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92d Congress 1
1st Session J

JOINT COMMITTEE PRINT

THE 1971 MIDYEAR REVIEW
OF THE ECONOMY

REPORT
OF THE

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
TOGETHER WITH

SUPPLEMENTAL AND MINORITY VIEWS

AUGUST 16, 1971

Printed for the use of the Joint Economic Committee
U.S. GOVERNMENT PRINTING OFFICE
65-810




WASHINGTON : 1971

JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.)
WILLIAM P R O X M I R E , Wisconsin, Chairman
WRIGHT P ATM AN, Texas, Vice Chairman
SENATE
JOHN SPARKMAN, Alabama
J. W. F U L B R I G H T , Arkansas
ABRAHAM RIBICOFF, Connecticut
H U B E R T H. H U M P H R E Y , Minnesota
LLOYD M. B E N T S E N , J R . , Texas
JACOB K. JAVITS, New York
JACK MILLER, Iowa
CHARLES H. P E R C Y , Illinois
JAMES B. PEARSON, Kansas

HOUSE OF R E P R E S E N T A T I V E S
RICHARD BOLLING, Missouri
HALE BOGGS, Louisiana
H E N R Y S. REUSS, Wisconsin
MARTHA W. G R I F F I T H S , Michigan
WILLIAM S. MOORHEAD, Pennsylvania
WILLIAM B. WIDNALL, New Jersey
B A R B E R B. CONABLE, JR., New York
CLARENCE J. BROWN, Ohio
BEN B. BLACKBURN, Georgia
JOHN R STARK, Executive Director
JAMES W. KNOWLES, Director of Research
ECONOMISTS

LUCY A. FALCONE
JOHN R. KARLIK

Ross F. HAMACHEK
RICHARD F . KAUFMAN
COURTENAY M . SLATER

Minority: GEORGE D . KRUMBHAAR, Jr. (Counsel)




JERRY J. JASINOWSKI
LOUGHLIN F . MCHUGH

WALTER B. LAESSIG

(II)

LESLIE J. BANDER

LETTER OF TRANSMITTAL
AUGUST 16,

1971.

To the Members of the Joint Economic Committee:
Transmitted herewith for the use of the Joint Economic Committee
and other Members of Congress is the report of the committee entitled
"The 1971 Midyear Review of the Economy" together with supplemental and minority views.
This report is issued pursuant to hearings held in July on the state
of the economy. The committee believes that the serious problems
confronting our economy warrant an analysis of the issues and recommendations for policy action at this time.




WILLIAM PROXMIRE,

Chairman.
an j

CONTENTS
Page

Letter of Transmittal
Introduction and Summary
I. A Coordinated Fiscal and Monetary Policy To Restore Full Employment
The Need To Set Clear Employment Targets
The Present Employment Outlook
A Fiscal Policy To Hasten Full Employment
Tax Policy
Expenditure Policy
A Monetary Policy To Support Recovery
II. An Effective Policy To Control Inflation
Persistent Lack of Progress Against Inflation
The Need for a New Approach
An Incomes Policy Is Essential
Supplemental Views of Vice Chairman Patman
Supplemental Views of Representative Reuss
Minority Views on the 1971 Midyear Review of the Economy
Views of Representative Widnall, Senator Percy, Representative
Conable, and Representative Brown
Views of Senator Javits
Views of Senator Miller and Representative Blackburn
Views of Senator Pearson




(V)

in
1
3
3
4
6
7
8
10
12
12
13
13
16
19
21
21
25
27
30

THE 1971 MIDYEAR REVIEW OF THE ECONOMY
INTRODUCTION AND SUMMARY
At the midpoint of 1971, it is clear that the economic goals set forth
by the Administration at the beginning of the year are not being met.
Unemployment has not been reduced, and without immediate new
policy actions, there is little hope that it will be reduced during the
remainder of this year. We entered 1971 with a 6 percent unemployment rate, and given present policies, there is every expectation that
we will enter 1972 faced with very much the same distressing situation.
The continued high level of unemployment has been accompanied
by a higher rate of inflation than had generally been anticipated. The
Administration now takes the position that high unemployment must
continue to be tolerated for a time because any effective action to
reduce unemployment might further aggravate inflation. Other approaches to containing inflation, including either mandatory price and
wage controls or comprehensive voluntary incomes policies have been
rejected, because, in the judgment of the Administration, they would
not be effective.
The members of this Committee share the Administration's concern
over the persistence of inflation, but we emphatically reject the "donothing" response which constitutes present policy. In this Report
we set forth a carefully considered alternative to present policy; an
alternative which would, in our judgment, both effectively control
inflation and significantly hasten the return to full employment.
Our proposals are by no means revolutionary. Indeed, given the
enormous human costs of unemployment and underemployment
presently being experienced, they are quite modest. Resources
capable of producing over $70 billion worth of goods and services
per year are presently idle. The actions we propose would put these
N O T E . — S e n a t o r Fulbright states: "While other responsibilities have not
allowed me to fully participate in the Committee's deliberations which have led
to the conclusions in this Report, I would like to express m y approval of certain
specific recommendations endorsed by t h e Committee. I refer particularly t o
the recommendation t h a t Housing a n d U r b a n Development funds now impounded by t h e Administration be released immediately. The effect of such
action on the overall budget can be more t h a n offset by significant defense expenditure reductions with no danger t o the national security. I, also, a m favorably
disposed toward the Committee's request for v o l u n t a r y price and income guidelines or other suitable machinery designed to combat inflation pressures, as well
as the recommendation t h a t our monetary policy be conducted in such a w a y
as t o reduce long-term interest rates.
As t o t h e other recommendations, I prefer t o reserve j u d g m e n t for the reason
previously s t a t e d . "
N O T E . — D u e t o t h e pressure of other responsibilities, R e p r e s e n t a t i v e Boiling
a n d Representative Griffiths could n o t participate fully in t h e midyear hearings
a n d t h e preparation of this R e p o r t . T h e y therefore reserve j u d g m e n t on t h e
recommendations m a d e in this R e p o r t .




(1)

2
idle resources back to work. Because of the low level at which the
economy is presently operating, and because we would couple expansionary policies with a vigorous incomes policy, the actions we
propose would not create strains on productive capacity that might
lead to new inflationary pressures. We believe our recommendations
are responsible and conservative. Above all, these recommended
actions are essential. The social costs of high unemployment are
too great to be borne any longer.
The Committee's principal recommendations are summarized
below. They are explained in greater detail in the body of this Report.
• The personal income tax reductions presently scheduled for
1972 and 1973 should be made retroactive to January 1, 1971.
• The increase in the social security tax base presently scheduled
for January 1972 should be postponed. The additional increase
in the tax base and the increase in the tax rate contemplated
under FLR. 1 should be instituted on a gradual basis beginning
no sooner than January 1973.
• The level of expenditure for emergency public service employment should be increased to double the $1 billion for fiscal
1972 and $1.25 billion for 1973 authorized by the recently
enacted Emergency Employment Act.
• At least $1 billion of the funds already appropriated for housing
and urban development but presently impounded by the Administration should be released immediately.
• The Federal Government should adopt a system of payments
to State and local governments to compensate these governments for the shortfall in their own tax revenues caused by high
unemployment. The amount of such payments should be
related to the unemployment rate, and such payments should
cease when the unemployment rate no longer exceeds an agreed
upon figure such as 4% percent. 1
• A comprehensive policy of voluntary price and income guideposts should be instituted at once. The President should establish a price and incomes board, or other suitable machinery, to
collect and publicize price and income data and to administer
the guideposts.
• Monetary policy should be conducted in such a way as to reduce
longer-term interest rates at least to the levels which prevailed
in January and February of this year.
1
Senator Bentsen reserves judgement on this recommendation, which he feels
was not fully explored during the Committee's hearings.




I. A COORDINATED FISCAL AND MONETARY POLICY TO
RESTORE FULL EMPLOYMENT
The Need To Set Clear Employment Targets
For well over a year now the United States has been experiencing
an unusual, and totally unsatisfactory, combination of high unemployment and persistent inflation. The continuation of this situation has
surprised and discouraged most observers, and it has caused many to
question whether our traditional goal of combining full employment
with reasonable price stability is still achievable.
For several years this Committee has held the position that the
Nation's long-term objective must be an Unemployment rate no
higher than 3 percent. 1 In our Annual Report last'March, we stressed
the importance of a firm national commitment to work toward a
combination of an unemployment rate of no more than 3 percent
and an annual rate of price increase, as measured by the gross national
product deflator, of no more than 2 percent. We reiterate our conviction that this is both an achievable long-term goal and an essential
aim of current policy.
We recognize that achievement of this goal will require an extended
period of concerted policy efforts. Interim goals which represent
progress toward our desired position must be set. Such interim targets
have been set before at times when unemployment has been clearly
too high. In the early 1960's, the Council of Economic Advisers
set a 4 percent unemployment rate as an interim goal. In January
of this year, the present Council of Economic Advisers set the " 4 ^
percent zone" as an interim unemployment target to be reached by
mid-1972. A gross national product (GNP) of $1,065 billion was
established as the output target because this was estimated to be
consistent with the employment target. Although the vague nature of
the employment target was somewhat unsatisfactory, even the "zone"
of 4J/2 percent would have represented clear progress from the 6 percent
rate that has prevailed since late 1970.
The hoped-for vigorous economic recovery has not materialized.
Unemployment remains in the neighborhood of 6 percent. Rather
than adopting additional policies designed to reach their " 4 3 ^ percent
zone" goal, the Administration has now chosen to abandon the goal.
This was made clear in the testimony of the Chairman of the Council
of Economic Advisers before this Committee during our midyear
hearings in July:
There is a danger that if money G N P were now to rise, or
be pushed up, to reach the targets previously put forward
that would revive inflation or at least seriously delay its
abatement. This is because to regain the original path from
the present apparent starting point of money G N P would
require a steeper rise of money G N P than was originally
contemplated and because the rate of inflation has been very
persistent.
1
Senator Bentsen states: "I agree that this is a worthwhile and important
objective. However, the difficulties involved in reaching this target should not
be minimized."
(3)

65-810—71
2



4
Even more disturbing is a recent statement by the Secretary of the
Treasury that casts doubt on the commitment of this Administration
even to a long-term goal of full employment:
We talk in terms of a norm of unemployed being 4 percent.
This is a myth, it has never happened, it has never been on
an annual basis unemployed at the rate of 4 percent save
in wartime, not in the last quarter of a century.
So 4 percent is not the norm. We have never achieved it
except in wartime. I don't think the American people are
willing at this point in time to continue the war or continue
all that that means in order to try to achieve a 4-percent
rate of unemployment. 2
Peacetime full employment with reasonable price stability has long
been an unquestioned bipartisan goal in the United States. Indeed, a
commitment to this objective is required of both the Executive and the
Legislative Branch under the Employment Act of 1946. The Chairman
of the Council of Economic Advisers recognized this commitment
during his testimony at our annual hearings last February when, in
regard to, the $1,065 billion G N P target, he stated:
I t is the target of government policy because it describes
the path that would reduce unemployment as rapidly as is
consistent with reduction of the inflation rate. In this sense
the target is required by the Employment Act of 1946. We
should not aim for less.
The Administration should immediately reaffirm its commitment to the goal of restoring peacetime full employment
with reasonable price stability. The appropriate officials
should specify the Administration's definition of full employment. Interim targets which represent measurable
progress toward full employment should be established at
once and policies designed to achieve these targets should
be adopted.3
The Present Employment Outlook
The consensus among the economic experts who testified before this
Committee during our midyear hearings was that no significant decline in unemployment is to be expected during the remainder of 1971.
The year is expected to close with unemployment still in the neighborhood of 6 percent. The improvement in employment during 1972 is
expected to be, at best, very gradual. Many forecasts place the unemployment rate still at 5% percent or more at the end of 1972.
2
Senator Bentsen states: "I very much regret that this statement by the
Secretary of the Treasury has been misinterpreted in this Report. The Secretary
has made his total commitment to peacetime full employment abundantly clear
on3 numerous occasions."
Senator Humphrey states: "I heartily endorse this recommendation. In
developing employment targets, full account should be taken of the extent of
hidden unemployment. In the first half of 1971 there were 746,000 people identified
in the official employment statistics as not looking for work because they believed
no work was available. These persons were not officially counted as unemployed.
If they had been, total measured unemployment would have risen by nearly 15
percent. Even this would give only a partial measure of hidden unemployment.
I urge the Labor Department to collect additional data on hidden unemployment,
and to include this information in the monthly press release on employment and
unemployment."




5
I t may seem puzzling that unemployment has remained so high
while G N P has grown substantially in dollar terms. Current dollar
G N P increased by $45 billion in the first half of this year, an unusually
large increase. Three factors are important in explaining why this.
G N P growth has not been accompanied by a reduction in unemployment. First, part of the growth of G N P represented a catch-up from'
the auto strike that took place late in 1970. Second, more than half of
the dollar growth of G N P was simply inflation and thus did not represent any increase in the real volume of goods and services produced,
nor in the number of job opportunities available. Third, the labor
force is growing and productivity is increasing.
The rate of growth of output that can be achieved through labor
force growth and productivity gains is referred to as the potential
growth rate of the economy. The unemployment rate will fall only if
the actual growth of output, after adjusting for price increases, exceeds
this potential growth rate, which is estimated to be between 4 and 4%
percent per year. As shown in Table 1, growth of real output over the
past year has not been sufficient to prevent unemployment from increasing. Only during the a catch-up" from the auto strike during the
first quarter of 1971 did the growth of real G N P exceed 4 to 4% percent. The average growth rate during the four most recent quarters
was only a little over 2 percent and unemployment rose from 5.2 percent in the third quarter of 1970 to 6 percent in the second quarter of
1971. If the rate of growth of real output remains below 4 to 4% percent, unemployment must be expected to rise further.
TABLE l.-SELECTED ECONOMIC INDICATORS
[All data seasonally adjusted]

1969 (quarter)

1970 (quarter)

Real GNP (billions of 1958 dollars; annual rate)..
Percent change in real GNP (annual rate)
Index of industrial production (1967=100)
Percent change in index of industrial production
(annual rate)
Business expenditure for plant and equipment

(billions of 1958 dollars; annual rate) i
Housing starts (thousands; annual rate)

Index of retail sales, adjusted for price increase

(1967 = 100)1
Total civilian employment (thousands)

Rate of unemployment
Gap between potential and actual GNP (billions

of 1970 dollars)
1
2

4th

727.8
+2.0
111.6

725.2
-1.4
110.6

+4.3

-3.6

-10.4

-0.8

-1.1

-13.6

+7.2

+4.4

67.3
1,429

66.8
1,357

66.2
1,252

67.2
1,286

67.9
1,512

64.1
1,768

64.3
1,813

2 66.5
1,951

102.49 102.06 101.90 102.24 103.43 101.01 104.59
78,089 78,570 78,992 78,533 78,520 78,568 78,625

107.02
78,701

3.6

3.6

1st

2d

3d

1971 (quarter)

3d

719.8 721.1 723.3
- 3 . 0 +0.7 +1.2
107.7 107.5 107.2

4.2

4.8

5.2

4th

1st

2d

715.9 729.7
- 4 . 1 +7.7
103.6 105.5

736.3
+3.6
106.7

5.9

5.9

6.0

+4.9 +18.1 +36.0 +44.9 +52.8 +73.7 +66.2

+68.7

Computed by the Joint Economic Committee staff from Department of Commerce, Department of Labor, and SEC data.
Anticipated.

Many observers expect the growth of G N P to be less in the second
half of this year than it was in the first. Production during the first
half was boosted by the catch-up from last year's auto strike and by
increased steel production as steel users built up their stocks in anticipation of a strike. Neither of these factors will be repeated in the
second half.
Moreover, little strength can be found in other sectors of the
private economy. Unless choked off by rising interest rates, the level
of housing starts can be expected to remain fairly high during the
second half (although still far below the housing goals set by Congress
in 1968). However, no further large increase in the real level of resi


6
dential construction can be expected. After adjustment for price
increase, business expenditures for new plant and equipment are
expected to decline slightly in the period ahead. Consumer behavior
is always difficult to anticipate, but the latest surveys indicate that
consumers remain Cautious in their buying plans, suggesting that no
surge of consumption expenditure is to be expected. The only real
strength in the economy during the second half of this year would
appear to lie in the government sector, primarily in the continued
growth of State and local spending. Given present policies, Federal
purchases of goods and services are expected to remain about level.
In light of these various factors in the outlook, growth of real output
in the second half is not likely to be sufficient to achieve any significant
reduction iii unemployment. In short, the economy is still in a recession, in theteense t h a t no progress toward restoring full employment
is presently being made.
I t should be ; stressed that the above assessment is based on the
assumed continuation of present economic policies. Although the
return to full employment cannot be immediate, i t can be significantly
accelerated by appropriate changes in government policy. In the
remainder of this chapter, we outline what we believe to be appropriate
fiscal and monetary policies to hasten the return to full employment.
These policies should be accompanied by an active and comprehensive
incomes policy to contain inflation. This aspect of policy is discussed
in chapter I I .
A Fiscal Policy To Hasten Full Employment
Federal tax receipts in fiscal 1971, the fiscal year just ended, were
more than $25 billion below what they would have been if the economy
had been at full employment. This shortfall in receipts more than
accounts for the $23 billion deficit in the unified budget in fiscal 1971.
Similarly, almost all of the expected deficit in the unified budget for
fiscal 1972 will be the result of a revenue shortfall. Thus, despite the
large deficits in the unified budget, neither the 1971 nor 1972 budgets
should be regarded as particularly stimulative. If the economy had
been at full employment, there would have been a small surplus in
the unified budget for fiscal 1971. As presented by the Administration,
the unified budget for fiscal 1972 also showed a small surplus at full
employment. On a national income accounts basis, the basis commonly
used for economic analysis, the budgets for both years showed somewhat larger full employment surpluses.
Since Congress has not yet completed action on the 1972 budget,
it is not possible to say what the net change from the President's
budget may be. Congressional actions such as the increase in social
security benefits, the postponement of the social security tax base
increase, and the Emergency Public Service Employment Program
will add to the deficit. But, these increases could be partially or entirely offset by cuts in defense spending, by the elimination of the
SST, and by other cuts in the President's budget recommendation.
In our view, the actions we recommend below can responsibly be
accommodated in the 1972 and 1973 budgets. All of the tax and
expenditure changes which we are recommending are temporary
and designed to phase out as full employment is restored. We recognize that future demands on the budget will be very heavy relative



7
to available resources. A program of economic stimulus which committed resources far into the future regardless of the level of employment would be short-sighted and ill-advised. None of our suggested
measures would have this effect. None of them will damage our ability
to responsibly finance vital Federal programs in the future.
T A X POLICY

We recommend two changes on the tax side of the budget:
The reductions in personal income taxes presently scheduled
to occur in 1972 and 1973 should be made retroactive to
January 1971.
The increase in the social security tax base presently
scheduled for January 1972 should be postponed until January 1973. The further increase in the tax base and the
increase in the tax rate presently being considered by
Congress as part of social security and welfare reform legislation (H.R. 1) should be instituted on a gradual basis,
beginning no sooner that January 1973.
Our first recommendation, the speed-up of the personal income tax
cuts already provided for under existing law, has been widely discussed. We regret that the Administration did not see fit to recommend
this action earlier. We continue to hope that such a recommendation
may yet be forthcoming. At this point, it would not appear that such an
action could be made effective before the beginning of the fourth
quarter of 1971. However, the tax cut could be made retroactive to
last January, with part of the cut being realized through reduced tax
withholding in the fourth quarter and the remainder through tax
refunds in early 1972. Since the tax cuts w^e are discussing will take
place in 1972 and 1973 anyway, a speed-up will have only a temporary
impact on the budget. I t will provide the economy with an immediate
temporary boost at a time when this is clearly needed.
Our second recommendation, the postponement of social security
tax increases, has been less widely discussed. The magnitude of scheduled and contemplated social security tax increases may not be
generally recognized. An increase in the social security tax base from
$7,800 to $9,000 is already scheduled for January 1972, as a result of
action taken by Congress last spring postponing this tax increase from
the January 1971 starting date originally recommended by the Administration. This Committee supported that postponement. January 1971
was not an appropriate time to raise taxes. The continued sluggish
performance of the economy makes it highly probable that January
1972 will be an equally inappropriate time to raise taxes. Therefore we
believe that this increase in the tax base should be postponed for an
additional year.
The social security and welfare reform legislation presently being
considered by Congress (H.R. 1) contains, as presently formulated, a
further increase in the social security tax base from $9,000 to $10,200
and an increase in the social security tax rate from 10.4 to 10.8 percent, both scheduled to take effect in January 1972. Coupled with
the tax base increase already legislated, these provisions would
result in one of the largest social security tax increases in history and
would exert a significant and most unfortunate restraining effect on




8
the economy. Therefore, we believe that these further tax increases
should be put into effect gradually, with none of them beginning any
earlier than January 1973. The social security trust funds presently
contain a large surplus. Even without the tax increases, this surplus
will grow by some $7 to $8 billion in fiscal 1972. Thus, postponement
of these tax increases does not present any danger of impairing the
sound financing of the social security system. There was virtually
unanimous agreement among our witnesses, however, that the whole
system of Social Security taxation raises increasingly serious questions
of c equity and that major reform should be given high priority.
EXPENDITURE POLICY

We recommend three areas where Federal spending should be
temporarily increased:
The level of expenditure for emergency public service employment should be increased to double the $1 billion for
fiscal year 1972 and $1,25 billion for fiscal 1973 authorized
by the recently enacted Emergency Employment Act.
At least $1 billion of the already appropriated funds nor
housing and urban development projects, presently impounded by the Administration, should be released
immediately.
The Federal Government should adopt a system of grant
payments to State and local governments to compensate
such governments for the shortfall in their own tax revenues
caused by high unemployment. The amount of such payments should be related to the unemployment rate, and such
payments should cease when the unemployment rate no
longer exceeds 4*/2 percent.4
In order to keep total expenditures within appropriate limits,
some part of these recommended increases should be offset by reductions in other areas. The largest potential for expenditure reduction
is in the defense area. As we have stated in the past, substantial
cuts in defense expenditures can be achieved with no damage to our
national security. 5
All of the expenditure increases which we are recommending are of
the type which should create a maximum number of employment
opportunities per dollar of Federal expenditure.
The Emergency Public Service Employment program works directly
to create additional jobs in State and local government. The enactment of this program by the Congress and its acceptance by the
President represent an important forward step toward a full employment economy. But the amounts authorized under this program are
small, relative both to the total number of unemployed and to State
4
Senator Bentsen reserves judgement on this recommendation, which he feels
was not fully explored during the Committee's hearings.
5
Senator Bentsen states: "While there is always room for greater efficiency
in Federal spending, I cannot agree t h a t substantial cuts in defense spending
b e y o n d those already recommended by the Senate Armed Services Committee
a r e realistically possible a t the present time without damage to our national
•security."




9
and local public service needs. A program at least double the presently authorized $1 billion for fiscal year 1972 and $1.25 billion for
1973 is clearly needed and would not be too large to be established
quickly and administered efficiently.
Since this program is temporary and tied to the unemployment
rate, with no further funds to be authorized once unemployment falls
below 4% percent, this program will phase out as full employment is
restored. The Emergency Program does not, therefore, take the place
of the comprehensive program of manpower training and public
service employment, passed by Congress in the last session but vetoed
by the President. Enactment of a comprehensive manpower program
designed to meet longer-term structural employment problems rather
than temporary cyclical needs continues to be a high priority task.
Every year some funds are appropriated by the Congress which
the Executive Branch, for various reasons, impounds and does not
allow to be spent. At the present time the cumulative total of such
funds is about $12.1 billion. Since the Congress presently lacks an
adequate procedure for determination of overall spending totals
consistent with the needs of economic policy, it is important that the
Administration have some discretion over the release of appropriated
funds. Otherwise, budgetary control would be difficult indeed. However, at the present time, the total size of impounded funds is disturbingly large and, in our judgment, the Administration has in many
cases shown poor judgment with respect to the best places to cut
spending. We are particularly concerned that over $1 billion in funds
for housing and community development remain impounded. We
urge that these funds be released at once. These funds could be put
to work quickly on projects that have already been planned. Jobs
would be created and some of the desperately necessary work of
community renewal presently being held up for want of funds could
proceed.
The third of our expenditure proposals, a counter-cyclical payment
to State and local governments, would go directly to the heart of one
major element in the present State and local budget crisis. As mentioned earlier, the Federal Government is experiencing a revenue
shortfall, due to high unemployment, at a rate of over $20 billion
dollars per year. State and local governments are also experiencing a
large revenue shortfall, perhaps in the neighborhood of $7 billion per
year.
We feel that the Federal Government should assume responsibility
for economic stabilization policy. When unemployment is high, States
and localities should be compensated for the amount by which their
own tax revenues (at existing tax rates) are below what they would
be at full employment. Such a policy would allow States and localities
to count on stable growth of their total revenues. They would not be
forced to raise taxes at a time when this would exert undesirable
restraint on the economy. Nor would they be forced to cut back on
services at a time when public service needs increase—as, of course,
they do during a recession.
The total amount of the counter-cyclical payments to be distributed should be based on the amount of excess unemployment. We
suggest that such payments should begin whenever the national
unemployment rate exceeds 4% percent in any calendar quarter and




10
should continue, with the amount varying with the excess of the
unemployment rate over 4% percent, until such time as unemployment has again fallen below 4% percent for a quarter. The distribution
of this total payment among States should be based on population,
on the severity of unemployment within the State, and on the degree
of dependence of each State on progressive taxes such as the personal
income tax. This latter factor is important because progressive taxes
are most sensitive to changes in the rate of personal income growth.
Consequently those States with the most progressive tax systems are
the most severely affected when unemployment rises.
The counter C3^clical payment we are proposing would remove one
major cause of current State and local budgetary problems. I t would
not by itself provide the complete solution to State and local financial
problems. Another major problem is the poor distribution of income,
and of tax resources, among and within States. This inequality of
income distribution is not a cyclical problem, but a longer-term structural problem. I t needs to be attacked by a major Federal effort to
change the distribution of Federal aid programs so as to bring this
distribution more in line with the distribution of need. The cyclical
problem and the longer-term structural problem are different both in
their cause and in their cure. We believe they must be attacked by
two separate programs rather than by a single "cure all" such as the
Administration's revenue sharing program. Unless the separate causes
of State and local budget problems are understood, the cures will not
be appropriate.
A Monetary Policy To Support Recovery
During the first half of 1971 the money supply increased at the
unusually rapid rate of 10^ percent per year. Yet, since April interest
rates have been rising. This combination is puzzling. More importantly,
the rise in interest rates is disturbing, because it could choke off activity
in the only two sectors of the economy that presently seem at all
strong, residential construction and State and local government.
Several factors may help explain the rise in interest rates in the
face of such monetary growth, although they are not complete explanations. First, business demands for credit have been heavy, as
business has been striving to correct the very tight liquidity positions
into which they were drawn during the tight money period of 1969 and
early 1970. Second, inflation is a factor in interest rates. As long as there
are expectations of inflation, interest rates will be higher than they
would otherwise be. Third, several of our witnesses pointed to the
difficult seasonal adjustment problem in the money supply estimates.
I t may well be that when the data are revised we will learn that the
money supply has been growing somewhat less rapidly than the preliminary figures indicated.
The Joint Economic Committee has previously suggested that in
normal times a rate of monetary growth somewhere between 2 and 6
percent per year is desirable, and we have requested that the Federal
Keserve supply this Committee with an explanation whenever the rate
of growth of the money supply departs from this range during any
quarter. Past statements of the Committee's view have made it quite
clear that we recognized there would at times be exceptionally difficult
periods when it would be desirable for monetary growth to be outside
our suggested range.



11
The present situation is certainly exceptionally difficult. In order to
restore full employment the rate of growth of real output must for a
time exceed the "potential" rate of growth of the economy. That is,
real output must grow in excess of 02 percent per year until full employment has been restored. The growth of the money supply must be
adequate to accommodate this growth plus some increase in the price
level. What the exact rate should be cannot be determined in advance,
but it might well continue to exceed the range recommended by the
Committee for normal times. In any event, it is essential that Federal
Reserve policy be based on present needs and not on any effort to
balance the very rapid monetary growth of the first half by very slow
growth in the second.
An important objective of policy must be to arrest the present rising
trend of interest rates, and, if possible, to reduce longer-term rates at
least to the levels of the first quarter of this year. Some witnesses at
our recent hearings expressed a concern that large increases in the
money supply would lead to further inflation and therefore to higher
rather than lower interest rates. We do not feel this has to be the case.
As discussed in chapter II of this Report, many observers expect thatgiven present policies, inflation will continue serious. But if the incomes policy recommendations we make in chapter I I are adopted, we
believe that a significant reduction in the rate of inflation can be
achieved. Most importantly, expectations of future inflation—an important factor in interest rate determination—can be sharply dampened by an effective incomes policy. If this is done, fears of inflation
need not deter the monetary authorities from adopting policies designed to produce lower interest rates. Certainly these policies should
include adequate growth of the money supply.
During the remainder of this year monetary policy should
be conducted in such a way as to prevent further increase
in interest rates and to gradually reduce longer term rates
at least to the levels which prevailed during the first quarter
of the year.

(.55-810—71

3




II. AN EFFECTIVE POLICY TO CONTROL INFLATION
Persistent Lack of Progress Against Inflation
The inflationary problem that has persisted during the past 3 years
has proved much more stubborn than had generally been anticipated.
When the present Administration took office the unemployment rate
was 3.4 percent, and the inflation rate measured by the G N P deflator
was 4.5 percent. At the time it was believed that excess demand could
be eliminated and inflation checked without causing unemployment
to rise much above 4 percent.
Experience has demonstrated that this estimate was far too optimistic. Unemployment has exceeded 4 percent for the past 18 months,
and it has averaged about 6 percent for the past 8 months, yet the
rate of inflation is not noticeably less today than it was in the first
quarter of 1969. After 2% years of a conscious effort to fight inflation
by holding economic activity below the full employment level, the
Chairman of the Council of Economic Advisers made the followingprogress report to this Committee at our midyear hearings:
First, at a minimum the rate of price increase, which had
been rising, has stopped rising.
Second, some important measures indicate that there
has been a significant decrease in the rate of inflation.
Third, although the evidence is less clear on this, the rate
of wage increase has probably also stopped rising.
We agree that during the first half of this year the rate of inflation
was somew^hat less than the peak rate reached hi early 1970. We hope
this improvement will continue. Unfortunately, examination of the
major price indexes does not offer any evidence of a continued slowing
of the rate of inflation. Table 2 shows, for each of the latest 8 months
available, the percent increase in three principal price indexes compared to the same month one year earlier. I t can be seen that the
Consumer Price Index improved through April, but the sharp increases in May and June have reversed this trend: The Wholesale
Price Index worsened steadily through June, then improved in July
due to a sharp drop in farm prices. The important industrial component of the Wholesale Price Index showed no change in its rate of
increase through June but accelerated sharply in July. From February through July wholesale industrial prices showed the sharpest
6-month rise since 1957.
TABLE 2.—SELECTED PRICE INDEXES
Consumer
Price Index

Percent increase during 12 months ending—
Decemberl970
Januaryl971
February
March
April
May
June
July

_.
..

> Not available.




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Wholesale
Price Index

Wholesale
industrials

5.5
5.2
4.8
4.6
4.3
4.4
4.5
(i)

2.3
2.3
2.8
2.8
3.1
3.4
3.6
3.3

3.6
3.6
3.5
3.6
3.7
3.6
3.7
4.1

13
It is clear that the Council of Economic Advisers still regards
inflation as a serious danger, for the Chairman also stated in his
testimony:
The Administration's rejection of a policy of further
economic stimulation reflects the belief that we cannot
temporize with the inflation problem * * *.
The Chairman of the Federal Reserve Board was even more
pessimistic about the price outlook. He summarized the situation
this way:
I wish I could report that we are making substantial
progress in dampening the inflationary spiral. I cannot do so.
Neither the behavior of prices nor the pattern of wage
increases as yet provides evidence of any significant moderation in the advance of costs and prices.
Many of the private witnesses who testified at our recent hearings
expected that the rate of inflation would still be between 4 and
5 percent in mid-1972. Thus, despite the enormous costs we^ have
paid in terms of output and employment, the rate of inflation is
just about where it was 2% years ago, and only modest improvement,
at best, is anticipated during the next year.
The Need for a New Approach
Since a policy of reducing inflation by increasing unemployment
has now been attempted for more than %{ years—at such enormous
cost and with such meager results—we are puzzled that the Administration continues to advocate more of the same. The Administration
recommends no further action to increase employment because to
take such action would, in the Administration's view, interfere with
progress against inflation. The Joint Economic Committee emphatically rejects this "do nothing" approach. Other policies to control
inflation are available. They should be tried.
The effort of the past 2l/2 years to control inflation by increasing unemployment has been a failure. Such an
approach, by itself, offers no hope of success in a modern
economy characterized by large areas of monopoly and
imperfect competition. Monetary and fiscal policy should
be conducted in a way that quickly restores and then consistently maintains a full employment level of economic
activity. Simultaneously, inflationary psychology must be
broken and price increases brought under control by the
immediate adoption of a vigorous and comprehensive incomes policy.
An Incomes Policy Is Essential
The Administration has candidly admitted their concern over the
danger of continued inflation. Both official and private witnesses
have especially stressed the role of inflationary expectations in driving
up interest rates, discouraging business investment, and weakening
consumer confidence. Yet the Administration continues adamant in
its refusal to adopt the one policy approach which, in our judgement,
would dampen inflationary expectations and create an atmosphere in



14
which full employment could be restored without creating new
inflationary pressures.
In a modern full employment economy reasonable price stability
can be consistently maintained only if the Government assumes
responsibility for specifying the rates of price and wage increase that
are in the public interest and for insuring that these rates are not
exceeded. We do not believe that compliance with such a policy will
necessarily require legal compulsion. That is, we do not believe compulsory wage and price controls are necessary. If price and income
guideposts are applied fairly and on a comprehensive basis, labor and
management will cooperate. An informed public opinion will exert a
powerful influence to help achieve compliance. In addition, the
Government, through its important role in the economy as a regulator
and as a purchaser of goods and services, has a great deal of existing
power to encourage compliance.
We do not mean to imply that there will be no difficulties in
establishing a comprehensive incomes policy or that results will
always be perfect. Of course there will be mistakes and setbacks. I t
may bo many years before we fully succeed in combining price stability and full employment. But the Nation will be much better off
with an incomes policy than without one. Such a policy can make an
immediate, significant contribution.
We are fully aware that one can easily find historical cases where
incomes policy has not worked. The historical record in this country
and abroad is valuable. We should study it carefully and attempt to
learn from past mistakes. We stress that one can find successes as
well as failures. Guideposts served this country well in the early 1960's.
They should not have been abandoned in 1967. The country has paid
dearly for their abandonment and for the failure of two successive
administrations to reinstate them.
In short, we reject the Administration's contention t h a t incomes
policies "won't work." I t is the policies presently being followed which
are a failure. Monetary and fiscal policy, unaided by incomes policy,
cannot come to grips with inflation. Effective incomes policies can
and must be established. The alternative is to abandon our goal of
combining full employment with reasonable price stability. Obviously
that alternative is not acceptable.
As we have repeatedly recommended, specific quantitative
price and income guideposts should be established, and a
board should be created to collect and publicize price and
income data and to administer the guideposts. This should
be done without further delay.1
1
Senator Humphrey states: "An independent anti-inflationary price and wage
board should be created to set guideposts. We should call this board exactly what
it is: The Anti-Inflation Board. This board should not only publicize price, wage,
and profit increases that are inflationary, but should, when necessary, recommend
to the President the imposition of selective freezes on profits and wages in particular industries or sectors."




15
If, in the President's judgment, a temporary price-wage freeze
would facilitate the introduction of a comprehensive guidepost policy,
Congress has given the President clear authority to impose such a
freeze.
Much valuable time has already been lost. As the Chairman of the
Federal Reserve Board told this Committee:
* * * I think a wage and price review board, had it been
instituted a year or two ago, would have been more effective
than it is likely to be tocla}^ * * * but I will still try it. I
think the effort is worth making. Then, we know where we
stand.
As a result of this delay in establishing an effective incomes policy,
an important lesson lias been learned. There is now widespread
recognition that incomes policy must be a regular part of overall
economic policy. Business, labor and the public are ready to support
such a policy because they recognize its necessity. There should be no
further delay.




SUPPLEMENTAL VIEWS OF VICE CHAIRMAN PATMAN
Because of my duties as Chairman of the House Banking and
Currency and Defense Production Committees, I have been unable
to attend the Midyear Review hearings. I am, however, in complete
agreement with the findings of the review and, in an overall sense,
I endorse its recommendations to reduce unemployment and dampen
inflation.
The need for decisive action along these lines recommended in the
review is of critical importance. In my estimation, the Nation is
much closer to a depression than it is to achieving a full employment
economy and significantly reducing inflation.
The suggestion that the Federal Government adopt a system of
grant payments to State and local governments to compensate for
lost tax revenues during periods of high unemployment obviously
raises questions regarding implementation. Are such compensation
payments to be on a no-strings-attached basis? If not, what requirements will be imposed on the expenditure of grant money by State
and local governments? Should a system of priority investment
areas be established? The questions do not reflect a negative attitude
toward compensating grants. Rather, they are being stated to indicate
the need for thorough study of the entire concept as it goes to the
responsibility of Congress and the Administration regarding expenditure of such funds.
Doubling the level of expenditures for emergency public service
employment and immediate release of impounded housing and urban
development funds, as recommended in the review, constitute effective ways of providing short-range economic improvements. At the
very least, these recommendations should be immediately executed.
At the same time it should be recognized that long-range approaches
to unemployment and the lack of adequate funds at reasonable cost
for priority areas of the economy should be devised. Compensating
grants may be one approach. Creation of a national financial institution to serve such priority areas as public works and facilities, location
of new industry and business and improvement of existing business
and industry to provide job training and employment opportunities
in chronically depressed urban and rural areas, and the funding of
low and moderate income housing can be another method of helping
to provide vital financial resources for these sectors, which are the
constant victim, of cyclical downturns in the economy.
It is my conviction that such a vehicle—a National Development
Bank—must be established to serve as a source of credit for public
works and facilities, small and medium size businesses and industries
and to produce low and moderate income housing when loans for
such purposes are not available from conventional lending institutions
or are being made available at unreasonable interest rates. Certainly
the Nation's economic history of the past 3K years had dramatized




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17
the necessity for a Development Bank which could provide credit at
reasonable cost through direct loans for both the public and private
sectors.
The need for a Development Bank is constant, regardless of whether
we achieve a full employment economy on a national basis or not.
With or without a full employment economy, depressed urban and
rural areas will continue to exist and require special effort. For the
most part, the private financial industry has failed to meet the requirements of such areas and, without a new mechanism to provide
incentive, they will not make an effective commitment to this problem
in the future.
Despite improved market conditions, State and local governments
continue to face the prospect of finding themselves virtually unable to
sell their bonds because the yields are not high enough to be competitive under tight money-high interest rate conditions. Moreover, the
penalty imposed by high interest-tight money conditions is one that
will be shouldered by generations of taxpayers. For example, a
20-year, $2 million bond issue carrying an interest rate of 5 percent
will have a total cost of $3.1 million. But a bond issue of the same
size and maturity carrying an 8 percent interest rate, which was paid
during the tight money period of 1969-70, will have a total cost of
more than $4 million—more than double the funds actually raised
for investment hi public works and facilities.
The need for a National Development Bank is apparent despite
lower interest rates and increased availability of funds. As the Midyear
Review points out, unemployment remains at an intolerable level and
there is no end in sight for the prevailing inflation. Eveiy reasonable
effort must be made to create and sustain employment and job training opportunities, especially in those areas in which the rate of joblessness far exceeds the present national level of 6 percent. In some of these
areas, like Seattle and Southern California, the problem is characterized by large numbers of jobless engineers and technicians. Utilization
of the National Development Bank resources to provide industrial
capital in such areas could serve not only to create employment
opportunities but technological innovations and diversification of
industry as well. In this way, new product areas can be explored and
the economic base of these communities can be significantly moved
toward stabilization.
Finally, the existence of a National Development Bank can be a
permanent bulwark protecting the Nation's low and moderate income
housing market. Full recognition should be given to the current high
rate of new housing starts. But it should also be recognized that
mortgage interest rates have begun to climb back toward the high
levels that recently all but crippled the housing industry. If the rate
continues to climb, hundreds of thousands of families will find themselves unable to purchase homes. Again, a National Development
Bank would stand ready to provide mortgage funds both for the construction of new housing and permanent mortgage financing of new
and existing housing for low and moderate income families.
Despite all of its great potential, our free private enterprise system
is an imperfect structure which often fails to reach into areas of greatest
need. Methods to overcome this fault without damaging the system
itself must be adopted.




18
To a large extent, the National Development Bank concept outlined
here resembles the Reconstruction Finance Corporation which played
a highly significant role in sustaining the Nation's economy by providing credit at reasonable cost when it was not available from conventional lending institutions. Since the R F C was repealed in 1953, businesses and industries have had to rely far more heavily, if not entirely,
on commercial banks to obtain loan funds necessary to remain competitive and otherwise continue operations. Invariably, dependence on
large commercial banks, especially the large New York City banks
which do not compete with each other in any meaningful way, has
made business and industrial entities the victims of exorbitant, usurious
interest rates during tight money-high interest rate periods. The
devices utilized by large commercial banks to obtain totally unfair
profits include demands for unconscionable yields on tax exempt State
and municipal bonds. As indicated above, this has frequently resulted
in school districts paying the price of two schools in order to finance
only one. The cost of such practices ultimately falls on the taxpayer
and the consumer.




SUPPLEMENTAL VIEWS OF REPRESENTATIVE REUSS
I heartily agree with the Committee's stress in this report on the
need for immediate adoption of a vigorous and comprehensive incomes
policy to break the present inflationary psychology that is driving up
prices and wages at an inordinately rapid rate despite an unemployment rate which has averaged 6 percent this year. But, I am convinced that it is too late for a mere voluntary or "jaw-boning"
approach to work effectively. Imbalances between the various wagerates and prices are now so extensive, and accumulated pressure on
business managers and union leaders so strong, that only compulsory
guidelines having the force of law can break the spiral of inflationary
expectations at this time.
The President should immediately make use of the authority delegated to him by the Congress a year ago to freeze all wages and
prices, and to set up a regulatory agency to carry this out.
Such firm action will not only bring a halt to inflation, it will also
permit expansion in the dollar volume of demand for goods and services to express itself in real output and employment, rather than in
further inflation. I t will bring about fuller employment and production in three ways :
1. As I pointed out in the Committee hearings, one of the impediments toward a rapid expansion of output and employment in the
economy is the extraordinarily high level of interest rates. These
high interest rates reflect to a substantial degree inflationary expectations. A wage and price freeze, by leveling off inflation and
killing expectations of further inflation will produce lower interest
rates. This will mean more home building, more demand for furnishings for those homes, and more demand for other goods and
services where the demand is stimulated by lower interest rates.
2. A large factor responsible for the 6 percent unemployment
rate for the past 6 months has been weakness in consumer demand
and a high savings rate. I am convinced that stablizing prices will
instill consumer confidence, leading to additional consumer purchases and a reduction in the high rate of savings that consumers
have maintained over the last year and a half.
3. Stopping inflation will also lead to a higher real level of
business investment. During his testimony on June 30, Dr. Arthur
F. Burns, Chairman of the Board of Governors of the Federal
Reserve System, agreed with the above two points, and added a
third:
You spoke of an enhancement of the confidence of
consumers. I think that an incomes policy would also
serve to enhance the confidence of businessmen and
financiers.




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20
A typical businessman these days, as he looks to the
future, sees wage costs rising and rising sharply. He
anticipates that higher price as well on his products. But
he is fearful that he will be unable to raise prices as much
as his wage costs go up.
A typical businessman these days knows that his
profit margins are low; in fact, the}7 are almost at the
lowest point that they have been at since the end of
World War II. He fears a further shrinkage in those
profit margins.
Fearing inflation, he is hesitant about making those
long-term capital investments on which this country's
economic growth is going to depend very heavily.
In this expansion, business capital expansion, business capital investment has lagged. In real terms, it has
actually gone down, whereas typically business capital
investment is the driving force of economic recover}7.
Therefore, to conclude, I accept your analysis, Mr.
Reuss. But, I also add the confidence factor as far as
the business community is concerned.
If the President will proceed vigorously and at once to use the
powers he now has to stabilize prices and wages, I am convinced we
can begin to move toward full employment without inflation. We
would then, within a year, begin to decontrol without the danger of
renewed inflation.
It is too early to provide further stimulation to the economy by
additional fiscal and monetary measures. Until we have tried stabilizing wages and prices, accompanied by programs of residual
public services employment, we will not need additional stimulus.
The January Budget suggested a full employment budget that was
approximately balanced. Since that time, according to Dr. Paul
McCracken, Chairman of the Council of Economic Advisers, the
Budget has been shifted towards a deficit by approximately $7 billion.
Actions taken since January have reduced revenues by almost $2
billion and increased outlays for fiscal year 1972 by about $3 billion.
Further increases in uncontrollable outlays for public assistance,
medicaid, veterans benefits and farm price supports will apparently
add almost $2 billion to what had been anticipated. Meanwhile revenues will fall far short of the original estimate, with the result that the
deficit for the current fiscal year is now estimated at about $23 billion,
a large figure.
In addition to the budget stimulus, the money supply has been
increasing at a rate averaging about 11 percent over the first half of this
year. I t is widety argued that this rate of increase should be reduced.
Under these circumstances, I think it advisable to postpone further
monetary and fiscal stimulus until a trial of an incomes policy with
teeth produces evidence of its effectiveness. If stabilizing prices and
wages produces the needed recovery to full employment, then we will
not need further fiscal and monetary stimulus. If a strong and wellenforced incomes policy does not produce the necessary results, then
we shall have to review the situation again, to see what monetary and
fiscal measures may be appropriate.




MINORITY VIEWS ON THE 1971 MIDYEAR
REVIEW OF THE ECONOMY
VIEWS OF REPRESENTATIVE WIDNALL, SENATOR
PERCY, REPRESENTATIVE CONABLE, A N D REPRESENTATIVE BROWN
The U.S. economy is recovering. Total output has risen since its
low point at the end of last year and the rate of unemployment has
declined. At the same time the rate of inflation has stopped rising and
shows signs of declining.
In the evidence presented to us there was general agreement that
the economy would continue to recover, with output and employment
rising further. The recent strength of retail sales, the high level of
housing starts, the rapid increase of State and local expenditures, the
expensiveness of the Federal budget and the large increase in the money
supply during the past year all point in this direction. On the inflation
side the prospects are less certain. There is little reason to think that
the inflation rate will start rising again, if we follow reasonable policy,
but opinion is more divided about how confidently we can expect a
significant slowdown in the rate of inflation.
We want to emphasize that early in the current administration
government policy was designed to stop the acceleration of the
inflation, keep the slowdown moderate and initiate a steady, noninflationary recovery and it had those results. That fiscal and monetary
restraint was continued through 1969 in the face of skepticism and
opposition. Both fiscal and monetary policy turned from restraint to
support around the beginning of 1970, before the slowdown had
proceeded very far. In the middle of 1970 the Administration announced its policy of keeping expenditures within the revenues that
would be yielded at full employment. This polic}' had the merit of
avoiding the depressing effects of trying to balance the budget by
cutting expenditures or raising taxes when the economy was below
par. Of course, it implied actual deficits under existing circumstances,
deficits which would be an appropriate part of a program to keep the
slowdown moderate.
Fiscal and monetary policy have both become more expansive than
was contemplated in the Administration's policy at the beginning of
this year. Deferral of Social Security rate increases and other charges
of taxes have reduced by $2 billion the expected revenue in fiscal
1972. At the same time various legislative actions and growth of
some existing programs have increased expected outlays by about
$5 billion. Also, whereas there had been a common expectation that
the money stock might rise at an annual rate of about 6 percent
during 1971 the actual rate of increase in the first seven months
was about 10.5 percent. These policies of expansiveness contribute
to our confidence that the economv will continue rising through 1971
and 1972.



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22
The issue of current economic policy is often discussed as if the
question were whether policy should be expansive or not. This, of
course, is not in controversy. We now have an expansive fiscal and
monetary policy. The question is how expansive that policy should be.
The answer to that question is not "more," despite the fact that unemployment is now higher than anyone would like.
We currently have a two-sided problem in the current economy. We
have the remains of the inflation problem left over from the irresponsible policy of 1965-68 along with the unemployment that has come
and was inevitable when it became necessary to curb the runaway
inflation resulting from that ill-advised policy. If we now neglect the
inflation side of our problem we will throw away the gains that have
been achieved in the past 2 years and will invite a renewed burst of
rising inflation. One has only to look at foreign experience, for example
in the United Kingdom, to see the heights to which inflation can soar
if all questions of economic policy are resolved on the side of more
expansion.
The necessary course today is to try to bring about as rapid expansion of the economy as is consistent with reasonable confidence that
the rate of inflation will decline. This is the objective of the Administration. Although no one can be sure of the precise combination of
policies that will yield this objective, we see no reason to think that
the policies now under way are inadequately expansive. After 7 months
in which the money supply grew at a rate of 10.5 percent, after a
fiscal year in which the actual deficit was $23 billion and entering
a fiscal year when there will be a deficit of several billion dollars even
on a full employment basis—to ask for more expansionism is reckless.
Expansive policies do not operate instantaneously. If we persist in
piling expansive measures on top of expansive measures as long as the
economy is below par we will surely have a great inflationary blow-off
when all these measures begin to work.
Our first and basic recommendation is that Congress should exercise
self-restraint and discipline about its appropriations and the budget.
We are in circumstances where every member of Congress can tout
every increase in expenditures and every reduction in taxes he has
always wanted as a measure to promote economic expansion and full
employment. If we all do this the result will be chaos—not only
galloping inflation but also growth of the already massive Federal
debt to unbearable size.
Congress should stay within the President's budget for fiscal year
1972 as revised by actions already taken and reestimates already
made of the costs of ongoing programs. Even this budget will result
in a deficit of several billion dollars at full employment. We should
not allow the deficit to go beyond that. If Congress decides to increase
some programs beyond the budget it should also decide to reduce
others.
Second, we commend the intention of the Federal Reserve to slow
down monetary expansion from the rate of the early part of this year.
We recognize that the rapid expansion in early 1971 compensated for
slower growth in late 1970, which resulted in an average 1970 rate of
about 8 percent rather than the 10.5 percent rate so far this year.
But we observe no disagreement with the proposition that a reduction
from the 10.5 percent rate is necessary.
We believe that the recommendation of the majority that monetary
policy should be so managed as to reduce long-term interest rates at
least to the levels of January-February 1971 is extremely dangerous.



23
The recommendation implies that there is a policy of monetary
expansion which will achieve this result. Yet it is important to note
that the recent rise of long-term interest rates occurred during a time
of extremely rapid monetary expansion. In fact the monetary expansion msiy have accelerated the rise of interest by intensifying inflationary expectations. If this is the case the only route back to lower
interest rates is a policy of fiscal and monetary restraint which will
generate confidence in the restoration of price stability.
Even if a specific monetary policy could produce a certain interest
rate objective, to commit monetary policy to that limited purpose
would be to prevent its use for the more important ainbition of
achieving an orderly, noninflationary expansion. Surely the basic
lesson of experience during the period of bond price supports from 1945
to 1951 was that monetary policy could, not simultaneously serve a
fixed interest rate objective and an economic stabilization objective.
This Committee thoroughly analyzed that problem at the time. I t
would be, a great irony if we should be the agent for putting monetary
policy into that straitjacket again.
Propdiieiiits of more expansive policy commonly try to escape from
the iiiflationiary implications of these programs by recommending
what they call an "effective" incomes policy. There are two important
things to bfe said about that:
1. The most that can be claimed for incomes policy is that
it may help to slow down the rate of price and wage increases
when there is not a strong inflationary pressure. I t will not
withstand inflationary demand pressure. The untested (or,
rather, frequently and unsuccessfully tested) possibilities of an
incomes policy are not a justification for pumping up demand
and should not be passed off as such. If we have an incomes
policy, and if it proves effective in reducing inflation, we can
then consider its implications for the desirable rate of expansion.
2. While many members of Congress, including the majority
of this Committee, and many other people, have recommended
an incomes policy there have been no extensive hearings on the
subject in Congress and no one has tried to answer specifically
the operational questions that are critical for the workability
and effectiveness of an "incomes policy." The public is continuously bombarded by suggestions that there is an easy but
undescribed way out of our difficulties, but the public cannot
judge the validity of these suggestions without more information
about what is intended. If "incomes policy" is to be more than
a political stick with which to beat responsible officials, Congress
needs to make a serious effort to discover whether the ingredients
of a policy can be specified which will be effective and command
the support of the public and the Congress.
Therefore we recommend that an appropriate legislative committee
initiate a study and hearings as background for considering the drafting of legislation. The subject should not be "Is Inflation Bad?" or "Is
an Undefined Incomes Policy Good," but "How Would an Incomes
Policy Be Managed?" Among the questions to be considered are:
1. Should there be a board representative of interest groups or a
public-only board?




24
2. Should the policy cover only prices and wages or also interest, rents, profits, dividends, professional fees, taxes, etc.?
3. Should notification of any income change be required before
it is made, or only after?
4. Should notification be required from everyone or only for
cases exceeding a specified size?
5. Is positive approval required or only the absence of disapproval?
6. What would be the criteria for approving wage increases?
Would previously negotiated deferred increases automatically be
approved? Would increases be allowed to catch-up with past
cost-of-living increases, past productivity increases, past increases
of comparable wages, etc.?
7. What would be the criteria for price increases? Would there
be a profits standard? What would it be?
8. Would there be penalties if prices, wages or other incomes
were raised after disapproval? What would they be?
These questions are not raised as intellectual conundrums. Upon the
answers to these questions, and others like them, will depend the
workability of an incomes policy. Let us now make a serious effort to
discover whether there are satisfactory answers to them. When we
have done this we shall all know much better how to proceed.




VIEWS OF SENATOR JAVITS
Stripped of their rhetoric, the Majority Views recommend measures
to stimulate the economy while holding down inflationary price and
wage increases. On the other hand, my Republican colleagues caution
against piling so many expansive measures on top of one another
while pointing out—quite legitimately—the economic policy gains
which have already been made by the Administration.
My differences with both sets of views are basically differences of
priority. I believe the chief aim of economic policy at this crucial time
must be to build up confidence in the recovery which may well be
already underway while ensuring that our hard won gains on the
inflation front do not erode and that the force and quality of the
recovery are adequate to the needs of our nation. Econometric analysis and common sense as well as eminent testimony tell us that a
restoration of confidence would be the single most beneficial factor
in bringing the economy back to its proper growth rate.
To bring about these goals we must embark immediately upon a
new and effective incomes polkrv. Such a policy would not onfy help
build up our progress against inflation, but also bring a new confidence
into business and consumer decisions that their spending plans will
not be frustrated by inordinate price increases.
Recently I joined with twelve other Republican Senators in proposing a National Commission on Wages and Prices, which would
establish the guidelines for noninflationary price and wage behavior.
Our proposal was constructive, and I note that the President has
welcomed Congressional debate on the issue. I believe the establishment of such a commission—with the power to publicize, to require
advance notice of price increases, and to recommend further actions—
is an essential first order of business for restoring confidence and
controlling inflation.
The second major economic initiative which needs to be taken at the
present time concerns productivity improvement. America's productivity in the past two years has been the worst of our entire postwar
history, and our recent productivity figures compare unfavorably with
every other industrial country. This performance shows up in many
ways, being heavily responsible for the inflationary situation at home,
for the noncompetitiveness of many American products abroad and
for the rapid growth of certain imports.
Indeed, our productivity experience is both a symptom and a cause
of an erosion of worker morale in our country. Conversely, experience
during World War I I has shown us that a major drive to improve
productivity can have a major influence on increasing productivity
and invoking patriotism.




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The United States needs such a major drive now. At a minimum we
must strenghthen the President's Commission on Productivity and
encourage a nationwide system of factory level productivity councils
such as we had during World War I I . Considering the price we have
had to pay for declining productivity, we cannot afford to do less
than place productivity improvement on the highest levels of economic policy priorities.
I t is my strong feeling that the two measures I have described are
essential if a better balance is to be brought to our troubled national
economy and if the spirit of the American people is to be renewed.




VIEWS OF SENATOR MILLER AND REPRESENTATIVE
BLACKBURN
The Economy in Perspective
All of us share the concern over unemployment and inflation.
However, there are different ways of looking at these problems. One
is the pessimistic wajr—looking at the unfavorable indicators, overlooking the favorable indicators, and neglecting to put these problems
in perspective with previous recessions when the unemployment
peak was considerably worse and when it was not aggravated by large
cutbacks in defense and space contracts and a reduction of 1,200,000
in the armed services. Even worse, perhaps, is to draw hasty conclusions from short-term statistics and to engage in premature action
which would lead to a short-term gain and a long-term disaster.
Another way is the realistic way—balancing the favorable indicators
against the unfavorable ones, putting the problems in perspective,
understanding that a "steady as you go" (to quote economist Milton
Friedman) improvement in the economy is better for our society
than a jerky up-and-down performance, and recognizing that those
in control of the Congress have far more to say about fiscal policy
than the Executive Branch of our government. The following observations take this approach.
T H E DEFICIT

Early this year, during the testimony on the President's "full
employment" budget deficit, I secured agreement from both the
Chairman of the Council of Economic Advisers and the Chairman of
the Federal Reserve Board that their projections rested on certain
assumptions. One of these was that those in control of the Congress
would adhere to the Administration's budget spending limits or, if
they exceeded them, they would pass tax increases to offset the increased spending. To date, the budget spending limits have been
exceeded by $5 billion, and there has been a shortfall in revenue
estimates of $2 billion. This would raise the deficit estimated by the
budget from $11.6 billion to $18.6 billion—and there are several
large appropriations bills yet to be enacted—with indications that
these will further exceed the budget spending limits. But there has
been little talk in the Congress about tax increases to offset the
increased spending; and, instead, some Members are talking about
tax cuts. AD of which, I fear, will impede efforts to solve the inflation
problem.
INFLATION

Another assumption was that there would be reasonable stability
on the domestic scene—for example, no major strikes such as the auto
industry strike of last fall. This assumption hasn't been borne out very
well. Also, there have been a number pf wage settlements which have




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considerably exceeded productivity increases. Resulting price increases tend to make our domestic goods more vulnerable to imports
and less competitive in overseas markets. Our once favorable trade
balance now shows a deficit. The "inflation factor" is again receiving
more weight in the determinition of interest rates.
Although the inflation rate for the first 6 months of 1971 was down
to an average annual rate of 4.1 percent compared to 5.3 percent for
1970 and 6 percent for the fiscal year July 1, 1969, to June 30, 1970,
progress is slower than many of us had hoped for. Recent increases
in the wholesale price index (which usually are reflected in the retail
price index later on) suggest that we will continue to have an inflation
problem for some time—granted that it is continuing to subside. (Some
key government economists say that the inflation rate would be around
10 percent had not certain restrictive policies been adopted 2 years
ago!)
UNEMPLOYMENT

The national unemployment rate has dropped from a high of 6.2
percent to 5.8 percent but there is some question whether this lower
rate can be sustained for the next few months. Peak unemployment
during the most recent recessions of 1949, 1954, 1958, and 1961
averaged 6.9 percent and these occurred without the heavy impact of
cutbacks in defense and space contracts and a 1,200,000 reduction in
the armed services which have been responsible for much of the present
problem. For example, if the reduction in the armed services had not
taken place, our unemployment rate would be 4.2 percent instead of
5.8 percent.
No one should minimize the undesirability of a situation where there
are people able and willing to work but who can't find jobs. However,
unlike previous recessions, a large proportion of those presently unemployed represents individuals who are not the main earner in a
family. Among married men, the peak unemployment rate was 3.4
percent (within the high of 6.2 percent), and the current rate as
3.1 percent (within the current 5.8 percent).
T H E PLUSES

The overall job total in the Nation has not exactly been standing
still. There are 78.5 million people working today (total personal
income $855 billion) compared to 78.3 million (total personal income
$804 billion) a year ago, and 77.7 million (total personal income
$741 billion) 2 years ago. Personal savings are at an all-time high.
The gross national product increased by $32 billion in the first quarter
of this year (an 8 percent real dollar increase over the previous quarter) and by $20 billion in the second quarter (a 3.7 percent real
dollar increase). The large first quarter resulted considerably from the
"catch u p " following the auto industry strike. Retail sales have been
strong, and, since there has been little expansion of inventories,
rebuilding of inventories is expected. Housing starts are going to
push near the 2 million mark for the year. In short, the economy is
moving along well enough to prompt this statement from one of the
Nation's leading economists, Leif Olsen (Reader's Digest, August
1971): "* * * it seems to me that all the indicators point in one
direction: toward moderating inflation, lessening unemployment, and
a steadily growing economy."



29
"INCOMES POLICY"

There has been considerable confusion over what is meant by an
"incomes policy." Chairman Arthur Burns of the Federal Reserve
Board, in his testimony before the Joint Economic Committee, advocated a wage and price review board which would have no enforcement powers, but could initiate inquiries into specific wage adjustments or into specific price adjustments and would evolve guidelines
for wages and prices. This suggestion does not appear to differ essentially from the wage-price guideposts of the Johnson Administration
which failed simply because botn labor and management refused to
adhere to them.
CONCLUSION

The hearings record before the Committee makes it clear that the
Administration's policy is to seek a simultaneous, continued lowering
of both the unemployment rate and the inflation rate. It does not
wish to over-emphasize one problem at the cost of aggravating the
other, because it recognizes that the two are inextricably intertwined—certainly over the long run.
This policy is working. The concern is over the fact that everyone
wants to see it work faster. As former Secretary of the Treasury
David Kennedy so well observed: "We are paying for our past sins."
and the price is painful. Compared to previous recessions, this recovery has, in fact, been more rapid. Therefore, I think we should be
patient for a few more months before reaching conclusions and making
decisions that deviate materially from the course we are following.
Needless to say, cooperation from those in control of the Congress
will be vital.




VIEWS OF SENATOR PEARSON
An incomes policy, including comprehensive w^ge and price guideposts, would, at this stage of the game, serve primarily a,s a signal to
business that prices must be held down. The major wage contracts
have been settled—steel, copper, railroads, construction—with awesome implications for creating a wave of inflationary pressures. B u t
this is a fact of life. We cannot improve the situation by taking the
attitude that the government's role has been played out in this area.
In most cases, industry has moved quickly to recoup its w&ge position
by announcing price increases, as in the case of steel recently. Now is
the time in my opinion for a strong step on the,part of government
to create the machinery that can halt the spiral of waig^/price increases.
Profits during tfye first two quarters of this year haveibeen! strong
and certainly there is little question that if we intend to stabilize
economic expansion, the government must take a,position lof reasonable intervention into the present cycle of events. I am inclined to
believe that mandatory wage and price controls, instituted <fbr a
limited period of time, would have a good effect if begun within the
next six weeks.
While this proposal is directed towards the struggle against inflation
and its burden on those who have a source of income, however limited
or fixed, we mast also consider those who have no job at all. In the city
of Wichita, Kansas, for instance, unemployment has reached 11.8%
after hovering at the 10% level for almost a year. Yet when one
visits the city, he sees that signs of economic disaster are simply not
there yet. People are hanging on. They are hoping for a better turn.
I think the confidence of these people in the future of the American
economy could be greatly increased by federal job-creating programs
directed towards areas of high unemployment. This is just what the
Emergency Employment Act would do, and I think the recommendation for increased authorizations under that act is a good one.
Of coarse, the real question now is how much we can appropriate.
But even with an enormous effort to create public service jobs, we have
to recognize that government programs simply cannot be expanded
enough to employ all the jobless in any area.
The President has rejected the idea of economic stimulus through the
construction industry. I agree. The inflationarj^ impact would be
devastating. But the man without a job in a city like Wichita or
Seattle or Bridgeport or Boston or Los Angeles is waiting for his
government to respond to his problem, and he knows there are resources enough in the nation to help him. He is no different in t h a t
regard from the black or Mexican American who lives below what we
glibly call the "poverty line."
I have introduced legislation to develop a program of economic
transition from wartime to peacetime, and I look on this as the basic
challenge facing our national policy. But in order to have the time we
apparently need to make this transition, the Congress needs to look




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carefully at legislation to attack unemployment where it is concentrated—through the private as well as the public sector. As an advocate
of tax incentives for the development of jobs in rural areas, I would
have no problem with proposals using this method. Admittedly, we
would be working in an area where little experience is readily available, but I think the unemployed aircraft worker in Wichita, Kansas,
would welcome an opportunity to test out this course of action. I t is
one which the Congress could initiate and carry forth through legislation and the appropriations process, and it would not reduce the Presidential prerogatives to use fiscal and monetary policies for the benefit
of the national economy as a whole.




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