix is not a matter of invoking the
doctrines of an exact science.
ground

--

To suggest that a comfortable middle

one which is sufficiently restrictive to curb inflation

but not stringent enough to trigger recession -- is readily available
is to be highly misleading.

While the difficulties which lie ahead

must not to be minimized, it is necessary from the start to make a
total commitment to halting inflation.

The difficulties described

are not intended to discourage policy makers, but rather to indicate
the sense of realism with which the anti-inflation effort must be
approached and to suggest the tenacity with which we must pursue
our anti-inflation goals.
control

To promote the belief that the effort to

inflation will follow a clear, steady and short path would

be a disservice to us all.

National
Farmers Union

STATEMENT
OF
TONY T. DECHANT
PRESIDENT
NATIONAL FARMERS UNION

PRESENTED TO THE
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
WASHINGTON, D. C.

MARCH 1979

*

Suite 600, 1012 14th Street, N.W., Washington, D.C. 20005

-

Phone (202) 628-9774

0150

(41)

42
Nobody
Chairman Bentsen and Members of the Committee.
would be more pleased than American farmers if the Carter
Administration could bring the national inflation rate within
tolerable levels.
What's tolerable?
It would be nice to get inflation down to 3 percent as
an annual rate, but we might have to accept a 4 or 5 percent
rate to have economic growth strong enough to maintain reasonably
full employment.
Let me tell you what difference it would have made to U. S.
farmers if the 1978 inflation rate had been 5 percent instead
of 9 percent -- we would have had $3.7 billion more net income
for the year.
American consumers paid $20 billion more for their food
supplies in 1978 than in 1977. That was an increase of about
Obviously, if inflation and food prices had increased
10 percent.
by only a 5 percent rate, consumers would have been $10 billion
better off.
But, how do you get from 9 percent inflation down to
5 percent? Many people think it will take several years at
best.
Because of the Humphrey-Hawkins Full Employment and Balanced
Growth Act of 1978, the executive branch is now required to
project goals for employment and price stability for five years
ahead. THE ECONOMIC REPORT OF THE PRESIDENT, which was sent to
the Congress on January 24, includes the first attempt to
project such goals.
It projects goals of reducing the inflation rate to 7.5
percent in 1979, to 6.4 percent in 1980, to 5.2 percent in 1981,
4.1 percent in 1982, and 3 percent in 1983.
At the same time, the ECONOMIC REPORT projects that employment will grow to 102.6 million persons in 1981, with unemployment dropping to 5.4 percent.
It projects an economic growth rate improving from 2.2
percent this year to 4.6 percent in 1981.
That the projection of reducing the inflation rate to just
over 5 percent in 1981 is overly optimistic seems quite obvious.

43
The ECONOMIC REPORT acknowledges that food costs could
rise 7 to 8 percent, and it anticipates increases in energy
costs, not just the OPEC's 14.5 percent increase (which in
itself will raise the inflation rate by 0.4 percent), but rises
as well in the price of natural gas and coal. Hospital costs
have been increasing at twice the rate of other consumer outlays
and even if the pace slows, it will still
be a strong force.
The prime interest rate is expected to peak at 13 percent
some time this spring.
This means that the going rate for most
borrowers will be 15 percent or thereabouts.
That will inflate
the price of most consumer goods.
Even if there were not these severe pressures, it seems
doubtful that the measures being advocated by the Administration
or by many economists would make much of a dent on the inflation
rate.
We think we have a right to be skeptical about the common
myth that high interest rates will be an effective tool in
reducing inflationary pressures.
Since July, 1977, the prime
rate has been increased twelve times.
It has been raised from
6-3/4 percent to 11-3/4 percent.
Meanwhile, the rate of inflation
has gone up from 6 percent to 9 percent.
Of course, if you persist long enough and hard enough with
the higher interest rate policy, you will cool the economy.
It
has been tried ten times by the Federal Reserve Board in its
66-year history and each time it has eventually caused a recession
or depression.
Let's look at a second common myth about inflation -- that
accepting a high rate of
employent will make a difference.
Calculations have been made that by throwing a million people
out of work, you can perhaps reduce the inflation rate by onequarter of 1 percent.
But, in the bargain, you will lose $60 billion
in production, you'll forego billions in federal taxes, while
spending billions in unemployment and welfare benefits.
If a
million more unemployed will reduce inflation by one-quarterpercent, then to reduce overall inflation from 9 percent to
5 percent would require 16 million workers being unemployed.
You can forget that one.
Let's take a third common myth -- that an end to deficit
spending by the federal government is the ultimate answer.
The
federal deficit in fiscal 1979 is now projected at $37 billion
-- and the deficit in the fiscal 1980 budget at $29 billion.
The deficit in fiscal 1978 was $48.8 billion -- reducing
it to its present level has not had an appreciable effect on the
inflation rate.

44
The crucial thing about the federal budget is not the
budget total or the budget surplus or deficit -- the vital
thing is how the money is used -- what kind of priorities we
have.
We haven't had a balanced federal budget since fiscal 1969
and it is hard to visualize anything but "red" budgets until we
get a handle on some of the "untouchables" in the budget package.
For the second straight year, farm programs are taking the
largest cut in the federal budget, other needed domestic programs
are reduced, including those designed to help put Americans back
But, at the same time, defense spending, health costs,
to work.
and interest payments escalate without any limits.
The fiscal 1980 budget provides $125.8 billion for the
Defense Department, on top of $75 billion unspent from prior
budgets.
Federal health care expenditures for 1980 are projected at
$53 billion. Total health care outlays, public and private,
have been advancing at twice the rate of the overall consumer
price index.
Interest costs in the new budget are projected at $57
billion, up almost $5 billion in a year's time.
able,

The tragedy is that these "untouchables"
if there is any will to do so.

are all control-

The adoption and implementation of a National Health Security type program would give Americans dramatically better health
care at less cost than the existing system.
If the implementation of national health insurance is
delayed until 1983, by that time the existing "non-system"
health care outlays will be $350 billion with no improvement in
Perhaps a new program will cost $40 billion a year
services.
in public expenditures, but it will be more than offset by
The most costly, and
efficiencies in health care delivery.
inflationary, course of all will be just to continue what we
are doing now.
They are not ordained
Interest costs, too, are controlable.
They are ordained by the Federal Reserve Bank -- an
in heaven.
organization of, by, and for the banking industry.
I said earlier that the prime rate is expected to peak at
When it surpasses 12 percent, that
13 percent early this year.
will be a 100-year high.

45
Let me tell you what that will mean to farmers and consumers.
As of the first of this year, American consumers have $298
billion in short-term, non-mortgage debt. That is about $1,360
per capita. With the prime rate at 13 percent, the going rate
for ordinary borrowers will be 15 percent and above.
I am aware that many consumers are alarmed at what is
happening to food costs. But regardless of what has happened,
American consumers still are spending only 16 percent of their
disposable personal income for food.
This will perhaps shock you --

and it should --

American

consumers are now spending 20 percent of their disposable personal
Think of that -- on the average,
income in debt service outlays.
interest costs are taking a bigger bite out of family budgets
than food costs.
Let's look at the farm side. U. S. farmers at the beginning
of this year had $136 billion in outstanding debt. The total
is being predicted to balloon to $153 billion by the end of the
year.
If interest rates stay at present levels, farmers will pay
about $10 billion in interest costs during the year.
If interest
rates increase another full point, as is expected, that will add
another $1 billion to the interest outlays. If you examine the
balance sheet of a typical American farm, you will see that
interest costs are now the second largest outlay -- second only
to feed purchases.
I said that interest costs could be controlled. Of course,
they could. The President has standby authority under the
Emergency Credit Control Act of 1969 to impose sweeping controls
on all forms of credit, broadly or selectively.
The President
can set maximum interest rates, set limits on the size of loans,
set repayment terms, and he can direct the Federal Reserve to
allocate credit to productive uses such as food production and
housing.
It's time that the President used this power because the
present situation is bleeding the national economy -- and doing
it for no useful purpose.
I have spent most of my time telling you why the antiinflation strategy of the Executive Branch has not and will not
work. There are things that could be done which would make some
difference.
The first, certainly, is to put Americans back to work.
Economists have projected that in a full-employment, fullproduction economy, the federal budget would have a surplus of
$100 billion.

46
Another step that would have a major effect on the inflation rate and upon the value of the dollar would be to improve
our balance of payments situation.
The U. S. had a trade deficit of $34 billion in 1978 and
the most favorable forecasts are that we will be fortunate to
hold it below $30 billion for 1979.
The 1978 trade deficit would, of course, have been a great
deal worse if we had not had an agricultural trade surplus of
513.5 billion.
But, we could have trimmed that trade deficit by another
$5 billion by pricing our export grain at the cost of production.
Can you imagine anything more silly than giving away our
grain and farm commodities at bargain basement prices?
The OPEC countries don't give us their crude oil at less
than the cost of production. Why do we give our grain away?
We and Canada, Australia, and Argentina have a $10 billion trade
imbalance with the OPEC countries -- and it is going to get
worse -- but we don't do anything to get an International Grains
Agreement with pricing features, because the multinational grain
trade giants like things the way they are -- and they seem to
have more influence over U. S. policy than all the farmers in
the nation.
In the same fashion, it seems that Coca-Cola, and the
candy-makers, and the breweries have more influence over sugar
stabilization policy than do the growers.
I am willing to let the Executive Branch and the Congress
But
share the credit for bungling sugar legislation last year.
there's no more time for excuses.
Five sugar beet refineries have already closed their doors
They are in Washington, Utah, Idaho, Colorado, and
for 1979.
Farmers, who have a heavy investment in the equipment
Kansas.
for sugar production, are losing markets for 87,000 acres of
sugar beets.
The last time we experimented with the free market for
sugar, prices for the consumer went to 65 cents a pound and
since have come down to a producer price less than half the
cost of production.
If you want a sure way to guarantee that retail sugar
prices go to $1 a pound, it is to let the domestic sugar
already underway -- you
It's
producing industry go bankrupt.
just have to sit there and do nothing, while the White House
and the Congress continue their bickering.

47
I know that you are bombarded with scare talk that each
1-cent increase in the cost of sugar is going to cost consumers
of the nation $214 million a year.
What I am telling you is that it is going to cost you a
whole lot more if you don't keep a domestic industry in business
-- it will cost you in terms of retail sugar prices and in
American jobs lost.
Consumers and the Congress must finally understand that
moderately higher U. S. farm prices for sugar and other major
commodities, are part of the solution rather than the problem.
I said a moment ago that sugar prices could go to $1 a
pound.
I can also tell
you how to get hamburger prices up to
$2 a pound and milk prices up to $3 a gallon.
The recipe is the same.
Just don't ever worry whether the
American family farm system survives.
Most of you in this room are certainly old enough to remember what happened to food prices in 1973 and 1974.
You've never
really recovered since.
That was the period when we experimented with the NixonButz "market-oriented" farm policy.
It wasn't a farm policy at
all.
It was just a policy of producing all you could and taking
your chances on markets.
By adopting this new "market-oriented" farm policy, consumers of the nation, as taxpayers, saved about $2 billion a year
in farm program costs, but they paid about $10 billion a year
more for food in the market place.
For the four-year period,
1973-1976, American consumers overpaid for their food supply
by $45 billion more than the food supply would have cost if
they had kept the old farm stabilization programs in force.
If you want to go that route again, it's
very simple -just refuse to see farm prices adjusted in line with rising
costs.
Holding down farm prices in the name of fighting inflation
may be the most inflationary course of all.
The livestock and meat industry is just one example of
what happens when an industry is left in a depressed state for
so long that there is no incentive for maintaining needed
production.
Federal action to support farm prices at or near full
parity levels would be the most productive investment society
could make to assure stability of supplies and prices.

48
If national policies deprive farmers of a remunerative
return on their production, and thereby lose our family farm
system, that could be the biggest inflationary blockbuster of
all. If family farmers go by the wayside, the likely successor
will be an industrialized agriculture which will assure its own
profitability by programmed scarcity.
if

That is the kind of alternative which awaits the nation
we don't save the family farm.

Farmers are not different than any other self-employed
They have to be able to recover their costs
small businessman.
of operating if they are to maintain themselves in production.
Some are saying that there was a significant improvement
if
in the farm economy in 1978, that it should be satisfactory
1979 is a carbon copy of 1978, and that therefore no improvement needs to be made in price support levels even though costs
may go up 7 to 10 percent.
Yes, there was a partial and spotty recovery in agriculture
The largest recovery was in cattle prices, but that
in 1978.
only a half-way recovery after three years in which
was still
cattle prices never got above the break-even point.
The bottom line for farmers, of course, is not the total
number of dollars, but what they can buy for the dollars they
receive for their products.
As of January 15, corn and wheat prices gave farmers a
purchasing power equal to 54 percent of parity, rice was at
50 percent of parity, cotton at 60 percent, soybeans at 70
percent, milk at 81 percent, hogs at 75 percent, and beef
The overall average for all commodities
cattle at 88 percent.
was 73 percent -- that is 27 percent short of the cost of
living and production.
If any of you are mystified about the term parity, you
every bit
It's
a measurement, a guideline.
It's
need not be.
the
as reasonable, justifiable, realistic, and up-to-date as
Consumer Price Index. To illustrate this, I might just
observe that years ago, a separate living cost computationwas
was made for farm living costs, but in recent years this was
found to be so close to the CPI that the duplicate effortfarmers
Today, the CPI reflects living costs for both
dropped.
and non-farmers.
If no increase is provided in farm price and income
as expected, costs rise by 7 to
programs for 1979, and if,
-10 percent, the nation's farmers will take a major setback
on the order of $6 to $7 billion in lost net income.

49
I noted a moment ago a parallel between farmers and
small businessmen.
We are both affected directly by the state of the national
economy -- the purchasing power of American families for the
goods which we produce. We are affected alike by inflation -and by the extraordinarily high interest rates alongside of
record-making debt levels.
I might just note that the economic pressures of 1978
were destructive for small main street businesses. The President's ECONOMIC REPORT shows that 62 percent of the 1978 business
failures of the nation were among firms with $100,000 assets or
less. All across rural America, these are the kinds of businesses which are the backbone of the economy.
Consumers, small businessmen, and farmers have a common
stake in the success of some kind of anti-inflation strategy.
Double-digit inflation, high unemployment, and the currently
high interest rates are all intolerable.
Yet, we are convinced that the American people are anxious
to cooperate if they have assurance of three things in the
campaign against inflation:
°

That there is parity of sacrifice;

°

That the system is administered fairly
and even-handedly;

o

That there is a prospect the strategy
will work.

Since we are the victims of inflation, we have the greatest
stake in developing and implementing a remedy that will work for
all Americans.

NATIONAL URBAN COALITION
COMMENTS ON
ECONOMIC REPORT OF THE PRESIDENT

1978 did not represent a year of major economic progress for
Black*Americans.

The traditional measures of economic pro-

gress, unemployment rates, median income, and percentage
of population under the poverty line, present a bleak picture:
while unemployment among blacks declined to 11.5% in the
fourth quarter of 1978 (from a rate of 13.2% in the fourth
quarter of 1977), the black unemployment rate remains more
than double that of whites.

Similarly, the percentage of

black families below the poverty line grew slightly in 1977
(see the Economic Report of the President, Table B-25), while
the percentage of white families below the poverty line decreased slightly.

There were fewer both black and white

unrelated individuals below the poverty line in 1977.

1978

income ratios, not reported in the Economic Report, indicate
further deterioration of the black income position.

The Wall

Street Journal recently reported that the 1978 black-to-white
income ratio is at a low point for this decade.
While economic progress has been elusive for minority Americans,
the President reported to the Congress that the economy is
operating "close to capacity"

(Economic Report, page 3), identi-

fies inflation as the major problem that confronts the economy,
and goes on to recommend a number of policy steps designed to
reduce inflation.

These policy steps threaten the economic

*black and minority are used interchangeably.
The black and
and other races statistical designation is 90% black.

(50)

51
well-being of the poor, and slows progress in programmatic
efforts designed to benefit those disadvantaged segments of
the population who have not been able to compete within the
market system and have relied on the government to cushion
the starkness of their plight.

Although there is a declared

sensitivity to the "most vulnerable" groups of our society,
a view of the budget and of other economic policies belies
this concern.

Defense spending, for example, will rise,

while outlays on social programs will decline.

Tax savings

due to cuts in individual income tax schedules, accrue largely
to the very poor

(those with incomes under 10,000), and the

very wealthy, with incomes over 200,000.

It is incongruous

that a tax cut for the wealthy should take effect in a year
that outlays are for social programs are being decreased
to reduce inflation.

Other policy proposals belie the con-

cern that the President articulates for the poor in the Economic
Report of the President.

While Federal salaries increases

have been held to 5.5%, and the private sector has been asked
to voluntarily comply to a 7% increase in wages, food prices
rose by 11.3% in 1978.

Ironically, the price increase for

food is higher for food consumed at home (a 12% increase in
1978) than it is for food consumed away from home

(a 10%

increase in 1978).
The remainder of this statement views more specifically concerns that the National Urban Coalition has in relation to
aspects of the Economic Report of the President.

52
The Forecast fof 1979
The Council of Economic Advisors has projected a small,
2 1/4% growth rate for 1979, and a rising, but still small,
growth rate for 1980 - 3 1/4%.

Unemployment, CEA predicts,

will increase from its present aggregate level of 5.8% to
This

6 1/4% in 1979, and remain at that level for 1980.

sluggish economic picture is seen necessary so that inflation
can be better contained:

the inflation rate is expected to

decline to about 7% in 1979.
Since a 6 1/4% unemployment rate is likely to mean at least
a 12.5% unemployment rate for minority Americans, the Coalition
is concerned that the costs of unemployment are not being
carefully weighed against the supposed benefits that the macroeconomy gains by slightly restraining inflation.

A rising

unemployment rate means rising costs to the Treasury for unemployment compensation payments, and additional pressure on
the deficit that restrained fiscal policies are designed to
alleviate.

Further, some economists have predicted that a

growth rate as sluggish as 2 1/4% will increase unemployment
to a level higher than the 6 1/4% predicted by CEA.

Again,

minorities are the primary victims of higher unemployment
rates.

Any increase in the unemployment rates of black

Americans will erodelthe very tenuous gains that have been
made during the economic recovery.

53
While we are aware that inflation poses a serious problem
to the economy, and that the poor, as well as others suffer
from dwindling purchasing power, the poor suffer from unemployment disproportionately as well.

Testimony by Gardner Ackley,

former CEA Chairman, to the committee on the Budget, urged a
moderate increase in the present fiscal thrust of the budget.
Ackley's statement takes a less hysterical view of the inflation
problem than the Administration has and, while expressing concern with rising inflation, notes that "economic welfare surely
includes the growth of per capita production... and the minimization of involuntary idleness."
Another concern with the forecast is that the economic restraint
prescribed by CEA might possibly lead to a recession.

If so,

the losses that black Americans are likely to expect as we
manage our economy at "close to capacity" will be much more
severe.

Again, minority Americans have not yet recovered

fully from the previous economic slowdown.

With unemployment

rates that would spell disaster if they were experienced by
the total population, and with incomes that are far lower
than those of the total population,the National Urban Coalition
constituency, the poor, minority, and urban dweller,

is that

segment of the population least prepared to survive a recession.
The failure of the economic fine-tuning implicit in the 1979
forecast could have devastating effects on the economic wellbeing of those the President has characterized as "most vulnerable" in the Economic Report.

54
Employment and Unemployment
The disproportionate burden that the black population carries
with respect to the unemployment rate continues to be a major
concern of the Coalition.

Despite a slight improvement in

the absolute position of blacks vis-a-vis unemployment, the
black unemployment rate remains twice that of white Americans.
The Economic Report falls into the familiar trap of rationalizing
that the unemployment rate would be lower if the demographic
proportions of the population represented in the labor force
were the same as they were in 1956.

(The labor force in 1956

was older, more white, and more male).

Thus, the Report arrives

at the startling conclusion that if things were now what they
were in 1956, the unemployment rate would be a remarkable 4.6%
This type of analysis is pointless.

It does not at all deal

with the structural problems that prevent

certain sectors

of the population from competing effectively in the labor force.
It certainly does not address the failure of the Federallysponsored employment and training programs to more noticeably
alter the deplorable employment situation for minority Americans.
And finally it implies that it is the "fault" of new labor
force entrants that the unemployment rate is so high.
Such analysis and views at the unemployment rate cloud a more
important concern:

that of declining labor force participation

rates of minorities, particularly minority youth.

If the labor

market and employment are viewed as the route to stability for
individuals and families, then this disturbing trend suggests that

55
there is a growing, alienated group within the population
that has found that the labor market does not work for
them.

While economists are not yet sure whether unemployment

in one time period decreases the likelihood of finding work
in a subsequent time period, the consequences of long term
non-participation for individuals seem to at the very
minimum to be a difficulty in making the transition from
non-participation to participation.

Unemployment rate

analysis also obscures the disproportionate number of blacks
that do not hold jobs, either because they are not employed
or because they are not in the labor force.

The employment

population ratio, at 59.3 percent for whites in 1978, was a
much lower 53.3 percent for blacks.

More disturbingly, employ-

ment-population ratios for black males have been falling and
are about ten percentage points less than those for white males-indicating a greater disability to compete in the labor market.
The employment-population ratios are alarmingly low for black
teens:

less than one in four black female teenagers is em-

ployed.
This disturbing employment picture is painted at a time when
federal support for employment programs, though continuing,
has been decreased.

And since one of the surest ways for

minority youth, in particular, to "buy into the system" is
the prospect of employment, the lack of policies to fight
this situation increases alienation of a population that
already sees itself as only peripheral participants in the

56
system.

It is ironic that this population is the very

population that will bear the brunt of policies designed
to reduce inflation and thus guarantee economic well-being
for the total population.
Longer Run Objectives and Policy
As required by the Humphrey-Hawkins Act of 1978, the Council
of Economic Advisors has presented economic goals for 1979-83.
To reach an unemployment rate of 4.0% by 1983, the CEA predicts
that real GNP will have to double more than from the predicted
2% rate this year to 4.6% in 1981 and 1982 and to maintain
about that level at 4.2 percent in 1983.

While it is clear

that forecasting for a five-year period is difficult, the
impetus necessary to move us from a "near capacity" economy
with a low growth rate and a 6 1/4% unemployment rate predicted
for 1979, to a relatively rapidly expanding economy with a
growth rate of more than 4 1/2% and an unemployment rate of
under 5%, is not outlined in the context of the Economic
Report.

The goals presented, then, are meaningless.

While

the uneven incidence of unemployment in the labor force is
reviewed, the structural unemployment problems are discussed,
there are no programmatic suggestions that would insure achievement of 1983 goals.

Present employment programs are mentioned,

but if such programs have failed to substantially impact the
unemployment rate in the past, what suggests that they will
be more effective in the future?

57
If the intent Af the Humphrey-Hawkins Act was to encourage
longer range planning by the President, then this Economic
Report fails miserably in adhering to the spirit of the Act.
The tone of the discussion which points out that it is unlikely to reach a 4 percent unemployment rate without accelerating inflation, is discouraging.

While the require-

ments on reporting of goals has been met, these goals are
useless unless several methods for reaching them are discussed
and a possible program to meet goals is outlined. The outcome
of the Humphrey-Hawkins Act,

a piece of legislation that the

Urban Coalition and other organizations supported, may well
be that there is increased reporting and discussion of
fictional goals but no noticeable impact on that constituency
that it was designed to assist.
Inflation
As many of my previous statements indicate, we are concerned
that the designation of inflation as the primary economic
problem that the country faces distracts from the very real
disparities that minorities, the poor, and urban dwellers
experience.

While we are concerned with high inflation rates

and the extent to which they erode the buying power of all
Americans, we are also convinced that nothing should interfere
with efforts to provide more jobs and better wages for the
disadvantaged.

As such, we must view with some skepticism

voluntary wage controls unless they are accompanied by price
controls.

We are concerned that the disadvantaged may be

58
forced to bear -the brunt of an inflation that has accelerated
in recent years in response to an economic recovery that the
If sacrifices

disadvantaged have yet to fully benefit from.

must be made to curtail spiralling inflation, these sacrifices
must be imposed on the population at large, not that segment
of it that is least equipped to deal with them.
Curtailing Expenditures for Social Programs
As noted above, one response to inflationary pressure has been
to decrease federal expenditures for social programs.

Addition-

ally, the President has promised to hold down the proportion of
federal output to gross national product to 21% by fiscal 1980.
While both of these goals may reduce inflationary pressure, they
will not maintain the level of social and human resource programs.
The urban policy, employment and training programs, and health
programs are all high priority items for the National Urban
Coalition.

The integrity of these programs must be maintained.

If cuts in federal outlays are necessary, we suggest that they
be realized at the expense of the defense budget or at the
expense of the growing,

federal bureaucracy.

It is especially

crucial that social and human resource programs be maintained
on the federal level as state and local governments, particularly those which have passed "Proposition 13"-like legislation,
have planned reductions in these program areas.

The fact that

the poor should not be forced to pay for this inflation cannot be overemphasized.

Options other than cutting outlays

on social and human resource programs include other monetary

59
and fiscal policies that will affect a broader cross-section
of the population.
Summary and Conclusions
After

The macroeconomy, in 1979, is in a precarious position.

a rapid recovery from the 1974-75 recession, we are faced with
inflationary pressures that threaten to undermine gains that
have been made in the past two years.

Thus, the President

and his Council of Economic Advisors have embarked on a
cautious course for managing this "near capacity' economy in
1979.

The precarious economic position that the economy

faces, however, cannot detract from the very real problems
that the disadvantaged experience whether we are in a recovery
or in a recessionary period.

The disadvantaged have not been

full partners in the recovery, but they are now being asked
to be full partners in a "war" to fight inflation.

The

solution of inflationary problems, however, does not at all
guarantee the solution of the problems that face the disadvantaged.
The persistently high unemployment rates that minorities face
makes the concept of a "near capacity" economy hard to understand.

When an economy is "near capacity",can no resources

be earmarked for the minimization of extreme problems
such as urban decay and the lack of jobs and training?

How

can such clear economic disparity be tolerated in an economy
that is "near capacity"?

60
While we understand the fear of inflation that has led to
anti-inflation policies that undermine programs to assist
the disadvantaged, we must also note that the integrity
of the economic system is at stake if, even in this inflationary period, steps cannot be taken to minimize the hardship
that the disadvantaged sector of the population faces.

This

hardship has not varied considerably in the 1970's, whether
economic conditions have been good or bad.

We urge the

President and the Congress to respond to the challenge of
managing and fine-tuning a "near capacity" economy while
insuring that all Americans are participants in the gains
that such an economy has generated.

If conventional economic

policy cannot address the disparities that presently exist,
then the development of new initiatives is the challenge
that the administration and its advisors must respond to.
Until this challenge is met, policymakers have not fully
fulfilled their obligations to a major segment of the
population.

I
UNITED STATES LEAiGUE of SAVI'NGS ALSSOCIATIONS IIl EASTWACKERDs/ICAGO.U

SUsts
EIjTEL OIZ' 431'W

NORMANSTRUNK

March 7, 1979

The Honorable Lloyd Bentsen
Chai rman
Joint Economic Committee
Congress of the United States
Washington, D.C. 20510
Dear Mr. Chairman:
/Thank you for your letter of February 14. Weappreciate this opportunity to
comment briefly on the January 1979 Economic Report of the President. Although
our interest in general economic stabilization policy is wide-ranging, I feel
our best contribution can be made by emphasizing those aspects of the report
that deal with the thrift business and housing industry as well as those aspects
of the report that deal with savings and capital formation.
Weagree with the President that the top economic priority must be to reduce
inflation. Considerable progress has been made over the last few years in
creating jobs in the private sector to accommodate the record growth in the
labor force. This progress, however, has not been without costs. Inflation
has reached double-digit levels in recent months and inflation pressures.
both domestic and those impacting us internationally, threaten many of the
gains made in the recent past.
Of particular concern to us are the growing signs of an economic slowdown
in 1979 stemming from domestic inflation and international events, such as
our weak balance of payments position and the recent increases in oil prices.
These problems underscore the necessity to develop more balanced economic.
stabilization policies in the future. An economic slowdown later in 1979 or
early 1980 will create pressures to abandon the President's goal of a balanced
Such a situation will reduce anticifederal budget by fiscal 1981 (p.114).
pated receipts and increase spending pressures.
Wefeel that should a slowdown occur, special efforts should be made to avoid
putting the primary emphasis on stimulative fiscal policy to counteract recessionary pressures. There has been a growing bias toward the use of
fiscal policy (budget deficits) to spur economic growth during periods of
economic slack. The results have been that deficits continue well beyond
the period desired, which exacerbates inflation; that savings are siphoned
off to finance the federal budget which would otherwise be available to finance
income-producing capital expenditures; that interest rates are forced to
levels too high to encourage capital spending; and that our limited savings
tapped to finance largely federal expenditures of a consumption nature
pool
rathe, Lhan private investment. The result has been that our long-ringe
economic goals of full employment with price stability are jeopardize.

(61)

62
More specifically, it means that labor productivity suffers, our international
position is weakened, and the real incomes of our population is reduced.
We hope, therefore, should such economic conditions arise in the near-ternm,
that every effort would be made to avoid the easy road of government spending
and budget deficits in favor of the more difficult but stable road of balanced
monetary and fiscal policies.
One sector of the economy that is likely to weaken in 1979 is residential construction. The economic report (p.31 and p.100) mentions; that the level of
housing starts has been held up by the June 1 authorization for thrifts and
banks to offer 6-month certificates of deposit tied to interest rates paid
on 6-month Treasury bills. The report goes on to say that "the effect of
these new money market certificates in reducing current earnings of thrift
institutions is a matter of concern." (p.100) We agree with this assessment
and can only add that it is a matter of "grave" concern.
When our institutions first offered these certificates, it was with the hope
that interest rates would be falling in late 1978 or early 1979. Under this
expectation our institutions felt comfortable in committing these short-term
"floating rate" deposits to long-term mortgages. More recently, however,
these certificates became counter-productive. Many institutions are concerned
over their ability to pay the rising costs associated with these deposits.
They are unsure whether they can afford to commit these funds to long-term
investment. On top of this, the federal regulators responsible for Reg. Q
have been under pressure to reduce the maximum denomination for these certificates to $1,000. The result of such an act would be most serious to the
financial stability of our country. Savings and loans would be expected to
avoid the serious cost impact of such a change, and the result could well be
serious disintermediation pressures or a cost impact that would weaken the
financial position of the business for many years in the future. Such a
situation must be avoided.
We also mention this problem because it dramatically points out the basic
structural inability of savings and loans to compete for deposits at money
market interest rates when their assets are tied up in long-term fixed-rate
mortgages. It points out the necessity to implement immediately nationwide
regulations permitting variable rate and rollover mortgages. Currently, only
federally chartered associations in California can offer variable rate mortgages. We hope, therefore, that the Federal Home Loan Bank Board will act
quickly to authorize these instruments nationwide.
Another issue raised by the economic report relates to the supply of investment capital. The report states: "One aim of Federal policy must be to avoid
excess aggregate demand and the inflation and credit market tightness that
it generates.... Achieving this goal in the context of favorable tax and monetary policies will help provide the real resources, credit-market conditions,
and incentives needed for rapid growth of the capital stock." (p.133) We
certainly concur with this position and feel it deserves to be specifically
addressed.

63
This issue of capital formation and adequate savings has been a significant
one for nearly a decade. The personal savings rate has been extremely low
during the last two years. This suggests the need for special Congressional
action on savings incentives. The League continues to support special tax
incentives for savings. Several proposals, such as a tax exclusion, tax
credit, or tax deferral for interest earned, deserve Congressional attention.
Possibly, a broadening of the successful IRA and Keogh plans would be in
order. Inflation and our progressive tax system have combined to create
enormous disincentives to save. Now is the time to reverse the situation.
Another area of special concern to our institutions relates to the impact of
social regulation on the costs of doing business. In the field of mortgage
lending, we have experienced an explosion in the number and severity of laws
that result in regulations impacting our institutions. In many cases these
regulations have become duplicative and costly. In other cases the problems
addressed by the laws and regulations have been solved but the reporting and
examinations go on. This matter must be addressed by Congress. Maybe the
Congress should devote a major portion of its calendar to the oversight of
agencies who write regulations and to a review of the many laws that have
given rise to the regulatory burden imposed on our economy. We will, of
course, be prepared to assist any such effort.
In this regard, we would like to take this opportunity to endorse your
personal effort to control regulatory costs. Your legislative proposal to
establish a regulatory budget ceiling for government agencies, entitled the
"Federal Regulatory Budget Act," is an important step in this direction.
Wewill certainly support this legislative initiative.
We appreciate your dedication to the maintenance of a strong economy. We
are especially appreciative of your willingness to address the specific problems of the thrift business and housing industry.
*ncerely,

Norman Strunk
Executive Vice President

Statement Submitted to Joint Economic Committee

March, 1979

INFLATIONi

IT'S REAL CAUSES AND SOME SUGGESTED CURES
by
JERRY VOORHIS

Everybody talks about inflation but nobody does anything about it.

At

least nothing very effective.
One reason for this lack of effective action is that there has been all
too little discussion of the causes of the problem.

We need to look those

causes squarely, honestly, and brpvely in the face.

Then maybe we can begin

to work toward some solutions.
In general the basic cause of inflation is too much demand chasing too
little supply of goods and services.

The more money that is spent into the

economy the worse inflation becomes all other factors being equal.

If less

'moneywere spent the pressure on prices would be less and there would be less
inflation.

On the other hand the more goods that Pre produced the less each

unit will be worth and, again, Pll other factors being equal, prices will come
down.

But if less is produced, because of deliberate curtailment of production

by monopolies or because exhorbitant rates of interest choke off production,
inflation will be more severe.

This is because the same number of dollars will

be chasing fewer goods and forcing prices up.
So the simple formula for overcoming inflation is to reduce demand or
increase supply or to do both.
in applying it.

Like all simple formulas care has to be taken

In this case it is true that if the supply of everything from

food to houses and medical care could be substantially increased, and if we had
a free market economy, inflation would be pretty well licked.
anything like a free market economy.

But we don't have

We have a largely monopolized economy

(64)

65
wherein powerful monopolistic corporations can and do control end increase prices
regardless of the supply-demand relationship.

On the other hand if

it

were

possible for both the government and the people to reduce their buying of goods
and services by 20% or 30% inflation would be ended.

But ws would probably bring

on the worst depression in the nation's history if we went that far all of a sudden.
So the simple formula isn't quite good enough.
or it

It does, however,

teach us-

should teach us-what won't work.
For example.it is

true that if the governments budget were balanced and govern-

ment deficit spending brought to an end the total demand would be reduced and
inflation would be less, all other factors being equal.

But if this reduction

in government spending were matched by a corresponding increase in spending by
us the people the effect on inflation would be exactly zero.
This is whdy politicians who call for a balanced budget and promise at the
same time tax reductions are deceiving the people in an inexcusable way.
if

Only

the budget were balanced by both Pn increase in the income of the government

in the form of taxes and a reduction in government expenditures so the total demand
in the economy was reduced would anything be accomplished.
it,

it

Hard as it

is

to say

is generally true that lower taxes will make inflation worse by giving

people more money to spend in forcing prices up.

And higher taxes on individuals

reducing demand, will make inflation less serious.

(Higher business taxes might

have a different effect since they are passed on to consumers in higher prices).
We are in trouble and there is

no cheap way out of it.

the form of lower taxes and have it
This is

We can't eat our cake in

in the form of less inflation at the same time.

why, if we really care what happens to the country, we have to work

for tax justice,

for closing of unjustified loopholes, and for an equalization

of the burden in proportion to ability to pay.

And not just for tax reduction

which, in itself, can cause more inflation.
Now there are powerful forces at work which are causing our inflation and
which modify the simple economics of the demand-supply ratio,
are dealt with balancing the federal budget will do very little

Unless these forces
good.

In fact,

66
if it were made mandatory to balance the federal budget we might be in even
worse trouble than we are now.

For we could not ward off a depression or meet

any other kind of national emergency without a drastic increase in current tax
collections.
Before we consider what the causes of inflation actually are let's dispose
of some factors which are not the cause of inflation and never will be.
The ability of people to buy enough food to maintain their health is not
a cause of inflation.

At least not one that Amounts to a hill of beans.

To

refuse cost of living increases to children dependent on welfare, or to deny poor
old people a minimum of social security payments or to throw people employed by
Job programs onto the welfare rolls-these measures will not have any appreciable
effect on inflation at all.

Such measures will increase welfare costs, they will

cause more ill-health and the need for more medical care, which is
expensive factor in the whole economy.

the most

The net effect may well be more rather

than less inflation.
Politicians who propose to control inflation by such means are n6t only
proposing to make the weak and defenseless bear the burden.

They are proposing

measures that won't touch the basic causes of inflation.
VWEta&r-

the real causes of the inflation?

First the voracious demand of

the American people for gasoline and other petroleum products.

Our use of such

products has been increasing every year despite ever increasing prices,despite
or knowledge that the supply of oil and gas is limited and will one day be
exhausted, and despite the fact that this inordinate demand is

the reason why

we are importing such quantities of expensive oil from abroad, thus forcing the
price still

higher and weakening our dollar.

The only rational or effective way to deal with this inordinate demand is

to

reduce that demand by mandating rationing of gasoline and other petroleum products, so that they remain available to all for essential uses, but to no one for
a use that is not essential.

We could then drastically reduce if not eliminate

our oil imports, correct the unfavorable trade balance, save the dollar from

67
further devaluation, and deal inflation a major blow.
It wouldn't be popular, but it might save the country.
Second, inflation is caused because the law of supply and demand, and the
operations of a free market are no longer in effect in most of our economy.

This

is because in industry after industry-above all in energy the most critical of

all

fields-monopoly control

has been gained by a handful of powerful corporations

which are able to dictate prices-always upwprd-regardless of the supply-demand
ratio.

In fact, these monopolies can and do control supply and keep it

if need be in order to protect their power to raise prices at will.

down

Take

food,

our basic human need for example.

Prices received by farmers have not increased

to any appreciable extent at all.

In many cases, such as grains, they have fallen.

But prices paid by consumers have continued to climb steadily.

The reason is

monopolistic bottle-necks between the farmer and the consumer which control prices
at the processing,

wholesale and even retail levels-thus preventing,

for example.

a reduction in what farmers receive from having any effect in lowering prices paid
by consumers.

A recent report of the General Accounting Office has well documented

these facts.
Until this problem of monopoly-pricing-sometimes called "administered pricing"_.
is dealt with we shall not control or even reduce inflation to any appreciable
extent.
There are various ways in which it could be dealt with.

One of the most

obvious-and necessary-would be to pass legislation forbidding any one company
from owning more than one source of energy.

In other words to force divestion by

the oil monopoly of its ownership of coal, gas, or any other form of energy.

Another perfectly obvious way would be by vigorous enforcement of the antitrust laws.

To date that has never been really tried.

On the positive side there could be provision for low interest loans to small
business to give it something like an even break in financing with the giants.
The investment tax credit could be made selective-granting it to competitive
businesses, but denying it to monopolistic ones that unjustifiably raised prices.

68
so that a certain level of
The corporation income tax could be graduated
benefitting smaller businesses
earnings higher than now would be completely exempt,
more than is now the case.
the most, and rates above the exemption graduated
Congress already started to do
Encouragement of cooperative enterprise-which
for Consumer Cooperatives-would help
in passing the legislation establishing a Bank
who buy from them have a builtbecause cooperatives being owned by the same people
in counter-inflationary impact.

Their motive is to lower prices as much as they

con.
restore competition Pnd to
If such measures as the above proved unable to
then there should be selective price
reduce monopoly power to boost prices at will,
or heprly-monopolized industries.
controls applied only to the prices of monopolized
of all-and probably the hardest
This would be the simplest, most direct method
to get passed by Congress.
it causes inflation is in
As to government spending the major way in which
dollars of demand into the economy
military expenditures which release billions of
that can be bought with those
without creating a single dollars worth of goods
the economy is forced upward. A
billions. Thus the price of everything else in
wonders in reducing the inflation
cut of 20% or 30% in military wastes would do
is the most inflationary move
problem. Whereas any increase in military spending
the government can make.
people to realize that
Why it has taken so long for otherwise intelligent
dampening it is indeed hard to
high interest rptes cause inflation rather than
and interest rates have been gounderstand. The facts are that inflation rates
And it is pretty obvious that high interest chokes
ing up together for some years.
the cost of b
off production, reduces supply, and increases
the economy.

business throughout

survive.
Prices must go higher to enable businesses to

in forcing reductions in the
It's high time the Federal Reserve did its duty
it in the midst of World War II
interest rate. It could if it would. For it did
to go above
when rates on government borrowings never were allowed
Another long-term cause of inflation is

3%.

our failure to put the resources and

69
effort that Are needed into the development and commercialization through reduction
of costs of alternate, clean, and inexhaustible sources of energy-solar energy
in all its forms-plus biomass methanras and other forms derived from what are
presently form wastes.
Less government regulation in a number of fields might help.

And 'sunset'

legislation to require periodic justification of their continued existence by
government agencies would be a SdhIatPry measure, though its effect on the inflation problem is probably exaggerated.

But such legislation is called for, in

any case, as a means of gaining more efficiency for our tax dollars and reducing
the cost of government.
Finally we the people have to recognize that the affluent among us are
ourselves a major cause of the inflation of which we complain so bitterly.

For

the insistence of the affluent majority on buying any and everything we want to
buy is probably s greater cause of'inflation than is an unbalanced federal budget,
to take that one example.
Here we come back to the simple formula.

The greater the demand we exert

in extravagant buying the more we force up prices-inevitably.

A reasonable

return to a semblance of the frugality that once was considered an American
virtue-for example a transfer of

% of spending to saving-would go A long way

toward dampening the inflationrry fires.
As Pogo so aptly remarked "We have met the enemy and they are us."
The real question is whether an understanding of some rather elementary
economics plus A return to straight forward patriotic concern for our country
can enable us to defeat that particular enemy.

0