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FEDERAL RESERVE BANK OF NEW YORK 135 The B usiness Situation Business activity continued to expand as the summer began. The pace of advance has recently been slower than in the unusual first quarter of the year, which has led to a more cautious reassessment of future prospects by a number of observers. Some of this reassessment has shown up in a change in the previously highly buoyant atmosphere of the stock market. The underlying sources of strength in the economy remain intact, however, and are being recognized both by business analysts and in cur rent official appraisals. These positive factors include business plans for further increases in plant and equip ment spending, the stimulus to consumer spending ex pected from the excise tax cut effective June 22, and a further expansion in the combined spending of Federal and state and local governments on goods and services in the months ahead. That the economy has in fact remained strong over the past several weeks is reflected in the gains in such key indicators of activity in May as industrial production, durables manufacturers’ unfilled orders, employment, and retail sales. Fragmentary data for June suggest that both automobile assemblies and steel ingot production were well maintained, while retail sales apparently continued near the record rate of the month before. The unemploy ment rate, to be sure, did edge up in June after a marked decline in the month before. Nevertheless, there has been a distinct improvement in the labor market situation dur ing the second quarter as a whole, compared with both the first quarter of 1965 and the second quarter of 1964. The economy continues to show signs of increased vul nerability to upward price pressures. The over-all con sumer price index was up by 0.6 percentage point in the April-May period, largely reflecting higher prices for meats. The excise tax cut has already resulted in price reductions in a significant number of consumer items, and these decreases should show up in the index for July, but it must be remembered that this is essentially a one-time effect (until the next round of reductions that becomes effective January 1). The wholesale price index was also up again in May, and apparently in June as well. It is true that some of the wholesale price increase in the past several weeks also reflected special factors relating to possibly temporary shortfalls in food supplies, which may ease again soon. Nevertheless, there continues to be a noticeable upcreep in prices for industrial commodities, and while the rate of advance in this component of the wholesale price index is still modest in comparison with the inflationary surge of the mid-1950’s, it nevertheless contrasts with the stability the country achieved during the earlier portion of the current expansion. Against the background of these developments, the need for restraint in price-wage decisions has become even more pro nounced. The steel industry, in which labor negotiations were recently resumed, will clearly be a bellwether of the future. PR O D U C T IO N , O R D E R S, A N D E M P L O Y M E N T The Federal Reserve’s seasonally adjusted index of industrial production rose by 0.5 percentage point in May to 141.3 per cent of the 1957-59 average (see chart). Output in industries producing business equipment showed particular strength in the month and reached a level 11 per cent higher than in the corresponding month a year earlier. Production of consumer goods was also up in May, buoyed by a slight rise in automobile assemblies as well as by some increase in output of consumer staples. Output of industrial materials, on the other hand, was essentially unchanged, following the sharp run-up that re flected the surge in steel production earlier in the year. In June, steel ingot production edged back close to the record rate reached in April, and producers in the auto- MONTHLY REVIEW, JULY 1965 136 RECENT BUSINESS INDICATORS Seasonally adjusted monthly data Per cent Per cent the steel industry. Outside the manufacturing sector, gains were widespread in May. For the April-May period com bined, the total number of persons on establishment pay rolls averaged more than 300,000 persons above the fig ure for the first quarter. Along with the continuing rise in business activity in June, both total employment and the number of persons seeking jobs expanded further. The over-all unemployment rate in the month was 4.7 per cent, a shade above the 4.6 per cent rate in May, reflecting a rise in unemployment among adult women. The unemploy ment rate for adult men, and married men, on the other hand, edged downward; and unemployment among teen agers was also down a bit. For the second quarter as a whole, the over-all unemployment rate averaged 4.7 per cent, compared with 4.8 per cent in the first quarter and 5.3 per cent in the corresponding year-ago period. C O N S U M E R SP E N D IN G A N D R E SID E N T IA L C O N S T R U C T IO N Sources: Board of Governors of the Federal Reserve System;United States Departments of Commerce and Labor. mobile industry assembled new cars at a seasonally ad justed annual rate of 9.6 million units— a further slight gain in comparison with the advanced rate of the month before. Prospects for future strength in production remain good. Although the volume of incoming new orders for durable goods declined somewhat in May, such orders were still well above the current rate of shipments. As a result, the backlog of unfilled orders held by durables manufacturers rose for the seventeenth consecutive month (see chart). This brought the stock of unfilled orders to a level equal to more than 2.7 times the current monthly rate of shipments, which is 7 per cent above the ratio for the corresponding month a year ago. Nonfarm payroll employment also rose in May, more than recouping the mild decline that occurred in April (see chart). Employment was off slightly in the manu facturing sector in May, but this decline largely reflected a smaller number of persons at work in the primary metals industry following the interim labor settlement in Retail sales rose by 2.2 per cent in May to a record sea sonally adjusted annual rate of nearly $281 billion. The dollar volume of both nondurables and durables sales ad vanced by slightly more than 2 per cent. In June, new-car sales surged to a seasonally adjusted annual rate of 8.8 mil lion units. Over-all retail volume was well maintained in the month as a whole, and sales in the last few days of the month probably received some stimulus from the excise tax cut, which the President signed into law June 21 to take effect the following day. (In the case of both new auto mobiles and air conditioners, the reductions were retro active to cover purchases made on or after May 15.) There were, to be sure, some reports of disappointment with the initial consumer reaction to the excise tax cuts in terms of actual purchases. Past experience indicates, however, that there tends to be a lag between the enact ment of tax cuts and the response in consumer spending. It would seem that such a lag is especially likely in the case of an excise tax cut which has its immediate effect only on specific goods. As consumers in the weeks ahead come to realize more fully that previously taxed items now take less of their income to purchase, they will find more income left over for spending on other things. There will therefore be a tendency for the effects of the excise tax cut to spread over the entire range of consumer goods and services. Developments in residential construction continued, on balance, to suggest improvement, although the erratic fluctuations in many of the statistical series relating to this sector of activity make it difficult to draw conclusions from any one month’s returns. One way of gaining per FEDERAL RESERVE BANK OF NEW YORK spective is to look at average levels of activity over sev eral months. The number of nonfarm housing starts, for example, fell by 4 per cent in May. This decline, however, followed an advance the month before, and the average 137 level of starts in the April-May period shows an increase from the January-March average. With respect to actual outlays for residential construction, activity in the second quarter was on a par with the previous quarter. The M oney and Bond M ark ets in June The money market remained firm in June while han dling readily the substantial financial flows generated by quarterly corporate dividend and tax payments. Heavy midmonth credit demands associated with these payments increased the pressure on the reserve positions of the money market banks. While these banks were able to cover part of the special needs of the period in the Fed eral funds market, their borrowings from the Federal Reserve Banks also increased. Treasury bill rates gen erally declined during most of the month in response to a steady demand from commercial banks, public funds, and other sources, but edged higher toward the end of June. Prices of Treasury notes and bonds fluctuated nar rowly in the early part of June when the outlook for interest rates was clouded by the congestion evident in the corporate and tax-exempt bond markets. Around midmonth, as selling of Governments by investors failed to expand, a more confident tone developed. Demand for coupon issues picked up, and prices moved higher in fairly active trading until late in the month when both activity and prices receded. In the corporate and tax-exempt bond sectors, market supplies of new and recent issues remained very heavy and prices declined during the first third of the month. A better tone subsequently emerged in the corporate sector, as progress was gradually made in dis tributing bonds to investors, but prices of tax-exempt bonds continued to move lower throughout the month in the face of persistent market congestion. THE M ONEY M ARKET A N D BANK RESERVES Nationwide net reserve availability in June fluctuated in approximately the same range which had prevailed in other recent months. The money market remained firm, with Federal funds trading on most days primarily at 4Vs per cent. Rates on new call loans to Government securities dealers were most frequently quoted in a 4V4 to AVz per cent range by the major New York City banks, while rates on renewal call loans were generally in a 4V4 to 4% per cent range (see the left-hand panel of the chart on page 139). Offering rates for new time certificates of deposit issued by leading New York City banks edged slightly higher in early June and then receded. The range of rates at which such certificates traded in the secondary market moved irregularly lower during the month. Rates on bank ers’ acceptances were unchanged and dealer inventories increased only slightly in June, as the usual substantial ex pansion in dealer portfolios over the June 30 statement date for banks failed to materialize. On June 1, the major sales finance companies raised their offering rates on 30to 89-day directly placed paper by Vs of a percentage point, thus setting a uniform rate of 4V4 per cent for all such paper in the 30- to 270-day maturity category. The month began with a consistently firm tone in the money market. System open market operations re leased reserves in the two statement weeks ended June 2 and June 9 as an offset to the absorption of reserves resulting from the movements in “market” factors. The dis tribution of reserves favored the major New York City banks, which continued to add to their negotiable cer tificates of deposit outstanding, presumably to be in a good position to meet credit demands expected over the June dividend and tax dates. In the meantime, these banks sold Federal funds on balance, including the siz able volume which they normally purchase from their correspondents. The major money center banks outside New York City were able to cover a good portion of their substantial reserve needs in the Federal funds market. Member bank borrowings from the Reserve Banks, how ever, remained around the half billion dollar mark. 138 MONTHLY REVIEW, JULY 1965 Table I CHANGES IN FACTORS TENDING TO INCREASE OR DECREASE MEMBER BANK RESERVES, JUNE 1965 In millions of dollars; (+ ) denotes increase, (—) decrease in excess reserves Daily averages— week ended F actor Net changes June June June June 2 June 9 16 23 30 4- 493 4- 405 — 305 4 - 229 76 + 18 — 25 4- 97 63 — 173 — 359 4- 90 — 98 4-122 + 4 4 - 63 4- 70 4- 72 4- 48 + 48 4- 95 4 - 12 4- 169 — 3 4- + 1 44 4- 952 — 9 211 4- 51 — 62 “ M arke t” factors Member bank required reserves* .................................. Operating transactions (subtotal) .............................. Federal Reserve float . . . Treasury operationsf . . . . Gold and foreign account. Currency outside banks* . Other Federal Reserve accounts (net) t ................ -f - 728 - 152 - 63 - 43 - 311 — 398 20 — 169 110 + 8 -j- 16 Total “ m arket" factors. — 68 4- 22 + — 502 — 348 4 - 80 — 15 — 12S — 334 Direct Federal Reserve credit transactions Open m arket instrum ents O utright holdings: Government securities . Bankers’ acceptances .. Repurchase agreements: Government securities . Bankers’ acceptances .. Member bank borrowings .. Other loans, discounts, and advances ................................ Total Excess .............................. reserves* .................. + 674 + 63 4* 9 4 - 35 + 53 — 4 4- 119 — 7 44 — — — — + -f 778 4- 124 84 10 4- 137 — — 5 + 976 — + 1 5 4 - 49 22 + 3 4- 876 + 4- 26 14 21,414 21,087 327 518 — 191 21,369 21,067 302 474 — 172 20,895 21,647 21,248 399 611 — 212 21,036 22,059 21,646 413 583 — 170 21,476 21,892 21,561 331 486 _ 155 21,406 21,6765 21.322S 354 § 534§ — 180§ 21,1421 Note: Because of rounding, figures do not necessarily add to totals. * These figures are estimated. t Includes changes in Treasury currency and cash. X Includes assets denominated in foreign currencies. § Average for five weeks ended June 30, 1965. During the midmonth statement week, the money mar ket dealt smoothly with the huge flows set in motion by the most popular dividend payment date, June 10, and the quarterly corporate tax date, both of which fell in the same statement week. Total demand deposits (including checks in process of collection) at weekly reporting member banks rose by $8.4 billion during the week, as corporations acquired the deposits to pay out a substantial amount of dividends and several billion dollars in Federal taxes. On the assets side, the weekly reporting member banks extended approximately $2.7 billion in loans over the week ended June 16, over 50 per cent more than in the same period of 1964. Commercial and industrial loans rose substantially, while loans to sales finance companies and to brokers and dealers for purchas- Table H RESERVE POSITIONS OF MAJOR RESERVE CITY BANKS JUNE 1965 D a ily average level of member bank: Total reserves, including vault cash* ............................ Required reserves* .............. Excess reserves* .................. . Borrowings ............................ Free reserves* .......................... Nonborrowed reserves* ------ ing or carrying securities also increased considerably. (During this period corporations not only borrowed from banks, but: also reduced their holdings of Government securities under repurchase agreements with securities dealers as well as their holdings of finance company paper.) These heavy credit demands brought a notable increase in reserve pressure on the New York City banks, while other major banks continued to have sizable basic reserve deficits. However, reserves were in good supply at 4Vs per cent in the Federal funds market, and borrowings from the Reserve Banks increased only moderately. The pressures generated by the tax date led to heavy borrowing at the Federal Reserve “discount window” over the June 18-20 weekend. Subsequently, the money market became easier and Federal funds were available to buyers at a nominal rate at the end of the June 23 statement week. A comfortable atmosphere carried over into the following statement week, but the tone of the money mar ket tightened as the week progressed. Borrowings from the Reserve Banks rose very sharply on the eve of the midyear In millions of dollars Daily averages—week ended Factors affecting basic reserve positions June 2 June 9 June 16 June 23 Average of five weeks ended June 30* June 30* Eight banks in New York City Reserve excess or 13 4 deficiency(—)t ....................... Less borrowings from Reserve Banks ..................... 18 47 Less net interbank Federal funds purchases or sales(—).. — 124 — 83 779 Gross purchases ............... 891 Gross sales ....................... 903 974 Equals net basic reserve surplus or deficit (—) ......... 119 40 Net loans to Government securities dealers ................. 486 424 1 64 2 17 166 213 96 108 38 937 899 158 - 26 934 782 777 808 — 203 — 306 — 68 831 942 998 _ 7 865 872 — 84 736 Thirty-eight banks outside New York City Reserve excess or deficiency(—) f .......................... 16 26 Less borrowings from 129 Reserve Banks ..................... 118 Less net interbank Federal funds purchases or sales(—).. 289 503 Gross purchases ............... 1,206 1,391 Gross sales ...................... 917 888 Equals net basic reserve surplus or deficit (—) ......... - 4 0 1 - 5 9 5 Net loans to Government securities dealers ................. 247 179 21 52 13 26 129 118 141 127 493 1,281 788 691 1,303 612 367 1,110 743 469 1,258 790 — 757 — 495 — 570 -6 0 2 282 401 365 295 Note: Because of rounding, figures do not necessarily add to totals. * Estimated reserve figures have not been adjusted for so-called “as of” debits and credits. These items are taken into account in final data, t Reserves held after all adjustments applicable to the reporting period less re quired reserves and carry-over reserve deficiencies. 139 FEDERAL RESERVE BANK OF NEW YORK SELECTED INTEREST RATES* A p rij-J u n e 1965 Per cent Percenfr 4.80 -4 .8 0 4.60 4.60 •4.40 -4 .4 0 4.20 4.20 4.00 -3 .2 0 3.80 3.60 14 21 28 5 Apr 12 19 M ay 14 21 28 5 Apr 12 19 26 2 M ay 9 16 June Note: Data are shown for business daysonly. from underwriting syndicate reoffering yield o fa given issue to m arketyield of the sam e issue ^ M O N E Y MARKET RATES QUOTED: Daily range of rates posted by major New York City banks on new immediately after it has been released from syndicate restrictions); d aily averages of yields of •call lo a n s(in Federal funds) secured by United States Governm ent securities (a point indicates the long -term Governm ent securities (bonds due or callable in ten years or mo re) and of Governm ent absence of any range); offering rates for directly placed finance com pany p a per; the effective securities due in three to five y e a rs, computed on the b a siso f closing bid prices;Thursday rate on Federalfunds (the rate most representative of the transactions executed);closing bid rates av e ra g e s of yields of twenty se ason ed twenty-y e ar tax-exem pt bonds (carrying M o o d y 's (quoted in terms of rate of discount) on newest outstanding three-and six-month Treasury bills. B O N D MARKET YIELDSQUOTED: Yields of new A a a - and Aa-rated public utility bonds are plotted around a line showing daily average yields of seasoned A aa-rated corporate bonds (arrows point statement date, on which banks ordinarily like to keep their borrowings small. Over the month as a whole, market factors absorbed $850 million of reserves, while System open market opera tions provided $874 million. The weekly average of System outright holdings of Government securities rose by $952 million from the final statement week in May through the last week in June, and average System holdings of Govern ment securities under repurchase agreements fell by $62 million. Average net System holdings of bankers’ accept ances (outright and under repurchase agreements), de clined by $16 million during the month. From Wednesday, May 26, through Wednesday, June 30, System holdings of Government securities maturing in less than one year ratings of A a a , A a , A, and Baa). Sources: Federal Reserve Bank of N ew York, Board of Governors of the Federal Reserve System, M o o d y 's Investors Service, a n d TheW eekly Bond Buyer. expanded by $359 million, while holdings of issues matur ing in more than one year rose by $452 million. TH E G O V E R N M E N T S E C U R IT IES M A R K E T Treasury bills were in broadly based demand in the opening days of the month. Market scarcities developed, particularly in the short-term maturity area, and rates continued along the downtrend which had begun in March (see left-hand panel of the chart). The June 3 reduc tion in the British bank rate from 7 per cent to 6 per cent was a factor contributing to the strength of Treasury bill prices. Around the June 10 corporate dividend payment date, bill rates generally edged a trifle higher, as dealers 140 MONTHLY REVIEW, JULY '1965 took on securities returning from maturing corporate re purchase agreements. A steady investment demand per sisted, however, and moderate offerings related to the div idend payment date and to the subsequent midmonth corporate tax date were readily absorbed. In the latter part of June, a keen investment interest centered upon bills coming due within three months as well as on bills maturing during future tax and dividend payment periods in September and December 1965 and in 1966. The gen eral downward movement of bill rates resumed and con tinued until the closing days of the month, when demand tapered off and rates rose slightly. At the last regular weekly auction of the month, held on June 28, average issuing rates were 3.784 per cent for the new three-month issue and 3.824 per cent for the new six-month bills, about 9 and 10 basis points lower than the average rates at the final weekly auction in May. The June 24 auction of $1 billion of new one-year bills pro duced an average issuing rate of 3.807 per cent, as against 3.954 per cent on the comparable issue sold a month earlier. The newest outstanding three- and sixmonth bills closed the month at bid rates of 3.81 per cent and 3.85 per cent, respectively. In the market for Treasury notes and bonds, the atmos phere of caution which had developed in the latter part of May persisted in the opening days of June. Throughout this period, participants continued to react warily to the substantial calendar of offerings scheduled for flotation elsewhere in the capital markets. In particular, as corporate bond yields moved higher, the widening spread between yields of corporate bonds and those of Government secu rities of comparable maturity generated some concern over the tenability of prevailing yield levels of Treasury issues. Against this background, dealer offerings of Gov ernment notes and bonds expanded somewhat. However, a moderate demand remained in evidence and provided a steadying influence. Thus, after declining slightly on June 1, prices fluctuated narrowly from June 2 through June 10 (the right-hand panel of the chart illustrates the cor responding general stability of yields early in June). Subsequently, investment demand and switching opera tions increased, and the coupon sector of the Government securities market strengthened. Participants were influ enced by an improved atmosphere in the corporate bond market and by the excellent reception accorded a $525 million offering of Federal National Mortgage Association participation certificates. The bond market was also influ enced by the decline in stock market prices— partially re versed late in the month— which was interpreted as being likely to lead to some increase in the demand for fixedinterest securities. The expansion in investor interest in coupon issues stimulated professional demand, offerings were easily taken up, and prices generally moved higher from June 11 through 24. Demand favored the short- and intermediate-term maturities— particularly the 2l/ i per cent wartime issues. The System Account also made open market purchases of coupon issues during the month to supply reserves in anticipation of large needs over the July 4 holiday weekend. In the last few trading sessions, investor interest declined and prices receded on profes sional profit taking. O TH E R SE C U R IT IE S M A R K E T S In the early part of the month, prices of corporate and tax-exempt bonds generally moved lower in a hesitant atmosphere. Considerable investor resistance contributed to, and was reinforced by, the substantial backlog of new issues and older bonds which crowded dealers’ shelves. Market participants were also aware of the heavy volume of impending flotations, including two large issues of capital notes by commercial banks. In the corporate sector, a steadier tone appeared in the latter part of the month as price reductions facilitated the distribution of new and recent corporate bonds. In the tax-exempt sector, how ever, dealer inventories remained large and prices con tinued to decline over the remainder of the month. Over the month as a whole, the average yield on Moody’s sea soned Aaa-rated corporate bonds rose by 2 basis points to 4.47 per cent. During the same period, the average yield on The Weekly Bond Buyer's series for twenty seasoned tax-exempt issues (carrying ratings ranging from Aaa to Baa) increased by 11 basis points to 3.30 per cent. (These yield series are shown in the right-hand panel of the chart.) The volume of new corporate bonds publicly floated in June amounted to an estimated $720 million, compared with $675 million in May 1965 and $460 million in June 1964. A $250 million offering of commercial bank capi tal notes maturing in 1990 reached the market early in the month. Reoffered at par to yield 4.60 per cent, the issue—which cannot be called for five years— initially en countered investor resistance, but demand for the notes subsequently expanded. Another major commercial bank also offered new capital notes in June. The latter issue con sisted of $266 million of 4 per cent notes maturing in 1990, which were offered at par to stockholders and were convertible into stock. The notes, which carried five-year call protection, were well received. The largest publicly offered new corporate bond issue of the month consisted of $40 million of Aaa-rated 4% per cent utility company debentures maturing in 2005. The debentures, which can FEDERAL RESERVE BANK OF NEW YORK not be called for five years, were reoffered to yield 4.55 per cent and were accorded a fair investor reception. New tax-exempt flotations totaled about $885 million, as against $895 million in May 1965 and $780 million in June 1964. The Blue List of tax-exempt securities adver tised for sale closed the month at $834 million, compared with $872 million at the end of May. The largest new tax- 141 exempt bond flotation during the month consisted of $67 million of state bonds which were reoffered to yield from 2.50 per cent in 1968 to 2.95 per cent in 1980. The bonds were Aaa rated by Moody’s and were accorded a fair re ception. Most other new corporate and tax-exempt bonds publicly offered during the period were accorded fairly good investor receptions. The Initial Effects of Federal B udgetary C h an ges on A g g re g a te Spending* Statistics describing how much the Federal Government spends and how much it collects in revenues are available in great quantity and on a variety of different accounting bases.1 Despite this wealth of data, however, and despite the increasing importance of fiscal policy as a tool for promoting cyclical stability and long-run growth, the task of assessing the precise impact of Federal budgetary oper ations on aggregate production and income remains diffi cult. This article presents one possible technique for quantifying the effect on the economy implicit in any particular set of changes in Federal budgetary programs. Essentially, the technique seeks to measure the direction and size of the budget’s initial influence on aggregate de mand through changes in Federal outlays and through the direct effects on private incomes associated with changes in tax rates. It should be stressed at the outset that no single measure of fiscal impact— including the relatively simple and tenta tive one presented here—will prove satisfactory in all analytical situations. The virtue of the procedure here presented is that it attempts to distinguish the independent effects of the budget on the economy from the “feedback” effects of the economy on the budget, effects which op * A number of persons in the Research Department of this Bank have worked toward developing the method of analysis presented here. Camille B. Pantuliano had primary responsibility for the preparation of this article. erate mainly on the revenues side of the budget. In this respect, the technique developed in this article has a goal similar to that of the so-called “full employment surplus”, a concept which also attempts to separate out the feed back effects and which has become familiar from the re ports of the President’s Council of Economic Advisers.2 The concept of the full employment surplus, of course, goes beyond this limited end; in particular, the concept has been used in discussions of the upward trend in tax revenues that would be generated by the economy as it approaches or maintains full employment of a growing labor force and productive capacity. The technique here discussed avoids the complications that arise in estimating tax revenues at a hypothetical full employment level of activity. The current employment and output situation is taken as given, and the computations are designed only to estimate the direct effect on total spending of actual changes in Federal expenditures and tax rates. As will be apparent from the discussion below, the basic methodology and all the numerical computations shown in this article rest on a long series of assumptions, any one of which might prove to be a fit subject for lengthy debate. Moreover, there are some aspects of the over-all economic impact of Federal fiscal operations that cannot be examined at all in the context of the technique 2 The reader who wishes to examine the concept of the “full employment surplus” may consult an article by Robert Solomon, 1 See Joseph Scherer, “A Primer on Federal Budgets”, this “A Note on the Full Employment Surplus”, Review of Economics and Statistics, February 1964, pp. 105-108. Review, April 1965, pp. 79-88. 142 MONTHLY REVIEW, JULY 1965 discussed here. Thus, even with the help of this technique, or any other such simple procedure, the analyst will still find it imperative to undertake a thorough investigation of all the circumstances prevailing in the particular period in which he is interested. S U M M A R Y OF B A SIC A P P R O A C H The technique described here is designed to measure the initial and direct effects of the changes in the Federal budget on aggregate spending by computing a weighted sum of the change in total Federal expenditures and the change in aggregate after-tax incomes due to statutory or administrative modifications in the Federal tax system. Additions to expenditures and reductions in tax rates are considered to be “stimulative”, while reductions in expen ditures and tax rate increases are considered to be “re strictive”. The aim of the procedure is to assess the combined effects of expenditures and tax rate changes in pushing up or pulling down aggregate spending in a given period relative to spending in the immediately preceding period. Consequently, changes on both the expenditures and tax sides are measured in terms of levels prevailing in the previous period. In the case of expenditures, the relevant figure is simply the absolute dollar amount of change from period to period, modified for certain timing factors (and adjusted for seasonal variation when periods of less than one year are used as the unit of analysis). For reasons explained in the Appendix, the data most suitable for this analysis repre sent a compromise between the “cash” and the “national income accounts” expenditures figures of the Federal bud get. A more sophisticated technique would obviously also take into account the expenditures “mix”, since it is very likely that different types of Government expenditures will have different effects on the economy. (One example that is frequently listed is the distinction between direct pur chases of goods and services and “transfer” payments such as social security payments which stimulate the demand for goods and services less directly.) Such refinements can be built into the technique once further research on Government spending by components has yielded work able empirical generalizations. The procedure for estimating the effects of changes in tax rates is somewhat more complex. Essentially, an at tempt is made to estimate the extra amount of income left in (or taken from) private hands as a result of the tax rate change. Clearly, this estimate should eliminate feed back effects— the effects of tax-change-induced variations in the tax base, and hence in tax revenues. Therefore, the evaluation is made on the basis of levels of personal income or corporate profits (or other relevant tax bases) prevailing in the period before the tax change becomes effective. This figure is then multiplied by 90 per cent in order to obtain an estimate of the initial and direct effect on aggregate spending of the tax rate change itself.3 The over-all impact of fiscal operations in any period is said to be stimulative when the net outcome of changes on the expenditures and tax sides so computed is positive. When the net outcome is negative, fiscal operations are said to be restrictive. It should be noted explicitly that the fiscal impact measure developed here differs conceptually both from levels of the actual surplus or deficit—however measured in terms of the standard budget accounts— and from changes in the surplus or deficit. The amount of the deficit at any one time depends of course on the level of expenditures relative to revenues, while the present con cept takes into account changes in both expenditures and tax laws. Moreover, since the level of the standard deficits depends upon the level of revenues actually realized rather than merely upon changes in the tax laws, it is the net result of two factors: the effects of the budget on the economy, and the effects of the economy on the budget. The latter represents mainly the previously mentioned feedback of changes in personal income and corporate profits on the tax receipts of the Federal Government. Since the present procedure seeks to measure the “in dependent” impact of budget changes on the economy, this independent effect must be isolated from the feed back effects. The same factors account for the conceptual difference between changes over time in the realized deficit or surplus on the one hand, and the present measure on the other hand. Changes in the deficit, of course, depend upon changes in expenditures and changes in realized revenues. The measure developed here does make use of changes in ex penditures, but on the revenues side it records only the effects on income due to changes in tax laws. Suppose, for 3 The 90 per cent figure is based on the fact that consumers on average tend to lay out a little more than 90 per cent of their after tax (or “disposable”) income for “personal consumption expen ditures”, while the remainder of disposable income is saved. This 90 per cent weight was also — somewhat arbitrarily — applied to the dollar amounts released by corporate tax reductions. Avail able data were not helpful in determining a more appropriate weight for corporate tax changes. Imperfect as it is, this method does allow for the virtual certainty that tax reductions (and increases) have a slightly smaller initial impact on the economy than expenditure increases (and reductions). The alternative of treating personal and corporate tax cuts as equivalent to expenditure increases (and tax increases as equivalent to expenditure reductions) would most likely lead to overestimates of the fiscal impact from tax changes. FEDERAL RESERVE BANK OF NEW YORK 143 Some further limitations of the procedure should be mentioned explicitly. First, it does not yield a measurement of the adequacy of fiscal policy in attaining full employment goals. Second, this measure gives no indication of the effect on the economy that occurs through the growth of Gov ernment revenues with the growth in the economy. (The “full employment surplus” concept does give such an indi cation, as noted earlier.) The present analysis skirts these issues by concentrating strictly on the narrower question whether changes in the budget are tending to push up or pull down aggregate demand from the level of the pre ceding period. Naturally, this also means the sacrifice of L IM IT A T IO N S OF B A SIC A P P R O A C H some of the valuable results yielded by the “full em Since the procedure is designed solely to measure the ployment budget” analysis. initial and direct effects of changes in fiscal operations on Third, the technique described here does not take aggregate demand, a change in expenditures or in tax rates account of the impact of fiscal operations on the capital is allowed to affect the computations only for the period in market, interest rates, or liquidity. For example, a fiscal which the change takes effect. If the expenditures or tax program that is stimulative in terms of the present analysis change remains in effect during subsequent periods, the might— though need not— involve a cash deficit requiring economy will of course behave differently in those periods the flotation of additional Government securities. This than if the change had never been made. In the present additional supply of securities in the market might, in technique, however, the test is whether additional stimu turn, tend to push up interest rates, make funds more ex lus is being provided relative to the previous period. pensive for private borrowers, and possibly discourage Thus, the assumption is made that a tax cut or an in private demands for funds. This process could con crease in expenditures will raise aggregate demand to a new ceivably offset part or all of the fiscal stimulus as here higher level during the period in which the budgetary measured. Therefore, such possibilities should be explored change occurs. The mere continuance of a tax cut or of an in a more nearly complete analysis of fiscal effects on the already elevated level of expenditures in subsequent economy than that here given. periods is not considered as an additional stimulus causing Fourth, the present technique cannot, of course, take demand to rise still further.4 any account of the “psychological” effects of fiscal opera Thus, the technique does not deal with the secondary tions. There is no way of attaching a dollar-and-cents fig repercussions of fiscal operations. This is certainly not to ure to the contribution to business optimism in much of deny the occurrence of such repercussions. It is usually 1963 made by the widely held expectation that a tax cut assumed that additional disposable income resulting would eventually be enacted. Similarly, the prospect of a from a tax cut will be spent and that the additional in particularly large budgetary deficit might introduce a note comes so generated will go on to stimulate still fur of uneasiness into business sentiment that could not be ther spending, via the so-called “multiplier” process. readily measured. This process is likely to operate with lags. Therefore, the In addition to these broad considerations, two par economy may continue to move up in subsequent periods ticularly thorny technical problems concerning the data as a result of the initial momentum generated by a tax had to be resolved and should be mentioned before the cut even though no further cuts take place. An analysis of results are presented. (Most of the technical problems are the precise size and timing of these secondary effects left for the Appendix.) One of these problems concerns would be both necessary and worthwhile to attempt, but the treatment of Federal lending activity; the other in would go beyond the bounds of this article. volves the treatment of corporate taxes. Federal lending obviously shares some, but not all, of the characteristics of outright expenditures. On the one hand, it is in fact stimulative insofar as the borrowers will spend much, if not all, of the proceeds on goods and 4 In somewhat the same sense, a rise in business spending on plant and equipment may be thought of as a stimulus for aggregate services. On the other hand, the borrowers assume a demand to rise in the period in which it occurs and yet not be liability which may dampen the stimulative effects sig counted as a further stimulus if plant and equipment outlays re nificantly. There is no clear-cut answer to the question main at the same higher level in subsequent periods. example, that expenditures change by a constant amount from year to year and that there are no changes in the tax laws. In such a case, the concept here developed would show a constant amount of fiscal stimulus in each year, which would correspond to the change in expenditures. If the economy were growing, however, actual tax receipts would be growing from year to year. Hence the actual deficit or surplus and changes in these figures would probably vary from year to year, while the present measure would remain constant, as noted. 144 MONTHLY REVIEW, JULY 1965 whether Federal lending should be included in or ex cluded from the fiscal stimulus. Therefore, the figures are given on both bases. (Further difficult problems related to the impact of Federal lending are treated in the Ap pendix.) In the case of corporate tax changes, the issues— which are also treated more fully in the Appendix— re volve around the choice of the proper basis for the tim ing of the impact of such changes. It makes a great deal of difference whether one chooses the time of accrual of tax liabilities or the time of cash payments. In the ab sence of a convincing rationale for the exclusive choice of either basis, a simple arithmetic average of the two possibilities was computed for the present purpose. Table I INITIAL EFFECTS OF CHANGES IN THE FEDERAL BUDGET ON GROSS NATIONAL PRODUCT Seasonally adjusted at annual rates; in billions of dollars C alendar years by h alf years 1960: 1961: 1962: 1963: RESULTS 1964: The present technique yields the figures of the chart and of Table I for the effects of changes in the Federal 1 ............................. Fiscal effects (excluding net Federal lending) Fiscal effects (in clu d in g net Federal lending) From expendi tu re changes From tax changes Total fiscal effects From expendi tu re changes - 0 .4 - 1 .9 - 2 .3 2 ............................. 2 .7 — 1 ............................. 4 .8 — From tax changes T otal fiscal effects 2 .0 - 1 .9 0 .1 2 .7 2 .2 — 2 .2 4 .8 6 .0 — 6 .0 4 .6 2 ............................. 2 .7 — 2 .7 4 .6 — 1 ............................. 5 .5 - 0 .5 5 .0 4 .1 - 0 .5 3 .6 2 ............................. 2 .0 2 .0 4 .0 0 .9 2 .0 2 .9 1 ............................. 3 .1 — 2.1 1 .0 3 .4 — 2.1 1.3 2 ............................. 1 .3 — 1.3 2 .4 — 2 .4 1 ............................. 3 .0 5 .4 8 .4 1 .0 5 .4 6 .4 2 ............................. 0 .4 3 .9 4 .3 1 .2 3 .9 5.1 Note: Absence of a sign denotes fiscal stimulus; a negative sign denotes a re strictive effect. Increases in expenditures or tax cuts are positive, decreases in expenditures or tax rises negative. The initial effect from expenditures is the period-to-period change in a series derived in Table II. The initial effect from taxes is the change in after-tax income due to tax revisions calculated in Tables III, IV and V (Tables II-V are in the Appendix). Source: Federal Reserve Bank of New York from United States Treasury data. INITIAL EFFECTS OF CHANGES IN THE FEDERAL BUDGET ON GROSS NATIONAL PRODUCT S e aso n ally adjusted at annual rates b y calendar half years Billions of dollars 8 -i Billions of dollars i r~f\^ 8 E x clu sive o f the net effects o f F e deral le n d in g _L J ______ I______ 1______ I______ I_____ I E FFECTS F R O M E X P E N D IT U R E C H A N G E S I E xclusive o f the net effects o f F e deral le n d in g U i In c lu siv e o f the net e ffe c t s / _ o f F e d e ral le n d in g . 1st 2 nd 1960 1st 2 nd 1961 1st 2 nd 3962 1st 2 nd 1963 1st 2nd 1964 Note: Positive changes denote fiscal stimulus; negative changes denote a restrictive effect. Source: FederalReserveBankof New York fromUnitedStatesTreasury data. budget in the calendar years 1960-64. At the beginning of the period for which calculations were made, i.e., in early 1960, budgetary changes were moving in the direction of restrictiveness as a result of an increase in social security taxes without any expenditures stimulus. The calculations suggest, however, that since that time changes in the Fed eral budget have been stimulative in each half-year period, regardless of whether the calculation includes or excludes the Government’s loan operations. Nevertheless, there have been significant fluctuations in the degree of stimulus occasioned by budgetary changes during the period under review. Generally, the effects of budgetary changes became gradually less stimulative be tween early 1961 and early 1963 but considerably more stimulative thereafter. This pattern is primarily the result of declining amounts of stimulus from changes in expendi tures after 1961, followed by the significantly expansionary tax cut in 1964. Because that tax cut fell into early 1964, this period emerges as the most stimulative within the five years for which calculations were made. It is interesting to note that the inclusion of net Federal lending activities in expenditures tends to smooth out some of the fluctuations in stimulus produced by changes in out right expenditures. Moreover, the broader measure was to some degree stimulative in each of the periods since 1960 FEDERAL RESERVE BANK OF NEW YORK —most particularly in early 1961, when business activity reached the trough of a recession. The measure excluding loans shows sharper variations from period to period and suggests that expenditures changes were most expansionary not in early 1961 but in early 1962. As was noted earlier, there is no reason to expect the numerical value of changes in the realized deficit from period to period to be the same as the numerical value of the present measure for comparable periods. Indeed, the differences have in fact been rather marked over the past few years. For example, the half-yearly changes in the cash deficit (at annual rates) have ranged from plus $1.7 billion to minus $1.9 billion in the 1962-64 period. The measure developed here, in contrast, has been positive throughout this period, ranging for the half years (at annual rates) from a low of $1.3 billion to a high of $6.4 billion (including net Federal lending), and from a low of $1.0 billion to a high of $8.4 billion (excluding net Federal lending). T E C H N IC A L A P P E N D IX The conceptual content of the measure of fiscal impact developed here requires information as exact as may be obtainable on the timing of the economic effect of Gov ernment expenditures and taxation: just when do outlays become an income flow to the private sector of the econ omy, and when do taxes become a withdrawal of income from the private economy? Unfortunately, many of the of ficial series on important components of the budget are not entirely satisfactory in this respect. Therefore, a com promise series had to be developed, based on information available in different sets of published data. e x p e n d i t u r e s . W hat data to use? With respect to in clusiveness, the expenditures figures listed in either the cash budget or the national income accounts budget are about equally satisfactory. Both cover virtually all Government payments to the private sector, though the national income accounts data do not include Government loans and though there is considerable “netting” of receipts and expenditures in both budgets.5 Administrative budget statistics, on the other hand, are not particularly useful for the analysis presented here, since they do not include the operations 145 of the social insurance funds or of the Government’s other trust fund accounts. As already suggested, the construction of a series in which expenditures are dated at the time of their im pact on incomes presents a difficult problem. Cash bud get data are not quite satisfactory for three reasons. First, the bulk of spending for the farm price support pro gram has an income effect at a time other than the time of listing as a cash expenditure. These outlays are recorded in the cash budget when farmers default on their crop loans and forfeit their crops to the Commodity Credit Corporation.6 Yet, the income effect of these loans prob ably occurs several months earlier when the farmers initially borrow the funds. Second, “payment” in cash budget terminology means that the check issued by the Treasury has actually been cleared through the banking system, whereas the income effect probably occurs when the person or firm receiving the check cashes or deposits it. Although the time lag between check issuance and check clearance is relatively short, the magnitude of the fluctuations in outstanding checks in the clearing accounts can be substantial, par ticularly around the end of a fiscal year. Third, no data are published which permit, on a sea sonally adjusted basis, a separation of expenditures under the Government’s lending programs from other expendi tures. The necessity for such a separation stems from the difficulties surrounding the measurement of the fiscal im pact from changes in Government loans. Unlike the recipi ents of outright expenditures, the recipients of loans incur a financial liability to the Government. Moreover, some types of lending programs— such as those of the Federal National Mortgage Association— are so operated as to influence primarily credit conditions rather than expendi tures in the private sector; and some loans made to foreign borrowers may have a smaller direct impact on the Amer ican economy than other types of loans or outright expenditures. Nevertheless, the bulk of Federal lending consists of loans which would not otherwise be available and generates additional spending by the recipients (or, in periods of net repayments to the Government, sub tracts from spending that would otherwise take place). The analysis developed here skirts the issue by the cal culation of two separate measures of fiscal effects— one excluding loans, the other including loans. 6 It should be understood that this “default” is actually one major 5 Expenditures for the Post Office are a case in point. These are way in which the farm price support program is implemented. It is included in both budgets as net of receipts of income from the sales a type of default that, in its implications, does not correspond to of stamps and of other postal services. defaults on private bank loans. 146 MONTHLY REVIEW, JULY 1965 Table n DERIVATION OF FISCAL EFFECTS FROM CHANGES IN FEDERAL EXPENDITURES Seasonally adjusted at annual rates; in billions of dollars C alendar years by half years N ational income accounts expenditures Excess of in te rest accru als over paym ents Excess of deliveries over paym ents (1) (2) (3) 1959: 2.......................... 92,4 0.8 - 0 .8 1960: 1........................... 91.7 0.3 - 0 .6 - 0 .1 Modified cash expenditures Modified cash e xpenditures including loans (4 )+ (6 ) Fiscal effects of modified cash expenditures including loans* (7) (8) (1)—(2) —(3) Fiscal effects of modified cash expenditures* Net Federal lending (4) (5) (6) 92.4 — 0.7 93.1 — 92.0 - 0 .4 3.1 95.1 2.0 2.2 2........................... 94.7 0.1 94.7 2.7 2.6 97.3 1961: 1........................... 100.8 0.3 1.0 99.5 4.8 3.8 103.3 6.0 2........................... 104.3 0.5 1.6 102.2 2.7 5.7 107.9 4.6 1962: 1........................... 109.5 0.7 1.1 107.7 5.5 4.3 112.0 4.1 2.......................... 111.4 0.9 0.8 109.7 2.0 3.2 112.9 0.9 I 1963: 1.......................... 114.6 0.9 0.9 112.8 3.1 3.5 116.3 3.4 2........................... 115.8 0.9 0.8 114.1 1.3 4.6 118.7 2.4 1964: 1.......................... 118.7 0.8 0.8 117.1 3.0 2.6 119.7 1.0 2........................... 119.7 0.8f 1.4t 117.5 0.4 3.4f 120.9 1.2 * Figures shown are period-to-period changes in preceding column, f Estimated by the Federal Reserve Bank of New York. Source: The data through 1963 are from the July 1964 issue of the Survey of Current Business with seasonal adjustments of columns 2, 3, and 6 by the Federal Reserve Bank of New York. The adjustments for the first half of 1964 were derived as the difference between the totals for fiscal 1964 listed in the Budget Document for fiscal 1966 (and other sources) and the totals for the second half of 1963. National income accounts expenditures for 1964 are available in the February issue of the Survey of Current Business. The national income accounts budget also has its short comings as a source of expenditures data in terms of the present concept, most particularly because of the dating of expenditures. To be sure, price support payments to farmers are recorded as of the time the loan is made rather than when it goes into default, and checks are re corded when issued rather than when cleared. On the other hand, a number of expenditures items are listed in the na tional income accounts budget either as of the time of delivery of the goods to the Government (which may post date the cash income effect), or when payments accrue to the private sector (which may precede the cash income effect). The national income accounts data do, however, pro vide a “clean” seasonally adjusted expenditures series (excluding the Government’s lending operations). As a practical matter, therefore, it is simpler to start with the national income accounts data rather than with the cash budget data. What follows, therefore, is a summary of the steps taken in adjusting the published expenditures data in the national income accounts budget to the “modified cash” basis needed for the present analysis. Derivation o f m odified cash expenditures. In col umn 1 of Table II, expenditures in the national income accounts budget are listed by half years at seasonally ad justed annual rates.7 Many of the adjustments of these data that might be made to arrive at the measure needed for the present analysis are so small or so stable from period to period that they may be safely ignored. The two major adjustments that cannot be ignored are shown in columns 2 and 3 of the table.8 The first of these adjustments, shown in column 2, concerns the dating of interest payments. The national income accounts budget lists interest on the Federal debt as an expenditure as interest accrues. The effect on pri vate income, however, occurs when interest is actually paid out and is so listed in the cash budget. In order to 7 Historical data for expenditures in the national income accounts budget are available by quarters and the adjustments needed are available by half years in the various July issues of the Survey of Current Business. Annual data, including the Administration’s pro jections for the coming fiscal year, are published in the Budget Docu ment, the Economic Report of the President, and the February issue of the Survey of Current Business. 8 Among the adjustments that have been ignored are expenditures for the District of Columbia (these are recorded as state and local expenditures in the national income accounts budget), and such adjustments for netting and consolidation as: contributions to Fed eral employee retirement funds by the Government and by Federal employees, contributions to the veterans’ life insurance funds by the Federal Government, and an adjustment for the receipt of interest and for the proceeds of Government sales. FEDERAL RESERVE BANK OF NEW YORK put interest payments in the national income accounts on a cash budget basis, the excess of interest accruals over interest payments, shown in column 2, should be removed from total expenditures. A similar problem occurs with respect to the payment for goods purchased by the Government. The national income accounts budget contains these payments when goods are actually de livered to the Government, but the impact is more likely to occur when cash payments for the goods are made, whether or not they have been delivered at that point. The adjustment which places expenditures on a payments basis is listed in column 3. The two adjustments just described, and the total for loans shown in column 6 of Table II, are part of the reg ular public record, but only in amounts unadjusted for seasonal variation. The seasonally adjusted data shown in the table were developed at this Bank.9 Subtraction of the adjustments in columns 2 and 3 from the data in column 1 yields the “modified cash” version of expenditures listed in column 4 of Table II. Half-yearly changes in these modified cash expenditures are shown in column 5 as the fiscal effects from the expenditures side of the budget excluding the Government’s lending operations. The addition to column 4 of Government loans, shown in column 6, gives a measure of modified cash expenditures including loans. These are shown in column 7, and halfyearly changes in this total, or the fiscal effects including loans, are shown in column 8. What accounting basis? The choice of an ac counting basis by which to measure taxes presents an even thornier problem than in the case of expenditures. The main problem relates to corporate taxes since the use of different possible bases typically results in substantial vari ations in the figures. The cash budget counts tax revenues when they are received by the Government; the national income accounts budget lists some types of taxes when they accrue. In the case of corporate taxes, this difference in timing can lead to widely disparate revenues totals in the two bud gets for the same period because of the considerable lag between the time when corporations accrue taxes and the ta x es. 147 time when these are paid.10 As an example, during early 1964 the effects of the Revenue Act of 1964 could be considered either restrictive or stimulative as regards cor porate taxes, depending upon the basis used for measure ment. On a liabilities basis the law provided for a corporate tax cut during the first half of 1964 of $1.4 billion, but on a cash payments basis the law resulted in a temporary increase in tax payments of $0.6 billion for the period, due to a speedup in the payments schedule (both figures given at seasonally adjusted annual rates). Similarly, the Budget Bureau has estimated that the dif ference between corporate tax accruals and corporate tax payments for fiscal 1966 will amount to $2.9 billion. These differences have, of course, substantive implica tions for a measure of the effect of budgetary changes on the economy as of the time when that impact is ini tially felt. More particularly, accuracy on the tax side requires some knowledge of whether the relevant impact upon corporations occurs as they incur the tax liabilities or as they actually make the tax payments. There is little empirical evidence on this issue. Therefore, the analysis presented here is based on a compromise. The estimates shown are a simple arithmetic average of corporate tax changes on an accrual basis and on a payments basis. No such averaging procedure appears to be necessary in the case of personal income tax changes. There is fairly gen eral agreement that individuals react to their tax pay ments rather than their tax liabilities. The remainder of this Appendix summarizes the esti mate of the initial effects of individual and corporate after-tax incomes stemming from recent tax law changes. In each case, the effect is measured in terms of the change in taxes at the level of income prevailing in the previous period rather than as the simple period-toperiod change in tax receipts. Changes in individual tax rates. Social security taxes and personal income taxes have undergone major changes since 1960. Social security rates were increased three times during the 1960-64 period. The Social Se curity Administration has estimated the amounts of these increases at annual rates of $2.1 billion in 1960, $0.5 billion in 1962, and $2.3 billion in 1963. Each of these 10 Until 1964, large corporations were not required to make any actual tax payments on income earned during a given calendar year 9 The formula (A -j- 2B -f C) 4, in which A represents the until September of that year. Indeed, the largest portion of their previous period, B the current period, and C the succeeding period, tax bill was not paid until the following March and June. (The has been used to obtain a “seasonally adjusted” figure for period B. somewhat different schedule for fiscal-year corporations does not The half-yearly totals are converted to annual rates by multiplying materially affect this point.) In the national income accounts budget, by 2. however, taxes for any period are listed as the liability is accrued. MONTHLY REVIEW, JULY 1965 148 rate changes became effective on January 1 of the year indicated. Thus, the impact of the changes is listed in Table III for the first half of these three years. Although each tax rate change remained permanently in effect, there was no additional curtailment of incomes sub sequent to the initial introduction of the increase, and therefore no tax change is listed in Table III for the suc ceeding half-year period or for later periods. The Revenue Act of 1964, of course, provided for a substantial cut in personal income tax rates. To imple ment the cut, the basic withholding rate was reduced from 18 per cent to 14 per cent, effective in early March of 1964. At the level of personal income prevailing in cal endar 1963, and given the amount of income taxes ac tually withheld at that income level, this reduction in the withholding rate would have provided individuals with an additional $8.9 billion (annual rate) in after-tax in come. Because the effective date of the withholding rate cut occurred in March 1964, or roughly two months after the first half of the year had begun, the amount of the tax cut for that half year is listed in Table III at an an nual rate of only $5.6 billion. In the second half of the year, however, the lower withholding rate covered the entire period. Hence the table lists an additional stimulus for the second half, which reflects the difference between the application of the lower rates to six months as against only about four months. The net effects of the changes in social security and personal income taxes are shown in the last column of Table III CHANGES IN INDIVIDUAL TAXES Seasonally adjusted at annual rates; in billions of dollars Calendar years by half years 1960: 1 ................................ Social security Revenue A ct of 1 9 6 4 + 2 .1 T otal + 2 .1 2 ......................................... 1961: 1 ................................ 2 ......................................... 1962: 1 .............................. + 0 .5 + 0 .5 + 2 .3 + 2 .3 2 .......................................... 19 6 3 : 1 ................................ 2 .......................................... 1964: 1 ............................... 2 .......................................... __ — 5 .6 — 5 .6 - 3 .3 - 3 .3 Note: A minus sign denotes a reduction in taxes, a positive sign an increase in taxes. Source: Estimates released by the United States Treasury Department and the Social Security Administration, or based upon the Treasury’s estimates. Table III. As previously explained, these figures should be adjusted to allow for the fact that some of this after tax income released was saved rather than spent and thus did not have a direct impact upon aggregate output. Therefore, these figures were multiplied by 90 per cent before including them in the final estimate of the total fiscal effect from taxes, shown later on in Table V. (The reversal of signs in Table V reflects the fact that a tax cut is stimulative, while a tax increase is restrictive.) Corporate tax rate changes. Since 1960, there have been several tax changes affecting corporations— the in vestment tax credit, effective in 1962; the liberalization of depreciation allowances, also effective in 1962; and the Revenue Act of 1964, which provided for a two-stage tax cut and the acceleration of corporate tax payments. The dollar value of the tax reduction generated by the investment tax credit of 1962 has been estimated at an annual rate of $1.0 billion, while the liberalization of depreciation allowances brought about a tax reduction of $1.2 billion (both figures based on 1962 income levels).11 These estimates of the change in tax liabilities are shown in the first two columns of Table IV. Because both these tax features became effective in the second half of 1962, the timing of the reduction in cash payments largely coincided with the reduction in tax liabilities (or accru als). These two reduction measures, of course, remain in effect, but once again the logic of the “initial” impact measure requires that these tax changes be shown as affecting only the second half of 1962, which is done in Table IV. Corporate income taxes were also reduced by the Reve nue Act of 1964. Calculation of the effects of this reduc tion is somewhat more complicated than in the case of the earlier tax measures. First, the effective date of the cut in liabilities preceded that in tax payments. Second, the Act also provided for some acceleration of tax pay ments. On the basis of 1963 profit levels, the Treasury has calculated that the value of the over-all reduction in corporate tax liabilities will amount to about $2.5 billion when fully effective in 1965. A little more than half this total, or about $1.4 billion, was estimated as applic able to calendar 1964, effective as of the first half of the year. This number is shown in the third column of Table IV, which is on a liabilities basis. Tax payments, on the other hand, did not begin to reflect the effects of the rate 11 All figures in this section are based on official United States Treasury estimates. 149 FEDERAL RESERVE BANK OF NEW YORK reduction until the second half of 1964. Thus, column 6 of Table IV, which shows the effects of the reduction in rates on a payments basis, lists the $1.4 billion figure for the second half of 1964. The Revenue Act of 1964 also provided that corpora tions make two “advance” income tax payments— in April and in June— on income earned during the same calendar year. These two payments were in addition to the traditional September and December advance pay ments. Between 1964 and 1970, the size of each of these new payments is scheduled to increase from 1 per cent to 25 per cent of the estimated tax liability for the given current year. In the long run, this provision affects only the timing of payments rather than the amount and will result in a closer correspondence of actual tax payments with accrued tax liabilities. But during the transition years, payments in any given half-year period are affected significantly. More specifically, corporate tax payments will tend to be relatively higher in the first half of each calendar year when corporations will make both the nor- Table IV CHANGES IN CORPORATE TAXES Seasonally adjusted at annual rates; in billions of dollars Changes in lia b ilitie s Calendar years by h a lf years Changes in cash paym ents Invest Lib L ib Invest m ent eralized eralized m ent ta x depreci Revenue tax d epreci c re d it a tio n of A ct of atio n cre d it of 1 9 6 2 1962 1964 of 1 9 6 2 of 1 9 6 2 (1 ) (2 ) 1 9 6 0 : 1 ................ (3 ) (4 ) Average of lia b ilitie s and pay m ents Speedup bases Revenue A ct of 1 9 6 4 Rates (5 ) (6 ) — — (7 ) | (8 ) __ ~~ i 2 ................ 1 9 6 1 : 1 ................ — 2 ................ — — — 1 9 6 2 : 1 ................. 2 ................ - 1 .0 1 9 6 3 : 1 ................. z - 1 .2 — — — — — — 1.0 - 1 .2 — — - 2 .2 — — — — — — — — + 0 .6 - 0 .4 - 0 .6 - 1 .0 ............ 1 9 6 4 : 1................ 2 ................ 1 — - 1 .4 — — — - 1 .4 Note: A minus sign denotes a reduction in taxes, a positive sign an increase in tax payments. Source: Estimates released by the United States Treasury Department or based upon the Treasury’s estimates. Table V DERIVATION OF FISCAL EFFECTS FROM CHANGES IN FEDERAL TAXES Seasonally adjusted at annual rates; in billions of dollars Individual ta x changes Corporate tax changes Fiscal effects of tax changes ( 1) (2 ) (3 ) - 1 .9 — — 1.9 1 .......................................... — — — Calendar years by h alf years 1960: 1 .......................................... n 1961: 1962: 1963: 1964: 1 .......................................... - 0 .5 — 2 .......................................... — + 2 .0 + 2 .0 1 .......................................... - 2 .1 — - 2 .1 1 .......................................... 4 - 5 .0 + 0 .4 + 5 .4 2 .......................................... + 3 .0 + 0 .9 + 3 .9 - 0 .5 Sources: Tables III and IV, with actual amounts of tax changes listed in those tables multiplied by 90 per cent to reflect the assumed initial effects of the changes in taxes on spending (and with signs reversed to reflect the inverse relationship of tax changes from the budgetary point of view as against their fiscal effects). mal final payments on profits earned in the preceding year and two additional payments on estimated profits for the current year. Thus, in column 7 of Table IV, an increase in tax payments of $0.6 billion is shown as occurring in the first half of 1964— the result of the speedup— fol lowed by a reduction in payments of $0.6 billion in the second half (to reflect the fact that higher payments in the first half do not also remain in force for the second half of the year). The last column of Table IV shows the “compromise” effect of the changes in corporate taxes over the 1960-64 period (calculated simply by taking the arithmetic average of the effects on a liabilities basis and on a seasonally ad justed cash basis). Following the same procedure that was applied to the effects of changes in individual tax rates, these compromise figures are multiplied by 90 per cent, the signs are reversed, and the results shown in col umn 2 of Table V. The last column in Table V, which is reproduced in Table I and is also plotted in the chart, shows the total initial effects of the changes that have oc curred in the individual and corporate tax laws over the 1960-64 period. MONTHLY REVIEW, JULY 1965 Publications of the Federal R eserve Bank of N ew Y ork The following is a selected list of publications available free (except where a charge is indicated) from the Public Information Department, Federal Reserve Bank of New York, New York, N. Y. 10045. Copies of charge publications are available at half price to educational institutions. 1. F E D E R A L RESERVE O P E R A T IO N S I N THE M ONEY AND G O V E R N M E N T S E C U R IT IE S M A R K E T S (1956) by Robert V. Roosa. A 105-page booklet describing how Federal Reserve operations are con ducted through the Trading Desk in execution of the directions of the Federal Open Market Committee. Discusses the interrelation of short-term technical and long-range policy factors in day-to-day operations. Has sections on the role of the national money market, its instruments and institutions, trading procedures in the Government securities market, what the Trading Desk does, the use of projections and the “feel” of the market, and operating liaison with the Federal Open Market Committee. 2. t h e m o n e y s i d e o f “ t h e s t r e e t ” (1959) by Carl H. Madden. A 104-page booklet giving a layman’s account of the workings of the New York money market and seeking to convey an under standing of the functions and usefulness of the short-term wholesale money market and of its role in the operations of the Federal Reserve. 70 cents per copy. 3. d e p o s i t v e l o c i t y a n d i t s s i g n i f i c a n c e (1959) by George Garvy. An 88-page booklet dis cussing the behavior of deposit velocity, over the business cycle and over long periods, with emphasis on the institutional and structural forces determining its behavior. 60 cents per copy. 4. M O N E T A R Y P O L IC Y U N D E R T H E I N T E R N A T I O N A L GOLD S T A N D A R D , 1880-1914 (1959) by Arthur I. Bloomfield. A 62-page booklet analyzing, in the light of current monetary and banking theory, the performance and policies of central banks within the framework of the pre-1914 gold standard. 50 cents per copy. 5. o p e n m a r k e t o p e r a t i o n s (1963) by Paul Meek. A 43-page booklet describing for the inter ested layman or undergraduate student how open market operations in United States Government securities are used to cope with monetary stresses and promote a healthy economy. 6. e s s a y s i n m o n e y a n d c r e d i t (1964). A 76-page booklet containing eleven essays on tech nical problems of monetary policy, Treasury debt and cash operations, and the Federal Reserve’s daily work. It also contains several analyses of money and securities market instruments and of banking prob lems and policies. 40 cents per copy. 7. t r e a s u r y a n d f e d e r a l r e s e r v e f o r e i g n e x c h a n g e o p e r a t i o n s : m a r c h 1961 - a u g u s t 1964 (1964) by Charles A. Coombs. A 47-page consolidated reprint of five reports on the title subject that appeared earlier in the Federal Reserve Bulletin and the Monthly Review. 50 cents per copy. 8. t h e n e w y o r k f o r e i g n e x c h a n g e m a r k e t (1965) by Alan R. Holmes and Francis H. Schott. A 64-page booklet about the New York market for foreign exchange, and the large exchange opera tions in that market. 50 cents per copy. Subscriptions to the m o n t h l y r e v i e w are available to the public without charge. Additional copies of any issue may be obtained from the Public Information Department, Federal Reserve Bank of New York, New York, N. Y. 10045.
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