View original document

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

FULL EMPLOYMENT AND BALANCED
GROWTH ACT OF 1978

HEARINGS
BEFORE THE

COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
N IN E T Y -F IF T H CONGRESS
SECOND SESSION
ON

Amendment No. 1703
TO

S. 50
TO E STAB LISH AN D TRA N SLA TE INTO PRA CTICA L RE ALITY
T H E R IG H T OF ALL AD U LT AM ERICANS ABLE, W ILLIN G, AND
SEEKING TO W O R K TO FU LL O PPORTUNITY FOR USEFUL
P A ID EM PLOYM ENT AT F A IR RA TES OF COM PENSATION; TO
COMBINE FULL EM PLOYM ENT, PRODUCTION, AND PURCHAS­
ING PO W ER GOALS W IT H PR O PE R ATTENTIO N TO BALANCED
G RO W TH AND NATION AL P R IO R IT IE S ; TO MANDATE SUCH
N ATIONAL ECONOMIC PO LICIES AND PROGRAM S AS ARE NEC­
E SSARY TO ACH IEVE FU LL EMPLOYMENT, PRODUCTION, AND
PURCHASING PO W ER, TO R E STR A IN IN F L A T IO N ; AND TO
PRO VID E E X P L IC IT M ACH IN ERY FO R TH E DEVELOPMENT
AND IM PLEM ENTATION OF SUCH ECONOMIC POLICIES AND
PROGRAM S, AND FO R O TH ER PURPOSES

M AY 8, 9, AND 10, 1978

Printed fo r the use o f the Committee on Banking, Housing,
and Urban Affairs

U.S. GOVERNMENT PRINTING OFFICE
30-464 O




WASHINGTON : 1978

COM MITTEE ON BANKING, HOUSING, AND URBAN A F F A IR S
W ILLIAM PROXMIREi, Wisconsin, Chairman
JOHN SPARKMAN, Alabama
HARRISON A. WILLIAMS, J r ., New Jersey
THOMAS J. McINTYRE, New Hampshire
ALAN CRANSTON, California
ADLAI E. STEVENSON, Illinois
ROBERT MORGAN, North Carolina
DONALD W. RIEGLE, J r ., Michigan
PAUL S. SARBANES, Maryland
K

A.

enneth

J e r e m ia h S. B
aul




Staff Director
Minority Staff Director
R o b e r t s , Chief Economist
Minority Professional Staff Member
M

cL ean ,

uckley,

Steven M .
P

EDWARD W. BROOKE, Massachusetts
JOHN TOWER, Texas
JAKE GARN, Utah
H. JOHN HEINZ III, Pennsylvania
RICHARD G. LUGAR, Indiana
HARRISON SCHMITT, New Mexico

F reedenberg,

(II)

CONTENTS
Page

Amendment No. 1703 to S.50_____________________________________________
L ist

of

277

W itnesses

MONDAY, MAY 8
Joseph L. Fisher, Representative in Congress from the State of Virginia. _
Andrew F. Brimmer, president, Brimmer & Co., In c ______________________
Jack Carlson, chief economist, Chamber of Commerce of the United
States___________________________________________________________________
Leon H. Keyserling________________________________________________________
R obert Nathan, president, R obert R . Nathan Associates, In c ____________

4
13
41
66
97

TUESDAY, MAY 9
M ike Gravel, United States Senator from the State of Alaska
F. R a y Marshall, Secretary, Department of Labor
Charles L. Schultze, Chairman, President’s Council of Econom ic AdvisorsJake Garn, United States Senator from the State of U tah
J. Charles Partee, Member, Board of Governors, Federal Reserve System.

169
180
184
197
211

WEDNESDAY MAY 10
Lewis W. Foy, chairman, National Planning and Em ploym ent Task Force,
the Business Roundtable, accompanied by Richard Schubert, vice presi­
dent, public affairs, Bethlehem Steel Corp.; and M alcolm Lovell,
president, R ubber Manufacturers Association__________________________
Hugh P. Donaghue, vice president and assistant to the chief executive
officer, Control Data Corp.; accompanied by Sherman R . Abrahamson,
special assistant to the chief executive officer___________________________
George Hagedorn, vice president and chief economist, National Associa­
tion of M anufacturers___________________________________________________
Arnold A. Saltzman, chairman of the board, Seagrave C orp______________
A dditional Statem ents

and




237
241
253

D ata

American Paper Institute, I n c .:
Letter from Norma Pace, senior vice president and chief econom ist. __
Statement prepared for the record____________________________________
Associated Builders and Contractors, Inc., statement prepared for the
record____________________________________________________________________
Brimmer, Andrew F., president, Brimmer and Company, Inc., economic
and financial consultants:
Excerpt from testim dny before Senate Banking Committee, hearing
on M ay 4, 1976_____________________________________________________
Rem arks before the General Session on Structural Unemployment,
White House Conference on Balanced National Growth and
Econom ic Development, January 30, 1978_________________________
Federal Reserve System, letter from Governor Partee with suggestions
for possible means to stimulate investment in productive plant and
equipm ent_______________________________________________________________
Humphrey, Muriel, U.S. Senator from the State of Minnesota, letter and
statement received for the record_______________________________________
Kendrick, Dr. John W., reprint of paper titled “ Definitional and M ethod­
ological Problems W ith K ey Concepts Incorporated in the Full Em ploy­
ment and Balanced G row th A ct of 1978” _______________________________

(in)

229

318
322
330

36
107
220
8
233

IV

Labor Department, supplemental statement on fiscal substitution in PSE
program s________________________________________________________________
M achinery and Allied Products Institute:
Comments on the new administration-endorsed Humphrey-Hawkins
com prom ise_________________________________________________________
Letter from Charles W. Stewart, president____________________________
List of studies dealing with capital formation, “ real p r o fits /’ and the
im pact of inflation and related accounting and tax issues___________
Reprints of papers b y George Terborgh, econom ic consultant:
Changing Theories of fiscal P olicy -----------------------------------------------Corporate Earning Power in the Seventies: A Disaster_____ ____
Inflation and Profits______________________________________________
M ohay, Kurt, research analyst, National Association of Manufacturers,
paper titled “ The Conflict Between the Humphrey-Hawkins Full Em ­
ployment Goal and the Noninflationary Rate of U nem ploym ent’ ’_____

Page
200
340
335
361
375
363
352
248

C H A RTS AN D TABLES
Administration proposal, personal tax cuts in 1979 excluding social secuity
(FICA ) tax changes_____________________________________________________
Administration proposal, personal tax cuts in 1979 including social security
(FICA ) tax increases____________________________________________________
Adjusted and unadjusted after-tax profits from the domestic operations of
nonfinancial corporations, 1947-76______________________________________
Adjusted domestic after-tax profits of nonfinancial corporations as a per­
centage of their adjusted domestic net w orth____________________________
Adjusted domestic after-tax profits of nonfinancial corporations as a per­
centage of their domestic gross products________________________________
Adjusted profits and retained earnings of nonfinancial corporations in 1972
dollars___________________________________________________________________
Adjusted retained earnings of nonfinancial corporations___________________
Adjustment of reported profits of nonfinancial corporations_______________
Allocation of tax cuts, 1962-65: Investment and consumption purposes____
Black and working age population in selected central cities, 1960 and 1970- _
Changes in black and working age population as percentage of total pop­
ulation in selected central cities, 1960-70_______________________________
Changes in central city’ s share of population, manufacturing employment,
and m oney income in selected metropolitan areas, 1960-73_____________
Changes in inflation because of the Carter administration’s proposals and
congressional enactment of legislation during 1977_______________________
Changes in the civilian labor force, employm ent and unem ployment by
color, sex, and age, M arch 1975 to December 1977______________________
Changing work hours of married men and w om en_________________________
Comparative growth rates, 1961-77________________________________________
Comparison of the current double-declining balance depreciation of non­
financial corporations with the depreciation allowed them for income
tax purposes_____________________________________________________________
Cost of departures from full econom y, 1953-77_____________________________
Earnings coverage of net interest payments, nonfinancial corporations_____
Economic im pact of the Carter administration’s proposals and congressional
enactment of legislation during 1977____________________________________
Economic im pact of Carter administration’s tax proposals, fourth quarter,
1977 through fourth quarter, 1980_______________________________________
Economic im pact of Humphrey-Hawkins employm ent objectives b y 1983__
Effective tax rates on the pre-tax profits of nonfinancial corporations as
reported and as adjusted________________________________________________
Em ployed and unem ployed as a proportion of total population____________
Em ployment during econom ic recoveries__________________________________
Em ploym ent of United States and other industrial countries during
economic recoveries______________________________________________________
Estimated division— Proposed tax cut between cuts for investment pur­
poses and cuts for consumption purposes_______________________________
Estimates of fiscal substitution in PSE program s________________________ _




90
91
366
368
368
358
357
356
92
147
149
146
56
136
48
85
355
80
372
53
135
51
359
46
45
45
93
204

V
Excess interest costs in the Federal budget, 1965-77 contrasted with
other costs for selected budget program s_______________________________
G N P deficiencies and budget deficits______________________________________
Growth of output and unemployment, 1961-69 and 1969-77---------------------H ypothetical unem ployment rates for various demographic groups in 1983.
Im pact of econom ic growth upon productivity grow th------------------------------Increases in average interest rates and excess interest costs due to these
increases, 1952-1977______________________________ ______________________
Inflation and unem ployment 1948-1977__________________ _________________
Inventory valuation adjustment for nonfinancial cQrporations------------------M anufacturing em ploym ent in selected m etropolitan areas: Central cities
vs. suburbs, 1963 and 1972______________________________________________
Median hourly wages in municipal governm ent___________________________
Percentage tax cut and percentage increase in income after tax, various
income groups, 1963-1973_______________________________________________
Personal tax cuts, 1945-1963______________________________________________
Population and m oney incom e in selected m etropolitan areas: Central
cities vs. suburbs, 1960 and 1973________________________________________
Real business profits during current and 1960 cycle_______________________
Real econom ic growth rates, em ploym ent and unemployment, inflation,
and Federal budget conditions, during various periods, 1947-1977______
Relative trends in econom ic growth, unem ployment and prices, 1952-1977.
Share of families in total fam ily incom e b y quintiles, 1947, 1953, 1960, and
1976_____________________________________________________________________
Share of unattached individuals in total income of unattached individuals,
b y quintiles, 1947, 1953, 1960, and 1976________________________________
Summary of econom ic performance in tw o eras___________________________
Summary of Full Em ploym ent and Balanced Growth A ct of 1978 relating
to Federal Reserve System (section 108— M onetary P olicy )____________
Taxes paid as percent of income, U.S. 1968_______________________________
The “ roller-coaster” perform ance: Econom ic growth rates, 1922-1929,
1941-1945, and 1947-1977______________________________________________
Unem ployed rates b y demographic groups________________________________
Unem ploym ent at year-end_______________________________________________
Unem ploym ent during current and 1960 cycle____________________________
Unemploym ent, percent rates and distribution, 1953-1977_______________
Unemploym ent rates for various demographic groups_____________________




Page
95
81
134
184
84
94
185
355
144
60
89
88
140
160
82
83
86
86
247
18
87
78
185
325
160
79
183




FULL EMPLOYMENT AND BALANCED GROWTH
ACT OF 1978

MONDAY, M AY 8, 1978
U nited S tates S enate ,
C omm ittee on B a n k in g , H ousing and U rban A ffairs ,

,

Washington D.C.
The committee met at 2 :40 p.m. in room 5302, Dirksen Senate O f­
fice Building, Senator William Proxmire (chairman of the committee)
presiding.
Present: Senators Proxmire, Sparkman, Sarbanes, Brooke, and
Schmitt.
OPENING STATEMENT OF CHAIRMAN PBOXMIRE
The C h a ir m a n . The committee will come to order.
Today we begin 3 days of hearings on the Humphrey-Hawkins
bill, which is now known as the Full Employment and Balanced
Growth Act of 1978. There are several differing versions of this
legislation, but all of them have as their main element the estab­
lishment of economic goals to attain both full employment and bal­
anced growth and a mechanism for the formulation of economic
policies that work toward the achievement of those goals.
The Senate Human Eesources Committee has just recently com­
pleted their work on this legislation. The Banking Committee intends
to move ahead with consideration of the legislation as soon as
possible.
The Humphrey-Hawkins bill makes £he reduction of unemploy­
ment the single most important objective of national economic policy.
It sets a target rate for unemployment of 4 percent for the total
civilian labor force by 1983, with the associated goal of 3 percent
unemployment among adults. The importance of achieving these
goals certainly cannot be overstated. We have 6 percent unemploy­
ment today, a vast improvement over a year ago, but still far too
high. We have almost 6 million people still seeking work.
W e have had 32 years of experience with the Employment Act of
1946, which had “maximum employment” as one of its objectives.
While we can point to the many successes of economic policy under
the Employment Act, it is time to be a little more specific in the state­
ment of economic goals so that policy can be made in a more consistent
and coordinated manner.
The Employment Act of 1946 also has as one of its economic ob­
jectives “maximum purchasing power.” This goal needs to be clarified




( 1)

2
in the Humphrey-Hawkins bill. I have submitted an amendment to
the Humphrey-Hawkins bill that makes it clear that the Congress
believes it is desirable, necessary, and feasible to achieve full employ­
ment and price stability together. The amendment establishes an
interim goal for inflation of 3 percent or less to go along with the
interim numerical goals the bill already contains for unemployment.
Both the numerical goals for unemployment are for the fifth year
after enactment of the legislation.
Further, because of the possibility of changing economic condi­
tions, the President could alter these numerical goals beginning
with the third economic report following approval of the legislation.
The 3 percent inflation goal for 5 years from now is desirable and
has a reasonable chance to be achieved. Some will argue that the
3 percent goal is too high. While I agree that 3 percent inflation is
too high, higher than anyone would like, I do not think we would
have a reasonable chance of doing better than that within 5 years.
It is crucial that established goals have a reasonable chance of being
achieved if they are useful.
Others will argue, of course, that we cannot get the inflation rate
down to 3 percent within 5 years. In fact, they may argue that we
cannot get inflation down to that low level ever again.
I reject that. It is very easy, perhaps far too easy, to close our
eyes to inflation and to avoid the hard problems. It is too easy for
the Congress to pass legislation authorizing ever increasing appro­
priations and to create new programs that require new expenditures.
That cannot be done continually without causing some inflation—
our resources are limited.
Unfortunately, it is very difficult to get the Congress to reduce
expenditures. It is clear, however, that some discipline needs to be
imposed.
We must also realize that in the past, tight monetary policies by
the Federal Reserve have been the main continuously used policy
tool aimed at reducing inflation.
However, tight money too often results in excessively slow eco­
nomic growth and loss of jobs because monetary policy alone cannot
stop an inflationary spirai without stopping the economy. I would
hope that neither the Congress nor the Federal Reserve Board want
to see that happen, and that the established inflation goal will lead
to the development of realistic anti-inflation economic policies.
The role of the Federal Reserve in the whole policy process is
critical. The bill requires the Federal Reserve to comment on the
President’s numerical economic goals and to indicate how their mone­
tary policies relate to them. This is very important.
However, the Federal Reserve has to explain its policies in a
meaningful way; they have to relate them to the economy. The an­
nouncement of monetary aggregate growth rate ranges is far from
sufficient to understand the policy intent of Federal Reserve actions
or the strategies the Federal Reserve has in mind in different eco­
nomic settings. Unless economic policies by the Federal Reserve and
the rest of the government can be better understood and coordinated,
the objectives of the Humphrey-Hawkins bill will be very hard to
attain.




3
OPENING STATEMENT OF SENATOR SCHMITT
Senator S c h m it t . I have a statement to include in the record of
the hearing if permissible.
I would just like to remind the committee and the witnesses, as to
what I think is fairly factual, and, that is, the basic causes of infla­
tion. Although there is argument about the relative proportions of
these causes, I think, it is generally agreed that they all contribute.
First, is the growth of money supply, which is greater than the
rate of growth of the Gross National Product.
I think, in most economists’ minds, this is the principal cause of
inflation today. Then there is the size of the Federal deficit, which,
of course, directly controls the amount of Federal borrowing at the
marketplace. This in turn affects the interest rates, which, in turn,
are related to the money supply. Only if interest rates were affected,
then that would have an inflationary component.
Then there is the basic decrease in productivity of both labor,
management and industry as a whole that we have seen over the last
decade or so, and there are numerous causes for that, not the least
of which is excessive taxation of the productivity sector of our econ­
omy. By productivity sector, I mean workers and business alike,
and then, there is the present situation, hopefully temporary, but
with our present policies, maybe not, which is cartel pricing of en­
ergy, brought on by our unfortunate dependence on imports of
petroleum from foreign sources.
And then, finally excessive regulation, regulation in excess of what
is necessary to provide the society with the appropriate standard
quality of life.
In the case of the growth in money supply, I agree with the chair­
man. I think there is a great deal we can do. I think that over a
5-year period, we probably could bring our money supply rate of
growth into rough coincidence with the rate of growth of the gross
national product. Chairman Burns has talked about that.
I think Chairman Miller roughly believes that now.
A t any rate, I think an attempt to decrease the rate of growth of
money supply over an average of a year, by about a half percent a
year, could provide a steady decrease in the inflation rate.
We have to realize there is an 18 to 24 months lag in the effect of
the money supply on the inflation rate, so we can’t become too im­
patient as we try to tackle that particular problem.
I think the chairman could also agree that the size of the Federal
deficit could be decreased. I personally believe we could have
chopped $10 billion out of the Federal deficit this year, instead of
what appears to be a $5 billion cut, at least according to the first
budget resolution.
Taxes, I think we also can decrease. I think it is a mistake to
believe that a one-shot, 1-year tax cut is going to have a great effect.
I think it’s got to be a permanent tax cut so that people and business
can judge the future expenditures that they will make only on the
basis of the money available to spend.
The only answer to breaking the back of the OPEC cartel, which
is controlling our price of energy right now is to have production,
domestic production, and increased efficiency on the domestic level




4
that will, in fact, create our own supply, rather than being dependent
on them.
Finally, the only answer to excessive regulation is that increased
congressional responsibility and reduction of oversight has to occur.
We have got to begin to realize very rapidly that there is too much
regulation and we are going to have to, not only avoid creating new
T
regulation, but start to cut back on what we have already created.
I look forward, Mr. Chairman, to the comments of our witnesses
today and for the remainder of these hearings and I hope to be able
to participate in them in entirety.
Thank you very much.
We are pleased to have as our first witness, Representative Joseph
Fisher from Virginia, who is also a highly regarded economist, with
a fine record.
The C h a ir m a n . I understand Congressman Fisher is likely to have
votes in the House and I think maybe out of courtesy to Congress­
man Fisher, if the other panelists would permit we would like to go
ahead with his testimony, then if we have questions for him, to pro­
ceed with that and then dismiss him so he can get back.
STATEMENT OF JOSEPH L. FISHER, REPRESENTATIVE IN CONGRESS
FROM THE STATE OF VIRGINIA
Mr. F isher . Thank you very much, Mr. Chairman.
I appreciate this opportunity and I have prepared something per­
haps you can put in the record and I will just speak briefly from it.
The C h a ir m a n . Y ou have a very short statement so we welcome
that.
Mr. F isher . Mr. Chairman, I may be the only economist, only
living economist who has worked for Leon Keyserling and Arthur
Burns.
Senator B rooke. And survived.
Mr. F isher . And survived. I think a friend of each.
At any rate I have a few comments to make on the matter before
you.
First, the bill that passed the House in March by a large margin,
really, was a far cry from the original Humphrey-Hawkins bill of
T
more than a year ago, and a far cry from what many persons around
the country still think it is.
Essentially it is a statement of intention to reduce the unemploy­
ment rate to 4 percent and so on over a period of several years by
advancing a coordinated set of policies, programs.
There is nothing binding or mandatory in the bill. No actions
would automatically take place on failure of the unemployment rate
to reach a goal.
Instead, a process will be set in motion. The bill sets forth quite
a number of purposes, as passed by the House. Targets for employ­
ment as well as unemployment, For real income, for productivity,
then there were numerous other targets or goals set forth in
amendments.
In the end, the bill became a whole collection of worthy objectives,
including special attention to veterans, handicapped, capital forma­




5
tion, 100-percent price parity in agriculture, national defense, anti­
inflation matters, budget balancing emphasis and so on. A veritable
catalog of good intentions.
But even with all this extra baggage, the central emphasis and
purpose remains: to establish goals and a program to cut unemploy­
ment. And because the central emphasis remained, I was pleased to
vote for the bill.
I would have preferred a much simpler, shorter, more direct bill
than finally passed in the House.
And two essentials of a good bill in my judgment are more empha­
sis on jobs and reducing unemployment with coordinated programs
to move the national economy in this direction; and second, the
addition of reducing inflation as a major purpose of the bill. Not
lost among 8 or 10 other objectives.
I would have also preferred to eliminate all numerical statements
of goals, both for unemployment and inflation. Not to mention the
10t)-percent parity for farm prices. Once it seemed the 4-percent un­
employment rate was going to be retained in the bill, I supported a
3-percent inflation rate goal as well, because I think these two ought
to be retained in some correlative position of importance. The reason
I don’t think the numerical goals mean all that much, are these:
suppose, for example, that there is enacted a 4-percent unemploy­
ment rate goal. In that case, one kind of President and Congress,
let us say, very much on the conservative side, would probably rec­
ommend tax cuts and program cuts in an honest belief that that
would best achieve the 4-percent goal. Perhaps, the opposite kind of
President and Congress would recommend, well, let’s say, tax cuts
and program increases by way of moving toward the 4 percent.
In short, any particular President could recommend from a wide
range of taxes and programs what he thought would achieve the
objective. Any particular Congress would have equally wide range
of choices of measures to consider. So, I don’t think the quantities
make that all much difference.
It is the interpretation of them that would count. In the final 2
or 3 minutes I would like to indicate how I think the anti-inflation
component of, if you like, a revision of— an addition to the Employ­
ment Act of 1946, might be worked out.
Because I think this is the language, the weakness, the shortcoming
of the bill that we sent you from the other body.
I am not entirely sure whether it ought to be added into this bill,
but I think it is important, and if not done in this bill, ought to be
done separately.
Here are the three things that I would propose by way of a build­
ing up of the anti-inflation side of the picture. First, I would ad­
T
vocate establishing anti-inflationary wage and price guidelines so
that compliance efforts can be pursued with reference to something
we know about.
The jawboning and arm twisting that has been set in motion is
good, so far as it can go, but I think there are severe limitations on
how far it can go.
Therefore, I would urge taking this additional step even though
at the moment it is not all that popular.




6
Second, I propose developing an effective process for achieving
compliance with guidelines. This process could involve perhaps a
borrowing from the way we handle labor disputes. A very clear
statement that guidelines have been exceeded or threatened to be
exceeded, development of objective factfinding, a persuasion, bargain­
ing, mediation if agreed to, arbitration, all set out in a process that
would be understood ahead.
Then, third, I would propose, and this is something like the
Humphrey-Hawkins bill, I would propose by going forward a co­
ordinated set of measures for achieving the inflation reduction goals.
These would include fiscal, monetary, regulatory, and other measures.
I have spelled this approach out some in an attachment which I
have submitted to you, and I would like to go more into each one,
but unfortunately, the bell has rung. What I would have said would
have been along the line of how to set the guidelines, and I have
indicated in a very general form, an approach to this, and similarly,
more about the process by which Government and labor management
would engage in order to hold to the guidelines.
I hate to do this, Mr. Chairman, but could I be excused to go vote ?
The C h a ir m a n . Y ou certainly can be. We certainly appreciate it.
Thank you very much.
Senator Brooke has an opening statement.
Senator B rooke . Thank you, Mr. Chairman.
I ask unanimous consent that my statement appear at the beginning
of the hearing.
The C h a ir m a n . Without objection.
OPENING STATEMENT OF SENATOR BROOKE
Senator B rooke. Mr. Chairman, I am pleased that we are continu­
ing our hearings on the Humphrey-Hawkins Full Employment Act
of 1978. Indeed, the unemployment statistics dictate we in the Senate
give this bill our full support. Our support will indicate we will
not accept an unemployment rate which hovers around 6 percent.
When translated into human terms, those statistics represent ap­
proximately 6 million Americans who are ready, able, and willing
to work. But for circumstances beyond their control, they have been un­
able to do so. The dislocation, degradation, anxiety, and the great waste
of human resources that account for the high unemployment rate is
tragic. We must not be deceived by Labor Department statistics
which tell us in absolute numerical terms, more Americans are work­
ing today than ever before.
As we all know, the current technique of gathering unemployment
statistics substantially understates the magnitude of the problem by
failing to take account of those who have given up the search for
meaningful employment or have accepted part-time positions. A real
assessment of the problem would include those categories of un­
employed and underemployed, and also those individuals who are
working in menial jobs which do not fully utilize their skills or
abilities.
Therefore, it is incumbent upon us in the Congress to initiate
measures that will commit our Nation to the solution of this pervasive
problem.




7
Humphrey-Hawkins is such a measure. It is a simple, yet mean­
ingful step toward full employment, and coordinated economic
growth. It is not a public works bill. Indeed, the emphasis of this
bill is to promote the expansion of private sector jobs. This is an
approach which I have consistently advocated.
For the permanent jobs, the ones that carry with them promise
of advancement, promotion, and personal fulfillment do not come
down from Washington. Rather, they are in the private sector. By
adopting this approach, Humphrey-Hawkins may actually reduce
the burden placed on federally funded programs. But at the same
time, it will permit the Federal Government to adopt policies which
will provide opportunities, for poor and disadvantaged persons who
have previously been ignored.
For the first time they will have opportunity for meaningful,
gainful employment. Certainly this will have a salutary effect on
both the economy and our Nation.
However, this bill also recognizes the principle that when the
private sector is unable to cope, the Government should be the em­
ployer of last resort. In its present form, the bill resorts to the
remedy of public employment only after measures to stimulate pri­
vate sector growth have been exhausted.
We expect and believe massive public employment programs will
be unnecessary, and I believe the currently underutilized private
sector has the potential to generate sufficient jobs to absorb great
numbers from the unemployment rolls.
The key is to stimulate growth, and in order to stimulate such
growth, the bill mandates coordinated economic policy.
This is an initiative that is long overdue. A ll too often the
various segments of our government charged with economic policy
operates as separate entities rather than as a cohesive unit. This ap­
proach produces a multiplicity of economic formulas which results
all too often in fiscal and monetary policies at odds with each other.
Therefore, the Humphrey-Hawkins bill directs the Federal Gov­
ernment, including the President, Federal Reserve Board, and Con­
gress to design and coordinate short- and long-term strategies to
promote full employment and balanced growth.
Humphrey-Hawkins is not a revolutionary bill. Rather, it is a
sensible and well-planned approach to solving one of the Nation’s
most debilitating problems. I would hope, at the completion of these
hearings, my colleagues will join in the support of this important
legislation.
I thank you, Mr. Chairman, and I look forward to the testimony
of this very distinguished panel.
The C h a ir m a n . N ow what we are going to do is to, although we
have four very distinguished panelists, any one of whom we could
listen to and learn a great deal from, in view of the fact that we have
four, if you gentlemen don’t object too much, we will run along here.
The first 9 minutes will be green, the next 1 will be yellow, and
the next will be please stop.
Our first panelist— we will do the same thing, running with the
Senators when they are asking questions. But before we begin let
us insert in the record at this point a letter and statement from
Senator Muriel Humphrey.




[The letter and statement follow:]
U n it e d S t a t e s S e n a t e ,
C o m m it t e e on G o v e r n m e n t A f f a ir s ,

W ashington, D.C., May 12, 1978.
Hon. W i l l i a m P r o x m ir e ,
Chairman Committee on Banking, Housing and Urban Affairs, United States
Senate, Washington, B.C.
Dear M r . C h a i r m a n : I appreciate this opportunity to present my views on
the Full Employment and Balanced Growth Act of 1978. The attached testimony
explains why I believe this proposal is of great importance to our nation and
to our citizens.
I have also attempted to explain my reasons for opposing the addition o f a
specific numerical inflation goal to the bill itself. I f my testimony appears long,
it is because I feel a heavy responsibility, as the principal sponsor o f this
measure, to clearly and fully explain my reasons fo r opposing such an
amendment.
I want you to know that I am very grateful for the priority you have
assigned to consideration of the Humphrey-Hawkins Bill in your Committee.
I understand the many important proposals with which you must deal. But,
I am convinced that the long-term impact of this measure on our economy and
on the quality of national economic decisions w ill fu lly ju stify the timely
attention you have given to this bill.
As you know, passing the bill is my first priority in the Senate, as it was
Hubert’s. I know that he would be as personally appreciative, as I am for your
prompt action and support.
Sincerely,

,

M
T e s t im o n y

of

S e n a t o r M u r ie l H

u r ie l

H

um phrey.

um phrey

These hearings mark the final phase o f Congressional Committee consideration
of the Full Employment and Balanced Growth Act o f 1978, the so-called
Humphrey-Hawkins Bill. After several years of study, debate, modification and
Congressional consideration, I believe that Humphrey-Hawkins now is ready for
final Congressional approval. The tireless work of Gus Hawkins, Hubert
Humphrey, and many, many others in Congress, the Carter Administration, and
in the public have produced legislation that is urgently needed. Moreover, it will
substantially improve our nation’s ability to maintain a growing economy with
high levels of employment and reasonably stable prices.
After extensive hearings and much debate the House o f Representatives
passed the Full Employment and Balanced Growth Act o f 1978 on March 16,
by a vote o f 257 to 152. On May 3, the Senate Human Resources Committee
approved this legislation by a vote o f 13-2. In the Senate there is growing
bi-partisan support for passage o f this important measure. When I reintroduced
the Humphrey-Hawkins bill on February 23, 1978, it was co-sponsored by 26 of
our Senate colleagues, including our distinguished M ajority Leader, Senator
Robert Byrd. This legislation also has been fully endorsed by President Carter
who has assigned priority status to its passage this year. It has been strongly
supported by a broad coalition of church, farm, labor, women’s, civil rights,
community and small business groups representing many millions o f Americans.
I believe that this support demonstrates the strong feeling in the country that
this legislation is needed.
The Humphrey-Hawkins Full Employment Bill amends the Employment Act
of 1946. It makes the commitment to high levels of production and employment
contained in that measure more specific. It builds on the experience o f the last
30 years to articulate a new strategy for achieving full employment and provides
the policies and procedures needed for its achievement.
It also recognizes that inflation is a m ajor national economic problem and
assigns high priority, in law, for the first time, to the achievement of reasonable
price stability. The Employment Act of 1946 was mute on the question o f
inflation. The authors and supporters of Humphrey-Hawkins are acutely aware
of the dangers o f inflation to the well being o f all our people. And, while the
major emphasis o f this legislation is on reaching full employment and the
strategies for doing so, this legislation reflects a firm commitment to reaching
our employment goals in ways that do not contribute to increased inflation.
I will discuss the anti-inflation provisions o f the bill later in my testimony.




9
In my opinion, and that o f many others, the Full Employment and Balanced
Growth Act o f 1978 must be ranked among the most important legislative
proposals now before Congress. I believe it should occupy this position because
it makes the goal of achieving and sustaining fu ll employment, while holding
inflation to reasonable levels, the permanent centerpiece of national economic
policy.
Furthermore, it provides a m ajor improvement in the way in which economic
policy decisions are made. It requires that economic policy be designed to
achieve specific, flexible, short and long-term numerical goals fo r economic
performance. It also establishes the procedures our Government will use to
carry out its efforts to meet these goals in a consistent, comprehensive, long­
term and focused manner.
In effect, the bill is an absolutely essential first step toward ending the
appalling tragedy and waste that successive and increasingly severe recessions
have imposed on the workers o f our nation and their families. It is not a
panacea for our economic problems. There are no miracle cures. But, I am
convinced that it w ill make all o f us much more able to ameliorate the
economic problems that periodically and predictably buffet our economy and
our citizens. It provides the rational fram ew ork without which progress in
unlikely to be made. This is why its passage is indispensable,
This legislation was born out o f the frustration o f millions o f Americans
with an economic system that repeatedly failed to live up to its full potential
and to provide all our citizens who are willing, able and seeking work with
opportunities to be usefully employed at decent wages. It is not our free
enterprise system which has failed. Rather, the failure rests with the inability
o f our nation’s economic policy decision makers— in Congress, in the Executive
Branch, in the Federal Reserve System— adequately to determine the state of
the economy, to decide on what government policy should be, and then to act
in a decisive, coordinated with sustained way, to reach our nation’s economic
goals.
Under its provisions, the bill has the real potential to put an end to the
faltering, too little and too late initiatives that have characterized government’s
after-the-fact response to recessions. The bill would rationalize the coordinate
comprehensive fiscal and monetary policies and programs in order to make
fu ll employment and stable growth the permanent centerpiece o f policy
formation. It sets forth the specific goal of reducing overall unemployment to
fou r percent of the labor force within five years follow ing enactment. It
establishes the procedures by which the Administration, Congress and the
Federal Reserve Board w ill participate in the formulation of policies and
programs to carry out the purposes o f this Act.
I am very pleased with the version of the bill reported by the Senate Human
Resources Committee and commend it to the members of this Committee for
their study. As approved, the bill requires the President, each year, to propose
short and medium term goals, covering a five year period, for employment,
unemployment, production, productivity, real income and inflation together
with the policies and programs required to reach these goals. The Federal
Reserve would annually report its intended monetary policy and state its
relationship to the economic goals proposed by the President. The Senate and
House Committees on Banking, Housing and Urban Affairs would be responsible
for recommending any action Congress might consider follow ing up on the
Federal Reserve Board Report.
A revised Title III o f the Humphrey-Hawkins Bill provides a workable and
reasonable process for Congressional consideration o f the President’s proposal.
It also provides the impetus and mechanisms for more comprehensive debate
on national economic policy, as it relates to the Federal Budget, each year.
I am pleased with this revised Title III as it emerged from the Senate Human
Resources Committee.
Prim ary emphasis throughout the bill is placed on establishing and sustaining
the econom ic climate necessary to enable the private sector of our economy to
provide most o f the job opportunities needed to reach fu ll employment. This is
where most people are working and should be working. This also is where most
new jobs should be created. Incentives for business and industry and existing
Federal community development, public works and facilities, job training and
public service programs would be tem porarily utilized to fill any gap that might
exist between the job creating perform ance o f the private sector and our
interim employment targets.




10
I f it becomes necessary, in order to reach the employment goals o f the bill,
the President is required to propose job creating programs to provide lower
pay and skill employment opportunities fo r those who cannot otherwise find
work. Such a proposal could be made no sooner than the third year follow ing
enactment and it would be subject to the normal Congressional authorization
and appropriations processes. Clearly it is better for society and fo r the in­
dividuals themselves to be paid fo r their w ork rather than for idleness.
To provide needed flexibility, the President, in the event o f unforeseen
circumstances, could propose that the specific fifth year employment goals of
the legislation be modified. This step could not be taken sooner than the third
year follow ing enactment and it too would be subject to Congressional action.
As I mentioned earlier in my testimony, the Full Employment and Balanced
Growth Act o f 1978 is an amendment to the Employment Act o f 1946. As such,
it is focused on policies and procedures needed to improve substantially the
employment, production and real income perform ance o f our economy. However,
unlike the Employment Act o f 1946, it clearly recognizes the critical importance
of maintaining reasonable price stability. In fact, it establishes reasonable
price stability as a m ajor objective o f our nation’s econom ic policy.
In further recognition o f the problem o f inflation the bill, as passed in the
House and approved by the Senate Human Resources Committee, requires that
a specific numerical goal for prices be included each year in the President’s
Annual Economic Report to the Congress. This numerical goal, for each o f the
five years included in the Economic Report, would be accompanied by the
specific policies and programs the President recommends fo r achieving this
goal. This inflation goal and the comprehensive policies needed to achieve it
would be subject to the same discussion and debate in the Congress as would
exist for the other economic goals contained in the President’s Economic Report.
In addition, the bill includes a set o f significant and specific anti-inflation
measures which the President would be required to consider each year in
developing the Economic Report. These anti-inflation measures would include:
Establishing a price monitoring system ;
Developing and implementing programs designed to meet shortages o f labor,
capital and materials in tight m arkets;
Eliminating unnecessary or counterproductive government regulations ;
Encouraging increased productivity on the part o f both labor and manage­
ment ; and
Strengthening competition and vigorously enforcing our nation’s anti-trust
laws.
The entire bill is based on the recognition that targeted employment efforts
will be required if w e are to achieve the employment objectives o f the bill
without aggravating the problems o f inflation.
While the Humphrey-Hawkins B ill elevates the concern over inflation to
national priority status for the first time in law, while it provides a set o f
policies and procedures designed to move toward the achievement o f full
employment in a manner consistent with reasonably stable prices, while it
includes a more specific annual focus on reducing inflation and requires annual
inflation goals covering five years and the comprehensive anti-inflation policies
to achieve these goals, and while it includes a set o f measures that should be
part of an effective anti-inflation program, it is not, nor was it designed to be,
in and o f itself, a complete and comprehensive anti-inflation proposal.
It requires that such a comprehensive program be developed and submitted
to Congress each year. It requires that specific annual numerical inflation
goals, consistent with the proposed anti-inflation program, covering a five year
period, also be presented to Congress by the President each year. Such a
comprehensive proposal might well be expected to deal in detail w ith such
non-employment related inflation factors as international and domestic energy
policy, foreign agricultural policy, deregulation o f various m ajor sectors o f
our economy, and much more.
I fully recognize the need to develop such a comprehensive anti-inflation
policy and am hopeful that given the legal requirement to do so in this bill,
the Congress and the President w ill redouble their efforts to develop such a
policy in a timely manner. Humphrey-Hawkins provides the legislative basis
for great strides toward fu ll employment in a manner consistent with stable
prices. It mandates the development o f a comprehensive anti-inflation program
as described above. It is, in my view, a very rational approach to dealing
effectively with both the problem o f unemployment and the problem o f inflation.




11
I look forw ard to working w ith the Adm inistration and my colleagues in
Congress toward a comprehensive and effective approach to am eliorating the
severe problem o f inflation which continues to plague our economy.
The House o f Representatives and the Senate Human Resources Committee
have approved the procedure described above under which the President
includes specific numerical inflation goals, covering a five-year period, each year
as part o f his Economic Report. These goals would then be considered by the
Congress. Such a procedure is supported by the Carter Adm inistration as w ell
as by the sponsors and supporters o f the bill. It is our hope that this procedure
w ill be considered and accepted by the Senate Committee on Banking, Housing
and Urban Affairs.
Some members o f Congress have proposed the addition o f a specific, long-term,
numerical goal for inflation to the Humphrey-Hawkins Bill. Such a proposal,
which is opposed by the Carter Adm inistration, a number o f prominent
economists and the sponsors and supporters o f the bill was considered in
Committee and on the floor o f the House o f Representatives. In each case this
proposed amendment to the Humphrey-Hawkins B ill was voted on and rejected.
As my support for the House passed inflation proposal indicates, I am not
opposed to establishing specific num erical inflation goals. On the contrary,
I have supported an amendment w hich requires the President to set an inflation
goal each year for five years and to submit it to Congress fo r its consideration.
It would be included in the President’s Annual Econom ic Report right along
side his unemployment goal and other goals. However, under this procedure
the goal would have to be accompanied by a comprehensive anti-inflation policy
that the President believes w ill enable us to reach the goal.
I am opposed to an arbitrary inflation goal that is simply hung on the
Humphrey-Hawkins Bill and not accompanied by a comprehensive anti-inflation
policy that can credibly be approved by Congress as sufficient to reach the
goal that is proposed.
At this point in my testimony I would like to discuss in m ore detail the
reasons for my opposition to adding an arbitrary anti-inflation goal to this bill.
First, as described in detail above, the current bill has been very carefully
designed to elevate the concern fo r inflation in our nation’s laws and to move
toward achieving full employment in a non-inflationary way. The focus 011
targeted employment creation, for example, is based on the recognition that
this is a necessity if we are to achieve fu ll employment with reasonable price
stability.
Second, the unemployment goals in the biU have been stretched out after a
great deal of discussion and study, from three percent within 18 months in the
1974 bill to four percent within five years in the current bill, to assure that
adequate time was provided to reach this goal without creating inflationary
pressures. This view on the achievability o f this goal w ithout generating
inflation is shared by the Carter Adm inistration, many prominent national
economic policy oriented economists, and the sponsors and supporters o f the
bill. W e should bear in mind that the present goal w ould require a reduction
in the unemployment rate o f only tw o percentage points over the next five years.
Third, I would suggest that those whose concern fo r inflation may override
their concern for unemployment consider the costs o f such a policy. A recent
analysis prepared by the Council o f W age and P rice Stability found that
constricting the growth o f aggregate demand through traditional policies to
dampen the economy does more harm to the economy in general than any good
that is ever achieved in reducing inflation. The Council found that this kind o f
approach to reducing inflation by one percent necessitates the loss o f $100
billion in production and 2.5 million jobs. In this vein, Arthur Okun, o f the
Brookings Institution, found that a one percentage point increase in unemploy­
ment is associated with a decrease o f three percentage points in GNP. This
amounts to a $60 billion decrease in real GNP. The loss in tax revenue and the
increase in Federal spending associated w ith a one percentage point increase
in unemployment in approximately $20 billion.
Fourth, the inclusion o f a specific, arbitrary, long-term, num erical inflation
goal, as a part o f the legislation itself, would invite suspension o f the unemploy­
ment goal whenever inflation increased, regardless o f the cause o f the particular
inflationary surge being experienced. In other words, even if the cause was
totally unrelated to efforts to reduce employment. I am afraid that an arbitrary
inflation goal would be used to postpone action to reach fu ll employment, based
on the discredited notion o f a trade-off between unemployment and inflation.

3 0 -4 5 4 0 - 7 8 - 2




12
No one who witnessed the high unemployment and high inflation perform ance
o f our economy during the past recession should continue to believe in a firm
trade-off, yet many still do. And, despite the views regarding the trade-off held
by some proponents o f this amendment, many w ill see these goals as simple
trade-offs in the future. W e should not do anything in Humphrey-Hawkins
w hich would encourage continuation o f this erroneous and simplistic perception
o f econom ic activity.
Regardless o f how clearly some members o f Congress have rejected the
Phillips-Curve ideology, such is not the case in many parts o f the government
and o f the private sector. Many influential people, witness the response to the
last three recessions, still believe that the best way to fight inflation is to
increase unemployment.
W ith or w ithout H umphrey-Hawkins the rate o f inflation may be substantial
at times in coming years. As I have said, we believe the bill will move us
tow ard fu ll employment w ithout generating inflation. W e must prevent setting
up a situation in w hich inflationary pressures, generated by factors unrelated
to our pursuit o f fu ll employment, lead to a policy response which diverts or
halts our effort to provide our citizens with productive jobs. Establishing a
specific arbritrary num erical inflation goal in the bill itself would, I fear,
encourage such misguided action.
Fifth, many o f the causes o f inflation appear to be beyond the reach o f
standard econom ic policies. The unemployed workers whom Humphrey-Hawkins
is designed to help are all w ithin our borders. Moreover, over 20 years o f
experience indicate that policies and programs o f the Federal government can
have a direct and positive im pact on the problem o f unemployment.
Our experience on the prices side is quite different. OPEC pricing decisions
on energy supplies or weather conditions affecting the size o f the grain harvest
in the Soviet Union or Canada, to use just tw o examples, can have a tremendous
inflationary im pact on our economy and one over which we appear to have very
little control at present. Furthermore, the Federal Government’s experience in
dealing with such inflationary pressures in recent years gives us little reason
for confidence that we now have an effective approach to preventing inflationary
pressures from such sources.
Sixth, the proposals to include an arbitrary, long-term, specific numerical
inflation goal in the bill itself, so fa r proposed, to my knowledge, do not include
a specific and comprehensive program for its achievement. Unlike the unem­
ployment goal which is accompanied by a detailed strategy for its achievement,
and required action to achieve it, the inflation goal is simply proposed as an
appendage to the existing bill. I believe that it is incumbent on anyone who
would add such a goal to the Humphrey-Hawkins Bill to provide the compre­
hensive program needed fo r its achievement as part o f the amendment with at
least as much specificity as is the case for the unemployment goal. Such a
comprehensive anti-inflation policy should be developed with great care and an
inflation goal consistent w ith such a program should then be proposed. This
requires extensive development, discussion, debate and consideration by the
Adm inistration and each House o f Congress on its own merits. And, this exact
procedure w ill be follow ed under the provisions included in Humphrey-Hawkins
as amended in the House and by the Senate Human Resources Committee.
Frankly, I am afraid that including this arbitrary goal w ill give the impres­
sion o f a significant action to reduce inflation when none has in fa ct been taken
by this amendment. As a result, the pressure that is building throughout the
nation for a comprehensive and effective attack on inflation may be reduced.
This would be a most unfortunate consequence, one which the sponsors o f the
amendment certainly do not intend, and it should be avoided. Moreover, the
credibility o f the Congress w ith the public would be further eroded by
establishing such a goal w ithout the policies, strategies and programs needed
to achieve it.
As you know, the Humphrey-Hawkins Bill has been criticized by some as a
goal without a method fo r its achievement. I believe this charge is without
merit and that it has been convincingly refuted. However, if an arbitrary
inflation goal is added w ithout a method for its achievement, this addition to
the bill could certainly be challenged on the same basis.
Seventh, while some organizations representing business may agree with this
amendment, there are a number o f business people who have expressed serious
concerns about including a specific long-term inflation goal in HumphreyHawkins. They believe that such a proposal raises disturbing possibilities




13
regarding the role o f government in achieving the inflation goal. In their view,
such a goal could lead to its interpretation as a guideline fo r price behaviour.
They feel that, unlike other provisions o f the bill, this addition could lead to
serious governmental interference in millions o f private sector market decisions.
Rather than building business confidence, such an effort, they believe, could
lead to conflict and uncertainty regarding future economic activity.
The Full Employment and Balanced G rowth A ct o f 1978 is not a final
solution to our economic problems. It w ill only be effective if we w ork
conscientiously to carry out its fu ll intent. However, it does present our
government with a rational procedure to determine the priority needs o f our
economy and to develop a consistent and comprehensive response to those
needs. In doing so, we can achieve and sustain the goals o f the legislation.
By their very nature the goals o f fu ll employment and stable grow th w ill be
difficult to reach and hold. But what other real alternatives are open to us? Do
we continue to stumble from recession to recession and accept the appalling
burden such circumstances impose on m illions o f our people, or do we embark
on the coordinated effort prescribed in the bill and use its goals to define the
direction in which we must move and the progress we make in doing so?
As challenging as they are, I believe the goals can be reached. The real
question, I believe, is whether the governm ent o f this nation has the w ill and
the courage to make the effort. I f this Committee reports a strong Full
Employment and Balanced Growth Act, free o f weakening amendments, it w ill
have gone a long way toward answering that question in the affirmative and
charting a new course o f full employment, fu ll utilization o f all our resources
and reasonably stable prices for Am erica fo r decades to come.

The C h a ir m a n . Our first witness is a very distinguished economist
and former member of the Federal Reserve Board. I think you served
8 years and, of course, the Federal Reserve has enormous influence
on what happens to the success or failure of the Humphrey-Hawkins
bill, so we are delighted to have Dr. Andrew Brimmer.
STATEMENT OF ANDREW BRIMMER, PRESIDENT, BRIMMER
& COMPANY, INC.
Dr. B rim mer . Thank you, Mr. Chairman, members of the com­
mittee. I was delighted to receive the invitation to appear before
this committee.
Three questions were put to me, two of which dealt explicitly with
the Federal Reserve and the third with the need for an explicit in­
flation target as a part of the legislation.
I have responded to each of those questions in the prepared state­
ment. I would hope that the statement could be made a part of the
record.
The C h a ir m a n . Yes. It will be printed in full in the record without
objection.
[The complete statement follows:]




14
BRIMM ER & C O M PA N Y,
S U ITE 916

INC._____________ I____________ Economic and Financial Consultants

(202) 466-3474

I

1201 C O N N EC TIC U T A V EN U E . N.W.

W A S H IN G TO N , O. C. 20036

For Release on Delivery
Monday, M a y 8, 1978
2:30 P M (EDT)

M ONETARY POLICY AND THE HUMPHREY-HAWKINS BILL

Testimony By
A ndrew F. Brimmer
President
BRIMMER & COMPANY,

INC.

Economic and Financial Consultants

Before the
Committee on Banking,




Housing and Urban Affairs

UNITED STATES SENATE

Washington,

D. C.

May 8, 1978

15
MONETARY POLICY AND THE H U M P H R E Y -HAWKINS BILL
Testimony By
Andrew F. Brimmer*

Mr. Chairman,

I was pleased to accept your invitation

to appear before this Committee to present my views on the
"Full Employment And Balanced Growth Act of 1978,” also
known as the "Humphrey-Hawkins Bill."

I was asked to

comment on:
(a)

"... The Federal Reserve's role in achieving
the policies set forth in the legislation

(b)

"... Possible need for an expanded dialogue
between the Federal Reserve and Congress

(c)

...;"

...;"

"... The need for an explicit inflation target
to go along with the unemployment target of 4
per cent for 1983."

I will address each of these issues in turn.
turning to that task,

Before

let me say briefly that I believe the

general objectives of the Humphrey-Hawkins Bill are desirable
although I have had (and still have)

some reservations about

several of its features.

If one can navigate through the

b i l l ’s 30 major sections,

a central aim shows through:

Expressed briefly,

the Humphrey-Hawkins bill would make uhe

reduction of unemployment the single most important objective

*Dr. Brimmer is President of BRIMMER & COMPANY, INC., a
Washington, D.C.-based economic and financial consulting
firm.
From March, 1966, through August, 1974, he was a
Member of the Board of Governors of the Federal Reserve
System.




16
of national economic policy.

It would establish a numerical

unemployment rate of 4 per cent for the civilian labor force
as a whole and 3 per cent for adults
years of age and o v e r ) .

(defined as those 20

These goals would have to be met

over a five-year period -- presumably by 1983.

Another

important goal -- although not stated quantitatively -- is a
significant reduction in the extremely high unemployment rates
among young people, members of minority groups,

and others on

the margins of economy.
The thinking behind the bill assumes that the private
sector will be the primary source of the jobs needed to achieve
the specified goals.

However,

it would also mandate that the

Federal Government use its various economic policy instruments
for the same purpose.

These would include fiscal policy

ting targets for both revenue and expenditures)

(set­

as well as

increased spending -- where necessary -- on training and public
service jobs.

Moreover,

the Federal Reserve System would be

required to give explicit consideration to the unemployment
goals in its conduct of monetary policy.
draft recognizes

While the revised

that inflation is also a serious problem,

the

fundamental focus remains on the reduction of unemployment.
As the several versions of the bill were evolving,

I

expressed some reservations about a number of its provisions.
These reservations




included doubts about the wisdom of

17

legislating specific numerical targets as a way of defining
national economic policy goals;

the heavy reliance on public

sector jobs as a vehicle for reducing unemployment,

and the

lack of sufficient emphasis on the need to check inflation.
I still hold some of these reservations,

but the bill which

was adopted by the House of Representatives on March 16, 1978
(H.R.

50), goes a long way toward meeting some of my con­

cerns .

The proposal made by the Chairman of this Committee

(Amendment No.

1794),

specific target

calling for the inclusion of a

(3 per cent)

to which we should try to

reduce the rate of inflation by 1983, would be a further
improvement.
In addition,

I believe more specific guidelines are

required to enhance the dialogue between the Congress and
the Federal Reserve System to assure that monetary policy
makes its contribution to the achievement of the goals of
the Humphrey-Hawkins bill.

Specific Provisions Relating to Monetary Policy
I have summarized in Chart I the key provisions
relating to monetary policy contained in H.R.
by the House)

50 (passed

and S. 50 (pending before the Senate).

It

will be noted that several provisions are common to both
versions of the bill, but a number of crucial differences




18
CHART I.

Summary of "Full Employment and Balanced Growth
Act of 1978" Relating to the Federal Reserve
System
(Section 108 - Monetary Policy)

Version of Bill
Provision

1.

Board of Governors of the
Federal Reserve System shall
submit to Congress:
(a) With i n one month after
the transmission of the
Economic Report
(b) An independent statement
setting forth the Federal
R e s e r v e ’s intended poli­
cies for the year ahead;
(c) And their relationship
to the short-term goals
set forth in the
Economic Report.
(d) An independent statement
setting forth the
Federal Reserve's intend­
ed policies for the year
ahead;
(e) And their relationship to
(1)

the short-term goals
set forth in the
Economic Report;

(2) medium-term trends in
employment, produc­
tion, and prices for
the 3 calendar years
subsequent to the 2
years referred to in
the bill.




H. R. 50
(Passed by
House)

S. 50
(Pending
before
Senate)

19

Provision

2.

H. R.

The House Committee on Banking,
Finance and Urban Affairs and the
Senate Committee on Banking,
Housing and Urban Affairs.
(a) shall consult with representa­
tives of the Board of
Governors concerning the
Board's and the Federal Open
Market Committee's intended
policies, and
(b) Each of these Committees shall
submit to the Joint Economic
Committee a report containing
their views and recommendations
with respect to the Federal
Reserve's intended policies.

3.

Thereafter, the Congress shall take
such action as it deems necessary
to insure closer conformity to the
purposes of the Act.

4.

Nothing in the Act shall be
interpreted to require that policies
proposed by the Board of Governors of
the Federal Reserve System be follow­
ed if the Board of Governors and the
Federal Open Market Committee deter­
mine that they cannot or should not
be followed because of changing
conditions.




X

50

S. 50

20

also stand out.

These specific provisions are set forth in

Section 108 of both H.R.
In general,

50 and S. 50.

the Federal Reserve would be required to

identify for Congress -- explicitly -- the monetary policies
it intended to pursue for the year ahead.

It would also

have to explain its perception of the relationship between
those policies and the short-term and medium-term goals
specified in the Act.

This assessment would have to be made

soon after the Economic Report is submitted to the Congress
each year.

The traditional oversight committees of the

Congress would have the responsibility to explore with the
Federal Reserve representatives the content and implications
of the central bank's independent statement of its objectives
and to weigh their compatibility with the national economic
goals set forth in the Act.

Finally,

the Federal Reserve

would retain the flexibility needed to modify its policies
as circumstances change.
Through reference to other provisions,

Section 108

assigns a specific role to the Federal Reserve in the pursuit
of the goals the Act seeks to achieve.

The central bank is

called upon to "...transmit to the Congress an independent
statement setting forth its intended policies for the year
ahead

..."

The Act does not suggest the contents of this

statement nor the types of subject matter it should cover.
However,

the section seems to imply that the Board should




121

express its intentions with respect to those policies which
will govern the growth of the monetary aggregates and credit
conditions during the first year of the five-year period by
which the full employment and price stability targets are
to be achieved.

(I will comment below regarding my own

views as to the contents of the statement the Federal Reserve
would be required to submit).
The short-term goals

(for the calendar year of the

Economic Report and the year following)
policy is to be related are "...
and real income, balanced growth,
growth,

to which monetary

full e m p l o y m e n t , production,
adequate productivity

full parity of income for farmers,

stability,

reasonable price

and proper attention to national priorities

..."

These goals are to be achieved as rapidly as feasible.

The

medium-term goals

(for the 3 calendar years subsequent to

the 2 years referred to above)

are to be expressed by the

President as annual numerical targets to be achieved by the
fifth year following adoption of the legislation.

Again,

the interim numerical unemployment goal is an unemployment
rate of not more than 3 per cent for adults aged 20 and over
and not more than 4 per cent for the entire civilian labor
force

(including those workers aged 16 and o v e r ) .
However,

in the case of the Federal Reserve Board,

Act seems to require only that the latter explain the




the

22
relationship of monetary policy to "... medium-term trends
in employment,

production,

and prices for the 3 calendar

years subsequent to the 2 years referred to ..." in defining
the short-term goals.
I believe this is a wise position,

since it would be

extremely difficult for the Federal Reserve to make detailed
projections of goals for the expansion of money and credit
over such a distant period.

By their very nature,

instruments of m onetary policy
open market operations,

the

(mainly the discount rate,

and changes in reserve requirements)

must be used over a fairly short time horizon.

Moreover,

because of its flexibility, monetary policy can be modified
fairly quickly as basic economic conditions change.

So,

it would be unwise to immobilize this tool of economic
stabilization by attempting to link it rigidly (which
probably could not be done anyway)

to targets with a running

time of 3 to 5 y e a r s .

General Provisions Relating to Monetary Policy
In a number of other sections, of the proposed legislation
(of which H.R.

50 is the most exhaustive version),

the role

of the Federal Reserve and its management of monetary policy
are stressed explicitly or incorporated by reference.
together,

Taken

these provisions and citations present a comprehen­

sive view of the part which the n a t i o n ’s central bank is
expected to play in the achievement of the goals set forth




23

in the Act.
In the section on General Findings,

the bill declares

that aggregate monetary and fiscal policies alone have been
unable to achieve full employment.
to do so in the future.

Nor will they be able

Consequently,

the attainment of the

Act's objectives will be facilitated by the establishment of
explicit short-term and medium-term economic goals and by
improving coordination among the President,

the Congress,

and the Board of Governors of the Federal Reserve System.
The Act seeks "...

to provide an open process under

which economic goals and policies are proposed,
and established;

reviewed,

and to provide for yearly review of na t i o n ­

al economic policies to ensure their consistency with these
goals to the maximum extent possible

...” (under-scoring added).

I interpret the intent of these requirements
that the Congress recognizes that monetary policy

to mean
(even in

combination with fiscal policy) has carried more of the b u r ­
dens of economic stabilization than it could effectively
handle -- without imposing seriously adverse consequences
for certain sectors.
of the Act,

Thus,

as indicated by other sections

specific and especially targeted? policies and p r o ­

grams are needed to supplement the tools of aggregate demand
management.

At the same time,

the Federal Reserve is being

called upon to participate in an open process of policy
formulation and to coordinate its own efforts with those of
the President and Congress to assure that the various policies




24
reinforce each other.
In an important finding underlying a key provision of
the Act,

Congress "...declares that inflation is a major

national problem requiring improved
management

... fiscal and monetary

..."as well as improvements in a number of other

Federal policies.

Also,

"...the Congress finds that sole

dependence upon fiscal or monetary policies or both to
combat inflation can exacerbate both inflation and unemploy­
ment.

The Congress determines that fiscal and monetary

policies which are utilized prudently and in conjunction
with specific targeted policies dealing with structural
measures are badly n e e d e d . .."
From the above references,
conclusion:

I draw the following

In the campaign to check inflation, monetary

policy has a positive contribution to make.
of monetary policy,

In the conduct

the Federal Reserve can -- and must --

support the overall objectives of achieving full employment.
However,

that role is less direct than the part the central

bank can play in the effort to abate inflationary pressures.
In another basic provision,
Federal Government,

the Act mandates that the

in the pursuit of full employment, must

rely initially and primarily on the private sector for the
creation of jobs

The success of this policy will depend

fundamentally on the promotion of private investment and
capital formation.

The latter presupposes that the avail­

ability of money and credit must be adequate -- and its




25
cost must be appropriate -- to finance the capital expenditures
businessmen will want to make.,

Here,

also,

the role of the

Federal Reserve -- manifested through its influence on credit
and interest rates -- is crucial.
So,

in general, while Section 108 of the Act is

specifically devoted to monetary policy,

other provisions

will affect the responsibilities of the Federal Reserve System
in a number of ways.

In my judgement,

constructive provisions,

on balance,

these are

and their adoption should enhance

the role of the central bank in the formulation and implemen­
tation of national economic policy.

Need for Expanded Dialogue Between the Federal Reserve and
Congress
Let me now turn to the second issue I was asked to
address:

Is there need for an expansion of the dialogue

between Congress and the Federal Preserve?
In fact,

My answer is y e s .

I have held this position for quite some time,

and I have so testified before the Committee.
of 1976

(Hearings:

In the Spring

Third meeting on the Conduct of Monetary

Policy, May 4, 1976, pp. 44-46),

I made a proposal aimed at

enhancing Congressional oversight over the management of
monetary policy.

I have attached as Appendix I to my state­

ment today an excerpt from that testimony which spells out




26

in detail the substance of the suggestions I made two years
ago.

W ith the passage of time, and in light of steps Congress

has taken in the interval,
mendations.

However,

Last November,

I would modify some of those recom­

I would still stress the central theme.

the Chairman of this Committee introduced

a bill "...that would improve Congressional oversight of
monetary policy,

provide additional information on monetary

policy for the Budget

Committees of the Congress,

and foster

better coordination of monetary and fiscal policies...".
Specifically,

that bill would have required the Federal

Reserve Board to consult with Congress at semi-annual hea r ­
ings before this Committee
of Representatives)

(and its counterpart in the House

during which the following information

would be presented:
"...(1) the Board of Governors'and the Federal
Open Market Committee's objectives and plans
with respect to the ranges of growth or diminu­
tion of monetary and credit aggregates for:
(A) the current fiscal year during which the
hearing is held; and (B) the next fiscal year
beginning not more than eight months from the
date of the hearing;
"(2) the Board of Governors' and the Federal
Open Market Committee's estimate of the levels
of employment, production and prices for the
end of the periods referred to in paragraph
(1) that are consistent with such objectives
and plans; and
"(3) an explanation of the reasons for any
revisions to the objectives and plans dis­
closed during the previous hearings pursuant
to this section."




27
The specifications set forth above are generally the
same types of information which I believe the Federal Reserve
Board should be called upon to present in its statement relat­
ing to monetary policy that would be required by Section 108
of the bill currently before the Congress.

I believe that

the present draft legislation does not need to be amended, but
the legislative record should show that the Federal Preserve’s
statement of objectives and plans is expected to include
some measure of credit as well as of the money supply -- ho w ­
ever the latter is defined.

I think it is unfortunate that,

in formulating the goals of monetary policy,

so much weight

has been given to targets for the growth of the monetary
aggregates.
exclusive)
rates.

I personally would prefer to see more

(but not

attention devoted to the behavior of interest

However,

since the Federal Reserve does operate wit h ­

in a monetary aggregates framework,

the inclusion of some

reference to credit is desirable.
I also think the System should be required to spell out
its expectations with respect to the behavior of the real
economy (that is, output,

employment and prices)

its objectives for the monetary aggregates.
advanced two years ago,

as well as

In my own proposal

I suggested that the Federal Reserve's

staff economists -- taking the FOMC's targets as given -should spell out the technical implications of the monetary
policy goals adapted by the F O M C .

3 0 -4 5 4

0

- 7 8 - 3




These staff projections

28
are already being made,
purpose.
time.

However,

and they could be adapted for this

I would modify this suggestion at this

Since that idea was advanced,

the dialogue between

Congress and the Federal Reserve has moved forward a great
deal.

Under the Federal Reserve Reform Act of 1977

succeeded House Concurrent Resolution 133),

(which

the Federal

Reserve Board reports to the Congress quarterly on its 12-month
targets for the monetary aggregates,

giving weight to "...

past and prospective developments in production,

employment,

and p r i c e s .M
Moreover,
Reserve Board,

the recently appointed Chairman of the Federal
in appearing before this Committee on April 25,

1973, went well beyond the reporting requirements of the
statute adopted last year.

After discussing recent economic

and financial developments,

and following the presentation

of the F O M C 's money supply targets,

he then shared with the

Committee h i s :
"...own views about the outlook for the economy in
quantitative terms.
(His) personal expectation
is that, over the year ending with the first quar­
ter of 1979, real GNP probably will increase in a
4-% to 5 per cent range, the unemployment rate
probably will drop into the 5-3/4 to 6 per cent
area, and the GNP price deflator is likely to rise
by 6-3/4 to 7-1/4 per cent.
It is h a ^ l y necessary
to add that quantitative projections, such as these,
are subject to considerable margins of uncertainty
Necessarily they have to be re-evaluated on the
basis of incoming economic data and changing con­
ditions here and abroad."

The above statement represents an innovation in the
content of the dialogue between Congress and the Federal




29
Reserve.

While the quantitative forecast for the economy

was presented as the personal views of the Chairman,

it is

reported to reflect the concensus of the FOMC as well.

It

is also my understanding that the Congress can expect to
receive similar projections in the future
The language of the bill introduced by the Chairman of
this Committee last year indicated that the Board and FOMC
"... shall maintain long run growth of the monetary and
credit aggregates commensurate with the economy's long run
potential to increase production, so as to promote effective­
ly the goals of maximum employment, stable prices, and
moderate long term interest rates."

I support the explicit

statement of the goals of monetary policy as expressed here.
The test of monetary policy should be its effectiveness in
promoting the growth of output and employment in the context
of price stability.

I recognize that the achievement of

these goals will always be difficult, but the fundamental
objectives of monetary policy -- and not purely short-term
variations in the monetary aggregates -- should be kept in
view.
If language of this type were to be included in the
legislative record -- given the new x^illingness of the Federal
Reserve to present at least the key elements of a quantitative
forecast -- it would be possible for the Congress to enhance




30
its ability to monitor monetary policy.

For example,

this

Committee could ask its staff to work out independently the
implications

(including the implications for interest rates)

of the targets for the monetary aggregates and the economic
forecast presented by the Federal Reserve during the latest
quarterly appearance before Congress.
assignment,

(To undertake this

the staff may have to be enlarged somewhat,

and

the computer resources of the Congressional Research Service
may have to be u s e d ) .

The staff report resulting from this

inquiry could serve as the basis of a series of questions
that could be addressed to the Federal Reserve.

The latter's

representative would be expected to respond to these ques­
tions during the next quarterly appearance before the
Congress.

I would anticipate that the central bank would

be reluctant to discuss the outlook for interest rates,
but the overall quality of the dialogue would be enhanced.
I also believe that the Federal Reserve should provide
an explanation of the reasons for any revisions made with
respect to its previously expressed goals.

In addition,

a

clear account should be given of any significant deviation
from the targets it expected to achieve over the time horizon
previously projected.
In conclusion,

I believe the legislative record relating

to the current bill should emphasize the objective of improv­
ing coordination of monetary and fiscal policies.




It should

31
avoid preoccupation with the details and mechanics of monetary
management -- while seeking to enhance the oversight role of
Congress.

Need for Explicit Inflation Target
The third question I was asked to discuss is this:
Should the Humphrey-Hawkins bill contain a specific numerical
target for inflation?

My answer is y e s .

The Amendment introduced by the Chairman of the Committee
would accomplish this objective.

Specifically,

the proposal

would define the phrases "rate of inflation” and "reasonable
price stability," as used in the bill,

to mean "...the rate

of change or level of the consumer price index,
by the Bureau of Labor Statistics,

as set forth

U. S. Deparment of Labor.”

It would also quantify the inflation target set in the bill by
adding to the medium-term goals "...and to reduce the rate
of inflation to 3 per centum or less."

Finally "...upon

achievement of the 3 per centum inflation goal,

each succeed­

ing Economic Report shall have the goal of further reducing
the rate of inflation toward zero.

Policies to achieve the

inflation goal shall be designed so as not to impede the
achievement of the unemployment goals."
I believe the above language should be added to the bill.
In general,

I think it is not desirable to attempt to reduce

complex economic policy objectives to numerical specifica­
tions.

While goals should be stated clearly,




the implementa­

32
tion of policies designed to achieve them requires considerable
flexibility and imagination.

The promulgation of rigid rules

limits the exercise of judgement that is needed in the adminis­
tration of public policy.
However,

since the medium-term unemployment targets in

the bill have been expressed in quantitative specifications
(and there is clearly little likelihood of changing this
aspect of the legislation), it is well to follow a similar
course w i t h respect to the inflation goal.

Otherwise,

the

commitment to fight inflation may get less emphasis than the
seriousness of the problem would justify.
I agree that the present language of the bill relating
to inflation is an improvement over that contained in the
original Employment Act of 1946.
"...

That language asserted

that it is the continuing policy and responsibility

of the Federal Government
production,

... to promote maximum employment,

and purchasing power."

The present language of

the Humphrey-Hawkins bill setting the inflation goal calls
upon the Federal Government to "... promote full employment
(and other goals)

... and reasonably stable prices

The

latter reference to the goal of price stability is more
explicit than the earlier reference to "maximum purchasing
power."

However,

more definitive,
that purpose.




the inflation target should be made even
and the proposed amendment would serve

33
The prospects for inflation over the next five years
are by no means bright,

and the implementation of the

employment policies mandated by the Humphrey-Hawkins bill
will put further upward pressure on prices.

This appears

to be likely despite the emphasis in the measure on over­
coming structural limitations and the use of especially
targeted training and employment programs.
The framers of the Humphrey-Hawkins bill are clearly
counting on the private sector
the new jobs.

to generate the bulk of

In BRIMMER & CO., we have estimated that

(given the outlook for the growth of the national economy),
between 1977 and 1983,

the civilian labor force may expand

from 97.3 million to 107.5 million,
persons.

During the same period,

a gain of 10.2 million

total employment may rise

by 11.4 million (from 90.4 million to 101.8 million).

The

level of unemployment might decrease by 1.2 million (from
6.9 million to 5.7 million),

cutting the unemployment rate

from 7.1 per cent to 5.3 per cent.
If this projected 5.3 per cent rate is to be cut to 4
per cent,

an additional 1.4 million jobs would have to be

found -- which would hold the unemployment level to 4.3
million in 1983.
task,

For the private sector to accomplish this

gross national product

(GNP) would have to expand in

real terms at an average annual rate in excess of 5 per cent




34
during the next five years.

Such a pace would be considerably

above the long-run growth trend which is somewhat less than
4 per cent.
If sustained for such a long period of time,

this

above-trend rate of growth in GNP would push output close to
the limits of production capacity and stimulate substantial
inflationary pressures in an economy in which the general
price level might already be rising at an annual rate close
to 6 per cent.

Consequently,

the inflationary potential of

the public policies required to implement the HumphreyHawkins bill suggests that it would be wise to specify a
numerical target for the anti-inflation goal included in
the measure.
Of course,

it will be difficult to achieve a 3 per cent

rate of inflation over the next five years,

and the p r oba­

bility is high that we will fall short of the goal.
reason is clear:

over the long-run,

The

the basic rate of

inflation is closely related to the rate of increase in com­
pensation per hour worked in excess of the rate of improvement
in productivity.

Currently,

compensation per hour is rising

at an annual rate close to 9 per cent, and productivity is
increasing at a rate just over 2 per cent.

Consequently,

the underlying rate of inflation is in the neighborhood of
7 per cent.

Over the next five years,




compensation may rise

35
somewhat more slowly,
more rapidly.

and productivity may advance somewhat

Nevertheless,

it is unlikely that either

trend will change dramatically.

As a result,

for a number

of years, we will probably face a rate of inflation that is
quite hi g h when judged in terms of historical experience.
For these reasons,

the bill ought to contain an expli­

cit target for the anti-inflation goal.




-

o

-

36

A p p e n d ix

I

EXCERPT FROM TESTIMONY
By
Andrew F. Brimmer

Before the
Committee on Banking, Housing, and Urban Affairs
United States Senate

May 4, 1976
pp. 44-46

CONGRESSIONAL ASSESSM EN T OF M ONETARY POLICT

At this point, I want to focus on ways in which the Congress can Improve
its monitoring of monetary policy. To this end. the following steps should be
taken:
1. A joint House-Senate staff should be established to assess and monitor
Federal Reserve monetary policy.
2. The Federal Reserve should be required to submit its Annual Renort to
Congress by approximately the same period set for the President’s Budget
Message and Annual Economic Report.




37
3. As a basis for Congressional hearings, the Federal Reserve Board should
be required to do the following:
(a ) Present a review' of its performance compared with the monetary policy
objectives it had set for itself the previous year.
(b) Present a projection of the targets for the monetary aggregates adopted
by the FOMC for the coming year.
4. Taking the FOMC’s targets as given, the Federal Reserve Board’s staff
should be required to perform the following tasks:
(a ) Develop projections (one year ahead) of output, employment, unemploy­
ment, and prices implied by the monetary policy the FOMC has adopted.
(b ) Project the flows of funds in major sectors o f the economy, implied by
the staff’s forecast
(c ) Discuss the range and configuration o f interest rates implied by the
staff’ s projections.
(d) This effort should result in a staff report to accompany the Board's
report to Congress.
5. On the basis of the FOMC’s monetary policy targets and the Federal
Reserve Board’s staff report, the joint House-Senate staff should provide its
oxen assessment of material submitted by the Federal Reserre.
6. In making its assessment, the Congressional staff should interview in
person each Member of FOMC.
Each of these recommendations can be amplified further.
Joint House-Senate Staff.— Members of Congress serving on the banking
committees which oversee the Federal Reserve System (as well as members
of the Joint Economic Committee) should have a professional staff with the
resources and technical capacity to monitor monetary policy. In establishing
the Congressional Budget Office. Congress took a vital— and long-needed— step
to equip itself to understand and control the budget of the United States. ‘No
longer is the Congress heavily dependent on information and analyses sub­
mitted by the Executive Branch of the Federal Government. Such a move is
also needed in the case of monetary policy. As matters stand now, the zap
between the Congress and the Federal Reserve with respect to staff resources
and technical capacity is wide indeed. Steps ought to be taken prom p tly to
narrow the margin. To some extent, the present staffs are able to perform this
task. However, a significant amount of ^trencthening is also needed.
Federal Reserve's Annual Report.— The Annual Report o f the Federal Re­
serve Board should reach the Congress during the same period in which the
President's Budget Message and Economic Report are submitted. The Congress
needs to have all three documents in hand before it can make informed judge­
ments with respect to the requirements of national economic policy. Currently
the Budget Message and Economic Report are normally available by midFebruary, However, it may be April or May before the Federal Reserve's
Annual Report is submitted to Congress. If the Board's entire Renort is not
available early in the year, a detailed accounting of its conduct of monetary
policy and a general statement of its plans for the year ahead should be
provided.
Statement of Monetary Policy Objectives.— For the last year—in response
to Congressional mandate— the Chairman of the Federal Reserve Board has
been appearing at six-month intervals before each of the Congressional oversisht committees to explain the System's conduct of monetary policv. On the^e
occasions, he has presented the range of tarzets set by the FOMC for the
growth of selected monetary aggregates for four quarters ahead. These periodic
reports contain a great deal of information on financial developments and
the performance of the economy in recent quarters. (A quarterly report pre­
pared by the Board’s staff and presented to Congress contains an even greater
amount of historical data.)
Yet. thprp- is little or no expression of the expectations held bv the Federal
Reserve Board or the FOMC with respect to the economic outlook and pros­
pective financial developments. This deficiency should be remedied.
To accomplish this end. I propnep the follow ing:
1.
When the Chairman of the Federal Reserve Board appears before Consrress
earlv in the year, he should present a review of the FOMC’s performance with
regard to the monetary policv objectives it had set for itself the previous
year. A full explanation should be given for any significant deviation of results
from stated goals.




38
2. The Chairman should also present a projection o f the targets for the
monetary aggregates adopted by the FOMC for the coming year. These aggre­
gates should include some measure o f bank credit as well as of the money
supply, however narrowly (M t) or broadly (Mj) defined. Along with this
projection, the Chairman should be asked to provide— on behalf of the FOMC
— an exposition of the reasons why the targets adopted are thought to be
adequate.
3. Taking the FOMC's targets as given, the Federal Reserve Board’s staff
should be required to spell out in some detail the technical implications of the
monetary policy goals adopted by the FOMC The Board’s staff should con­
centrate on working out the economic and financial consequences which might
be expected to follow — if the stared objectives were to be achieved. This task
should include projections of output, employment/unemployment, and prices—
on a o.uarterly basis for at least one full year. Specifically, the projection should
include most of the items shown in Table 1 describing the expectcd behavior
of the economy in real terms. In addition, the staff should project the flows of
funds (.perhaps on a semi-annual basis) through the major sectors of rhe
economy which may be associated w*ith the contours of economic activity
sketched below.
The staff projections discussed here are curren tly being done. While the
results are not made public, economists outside the Federal Reserve are
thoroughly familiar with the techniques employed by the Board’s staff. In
fact, many former staff members have been employed by private institutions
(such as banks and brokerage firms as well as research organizations) with
the specific purpose o f tracking and interpreting Federal Reserve activity.
Finally, the Board’s staff should discuss the range and configuration of
interest rates implied by the staffs projections. This effort should result in a
staff report to accompany the Board’s Report to Congress.
Here it must be emphasized again that the Board’ s staff is being asked to
undertake a technical and professional assignment. They are not being asked
to make independent judgments regarding the proper role of monetary policy.
Some observers might argue that it is difficult— if not impossible— to distinguish
between the staff’ s analysis of the consequences of policy decisions and the
giving of policy advice. I would not accept such an argument The excellent
performance of the staff of the Congressional Budget Office in this regard
provides convincing evidence that it can be done. It mizht also be argued that
the staff’s analysis and conclusions will be taken as proxies for the judgmenrs
and expectations of the FOMC itself. I recognize this risk, but I believe it is
worth taking.
After all, the Federal Reserve System does share— on a delegated basis—
the Constitutional authority given to Congress to ‘*coin money and regulate the
value thereof.** Thus, the Congress must look to the Federal Reserve for guid­
ance as to the general consequences which niisht be expected to follow from
the Board’s exercise o f that shared responsibility. Since the Board and the
FOMC are reluctant to encase publicly in economic forecasting, it should be
willing to have the staff present its professional iudgments.
4. Once the Congress has received the FOMC’s projection of its monetary
policy targets— along with the Federal Reserve Board's staff report— the joint
House-Senate staff (whose establishment is recommended) should provide for
the Congress an independent assessment of the material submitted. Since the
Congressional staff would have been monitorincr monetary policy in any ons*.
it: should be able to perform this assessment without much delay. In makinsr
its assessment, the Congressional staff should interview in person each Member
of the FOMC. These views of individual Members would then be a part of the
record available to the Congress when it undertakes its own review of the
adequacy of monetary policy.




39
Dr. B rim m er . Thank you very much.
Before turning to the response to the particular questions, let me
make it clear that I think the objectives of the Humphrey-Hawkins
bill are desirable— although I have had and still have some reser­
vations about several of its features.
Now, as the bill was going through the several phases which have
brought it before the Senate, and as passed by the House, I have
been concerned about the wisdom, among other things, of including
a quantitative target for the unemployment rate. I have also been
concerned about the reliance on public sector jobs and vehicles for
reducing unemployment, and I have been concerned about the lack
of sufficient emphasis on the need to check inflation.
The bill that is now before the Congress, as passed by the House,
still needs some modification, and I would suggest one of these is
the inclusion of a specific target for the rate of inflation.
The proposals made by the chairman of this committee strike me
as appropriate, and I have some suggestions as to why we should
include a 3-percent target.
Mr. Chairman, given the limitation of time, I would address my­
self first to the question of the provision of the bill related to the
Federal Reserve and the role the Federal Reserve might play in the
implementation of the Humphrey-Hawkins bill objectives.
I have summarized on pages 4 and 5 of my statement, the major
features of the bill that related directly to the Federal Reserve. I
have followed those comments with some observations with respect
to general provisions of the bill, which also have some important
implications for the Federal Reserve.
Finally, I talk about the need to expand the guidelines with re­
spect to the Federal Reserve and bylaws for the Federal Reserve, and
I do that before I get to the need for the target.
Before I do that, I concentrate on the need for S. 50, H.R. 50
passed the House and S. 50 is pending before the committee. I f you
look down the column on the chart on pages 4 and 5, you will notice
that the sections relating to the Federal Reserve are quite similar,
although they are not identical.
As far as I am concerned, the most crucial distinction between the
House-passed version and the bill as pending in the Senate is the
following: you will note that the House bill spells out much more
fully the expected response of the Federal Reserve in terms of the
way it is supposed to look upon the report submitted by the President
each year, and the way the Federal Reserve is supposed to coordinate
its own efforts to help achieve the efforts of the bill. The way to
spell out, the way the House version does, and the way the Senate
version does not.
I think it is also crucial, however, to recognize that the task
before the Federal Reserve is quite different than the task before the
administration and Congress.
Thus the Federal Reserve, once it established a set of goals and
objectives for the 2, 3, to the 5 year, we have to review those,
and the House version makes it possible, quite explicitly, for the
Federal Reserve Board and the committee to review the target and
the goals it sets and to modify them as the goals change.




40
I think that is an important point. However, both versions of the
bill do make it clear that the Federal Reserve, while it is to run
an independent monetary policy, is called upon to coordinate its
activities explicitly with the rest of the Congress. That is an inno­
vation and the bill ought to have that provision to make certain that
the Federal Reserve understands it is expected to do that.
The bill also spells out— the House version does— the kind of
response expected with respect to the targets.
I will argue later that I would have preferred no new numerical
targets in any case, but as long as they are there, then it ought to
be clear what kind of statement the Federal Reserve is expected to
make with respect to those targets, and the House version again
makes that clear.
The Senate version does not.
Now, Mr. Chairman, the most important feature of the bill is
scattered through a number of various places in the legislation. What
I tried to do on page 8 through 11 in my statement, is to pull to­
gether the various segments of the bill, that would have a direct—
more or less direct impact on the conduct of monetary policy, and
I have tried to suggest there what kind of response the Congress
already expects the Federal Reserve to make under the bill, as those
various provisions are brought to bear.
It is clear that the legislation does not anticipate the monetary
policy and fiscal policy will continue to carry the disproportionate
burden of stabilization efforts which they have carried in the past.
As I read the draft legislation, and the House-passed bill explic­
itly—that is an explicit innovation.
I would like to see that, and I hope it remains that.
The act, however, also calls upon the Federal Reserve to engage
in an open process, as a part of the rest of the Government, to make
certain that monetary policy is consistent with the rest of the na­
tional stabilization policies to promote the economic growth and
reduce unemployment.
That provision is wise and ought to be supported.
The bill in general relates monetary and fiscal policy as a part
of overall Government policy.
One objective of the bill is to promote full employment through
the expansion of private capital investment and formation.
In that concept the role of the Federal Reserve is crucial. The
Federal Reserve clearly will have to make certain that the availabil­
ity of money and credit is sufficient, and the cost of money, interest
rate, is appropriate to finance the kind of investment the business
community would want to make. That too is an important provision.
I hope it would be included.
Mr. Chairman, I was next asked to address myself to the question
of the need for improved dialog with the Federal Reserve, that is,
dichotomy with the Federal Reserve. I deal with that question on
pages 11 through the top of 17.
Let me summarize this quickly by saying that, in my judgment,
there is already a great deal of dialog between the Congress and the
Federal Reserve. Over the last 2 years, since the current resolution
is being enforced, and that was later done also by the Federal Reserve




41
Act of 1977, the Federal Reserve appears before Congress four times
a year, twice before each of the Banking Committees.
It presented a substantial amount of information which the record
shows it did not have a few years ago, and that information can be
used as a basis for building further communication between the
Federal Reserve and the Congress.
In the text of my statement, I have a suggestion for the way
that can be done. Time does not permit me to go into it in detail, but
I would be delighted to respond to it during the question and
answers.
Finally, Mr. Chairman, with respect to the question of a guide
for the inflation target: As I said at the outset, I believe the 3percent target is appropriate. It ought to be included in the legis­
lation as a part of the legislation.
I would prefer no quantitative targets, either for unemployment
or for employment or for inflation.
I f the target for unemployment, a quantitative one can be elim­
inated, it should be.
I f not, the 3-percent target ought to be added, and I would defend
those propositions in questions and answers, if you wish.
The C h a ir m a n . Thank you very much, Dr. Brimmer.
The next witness is a very distinguished economist, chief econo­
mist with the Chamber of Commerce of the United States, and a man
of very considerable experience.
W e are delighted to have Dr. Jack Carlson.
STATEMENT OF JACK CARLSON, CHIEF ECONOMIST, CHAMBER
OF COMMERCE OF THE UNITED STATES
Dr. C arlson . Thank you very much, Mr. Chairman. I, too, would
like to submit my written statement for the record.
The C h a ir m a n . Without objection, it will be printed in full in
the record.
[Complete statement follows:]




42
STATEMENT
on
THE FULL EMPLOYMENT AND BALANCED GROWTH ACT (S.50)
before the
SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
for the
CHAMBER OF COMMERCE OF THE UNITED STATES
by
Dr. Jack Carlson
May 8, 1978

I

am Jack Carlson, Vice President and Chief Economist of the Chamber of

Commerce of the United States.

On behalf of nearly 72,000 members of the

National Chamber, I am pleased to testify on The Full Employment and Balanced
Growth Act (S.50).

Also, I am pleased to have Dr. Paul Reardon, Senior Chamber

Economist, with me to respond to your questions.

POSITION
Although S.50, the Humphrey-Hawkins bill, has been improved since early
1977, the National Chamber is unable to support the bill in its present form.
The bill promises too much.

It is symbolic.

To many people, it symbolizes

boom-bust fiscal overstimulation and accelerating inflation.

Meaningless or

overly ambitious policy declarations should be the wave of the past not the wave
of the future.
Our lack of support for S.50 in its present form is not because of
opposition to its underlying economic objectives nor the objectives of the
Employment Act of 1946, which S.50 would amend.

On the contrary, American

business strongly supports these broad objectives of the bill:
•

"to foster and promote free enterprise"

•

"to promote maximum employment, production and purchasing power"

•

"to promote price stability", and

•

"high rates of capital formation."

Our disagreement is with the way the bill proposes to achieve these
objectives.

The Senate or House bill requires by legislation:




43
•

achievement of an unrealistic 3% adult unemployment rate and 4%
overall unemployment rate within five years, which in turn would cause
higher inflation, at least 5% higher prices, higher taxes, at least
$1,600 for the average U.S. family, and runs the risk of actually
creating fewer jobs because of the greater risk of a recession;

•

reliance on statistical measures that are in the process of being
changed by the National Commission on Employment and Unemployment
Statistics;

•

a goal of 100% of parity in farm prices by 1983 (H.R. 50), which
according 'to the Agriculture Department could cause 3% higher prices
and a loss of real family income of $170;

•
•

government price speculation through food and mineral stockpiles;
steps threatening the independence and flexibility of the Federal
Reserve Board at a time when inflation is increasing and the dollar
is depreciating against other key currencies;

•

wages of public-subsidized jobs higher than the minimum wage and
higher than wages of unsubsidized and fully productive workers earning
near the minimum wage.

This would encourage workers to leave lower

paying but productive jobs for the higher paying but make-work public
jobs, thereby hurting small businesses and imposing an unfair and
unnecessary burden on taxpayers; and
•

an inflexible and cumbersome economic policy process whereby a onehouse veto could overturn the President’s five-year unemployment goals.

Comments on the Bill's General Findings
The General Findings section of the bill follows a negative theme on the
performance of the American economy.

The Findings Section emphasizes the

problems of our economic system without sufficiently recognizing its many strengths.

3 0-454 0

-

78-4




44
The Humphrey-Hawkins bill is biased toward government oversight and
intervention in private decision-making.

Humphrey-Hawkins symbolizes the

view that the Federal government must intervene in the economy through national
goal setting and goal implementation.

In order to monitor deviations from

national goals, the Federal government would need to more closely observe
individual firms and industries.

This principle is made explicit in the bill

where it calls for closer monitoring of prices and wages (and other economic
indicators) in particular industries.
In Findings Section 2(b)(1), the bill declares that unemployment causes
inflation.

This is unusual economic reasoning.

To follow it through we must

conclude that by reducing unemployment to 3% for adults in 1983 we would thereby
reduce inflation.

Recognized economic studies have found just the opposite

relationship between inflation and the unemployment rate as currently
measured.

How Has the American Economy Performed?
The two-fold role of business in our market economy is to provide the
goods and services consumers demand and jobs for people willing and able to work.
Business has been highly successful in producing both.
In regard to employment, the economy has created 38.6 million new jobs
since 1946 when the original Employment Act was passed, over 12.6 million jobs
since the first quarter of 1975 which was the trough of the last economic cycle,
and over 3.9 million during the last 12 months.

More than five out of six of

these new jobs were created in the private sector.
This growth in employment is above the most comparable economic
recovery in the last 25 years




(see Graph 1).

45
GRAPH 1
EMPLOYMENT DURING
ECONOMIC RECOVERIES
(1975:1=1.0)

Also, the United States has been (and is forecast to continue to be) much more
successful in creating jobs than other major industrial countries




GRAPH 2
E M P L O Y M E N T OF
U.

S. A N D O T H E R

INDUSTRIAL COUNTRIES

DURING ECONOMIC RECOVERIES
(1975Actual

1-1.0)
Forecast

(see Graph 2).

46
The market oriented U.S. economy has provided more jobs as a proportion
of the population in recent months than at any other time in U.S. history.

The

level of employment today is greater than during any of the so-called
"full-employment" years since World War II:

58.4% of the population now

employed with about 6.0% unemployment compared with less than 55.7% employed
during years with unemployment at or below 4% (see Table 1).
TABLE 1
EMPLOYED AND UNEMPLOYED
AS A PROPORTION OF TOTAL POPULATION

April 1978
Employed

Average of Ten Years
With Unemployment at
or Below 4%__________

58.4%

55.7%

Armed Forces

1.3%

2.5%

Unemployed (seeking work)

3.7%

2.1%

36.5%

39.7%

Not Employed or Seeking Work
(Labor Reserve)
Total

Source:

100%

100%

U.S. Dept, of Labor, Unemployment Situation, April 1978;
Geoffrey H. Moore, National Bureau of Economic Research;
the "full employment" years are 1947, 1948, 1951, 1952,
1953, 1966, 1967, 1968 and 1969.

In recognition of this outstanding performance and expectation for
the future, a more explicit general finding committing the Government to
preserving the market economy instead of hobbling it would be helpful.

Such a

statement could be inserted in Sec. 2 (General Findings) as follows:
The Congress further finds that the American enterprise system,
operating under the Constitution and laws of the United States,
has produced a higher standard of living, greater economic
opportunity and social justice than that found in any major
industrialized nation and that it is the purpose of this Act to
achieve the goals enumerated herein by encouraging those federal
actions which strengthen the effectiveness of the private




47
enterprise system while at the same time dealing sensitively and
compassionately with those individuals who have been adversely
affected by the dynamics of economic life.

Employment Growth
The record and the prospect of employment growth is ignored in the bill.
It focuses purely on unemployment statistics.

It considers only 3.7% of the

working age population that are unemployed to be important, not the currently
58.4% that are employed.
opportunities.

This is a rather limited view of employment

The fact that the economy created about 4.1 million new jobs in

1977 and 3.9 million during the last 12 months is as important as the fact that
unemployment fell by 886,000 in the same period.

Unemployment and Structural Change
Moreover, the slow decline of the unemployment rate in this recovery
while jobs are being created at all-time record rates reflects a major change
in the economy from past periods of time.
(1)

This change is caused by:

A heavy influx of women and teenagers in the labor force who
voluntarily quit or change jobs more often and cause the overall
unemployment rate to be higher than 10 or 20 years ago.

(2)

Much higher income security (unemployment, food stamps and
welfare) benefits which reduces the incentive to accept newly
created jobs and causes some potential workers to remain
nominally unemployed for eligibility purposes, such as the
2 million employables receiving aid for dependent children.

(3)

The fact that unemployment is far less a hardship because of a
larger proportion of families with two or more workers today.
In part, this is illustrated by the increasing hours spent
working by married women in addition to the hours spent working




48
by married men.

If either a working husband or wife becomes

temporarily unemployed, the other offers a buffer against hardship
that was not available in the past (see Graph 3) .
GRAPH 3
CHANCING WORK HOURS OF MARRIED MFN AND WOMEN
per

Source

Dr

John Haldi "The Impact of New Work Schedules on Business" 1977

For these and other reasons, I do not know many economists who feel that
a 4% unemployment rate is realistic today or in the 1980's.

This is in sharp

contrast to the appropriateness of a 4% unemployment rate in the mid-1950's.
Carter Administration shares this assessment.
states on page 41:

The

The President’s FY 1979 Budget

"The unemployment rate at high employment is estimated to be

4.9% currently and to decline to 4.7% by 1983.

These rates are consistent with a

4.0% rate in 1955, adjusted for changes in the composition of the labor force
towards groups that typically experience higher rates of unemployment."

The

Congressional Budget Office identifies a rate of growth that "is optimistic by
historic standards" — ^ so that the unemployment rate can decline to 4.5% in 1983.

1/

Statement of Alice M. Rivlin, Director, Congressional Budget Office,
before the Joint Economic Committee, December 5, 1977.




49
Such a rate of growth in the private sector would have to rely on a very rapid
growth of business fixed investment.

In today’s economic climate, that rate has

not yet materialized.
S.50's requirement for a 4% unemployment rate within five years is not
feasible.

Broad economic policy such as fiscal and monetary measures may achieve

4-3/4% to 5^% unemployment rates with inflation below double-digit rates.

To go

below these unemployment rates would result in even higher rates of inflation or
require special job programs.

If public sector jobs were relied upon to lower

the unemployment rate from 5% to 4%, you may quickly estimate that only one
million new jobs would be required.

However, new workers drawn in by new job

opportunities would also seek jobs, perhaps another one million more, or a total

2/

of about two million. —

At $9,000 for each job, the federal budget would have to

increase by $18 billion, much larger than the FY 78 Comprehensive Employment and
Training Act manpower budget, or the equivalent of $300 additional taxes for the
average American family.

The reduction in hardship through creatiqn of public

sector jobs, particularly jobs for casual supplementary earners, may not be as
great as the additional hardship imposed upon American families who would pay the
increased taxes.
Changing Definition of Unemployment
Unemployment statistics are imprecise, so much so that the Congress and
the President have established a Commission on Employment and Unemployment
Statistics to recommend ways to improve such statistics:
The Commission’s specific mandate, as set forth in the law is to
"identify the needs of the nation for labor force statistics and
assess the extent to which current procedures, concepts and
methodology in the collection, analysis and presentation of such
statistics constitute a comprehensive, reliable, timely and consistent
system of measuring employment and unemployment and indicating trends
therein.
(January 11, 1978)

2/

This may be a conservative estimate.
Eli Ginzberg recently estimated that
there are up to 17 million potential job seekers who might enter the labor
force under favorable conditions.
Scientific American, Nov. 1977, p. 50.




50
Even if the Commission only makes recommendations as modest as the last
Commission did in 1962 to improve employment statistics, the definitions and
standards for measuring unemployment and employment will likely change.

Such

changes could cause the current statistics of unemployed teenagers to drop from
a 15% unemployment rate to 10% or rise to 20%, depending upon inclusion of
voluntary Armed Forces or changes in minimum number of hours worked each week.
For this reason, among others, it would be unwise to place in legislation
a 4% unemployment goal because the definition is about to be changed and affect
the degree of hardship associated with a current rate of 4%.
The 4% Unemployment Target
The 3% adult unemployment five year goal and the 4% overall unemployment
five year goal are twenty years out of date and unrealistic.

Studies by Professor

Philip Cagan of Columbia University, Robert E. Hall of MIT, testimony by
Charles Schultze, then of The Brookings Institution, in 1976 and, more recently, a
comprehensive study completed by Professor R.A. Gordon for the National Commission
for Manpower Policy conclude that the 4% and 3% targets are not feasible by 1983.
An attempt to achieve this could result in fewer jobs and higher inflation.

The

likely result with even above-average economic policies would cause 1.5 billion
fewer jobs and 5.2% higher prices than would occur otherwise.

With average

economic policies, the drive to achieve the Humphrey-Hawkins unemployment goal
could result in losing 2.3 million jobs and adding 5% to inflation by triggering
a typical recession.

Even with an ideal growth path and economic policies,

Humphrey-Hawkins1 goal would cause at least 6% higher inflation and $1,657 higher
taxes for the average family.

Below average policies and trends could cause much

higher inflation and much lower job growth.

The impact on the citizens of each

State would vary based on labor force composition, unemployment, composition of
industry and average family taxable incomes (see Table 2).




51
TABLE

2

ECONOMIC IMPACT OF HUMPHREY-HAWKINS
E M P L O Y M E N T O B J E C T I V E S BY 1983
(Change

in

Likely Resuits

levels

%
)

from

stable

growth

Ideal Stable Growth 3/

trend)

Typical Recession 2/

Inflation

Inflation

Taxes

Inflation

Jobs

(%)

UNITED STATES
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Dist. of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahona
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming

Jobs
(1000's)

(%)

($77/Fanily)

(%)

(1000's)

5.2
4.0
8.6
4.8
4.0
5.8
5.3
6.1
6.0
6.8
4.8
4.6
6.7
4.5
6.1
4.8
5.2
5.3
4.1
4.5
4.1
5.8
4.9
5.2
5.3
3.7
4.8
4.7
5.5
5.6
4. /
6.0
4.0
5.8
4.2
5.4
4.7
4.4
4.8
5.1
5.2
4.2
4.5
4.2
5.1
6.4
4.4
5.4
5.4
4.1
5.2
5.2

-1,460
-22
-3
-17
-14
-152
-21
-21
-4
-11
-62
-36
-6
-6
-72
-36
-20
-16
-22
-23
-7
-28
-37
-58
-28
-15
-32
-5
-12
-5
-6
-47
-8
-110
-41
-4
-73
-13
-17
-75
-6
-20
-5
-32
-91
-9
-3
-37
-22
-10
-32
-3

1,657
1,286
2,731
1,544
1,269
1 .837
1,702
1 ,936
1 ,922
2,156
1 .545
1.477
2, 125
1 ,441
1,935
1 .540
1,654
1,693
1.314
1,446
1,309
1 864
1,573
1.648
1 ,687
1,191
1.544
1,490
1 ,747
1 ,780
1.511
1 ,900
1,265
1 ,846
1,355
1.722
1,496
1,412
1 ,540
1,630
1,655
1.343
1 .445
1 .338
1,611
2.045
1 ,388
1.707
1.713
1 3i 3
1 .649
1,649

5.0
3.9
8.2
4.6
3.8
5.5
5.1
5.8
5.8
6.5
4.7
4.4
6.4
4.3
5.8
4 .6
5.0
5.1
4.0
4.4
4 .0
5.6
4.7
5.0
5.1
3.6
4.7
4.5
5.3
5.4
4.6
5.7
3.8
5.6
4.1
5.2
4.5
4.3
4 .6
4.9
5.0
4 .0
4.4
4.0
4 .9
6.2
4.2
5.1
5.2
4.0
5.0
5.0

-2,300
-35
-4
-27
-22
-240
-33
-33
-7
-17
-98
-57
-9
-9
-113
-57
-32
-25
-34
-37
-10
-44
-58
-91
-44
-24
-51
-8
-18
-8
-9
-74
-12
-173
-64
-7
-114
-29
-27
-118
-9
-32
-8
-51
-144
-14
-5
-59
-35
-16
-50
-5

6.0
4.7
9.9
5.6
4.6
6.7
6.2
7-0
7.0
7.8
5.6
5-3
7-7
5.2
7.0
5.6
6.0
6.1
4.8
5.2
4.7
6.7
5.7
6.0
6.1
4.3
5.6
5.4
6.3
6.4
5.5
6.9
4.6
6.7
4.9
6.2
5.4
5.1
5.6
5.9
6.0
4.9
5.2
4.8
5.8
7.4
5.0
6.2
6.2
4.8
6.0
6.0

1/ Assumes a 20% probability of the TRENDLONG0378 assumptions occurring during the next 5 years, and an 80%
chance of the CYCLELONG0378 assumptions occurring.
2/ Data Resources, Inc. CYCLELONG0378 (Spring 1978) simulation was used as the cyclical growth case.
In this
simulation, which depicts a business cycle scenario similar to the pre-1973 experience with a recession
in 1982, unemployment rates were forecasted at 5.8% in 1980, 5.0% in 1981, 6,1% in 1982, and 7.1% in 1983.
Consumer prices in CYCLELONG0378 grew at 5.9% in 1980, 7.0% in 1981, 7.4% in 1982, and 6.1% in 1983.
3/ Data Resources, Inc. TRENDL0NG0378 (Spring 1978), which assumes few unpredictable shocks and the right
combination of fiscal and monetary policies, was used as the stable growth simulation to achieve the
Humphrey-Hawkins unemployment objectives. In this simulation, DRI forecasted unemployment rates of 6.0% in
1980, 5,7% in 1981, 5.7% in 1982, and 5.3% in 1983.
Consumer prices in the TRENDLONGO378 simulation grew
at annual rates of 5.8% in 1980, 5.5% in 1981, 5.2% in 1982, and 5.0% in 1983.
The Humphrey-Hawkins
unemployment objectives were achieved by lowering the unemployment rate below what would otherwise occur
from the stable growth trend estimated by DRI.
Humphrey-Hawkins unemployment objectives were assumed to
be 5.6% in 1980, 5.1% in 1981, 4.6% in 1982, and 4.0% in 1983.
Under these unemployment assumptions,
consumer prices grew at 6.0% in 1980, 6.3% in 1981, 6.6% in 1982, and 7.3% in 1983.




52

In order to reduce the likelihood of adverse impacts from an overly
ambitious or economically unfeasible goal, Congress should delegate the
responsibility for determining short term and intermediate term numerical
economic goals to the President with adjustment allowable each year.
For the above reasons we recommend that the provisions in S.50 requiring
achievement of the 4% unemployment rate within five years be deleted and that the
President or subsequent Congresses be allowed to assess the appropriate rate for
that time based on changing characteristics of the labor force, changing
incentives to work, and changing definitions of employment and unemployment.
Section 304 in Title III of the bill reported by the Human Resources
Committee on May 3, 1978 makes the 3% adult unemployment rate and 4% overall
unemployment rate even more binding on the President.

That section would enable

the Congress to overturn a President’s decision to modify the numerical goal
after three years with a one-house veto.

The constitutionality of a one-house

veto is questionable and the President needs flexibility in setting goals for
economic policy.

Section 304 should be deleted.

Economic Impact of Government Actions
The Federal government has often ignored the goal of high employment while
apparently seeking other objectives.

The Administration has supported and the

Congress has enacted laws that slow down the creation of jobs for persons willing
and able to work.

For example, during 1977 the Administration recommended

legislation that could have caused a loss of 2.1 million jobs in gross terms by
1979 and even larger job losses in the 1980’s (see Table 3, line 11).
However, the Congress has rejected or not acted on some of the
Administration’s recommendations; consequently, the job loss would be 0.8 million
by 1979.

After adjusting for the fact that one job might be eliminated by two

separate bills, the net job loss would be 203,000 by 1978, 844,000 by 1979,
1,445,000 by 1980 and 2,516,000 by 1985.




These estimates do not include the job

53
reducing impact of Clean Air and Clear Water amendments and other legislation
that affects the economy but has yet to be measured.

Nor does it include job-

reducing results of numerous new regulations imposed during 1977.

Consequently,

these conservative figures should be considered as underestimates of the
job-destroying results of federal actions during 1977.
TABLE 3
ECONOMIC IMPACT OF THE CARTER ADMINISTRATION’S PROPOSALS
AND CONGRESSIONAL ENACTMENT OF LEGISLATION DURING 1977
________
(Change in Levels:
1978-1985)___________________________
EMPLOYMENT
Gains (+) or Losses (-)
•
(Thousands of Jobs)
1978

1979

1980

1985

502

206

103

100

-605

-1230

-1815

-1926

0

-108

-305

-1284

ENACTED:
(1)

Economic Stimulus

(2)

Minimum Wage

(3)

Social Security Taxes

(4)

Farm Support

-108

-109

-110

-111

(5)

Federal Pay Increases

-102

-110

-110

-209

(6)

Gross Impact of Enacted
1977 Legislation

-313

-1350

-2236

-3430

Net Impact of Enacted
1977 Legislation

-203

-844

-1445

-2516

-110

-549

-735

-1890

-50

-105

-156

-215

0

-109

-202

-703

(7)

PROPOSED AND PENDING:
(8)

Energy Taxes

(9)

Regulation of Intrastate
Natural Gas

(10)

Labor Law Reform

(11)

Gross Impact of Administra­
tion's Proposed and Still
Pending Legislation

-473

-2114

-3329

-6148

Net Impact of Administration's
Proposed and Still Pending
Legislation

-307

-1331

-2164

-4488

(12)

Source:

Dr. Jack Carlson and George Tresnak, United States Chamber of Commerce,
Forecast and Survey Center; Data Resources, Inc. and Chase Econometrics
Modelling and Data; The National Planning Association Data.




54

Price Stability
Removal of the requirement for a legislated numerical goal for
unemployment would reduce the apparent inflationary bias of S.50.

No numerical

goal for price stability was included.
Unequal treatment of price stability and unemployment may give the
appearance that the Congress fails to recognize that reduction of unemployment
to low levels through the powerful tools of monetary and fiscal policies will
result in high and accelerating inflation; subsequently when efforts are made
to slow inflation, unemployment will increase and defeat the employment
objective.

Public policy should consider both unemployment and price stability.

S.50 would be strengthened if the price stability goal-setting process
were placed on a completely equal footing with the unemployment goal-setting
process.

Also, the qualifier "reasonable" ought to be deleted.

Regarding the 3% Inflation Amendment
Amendment 1794 introduced by Senator Proxmire would add an interim
five year goal of a 3% increase in the new Consumer Price Index.

If the bill

still contains the 3% adult unemployment and 4% overall unemployment goals,
then we would recommend inclusion of the 3% inflation target.

A far better

means of reducing the inflationary bias in the bill would be removal of
numerical targets of any kind, allowing officials to set targets as
circumstances warrant in the future.
Elimination of inflation should be an objective supported by the
Federal government on all occasions, not just during the narrow deliberations
of this bill or any other single bill.

This has not been the case.

For

example, during 1977, the Administration proposed legislation that would have
2.2 percentage points to the inflation during 1978 in gross terms
Table 4, line 11),




(see

55
The legislation passed by the Congress would add 1.8 percentage points
to the inflation rate in gross terms, and, after adjusting for the effect of
overlapping policies, will add a "net1 0.8 percentage points to the inflation rate
1
in 1978 and 1.8 percentage points by 1979.

So, while the Administration forecast

consumer price inflation of 6.1% for 1978, it would have been only 5.3% had the
Federal government not enacted cost-push inflationary measures (see Table 4).
These estimates do not include cost-push inflationary policies enacted
prior to 1977 but effective in 1978, such as the social security tax increase
January 1978, and increases in regulations, such as new clean air and water
regulations.

When these are included, government is causing 2 percentage points

acceleration in inflation.
Government Economic Stockpiles
Proposed Government price speculation in food and mineral stocks is
an unnecessary intrusion into the private sector and, importantly, Federal efforts
in the past have proven to be poorly timed and more hurtful than helpful.

Food

stockpiles for humanitarian purposes and mineral stockpiles for strategic purposes
can be justified, and have been established by separate legislation.

An open

invitation for the Government to speculate in commodities on economic grounds
should not be enacted.

Nor should a harassing or burdensome new reporting system

be initiated.
In particular, Title I, Sec. 109 (amending Sec. 9 of the 1946 Act)
subsection (1) calling for "an effective information system . . . "
(3)

and subsection

calling for "establishment of stockpiles of agricultural commodities and

other critical materials to help stabilize prices . . . "

should be deleted.

Regarding Federal Reserve (FRB) Reporting (Section 108)
This section causes great concern among business people everywhere.
The Joint Economic Committee (JEC) 1978 Joint Economic Report calls for
improvements in fiscal and monetary policy coordination.

The Report urges the

Congress to assure that monetary and fiscal policies do not work at cross




56
TABLE 4
CHANGES IN INFLATION
BECAUSE OF THE CARTER ADMINISTRATION'S PROPOSALS
AND CONGRESSIONAL ENACTMENT OF
LEGISLATION DURING 1977
(Change in Levels:

1978-1985)

Inc,, (+) or Dec. (-)
in Consumer Prices
(Percent)
1978

1979

1980

1985

Gain (+) or Loss (-)
Purchasing Power for
Average Family
($1977)
1978

1979

1980

1985

ENACTED:
(1)

Economic Stimulus

0.1

0.2

0.2

0.2

-30

-59

-62

-72

(2)

Minimum Wage

1.1

2.0

2.7

2.7

-298

-554

-764

-830

(3)

Social Security Taxes

0.0

0.1

0.3

0.3

0

-40

-93

-104

(4)

Farm Support

0.4

0.5

0.6

0.8

-119

-148

-183

-261

(5)

Federal Pay Increases

0.1

0.1

0.2

0.2

-38

-41

-50

-75

(6)

Gross Impact of Enacted
1977 Legislation

1.8

3.0

4.1

4.4

-485

-842

-1153

-1342

(7)

Net Impact of Enacted
1977 Legislation

0.8

1.8

2.5

3.0

-222

-501

-713

-908

-454

-803

-1393

PROPOSED AND PENDING:
(8)

Energy Taxes

0.4

1.6

2.8

A.5

-119

(9)

Regulation of Intra­
state Natural Gas

0.0

0.0

0.1

0.4

0

0

-34

-126

(10)

Labor Law Reform

0.0

0.6

1.3

3.7

0

-152

-353

-1138

(11)

Gross Impact of Admi­
nistration's Proposed
orPending Legislation

2.2

5.2

8.4

13.1

-604

-1448

-2343

-3999

(12)

Net Impact of Adminis­
tration's Proposed or
Pending Legislation

1.0

3.1

5.2

8.8

-276

-862

-1452

-2719

Source:

Dr. Jack Carlson and George Tresnak, United States Chamber of Commerce,
Forecast and Survey Center; Data Resources, Inc. and Chase Econometrics
Modelling and Data; The National Planning Association Data.




57
purposes.

The Report asserts JEC concern with the development of a rational

monetary-fiscal strategy.
To facilitate this strategy the JEC wants the FRB to report to Congress
in a more detailed, quantitative and disciplined fashion than even that required
in the language of S. 50 or existing law.

"This reform", the Report asserts,

"would ensure that monetary and fiscal policies aim at the same goals rather than
work at cross purposes as has happened all too frequently in the past."
In his report to the Congr-ess on April 25, 1978 FRB Chairman Miller said
that "the (FRB Open Market) Committee remains firmly committed to a gradual
reduction in monetary growth over time to rates more nearly consistent with
reasonable price stability."

The strong language of the JEC Report regarding

the need for a coordinated fiscal-monetary policy strategy may suggest to many
financial decisionmakers that a Congressional view as to appropriate current
monetary policy should overrule the existing decision of the FRB Open Market
Committee on bringing down the rate of growth of the money supply.
The inherent danger in this JEC language is that it suggests to many
people that the Congress should set quantitative targets for growth of the
money supply.

This could mean that such targets would be politically

determined and might not be the kind of targets which can be made operational
without inducing harmful side effects.

Foreigners who hold balances of up to

$400 billion might be led to expect higher inflation and a depreciating dollar
as a result of this political means of selecting monetary growth targets.
might then reduce the dollar commitments in their financial portfolios.

They
This

could have disastrous effects on world trade as nations moved further into
protectionist measures against the balance of payment deficits caused by a
cheaper dollar.




58
Therefore, there is a real danger that politically determined monetary
growth targets would be unrealistically high and have a self-fulfilling
inflationary impact by affecting the expectations of workers, investors,
financial decisionmakers and others.

Congress has wisely assigned the responsibility for determining
monetary policy to an independent body.

Inclusion of a balance of payments goal among the list of numerical
annual targets to be submitted by the President would indicate consistency
among the various targets and the foreign sector.

R e g a r d i n g C o n g r e s s i o n a l R e v ie w

o f t h e P r e s i d e n t ’ s E c o n o m ic R e p o r t

(T itle

III)

Our major concerns with this section as reported by the Senate Human
Resources Committee on May 3, 1978 are its amendment of the Budget process,
and the JEC objectives of having the Congress sign-off on the President’s
annual numerical targets for several economic indicators.

We believe it is

preferable for a legislative body to assign responsibility to others for
selecting operational numerical targets.

The House vote on the 100% farm

parity goal in H.R, 50 compared to its vote on the Emergency Farm Bill verifies
our concern in this respect.

The House added the 100% farm parity goal by a vote of 264 to 150.
Then, on April 12, the House voted down by 150-268 the Emergency Farm Income




59
bill (H.R. 6782) which had passed in the Senate by a vote of 49 to 41.

The

House vote on April 12 was the mirror image of its easy vote on the economic
goal barely one month before.

There is no better example than this of the

disparity between voting on numerical economic goals in a legislature and
voting for large expenditures and action to achieve the goals.

We prefer that

all numerical goals be dropped from this bill.

Regarding Budget Discipline
The second concern relates to S.50’s ignoring the discipline that the
concurrent resolution on the federal budget and the entire budgeting process
required by the 1974 Budget Control Act imposes on the Congress.

Individuals

in the market economy are disciplined in their spending decisions by their
limited incomes, and by their limited ability to borrow in the context of
relentless market forces.

Congress can discipline itself only through a process.

Since 1975 Congress has had such a process and Title III threatens to weaken it at
precisely the worst possible time.

With a $53 billion deficit budgeted in the

third year of an economic recovery and with the dollar having declined by more
than 17% against the Swiss Franc and by 10.4% against the German Mark in the last
seven months, we need the discipline of our budget process more than ever.
We urge that no amendment be made to Section 305 of the Budget Control
Act regarding "Provisions relating to the Consideration of Concurrent
Resolutions on the Budget."

We cannot support any weakening of the budget

process discipline for the purpose of introducing "soft" statements on economic
goals.

Regarding Section 402(b) on Wages
Section 402(b) directs the President to insure that any person in any
job utilizing funds provided even in part under this Act shall be paid not less

30-454 0

-

78-5




60
than the pay received by others performing the same type of work for the same
employer.
This would apply to many structural employment policies and in
particular it would apply to the reservoir jobs recommended to the President
in the bill.
Table 5 demonstrates what reservoir jobs for the unskilled would cost
in the public sector.

Wages for park laborers range from $3.25 per hour in

Cleveland, Ohio to $5.68 per hour in Seattle and Chicago.

Wages for refuse

collectors range from $3.93 per hour in Atlanta to $7.16 per hour in Chicago.

TABLE 5

MEDIAN HOURLY WAGES IN MUNICIPAL GOVERNMENT

Occupations
Janitors,
porters &
cleaners

CITIES

Cleveland,
Ohio

$3.59

Laborers
Class A

__

Laborers
Class B

$4.34

Park
Laborers

Refuse
Collectors

$3.25

$4.89

Kansas City,
Missouri

3.71

3„54

3.12

Atlanta,
Georgia

3.35

4.10

3.09

3.78

3.93

Seattle,
Washington

4.76

5.90

5.30

5.68

7.04

San Diego,
California

4.49

4.79

-----

4.68

-----

Chicago,
Illinois

5.45

7.95

-----

5.68

7.16

Source:

-----

4.69

U.S. Department of Labor, Bureau of Labor Statistics Municipal
Government Wage Surveys for each of the above cities.
(Class A
laborers use power tools and Class B laborers do not.)




61
According to a Bureau of Labor Statistics survey comparing municipal
government salaries to private industry salaries, janitors, porters and cleaners
working for government earn 10% higher wages than those doing the same work in
the private sector in Atlanta, 22% higher in Chicago, and 8% more in San Diego
and 4% more in Seattle, 7% less in Cleveland and 6% less in Kansas City.
Therefore, as Section 402(b) is written, the law will mandate that
janitors, porters and cleaners working on public service jobs in Atlanta,
Chicago, San Diego and Seattle be paid higher wages than available to the
comparable employee in the private sector.
An unweighted average of the wages on Table 5 indicates an average wage
to be paid on jobs covered by this bill in the neighborhood of $4.73 per hour,
or $9,838 per year.

This is higher than the 1977 average hourly earnings for

wholesale and retail trade ($4.28 per hour), a sector of the economy with almost
15 million employed workers.
Clearly, even a cursory overview of the wage standards of this bill
demonstrates that employees will be drawn away from small businesses into the
public service employment sector or many small businesses will have to raise
their wages to compete with municipal government wages as programs to achieve
the b i l l ’s 3% adult unemployment and 4% overall unemployment targets are
implemented.
We urge that this prevailing wage requirement be deleted from the bill.

Regarding Farm Parity
The House bill (H.R. 50) sets a new goal of 100% of parity in farm
commodity prices by 1983.
unemployment —

Achieving this goal would add to inflation and

and it would lower output and incomes of Americans.

To

accomplish 100% of parity in farm prices would require mandatory government
controls over farm production and would result in government planned scarcity,




62
vulnerability to export controls and a lack of world confidence in the
availability of U.S. farm exports.
The Agriculture Department, in a March 3, 1978 Issue Briefing Paper,
has estimated that 100% of parity in 1978 would reduce national economic growth
(GNP) by h°/o a year —

at an annual cost of more than $10 billion.

This is

equivalent to a $170 loss of income for the average American family.

The loss

would be greater by 1983 in the larger economy at that time.
The Agriculture Department also estimated that 100% of parity would
increase consumer prices by 3%.

This would result in a $400 loss of purchasing

power for the average family, if its income did not adjust to the price changes.
Consumers would have less to spend on other products.

Consequently, employment

in the economy would decline by about one-half million.
The Agriculture Department estimates that 100% of parity would raise
farm incomes by $20 billion, although at a great cost to the market system for
agriculture.

If parity is achieved through government subsidies, this would be

equivalent to increasing taxes for the average family by $335.

SUMMARY
While we support the objectives of the bill, we believe that its
declaration of policy and goals are biased toward inflation.
impose rigid goals on the President.

The bill would

The President needs greater flexibility

to adapt policies to changing economic circumstances.

The 3% adult unemployment

goal and 4% overall unemployment goals are unreasonable and inflationary.

The

bill reflects a continuing attempt to reduce the independence of the Federal
Reserve System.

The process for Congressional Review of the President’s

economic goals and Report would weaken the discipline of the budget process.
The wage levels specified in Section 402 would result in more costly jobs




63
programs and unwarranted competition by government with small business for
unskilled workers.

Implementation of the (H.R. 50) 100% of parity goal by 1983

would be highly inflationary, disruptive of the market process and could cause
renewed political efforts to reduce agricultural exports.
The b i l l

h a s n o t b e e n am ended a s we h a d u r g e d .

Implementation of highly stimulative fiscal and monetary policies plus
large scale spending increases on structural jobs programs would be inflationary.
Inflation would rise to rates considerably higher than those of early 1978.
would be a much greater chance of recessions from such policies.

There

If a

recession occurs there would be fewer jobs and higher unemployment than if
economic growth had not been accelerated as the bill requires.

Average family

real income would be lower and inflation and unemployment higher if supercharged
economic growth results in a sharp economic downturn.




64
Dr. C arlson . I would also like to identify myself with the broad
economic objectives of the bill, to foster free enterprise, purchasing
power, promote price stability and high rates of capital formation.
Certainly, I think most Americans could support those objectives.
However, the specific way of going about to achieve those does
raise problems, and that is why the National Chamber recommended
changes in both the House and the Senate, to the legislation in both
bodies. First, we strongly recommend removing a numerical unem­
ployment goal, particularly a 4-percent overall and 3-percent adult
unemployment goal. This I frankly feel, given the tradeoffs that
would have to be made, is unachievable.
Like Senator Brooke, I do think we should look for things that
are somewhat achievable, especially those that can be achievable
with real jobs, productive jobs, in the private sector, and I don’t
think 4-percent or particularly the 3-percent adult numerical un­
employment goal is achievable.
I would much rather have the process to identify the numerical
goal for each year’s or for several years ahead, but in that process not
to have it in concrete in legislation.
Clearly, almost any reputable economist, I know, I apologize, I
should say the majority, would clearly think going to 4 percent re­
quires a tremendous tradeoff in inflation or does require a lot of rela­
tively unproductive jobs, public sector jobs. This does reduce some­
what the 4.7 percent 1983 noninflationary unemployment rate cited
in the 1979 OMB Federal Budget documents. Other people have
shown that that rate is closer to 5*4 percent. In fact, the current
Chairman of the Council of Economic Advisors, Charles Schultze,
testified before the Congress a couple of years ago and indicated once
you start going down to a 5y2 percent unemployment rate, you do
initiate inflationary pressures and go up (Congressional Record May
27, 1976, pp. E 2920-22).
I f that is the case, you go to public sector jobs at $9,000-plus per
job, (CETA Public Service Employment cost and consistent with
sec 402 of S.50) you are talking about a considerable increase of ex­
penditures there and the taxes that pay for that, or you have to suffer
the inflationary consequences. Also putting in concrete a 4-percent
numerical unemployment goal is assuming we have a perfect defini­
tion for it. The Congress and administration set up a National Com­
mission of Unemployment and Unemployment Statistics; and, being
a member of that Commission, I can assure you that the definitions
do change the numerical value, and I think it would be much wiser
for the Congress to wait and see what better definitions are and there­
fore determine those goals from those different definitions than going
into concrete now as to what 4 percent may be with the current defini­
tion and the current definition is generally felt to be defective.
I agree with Senator Brooke’s comments again, efficiency measures,
referring to unemployment and unemployment and certainly any new
measures would have to address some of those issues, so having a
numerical goal, put in law, I think would clearly be a mistake.
Senator Proxmire brought out the asymmetry that exists with no
numerical goals for price stability and clearly the logic could be ar­
ranged. I f you think both are available, then they both should have




65
the same force of law. If you put one in the law you should have the
other. However, I would prefer not to have the numerical goal in law
or the inflation goal in law, but have it developed by the process,
through the administration and Congress, as each year goes along,
but if you were to choose one, also overly ambitious and equally diffi­
cult, and I would say, infeasible, 2 percent would be one that could
match up well with the 4-percent unemployment and 3 percent for
adult males.
W e create a problem of inflexibility with the 4-percent objective or,
if you legislate a 3-percent objective for the inflation rate by oneHouse veto of a change in the goal required in your current law.
Either House can veto a President’s proposed change in the interim
goals we must have (sec. 304, S. 50). Consequently you are locking
yourself perhaps more into bad definitions, and perhaps bad objectives
over the longer run by making it very difficult for Presidents or Con­
gresses to go ahead and change the objectives they have.
As Congressman Fisher pointed out, I too have looked at choices
of policy, tax cuts, spending increases or other alternatives or mixes
of those to see what it would cost in the next 5 years. I can’t see us
getting to a 4 percent overall unemployment rate without a minimum
of 2 million public sector jobs at $9,000 each. You are talking about
$18 billion or about $300 per average family increase in taxes. Also
you run a substantial risk of recession higher than you would other­
wise have, and we normally have recessions over a 4- or 5-year period
of time in the postwar period anyway, but it would be higher, be­
cause you w^ould be asking for a higher tuning of the economy.
Paradoxically, you could run up with a job loss, as identified in
S. 50.
In another area, the subsidized jobs wages, being equal to or greater
than other workers’ wages and not limited to minimum wage, I think
is a mistake. You have the circumstances that a person who is in a
fully productive job paying less would, in effect, be enticed to go into
a less productive job, financed or subsidized by the Government, or
you would have the situation of a taxpayer who would be at a lower
income subsidizing a higher-paying job than he receives. Many
workers in the huge retail trade sector for example would subsidize
public service workers earning more than their own wages. This is a
redistribution of income up the income ladder, so I argue you ought
to limit the jobs of last resort to the minimum wage.
I do hope, too, that you would strike out the 100 percent of parity
in farm products in the House bill and not put one in on the Senate
side.
The Department of Agriculture has identified that is worth 3 per­
centage points in the Consumer Product Index.
In the gross national product it is about half a percentage point
slower real growth or $170 loss of income for the average family. Also
I suggest if you go ahead with the legislation you provide some sortof sunset provision.
I think this deserves that kind of treatment, just as other laws
deserve that kind of treatment.
My last point, I would disagree with Congressman Fisher in terms
of his suggestion to add to the legislation wage and price guidelines




66
and compliance or Government negotiated prices and wages as an
amendment. As an amendment, I think that would be a mistake.
If the changes that we have suggested are not made, then we have
to stand in opposition to the bill.
The C h a ir m a n . Thank you very much, Dr. Carlson for your con­
cise and effective presentation.
Our next witness is an old friend of all of the Senate committee,
and a man who has served this Government a long, long time— in
Harry Truman’s administration, as Chairman of the Council of Eco­
nomic Advisors and many other capacities, highly esteemed as an
economist, Mr. Leon Keyserling.
STATEMENT OF LEON H. KEYSERLING
Mr. K eyserling . Mr. Chairman and members of the committee, I
must say that I feel a little depressed.
The discussion thus far has covered some very interesting points,
but really hasn’t stressed at all adequately what this bill is all about.
Now, the chairman was kind enough to give me credit for being
old enough to have worked with Harry Truman. Actually, I got here
in March 1933. During the 45 years that I have worked with Govern­
ment policy I have been reminded of a story of Napoleon at the Battle
of Austerlitz, his greatest victory. Before the battle, one of his mar­
shals came up to him and said, “ You are opposed by two armies, the
Prussians and the Russians. Each has a general, and you are going
to win, because one good general is better than two bad generals.”
And Napoleon said, “No, I am going to win because one bad gen­
eral is better than two good generals.”
In my 45 years in Washington, I have come to believe that this
story illustrates what this bill is all about. We have had many eco­
nomic policies which I am willing to call good. But we have never
had a unified policy, except during World War II. We have had
policies and programs, but we have never had a unification of policy
or program. We have had spur-of-the-moment decisions. We have
had emergency legislation. But we have not put it all together.
I can’t imagine any time when this was more acutely true than now.
We operate a system where, with all due respect, a President proposes
and the Congress evaluates and disposes. And how can the Congress
cease to be concerned about the changes, and I am not being critical
of anyone in particular, the inconsistencies, the partial remedies, the
short range views, that have come to be the hallmark of the policies
of a great Nation which can do better and needs to do better?
Now, let me run quickly through my experience, and then point out
how the Humphrey-Hawkins bill deals with this problem of policies
but no policy, programs but no program.
The big issue is not the relative weight to be attached to inflation
and unemployment.
I regard this as asking, what is more important, for a man to keep
his liver or to keep his heart? .
They are both parts of the same human body, and they surely re­
late, and both must function well for the total body which they both
serve to do well.




67
Let me next cite some of the inconsistencies in national policies
which I have experienced.
I came down here during the start of the New Deal, and many
wonderful things were done.
But why didn’t we recover fully until World W ar II?
Because we took one step in one direction and another step in
another direction. We plowed under the pigs at the same time people
were starving and needed to be fed. We sought to increase production
and authorized restraints which reduced production. We pilloried
businesses at the same time that we asked for expansion. I can go on
ad infinitum.
Then we got in World War II. We then applied a business prin­
ciple, equally applicable to Government in war and peace. You have
to have objectives which you state quantatively— the family does, the
business does, Federal Government should— then you have to adjust
policies to objectives, and you have to put the policies together so
that each relates to each other, and you have to quantify them all.
We accomplish miracles by doing that during World War II.
People say, well, we are not in a war anymore.
Well, if we learned a better anesthesia method during the war, we
don’t abandon it when the war is over.
Surely, we don’t need the high tax we had during World War II,
we don’t need the kind of controls we had then, but the simple prin­
ciple of how much more the American economy can do by putting
things together than by flying blind is applicable for the long term,
in peace no less than in war.
I think we applied that lesson pretty well under President Truman,
who was a good administrator. I think he put things together, I think
he made a good economic record. I don’t want to belabor that point.
But in the main, in the main over the last 25 years, we have combined
a very bad average record for the American economy with a failure
to put policies together, a failure to budget the economy, while we
talk about budgeting the budget and the budget’s a part of the
economy.
Let me give some specific areas, bringing you right up-to-date. We
talk now about how unemployment is lower than it was 2 months ago.
And how it is lower than it was 2 years ago. You know what that is
like? That is like watching a man out in the water whose head is
bobbing up and down as he struggles, and every time he comes up
you say, “oh, his head is up again, we can stop worrying about him.”
That is not the problem now.
The real problem of our economy today is not short-range. It is
the long range problem of getting out of the troubled waters of
25-year duration. It is not the one day problem of a banana seller on
the street. It is the long range problem of a great Nation. That is
why the Humphrey-Hawkins bill requires a 5-year approach.
Near the peak of this recovery, and I think we are near the peak
now, our unused resources are higher than at 2 of the troughs of
the 5 recessions that we have had in the last 25 years. Is that a real
recovery ?
Or does calling it a real recovery represent a failure to adjust for
the stage of the business cycle, just as we adjust data seasonally to get
a true picture of longer range trends?




68
So we can’t meet this problem by saying, oh, we are over the hump,
the head is bobbing up again.
The economy has been in a long-term retreat from the great source
of its wealth and strength, the full use of its resources, for 25 years.
And my charts 1 and 2 show that, adjusting for cyclical factors, we
have gotten worse and worse off on a chronic basis. Each recovery
has been more aborted, each recovery has been shorter, and each one
has carried us less upward. It is pointless and irrelevant to guess
whether the unemployment rate will be 6 percent or 5.6 percent by
the end of 1978. The vital pont is that we are headed toward a con­
tinuation of the rollercoaster economic performance, continuation of
the long-term retreat from full resource toward another recession
bigger than the last one.
Let me give a second example of the inconsistent and conflicting
policies. They relate to the matter of how we have approached the
problem of economic stabilization. We have approached it mostly
through tax reduction.
But you know what it’s been like?
It’s a blunderbuss method. “If the economy is tight, let’s restrain it.
If the economy is slack, let’s stimulate it.” But here’s the way we
have done it. We have done it, like a fellow driving up to a gasoline
station and saying, “fill her up.” When the attendant says, “shall I
pour the gas into the cooling system and the water into the tires and
the oil into the gas tank,” the economists within the Government say,
“what difference does it make? Haven’t you heard of Lord Keynes?”
This is not responsive to the way the economy works. The economy
gets into trouble because there are imbalances, defects in the struc­
ture, in the structure of the labor force, in the structure of the fiscal
and monetary arrangements, in the distribution of national income,
and when you seek to fill it up you can’t just fill it up. You have to
ask, “where is the trouble and where should we apply stimulus and
where should we apply restraints? How do we have a selective pro­
gram that responds to a complex economy which is out of kilter?”
I have illustrated these points in my charts. It’s a pity I don’t have
the time to go through them. Among other things, I show that all of
the tax reductions we have enacted since 1964 have meticulously and
increasingly attempted to fill her up without examining where to do
the pouring.
On net balance, these tax reductions have made the distribution of
income more regressive. They have applied relative help to the various
sectors of the economy which has fed the fat and starved the lean.
I am not talking from the equalitarian point of view or idealistic or
reformist point of view. I am talkng simply in terms of the realities
of how the economy works and what has happened after each tax
reduction. Each one, because we did not put things together under a
consistent set of goals and policies, gave the economy a shot in the
arm for a brief spell, but for the longer run augmented the economic
imbalances which brought on another stagnation and then another
recession. This is why we so much need to put things together, to
have related goals, and to reexamine goals and policies year by year.
We did that during World War II and the Korean War, and I know
how we did it. And I know how we got unemployment down to 2.9
percent and inflation down to 0.8 percent at the same time by 1953.




69
But nobody wants to set up a Department of Experience in the Gov­
ernment, which is the department we now need.
What happened, why did it happen, what can we learn from it?
You read all the reports on what we ought to do now. They say,
“we have had the five cycles, how did we get into them? We got into
them because of inflation.” That is far too simple. There was not infla­
tion before most of the recessions; there was before some of them.
There was no inflation before the Great Depression, nor before the
1953 or 1957 recessions. So what is the real explanation of the down­
turns ? The real explanation is imbalances in the structure.
During the Korean war we had a selective program, we said what
is the goal for investment, what is the goal for consumption, what
is the goal for public outlays, why do we need to stimulate some
lines of shortages and at the same time and restrict other things? We
cured imbalances, treated maladjustments, and brought things into
compatible relationships.
We adopted a maturity that has some relationship to the American
economy. We haven’t done much of that since.
,
Now, I come finally to the matter of the inflation question, which
was raised. I said at the beginning, you have a heart and a liver, and
the proper functioning of both are equally important. You know the
greatest single trait of American economy policy in the last 25 years
is that we have oscillated from day to day between saying one is more
important or the other is more important. They are equally important,
equally essential, they interrelate. But not recognizing that they
interrelate we haven’t looked at the empirical evidence for the last
25 years, which gives the key to the main, although not the only solu­
tion to the problem of inflation. For the main key to the solution of
inflation is to have the economy operating close to the optimum and
not stagnating.
I have traced through in separate charts, and increasingly nobody
has challenged it, there is a positive correlation, a positive correlation
between a lower level of unemployment and a lower level of inflation.
This is proposition No. 1.
Now, I agree with the chairman entirely, that we should have in
this bill a quantitative goal, a series of quantitative goals, for the
reduction of inflation, integrated with the other parts of the economy.
I would add to the section of the bill that deals with the goals for
productivity and for employment and for production and purchasing
power a specific requirement that the President and the Congress
every single year, every single year, the President would have to set
a quantitative goal for employment reduction and for inflation re­
duction and the Congress under this procedure would have to review
it each year and Congress can modify the President’s program.
I think you should have a goal every year for each of the bills as
enacted by the House, and as reported by the Senate.
The only thing that concerns me, Mr. Chairman, and I don’t say
this by way of argumentation, the only thing that concerns me is
the putting of the unemployment-reduction goal and the inflation
reduction goal together in the way which supports a continuation or
the attempted trade-off of (he two. Anything that puts a goal in this
bill for the reduction of inflation that didn’t impose or permit a trade­
off between unemployment and inflation would be workable. Any




70
thing that doesn’t, would be a repeat of the most disastrous mistake
that we have made in national economy policy for many a year.
Furthermore, I see a human difference between the unemployment
problem and the inflation problem.
I think employment is an end, and prices a means. Lower unemploy­
ment is always desirable. Lower prices may or may not be, at any
given time, depending upon a variety of factors, including the rela­
tionship of price trends to other trends.
I think Congress must determine what amount of unemployment
will be allowable in the United States. I don’t know whether Congress
could determine 5 years from now whether the rate of inflation should
be 3 percent or 4 percent or 2 percent. I think they can join with the
President each year in defining that goal on a pragmatic basis.
I am sorry my time is up. I don’t want to overdo it, but I get back
to the main theme.
This bill has every provision in it for imposing the discipline of
goals, a series of interrelated objectives and annual testing of whether
we are meeting the goals through the policies being used. Therefore,
the argument that the bill doesn’t have anything in it because you
could do this anyway, is spurious; everybody could drive less than
55 miles an hour without a speed limit. Everybody could have pros­
perity without any taxation and without spending for if the economy
operated perfectly— but under a free society, we need laws to chan­
nel people into the doing of what they otherwise have not done.
The Employment Act of 1946 did not require anything we could
not have done anyway. But, as the chairman said, that act achieved
a lot, and we have learned a lot and can do a lot more and I think
this bill focuses on the things we need to do, to apply the discipline,
the quantification, the interrelationships, and the planning. Not plan­
ning of whole economy, however. This bill doesn’t ask the Government
to assume any function it doesn’t already have, in the categories of
taxation, monetary policy, fiscal policy, structural policies, Federal
Reserve policy, farm policy. These are all going to stay in
Washington.
The bill simply provides as to the things that you, the Government,
do, not the policies of the private economy, as to the policies you do,
put them together, evaluate them, quantify them, study them year
by year and have a participation of the President and the Congress
so we don’t continually have a system, really, of checks and no system
of balances.
Thank you.
[Complete statement of Dr. Keyserling follows:]
T e s t i m o n y of L e o n H. K e y s e r l i n g , C h a i r m a n , C o u n c i l of E c o n o m ic A d v is o r s
to P r e s id e n t T r u m a n . P r e s i d e n t , C o n f e r e n c e o n E c o n o m ic P ro g r ess

Mr. Chairman and Members o f the C om m ittee: The measure before you is
comprehensive and detailed. But to save time, and to try to be most helpful, I
shall concentrate upon its unifying and central purpose, which is frequently
overlooked and which I deem to be o f utmost importance.
L A C K OF CO H ESIO N AN D ST E A D FA ST N E SS IN U SE OF PO LIC IE S

This central purpose is to bring more discipline and effectiveness into national
economic policy by substituting longer-range analysis and action fo r a series of
disconnected fits and starts in response to the seeming problems o f yesterday,




71
today, or the next few m onths; to provide more effective use of past experience
as a guide to current decisions; to substitute greater consistency o f action for
actions which are all to frequently uncorrelated, inconsistent, or even at cross­
purposes ; to develop a closer connection between the goals sought and the means
used, with the means continuously evaluated in terms o f progress toward the
g o a ls ; and, in the relationship between the Executive and Legislative Branches,
to accent processes which, under our system o f checks and balances, find a
better apportionment between the two, so that excessive resort to the checks
does not result in stalemate and frustration.
IGN O RING T H E C H R O N IC, LONG-RANGE N ATU R E OF OUR ECONOM IC TROUBLES

In order to set forth the seriousness and duration o f these problems, let us
use the current economic situation and the attempts to deal with it as an
example o f the first difficulty I have mentioned, the undue substitution of
short-range for long-range analysis and policy. W e hear and read on all sides
that the rate o f unemployment was lower last month than two months ago or
two years a g o ; then we speculate whether it may be still lower next month
or a year from now, and thus mask the nature o f the chronic problem. For we
have been in a chronically weakening economic situation fo r a quarter century
since 1953. The average annual real growth rate has been phenomenally low by
historical tests and in terms o f our potentials; we have been experiencing a
“ roller-coaster” economic performance, and are now in the fifth cycle of
stagnation, recession, and inadequate upturn, w ith the trough of each recession
and the peak o f each recovery tending to leave us with more disuse or wastage
o f human and other production resources than the previous troughs and peaks.
At the current stage of the recovery movement, the percentage rate of our
unused resources is not only higher than at the peak or near peak o f any
previous recovery movement, but higher than at the trough o f three o f the five
previous recessions. This chronic retreat is a staggering fact, and the failure
to recognize its current significance is like watching a struggling person in
deep water and cheering each time his head bobs above the surface. The
validity o f my conclusions that we are challenged by a chronic or long-range
rather than a temporary difficulty is supported by my Charts 1 and 2.
IN A D E Q U A TE RESPON SE TO COSTS OF T H E C H R O N IC RETREAT

The failure to recognize the chronic or long-range rather than the temporary
or short-range problem to be dealt with arises in large part from failure to
focus upon the economic, civil, and social costs o f the chronic or long-term
retreat from that fu ll utilization o f our production resources which is the
ultimate source o f our wealth and progress. Conservatively estimated, the
forfeitures resulting from neglect or misdirected policies during the quarter
century include almost 5.3 trillion 1977 dollars worth o f total national produc­
tion and more than 72 million man-, woman- and teenager-years of unemploy­
ment in excess o f reasonably fu ll employment. For the details o f this, see my
Chart 3. This is the core explanation of all o f the other difficulties with which
we have been struggling unsuccessfully because we treat them in isolation and
not in their broader setting. The vast and grow ing gaps between full employ­
ment and fu ll production on the one hand, and actual economic performance on
the other hand, explain during the past 25 years a forfeitu re of far more than
a trillion dollars in public revenues at all levels at existing tax rates. With
these revenues in hand, we could have served fa r more adequately some of the
great priorities o f our national needs depending upon public outlays, which
we all know we should be serving better but feel that we cannot afford to serve
better. And at the same time, we would not be confronted with the huge and
rising Federal Budget deficits to which w e attribute so many of our difficulties,
including the inflationary problem. The intimate connection between the
chronic malaise o f the economic perform ance and the chronic and alarming
increase in the Federal deficit is illustrated on my Charts 4 and 5.
M IS M A N A G IN G T H E C A U S A L R E L A T IO N S H IP BE TW E EN U N E M P L O Y M E N T AN D IN F LA TIO N

Undoubtedly, the best example o f our failure to examine cause and effects
is our hesitant and inconsistent treatment o f the problem o f unused resources
and inflation, respectively. One month we say that unemployment is the top




72
priority problem, and the next month we say that it is inflation. And year after
year, we have tried deliberately, in the name o f the so-called “ trade-off,” to
solve or ameliorate one problem by restraining vigorous attention to the other
problem. Nothing could be a more poignant illustration than this o f the constant
improvisations and redirections o f emphasis which neglect the longer-range and
compelling empirical evidence in the great laboratory o f the U.S. economy in
action. Indeed, the empirical evidence has now become compelling, over the
past quarter century to date, that the inflation rate tends to be lowest when
the economy is close to or at reasonably full resource use, and tends to be
highest when the percentage rate of unused human and other production
resources is highest. This is revealed on my Charts 5 and 6.
One explanation of this is that the shortages— in medical care, housing,
energy, food supply, etc.— in consequence o f resort to an economy o f scarcity
rather than abundance are inflationary per se. Another even more important
reason is that an economy operating close to full resource use has much lower
costs per unit of output, and therefore much less impulse to increase prices per
unit, than an economy operating inefficiently at far below the optimum rate o f
progress. Similarly, an automobile driving 25 miles an hour burns more gas per
mile than one driving 45-50 miles per hour, even though it is also true that
driving at the excessive speed o f 90 miles per hour burns more gas than at 45.
Many of the economists who have observed correctly that an excessively
expanding economy exacerbates inflation have not noticed that an economy
expanding much too slowly, or in stagnation or recession, also exacerbates
inflation.
The ratio o f the productivity growth rate to the rate o f real economic growth,
as shown on my Chart 7, is the best single example o f the fallacy o f the “ trade­
off,” and o f the profound inflationary pressures exerted by holding the economy
far below full resource use. The actual record shows the great spurt in
productivity when, immediately after the recent recession, the real economic
growth rate was moving upward very rapidly, and the sharp decline in the
productivity rate later on when the real economic growth rate declined sharply.
But developments in the first quarter o f 1978 are most telling of all. As the real
economic growth rate became negative, the productivity growth rate dropped
so sharply that the clam or again rose that this increased per unit business cost
was highly inflationary and thus again made inflation a greater problem than
unused resources. In consequence, the clamor again arose that programs
designed to stimulate the economy should be reduced or postponed. But I ask
this question: When a continuing slow-down in the rate o f real economic
growth for two years or so, accentuated in first quarter 1978, causes as has
usually been the case a sharp increase in inflationary pressures and the forecast
of another recession next year if not late this year, is it not inconsistent to try
to cure the inflation by running still greater risks of a perpetuation of the slow­
down and still another recession? The way we are now behaving, that sixth
recession, and possibly a progressively severe one, is in the cards within a
year or so.
A F U L L Y O PERATING EC O N O M Y IS T H E M OST PO W ERFU L A N T I-IN F L A T IO N A R Y W EA PO N .

I do not raise these questions to argue the relative importance o f reducing
unused resources and reducing inflation. That is an arid and misplaced
argument. W e have always done best on both fronts when we pursued the two
goals simultaneously with full vigor, and always done worst on both fronts
when we played off one against the other. W ithout pride, I can state that we
did best on all fronts, weighting each factor properly, and particularly viewing
the trends from the first year to the last, during the seven years when I was
Vice Chairman and then Chairman of President Trum an’s Council of Economic
Advisers (in the face of domestic and international difficulties greater than any
confronted since) as illustrated on my Chart 5.
Let me offer two simple explanations o f this record, which I believe so
relevant today. There was consistency rather than conflict in President Trum an’s
economic policies, partly because he was a student o f our history, and partly
because he was a good enough administrator to rely primarily upon one top
expert in any given field at any given time and to fire him when he was
dissatisfied— instead of having five top experts at the same time advising the
President, the Congress, and the public on their conflicting views on economic
policy. The second reason for this success o f President Truman, domestically




73
speaking, was t h is : Although he was not afraid o f a vigorous anti-inflation
program per se, and even had the courage to increase taxes and impose direct
controls when these were necessary during the large-scale Korean war (entirely
different from the current situation), he nonetheless insisted always that the
most successful weapon against inflation and toward amelioration or solution
of all our other problems wT calling forth what we then called the “ great
as
non-secret weapon o f the U.S. economy,” its unrivaled capabilities for real
growth in production, employment, and wisely channeled distribution.
H aving thus called attention to some o f the outstanding departures from a
long-range and empirical approach which have brought us to where we are now
and where we are trending in the long run, I want to run quickly through some
other examples of the same errors and their consequences during the 45 years
o f my intimate connection with national economic policies, both from within
the Government and from without.
COSTS OF IN C O N S IS T E N T AN D UNCOORDINATED PO LICIES D URING TH E N EW DEAL

During my years in the New Deal from 1933 to 1939, I was impressed by the
human responsiveness and long-range reform values of some of the measures
adopted. Simultaneously I recognized, albeit under circumstances more excusable
than today, the excessively experimental, improvised, and ad hoc nature of many
of the so-called recovery policies, and their inconsistencies one with another.
W e slaughtered pigs and plowed under crops while trying to feed the hungry.
The N.R.A. was a curious compound o f seeking to reduce unemployment while
winking at some of the restraints upon competition which in fact impeded
expansion of production. W e had policies and programs, but no unified policy
or program. W e pleaded with business to expand, even while we pilloried big
business for political advantage. W e sought to accelerate the economy by more
public spending, but did not think seriously of lowering the tax bu rden ; we did
threaten imposition of more taxes, and we imposed some unnecessary restrictions
upon business along with some necessary reform. All this does much to explain
why recovery was so partial until we became the arsenal of democracy in
1939-1940.
T H E A M A Z IN G RE SU LTS OF C O N SISTE N T AN D INTEGRATED POLICIES DURING
WORLD W A R I I

During W orld W ar II, by accident or design, we adopted policies which
resulted in unexpected miracles o f achievement. These may be quickly
summarized. W e established quantitative and interrelated long-term goals, and
geared policies to their achievement. W e did not try to stimulate or retard the
whole economy at once, but selectively focused upon areas needing stimulation
and areas needing restraint. W e quantified goals for the component parts of the
economy, recognizing that sustained and optimum progress depended upon
balanced relationships among the components, instead o f throwing blunderbuss
or aggregate programs against the economy at large. And we were able to
maintain reasonable public support, and reasonable commity between the
Executive and the Congress, because what we were doing was clear, consistent,
and explainable.
I have never claimed that what happened during W orld War II remained
entirely pertinent later on. Equally high rates o f taxation and analogous use
o f the direct controls and allocations have not been needed. Equivalent intrusion
of the Government upon the private economy became unwarranted. But it does
not follow that we were at all well advised not to learn enough from the
economic perform ance record o f W orld W ar II to recognize that, while the
Government should do much less, it should not start to fly blind. It should not
substitute, in its own traditional efforts, inconsistency for consistency, random
improvisation for some long-range planning, and purely defensive anti-inflation
and anti-recession efforts for positive pro-prosperity goals and programs.
Near the end of W orld W ar II, in 1944, I wrote a prize-winning essay in the
Pabst Post-W ar Employment Contest, which form ed an important basis of the
Employment Act o f 1946. Essentially, it summarized the criticisms and the
concrete approached which I have just outlined. And during the first years
under the Employment Act, that is during the Truman years which I have
already discussed, we were relatively successful because we rejected the idea




74
that it was proper for national economic policies to go off half-cocked just
because we were no longer trying to shoot up h alf o f the rest of the world.
T IC K IN G OFF T H E SA L IE N T PO LIC Y ERRORS D URIN G A QUARTER C E N TU R Y

Unfortunately since 1953, except for a heartening period during 1961-1966,
we have reverted to the old errors o f commission and omission, and in the long
run the process seems to have been gaining force. Quickly, I w ill attempt to
catalogue the most important examples of this.
First, I have already detailed the errors o f and the tragic results o f playing
off the restraint o f inflation against the restoration of a fuller used economy
and vice versa. I w ill not dilate further on that point.
U N D E R E ST IM A T IN G OUR PO TE N T IA LS AN D NEEDS

Second, by not setting long-range and interrelated goals in terms o f our
productivity and labor force growth potentials, we have greatly underestimated
the size o f the job to be done, and thus policies have been inadequate as well
as misdirected. Such unintegrated goals as we have set have hardly related to
the true productivity growth potential under favorable economic policies, a
matter to which I have already called attention on my Chart 7. By selling
America short, we have shortchanged ourselves.
L A C K OF A T TE N T IO N TO BALANCED ECONOM IC DEVELOPM ENT

Third, and by far the most important o f all, we have assumed that we can
properly stimulate or retard the economy by aggregate or blunderbuss fiscal or
monetary policies, throwing weight in one direction or another without regard
for the structural or interrelationship problems requiring different types o f
attention to different components o f the economy, on the investment side, the
consumption side, the public outlays side, and the tax side. These have increased
the imbalances in the long run, and made inevitable another stagnation and
recession after each period o f aborted and inadequate recovery. The record
shown on my Chart 1 speaks for itself.
The best example o f this error is illustrated by my Chart 8, a demonstration
for 1961-1977 which could be shown equivalently for other periods. Both the
periods o f inadequate upturn and the periods o f stagnation follow ed by recession
have been marked by severe imbalances between the rate o f real growth in
investment in the plant equipment which add to our ability to produce, and the
real growth rate in ultimate demand, in the form o f private consumption and
public outlays combined, which provides the markets for the increased
production potential. Sometimes one side has grown too fast relative to the
other, while at other times one side has grown too slowly relative to the other,
regardless o f whether one or both sides have grown too fast or too slowly in
absolute terms. Yet our efforts to stimulate or restrain have been thrown
recklessly at the economy as a whole, without regard for the imbalances which
needed to be corrected. And thus the “ roller-coaster” perform ance has been
aggravated by the national policies designed to correct it.
T H E IN D IS C R IM IN A T E U SE OF REPEATED T A X REDUCTIONS

Fourth, the best example o f this imbalanced use o f remedial efforts has been
the repeated use o f tax reduction. This is not because tax reduction does not
have its proper uses, but rather because it has come to be regarded as the
solution o f all our problems, and because it has been used without proper
selectivity and focus. A few examples of this appear to me essential.
Most economists and other analysts would agree that some moderate im prove­
ments in the nationwide distribution o f income on a progressive basis would be
highly desirable on purely economic grounds, and are unanswerably needed on
social and equitable grounds. Many costly Government spending programs are
directed toward these ends. But meanwhile, our repeated tax-cutting has moved
in the opposite direction, especially when one considers the long-term trends
in the distribution o f income as shown on my Chart 9, and considers also my
Chart 10 setting forth some very surprising inform ation about the highly
regressive imposition o f the total tax burden in the United States. In the latter
connection, my Chart 11, covering the period 1945-1963, my Chart 12 covering




75
1963-1973, and my Charts 13 and 14 covering the President’s current tax
proposals, all demonstrate very clearly this disconcerting f a c t : Measuring tax
reduction properly by its percentage effect upon after-tax or spendable income,
the net consequences o f these tax reductions in their entirety are highly
regressive. And looking at the relationships between the tax reductions intended
directly to stimulate total investment and those intended directly to stimulate
consumption, as shown on my Chart 15 applicable to 1971 tax cuts (character­
istic o f other tax cuts in varying degrees), and most recently with regard to
the President’s current proposals as demonstrated by my Chart 16, all o f these
tax reductions could hardly be defended on the basis o f any analysis— hardly
attempted in fact— o f appropriate goals fo r the economy and the balanced
requirements for their attainment.
IN D IS C R IM IN A T E T A X REDUCTION V S. SELECTIVE U S E OF T A X REDU CTION A N D SELECTIVE
RESORT TO IN C RE ASE D PU B L IC IN V E S T M E N T

Fifth, because w e have substituted political ease o f action fo r successful
consequences, we have stopped differentiating between the value o f indiscrim i­
nately applied tax reductions and the value o f a selective combination o f tax
reductions and increased public investment when it is agreed that the economy
needs stimulation. Yet common sense must dictate, and studies by the
Congressional Budget Office and many others have confirmed, that in some
cases properly selective increases in public outlays (as distinguished from the
sometimes careless increase in outlays almost continually in process) would
create more private investment and m ore jobs, be fa r less costly to the Federal
Budget per unit o f success in substituting resource use fo r idleness and waste,
and come far closer to paying off in terms o f econom ic and social priority needs.
I am not here to argue as to the proper choice between tax reduction and
increased public ou tla ys; I am merely saying that a Federal Government with
a Budget in the neighborhood of h alf a trillion dollars cannot continue to afford
its confirmed reluctance to deal system atically w ith this issue.
T H E PERVERSE CONSEQUENCES OF T H E PR EV ALE N T M O N E T A R Y P O L IC Y

Sixth, the prevalent monetary policy is an extreme example o f all o f the
errors thus far detailed. When borrowed money is one o f the most commonly
used o f all commodities, especially by the average consumer, State and Federal
Governments, and small- and middle-size business, how can it be anti-inflationary
rather than inflationary to deliberately engineer the fantastic increases in
interest rates during the past quarter century, now being lifted again, as
illustrated by my Chart 17? H ow can adequate public-priority investment be
safely financed, and how can the huge Federal deficit which is asserted to be
a m ajor cause o f inflation be reduced, when the endless increases in interest
rates are imposing the huge and increasing toll upon the Federal Budget, as
shown on my Charts 17 and 18? Can we absorb these inflationary costs forever?
And how can the chronic increases in the gap between fu ll employment and full
production on the one hand, and actual econom ic perform ance on the other hand,
be decreased rather than increased when all o f the empirical evidence shows
a marked positive correlation between the tightening o f the money supply and
a sharp diminution in the rate o f real econom ic growth, as shown on my
Chart 19? I do not herein suggest in detail w hat changes are needed in the
prevalent monetary policy. But I do insist that, unless the Congress exerts
some appropriate role in the general supervision o f the Fed to bring it into
better accord with the avowed intentions and efforts o f the President and the
Congress, all other policies to reduce unemployment, promote real growth, and
restrain inflation w ill spend themselves in vain.
BRINGING TH E EXECUTIVE B R A N C H AN D T H E CONGRESS IN T O BETTER ACCORD

Seventh, and finally, in the correction o f these salient errors o f omission and
commission in national economic policy fo r so many years, we need to strive
toward an improved commity of effort between the Executive Branch and the
Congress, not by departing from a system o f checks and balances, but rather
by bringing less stalemate and a more balanced effort into the proceedings
through practical changes in accepted procedures.

3 0 -4 5 4 0 - 78 - 6




76
HOW

S.

5 0 EM BOD IES T H E LE SSO N S OF EXPERIENCE

This leads up to my conclusions as to how the bill now before you, generally
known as the Hum phrey-H awkins proposal, draws directly and honestly upon
the empirical r e c o r d ; and how the bill seeks to motivate and facilitate the
needed redirections in national economic thought and action, not by telling the
private economy w hat to do, but instead by reorienting and reconstructing what
the Government itself does— in areas where the Government has been acting
and must continue to act. W e need not reach for the moon to reshape the whole
econ om y ; it w ill be a w onderful first step to reshape what the Government does,
because it so pow erfully affects the whole economy, and because this is within
the easy scope o f the Chief Executive and the Congress.
(1 ) The bill provides for an integrated, quantified, and consistent set o f
long-range and medium-term goals, which all experience has shown to be the
sine qua non for proper adjustm ent o f national policies.
(2 ) The bill provides for an annual test, joined in by the President and the
Congress, as to whether the policies actually put into effect are moving
adequately tow ard the goals, and toward revision of these policies if they
are not.
(3 ) The bill properly sets a quantified goal and timetable for the reduction
o f unemployment. This is an all-embracing economic and human consideration,
w hich it becomes the prim ary responsibility of the Congress itself to define,
because leaving that definition to the Executive Branch has done nothing but
promote tolerance o f higher and higher levels o f unemployment with devastat­
ing effects upon fundam ental econom ic performance and also upon the rate of
inflation. But in aid o f the mandated goal and timetable fo r the reduction o f
unemployment, the bill properly leaves the choice o f a wide variety o f specified
programs and policies to the President and the Congress year by year.
Pragm atically, nothing else could work, and in the very nature o f our
Government nothing else could really be attempted.
(4 ) The bill imposes strict mandates against the deliberate contrivance o f
highly unused production resources in a self-defeating effort to restrain inflation
in this manner so discredited by experience. Nonetheless, the bill as approved
by the House and reported by the Senate Committee on Human Resources
mandates annual quantitative goals for the reduction of inflation until rea­
sonable price stability is achieved and maintained.
(5 ) The bill mandates against the continued use o f blunderbuss fiscal and
m onetary policies, whether spending or taxation, or interest rate or credit
policies, and mandates in fav or o f the selective use o f these policies in
relationship to quantified goals for balanced economic development, tested and
revised from year to year by the President and the Congress.
(6 ) The bill, in extrem ely moderate fashion, opens the way fo r some
Congressional supervision o f the Federal Reserve— without m ilitating against
its proper independence— in order that monetary policy not be alien to the
declared purposes and actual policies o f the Congress itself.
(7 ) The bill mandates a closer consideration of the respective relevance o f
the use o f the tax and spending policies o f the Federal Government, measured
in terms o f effective results as reviewed year by year.
(8 ) The bill establishes a set o f national priorities, to be built into the
structure o f the entire effort. This is responsive to the millions o f words o f talk
but w oefully little real effort since the launching of the first Sputnick in 1957,
that we should reorder our national priorities in consonance with the needs
o f the economy and the needs and aspirations o f the American people.
(9 ) The bill expands and builds upon the gains made— insufficient though
these have been— through the Budget Act of 1974. It does this by restraining
the tendency to look at the Budget and the well-being o f the Budget as a
thing in itself, and instead sets the management o f the Federal Budget within
the context o f the perform ance o f the entire economy and the Budget’s effects
upon the latter. A fter all, Mr. Chairman and Members of the Committee, the
Federal Budget is not an end in itself, but the prime instrument for calling
forth the fu ll use o f our optimum potentials and the restraint o f inflation.
(10) The bill in Title III (and I am speaking here of the version of Title III
reported recently by the Senate Committee on Human Resources and, as I
understand it, agreed to by the leadership o f the Budget Committees o f the
Senate and the House as well as other primary interested parties in the Senate
and the H ou se), institutes a vastly improved procedure fo r unifying and




77
improving economic and financial policy, through improved cooperation and
united efforts by the President and the Congress.
Mr. Chairman and Members of the Committee, the enactment of S. 50 w ill not
hasten the achievement o f the millenium. But it combines sensible and national
procedures, in my view the inevitable product o f long and hard experience,
toward achieving what we all w ant and can achieve. There is nothing im ­
practical in the bill. The bill is novel and enterprising, measured against the
efforts and results o f the years I have reviewed, but goodness knows every
knowledgeable person has been calling fo r a recasting o f efforts which simply
have not been producing the essential results. H owever, the bill is neither novel
nor risky, in terms o f what we all, at long last, should have learned from long
and costly experience. I therefore urge prom pt enactment of this vital measure,
in some respects the most significant and potentially useful one put before the
Congress on the domestic economic fron t during the past generation or longer.
Moreover, the bill provides explicitly fo r reform ulation of its approaches as
further experience reveals the need.
W e have all heard the assertions that “ all that the bill proposes could be
done without its enactment.” That is true o f a substantial portion o f the most
necessary legislation on the books. People could drive less than 55 miles per
hour without legal speed limits. People could pay decent wages without being
prohibited from paying substandard wages. People receiving fa ir incomes during
their working lives, and saving prudently, might exist decently in their declining
years without social insurance. Good housing and adequate health services for
all, at costs within their means, could be provided w ithout a long history o f
useful Congressional action— with still more needed. Fair competitive conditions
for all business, large and small, and avoidance o f monopolistic misdeeds, could
be maintained without aid o f law. H ypothetically, we could have a fu ll and
equitable economic society without taxation or public spending. W e could avoid
the ravages o f inflation without any public action. But w e have not done
nearly all that we could and should without a popular consensus written into
law ; and we know that we w ill not.
Likewise, the right to be employed at useful w ork for fa ir pay could have
been universal and continuous w ithout the Employment A ct o f 1946. And
everything done under that Act, during 30 years, could have been done without
it. Nor did that Act, read line by line, provide explicitly, nor provide the funds
for, a single job. Yet, despite many disappointments and shortfalls, we all
know that the 1946 Act has immeasurably im proved national economic policies,
broadened the citizens’ understanding o f econom ic affairs, and helped mightily
to avoid cyclical disturbances of the severity w e suffered regularly— and not
just once— before W orld W ar II. By the same token, after thirty-two years o f
additional experience, the hour has struck to try through new legislation to do
much better, as a necessary condition to actually doing much better. And “ if
we would guide by the light o f reason, we must let our minds be bold.”




THE "ROLLER-COASTER" ECONOMIC PERFORMANCE:
ECONOMIC GROWTH RATES. 1922-1929,1941-1945, AND 1947-1977
(U n ifo rm D o lla rs )

ANNUAL GROWTH RATES

oo
AVERAGE ANNUAL GROWTH RATES
9.0%

Recession during part of perlod.There were five recessions,1953-1977,but some were entirely within one year, and began and ended in different years.




79
CHART 2

UNEMPLOYMENT. % RATES 8cDISTRIBUTION. 1953-1977
% RATES, FULL-TIME AND OTHER LEVELS OF UNEMPLOYMENT-1 [■
''

% RATES OF TEENAGER UNEMPLOYMENT.BY COLOR^

n«jd tre
o ).«w t»
A/\n deriving these percentages, the officially reported civilian

labor force is augmented by concealed unemployment Thus,
some of the rates for full-time unemployment are very slighly lower than in the official reports of full-time unemployment
^/Withdrawals from labor force.due to scarcity of job opportunity
Officially reported concept of full-time unemployment.
^Distribution by color unvailable
Note:Some totals affected by rounding.




COST OF DEPARTURES FROM FULL ECONOMY, 1953-1977'
G.N.P.
3illions of 1977 Dollars

1953 '54

'55

'56

'57

'58

'59

'60

'61

'62

'63

'64

'65

'66

'67

'68

'69

'70

'71

'72

'73

‘74

'75

'76

'77
00

o

■2/Real average annual growth rate of 4.4 percent.
•2/Real overage annual growth rate of 3.2 percent,the 1953-1977 average.
^/Average true level of unemployment of 4.1 percent, or 2.9 percent full-time unemployment.
^/Average true level of unemployment of 7.7 percent, or 5.3 percent fu 11-time unemployment.
Basic Data: Dept, of Commerce; Dept, of Labor




81
CHART U

6.N.P DEFICIENCIES^AND BUDGET DEFICITS
G.N.P DEFICIENCY
Billions of 1976 Dollars
Average,Calendar Years

410.7

1947-1953

1954-1961

1962-1970

1971-1976?/

BUDGET DEFICITS AND SURPLUSES
Billions of Current Dollars
Average,Fiscal Years

0.9

1955-1962

1963-1971

1972-1977^

1948-1954
-2 .7

-

8.1

-3 4 .8
-i/ Production deficiencies represent differences between actual production and production at full economy
rate of growth Projections from 1946.
1976 estimated.
5/1977 estimated
Source: Dept, of Commerce; Office of Management and Budget,for actual figures




REAL ECONOMIC GROWTH RATES. EMPLOYMENT ft UNEMPLOYMENT. INFLATION.
AND FEDERAL BUDGET CONDITIONS. DURING VARIOUS PERIODS. 1947-1977^
Rcol Ave.Ann.
Econ. Growth Rate

Ave. Annual^
Unemployment
(full-tim e)

Unemployment
First Yr. LastYr.

Ave. Annual
Inflation

Inflation Rate
First Yr. LastYr.
(C.P.I.)

Ave. Ann. Surplus
or Deficit
FedJ3udget
(Fiscal Years, Billions)

7 .8 %

4 .8 %
-40%

1947-1953

J jji§ 2 L

2 .9 %

3 .0 %

6 .7 %
2 .5 % ^

1953-1961

5 .4 %

1961-1966
1966-1969

H

i i l u

2.9%

5 .2 %
M

H i

1.4%
jb u ssl

0 .8 %

1.2 %

6 .7 %

-$ 2 .5
2 .9 %

.3,2*/.

1969-1977
1976-1977
2 '/4 y®ar average. Including transition period. To allow for momentum effects of policies, the first year of one period is also treated as the last year of the proceeding period.
ty
Source: Economic Reports of the President, and Economic Indicators.




-$55.3-1/

83

CHART 6

RELATIVE TRENDS IN ECONOMIC GROWTH
UNEMPLOYMENT. 8 PRICES, 1952-1977
PRODUCTION AND EMPLOYMENT
j Total National Production in Constant Dollars, Average Annual Rates of Change
] Industrial Production,Average Annual Rates of Change
Unemployment as Percent of Civilian Labor Force, Annual Averages*

- 10.6%
(ann.rate)
(ann.rate)
1952-1955 1955-1958 1958-1966 1966-1969 1969-1977 KM -/Q75 4Q75-IQ76 IQ76-4Q77

PRICES
i M l Consumer Prices

HH! Wholesale Prices

L S I Industrial Prices
2 .4
1%

s

1952-1955 1955-1958 1958-1966 1966-1969 1969-1977 IQ'74-1 Qf75 4075-l076 10*76-4077
Average Annual Rates of Change
(anarote)
(anarate)

^ These annual overages(as differentiated from the annual rates of change) are based on full-time officially
reported unemployment measured agoinst the officially reported Civilian Labor Force.
Source; Dept, of Labor, Dept, of Commerce, 8 Federal Reserve System




84

CHART 7

IMPACT OF ECONOMIC GROWTH --------UPON PRODUCTIVITY GROWTH
GNP

( Average Annual Real Growth Rate)

8 .8 %

I 17
Q96

(ann. rate)

401977

(ann. rate)

PRODUCTIVITY IN U.S. PRIVATE ECONOMY
(Average Annual Growth in Output Per Man-hour)

7.6%

1 4 -1 5 1 5 -1 6 196 -1 6 1966-1970 1 7 -1 7 1 7 -1 7
97 93 93 90
0 96
90 92 92 97

4Q
I975IQ 9 6
17
(ann.rate)

Source Dept, of Labor, Dept of Commerce




101976401977
(ana rate)

85
CHART B

COMPARATIVE GROWTH RATES, 1961-1977^
( Average Annual Rates of Change, in Uniform D o lla rs)
I Investment in Plant and Equipment
| Ultimate Demand:Total Private Consumption Expenditures Plus Total Public Outlays For Goods
and Services

INVESTMENT AND ULTIMATE DEMAND
1st Half *61Ist Half '66
"Boom'

1st Half '6 6 4th Qtr.'70
"Mixed Period
Including
Recession’

J Corporate Profits (and IV A )
} Wages and Salaries_________




4th Qtr. '7 0 4th Qtr. '73
"Inadequate Upturn
and Stagnation"

4th Q tr.'7 3 4th Qtr. '75
"Recession and
Inadequate Upturn"

4th Qtr. *754th Qtr. '77
"Upturn"

86

CHABT 9

SHARE OF FAMILIES IN TOTAL FAMILY INCOME
BY QUINTILES, 1947, 1953, I960,and 1976
(Percent of Money Income)

1947

LOWEST
FIFTH

SECOND
FIFTH

MIDDLE
FIFTH

FOURTH
FIFTH

LOWEST
FIFTH

I960

LOWEST
FIFTH

SECOND MIDDLE
FIFTH
FIFTH

SECOND MIDDLE
FIFTH
FIFTH

FOURTH
FIFTH

1976

FOURTH
FIFTH

FIFTH
FIFTH

LOWEST
FIFTH

SECOND MIDDLE
FIFTH
FIFTH

FOURTH
FIFTH

SHARE OF UNATTACHED INDIVIDUALS IN TOTAL
INCOME OF UNATTACHED INDIV, BY QUINTILES,
1947, 1953, 1964 and 1976

LOWEST SECOND MIDDLE
FIFTH
FIFTH
FIFTH
i/Lotat year available.
Data: BurMu of tht Census.




FOURTH
FIFTH

FIFTH
FIFTH

LOWEST SECOND MIDDLE
FIFTH
FIFTH
FIFTH

FOURTH
FIFTH

FIFTH
FIFTH

87

CHART I Q

TAXES PAID AS PERCENT OF INCOM E.USlSe^
FEDERAL INCOME TAXES
( 76.1 Billion; 9.5% of Total Income)

19.8%

7
5 3%

1
.2%
$2P00

&7%

8.5%

a

a

$2,000$3,999

$4,000$5,999

i

B

$6,000$7,999

$8,000$9,999

l
$10,000- $15,000- $25,000- $50,000
$14,999 $24,999 $49,999
and

TOTAL TAXES^
(254.0Billion;31.6% of Total Income)

Under
$2,000

$2,000$3^999

$4,000$5,999

$6000$7,999

$8L000$9^99

$10,000- $15,000$14,999 $24399

$25,000- $50,000
$49,999
and
over

J-/Income relates to total income of all persons In the adjusted money Income classes shown. Total income is
adjusted money income, plus imputed income,less direct taxes, plus retained corporate earnings, plus taxes
minus transfer payments,plus realized capital gains.
1/Includes the following Federal and State and Local taxes: Individual income.estate and gift,corporate profits,
and social security.Also includes Federal excise and customs taxes, and State and Cbcal sales taxes,
motor vehicle licenses,property taxes,and miscellaneous other taxes.
Basic Data: Dept.of Commerce,Bureau of the Census




CHART 11

PERSONAL TAX CUTS, 1945^953:
Percent Federal Tax Cut And Percent Gain In A fter-Tax Income
Married Couple With Two Children At Various Income Levels-1
7
$ 3,000 Income

$5,000 Income

$ 7,500 Income

(Tox Rote Cut From 6.9% To 2.0%
Tox Cut From $206. To $60i)

(Tox Rots Cut From 12.6%To 8.4%
Tax Cut From $ 63a To $420.)

(Tox Rote Cut From 16.3% To 11.7%
Tox Cut From $1,223 To $877.)

70.9%

33.3%

28.3%
4.8%

Tox Cut

After-Tox Income

$10,000 Income

Percent
Tax Cut

Percent Goin In
After-Tox Income

$15,000 income

llll

Percent
Tox Cut

5.5%
Percent Coin In
After-Tox Income

$25,000 Income

(Tox Rote Cut From 19.2% To 13.7% (Tox Rote Cut From 24.0% To 16.6% (Tax Rate Cut From 32.8%To21.3%
Tox Cut From $1,915. To $1,372.) Tox Cut From $3,600 To $2,486.) Tox Cut From $8,200. To $5,318.)

HI
Percent
Tox Cut

35.1%

30.9%

28.4%
6.7%
iw m
Percent Goin in
After-Tox Income

$50,000 Income

It^
Percent
Tax Cut

17.2%

9.8%

m
Percent Goin In
After-Tox Income

$100,000 Income

Percent
Tax Cut

Percent Goin in
After-Tax Income

$200,000 Income

(Tox Rote Cut From 46.3% To 32.0% (Tox Rote Cut From 59.6% To 44.7% ( Tax Rate Cut From 71.2% To 57.6%
Tox Cut From $23,145 To $15,976.) Tox Cut From $59,625.To $44,724.) Tox Cut From $142,405 To $115,224)

m

47.2%
36.9%
26.7%

25.0%

•v**:::
i:::*
**

19.1%

111
H i
Percent
Tox Cut

Percent Gain In
After-Tox Income

Percent
Tax Cut

Percent Goin In
After-Tax Income

H

Percent
Tox Cut

Percent Goin In
After-Tox Income

-1/ The amount of Federal tax, as opplied to adjusted gross income, was estimated for 1945
by CEP and for 1963 by Treasury Dept. Both estimates assume 10 percent deduction for foxes,
interest, contributions, medical care, etc.
Note: Tax rates shown are effective tax rates.




PERCENTAGE TAX CUT AND PERCENTAGE INCREASE IN INCOME
AFTER TAX. VARIOUS INCOME GROUPS, 1963-1973 ^
£ E R C E i m G ^ A ) ^ U T ---------p

r..........-

35.9%

33.0%
20.6%
10.4%
■

Income «
Group-6'

Under

$3000

$3,000$5000

$3000$10,000

9
$10000$20000

$20,000$50,000

Over

$50,000

00

All
Groups

CO

PERCENTAGE INCREASE
IN INCOME AFTER TAXES

12




CHART

$3,000
-^Effects due to change* m personal tax under Revenue Act of 1964,Tax Reform Act of 1969,and Revenue Act of 1971 (H.R. 10947, at reported by the House-Senate Conference Committee,excluding the
effect on personal taxes of removing the first year convention under the Asset Depreciation Range system f
2/Adjusted grots income class.
Basic Data: House Ways and Means Committee and Senate Finance Committee Reports, and Congressional Record

90

CHART 13

ADMINISTRATION PROPOSAL, PERSONALTAX CUTS IN
•79EXCLUDING SOCIAL SECURITY (FICA) TAX CHANGES
Percent Tax Change and Percent Change In A fter-Tax Income
Married Couple with Two Children at Various Wage Income Levels-^
$ 5 ,0 0 0 Income
Tax rate remains a t-6 .0 %
After-tax income remains
at $5 ,3 0 0

$10,000 Income
Tax rate cut from 4.5%to 1.3%
After-tax income up from
$ 9,554 to $9,866
70.0%

$15,000 Income
Tax rate cut from 8.9%
to 7.1%
After-tax income up from
$13,670 to $13,928

19.4%

3.3%

0%
Percent Percent gain in
tax cut after-tax income
$ 2 0 ,0 0 0 Income
Tax rate cut from 10.9%
to 9 .6%
After-tax income up from
$17,820 to $18,090

12.4%

Percent Percent gain In
tax cut after-tax income
$ 2 5 ,0 0 0 Income
Tax rate cut from 12:6%
to 11.3%
After-tax income up from
$21,850 to $22,170

10.2%
1.5%

Percent Percent gain in
tax cut after-tax income
$ 4 0 ,0 0 0 Income
Tax rate cut from 17.1%
to 16.6%
After-tax income up from
$33,152 to $33,370

3 .2 %

0.7%

Percent Percent gain in
tax cut after-tax income

$ 3 0 ,0 0 0 Income
Tax rate cut from 14.1%
to 13.0%
After-tax income up from
$25,768 to $26,090

76%
1.5%

Percent Percent gain in
tax cut after-tax income
$ 50 ,00 0 Income
Tax rate cut from 19.9%
to 19.7%
After-tax income up from
$ 4 0 ,9 5 0 to $40,130

0.8 %

0.2%

Percent Percent gain in
tax cut after-tax income

•i/ On* woge earner; deductible expenses assumed at 20 percent of income.
Source=
Department of the Treasury, Office of Tax Analysis




1.9%
Percent Percent gain in
tax cut after-tax income

1 %
.2
Percent Percent gain in
tax cut after-tax income
$100,000 Income
Tax rate raised from
2 8 .9 % to 29.5%
After-tax income down from
$71,120 to $70,530

2 .0 %

0 .8 %

Percent
Percent loss in
tax increase after-tax income

91

CHART ljt

ADMINISTRATION PROPOSAL. PERSONAL TATCUTS IN
'79,jlNCLUDING SOCIALSECURITY (FICA)TAX INCREASES
Percent Tax Change and Percent Change in After-Tax Income
Married Couple with Two Children at Various Wage Income Levels-!/
$5,000 Income
Tax rate remains at 0.1%
After-tax income down from
$ 4,997 to $4,994

$ 10,000 Income
1 k rate cut from 10.3%
ra:
to 7.5%
AJfter-tax income up from
$ 8,969 to $9,253

$15,000 Income
Tax rate cut from 14.7%
to 13.3%
After-tax income up from
$12,793 to $13,009

Z 7.5%

9 .8 %
0%
0%
I
i
i
i _
Percent Percent loss in
tax cut after-tax income
$20,000 Income
Tax rate remains at 15.7%
After-tax income up from
$16,855 to $16,864

, 0% ,

0.1%

Percent Percent gain in
tax cut after-tax income
$ 4 0 ,0 0 0 Income
Tax rate raised from
19.5% to 20.1%
After-tax income down from
$32,187 to $31,966

[ 28%
M W

1

Hi

32%

I 'l P i i

Percent Percent gain in
tax cut after-tax income
$25,000 Income
Tax rate raised from
16.5% to 16.9%
After- tax income down from
$20,885 to $20,766

2.9%
R XSBB
fiX x x x l

fM JA A M
W WU

Percent
tax cut

$30,000 Income
Tax rate raised from
17.3% to 17.7%
After-tax income down from
$ 24 ,80 3 to $24,686

2 .3 %
RS 5 8 9
S8559

Percent
Percent loss in
tax increase after-tax income

Percent
Percent loss in
tax increase after-tax income

$ 50 ,00 0 Income
Tax rate raised from
21.8% to 22.5%
After-tax income down from
$39,085 to $38,726

$ 100,000 Income
Tax rate raised from
29 .8 % to 30.9%
After-tax income down from
$70,155 to $69,126

3.3%

3 .4 %

Percent
Percent loss in
tax increase after-tax income

Percent
Percent loss in
tax increase after-tax income

-J/One wag* earner ; deductible expenses assumed at 20 percent of income; FICA tax calculated
under prior law rote and base for 1977 (5.85% and $16,500) and present law rate and base for
1979 (6.19% and $22,900), employees' share only.
Source: Deportment of the Treasury, Office of Tax Analysis

3 0 -4 5 4 0 - 7 8 - 7

w w^
#

U.(m

Percent
Percent loss in
tax increase after-tax income




Percent gain in
after-tax income

92

CHART 15

ALLOCATION OF TAX CUTS, 1962-1965:
INVESTMENT AND CONSUMPTION PURPOSES
( B i l li o n s o f D o l l a r s )

TOTAL TAX CUTS

ESTIMATED ALLOCATION
TO INVESTMENT PURPOSES

ESTIMATED ALLOCATION
TO CONSUMPTION PURPOSES

1 9 .2

S I

EXCISE TAX CUTS,
1965

1
1
I I

PERSONAL TAX
CUTS, 1964

10.6
PORTION OF
EXCISE TAX
CUTS.I965*/
PORTION OF EXCISE
TAX CUTS 19651/
I PORTION OF
I PERSONAL TAX
j CUTS,19642/

TAX CONCESSIONS
TO INVESTORS,
19652/

ln l
1

CORPORATE TAX
CUT, 1964

TAX CONCESSIONS
TO INVESTORS,
1962 J/

PORTION OF
PERSONAL TAX
CUTS, 1964S '

TAX CONCESSIONS
TO INVESTORS,
19652/

2.2
M
2 .7 U

CORPORATE TAX
CUT, 1964

1 5 .3 H

I PORTION OF
PERSONAL TAX
1 CUTS,! 1
9645/

TAX CONCESSIONS
TO INVESTORS,
19621/

-i/Through Congressional 6 Executive Action
-£/Through Executive Action

1/ Estimated portion of personal tax cut,for those

with incomes of $10,000 and over,
which they would save for investment purposes.

4/ Based on estimates of excise tax cuts passed on to consumers through price cuts.
• Personal tax cuts for those with incomes under $10,000.
5/
• Estimated portion of personal tax cuts for those with incomes of $10,000 and over, which they would
§/
spend for consumption.

Note: Estimates of excise tax reduction allocation by C.E.R.(omount might be passed on to
consumers by price reductionsjHowever, a large portion of this did not go to low income consumers.




93

CHART 16

ESTIMATED DIVISION-PROPOSED TAX CUT
BETWEEN CUTS FOR INVESTMENT PURPOSES
AND CUTS FOR CONSUMPTION PURPOSES
(Effects on Calendar 1979 Tax Liability)

EXCLUDING PROPOSED TAX REFORMS
TO TA L TA X CUTS-1
7

ESTIM ATED ALLOC ATION ESTIM ATED ALLOCATION TO
T O IN VE STM EN T PURPOSES CONSUMPT ION PURPOSES

31.5

16.4
- Portion of personal
tax cuts^/
Corporate tax cut
6SW

Telephone 8
/unemployment
:l=l|4 =l=|/ payrollcutt3/

- Portion of personal
tax cuts 4/
_ Portion of personal
tax cuts§/
^Telephone portion

INCLUDING PROPOSED TAX REFORMS
T O TA L TAX C UTS

ESTIM ATED ALLOCATION ESTIM ATED ALLOCATION TO
T O IN VESTM EN T PURPOSES CONSUMPTION PURPOSES

24.5

Personal income

»

14.0
Portion of personal
tax cuts 2/

^Corporate income
.

■ Telephone excise
Unemployment
payroll

Corporate tax cut
Telephone ft
.unemployment
payroll cuts

-L/Total tax cuts for calendar 1979, as estimated by Department of theTreasury.
■2/l .h .k . estimate of portion of personal tax cuts for those with incomes of $15,000 and over
• LH.K. estimate of portion of telephone excise cut going for investment.
2/
4 / L.H.K. estimate of portion of personal tax cuts for those with incomes of $15,000 and over
which would be spent for consumption.
& L.H.K. estimates of personal tax cuts for those with incomes under $ 15,000.




Portion of personal
tax cuts ft/
Portion of personal
tox cuts5/
^-Telephone portion

94
CHART 17

INCREASES IN AVERAGE INTEREST RATES,AND
EXCESS INTEREST COSTS DUE TO THESE INCREASES,
1952-19771
7
COMPUTED AVERAGE INTEREST RATES.1952-1977

Federal Public Debt?/

State and Local Debt

Private Debt 2/

Total Public and
Private Debt

EXCESS INTEREST COSTS, 1953-1977
( Billions of Dollars )

$1,3274

1976-1977 estimated.
• Includes net foreign interest.
2/
3/ Computed os a residual by subtracting Federal Government and state and locol debt from total public and private debt. Includes
debt of federally-sponsored credit agencies.
Source:Dept, of Commerce; Economic Report of the President




95
CHART 18

EXCESS INTEREST COSTS IN THE FEDERAL
BUDGET 1965-1977 CONTRASTED WITH OTHER
COSTS FOR SELECTED BUDGET PROGRAMS^
Millions of Dollars

EXCESS INTEREST
COSTSIN THE
FEDERAL BUDGET

BUDGET OUTLAYS
FOR EDUCATION

BUDGET OUTLAYS
FOR HEALTH SERVICES
AND RESEARCH
$43,900

$17,730

$9,126

BUDGET OUTLAYS
BUDGET OUTLAYS
FORHOUSING AND
FOR
COMMUNITYDEVELOPMENT PUBLIC ASSISTANCE
AND OTHER
INCOME SUPPLEMENTS

BUDGET OUTLAYS
FOR MANPOWER
PROGRAMS

$ 9,200
$3.654

Annual Average

Annual Average

1966-1977

1966-1977

-1/ Interest costs, calendar years; budget outlays, fiscal years.1977interest costs and 1978 budget outlays estimated.
-^/Proposed in fiscal 1978 Budget of President Carter.as revised November 11,1977




1978 ^

96

CHART 19

RELATIVE TRENDS IN ECONOMIC GROWTH
UNEMPLOYMENT, a PRICES, 1952-1977
PRODUCTION AND EMPLOYMENT
Total National Production in Constant Dollars, Average Annual Rates of Change
I M H Industrial Production,Average Annual Rates of Change

BIB Unemployment as Percent of Civilian Labor Force, Annual Averages*
1 .4
2%

PRICES
H H Consumer Prices

M U Wholesale Prices

(

[ industrial Prices
24
1%

17 8v
4%

1952-1955 1955-1958 1958-1966 1966*1969 1969*1977 IQ'74- 1 tf75 4Q75-IQ'76 IQ*76-4Q77
Average Annual Rates of Change
(anarote)
(anarate)

&

These annual averages(as differentiated from the annual rates of change) are based on full-time officially
reported unemployment measured against the officially reported Civilian Labor Force.

Source: Dept of Labor, Dept, of Commerce, 8 Federal Reserve System




97
The C h a i r m a n . Thank you very much, Dr. Keyserling for a very
powerful and serious statement.
Our final witness is also a veteran of the New Deal, and so forth,
Robert Nathan, came to Washington, I think also in 1933.
Mr. N a t h a n . That’s right.
The C h a i r m a n . And also served in a number of top economic policy
positions, recognized then as a boy wonder, and I guess he still is. We
will be happy to print your statement as well as Dr. Keyserling’s,
and the other statements in full in the record.
[The complete statement of Mr. Robert Nathan follows:]
STATEMENT OF ROBERT R. NATHAN, PRESIDENT, ROBERT R.
NATHAN ASSOCIATES, INC.
Mr. Chairman and members o f the C om m ittee: Thank you for this opportunity
to discuss S. 50, the “ Full Employment and Balanced Growth Act of 1978.”
This legislation, as moderate as is its content, may well prove to be the most
important contribution to the sustained economic progress of the United States
made since the Employment Act of 1946.
The Employment Act o f 1946 was adopted because o f the great economic
losses to the nation and the extreme hardships suffered by tens of millions of
Americans during the Great Depression, and because we had considerably
enhanced our understanding o f economic problems and policies as a result of
both the recovery measures o f the 1930’s and the mobilization plans, policies
and perform ance during W orld W ar II.
It is no accident that we have suffered no m ajor depression in the third of
a century since the end o f W orld W ar II. Never before have we enjoyed such a
long period without extremely costly booms and busts. True, we have had six
recessions during these years and we still have not fully recovered from the
sharpest and longest recession since the 1930’s. Nevertheles, tremendous progress
has been made in preventing and moderating business cycles. This is attributable
in no small measure to the Employment Act o f 1946 and to the roles played by
the Council o f Economic Advisers and the Joint Economic Committee, both of
which were provided for in that legislation.
In addition to what we learned from the programs designed to recover from
the Great Depression and about our economy in successfully mobilizing our
resources for W orld W ar II, we further learned much from the formulation
and application o f new economic policies and programs since the enactment of
the Employment Act of 1946. Unfortunately, our learning curve has not kept
pace with our expectations and our standards. In the past few years we have
also gained experience from dealing with various aspects o f budgetary issues
in the Congress as a result o f the legislation that established the Congressional
Budget Office and the House and Senate budget committees.
W hat continues to be seriously lacking is an institutionalized arrangement
which will serve to m aximize the prospects not only for analyses of economic
problems but, more importantly, for the form ulation o f coordinated plans,
policies and programs essential to the improved perform ance of our economy.
The Annual Economic Report o f the President, which incorporates the
Annual Report of the Council o f Economic Advisers, plus the reports of the
Joint Economic Committee o f the Congress, have contributed immeasurably to
our understanding and to valuable dialogue on most o f the nation’s key economic
issues. However, there has been no parallel in the articulation of plans and
policies and programs that can contribute to the solution o f our economic ills.
The above reports make some recommendations but do not provide the needed
economic policies and programs and plans which would lead to coordinated and
fruitful legislation and executive actions.
The most important single contribution o f the Humphrey-Hawkins legislation
is the requirement for the President o f the United States to submit annually
to the Congress not just an analysis o f econom ic issues but also coordinated
plans and programs and policies designed to deal contructively and positively
with the problems that plague the economy. It is a new dimension in our kit
of economic tools and processes. As one who has been concerned with economic
planning for the past 40 or more years, I am greatly impressed by the benefits




98
that can come to a private enterprise system from intelligent and careful
planning. Having been closely associated with those who strived to bring
recovery from the Great Depression, having served as Chairman of the Planning
Committee of the W ar Production Board, having held the post o f Deputy
Director o f the Office o f W ar M obilization and Reconversion, and having served
in advisory capacities in form ulating economic plans in many developing
nations o f Asia, Latin Am erica and A frica, I feel certain that planning is
essential and useful and can contribute invaluably to the economic progress o f
the United States.
I know many o f the opponents o f this Bill. They are generally not dissimilar
to those who opposed the Employment Act o f 1946. They are almost paralyzed
with fear o f the potential harm that they envisage coming from economic
planning by some conjured up zealots against private enterprise, rather than
with the benefits that planning by largely competent and patriotic executive
and legislative officials and their staffs can bring to business, labor, agriculture
and consumers.
Had the “ let nature take its course” and the “ rely entirely on the market­
place” philosophies of the early 1930’s continued, I am not at all confident that
the free enterprise system would have survived the Great Depression. Certainly
without planning our mobilization o f resources for W orld W ar II would have
been far less successful. Similarly, had it not been for the Employment Act
of 1946 we may very well have regressed to m ajor booms and busts and
jeopardized private enterprise.
The present economic world is ever more complex and offers more challenges
as well as new opportunities compared with pre-W orld W ar II years and with
the first quarter o f a century follow ing W orld W ar II. In the present difficult
environment we have perform ed poorly. W e now seem to be making less rather
than more progress. W e continue to suffer peacetime inflation unprecedented
in Am erica’s history. W e face energy crises which seriously threaten the
nation’s economic independence. The once cherished dollar has become an
unstable currency. W e have experienced high levels and persistent unemploy­
ment. The concept o f work as the principal source o f income and support is
being eroded. Liberal trade policies are under increasing attack, in part because
of unemployment. Many o f our cities are in serious financial trouble. Many
sectors o f the economy are stagnant. Our industries lag in modernizing their
facilities and in expanding capacity to meet new market opportunities. There
seems to be a lack o f confidence that vigorous economic growth w ill be
restored. Productivity trends have been disappointing, thus pushing up unit
labor costs. Higher costs o f imports attributable to the falling value of the
dollar serve to aggravate the rate of inflation. Our economic perform ance
generally has not been good by almost any modern standard.
It is against this background that I find it hard to understand the rationale
of the opponents o f the Humphrey-Hawkins Bill. I can only attribute that
opposition to a lack o f confidence that America can solve the multitude of
problems it now faces— that it can do a better job in overcoming unemployment,
in reducing inflation, in solving our energy problems, in expanding and
modernizing our productive capacity, in improving our cities, in once again
restoring substantial growth in productivity and in coping with a variety of
other key problems which we have failed to address constructively in a
comprehensive and balanced manner.
The business community— at least if we listen to its strident spokesmen— is
generally against this legislation. Yet, when performances of individual enter­
prises and individual companies are as bad as the perform ance o f our economy
has been over the past decade, and management does not come forw ard with
more effective plans and programs to improve that performance, they are fired
by the board o f directors or the board members are voted out o f office by the
shareholders.
Successful business inevitably engages in-planning. It must plan programs to
overcome failures and to broaden the areas of success. It must plan for new
products and new markets. I know o f no large business which does not plan
ahead for several years, which does not up-date these plans from time to time
and which does not take these plans into consideration in making decisions.
Yet when it comes to the government, those same corporate officers who
require their subordinates to prepare corporate plans and programs manifest
a degree of irrational fear, if not terror, of government planning. They equate
planning in government with regimentation, but they know good planning is




99
good business in their corporations. Basically, they must have a lack of
confidence in our political and economic system. Government is our biggest
business and it needs planning to improve its effectiveness and its efficiency.
In essence, I strongly favor this legislation because o f the improvement it can
bring in our economic performance. The benefits arising out of more coordinated
economic plans, policies and programs can greatly outweigh even the remotest
possible disadvantages.
W e are not going to solve the problems of unemployment and inflation by
resorting to a soft economy as the way to restore price stability. W e are not
going to solve our energy crisis by totally relying on the marketplace. W e are
not going to strengthen the dollar without reducing our huge and growing
reliance on imports of oil and without making progress in the fight against
inflation. W e are not going to give a sense o f participation and rewards to our
youth without improving the economic environments in our cities and expanding
job opportunities. W e are not going to strengthen our water and air environ­
mental qualities compatible with our resources and our values without
coordinated policies.
These are merely illustrative o f some o f the areas and issues on which we
need to focus not only better analyses and understanding, but also on planned
and programmed policies and actions that can be debated and discussed by the
Congress, by business, by labor, by economists, by engineers, by farmers, by
state and local officials and by opinion makers throughout the nation. Attacking
each problem separately is better than doing nothing, but it is not nearly as
effective as having a total perspective within which policies and programs can
be developed and adopted in a cohesive and coordinated approach.
Requiring the President to submit economic plans and policy proposals and
programs annually, covering the next five years, by no means assures that these
plans or policies or programs w ill be adopted. Congress still will have the
responsibility to evaluate these proposals and to come to final decisions on
legislation. Facts can be analyzed, policies form ulated and reviewed, incon­
sistencies confronted and reconciled, priorities established and implementation
carried out more productively than is now done. I believe that with specific
plans and policies submitted by the Administration, the prospects w ill be
greatly enhanced for not only more constructive and beneficial determinations
by the Congress but, most important, these determinations can be inter-related
within a coordinated and positive planning environment.
In addition to the basic issue of planning and the responsibility placed upon
the President, this legislation entails a great many specific issues. I shall not
attempt to deal with all o f these specifics, but shall confine my comments to
two important considerations. One concerns the matter o f responsibilities of the
Federal Reserve Board and the other to the setting o f a specific quantitative
goal on inflation.
Concerning the Federal Reserve, I agree with the basic objective o f assuring
independence to the Federal Reserve in its recurring monetary decisions and
actions rather than subjecting the B oard’s operations to control by either the
Executive branch or the Legislative branch of the government. The Board
requires considerable latitude in the exercise o f its authority with respect to
money supply and credit considerations. On the other hand, the Federal
Reserve Board is a public institution and part of the government. It should
be called upon to fit its activities into a fram ew ork which encompasses the
basic economic objectives set forth in this legislation.
As already stated, the trade-off concept between unemployment and inflation
is subject to grave questions. In today’s w orld a soft economy is not an
effective or desirable path to curbing inflation. In fact, unemployment and idle
capacity have tended to reduce productivity and to increase unit costs and
intensify inflation. A contractionist monetary policy by the Fed may be totally
inconsistent with the plans and policies set down by the President and the
Congress to fight both inflation and unemployment simultaneously. Yet a
totally independent posture for the Fed could serve to undermine efforts of
the President and the Congress to pursue these policies. Of course, to the
extent that executive and legislated policies were to ignore the prevalence of
inflation, the Federal Reserve might be forced to pursue tight money to prevent
overheating the economy. But the Federal Reserve should be required to submit
plans and to be bound basically to perform in harmony with the goals and
objectives set forth in this legislation.




100
What is being legislated in the Bill is the provision of a process and a
procedure for economic planning, for form nlating economic policies and for
proposing economic programs that w ill serve the best interests of the nation.
The Federal Reserve should definitely be involved in this process. It is not an
entity which serves only as a residual actor on the economic scene. In planning
for the coming years, monetary policy must be an important part of the total
economic policy package that should come before the Congress.
In essence, what I am urging is to require the Fed to be involved not only
in the setting o f monetary policies but also broad economic goals and policies.
It should be assured considerable latitude to exercise its week to week and
month to month influence on money supply and on credit terms within the
framework o f the objectives set for it in this Bill and consistent with the
annual policy determinations made by the President and the Congress.
The other principal point to which I want to address the Committee concerns
the establishment of a specific quantitative goal on inflation. The simplistic
conclusion that there is a direct trade-off between unemployment and inflation
is damaging and costly. In my judgment, the use of a quantitative goal on the
rate of inflation along with a quantitative goal on the percentage o f unemploy­
ment would tend to cause more and more people to pursue the trade-off
concept. Rather, what is needed is a continued effort to achieve lower levels
of unemployment and lower levels of inflation simultaneously and compatibly.
Of course, at some high point of capacity utilization the goals of price stability
and high employment w ill be incompatible. But I believe that the setting of
quantitative goals for both will serve to yield higher than tenable levels of
both unemployment and inflation because it w ill lead to a greater tendency to
rely on unemployment and idle productive facilities to fight inflation.
I certainly favor the strongest possible statement o f objectives in the
legislation calling for substantial reductions in the rate of inflation. I would
urge that wT try to get back to one to two percent increases in prices.
e
Inflation is a cancer on the economic body of the United States and it must be
eradicated. H ow soon and how fast this can be done w ill depend on what kinds
of measures and steps we take to fight inflation other than through un­
employment.
The W right amendment adopted in the House o f Representatives bill calls
upon the President to set annual goals over the foreseeable years in the pursuit
of price stability. This means that there w ill be annual goals for prices and
that would be far preferable, in my judgment, than the setting of a price goal
in the legislation.
I testified on August 3rd of last year before this Committee in reference to
S. 1542, which provided for extending the authority of the Council on W age
and Price Stability. I offered suggestions on what to do about inflation.
Measures against inflation are needed even more today than a year ago. The
government must be involved in fighting inflation through every feasible
measure short o f direct controls.
The American people are adamant in their determination to stop the ravages
of inflation. Most people would prefer controls to inflation. I think that we can
lower the pace of price increases without broad price and wage controls and
without relying on unemployment. It will not be easy and rhetoric alone w ill
not succeed. The appointment of Barry Bosworth as Chairman of the Council
on Wage and Price Stability is the most encouraging thing that has happened
on the inflation front in a long time. I f he is given the support he needs and
if the President puts the full force of the prestige o f his office behind the war
on inflation, we can make progress toward real price stability.
I urge the favorable votes by this Committee and the fu ll Senate in favor of
this important and timely legislation.

Mr. N a t h a n . Thank you. I will be as brief as I can, summarizing
three points.
The first point has to do with the general formulation and the con­
tent of the bill in its broadest perspective. I came to Washington, I
think, 4 months after Leon Keyserling in the summer of 1933, and
having been involved in the thirties with people that were directly
concerned with the recovery from the recession, the great depression,
I agree with Leon Keyserling that was a rather ad hoc, grab as grab




101

can, inconsistent sort of set of programs, but nonetheless, it was in
rather considerable degree successful.
Second, I had the privilege of working as chairman of the Planning
Committee of the War Production Board, where we did the planning
for the mobilization for the war.
I say if we hadn’t had that kind of planning we could have never
T
r
achieved the degree of success that was achieved, whether it was war
or not war. It was an organized, integrated effort.
We had reconversion in trying to plan for going back to peacetime,
and I have had the privilege a]so of working since the end of World
War II in many, many less developed countries of the world, and I
myself feel that those that try to put together some meaningful, in­
telligent program, and efforts to use their resources in a constructive
manner are the ones that made the greatest progress, and ones that
failed in the planning directions are the ones that lagged furthest
behind. This was not inconsistent with the private enterprise sector.
One can argue a great deal about Korea, and Korea’s civil liberties,
but when it comes down to economic programing and developing, that
country had by far the most outstanding progress of any country on
the economic front since the end of World War II. It was programed
and planned, and it was primarily in the private enterprise system
and not in public enterprises, but they did have programs and poli­
cies and institutions that made sense and led to something.
Now, here in the United States, I agree that the Employment Act
of 1946 has been a great contributor to the fact we haven’t had any
major booms or busts, but you never lived in a society that is changing
in its goals, and the objectives changed and I think the HumphreyHawkins bill offers that kind of opportunity, as modest as it is.
I f there is any belief that we don’t need a more integrated coordi­
nated, meaningful set of policies and programs, then I say, let’s look
at the miserable inflation of the last decade.
Let’s look at the energy program. I hate to say this, but in just
another few months, we have a 5-year anniversary, a celebration, so
to speak, of the embargo, in October of 1978, and what have we ac­
complished in those 5 years in terms of economic independence of the
United States in the energy area? Almost nothing. We have the
weakest dollar we have had almost in memory, in economic recorded
memory.
High employment, 3 years after we passed the controversy of the
recession, restrictive trade policies emerging all over the lot, messes
in the cities, lagging investment in the private sector, and lagging
productivity, and yet, we are not trying to put the package together.
I think the Humphrey-Hawkins bill is the real ingredient whereby
we will at least have a chance. There is nothing in this bill which
directs any specific legislation or results in any specific activity, but
it does try to provide us a framework within which we can try to
make this economy more effective.
Now, having emphasized that, I would just say one thing, that this
is not a bill to regiment the economy, it is not a bill to discourage the
private sector, I think it will encourage investment in the private
sector, not a deficit bill or public works bill, but to try to stimulate
investment productivity and provide private employment.




102

There are two specifics that are discussed here today, one has to do
with the Federal Reserve. Basically, I agree with Andy Brimmer’s
position that the Fed ought to fit within the overall context. After all,
the Federal Reserve Board needs a high degree of independence be­
cause of the nature and character of the activities, of its techniques
and devices and procedures, but when it comes down to goals and
objectives, there is no doubt it is part of the Government and that it
ought to fit into the Government in terms of its goals and overall
policies.
Where I disagree strongly with Brimmer and Carlson is on the
specific goal for inflation.
I believe that a specific goal on unemployment is necessary. We
have had experience, we know what we can do, and I think to try to
put down two goals, specify side by side in my judgment, is almost
certain to lead to what is not appropriate, namely, a tradeoff between
unemployment and inflation.
That does not mean that there is not a point, where Charlie
Schultze might be right, as 5 percent or 4.9 percent or 4 percent, is not
a given. It depends upon what we do about inflation, and what we do
about unemployment, what we do about employment. I think it would
be unfortunate if we sat here in the context of 1978’s failure to deal
with the inflation problem, in a vigorous, dynamic way, except
through unemployment which has not worked.
If we stay in that area, then of course, the tradeoff of 6 maybe
7 or 8 percent unemployment is needed to adjust price stability, but
I would like to see us shoot for inflation of 1 percent or iy 2 percent
as we first had in the first half of the 1960’s, and with declining un­
employment, but unemployment is something we have had experience
about, we know about jobs, we know about investment, we know about
stimulation, but I hazard to say here, in the face of my associates at
this table, we don’t know a heck of a lot about the inflation and vari­
ous elements and factors causing it.
We know very little about the weakness in the marketplace, which
permits us to get into such a high degree of inflation, in spite of such
labor resources and ideal production capacities. We have to set an
approach, a set of policies and principles working on the inflation
rate.
I think it is appropriate, as Mr. Keyserling said, let the goals be
set each year, and then adopt the policies and plans that will be here
to achieve those programs. But I think fundamentally, to put in a
3-percent bite, I would rather see it two, if you are going to put that
in, I am convinced that you enhance the probability of this tradeoff
which hasn’t worked, and which Keyserling stated, demonstrated, I
think very impressively, is not going to continue to work.
I believe what we ought to do is not set a long-term goal within
this on the inflation front, but call for annual goals, and annual poli­
cies and programs to achieve it.
Now, just one final word.
This economy is now far more complex than it was in 1946, when
we adopted the unemployment rate, we are far more interrelated and
dependent and I believe most of the nations in the world are engaging
in the kind of programs we need here. Unless we go after inflation,
go after unemployment, go after energy replacement, go after the




103
liberalized trade policy, increased investment in productivity, I think
we are in dire trouble. Therefore, I strongly urge the adoption, sup­
port by this committee of the act and also I would hope that the
specific goal of inflation will be left off, because I think it will do
nothing but tend to give us more unemployment and more inflation.
The C h a ir m a n . Well, gentlemen, I want to thank all of you. You
certainly made a good, constructive, helpful record for us, for con­
sidering this legislation.
Let me start off with you, Mr. Nathan, since you explicitly, directly
and indefatigably rejected any notion of an inflation goal. Leon
Keyserling said the inflation goal should not be a 5-year goal but an
annual goal, and so his position is somewhat different than yours.
Today, right now, at this moment, as you know, we have been able
to reduce unemployment. It is still too high as I said. It’s been re­
duced. It is down to 6 percent. Inflation has been heating up, the
finished goods index, which may be the best index available, indicates
that that particular reflection of inflation suggested in the first 4
months of this year we had annual inflation of about 12 percent. The
Gallup Poll indicated 42 percent of the people thought inflation was
our No. 1 problem now, above all other problems, and unemployment
was 11 percent. Whether we like it or not this is on the front burner
now. We are concerned with inflation. The President has come for­
ward with an inflation program that is detailed, some people think
it is not enough and others think it is all we can do under the cir­
cumstances. In my amendment that I am offering, I directly, explicitly
confront that tradeoff problem and I think no matter what we put in
Humphrey-Hawkins, you will have that tradeoff concern. One, that
Congress is going to be thinking about, Presidents are going to be
thinking about and the public, business, and others.
Let me read you these two short sentences, one sentence, as a matter
of fact: “Policy to achieve the inflation goal shall be designed so as
not to impede the achievement of the unemployment goal.”
Now, I could change that maybe, modify it, but it was particularly
to recognize that there should not be a policy that would attempt to
hold down prices to the expense of those thrown out of work. I have
tried to confront that by wording my amendment in that way.
What is your response ?
Mr. N a t h a n . Well, you know, Mr. Chairman, the very fact that
figures are given in the public polls, which is No. 1 and which is not,
I think just puts it right on this tradeoff concept.
I like your words, if we are going to have an inflation goal I would
like to see the goal of, the goal should not be at the expense of lower
levels of employment.
I don’t think the rise in recent months has anything to do with
excess demand. I think we have some problems in the marketplace in
this economy and I wish the U.S. Chamber of Commerce would find
out what it is that is functioning so badly.
How is it, when you have 7 million cars being produced, prices rise
faster than when there are 11 million? There is something wrong in
the marketplace and I think we need a hard look at it.
I think we have to have a strong program.
I say in my statement here, I think the best thing that has hap­
pened is the employment of Perry Bosworth. He’s a dynamic, hard­




104
working guy and if he can get President Carter to move in and work
with labor and management, I think we can break this inflation spiral,
by not sitting back and-----The C h a ir m a n . I agree Bosworth is a fine appointment, but Bosworth is saying over and over again, we aren’t doing enough. Inflation
will be much worse unless we have the guts to act.
T
Dr. George Perry, whom I think we all recognize is an eminent
economist in this area was quoted in the New York Times on Satur­
day as indicating he thinks the drop in unemployment has already
affected w
^age settlements and wage increases to a point where they
are going to have an effect on prices that will be adverse. Of course,
Dr. Perry is no automatic knee-jerk reactionary. He’s a very fine
economist, very thoughtful and careful, so we are already in a posi­
tion with 6 percent unemployment, where competent people are
looking for this tradeoff. There’s no way we can make it go away. It
would seem to me, it is best to confront it, put it right into the act.
And I also require that you adopt policies that will not be at the
expense of reducing unemployment.
Mr. N a t h a n . That is hard to reconcile.
The C h a ir m a n . Maybe it is.
But otherwise it seems to me, you will have the same kind of en­
forcement experience we had in our housing goals. We set housing
goals of 26 million starts over 10 years, beginning in 1968. That was
my amendment. We didn’t come within 20 percent of it, and with
Government-assisted housing starts we had 6 million. We got only
45 percent. Pitiful performance, so just by putting it in law to achieve
it, unless you recognize the inhibiting factors that are likely to lie
in the way, and require Congress and the President to confront that,
r
too.
Mr. N a t h a n . I would certainly hope that the President with the
help of the Council on Wage and Price Stabilization, Mr. Bosw^orth
or whoever else can be brought in, will work jointly with labor and
management because you can’t get w'ages held down without some
constraint on prices, and you can’t get it on the other side, and I
don’t think the marketplace will do it without 7 or 8 or 9 percent
unemployment.
We have to do a lot more on the anti-inflation front than we have
been doing.
The C h a ir m a n . Dr. Keyserling, then Dr. Carlson.
Mr. K eyserling . I shall talk a little more about the magnitude of
the injuries due to unemployment and those due to inflation, and I
don’t think they are comparable, but I will try to make that succinct.

When we say that only 6 to 8 percent are hurt by unemployment,
r
that is for the birds. Because the unemployment is merely an index
of the performance of the whole economy. That rate of unemploy­
ment correlates with a demonstration I have here, that since 1953 this
economy has thrown down the gutter irretrievably, more than $5.3
trillion w'orth of production, representing the conservative estimated
difference between actual production and reasonably full production
and full use. That loss is to all, private and public, economic and
social.
As for inflation, everybody knows that everybody is aware of it,
but everybody isn’t hurt by it. The housewife goes into one of the




105
food emporiums, who have unconscionably jacked up their prices
with no relationship with what is happening to farm prices or any­
thing else and whose profits soar. They are not hurt by inflation the
same as the housewife. The lender who collects inflated interest rates
is not hurt by this inflation of money costs to the borrowers.
Prices are a means. Employment is an end. Corroborating what Bob
Nathan said, we know a lower level of unemployment is always de­
sirable; nobody can argue that 5 percent of people thrown in the
streets with nothing to do is better than 3. But we don’t know, ex­
cept on a year-by-year pragmatic basis, what the ideal price level is.
You can’t find an economist that has taken the position that we would
have been better off if prices were absolutely stable. That is not true
of any economy.
It is a matter of degree. I will say this, I think Senator Proxmire
knows from exchanges we have had, I am rather flexible on this. I
think that the basic objection to a quantitative inflation goal is giving
any sanctimonious support to the view that you are going to use
unemployment as a means of stopping inflation, and while I am not
prepared to say that the 3-percent goal in 1983 is nearly as good as
the annual pragmatic goal I am talking about, I would be certainly
prepared to say that if such 3-percent goal can be accompanied by an
absolute watertight categorical requirement in the bill, that it shall
not be sought by any modification whatsoever of the responsibility of
getting down to 3 and 4 percent unemployment by 1981, that would
certainly be a very ameliorating feature of any 3 percent by 1981
unemployment goal.
Dr. C arlson . Let me make a comment; a lot of the inflation we
have seen has come from discretionary acts of Government. Minimum
wage, increases in social security. Barry Bosworth of the Council on
Wage Price Stability says 1y2percent of the acceleration in inflation
is coming from this source, and our estimate is 2 percent.
The feature of this cost-push element is it tended to make labor
more intensive, and we are in fact causing some of the unemployment
problems because of the increased minimum wage and social security.
We have increased the tradeoff level, some people argue, by a couple
of percentage points, let alone the other increases.
We are making many people unemployable by pricing them out
of the market.
The C h a ir m a n . I have to go to the floor. I will ask Senator Sarbanes to chair. Senator Brooke would next be in turn.
Senator B rooke. Thank you. Do you see any danger in the bill
compromising the Federal Reserve Board, Dr. Brimmer?
Dr. B rim m er . I see no danger that the bill would compromise the
Federal Reserve Board. I can see a danger, if the bill tried to pre­
scribe in detail the conduct of monetary policy— there would be that
danger. In my statement I address myself to the limitation which I
would like to see, to keep the focus on the right element, not on the
specific constructions of the Fed.
I would say in the last couple of years, the dialog between the Con­
gress and the Fed has grown quite different.
For example, to provide some guidance for the Congress and
administration, the Federal Reserve needs to say, the first year of this
bill’s operation, more about its own goals with respect to unemploy­




106
ment and prices and not simply be content with the forecast for the
money supply. The bill will call on the Fed to do that. A t least the
House version would.
The Senate version does not. At the same time, the Federal Reserve
itself has moved toward sharing with the Congress, more information
about its own expectations. I was personally surprised and pleased to
see the Chairman of the Federal Eeserve appear before this committee
on April 25 and share with this committee what he called his personal
expectations about pricing. As a matter of fact, that statement which
I summarized on page 14 of my statement, reflected the consensus of
the Federal Marketing Committee. So the Fed has gone some distance
toward opening up and giving indications on where they expect the
economy to go and by implication, the kind of monetary policy they
think would be appropriate to sustain that effort,
As the bill is now addressed, I think it would be quite acceptable
to the Federal Reserve.
Senator B rooke. The backers of this bill feel many of the Nation’s
problems can be attributed to the lack of economic coordination of
the various branches of the Government. What are your views ? What
is your reaction to that ?
Dr. B rim m er . I think the lack of coordination— by the way, there
has been a lack of coordination, I think. But I do not look upon co­
ordination and planning to mean the same thing. Detailed, indicative
planning, in my judgment, goes well beyond the requirements of this
bill or in fact the requirements of the country.
So more coordination is acceptable, but very frankly, if you are
coordinating bad policy, then the economy would be worse off. So I
would hesitate to say let’s put the emphasis on coordination. I would
be concerned about the contents.
While I have an opportunity, may I indicate one thing I would
like to do, if the committee would permit. I took seriously the chair­
man’s request to me, and I addressed myself to three questions, two
about monetary policy, and a third about inflation. I did not address
myself in my statement to a number of implications of this bill. I
have done so in another context.
I
would hope that the committee would permit me to supply for
the record my own analysis, a somewhat more comprehensive analysis
of the consequences of the Humphrey-Hawkins bill.
Senator S arbanes . I think it would be helpful to have that analysis,
Dr. Brimmer. Without objection, it is so ordered.
Dr. B rim m er . Thank you very much.
[The paper referred to follows:]




107
BRIMMER & COMPANY. INC.___________ I___________ Economic and Financial Consultants
SUITE 916

(202) 466-3474

|

1201 CONNECTICUT A VEN U E. N.W.

W ASHINGTON, O. C. 20036

For Release on Delivery
Monday, January 30, 1978
2:00 pm (EST)

ECONOMIC GROWTH AND STRUCTURAL UNEMPLOYMENT

Remarks By
Andrew F. Brimmer
President
BRIMMER AND COMPANY, INC.
Economic and Financial Consultants

Before the General Session on
Structural Unemployment
THE WHITE HOUSE CONFERENCE
ON
BALANCED NATIONAL GROWTH AND ECONOMIC DEVELOPMENT
Sheraton-Park Hotel
Washington, D.C.
January 30, 1978

3 0-4 5 4 0 - 7 8 - 8




108
ECONOMIC GROWTH AND STRUCTURAL UNEMPLOYMENT
By
Andrew F . Brimmer*
Since the topic of this General Session is quite broad
("Structural Unemployment:

Should We Move People to Jobs or

Jobs to People”) , I thought it wise to impose upon myself an
initial boundary to the subject matter I would try to cover.
Moreover, because of the time limitation for each participant,
I also thought it wise to spell out in writing and as care­
fully as possible some of the key background elements which
I believe should be explained in a search for ways to reduce
structural unemployment.
Given my own professional experiences (which have been
mainly in the area of national economic policy rather than in
the development or management of manpower programs), when I
accepted the invitation to participate in this General Session,
I indicated that I would attempt to provide a macro-economic
perspective on the challenges

We

face (and the opportunities

open to us) in the effort to create jobs for disadvantaged
workers.

The agenda for this program identifies a number of

experts who have first-hand experiences gained through front­
line contact with -- and daily struggles to overcome -- the

*Dr. Brimmer is President of Brimmer and Company, Inc. , a
Washington, D.C.-based economic and financial consulting firm.
From March, 1966, through August, 1974, he was a Member of the
Board of Governors of the Federal Reserve System.




109

obstacles which impede the employment of labor market parti­
cipants with .few saleable skills.

I can make little or no

contribution to that part of the agenda.
The key elements which I believe should receive consider­
ation are discussed in subsequent sections of these remarks.
The highlights can be summarized here:
- A fundamental pre-condition for the success of any
specially-targeted program to cope with structural
unemployment is a vigorous and sustained expansion
in overall economic activity. A sluggish economy
(even if recessions are avoided) is a harsh and
inhospitable soil for the cultivation of jobs for
the hard-to-employ.
- The strategic role of economic growth in the generation
of jobs is clearly demonstrated by the experience over
the last decade and a half. The 16 years ending in
1977 were divided equally between eight years of
sustained economic expansion and eight years of re­
cession, inflation, and stagnation. The effects on
jobs stand out sharply: the first half of the period
was one of expanding jobs and declining unemployment.
The second half was one of slow growth in jobs and
sharply rising unemployment.
- Against this background, the Carter Administration’s
proposed $25 billion tax reduction for individuals
and businesses represents a wise move.
Without such
action, the American economy would face a "growth
recession" in 1979 -- meaning a rise in real gross
national product less than the 4.0 per cent necessary
to prevent an increase in unemployment.
- Whenever we focus on structural unemployment there is
no way to avoid an explicit appreciation of the
distressing situation among blacks as a group, and
not simply among black teenagers. During the 1973-75
recession, blacks had to bear a disproportionate share
of the burden of increased unemployment. Moreover,
during the last 33 months of economic recovery, blacks
have gotten a smaller fraction of the added jobs
compared with their relative position in the labor
market. Over the same period, the level of unemploy­
ment among blacks actually rose slightly, while total
unemployment declined noticeably.




110

- In preparing programs to attack structural unem­
ployment, it is necessary to keep in mind a number
of changing demographic characteristics of the
civilian labor force, since these will have an impact
on the competition for jobs in the years ahead. For
example, over the last decade and a half, a dramatic
rise in the participation of both women and teenagers
in the labor force has aggravated unemployment. How­
ever, over the next several years, as the shadow of
the 1960's drop in birth rates is cast into the 1970's
and 80's, the youth population will decline. The
result will be a slight lessening in labor market
pressures following from fewer teenagers seeking
jobs. The effect on labor markets of increased
job-seeking by women will also moderate somewhat over
the remainder of this decade. But, on balance, the
above-average participation of both women and teen­
agers in the work force will continue to make it hard
to reduce structural unemployment.
- Another long-run trend which must be kept in mind is
the differential rate of growth in population, jobs
and money income in central cities compared with the
suburbs in major metropolitan areas. As is generally
recognized, over the last decade and a half, most
central cities have experienced an absolute decline
in population. But a substantial number of these
cities have also had a relatively larger absolute
decline in the number of jobs. The net effect has
been a clear tendency for the cities to fall behind
relative to the suburbs.
- Among many persons concerned with structural unemploy­
ment, a considerable amount of hope is being attached
to the Humphrey-Hawkins bill, which aims at a signi­
ficant reduction in the excessively high level of
unemployment over the next five years. However, my
assessment of the potential impact of the proposal
leads me to be less optimistic than most of the bill's
proponents.
- In particular, too much hope is being placed on the
expected expansion of public service jobs. Instead,
we must look to greater efforts to increase openings
on private payrolls.
- In this regard, it is clear that private employers
will need some kind of Federal Government subsidy to
help off-set the extra costs of hiring any significant
number of marginal workers. If the $400 million of
subsidy recently recommended by the Carter Administration
were used with imagination, perhaps 252,000 entry-level




I ll
jobs could be created. The same amount spent on
public service jobs may generate only 44,000 new
openings.
- In addition, private employers will also need
inducements to locate production, distribution
and service facilities in central cities — from
which many firms are continuing to migrate.
Liberalized use of the investment tax credit
could help to off-set the extra costs of making
investment expenditures in these areas.
Each of the above conclusions is amplified in the rest of
these remarks.




11 2

Economic Growth and Employment
The strategic role of economic growth in generating jobs
shows through clearly in the statistical evidence tracing
changes in output and employment during the last decade and
a half.

The longest sustained expansion in economic activity

in the post World War II period occurred during the eight years
1961 - 1969.

As shown in Table 1 (attached), over these years,

gross national product corrected for inflation (real GNP) rose
at an average annual rate of 4.5 per cent.

The civilian labor

force climbed by 10.3 million; employment rose by 12.2 million,
and the number of unemployed workers dropped by 1.9 million.
These figures represented annual average rates of change of 1.7
per cent; 2.1 per cent, and 6.0 per cent, respectively.

Over

these eight years, the overall unemployment rate decreased
from 6.7 per cent in 1961 to 3.5 per cent in 1969.
Even more striking was the decrease in long-term unemploy­
ment (27 weeks and over).
persons in this category —

In 1961, there were 804 thousand
representing 17.1 per cent of

total unemployment of 4,713 thousand.

By 1969, the number of

long-term unemployed had shrunk to 133 thousand and accounted
for only 4.7 per cent of total joblessness -- which in turn
had fallen to 2,832 thousand.
In sharp contrast, between 1969 and 1977 (also a period
of eight years), real GNP expanded at an average annual rate
of 2.7 per cent -- far below the historical trend of approxi­
mately 3.6 per cent over the 30 years ending in 1977.




The

113
reasons for this relatively poor performance of the national
economy were a mixture of inflation, recession, and stagna­
tion —

partly caused by a five-fold jump in the price of oil

but also aggravated by a combination of inappropriate monetary
and fiscal policies.

In this environment, the civilion labor

force continued to expand —

climbing by 17.0 million.

How­

ever, the number of jobs rose by only 13.1 million, and un­
employment jumped by 3.9 million.

These figures represented

average annual rates of change of 2.4 per cent; 1.9 per cent,
and 11.5 per cent, respectively.

During this second eight-

year period, the overall unemployment rate rose from 3.5 per
cent to 6.9 per cent of the civilian labor force.
The impact of these trends on the long-term unemployed
was predictable.

Between 1969 and 1977, this category of job­

lessness rose by 813 thousand to 946 thousand.

Last year, the

latter figure was equal to 14.0 per cent of total unemployment
-- which in turn had climbed to 6,772 thousand.
In summary, the last decade and a half of American eco­
nomic history can be divided equally between eight years of
sustained economic expansion and eight years of recession,
inflation, and stagnation.

The effects on jobs stand out

sharply: the first half of the period was one of expanding
jobs and declining unemployment.

The second half was one of

slow growth in jobs and sharply rising unemployment.
What is the lesson to be learned from the foregoing ex­
perience?

It is unmistakable: a sustained, high level of




114
real economic growth is a necessary underpinning for any pro­
gram to create jobs for the disadvantaged.
What are the prospects for economic growth and employment
in the years ahead?
tain —

At this juncture, the outlook is uncer­

since the outcome depends substantially on the fortunes

of the Carter Administration's tax reduction-tax reform propos­
als announced on January 21, 1978.

In broad terms, the Adminis­

tration recommended a net reduction of $24.5 billion of Federal
income taxes paid by individuals and businesses.

This figure

is the result of tax reductions amounting to $33.9 billion
partly offset by increases of $9.4 billion recommended under
the heading of "tax reform."
$16.8

Individuals would receive about

billion (over two-thirds) of the net tax reductions,

and $5.7 billion (just under one-quarter) would benefit the
business sector.

The remaining $2.0 billion would represent

a reduction in excise taxes on telephones and the repeal of
the recently enacted increase in unemployment insurance taxes.
The tax reductions would become effective in fiscal year 1979
—

which begins October 1, 1978.
The Administration explained that one objective of the

proposed tax reduction is to spur economic growth —

which in

turn would create extra jobs and speed the reduction in un­
employment.

The expected impact of the proposals in this regard

can be seen in Table 2, (based partly on estimates prepared by
the Council of Economic Advisors (CEA) .

It will be noted that the

CEA concluded that, in the absence of a tax cut, the growth




115
rate of real GNP would be about 4.3 per cent from the fourth
quarter 1977 through the fourth quarter of 1978.

Though 1979,

the rate would ease off to 3.8 per cent and then increase to
4.9 per cent through the end of 1980.

If the tax reductions

become law according to the recommended schedule, the growth
rates for real GNP may be lifted to 4.7 per cent through the
fourth quarter of both 1978 and 1979 and to 5.0 per cent through
the end of 1980.
Expressed in terms of overall economic performance, the
tax reductions are expected to lift real output by $20.9
billion above the level it might otherwise reach.

Moreover,

the added stimulus would help to avoid a "growth recession" in
1979 —

meaning a rise in real GNP of less than the 4.0 per

cent necessary to prevent an increase in unemployment.
If the cut in taxes does not materialize, the overall un­
employment rate (which averaged 6.8 per cent in the final quar­

ter of 1977) may decline to 6.3 per cent by the end of this
year.

The same rate may prevail in the fourth quarter of

next year, and the rate might decline only slightly to 5.9 per
cent by the end of 1980.

With the tax reductions in place, the

unemployment rate may decline steadily to 6.2 per cent at the
end of this year; to 5.8 per cent in the final quarter of 1979,
and to 5.3 per cent by the end of 1980.
The level of employment is also expected to rise as the
economy responds to the stimulus of tax reduction.
of 1978, an extra 70,000 jobs may have been created.




By the end
As the

116
full impact of the tax cut benefits are registered, about
700,000 additional jobs would be available at the end of 1979.
The number would be up to 900,000 by the close of 1980.
Finally, the fiscal stimulus is expected to generate a
larger increase in output (1.4 per cent) than in the rate of
inflation (0.5 per cent).

Thus, on balance -- and judged in

terms of the impact on economic growth and employment -- the
proposed tax reduction is clearly desirable.
Differential Employment Experiences:

Black vs. White

At this point, we can turn to a discussion of the differential
job experience of black and white workers in recent years.

In

general, during the 1973-75 recession, blacks had to bear a dis­
proportionate share of the burden of increased unemployment.
Moreover, during the last 33 months of recovery, they have gotten
a smaller fraction of the added jobs compared with their relative
position in the labor market.

Over the same time period, the

level of unemployment among blacks actually rose slightly -while total unemployment declined noticeably.
The major dimensions of labor market trends can be traced
in Table 3, showing changes in the civilian labor force, employ­
ment, and unemployment, by color, sex and age from March, 1975,
through December, 1977.

These months mark the recovery of the

economy from the 1973-75 recession -- a recovery which began
in the Spring of 1975.
These data document the fact that -- so far in the recovery -blacks have not participated in the job rebound as fully as
have whites.

Between March, 1975 and last December, the total

civilian labor force rose by 7.5 per cent; the corresponding




117
figures for blacks and whites were 13.0 per cent and 6.8 per
cent, respectively.

During the same period, total employment

expanded by 10.0 per cent; black employment climbed by 14.9
per cent, and jobs held by whites rose by 9.4 per cent.

However,

the growth in the black labor force (13.0 per cent) almost
equaled the rise in black employment (14.9 per cent).

Conse­

quently, over this 33-month period, the number of blacks with­
out jobs rose by 1.8 per cent -- while total joblessness
among whites declined by 23.2 per cent.
Reflecting these mixed trends, the total unemployment rate
(which had been 8.5 per cent in March, 1975) had decreased to
6.4 per cent in December of last year.
whites was 5.6 per cent.

The rate last month for

The unemployment rate for blacks in

December was 12.5 per cent -- (only slightly below the 13.9 per
cent registered when the national economy reached the bottom of
the last recession.
In every demographic category, black unemployment rates by
December of 1977 had fallen proportionately less than was true
of their white counterparts.

The extent to which black unem­

ployment has decreased less during the recovery can be seen in
the behavior of the black-white unemployment ratio.
1975, the overall ratio was 1.78.

In March

For youth, it was 2.26; for

adult males 1.85, and for adult females 1.49.

By December, 1977,

the overall ratio had climbed to 2.23; the ratio for youths was
was 2.96; for adult males 2.22, and for adult females, 1.90.
Further insights into the deterioration of blacks' position
in the labor market over the last 33 months can also be gotten
from the data in Table 3.

These figures show blacks as a

percentage of the civilian labor force, employment, and unem­




118
ployment, by color, sex, and age in £iarch» 1975; December, 1976,
and December, 1977.

By comparing their employment and unemploy­

ment percentages with their share of the civilian labor force,
one can get a rough impression of the extent of the short-fall
in blacks' participation in the recovery.

For example, in

March, 1975, blacks represented 11.3 per cent of the labor force;
they held 10.6 per cent of the jobs, and they accounted for 18.6
per cent of the total unemployment.

Thus, in the Spring of 1975,

blacks had a "deficit” of 0.7 percentage point in their share
of jobs and a "surplus" of 7.3 percentage points in their share
of unemployment.

Similar calculations are made for blacks by

sex and age.
Using these calculations, one can trace the progressive
deterioration in blacksr position over the last 33 months.

By

December of last year, their overall job deficit had risen to
0.8 percentage points, and their burden of surplus unemployment
had climbed to 11.4 percentage points.

The same pattern of

deterioration is evident among all categories of black employ­
ment.
These mixed -- and distressing -- black^white employment
patterns must be kept in mind as the quest is pursued to expand
job opportunities for the disadvantaged.
We can now turn to an assessment of several long-run trends
in the labor force and employment patterns.

These will have a

direct bearing on the magnitude of the structural unemployment
problem in the future.
Long-Term Labor Force Trends
Over the last decade and a half, the growth of the civilian
labor force has reflected a number of fundamental changes in
the nature and extent of participation by both women and teen­




119
agers. As is generally known, the changing composition of the
adult population (which in turn is a reflection of variations
in birth rates) is a principal determinant of the potential
size of labor force.

The high birth rates recorded in the after-

math of World War II -- combined with the greatly expanded
participation of women in the labor market -- have caused the
civilian labor force to increase rapidly -- at a rate averaging
over 2 per cent per year since 1960.

On the other hand, the

drop in the birth rate during the 1960's and early 1970’s will
cause a slackening in the rate of labor force expansion during
the rest of this decade.

For example, the population 16 to 19

years old (the youth component of the civilian labor force)
rose by 1.3 per cent in 1975.

However, this population group

increased 0.8 per cent in 1976, and by 0.1 per cent in 1977.
But, as the shadow of the 1960's drop in birth rates is cast
into the 1970's,’ the 16 to 19-year-old population will decline
by 0.2 per cent in 1978; by 0.6 per cent in 1979, and by 1.1
per cent in 1980.
During the last decade and a half, teenagers accounted for
a sizable fraction of the rise in the civilian labor force.

For

instance, between 1960 and 1977, the civilian labor force rose
by 29.3 million persons.

About 4.5 million of this increase

(or 15.4 per cent) was accounted for by teenagers.

As a result,

teenagers rose from 7.0 per cent of the labor force in 1960 to
9.5 per cent in 1977.

The low job attachment of these young

adults and their slow absorption into the labor market have com­
bined to lift the aggregate unemployment rate well beyond what
it would have been in the absence of the demographic changes
noted above.

Moreover, the labor force participation rates of

youths 16 to 19 years old declined steadily from the late 1940' s
until the early 1960's.




Following this period, participation

120
rates began to rise, and the uptrend was still evident through
last year.

This turnaround also expanded the youth component

of the civilian labor force.

But, as mentioned above, this

bulge in the youth population has just about passed through the
labor market, and the youth component of the labor force should
diminish from here on.
The effect on labor markets of increased job-seeking by
women will also moderate slightly over the remainder of this
decade.

However, women will continue to account for a sizable

fraction of the rise in the labor force.

In 1977 women consti­

tuted 36.8 per cent of the total labor force compared with 30.4
per cent in 1960.

But over this 17-year time span, the number

of adult women in the civilian labor force rose by 15.2 million.
This represented 52.0 per cent of the total rise over this
period.

The quickened participation of women in the labor force

has coincided with a decrease in the fertility rates to 1,862
births per 1,000 women in 1974 compared with a peak of 3,767 in
1957.

Data compiled by the U. S. Census Bureau suggest that

birth expectations are now averaging two per family -- suggest­
ing a continuation of low birth rates.

With less time devoted

to child-raising, women entered the labor force in increasing
numbers during the last two decades.

Looking ahead, however,

it now appears that the rise in women's participation in the
labor force will be at a somewhat reduced pace.




121
Trends in Population. Manufacturing Employment, and Money Income
in Metropolitan Areas
In searching for the best means to attack structural
unemployment, we should also keep in mind a numbjer of fundamen­
tal long-run trends which have had an adverse effect on.job
opportunities for blacks- and other marginal groups in the econ­
omy.

This set of trends involves the differential rates of

growth in population, jobs, and money income in central cities
compared with the suburbs of our major metropolitan areas.

As

is generally recognized, over the last decade and a half, most
central cities have experienced an absolute decline in popula­
tion.

A substantial number of these cities have also had a

relatively larger absolute decline in the number of jobs.

The

net effect has been a clear tendency for the cities to fall behind
relative to the suburbs.
To enhance understanding of these trends, data relating to
population, income, and manufacturing employment were assembled
for 26 leading metropolitan areas (SMSA's) in the United States.
For the most part, these SMSAfs were ranked according to the
population of their central cities in 1973.

In each case, the

SMSA was divided between central city and suburbs.

Population

and money-income figures for 1960 are shown in Table 4.
same data for 1973 are shown in Table 5.

The

Manufacturing employ­

ment for 1963 and 1972 is presented in Table 6.

Changes in

each central city's share of population, manufacturing employ­
ment, and money income between 1960 and 1973 are shown in
Table 7.

Figures showing the size of the black and working-age

population in the selected central cities in 1960 and 1970 are
recorded in Table 8.




Changes in both population categories

122

over that decade can be traced in Table 9.

/

A number of insights can be drawn from these statistics.

For

this purpose, the data in Table 7 are particularly instructive.
Again, these figures show changes in the central city's share of
population, manufacturing employment, and money income in each
of these selected metropolitan areas between 1960 and 1973.

All

of the 26 central cities shown (except Memphis, Tennessee) lost
population compared with the total metropolitan area. In other
words, during the 13-year period the suburbs grew at a much
faster rate than did the central cities.

The same general pat­

tern prevailed with respect to manufacturing employment.

In

this instance, two of the central cities (Indianapolis, Indiana
and Phoenix, Arizona) increased their share of factory jobs in
their respective SMSAfs.

San Antonio, Texas expanded manufactur­

ing employment at the same rate as the suburbs.

In the remain­

ing 23 cities, a decline was recorded in their relative share
of factory jobs.

The trend of money income paralleled the

trend of population and employment.

Only Indianapolis and

Memphis succeeded in expanding money income originating in the
central city at a faster rate than was recorded for the SMSA
as a whole.
Moreover, most central cities saw their share of total SMSA
money income decline
population.

at a faster rate than their share of total

In other words, while the typical central city lost

population, its relative share of factory jobs and other




123
opportunities for its citizens to earn income shrank even faster
than the decline of total SMSA popolation.

This meant that the

central cities were left with a relatively weaker economic base
than was the case at the beginning of the 1960’s.
Along the same lines, the figures in Table 9 show that in
all of the 26 central cities (except Phoenix, Arizona) the black
population increased as a percentage of the total.

The relative

changes were particularly striking in Detroit, Baltimore,
Washington, D. C., Cleveland, and St. Louis.

In the case of

Washington, D. C. (where blacks already represented 54 per cent
of the total population in 1960), the increase lifted blacks1
share of the total to over 71 per cent.

In Detroit, Baltimore,

New Orleans, and St. Louis, blacks represented over 40 per cent
of the population in 1970.
per cent.

In Atlanta the proportion was 51

(In passing, by 1975, blacks represented more than

half of the total population in several of the cities named.)
With respect to the working-age population in these cities,
another important trend stands out.

The number of cities which

showed an increase in the working-age population as a percentage
of the total (12) just about equals the number showing a decline
in this ratio).

However, virtually all of the relative decline

in the working-age population occurred in the older industrial
cities of the Northeast and South.

In sharp contrast, the

cities which gained in working-age population compared to the
total were the relatively young and rapidly growing cities of
the West and Southwest.

These tend to be the same cities which

experienced a relatively smaller decrease in their shares' of
factory jobs and money incomes compared with their surrounding

3 0 - 4 5 4 0 - 78 - 9




124
suburbs.
The lesson

to be learned from a review of the statistics

presented above is quite clear: the older central cities in the
industrial heartland of the nation are finding it increasingly
difficult to compete for jobs to support their population.

More­

over, a rising proportion of the latter is being made up by
blacks and members of other minorities groups.

Since the latter

find it difficult to compete for jobs under any circumstance,
they are finding it particularly hard to get jobs in local labor
markets that are growing more slowly -- or actually declining -compared with the nation as a whole.

So, when attention turns

to the question of structural unemployment, a major focus has
to be on the country's mature urban areas.
Against this background of long-term trends, we can look
more closely at one of the most widely-supported proposals to
reduce structural unemployment over the years ahead.

The propos­

al is embodied in the Humphrey-Hawkins Bill.
Expected Impact of the Humphrey-Hawkins Bill
Among many persons concerned with structural unemployment,
a considerable amount of hope is being attached to the HumphreyHawkins Bill -- which aims at a significant reduction in the
excessively high level of unemployment over the next five years.
The draft legislation (sponsored by the late Senator Hubert H.
Humphrey and Representative Augustus F. Hawkins of California)
has been modified sufficiently to attract the endorsement of
President Jimmy Carter.




Since the bill has the support of the

125
Democratic leadership in Congress as well as of organized labor,
it probably will be enacted before the end of 1978.
Given this prospect, one ought to ask whether the faith that
is being placed in the measure is justified.

My own assessment

of the potential impact of the proposal leads me to be less optim­
istic than most of the bill's proponents.
Expressed briefly, the Huxnphrey-Hawkins bill would make the
reduction of unemployment the single most important objective
of national economic policy.

It would establish a numerical unem­

ployment rate of 4 per cent for the civilian labor force as a
whole and 3 per cent for adults (defined as those 20 years of
age and over).

These goals would have to be met over a five-year

period -- presumably by 1983.

Another important goal -- although

not stated quantitatively -- is a significant reduction in the
extremely high unemployment rates among young people.
The thinking behind the bill assumes that the private sector
will be the primary source of the jobs needed to achieve the
specified goals. .However, it also would mandate that the Federal
Government use its various economic policy instruments for the
same purpose.

These would include timely reductions in income

taxes for both individuals and businesses -- as well as a sizable
increase in spending on training and public service jobs.

More­

over, the Federal Reserve System (which influences interest rates
and regulates the availability of money and credit) would be
required to give explicit consideration to the unemployment goals
in its conduct of monetary policy.

While the revised draft recog­

nizes that inflation is also a serious problem, the fundamental
focus remains on the reduction of unemployment.




126
Rationale Behind Proposal
The. motivations which, gave rise to the Humphrey-Hawkins bill
are easily understood:

unemployment among blacks and other

marginal groups has risen persistently in the last three years,
while joblessness in the nation generally has decreased somewhat
as the economy recovered from the 1973-75 recession.

As noted

above, between March, 1975, and December, 1977, the civilian
labor force rose by 6,937 thousand, and the black labor force
climbed by 1,354 thousand -- representing 19.5 per cent of the
total rise.

Over the same period, the number of jobs in the

economy expanded by 8,382 thousand, of which 1,328 thousand (or
15.8 per cent) went to blacks.

As a result, the level of unem­

ployment in the economy as a whole dropped by 1,445 thousand,
and for whites the decrease came to 1,471 thousand.

But jobless­

ness among blacks rose by 26 thousand.
Reflecting these mixed trends, the total unemployment rate
(which had been 8.5 per cent in March, 1975) had decreased to
6.4 per cent in December of last year.

The rate for whites was

5.6 per cent (vs. 7.8 per cent in March, 1975), and the rate for
blacks was 12.5 per cent (vs. 13.9 per cent in March, 1975).
Moreover, the unemployment rate for black teenagers was 37.3 per
cent last December, compared with 12.6 per cent for white youths.
In March, 1975, the rates were 40.3 per cent and 17.8 per cent
for black and white teenagers, respectively.
Under these circumstances, reaching the Humphrey-Hawkins
objectives will be a difficult task.

Apparently no firm Federal

Government estimates have been made of the number of additional




127
jobs that will have to be created if the goals are to be fulfilled.
In late November, 1977, Secretary of Labor Ray Marshall suggested
that, during the five years ending in 1983, at least two tax reduc­
tions of a minimum of $20 billion each plus 1.0 million extra
public service jobs will be required to get the overall unemploy­
ment rate down to 4 per cent.

Under the existing 1973 Manpower

program, 700,000 public service jobs have already been funded,
and the new Youth Employment program introduced last year by the
Carter Administration authorized another 300,000 public service
jobs.

The work requirements of the Administration's welfare

reform scheme would necessitate 700,000 openings on public pay­
rolls, and the original draft of the new urban policy called for
an additional 300,000.

These figures add up to 2 million public

service jobs by the early 1980's -- about double the present
number.
But, as mentioned above, the framers of the Humphrey-Hawkins
bill are clearly counting on the private sector to generate the
bulk of the new jobs.

In BRIMMER & CO., we have estimated that

(given the outlook for the growth of the national economy)
between 1977 and 1983, the civilian labor force may expand from
97.3 million to 107.5 million, a gain of 10.2 million persons.
During the same period, total employment may rise by 11.4
million (from 90.4 million to 101.8 million).

The level of

unemployment might decrease by 1.2 million (from 6.9 million to
5.7 million), cutting the unemployment rate from 7.1 per cent
to 5.3 per cent.




128
If this projected 5.3 per cent rate is to be cut to 4 per
cent, an additional 1.4 million jobs would have to be found -which would hold the unemployment level to 4.3 million in 1983.
For the private sector to accomplish this task, gross national
product (GNP) would have to expand in real terms at an average
annual rate in excess of 5 per cent during the next five years.
Such a pace would be considerably above the long-run growth
trend which is somewhat less than 4 per cent.
If sustained for such a long period of time, this above­
trend rate of growth in GNP would push output close to the
limits of production capacity and stimulate substantial infla­
tionary pressures in an economy in which the general price level
may already be rising at an annual rate close to 6 per cent.
Consequently, the inflationary potential of the public policies
required to implement the Humphrey-Hawkins bill militates
against its mandates being pursued as vigorously as its advocates
anticipate.
Moreover, the budget cost of sustaining 2 million public
service jobs is another factor working against this approach.
No precise figures are available on the anticipated cost of the
program.

However, the U.S. Department of Labor estimates that

in late 1977 each public service job costs about $9,000.

Thus,

even without allowing for the effects of inflation over the next
five years, the 2 million public service jobs would cost at
least $18 billion.

Given the Carter Administration's expressed

determination to restrain the growth of Federal spending, it
seems highly unlikely that it would request an appropriation of




129
this magnitude -- or spend the funds if they were voted by
Congress over the Administration's opposition.
In conclusion, both the inflationary potential and the
budget cost of the Humphrey-Hawkins bill suggest that its goals
are not likely to be pressed with a great deal of vigor.

So,

while the measure will undoubtedly continue to attract support,
its advocates ought to scale down somewhat the overall employ­
ment benefits they expect to flow from its passage.
Additional Measures to Reduce Structural Unemployment
The evidence presented in the foregoing discussion has con­
vinced me that little real headway will be made in the reduction
of structural unemployment if heavy reliance is placed on
public sector jobs.

Instead, we must look to greater efforts

to expand openings on private payrolls.

After all, the vast

majority of American jobs is found in the private arena
rather than in the public sector.

For example, in October,

1977, there were 82.9 million persons on nonagricultural pay­
rolls.

Of this number, 67.6 million (81.5 per cent of the

total) were in private employment, and 15.^- million (18.5 per
cent) held public sector jobs.

Among the latter, Federal

Government employment stood at 2.7 million (3.3 per cent),
and State and local governments accounted for 12.6 million
(15.2 per cent) of the total.
Unfortunately, however, while the incidence of structural
unemployment is most acute among blacks, the latter have
historically depended relatively more heavily on the public
sector for employment than was true of the labor force as a
whole.

This has been especially true of those in professional

positions.

For instance, although blacks represented about




130
10 per cent of total nonfarm workers in private industry
in 1974, they accounted for 16 per cent of all civilian
employees in the Federal Government.

Moreover, while Federal

employment represented 2.8 per cent of the total jobs in the
economy in 1974, about 4.8 per cent of the blacks in civilian
jobs were on the Federal payroll.
As we focus on the expansion of job opportunities in the
private sector, it is clear that employers will need some
kind of Federal Government subsidy to help off-set the extra
costs of hiring any significant number of marginal workers.
The Carter Administration apparently recognizes this point.
The fiscal year 1979 budget submitted to Congress last week
contains $400 million for this purpose.

Unfortunately, there

was no indication of how the funds are to be used nor of the
number of additional jobs expected to result from the expen­
diture.

However, even a brief analysis suggests that one

ought to be reserved in estimating the probable impact.
If one assumes that the subsidized private sector jobs
would be at the entry level and paid the present minimum wage
($2.65 per hour), the annual payment to an employee working
a 40-hour week would amount to $5,512.

The employer would

have some additional out-of-pocket costs —

which might run

as high as 15 per cent of the payment to the worker.

This

factor would raise the total annual cost to $6,339 per job.
Of course, there is no way to estimate how large a subsidy an
employer would require to induce him to offer such a job.
But given the prospect that such a new worker's productivity
is likely to be substantially below that of the average employee,
the necessary subsidy may be as large as 25 per cent of the




131
firm's cost.

If this ratio were applied, the needed subsidy

would be in the neighborhood of $1,585 per job.

At this rate,

the $400 million in President Jimmy Carter's budget would help
to generate about 252,000 extra jobs.
This last figure should be contrasted with the number of
jobs which might result if the $400 million were spent to
create public service jobs.

As noted above, an official in

the U.S. Department of Labor recently estimated that such
jobs on the public payroll might cost about $9,000 each.

At

this rate, the $400 million would finance about 44,000
openings -- a figure less than one-fifth of the number that
may result from using the funds in the private sector.
If private firms were asked to provide an additional
252,000 jobs, partly with Federal Government assistance, the
impact on each employer would not be very great.

For example,

in 1975, the 500 largest industrial corporations in the United
States had 14,413,000 employees -- an average of 28,826 per
firm.

If these 500 firms alone were asked to provide the

extra 252,000 jobs, each would have to absorb about 504
additional workers.

This latter figure would represent around

1.7 per cent of the average number of employees on the payroll
of each of these largest corporations.

Clearly, they could

manage such a task -- and, in fact, go far beyond such a modest
request.
In addition to subsidies for new entry-level jobs,
private employers will also need inducements to locate production,
distribution, and service facilities in central cities.

It was

shown above that such cities are being left with a dispropor-.
tionate share of total metropolitan populations, compared with




132
the number of job opportunities in their respective metropolitan
areas.

On the other hand, the growing migration of firms --

and the jobs they offer -- from central cities to suburbs
reflects real incentives (such as lower taxes, less crime,
and greater availability of skilled workers).

If central

cities are to compete successfully for such employers, the
latter must be offered strong incentives to remain -- or to
return.
One such inducement might be found in allowing firms to
draw down -- or assign -- a large proportion of the unused
investment tax credits (ITC) many of them have accumulated -if they establish job-creating facilities in central cities.
In 1972 (the latest year for which U.S. Treasury figures
are available), American corporations claimed $3.8 billion
in new investment tax credits (against $62.8 billion of invest­
ment outlays eligible for the ITC).

They already had $2.7

billion in carryovers from previous years -- making a total
of $6.5 billion in credits that could have been used.

However,

in that year, these firms claimed only $3.0 billion of the
total available -- leaving unused $3.5 billion (or 53.8 per
cent of the total).
Businesses do not use all of their ITC eligibility for a
variety of reasons -- the main one of which appears to be the
lumpiness of capital expenditures relative to taxable income
(the ITC can be used to offset only 50 per cent of tax li­
ability) . A substantial part of the unused credits will even­
tually be drawn down, but some portion will expire.
one sense, such unused credits would be "wasted."

So, in
Alterna­

tively, firms which cannot use such credits before they are
scheduled to expire might be allowed to assign their




133
potential claims to another business who could use them to
help off-set the costs of investment expenditures -- provided
the latter was made in central cities or other areas suffering
from a substantial amount of structural unemployment.

The

extra budget costs of such a proposal would not be very large -certainly no larger than the potential loss in tax revenue to
which the U.S. Treasury is already exposed if firms elect to
claim the tax off-set for investment in suburbia or other
vigorously growing areas.

The extra administrative burden of

this approach to the management of the ITC would not be par­
ticularly heavy -- since the Treasury Department has already
accumulated considerable experience in administering the ITC
with differentiations on the basis of varying standards of
eligibility.
In the meantime, this type of linkage of the ITC to
specific investment targets might enable central cities and
other needy locations to turn in a somewhat better performance
in attracting job-creating facilities.




TABLE 1.

Category

Gross National Product
(Billions, 1972 Dollors)

Growth of Output and Employment, 1961-69 and 1969-77

1977

1961

1969

$755.3

$1,078.8

$1,337.2

Changes
1961-69
1969-77
$323.5

Average Annual Growth
(Per Cent)
1961-69
1969-77

$258.4

4.5

2.7

Civilian Labor Force
(Thousands)

70,459

80,734

97,741

10,275

17,007

1.7

2.4

Employment
(Thousands)

65,746

77,902

90,969

12,156

13,067

2.1

1.9

4,713

2,832

6,772

- 1,881

3,940

6.0

11.5

Long-Term(27 week & over)
(Thousands)

804

133

946

671

813

14.0

70.0

Unemployment Rate
(Per Cent)

6.7

3.5

6.9

3.2

3.4

Unemployment
(Thousands)

Source:

-

Calculated in BRIMMER & COMPANY on the basis of data from U.S* Department of Commerce, Bureau of
Economic Analysis and U.S. Department of Labor; Bureau of Labor Statistics.







TABLE 2.

Economic Impact of Carter Administration's Tax Proposals,
Fourth Quarter 1977 Through Fourth Quarter, 1980.

1978 IV

1979 IV

1980 IV

NO TAX Cut
Growth Rate
Real GNP

4.3
$1,420.0

3.8
$1,474.0

4.9
$1,546.2

TAX Reduction
Growth Rate
Real GNP

4.7
$1,425.5

4.7
$1,492.5

5.0
$1,567.1

Difference: Real GNP

$

$

$

Category

Gross National Product
(Billions, 1972 Dollars)

Unemployment Rate
NO TAX Cut
Tax Reduction

Employment Gain from Tax Reduction
(Thousands)

Increase in Inflation Rate
(Percentage Point)

Source:

1977 IV

$1,361.5

5.5

18.5

20.9

6.8

6.3

6.3

5.9

6.8

6.2

5.8

5.3

70

700

900

0.0

0.3

0.5

Calculated by BRIMMER & COMPANY, based on data from U.S. Department of Commerce, Bureau of
Commerce, Bureau of Economic Analysis and Council of Economic Advisers.

I1
—
00

Oi

TABLE 3.

Category.

Changes in the Civilian Labor Force, Employment, and Unemployment by
Color, Sex, and Age, March, 1975 - December 1977
(Number in Thousands)

March, 1975
,
Number
Per Cent

December,■ 1976
Number
1
?er Cent

92,018

95,963

December, 1977
Number
Per Cent

Change:
March, 1975Deccmber, 1977
Number
Per Cent

Change
December, 1976December, 1977
Number
Per Cent
<

CIVILIAN LABOR FORCE
Total
16-19

100.0

100.0

98,955

100.0

6,937

100.0

2,992

100.0

8,754

9.5

8,957

9.3

9,369

9.5

615

8.9

412

13.8

Male 20 & over

50,592

55.0

52,081

54.3

53,158

53.7

2,566

37.0

1,077

36.0

Female 20 & over

32,672

35.5

34,925

36.4

36,428

36.8

3,756

54.1

1,503

50.2

78.9

WHITE
81,631

88.7

84,854

88.4

87,214

88.1

5,583

80.5

2,360

7,844

8.5

8,019

8.3

8,310

8.4

466

6.7

291

9.8

Male 20 & over

45,422

49.4

46,624

48.6

47,542

48.0

2,120

30.6

918

30.7

Female 20 & over

28,365

30.8

30,211

31.5

31,362

31.7

2,997

43.2

1,151

38.4

10,387

Total
16-19

BLACK
Total

11.3

11,109

11.6

11,741

11.9

1,354

19.5

632

21.1

910

1.0

938

1.0

1,059

1.1

149

2.2

121

4.0

Male 20 & over

5,170

5.6

5,457

5.7

5,616

5.7

446

6.4

159

5.3

Female 20 & over

4,307

4.7

4,714

4.9

5,066

5.1

759

10.9

352

11.8

16-19




00
05

TABLE 3. (continued)

Changes in the Civilian Labor Force, Employment, and Unemployment by
Color, Sex, and Age, March, 1975 - December 1977
(Number in Thousands)

December . 1977
Number
Per Cent

Change:
March, 1975December . 1977
Number
Per Cent

Change :
December, 1976December,, 1977
Number
1
Per Cent

March, 1975
,
ter Cent
Number

December* 1976
.
Number
Per Cent

84,240

100.0

88,451

100.0

92,622

100.0

8,382

100.0

4,171

100.0

6,993

8.3

7,253

8.2

7,928

8.6

835

11.1

675

16.2

Male 20 & over

47,247

56.1

48,882

55.3

50,696

54.7

3,449

41.2

1,814

43.5

Female 20 & over

30,000

35.6

32,316

36.5

33,998

36.7

3,998

47.7

1,682

40.3

Category
EMPLOYMENT
Total
16-19

C
O

WHITE
Total
16-19
Male 20 & over
Female 20 & over

75,299

89.4

78,828

89.1

82,353

88.9

7,054

84.2

3,525

84.4

814

9.7

623

14.9

6,450

7.7

6,641

7.5

7,264

7.9

42,660

50.6

44,044

49.8

45,590

49.2

2,930

35.0

1,546

37.0

26,189

31.1

28,143

31.8

29,499

31.8

3,310

39.5

1,356

32.5

8,941

10.6

9,623

10.9

10,269

11.1

1,328

15.8

646

15.6

0.7

121

1.4

52

1.3

BLACK
Total
16-19

543

0.6

612

0.7

664

Male 20 & over

4,587

5.5

4,838

5.5

5,106

5.5

519

6.2

268

6.5

Female 20 & over

3,811

4.5

4,173

4.7

4,499

4.9

688

8.2

326

7.8




TABLE 3. (continued)

Category

March, 1975
,
Number
Per Cent

Changes in the Civilian Labor Force, Employment:, and Unemployment by
Color, Sex, and Age, March 1975 - December 1977
(Number in Thousands)

December, 1976
Number
Per Cent

December■ 1977
.
Number
Per Cent

Change:
March, 1975December , 1977
Number
Per Cent

Change :
December, 1976December . 1977
Number
Per Cent

UNEMPLOYMENT
Total

7,778

100.0

7,512

100.0

6,333

100.0

-1,445

100.0

-1,179

100.0

16-19

1,761

22.6

1,704

22.7

1,441

22.7

-320

22.1

-263

22.3

Male 20 & over

3,345

43.0

3,199

42.6

2,462

38.9

-883

61.1

-737

62.5

Female 20 & over

2,672

34.4

2,609

34.7

2,430

38.4

-242

16.8

-179

15.2
GO

WHITE
Total

00
6,332

81.4

6,026

80.2

4,861

76.7

-1,471

101.9

-1,165

98.8

1,394

17.9

1,378

18.3

1,046

16.5

-348

24.1

-332

28.2

Male 20 & over

2,762

35.5

2,580

34.4

1,952

30.8

-810

56.1

-628

53.3

Female 20 & over

2,176

28.0

2,068

27.5

1,863

29.4

-313

21.7

-205

17.4

1,446

18.6

1,486

19.8

1,472

23.2

26

-1.9

-14

1.2

367

4.7

326

4.4

395

6.2

28

-2.0

69

-5.8

16-19

BLACK
Total
16-19
Male 20 & over

583

7.5

619

8.2

510

8.0

-73

5.0

-109

9.2

Female 20 &

496

6.4

541

7.2

567

9.0

71

-4.9

26

-2.2




TABLE 3. (continued)

Category

March, 1975
Number
Per Cent

Changes in the Civilian Labor Force, Employment, and Unemployment by
Color, Sex, and Age, March 1975 - December 1977
(Number in Thousands)

December, 1976
Number
Per Cent

December, 1977
dumber
Per Cent

Change:
March, 1975December, 1977
dumber
Per Cent

Change:
December, 1976December, 1977
Number
Per Cent

UNEMPLOYMENT RATE
Total

8.5

7.8

6.4

20.1

19.0

15.4

-4.7

-3.6

Male 20 & over

6.6

6.1

4.7

-1.9

-1.4

Female 20 & over

8.2

7.5

6.7

-1.5

-0.8

7.8

7.1

5.6

17.8

17.2

12.6

Male 20 & over

6.1

5.5

4.1

-

Female 20 & over

7.7

6.8

5.9

16-19

-

2. 1

-1.4

WHITE
Total
16-19

2.2

-1.5

-5.2

-4.6

2. 0

-1.4

-1.8

0.9

-

BLACK
Total

13.9

13.4

12.5

-1.4

0.9

16-19

40.3

34.8

37.3

-3.0

2.5

Male 20 & over

11.3

11.3

9.1

Female 20 & over

11.5

11.5

11. 2

Source:




Calculated by BRIMMER & COMPANY from U.S. Bureau of Labor Statistics data.

-

2.2

-0.3

-

2.2

-0.3

TABLE 4. Population and Honey Income In Selected Metropolitan Areas:
Central Cities, vs. Suburbs, 1960

SUBURBS

CENTRAL CITY
POP.
PER
(Thousands) CAPITA
INCOME

JUl.

_ iL_
CL

TOTAL
INCOME
(MU lions)

POP.
PER
(Thousands) CAPITA
_________ INCOME

TOTAL
INCOME
(Millions)

(6)

-13 JL

TOTAL
TOTAL
POP.
INCOME
(Thousands) (Millions)

JLLL

_I8L.

CENTRAL CITY AS
PER CENT OF TOTAL
POP. INCOME
(9)

go)

1.

NEW YORK, N.Y.

7,781

$2,306

$17,943

2,912

$2,734

$7,962

10,693

$25,905

72.8

69.3

2.

CHICAGO, ILLINOIS

3,550

2,293

8,140

2,670

2,662

7,108

6,220

15,248

56.3

53.4

3.

LOS ANGELES, CA.

2,823

2,603

7,348

3,215

2,453

7,886

6,038

15,234

46.8

48.2

4.

PHILADELPHIA, PA.

2,002

1,875

3,754

2,340

2,272

5,316

4,342

• 9,070

46.1

41.4

5.

DETROIT, MICH.

1,670

2,005

3,348

2,092

2,261

4,730

3,762

8,078

44.4

41.4

6.

HOUSTON, TEXAS

7.

SAN FRANCISCO, CA.

938

2,062

1,934

480

1,735

833

1,418

2,767

66.1

69.9

1,107

2,596

2,874

1,540

2,516

3,875

2,647

6,749

41.8

42.6
49.6

8.

BALTIMORE, MD.

939

1.866

1,752

864

2,063

1,782

1,803

3,534

52.1

9.

DALLAS, TEXAS

679

2.219

1,507

439

1,906

837

1,118

2,344

60.7

64.3

10.

SAN DIEGO, CA.

573

2,301

1,318

459

2,054

943

1,032

2,261

55.5

58.3

11.

SAN ANTONIO, TEXAS

587

1,427

838

128

1,937

248

715

1,086

82.1

77.2

12.

WASINGTON, D.C.

763

2,406

1,836

1,312

2,432

3,191

2,075

5,027

36.8

36.5




o

TABLE 4. (continued) Population and Money Income In Selected Metropolitan
Areas: Central Cities, vs. Suburbs, 1960

CENTRAL CITY
POP.
PER
(Thousands) CAPITA
_________ INCOME

_ QL ...
_

_OI_
13.

INDIANAPOLIS, IND.

14.
15.

SUBURBS
TOTAL
INCOME
(Millions)

POP.
PER
(Thousands) CAPITA
_________ INCOME

TOTAL
INCOME
(Millions)

J&L

(4)_______(5)

TOTAL
TOTAL
CENTRAL CITY AS
POP.
INCOME
PER CENT OF TOTAL
(Thousands) (Millions) POP.
INCOME

_L _______ m______ (91
D

(10)

476

$2,031

MILWAUKEE, WISC.

741

2,105

1,560

537

2,305

1,238

1,278

2,798

58.0

55.8

CLEVELAND, OHIO

876

1,856

1,626

1,033

2,693

2,782

1,909

4,408

45.9

36.9

16.

MINNEAPOLIS, MINN.

796

2,218

1,766

685

2,178

1,492

1,481

3,258

53.7

54.2

17.

MEMPHIS, TENN.

497

1,651

821

177

1,220

216

18.

PHEONIX, ARIZONA

439

2,013

884

224

1,741

390

19.

BOSTON, MASS.

697

1,919

1,338

1,898

2,363

4,485

20.

NEW ORLEANS, LA.

627

1,740

1,091

279

1,673

467

21.

ST. LOUIS, MO.

750

1,801

1,351

1,354

2,192

2,968

2,104

4,319

35.6

31.3

22.

SEATTLE, WN.

557

2,664

1,484

550

1,989

1,094

1,107

2,578

50.3

57.6

$

967

440

$2,179

$

959

916

674
663

1,274
5,823

906

23.

COLUMBUS, OHIO.

471

1,885

888

283

2,310

654

754

DENVER, COLO.

493

2,275

1,122

435

2,050

892

928

25.

MIAMI, FLA.

291

1,838

535

643

2,101

1,351

26.

ATLANTA, GA.

487

1,934

942

529

1,918

1,015




1,037

2,595

24.

Source:

$1,926

934
1,016

1,558

‘

52.0

73.7
66.2
26.9
69.2

50.2

79.2
69.4
23.0
70.0

1,542

62.5

57.6

2,014

53.1

55.7

1,886
1,957

31.2
47.9

28.4
48.1

Calculated In BRIMMER & COMPANY on the basis of data from the U.S. Department of Commerce, Bureau of the Census and from the Advisory
Conmlsslon on Intergovernmental Relations.




TABLE 5.
SMSA

Population and Money Income in Selected Metropolitan Areas:

il)________(2}________(3}_________
1.

Central City vs. Suburbs, 1973

______CENTRAL CITY______________________ SUBURBS____________________________ TOTAL SMSA___________
Total
Total
Central City As
Pop.
Per Capita
Total
Pop.
Per Capita
Total
Pop.
Income
Per Cent of Total
(Thousands)
Incone
Income
(Thousands)
Income
Income
(Thousands) (Millions)
Pop.
Income
____________________ (Millions) _____________________ (Millions)

H}
i_______

(5)

New York, New York

7,646

$ 4,309

$ 32,947

3,763

$ 5,088

___ { 1
6
$ 19,146

(9)

(7)

(8)

11,409

$ 52,093

67.0

(10)
63.2

2.

Chicago, Illinois

3,172

3,984

12,637

3,829

4,975

19,049

7,001

31,686

45.3

39.9

3.

Los Angeles, CA.

3,091

4,569

14,123

3,832

4,419

16,934

6,923

31,057

44.6

45.5

4.

Philadelphia, PA.

1,861

3,678

6,845

2,944

4,394

12,935

4,805

19,780

38.7

34.6

5.

Detroit, Mich.

1,386

3,817

5,290

2,804

4,736

13,280

4,190

18,570

33.1

28.5

60.2

61.6

Houston, Texas

f,296

4,128

5,350

856

3,896

3,335

2,152

8,685

7. San Francisco, CA.

1,033

4,762

4,919

2,110

4,964

10,174

3,143

15,093

32.9

32.6

Baltimore, MD.

877

3,595

3,153

1,250

4,517

5,646

2,125

8,799

41.3

35.8

6.

8.

Dallas, Texas

815

4,432

3,612

788

4,055

3,195

1,603

6,807

50.8

53.1

10.

San Diego, CA.

757

4,215

3,191

712

3,876

2,760

1,469

5,951

51.5

53.6

11.

San Antonio, Texas

756

2,892

2,186

175

4,430

775

931

2,961

81.2

73.8

12.

Washington, D.C.

733

4,901

3,592

2,219

5,809

12,890

2,952

16,482

24.8

21.8

9.

13.

Indianapolis, Ind.

728

4,104

2,988

4C7

3,931

1,600

1,135

4,588

64.1

65.1

14.

Milwaukee, Wise.

690

3,809

2,628

726

4,628

3,360

1,416

5,988

48.7

43.9

15.

Cleveland, Ohio

678

3,160

2,142

1,327

4,773

6,334

2,005

8,476

33.8

25.3

16.

Minneapolis, Minn.

669

4,141

2,770

1,159

4,467

5,177

1,828

7,947

36.6

34.9

17.

Memphis, Tenn.

658

3,562

2,343

129

2,982

385

787

2,728

83.6

85.9

18.

Phoenix, Arizona

631

4,118

2,598

495

4,092

2,026

1,126

4,624

56.0

56.2

TABLE 5. (continued)

SMSA

Boston, Mass.

20.

Central City vs. Suburbs, 1973

______ CENTRAL CITY______________________ SUBURBS____________________________ TOTAL SMSA
Pop.
Per Capita
Total
Pop.
Per Capita
Total
Total
Total
(Thousands)
Income
Income
(Thousands)
Income
Income
Pop.
Income
(Millions)
(Millions) (Thousands) (Millions)
...a > ....

19.

Population and Money Income in Selected Metropolitan Areas:

_ (3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

618

$ 3,678

2,273

2,122

$ 4,617

$ 9,797

2,740

$ 12,070

22.6

18.8

New Orleans, LA

573

3,319

1,902

509

3,544

1,804

1,082

3,709

53.0

51.3

21.

St. Louis, MO

558

3,292

1,837

1,785

4,179

7,460

2,343

9,297

23.8

19.8

22.

Seattle, WN

552

4,545

2,509

830

4,228

3,509

1,382

6,018

39.9

41.7

23.

Columbus, Ohio

540

3,547

1,915

406

4,376

1,777

946

3,692

57.1

51.9

24.

Denver, Colo.

515

4,560

2,348

847

4,428

3,751

1,362

6,099

37.8

38.5

25.

Miami, Fla.

353

3,592

1,268

1,016

4,635

4,709

1,369

5,977

25.8

21.2

26.

Atlanta, GA

451

3,903

1,760

1,046

4,631

4,844

1,497

6,604

30.1

26.7

Source:




$

(2)

Central City As
Per Cent of Tota
Pop.
Income

$

Calculated in BRIMMER & COMPANY on the basis of data from the U.S. Department of Commerce , Bureau of the Census and from the
Advisory Commission on Intergovernmental Relations.




TABLE 6.

SMSA

Manufacturing Employment in Selected Metropolitan Areas:
Central Cities vs. Suburbs, 1963 and 1972
(Number in Thousands)

_________________ 1963___________________________________________ 1972__________________
Central City
Central City
Total
As Percent
As Percent
Central
Central
Total
Suburbs
SMSA
of SMSA
of SMSA
City
City
Suburbs
SMSA
220

1,147

80.8

757

233

509

352

861

59.2

430

313

433

746

42.0

320

271

536

49.4

293

494

40.7

109

70.6

New York, NY

927,

2.

Chicago, Illinois

3.

Los Angeles, CA

4.

Philadelphia, PA

265

5.

Detroit, Michigan

201

6.

Houston, Texas

77

32

1.

990

76.5

479

909

47.3

460

780

41.0

203

295

498

40.8

180

359

539

33.4

105

55

160

65.6

7.

San Francisco, CA

92

104

196

49.9

69

112

181

38.1

8.

Baltimore, MD

104

87

191

54.5

91

99

180

50.6

9.

Dallas, Texas

86

24

110

78.2

107

46

153

69.9

10.

San Diego, CA

49

11

60

81.7

45

20

65

69.2

11.

San Antonio, Texas

21

24

87.5

28

4

32

87.5

12.

Washington, D.C.

22

28

50

44.0

19

36

55

34.5

13.

Indianapolis, Ind.

70

46

116

60.3

93

30

123

75.6

14.

Milwaukee, Wise.

119

75

194

61.3

106

94

200

53.0

15.

Cleveland, Ohio

169

111

280

60.4

131

138

269

48.7

3

Manufacturing Employment in Selected Metropolitan Areas:
Central Cities vs. Suburbs, 1963 and 1972
(Number in Thousands)

1963
Central
City
16.

Minneapolis, Minn.

17.

Suburbs

1972

Total
SMSA

Central City
As Percent
of SMSA

110

54

164

67.1

Memphis, Tenn.

43

4

47

91.5

18.

Phoenix, Arizona

29

12

41

70.7

19.

Boston, Mass.

83

210

293

39.5

31

18

49

129

131

Central
City
109

Suburbs

Total
SMSA

Central City
As Percent
of SMSA

82

191

57.1

54

6

60

90.0

52

20

72

72.2

59

214

273

21.6

63.3

29

26

55

52.3

260

49.6

98

158

256

38.3

©
C
M




TABLE 6. (continued)

New Orleans, LA

21.

St. Louis, MO

22.

Seattle, WN

84

38

122

68.9

48

61

109

44.0

23.

Columbus, Ohio

66

14

80

82.5

62

27

89

69.7

24.

Denver, Colo.

38

32

70

54.3

42

53

95

44.2

25.

Miami, Fla.

19

24

43

44.2

26

60

86

30.2

26.

Atlanta, GA

52

44

96

54.1

48

68

116

41.4

Source:

Calculated in BRIMMER & COMPANY on the basis of data from the U.S. Department of Commerce, Bureau of the Census
and from the Advisory Commission on Intergovernmental Relations.

146
TABLE 7.

Changes in Central City's Share of Population
Manufacturing Employment, and Money Income in
Selected Metropolitan Areas, 1960-1973
(Percentage Points)

Population

SMSA/CENTRAL CITY
1.

(1960-1973)
5.8

Manufacturing
Employment
(1963-1972)

Money Income

(1960-1973)

New York, NT

-

2.

Chicago, Illinois

- 11.0

- 11.9

3.

Los Angeles, CA

-

2.4

-

1.0

-

2.7

4.

Philadelphia, PA

-

7.4

-

8.6

-

6.8

5.

Detroit, Michigan

- 11.3

-

7.3

- 12.9

6.

Houston, Texas

-

5.9

-

5.0

-

7.

San Francisco, CA

-

8.9

-

8.

Baltimore, MD

-

9.

Dallas, Texas

10.
11.
12.

-

4.3

11.8

-

6.1

- 13.5

-

8.3
10.0

10.8

-

3.9

- 13.8

-

9.9

-

8.3

-

San Diego, CA

-

4.0

- 12.5

-

4.7

San Antonio, Texas

-

0.9

0.0

-

3.4

Washington, D.C.

-

12.0

-

9.5

- 14.7

12.1

+ 15.3

+ 14.9

-

- 11.9

11.2

13.

Indianapolis, Ind.

-

14.

Milwaukee, Wise.

-

15.

Cleveland, Ohio

-

16.

Minneapolis, Minn.

- 17.1

17.

Memphis, Tenn.

+

18.

Phoenix, Arizona

-

19.

Boston, Mass.

-

4.3

- 17.5

-

20.

New Orleans, LA

- 16.2

- 11.0

- 18.7

21.

St. Louis, MO

-

11.8

- 11.3

- 11.5
- 15.9

9.3

12.1

8.3

- 11.7
-

10.0

-

11.6

- 19.3

9.9

-

1.5

+

10.2

+

1.5

- 13.2

6.9

4.2

22.

Seattle, WN

- 10.4

- 24.9

23.

Columbus, Ohio

-

5.4

-

12.8

-

24.

Denver, Colo.

- 15.3

-

10.1

- 17.2

25.

Miami, Fla.

-

5.4

- 14.0

-

26.

Atlanta, GA

- 17.8

- 12.7

- 21.4

Source:

5.7

7.2

Calculated in BRIMMER & COMPANY on the basis of data contained
in Tables 4, 5, and 6.




TABLE 8.

Black and Working Age Population In Selected Central Cities, 1960 and 1970
(Number in Thousands)

__________ 1960

Central City

Total
Population

Black Population
Per Cent
Number
of Total

__________ 1970
Working Age
Population
Per Cent
Number
of Total

Total
Population

Black Population
Per Cent
Number
of Total

Working Age
Population
Per Cent
Number
of Total

1.
2.

New York, NY

7,781

1,089

14.0

4,803

61.7

7,894

1,674

21.2

4,712

59.7

Chicago, Illinois

3,550

813

22.9

2,099

59.1

3,366

1,101

32.7

1,930

57.3

3.

Los Angeles, CA

2,823

344

12.2

1,674

59.3

3,174

524

16.5

1,904

60.0

4.

Philadelphia, PA

2,002

529

26.4

1,177

58.8

1,948

655

33.6

1,113

57.1

5.

Detroit, Michigan

1,670

483

28.9

964

57.7

1,511

660

43.7

844

55.9

6.

Houston, Texas

938

215

22.9

534

56.9

1,232

317

25.7

711

57.7

1,107

158

14.3

679

61.3

1,077

221

20.5

671

62.3

939

326

34.7

539

57.4

905

420

46.4

507

56.0

7.

San Francisco, CA

8.

Baltimore, MD

9.

Dallas, Texas

679

129

19.0

391

57.6

844

210

24.9

490

58.1

10.

San Diego, CA

573

34

5.9

341

59.5

696

53

7.6

423

60.8

11.

San Antonio, Texas

587

42

7.2

305

52.0

654

50

7.6

349

53.4

12.

Washington, D.C.

763

411

53.9

474

62.1

756

538

71.2

462

61.1

13.

Indianapolis, Ind.

476

71

14.9

267

56.1

744

134

18.0

413

55.5




TABLE 8.

Central City

(continued)

Total
Population

Black and Working Age Population in Selected Central Cities, 1960 and 1970
(Number in Thousands)

1960_______________________
Working Age
Population
Per Cent
Number
of Total

Black Population
Per Cent
Number
of Total

14.

Milwaukee, Wise.

741

62

8.4

15.

Cleveland, Ohio

876

205

23.4

16.

Minneapolis, Minn.

796

20

2.5

17.

Memphis, Tenn.

497

184

37.0

274

18.

Phoenix, Arizona

439

21

4.8

19.

Boston, Mass.

697

63

9.0

20.

New Orleans, LA

627

233

21.

St. Louis, MO

750

214

22.

Seattle, WN

557

23.

Columbus, Ohio

24.

424

_______________________ 1970

Total
Population

Black Population
Per Cent
Number
of Total

Working Age
Population
Per Cent
Number
of Total

57.2

717

105

14.6

403

503

57.4

750

288

38.4

419

55.9

452

56.8

744

30

4.0

424

57.0

55.1

623

243

39.0

346

55.5

239

54.4

581

28

4.8

325

55.9

411

59.0

641

104

16.2

377

58.8

37.2

354

56.5

593

267

45.0

329

55.5

28.5

426

56.8

622

254

40.8

333

53.5

25

4.5

305

54.8

584

38

6.5

356

61.0

471

77

16.3

273

58.0

539

100

18.6

317

58.8

Denver, Colo.

493

30

6.1

278

56.4

514

47

9.1

299

58.2

25.

Miami, Fla.

291

65

22.3

181

62.2

334

76

22.8

202

60.5

26.

Atlanta, GA

487

187

38.4

287

58.9

496

255

51.4

292

58.9

Source:




56.2

Calculated in BRIMMER & COMPANY on the basis of data from the U.,S. Department of Commerce, Bureau of the Census, and from the Advisory
Commission on Intergovernmental Relations.




TABLE 9.

CENTRAL CITY

Changes in Black and Working Age Population as Percentage
of Total Population in Selected Central Cities, 1960 - 1970
(Percentage Points)

BLACK POPULATION

WORKING AGE POP.

1.

NEW YORK, N.Y.

7.2

- 2.0

2.

CHICAGO, ILLINOIS

9.8

-1.8

3.

LOS ANGELES, CA.

4.3

+0.7

4.

PHILADELPHIA, PA.

7.2

-1.7

5.

DETROIT, MICH.

14.8

-1.8

6.

HOUSTON, TEXAS

2.8

+ 0.8

7.

SAN FRANCISCO, CA.

6.2

+ 1.0

8.

BALTIMORE, MD.

11.7

-1.4

9.

DALLAS, TEXAS

5.9

+0.5

10.

SAN DIEGO, CA.

1.7

+1.3

11.

SAN ANTONIO, TEXAS

0.4

+1.4

12.

WASHINGTON, D.C.

17.3

- 1.0

13.

INDIANAPOLIS, IND.

3.1

-0.6

14.

MILWAUKEE, WISC.

6.2

-1.0

TABLE 9. (continued)

CENTRAL CITY
CLEVELAND, OHIO

16.

WORKING AGE POP.

.15.0

-1.5

MINNEAPOLIS, MINN.

1.5

+ 2.0

17.

MEMPHIS, TENN.

2.0

+0.4

18.

PHEONIX, ARIZONA

0.0

+1.5

19.

BOSTON, MASS.

7.2

-0.2

20.

NEW ORLEANS, LA.

7.8

-1.0

21.

ST. LOUIS, MO.

12.3

-3.3

22.

SEATTLE, WN.

2.0

+ 6.2

23.

COLUMBUS, OHIO

2.3

+ 0.8

CM

15.

BLACK POPULATION

Changes in Black and Working Age Population as Percentage
of Total Population in Selected Central Cities, 1960-1970
(Percentage Points)

DENVER, COLO.

3.0

+ 1.8

25.

MIAMI, FLA.

0.5

-1.7

26.

ATLANTA, GA.

13.0

0.0

Source:

Calculated in BRIMMER & COMPANY on the basis of data contained in Table 8 .




151
Senator B rooke. N o w , Mr. Nathan, economist Herb Stein has
argued 4 percent is an unrealistic figure used for unemployment. Stein
proposes 7 percent.
A study by Professor Philip Cagan of Columbia proposes, I think,
said 6 percent.
How do you feel about those estimates ?
Mr. N a t h a n . I think 7 percent or 6 percent represents an abdica­
tion of responsibility. In other words, to say, let the unemployment
go up, don’t worry about whether people have jobs, first of all, if
you would associate that kind of defeatism with, a welfare program,
I think in 2 or 3 or 4 years we’ll be seeing 9 or 10 percent as an
acceptable level because you go into a continuing process of under­
mining the whole concept of work as your primary source of income,
in an effort to really provide people with opportunity to earn income.
I think basically what Herb Stein is saying, if you just get enough
unemployment, wages will go down; and if wages go down, prices
will slow down; then the economy will really stabilize. I think it is
an utter ignoring of the deficiencies in the marketplace. A totally un­
realistic expectation with a lot of unemployment you get a reduction
in inflation. I think one ought to look at Keyserling’s chart, over the
years— I am not talking about 20 percent unemployment, but when
you have higher, you have lower productivity and more inflationary
pressure. I think what Herb Stein is doing, is resigning himself to
walking away and the marketplace will take care of it. I think if we
followed Herb Stein’s policies-----Senator B rooke. Y ou don’t— what do you think will happen?
Mr. N a th a n . I think we would have 9 or 10 percent unemployment
in a few years.
Senator B rooke. The German example, is often cited as a model for
the United States to emulate. The Federal Republic has combined low
rates of unemployment with low rates of inflation since the war, as
a matter of fact. Do you feel that this is a valid comparison ?
Mr. N a t h a n . Y ou have two problems. One is the problem of meas­
urement and the definitions do have some differences, but I think you
have a completely different sort of economic environment in the Fed­
eral Republic of Germany and you also had in Japan until quite re­
cently, where the German labor force is far more resigned to whatever
sort of public decisions are made to abide by them. I think that Ger­
many has gone through, as did Japan, a tremendous concentration on
investment, a tremendous focusing on exports as the driving, motivat­
ing force, and by and large, I think the labor there, unlike in the
United States, has said, well, w e would rather have a little more total,
^
even though we have a smaller share, and I don’t think this is the
kind of situation which will prevail here.
Second, Senator Brooke, I don’t think it is going to prevail in
Germany endlessly either.
Dr. B rim mer . May I comment on that, please?
Senator B rooke. Yes.
^Dr. B rim mer . We have been doing some work on the parity of infla­
tion, in Germany, Japan, United States, as well as other countries.
Several things that stand out I would like to mention.
First of all, aside from the differences in definition between un­
employment and employment, which Mr. Nathan mentioned, Ger­




152
many is faced with a labor force that is growing more slowly than
the rate of growth of potential capacity aside from labor. Germany’s
population is actually declining or leveling off.
Second, Germany over the years has had a great advantage of
being able to export its unemployment physically, by sending the best
workers back home. Under EEC arrangement, after the 5-year resi­
dence requirements, they can no longer do that as readily as in the
past, but they have been able to reduce their unemployment by not
redoing the work permits, and the worker went back to Turkey,
Spain, Portugal, and so on.
I don’t wish to belittle the German effort, but I suggest it is
qualitatively quite different from ours.
The C h a ir m a n . Dr. Carlson, Andrew Leonard argues that the Fed­
eral deficits of recent years are not the cause but the result of the
Nation’s economic problems. How would you react to that argument?
Dr. C arlson . I would agree that during the last 2 years the size
of the deficit has not been the spur to acceleration of inflation. The
largest portion of the deficit in a recession is shortfall of revenues.
I would, however, have to admit that the fiscal 1979 deficit by in­
creasing from $45 billion last year to $53 billion this year and to
maybe $60 billion next year is certainly the wrong trend at this late
stage of an economic recovery and it could well be demandful inflation
will remove that fiscal policy we see.
Senator B rooke. Irving Bluestone of the U A W stated in his testi­
mony that the union was flatly opposed to any numerical inflation
goal being included in the bill and the House refused to include it in
its amended version, as you are aware. Do you think such a numeri­
cal inflation goal should be a part of this bill ?
Dr. C arlson . I would argue the process should determine the goals,
period, and no goals should be put in legislation either. Either in
unemployment or inflation.
However, if you go with the numerical value on the unemployment
side, I would argue it is preferable to have a numerical value, even
though probably impossible on the inflation side.
Senator B rooke . Couldn’t have one without the other, but you
would prefer neither.
Is that correct?
Dr. C arlson . That is correct.
Senator B rooke . Dr. Keyserling, do you think it will ever be pos­
sible to return to the good old days, during the period, let’s say, from
1952 to 1957, when we had both a low rate of inflation and low rate
of unemployment?
Mr. K eyserling . I don’t think the low rate of inflation and low
rate of unemployment were merely coincidental. I think the low rate
of inflation flowed from the low rate of unemployment. Let’s get to
the connection between that and your other question, about the deficits.
I f you look at my charts 4 and 5, I have been interested in this for
a long time. There is no question about it that, short of a situation
like World W ar II, when you were burning up half of the product
for nondomestic purposes, you can’t construct any realistic model for
the American economy in action which combines full employment
with a big Federal deficit. Full employment automatically removes
the deficit and high unemployment automatically creates the deficit,




153
and for those who say that the huge deficit is the main cause of in­
flation, then they have also to say that high employment is a high
cause of inflation because the high unemployment creates the huge
deficit.
I have some question as to whether a big Federal deficit creates
inflation when the economy is very slack, but if I admit it, I am talk­
ing about the dichotomy in their argument, which is a byproduct of
all of this confusion and conflict in economic policy that this bill
will at least begin to get around by requiring them to do their homework.
Now, let’s look at the chart on the Truman administration. You
say the happy old days. You know what, every year since— first of
all I have had to listen to a lot of things, I have had to listen to the
fact that I am an inflationist when the administration I was a part
of reduced inflation from 7.8 percent to 0.8 percent and I have had to
listen to the point that I am for unbalanced budgets, when the admin­
istration I served was, despite the Korean war, the only one which
achieved an average surplus in the Federal budget. We simultaneously
reduced unemployment to 2.9 percent.
Well, we are now told, the good old days, things were different
then, you are talking about the past, all the problems are more diffi­
cult now. Nonsense. What is more difficult now?
The Korean war was bigger, relative to the size of the economy,
than the Vietnam war.
Western Europe was in far worse shape then than at any time since.
The accumulated savings of World W ar II, released after the war,
when the production assets that would have supported them were
blown up in support of the war, were a greater inflationary pressure
than at any time since. But the policies were different. W e ought to
learn from that. The first thing we can learn, if we look at my charts,
one by one, there hasn’t been anything in American economics more
rigorously confirmed by empirical experience than the relationship
between a lowering of unemployment and a lowering of inflation.
Let’s take the beginning of this year 1978, and I will show you
the inconsistency in policy. What happened right after the end of
the last recession about 3 years ago? The economy began to grow
at a real annual rate of about 9 percent productivity. Productivity
went up tremendously fast. And the inflation rate slowed down very
fast. Later on as the real growth rate slowed down, the productivity
rate slowed down, and the inflation rate speeded up. Then, in 1978,
in the first quarter of this year, the real economic growth rate went
down to zero, or it was negative. In other words, we had a minirecession in the first quarter of the year. And inflationary pressures
began to take on new vigor.
When we had a minirecession, the productivity growth rate went
almost down to zero. So you read in the papers and you hear the
Chairman of he Federal Reserve saying, look, the great problem now
is inflation, because the zero productivity growth rate and its high
per unit costs are inflationary so we have to forget about the stimu­
lative program, we have to slow down on it, we have to discard it
because the problem is inflation.
But the inflation aggravated because it was the reversal of the econ­
omy toward a minirecession that brought the low productivity and




154
brought the high costs and brought the inflation. So how can we now
fig;ht the inflation by encouraging the economic slowdown, and by
bringing on still another recession?
That has been true all the way through. So, look at the inconsist­
ency. We get the increase in inflation because the economy is threat­
ening to go to hell again, and we say we will cure the inflation now
by encouraging real growth, forgetting about reducing unemployment
because unemployment and growth are no longer the real problem.
This tragic farce has not happened just once. At the end of the
Truman administration when we had the 2.9 percent unemployment
and 0.8 percent inflation, a man came in, and never did anybody have
more influence over economic policy, my immediate successor, who
influenced the policies of the President and of the Federal Reserve
Board too. I won’t mention his name, except to say that Joe Fisher
as he has just stated was only one who worked for both of us. My
successor inherited 2.9 percent unemployment, 0.8 percent inflation,
so he thought we have to worry about inflation; that unemployment
was too low. So through him and his hand-picked successor, over 8
years, they succeeded in lifting the unemployment rate from 2.9 per­
cent to 7.6 percent. It is all shown on my charts here. Concurrently,
they multiplied the inflation rate 2y2 times. Thereafter, Walter Heller
came along and said let’s go for broke, to make the economy run
again, let’s get it to move, and by 1966 unemployment was reduced to
3.8 percent, and during 1961-1966 the average price-increase rate was
only 1.5 percent annually. Then the whole doctrine of the trade-off
came back, under Republicans and Democrats, there is nothing parti­
san about this, the Democrats were just as much for the trade off as
the Republicans.
I have never understood the acceptance of the trade off. For it is a
simple apple pie American doctrine, that you do better on prices
when your economy is working at optimum use. I use the analogy
of the automobile.
I am sorry if I say so much about this, but it is so dam important.
To get to the question, the best goal you can have in the law is what
is in there now. W e want to get the economy running again, and we
won’t have to worry so much about inflation, because there will be
so much less of it.
When they started to say “when you slow down the economy, you
stop the inflation,” I said this: During World War II, the economy
was growing 9 percent a year in real terms. That was too fast for
normal times. W e had inflation. So the economists said, “well, the
way to stop inflation is to slow down the economy.” But they didn’t
apply this idea only until it slowed down to a normal rate of growth.
They said “the more you slow it down, the less inflation you have.”
But they didn’t really understand that, just as an automobile bums
more gas per mile when it goes 90 miles per hour than when it goes 50,
similarly, it burns more gas when it goes 25 miles an hour than 50.
Too fast or too slow is uneconomical. The economy is the same.
When the slowdown is too great, productivity declines, scarcities ap­
pear, and the inflation rate goes up. You get back to the normal speed,
and you reduce most of those inflationary pressures.
Senator B rooke . Thank you very much. Mr. Chairman, Senator
Sarbanes has been most considerate. I have gone way over my time.
I just have one more question. I will direct this to you, Mr. Nathan.



155
Thank you, Dr. Keyserling.
Mr. Nathan, Ken Galbraith testified before this committee 2 years
ago that a 4-percent unemployment rate would be inflationary, an un­
realistic goal. The American economy just could not sustain low em­
ployment and a low rate of inflation. How do you feel about? Are
these two goals incompatible ?
Mr. N a t h a n . It depends, Senator Brooke, upon what policy one
pursues. I f we make no effort to increase investment, no effort to
increase productivity, no effort to try and overcome some of the
structural deficiencies in the labor force, and no effort to increase the
competitiveness in the economy in the response of prices to changes,
and demand and supply, maybe 4 percent is too low.
The real test is whether you sit back and relax at 4 percent and say—
or 5 or 6 or 7. I think Herb Stein is probably right. I f you just
don’t do anything, 7 percent becomes something. But I don’t know
that that is the American way and the American concept.
I think when women want to work, that is a positive factor. Not a
negative factor. They are productive, they can add to our total capa­
bility of producing in the economy, and a lot of people say, one of
the problems is, all the women want to work. So what ? That’s great.
This means we can have a higher standard of living, higher produc­
tivity, higher improvement, really higher levels of general growth.
I favor that. I think it depends upon what kind of policies we
adopt, but if we sit back and don’t do anything in training, don’t do
anything in competition, don’t do anything in stimulating investment,
don’t do anything toward improving productivity, 4 percent may not
be unrealistic, but 5, 6 or 7 may be unrealistic.
Senator B rooke. Thank you gentlemen, and thank you, Mr. Chair­
man.
The C h a ir m a n . Mr. Sarbanes.
Senator S arbanes . Gentlemen, I want to ask this rather simple
question. That is, why don’t we have a zero unemployment rate objec­
tive in the bill ?
Mr. K eyserling . Because we are not morally ready for it. I wish
we were.
Senator S arbanes . What do the others say to that ?
Mr. N a t h a n . Just one word. I think given our organizations, our
institutions, our arrangements about freedom of choice and so forth,
you are bound to have a lot of mobility in this economy, you are bound
to have changing job capabilities, skills, job demands, geographic
differentials, and this is one of the elements in that private enterprise
system.
You think if one were to decide you are going to have zero un­
employment, really provide last resort employment Government jobs,
I think you could approach it, but you never get down to zero. You
can change the definitions.
And get to zero.
Dr. C arlson . Because of the definitions we use, even though they
are in between jobs you call them unemployed. I think what you are
really aiming at in this bill are the people are not increasing their
well-being and bettering their conditions. They are unemployables,
can’t find jobs, and it takes a lot of tools, including just plain literacy
and getting a discipline so people can work within our society. It
takes time.
30- 454— 78------------11




156
Our schools, training system, the transition from school to a career
job, and many other things must improve over long periods of time.
One thing we can do to reduce unemployment is to make people em­
ployable. The increase in minimum wage level has caused some of
the youth unemployment, Government policy did that and could
undo it. So we are making more of our own problems, and adding to
what Bob Nathan is talking about, we are adding to our structural
problems, not reducing them, so consequently, the Herb Steins in the
world can estimate higher figures in the future, because we are adding
to our employment.
Dr. B r im m er . I would say that even if we could get down to zero
unemployment, and I agree with my colleague that you probably
cannot for structural and other reasons, definition reasons, I would
personally not like to see you try. I will repeat that. I think it would
be very bad for public policy, which really means mandated to policy,
to decide that everybody has to be working. That is what zero un­
employment means. Everybody, in the labor force, he or she, that
he’s in the labor force, would have to have a job. That is the definition.
I think that would go too far in the abrogation of freedom of choice.
Perhaps I want to be in the labor force sometimes and sometimes not.
Perhaps I want to be idle. That is trivial-----Senator S arbanes . I f you were not in the labor force I guess you
wouldn’t be counted. As I understand it, Dr. Carlson said the tradeoff
for zero unemployment under inflation would just be enormous.
Dr. C arlson . I have to agree with Charles Schultze and the other
people Senator Brooke referred to, historically there is a tradeoff. As
you lower the unemployment rate below a point. Not in the begin­
ning of the recovery, but in the latter stages, the stage we are entering
now.
Senator S arbanes . The general view is, if I came here and said, we
ought to pursue a generalized fiscal and monetary policy with prime
reliance on getting the unemployment rate down to 2 percent or 1 per­
cent or a half of 1 percent, you would say, you are just going to
trigger a tremendous inflation problem; wouldn’t you ?
Dr. C arlson . Yes, sir.
Senator S arbanes . Y ou would testify to that? Doesn’t the fact that
we have exceeded the 4-percent unemployment figure, indicate that
this is a tremendous deference to the inflation consideration-----Dr. C arlson . The standard we used in 1956, we were supposed to
have a tradeoff in that year, roughly 4-percent unemployment, but so
much has changed since then, including the composition of the labor
force that the equal social pain level of unemployment according to
the administration is now 4.9 percent— President’s 1978 economic
report.
Some people say it is 514 , up to 514.
Senator S arbanes . Let’s pursue that. I am prepared to enter into
a discussion which recognizes that the fact that we are using an un­
employment rate of higher than zero percent, whatever that rate may
be, is a deference to the inflation consideration.
Then we can have a discussion.
Is the right rate for your goal 4 percent, 4 ^ , 3y2, 5?
But you not only want to do that. You also want to add an inflation
goal when an inflation goal has already been built into the objective
of the bill by level unemployment rate.




157
Dr. C arlson . I am opposed to a numerical value. I prefer the
process, with the additional information and different definitions to
be set each year and modified for the out years— third, fourth and
beyond— as opposed to putting one in law now. I don’t think the 1956
economic conditions are appropriate as a guide at this time in 1978.
And the guide we select for today now will not be appropriate in
1983. It should be set in the process itself.
I did concede with Senator Proxmire, if he told me my choice was,
if we had a bill with the numerical bill for unemployment, then I
T
would argue we ought to have an explicit one for price stability.
But I prefer to start with none. Let the process generate.
Mr. N a t h a n . Well, I agree with the implications, Senator Sarbanes, when we go to 4.9— by the way, it was Alan Greenspan’s con­
tribution to our economic advancement, that 4.9 I don’t think—
although I agree with Charles Schultze’s figure, there is a tradeoff
even above that, but there is no doubt that you are right, Senator
Sarbanes, whatever you are going to pick above— I wouldn’t say above
zero but above that level of unemployment that is truly transitional,
mobility, structural, where you have people changing jobs, skill movings, people moving from one city to the other, but I think anything
above that, that is probably 2 or 3 percent, you are making already
an implicit tradeoff with inflation.
I think fundamentally what we are doing, we keep raising that 4.9,
514 , as I remember the words of Greenspan’s economic report, when
they went to 4.9, he talked about, that’s probably too low, so he
already was prepared to have a higher tradeoff.
I think if we do begin to resign ourselves to setting down both in
quantitative goals, my guess is, we will end up with a real tradeoff
approach, and I would say 4, 5 years from now we would have 8 or 9
percent unemployment.
Senator S arbanes . Y ou double the inflation factor because you ac­
cept an unemployment rate which recognizes the inflation factor and
that rate is established at a level above the very minimum that we
are talking about, because you don’t want to push beyond that; and
then you weight it again by putting a specific inflation goal into the
bill, so it ends up being double-weighted.
Dr. C arlson . I don’t know of anybody who has an estimate what
the inflation rate would be at 12 percent. The model we run is well
over 10 percent and running not very quickly, especially as time
goes on.
I want to know what the tradeoff is to be able to advise you what
inflation rate you are accepting when you accept a 4-percent un­
employment rate.
Senator S arbanes . Rather than arguing for double weighting you
ought to argue for different unemployment figures, then we can go
back and forth about that as to how much is being built into that
figure, and how reasonable that is, rather than play it both ways, to
try to get the figure up and you also double weight it by putting in
an inflation goal.
Dr. B rim m er . In anticipation of this kind of question, we did try
to estimate the interrelations among the unemployment goal, 4 per­
cent, the rate of growth in output, that will be required to reach that
goal by 1983 and the rate of inflation that might be associated with
that effort.



158
We summarize those results on pages 19 and 20 of my statement.
Essentially what we concluded, without going into details, is this:
In the absence of the Humphrey-Hawkins bill, taking into account,
the accounts of the economic advisers, we concluded the rate of un­
employment by 1983 might be in the neighborhood of just under 5y2
percent. I f one sought to reduce that unemployment rate to 4 percent,
one would need to generate an additional 1y2 million jobs in the
private sector.
To do that would require, the policy would require the economy to
grow at an annual average compound rate in excess of 5 percent.
That would be associated with the rate of inflation close to 6 percent.
For this reason, we concluded that it would be wise, not unwise, to
have in the bill an explicit quantitative target for inflation, if you
were to stick to the 4-percent target for employment.
I wouldn’t assert that these figures are definitive and you should
live and die by them, but I do think they are suggestive.
Mr. K eyserling . I feel compelled to say, in all honesty, I agree
with everything explicit and everything implicit that Senator Sar­
banes is saying.
I f I put myself in the position, as I do, of defending a great nation
which sets a goal of not getting unemployment any lower than 4 per­
cent, by 5 years from now, I am doing so only in the practical vein
of what I think is acceptable and not in accord with my economic
analysis, not in accord with the lesson of experience, and not in accord
with my moral judgments.
I want to make a challenge directly to Dr. Brimmer, or anybody
here who takes his position. I have made this challenge for about 20
years. About 20 years ago, I wrote a book called “Inflation: Cause and
Cure,” and in which I forecast, before anyone was thinking of it,
that more unemployment could cause more inflation. Everything since
that has proved it. I challenge Dr. Brimmer. It doesn’t mean any­
thing to stuff things in models and make projections of how much
unemployment 5 or 6 years from now will be consistent with what
rate of inflation without regard for the empirical evidence to date.
You feed garbage hypotheses into the model or computer and you
get garbage out. Why don’t they look backward? W hy don’t they
offer any charts or any tables to show at any time that the rate of
inflation has gone up, as Charles Schultze testified 5 years ago, when
unemployment gets below 5 percent. It isn’t so.
It is not what happened. It is not what the record is.
A second point. The second point is that is not what the tradeoff
really involves. The really important tradeoff question is not, whether
if you have a little more unemployment you will have a little less
inflation. That is not the big issue.
The big issue is whether the 60 million people in the United States
directly affected by unemployment last year should be told, “you
should suffer that burden or that cross because an economist tells you
that Leon Keyserling can go to Delmonico’s in New York and buy a
steak dinner for a little less, because you are unemployed. That is
un-American and I don’t think it works. The real tradeoff anyway
is not between inflation and unemployment. It is the relative value to
the economy of a lower level of unemployment as against a mar­
ginal change in rate-of-price inflation.




159
I again challenge any economist to take the $5.3 trillion we have
lost since 1953 through the roller coaster economic performance, and
the $1 trillion in public revenues lost thereby, and the consequent
budget deficits, and take the social and civil costs, and take the in­
ability to meet priority needs, and try to weigh that against what it
would have cost the American economy if, in accord with their
hypothesis, which they cannot substantiate, we had had a half a
percent higher inflation rate if we had not had those other losses.
That is the real tradeoff. That is the first tradeoff any economist
should try to measure. But see if you can find those measurements.
I can’t find them anywhere.
Senator S arbanes . Let me pursue a couple of other questions.
Dr. Carlson, has the Chamber of Commerce done any studies to
correlate the level of corporate profits with the unemployment rate ?
Dr. C arlson . No. I would be glad to comment on what it would
show. As the unemployment rate goes down, especially in the initial
phase of the business recovery, you have your largest percentage in­
crease in corporate profits.
It does go up rather rapidly, and partly because of the productivity
increases that Mr. Keyserling is talking about in the initial phase of
the business recovery.
As the recovery matures, the rate of increase in real terms tends
to decline, becomes negative.
Senator S arbanes . But it increases, does it not ?
Dr. C arlson . During the recovery it does increase.
Senator S arbanes . I f one were to just take the view of what would
maximize corporate profits, a look backwards of our experience would
indicate that one of the best things to maximize corporate profits is
a low rate of unemployment. Is that not correct ?
Dr. C arlson . Sure.
Senator S arbanes . I never have understood the sort of reticence of
the business community toward policies that will bring us to low
levels of unemployment.
Dr. C arlson . On the contrary, you will find they do it. They may
not choose the way you do it, they may prefer tax relief to increase
plant and equipment spending and sustain a balanced expansion.
Higher expected corporate profits will lead to investment which
creates jobs and reduces unemployment.




160
U em loym i
n p
en
D
uring Current a d 1960 Cycle
n
1975:1 = 180

G a ter Iy
ur
R
eal Business Profits
D
uring C
urrent a d 1960 Cycle
n
197S•1 * 180

Quarter!y




161
Senator S arban es. I was with Walter Heller when he finally man­
aged to get that part of the approach across, and generally now the
business council walks in to see the President and comes out and says,
we need a business tax cut, even though it produces a deficit, because
given the circumstances we are under, we have to stimulate the
economy and if we stimulate the economy, and put the people back
to work, we will end up not having the large deficit we would have
had if we allow the economy to continue to deteriorate, so on the part
of some of the business community, at least on that aspect we are get­
ting some response, but that is a relatively new development, is it not ?
And the Chamber doesn’t always go along with the Business Coun­
cil, is my recollection, with respect to that approach.
Dr. C a r ls o n . I f you are saying it is important to keep a healthy
economy for the business community, you are perfectly correct. For
instance, the increase from January to March in spending going from
$38 bill to $45, thereby squeezing out tax relief, special tax relief
that can encourage the investment that many people talk about here,
yes, that is of considerable concern.
Because we haven’t had any real growth in investment since 1973,
that is, making tools for our workers; therefore productivity is cut
in half. It is of great concern to the business community, and should
be to any worker interested in real earnings increases in the future.
Senator Sarban es. Let me ask the panel this question: what level
of unemployment would you regard as kind of a critical point where
you think generalized fiscal and monetary policies are going to really
produce not very significant benefits in bringing down the unemploy­
ment rate, and create serious inflationary pressures ? Assuming a rea­
sonable program to deal with inflationary pressures, in terms of how
the markets function and so forth, nothing radical.
What is the rate of unemployment or the range without making a
too broad of a range that you see as the warning area ?
I know our time is running out. I f you all could just sort of give
me a number, maybe just a brief explanation of it, I would prefer
that rather than a long, detailed answer, short as we are with time.
Dr. B rim m er. That range in my judgment is somewhere around
4y2 to 5 percent, and the explanation is what I suggested earlier,
basically.
Mr. N a th a n . I would say the range is around 4 percent given
present circumstances, but that does apply what you say are reason­
able anti-inflation policies on the productivity, investment front, and
working with labor and management to try to slow the rates of
change.
Dr. C a r ls o n . I would think those suggestions Bob had would be
rather major changes in the operation of the economy. I f you take
the way it is operated now, I think the 5-, 5!/^-percent range, and you
will have difficulty getting into that range unless you have a signifi­
cant increase in investment.
Investment is one of the factors that is making it difficult to get
it down, let alone the composition of the labor force changes.
Mr. K e y s e r lin g . I take the position there is no empirical evidence
that would enable us to fix a figure at which a lower rate of unemploy­
ment generally generates a higher rate of inflation. The evidence in




162
general is the other way. The main question is, at what point is un­
employment so high that inflation increases?
Senator S arbanes . I think I want to direct this to Dr. Carlson, and
Dr. Brimmer. Do you accept the view that significant levels of un­
used manpower and unused resources, in other words, a low utiliza­
tion of plant capacity, but a high unemployment rate is a contributor
to inflation, because of the loss of productivity and the increase in
unit cost ?
Dr. B r im m e r . Yes. But I don’t start there. I know you want to
save time, but I feel I must say-----Senator S arbanes . I don’t want you to give an answer you don’t
want to give, so take the time to clarify your answers.
Dr. B rim m er . One thing that stands out, I refer to it on page 20
of my statement, over the long run, if one looks at the historical evi­
dence, the basic rate of inflation is closely related to the rate of in­
crease in compensation per hour worked in excess of the rate of
improvement in productivity. That relationship holds year in and
year out, to describe the trend rate of inflation.
On top of that, excess demand, which is a cyclical phenomenom,
does add to the rate of inflation.
That catches what you just described. Excess capacity can be
measured, as aggregate demand rises, then one gets additional pres­
sure on price. The declining unemployment during such phases of
the cycle is simply a manifestation of the underlying relationship I
just described.
And as one reverses that, the credence of excess labor can be mis­
read as taking the pressure off prices.
It is the lack of pressure when one underlines the capacity to pro­
duce, that is a part of it.
So, rather than responding to the question as I put it, which I
agree, I would say that the high level of unemployment can be mis­
read, in reflecting the high unit cost.
It is the effect of high fixed cost, being spread over lower volume
of output, which gives the impression that high unemployment is
associated with high cost, as Mr. Keyserling described.
What we have to come to grips with is the underlying trend rate
of inflation which is present to a more or less degree, even during the
down phase of the cycle. That is the basic cause of inflation. It is cur­
rently that compensation— that compensation is currently running
around 9 percent.
Productivity is running around 2 percent.
So the hard core rate of inflation stays at 7 percent. You can’t
explain that away. That is the point I would like to stress over and
over again.
Dr. C a rlso n . When your unemployment is clearly above 5 y2 per­
cent and declining as the economy grows, productivity is moving up
rapidly. It will start running into bottlenecks of skilled labor between
5 and 5y2 percent, and in terms of recovery you will run into short­
ages in plant and equipment and that will outstrip any productivity
gains.
Senator Sarbanes. T o what extent would you say that concern
about either existing unemployment or potential unemployment as
perceived by workers and by their representatives, specially in those




163
situations in which they are organized, constitutes a psychological, if
not a real impediment to support of anti-inflation policy ?
I guess a classical example is maybe a featherbedding situation, in
which there is strong resistance to an improvement in efficiency, be­
cause of a fear that you are going to lose your job.
Now, if you had a situation in which it was generally perceived
that you should be able to find work, and you weren’t going to be
moved into a severe unemployment situation, would that not create
significantly better national attitude toward measures to increase the
efficiency and productivity and, therefore, make a contribution on
inflationary issues ?
Mr. K eyserling . I have never tried to spread out a theory and then
assume that the facts are going to fit the theory. I always try to look
at the facts, and then build the theory as merely a helpful way of
explaining the facts. Getting to the matter that Dr. Brimmer talked
about, he said quite correctly, that when the unemployment rate—
Dr. Brimmer said quite correctly, when the rate of money wage rate
increases exceed the rate of productivity gains, we have a pronounced
pressure in an inflationary direction.
Conversely, if the rate of money wage rate increases do not exceed
the productivity gain or fall below it, we have an anti-inflationate
pressure. I couldn’t agree with that more.
But let’s just use commonsense, although I can support it by em­
pirical evidence, to see how this ties in with the rate of unemployment.
I have done something that I haven’t seen elsewhere. I have corre­
lated the rates of productivity growth with the rates of real and
money wage rate increase at every level of unemployment and every
rate of real economic growth. What do you find? When the rate of
real economic growth is high, and when the unemployment growth
rate is low, the real wage rate increases fall behind the productivity
gains, and so do the money wage rate gains to the extent that the
price level is stable.
In other words, when the real rate of economic growth is high and
the unemployment rate is low, the wages are operating under noninflationary pressures and, incidentally, there is a lag in wage gains
behind productivity gains which has been one of the causes of the
oncoming stagnation and recession.
Contrariwise— the last year is a good example— when the unem­
ployment rate is high, and 6 percent is very high, and 82 percent use
of plant capacity is very low, then the productivity is exceeded by
the rate of money wage rate increases.
God forbid if it weren’t, because if we brought the wage increases
down to the low productivity growth rates, we would have what we
got in the 1930’s.
Even Mr. Hoover argued for the businessmen not to do that.
So the whole thing fits together. It is the lowering of the unemploy­
ment rate that raises the productivity rate. The increased real eco­
nomic growth rate raises the productivity growth rate.
When that happens, the wage rate gains, moneywise, are equal to
or lag behind the productivity growth rates, and you have a noninflationary factor. It is unnecessary to argue whether this is true,
if you get down to 2-percent unemployment. For you are saying,
“Maybe we can get down to 3 or 4 percent by 1983.”




164
Thus, so far as the situation that we have to deal with, within the
ambit of the framework of this bill, we will even by 1983 be operat­
ing in a situation where the productivity growth rate will not have
the incentive of a high enough level of utilization, and the problem
will continue to be academic as to what to do when there is too much
pressure upon available resources.
Senator S arbanes . Would the others like to speak to that point?
Dr. B rim m er . I would say, quickly, Senator Sarbanes, I would
interpret you to say it is a scarcity complex. I feel not having enough
jobs to go along, if technology or other sources, or efficiency would
be promoted, that you would be somehow displaced, that jobs would
be lost.
I think that at one time was quite restrictive of many craft unions.
I think it is less today.
Senator S arbanes . Let me say to you as one who, because he is a
politician, has to spend time out on the street, that I am not sure I
agree with that. I think on the part of many Americans who work in
situations in which they see fluctuating employment, people being laid
off, even if they may not reach them, in many instances it may reach
them even with a number of years of seniority that the anxiety that
prevails makes them regard efforts to improve efficiency and pro­
ductivity with a very skeptical eye, because they are very fearful that
their jobs are at stake.
I f they have some sense that we really are going to be moving well
on the job front more or less all the time, I think you might well
over time develop a different response.
The other point I want to add to that, and it goes to a different
point— the chairman has been very generous— but there is a point in
your paper, Dr. Carlson, about the cost of public jobs, and if you
translated that into what the average family pays in taxes, maybe
they wouldn’t want to pay that in order to put the people to work.
It is an interesting point, but it is only an economic point.
I think the undercutting of the work ethic that takes place when
you permit high levels of unemployment is extremely serious. I want
people to work and I want to have programs to put them to work. I
think w e really need to have a work ethic in the sense of the dis­
^
cipline that comes with it and the notion of productivity and the use
of those resources in society. And two things happen when you fall
short. One is you carry the people, you are not going to let them
starve. So among a certain group you develop an attitude of “let’s
rip off everybody else and get a free ride.” And then among those
that are continuing the work there is a sense of outrage that they are
being ripped off and taken advantage of.
So it becomes debilitating in two respects. One in creating a class
that is basically not work oriented but is basically designed to learn
how to play off the system. And then, of course, debilitating in that a
significant number of those working resent— I mean they have an
exaggerated notion of what is happening, but in any event they re­
sent what is taking place.
It seems to me all of those arguments, and I really address them
more to you because it seems to me the people you represent in a
sense have the greatest interest in these kinds of attitudes I am talking
about, but all of those arguments argue very strongly for an ap­




165
proach, and, of course, this legislation is really an approach, it is not
the substance of the programs— it leaves open the question, in terms
of the substance of the programs, to either take the tax cut approach
that you all might favor under the circumstances as opposed to a
spending approach that someone else wants to take, it leaves open the
question whether the tax cut is to go to consumers or investment and
so forth. It is just an approach.
It seems to me the people you represent, in an enlightened view of
what their self-interest is in the broader view of the society, ought to
be very strongly for implementing or putting into place these things.
Dr. C arlson . I think my testimony makes it clear this is part of
the high unemployment effort. The increase in minimum wage, the
increase in social security taxes, we could have folded in the Federal
employees, for example, and certainly in terms of looking at those
that can’t find jobs even in a high employment economy we have
supported assistance to the structurally unemployed. We would like
to keep the employment possibilities greater in the private sector as
opposed to the other sector.
The C h a ir m a n . Thank you.
I want to congratulate Senator Sarbanes on this line of questioning.
It has been particularly interesting.
I would like Mr. Nathan to comment on this. W hy not have a dual
goal, recognizing the wisdom of what you said, Mr. Carlson said and
what others have said, the argument that the level of unemployment
you have with the given level of inflation depends on the policies
you follow on. And what this would be doing really is giving a mes­
sage loud and clear that we want those policies followed, so that you
can reconcile these two goals. Policies like training unskilled people
so that they are better able to qualify; policies like providing a
greater degree of mobility.
In Wisconsin, for instance, we have a system overnight, every single
night on the computer system you can go into every city of 10,000
and find every job that is available. That is one of the reasons our
unemployment is less than other places.
Productivity policies, which we have been very reluctant to push
and very lax in doing so, policies the President has been urging of
achieving a greater degree of price restraint by management and
wage restraint by labor— why wouldn’t these policies be really en­
couraged by this bill in a positive, constructive, emphatic way to
produce these goals?
Mr. N a t h a n . The question, Mr. Chairman, is whether the setting
of those goals will be inclined to stimulate the policies of structural
changes or stimulate those policies of wage-price restraint or stimu­
late those policies-----The C h a ir m a n . Well, I say the inflation goals shall be designed so
as not to impede the achievement of the unemployment goals. That is
the way you do it.
Mr. N a t h a n . I f you go that route, I would like to put in a few
other phrases right there.
The C h a ir m a n . Fine.
Mr. N a t h a n . Put in a few other phrases, and certainly it is not to
be designed as a substitute for specific positive measures on the policy
front, to increase productivity, to lower wage-price increases, to in­




166
crease investment and modernization and the like, so that it clearly
does not become an excuse for these policy measures. This is what I
am fearful of.
I just think that the trade-off in wages and prices is a simplistic
thing, that too darn many people— unfortunately, at high prices,
they buy it even though they say they don’t. I f we do get enough of
the qualifications there to make sure it isn’t a trade-off, that at least
would be a big help.
The C h a ir m a n . That is very helpful.
Dr. Brimmer, the Federal Eeserve is required by the bill to com­
ment on the President’s economic proposals contained in the eco­
nomic report. You were very helpful in this. There was excellent
analysis that hadn’t occurred to me, comparing the House bill and
Senate bill as far as the Federal Eeserve is concerned, but the legis­
lation does not require the Federal Eeserve to comment on the budget
even though the monetary policies must take these things into account.
Should a requirement be added to the bill that would have the
Federal Eeserve report to Congress after the first concurrent resolu­
tion on the budget that has been adopted, in which it would provide
its views in a manner similar to the report it would make on the
President’s proposal?
Dr. B rim m er . First, Mr. Chairman, I hadn’t thought of putting
the question that way, so I haven’t worked it through. I see the im­
plications though. I think the Federal Eeserve ought to stick substan­
tially to monetary policy and I think it would be very difficult for
the Board as a whole, for the Federal Open Market Committee to
come to any kind of consensus on the content of the budget or appro­
priate level of spending or fiscal policy in general. That is trying to
get an agreed view-----The C h a ir m a n . They sure as dickens let us know. Arthur Burns
and Miller come up here and they tell us what they think of things,
but they don’t speak for the Board, and when they don’t do that it
is hard to know what emphasis to put on it. They have great effect
on the Congress. They should have. They are men of great sense and
prestige, and they are in a position of considerable power. But why
shouldn’t they be frank and tell us the whole thing?
Dr. B r im m er . I would naturally be reluctant to criticize the per­
sonal behavior of my former colleague.
The C h a ir m a n . I didn’t mean that. Just describe what they do.
Dr. B rim m e r . That is part of the problem. Much of what was said
and still is said before Congress on matters other than monetary
policy reflects personal opinion, and trying to get 12 people on the
Open Market Committee or 7 people on the Board to agree to what
ought to be fiscal policy would be very difficult.
Senator S arbanes . It is worse than getting seven Senators to agree.
The C h a ir m a n . But for us to understand why they have adopted
the monetary policy they have and for us to develop any kind of a
debate and have any influence on it— after all, we are the committee
to whom they are responsible; they should know we have oversight
over them— it seems to me they should spell out what they are talking
about. They come up and talk about M l, M2. Forget it. Nobody will
pay attention to that. I f they talk about the level of unemployment,
level of prices, talk about interest rates, talk about things people can




167
understand and have strong feelings about, it seems to me we can
make some progress.
Dr. B r im m er . I agree. I didn’t neglect the issue altogether. On page
14 and 15 of my statement I developed an approach which I would
recommend strongly that the committee might consider. I took ad­
vantage of the fact that the Federal Reserve now reports four times
a year before Congress. I also took advantage of what seems to be an
innovation at the Federal Reserve where the Chairman of the Federal
Reserve, as he did on April 25, volunteered some views with respect
to the outlook for the real economy.
The C h a ir m a n . That is page 15 ?
Dr. B r im m er . Page 14 and 15, Chairman Miller’s comment, the
summary on page 14 of my statement. And as I said, he went quite
far. He went beyond projection of the monetary aggregate; he talked
about the outlook for real GNP and prices and unemployment. These
are my personal views, but I understand. As a matter of fact, he was
summarizing the consensus view in the Open Market Committee. He
may have said so before the Congress here.
The C h a ir m a n . When he addressed us the last time, we asked him
specifically about that. He said he could only express his own per­
sonal views.
Dr. B rim m er . But it is my understanding that that was in fact a
reflection of the consensus in the Open Market Committee. I under­
stand further that the Congress can look forward to receiving that
kind of commentary each time the Federal Reserve representative
appears.
Taking that as background-----The C h a ir m a n . W hy not require that? W hy not require that so
that they understand it, the Federal Reserve Board Governors under­
stand it, and they instruct the Chairman when he comes up what
their position is ? That is all we are asking.
Dr. B rim m er . This is my compromise, and I suggest it as a com­
promise: One, the legislative record of the Congress’ consideration
of this matter indicates that the Congress expects this kind of con­
duct. I say further that the committee, and I have this committee in
mind, for example, once the Federal Reserve representative has ap­
peared, has now talked about the monetary aggregates and the out­
look for the economy, that this committee ask its own staff to take
the Federal Reserve’s commentary; make its own assessment. And I
say in my statement that its staff may have to be enlarged somewhat
to do that. They may have to call on the resources of the Congres­
sional Research Service, but I can visualize a scenario under which
this committee would take the staff’s reports based on the Federal
Reserve’s own forecasts and projections of monetary aggregate, draw
its own conclusion with respect to the implication for the economy
as a whole and, as I said, even the outlook for monetary policy interest
rates.
I wouldn’t expect the Federal Reserve to be willing to discuss
interest rates, but I would like to see the chairman of this committee
submit to the Chairman of the Federal Reserve, before the next repre­
sentative appears, this committee’s own interpretation of the implica­
tions of the Federal Reserve projected policy for the economy as a




168
whole. That would be an agenda for discussion between the Federal
Reserve and this committee.
I know in advance the Federal Reserve would be reluctant to ad­
here to that, especially the discussion on the outlook for interest rates
and credit, but I personally think the Congress needs much more of
a focussed debate on these measures. My paper summarizes this
approach.
The C h a ir m a n . That is very helpful.
I might point out, it is going to be hard. We could get a useful
colloquy between the committee as a whole and the Board of Gov­
ernors as a whole, because while they may have their differences, we
really have ours all over the place. But we might be able to get a
majority view, undoubtedly with many minority views attached. That
is what we don’t have now. We don’t have that kind of discussion on
the effects of monetary policy. A few Senators may make a speech
somewhere, but we don’t really develop the kind of discussion we
ought to have that would help monetary policy, to be useful in achiev­
ing the goals w e are all interested in achieving.
^
Dr. C arlson . I think one ought to be very cautious about the inno­
vations in this area, because if the Federal Reserve appears to be
losing some of its independence to Congress or a committee of Con­
gress, that could have an adverse effect.
The C h a ir m a n . That old myth of independence of the Congress.
I don’t know where it develops. Every chairman seems to go further
in asserting it. There isn’t any.
Paul Douglas directed to William McChesney Martin, “ You write
on your bathroom mirror ‘I am a creature of Congress’ and look at it
every morning.”
We are not independent.
Dr. C arlson . N o question as far as the Constitution. But as far as
influencing of funds into the committee, the fact that there are wise
people, based on the information they have as opposed to a political
decision as to the size of M 1 M 2 or M3, or whatever, is very important
?
in the confidence in the committee.
So I think movements toward what appears to be, what is existing,
de facto independence of the Fed, should be handled very carefully.
The C h a ir m a n . W e will be careful.
Thank you very much.
The committee will stand in recess until 10 o’clock tomorrow
morning.
[Whereupon, at 5 :08 p.m., the committee adjourned, to reconvene
at 10 a.m., Tuesday, May 9, 1978.]




FULL EMPLOYMENT AND BALANCED GROWTH
ACT OF 1978

TUESDAY, 3VCAY 9, 1978
U nited S tates S en ate ,
C omm ittee on B a n k in g , H ousing , and U rban A ffairs ,

,

Washington D.C.
The committee met at 10:05 a.m. in room 5302, Dirksen Senate
Office Building, Senator William Proxmire (chairman of the commit­
tee) presiding.
Present: Senators Proxmire, Cranston, Brooke, Garn, Heinz, and
Schmitt.
The C h a ir m a n . The committee will come to order.
Today we are continuing our hearings on the Humphrey-Hawkins
bill, the Full Employment and Balanced Growth Act of 1978. We had
an excellent hearing yesterday in which we spent a good deal of time
discussing the numerical unemployment goal that’s in the bill, the
4-percent overall unemployment in 5 years, and the 3rpercent infla­
tion goal that I proposed to be added to the legislation. We did not
find unanimity among the witnesses yesterday, but there was a con­
sistent feeling that unemployment and inflation are both serious prob­
lems for which we must find solutions and it would be far better to
approach them head on rather than be paralyzed by the tradeoff fear.
Our first witness this morning is Senator Mike Gravel from the
great State of Alaska, where I understand unemployment has in­
creased dramatically since the completion of the pipeline. He is to
be followed by the Secretary of Labor, Ray Marshall; and Charles
Schultze, Chairman of the President’s Council of Economic Advisers.
Then we will hear the views of Gov. Charles Partee.
We are going to ask Senator Gravel to proceed and we will ques­
tion him and then follow up with the other witnesses.
STATEMENT OF MIKE GRAVEL, UNITED STATES SENATOR PROM
THE STATE OF ALASKA
Senator G ravel . Thank you very much, Mr. Chairman.
In your consideration of the Humphrey-Hawkins bill you will be
establishing specific national employment goals. In developing your
recommendations I would like to suggest that you consider a minor
extension of the bill to deal with the broadening of capital ownership.
However, before I talk about my specific proposal, let us pause for a
moment to consider the roots of our historic concern for employment.
Why are we concerned about full employment? We are not con­
cerned about employment for its own sake, but as a source of income




(169)

170
for the employee. Traditionally, the majority of our citizens have
relied for their income solely on their personal labor. For most Amer­
icans employment is the only source of income. W e are concerned
about jobs not because we necessarily want everyone to work, but be­
cause we want everyone to have sufficient income.
However, job-related income is not the only source of income in our
economy. There is another source of income which is enjoyed by a
select few in our economy. Income which does not hinge on employ­
ment, income which grows even while the owner sleeps. I am refer­
ring, Mr. Chairman, to income from capital. The Rockefellers do not
need jobs. We are not concerned about full employment for the
DuPonts. No, Mr. Chairman, we are only concerned about full em­
ployment for those in our country who do not have sufficient capital
income to survive without wages.
Income from capital can provide the same basics of life which come
from employment income. And the capital stock of our economy is
sufficient to provide significant amounts of income for many Amer­
icans. However, 5 percent of Americans own over 50 percent of the
capital assets in our economy and this has been the case throughout
this century. The same 5 percent own 62 percent of American busi­
nesses and 83 percent of the corporate stock. By virtue of this owner­
ship this small group of individuals receive a large portion of our
national Income from capital.
Now, Mr. Chairman, I would not suggest that we appropriate that
capital and spread the wealth around. Although, I would submit that
we do much the same thing through the high levels of taxation neces­
sary to fund transfer payments and job support programs for those
who have no capital-related income. What I would propose is that we
look to the future and ask ourselves whether we may not develop a
means for broadening the ownership of the new capital which must
be generated in the future to fuel the expansion of jobs and the
economy.
Over the next 20 years our normal economic expansion will require
a doubling of the capital stock of the American economy. I f we can
devise a system through which this new capital can be owned by new
capitalists, without taking anything away from those who now own
most of our capital, we can ease the pressure for the creation of arti­
ficial jobs by putting capital related income into the hands of those
who have never before benefited from capital ownership.
I have developed a proposal which would begin the spread of capi­
tal ownership and capital income throughout our society. I would like
to include in the record a copy of a paper outlining in some detail
the principles of this proposal. The program would provide federally
guaranteed nonrecourse loans to individuals for the purchase of capi­
tal investments which would generate income for the individuals
involved. The individuals could then use the income generated to
repay the debt and be left, after debt retirement, with an asset which
would continue to produce income for them.
Mr. Chairman, as you know the formation of capital in our economy
is essential to the creation of jobs. The proposal of which I speak
would provide for the discount of capital formation loans directly to
the Federal Reserve Bank at nominal interest rates. This w^ould ac­
celerate the formation of capital by lowering the cost of new invest-




171
ment and in the process expand the job market. There are those who
mig;ht argue that such an expansion of credit would cause inflation
by increasing the Federal deficit, but I would submit that it is the
monetization of transfer payments which is inflationary rather than
the monetization of productive capacity.
Mr. Chairman, the proposal which I put forth here may be one of
the tools about which the Humphrey-Hawkins bill speaks when it
refers to devices which expand employment without at the same time
increasing inflation. The diversification of capital ownership in our
society must be undertaken as a compliment to the creation of jobs,
for without an expansion of capital ownership the creation of jobs
will simply be one more tool in the armory of income transfers, wel­
fare disguised as work.
And so, Mr. Chairman, I would like to encourage the committee
to include in the bill a statement on the importance of expanding
capital ownership in our economy. It would also be appropriate for
the bill to require the President, in his annual report to Congress, to
state the progress made during the year on widening the participa­
tion in our capital stock. It could also instruct the President to de­
velop policies and programs designed to broaden capital ownership.
The assurance of jobs in our economy for those who desire to work
r
is a laudable national objective, but we must not lose sight of the fact
that we are concerned about jobs because they provide income. We
must, of necessity, focus on other sources of income as well, and en­
courage the growth and expansion of those sources. Growth of jobs
cannot occur without capital investment, and the new capital can
form the basis for a significant new income source for the average
American.
I would only add, Mr. Chairman, that by the year 2000 when we
have doubled the capital stock of our country if we as policymakers
can make the same statement that we made today, that 5 percent of
the people own more than 50 percent of the wealth, then all I can
add is shame on us for not having altered that situation.
The C h a ir m a n . I want to thank you very much, Senator Gravel,
for a very interesting and innovative suggestion. You want to see far
more Americans become capitalists I take it, far more Americans
with a capital at stake, far more Americans with the kind of motiva­
tion and drive and initiative and so forth that somebody with an
investment has, and I think that’s commendable, and we will certainly
consider your suggestion very carefully.
Senator G ravel . I would hope so. The inclusion of the language
and the data provided by the President would not be a great de­
parture from what you presently have and I think it would add infor­
mation that would help us make a case. I thank you.
The C h a ir m a n . Senator Brooke.
Senator B rooke. I have no questions. I ’d just like to say I ’m always
pleased to hear the suggestions of our very able and distinguished
colleague from Alaska and I think it’s a very interesting concept.
W e’ll certainly give it every consideration.
The C h a ir m a n . Senator Schmitt.
Senator S c h m it t . Senator Gravel, does your paper, which I will
read with considerable interest, trade off the general reduction of
30- 454— 78------------12




172
taxes versus the guaranteed investment proposal which you have
given us?
Senator G r a v e l . Trade off taxes in what way ?
Senator S c h m i t t . I f you reduce taxes and put more capital in the
hands of people, presumably many of them will reinvest that in the
same way your program would have the Government finance it. Now
I ’m wondering if you have done the economic tradeoff. Not everybody
will reinvest. One of the apparent reasons that there’s a lower amount
of investment by individuals nowadays than has been in the past is
because of taxes, and that’s another way in which we take from the
productive, and transfer to those portions of the society that generally
spend.
Senator G r a v e l . The only way that I would reduce taxes is through
another proposal that I ’m proposing in the Finance Committee and
that would be through the utilization of the general stock ownership
plan or a continuation of an ESOP where we do away with the double
taxation at the corporate level. Under the ESOP we don’t tax the
corporate income; it goes to buy the stock for the employee; and I
would hope to do the same thing in a GSOP. I have not done any
macroeconomic studies other than a seminar at Brookings that was
sponsored by the Ford Foundation. Myself and Larry Klein were
the two hosts of that and we discussed the economics at great length,
but there’s been no specific study. I think the inference is clear that
if we can provide an incentive for capital expansion that there would
be in a direct sense a reduction in taxation, but in the long-term
sense there would be increased revenue because there would be more
income going into more hands.
Senator S c h m i t t . Thank you.
The C h a i r m a n . Thank you very much, Senator Gravel.
Senator G r a v e l . Thank you.
[Additional material received for the record follows:]
S t a t e m e n t b y S e n a to r M ik e G ravel
IN T R O D U C T IO N I T H E FIN A N C E D C A P IT A L IS T P L A N

The capital requirements o f our economy w ill double in the next twenty years
providing fo r grow th in capacity o f American industry. Under present financing
methods most o f this new capital w ill belong to those who own the bulk o f our
capital today. The internal generation o f capital and the use o f debt financing
fo r corporate expansion inhibits the broadening o f capital ownership.
One o f our greatest challenges is to provide more Americans with a stake in
our econom ic system. W ages, received in return for labor, allow many o f our
citizens to share in the econom ic bounty o f America. Congress has often
directed its effort tow ard the creation o f jobs. But, income from labor is
limited, and old age, health, or technology may intervene to terminate the
laborer’s job. W hen a laborer loses his job or retires, our economic system is
put to its severest test: where w ill this person find the money to survive? The
best aid w e have been able to develop is the transfer payment. But, like all o f
us, the unemployed laborer, the social security recipient, the w orking poor— all
resent charity. Government transfer payments, like all form s o f charity, result
in a loss o f econom ic independence.
The loss o f econom ic independence in American has grown at a frightening
rate. Transfer payments funded through federal programs such as W elfare,
Supplemental Security Income, Social Security, and military retirement
threaten to bury us financially.
The actuarial problem s o f the Social Security System have become almost
insoluble. Our citizens groan under the enormous tax burdens required to fund




173
these programs. Yet, w e have no answer fo r their cries, no remedy but “ more
o f the same” . W e are moving away from our roots in capitalism, from our
belief in the power o f free enterprise and the independence o f the individual.
We are creating a system whereby w e take from the rich to maintain the poor.
Eventually, the confrontation must come between the last vestiges o f capitalism
and the new society we are creating. That confrontation w ill mark the end o f
the individualist in America.
W e may yet be able to save ourselves from our own folly. W e may be able
to improve the economic independence o f all our people by allow ing the poor
to share in the wealth of our country instead o f m erely transferring to them
income enough to survive. In the past, Congress has focussed on the creation
o f jobs. But, jobs are only part o f the larger issue o f insufficient income.
Perhaps w e can create a system whereby the expansion o f our capital plant
and equipment can provide capital incom e in addition to job related incom e for
many who have never had such income before.
The immense capital requirements o f our econom y in the coming years w ill
provide the opportunity for the great masses o f poor and m iddle income
Americans to become owners o f capital. This capital can generate a second
income fo r them. W e can develop a program w hich w ill build capital ownership
into those who have never owned capital before. The incom e from this capital
can then supplement and perhaps even eventually replace their income from
labor or the transfer payments which they may receive through federal
programs.
BROADENED C A P IT A L O W N E R S H IP I A P L A N

I propose a new approach to capital expansion w hich would diffuse ow ner­
ship o f new capital to those who have not previously reaped the benefits o f
capital ownership. In simple outline the plan w ould guarantee private loans to
purchase corporate stock, with the new capital being used by the corporation
to pay fo r the expansion o f plant and equipment. The stock would be held as
security fo r the loan, and dividends used fo r repayment. A fter the loan is fu lly
or partially retired, the investor w ould receive dividend income. The plan
provides investment capital fo r industry w hile developing an alternate source
o f income fo r those who historically have depended on their labor income alone
The plan would not transfer existing wealth from the rich to the poor, but
rather allow the poor to obtain a share o f the new wealth generated by our
capital expansion.
The plan should be tested on a lim ited scale to determine its effect on
individuals, corporations, government and the econom y as a whole. In each of
five consecutive years $800 million in private, federally guaranteed loans could
be made available to participants in amounts o f $20,000 per fam ily unit, $800
million represents approximately 1 percent o f the non-residential fixed private
net investment o f American industry fo r calendar year 1977, using national
income accounting figures fo r depreciation. In comparison, this sum is about
10 percent o f the total loans guaranteed by the Federal H ousing Adm inistration
during fiscal year 1975 and less than 5 percent o f the loans guaranteed by the
Small Business Administration during 1976. Under these restrictions, the test
program would involve about 40,000 participants per year for five years fo r a
total o f 200,000 participants. This w ould give a sufficiently large and repre­
sentative sample for analytical purposes.
T H E P A R T IC IP A N T S

The participant would be eligible fo r federal guarantee o f a loan, not to
exceed $20,000 to be used for the purchase o f new corporate stock. The
proceeds o f the new issue would have to be used by the corporation to finance
capital expansion. Participants wrould be draw n from a cross section o f
American society. They would be chosen at random from fou r target g ro u p s:
the blind and disabled, low income w orking poor, middle incom e taxpayers, and
Social Security recipients. These groups were chosen because they are faced w ith
a diversity o f problems and are likely to have wT
ide educational and sociological
differences. Many o f the members o f these groups may also receive some
federal assistance varying from Aid to Dependent Children to FH A guaranteed
home loans. The hard core unemployed and w elfare recipients w ould be
excluded for purposes o f the test because their special problems and needs in
relation to a program o f this nature might make excessive demands on the




174
system. Geographic diversity o f the participants will be emphasized. The
experience o f these fo u r groups w ill give valuable insight into how such a
program w ould be received by the general public and would allow fo r a fa ir
evaluation o f the program ’s successes and failures. Of course, if the program
proved successful it could be extended to groups not included in the test
program.
The participant w ould receive notification o f his eligibility by mail. The
notification letter w ould suggest that he contact his banker or financial advisor
regarding the matters discussed in the letter. Since many o f the participants
could not be expected to be fam iliar with financial institutions or transactions,
the notice o f eligibility w ould be follow ed up by telephone and personal contact
from the local social services agency. The program would be explained and
assistance offered to the participant in contacting the appropriate financial
intermediaries.
THE

SE C U R IT IE S

(FU LL RETU RN STOCK)

The proposal contemplates the creation o f a new class o f corporate stock.
The stock, referred to as Full Return Stock, would be preferred as to
dividends and have its share o f corporate earnings distributed quarterly. The
corporation w ould be required to distribute all the per share earnings currently
to the Full Return stockholders. It would, however, be allowed to retain a
reasonable percentage o f the earnings o f the Full Return Stock as a reserve
fo r contingencies.
The fu ll distribution o f earnings on the Full Return Stock could have a
dilutive effect on the equity o f the common stockholders. Part of the corpora­
tion’s profits are attributable to the earnings o f the common stockholders which
have been retained by the corporation. Thus, if earnings are simply divided by
the number o f shares outstanding to determine the amount distributable to the
Full Return stockholders they w ill receive dividends which are, in part,
attributable to the retained earnings of the common stockholders. In order to
encourage corporations to participate in this program by issuing Full Return
Stock this dilution problem must be resolved. Two possible solutions are
presented fo r d iscu ssion :
(1) The earnings of the corporation could be reduced b y the earnings attributable
to the retained earnings and the balance could then be divided b y the number of
shares to determine the per share distribution on the Full Return Stock. Cor­
porate tax would then be com puted on corporate profits, including profits on the
retained earnings less a deduction for the profits on Full Return Stock which had
been distributed. The effect of this adjustment would be to have the common
stockholders neutral w ith respect to earnings distributed to Full Return stock­
holders and would exempt the Full Return dividend from tax at the corporate
level.1
(2) The dilution problem could also be dealt with through a tax deduction or
credit for distributions to the Full Return stockholders. Deductions have the dis­
advantage of varying in value with respect to the profitability of the corporation.
The m ore profitable the corporation the greater the cost to the organization of
m oney raised through the Full Return Stock if a deduction isused to resolve the
dilution problem .2 Tax credits on the other hand would not vary in effect with
1 On a tax expenditure basis using a 48 pet corporate tax rate and computing the tax based on average cor­
porate pretax profits of 16 pet this would represent a subsidy of approximately $61,440,000 in the first year of
the program and $307,200,000 in year five. This would be a continuing subsidy until all the Full Retrun
Stock was converted to common stock. However, this exemption might be more accurately viewed as a form
of corporate integration and therefore not a subsidy at all.
2 Assuming a deduction of 110 pet. for the Full Return Stock distributions and a corporate tax rate of 50
pet with a cash dividend on the stock equal to pre-tax earnings per share the following possibilities present
themselves:
2

1

Received for sale of shares______ ______ ______ ____
Shares of FRS outstanding.____________________
Earnings per share_______________________ _______
FRS cash dividends paid............................................
Deductible for tax purposes______________________
Tax credit at 50 pet. ....................................... .............
Net cash outlay annually............ .................. . . . ........
Earnings necessary to cover net outlay before taxes..
Effective rate of “interest” (percent).........................




$1,000,000
10,000
10.00
100,000
110,000
55,000
45,000
90,000

9

3

$1,000,000
10,000
20.00
200,000
220,000
110,000
90,000

180,000
18

$1,000,000
10,000
25.00
250,000
275,000
137,000
112,500
225,000

22.5

175
the profitability of the corporation except to the extent that the corporation’ s
effective tax rate varied. T o take account of the variations in the effective tax rate
the credit amount could be adjusted based on the actual effective tax rate for the
year. Thus, if the corporation paid 3 5 % tax on its total incom e the credit would be
equal to 35% of the Full Return distribution for the year. In this w ay the corpora­
tion would be returned the tax which it had paid on the Full Return Stock earnings
which were distributed. However, as accumulations of retained earnings developed
within the corporation the credit would have to increase in order to assure the
com m on stockholders parity with shareholders in a similar corporation w hich did
not issue Full Return Stock.3
W hile the shareholders o f the corporation may be rendered indifferent
financially by the distribution adjustment, they m ay still lose some rights o f
preemption and suffer some diminishment o f their liquidation rights. In order
to compensate the existing shareholders fo r this loss and to give the corporation
some incentive fo r entering into this program by the issuance o f Full Return
Stock, participating corporations could be allow ed an additional investment tax
credit o f 1 percent on all investments made during years in w hich Full Return
Stock is outstanding.
O W N E R S H IP OF F U L L RE TU RN ST O C K

The ownership o f the Full Return Stock could be handled in either o f tw o
ways, or a combination o f both. The stock could be owned directly by the
participant or the participant could purchase shares in a mutual fund holding
fu ll return stock. The Full Return Stock is designed to provide incom e since
the fu ll distribution o f earnings by its very nature lim its considerably prospects
fo r appreciation. This income emphasis w ill result in very favorable rates o f
return to Full Return Stock investors and the stock w ill be underpriced in
relation to other public offerings. As a result it w ill be necessary to lim it the
transferrability o f the stock or mutual fund shares.
The participant could acquire a federally guaranteed loan only fo r the
purchase o f Full Return Stock or shares o f a mutual fund investing solely in
such stock. Any mutual fund designed to com ply w ith the requirements o f this
program would be required to pass through the Full Return dividends, retaining
only a reasonable amount for administration. I f a mutual fund approach were
used, transfer limitations could easily be imposed upon the fund shares. The
fund shares could be made transferrable only by g ift or inheritance ( or transfer
could be limited to inheritance alone) and sale w ould only be allow ed in the
event o f a repurchase by the fund. The Full Return mutual funds would be
entitled to trade the Full Return Stock held by them, but if the sale were made
to other than a qualified mutual fund the stock w ould convert from Full Return
Stock to ordinary common stock. W hile some suggestions have been made to
operate the fund under a government agency, private industry has the capacity
to handle such transactions and private operation would be more philosophically
consistant with the other aspects o f the plan.
It would also be possible for participants to purchase Full Return Stock
directly. In such a situation the corporate stock could be restricted as to
transferrability by a conversion fa ctor wT
hich w ould decrease the transfer value
in relation to the income value. Upon transfer by g ift or inheritance the stock
would continue to have its full claim on earnings. But, if the stock were sold
or transferred fo r consideration it w ould loose its preference on earnings and
revert to ordinary common stock. This m andatory conversion upon sale would
decrease the value o f the stock, encouraging its retention in the fam ily group.
F or estate tax purposes the stock could be valued at its common stock value
rather than through an income discount approach. This would minimize the
need fo r a forced sale by the estate.
3 For purposes of illustrating the tax credit approach to achieving stockholder neutrality on the issue of
Full Return distributions it may be helpful to set up a simple example comparing two corporations, X and
Y . Each corporation has 200 shares outstanding and $200 of paid in capital, one dollar per share. Each cor­
poration earns 100 pet per year on its capital. The corporations retain all earning on common stock and cor­
porate tax is assumed to be 50 pet. Corporation X has only common stock outstanding, corporation Y has
outstanding 100 shares of common and 100 shares of Full Return Stock. One Half the pretax earnings are
distributed by corporation Y to its Full Return stockholders. The results over three years and the necessary
tax credits are set forth in th3 chart attached as Appendix “A ” . As can be seen from the chart, it would be
necessary to vary the amount of the credit to the corporation in order to maintain equivalence for the com­
mon stockholder with similar stockholders in a corporation which had not issued Full Return Stock.




176
Either the mutual fund or the individual share approach could be used
effectively in this program . The mutual fund approach is attractive in that the
risk o f loss is spread to all participants while the individual share approach
brings the participant somewrhat closer to the operation of our economic system.
The individual share approach may also allow for a greater diversity in
investment successes and failures. In a test program, reaction to these more
radical results might be inform ative. It should be noted that these tw o
alternatives are not mutually exclusive and both might well be included in any
test program.
T H E F IN A N C IN G

The foundation o f the program is to provide 100 percent financing fo r the
purchase o f the Full Return Stock. This will allow those w ithout collateral to
borrow for the purchase o f stock. The loan would then be repaid from the
dividends on the securities purchased. Local banks, savings and loan associa­
tions, credit unions, insurance companies and trust companies would be
authorized to loan the participant up to $20,000 for the purchase o f Full
Return Stock or Full Return mutual fund shares. As security fo r repayment
the borrow er would execute a promissory note and the lender would retain a
security interest in the stock or shares. The securities would be held in escrow
until the loan wras retired.
The loan w7
ould be non-recourse so that upon default the lender could not
collect any deficiency from the investor. I f default occured, the lender would
have the right to foreclose the loan and sell the stock or shares, applying the
proceeds to the remaining principal balance o f the loan. Any deficiency would
be insured by a new independent federal corporation, the Capital Development
Insurance Corporation. This corporation would insure the sale o f the stock or
shares to the extent o f 75 percent of the original principal balance. The CDIC
would be a self liquidating insurance corporation funded through a nominal
charge against the dividends paid on the insured stock or mutual fund shares.
Dividends on the stock or mutual fund share would be paid through the
escrow to the lender in am ortization o f the loan from the bank or other
financial institution. Dividends used for repayment o f the loan would be tax
exempt at the shareholder level, but once the loan were am ortized and the
shareholder began receiving dividends, those dividends would be treated as
ordinary incom e and subject to federal income tax.4 Since dividends might vary
in timing and amount, no prepayment penalty would be allowed and interest
w ould be computed on the remaining principal balance. Until 25 percent o f the
balance had been amortized, all dividends would be applied against the loan.
Thereafter, the investor could elect to receive 25 percent o f the dividends until
50 percent o f the balance had been amortized. When 50 percent o f the loan
balance had been retired, the investor could elect to receive 50 percent o f each
dividend payment. W hen the remaining principal balance reached 25 percent
o f the initial loan, the participant could receive 75 percent o f each dividend
w ith the rem aining 25 percent going toward retirement o f the loan. The par­
ticipant could elect not to receive any or all o f the incremental payment steps,
thereby accelerating the retirement of the loan. Based on average pretax
corporate earnings o f 16 percent and an interest rate o f 4 percent to the
investor, the loan would be retired as fo llo w s : 5
(1 ) I f the participant received each incremental payment the loan would be
retired in 16 years.
(2 ) I f the participant w aived the final 25 percent incremental payment the
loan would be retired in 12 years.
(3 ) I f the participant w aived the final two incremental payments, the loan
w ould be retired in 10 years.
* Un d e r a tax expenditure theory, this tax exemption would generate a loss to the
Treasury equal to the total loan p a yment amounts under the program times the effective
tax Tate of the participants. Generally, since the participants would be in the lower
income tax brackets their effective rate on all income would probably not exceed 15
percent so that the total subsidy over the life of the program would a m o u n t to approxi­
mately $900,000,000, assuming a 4 percent interest rate and election by all participants
of the most rapid amortization schedule. Of course, it could be argued that no tax
expenditure exists because n e w income would be created which without the program would
not have been taxed anyway, so that there is no loss to the Treasury from the tax
exemptions.
5 See Appendix “B ”, which sets forth the amortization schedules upon which these
retirement projections are based.




177
(4 )
I f the participant waived all the increm ental payments and elected to
use all dividends fo r amortization o f the loan until retired it would take 8 years
to pay off the loan.
I f the business cycle experience turned out to be w orse (or better) these
repayment schedules would have to be changed.
The investor could sell the stock or mutual fund shares in escrow subject to
the approval o f the lender. Sale o f the escrowed securities would be subject to
the same restrictions as the sale o f stock or shares in other situations. I f
escrowed shares are sold, the proceeds o f the sale w ould have to be reinvested
in Full Return Stock or Full Return mutual fu nd shares. Once the shares w ere
released from escrow the investor would have the unrestricted right to sell the
stock or redeem the shares and retain the proceeds o f the sale. One o f the
aspects o f the program which warrants careful study w ould be the retention
rate o f the securities— who keeps the stocks or shares to benefit long term
from the income and who sells them fo r immediate cash.
The investor in conjunction with the lender w ould have discretion as to
which stocks or shares to purchase, assuming that the private markets develop
more than one Full Return mutual fund. Since the bank or other lender w ill
rely on the stock or shares as security fo r repayment o f the loan, the lender
would have authority to veto the investor’s selection.
The program is designed to allow the private sector maximum flexibility in
dealing with this new type o f investor. The operation would require the
cooperation of local social service personnel, bankers and other lenders, stock
brokers and financial advisors, and trust or escrow companies. The mechanics
o f the relationships could be worked out by the parties involved, and several
viable methods might be developed which w7
ould be superior to a single
legislated method. Similar problems have been solved by banks and brokerage
firms in developing relationships to handle investor-directed Individual
Retirement Accounts. To the extent that these private institutions provide
services to the participant, it is anticipated that they w ould receive their
normal fees which would be allowed as a deduction from the initial loan
proceeds prior to investment o f the balance in stock or mutual fund shares. It
should be emphasized that the system is designed to operate with only a single
federal subsidy, for interest. The balance o f the program w ould function w ithout
the support of direct federal funds. The insurance corporation would be self
liquidating through premiums charged against dividends on insured securities.
The federal guarantee would go only to the ultim ate solvency o f the CPIC.
IN T E R E ST R A TE S

Essential to the success of the program wT
ould be reasonable rates o f interest
on the loans to participants. An interest rate o f 4 percent was assumed in the
figures quoted on page 13, above. It was noted there that at 4 percent interest
writh no partial early payout it would take approxim ately 8 years fo r the loan
to be amortized assuming average corporate pretax earnings o f 16 percent. I f
the interest rate were substantially higher, say 8 percent, it would take much
longer to amortize the loan. At a interest rate o f 8 percent it would take 9 years
to retire the loan with no early payout.
There are two possible ways in wiiich the interest rate could be kept to a
manageable level. D irect federal subsidies could be used as in the case o f
federally supported educational loans under the National Defense Education
Act, or the loans could be discounted to the Federal Reserve Bank.
In terest Subsidy
I f a direct interest subsidy were used it w ould be funded through the U.S.
Treasury and would be paid directly to the lender. Since the loan would be
federally guaranteed it w^ould be fa ir to assume that it would already bear
a relatively low interest rate. In order to bring the rate to the investor down
to the level o f 4 percent it should not be necessary to have an interest subsidy
in excess o f 4 percent. This assumes a lending rate by the financial institutions
o f approximately 8 percent. Of course, whether or not such an interest rate
would be sufficient to allow financial institutions to service such loans must be
explored.
The interest subsidy computed on an $800,000,000 initial loan amount retired
over an eight year period would amount to a total subsidy o f $119,245,000. This
assumes that corporate profits run at an average rate o f 16 percent pretax and




178
are fu lly distributed w ith the participant electing to have all o f the dividends
from the mutual fund used in am ortization o f the loan until it is retired. These
are the assumptions w hich went into the development o f the retirement
schedule previously discussed at page 13, above. This interest subsidy is
computed on the average outstanding balance fo r each year o f the total eight
year period and is not adjusted fo r present values.
The maximum interest subsidy under these assumptions would occur in year
five o f the program when the final $800,000,000 would be lent. Assuming the
fu ll $800,000,000 w as loaned out on January 1 o f each eligible year, the interest
subsidy in year five w ould be $108,636,800. This would be a direct cost to the
Treasury and w ould require an appropriation under the federal budgetary
process.
F ederal R eserv e D iscount
Alternatively, the interest rate could be subsidized in a less direct manner
through expansion o f the money supply. The notes acquired by the lending
institutions could be discounted to the Federal Reserve Bank. This direct
discount is w ithin the F ed’s powers, but is not often exercised on a commerical
basis. The discount to the Fed would be kept at a minimum, sufficient only to
cover the cost o f adm inistration to the Federal Reserve Bank. W ith a normal
profit to the lending institution the interest rate on the loan to the participant
should not exceed 4 percent.
The effect o f a Federal Reserve discount would be to expand the money
supply. The Federal Reserve currently controls the size o f the money supply
through open m arket operations and other devices such as member bank
reserve requirements. Current Fed projections are for an expansion o f the
money supply on the order o f 5 to 7 percent annually. The effect o f discounting
notes directly to the Federal Reserve Bank would be to target some of this
expansion. It could be assumed that the Federal Reserve Bank would not
revise its estimates o f reasonable monetary expansion as a result o f this
program , so that the effect o f such a discount would be simply to shift the
focus o f the m onetary expansion somewhat.
CO NCLUSION

The plan I have proposed here is revolutionary and needs careful study.
Continuing social and econom ic review of the plan’s operation should be
undertaken. The studies could be funded through the Capital Development
Insurance Corporation, w ith fees paid out o f dividends on the insured stock.
An annual report to Congress should be prepared discussing the operation o f
the plan.
This is a modest proposal to test a program holding great promise fo r our
nation. The program could simultaneously increase the income o f many o f our
citizens w hile expanding the investment of American industry in plant and
equipment. It could provide dividend income to those whose incomes have been
lim ited to wages. It could expand the industrial capital o f our economy and
im prove the job m arket fo r the American worker. B y raising Am ericans’
incomes through new jobs and dividends we increase the buying power o f
consumers. Increased buying power could generate a more rapidly expanding
econom y with new jobs and new demands for capital.
This program holds out the promise o f investment related income fo r many
Americans. It does this in a manner consistent with our fundamental concepts
o f free enterprise. It does not take from the rich and give to the poor as so
many o f our present program s do. It is not another income transfer scheme.
The plan simply provides the structural fram ework within which a crosssection o f low er and middle incom e Americans can do what the rich have always
done— borrow to finance capital investment and repay the loan out o f the
earnings. The plan does not transfer wealth. It does insure that the ownership
o f the new wealth created by the expansion o f American industry w ill be
diffused through the population instead of belonging only to those who already
own the bulk o f our national wealth.
It is my hope that this program w ill prove to be a great boon to America.
Through this mechanism we not only can help our economy grow more rapidly,
but we also can spread the ownership of that new growth to a whole new class
o f property owners. I f this program proves successful in its modest form,
expansion o f the concept may be undertaken at a rate lim ited only by
econom ic prudence and the constraints o f the capital demands o f our economy.




179
A P P E N D IX A
Corporation X

Corporation Y

Shareholder A
Capital.................. .......................
Earnings of corporation
Corporate ta x ........................

Shareholder B
100

100

100

0
0
0

50

Total.

-

100

50

0

->50

-

150
150

150
300
(15 0 )

75

Total

225

Total.

150
(1 2 5 )
■

■>125 -

75 .0 0
225

225

100

225

225
450
(2 25 )

Profits (after ta x )..............
Full return distribution.
T a x c r e d it .............................
Additional c r e d it..............
Retained earnings.

100

150

125
(1 2 5 )
6 7.5 0 <--------6 7.5 0
12 .5 0 <--------12 .5 0

0
0
0

Retained earnings.

100

150

(1 2 5 )

150

Profits (after ta x )____
Full return distribution.
T a x c r e d i t ............................
Additional credit................

-> 0 ■
10

(10 0 )-

150

YEAR 3
Capital.............................. ............
Earnings of corporation.
Corporate ta x.........................

100
200

( 100)

100

Retained earnings.

Shareholder
B (F R S )

100

200

( 100)

Profits (after ta x )____
Full return distribution.
T a x credit.................................
Additional credit................

YEAR 2
Capital.........................................
Earnings of corporation.
Corporate ta x ........................

Shareholder A

225

0
0
0

1 6 2 .50->

112 .5 0 «

■>112.50

11 2 .5 0

33 7.5 0

337.50

33 7.5 0

ICO

A P P E N D IX B
[Assum ptions: 16 pet corporate profits, full distributions quarterly, 4 pet loan interest rate]
25/50 pet
distribution

25/50 pet
distribution

- _______ ____________________
1 7 ,6 5 6 .3 3
1 7 ,5 6 8 .3 3
1 7,5 6 6 .3 3
___________________________________
1 4 ,9 9 2 .9 3
14 ,9 9 2 .9 3
1 4 ,9 9 2 .9 3
____________ ____ ______________
1 2 ,3 5 5 .2 9
1 3 ,1 6 7 .4 1
1 3 ,1 6 7 .4 1
____ _________________________
9 ,6 1 0 .1 9
1 1 ,2 6 7 .5 1
1 1 ,2 6 7 .5 1
_________________ _________________
6 ,7 5 3 .2 4
9 ,2 9 6 .2 9
9 ,4 9 0 .2 3
__________________________________
3 ,7 7 9 .9 1
7 ,2 3 8 .6 7
8 ,2 5 2 .6 4
__________________________________
685.42
5 ,0 9 7 .2 3
6 ,9 6 4 .6 3
------------------- --------------------------------------2 ,8 6 8 .5 3
5 ,6 2 4 .1 3
_____ __________________________________
549.03
4 ,2 2 9 .0 4
________________ ____ _______________ ______________________________
2 ,7 7 7 .1 1
___________________________________ ____ ___________________________
1,2 6 6 .0 3
____ _____________________________________________________________ ______
--------- -----------------------------------------------------------------------------------------------------------------------------------------------------________________ ______ ________ _________________________________________________

1 7 ,5 6 6 .3 3
1 4 ,9 9 2 .9 3
1 3 ,1 6 7 .4 1
1 1 ,2 6 7 .5 1
9 ,4 9 0 .2 3
8 ,2 5 2 .6 4
6 ,9 6 4 .6 3
5 ,6 2 4 .1 3
4 ,6 3 1 .0 4
4 ,0 0 7 .6 2
3 ,3 5 8 .7 8
2 ,6 8 3 .1 5
1 ,9 8 0 .7 5
1 ,2 4 9 .3 2
4 8 8 .10

Year

1
1
1
1
1
1

1
2
3
4
5
6
7
8
9
0
1
2
3
4
5

No distribution

25 pet distribution to shares

17.

The C h a i r m a n . I ’m going to ask Secretary Marshall and Chair­
man Schultze to come forward as a panel. Gentlemen, we are honored
to have you before us today on this critical legislation and we would
be happy to hear you in order. Secretary Marshall, go right ahead,
sir.




180
STATEMENT OF F. RAY MARSHALL, SECRETARY,
DEPARTMENT OF LABOR
Secretary M a r s h a l l . Thank you, Mr. Chairman.
The C h a i r m a n . Incidentally, if you would like in any way to
abbreviate your statement we would be happy to have it printed in
full in the record.
Secretary M a r s h a l l . A ll right. Thank you.
[Complete statement follows:]
S ta tem en t

o f

F.

R ay

M a r s h a ll,

S ecreta ry

o f

Labor

Mr. Chairman and Members o f the Com m ittee: I am happy to be here today
to express the Adm inistration’s support o f the “ Full Employment and Balanced
Growth A ct o f 1977,” the Humphrey-Hawkins bill. It is time this country made
a commitment to the m aintenance o f full employment. As the President put it
in his State o f Union Message, “ job opportunity— the chance to earn a decent
living— is also a basic human right which w e cannot and w ill not ignore.”
The Hum phrey-Hawkins bill provides fo r a specific annual target leading to
a fu ll employment goal o f 4 percent unemployment in 1983 with reasonable
price stability. To meet that target w ill not be simple, but I believe we can
and must achieve it. In citing this goal we follow in Senator H umphrey’s
footsteps and spirit. H e never shirked from the pursuit o f social and economic
ju stice simply because the w ay was difficult.
In my remarks today, I w ould like to emphasize the 4 percent unemployment
goal and how it can be achieved. I believe the key to accomplishing this
objective is a coordination o f monetary and fiscal measures with so-called
structural policies. W hen I speak o f structural policies I mean measures aimed
a t reducing the unemployment barriers facing specific groups— whether those
barriers be lack o f education and training or discrimination. Further, I would
like to discuss the relationship between the Humphrey-Hawkins goal and the
level o f inflation.
CO O RD IN ATION OF MACROECONOM IC POLICIES

This bill establishes a mechanism fo r bringing together macroeconom ic
measures (both m onetary and fiscal) and structural measures to reduce
unemployment. Tw o types o f coordination are implicit in the mechanism
contemplated in the Humphrey-Hawkins bill. First, there is coordination among
the various actors in the macroeconom ic scene. Second, there is a coordination
between m acroeconom ic policies and structural policies. Both aspects o f this
coordination are critical to the achievement o f the Humphrey-Hawkins goal.
Internal coordination o f macroeconom ic policy is critical if such aggregate
policy is to permit us to reach the maximum possible level o f employment
consistent w ith reasonably stable prices. W e are all too fam iliar w ith the
situation in w hich a concern about inflation has caused monetary policy to
tighten w hile fiscal policy is still in an expansionary stage. Higher interest
rates also produce inflationary pressures by raising the cost o f money, causing
serious problems fo r industries like residential construction that depend heavily
on borrowed funds by home buyers. Such conflicting application o f the principal
m acroeconom ic policy tools leads to higher interest rates and therefore to
low er rates o f real econom ic growth and higher rates o f price increases than
would otherwise be the case. I feel the annual review of the economy required
by the Hum phrey-Hawkins bill can avoid these problems and can bring a
significant new level o f coordination to government economic policymaking.
The mechanism by w hich such coordination is achieved is both critical to the
success o f the effort and, as always when institutions are being changed, difficult
to construct. W ith the divided responsibilities for economic policy that exist
within the Congress, the Administration, and the Federal Reserve, both
innovation and compromise are going to be required in order to achieve an
effective mechanism fo r p olicy coordination. It is important that the Federal
Reserve, the Congress, and the Administration all be a part o f the coordination
process. I ’m sure you w ill agree with me that the w elfare of millions of
unemployed Am ericans is dependent upon our wise and competent solution o f
this problem.




181
But macroeconomic policy is not enough. H istory has taught us all too w ell
that macroeconomic policy has its limits. The creation o f too much additional
demand has, in the past, caused inflation to increase. Structural policies w ill
be necessary if we are to reduce significantly the level o f unemployment that
can be reached without additional inflation. Thus, I see the second form o f
coordination being that between m acroeconom ic policy and structural policies.
I feel this coordination is critical i f w e are to achieve the goals o f the
Humphrey-Hawkins bill.
STRU CTU RAL POLICIES FOR D EA L IN G W I T H U N E M P L O Y M E N T

The goal o f structural employment policies must be to reduce the disparities
in unemployment rates which exist w ithin various groups in the labor force.
The challenge facing structural employment policies can be seen from existing
unemployment patterns. In April, w ith an overall unemployment rate o f
6.0 percent, the rate for adult white males was 3.6 percent w hile the rate fo r
adult white females was 42 percent larger than the male r a t e ; the w hite
teenage unemployment rate was more than 300 percent larger than the adult
male rate; the adult minority unemployment rate was nearly 180 percent
larger than the adult white male r a t e ; and the m inority teenage unemployment
rate was nearly 10 times the adult w hite male rate. Table I o f the attachment
shows the underlying unemployment data fo r A pril 1978.
W e believe we can influence the structure o f unemployment through such
measures as training, improved coordination wT
ith private firms, public service
employment, youth programs, im proved labor market inform ation, antidis­
crim ination enforcement, and lim itations on the entry o f undocumented workers.
The general policies must be aimed at im proving the em ployability o f a variety
o f specific groups that have high unemployment rates. The Labor Department
w ill continue to propose changes in targeting requirements to enable us to
reach those groups with the programs now administered.
W e expect unemployment rate differences to persist unless specific policies
are adopted whose goal is to reduce the differentials. The differences w ill create
bottlenecks in the attempt to reach fou r percent unemployment. For example,
we estimate that at an aggregate unemployment rate o f 4 % percent in 1983
with an unchanged labor market structure, the black unemployment rate would
still be 130 percent larger than the w hite r a t e ; the adult fem ale unemployment
rate would still be 40 percent larger than the adult male rate, and the teenage
unemployment rate would still be 200 percent larger than the adult rate.
These wide differences in employment experience are unacceptable, as is the
overall unemployment rate of 4% percent reported in that table. I f the
differentials can be reduced, the overall unemployment rate can be reduced
further without adding to inflationary pressures.
Programs aimed at reducing black/w h ite, m ale/fem ale, and y ou th /adu lt
differentials in unemployment rates can have a significant im pact on the
overall unemployment rate. A series o f program s w hich halved these differentials
w ould reduce the unemployment rate by m ore than one point.
In the many discussions which have been held concerning the achievability
o f the Humphrey-Hawkins goal, concern has been raised that inflation may
begin to accelerate before we reach 4 percent unemployment. Clearly, the point
at which inflation begins to accelerate is a significant determinant o f the m ix
between macro stimulus and structural program s w hich we use to achieve
the Humphrey-Hawkins goal. My own feeling is that at the present time we
need structural programs large enough to reduce unemployment by about three
quarters o f a million people in order to achieve the Humphrey-Hawkins goal
by 1983. Implicit in this number is my judgm ent that w e can get to a 4%
percent unemployment rate using m acroeconom ic policy tools w ithout causing
inflation to accelerate. Reducing unemployment by three quarters o f a million
w ill require large scale, successful skill training and transitional public service
employment programs, substantially targeted in the intervening years on low
income and minority workers. Adm inistration proposals in the area o f w elfare
reform and the CETA reauthorization are intended to accomplish this w ith
tighter targeting, strong emphasis on training and placement in the private
sector, and over one and a quarter million public service jobs by 1983.
However, some concern has been expressed that w e may not be able to get
as low as 4% percent unemployment before inflation begins to accelerate. In




182
the event that inflation should begin to accelerate at higher levels o f unemploy­
ment, I see tw o choices. First, w e can permit the unemployment rate to remain
at a higher level. Second, w e can pursue more vigorously those structural
program s aimed at reducing unemployment differentials. Given our recent
success w ith the C E TA public service employment and training programs, I
feel encouraged that w e can achieve the Humphrey-Hawkins goal even if
m acroeconom ic policy is able to do no better than an unemployment rate o f
5 percent. H ow ever, there are circumstances that could arise which would
w arrant changing the Humphrey-Hawkins goals. The bill now provides this
flexibility.
IN F L A T IO N

I firmly believe that the appropriate combination o f structural and
monetary and fiscal policies can achieve a 4 percent unemployment rate in
1983 without causing any increase in the rate o f inflation.
However, considerable concern has been raised that the inflation goal o f the
Hum phrey-H awkins bill is not stated strongly enough. In fact, there have been
several suggestions that a num erical goal should be incorporated in the bill.
W hile I believe that inflation is a serious problem, I do not believe that the
incorporation o f a num erical goal is the appropriate way to deal with this
problem. In order to set out specific numerical goals fo r public policy, I
believe w e must satisfy tw o criteria. W e must understand the causes of changes
in the goal that w e set forth. W e must also have some control over the
principal causes o f these changes. I believe that inflation policy satisfies
neither o f these tw o criteria.
The mechanism by w hich inflation is transmitted through the economy is
nowhere near as w ell understood as the mechanisms affecting unemployment.
W h ile w e can, w ithin fa irly narrow limits, determine how much employment
w ill be generated by a specific fiscal or monetary policy, we do not enjoy the
same level o f success w ith predicting the impact o f policies designed to counter­
act inflation. Thus, w hile w e can set forth aggregate levels o f growth and the
appropriate fiscal policy to achieve this level o f growth and be pretty sure o f
com ing close to a specified unemployment target, we cannot set forth in
anywhere near as precise a fashion the level o f or type o f policies appropriate
to reduce inflation, by say, one percentage point a year.
Secondly, as events in the recent past in both the energy and food sectors
have shown, w e are particularly subject to developments outside the domestic
econom y in the area o f inflation. Thus, the large elements o f uncertainty which
must attach to both fu tu re energy and food prices would become crucially
im portant determinants o f the overall economic policy and hence o f the rate
o f unemployment. Thus, I feel that until such time as the state-of-the-art
provides policym akers with appropriate tools to meet an inflation target, it
would be premature to include a numerical inflation goal in the HumphreyH aw kins legislation.
Let me at this point turn to an issue that has interested the chairman in the
past. That is the issue o f the link between reduced inflation and low er
unemployment. I believe that the attainment o f fu ll employment would reduce
some inflationary pressures. I see the follow ing forces operating to reduce
inflation.
First, high rates o f unemployment cause a drain on the unemployment and
social security trust funds. H igh unemployment causes outlays to rise and
revenues to fall. W e then raise payroll taxes and thereby increase unit labor
costs. W e estimate the drain on the trust funds increases by fou r tenths o f a
percent o f total w ages and salaries fo r each percentage point increase in the
unemployment rate. F or example, State funded unemployment fund payouts
grew from 4 billion in 1973 to nearly 13 billion in 1975. Many State unemploy­
ment systems are still in trouble as a result.
Second, State and local sales tax receipts fa ll as unemployment rises. A
natural response to this decline is to raise tax rates, including sales taxes which
are part o f the cost o f living. W hile State and local tax rates have not risen
since 1975, there has been extensive assistance to localities through the
econom ic stimulus package. W e are currently looking at the fiscal impacts o f
this assistance as part o f our evaluation of the economic stimulus package.




183
Third, as is well known, increasing unemployment is associated with
productivity declines and hence higher costs. D uring the 11 quarters after the
peak in the first quarter o f 1973, productivity averaged 2.6 percent below its
highest level, implying unit labor costs w ere 2.6% higher over this period.
Further, lay offs often result in a demand fo r productivity low ering workrule protections.
Finally, overhead costs from idle capital facilities must eventually be
recovered. As output declined from norm al levels to the trough in 1975, we
estimate that overhead costs per unit o f output rose more than 20 percent.
W hile firms clearly absorb some o f this increase, increased prices w ill occur
w herever firms have sufficient market power. Overhead costs per unit o f output
are still 2.4 percent above those which w e w ould have at 85 percent o f capacity.
Since these factors do not affect prices on an im m ediate or regular basis,
they are not given their proper w eight in the simple statistical relations used
to establish a link between low rates o f unemployment and high rates o f
inflation.
There are reasons to expect inflation to accelerate as the economy nears fu ll
employment. Shortages o f particular kinds o f labor or productive facilities arise
and prices rise to alleviate the shortages. In the labor market, shortages fo r
skilled workers can arise before all o f the unskilled workers have found jobs.
These shortages, often specific to certain regions, occupations, or industries,
cause wage pressure to increase well before fu ll employment is reached.
A long recession can make this problem worse. An extended period o f high
unemployment— like the one we have been in— can cause few er w orkers to
accumulate needed skills. Opportunities fo r younger wrorkers to gain experience
are necessarily limited in a recession. Shortages o f skilled and experienced
w orkers are, therefore, more likely in the subsequent recovery and these
shortages are as much the result o f high unemployment rates in the recession
as they are of low unemployment rates in the recovery. Continued high levels
o f employment w ill expand the supply o f skilled labor, thus reducing w age
pressure and offering wider opportunities to those not now enjoying access to
good jobs. Our structural programs should continue to play a m ajor role in
this movement to a skilled labor force.
CO N C LU SIO N

I am optimistic that we can do better than 4 percent in the long run. Our
best estimates, however, indicate that the 4 percent goal w ill provide quite a
challenge. W e know that our structural program s wrill have to perform better
than before if this goal is to be reached, that w e w ill have to tighten up
further on antidiscrimination programs, and that w e w ill have to reduce the
illegal flow of easily exploited low w age workers from abroad.
W hile the goal provides a challenge, it is not beyond our reach. It is a goal
w e are committed to achieving because it is a goal w e truly believe is im portant.
I would be happy to answer any questions.
T A B L E 1 .— U N E M P L O Y M E N T R A T E S F O R V A R IO U S D E M O G R A P H IC G R O U P S
A p ril 1978
Rate
Tota l, 16 years and o v e r ................................................................................... .......................................................
W hite:
To ta l............................................................................................................................................__________________
M en, 20 years and over............................................................................................. ........................ ..............................
W omen, 20 years and other.................................................................................. ______ ____________
Both sexes, 16-19 years................................................................. .......................... ______ ____________
Black and other:
T o t a l . . . ............................................................................................................................... .......................................................
M en, 20 years and o v e r . . . ......................................................... ...........................__________________
Women, 20 years and over..................................................................................... .......................................................
Both sexes, 16-19 years............
..........
............................. .....................................................

N um ber
(000 om itted)

6 .0

5,983

5 .2
3 .6
5 .1
1 4 .6

4 ,55 9
1 ,6 9 6
1 ,6 4 0
1 ,2 2 3

1 1 .8
8 .8
1 0 .5
35 .3

1 ,3 9 8
501
539
358

N ote .—Table I is taken from the Bureau of Labor Statistics A pril 1978 release on the unem ploym ent situation,




184
T A B L E 2 .— H Y P O T H E T I C A L U N E M P L O Y M E N T R A T E S F O R V A R IO U S D E M O G R A P H IC G R O U P S IN 1983'

Rate
4 .7 5

5 ,2 9 2

3 .0
4 .1
10 .9

1,5091 ,6 0 1
901

7 .0
9 .3
2 1 .7

Total, 16 yr and ove r............................................................................... — ........................................................
W hite:
M en, 20 yr and over ................................................................................ ............. ............ ............................................
W omen, 20 yr and other....................................................................................... .......................................................
Both sexes, 16 -19 y r . ____ _______________________ _ __________________
Black and other:
Men 20 yr and o ve r.......................................................................................................................................................
W omen, 20 yr and ove r_____ ___________________ ____ ............... ......................................
Both sexes, 16 -19 y r __________________________ ____ ............... ........................................

N um ber
(000 om itted)

4 47
591
243-

1 Assum ing an overall unem ploym ent rate of 4 % pet and no change in the historical structure.
N o te : Table 2 gives the simulated distribution of unemployment rates by demographic group if macroeconomic policy
succeeds in reducing the overall unem ploym ent rates to 4 % pet. The simulation procedure uses the average relation
over the business cycle from 1954 to 19 77 between the unemployment rates for various demographic groups and ( 1 ) the'
unem ploym ent rate for males between 25 and 55 and (2 ) the fraction of the population 16 and over which is between
16 and 19. This is the same procedure followed by Michael Wachter in "T h e Changing Cyclical Responsiveness of Wage
In fla tio n ,” Brookings Papers on Economic A ctiv ity, 1 9 7 6 :1 , pp. 11 5 -1 6 7

The C h a ir m a n . Thank you, Secretary Marshall.
Chairman Schultze.
STATEMENT OF CHARLES I. SCHULTZE, CHAIRMAN,
PRESIDENT’S COUNCIL OF ECONOMIC ADVISORS
Mr. S c h u ltze . Thank you, Mr. Chairman. I have a statement which
I would request be put in the record and I shall excise freely in order
to speed the time.
[Complete statement follows:]
T e s t im o n y

of

C h a r l e s L . S c h u l t z e , C h a i r m a n , C o u n c il

of

E c o n o m ic A d v is o r s

Mr. Chairman, I am pleased to appear before this Committee in support o f
S. 50, The Full Em ploym ent and Balanced Growth Act. As noted by the Presi­
dent in his State o f the Union Message, this Administration supports early
passage o f the Hum phrey-Hawkins bill.
The Full Em ployment and Balanced Growth bill accomplishes fou r m aj6r
g o a ls :
It reaffirms and strengthens our national purpose of providing job oppor­
tunities fo r all those who are able and willing to w o r k ;
It sets forth a national policy o f achieving reasonable price sta b ility ;
It explicitly recognizes the need to combine overall fiscal and monetary meas­
ures w ith structural econom ic programs and reform s;
It substantially im proves the procedures by which national econom ic policy
is form ulated and coordinated.
THE

FU LL

EM PLOYM EN T

AND

BALANCED G RO W TH ACT AN D T H E E M P L O Y M E N T A C T
OF 1 9 4 6

The Hum phrey-Hawkins bill modifies and extends the general principles o f
the Em ployment A ct o f 1946. T h a t act, for the first time, charged the Federal
Government w ith responsibility to assure satisfactory perform ance o f our na­
tional economy. The broad econom ic objectives of maximum employment, pro­
duction, and purchasing pow er enunciated in that act have served as useful
guidelines fo r designing overall economic policy during the past 30 years. A l­
though the Em ployment Act, wisely, did not enact particular program s or
approaches into law, it did play an important role in ensuring that the eco­
nom ic perform ance o f our nation in the decades after the second w orld w ar
was vastly superior to that o f earlier periods.
In recent years, however, our nation, along with all the other industrial
countries o f the world, has been afflicted with the simultaneous appearance o f
high unemployment and persistently high levels o f inflation. Structural unem­
ployment am ong teenagers and minority groups has grown to serious propor­




185
tions. And a significant decline in the rate o f productivity growth has reduced
the growth of our living standards.
The table below summarizes the inflation, unemployment, and grow th picture
during the past 30 years. A fter the im m ediate econom ic adjustments from the
second w orld war, the average perform ance o f our econom y— in terms o f un­
employment, inflation, and rising living standards— w hile fa r from perfect w as
on the whole quite good. The period o f our heavy involvem ent in the Vietnam
war saw a significant rise in the rate o f inflation, but a maintenance o f rela­
tively low unemployment rates. Since 1972, however, both the rate o f inflation
and the rate of unemployment have averaged fa r above the earlier postw ar
years. W e are making progress in reducing unemployment, but the rate o f
inflation has been persistently running in the 6 to 6y2 percent range fo r over
tw o years.
I N F L A T I O N A N D U N E M P L O Y M E N T 19 4 8 -77
[In percent]

Average annual
inflation rate i

Average unem ­
ploym ent rate

Real economic
growth per
capita 2‘

1 .7
4 .3
7 .7

4 .8
4 .6
6 .7

2 .3
2 .0
>
1 .9

1948-1966......... ...................................................... .......................- ..................................................
1 9 6 7 -1 9 7 2 ............................................................. ...............................................................................
19 7 3 -1 9 7 7 .................................................................................................................................................
1 Change in consumer price index.
2 Real gross national product growth per capita.

Structural unemployment has been a problem for a long time but its seriousness
has grown in recent years. In the absence of measures to deal specifically w ith
structural unemployment problems, a return to an overall econom ic perform ance
similar to that which characterized the earlier postwar years would still leave
unemployment at intolerably high rates am ong some groups, and most particu­
larly among minority youth.
U N E M P L O Y M E N T R A T E S B Y D E M O G R A P H IC G R O U P S
[In percent]
1956
T o ta l............................ .......................................................................................
W hite:
Males 20 yr and over................................................................................
Females 20 yr and over...........................................................................
Teenagers............ ............................ ............................................................. __
Black and other:
Males 20 yr and over.................................................................................
Females 20 yr and over........................................................................
Teenagers............ ............................................................................................ ...

1965

1973 III

1978 F

4 .2

4 .6

4 .8

6 .2

2.7
3.9
9.1

2.6
4.2
12.3

2.8
4.4
12.2

3.9
5.1
14.4

6.7
9.4
16.6

5.4
9.0
24.6

6.0
8.1
31.5

9.0
10.8
38.6

N O T E .— Data for 1956 and 1965 adjusted for change in definitions in 196 7. Quarterly data are seasonally adjusted.

W hile the Employment A ct of 1946 has served the nation well, the problem s
that now confront us are not the same as they w ere when that act w as passed.
The time has therefore come both to reaffirm our commitment to stable econom ic
prosperity and to devise a new set o f procedures to reach this objective in
today’s economic circumstances.
The Full Employment and Balanced Growth A ct updates the Employment A ct
o f 1946 in ways that respond to these needs. Its focus is not on enacting in to
law specific programmatic measures. Rather, the bill establishes a long-term
fram ew ork for economic policy making that should serve us fo r the decades
ahead. It sets forth a process in w hich policies designed to meet the needs o f
the immediate future are formulated w ithin the context o f a longer-term eco­
nomic strategy. Furthermore, the bill emphasizes the im portance o f adopting
specific policies to deal with the structure o f the economy as w ell as overall
monetary and fiscal policies to deal w ith the management o f aggregate demand.




186
In its deliberations on this bill, I urge the Congress to keep in mind that
it is establishing a fram ew ork fo r economic policy making, under which we can
deal not only w ith the problem s and circumstances of today but with the d if­
ferent problem s and changed conditions o f tomorrow. The bill now before you
does th a t; it is a broad and flexible instrument fo r current and future policy
making.
The Full Em ploym ent and Balanced Growth A ct that you are currently con­
sidering has evolved over time from earlier versions. Last year, lengthy dis­
cussions between the Adm inistration and the Congressional sponsors contributed
to that evolution. W e believe the time and effort were w ell spent. Those dis­
cussions resulted in a number o f substantial improvements in the legislation.
The A dm inistration fu lly supports the bill now before you.
EC O N O M IC GOALS AN D T H E P O LIC Y M A K E R

The heart o f the Humphrey-Hawkins bill is a new set o f procedures fo r
establishing and review ing econom ic goals and policies in w hich the President,
the Congress and the Federal Reserve all participate.
The President w ould be required to enunciate explicit short-term (2-year)
econom ic goals fo r employment, unemployment, production, real income, and
productivity, and to recom mend the fiscal policies necessary to achieve them.
H e would also be required to set forth medium-term (5-year) goals fo r the
same econom ic variables and present projections o f Federal receipts and out­
lays consistent w ith them. In the first Economic Report o f the President sub­
m itted under this bill, the President would be required to include the goal o f
reducing the overall unemployment rate to not more than 4 percent within a
5-year period.
The Congress w ould review the President’s economic goals and policy recom­
mendations, and adopt its own set o f goals and policies, which may or may not
coincide w ith those o f the President. The Administration has not made recom­
mendations on the specific procedures fo r Congressional review, because this is
a m atter fo r the Congress to decide itself. Nevertheless, w e feel strongly that
Congressional deliberations and conclusions on economic goals should be closely
integrated w ith the new procedures in the Congressional Budget A ct o f 1974.
B oth the Congress and the Adm inistration should be subject to the same dis­
cipline— namely, that econom ic objectives and budgetary policies should be
established on a mutually consistent basis. W ithout that discipline o f con­
sistency, there is substantial danger that the establishment o f economic goals
w ould become meaningless, and fa il to accomplish the purpose intended in the
hill.
The Federal Reserve w ould be required, under this bill, to submit to the
Congress a report on its intended monetary policies, and to explain the rela­
tionship between those policies and the President’s short-term goals. This pro­
vision goes som ewhat beyond existing reporting procedures, but is consistent
w ith the recent efforts o f the Congress to monitor the course o f monetary policy
and to im prove the coordination o f monetary and fiscal policies.
Let me emphasize that the bill does not call fo r review or oversight by the
Executive Branch o f the Federal Reserve’s policies. The monetary authority
w ould continue to be responsible to the Congress and to the Congress alone.
The independence o f the Federal Reserve System from the Executive Branch
o f government, an arrangem ent which has served our nation well, w ould be
preserved.
This process o f placing econom ic goals and proposed policies form ally on the
record serves several im portant purposes. The Congress and the public would
be regularly inform ed o f the Adm inistration’s economic objectives, and the
means fo r pursuing them w ould be clearly identified. Setting explicit goals also
disciplines the form ulation and execution o f policies, and creates a system o f
early w arning signals fo r midcourse policy adjustments. Moreover, the require­
ment to establish econom ic goals fo r a 5-year time horizon w ill focu s attention
on the longer-term im plications o f short-run policies. Thus we are more likely
to avoid the mistakes that can occur from too short range a view o f the im pli­
cations o f a given course o f policy.




187
T H E PROBLEM OF IN F L A T IO N

In the past, concern has been expressed that the Full Employment and
Balanced Growth A ct may be dangerously inflationary. I can assure you that
the Adm inistration would not endorse this bill if it threatened to aggravate
our inflationary problem. The problem o f inflation is much too serious to be
given second place among our priorities. W e must, and will, give it our fullest
attention. This legislation recognizes the seriousness o f the problem o f inflation.
It also recognizes that the kind o f inflation that troubles our economy today
cannot be dealt with effectively by relying solely on monetary and fiscal policies.
Gaining better c o n tr o lo v e r inflation is absolutely critical, not only fo r its
own sake but because it could threaten the achievement o f high employment
and fu ll prosperity. W e and other nations are still suffering from , the trauma
produced by the marked worsening o f inflation during 1973 and 1974 and the
deep recession that follow ed it.'F e a rs that inflation might be aggravated con­
tinue to inhibit many countries around the world from taking the steps that
are needed to invigorate the jgrowth o f w orld economic activity.
The United States has made significant progress in reducing inflation from
the 12 percent rate o f 1974. But despite significant slack in the economy dur­
ing the course o f the, recovery— with unemployment rates ranging between 6%
and 9 percent— the underlying momentum o f inflation has not abated. Over the
past six months, prices o f consumer goods and services less food and energy—
a measure o f the underlying trend o f inflationary pressures on the economy—
rose at an annual rate o f 6.6 percent. That is little different from the 6 to 6y2
percent range in which the underlying inflation rate has remained for. almost
three years.
Although considerable slack exists in bur economy today and we are not now
facin g a situation where excess demand is exerting upward pressure on prices,
as we approach higher levels o f employment in the period ahead, the risks w ill
increase that the rate o f inflation may worsen. A significant in crea se;in, the
inflation rate would undermine the confidence o f consumers and businesses and
jeopardize the recovery. Moreover, we would be inhibited from taking the
fiscal and monetary steps necessary to keep the economy grow ing at a pace
consistent with a steady reduction in unemployment. Progress against inflation
is thus absolutely essential to reduce unemployment.
The inflation problem that wT face today has tw o distinct aspects. W e need,
e
on the one hand, to pursue policies that w ill avoid a worsening o f inflation as
we regain high employment. And we must take steps now to begin unwinding
from the high rate o f inflation that we have inherited from the past.
The government can, by follow ing prudent fiscal and monetary policies, en­
sure that inflationary pressures are not increased due to excess aggregate
demand when the economy returns to high employment. The HumphreyHawkins bill recognizes that coordinated use o f fiscal and monetary policies
has a vital role to play in dealing w ith inflation.
A second important step is to ensure a healthy growth in investment. W e
must promote an expansion o f industrial capacity rapid enough to prevent
shortages and bottlenecks in individual industries as w e reach the higher levels
o f output and employment called fo r by this bill. And w e must also seek to
reverse the recent slowdown in the growth or productivity. The bill recognizes
this fact, and requires the President to recommend, as appropriate, policies and
programs to increase the rate o f capital form ation.
Third, a successful attack on the structural sources o f unemployment also is
essential to reduce the chances o f higher inflation rates in the future. This,
too, is fully recognized in the Full Employment and Balanced Growth Act.
In addition to measures that avoid any worsening o f inflation, however, we
must take steps now to begin unwinding the high rate o f inflation that we have
inherited from the past. The current inflation has been underway fo r more
than a decade, and is now deeply entrenched in the process o f setting wages
and prices. It cannot be brought to a halt by governmental actions alone. Nor
can it be eliminated through the action o f any one group o f w orkers or busi­
nesses. There is no easy w ay out o f the dilemma in which w e find ourselves,
but some effort must; clearly be made. I believe the President's program fo r
voluntary deceleration o f wage and price increases offers the best chance fo r

30 - 454— 78------------13




188
success in resolving this very difficult problem. It Is a fa ir and flexible pro­
posal. I f it succeeds in accomplishing a gradual reduction in inflation, as I
believe it will, our chances o f sustaining economic growth w ill be improved, and
the risk o f new inflation reduced.
The Humphrey-Hawkins bill contains a fa r more explicit recognition that
inflation is a m ajor national problem than did the Employment A ct o f 1946.
That earlier act required the Federal Government to promote “ maximum pur­
chasing power,” but left the meaning o f the phrase ambiguous. This bill ex­
plicitly identifies inflation as a m ajor national problem and establishes the goal
o f reasonable price stability as a high priority objective o f national policy.
The bill explicitly requires the President to recommend macroeconomic poli­
cies “ to achieve reasonable price stability as rapidly as feasible.” Furthermore,
the potential conflict between low rates o f unemployment and inflation is
im plicitly recognized; the bill specifies that in choosing policies to achieve these
tw o goals, “ those means which are mutually reinforcing shall be used to the
extent practicable.” Also, the bill provides the President with the fle x ib ilit y after three years— to m odify his goal fo r reducing unemployment if he finds
it necessary to do so.
At the same time, the bill recognizes that the rate o f inflation is increas­
ingly unresponsive to widespread unemployment and idle capacity, and that
overall monetary and fiscal policies alone are not able to bring under control
the kind o f inflation we have today. The bill recommends that programs and
policies be developed which directly improve the structure and functioning o f
individual markets. Included among such measures are an early-warning sys­
tem to detect emerging capacity problems, stockpiling o f agricultural com­
modities and other critical raw materials, regulatory reform, vigorous enforce­
ment o f the antitrust laws, and the promotion o f labor-management cooperation
in efforts to boost productivity. These steps are consistent with the Adminis­
tration’s views as to the measures needed to cope with the present inflation.
Together with policies to deal with structural employment, they can help us
make progress simultaneously tow ard reducing unemployment and controlling
inflation.
t h e u n e m p l o y m e n t problem

Let me turn next to the goal o f reducing unemployment. The Employment A ct
o f 1946 was concerned principally w ith cyclical unemployment— that is, un­
employment stemming from insufficient aggregate demand. The Full Employ­
ment and Balanced Growth A ct is also concerned with that problem, as it
should be. In addition, however, it addresses the more intractable problem o f
structural unemployment.
The rate o f unemployment, in good times and bad, varies substantially among
different groups in our society. Some kinds o f differentials are understandable
and necessary. Even with plentiful job opportunities, young people are more
likely than others to be changing jobs, searching for a desirable life-time career.
Short spells o f unemployment while engaged in a search fo r better jobs are
not a m ajor social problem, and do not constitute structural unemployment. But
among some groups in our society unemployment rates, even in good times, re­
main unconscionably high. They do not result from the successful search for
better jobs, but represent a m ajor economic and social problem. The problem
exists in a variety o f form s and fo r a number o f reason s: lack o f skills or skills
that have become obsolete; a regional mismatching o f workers' skills with job
requirem ents; wage rigid ities; a job market whose requirements, in terms o f
w orking hours and schedules, are changing too slowly to accommodate the
grow ing number o f married women seeking w ork ; and discrimination against
minorities. There are many groups affected, but as the earlier table showed,
none so much as minority workers, and among them, young people. Moreover,
the problem o f structural unemployment has worsened appreciably in recent
years. A t the trough o f the 1974-75 recession, the unemployment rate for black
males over 20 years o f age and over w as 12.0 percent— 1.8 times as high as the
rate fo r white adult males. This ratio would normally decline in the course o f
a cyclical recovery in economic a ctiv ity ; in fact, however, it has risen. In the
first quarter o f 1978, the unemployment rate fo r black male adults— at 9 per­
cent— was 2% times as high as that fo r white adult males. Still worse, the
unemployment rate fo r black teenagers has shown no improvement at aU dur­
ing the first three years o f *recovery, and still ranges between 35 and 40
percent.




189
Overall monetary and fiscal policies alone cannot deal with the problem o f
structural unemployment. Effective measures to reduce structural unemploy­
ment are absolutely essential to the goal o f controlling inflation as our economy
returns to higher levels o f employment and output. When the overall unemploy­
ment rate declines, at some point the number o f job vacancies begins to exceed
the number o f qualified job seekers. The unemployment rate among experienced
adult male workers drops to very low levels, while unemployment rates among
other groups remain much higher. Instead o f meeting their labor force needs
from among t h e . groups with high unemployment rates, firms compete with
each other to hire from among the group o f older and experienced workers who
are in increasingly short supply. The result is strong upward pressure on wages
and prices, and the emergence o f renewed inflation, even though there are still
very high unemployment rates among many groups in the labor force. Effec­
tive programs to increase job opportunities fo r groups with high unemployment
would greatly reduce the prospects that wage and price increases would begin
to accelerate while the overall unemployment rate w as still unacceptably high.
The Humphrey-Hawkins bill recognizes that monetary and fiscal policies to
deal with aggregate unemployment must be accompanied by structural employ­
ment and training policies that focus directly on groups with chronically high
unemployment. There is no requirement in the bill that any specific program
be introduced, but a number o f programs are recommended to the President
fo r his consideration— including public works projects, public service employ­
ment, countercyclical revenue sharing, and youth employment programs.
The bill also provides fo r establishment o f such additional public and private
nonprofit employment projects as the President determines are needed to meet
the long-term target fo r the unemployment rate. These additional projects may
be created, however, only after an official finding by the President that all other
means o f reducing unemployment are insufficient. Furthermore, new program s
recommended by the President would require specific authorization and fund­
ing by the Congress.
TH E

4

PERCENT U N E M P L O Y M E N T

GOAL A N D

STRU CTU R AL E M P L O Y M E N T

PO LICIES

Achievement o f the 4 percent goal fo r the overall unemployment rate target
by 1983— assuming passage o f the bill in 1978— would imply that actual GNP
would exceed our current estimates o f the nation’s potential output. Therefore,
the actual unemployment rate would lie below the “ benchmark” unemployment
rate on which estimates o f potential output are based.
It is generally believed that during the mid-1950s the overall unemployment
rate could be reduced, to about 5 percent by overall monetary and fiscal poli­
cies before inflationary pressures would begin to appear. A number o f forces
have been at work during the past 20 years to raise this rate. The principal
factor seems to be the shift in the composition o f the labor force toward those
demographic groups— particularly teenagers— with the highest rates o f labor
force turnover and unemployment. This means that the overall rate o f un­
employment corresponding to any degree o f labor market tightness is higher
now than it w as two decades ago.
Given the present structure o f labor markets, it is highly unlikely that a 4
percent unemployment rate could be achieved through aggregate demand poli­
cies alone without at the same time causing increased inflation. But this does
not mean that a 4 percent unemployment rate by 1983 is unachievable. As the
Full Employment and Balanced Growth A ct clearly recognizes, it merely means
that we cannot rely solely on monetary and fiscal measures to get there. Respon­
sible policy requires not that we abandon efforts to reach the 1983 unemploy­
ment goal, but that we work steadily to reduce any potential conflict between
low unemployment and inflation through the development o f structural measures
to improve the functioning o f .markets, especially labor markets.
The task we face is a difficult one. W e have already taken some important
first steps, but much remains to be done.
In 'th e 1977-78 stimulus package, the level o f jobs under the Public Service
Employment program w as increased from 310,000 to 725,000. The program was
also modified to target it more carefully on the longer-term and low-income
unemployed, who are the most likely to be among the structurally unemployed.
The President is proposing to continue this program at the 725,000 job level in
1979.




190
The current public service jobs program is principally countercyclical in
nature, and w ill be stepped down gradually after 1979 as the overall unemploy­
ment rate declines. A more permanent program, designed to provide w ork fo r
1.2 to 1.4 million persons, is part o f the President’s proposed overhaul o f the
nation’s w elfare system. This program is aimed at offering work, rather than
cash welfare, to those o f the nation’s poor who are able to work. The 1979
budget includes a request to fund a 50,000-job program to demonstrate the
feasibility o f the Program fo r Better Jobs and Incomes.
: Special programs’ fo r young people w ere authorized under the Youth Em ­
ployment and Demonstration P rojects A ct enacted by the Congress in 1977.
These projects are aimed at testing a number o f alternative approaches to com­
bine work experience and training fo r young people. In the 1979 budget, we
are requesting funding fo r 166,000 slots in the Y E D P A programs and to in­
crease the Job Carps.
The private sector also has a m ajor role to play in attacking the structural
unemployment problem. Most new jobs w ill be created there. To bring the
structurally unemployed into the mainstream o f the American economy— with
decent jobs and a chance fo r advancement— they must have fu ll access to pri­
vate jobs. The President has sent to the Congress a proposal to provide incen­
tives and to enlist the cooperation o f private industry tow ard increasing the
hiring o f disadvantaged workers. Some $400 million has been set aside in the
1979 budget fo r this new initiative. Also, the Adm inistration has proposed, as
part o f the President’s urban initiative, a new targeted employment tax credit,
ultimately to cost about $ 1 ^ billion, to help provide jo b opportunities to dis­
advantaged young people.
Between now and 1983, w e expect to make significant progress in reducing
structural unemployment. W e do not yet have answers to all the problems,
however. I cannot, therefore, assure you that w e w ill be able to achieve a
4 percent unemployment rate by 1983 w ithout risking more inflation. That is
why the Administration believes it essential that the bill provide the President
with the flexibility he needs to m odify his goals fo r the overall unemployment
rate i f that should be necessary. The bill before you contains that needed
flexibility.
, W e w ill w ork strenuously ourselves, and w ith the Congress— to determine
which structural employment programs work w ell and which do not, to con­
centrate our efforts where they do the most good, to improve the effectiveness
o f existing measures, and to design new ones if needed— in order to attack suc­
cessfully the problem o f structural unemployment, and thereby help meet the
overall unemployment goals o f the bill w ithout setting off inflationary pres­
sures. The bill establishes a difficult set o f goals. B ut it is precisely in striving
to meet difficult goals in a responsible w ay that w e make progress.
CONCLUDING C O M M E N TS

• The Full Employment and Balanced Growth A ct challenges us to make our
economy function better, and proposes a new set o f procedures to help meet
our short- and long-run econom ic objectives. There is a strong commitment
to fu ll em ploym ent; at the same time, the bill places the achievement o f reason­
able price stability on an equal footing with the achievement o f high employ­
ment, and it provides adequate safeguards against policies that ultimately could
prove destructive. Moreover, it relies on existing governmental institutions to
achieve its objectives and does not authorize massive new Federal programs
or impose controls on the economy. And it reaffirms the critical role that a
healthy and dynamic private sector must play in achieving our long-term eco­
nomic goals. It is in the spirit o f the Adm inistration’s econom ic goals as stated
in the Economic Report o f the President.
This new fram ew ork cannot guarantee that our nation's resources w ill always
b e fu lly employed or that the economy w ill always be healthy. But, it should
help identify wT
here the most serious obstacles are and point the way toward
rational solutions." The Adm inistration believes this legislation represents an
important and necessary step bey on d ’.the Employment A ct o f 1946, and we
urge its prompt passage.
'

/-TKq C h a i r m a n . I want to thank both yon gentlemen for excellent
and very powerful, persuasive statements in support of your position.




191
Chairman Schultze, didn’t you previously indicate at least some
reluctance about the Humphrey-Hawkins bill? In fact, did you at
one point oppose it? I ’m not talking about this particular measure.
I realize it’s been modified, but I ’d like to know just what changes or
improvements have been made that has persuaded you to give you its
enthusiastic support now whereas you expressed reluctance in the
past.
.
. .
'
Mr. S chultze . As a matter of fact, earlier, as a private citizen, I
did oppose what I think is the third modification prior to the bill
now before you.
There have been a number of very substantial improvements in
this bill:
First, the bill as it now stands puts inflation control as a major
objective of national policy. The earlier bill did not.
Second, the bill as it now stands does not authorize a number of
largo additional programs. The earlier bill did in some cases and in
other cases required the President within 60 to 90 days to come up
with such proposed authorization.
Third, this bill provides the necessary flexibility to deal with un­
foreseen circumstances in the economy. Among other things, it gives
the President, should it prove necessary, the flexibility to modify his
goals if circumstances should require it. The earlier bill did not.
These I think are the major changes in the bill which make it, I
think, substantially improved and gained my support. ,
The C h a ir m a n . Well, the very first point you make is that this
bill, unlike the previous bills, does provide for a priority for inflation
and for controlling inflation and limiting inflation. I just wonder if
that priority is as effective as you imply. There’s rhetoric in here and
there’s some very substantial suggestions here, but there’s nothing
really that puts inflation on the same basis as unemployment.
Let me point out that we now have a situation in which some of the
balest economists in the country are arguing that we are already
right now today at a point where the reduction of unemployment has
put us close to what some people call full employment and other
people say is beginning to exert pressure in pushing up wages and
pushing up prices.
Dr. Burns, whom we all highly respect, has indicated that the 2.8
percent unemployment level of married men suggests that we may
now be close to full employment. He said that yesterday. George
Parris, whom I ’m sure you admire and respect, said we are already
at a level where employment pressures may be driving up wages and
prices. The polls indicate that four times as many people argue that
inflation is our No. 1 problem as argue that unemployment is our
No. 1 problem today, and yet in this bill we have a specific target for
unemployment— and I think the overwhelming majority of members
of: the Congress and the public would regard that as what the
Humphrey-Hawkins bill really does— and we don’t have that for
inflation.
.
I wonder in the light of that and in view of the way that has been
expressed, to wit, I have suggested as you know a 3 percent inflation
goal to go in tandem with the 4 percent unemployment goal, and I
say “policies to achieve the inflation goal which will be designed so




192
as not to impede the achievement of the unemployment goal.5 That is,
5
the inflation goal can’t be used as an excuse for not meeting the un­
employment goal.
Now what’s wrong with that kind of approach?
Mr. S chultze . Well, let me start first by referring you to Secre­
tary Marshall’s very cogent arguments that the very nature of our
tools to deal with inflation make it much more difficult to set a nu­
merical goal and achieve it than in the case of unemployment. Both
are difficult, but it is substantially more difficult to achieve a specific
numerical goal for inflation.
Let me go on. What is very important is that we continue to push
the rate of inflation down; that we make progress in decelerating
inflation.
The C h a ir m a n . That’s what a goal is for. That’s what a specific
numerical goal is for, so you have benchmarks so you know whether
you’re moving or not.
Mr. S chultze . The bill as now drafted explicitly states reasonable
price stability as a goal and requires the President to set forth his
programs and policies to achieve it.
Let me also note that this is an act which, like the Employment Act
of 1946, is not an act just from now until the year 1983. It is setting
a long term framework for economic policy. Putting a numerical goal
for inflation in the legislation, as opposed to requiring the President
each year to say something about what his goals are, as the bill does,
runs into an incurable dilemma.
No. 1, if you put a number in which is reasonably achievable over
the long term, that number in the short term is going to be looked on
as unrealistic. If, on the other hand, you put a number in which in
the short term may be reachable, then the Congress has placed its
stamp of approval pver the long term on too high a level.
I don’t believe any number ought to be put down as a desirable
number on inflation. I think it is important that we keep trying to
reduce whatever rate of inflation we have but I think there is a real
dilemma in putting a number into this bill.
That does not mean the Congress shouldn’t require the President
each year in his 5-year goals, as the bill does, to say what he is going
to do with regard to reasonable price stability and what his objec­
tives are so that the Congress can evaluate this each year. But putting
a number in a long term piece of legislation, a single number on
inflation, seems to me, in addition to the problems Secretary Marshall
has pointed out, to suffer from that dilemma.
The C h a ir m a n . Let5 see what that language means. The bill as it
s
•passed the House provides a requirement that the President state
short term goals for employment and unemployment, production, real
income, productivity, and prices for each of the next 5 years.
Now the burden will fall upon you, as chairman of the Council of
Economic Advisors, to tell the President the appropriate and con­
sistent goals for these variables for 1979, for 1980, 1981, 1982, and
1983. What goals will you select for unemployment and inflation for
1983 if they are not numerical?
Mr. S chultze . Well, there is a difference, Mr. Chairman. The bill
requires the President to lay out a rolling 5-year plan— each year you
set forth 5-year goals and the next year you come back and add a




193
year and modify in between, depending on circumstances. That is
doable. That is acceptable. That is desirable. That’s a different thing
from stating in the legislation that the President for year “a ” must
?
put in a certain number for inflation.
The C h a ir m a n . Y ou see, as I envison my amendment, it would
enable the President to change the long term inflation goal at the
same time that he might modify his long term unemployment goal.
Mr. S chultze . I understand that, Mr. Chairman. What I ’m saying
is that if you tell the President he must^put down 3 percent for 1983
and have this in a long term piece of legislation, it may be unrealistic
and what we really need to do is make progress. It might turn out
we could make it, but the key thing is to make progress now.
On the other hand, if you put in 3 percent and bless it, this is
saying the Congress thinks 3 percent now is the right number. I ’m
saying what you want is to force the President to set forth his goals,
to state the national policy of achieving reasonable price stability as
rapidly as possible, but not to pin that on a single number because
it is different from unemployment.
The C h a ir m a n . Well, the fact that you require the President to
make that and offer him the opportunity to modify as time goes on
seems to me does give him flexibility. Also, I think it’s clear that we
are sophisticated enough, the people in this country are, to recognize
if you have an embargo on oil, if you have any number of other de­
velopments— a crop failure worldwide for 2 or 3 years— that you’re
going to have inflation, and there’s nothing you can do about it and
prices are just going to go up very high— either that or you’re going
to have a monetary policy that’s going to put you in an incredible
depression.
Let me ask you, Mr. Marshall, you told me that we have the ability
to design programs to achieve the 4 percent unemployment goal in
the Humphrey-Hawkins bill. You said we know where the problems
are and how to deal with them. A t the same time, you said that we
do not know how to solve the inflation problem and that we do not
have a program to reduce inflation.
Now it seems to me that inflation may be more difficult to deal with
because stopping it may require sacrifices from everybody, but it can
be done if we have the will to do it under most circumstances except
under the kind of unusual circumstances I just described— a war
situation or .an international situation that could be devastating or
something of that kind.
Do you believe that appropriate policies to reduce inflation can be
found and implemented?
Secretary M arshall . Yes, I do. I don’t think we can state them
with the same precision, and I think some of them are more uncertain
in their outcome than is the case with unemployment, but I believe
very strongly that we can and must find ways to reduce inflation as
well as unemployment. .
“ The C h a ir m a n . My time is just about up, Mr. Marshall, but before
I yield to Senator Brooke, let me just, say that I think that by putting
a numerical inflation goal there what you. really do is to mandate—
put in the way I have said so you don’t impede progress toward re­
ducing unemployment— you mandate the kind of policies which you
have been calling for. The only way you can achieve this is by train­




194
ing policies and by productivity improvements and by increased
mobility and by restraint on the part of management and labor. Poli­
cies of that kind could give much more force and explicitness and
direction if you have that goal' spelled out as clearly as a matter of
national policy as you have the unemployment goal.
Senator Brooke.
Senator B rooke. Thank you, Mr. Chairman, and thank both of you
for your very excellent statements.
Secretary Marshall, do you see any danger that we might be unduly
raising the level of expectations for the unemployed and the consumer
in this country that we are really going to be able to hold down in­
flation without any mechanism in this bill at all, any machinery for
achieving these goals?
Secretary M arshall . Well, I think there is that danger, but I think
that it’s important to establish goals that we can reach and that it
will take a lot of hard work to achieve both of these objectives.
Senator B rooke. Is the administration prepared to come forth with
some machinery, some mechanisms for achieving these goals if the
Humphrey-Hawkins bill is passed?
Secretary M arshall . I think so. In fact, I think much of the ma­
chinery to achieve these goals is already either proposed or in exis­
tence and that’s one of the major differences between the situation
that we face now and. the situation we faced earlier with respect to
the Humphrey-Hawkins bill. Much of what the earlier versions of
this bill contemplated have already been passed or proposed.
Senator B rooke. N ow the revised version of S. 50 places a good
deal of emphasis on the C ETA program to prepare people for useful,
productive employment in the private sector. Do you think that the
present C E TA superstructure is adequate to cope with the demands
which are likely to be placed upon it by the Humphrey-Hawkins
o-enerated increase in volume?
Secretary M arshall . N o ; I do not believe that it’s currently ade­
quate, but I think that by the time we get more to the 1983 target we
must make it more adequate.
One of our major objectives this year in the Labor Department is
to start that process of first perfecting the system itself, improving
the system itself, and improving the linkages between the public
service employment and training programs and the private sector.
Unless we perfect those linkages it will be very difficult for us to
achieve our objectives and that’s the reason we have assigned it such
high priority.
Another thing that’s important to the achievement of that objective
is welfare reform. In our thinking about how to get to the 4-percent
unemployment target without inflationary pressures, we have placed
great emphasis on those jobs that we hope will be created as a part
of welfare reform.
Senator B rooke. In the main, you’re really talking about the hard­
core unemployed, aren’t you?
Secretary M arshall . Y es;#we are, and of course in the CETA
reauthorization— the other thing I should mention besides targeting
on the private sector— we have got to target most on those people
with the highest rate of unemployment, and on those places with




195
the highest rate of unemployment. This is exactly what we proposed
in the C ETA reauthorization currently before the Congress.
Senator B rooke. But in your very startling statistics and the data
that you gave us in your text this morning it just appears to me,
no matter what programs come out of the Government, that we still
are not making any marked decrease in unemployment in the hard­
core. So these programs are really not reaching the people that we
really have to reach in order to get the reduction we are talking about.
Isn’t that true?
Secretary M arshall . They need to be targeted more in order to
achieve those results, but it is not true that they have not had an
impact. I f you look at-----Senator B rooke. Well, some impact, but not the impact— I think
you have to-------.
Secretary M arshall . I think the public service^ employment pro­
gram— take, for example, the experience we had with the President’s
stimulus program in 1977. During the first half of 1977 black un­
employment was rising while white unemployment was going down.
During the first half of 1977, Vietnam veterans’ unemployment was
rising, while the overall rate was going down. When these programs
went into operation those trends changed dramatically during the
year, black unemployment peaked during the last half of the year and
started declining. Black youth unemployment, for example, was about
40 percent. Now it’s about 35 percent. .
Now if you compare points in time it looks like there’s jno-change,
but if you compare the fact that it was rising and now it’s coming
back down, I think that you get dramatic results.
Senator B rooke. But 35 percent is still an unconscionable rate.
Secretary M arshall . That’s right, but if we can reduce it 5 percent
at points every 6 months between now and 1983 we will do a lot
of reducing.
Senator B rooke. Do you anticipate that?
Secretary M arshall . I think that we will not be able to do it that
dramatically, but I think we can do it, and I think there are a num­
ber of things that we can do to accomplish it. There are only, about
252,000 unemployed black teenagers in the country. W e created more
jobs than that just in the last half of the year in our stimulus
program.
. Senator B rooke. And they all have to go into the public service
jobs. Is there no.possibility of getting them into private sector jobs?
Secretary^M arshall . N o ; I think it’s absolutely essential that they
get .into private sector jobs, and we are .paying every attention to
that, as I mentioned. I f you just get them into public service jobs you
won’t solve the problems, because most of the better jobs are in the
regular economy, and we have to work very hard in establishing the
linkages between the regular economy and our public sector jobs.
The way we do that is to first get the private sector to help us
and that’a the reason we are proposing to do that.
Senator B rooke. Well, I voted for public service, jobs because of
our consistently high'unemployment, but I don’t think that’s the
road we want to travel.
Secretary^ M arshall . I don’t think it is either. I think we need to
get people into training programs so that their skills are improved,




196
and we need to look at the characteristics of the people you have and
try to permit the flexibility in the system to meet the unique problems
that they have. Some young people need programs that make it pos­
sible for them to return to school, for example. Some need programs
to make it possible for them to stay in school. Our Youth Employ­
ment Demonstration Act does that. Some people need remedial edu­
cational work as well as training. The Job Corps does that. W e are
moving to double the size of the Job Corps. We need to establish
better linkages between the educational system and the workplace,
and we are trying to do things to accomplish that, but we also need
to strengthen these linkages between the public programs and the
private sector. .
Senator B rooke. And the permanency of that you can achieve in
private sector jobs as opposed to public service jobs.
Secretary M arshall . Yes.
Senator B rooke. N ow Humphrey-Hawkins at least implicitly con­
templates a return to the good old days we experienced during the
period of 1952 to 1957 when we had a low rate of unemployment and
a low rate of inflation, but do you really feel this is a realistic goal,
or are we really stuck between this tradeoff between inflation and
unemployment?
Secretary M arshall . I believe it’s a realistic goal and I don’t be­
lieve the tradeoff is necessarily a real tradeoff. If, for example, the
structural changes in the economy make it more difficult for us to
reduce unemployment, then it’s clear that we need to take structural
measures to deal with that problem.
So I think the combination of general or macroeconomic policy and
structural policy can deal with the problems that we now face which
are substantially different than the problems we faced in the 1950’s
and 1960’s.
Senator B rooke. Chairman Schultze, your predecessor was here
yesterday, Leon Keyserling, and he argues very persuasively that his
experience under President Truman showed that deficits follow un­
employment as does inflation and if you get rid of high unemploy­
ment rates, large Federal deficits and high rates of inflation will then
take care of themselves.
How would you react to the Keyserling analysis ? It seems to but­
tress the theory behind the Humphrey-Hawkins bill.
Mr. S c hu ltze . Well, I would say first that if you look at the
periods in which we have had very large deficits and very high un­
employment that the major factor causing large deficits is high
unemployment. A t the^ same time, I think it’s also true that you can­
not thereby also state in some sense that you can magically, by push­
ing a button, get low unemployment and wipe out the deficit and
everything will be OK. That is, we also have to work in the measures
we take to promote economic growth, to promote employment so that
we also don’t wind up having overdone it with large deficits and low
unemployment leading us therefore into a potential of inflation. So
I take a mixed view.
It’s clear that the big deficits do come in periods of high unemploy­
ment. I think at the same time we do have to pursue monetary and
fiscal policies so that as we get back to these lower levels of unemploy-




197
ment and higher levels of prosperity, we don’t maintain the same,
kind of deficits driving us^ into inflation.
Let me add one point with respect to the realism of achieving the
goals. I think it’s absolutely unquestionable it’s going to be much
harder to get there than it was in the middle 1950’s and the middle
19G0’s. It’s going to be much harder to get there. The nature of our.
labor force is different. The composition has shifted. There are larger
problems of structural unemployment. So first, yes, it is more difficult.
Second, I think the major point of the Humphrey-Hawkins. bill is
precisely that it realizes it is more difficult and puts#very heavy stress
on structural employment policies to provide incentives to the private
sector to hire not just, quite frankly from the highly experienced work
force, but to dip more into that pool of high unemployment during
periods in which production is expanding. That’s the name of the
game in effect, to redirect those patterns so that we don’t put so much
pressure on bottleneck areas but spread the employment increase
around so everybody does better. And that is going to be difficult but
it is not unachievable and I think it’s a good goal.
Senator B rooke. Thank you. My time has expired.
The C h a ir m a n . Senator Garn.
Senator G a r n . Thank you, Mr. Chairman. I ’m sorry that I was,
unable to be here at the beginning of these sessions, so not to take the
time of the witnesses I would ask unanimous consent that a statement
explaining my opposition to Humphrey-Hawkins be included in the
record.
The C h a ir m a n . Without objection, so ordered.
[Statement of Senator Garn follows as though read:]
STATEMENT OF SENATOR GARN
Senator G a r n . I am in full agreement with the goals of the
Humphrey-Hawkins Bill. I think that everyone would agree that it
ought to be a top priority of our government to work towards the
reduction of the unemployment rate, the furtherance of balanced
growth, and the control of inflation.
Where I, and many of my colleagues disagree, is whether the ap­
proach embodied in Humphrey-Hawkins is the way to achieve those
worthwhile ends.
As we all know, a basic proposition of economics is that “there is
no such thing as a free: lunch.” And I fear that the cost of the “ free
lunch” contemplated in Humphrey-Hawkins far exceeds the value of
the goods delivered. #
.
Humphrey-Hawkins assumes that a major cause of our nation’s
economic ills— particularly unemployment— is the lack of coordinated
planning by agencies of the Federal Government charged with eco­
nomic policy. To remedy this assumed defect, the bill directs plan­
ning and coordination on an unprecedented scale.
I f you begin with the wrong assumption, as I would argue
Humphrey-Hawkins does, then the remedies are likely to be irrelevant
to the problem, or worse, may even compound the problem you seek
to deal with.
Unemployment is not caused by poor planning and coordination in
the Federal Government. It is the result of wrong-headed— and, per-




198
haps, too well-coordinated— Federal programs, which create disincen­
tives to invest in the private sector, drain off vital capital from the
private sector, and generally impede the free market forces essential
to good economic health.
More planning and coordination, particularly if it involves com­
promising the independence of the Federal Eeserve, as HumphreyHawkins contemplates, is likely to compound the problems which have
already been created by deficit spending and interventionist Federal
policies.
Most ironically of all, Humphrey-Hawkins contemplates the formu­
lation of “5-year plans.” One might have hoped that the disastrous
Soviet experience with “5-year plans” would have warned even our
most liberal economists away from such experiments with centraliza­
tion of the economy, particularly when even the Soviets have begun
to move away from rigid planning.
I fear that the goals contemplated in S. 50 are unattainable and
indeed a cruel hoax on our Nation’s poor and unemployed. It is wrong
to raise their hopes only to dash them once more when Congress balks—
as it is likely to do— at huge deficits to finance deadend, makework
projects a few years down the road when the economic planning and
coordination contemplated in Humphrey-Hawkins shows its bank­
ruptcy.
J
Secretary Marshall, I ’m concerned particularly along the line that
my distinguished colleague from Massachusetts was pursuing, about
public service employment versus private.
Do you have any facts or figures that you have accumulated to
show that public service jobs have led to private employment?
Secretary M arshall . Yes. About 41 percent of those who were in
public service employment between January and June 1975 and who
are now employed are employed in the private sector. W e think that—
and I am .confident that the experience we have had in the past is
riot necessarily predictive of what we can do. I think at least during
this past year when I was^ involved in it, we were so busy building
up the programs that we didn’t give complete attention, nor the kind
ol; attention that we are now giving, to perfecting the linkages and
improving the movement of people into the private sector.
Now, some of our programs were mainly private sector programs
and those have worked reasonably well during the year. I think we
need to do much more with that. Our main defect, I think, has not
been our inability to get the help of the business community at the
national level. The real problem has been improving the linkages
between public service. employment and training programs and the
private sector at the local level. That’s the place I think we need to
give the greatest attention. .
Senator G a r n . I s it possible, not only for the last year, for you
and the Department to go back and supply us with specific figures
on this transfer over a period of several years? I would appreciate it
if you could do that for the record.
Secretary M arshall . W e are preparing a report in this area and
will make it available to you as soon as it is completed.
Senator G ar n . O f course, implied in your statement when you say
one-third have, that means that two-thirds have not.
Secretary M arshall . That’s right.




199
; Senator G a r n . That becomes a very expensive proposition. The
reason I ’m interested in more overall statistics, I look back at my
own situation when I was mayor of Salt Lake City and saw very
little transfer,to private employment, and as long as the programs
were continued to be enacted we hired people and most of them were
carried as long as the Federal funds were there and when they were
not, depending on the whims of Congress, the jobs were gone and the
people were back on the unemployment rolls; plus a lot of other
problems that were created for cities in trying to create these kinds
of jobs because of the rules that went with them. Somebody had to
be on unemployment for 30 days to qualify. So we had people com­
ing in on our work force requesting to be taken off the payroll for
30 days so they could get one of these public service type .jobs and
there was pressure on local mayors and city councils to do that very
thing because of having difficult financial conditions of keeping the
present work force on, and so it didn’t make much sense to hire
public service people at the same time out of your general fund
budget you were having to lay people off and that happened in a lot
of cities around this country. I was an officer of the National League
of Cities, so we would talk about this problem of public service jobs.
So not only if your statistics are correct two-thirds did not go,
there were just a lot of other problems that still have not been solved
and it made no sense to lay people off so you could rehire them and
pay them from a different fund, but that was done. It was done, in a
lot of cities. So you were getting no decrease in unemployment what­
soever by the public service jobs. You were merely transferring them
from a local property tax funded payroll to a federally funded
program.
This is one of the reasons I have such difficulty with these Federal
programs. For 7 years I worked with them. I finally reached a point
where I turned down a half a million dollars of public service jobs
the last year I was mayor, because I didn’t want to get caught up in
that any more. I was continually trapped. The new budget je a r came
and the.funds ended and what did you do? Did you fund it from
local funds or did you terminate them? That was the choice and I
didn’t want to get in that bind. So I said give that $500,000,to.some­
body else; we don’t want it.
Unless we start to address some of those problems— I don’t dis­
agree with the goals, with what Humphrey-Hawkins is trying, to
accomplish at all. I don’t know how anybody could. I really have a
very difficult time seeing how coming up with the idea to plan arid
coordinate and set goals is going to solve the massive problems we
have had just in this public service area.
Can you respond to what has been done in the last year to try
and solve that public service job problem—not just the lack of trans­
fer, but the lack of cutting down unemployment even with the very
expensive public service jobs?
•Secretary M arshall . Yes. We have had the same concerns that you
expressed about substitution and we tried initially— and the evidence
indicates that we had some success— with the stimulus program in
reducing substitution— that is, reducing the use of these programs
for regular local government employment. W e have done a number
of things in the CETA reauthorization to reduce that further.




200

There was a study by Richard Nathan at the Brookings Institution
looking at that particular question. His estimate was that in the
programs before the stimulus program, substitution was about 20
percent. In the stimulus program it was 8 percent. So if his study is
correct, that indicates that we were able to do some immediate things
in the stimulus program, like trying to emphasize more projects
.rather than letting the local communities do whatever they wanted
to with the resources, that reduced substitution. W e have in the
CETA reauthorization tried to tighten that up even more through a
number of measures: one key thing is to try to emphasize the private
.sector— either the private profitmaking sector or the private nonprofitmaking sector— because the more we can encourage the system
to use the private nonprofits, the more you minimize substitution.
One of the reasons that prime sponsors didn’t try to get people out
of the public service employment position and into the private sector
is that there was no requirement to do that. W e have proposed in the
reauthorization a definite time limit on how long anybody can spend
in the public service employment. Also fairly stringent limitations
have been proposed on the extent of supplementation by local units
of government of the wages of people who are in the CETA pro­
gram. I f you permit completely open-ended supplementation, then
you’re likely to encourage substitution. W e are doing other things
also to offer an incentive for moving people into the private sector.
Such a private sector move is an integral part of the President’s wel'fare reform proposals, thus, there are lower earnings in the public
service jobs than in the private sector jobs. W e are trying also to
give employers incentive to hire people through targeted job tax
credits. Now we have tried to do all those things and I ’d. be glad
to give you our thinking about it and give you some statistics and
information on what we have tried to do to tighten the program up
as well as just enforce the law. Much of what you’re talking about
was illegal substitution, and I have created in my office an Office of
Special Investigations to enforce the law. W e have required restitu­
tion of funds by local units of government that did not carry out
the laws as Congress intended.
Now I think all these things will be hard for us to do, but I think
we can do it and I think that ,we can see how to do it and we will be
'glad to share at least on paper the thinking that we have tried to do.
[The following was received from the Department of Labor for the
record:]
F is c a l S u b s t it u t io n

in

PSE

P rograms

Concern over the extent o f fiscal substitution in .th e Department's PSE pro­
grams has been widespread. It first arose shortly after the implementation o f
the Emergency Employment A ct in 1971 and has been directed at the CETAbased programs as well. In recent months, questions about substitution have
come up in hearings on CETA reauthorization, W elfare Reform , and HumphreyHawkins.
. The worry over substitution makes a great deal o f sense given that the com­
bined enrollment in CETA Titles I I and V I has recently surpassed the 725,000
level where it w ill remain through the end o f F Y 1979 under the President's
budget request. I f substitution is large and pervasive in the program, then much
o f the $6.3 Billion requested fo r F Y 1979 might be used inefficiently since State
and local governments w ill simply be using these funds to perform activities
and to hire workers which they would have done anyway.




201

At the same time, recent evidence suggests that the extent o f true fiscal sub­
stitution has been overstated and that in any event it is a problem which can
be controlled and limited effectively through relatively simple design features.
T H E N A TU R E OF S U B S TITU TIO N

The main objective o f a PSE program is to provide employment which would
not have otherwise existed in both the locality and the nation as a whole.
There are two basic ways in which this direct job creation through PSE takes
place. They a re:
Program Expansion or Addition: Personnel are hired, in projects or other­
wise, to expand existing programs and services or to add new ones which would
not have been possible in the absence o f the PSE funds.
Program M aintenance: Personnel are hired to maintain existing programs
and services in the locality which would have been either curtailed or elimin­
ated entirely in the absence o f the PSE funds.
The first is easier to visualize as actual job creation than the secon d; how ­
ever, in the case o f program maintenance despite the fa ct that measured em­
ployment fails to rise, direct job creation has occurred. The point o f reference
is the decline in employment which would have taken place in the program ’s
absence.
Budget leakage, or substitution, does occur, o f course, so that not all o f the
monies are spent on direct job creation in this first expenditure round. The
leakage which takes place is partly analogous to households’ saving a portion
o f a personal income tax c u t : Only the part o f the increase in their disposable
income which they in turn consume leads to further economic stimulus. How­
ever, it can be shown that the analogy can only be carried to a point, since in
most cases even the funds which represent substitution or leakage can lead
to job creation at the next or later rounds.
^ .
• In practice, fou r types o f substitution can be identified, all o f which are
contrary to DOL policy. They are the follow ing:^
T ran sfers: Personnel are transferred from positions supported by State or
local funds to those supported directly by Federal PSE monies.
R eh ircs: State or local personnel are laid off so that they can be and are
subsequently rehired in PSE supported positions.
Contract R eduction: Personnel hired with PSE funds are used to internalize
work which had been, or normally would have been, contracted to an outside
organization.
Potential H ires: Personnel hired with PSE funds are those whom the State
or local government would have hired in any event.
These are situations which must be added to the calculations estimating the
net employment impact the various uses to which the funds released through
substitution are put. There are five possible uses for these funds, each o f which
has a different employment effe ct: They a r e :
. Increased Non-employment Purchases: Funds could be used to purchase nonemployment goods or services, such as capital equipment, outside services, etc.
Tax R eduction: Funds could be used fo r reducing taxes, maintaining taxes
at a level lower than they otherwise would have been, or preventing an in­
crease in taxes.
D ebt R edu ction : Funds could be used fo r reducing the amount o f debt out­
standing, either by borrowing less or by increasing debt repayment.
Increased Transfer Paym en ts: Funds could be used to increase transfer pay*
ments either by enhancing existing public assistance or by matching a greater
amount on AFDO or other programs.
. Increased Non-Encumbcred Fund Balances: Released funds could be used to
increase balances on hand which are not committed to any particular use in
order to provide a financial cushion for the locality.
These alternative uses are listed approximately in declining order o f job crea­
tion impact. Increasing non-employment purchases may even have a greater
em ploym ent.im pact per dollar than direct job creation via the PSE program
depending on the sectors to which the purchases flow. Only the last alternative
o f increasing fund balances has no employment generating effect and is thus
completely analogous to the household savings case. The other three alternatives
have roughly the job creation impact o f a Federal income tax cut o f the same
size.




202
E S T IM A T E S OP S U B S T IT U T IO N

There are essentially only tw o basic methods o f estimating job creation or
substitution occurring with a PSE program, and with each the difficult part is
not calculating how many jobs exist with the program, but how many job s
would have existed w ithout it. Each o f these methods— econometrics and field
observation— has its strengths and weaknesses, and the estimates which have
been generated encompass a very broad range as indicated in Table I.
E conom etric M ethods. Most o f the studies o f substitution have relied heavily
on econometrics which attempts to estimate the level o f employment that would
have existed w ithout PSE by first building economic models which lay out all
o f those factors thought to influence the level o f employment, and then con­
trolling fo r the effects o f these factors statistically so that the true influence
o f PSE can be guaged. These studies have taken the form o f cross-sectional
analysis, measuring program effects over many different units o f government at
a point in time, and o f time-series analysis, measuring program effects on units
over time.
Unfortunately, the lim itations to the econom etric analyses to date have been
many. The studies have only estimated program effects on State and local gov­
ernmental units, omitting non-profit organizations which have received funds.
They have not estimated rates o f job creation or substitution fo r the nation
as a whole. There has been little effort given to calculating the employment
effect o f the substituted funds. More importantly, certain o f the lim itations are
inherent in the approach. Even the studies which are o f the highest quality
have difficulty specifying the proper relationships between all o f the factors
thought to influence employment within the model, deciding which o f the factors
are, in fact, the key ones to include, and obtaining data fo r measuring those
variables. The result o f these lim itations is that the findings are generally
imprecise, allow ing a very wide range o f estimates to fa ll within normally ac­
cepted bounds o f confidence: As can be seen from Table I, the estimates o f
substitution after one year, range from a low o f about — 10% to a high o f
120%. And these estimates fa il to provide any inform ation concerning the uses
o f these released funds.
Field Observation. The alternative to econometric estimation is to make use
o f some type o f field observation, either in the form o f mailing out survey
questionnaires to State and local officials or detailing professional observers
fam iliar w ith the local situation as well as w ith the national program pro­
visions. The survey technique entails many problems which the observer tech­
nique corrects for, though certain problems do remain. In particular, main­
taining the field network is very costly, data comparability across sites may be
poor, and the ,subjective judgment o f the observers may vary in ways which
cannot be guessed. A s with the econometric studies, at best only inferences can
be drawn about the net employment effects fo r nation as a whole. However,
despite the difficulties involved, the estimates derived from the field observa­
tion avoid many o f the problems o f the econom etric work, and offer a more
reliable look at the extent o f substitution when properly carried out.
The Brookings Institution study o f PSE, commissioned by The National Com­
mission as Manpower Policy, relied on the field observation method and issued
a preliminary report in February 1978. Their sample o f 42 units nationwide is
heavily weighted in fa v or o f large urban locations. The most serious problem
with the study is its tim eliness: their observations were made in July 1977, at
a time when total enrollment in the program was w ell under 400,000, and fo r
many localities the buildup o f slots and project-type PSE under the Econom ic
Stimulus Package appropriation had scarcely begun, if at all. Of course, it is in
the buildup portion o f the PSE effort that many o f the features designed to
constrain substitution w ere contained.
The Brookings* findings, while tentative, indicate fa r low er rates o f sub­
stitution than the econometric estim ates: the overall rate fo r all units o f
observation ranging from local government to. community based organizations
and including both projects and sustainment PSE w as only 20 percent. As
expected, substitution in project PSE was less than in sustainment PSE, 8%
and 21% respectively. And in addition, governmental units under extreme fiscal
pressure experienced fa r less substitution than those under no such pressure
fo r sustainment PSE.
Much o f the difference between the Brookings' estimates— particularly the
much lower overall rate o f substitution— and those from econometric studies




203
can be attributed to the fa ct that (1) nonprofit organizations are included,
and (2) the sample is biased towards the large urban governments which
exhibited a high proportion o f ‘ ‘program maintenance” job creation which
would likely have shown up as substitution in econometric analysis. Fully onethird o f the retained positions in the sample government units were classified
as “ program maintenance” , , and a large share o f this was accounted fo r by the
distressed large cities. However, economic improvement in these areas can
transform program maintenance to substitution.
Unlike the earlier studies the Brookings study also provided a brief look at
how the sample units utilized the released funds. A t the time o f observation
more than two-thirds o f the funds classified as substitution were being used
fo r tax reduction or stabilization, while less than three percent were being used
to build up fund balances. Thus, it appears that, not only w as the rate o f sub­
stitution relatively low generally, but also those funds released through sub­
stitution were having approximately as much stimulative effect on the economy
as a Federal income tax cut.
L IM IT IN G S U B S TITU TIO N

Regulations and Compliance Efforts. The “ maintenance o f effort” regulations
fo r CETA Titles I I and V I prohibit the use o f PSE funds to (1 ) reduce exist­
ing local governmental contracts fo r service (2 ) employ a PSE participant in
a position equivalent to one which is vacant due to a hiring freeze, unless the
freeze resulted from a lack o f funds to sustain staff levels, (3 ) replace cur­
rently employed workers, (4) reduce the wages, hours, or benefits o f existing
workers, or (5 ) substitute PSE jobs fo r existing Federally-assisted employment.
The Department actively reviews prime sponsor plans each year to preclude
substitution, and in addition makes use o f field staff m onitoring and periodic
audits as well.
When substitution appears, tw o types o f sanctions are applied. First, prior
disapproval is exercised to deny funding o f such slots, as in the case o f some
500 positions in FY 1977. Second, funds are disallowed after the fa ct and monies
recovered. In FY 1977 an estimated $1.4 m illion has been questioned fo r dis­
allowance.
A s a practical matter, it is only feasible to curtail substitution through these
administrative measures to a limited extent, in that only the more flagrant vio­
lations are detected. The more subtle infractions are very difficult to detect
without meticulous and extended investigation o f local budgets, an activity pre­
cluded with existing staff levels.
Program D esign Measures. A clear alternative to the administrative control
o f substitution is the utilization o f design features which can effectively lim it
it with a minimum o f administrative effort and red tape. Several recently en­
acted program features as well as some measures proposed in the Adm inistra­
tion’s CETA Reauthorization B ill (H R 11086) illustrate this approach' and
suggest its potential effectiveness.
The 1976 CETA Title V I extension incorporated two provisions in part de­
signed to minimize substitution. The first split PSE into a project and a sus­
tainment portion mandating that program expansion take place in projects
which had a specific objective and a limited duration o f no more than one year.
The Brookings study, while using a narrower definition o f “ projects” and also
dealing w ith the very early stages o f the buildup, found a significant lowering
o f the substitution rate in going from sustainment to project PSE. The second
provision targetted eligibility more narrowly on the disadvantaged. Thus fa r no
evidence o f an effect from this change has been forthcoming.
In Title V I o f H R 11086, the provisions designed to counter substitution
pressures include the fo llo w in g : All PSE must be in p r o je cts; all participants
must be.econom ically disadvantaged; and the supplementation o f wages with
State and local funds is limited to (i) those already being supplemented at
the beginning o f F Y 1979, and (ii) a maximum o f 10% o f the prime sponsor’s
wage bill beyond that amount. These measures should help to constain the
possibilities considerably.
CO N CLU SIO NS

W hile some o f the early studies o f fiscal substitution may have led to the
general belief that PSE funds could result in little net jo b creation, in fa ct
more recent analyses put the situation in a better light. It is now recognized
30-454— 78--- 14




204
that, first the estimates o f the extent o f substitution w ere biased upwards for
numerous reasons, and, second that in most cases even the funds released
through substitution have the effect o f creating job s on balance. In any event,
early findings suggest that it can be lim ited or controlled in a relatively in­
expensive way by designing the program to make use o f special projects or by
curbing wage supplementation.
However, it is equally clear that if not kept in check, substitution can grow
to unmanageable proportions diluting the im pact o f the limited funds the nation
has to spend on employment creation. As the economic situation improves in the
country and in the many localities, the problem must be watched that much
more carefully.
T A B L E I.— E S T IM A T E S O F F IS C A L S U B S T I T U T IO N IN P S E P R O G R A M S

Type of study author
Econometric Studies CrossSectional Analysis:
National Planning A s so c ia tio n ..
Isseman.............................................................
Tim e series analysis:
Johnson-Tom oia....................................
D o ................................................................
D o ................................................................
Brrus-Ham erm esh__________
Proher............................................................
Wield Observation S tu d ie s :.
Brookings Institution......................

Date of
study

P S E program

Tim e
reference

1974 P E P ......................................................... 1 yr--.................
1976 Recalculated N P A ....................
1974
1975
1977
1978
1974
11978

Rate of substitution
(percent)
Estimate

Range

46 - 1 1 to 120.
31 .

P E P .......................................................
P E P .......................................................
P E P / C E T A .......................................
Recalculated
JohnsonTomoia 1977
N o n -P S E data............................... “ Long-run” . . .

49 .
49 ,
58

C E T A ................................................... ■ ( 2)

20

- 9 to 56.
60 to 90.
#8 to 21 *

1 Preliminary findings.
As of Ju ly 1 9 7 7. Some sustainment slots extant from 1 9 7 4 - 7 7 ; other project slots less than two m o.
3 T he 8 pet is for title VI projects, 21 pet for sustainment in titles II and V I.

2

EFFORTS OF T H E D EPARTM EN T OF LABOR TO CONTROL PSE SU B S TITU TIO N

In recognition o f the potential problem o f Federal expenditures replacing
local expenditures when substantial amounts o f funds are devoted to public
service employment, Congress included several provisions in the CBTA legisla­
tion which were meant to prohibit such substitution. These provisions a re:
• Section 20 8(a ) : ‘‘The Secretary shall not provide financial assistance fo r
any program or activity under this title unless he determines, in accordance
with such regulations as he shall prescribe, that the program (A ) w ill result
in an increase in employment opportunities over those opportunities which
would otherwise be available, (B ) w ill not result in the displacement o f cur­
rently employed workers (including partial displacement such as a reduction
in the hours o f nonovertime w ork or wages or employment benefits), (C ) w ill
not impair existing contracts fo r services or result in the substitution o f Fed­
eral fo r other funds in connection with w ork that would otherwise be per­
formed, and (D ) w ill not substitute public service jobs fo r existing federally
assisted jobs.”
Section 7 0 3 (7 ): “ The program w ill not result in the displacement o f em­
ployed workers or impair existing contracts fo r services or result in the sub­
stitution o f Federal fo r other funds in connection with w ork that would other­
wise be perform ed.”
Section 20 5 (c) (7) : The A ct does “ not authorize the hiring o f any person
when any other person is on lay-off from the same or any substantially
equivalent job.”
Section 2 0 5(c) (8) : The CETA prime sponsor shall provide “ assurance that
no funds received under this title w ill be used to hire any persons to fill a
job opening created by the action o f an employer in laying off or terminating
the employment o f any regular employees not supported under this title in
anticipation o f filling the vacancy so created by hiring an employee to be
supported under this title.”
Section 20 5(c) (25) : “ * * * jobs funded under this title are in addition to
those that would be funded by the sponsor in the absence o f assistance under
this Act * * * ” .




205
When title VI was added to CETA, substantially expanding the level o f
public service employment under the Act, these provisions were incorporated
into the new title. However, because increasing Federal expenditures fo r PSE
also increased the potential for substitution, the “ project” concept was introduced
in title VI. The m ajority o f title VI funds were provided to establish public
service employment projects which were to be o f limited duration (on longer
than one year) and which were to involve special activities that were not
liierely an expansion o f ongoing services provided by local governments. Also
Congress intended, as described in the Explanatory Statement o f the Conference
Report, that a substantial portion o f project funds be allocated to private
nonprofit organizations. Both o f these provisions were an attempt to reduce
the likelihood that local governments would curtail their own expenditures for
jobs as the Federal jobs money become available, and both have undoubtedly
helped in this area.
W hile there are legislative prohibitions against substitution and Congress
has made the specific efforts mentioned above to reduce the substitution poten­
tial, there are also some statutory factors which tend to contribute to the prob­
lem. One is the prohibition, included in the 1976 title VI amendments, against
setting any limit on the number o f laid-off State or local government employees
who can be rehired using CETA funds. State and local governments facing
financial deficiencies can therefore lay-off employees and rehire them as public
service employees under CETA with, in effect, no limitation other than the
amount o f PSE funds available to the jurisdiction. Another factor that tends
to contribute to substitution is the requirement that PSE employees must do
work that is normally done by the jurisdiction. That is, local governments are
generally constrained by State law, city charter, etc. to providing certain
services. PSE jobs must, then, be established within the bounds o f what
services and functions already exist in the jurisdiction. Thus, it is often d if­
ficult for local jurisdictions to create PSE jobs in job categories different from
the locally funded positions, and the substitution potential is raised.
Conversely, there are elements o f Federally-funded public service employ­
ment which tend to hold substitution in check. The m ajority o f public service
jobs are in categories such as laborer, park maintenance, other maintenance,
and various types o f “ aide” positions, which involve peripheral rather than
essential services. The percentage o f CETA participants in ongoing municipal
functions such as police, fire and other similar activities is relatively small.
One o f the reasons fo r this circumstance is the CETA limitation on wages
($10,000 per year out o f CETA funds) but another is that peripheral positions
can be terminated without critically disrupting local government functions.
This is particularly true with PSE “ projects,” since they can last no longer
than a year. Thus, it is unlikely that the bulk o f these noncritical jobs are
substituting fo r jobs that the jurisdiction would otherwise fund out o f local
resources. Another check against substitution is the monitoring o f PSE pro­
grams by local public employee unions. Many instances o f potential sub­
stitution are avoided as a result o f unions identifying problems and working
out a resolution at the local level or bringing the problem to the attention o f
the Department o f Labor. Lastly, local elected officials are conscious o f the
adverse political effects o f improperly using CETA funds, both in terms o f
infringing on the employment o f their regular w ork force and o f adverse
publicity in the event o f fiscal penalties for illegal use o f PSE monies, and are
therefore disinclined to construct a program that would lead to such effects.
PROCEDURES T H E D EPARTM EN T H A S IM PLE M E N TE D TO ENFORCE M A IN T E N A N C E OF
EFFORT PR OV ISION S IN CURRENT L A W .

Review and Monitoring Procedures
The ongoing management by the Department o f Labor o f PSE programs in­
cudes a number o f activities which involve the monitoring o f programs for
potential substitution. The initial step in monitoring is the review o f the
grant application prior to implementation and enrollment o f participants. On
the basis o f the review prime sponsors w ill often reqeust determinations by the
Regional Adm inistrator as to whether certain arrangements represent potential
maintenance o f effort violations. This provides a frequent opportunity to
avoid subsequent problems or disallowances. The regulatory complaint system,
by which allegations o f violations o f the act or regulations at the local level are
processed and resolved, brings to our attention cases o f potential violation. The




206
regular monitoring o f all CETA programs includes examination o f maintenance
o f effort, and CETA programs are regularly audited in accordance with the
A ct and the regulations. In addition, all prime sponsor programs are form ally
reviewed and assessed prior to granting funding each fiscal year and each
annual plan is reviewed fo r compliance with the act and regulations prior to
the funding o f the applicant.
<
However, it must be recognized that monitoring the legislative prohibitions
against substitution o f Federal fo r local funds is a difficult task and the de­
termination o f substitution a most elusive one. In order to police “ maintenance
o f effort” it is necessary to analyze virtually all local public expenditures over
a period o f years. This, o f course, is an enormous task, and the Department
o f Labor does not have adequate staff resources to monitor the expenditures o f
all local governments receiving CETA funds. Potential violations o f main­
tenance o f effort most readily come to our attention, and are most easily ex­
amined, when layoffs occur. The Department has issued regulations and estab­
lished procedures fo r responding to situations when layoffs occur where there
are CETA w orkers in jobs substantially the same as those from w hich th e
regular employees are laid off. W e have also issued regulations and pro­
cedures dealing w ith local governments' use o f CETA funds to rehire laid o ff
employees who were form erly on the local payroll. Our regulations on main­
tenance o f effort place the burden o f proof on the local jurisdiction to document
that CETA funds are not being used to substitute fo r other expenditures.
This policy, which is in accordance w ith the CETA legislation and with recom­
mendations o f the General Accounting Office, provides the Department w ith
the tools fo r identifying and correcting problems o f substitution and allow s
us to devote prim ary attention to the management o f all CETA program s.
A ctions Taken by the .Departm ent Including Disallowance o f Costs, as a Result
o f M aintenance o f. E ffort Violations by Prim e Sponsors.
The Department has put substantial effort into reviewing cases where main­
tenance o f effort questions have been identified and in a number o f cases
punitive action has been taken. Preliminary inform ation from a survey o f o u r
regional offices indicates that during the past year, over 100 such cases have
been identified and an extensive amount o f staff time has been devoted to re­
viewing and resolving these cases.
There have been a number o f cases where penalties have been imposed
through the disallowance o f costs. Preliminary inform ation indicates th at
about $1,400,000 has been disallowed as a result o f maintenance o f effort
violations.
The follow ing are examples o f several m ajor maintenance o f effort cases
which regional offices have dealt with over the past tw o years.
Minneapolis, M innesota
The City o f Minneapolis in 1975-76 constructed a municipal parking ramp
using nearly $900,000 in CETA funds to supplement local bond revenues f o r
the project. Subsequent to a complaint by local contractor associations that the
City had previously planned, and had requested bids, to build the parking
facilities entirely from local revenues, E T A investigated- and found the com ­
plaint substantiated. Pursuant to this finding o f a violation o f maintenance o f
effort, the ETA regional office ordered that the city make restitution o f th e
im properly expended CETA funds. The case is now on appeal.
Las Vegas, Nevada
The City o f North Las Yegas laid off seven locally funded employees in its
fire department but retained tw o CETA funded firemen, contrary to the CETA
prohibition against employing CETA personnel when regular workers are laid
off. Las Vegas w as required to pay back approximately $21,000 in disallowed
CETA costs.
Buffalo, New Y ork
Several maintenance o f effort violations w ere discovered in the Buffalo N ew
York program through ETA regional office monitoring. Approxim ately $109,000
was restored to the CETA program by Buffalo follow ing a regional office in­
vestigation and substantiation o f charges. Eight E T A
N ew B edford, Mass
Through its regular m onitoring activity the Regional Office discovered'
evidence o f CETA w orkers employment substituting fo r that o f regular c ity




207
job s. A fter a thorough investigation the city was notified o f a finding o f
violations o f maintenance o f effort and has agreed to restore $26,000 to the
CETA program.
STRENGTH EN ED CONTRACT RE VIE W A N D C O M PLIA N C E A C T IV IT IE S

In order to further control substitution o f Federal fo r State and local funds,
the Department o f Labor is continually reviewing and strengthening, where
necessary, its contract review and compliance activities.
The Department has recently established an Office o f Special Investigations
and Review, which is responsible fo r investigations o f maintenance o f effort
abuses and other program deficiencies and fo r recommending corrective action
and monitoring its implementation. This office is responsible directly to the
Secretary and reports directly to him on a regular basis. The Department is
now building a permanent staff fo r this office. The Department could, if given
additional resources, expand this office in order to more closely monitor and
control substitution in CETA programs.
In the F Y 1979 budget the Department has requested additional personnel
fo r all its contract compliance activities. In the expectation o f Congressional
approval fo r this increase, we are developing a program where we would
randomly select 25 to 50 prime sponsors a year fo r intensive on-site investiga­
tion into all program aspects. W ith sufficient Federal staff to review all aspects
o f these prime sponsors’ programs we could obtain valuable data about the
problems common to all prime sponsor programs, including the substitution
problem, and be in an excellent position to design a more effective m onitoring
system fo r all our prime sponsor programs. More importantly, knowledge by
a ll prime sponsors that a sizeable fraction o f them would be randomly selected
and rigorously audited each year would encourage much more attention to
conscientious compliance by all.
Recently, in order to further strengthen prime sponsor contractor compliance,
including maintenance o f effort provisions, the Employment and Training A d­
ministration has instituted the follow ing action s:
(1 ) Strengthened an “ Early W arning System” by use o f what w e call
Questionable Activities Reports from regional offices to alert the national office
to actual or alleged irregular activities.
(2 ) Installed regional office Compliance Staff Units answering directly to
the regional administrators. These units w ill handle all complaints and per­
form reviews concerning fraud, political patronage, and maintenance o f effort.
(3) Began increasing the staff o f the national Office o f Investigations and
Compliance. Given additional resources, we could further expand this office, to
m ore closely monitor maintenance o f effort provisions.

Senator G a r n . I. would appreciate that. Listening to you talk about
till the problems, I think you make my point of why I don’t like the
public service job approach, and I think you would have to agree,
without arguing the philosophy of public service jobs at all, that it’s
a very, very expensive way to create jobs.
Secretary M arshall . I think it’s the lpast expensive way to reduce
unemployment, and it’s the next best thing you can do.
Senator G a r n . H ow can you say it’s the least expensive way?

Secretary M arshall . T o reduce unemployment.
Senator GARN.With two-thirds not going to private employment?
What we had didn’t even show up. The unemployment rate in our city
didn’t show any reduction at all as far as the overall rate.
Secretary M arsh all . Our statistics show during the year, as I
mentioned before you came, that we were able to turn some unem­
ployment trends around with these programs, and we have got evi­
dence that the programs had an impact. A third of all the increase in
black employment in this country last year during this expansion of
the stimulus program was in titles 2. and 6 of CETA. You’ve got a
problem, of course, because as you create more jobs, you draw more
people into the work force. We had to create 4 million jobs in order




208
to reduce unemployment by just over 1 percentage point. But you
have to look at the effect of these jobs on employment as well as "the
effect on unemployment. The evidence, from CBO and other people
who made independent studies of it, indicates that the net cost of
reducing unemployment through public service employment is lower
than any other way that you would reduce unemployment.
I also believe that it’s better to put unemployed people to work
doing useful things that the society needs to have done, than to have
them either unemployed or on unemployment insurance or welfare,
and I think those are your options.
Senator G ar n . Let me just follow up.
Secretary M arshall . The reason I say it’s the next best thing, I
think the best thing to do is to get people a regular job.
Senator G ar n . My time is up, however that is the point I wanted
to make. I disagree on the cost. Maybe I have seen too much of it 011
the other end of the tunnel to think that it is the least costly way to
create jobs. I don’t agree with that, especially if we are not putting
more people permanenly to work, rather than just a temporary shot in
the arm, reducing unemployment rates while they are employed in
that particular Government program.
But I do appreciate your willingness to supply additional informa­
tion and I do agree with you that it is a far better way to put people
to work in the private sector on permanent jobs than in temporary
public service jobs.
Thank you, Mr. Chairman.
The C h a ir m a n . I just have one more question. We do have a
Governor of the Federal Reserve Board that will follow, as you
know.
This question is for Chairman Shultze. Chairman Shultze, are
you aware that in the first 4 months of this year we had about a 12percent annual rate of inflation ? The newspaper this morning, in the
financial pages, says, “Lack of support imperiling anti-inflation
plan.”
Consumers, business people, and I should say labor and business
people alike are blamed for not being willing to slow wage and price
increases. I think that much of this is because there is a feeling that
the Government itself really isn’t taking inflation as seriously as
they should, except for the Federal Reserve Board. We have, No. 1,
the $500-billion budget that many people perceive as being too big,
we have an enormous deficit at the present time, and I think some
people feel the kind of signal that would mean something like a big
cut in the budget, rejection of Humphrey-Hawkins, which I oppose—
as you know, I favor Humphrey-Hawkins— and at the very lease
giving inflation an equal status with unemployment as a goal we
would like to achieve.
That is what my amendment would do. I f you pass HumphreyHawkins at a time when you have rapidly diminishing, or rather,
rapidly increasing employment, and some diminution in unemploy­
ment, when you had rapidly rising inflation, at a time when you have
prominent economists saying you are already having inflationary
effects from this, which I disagree with that, it seems to me you are
not giving the kind of signal you ought to give at all.




209
I tliink if we put inflation on the same basis in this bill, it could
have that desirable effect, and not in any way compromise what
you gentlemen are anxious to achieve, we are all anxious to achieve,
a reduction in unemployment.
Mr. S ciiultze . Mr. Chairman, there is no disagreement about giv­
ing inflation equal billing in the bill. The only question is the wisdom
or lack of wisdom in putting a specific numerical target in the bill.
It has nothing to do with the priority you give inflation. That is point
No. 1. No. 2-----The C h a ir m a n . The only other way to do it is take the 4-percent
unemployment goal out of the bill. Then you have nothing.
Mr. S ciiultze . No, sir, I think the fact is that the achievement of a
specific numerical number goal is easier with respect to unemploy­
ment than with respect to inflation. That fact itself, which does mean
you don’t put a numerical goal in for inflation, that fact does not
mean you don’t give them both equal billing. It is important to reduce
the rate of inflation. What is really significant is to try to edge it
down each year.
The C h a ir m a n . The trouble is on one hand you have a specific
numerical objective commitment, on the other hand you have rhe­
toric. For unemployment you have a specific numerical goal. In
inflation you say we are against it and that is about it.
Mr. S ciiultze . No, sir; there is a lot more than saying that.
The C h a ir m a n . You don’t require anything.
Mr. S ciiultze . Y ou do, it does require the President each year to
lay before the Congress, for a 5-j7
ear period, his specific targets.
Those will change over time as you roll that 5 years forward, depend­
ing on circumstances. It is not simply saying we are against inflation.
The bill in section after section lays out the control of inflation as a
high priority objective, sections 102, 103, 104, 106, and 109, all of
them.
The C h a ir m a n . Senator Brooke.
Senator B rooke. Secretary Marshall pointed out that in his state­
ment. You know, we can control unemployment, at least. It might not
be acceptable to all of us as to how to control it, but we can control
unemployment. But we can’t control inflation. Obviously, you know,
there are too many factors that come into it over which we have no
control.
So it is going to be very difficult, if not impossible, is it not, to
control the inflationary goals.
The C h a ir m a n . I think the Senator is correct. But I think we can
make progress toward an inflation goal and recognize that there will
be various elements that will interfere with it.
Senator B rooke. What machinery can we put into place?
The C h a ir m a n . These gentlemen have indicated many things, we
can improve productivity, training, mobility, we can do all of these
things that will make it possible for the people who are unemployed
to work and that will tend to achieve both a low level of unemploy­
ment and a lower level of inflation.
This is the kind of thing, it seems to me, that is mandated by
putting those goals in there. Congress, is saying we want to move in
the direction of holding both dow^n, we want to follow those kinds of




210

policies. And we are going to make a commitment to do it and this
is the way we are going to try to achieve it.
Mr. S chultze . Mr. Chairman, again I would stress that there is
no disagreement in terms of the priority you give control and reduc­
tion of inflation. No. 2, we want to do that not just for its own
sake, but because unless we also do something on inflation, we are not
going to do something on unemployment.^ It cuts the other way, too.
Continued economic growth and reductions in unemployment de­
pend upon dealing with the inflation problem. But there is still, a
difference in terms of your ability to hit a particular numerical num­
ber. And for Congress to bless in a piece of long-term legislation
any single number seems to me to be dangerous on both grounds.
It is either too much or too little.
The C h a ir m a n . It is not nearly as easy as we would like to think.
We don’t know what is going to happen to the work force, I wish we
did. Everybody has been wrong in the last few years on that. Given
the increase in employment we have had in the last couple of years,
we should have unemployment down close to 4 percent now, if it
hadn’t been for the unexpected, unpredicted enormous increase in
the work force. The number of women coming in was completely
unforeseen, the number of teenagers who are in the work force now
was unforeseen.
Senator B rooke . That is probably going to increase.
The C h a ir m a n . I don’t think so. The demographic figures suggest
that will not be the case.
Mr. M arsh all . And that indicates it is more unpredictable. The big
unknown-----, The C h a ir m a n . Maybe. But it is all maybe, we just don’t know.
About 50 percent of the women now, as I understand it, the married
women, 50 percent of the married women with a child between the
ages of 6 and 16 now are in the work force, twice as high a proportion
as 25 years ago. That could go to 75 percent, we don’t know.
Mr. M arsh all . But you know what the limit is.
The C h a ir m a n . It is finite.
^
Mr. M arsh all . The thing that keeps it from being more finite that
you really have to work on, I think, and creates the biggest uncer­
tainty in my mind about the. unemployment, is illegal immigration.
W e don’t know how many are coming in.
Senator B rooke. A lot of women are working because they have to
work, Mr. Secretary; you know that. There is no question about that.
I mean the income of the husband is just not sufficient to hack it, as
they say. So a lot of them are going to work because they are forced
to go to work.
The C h a ir m a n . I agree with that. That is why it is unpredictable.
Senator B rooke ; Germany has been able to achieve a low rate of un­
employment and a low rate of inflation.
You are shaking your head. What have they done we didn’t do?
Mr. M arshall . There are fewer jobs in Germany now than there
were in 1970, and unemployment has been rising.
Mr. S chultze . German unemployment is higher than it was at the
peak of the recession. No. 2, it also is true that wages and prices in
Germany, for reasons I don’t fully understand, are somewhat more
flexible.




211

The C h airm a n . D o they also export their unemployment ?
Mr. S ciiultze . Some of it.
The C h a ir m a n . A lot of people working there were from surround­
ing countries, and they have gone back.
Mr. S ciiultze . It is not quite so much that they have gone back, but
the big flood of incoming ones has stopped.
Senator B rooke. They don’t send them back.
- Mr. S ch ultze . There have been some that have gone back. The big
thing is it is like cutting the labor force growth in half, or even more.
Senator B rooke. The sum and substance is both of you believe we
can achieve a low unemployment rate and a low inflation rate at the
same time ?
Mr. S ciiultze . W e both— I think that is fair to summarize by say­
ing we both believe it. We both recognize it will be difficult. W e can’t
guarantee it, but we think it is a worthy objective to try for.
Senator B rooke. D o you think the time frame is a reasonable one ?
Mr. S ciiultze . Yes. Five years, yes; I think so.
Senator B rooke. What about balancing the budget ?
Mr. S ch ultze . The more we are able to achieve the goal o f high em­
ployment, through appropriate structural measures in particular, the
more we are going to be able to achieve that balanced budget.
The C h a ir m a n . Gentlemen, we want to thank you very very much
for excellent testimony and a fine record.
Senator B rooke . Thank you for your optimism.
The C h a ir m a n . Our final witness is the Honorable J. Charles
Partee, member of the Board of Governors of the Federal Eeserve
System.
W e are delighted to have you, Mr. Partee, not only a distinguished
Governor of the Federal Eeserve Board, but you have been with the
Board longer than any other Governor who is serving at the present
time. Isn’t that correct, Governor Partee, counting your service as a
staff member?
STATEMENT OF J. CHAKLES PARTEE, MEMBER, BOARD OE
GOVERNORS, FEDERAL RESERVE SYSTEM
Mr. P artee . Counting the service as a staff member, about 1G years.
Not that long as a Governor.
The C h a ir m a n . Well, y ou are a real expert.
Mr. P artee . Thank you, Mr. Chairman.
The C h a ir m a n . W e are delighted to have you. We apologize for it
being so late. .
Mr. P artee . That is quite all right. It is an important subject.
[The statement read by Governor Partee follows:]
Statem ent

by

J. C h a r l e s P a r t e e , M e m b e r , B oard
of t h e F ederal R eserve S y s t e m

of

G overnors

I appreciate this opportunity to present the views o f the Federal Reserve
Board on the Full Employment and Balanced Growth Act— known popularly as
the Humphrey-Hawkins bill. This proposed legislation would amend the Em­
ployment A ct o f 1946 by setting forth specific economic goals and by providing
explicit roles in the economic policy planning process fo r the President the
Congress and the Federal Reserve.
’




212

The several, somewhat different versions o f the A ct now under discussion
in Congress contain substantial improvements over the earlier bill on which
I testified before this Committee in the Spring o f 1976. Particularly welcome
is the increased emphasis o f the current bills on the need to reduce inflation
as well as unemployment. The Federal Reserve strongly supports this change,
as the more specific recognition o f the goal o f price stability addresses a m ajor
inadequacy o f both the 1946 Act and the amendments to it proposed in earlier
versions o f the Humphrey-Hawkins bill.
W e are encouraged also by deletion o f some o f the m ajor inflationary features
o f the previous bill. The Board had been especially concerned by the pro­
visions that would have required the Federal government to become the em­
ployer o f last resort, and by the very high wage standards mandated fo r such
Federally funded jobs. The new versions o f the bill require that all special
programs which provide job opportunities to the hard-core unemployed be de­
signed to avoid drawing workers from private employment, and the wage rate
provisions appear to be more reasonable than those o f the earlier bill.
The bills under discussion today also no longer contain those provisions that
would have unduly restricted economic policy by requiring a comprehensive
policy planning process directed toward the achievement o f a 3 per cent un­
employment rate goal, with no regard fo r any inflationary consequences until
that goal was reached. That earlier structure would have stripped monetary
policy o f its ability to respond flexibly to changing economic conditions.
These improvements in the current bills are clearly all to the good. H ow ­
ever, the Federal Reserve continues to have reservations about some o f the
provisions that still remain. I would emphasize in particular that the un­
employment goals to be attained within five years are extremely ambitious. The
goals established by the bill— 3 per cent fo r workers aged 20 years and over,
and 4 per cent for workers aged 16 years and' over— were last achieved only
during the 1966-69 period, when the U.S. economy was suffering from demandpull inflation stemming from the m ilitary manpower requirements and heavy
spending pressures o f the Vietnam W ar.
The historically low unemployment goals, moreover, tend to ignore the
significant changes that have occurred in the composition o f our labor force
over the past decade or so. Due to changes in the age distribution o f our
population and to increases in the participation rate fo r certain groups, the
numbers o f teenagers and adult women in the labor force have grown dram ati­
cally. F or example, in the last 10 years, total population has increased by
about 9 per cent, while the numbers o f adult women and teenagers in the labor
force have risen by 42 and 40 per cent, respectively. I f the unemployment rate
for the first quarter o f this year were to be adjusted to take account o f this
change in labor force composition, it would have been nearly one-half percent­
age point lower than the 6.2 per cent rate that w as reported.
Efforts to keep our rapidly expanding labor force fully employed have been
further complicated because those seeking w ork have often lacked the skills re­
quired to handle the jobs available. Also, the job markets in which opportunities
occur have often been at locations fa r distant from the persons in search o f
work. These structural problems, I believe, can be attributed partly to the
higher skills required by a technologically advancing society, and partly to
geographical shifts in population and job opportunities— broadly from north to
south, and also from central cities to the suburbs. Moreover, in the case o f
unproved workers, such as unskilled teenagers, the unemployment problem has
aggravated by increases in the minimum wage. Such increases have tended
to mean that m arginally productive job applicants become unemployable on
an economic basis at the going wage.
In our present circumstances, therefore, it is unlikely that macroeconomic
policies alone can achieve the low unemployment goals o f the Humphrey-Hawkins bill without running the grave risk o f substantially exacerbating the in­
flation problem. I f sole reliance were to be placed on general economic policies
to reach these very ambitious unemployment rate objectives, certain critical
labor skills could be expected to come into short supply and some industries
would be pressed above practicable capacity limits, well before aggregate de­
mands had risen sufficiently to absorb the more marginal types o f workers.
. It seems to me abundantly clear, therefore, that any hope o f attaining the
Humphrey-Hawkins unemployment targets w ithout escalating price pressures
w ill depend on a m ajor effort to develop special employment programs. These
are needed to make our unemployed more employable, to put the jobless in




213
touch with available jobs, and to generate employer interest in taking on
marginal workers— perhaps at an initially subsidized wage cost that makes
their employment econom ically attractive. Moreover, although our structural
employment problems are aggravated by business cycle downturns, they appear
also to be growing over time, so that their correction is likely to require more
than the countercyclical programs contained in Title II o f the proposed bill.
Apart from training and other programs fo r the hard-core unemployed, care­
fu l consideration also needs to be given to the recent shortfall in business in­
vestment spending and to the effects this is likely to have on the creation o f
new job opportunities. Unfortunately, during the past five years, growth in
the nation’s stock o f capital has been slowing relative to growth in our labor
force. I f this trend persists, it may mean a slower creation o f new jobs relative
to our employment needs as well as a slower increase in the general productivity
o f our economy. Thus, there is an important stake fo r all o f us in finding
effective means o f encouraging more investment’ in productive plant and equip­
ment, through stronger incentives fo r business and perhaps some structural
revision in the tax laws.
In addition, the Board is deeply concerned that the emphasis and organiza­
tion o f the current bills still appear to place the objective o f controlling in­
flation in a role distinctly subordinate to that o f reducing unemployment. A l­
though the reduction o f inflation is mentioned in one w ay or aother 5 or 6
separate times in the bills, the prescription fo r moderating inflation is quite
vague. Moreover, in the House-passed version, the President is not even re­
quired to report on progress or plans fo r controlling inflation until the third
year o f the program.
The amendment introduced by Senator Proxm ire seeks to redress this relative
imbalance in objectives by adding an explicit goal fo r reducing inflation to 3
per cent or less, on the same time-table set forth fo r achieving the unemploy­
ment rate goals. The Federal Reserve supports the inclusion o f a specific
interim inflation rate objective, though we believe that greater flexibility for
revision should be provided than the amendment contemplates. A possible ap­
proach would be to permit the President to recommend modification in the in­
flation rate goal an d/or the timetable for attainment, starting with the third
Economic Report after the lav/ becomes effective. This alternative would pro­
vide parallel treatment for both the inflation and the unemployment goals.
The Board would urge also that every effort be made to reduce or eliminate
the many inflationary biases that are at w ork in the economy, some o f which
are a result o f long-standing Federal programs. W e are encouraged by
recognition in the Humphrey-Hawkins bill o f the need fo r structural measures
to combat inflation— including the removal or modification o f governmental re­
strictions that have anti-competitive effects or add needlessly to costs, and the
effective enforcement o f the anti-trust laws. But there is a need to reexamine
the relative costs and benefits o f other Federally mandated programs as well,
such as the Davis-Bacon Act, the minimum wage fo r teenagers, extended un­
employment insurance, and the full indexing o f public retirement benefits. Also,
we would recommend that the inflationary costs as well as the potential bene­
fits explicitly be taken into account in setting our environmental quality goals,
particularly at the outer margins o f the improvements specified. Meaningful
progress in reducing the overall inflation rate w ill require a comprehensive at­
tack on the problem, program by program, in the public as well as the private
sector.
Let me turn now to the specifics o f the Humphrey-Hawkins bill that apply
to monetary policy. The procedures currently contemplated fo r evaluating anil
monitoring the role o f the Federal Reserve in economic policy planning and co­
ordination have substantially improved upon the rigidity o f the earlier bills.
The Federal Reserve would now be required to provide an independent state­
ment setting forth its intended policies fo r the year ahead, along with an
explanation o f their relationship to the economic goals presented in the
Economic R eport o f the President.
In the House-passed version o f the bill the role o f reviewing the intended
policies o f the Federal Reserve remains appropriately with the Banking Com­
mittees o f the Congress. The Board believes that this assignment is consistent
with the quarterly oversight procedures now in place, and would benefit from
the accumulated experience and fam iliarity o f these Committees with the
Federal Reserve and the m ajor issues encountered in the form ulating o f
monetary policy. And to the extent that the Congress determines that action
may be called fo r in order to ensure the consistency o f monetary policy with




214
the purposes o f the bill, the Board would favor a provision that assigns prin­
cipal responsibility to the Banking Committees.
' In order to provide further consistency with the current procedures fo r
Congressional review o f monetary policy, the Board supports the inclusion o f
the last sentence o f Section 2A o f the Federal Reserve Act, as appears in
H. R. 50. Section 2A provides that the Federal Reserve not be required to
adhere strictly to its intended policies fo r the year ahead if the Board and
the Federal Open M arket Committee should determine that these policies, as
reported to the Congress, cannot or should not be achieved because o f changing
conditions. That language w as w isely included in the Federal Reserve Reform
A ct in ord er. to preserve the flexibility essential to the proper conduct o f
monetary policy. Its inclusion in the Humphrey-Hawkins bill would avoid the
statutory inconsistency that might otherwise occur.
One potential problem inherent in the planning fo r general economic policies
designed to control both unemployment and inflation is that trends in employ­
ment end to respond more quickly to changes in policy, including monetary
policy, than do trends in prices. Actions that stimulate a general expansion in:
spending fo r goods and services tend to generate needs fo r additional workersfairly early in the process. W hile this step-up in demands fo r workers and the
materials they use may exert some immediate upward pressure on wages and
prices, the fu ll im pact o f the stimulus is likely to be stretched out over a fa irly
extended period. Some wage and price adjustments are delayed until the expira­
tion o f existing contracts, or until the strengthening trend develops sufficient
upward momentum. But when these contracts are eventually adjusted, they
often generate additional catch-up demands fo r further adjustments in other
sectors o f the economy. Because o f this long trail on inflation, public policies
are in danger o f giving insufficient weight to potential inflationary pressures
unless they focus on a planning horizon that looks beyond the next year or two.
Thus, the inclusion o f inflation as well as unemployment rate targets to be
attained on the same timetable 3 to 5 years out would be a desirable addition
to the Humphry-Hawkins bill. Policymakers would then be guided by both
these longer-range economic goals, and the undue focus on short-term objectives
which can occur would tend to be moderated. It must be recognized, o f course,
that the linkages between current policy actions and the perform ance o f the
economy over a longer horizon are quite tenuous. M oreover, since current eco­
nomic conditions can often change in abrupt and unexpected ways, appropriate
adjustments in short-term policy goals may require revisions in longer-range
policy plans as well. But so long as the longer-range unemployment and in­
flation rate goals are not considered rigid absolutes, it would be preferable to
make adjustments in short-term policy with an eye to their implications fo r
the timing and attainability o f longer-run objectives, especially with respect to
price developments.
In conclusion, I want to assure you that the Federal Reserve fu lly shares the
desires o f Congress and the Administration to achieve conditions that w ill
foster the creation o f jobs fo r all o f our people who are able and w illing to
work. Since the passage o f the Employment A ct in 1046, this has been an
explicit objective o f national economic policy to which the Federal Reserve has
subscribed. The economic history o f this and other countries in the postw ar
period, however, has amply demonstrated that our perform ance w ith respect
to inflation has a critical bearing on the chances for actually achieving meaning­
fu l and sustainable fu ll employment. High and rising rates o f inflation, quite
aside from the inequitable consequences they bring to our people, tend to
distort economic decisions, sap consumer purchasing power, and lead to condi­
tions that are likely in time to reduce rather than enhance employment
prospects. W e must be on guard also to avoid the higher Federal expenditures
and therefore larger budget deficits that might follow from mechanical efforts
to achieve the employment objectives o f this bill.
W hile the current versions o f the Humphrey-Hawkins bill take more account
than earlier versions o f the threat that inflation poses to our economic health,
they still do not ackowledge adequately the crucial need to reduce inflation,
both as an integrated element in the process o f achieving fu ll employment and
as a necessary condition fo r effective public and private planning. There is a
real risk that the Humphrey-Hawkins bill, if enacted with the present lopsided
emphasis, w ill accord by law a back seat to the need fo r more effective control
over inflation. It seems paradoxical that this might take place at precisely
the time when inflationary pressures are coming to represent the m ajor threat
to the stability o f our econom ic process.




215
The C h a ir m a n . Thank you very very much, Governor Partee. Do
you speak for the Board ?
Mr. P artee . Yes.
The C h a ir m a n . Y ou do. Not simply for yourself, but for the
Board ?
Mr. P artee . That is right. This statement was approved by the
Board yesterday.
The C h a ir m a n . On page 5 you suggest a change. You support my
amendment, but then you suggest that we should permit the President
to recommend modification of the inflation rate goal and/or the time­
table for attainment, starting with the third Economic Report after
the law becomes effective.
I agree with that. We intended to make that change. That has been
suggested, and we will be happy to accommodate that.
Sir. P artee . I think, Mr. Chairman, it might reduce the criticism of
the kind that Chairman Shultze was making, because a specific target
out in the future might prove to be not attainable. You recognize that,
and that the goal may have to be adjusted.
The C h a ir m a n . Some of the tirguments have been made that it is so
hard to attain that it should be modified to some extent.
^Then in your statement on page 7 you say that you favor a provi­
sion that assigns principal responsibility to the banking committees.
I think this committee would tend to support that. I think your rea­
soning makes sense, too, that is, we do have that experience here, and
that is our responsibility. So I think we will J e happy to support that.
b
Then further down on page 7 you say section 2A of the Federal Re­
serve Act provides that the Federal Reserve not be requird to adhere
strictly to its intended policies for the year ahead if the Board and
the Federal Open Market Committee should determine that these
policies, as reported to the Congress, cannot or should not be achieved
beceause of changing conditions.
On that I think we can agree, but we ought to have the Federal Re­
T
serve come in and tell us, explain.
Mr. P artee . That is precisely what we are proposing, precisely the
same language as occurs in the Federal Reserve Act. And, as we do
now, we would come and tell you in the quarterly oversight hearings.
I think that would make the two bills consistent.
The C h a ir m a n • You are the first witness to challenge the goals as
being extremely ambitious over a 5-year period. I f you had to make
the decision as to the appropriate rate of unemployment, fix a goal
for 1983, what rate would establish, if not 4 percent?
Mr. P artee . Well, Mr. Chairman, it is very difficult to talk about
this subject, because the appropriate rate depends so much on what
goes on during the interim period, between now and 1983. I would
say that on the basis of what we have now in the economy, and with­
out any greater impact on unemployment from special programs than
we are now receiving, it is extremely unlikely that the unemployment
rate could be reduced below 5 percent without substantial inflationary
pressure.'
, ;
_ I f we could come up with microprograms that were truly effective
in trainiilg and putting people to work, and finding jobs for them
then I think perhaps we could move.on down towards 4 percent. But
I have some doubt that we could reach it.




216
The C h a ir m a n . And the adoption of the amendment that would
oive inflation equal status, numerical status specifically, would pretty
much mandate policies of that kind, wouldn’t it ?
In other words, if we are going to achieve it, we have to achieve it
through structural programs.
Mr. P artee . I think it would put emphasis on structural programs.
There are a lot of structural programs mentioned in the bill and the
Secretary of Labor has an important role. But I think giving inflation
equal status would put added emphasis on structural programs both
to increase employment and to reduce inflation. I particularly would
like to see equal emphasis given to structural programs to reduce in­
flation, in which I think your amendment helps quite a bit.
The C h a ir m a n . Your testimony points out in the House-passed
version of the bill, the President is required to report on the programs
and policies being used to reduce inflation and the progress made be­
ginning with the third economic report after enactment. Now the
legislation that was recently approved by the Human Resources Com­
mittee doesn’t contain that.
Do you think we should add a requirement about progress on infla­
tion back into the bill, and at the same time change it to require the
Preseident to do this each year?
Mr. P artee . Yes, I think it should be required from the beginning,
and I think there should be as a part of this, as Charlie Schultze said,
planning machinery— a distinct plan to work with inflation— that is
announced by the President. I would certainly do that,
I might say I am at a little disadvantage here. W e have, appar­
ently, three bills, H.R. 50, S. 50, and the amended version of o. 50.
And I may be somewhat vague at. times about exactly what is in one
bill as against another.
The C h a ir m a n . The various versions of the bill require the Fed to
provide an independent statement setting forth its intended policies
for the year ahead, along with an explanation of their relationship to
the economic goals presented in the Economic Report of the President.
Do you interpret that to mean that the Federal Reserve would com­
ment on the appropriateness, consistency, the attainability of the goals
specified by the President ?
Mr. P artee . Well, I think that it could. I don’t know that one often
would want to have a situation in which there was a public challenge
to the President’s program by the Federal Reserve. But the bill would
certainly give it the authority to do so.
The C h a ir m a n . Well, we get that from individual chairmen. In
fact, we always had that from individual chairmen. I think it is a
welcome response by the chairmen. I think it is their responsibility to
do this. Some debate from one of the best qualified economic institu­
tions in our Government is most desirable.
So I would hope it would be interpreted that way.
The bill would require the Federal Reserve to announce its intended
policies for the year ahead, and thir relationship to the short term
goals specified by the President. Those goals cover a period of 2 years,
the remainder of the current year, and the next year.
That seems to be a little inconsistency that we might want to correct.
Do you see any problem for the Federal Reserve in stating its in­
tended policies for the same period as is covered by the short term




217
goals specified by the President, as long as we provide you with the
flexibility to adjust your policies if need be because of changing eco­
nomic conditions or changes in the President’s goals ?
Mr. P artee . Another year is a good deal longer to go out into the
unknown future in specific terms. This would mean almost 2 years
rather than 1 year. I think if it were well understood that that second
year is much more provisional than the first, that what you propose
would be acceptable.
Again, the important thing is maintaining the ability to change in
response to changes in the economy. Why* Because we just don’t see
the future very well; we have missed time and time again. And when
I sav “we,” I think I mean all of the Government, in fact, all of the
professional economist community. W e.have *° be prepared to adjust
to those changes that we have not anticipated.
The C h a ir m a n . The Federal Reserve Act, section 2A, requires the
Federal Reserve provide the monetary aggregate growth rate changes
at each quarterly oversight hearing, as you know. I have a few ques­
tions about that procedure.
First, do you think there is undue stress on the monetary aggregate
growth rate changes ?
Mr. P artee . N o, I don’t think so. I think it may be that we should
have a broader range of the aggregates that we discuss than has been
the case typically in the last year or two of oversight hearings.
But I believe it is awfully important to keep in mind the fact that,
in the end, if you create a great deal of money and credit, regardless
of what interest rates are doing, you are going to have inflationary
consequences.
#
•
The C h a ir m a n . That is right. I just wonder if the monetary aggre­
gates are enough, if we shouldn’t have a broader analysis that would
cover other statistics also, so we have a better understanding, which
would convey to us more clearly the strategy being pursued by the
Federal Reserve.
Mr. P artee. What kind of other statistics do you mean? Do you
mean credit statistics, or interest rate statistics, or others ?
The C h a ir m a n . I mean interest rate statistics and I mean credit
statistics, too.
The C h a ir m a n . You see my problem is I think the monetary aggre­
gates are among the least understood, least discussed by people in gen­
eral, let alone economists. A lot of economists don’t pay much atten­
tion to it for various reasons. Members of Congress, when you talk
about what happened to Mt, M2, or M3, it doesn’t mean much, but
when you talk about interest rates they begin to get interested and to
understand.
The C h a ir m a n . I am not saying forget about M 1 I am saying
b
bring in other elements, too.
Mr. P artee. As far as credit statistics^ are concerned I agree with
you. As a matter of fact, we have provided in the recent oversight
hearings a good deal more discussion on credit flows, particularly in
the first report that Chairman Miller gave before the House Com­
mittee.
But as far as interest rates are concerned, I don’t like to be in the
position of having the central bank predict interest rates. I think that
is a poor policy procedure, because financial market participants may




218
act on the basis of those predictions, and may themselves fulfill the
prophecy.
Also, I might say that having coped with this area for many years,
we are no better at predicting interest rates than anybody else, so we
shouldn’t be given that kind of emphasis.
The C h a ir m a n . My time is up, but let me say I will never forget
the chart you put up here that showed you hit the Federal funds rate
right on the nose every single month and the monetary aggregates
were way off.
,
.
‘
»
Mr. P artee . I think there might be some misunderstanding, Mr.
Chairman, of the role that the shorter term aggregate ranges have for
us. They are triggers indicating the need to adjust money market con­
ditions. Money market conditions are the instrument of change. There­
fore money market conditions are naturally what we intend them to
be, and the changes that occur are based on whether we are running
over or under those shorter term monetary aggregate ranges. These
ranges indicate where we think the proper number should be under a
given set of conditions, but we can seldom hope to achieve them in so
r
short a period of time.
The C h a ir m a n . Thank you. Senator Brooke.
Senator B rooke. Thank you, Mr. Chairman.
Mr. Partee, does your statement represent the unanimous opinion of
the Board or are there minority views ?
Mr. P artee . -With respect to the content of this statement, there
were no points on which there was a dissent by any Board member.
Senator B rooke. Then I take it that the Board feels that without
inflationary goals, that we should not have unemployment goals ?
Mr. P artee . The Board didn’t discuss that point specifically.^ But
speaking personally, I w^ould take the view that if we did not have a
specific inflation target, we should not have a specific unemployment
target. Rather, simply state that our objective is to achieve high levels
of employment and low levels of unemployment, just as the bill now
states our objective with regard to inflation.
I think parallel treatment is very important in terms of the kind of
actions that this bill precipitates.
Senator B rooke. Y ou seem to be pleased with the arrangements for
•coordinating the Federal Reserve policy with the economic planning,
in the latest version of S. 50.
Mr. P artee . Yes.
Senator B rooke. Do you foresee any danger at all of the loss of the
Federal Reserve’s independence in the new role contemplated for it in
S. 50, or any of the other current versions of Humphry-Hawkins ?
Mr. P artee . I know that there has been something made of that, but
I can’t find it myself in the bill. I must say that I have paid more
attention to H.R. 50, because it has already been passed by the House,
and I am not absolutely certain of all the points of difference in S. 50,
some of which I mention in my testimony.
But it seems to me that unlike the earlier version of a couple of
years ago, the current versions call for us to report to the Congress,
which is appropriate, rather than to the administration. And the
President is not called upon to specify monetary policy as he was in
the bill 2 years ago. Now, if we can establish the role of the oversight
-committees ,in this ,legislation, it seems to me that what is involved




219
would be consistent with what is now done in the oversight hearings
for the Federal Reserve,
There is the question of accepting the national goals for the coming
2 years as stated by the President, and presumably accepted by the
Congress— specific quantitative goals called for by the bill. As the
chairman stated, we could differ with those goals, if we wished. The
chances are we wouldn’t except when there was a rather fundamental
difference. All in all as a matter of proper political process, I must
say I think that the organizational framework for policy planning in
which the Federal Reserve would fit is a better one than exists at
present. I think it is an improvement.
Senator B rooke . What is the unemployment floor past which major
inflationary pressures would be generated ?
Mr. P artee . Well, it is a continuum. Senator Brooke. I would say
I would disagree with the previous witness today to a degree. I be­
lieve there is some sign of demand pull or excess demand pressure
right now in the economy. I think the increase in some construction
material costs in the last year is evidence of demand pull. I think in
the last 3 or 4 months we have had similar evidence in the commercial
building sector. I think there are materials coming into short supply,
aluminum being a prime example. And I think that there are some
special labor skills now in sufficiently short supply that they are being
bid up in the marketplace.
There will be differences of opinion among individual economists
and individual Board members as to achievable unemployment tar­
gets. As I stated, I believe if we were to work carefully and gradually,
we could probably reduce the unemployment rate to the 5-percent
vicinity over time, without strong inflationary pressures developing.
To go below 5 , 1 think, would require better structural programs than
anything that we have seen in the last few years.
Senator B rooke. N ow you call attention to the need to stimulate
more investment in productive plant and equipment. But you don’t
seem to be very specific about just what the Federal Government
ought to do to do that. Would you care to elaborate on your call for
stimulation, giving just a little more programmatic content to it?
Mr. P artee . This is a very big subject and I hate to answer the
question quite so casually. I do believe that we should consider tax
revisions that would particularly reward new investment and not just
general corporate profitability.
Senator B rooke. Y ou mean investment tax incentives?
Mr. P artee . Yes, and there might be other possibilities, incremental
programs, to encourage investment. I think also that we ought to give
considerable attention to the effect that environmental quality require­
ments have on investment in this country. There are many major pri­
mary industries where there has been little new expansion in recent
years, and industry leaders will tell you it is because they can’t meet
that very last bit of the environmental requirements at reasonable
cost. I think we ought to look into this as a matter of policy.
I might say that the Board staff is giving considerable attention to
the question of the shortfall in investment and what might be done
about it in the long run. With the research program that is now un­
derway, we would hope to have material dealing with this subject and
suggestions developed by the end of this year.
30- 454— 78------------ 15




220

Senator B rooke. I appreciate that. I would further appreciate it i f
you would submit for the record any additional views you may have
as to the specifics for such a program.
Mr. P artee . I can certainly do that.
[Governor Partee submitted the following letter for inclusion in the
record at this point:]
F ederal R eserve S y s t e m ,

W ashington, D. C., M ay 19, 1978.
Hon. E d w a r d W . B r o o k e ,
TJmted States Senate,
Washington, D.G.
Dear Senator B r o o k e : Last week, when I appeared before the Banking Com­
mittee to present the views o f the Federal Reserve Board on the HumphreyHawkins bill, you requested that I submit fo r the record my suggestions for
possible means to stimulate investment in productive plant and equipment. This
letter is submitted in response to that request.
Over the past three years o f economic recovery there has been a noticeable
shortfall in investment spending compared with past periods o f recovery. This
shortfall appears to have been especially acute w ith respect to m ajor additions
to our capital stock, such as the construction o f plants and factories and the
purchase o f long-lived types o f heavy equipment. A principal difficulty in
stimulating such investment, in my view, has been the problem o f heightened
uncertainty in the prospective pay-off from investment as perceived by business
firms. A fter the experience o f the early 1970’s, businesses are w ary o f the
effects that rising materials and labor costs and unexpected shifts in the
demands fo r their output can have on the profitability o f investment.
Thus, my recommendations fo r stimulating investment are premised on the
need to reduce the expected duration o f the pay-off period. This can be done
in several w ays which are not necessarily mutually exclusive. One w ay would
be to reduce the effective cost o f capital goods by increasing fo r a time the size
o f the investment tax credit. In this connection, I would think it desirable to
consider larger percentage allowances fo r the kinds o f long-lived plant and
equipment needed in our basic materials industries. Similarly, faster deprecia­
tion schedules often have been suggested as an incentive to investment spending,
since they serve to delay the stream o f profits from a project on which taxes
must be paid. Here, too, I would urge that special emphasis be placed on longlived additions to our stock o f productive capital.
A second means o f encouragement, as I noted in my statement, could flow
from some reduction o f the regulatory barriers to investment. It appears that
the largest shortfalls in plant and equipment spending have occurred in those
industries most subject to our new, tighter safety and environmental quality
standards. These tend to be the m ajor materials industries which are often
sources o f potential bottlenecks at critical points in the business cycle. I do
not mean to suggest that such standards ought to be relaxed altogether, but
that the precise setting o f the goals specified, and the speed w ith which they
are to be reached, may w arrant reconsideration in terms o f their im pact on
investment initiatives in strategic sectors. A modest relaxation o f standards,
or extension o f the timetable fo r achievement, might well prove extremely e f­
fective in reducing the costliness o f new investment.
A third area of action which could materially improve the environment for
investment would be to achieve more stable economic conditions generally. I f
inflation can be moderated, the severity o f the business cycle dampened from
that experienced in the early 1970’s, and a dependable' basis established for
business planning with respect to energy prices and supplies, I believe that
the effect would be to stretch out acceptable pay-off periods once again. This
would be especially true if interest rate levels (and hence, rates o f capitaliza­
tion) could also be reduced over time, which I would expect to be the case in
a less inflationary and more stable economy.
One final point. Excessive demands fo r plant and equipment, like excessive
demands for goods and services generally, can be a source o f inflationary pres­
sure in an overheated economy. It is thus important to have in hand devices
that can be used to modulate the investment resurgence that we seek to bring
about, so that it^ w ill not run up so far or so fast as to exceed our productive
capabilities. This suggests to me that segmented, potentially reversible pro­




221

grams fo r stimulating investment are better tban
efforts.
Sincerely,

all-out, once-and-for-all
J. C h a r l e s P a r t e e .

Senator B rooke. N ow you place a great deal of emphasis on the
need to control inflation, as well you should, as a member of the
Board. But the supporters of Humphrey-Hawkins, particularly the
labor unions, argue to add the numerical inflation goal such as you
suggest would be to significantly weaken the thrust of HumphreyHawkins, which is directed at unemployment.
How would you respond to that ?
Mr. P artee . Senator, I think I would say first that this series of
Humphrey-Hawkins bills was initiated during a somewhat different
period than the one we are now in. I can see that there would be great
concern about undercutting the efforts to get down unemployment
when we were in the midst of a recession, when the unemployment
rate was very high— up around 8 or 9 percent— where it was when
these bills all got started. It seems to me, though, that the degree of
concern and the degree of pain ought to have been reduced as time
has gone by, and the unemployment rate has dropped by 3 full per­
centage points.
Second, I do seriously accept Chairman Schultze’s view that this is
a planning document. It seems to me that a planning document that
looks only at one objective of public economic policy is a flawed one.
In the long run the public— labor and the public generally— is not
going to be better off with double digit inflation and temporarily high
levels of employment.
There need to be ways found that will get unemployed people into
productive useful jobs without creating conditions of very large gov­
ernmental expenditure, inflationary Federal Reserve monetary policy*
and wage-price cycle developments that create double digit inflation.
I must say, as one who has always felt employment is a very im­
portant goal and a very serious priority for the economy, that the
thrust of this bill scares me to death— especially the possibility that
over time it will guarantee double digit inflation. I don’t think labor
would be well off in that environment. Perhaps what is required is a
little trust and confidence that if an inflation objective is included in
the bill, this won’t mean that we are just going to disregard the need
and the desire to get unemployment down through constructive and
useful programs.
Senator B rooke . Thank you. My time is up. I just wanted to ask,
T
you don’t have any problems with the role or the requirements for the
Federal Reserve ?
Mr. P artee . No.
Senator B rooke . Y ou can meet those without any problem?
Mr. P artee . So long as we have the suggestions I made for that
section o f the bill.
Senator B rooke. Thank you.
The C h a ir m a n . Senator Heinz.

Senator H einz. Thank you, Mr. Chairman. Mr. Partee, you have
raised the issue of equal treatment for, on the one hand employment,
and on the other, inflation.




222

Now the employment goal in Humphrey-Hawkins is 4 percent for
those 20 and over.
Mr. P artee . Three percent, sir, for those 20 and over.
Senator H e in z . Excuse me, 3 for those over 20, and 4 percent for the
work force as a whole.
Senator Proxmire’s amendment states an inflation goal of 3 percent.
Now several questions occur to me in that regard.
The first is really a question of reasonableness. W e have attempted
here today to try and decide whether the 4 percnt goal is reasonable
and the administration testified, I believe Mr. Schultze testified that
they felt that through macroeconomic policies they could get down a
little bit lower than that. You felt 5 percent was about the best you
could do with macroeconomic policies.
Mr. P artee . In the current situation, yes, with the current labor
force and skills, and existing structural programs.
Senator H e in z . Yes, right. Mr. Schultze said he felt that 4% per­
cent was about what would be realized and felt that public service
job programs could take us down from 4% to 4 percent.
So that is his statement of feasibility. You have said that about the
only way we could go from 5 percent down to 4 percent would be with
better structural unemployment programs. So there is not a magnitude
of difference between yourself and Mr. Schultze, although you might
disagree with the public service jobs.
Mr. P artee . I think I would probably err on the high side of the 5,
and he would probably tend to err on the low side of 5.
Senator H e in z . Right. But it is not a magnitude of difference, it is
literally fractions. I think that is a fair statement, is it not ?
Mr. P artee . Although every point represents a million unemployed
people.
Senator H e in z . That is correct. And a quarter of a point is 250,000
people.
Now inflation, in Senator Proxmire’s amendment, at 3 percent, I
would also like to find out how we can get to 3 percent. I can see that
there are ways where we can get to somewhere between 4 and at the
outside 4% or 5 percent unemployment. I have a little more difficulty
seeing how we are going to get down to 3 or 4 percent inflation, given
the present outlook.
Could you speak to that a little bit?
Mr. P artee . It is a very ambitious target. There is no question
about it.
I am inclined, by the way, to feel that targets ought to be ambi­
tious; that you ought to make that little extra effort that would be
required in order to get the rest of the way. Thus, I don’t greatly dis­
agree with the 4 percent target for the unemployment rate, so long as
it is adjustable— as long as the President can say, “W e can’t make
this by 1983,” or “This rate, given our conditions, is just impossible.”
Senator H e in z . Which you feel he can do under this bill ?
Mr. P artee . Yes, he would be able to, as I understand the bill. The
same could be said of Senator Proxmire’s 3 percent inflation goal
under my suggestion; the President might have to admit we just
couldn’t make it, or couldn’t make it by 1983 under the kind of condi­
tions that we face. I must admit that it is hard to see how we would
get down to 3 percent by 1983.




223
; Senator H e in z . Under those circumstances, ma^ybe Senator Proxmire’s amendment is not enough, maybe we should insist on zero.
, Mr. P artee . I agree with Chairman Schultze that zero is just too
heroic a number to put into law at this time. I believe that the Chair­
man’s proposal is that 3 percent is an interim target, and once having
reached the interim, we should move on down to zero. That seems to
me a good way of putting it.
Now I believe that quite a bit can be done to reduce the rate of in­
flation with structural programs, through avoidance of areas of excess
demand and through supply-creating activities, such as more invest­
ment and a better program for increasing agricultural products and
other raw materials in the economy.
I also think that it is just conceivable that we might again find our­
selves in the circumstances where the wage-price spiral will slow. To
my knowledge, nobody forecast the period of very low rates of infla­
tion that occurred in the early 1960’s. In the late 1950’s, the view was
that we were going to have an accelerating rate of inflation in the
country, that 3 percent was a minimum, and it was going to build up
from there. Yet, in the early 1960’s somehow we landed on the kind of
conditions that made it possible to have an average annual CPI
increase of 1.25 percent, for example, and for wage increases to be
within sight of the productivity gains in the economy.
I don’t see that it is an impossibility that we could have that kind
of situation again, perhaps with Government aid, perhaps as a result
of natural forces. And if we do, the 3 percent inflation rate that the
chairman has proposed is not unreasonably low. Indeed, if we could
eliminate the circularity that leads to 8.5-percent wage rate increases,
2.5-percent productivity gains, and a 6-percent unit labor cost increase
each year— a circularity that doesn’t benefit anybody at all— 3 percent
would be a rather high rate of inflation for the economy to be gener­
ated on the basis of, say, spot droughts, the energy crisis, and shocks
like that.
So I don’t consider moving down to 3 percent or below an impossi­
bility, by any means.
The C h a ir m a n . Would the Senator yield on this Senator’s time for
just a minute ?
Senator H e in z . I would be happy to yield on the Senator’s time.
The C h a ir m a n . I think we ought to recognize the fact throughout
our economic history, except for war periods, price stability has been
pretty much a characteristic. It is very hard to compare, but the evi­
dence is that the prices in 1940 were about the same as they were in
1840; in 100 years they didn’t go up very much.
There were periods of deflation, inflation, they skyrocketed one time
and then dropped down sharply. It is only in recent years that we
have had this high inflation, and we have really only had it in the last
10 years or so.
On the other hand, unemployment has been something that has been
around 3, 4, 5, 6, 7, or 8 percent. W e have had some serious depres­
sions.
So looked at from a historic standpoint, that 3-percent goal would
seem to be more in keeping with our economic history by far than the
unemployment goal.




224
Senator H e in z . I am delighted to have the Senator’s views.
The C h a ir m a n . On my time.
Senator H e in z . Mr. Partee, I would still like to ask you to come
back to this question, and that is is the inflation limitation or goal of 3
percent going to be more difficult for us to achieve than the employ­
ment goal of 4 percent?
I mean I agree with you that we ought to have goals that challenge
us. But on the other hand, if we are asking one group of people to
jump 7 feet and the other to jump 9 feet, knowing full well that the
world’s record is 7y2 feet, we are a little tough on one group of people.
We want to make sure that we haven’t set the hurdle at an unacceptably high level here for us to have any reasonable chance of clear­
ing it.
Now that carries with it the very real implication that if you set a
goal which you know you can’t possibly achieve, pretty soon every­
body says well, let’s not pay any attention to that part of the law,
■they didn’t know what they were doing, or if they did know what they
were doing, they were being cynical, and pretty soon you invite break­
ing the law, and the law enforcement branch turns its head, as they
do with so many of the laws that legislators have written on the books,
both Federal and State. W e have lots of laws that are not enforced
because nobody believes they are reasonable laws.
So my question is are you sure that 3 percent is indeed of equal
reasonableness with 4 percent? We have had a rationale as to how we
get the 4 percent unemployment. Can you give us any kind of similar
rationale for an inflation goal of 3 percent, and if not 3 percent, give
us a rationale for Sy2 or 4 percent or 41 percent, whatever you feel
/£
you can give us a rationale for ?
We look to the Fed as one of our principal bastions of fighting in­
flation. I would want to be sure the Fed has a good rationale for fight­
ing inflation here, and I would like to hear it.
Mr. P artee . A s I said, my rationale for 3 percent is simply that I
believe that would allow plenty of room for the kind of rates of infla­
tion which might result from occasional shocks to the economy, the
need for energy prices to rise significantly over time, that kind of
thing. What it doesn’t allow room for is a situation in which unit
labor costs go up 5 or 6 or 7 percent a year as they have been doing,
recently.
What is necessary in order to get the current inflation rate down is
a reduction in the increase in unit labor costs. That is very difficult to
do through monetary policy alone, because the kind of restraint that
monetary policy can introduce falls on both prices and real activity..
In fact, initially it falls more on real activity than prices, in my view.
So it is very difficult for monetary policy to dampen unit labor cost
increases.
What we need to find, and I would not rule it out, is a way of en­
tering into this wage-price spiral problem. I f we can do that, a
3-percent target is OK.
I wouldn’t quarrel greatly with 4 percent as a target. The difficulty
with it is that prices would double in 18 years at a 4-percent rate of
inflation. That seems pretty fast. A t a 3-percent rate of inflation, it
takes a quarter of a century for prices to double and that seems to be




225
a more reasonable kind of an objective to have in terms of an interim
target.
I f inflation continues at a rapid rate I think it will have a tendency
to accelerate, because of precautionary behavior on the part of the
public attempting to protect themselves against the inflation. There­
fore, I think we have to take care that we don’t have an interim target
that is so high that it might lead people to engage in precautionary
inflationary behavior. Thus, I have some preference for 3 percent,
though 4 perhaps is a more realistic target.
Senator H e in z . One last question. The chairman has been very
patient.
You mentioned on page 7 of your statement that you seek to add the
language from section 2A of the Federal Reserve Act.
Does that mean if that language were added, and the Fed saw this
cycle of inflation building up and let’s say it saw a combination of
macro and ineffective structural economic policies being put into
effect, so that while some additional people were being employed, the
overall benefit to the economy was extremely marginal, and larger
deficits were being created and were fueling an inflationary fire, that
the Fed would construe this language to mean they would be obli­
gated and certainly at the minimum authorized to take steps to miti­
gate such an inflationary situation by whatever means they might have
at their disposal ?
Mr. P artee . Yes, but I would read that language as having more
effect on the interim between yearly reports. I think if there were over
time developing inflationary processes that were getting to an uncon­
trollable point, that we would differ with the President’s program in
the annual report. But it also could well happen that during the
course of the year there might be a change in circumstances that could
call for a change in emphasis. For example, we are only into early
May 1978, and yet I don’t know anyone who would have predicted at
the end of last year, 4 months ago, that the unemployment rate would
already be down to 6 percent. Generally the expectation was that it
would drift down gradually as the year went on to something above
6 percent at the end of the year. W e are way ahead of expectations in
that area.
Senator H e in z . D o you consider the Federal deficit ahead or behind
expectations ?
Mr. P artee . I am not as well informed on that.
I was going to say, on the other hand, that I don’t know of anyone
who would have predicted that the rate of price increase thus this
year would have been as large as it has been; it is close to a double
digit rate in the first 4 months.
^So it might well be that interim developments, unexpected at the
time the President writes his report, and at the time we comment and
write our independent report, would call for a change in posture. I
think we ought to have the right to change and to report to this com­
mittee, as we do under the Federal Reserve Reform Act.
Senator H e in z . Thank you very much, Mr. Partee.
The C h a ir m a n . Thank you, Governor Partee. It was excellent testi­
mony. It is most heartening to see we have the seven distinguished




226
Governors of the Federal Eeserve Board supporting the Proxmire
amendment,
Mr. P artee. W e only have six currently, Mr. Chairman.
The C h a ir m a n . Well, you speak with a voice of 600. A t any rate,
thank you very much.
The committee will stand in recess until 10 o’clock tomorrow
morning.
[Thereupon, at 12:30 p.m. the hearing was recessed, to reconvene at
10 a.m. the following day.]




FULL EMPLOYMENT AND BALANCED GROWTH
ACT OF 1978

WEDNESDAY, M A Y 10, 1978
U nited S tates S en ate ,
C om m ittee on B a n k in g , H ousing , a n d U rban A ffairs ,

,

Washington D.C.
The committee met at 10:10 a.m. in room 5302, Dirksen Senate
Office Building, Senator William Proxmire (chairman of the commit­
tee) presiding.
Present: Senators Proxmire and Riegle.
The C h a ir m a n . The committee will come to order.
Today is the third and final day of the committee’s hearings on the
Humphrey-Hawkins bill. #
As you are all aware this legislation would amend the Employment
Act of 1946 with the major idea of establishing a 4-percent unemploy­
ment objective for 1983 and the creation of a framework within which
policies designed to foster full employment and balanced growth
would be formulated and coordinated among the various parties in
the Government with responsibility for economic policy.
Our economy is confronted both with an unemployment problem
and an inflation problem. The committee has been told repeatedly dur­
ing the past 2 days that these problems should be approached together
rather than separately and we have had several suggestions on how
this might be done. As you may know, I favor a 3-percent inflation
goal for 1983 to go along with the unemployment goal so they are
approached on an equal basis and so that the inflation is not confined
to rhetoric but has the same status as the numerical specific unemploy­
ment goal.
Our witnesses today are all from the business community which has
long ago embraced the concepts of corporate goals and corporate plan­
ning to achieve them. I am interested in hearing the views of today’s
witnesses on how goals and planning can be used to help the Congress
and the administration fulfill its responsibilities for economic policy.
Our witnesses today will be heard as a panel. They are: Mr. Lewis
Foy, chairman of Bethlehem Steel and representing the Business
Roundtable; Mr. Hugh P. Donaghue, vice president and assistant to
the chief executive officer, Control Data Corp.; Mr. George Hagedorn,
chief economist and vice president, National Association of Manufac­
turers ; and Mr. Arnold Saltzman, chairman and chief executive offi­
cer, Seagrave Corp.
I ’m going to ask Mr. Foy to go first. Mr. Foy, unfortunately, is
going to have to leave after his statement. He’s told me that he has




(227)

228
very able people who can respond to questions relating to the Round­
table position on the bill and we regret very much that Mr. Foy has
to leave but we certainly understand. Mr. Foy, why don’t you go
ahead and give your statement and then you will be excused. W e
would appreciate it if you could limit your statements to 10 minutes
because of the fact that we have four distinguished witnesses and we
would like to get into questioning if we could, and to assist you in
that regard we are going to run the green light for 9 minutes, the
yellow light for 1 minute, and then the red light will tell you that,
your time is up. These are all for your assistance.




229
STATEMENT OF LEWIS W. FOT, CHAIRMAN, NATIONAL PLANNING
AND EMPLOYMENT TASK FORCE, THE BUSINESS ROUNDTABLE;
ACCOMPANIED BY RICHARD SCHUBERT, VICE PRESIDENT, PUB­
LIC AFFAIRS, BETHLEHEM STEEL CORPORATION; AND MALCOLM
LOVELL, PRESIDENT, RUBBER MANUFACTURERS ASSOCIATION
Mr. F o y . Mr. Chairman, I will watch the light.
[Complete statement and additional material received from Mr. Foy
follows:]
T e s t i m o n y P r e s e n t e d b y L e w i s W . F o y ,* C h a i r m a n o f T h e B u s i n e s s
R o u n d t a b l e T a s k F orce o n N a t i o n a l P l a n n i n g a n d E m p l o y m e n t

Mr. Chairman and members o f the committee, I appreciate the opportunity
to appear before you this morning to present the views o f The Business Round­
table on Senate Bill 50— “ The Full Employment and Balanced Growth Act o f
1978” — better known as the Humphrey-Hawkins Bill.
Accom panying me this m orning are Richard Schubert, vice president, public
affairs o f Bethlehem Steel Corporation, and Malcolm Lovell, president o f the
Rubber M anufacturers Association.
The Business Roundtable believes that our society must mount a m ajor at­
tack on structural unemployment. Tow ard this end, w e support specific meas­
ures to deal w ith such real and serious problems as the high level o f jobless­
ness among minorities and youth.
Representatives o f The Business Roundtable have offered testimony in sup­
port o f reauthorizing the Comprehensive Employment and Training Act, and
we have been working w ith the administration and the National Alliance o f
Businessmen to perfect the new private sector training initiatives proposed in
that act.
Such programs must be specifically designed and targeted to meet specific
problems.
Unfortunately, in our judgment the Humphrey-Hawkins Bill is not a specific
and practical response to the structural unemployment problem.
Generalized national planning solutions, like this proposed act, only serve
to deflect the energies and obscure the purposes that must be pursued if we
hope to alleviate the human and econom ic suffering that result from structural
unemployment among certain groups.
Before proceeding to give you our detailed reasons fo r opposing this legisla­
tion, I believe it would be useful and instructive to remind ourselves o f the
origins o f the w idely diverse purposes and interests that are embodied in the
current version o f the Humphrey-Hawkins Bill.
The original House bill sought a goal o f “ fu ll employment” by setting forth
a legaUy enforceable right to a job at prevailing wages fo r every citizen willing
and able to w ork and it made the federal government the guarantor o f that
right.
The federal government was responsible fo r ensuring that within two years,
the unemployment rate would be three percent, and w as made the “ employer
o f last resort.” The government was required to create the requisite number o f
public jobs necessary to meet the deficit in private jobs.
The original Senate bill provided fo r a new “ national planning” system with
an elaborate set o f “ indicative” planning requirements. It essentially set up dual
planning systems, w ith the President required to propose numerical five-year
planning goals which the Congress w as then obliged to act on and either
adopt or revise in legislation.
♦Mr. F o y is Chairman and Chief Executive Officer of Bethlehem Steel Corporation.




230
These tw o disparate proposals w ith w idely differing purposes w ere sub­
sequently joined together apparently in an attempt to both broaden the base o f
support fo r “ national planning” and to benefit from the public’s concern over
the continuing high levels o f unemployment.
This original, join t Senate-House bill thus welded “ national planning” and
“ full employment” together by making the achievement o f “ fu ll employment”
the over-riding purpose o f “ national planning.”
It called fo r the development o f num erical five-year plans through a “ national
planning” process, but it dictated an explicit five-year “fu ll employment” goal
i n le g is la tio n !

The original version o f the Humphrey-Hawkins Bill has been gradually re­
vised over the past several years— first by its sponsors, and then by the Presi­
dent— so that many o f the most far-reaching and controversial o f the initial
provisions have been deleted.
The legally enforceable job guarantee was deleted early in the process, and
the authorization o f m ajor public job-creation programs was trimmed later at
the President’s insistence.
But in spite o f these w ise modifications, the basic structure o f the bill re­
mains. It still overpromises that both “fu ll employment” and “ balanced grow th”
can be achieved by “ national planning,” and it still legislates a specific un­
employment goal o f fou r percent by 1983, while leaving the setting o f other
goals to the operation o f the planning process.
Apparently reflecting the presumed strength o f the “ fu ll employment” sym­
bolism in the bill, no attempt was made in the House to remove the explicit
four percent unemployment goal. In, fact, the overwhelming vote by the House
mandating the achievement o f 100 percent o f parity for farin prices might be
interpreted as establishing a goal equal to that o f the unemployment goal.
The House also greatly strengthened the provisions o f the bill directed at
reaching “ reasonable price stability” and a “ balanced budget.”
On the other hand, attempts were narrow ly defeated to set a three percent
inflation goal for 1983, to balance the budget by 1983, and to legislate specific
tax rate reductions.
The most significant action taken by the House was the deletion o f the pro­
cedures in T itle I I I by which the Congress was to act on and set specific
numerical econom ic goals, thus properly leaving w ith the President the respon­
sibility fo r planning and implementing econom ic policy.
The Business Roundtable believes that both Senate Bill 50 and the Housepassed bill are unwise and unrealistic. W hile all Americans desire “ fu ll
employment,” it is unrealistic and less than honest to promise such a result
simply through installation o f a complex new national planning system, or
through the symbolism o f legislating an unachievable unemployment goal.
W e support the House amendments to Title III, but still believe the “ national
planning” purposes o f the bill are flawed, particularly because the bill prejudges
the result o f the planning system by legislating specific economic goals.
Mr. Chairman, now I ’d like to give you some o f the reasons w hy we believe
it’s unwise to legislate an unemployment goal, and particularly the fou r percent
goal specified in the bill.
First, because o f changes in the make-up o f the labor force, the low est level
o f unemployment w e could achieve solely through noninflationary macroeconomic policies is no longer fo u r percent, but probably closer to 5% percent.
The old fou r percent goal is outmoded and has no valid meaning under today’s
circumstances.
The National Commission on M anpower P olicy has ju st published a study by
Professor R. A. Gordon o f the University o f C alifornia entitled “ The Need to
Disaggregate the Full Employment Goal.”
Professor Gordon writes as follow s: “ It is common today to consider a
national rate o f about 5% percent as corresponding to ‘full employment’— not
only because o f the changing age-sex pattern o f the labor force, but also because




231
o f the worsened tradeoff between inflation and unemployment that seems to
have taken place.”
.
Professor Gordon is eminently well-qualified to make that judgment. In
1962 he chaired the President’s Committee to Appraise Employment and
Unemployment Statistics, which led to the last m ajor restructuring o f unem­
ployment data. He is recognized to be a leading authority in this field.
Our point here is not only that fou r percent is no longer a realistic criterion
fo r “ fu ll employment,” but that the “ fu ll employment” concept itself is dynamic
and ever-changing. This year’s “ fu ll employment” rate may be inappropriate
next year, and w ill most probably be inappropriate several years hence. Thus,
it would not only be a mistake to write into law the obsolete rate o f four
percent, but it would be a mistake to write any arbitrary numerical rate into
permanent law.
Second, the methodology and procedures fo r collecting unemployment statis­
tics are not sensitive enough to the realities o f our economic system so that the
data can be reliably used to evaluate progress toward an absolute economic goal.
Likewise, the very definitions o f “ employment” and “ unemployment” reflect
judgments that must change with the times and indeed were changed signifi­
cantly in 1967 as a result of the recommendations o f the committee chaired by
Professor Gordon.
The Congress has recently recognized the dynamic nature o f these statistics
by establishing a National Commission on Employment and Unemployment
Statistics. The commission is chaired by a distinguished economist, Dr. Sar
Levitan o f George W ashington University, and is to issue a final report in the
fa ll o f 1979.
The report w ill undoubtedly call fo r some basic changes in the concept and
methodology fo r computing unemployment. Consequently, it would seem wise
to refrain from casting the current unemployment concepts and methodologies
in the concrete o f legislation.
Third, the Carter administration’s economic report o f this past January
calculated that the “ full employment without inflation” rate was now 4.7 per­
cent. Nevertheless, the administration has continued to support the HumphreyHawkins goal o f fou r percent, by maintaining that the rate would be brought
down from 4.7 percent by the creation o f public jobs.
Assistant Secretary o f Labor Arnold Packer in recent testimony before the
House Budget Committee, estimated that total unemployment in 1983 w ill have
to be reduced by something in the range o f 800,000 to 840,000 through structural
programs if the fou r percent goal is to be achieved.
Because creating public sector jobs draws workers into the labor force, he
estimated it would require two public jobs to reduce unemployment by one. On
that basis he concluded that it would require 1.6 to 1.7 million public jobs to
meet the fou r percent goal.
A public job program o f that size would cost an estimated $14 billion annually.
B y comparison, the current public jobs program employs about 725,000 workers
and costs about $6.2 billion annually.
The im plications are serious. By adopting the four percent goal in the face
o f the administration’s own estimates. Congress would be implicitly committing
itself to more than doubling the existing public job creation program which is
already large and costly.
Finally, the supporters o f an explicit fou r percent “ full employment” goal
maintain that the goal is flexible since an escape clause is written into the
legislation. This provision allows the President to recommend a revision in the
goal if he finds that it cannot be met.
As a practical reality, this provision w on’t give the President “ flexibility,”
but rather confront him with a “ no-win” situation. He w ill have to either
m odify the goals and suffer the political consequences, or, by law, present a
budget and economic plan that w ill meet the goal.
On^e national goals are fixed in legislation they become absolute political
imperatives that can only be revised at great political peril. It’s risky to rely
on political embarrassment as the tool to ensure that the President wisely and
vigorously pursues effective economic goals.
The President’s so-called “ flexibility” to revise economic goals under the
provisions o f Senate Bill 50 would be substantially diluted by the amendment
recently voted by the Senate Human Resources Committee.




232
This amendment provides that any modification o f a goal or timetable
recommended by the President would not take effect if either House adopted a
resolution disapproving the modification.
This additional intrusion o f the Congress into detailed economic policy-setting
could have very serious consequences.
If only one House disapproved the President’s economic policies, he would be
forced to adjust his revenue and expenditure programs to meet econom ic goals
which, in his judgment, were unwise and perhaps unattainable.
Mr. Chairman, I ’ll now move along to the reasons why we oppose the
“ national planning” provisions o f the bill under consideration.
I want to emphasize that short- and long-range planning by the executive
branch is absolutely essential and should be constantly encouragegd and im­
proved. No modern enterprise can prosper without strategic plans, and this is
particularly true of our national government.
Presently, the executive branch carries out detailed economic and fiscal
planning, and constantly reports the results o f these various planning processes
vto the Congress.
The President’s budget and economic report now contain five-year economic,
expenditure, and revenue estimates, and would seem to provide sufficient
inform ation to allow the Congress to make inform ed decisions.
Consequently, it’s clearly not necessary fo r the Congress to require by law
that the executive branch continue to carry out and develop an effective and
integrated planning system.
Indeed, specific legislative requirements might interfere w ith the continual
process o f change and adaptation to new circumstances that are the very
essence o f a dynamic and effective planning system.
Secondly, we are concerned that the bill prescribes five-year numerical plan­
ning and goals fo r economic variables that aren’t defined in the bill and which
may have a variety o f interpretations and a number o f optional data sources.
For example, the terms “ production,” “ capital form ation,” “ real incom e,”
“ productivity,” and “ reasonable price stability” have no common and accepted
definitions and no authoritative data base fo r measurement.
Mr. Chairman, rather than going into detail on this point I ’d like to offer
fo r the record a paper The Business Roundtable commissioned by Dr. John
I^endrick o f George W ashington University.
We believe the paper shows the difficulty and confusion that may result from
the facile belief that these broad economic concepts can be reduced to simple
numerical goals that can be readily understood and effectively measured.
Finally, on this point, w e’re concerned that the original bill, Senate B ill 50,
makes numerical national planning paramount by requiring that both the execu­
tive branch and the congressional budget and taxing policies shall be “ geared
to” the goals.
This would subordinate both the new congressional budget process and the
long-standing tax-w riting procedures of the Congress to this new economic
goal-setting process.
Certainly the country should not condemn its well-tested fiscal processes
to the vagaries o f economic forecasting.
The joint economic committee has been an im portant and useful vehicle for
studying economic problems and trends and then focusing national attention on
them. But it would be a mistake to elevate it to the pre-eminent position o f
setting the economic parameters within w hich the budget, finance, and other
fiscal committees are required to operate.
As I stated earlier, Mr. Chairman, we support the House amendments to
T itle III. The Senate Human Resources Committee has recently recommended
amendments to Title III, which, in our judgment, are a step backward from
ithe House action.
These amendments would restore a strong role to the joint economic com­
mittee and would provide fo r the setting o f economic goals by the Congress
in conjunction with its action on the first concurrent budget resolution.
I repeat that we are opposed to a national planning process wherein the
Congress sets explicit numerical economic goals.
We are concerned, Mr. Chairman, by the provisions o f the bill that would
alter the relationship between the Federal Reserve Board and the Congress.
The desirable independence o f the Federal Reserve Board could be damaged
by requiring it to report to the Congress on the relationship o f its “ intended




233
policies fo r the year ahead” to those o f the President. And further, by directing
the Congress to take such action as it finds necessary to “ insure closer con­
form ty” to the purpose o f the bill.
In summary, Mr. Chairman, we oppose the bill fo r tw o primary reason s:
First, the Congress should not infringe on the responsibility o f the President to
plan and implement the economic policies o f the nation. Second, the Congress
should not set explicit numerical econom ic goals fo r unemployment or any other
econom ic variables thereby mandating in exquisite detail the results o f the
planning processes, and possibly forcin g the President into unwise economic
choices.
This concludes my statement, Mr. Chairman. My colleagues and I w ill be
glad to answer any questions the committee may have.

D

a n d M e t h o d o l o g i c a l P r o b l e m s W i t h K e y C o n c e p t s In c o r p o r a t e d
i n t h e “F u l l E m p l o y m e n t a n d B a l a n c e G r o w t h A c t o f 1978” (H .R. 50)
( H u m p h r e y -Ha w k i n s B ill) b y D r .Jo h n W. K e nd r i c k

efinition

The Full Employment and Balanced Growth A ct o f 1978 (H.R. 50) as passed
by the House asserts the responsibility o f the Federal Government “ to use all
practicable programs and policies to promote fu ll employment, production, and
real income, balanced growth, adequate productivity growth, proper attention
to national priority needs, and reasonably stable prices.” (p. 7) Elsewhere,
reference is made to high rates o f capital form ation as being necessary to
ensure adequate rates o f capacity expansion and productivity growth (p. 37).
Further, the President is required to set forth “ annual numerical goals for 5
years fo r employment and unemployment, private sector employment, produc­
tion, real income, farm income, productivity, and reasonable price stability.”
(p. 10).
Despite the importance placed on these various econom ic objectives, no­
w here in the A ct are the concepts refined even in general terms, with the
exception o f the unemployment and employment goals, nor are they related to
specific statistical series. This lack o f specificity with respect to most o f the
econom ic variables would cause serious ambiguities and difficulties in ad­
m inistration o f the Act. The purpose o f this paper is to set forth some o f
the alternative interpretations that can be given to the m ajor economic variables
cited in the Act, and some o f the alternative statistical series that could be
used to implement the concepts fo r purposes o f goal-setting and the monitoring
o f economic developments relative to those goals. This review points up the
serious conceptual and methodological problems w ith reducing to single numbers
the series o f general economic goals included in the Act.
production

The broadest currently available official measure o f production is the gross
national product (G N P ). But since movements in the GNP reflect changes in
prices as well as changes in the “ real” physical volume o f production o f final
goods and services, it may be assumed that the authors o f the Act are interested
in the levels and growth o f real product (i.e., current dollar product deflated
by appropriate price indexes to constant dollars). But there are two versions
o f aggregate real product: real GNP, and real NNP (net national product)
w hich excludes real capital consumption allowances. Given the interest ex ­
pressed by the Act in “ economic well-being,” presumably the authors would
prefer the real NNP measures, although it is less well-known, and subject to
greater margins o f error owing to difficulties o f estimating depreciation and
other capital consumption in constant prices. But the Act does not indicate
w hether it is referring to gross or net product measures.
Nor does it specify whether “ production” relates to the total economy, or
the business sector. The official GNP and NNP estimates comprise product
originating in general governments, households, and nonprofit institutions, and
the rest-of-the world, as well as in business, although the latter represents
about 85 percent o f the total. Because o f the unavailability o f adequate output
measures fo r the non-business sectors, the Bureau o f Economic Analysis meas­
ures income and product originating in the government and personal sectors in
terms o f compensation o f employees. Compensation is deflated by average




234
earnings, so that the real product reflects changes in labor input, not output.
Income originating in the rest-of-the-world is almost entirely property income,
and this is deflated by the “ im plicit price deflator” fo r the GNP, so that real
net income from abroad is measured in terms o f its purchasing power fo r
domestic products, not in terms o f output. Some portions o f gross business
product, prim arily in the finance and service sectors, are also deflated by input
prices instead o f output prices, so that even real gross business product is not
a pure production measure.1
Because o f problems in measuring output in parts o f the service sector, some
analysts prefer to follow the Federal Reserve B oard’s index o f industrial pro­
duction, which covers manufacturing, mining, and utilities. This index is m ore
cyclically sensitive than real product, even that o f the business sector, and is
available monthly rather than quarterly. But the current F R B index is based
to a significant degree on productivity-adjusted input data as w ell as on direct
output data. When more adequate annual production data become available,
the FR B index is revised. And every five years it is further revised to reflect
the more comprehensive data available from the econom ic censuses.
It should also be noted that the overall F R B index is duplicative, in that
it includes m aterials and other intermediate products as w ell as final products.
Indexes are also available fo r final production alone. Even these indexes d o
not show the same movements as the BE A estimates o f real product originating
in the same industries because o f both conceptual and statistical differences
between the two sets o f measures. The BEA estimates are basically value-added
measures, in that the real cost o f intermediate goods and services are deducted
from the real value o f total production in order to obtain real product originat­
ing in industry. This differs from the FR B measure o f final production. Further,
BEA uses price-deflation techniques, whereas F R B uses prim arily direct pro­
duction measures or proxies fo r production. Movements fo r the same industries
differ even between years in w hich both sets o f measures have been adjusted
to benchmark Census data.
Consequently, there are three general measures o f “ production” which are
now iti use by econom ic analysts fo r various estimation purposes. Each has
its particular strengths and weaknesses, and each would produce a different
numerical goal fo r purposes o f the Act.
BEAL INCOME AND ECONOMIC WELL-BEING

The term ‘‘incom e” is often used synonm ously w ith “ product,” as in the
national income and product accounts. In the accounts, Income, or fa ctor costs
and other charges against product, is the debit side o f the national production
account and final expenditures are the credit side. Although real income could
therefore be considered identical to real national product, gross or net o f
capital consumption allowances, it is more likely to be interpreted as relating
to real national income (fa ctor c o st), in which real indirect business taxes less
subsidies, and real business transfers, are deducted from real NNP. This
represents NNP at constant factor costs per unit o f final product, not real
factor costs measured as factor inputs at constant factor prices, which is an
alternative measure.
Real income might also be interpreted as real disposable personal income
(D P I), w hich would come closer to the notion o f economic well-being. But
there is some question as to how disposable personal income should be de­
flated— by the BLS consumer price index or by the BE A im plicit price deflator
for personal consumption expenditures, to represent the potential command o f
disposable personal income over consumer goods and serv ices; or be a com ­
bination o f consumer prices and investment goods prices, since part o f dis­
posable personal income is saved and invested.
The material basis fo r increased individual well-being does not increase un­
less real income rises faster than population. F’or this reason, there is special
interest in estimates o f real income per capita. Population is a crude denomi­
nator, however, since various groups differ considerably in consumption patterns
and requirements. But there are many problems involved in estimates o f real
income— whether NNP, national income, or disposable personal income— as a
basis fo r comparisons o f econom ic well-being. F or one thing, there is much
1 Concepts and measures of production are treated In John W . Kendrick, “E conomic
Accounts and Their Uses” N e w Y o r k : McGraw-Hill B o o k Co., 1972).




235
non-market economic activity whose value is not included in national incom es
and product; fo r example, the value o f unpaid services o f housewives and
other fam ily members. Nor is the value o f voluntary leisure time estimated. In
its proposed budget fo r -Fiscal Year 1&7&, B E A has a project which w ould experimet with estimates o f the “ imputed” values o f such activities, which clearly
contribute to economic well-being. Unofficial estimates indicate such im putations
would add more than 50 percent to the official GNP estimates. Further, there
are no deductions o f “ bads” from the incom e and product estimates, such as
the negative value o f the disamenities o f urban living. Nor do the estimates
reflect changes in the quality o f the physical environment.
Professors Nordhaus and Tobin have attem pted to produce a “ measure o f
econom ic w elfare” by adjusting the official NNP estimates fo r the variables
mentioned above, and others.2 It has been cited by Paul Samuelson in his latest
Principles textbook, under the acronym NEW , fo r net econom ic w elfare. But
its authors admit there are severe conceptual and statistical problems involved
in estimating economic well-being. It is unlikely that a panel o f econom ists
could agree on the conceptual fram ew ork fo r such estimates, and if they could
many o f the basic data required to produce reasonably good estimates w ould
be lacking. It must be concluded, therefore, that the term “ econom ic well-being”
as used in H.R. 50, is non-operational unless those who w ould be administering
the Act were willing to settle fo r such adm ittedly im perfect measures as real
NNP or D P I per capita.
PRODUCTIVITY

The most common measure o f productivity is made in terms o f the “ output
per labor-hour” concept. The BLS produces quarterly estimates o f real product
per hour o f all persons engaged in production in several m ajor sectors o f the
U.S. economy. But the broadest o f these is confined to the business sector (a d ­
justed to remove rental income from residential real estate), since as noted
above there are not adequate independent measures o f real product and labor
input fo r the non-business sectors. Even real business product and productivity
estimates have some downward bias as explained above. But presumably the
authors o f H.R. 50 would settle fo r measures o f productivity in the business
economy, since reasonably adequate measures do not exist fo r the entire U.S.
economy.
It is important to observe, however, that labor is only one o f the factors
o f production, so that outpct per hour is a “ partial productivity ratio,” and
there are as many partial producivity ratios as there are classes o f inputs
associated with output. Associated with real product are inputs o f capital and
land as well as o f labor. Associated with gross production measures (such as
the FR B indexes) there are also inputs o f energy and other intermediate
products as well as o f the basic factors o f production (land, labor, and cap ital).
The most comprehensive productivity measures are “ m u ltifactor” or “ total
fa ctor” productivity measures, which relate real product to all the associated
tangible factor inputs, or relate gross production to the sum o f fa ctor and
intermediate inputs. These ratios reflect the net savings achieved over time
in real costs (inputs) per unit o f output, and thus the increase in productive
efficiency generally. Estimates o f total factor productivity fo r the U.S. private
domestic business economy by m ajor sector and industry have been presented
in studies by the National Bureau o f Econom ic R esea rch 8 and by other re­
search institutions and individuals. But they are not prepared on a regular,
continuing basis as are the BLS output per hour measures w hich reflect changes
in input mix (factor substitutions) as w ell as changes in productive efficiency
generally.
It would seem reasonable to assume that the authors o f H.R. 50 would prefer
to have their productivity concept implemented in terms o f multi-fnotor pro­
ductivity. This would involve expanding the productivity measurement program
o f the Federal statistical agencies. I f they are w illing to settle fo r the partial
output-per-hour ratios, this should be specified in the Act.
O f course, policies to promote “ adequate productivity grow th” require
adequate analysis o f the sources o f productivity growth. M ore or less rough
2
William D. Nordhaus and James Tobin, “Is G r o w t h Obsolete?” , “T h e M easurement of
E conomic and Social Performance,” Vol. 38 of “Studies in Income and Wea l t h ” ( N e w
York: National Bureau of Economic Research, 1973).
*See John W. Kendrick, P o s t w a r P r o d u c t i v i t y T r e n d s i n t h e U n i t e d S t a t e s , 1 9 W - J 9 6 9
( N e w York: National Bureau of Economic Research, 1974). In this volume reference is
m a d e to earlier studies of total factor productivity.

30- 454— 78------------16




236
estimates o f the m ajor-sou rces o f growth o f real product and productivity in
the U.S. econom y have been made by a number o f analysts, nQtably Edw ard F.
Denison o f The Brookings Institution.4 But much more w ork remains to be
done to quantify the m a jor factors affecting productivity change as a basis fo r
form ulation o f policies to prom ote productivity.
INFLATION AND REASONABLE PRICE STABILITY

W hereas H .R. 50 names “ reasonable price stability” among its objectives,
nowhere in the A ct are the appropriate measures of the general price level
specified in terms o f w hich the President should set forth explicit short-term
and medium-term goals. W ith regard to the BL indexes, the consumer price
index w ould be more directly relevant to individual well-being than the in­
dustrial price index. B ut the broadest general price index is the im plicit price
deflator fo r the GNP, published quarterly by BE A in several versions (fixed
1972 weights, as w ell as changing weights, and a “ chain price index” ). The
deflator fo r government product is, however, the average compensation o f
government employees, by type, which is not an output price index. Therefore,
if the im plicit price deflator were to be used by administrators o f the Act as
an indicator o f the degree o f price inflation, it should be confined to the im ­
plicit price deflator fo r gross private product, or business product. Even then
the preferable version o f the im plicit price deflator should be specified, since
short-run movements o f the several versions can differ significantly.
None o f the price indexes adequately adjust fo r changes in the quality o f
goods and services, o f course. Even if the most appropriate one o f the avail­
able price indexes w ere chosen, there would be considerable latitude o f ju dg­
ment regarding wT
hat constitutes “ reasonable price stability.”
CAPITAL FORMATION (INVESTMENT)

Finally, the A ct w ould seek to encourage “ high rates o f capital form ation”
as necessary fo r adequate grow th o f productivity and productive capacity.
In the official B E A estimates the saving-investment account is confined to
gross private dom estic investment, consisting o f new construction, producers’
durable equipment outlays, and the net change in business inventories, plus
net foreign investment. Under government purchases, new construction is
identified, but not equipment purchases, and no allowance is made fo r inventory
change. W ith respect to the personal sector, new residential construction fo r
ow ner-occupancy is included under business investm ent; but while expenditures
fo r consum er durable goods are identified, they are not classed as investment
although many econom ists so view them, since they provide flows o f services
over a number o f years. Estimates are not available on changes in household
inventories, w hich are conceptually also a form o f investment.
I f capital form ation is defined as outlays providing services over a number
o f years, the concept includes more than investments in structures, equipment
and inventory accum ulation by all sectors. It can also be interpreted as in­
cluding intangible investments which enhance future incom e-and/or output-pro­
ducing capacity. In particular, outlays fo r research and development (R & D ),
education and training, health, safety, and labor mobility may be classed as
investments. These outlays, in addition to non-business tangible investments,
m ore than double the official estimates o f investment.5 The A ct does refer to
research and development and training, and touches on other form s o f invest­
ment tangentially, but not as comprising part o f capital form ation. Clarifica­
tion is needed regarding the scope o f capital form ation if the administrators
o f the Act, should it become law, are to promote its goals unambiguously with
reference to specific statistical series.

The C h a i r m a n .^M t . Foy, we appreciate it very much and we ex­
cuse you. W e regret very much that you have to go, but we certainly
understand it and we will follow up with questions for your colleagues
who I understand will remain.
* E d w a r d F. Denison, Accounting for United States Economic Growth, 19US-1969
(Washington: T h e Brookings Institution, 1974).
5 See John W . Kendrick, The Formation and Stocks of Total Capital ( N e w York: N a ­
tional Bureau of Economic Research, 1976).




237
Our next witness is Mr. Hugh Donaghue, vice president and assist­
ant to the chief executive office, Control Data Corp.
STATEMENT OF HUGH P. DONAGHUE, VICE PRESIDENT AND AS­
SISTANT TO THE CHIEF EXECUTIVE OFFICER, CONTROL DATA
CORPORATION; ACCOMPANIED BY SHERMAN R. ABRAHAMSON,
SPECIAL ASSISTANT TO THE CHIEF EXECUTIVE OFFICER
Mr. D o n a g h u e . Mr. Chairman and members of the committee: My
name is Hugh P. Donaghue. I am vice president and assistant to the
chief executive officer of Control Data Corp., which is headquartered
in Minneapolis, Minn. Accompanying me today is Sherman E. Abrahamson, special assistant to the chief executive officer.
Our company and its chief executive officer, William C. Norris, are
greatly concerned about jobs in the United States. Therefore, I deeply
appreciate the opportunity afforded me to speak about the HumphreyHawkins Full Employment and Balanced Growth Act of 1977.
We believe that enactment of the Humphrey-Hawkins bill must be
considered as a top priority objective of the second session of the 95th
Congress. Its passage will announce to all our citizens that the United
States is firmly and fully committed to reducing unemployment in
our country. It also provides a framework for follow-on legislation
that will be needed to establish specific action programs to reduce un­
employment, underemployment, and to create jobs for our expanding
work force.
There are a number of provisions in the bill that are exemplary,
:and in my written statement I have addressed these. However, in my
.oral testimony I would like to emphasize just a fewr
.
First, the bill makes clear that while its main purpose is to maxi­
mize the number of jobs, it places primary emphasis on the expansion
►f employment in the private sector, and all related policies and pro­
o
grams are to be geared to that purpose.
There are those who sincerely wish to reduce unemployment but are
^equally sincere in their fear of massive diffusion of public funds or
vast increases in the powers of the Federal Government. Those who
have these concerns are provided opportunity for constructive initia­
tive and support of Humphrey-Hawkins by the unequivocal thrust of
the bill towards the private sector.
This bill provides the basis for a coming together of all elements of
our society who have a common aim: meaningful, productive jobs for
Americans. In this regard, we believe that for too long the American
business community, along with labor unions, the churches, universi­
ties, and other sectors of society, have been too occupied with nar­
rowly focused goals and objectives of doing what each wants to do as
opposed to each utilizing its resources to the most reasonable extent
in addressing the problem of unemployment. With passage of this
bill, however, we believe the likelihood of all parts of the private sec­
tor joining with Government in a coordinated effort to obtain national
employment goals will be greatly increased.
Another significant provision that we should like to emphasize is
that of youth employment policies. Minority youth unemployment, at




238
a 40-percent rate and even higher in some of our large cities, is a
shameful blight on our society. We can do better— we must do better.
W e are convinced that dedicated and coordinated large-scale co­
operation of the private sector— that is, business, academia, labor
unions, and the church, with the government—all levels of govern­
ment— can make a vast improvement. This has been demonstrated by
our company’s success in placing plants in poverty areas, thereby
creating local job opportunities within those communities.
Let me give you a specific example from our experience. More than
a decade ago Control Data adopted an explicit social responsibility
program. Its objective was to identify areas in which our know-how
could be used to solve social problems.
A t the urging of some of our younger managers who wanted us to
innovate in hiring part-time employees, we set up a bindery plant in
1970 in a rehabilitated bowling alley that had been gutted during the
riots of the 1960’s in downtown St. Paul. The plant’s operations were
designed especially to employ people who could work only part time,
such as students and mothers.
By 1974 the plant proved to be sufficiently successful to justify our
putting up a new building. It was the first new building to be con­
structed on the mile-long strip in inner St. Paul in 70 years.
Today the plant employs 160 permanent part-time and 10 full-time
employees in three shifts: 8 :30-2 to accommodate mothers who want
to be home when their children arrive from school; and 2 -5 :30 and
5 -9 :30 to accommodate family and school schedules. Ninety percent
of all workers are from minority groups.
The plant binds all the company’s documentation, ranging from an­
nual reports to software manuals, as well as similar work from 80
outside steady customers. Last year the plant’s volume exceeded
$700,000. To tell the truth, the work could be automated with far less
employees. Nevertheless, the operation pays all its corporate overheads
and makes a profit, with wages that are competitive with other bind­
ery plants in Minnesota.
For many of our employees at the plant, this was their first work
experience. Some had criminal convictions and others severe marital
problems and drug addiction. We had to invest considerable time and
effort in training and counseling. This effort has paid off in another
respect, too. Over 150 of our part-time employees have gone on to full­
time jobs in CDC and other companies in the Twin Cities. Just one
example to show what can be done if you have the desire to do it.
Finally, let me address another feature of the bill that we whole­
heartedly endorse and that’s its concern with inflation, but some
comment should be made on the question of whether a specific, nu­
merical, anti-inflation control should be added to the bill, as insisted
upon by the National Chamber of Commerce and that I understand
you are in favor of. W e believe such addition to the bill is not in the
best interests of the country, and goes against the grain of past ex­
perience. It would inevitably lead to the establishment of an inequi­
table wage/price guideline, and ultimately to the demoralizing impo­
sition of wage/price controls.
There is another reason why a numerical anti-inflation goal should
not be included in the bill. It is generally conceded that inflation in




239
this country has not risen totally from domestic pressures on wages
and other traditional factors. In fact, one doesn’t have to be an eco­
nomics expert, which I certainly am not, to perceive international
causal factors of U.S. inflation, notably the oil price-setting actions
of the OPEC cartel. I f you establish numerical goals to attack both
unemployment and inflation in this bill, you will be creating a situa­
tion that will inevitably force tradeoffs that can defeat both efforts,
and we should not be diverted from our goal of providing jobs for
Americans.
And there is a noninflationary solution to unemployment. W e must
recognize the interrelationship of solutions to our energy problems,
our employment problems, our urban problems, our industrial mate­
rials problems, the high cost of food, our water problems, and other
major societal problems. Millions of new, private sector productive
jobs would be derived from their solutions. Therefore, aggressive
efforts are called for to implement solutions under provisions of the
bill which call for programs and policies with particular emphasis
on food, energy, and critical materials.
There are within the United States vast but latent resources that
could be employed in providing more timely and effective creation of
new jobs if all sectors of society were to participate in a dedicated and
cooperative effort. The Humphrey-Hawkins bill provides the frame­
work within which we can move more rapidly toward meeting na­
tional employment goals.
The C h a i r m a n . Thank you very much, Mr. Donaghue.
[Complete statement follows:]
S

t at em e nt

of

H

u g h

E

P. D

o n a g h u e

xecutive

O

,V

ice

P

resident a n d

fficer,C o n t r o l

D

ata

C

A

ssistant to t h e

C

hief

orporation

Mr. Chairman and members of the committee* M y name is Hugh P. Donaghue.
I am Vice President and Assistant to the Chief Executive Officer o f Control
D ata Corporation, which is headquartered in Minneapolis, Minnesota. A ccom ­
panying me today is Shermn R. Abrahamson, Special Assistant to the Chief
E xecutive Officer.
Our company and its Chief Executive Officer, W illiam C. Norris, are greatly
•concerned about jobs in the United States. Therefore, I deeply appreciate the
opportunity afforded me to speak about the H um phrey-Hawkins Full Em ploy­
m ent and Balanced Growth Act o f 1977.
W e believe that enactment o f the Hum phrey-Hawkins B ill must be considered
a s a top priority objective o f the Second Session o f the 95th Congress. Its
passage w ill announce to all our citizens that the United States is firmly and
fu lly committed to reducing unemployment in our country. It also provides
a fram ew ork for follow-on legislation that w ill be needed to establish specific
action programs to reduce unemployment, underemployment, and to create job s
l o r our expanding work force.
There are a number o f provisions in the bill that are ex em pla ry :
emphasis

on

private sector jobs

First, the bill makes clear that w hile its main purpose is to m axim ize the
num ber o f jobs, it places primary emphasis on the expansion o f employment in
the private sector, and all related policies and program s are to be geared to
th at purpose.
There are those who sincerely wish to reduce unemployment but are equally
sincere in their fear o f massive diffusion o f public funds or vast increases in
the powers o f the federal government. Those who have these concerns are
provided opportunity fo r constructive initiative and support o f HumphreyH aw kins by the unequivocal thrust o f the bill tow ards the private sector.




240
This bill provides the basis fo r a coming together of all elements o f our
society who have a common a im : meaningful, productive jobs fo r Americans.
In this regard, w e believe that fo r too long the American business community,
along with labor unions, the churches, universities, and other sectors o f society,
have been too occupied w ith narrow ly focused goals and objectives o f doing
w hat each w ants to do as opposed to each utilizing its resources to the most
reasonable extent in addressing the problem o f unemployment. W ith passage
o f this bill, however, w e believe the likelihood o f all parts o f the private sector
joinin g w ith governm ent in a coordinated effort to obtain national employment
goals w ill be greatly increased.
PRIORITY FOR DEPRESSED AREAS

The second significant provision o f the bill requires the President, as ap­
propriate, to initiate and recommend legislation fo r encouraging new private
sector production and employm ent within depressed regions and localities where
unemployment is high.
B y avoiding the allocation o f funds fo r economic development broadly, on
a simple per capita basis, thousands o f jobs can be created where they are
needed most w ithout adding to inflation. In other words, instead o f allocating
funds or providing tax incentives in areas with low unemployment, provide
these types o f econom ic stimulants where they are urgently needed, such as in
the geographical areas o f high unemployment.
YOUTH EMPLOYMENT

The third significant provision that we should like to emphasize is that o f youth
employment policies. M inority youth unemployment, at a forty percent rate and
even higher in some o f our large cities, is a shameful blight on our society. W e
can do better— w e must do better.
W e are convinced that dedicated and coordinated large scale cooperation o f
the private sector, that is, business, academia, labor unions, and the church,
w ith the government— all levels o f government— can make a vast improvement.
T his has been dem onstrated by your company’s success in placing plants in
poverty areas, thereby creating local job opportunities w ithin those com ­
munities.
JOB TRAINING AND COUNSELING

Our experience relates closely to another important section o f the HumphreyH aw kins Bill, w hich provides fo r job training, counseling, and other support
activities necessary to better prepare disadvantaged persons to enter the work:
force. H ere again, much has been accomplished with existing programs, but
much more needs to be done and can be done by closer, more dedicated efforts
between the private sector and government.
CAPITAL FORMATION

As a businssman who has started several small business firms, and w ho has
personally experienced the challenge o f raising enough risk capital to get
started, I am pleased that the bill includes a section on capital form ation.
This issue has not been given sufficient consideration in national tax legislation,
especially the availability o f funds to the small business community. In ou r
country small business firms have been the principal vehicle fo r introducing
innovation into our econom ic system, and they have suffered severely during
the recent period o f recession and inflation. Interest rates have been high, the
stock market has been depressed, and the availability o f funds has been so
constrained that funds fo r the start-up o f new businesses have been virtually
choked-off.
During the five-year period 1972-1976, first-time stock offerings fell as a
proportion o f all SEC-registered stock offerings from 62 percent to 16 percent.
Registered stock offerings by firms with less than $5 million in assets dropped
from a high o f 698 in 1969 to a low o f 3 in 1975, and only 41 fo r the three
years 1974 through 1976. A section on capital form ation in the HumphreyHaw kins B ill gives this im portant issue the attention and consideration it
deserves.




24 L
DEVELOPMENT AND DIFFUSION OF NEW TECHNOLOGIES

Fully as important as capital form ation is the provision that the Econom ic
R eport should review and assess federal support fo r the development and d if­
fusion o f new technologies. Technological innovation is the wellspring o f both
new and improved products and services and hence, new jobs. In recent years,
in the U.S., this process has been stowing, and it is crucial to bring about a
reversal, and once this is achieved, to maintain it at the required levels.
H ere again, the requirement in the H um phrey-Hawkins Bill fo r reports^ on
technology development and diffusion w ill help to stimulate the required action.
ECONOMIC REPORT

Unfortunately, the relationships o f technology and capital to the creation o f
new job s are not widely understood. H ow ever, the E conom ic R eport can be
used by the Executive Branch and the Congress not only to take appropriate
action to correct deficiencies, but also to assist in gaining a broader public
understanding o f the processes by w hich job s are created.
O f course, the Economic Report w ill serve many other im portant uses, and
is a highly essential tool fo r developing policies and program s needed fo r
achieving employment goals.
in f l a t io n is s u e

Another feature o f the bill that w e w holeheartedly endorse is its concern
with inflation, but some comment should be made on the question o f whether
a specific, numerical, anti-inflation control should be added to the bill, as
insisted upon by the National Chamber o f Commerce. W e believe such addition
to the bill is not in the best interests o f the country, and goes against the
grain o f past experience. It would inevitably lead to the establishment o f an
inequitable w age/price guideline, and ultim ately to the dem oralizing im position
o f w age/price controls.
There is another reason why a num erical anti-inflation goal should not be
included in the bill. It is generally conceded that inflation in this country
has not risen totally from domestic pressures on w age and other traditional
factors. In fact, one doesn’t have to be an econom ics expert to perceive inter­
national causal factors o f U.S. inflation, notably the oil price-setting actions o f
the OPEC cartel. I f you establish num erical goals to attack both unemployment
and inflation in this bill, you w ill be creating a situation that w ill inevitably
force trade-offs that can defeat both efforts, and w e should not be diverted
from our goal o f providing jobs fo r Americans.
And there is a non-inflationary solution to unemployment. W e must recognize
the inter-relationship o f solutions to our energy problems, our employm ent prob­
lems, our urban problems, our industrial m aterials problems, the high cost o f
food, our water problems, and other m ajor societal problems. M illions o f new,
private sector productive jobs w ould be derived from their solutions. There­
fore, aggressive efforts are called fo r to implement solutions under provisions
o f the bill which call for programs and policies w ith particular emphasis on
food, energy, and critical materials.
There are within the U.S. vast but latent resources that could be employed
in providing more timely and effective creation o f new jobs i f all sectors o f
society were to participate in a dedicated and cooperative effort. The HumphreyHawkins B ill provides the fram ew ork w ithin w hich w e can move rapidly to ­
w ard meeting national employment goals.

The C h a ir m a n . Mr. Hagedorn. Mr. Hagedom is vice president and
chief economist of the National Association of Manufacturers. W e
are happy to have you, sir.

STATEMENT OF GEORGE HAGEDORN, VICE PRESIDENT AND CHIEF
ECONOMIST, NATIONAL ASSOCIATION OF MANUFACTURERS
Mi*. H a g e d o rn . Thank you, Mr. Chairman.
Your committee has been chewing over this whole subject for sev­
eral days now, and it’s hard f o know what you can add to the thoughts




242
that have been expressed here* I have given you a tome on the subject
for the record.
The C h a ir m a n . W e will be happy to have it printed in full in the
record. It’s an excellent statement.
Mr. H a g e d o r n . Well, thank you.
[Complete statement follows:]
St

at em e nt

of

G

eorge

N

G. H

ational

agedorn

A

, C

E

hief

ssociation of

M

conomist

a n d

V

ice

P

resident,

anufacturers

I f ever there w as a time that cried out for a thoroughgoing reconsideration
o f the theory and practice o f national economic policymaking, it is the present.
Judged by their result, the style and philosophy which have prevailed in that
field since the mid-19t>0’s have been a national disaster. W e have achieved
w hat was previously thought to be unachievable— simultaneous high rates o f
inflation and o f unemployment. These are accompanied by such other signs o f
econom ic deterioration a s : a productivity slowdown, sub-par gains in real
wages, and a sharp drop in the international-exchange value o f the dollar.
I f the Hum phrey-Hawkins bill, in its various versions, truly represented a
disillusionm ent w ith the practices o f the recent past, and a recognition o f the
need fo r drastic change, w e w ould welcome it as opening the w ay fo r a re­
turn to sounder principles. T o the extent that it is based on the belief that
w e have now accum ulated the wisdom to create a wholly new fram ew ork fo r
econom ic policy making which, we may confidently expect, w ill lead to better
results in the future, it merely substitutes a new illusion fo r the old.
Actually, S. 50 is not quite either o f these two alternatives. It has relatively
litte to say about the substance o f economic policy, and that little is not very
new. The suggestions fo r policies to be considered in improving the state o f
the econom y are m ainly reworked versions o f policies that have been tried, w ith­
out much success, during the past decade.
This point ik not raised w ith the intention o f Urging that a large new sub­
stantive econom ic content should be added to the proposed legislation. W e
clearly are not ready fo r that. Events have given all of us an extensive and
valuable econom ic education during the past decade. But it has been mainly
education o f a negative kind. W e have learned a lot about economic programs
and policies that do not w ork and that is hardly a firm basis fo r establishing in
law a bold new program fo r the conduct o f economic affairs.
T h e bill is devoted m ainly to establishing new intra-governmental procedures
fo r the development o f econom ic policy. These new procedures are elaborate
and, one has to say, cumbersome. Some doubt is justified that this is the w ay
to get to the heart o f the econom ic problems that plague us.
Intellectual m odesty is appropriate fo r all o f us, in and out o f government,
w ho are concerned w ith the form ulation o f economic policy. The events o f
recent years have given us so much to be modest about. One wishes that
evidence o f such m odesty w ere more visible but, in any case, modesty is not
a satisfactory base fo r radical revision o f our fundamental legislative guide to
the development o f econom ic policy.
(T h e objection may be raised that, like it or not, since existing procedures
fo r policy development have not achieved the desired result, we have no choice
but to develop a brand new approach to the problem. But present law— the
Em ployment A ct o f 1946— allow s plenty o f leeway fo r shifts in the approach
to policy form ulation as conditions change and experience accumulates. It is
the proposed new legislation, S. 50, that threatens to lock us into a new
riaridit?.)
Perhaps the most serious danger involved in S. 50 is not that it offers so
m uch in the w ay o f fundam ental change in how government carries out its
econom ic responsibilities but that on its face at least, it does so little to change
the unsuccessful practices o f the past. Somehow the public has obtained the
opposite im pression— high hopes have been built up that this legislation w ill
usher in a new econom ic era in which all problems w ill be solved. It is w idely
described in the press as “ landm ark legislation.” Since these expectations are
bound to be disappointed, the end result could be severe damage to the national
m orale, constant pressure fo r m ore extremist policies, and further deterioration
o f the economy.




243
For these, and other reasons w hich w ill be explained in w hat follow s, w e
must tfrge that Congress not enact legislation o f this character. I hope it w ill
be clear that our opposition is not based on a generalized aversion to innova­
tions i?in governmental policy. T o the contrary, new departures from the prac­
tices w hich have prevailed in recent years are desperately needed. But it is not
the limitations o f the Employment A ct o f 1946 w hich has impeded us in finding
and adopting new approaches. It is S. 50 and related bills which w ould create
a new orthodoxy and solidify an elaborate set o f policy-m aking procedures that
w ill further impede the search for new directions.
MULTIPLE ECONOMIC GOAL IN S. 50

In its general statement o f national econom ic goals S. 50 takes a somewhat
broader view than the original Employment A ct o f 1946. This is neither objec­
tionable nor surprising, since the 1946 A ct was rather narrow ly focused on fe&rs
o f a return to the special conditions prevailing in the decade o f sub-par econom ic
perform ance preceding W orld-W ar-II. Our problems in the 1970’s have turned
out to be less severe, but more diverse and ju st as intractable.
W here the original A ct simply directed governm ent to “ prom ote maximum
employment, production and purchasing pow er,” S. 50 w ould change “ maximum
employment” to “ full employment” and add as additional goals “ real income,
balanced growth, adequate productivity growth, proper attention to national
priority needs and reasonably stable prices.” A t other points, S. 50 calls f o r :
“ better management, increased efficiency, and attention to long-range as well
as short-range problems” in the policies and program s o f governm ent; and “ high
rates o f capital form ation.” A number o f other goals are scattered through the
text o f S. 50.
There is little in this list o f general goals that can be regarded as exception­
able, in the sense that anyone would find attainm ent o f any o f these as unde­
sirable. A minor quibble can be raised regarding inclusion o f “ balanced
grow th,” which seems to have become a popular cliche w ith no clearly-defined
meaning.
Some question has been raised to statement o f the anti-inflationary objective
in terms o f “ reasonably stable prices.” It is sometimes suggested that this
should be reinforced by adding a specific num erical target to which the rate
o f price climb should be reduced. However, I am not especially troubled by the
existing language. W hile opinions may vary as to w hat precise degree o f price
stability is “ reasonable,” it is perfectly clear w hat kind o f price-level behavior
is not reasonable. No sane persons w ould affirm that an accelerating price rise—
one that becomes worse each year than the year before— can be accepted in­
definitely as reasonable price stability. (A s w ill be pointed out later, this is the
real danger that we face in repeated efforts to low er the unemployment rate by
fiscal and monetary stimulation.) There seems no inclination to regard the 6%
to 7% underlying inflation rate o f the past three years as reasonably acceptable.
Leaving peripheral objections aside, the m ajor question posed by the goals
set forth in S. 50 is why anyone should think it necessary or helpful to set them
down in legislative language. These have been the de fa cto i f not the de ju re
aims o f national economic policy for many years. Any o f our recent President’s
would surely have been happy to go down in history as the man w ho finally
reconciled low levels o f unemployment w ith low levels o f inflation, w ith or
w ithout a legislative directive fo r doing so.
Enactment into law o f these general goals might make sense i f at least one
o f the follow ing two conditions p rev a iled :
1. The economic means for attaining these goals w ere w ell understood and
generally agreed upon, and all that had been lacking w as a w ill on the part o f
government for undertaking the job.
2. A breakthrough in economic wisdom had suddenly occurred w hich m ade
attainable what was previously unattainable.
Neither o f these conditions holds.
PROCEDURAL REQUIREMENTS

H aving described general econom ic goals, S. 50 turns over to the President
the problem o f how to achieve them. A t least, it is left up to him to take th e
first step in converting the general goals into num erical targets and program
proposals.




244
One wonders w hat is gained by such a legislative directive to the President.
Any President w ho w as confident that he knew how to attain all the good things
mentioned in the A ct w ould hardly keep his knowledge concealed. The only real
effect o f the requirem ent is to compel a President who does not know how to
reach the A ct’s goals nevertheless to propose a program fo r doing so.
As things stand, the annual Economic Reports o f the President, and o f his
Council o f E conom ic Advisers, do almost invariably discuss the subjects listed
in S. 50 as goals and, to the extent feasible, suggest ways o f dealing with them.
Num erical projection s fo r fu tu re years are made o f the m ajor indicators o f eco­
nomic perform ance and, since these are in accord with what the President hopes
to achieve by the program s he has recommended, they are, in a realistic sense,
targets. These procedures are w ell established by custom and the fact that they
are less form al than those required in S. 50 is an advantage rather than the
reverse.
The procedures w ithin Congress, as established in S. 50 are complex and
multi-layered. The President’s report is to be forwarded to all the standing
Committees o f both houses, w hich are to report on their reactions to it to the
Joint Econom ic Committee. The members o f the Joint Committee from the
Senate, and those from the House, are then, separately, each to recommend a
concurrent resolution on the subject to their own branch o f Congress. The
House and the Senate, separately, is each to consider and act on its own version
o f the concurrent resolution. The whole process is to culminate in a conference
report reconciling the tw o versions o f the concurrent resolution, and both houses
w ill have to act on it. A ll this is to be done every year.
In this legislation Congress would be imposing an enormous body o f additional
w ork upon itself. Perhaps Congress is willing to assume that burden, but the
real question is w hat kind o f economic policy would emerge. I f a camel is a
horse designed by a Committee, what kind o f monstrosity would this multi­
layered operation produce?
THE S % - 4 %

UNEMPLOYMENT TAEGET

F or the most part, S. 50 leaves to the President the conversion o f its general
goals into specific num erical targets and programs. The notable exception is
the setting forth in the A ct itself o f numerical targets fo r reduction o f the un­
employm ent r a t e : The President is required to set this unemployment objective
at 3 percent (fo r adults) and 4 percent (fo r the civilian labor force as a w h ole),
in (o r before) the fifth calendar year after the first Presidential report under
the Act.
True, the President m ay recommend modifications in these num erical goals,
beginning w ith his third econom ic report after enactment, and Congress may
then “ take such action as it sees fit.” But any such modification would surely
be a traum atic political event, especially since the 3 % -4 % goal would have
been allow ed to stand fo r a period o f more than three and possibly almost fou r
years. A fter that length o f time the public would surely regard modification
o f the employment goal as betrayal o f a promise.
One can, o f course, take the attitude that all the Act commands is the setting
o f targets; it does not command that the targets be attained, or impose any
penalties fo r failure to do so. I trust, however, that members o f Congress w ill
not take any such cyn ical attitude toward their legislative responsibilities.
There is little point, and grave danger, in enacting into the law o f the land an
unemployment target i f it is virtually impossible o f attainment, or possible o f
attainment only under unacceptable conditions o f inflation.
It is not clear what, i f any, analytical basis exists for the choice o f 3 % -4 %
as the unemployment goal— instead of, say, 2 % -3 % or 4 % -5 % . H ave the au­
thors o f this bill simply seized upon figures which look good in print, have a
tradition o f acceptability, and seem to have become popular in public discussion?
A further com plication arises from the fact that a National Commission,
established by Congress, is now at work considering the need for a revision o f
the concepts and m ethodology used in computing the unemployment and man­
pow er statistics. T heir assignment is a wide one and it w ill be surprising if
they do not recommend im portant changes. W e are quite likely to find, sometime
in the future, the 3 % or 4 % measures o f unemployment have an entirely d if­
ferent significance than they have at present.
Leaving that com plication aside, it does not appear that 4% unemployment
in the civilian labor force is a realistic goal fo r non-inflationary unemployment,




245
o r that it ever was during the past quarter century* In the 1955-57 period
unemployment did get down to the neighborhood o f 4 percent, but only to the
accompaniment o f an accelerating inflation (w hich, however, now appears as
a. minor inflationary incident in the light o f subsequent experience). In the late
1960s unemployment held below 4 % fo r a period o f fou r years— during w hich
the inflation rate accelerated alarmingly. Since then, unemployment has never
got even close to 4 percent. It did get, briefly and barely, below 5 percent in
1973— the onset o f double-digit inflation.
Progressively, over the entire period since the K orean W ar, dem ographic
trends (and other developments) have been against us in efforts to reconcile 4
percent unemployment (total-labor fo rce ) w ith reasonable price stability. Our
prospects for attaining the num erical objectives o f S. 50 have reached the
vanishing point.
THE RELATION BETWEEN UNEMPLOYMENT AND INFLATION

Crude conceptions o f a calculable trade-off between unemployment and infla­
tion, prevalent a decade or so ago, are now in disfavor but they did much dam­
age while they lasted. Toleration fo r inflation, as a means o f holding unem ploy­
ment down, has been a losing game and we have wound up losing ground in both
respects. It is not that government officials, consciously and explicitly, advocated
accepting inflation as the price to pay fo r high employment, but there w as a
tendency to take all the risks on one side.
Hopefully, that era is now over, but it would be a mistake to assume there is
no connection whatever between unemployment rates and inflation rates. A
deeper penetration o f the subject now indicates that there is such a relation­
ship, but that it functions rather as a lim itation on w hat can be achieved by
economic policy, than as an option w hich gives us scope for policy choices.
The connection between the unemployment rate and the inflation rate is m ore
subtle than had previously been supposed. W e cannot simply read off a chart,
with reasonable accuracy, what particular rate o f inflation we must tolerate
in order to achieve a specified unemployment rate. The relationship is between
the acceleration in the rate o f inflation, and the level o f the unemployment rate.
In other words, once unemployment is pushed and maintained below some trig­
ger rate, the inflation begins to become more rapid each year than the year
before.
This is, o f course, precisely in accord w ith our experience o f recent years. It
also puts an entirely different face on the matter. Toleration o f inflation as a
means o f lowering unemployment can no longer be regarded as a practical
option for policy makers. Although opinions may differ as to w hat rate o f infla­
tion is tolerable as the price to pay for low er unemployment, an inflation w hich
is allowed to grow continuously m ore rapid must eventually exceed anyone’s
lim it o f toleration.
W hat is the trigger rate o f unemployment that sets off an accelerating infla­
tion? Since that is the crucial question, I have attached a paper on the subject,
prepared in our NAM offices, as an appendix to this testimony. It summarizes
the methods and conclusions o f a number o f experts in estim ating N IR U (the
non-inflationary unemployment ra te).
Although the experts have approached the question in w idely differing ways,
there is a surprising degree o f consensus in their findings. The “ sa fe” rate o f
unem ploym ent— the lowest rate which does not set off an accelerating inflation—
Ties in the range o f 5.5 percent to 6.0 percent. There are some dissidents whose
results lie outside that range, but most o f them are above rather than below it.
In this light, the 4% unemployment goal (tota l civilian labor fo rce ) set forth
in the Act is entirely unrealistic. In fact, w ith unemployment at 6.0 percent last
month, we are already at the upper edge o f the zone o f inflationary tightness in
the labor market.
I do not mean to imply that the 5.5 percent to 6.0 percent “ safe” range o f
unemployment is an unalterable lim itation im posed on us for all time. In fact,
it is clear that the non-inflationary rate o f unemployment has changed by about
2 percentage points over the past quarter century— unfortunately in the w rong
direction. It is reasonable to hope that in the future w e w ill be able, both
through more favorable demographic trends and through deliberate action, to
reconcile a substantially low er rate o f unemployment with reasonable price
stability than is now possible. But the changes in underlying conditions neces­
sary for that to happen occur slowly and the time required must be measured
in decades rather than years.




246
In principle, an effort to create and maintain unemployment rates as low as
those set in S. 50 w ould set off an accelerating inflation that would finally
become astronom ical. I do not, however, think that things w ill work out
precisely that way. My expectation is that, in the foreseeable future, we are
not likely to get either the 3 % -4 % unemployment stated in the A ct or the
astronom ical inflation a persistent effort to achieve them would bring. Rather
w e are likely, i f this A ct is passed, to see a repetition o f the stop-go econom ic
policies o f the past dozen years— with both inflation and unemployment getting
progressively w orse with, each turn o f the cycle. Surely, our painfully-acquired
econom ic experience since the mid-1950’s should have, taught us to do better than
that.
STRUCTURAL ECONOMIC POLICIES

In S. 50 there is a heayy emphasis on “ structural’7 economic policies. This is
to be welcom ed as a healthy shift from the previous emphasis on aggregatedemand management as the key to creating and maintaining prosperity. I f ever
w e are to create con d ition s. in which unemployment levels substantially below
the present lim itation o f 5.5^ to 6.0 percent are feasible, sustainable, and com­
patible w ith price sta b ility / it w ill be through, changes in tjie structure o f
society and the labor market.
(In the Act, and in common parlance, the term “ structural” has taken on a
broad meaning, referring to all aspects o f economic policy except the manage­
ment o f aggregate demand. Perhaps our academic brethren can refine th e
sem antics for us but, fo r present purposes, I accept this broad interpretation.)
There is, however, danger that we may be encouraged to expect too much
too soon from this new attention to structural factors. There are lim itations on
w hat government, in a free society, can do to influence the underlying social
structure w e have to deal with. Demographic trends must largely be taken as
given. Basic attitudes, w hich affect employability, change in ways that are only
dim ly understood and which? usually surprise us when they occur.
Government can, presumably, make a contribution to the improvement o f
basic education and practical skills, although there is little on the record which
encourages us to believe that w e know how to do this on any large scale. In
any case, the results o f even successful efforts o f this nature are likely to be
achieved on a tim e seale to be measured in generations rather than years.
S. 50 outlines a number o f employment programs, governmental, a n d /o r
governm entally supervised, a n d /or governmentally financed. There is not m uck
that is basically new in these programs although new vocabulary and new
adm inistrative procedures are introduced.
Clearly these program s are meant to be a means for im proving the employ­
ability o f individuals, rather than to be a m ajor ongoing form o f job creation.
There is substantial danger that they might become the latter, but leaving that
aside there is a m ore basic problem with such governmental efforts. Too much
government assistance to an individual is likely to detract from , rather than
add to, his em ployability. It is an entirely different thing to liold a job because
o f a general governm ent policy which asserts that it is desirable that we should
have one, than to hold a job because a specific employer needs us and finds w e
are w orth w hat w e cost. The individual himself knows that and prospective
fu tu re em ployers know it.
The A ct directs that the reservoir jobs created under it shall be “ useful and
productive.” This forth righ t declaration is welcome but— is there any adequate
test o f usefulness and productivity outside the free market place?
The conclusion has to be that, while employment programs o f the type de­
scribed in T itle I I o f S. 50 should continue to be experimented with, great
caution should be exercised i f they are hot to be counterproductive in our effort
to achieve a better reconciliation between high employment and price stability.
W hatever they may eventually contribute to the goals o f S. 50, they cannot
have much im pact over the timescale contemplated therein.
A PERSPECTIVE 6N ECONOMIC ACTIVISM

Since S. 50 is a m a jor reopening o f the fundamental legal guide to economic
policymaking, a broad-gage comment may be appropriate. The whole spirit o f
this legislative proposal is that government should “ take charge” o f the economy
and so direct it that it w ill achieve the goals government chooses to set for it.
In other, words, it is a call fo r continued and intensified government activism in
the econom ic field.




247
H istory has provided those o f us w ho are em pirically-m inded with, in effect,
a controlled experiment on the effects o f econom ic activism. The quarter-century
«in ce the Korean W ar divides itself rather neatly into tw o periods: the “ lim ­
ited— role-for-government-period,” extending from 1953 to 1964; and the “ intenseeconom ic-activism” period o f 1964 to the present.
The year 1964 is a natural breaking point between the tw o eras. It w as the
year o f the war against poverty, and the G u lf o f Tonkin R e s o lu t io n w hich
started us on our guns-and-butter approach to Vietnam W ar financing. Above all,
it was the year o f the New Econonifcs— the belief that management o f aggre­
gate demand th r o u g h fiscal and m onetary policy was the means o f steering the
economy along a steady course between recession and inflation. You w ill remem­
ber the chorus o f self-congratulation in 1964 to the effect that “ W e now know
how to manage a modern economy.” As events cast doubt on this confident
assertion, the aggregate-demand approach w as supplemented by an abortive
“ guidepost” policy in the 1960’s, and a near disastrous experim ent w ith wageprice controls in the early 1970’s. The fundam entals o f demand management
w ere nevertheless preserved throughout this interval. H ardly a year goes by
w ithout a new call for economic stimulation. The proposal o f new form s o f
“ incomes policy” has become a year-round pass-time. It has been an era o f
constant new initiatives in economic policy.
By contrast, the period from the K orean W a r to 1964 w as one in w hich
relatively little happened in new governm ental initiatives. The philosophy and
practice o f that time envisioned a much more lim ited econom ic role fo r govern­
ment.
This makes it natural to compare econom ic perform ance in the tw o eras. That
is done in the follow ing table.
The results are striking. By practically every significant econom ic criterion,
perform ance in the limited-role-for-government period w as markedly superior to
perform ance in the intense-economic-activist period.
Thus it is hard facts rather than ideological prejudice w hich leads us to
question the desirability o f a high degree o f government involvem ent in eco­
nom ic affairs. W e have more to fear from excessive governm ent attention than
from government neglect. The Humphrey-Hawkins approach is based on the
assumption that more (governm ent) is better, w hile experience keeps proving
the opposite,
S U M M A R Y O F E C O N O M IC P E R F O R M A N C E IN T W O E R A S
[In percent!
Lim ited-rolefor-governm ent
period
(1953-64)
Average unemployment rate........................................................................... ...............................................
Range of interest rates:
Prim e rates......................................................................................................... ................................................
Corporate bonds (AAA)..................... ................................................
A n n u a l rate of increase:
Consumer prices............................................................................................ ...............................................................
Wholesale price............................................................................................ ... - ............................................
Total economic output.............................................................................. ................................................
Real wages............................................. .............................................................. ...............................................
Productivity......................................................................................................... .........................- ....................

Intenseeconomic activ­
ist period
(1964-77)

5.2

5.8

3-5
2 .8 -5 .4

4.5-12
4.4-10.4

1.4
.7
3.2
2.3
3.1

5.0
5.2
2 .8
1.5
1.6

CONCLUDING RECOMMENDATIONS

F or all the reasons described in the testim ony we must urge that Congress
not enact S. 50 or any variant form s o f the same legislation. Changes should be
made in the basis for ongoing form ulation o f national econom ic policy, but
S. 50 does both too much and too little in that respect. It offers the public false
hopes which w ill surely lead to disappointment, confusion, contention and
governmental hyperactivism. It is fa r better to leave changes in our methods
fo r economic policy to a natural development, and the prospects are now ex cel­
lent that this w ill lead to better results in the future.




248
A p p e n d i x t o t h e N a t i o n a l A s s o c ia t i o n o f M a n u f a c t u r e r s T e s t i m o n y , t h e
C o n f l ic t B e t w e e n t h e H u m p h r e y -H a w k i n s F u l l E m p l o y m e n t G o a l a n d *
th e
N o n in f l a t io n a r y R a t e of U n e m p l o y m e n t , b y K u bt M o h a y , N A M
R esearch A n a l y s t

W e are all aw are that the F ull Employment and Balanced Growth A ct o f
1978 w ould establish a fu ll employment goal o f 4 percent unemployment by
1983 fo r the civilian labor force aged 16 and over. But many are unaware o f the
fa ct that there is a basic econom ic inconsistency between the HumphreyHawkins fu ll employm ent goal and the goal, also stated in the Humphrey*
Hawkins bill, o f reasonable price stability.
This is not to say that we should ignore the unemployment problem or relegate
it to a low er rank in the hierarchy o f economic concerns. Quite the contrary, w e
should all be genuinely concerned about unemployment because o f the hardship,
suffering, w aste o f productive human resources and stresses and strains in
personal relationships it causes. In the same vein, our other econom ic ambitions
should not take a back seat to achieving the Humphrey-Hawkins fu ll employ­
ment goal.
Careful econom ic analysis by some o f the nation’s leading labor economists
and by the Council o f Econom ic Advisers indicates that the bill’s unemployment
goal is achievable only at the cost of severe inflationary consequences. T h e
follow in g is a brief review o f their analysis and conclusions. The studies exam­
ined here are listed on the last page o f this appendix.
A ll the studies outlined here are attempts co determine the noninflationary
rate o f unemployment (N IR U ). N IR U is defined as a critical rate o f unemploy­
ment such that, as long as unemployment does not fall below it, inflation can
be expected to decelerate; i f unemployment does fall below this level, inflation
can be expected to accelerate; and if the unemployment rate equals this level
there w ill be no change in the inflation rate. In other words, N IR U is the
“ low est rate o f unemployment attainable, under the existing institutional
structure, that w ill not result in accelerated inflation.” 1
Another employment concept that should be mentioned is the fu ll employment
unemployment rate. This is simply the target rate of unemployment that is
established by the government. I f the Humphrey-Hawkins bill becomes law, it
w ill set a full-em ploym ent unemployment rate of 4 percent, which is far below
the NIRU . This, as indicated in the NIRU definition above, means that attempts
to achieve the fu ll employm ent goal w ill lead to accelerating inflation.
It should be made clear at this point that this does not mean that the pursuit
o f an unemployment goal below the noninflationary rate should be given up as
an aim o f policy. Specific program s directed toward the structure o f the labor
market may indeed prove useful in reducing the unemployment rate consistent
with non-accelerating inflation. These programs may improve the m obility o f
the labor force or possibly increase the educational level or productivity o f
workers. These programs, however, may take many years to perfect and it m ay
be perhaps, decades before their employment impact is realized. Thus, the
utility o f these program s fo r reducing unemployment in the short period pro­
vided in the Hum phrey-Hawkins legislation is severely limited. Recourse to
aggregate demand policies or inefficient make-work programs, however, w ill
only reduce unemployment below the critical NIRU level at the cost o f acceler­
ating inflation.
Conscientious research reveals that NIRU changes over time and that 1957
was the last year in w hich the 4 percent full-employment unemployment rate
established by Hum phrey-H awkins was compatible with NIRU .2 More pre­
cisely, N IR U has increased every year since 1957. Research indicates that this
constant increase is attributable to such demographic factors as changes in the
composition o f the labor force and to such legal provisions as changes in the
minimum wage level and changes in w elfare and unemployment benefits. P rac­
tically all attempts to measure N IR U place it in the 5.5% to 6.0% range.
(Table # 1 and the studies listed at the end o f this paper.)
As mentioned above many factors have been cited as contributors to the
constantly increasing N IR U and several methodologies have been employed
in an attempt to measure NIRU. It is noteworthy that all these endeavors have
1 Th e Annual Report of the Council of Economic Advisers, January, 1977, pg. 48.
2 Wachter, Michael L., “T h e Demographic Impact on U n e m p l o y m e n t : Past Experience
and the Outlook for the Future,” Demographic Trends and Full Employment, the N a ­
tional Commission for M a n p o w e r Policy, Special Report #12, December, 1976, pg. 48.




249
come up w ith parallel estimates o f N IR U . M ention should be made here o f the
factors that have increased N IRU and the various m ethodologies used by
researchers to estimate it.
The dominant cause o f an ever rising noninflationary unemployment rate is
the changing composition o f the la bor force due to an influx o f women and
young workers. The proportion o f women in the labor force has increased from
31 percent in 1956 to 42 percent in March, 1978. T his is reflected in a rise in
their participation rate from 37 to 49 percent. The proportion of young w orkers
(16 to 24 years old) has increased from 17 percent in 1956 to 23 percent in
March, 1978. Women and young w orkers tend to have higher unemployment
rates and unemployment rates o f these groups makes fo r a higher overall
unemployment rate. Estimates o f the im pact o f women and young workers on
NIRU have ranged from .5 to 1.0 percent.
Changes in the cost o f being unemployed have also impacted on the NIRU.
The cost o f being unemployed is the difference between the market w age rate
and transfer payments, i.e., food stamps, in-kind transfers, unemployment
compensation, and welfare payments received by the unemployed. Evidence
indicates transfer payments have been increasing relative to market wages in
the last ten years. As the cost o f being unemployed declines the incentive or
urgency to find work declines. The unemployed stay jobless longer and the
unemployment rate rises. Estimates are that this fa ctor has increased N IR U
by .3 to .5 percentage points.
In 1972, Congress required mothers receiving w elfare w ho were able to w ork
to register fo r employment. This swelled the unemployment rolls and added an
estimated .2 percentage points in NIRU.
Finally, the ever higher minimum wages have also increased NIRU. Em­
ployers are less inclined to hire young and m arginally skilled workers whose
productivity is not sufficient to make them attractive as employees at the
higher minimum wage. The increased minimum wage, in addition to the greater
coverage o f the minimum wage laws, has added an estim ated .7 percentage
points to NIRU since 1956.
The above are the m ajor demographic and legal factors that are cited as
reasons for the rising noninflationary rate o f unemployment. All told these
factors have added approximately 2 percentage points to NIRU . Other factors,
such as, increased manpower programs have reduced N IR U by .2 percentage
points. The net change then, is an addition o f about 1.8 percentage points to
NIRU.
Most researchers agree that the 1956 unemployment rate o f 4.1 pcrcent was
the NIRU o f the time. I f the 1.8 percentage point increase in the fu ll em ploy­
ment rate is added to the 1956 N IRU w e find that the present N IR U is almost
6 percent.
Three distinctive methodologies have been utilized in an attempt to estimate
a current NIRU. These methodologies are outlined below.
One scheme that has been used is basically the same as that w hich was
outlined above. This procedure attempts to determ ine the N IR U at some point
in time, usually 1956, and then calculate how much this “ base” figure has
increased over time in order to arrive at a current NIRU. The 1956 unem­
ployment rate is usually chosen as the “ base” figure because the period 1955
through 1959 seems to illustrate a classical example o f NIRU. In this period
the national experienced accelerating inflation as the unemployment rate fell
towards 4.1 percen t; as the unemployment rate leveled off at about 4.1 percent
the nation experienced no change in the inflation r a t e ; and in subsequent years
as the unemployment rate rose above the critical 4.1 percent rate, inflation
decelerated. Hence, most researchers adopt an unem ployment rate o f 4.1 to 4.3
percent as the 1956 NIRU.
The demographic and legal factors listed above that have increased the unem­
ployment rate since 1956 are then added to the base figure o f 4.1 percent to get
an updated NIRU o f almost 6.0 percent.8
The Council of Economic Advisers has made a sim ilar calculation and arrived
at a comparable estimate o f NIRU. “ Using available data on labor force com ­
position and unemployment rates, and adjusting fo r the increased proportion
o f young persons in the labor force and for the increase in their unemployment
rate relative to adults, the CEA has estimated that the N IR U equivalent to 4
percent in 1955 is now 4.9 percent.” Furtherm ore the CEA stated that “ the
3 See the last page, papers written by Alfred Telia and Phillip Cagan.




250
effects o f many o f the other factors which are believed to influence N IR U are
much more difficult to guantify, but it is likely that they have raised N IRU
even higher than the current estimate, perhaps closer to 5.5 percent.” Finally,
the CEA said that the “current benchmark estimates incorporate only the effects
fo r which evidence is substantial. As further evidence becomes available the
current estim ate o f N IR U might be even further refined.” *
A second m ethodology that has been employed is the graphical approach. In
this approach the horizontal axis measures the change (acceleration or decel­
eration) in the rate coordinates are then plotted for each year from 1956
through 1974. W hen this is done one notices that years in which the unemploy­
ment rate w as 5.8 percent or more enjoyed decelerating inflation. Also, one
notices that years in w hich the unemployment rate was less than 5.1 percent
suffered accelerating inflation. Researchers who used this approach concluded
that the “ noninflationary rate o f unemployment is in the 5.1 to 5.8 percent
range— probably tow ard the upper end.” 5 Thus, through the graphical approach
one arrives at the conclusion that NIRU is about 5.6 percent.
A third m ethod determines a noninflationary rate o f unemployment for each
o f 14 different age-sex groups. An aggregate noninflationary rate o f unemploy­
ment is then determined by taking a weighted summation o f the separate
N IR U ’s fo r each age-sex group. The weights for each group are the relative
im portance o f each age-sex group in the labor force.6
W hen this method is employed one finds that the aggregate noninflationary
unemployment rate in 1975 w as 5.5 percent. Furthermore, one finds that NIRU
has increased every year since 1957, when it last equaled the 4 percent Humph­
rey-H awkins fu ll employm ent goal.7 Thus, this methodology results in a N IRU
that is very sim ilar to that w hich was derived by the previous procedures, and
when this m ethodology is applied to historical data it indicates that the
Humphrey-Hawkins goal is 21 years out o f date.
T o summarize then, several economic researchers using distinct methodologies
have come to very sim ilar conclusions concerning a noninflationary rate o f
unemployment. A ll have found this value to lie in the 5.5 to 6.0 percent range.
The conclusion that should be drawn from this is obvious. Attempts to achieve
a fu ll employment goal w hich is almost 2 percentage points below N IR U w ill
touch off an accelerating inflation that w ill have a devastating im pact on the
entire economy. Given our present economic wisdom, the goals o f 4 percent
unemployment and reasonable price stability are clearly incompatible.
TABLE NO. 1
N IR U estimates
(percent)

Researcher
Phillip Cagan______________________ _______ _______ ................, .............. ............. ..............
ModiglianJ A Papadem os................................... ..........................................___ ................... ....................... ..............
Alfred T e lia_________ _____________________________ ...................... .............................
Michael W achter___________________________________ _____________ __________
Council of Economic A dvisers........................................................................ — - ______ _____________

Year N IR U
estimated to

5.9-6.3
5.6
5 .5-5.8
5.5
+ 5 .5

1977
1974
1975
1975
1976

PAPERS

Cagan, Philip, “ The Reduction o f Inflation and the Magnitude o f Unemploy­
ment,” Contem porary Econom ic Problems, American Enterprise Institute, 1977.
The Annual Report o f the Council o f Economic Advisers, January, 1977, “ The
Full-Em ployment Unemployment Rate.”
M odigliani, Franco and Papademos, Lucas, “ Monetary P olicy for the Coming
Q u arters: The Conflicting View s,” The New England Economic Review, M arch /
April, 1976.
Telia, A lfred J., “ Analyzing Joblessness,” Op-Ed page o f The N ew York
Tim es, October 27, 1976.
W achter, M ichael L., “ The Demographic Impact on Unemployment: Past
Experience and the Outlook fo r the Future,” Demographic Trends and Full
Th e Annual Report of the Council of Economic Advisers, Jan, 1977, pg. 51.
5 See the last page, paper by Modigiliani and Papademos, page 9.
6 See the last page, paper by Michael L. Wachter.

*

7 Ibid.




251
Employment, the National Commission for Manpower Policy, Special Report
#1 2 , December, 1976.

Mr. H agedorn. In my oral remarks I will just make a few com­
ments on the highlights extemporaneously.
The bill describes in very general terms certain goals. As far as
these general goals and directions are concerned, nobody can have
any quarrel with them. But beyond that, it seems to me the bill
approaches the whole problem backward or at least in an unbalanced
way.
There’s no thorough examination of our resources for attaining the
goals in the bill. I don’t mean just financial resources, although that
has some importance, but I mean our intellectual resources. Do we
know how to do it? W e have been trying to attain the goals described
in the bill for a long time and tried a lot of different things, and here
we are without much hope of doing it in the immediate future.
It seems to me, instead of setting targets and then trying to arrange
a program, trying to figure out a program for attaining those targets,
you have to examine closely w^hat’s practical, what resources you have,
and what you can do; and then you have to work out the program
first and then decide in that light what target is practical. At least
the two things have to be done more or less simultaneously rather
than one after the other.
Let me talk about the 4-percent unemployment goal. Now you’ve
got a lot of testimony that as things stand, given the structure of the
economy, 4 percent unemployment is not compatible with price sta­
bility, and I certainly endorse that, and there’s a great deal of mate­
rial in my written statement supporting that argument.
The point that’s always brought up— and it’s certainly a valid
point—that with a structural approach you can reduce the level of un­
employment that’s compatible with price stability, and that’s certainly
true. Things along that line have been done with some success. Mr.
Donaghue was just describing his company’s efforts in St. Paul, and
there’s a great deal of that type of activity going on in the country.
I hope it will continue and I assume that it will. But it hasn’t made
any big dent in the unemployment problem. We hope that it will
have further beneficial effects in the future. I assume that it will, but
they are going to come slowly.
When you try to change the structure of society, and the other
basic things that determine employability, that’s something that you
accomplish over a time scale that’s more like generations than years.
With that 4-percent unemployment goal standing in the bill, I ’m
afraid it will be an invitation to extremism. As the years go by and
it becomes clearer and clearer that you are not going to achieve the
4-percent unemployment goal, then the political pressures will be for
more and more extreme measures. I ’m afraid, particularly, of over­
stimulation of the economy and continuation of the stop-go situation
we have been in in recent years. More about that later.
Well, now, let me talk about the 3 percent inflation goal that’s
been brought up in these hearings. I have heard it elsewhere and I
hope you and I are still friends after I get finished with what I have
to say about this.

30- 454— 78------------17




252
I am totally opposed to putting that sort of thing in the bill. In
the first place, on general principles, I ’m opposed to it for the same
reason I think it’s unwise to put the 4 percent unemployment goal
in the bill. You are tying yourselves to a number when the process
should be a search and find type of process in looking for solutions.
Whatever solution we find ultimately, if we do find one, probably
will surprise us by its nature and we shouldn’t tie ourselves down in
advance to any rigid framework for doing that.
A second reason that I oppose it is that I ’m not really troubled by
those words, “reasonable price stability” that now appear in the bill.
Sure, they are imprecise, but I think we know well enough what they
don’t mean. They don’t mean an accelerating inflation, an inflation
that gets worse each year than the year before, the kind of situation
we had in 1966 through 1969 where each year the inflation got worse
than the year before because we were overstimulating the economy.
I think everybody would agree— whether your feeling is that rea­
sonable price stability might be 3 percent, I might think 5 percent is
right, somebody else might think 10 percent— but everybody has to
agree that an inflation that gets continually worse is going to exceed
whatever standard any of us has set. I think clearly that’s outside the
range of reasonable price stability. I don’t feel the pressing need for
making the goal more precise.
Another reason for my urging you not to put that sort of thing in
the legislation is that it would lead to another form of extremism—
wage and price controls. We have seen a constant search for some­
thing that would have all the good effects of wage and price controls
and none of the bad effects but still isn’t wage and price controls.
That’s something called incomes policy. A new version of incomes
policy comes out every few months and gets attention but you know
it’s really just wage and price controls under another name.
The objection to wage and price controls, putting it very briefly, is
that Government doesn’t have the wisdom to know better than the
marketplace what any given wage or price ought to be, and that
applies to every form of incomes policy that I have ever seen. So, I ’m
afraid that perhaps your 3 percent inflation goal would create much
more pressure for some kind of incomes policy and through that kind
of a route we will wind up with wage and price controls. Indeed, we
already have a kind of incomes policy— the deceleration program—
though people don’t like to refer to it as an incomes policy.
To wind up, I ’m afraid this bill raises false hopes. I f you read the
bill carefully nowhere does it say, “We, in Congress, promise the
American people that these goals will be achieved,” but they imply a
promise. I thing generally that the people of the country will take it
as a promise that you’re going to achieve those goals. The fact that
we aren’t, which I think is pretty clear, is going to do grave damage
to the national morale. It’s going to be an invitation to Government
overactivism.
As for its economic results— well, I ’m not going to tell you if you
pass this bill immediate disaster is going to overtake us. We have
survived a lot of other things. But what I am afraid of is that this
bill would lead to a continuation of the stop-go type of distressing
economic events that we have had in the recent past. They have been




253
coupled with a progressive deterioration in productivity. The slow­
down in productivity is a very ominous sign. I ’m afraid that with
this bill that sort of thing would continue.
Anyway, these are my reasons for urging you not to pass this bill.
The C h a ir m a n . Thank you very much, Mr. Hagedorn.
Our final witness is Mr. Arnold Saltzman, chairman of the board,
Seagrave Corp., and old friend. Go right ahead, Mr. Saltzman.
[Complete statement follows:]
STATEMENT OF ARNOLD A. SALTZMAN, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, THE SEAGRAVE CORPORATION, AND
RECENTLY CHAIRMAN, FEDERAL ADVISORY COMMITTEE ON
NATIONAL GROWTH POLICY PROCESSES
Senator P ro x m ire : The last time I testified before a Congressional committee
o f which you were Chairman was September o f 1971, when you were Chairman
o f the Joint Economic Committee. At that time we were discussing unemploy­
ment, inflation, and the ability o f our government to avoid problems by looking
ahead in their policy making.
Despite the passage o f almost seven years, w hat we are really talking about
in reference to the proposed S.50 is unemployment, inflation, and how to get
our government out o f the “ crisis intervention” business.
In regard to unemployment we w ill hear arguments that 6% unemployment
doesn’t mean that we can put all o f those people back to work— or perhaps not
even 3,000,000 o f them— and that is true. One can hear arguments about those
who w on’t or can’t work, about students or women going in or out o f the labor
force, about people moving and creating temporary unemployment— thus skew­
ing the numbers— about the increasing number o f people joining the work force
and all o f these events distorting the statistics and thus our clear understanding
o f the choices. A ll o f this has sufficient merit to suggest that we need a better
grasp o f what kinds o f unemployment we suffer, what are the causes, and which
remedies can be most effective considering both social and economic costs. This
should be accomplished by the S.50.
I believe we have already entered a third great phase in our economic society—
equal in im portance to the Agricultural Revolution and then the Industrial
Revolution. M ajor changes in patterns o f employment and unemployment that
flow from this upheaval must be recognized and managed. For example, the
shift from industrial production to services is evidenced by the fact that in
1947 over 50 percent o f all American workers were employed in the production
of goods, whereas by 1980, two-thirds o f the nation’s manpower will be concen­
trated in service industries such as transportation, trade, finance, and govern­
ment. This post-industrial revolution has profound im plications for the nation’s
economy— including patterns o f employment. Thus, I do sympathize with those
critics who argue that we must avoid simplistic form ulas in regard to unem­
ployment. One o f the advantages o f the Humphrey-Hawkins legislation is that
it w ill tend to foster that kind o f introspection on the part of the Executive
office o f the President, as wT as the Congress.
ell
However, I do not believe our nation can accept the present and past several
years’ rate o f high unemployment since it is first o f all immoral, also econom­
ically unsound and financially intolerable. Unemployment destroys families,
promotes crime and erodes individual self-respect, and if these immoralities
were not enough, it also tears at the fabric o f our dem ocratic society. It is
particularly pernicious in youth who have not had a foundation o f faith in our
system with good years behind them to look back upon.
I could never understand the argument that unemployment helps keep infla­
tion in check. The best hedge against inflation is large-scale production and
employment by the private sector w ith an abundance o f goods that people and
companies buy. W e have just seen that 8 percent and 9 percent unemployment
has not prevented double digit inflation. In fact, inflation increased as unem­
ployment went up. But it is essential that urgent and innovative plans be
form ulated in com pliance with this legislation to make the private sector the
employer to the highest degree possible.




254
It is fou r years since P roject Independence was announced to move us
towards self-sufficiency in Energy. Instead, today we im port fifty percent more
oil than we did five years ago, in large measure because we have not adequately
converted to coal. To do that, we need a massive commitment to improve the
roadbeds o f our railroads, to produce large numbers o f additional freight cars,
to create coal-fired ovens, scrubbers for those ovens to avoid excessive air
pollution, and an assortment o f additional machinery to bring forth the coal
which exists in huge abundance. This is what the private sector can and should
do with the proper incentives, creating a large number o f jobs as opposed to
public employment. It is a matter o f ferrying the money to the right place
coupled with a commitment to move.
Inflation is a virus that has not been appropriately understood or tackled
by this or previous Administrations. W e do not have a scenario, or alternative
possibilities for dealing w ith it on a coordinated basis. It is time we had the
courage to say these are the causes, here are the alternative possible cures and
here are the costs in economic and social terms to keep it in check. A t least
then clear purposeful decisions can be made— even if we choose to have infla­
tion. Right now, Government decisions are made on the basis of, “ Oh, that
won’t w ork” , or “ The American people wouldn't accept that” , or “ Let the Fed
raise interest rates” .
The single greatest cause o f inflation in our country today results from our
huge imbalance o f trade payments. Our reaction so far has been waiting for
an energy bill, and for Ambassador Bob Strauss to scurry about trying to put
his fingers in the various holes in the dykes. It is high time we took a look at
the whole series o f problems that flow from the way we (the Government)
conduct our foreign trade policies— and all the complications that flow from
those policies. Am erica no longer has a “ lock” on much o f the w orld’s technolo­
gies, with the most productive manufacturing capabilities, when so-called Free
Trade concepts were more or less taken for granted. W e need to explore—
without preconceived bias— the various avenues for tackling our unfavorable
balance o f payments. Certainly selling cheap and buying dear because o f our
debased currency does not help.
I am convinced that “ jaw boning” is not a solution. It can only have tempo­
rary shock value. Voluntary restraint suggests that business leaders and labor
leaders must forego their own immediate econom ic well-being for some less well
perceived general benefit. I fear that type o f moral persuasion is a very weak
reed on which to hang our anti-inflation program.
So we cannot now tie a specific inflation rate to a specific employment
objective. These two factors do not directly relate to each other, and Govern­
ment is not now prepared to propose an integrated anti-inflation plan.
This w ord “ plan” takes me to the less obvious but more vital part o f the
Humphrey-Hawkins bill— the need for a more farsighted and integrated ap­
proach to solving our nation’s problems, not merely unemployment.
From July o f 1973 until March o f 1974, I conferred with the leaders o f both
parties in both Houses o f Congress on the proposition that we lacked the
machinery in our Government to induce proper economic policy-making. By
April o f 1974 all fou r leaders agreed that our national policy-making for some
time had been too often a matter o f reacting to crises instead o f anticipating
events. It was replete with ad hoc uncoordinated actions on a piece-meal basis—
frequently counterproductive to the larger objective. The leaders agreed that a
Committee be form ed o f which I was named Chairman, to report on why that
was happening and ways to improve the result. The need was so obvious that
the legislation passed with only a couple o f dissenting votes. I am hopeful that
our same legislators w ill remember that history and find in this bill the conti­
nuity o f those objectives. It is now four years later and Congress continues to
be plagued with the same problems that cause the same questions to be asked.
1. Since we knew in 1970 that we had begun to use more oil than we produced,
why did we w ait until 1974— and now 1978— without a coordinated energy
policy ?
2. Since we knew in 1974 that our unfavorable balance o f payments threat­
ened the w orld’s monetary standard— the Am erican D ollar— why are we in even
worse trouble in 1978—with no plan or no solution in sight?
3. And wasn’t it clear in 1974 that using high interest rates as the w ay to
fight inflation was driving us into Recession and hurting the weakest the m ost?
And do we have any other plan on the table in 1978 as w e again face that
possibility ?




255
4.
And isn ’t it clear in 1978— as it w as in 1974— that the proportion o f
Am ericans over 65 was increasing dram atically, w ith enormous consequences
to industry, to the pension systems, to the fam ily, to social structures, to our
economy— and is there any concerted approach to the issue?
One could go on and on to demonstrate that we lack the mechanisms to cause
the Government to look at m ajor problems in an integrated fashion even when
they have surfaced.
It is all the more difficult for Congress and the President to focus on the less
clearly perceived problems o f the future— w hich need to be identified, quantified,
and solutions proposed— to anticipate the com ing crisis. It is this functional
disability o f our Government which has kept us in the “ crisis-intervention”
business in Washington. And the failure o f W ashington to anticipate and avoid
trouble has brought m ajor hardship to most states and cities.
The question facing the Congress and the President is, why doesn’t “ the
system” work as well as it used to? W hat has changed over the last dozen
years that gives people the feeling that their Government is not perform ing as
well as it should?
The answer is short and simple. The w orld has changed enormously since
3960, but Governmental institutions and mechanisms have not responded ade­
quately to the changes in the environment that they are supposed to understand
and manage. We are backing into the future stum bling as we go.
There are two m ajor developments that have m aterially altered the condition
o f the U .S .; our nation has not fully recognized them, nor has the Government
adequately reacted to them. The first is the accelerating interdependence o f the
nations o f the w orld (despite increased nationalism and often poor coopera­
tion) and the effects o f this on a United States economy com m itted— in theory,
if not in practice— to free-market principles. The second is the almost unmarked
but rapid shift o f our already mature industrial civilization into a new phase
o f industrial and societal development. Together these have produced a host
o f new problems that tax our government’s capacity to understand, let alone
deal with. The difficulties are exacerbated by an increasingly w idespread belief
that improving the economic well-being o f individual citizens is a legitimate
responsibility of Government.
The w orld is indeed smaller, but the ensuing benefits have been obscured by
the willingness o f nations— particularly emerging or relatively underdeveloped
nations— to use their sovereignty as an econom ic sledgehammer. Growing w orld
trade spurred the prosperity o f recent decades and cemented global interde­
pendence. Between 1960 and 3974, the United States’ Gross National Product
tripled, but the value of its imports and exports multiplied sixfold. It is symp­
tom atic o f the changing world that trans-national corporations have recently
grown at an annual rate o f 10 percent, tw ice that o f the w orld’s economies
taken as a whole. By 1980, it is expected that sales by trans-national corpora­
tions w ill constitute 16 percent of the Gross W orld Product.
During this period, our vulnerability to foreign econom ic pressures has in­
creased with American dependence on im ported raw materials. The w orld does
not face an imminent shortage o f natural resources, but Am erican dependence
on imports and the willingness o f producers to form cartels or to use materials
to promote immediate national objectives may combine in the future, as they
have in the past, to create domestic shortages o f necessary raw m aterials or
sudden artificially high prices.
D uring this same period we have seen the great surge forw ard o f th e W est
European nations and Japan— our allies, trading partners and trading com ­
petitors. W e no longer have most o f the wT
orld’s supply o f gold, we no longer
have the world's strongest currency, the overwhelm ing superiority in technol­
ogy-—we no longer dominate the w orld econom y w hich permitted us to “ call the
shots” .
A ll o f the above means that substantial and rapidly increasing influences
on our total economy are more difficult to control. Yet, Am erica must have a
coordinated set o f economic policy objectives, w ith respect to both foreign and
domestic considerations. In the absence o f such objectives we w ill perform
inadequately both at home and abroad. And the growth o f the Federal G ov­
ernment’s role in economic policymaking m irrors the concentration o f pow er
in A m erica’s giant corporations. The tw o hundred largest m anufacturing cor­
porations controlled 48 percent o f all m anufacturing assets in 1950, 56 percent
o f such assets in 1960, and 60 percent o f these same assets in 1970. The issue
then is not whether the Government should be involved in economic policy ­
making but whether it perform s poorly or well.




256
S.
50 intends to im prove our national planning process by causing both the
President and the Congress to look ahead two, three, five years and more and
ask what are our nation’s capabilities and what are our needs? The President
is required to set goals leading to low er unemployment, controlled inflation
and a balanced national grow th and development. Congress is required to
respond both philosophically and through its budgetary process.
I purposely used the w ord planning because it has been studiously avoided
in the legislation. Congress has been pressured to fear the use o f the word—
although every businessman gives high priority to planning in his corporation
and every fam ily plans ahead for its vacations, its children’s education, the
home it w ill buy, through its insurance policies.
In planning “ Am erican style” we are not advocating a small group o f techno­
crats, isolated from criticism achieving centralized power, i.e., the Soviet Union
or China. I do not contemplate a group in an ivory tower deciding that
Am erica w ill produce fou r million red dresses in 1981. Obviously no one who
cares about Am erican liberties could support such a process. Furthermore, no
planning process can or ought to try to achieve that degree o f precision. Ideo­
logical critics who think o f planning as “ totalitarian” seem to forget that
no program w ill go forw a rd until the duly elected and dem ocratically account­
able representatives o f the people want it to go forward. Any planning w ill
be conducted w ithin the Constitutional framework.
I urge that Am erica become a planning society, not a planned society. In
the long run, I believe that intelligent planning w ill actually reduce burden­
some governm ental intervention in matters affecting the private sector. Much
governm ental interference in the economy now consists o f ad hoc reactions to
situations w hich have become acute because they had been ignored until they
became intolerable. W ith the benefit o f foresight, I expect that any necessary
Government intervention w ill be more considered, more timely, and less heavyhanded.
In addition, the provision in the bill calling for an Advisory Board is o f
m ajor importance. It is particularly desirable that those who are chosen be
selected based on their knowledge and experience of both the Government and
the private sector and not only for balance or political convenience. W e need
a small body o f “ wise men (w om en )” for serious consultation— not window
dressing— who can think o f the welfare o f the country as a whole. They can
also guarantee w ide citizen participation in the process by the judicious use
of sub-committees.
Let me turn briefly to my caveats in regard to the bill.
1. In regard to the Federal Reserve Board, I question the wisdom o f includ­
ing the Fed in the process. It is unrealistic for the Fed to marry itself to a
policy fo r a year in advance even if only in reaction to the Economic Report.
A m ajor source o f its strength lies in its ability to shift gears quickly and
often purposely w ithout advance notice.
Its inclusion in this legislation is a product o f the m ajor role the Fed has
previously been assigned in reacting to inflation. I believe it has been unwise
to rely alm ost entirely on fiscal and monetary policies to curb inflation or
reduce unemployment and they have proved unsuccessful. W e must rely on
sectorial and regional solutions— using a rifle and not the shotgun o f the Fed.
2. In my view, both the Executive Office of the President and the Congress
presently lack the capability to do the job assigned to them by S. 50. In the
case o f the E xecutive Office o f the President, there is presently no place
w here the long-range planning function is handled (except for individual iso­
lated causes that may arise). There are, indeed, in particular Departments
(such as Agriculture and Defense) competent efforts o f this type. But these
are directed to the purpose o f those individual Departments and not aimed
at an overall national purpose.
W hat is even more serious is that there exists no clear mechanism to insure
an integrated policy approach on a broad front on an ongoing basis. This is
especially true when w e are talking about the avoidance o f future problems
that have not yet even been fully identified. Of course, on any given m ajor
problem the President can sit with Department Heads and try to thrash out a
consolidation o f views. But on a regular basis, and looking at the wide range
o f issues to be integrated and solved, a better way must exist. The President
should develop that capability now in a group or person with sufficient authority
to range across D epartm ental and Agency lines. Such a job needs to be done,
Humphrey-Hawkins or no.




257
Likewise, the Congress presently lacks the capability to appropriately reply
to the President’s Economic Report— and incidentally to monitor the appro­
priate perform ance o f the Executive Branch in that regard. Here the mechan­
isms do exist. To carry out the intent o f the legislation, the Joint Econom ic
Committee w ill have to be beefed up— and to some extent the Congressional
Budget Office. All o f these can be achieved, however, w ithout a huge expendi­
ture o f money.
3.
There may be a piece missing from the logical structure that the H um ­
phrey-Hawkins bill is endeavoring to create. S. 50 aims at im proving the
economic decision-making capability o f the Executive Office o f the President
and the Congress on a combined basis by causing them to focus on the same
matters w ith similar yardsticks. It does not quite achieve that, although the
objective is valid.
One o f the reasons we still do not have the energy legislation the President
has been speaking is that on important and controversial issues, it is very
hard to shorten the time span. I f goals and objectives had been set out several
years ago with the necessary factual data (w hich could have been the ca se),
and had alternative solutions been proposed, there w ould have been time not
only fo r orderly debate in the Congress but for national public awareness and
participation. It is exceedingly difficult in our kind o f dem ocratic form o f
government to make legislative haste. M oreover, I have found from talking
both to the W hite House and my friends in the Senate, that each tends to be
sensitive about encroaching on the other’s prerogatives and responsibilities.
Somewhere in this process it is desirable to have a small neutral body—
with no legislative or executive responsibility— to assist the W hite House and
the Congress in focusing on anticipated m ajor econom ic problems before they
arise— and at the same time, we need an early w arning system to sound alarms
to the E.O.P., the Congress, and the public. It could not only identify the
incipient problem but also lay out alternative possible solutions and attach
to each o f the possible solutions the econom ic and social costs. This arrange­
ment could ensure that the Economic Report is not missing potentially im por­
tant problems (or opportunities). It could also provide fo r much more orderly
debate, since it would set forth the pros and cons and alternatives o f matters
to be debated, so that Congresss, the President, and the Public w ill all look
at the same possibiilties.
One might call this a National Growth and Development Commission, and
their contribution could b e: (a ) an im proved and more farsighted President’s
Economic R eport; (b) an improved and more comprehensive response by the
Congress to the President’s Economic R ep ort; (c ) earlier and more know l­
edgeable public participation in the national debate on m ajor issues; (d ) the
greater likelihood o f taking care o f a problem through legislation before it
gets to be a mess.
In conclusion, let me add that I regret that so far business has not rallied
in support o f this legislation. When I look at the achievements o f Japanese
and W est German business enterprise, in large measure a product o f joint
economic planning by Government and Business, I think why not us? W hen
I realize that Government cannot and w ill not w ithdraw from influencing
economic policy, I think fa r better that the private sector should know in
advance what Government intends to do than be faced with unanticipated
actions that may require m ajor and costly readjustm ents on my part. And
I would hope that the private sector— business and the general public— w ill
bring all its ability, experience and w isdom to the planning process this
legislation envisages.
I f Government performance is to improve, it must reflect a corresponding
change in the attitude o f its citizens. The public must understand the whole
potential problem early enough to contribute to the national debate and then
be ready to share the burden. Focusing on the future instead o f the present
and sacrificing some o f the present to insure the future has not been a popular
pursuit either by the people or its Congress. But the turbulence we see all
around us today is a product o f “ yesterday’s fu tu res” not tended to— oppor­
tunities lost to improve ourselves or to stay out o f trouble.
American conditioning is influenced by our history. W e dream o f a land
o f infinite size and riches— o f water to waste, oil to spill, forests to raze and
free land to stake out. This dream is philosophically inconsistent w ith tod ay’s
reality, which demands that we conserve, husband our resources, define more
sharply our objectives at home, use our strength m ore selectively abroad w ith




258
heightened reliance on econom ic solutions. That means we must plan more
carefully the use o f our m ore limited resources and more fragile environment
w hile we im prove our mechanisms to avoid trouble instead o f merely reacting
to it.
Crossing the psychological divide between the dream and the reality is our
nation’s most difficult obstacle. Foresight and integrated policym aking in
Government w ill emerge only if an informed public understands the need for
it and demands it. The Humphrey-Hawkins bill can be an important first step
in that process.

The C h a i r m a n . Thank you very much, Mr. Saltzman.
I want to thank you gentlemen for a clear and emphatic statement
of your position.
Let me start off with the Roundtable, Mr. Lovell and Mr. Schu­
bert. On page 7, you go right to the heart of the statistical problem
here. I f we’re going to have a Humphrey-Hawkins bill with a 4percent rate of unemployment, the rate of unemployment ought to
stand up. That is, the statistics ought to have some integrity and some
reliability. And you say at the top of the page,
The m ethodology and procedures for collecting unemployment statistics are
not sensitive enough to the realities o f our economic system so that the data
can be reliably used to evaluate progress toward an absolute economic goal.

Now for the last 7 years we have been holding hearings in the
Joint Economic Committee, which I have chaired about 90 percent
of those hearings, on unemployment. Every month when the unem­
ployment figures come up we have the head of the Bureau of Labor
Statistics come up and testify on it. W e have gone into great detail on
those statistics. W e have had Professor Gordon before us several
times and Sar Levitan and there’s no question, on the basis of their
testimony, that they feel that our statistics are the best in the world.
That, of course, doesn’t make them perfect, because they are not
perfect anywhere, but we have an enormous sample. We have, as you
know, a cross section so we not only have household data— that is,
some 55,000 households that are queried every month— we also have
establishment data coming in from corporations all over the country
giving their reports too. So we have a cross-check there.
It seems to me if any of our statistics can be considered to be rea­
sonably reliable, these are. So what do you base this charge that the
statistics are not senstitive enough to the realities of our economic
system ?
Mr. L o v e l l . Well, I think, as you know, Sar Levitan is commis­
sioned to reexamine the unemployment statistics because there has
been concern as to what the basic conceptions are.
The C h a i r m a n . There are a number of things Mr. Levitan suggests
that makes sense. For instance, he doesn’t see any reason why people
in the military should be considered as out of the work force. I
couldn’t agree with him more. After all, the 2 million people in the
T
military are working and working hard in their very essential func­
tion of preparing to defend this country, but they are excluded
completely. But that wouldn’t have— and he would agree on the basis
of our questioning him— he would agree that the statistics— that the
elements that he would suggest changing would not significantly alter
the statistics.




259
Mr. L ovell. Senator, it’s not a lack of accuracy of the statistics
because I think they accurately portray what they say they portray,
given the assumptions that they have. I think our concern is that to
base all our economic actions on a figure of that character that repre­
sents a wide variety of kinds of unemployment, some of which is much
w
^orse than others, is a totally unrealistic base.
The unemployment of poorer youth represents a tremendously
serious problem, far greater, for example, than the unemployment of
inschool youth who are looking for part-time w^ork, and yet the same
figures are part of the computation.
I think our concern is in setting our priorities we should look at
the kinds of unemployment that give us the greatest concern and take
swift and useful action to correct that kind of unemployment rather
than bringing in the gross figures that we are.
The C h a ir m a n . I think that’s an excellent answer, but I think the
only way we can get the overall unemployment figure down clearly
T
is to make some real progress in the area of black unemployment,
youth unemployment, and so forth.
Mr. L ovell. That’s right, and the Business Eoundtable clearly feels
that’s the highest priority.
The C h a ir m a n . Well, if we have a 4-percent unemployment target—
and we now have today 2.8-percent unemployment for married
men, for instance. We have for black teenage females an unemploy­
ment rate of around 40 percent. Obviously, if we are going to achieve
these goals they are the people we have to provide training for, and
so forth.
Mr. L ovell. That’s right.
The C h a ir m a n . And you agree with that ?
Mr. L ovell. Yes.
The C h a ir m a n . Why wouldn't that goal work in the direction you
desire ?
Mr. L ovell. Well, if we said that our goal is to reduce black youth
unemployment, the steps taken are vastly different than if you’re
trying to reduce all unemployment from 6 to 5. In other words, you
don’t generally reduce this kind of unemployment by your macroeconomic actions. The cost of doing it that way are very high indeed.
The C h a ir m a n . This is exactly why I think we need that inflation
goal in there precisely.
Mr. L ovell. I think our basic philosophy is we would like to be
here today talking about specific programs that are necessary to
achieve that we all agree are more desirable inflation and unemploy­
ment goals, and we are concerned about the debate over a statement
of philosophy that we want to do this with the thought that this is
really going to achieve anything. I think that Congress and the
executive branch of this country, under a variety of administrations,
have been working a long time to achieve both of these purposes.
I don’t think there’s any lack of purpose. It’s that we sometimes lack
the courage to do the things that we have to do and occasionally the
wisdom. But to pass a law saying that we should have low inflation
and low unemployment is like passing a law saying we should abolish
cancer. Obviously, the goal is worthwhile, but it doesn’t give us any
clues as to how we proceed.


3-5
04
81
http://fraser.stlouisfed.org/4 0 - 7 - 8
Federal Reserve Bank of St. Louis

260
The C h a ir m a n . Well, I realize that and I think I ’d like to get
Dr. Hagedorn in on this too because lie seemed to feel that by passing
a law providing for a goal of 4-percent unemployment we are giving
that an absolute sanctity that we are going to achieve that goal
regardless. A lot of people feel we should do that, but we all know
that’s not the case.
I got an amendment adopted in 1968 providing for a goal of 26
million housing starts in the 10 years beginning in 1968, 2.6 million
a year, 600,000 publicly assisted housing starts a year. We achieved
only 80 percent of that goal in the 10 years overall. We achieved only
45 percent of the publicly assisted. It wasn’t because we set the goal
we didn’t accomplish it. In spite of that failure— and it was a failure—
I don’t think the goal was a mistake. I think it measures the degree
of our failure and put pressures on Congress to consider it each year.
I think it was wholesome, desirable, and supported by builders in the
business as well as by the labor people and the academic people—
just overwhelmingly supported.
I just don’t see why it's wrong to set a goal. What's wrong with
a goal? Why isn’t a goal desirable? You set your goals in business.
You set your goals in life if you're going to have a degree of success.
It doesn't mean that you commit suicide if you don’t reach the goal,
but if you’re going to be a successful person or a successful business
or a successful family or a successful community, you have some clear
notion of where you’re trying to go. What’s wrong with that, Dr.
Hagedorn ?
Mr. H agedorn. Well, Senator, I think if the American public
generally understood this bill in the terms you have just described
I would have no strong objections against your enacting the bill,
but I also think that if the general public in this country understood
the bill as setting goals which we may or may not attain and there
should be no pressure for us hitting these targets, if they understood
that way, there wouldn’t be much enthusiasm for this bill around
T
the country and you wouldn't have parades in the streets here down
Pennsylvania Avenue in support of this bill if they had heard what
you just said.
The C h a ir m a n . Well, I don’t mean that we don’t want to achieve
the goal. What I ’m trying to say is we are not going to just throw
everything aside if we have 15 or 20 percent inflation as iong as we
get unemployment down to 4 percent. We have to consider the con­
sequences of this kind of thing, but we want to have some kind of a
clear numerical goal. We have had a rhetorical goal since 1946 since
we passed the 1946 bill.
Mr. D onag hu e . I just wanted to add, that there's one thing about
setting a goal, and that is that you’re going to be measured against
that goal; and the feeling of our company in a lot of these areas is
that business doesn’t really want to be measured. There are efforts
by individual companies to try to do what they can for the unem­
ployed and particularly the minority youth, but the programs have
been scattered. They have been individual company actions. But I
don't think the business community as a whole has really tried to
help solve this problem. By setting a goal we will also realize that
there will be pressures upon us, since we will be measured against
1he goal and we will probably move a lot faster.




261
The C h a ir m a n . A s long as you’re speaking, I ’d like you to veil us
why it is that your corporation— and I ’d like also Mr. Saltzman to
speak on this— are you so unique? Let's not kid ourselves. The busi­
ness community supports the Hagedorn and Roundtable position
overwhelmingly. I know that and you know that and we all know
that. We wanted to get all viewpoints expressed, but the business
community does not like this bill.
Now how do you explain the fact that Control Data, a very, very
successful corporation, a national corporation, a profitable corpora­
tion, has been able to move in as you have described in some cases
to provide employment for those who are considered unemployable?
How can you bring yourselves to support this and how do you
explain the fact that your fellow businessmen don’t?
Mr. D o nag hu e . Well, the first thing I ’d like to say is we have
a very unique chairman in Mr. Norris who differs a lot with the rest
of the business community, and I must submit that I believe-----The C h a ir m a n . H ow big is your corporation, incidentally ?
Mr. D o naghue . It’s a $2 billion corporation, employing over
40,000 people.
The C h a ir m a n . And roughly what was your net income last year ?
Mr. D o naghue . Net income last year was about $65 million.
Now it seems to us that business reacts to situations. You had
the riots in Watts and you had the business community step in to
try to assist that area. But as Mr. Norris has stated many times,
business considers doing something in a ghetto area or an inner city
as being a part of corporate philanthropy, that is, we ought to give
because it’s good.
In Control Data’s case our position has been that where others have
sent in tlieir money, we send in our brains and our guts. In other
words, when we built a plant, as we have here in Washington, D.C.
and Minneapolis-St. Paul and even down in Appalachia, that plant
is an integral part of our corporation and our corporate profits de­
pend upon the success of those plants.
We also have a saying in Control Data that somebody’s problem
may be a business opportunity. We have established in the computerbased education area a project called “Fair Break.” “Fair Break”
is the use of computers and computer-based education for unemployed
minority youth.
One of the things we have discovered in trying to train and coun­
sel young people, especially minority youth, lias been their concern
about being in a classroom where they want to learn more but being
with their peers, if they are not quite as smart, they may feel out
of place.
The C h a ir m a n . H ow do you answer the arguments of Mr. Hage­
dorn and the Business Roundtable and others that if you follow this
Humphrey-Hawkins to its conclusion that you’re going to have over­
whelming Federal planning, Federal control, Federal direction, Fed­
eral domination ?
Mr. H agedorn. I didn't say that.
The C h a ir m a n . All right. 1 beg your pardon. I won't include you
there. But we have had witnesses who said that and many people
who feel that, that this will lead in the direction— I don’t "say that
it provides that here— will lead in the direction of controls of various




262
kinds. Mr. Hagedorn specified it would lead— if we provided that
inflation goal, it would lead to wage and price controls, for instance.
Now how do you answer the argument that this would lead in
the direction of greater Federal involvement and greater Federal
control ?
Mr. D o nag hu e . We look at it a little differently. I don’t see any­
thing in the current bill that spells out that there’s going to be
Government control. We certainly have to be very careful in the
follow-on legislation that will determine what the action programs
are, so it doesn’t include Federal control, but includes the coopera­
tion of the Government with all other elements of the private sector.
That’s what we think is needed— cooperation.
Control Data doesn’t want Federal controls any more than any
other company does. We feel that through cooperation we can accom­
plish more than we are doing individually and we cannot afford
the 40-percent minority unemployment rate (that we have today)
in many of our cities. One of these days this situation is going to
explode and then what are we going to do ? We are going to pour
massive funds into reconstructing our inner cities over something that
needn’t have happened in the first place.
The C h a ir m a n . Mr. Schubert wanted to comment and then we will
go to Mr. Saltzman.
Mr. S chubert . Mr. Chairman, let me say that Control Data and
Seagrave are not the only corporations that are not only concerned
about the problems that have been alluded to this morning but are
doing something about it.
My company, Bethlehem Steel, has been deeply involved in training
minorities in centers around the country and one very close at hand
is at Baltimore, Md. We are proud of the record we have.
Second, we have been intensively involved with discussions with
the administration and legislative leaders here in the Congress in
trying to devise a better way to go at the problem.
Third, we oppose Humphrey-Hawkins for three basic reasons.
One, we believe it’s fraudulent in that it overpromises. It promises
something that cannot be, in our perception, achieved. Either it’s an
unemployment bill or it’s a planning bill. I f it’s an unemployment
bill it cannot deal with the structural problems of unemployment
that are so telling in our society. I f it is planning, we are opposed
philosophically to the kind of control that was suggested by the
witness from Seagrave Corp.
Mr. Chairman, I would just note one additional comment on a
matter that has been touched on earlier. With regard to the matter
of an inflation goal, I think we probably don’t view this matter in
precisely the same way as Mr. Hagedorn does. We oppose the bill.
We do not think that even with the inflation target that the bill is
an acceptable, credible piece of legislation. But, on the other hand, if
the Congress is going to insist on enacting it, we believe that it is
better with an inflation target than without because it does provide
some balance and stability.
We don’t accept the notion that having an inflation goal will neces­
sarily lead to wage and price guidelines or wage and price controls.
They will come for political reasons whether there’s a 3-percent




263
target in Humphrey-Hawkins or whether there’s not any target if
they're going to come.
The C h a i r m a n . I appreciate that very much. Mr. Saltzman, will
you comment on the general question I asked initially as to why it is
that your firm, and you as the principal owners of your firm, I take it,
suport the bill ?
Mr. S a l t z m a n . I believe that the bill is in many ways essential
to the welfare of our country, and its citizens, and that includes all
of the citizens and businesses as well.
We can look back over the last 10 tor 12 years and it is replete
with examples of opportunities that are lost and trouble that we have
got into, not only because there are philosophical differences on issues,
but more importantly, because we lack the mechanisms in our Gov­
ernment to make our economy function properly in light of the world
events today.
We no longer live in a land that is part of an illusion in our minds
of free trade and the marketplace. How can you talk about the
marketplace in regard to petroleum, for example? Does that mean
if we are short, that oil could go to $2 a gallon, and the people who
can’t afford it won’t be able to heat their homes, while if I buy
petrochemicals for paint, I can pay any price I want.
The world has changed so enormously in the relationship, in the
way the raw materials are divided up with the changes in under­
developed countries. There used to be a time when we could send in
the marines and do something about it. That is no longer the case.
I have spent sometime delving into the way our Government works,
as chairman of a committee composed of labor— we had several labor
leaders, Woodcock, Pillard, Clayman, and others. We had several
industrialists, we had government people like Governor Lucey and
Mayor Hatcher, we had people that represented consumers, like John
Gardner and Carol Foreman. We had economists, such as Herb Stein,
as well as the Nobel Prize winning economist, Leontief. And we
started out with very diverse viewpoints and some very very strong
opinions that this country should not engage in any kind of goal
making or even get near the question of planning. In fact, the word
“planning” itself is a dirty word, not to be used.
This legislation carefully avoids the use of the word, because
Congress has been pressured to not even think in those terms.
After a year of looking into the way our Government does in fact
work, the mechanisms which are missing in order to permit this
country to achieve the objectives that it needs to achieve, the pressures
that are placed upon us by all of the other peoples in the world, we
looked at the way Japan operates, where business and Government
work together, and West Germany, where business and Government
work together in setting goals and objectives, it became very clear
how far we have lagged behind.
At the end of a year and a half of consultation and debate, we
reached the unanimous conclusion that there needed to be some kind
of planning mechanism which exists in our Government.
We are convinced, and I am convinced, that were there such a
thing, the activities of Government would be less heavy-handed, and
would be better coordinated.




264
The C h a ir m a n . Did Herb Stein go along with that?
Mr. S a l t zm a n . Yes, he went along with that.
The C h a ir m a n . He didn’t go along with the bill though?
Mr. S a l t zm a n . He didn’t go along with the bill. He went along
with the concept that some form of looking ahead, setting forth
alternative possibilities of what might occur, measuring those costs
both in social and economic terms, and then laying that on the
President and the Congress. Because that is fundamentally what this
bill does.
The C h a ir m a n . I think what you have described so far nobody
would object to, including any of the witnesses here. The objection
is in the first place to the 4 percent goal, and then to the Federal
Reserve involvement, and other things, but not the general picture
that you paint so glowingly.
Mr. S a l t zm a n . Mr. Chairman, I have heard different words. I
heard there were two objections. One is the objection to setting the
4 percent unemployment rate. The second is we don’t need any kind
of national planning of any kind whatsoever, because in so doing,
we might open up the door for eventual regulation.
The C h a ir m a n . Let me get into that in just a minute. Unfor­
tunately, gentlemen, the chairman of an agency is waiting for me
outside, he just has to see me now, so I will have to recess the hearings
for about 10 minutes. I will be back as quickly as I can. I apologize
for this, it is very rude, but there is nothing else I can do.
[Short recess.]
The C h a ir m a n . Further on in your statement, the statement by the
Round Table, on page 8 you say in the second paragraph: “Because
creating public sector jobs drawls workers into the labor force, we
estimate it would require two public jobs to reduce unemployment
by one.”
As you know, we have had an enormous explosion in the work
force in the last couple of years. In fact, last year we had a marvelous
year in employment, we increased employment by 4 million, the best
year ever. And we have a higher percentage of people working than
we have ever had, which is very very encouraging.
What you are saying is that if you follow this public service job
program, then you are going to expand it even more.
I don’t think that is so bad necessarily. Who are these people who
come in and join the work force. They are people who, to a consider­
able extent, particularly in view of the wages that are paid in public
service jobs, who are on welfare. And to some extent the net cost to
the Federal Government might not be so much.
Mr. L o v e ll. N o, Senator if it were people on welfare, we really
wouldn’t voice that much concern. But public service jobs, particu­
larly when wages are the prevailing wage level, do attract people
into the labor force, some of which take the jobs and some of whom
indicate willingness to take jobs, and so that increases your unem­
ployment rate, even if they don’t take them.
As you know, during World War II, when there were a lot of
high paying jobs, and a lot of social pressure to work, people came
into the labor force in tremendous numbers.
Now when we say we are interested in a 4 percent unemployment
rate, at what base? How many people in the labor market are we




265
talking about at 4 percent? What are we at now in terms— we have
roughly 200 million people, and we have 86 million people in the
labor force.
The C h a i r m a n . We have 99.735. We have almost exactly 100 mil­
lion. We are just a shade away from 100 million. It will probably be
100 million next year.
M r. L o v e l l . S o we are talking about a little less than 50 percent
o f the people in the labor force.

The C h a i r m a n . Most of those not in the labor force are babies
and retired people, and very young children under 16.
Mr. L o v e l l . Well, many. But you could certainly expand the work
force by 10 percent if you developed enough encouragement for
people to come into jobs that were attractive to them. That is what
that comment relates to.
The C h a i r m a n . Well, I think that is something to be aware of,
and I think it is another reason why we do provide this flexibility.
And you move to that on page 9, when you say the practical reality
is that this provision won’t give the President flexibility, but rather
confront him with a no-win situation.
I don’t think there is any political damage there. I wouldn’t view
that as damaging to a President, if he has to make a statement like
that. In fact, I think it could be a popular statement, particularly
because so many people are concerned with inflation.
The last polls indicated that four times as many people feel
inflation is the No. 1 problem as feel that unemployment is the No. 1
problem.
When you get to a point where the President is convinced of that,
and this President is not yet, perhaps other Presidents wouldn’t be
quite at this point, I think it is going to be relatively easy to say,
from the political standpoint, to say now we want to keep working
on unemployment, but we have to recognize the target will have
to be raised.
Mr. L o v e l l . I am glad you mentioned that, because as you may
know, the Senate Human Resources Committee, in its amendments to
title III, dealt specifically with the ability of the President to change
the 4 percent goal. What they said, in essence, as I understand it, is
if the President recommends a change in the goal, either House may
in essence veto that. So that his recommendation does not take effect
and he is therefore compelled to submit to Congress plans and pro­
grams to carry out the original goal.
Mr. C h a i r m a n . Well, I think again it may well be that one House
might veto it. Maybe we should change that.
Mr. L o v e l l . We would certainly hope you would change that
provision.
The C h a i r m a n . Does it require both Houses to take action? At
any rate, we are moving to a situation now where the most popular
position you can take in this country is not on unemployment, but
on inflation.
Mr. L o v e l l . That is true, inflation affects everybody, and unem­
ployment does not.
The C h a i r m a n . A s we know, we have 12 percent inflation annual
rate in the first 4 months of this year and we still have an unfortunate




266
unemployment that we are concerned about, but it is much less than
is was.
Mr. S c h u b e r t . With regard to the matter of the goal, again, I must
respectfully decline to view the 4 percent unemployment goal in the
bill to be quite the same as the housing goal, which you established
and set for our economy as you indicated a few years ago.
This goal has a great deal of meaning to the constituent groups,
as you well know, who are so strongly supporting the passage of
Humphrey-Hawkins.
Indeed it is the only thing which has held the constituent groups
together. And when there have been discussions— in fact, we were
involved in the discussions in the House with regard to making the
bill more palatable, so larger segments of the business community
could support it.
The C h a i r m a n . I would agree with that, it should have that. We
would be hyprocrites if we just passed it and said this is just a balm
to be given out to those who favor-----Mr. S c h u b e r t . But the concern, Mr. Chairman, is a President
faced with that continuing reality, despite the increased importance
of inflation, who would find great difficulty in not skewing macroeconomic policy to meet structural needs that can’t be met by macroeconomic policy anyway.
We perceive this minority unemployment problem in our inner
cities to be one that can not realistically be addressed by this.
The C h a i r m a n . I think you are right. I am glad you are indicating
your support, if you do have the 4 percent unemployment goal, for
a 3 percent inflation goal. Because that would mean you move in the
direction of providing additional employment by structural means,
rather than by monetary and fiscal policy, a big deficit and a greatly
increased supply of money, which would obviously have an infla­
tionary effect.
Mr. S c h u b e r t . That still doesn’t make the total package acceptable,
Mr. Chairman. It is a rational position, certainly.
The C h a i r m a n . I understand that, you have made that very clear.
Mr. Saltzman.
Mr. S a l t z m a n . Mr. Chairman, I am concerned that the attack on
the 4 percent number— and I have expressed my concerns about what
that number means— is perhaps designed to defend the desire to avoid
the whole implications of the bill. I would like to separate the two
things and discuss them with you for a moment.
It seems to me that the thing which is important in this bill far
transcends the question of whether we have 4 percent unemployment,
or 5, or 3. And that is how do we get our Government to perform
both with some farsighted objectives and also how we get some
integrated policymaking in our governmental actions.
It was not so long ago, 1970, when we passed the Clean Air Act,
which said that we had to put scrubbers on the coal-fired ovens and
it was then cheaper to convert them to oil, which was just the very
year that oil was coming into a position where we were beginning to
produce less than we were using.
Now had we had the kind of mechanisms which implicitly are
suggested by the overall philosophy of this bill, setting aside for the
moment unemployment, we would have been forced to look at all of




267
the implications, as they affect our economy. And had we done so,
perhaps we wouldn’t be in the position where, now several years
later, we are going back to those same people and trying to make
them convert back to coal because previously we had in our mind one
aspect of the problem, and that was the environmental aspect.
We are all more comfortable today, we have 6 percent unemploy­
ment, the stock market is up somewhat, but it is only 2 years ago
that many of the business leaders, and many other leaders in the
country, were saying they do not understand how we got into that
kind of mess and they really didn’t know how to get out of it.
We no longer live in a world which is the one that Adam Smith
envisaged. And an atomic bomb explosion in China equals con­
taminated milk in your State of Wisconsin. It is essential that the
governmental mechanisms update themselves to the point where all
of the people will know what are our reasonable objectives, what are
the country’s capabilities, what are the needs, and what kind of a
program might be envisaged to try to meet them.
The unemployment portion of this bill is one that was started
back in 1946, that everybody ought to be able to have a job in this
country. Putting it in more concrete numerical terms does not in my
view cast it in concrete. Solutions will relate to the individual situa­
tions at the time and one of the advantages of this bill is that we
will avoid the very kind of objections that were stated a moment
ago, and that is we cannot rely only on macro-economic considera­
tions. That is why as far as I am concerned, I would just as soon
take the Fed out of this bill, because that has been the only place
that we have relied upon to solve our inflationary problems. High
interest rates and monetary solutions will probably create as much
inflation as they might cure.
The C h a i r m a n . Well, I think if we took the Fed out of the bill,
we w^ould lose a great deal. I think there is a recognition that you
have to have a greater degree of coordination and cooperation than
we have had in the past in monetary and fiscal policy.
Incidentally, we had the Fed testify yesterday, Dr. Partee, repre­
senting the entire Board, he didn’t speak for himself, he spoke for
himself, for Chairman Miller, for Governor Coldwell, Governor
Gardner. Governor Wallich, Governor Jackson who unanimously said
there was nothing in this bill that in their judgment would adversely
affect the independence of the Federal Reserve Board.
As you know, they were appointed, most of them were appointed by
a Republican President, and they represent a broad variety of views
and they are experts on it, who think about it all of the time.
So it seems to me both Mr. Hagedorn and the Round Table position
that the Federal Reserve Board independence might be affected was
answered by the people who can probably supply us with the greatest
authority on it.
Mr. S a l t z m a n . My objection was somewhat different. I am afraid
T
if we leave it to the Fed we will never have an anti-inflationary pro­
gram in this country because no other meaningful solutions are being
proposed.
Mr. H a g e d o r n . I don’t think I said anything about the Fed in my
oral remarks, and I guess I forgot to get around to it in the prepared
testimony.




268
The C h a ir m a n . I thought you did.
Mr. H agedorn. Let me say it would be rather hard for me to answer
a question as to whether I think the requirement for the Fed to
make a special report should or should not be in the bill, because
T don’t think there should be a bill at all.
The C h a ir m a n . The Round Table on the bottom of page 12 and
the top of page 13 is very explicit in saying the independence of the
Fed would be damaged.
Mr. S chubert . There is no question that the language with regard
to the Fed has been improved over time and that certainly is not
one of our key objections.
But I would like to take an opportunity to approach one other
matter, if I might, Mr. Chairman.
Apart from the question that was just raised about the coal con­
version fiasco, and there is a logical argument that could be made
that the coal conversion fiasco occurred because the Government
attempted to intrude too far into the market mechanism, but, Mr.
Chairman, more significant than that, intellectually how can this
procedure be extolled as the epitome of good hard rational interestbalancing and even planning, and at the same time prejudge what
the results will be 5 years from now?
How can we say there ought to be coordinated planning, pulling
all of the units of government together, balancing out the various
interests, and at the same time say we are going to prejudge what
the results are going to b 5 years from now by setting a 4 percent
unemployment goal ?
Intellecturally there is no way that can be rational.
The C h a ir m a n . Mr. Shubert, you do that every day in business.
You say 5 years from now we are going to sell $2 or $3 billion,
whatever it is, we are going to have a certain net on this, we are
going to have a certain kind of investment during that period. You
set your goals and you change them as time goes on, you find that
circumstances change, so you have to modify and change them.
If you didn't do that planning, decide you were going to work
toward that goal and pull your resources in to do it, and gear up
your people to move in that direction, you probably wouldn’t make
anything like the progress you do having set your goal.
Mr. S ciiubert . We don't prejudge what our price is going to be,
what our employment requirements are going to be, what our costs
are going to be.
The C h a ir m a n . What do you mean by prejudge ? If you are going
to set a sales goal, you have to set a production goal, and you have
to determine what in all likelihood you are likely to require in invest­
ment, likely to require in workers. That is why you have a hiring
and personnel program. You certainly wouldn’t tell me that your
personnel needs are not related to what you expect your sales to be.
And then, if you are an efficient company, you do that as meticu­
lously and as carefully and precisely as you can. You don’t leave
it to a guess.
Mr. L ovell. Senator, I think the critical question is the flexibility
of the goal. I think our whole concern is that. I f you were to say
the President sets the goals, we agree. We don't have any problem




269
with that. And in regard to this planning process, I want to assure
my business asociates here as well as you, Senator, the business
community is not against planning. We would like to think that
responsible Government planning is very useful.
We think the planning mechanism here which sets up a separate
congressional planning process that really indeed is not integrated
with the President's, in our judgment, but we see two planning
processes, and they say a camel is a horse put together by a com­
mittee. I just-----The C h a ir m a n . Regardless of whether you like it or not, I think
we have to recognize that the Congress, with all of its disparate
views and so forth, doesn't make the decisions. The President pro­
poses, and we dispose. We have the spending power, the power of
the purse, the Founding Fathers decided it ought to be given to
the Congress and that is the way it is.
So therefore we should be in a position of assuming the respon­
sibilities and of working with the President to decide how these goals
should be modified.
Mr. L ovell. Well, certainly I would be the last one to suggest that
Congress have less authority in that regard.
I am talking about the original planning process. It would seem
to us that the executive would make the plans and submit them to
Congress, and Congress would perhaps alter or change them. But
as I read this bill, the Congress would have almost an equal planning,
initial planning responsibility in all of these broad areas, which could
conceivably and almost in many instances be contrary to that which
the executive comes up with.
I would be afraid that this would result over time in less effective
planning rather than more effective planning.
The C h a ir m a n . Mr. Donagliue, did you want to comment ?
Mr. D o nagiiue . First of all, with regard to setting the goals, I am
positive every company does. We certainly do in our company and
we do it not just on a year-to-year basis, but try to project our goals
for 5 years. It is a natural planning process.
We were able to get away with year-to-year planning 10 or 15
years ago, but in todays environment it has to be more long range
and it has to be worldwide.
With regard to the Congress and its pi aiming, I personally am
not concerned about that. I am sure that in their wisdom they are
going to consult the various sectors that are going to be involved
in cooperation with them. Just as we have our say right here today,
and you are hearing different viewpoints, you are probably going to
hear them on every aspect of the planning mechanisms. But this bill
provides us with, again, goals, long-range goals, and medium range
goals, and also as I read it it is going to involve the private sector
in the development of the plan, but it gives us an impetus to move
ahead. That is what we are for.
The C h a ir m a n . Let me ask you something else, and we can come
back to this later, but I would like to move on if I could to another
issue.
Mr. Donagliue, you and Mr. Hagedorn, and I believe the other
members of the panel have not taken the same position, you both are
clearly and emphatically against the 3-percent inflation goal.




270
Now the President has announced a program to hold down infla­
tion, that will require cooperation from both business and labor to
be successful. Yesterday the Washington Post indicated that the
President had concluded that the anti-inflation program is in doubt,
because few business and labor leaders seem willing to make the
sacrifice needed to slow down wage and price increases.
Why wouldn’t— in the first place, do you think that is correct?
And in the second place, why wouldn’t the goal be helpful in that
respect in making it a national aim, something that all citizens would
try to achieve if they could, making it more specific.
We have general language in the Employment Act, but we have had
that for years, and the general language is just not as forceful as a
specific numerical target.
So why wouldn’t this be a useful kind of an action under these
circumstances? Or do you think it was a misjudgment on the part
of the White House that they are not getting cooperation from busi­
ness and labor?
Mr. D o n a g h u e . That is very difficult to say. I understand the
President is meeting this morning with some of the leaders of the
A F L -C IO on his program.
But our concern about setting a numerical figure is that it may
become the overriding issue in the future, and when it comes to the
point of tradeoffs, that the unemployment aspect of the thrust of the
Humphrey-Hawkins bill might be lost.
Now, unlike many of my colleagues here, we look at unemployment
as being the No. 1 issue in the United States. We look at it from a
societal viewpoint rather than strictly the monetary aspects of our
business. We are very concerned that if the trend toward minority
unemployment in youth continues to grow, w e are building a tinder
^
box here in the United States. Therefore it is in our national interest
to stem that movement or that potential danger of the future.
The C h a i r m a n . Well, the way that we have designed, the way we
have drafted this 3-percent inflation goal, we aid “policies to achieve
the inflation goal shall be designed so as not to impede the achieve­
ment of the unemployment goal.”
What we had in mind was we would try to achieve the inflation
T
goal by structural remedies, by providing a greater degree of training,
by all of these efforts that everybody seems to enthusiastically sup­
port, but we just don’t seem to get that kind of concentration of
resources that we should.
So this would not be an inhibition in trying to achieve this goal;
on the contrary, it would be trying to channel these efforts in a con­
structive direction, working on both goals at once.
The control over inflation is complicated by a complex set of fac­
tors, many of which are not under our direct control. Unemployment
is something that we can look towards and develop plans that can
help solve the problem.
The C h a i r m a n . W e can certainly do that to a very great extent
with respect to inflation. None of these things can we determine, I
think everybody here would agree. Maybe not. Secretary of Labor
Marshall didn’t agree yesterday. He indicated we can achieve an
unemployment goal, no question about it, all we have to do is say
we have the will and that is it.




271
I don’t agree with that at all. I think there are all kinds of reasons
why it will be hard to achieve that kind of goal, not the least of
which is the work force itself is not a given factor, you just can’t
spend a certain amount of money, even price controls wouldn’t
achieve it.
But at any rate, let me ask Mr. Hagedorn about this issue of why
labor and management haven’t cooperated, if they have not.
Mr. H a g a d o r n . Well, I am not sure to what degree individual
groups have cooperated. Generally the NAM, in the preliminary
steps of framing up this program, was working closely with the ad­
ministration, and still is, in trying to make it a realistic program.
I have to tell you that personally I am a monetarist, and I think
all this is an irrelevant sideshow. I can’t represent to you that this
is the NAM point of view.
The C h a i r m a n . For which I am grateful.
Mr. H a g a d o r n . This program keeps being presented to us as a
voluntary program. The word “voluntary” is emphasized, it appears,
in every sentence.
Last week Barry Bosworth made a speech in Atlanta, and in his
speech he described this voluntary program. He said if we don't get
the voluntary cooperation that we need from business and labor, we
are going to pry it out. Those are his words, they are going to pry
it out.
Now prying out voluntary cooperation is a combination of ideas I
find hard to deal with. Personally, I think with this kind of phi­
losophy pressures will mount on the administration to get tough.
With those pressures, I am afraid we are on a headlong race toward
wage and price controls. It won’t be called that name, it will still be
called a voluntary program.
The C h a i r m a n . You see that everywhere. I think they are a danger,
they are a threat. We had them in 1973, but I think the experience
was so bad, you had such an overwhelming almost unanimous dis­
approval, from management, from labor, from Members of Congress,
I don’t think there is any prospect, unless you get 15- or 20-percent
inflation, in which case-----Mr. H a g a d o r n . I know, nobody has a good word to say for wage
and price controls in this town, whatever his political persuasion or
whatever interest group he is from. But people keep talking about
various kinds of income policy. For example the tax-based income
policy, as though it was something different from controls.
I f you want to argue that point, I would be delighted to have an
opportunity to talk at length on it.
The C h a i r m a n . We are going to have hearings on that later on.
Maybe we can have you here.
Mr. H a g a d o r n . I think it is just another word for control.
The C h a i r m a n . Yes, sir, Mr. Schubert.
Mr. S h u b e r t . My boss, Mr. Chairman, who appeared before you
briefly this morning, was at the business leader meeting at the White
House, and his report to me was that there certainly was not any
evidence of lack of cooperation, everyone had their own reservations
as to the degree to which cooperation could be effectuated, with the
guidelines or the targets that were ennunciated by the President.




272
Obviously in an industry like steel, where the price increases
realized over the last 3 years have not in any fashion approached the
cost increases that we have all absorbed and experienced, a commit­
ment to a flat number is very difficult.
But everyone at the meeting as described by Mr. Foy, indicated
recognition that this was a No. 1 problem, and they would cooperate
with the President in every way they could.
The C h a ir m a n . Maybe I should put it in a different way. I don’t
mean there is not good will, and we are all patriotic and want to do
our best, and I mean that sincerely. The difficulty is the conditions
may make it virtually impossible. The statistics we have in the first
4 months of this year indicated the materials index, for example,
is up very sharply. The price of finished goods is up 11.8 percent
in the first 4 months of this year. We have a drop in productivity
and a big increase in wage settlements.
Now does that mean that there is no way you can avoid substan­
tially higher prices, or is there a way, with restraint on the part of
business, that you can reduce the inflationary pressure.
Mr. S chubert . Mr. Foy suggested to the President in the steel
industry we have been very restrained and indeed our profitability
last year being 42d out of 42 industries in Citibank’s survey kind of
demonstrates that.
But the energy increases, for example, that are going to come out
of the coal settlements are very significant.
The C h a ir m a n . Profitability is not necessarily keyed to your price
level. It depends on your volume, too. And your volume, if it is hit
hard and drops, your profitability drops, even though your price
picture may be all right.
Steel is an industry that is very, very puzzling. You have had
excellent productivity, I don’t know about recently, but you have had
excellent productivity improvements. You have been an industry that
has provided substantial improvements in technology.
Mr. S chubert . There are two problems. The productivity has been
relatively good as compared to the rest of manufacturing. But there
have been two problems. One is your profitability has been down,
and it has been down primarily because of price restrictions. Every
time we sneeze, the President reacts against the steel industry, be­
cause of alleged impact on the economy. We don’t think we have that
much of an impact.
Second, foreign imports, which have been traumatic, we are now
running at 20 percent, Mr. Chairman, and it makes it very difficult
for us to retain the earnings sufficient to meet some of the capital
improvements made by some of our foreign competitors.
The C h a ir m a n . Let me ask both Mr. Hagedorn and either of you
gentlemen from the round table this question. The HumphreyHawkins bill, we know, has a 4-percent unemployment goal for 1983.
Yesterday both Secretary Marshall and Chairman of the Council of
Economic Advisers Schultze said they thought this could be accom­
plished by using structural programs in addition to monetary and
fiscal policy, but primarily structural programs.
Do you think that is realistic or not? I am not sure that I was able
to ascertain that from your statements.
Mr. H agedorn. I think it is entirely unrealistic.




273
The C h a i r m a n . H o w can you be so sure ?
Mr. H a g e d o r n . I can’t be sure.
The C h a i r m a n . We have had a drop in unemployment, down to 6
percent in the past 2 or 3 years. Why can’t we get that down to 4 per­
cent ?
Mr H a g e d o r n . I can’t be sure. Economics is not an exact science,
and I am not 100 percent sure of anything.
But the progress we make through structural efforts, laudable
though they be, and I certainly want to encourage them, the progress
we have made in putting a real dent in inner-city unemployment, for
example, has been so slow that we shouldn't count on it ; you shouldn’t
put it in concrete in legislation.
The C h a i r m a n . Y o u criticized Mr. Donaghue’s— you didn’t criti­
cize, but you indicated Mr. Donaghue’s appraisal was limited to a
relatively small section of the economy. Let me give you a bigger
example, still a segment of the economy, but give you my State of
Wisconsin.
We did two things in Wisconsin. No. 1, we have put an enormous
emphasis on vocational and technical education, perhaps more than
any other State. Reader’s Digest had a comparison some years ago
that said we spent 19 times as much per capita in Milwaukee com­
pared to Philadelphia on that.
We have a harsh climate, we have a high wage rate, and we are
a State that has disadvantages of that part of the Middle West, yet
we have been gaining jobs and we are well below the national average
T
on unemployment.
One reason is that strong emphasis on a trained work force. An­
other is we have a mobility that is based on a computer system, where
everybody who lives in a town of 10,000 or more can find immediately
every job that is available in Wisconsin simply by going to the
Employment Service. They can tell you every job that is available
in Milwaukee, what it pays, what the qualifications are, or in Su­
perior, Green Bay, all over the State.
Why couldn't that kind of program nationally, with strong em­
phasis on vocational and technical education, making a real outreach
effort to get the minority groups and the young people, the dropouts
into it, and a big emphasis on making the knowledge of where jobs
are available, why wouldn’t that be a way of moving down that
direction?
Mr. H a g e d o r n . Accepting all that you have said, Senator, and I
know Wisconsin’s record is impressive, it is going to take a lot more
than 5 years to reform the vocational educational system in all of
the 49 other States, so it becomes as successful as the one in Wisconsin.
The C h a i r m a n . But we are asking to get it down to a level of un­
employment that we have often had in the past, we have had that
level of unemployment below 4 percent in most of the 1950’s.
Mr. H a g e d o r n . That was before the youth explosion.
The C h a i r m a n . Well, that youth explosion is just about over.
Mr. H a g e d o r n . It is tapering off, yes; the signs are much better.
The C h a i r m a n . That should help us get to the 4 percent.
Mr. H a g e d o r n . Yes; it will improve the prospects for doing some­
thing in the future. But again, demographic changes occur slowly.




274
You are talking about a period of a quarter of a century ago. Four
percent might very well have been realistic then; as a matter of fact,
I think it was.
T h e C h a i r m a n . Mr. Lovell, would you comment on the realism
of the 4-percent figure, given a vigorous program of structural
activities ?
Mr. L o v e l l . I think that there is certainly a lot we can do in terms
of some of the specific problems; there are some things that can be
done through structural efforts. I would be very surprised and would
be delighted but very surprised that we can get down to 4 percent.
I have more confidence in structural methods than George does, I
think, partly because of my prejudice, having worked on them for so
many years.
The C h a i r m a n . Let me put this this way: We are just about to
wind up, but let me ask each of you gentlemen to give me an estimate
of what level you think we can get to in 5 years.
I think Mr. Hagedorn indicated about 5y2 percent. But I am not
sure that he had embodied a vigorous structural program in that. I
think that was given the present policies. But if each of you could
say at what level you think would be realistic, if not 4 percent, 4y2,
5, whatever.
Mr. H a g e d o r n . I would answer in terms of a safe zone. A safe
zone for the unemployment rate, I think, for the next 5 years will be
5y2 to 6 percent.
The C h a i r m a n . Y o u say 5y> to 6 percent.
Mr. H a g e d o r n . Yes.
Mr. L o v e l l . Senator, I think that as long as we recognize it as a
goal, rather than as a commitment, and an obligation, it should be set
lower than we think will happen by itself. So I might say 5 percent.
But my main concern is having the language of this bill, if it is
passed, to be able to reflect changing times and changing conditions,
and not have people coming before this Congress in 2 years and say­
ing, look, this bill is passed, you have to do A , B, and C that you and
others would know are not wise in terms of the total health of the
economy.
I think that is our major concern, not to lock ourselves in so we
don’t have manueverabilitv.
I certainly don’t have any objection to a goal that is hard to reach,
but we shouldn’t be locked into it.
The C h a i r m a n . Mr. Donaghue?
Mr. D o n a g h u e . Well, it is very difficult to say whether we will
actually meet the 4-percent goal or not. The main thrust ought to be
that we certainly have to work for that. There are structural changes
that are needed, and there is a great deal of follow-on legislation to
start to implement some action programs in this area.
Is it achieveable? I just don’t have any crystal ball to really be able
to predict that. But we certainly should be aiming for it.
The C h a i r m a n . Y o u don’t quarrel with the 4-percent goal?
Mr. D o n a g h u e . No; I do not.
The C h a i r m a n . Mr. Saltzman.
Mr. S a l t z m a n . Senator, I would say we can reach it. I am not
saying we will. I say we can.




275
One of the things that worries me is in my city of New York,
which has had 30 percent unemployment of kids getting out of school,
largely blacks and Puerto Ricans, but not limited to them by any
means. When the Federal Government advertised there were about
1,200 jobs available for the summer, you saw 4,000 kids line up at 6
o’clock in the evening before, and stay in line all night in the cold
and even rainy weather, and fighting for a place in the line. It is
clear to me there is a tremendous need to be able to see this-----The C h a i r m a n . Where was this ?
Mr. S a l t z m a n . New York City, waiting in line.
The C h a i r m a n . What were they paying?
Mr. S a l t z m a n . They were paying the minimum wage.
Mr. L o v e l l . It was higher than the minimum.
Mr. S a l t z m a n . N o ; it was the minimum wage. But the point is that
unless we can bring a submerged portion of the people of this country
back into our country, and into the economy, we are in serious trouble,
not only socially, but also economically.
I
think we can do it. I think it will be difficult and expensive, and
one of the problems is that you must spend the money before you get
the benefit. We save an awful lot of money by making it possible for
these people to go to work, but you have to spend it first.
The second problem is that you do have at least temporarily, an
accretion in the inflation rate, while you are doing that, and there is
almost no way to avoid that.
But it seems to me, that especially if we set a maximum inflation
rate, which may indeed be necessary, that there is a hard line we are
going to have to face. Nobody is going to say that they were against
a voluntary program. But I cannot understand when we talk about a
free marketplace, but at the same time we suggest to labor unions and
businesses that they take positions which are contrary to the very
nature of the free marketplace— which is to get whatever the free
marketplace puts you in a position to try to extract— because the two
are incompatible, both economically and philosophically. Whether
we like it or not, we are going to get to the point where some stric­
tures have to be applied in order to get to the place we have to get to.
That is true both with our efforts in unemployment and with our
efforts in inflation.
The C h a i r m a n . Gentlemen, I want to thank you very much, this
has been an excellent panel, well balanced and very thoughtful.
I
realize you differ in your views, but I think that is one of the
reasons it has been such a good and helpful and enlightening panel..
Thank you very much.
The committee will stand adjourned.
("Thereupon, at 12:10 p.m. the hearing was adjourned.]
[Additional material received for the record follows in the
appendix.]


3-5 0 - 7 - 9
044
81





277
APPENDIX

Purpose:

Amdt.No. 1703

95th CONGRESS
2d Session

pd
1

IN THE SENATE OF THE UNITED STATES
Referred to the Committee on Human Resources and ordered to be printed

F ebruary 23 (legislative day, F ebruary 6), 1978

AMENDMENT
Intended to be proposed by Mrs. H u m ph r e y

(for herself,

Mr. N elson , Mr. R obert C. B yrd , Mr. W il l ia m s , Mr.
J a v it s , Mr. Cran ston , Mr. B rooke , Mr. J ac k so n , Mr.
M agnuson , Mr. A b o u r e zk , Mr. A nderson , Mr. B a y h ,
Mr. Case , Mr. Cl a r k , Mr. E a g leton , Mr. H a t h a w a y ,
Mr. I nouye , Mr. K en n edy , Mr. M a t s u n a g a , Mr. M c­
Govern , Mr. M e t z e n b a u m , Mr. M o y n ih a n , Mr. P e l l ,
Mr. R iegle , Mr. Sa r b a n e s , Mr. L e a h y , and Mr. R ib i c o ff)

to S. 50, a bill to translate into practical reality

the right of all Americans who are able, willing, and
seeking to work to full opportunity for useful paid employ­
ment at fair rates of compensation; to assert the responsi­
bility of the Federal Government to use all practicable
programs and policies to promote full employment, pro­
duction, and real income, balanced growth, adequate pro­




278
ductivity growth, proper attention to national priorities, and
reasonable price stability; to require the President each
year to set forth explicit short-term and medium-term
economic goals; to achieve a better integration of general
and structural economic policies; and to improve the co­
ordination of economic policymaking within the Federal
Government, viz: Strike all after enacting clause and insert
in lieu thereof:
1

That this Act and the following table of contents be cited

2

as the “ Full Employment and Balanced Growth Act of

3 1977” .
TABLE OF CONTENTS
Sec. 1. Title.
Sec. 2. General findings.
TITLE I—ESTABLISHMENT OF GOALS AND GENERAL
ECONOMIC POLICIES
Sec. 101. Statement of purpose.
Sec. 102. Declaration of policy.
Sec. 103. Economic Report o f the President and short-term economic
goals and policies.
Sec. 104. Full employment and balanced growth: medium-term economic
goals and policies.
Sec. 105. Provisions applicable to short-term and medium-term goals.
Sec. 106. National priority policies and programs required for full em­
ployment and balanced growth.
Sec. 107. The President’s budget.
Sec. 108. Monetary policy.
Sec. 109. Overcoming inflation.
Sec. 110. Council of Economic Advisers.
Sec. 111. Advisory Board or Boards.
TITLE II—STRUCTURAL POLICIES AND PROGRAMS IN­
CLUDING TREATM ENT OF RESOURCE RESTRAINTS
Sec. 201. Statement of purpose.
Sec. 202. Countercyclical employment policies.
Sec. 203. Coordination with State and local government and private sector
economic activity.
Sec. 204. Regional and structural employment policies.
Sec. 205. Youth employment policies.
Sec. 206. Job training, counseling, and reservoirs of employment projects.
Sec. 207. Capital formation—private and public.




279
TITLE III-r-POLICIES AND PROCEDURES FOR
CONGRESSIONAL REVIEW
Sec.
Sec.
Sec.
Sec.

301.
302.
303.
304.

Statement of purpose.
Review of Economic Report by Joint Economic Committee.
Exercise of rulemaking powers.
Review of Economic Report by Committees on the Budget of
both Houses.
TITLE IV—GENERAL PROVISIONS

Sec. 401. Nondiscrimination.
Sec. 402. Labor standards.
Sec. 403. Authorizations.
1

2

GENERAL FINDINGS

S e c . 2. (a) The Congress finds that the Nation has

3 suffered substantial unemployment and underemployment,
4 idleness of other productive resources, high rates of inflation,
5 |and inadequate productivity growth, over prolonged periods
6

of time, imposing numerous economic and social costs on the

7

Nation. Such costs include the following:

8 i

( 1 ) The Nation is deprived of the full supply of

9

goods and services, the full utilization of labor and capital

10

resources, and the related increases in economic well-

11

being that would occur under conditions of genuine full

12

employment, production, and real income, balanced

13

growth, and reasonable price stability.

14
15

( 2 ) Insufficient output of goods and services is
available to meet pressing national priorities.

16

(3) Workers are deprived of the job security, in-

17

come, skill development, and productivity necessary to

18

maintain and advance their standards of living.

19

(4) Business and industry are deprived of the pro-

20

duction, sales, capital flow, and productivity necessary to




280
1

maintain adequate profits, undertake new investment,

2

create jobs, and contribute to meeting society’s economic

*3

needs.

4

(5) Unemployment exposes many families to social,

5

psychological, and physiological costs, including disrup­

6

tion of family life, loss of individual dignity and self-

7

respect, and the aggravation of physical and psychologi­

8

cal illnesses, drug addiction, crime and social conflicts.

9

( 6 ) Federal, State and local government budgets

10

are undermined by deficits due to shortfalls in tax reve­

11

nues and in increases in expenditures for unemployment

12

compensation, public assistance, and other recession-

13

related services in the areas of criminal justice, drug

14

addiction, and physical and mental health.

15

(b) The Congress further finds that:

16

( 1 ) High unemployment often contributes to infla­

17

tion by diminishing labor training and skills, under-

18

utilizing capital resources, reducing the rate of produc­

19

tivity advance, increasing unit labor costs, and reducing

20

the general supply of goods and services and thereby

21

generating cost-push inflation.

22

( 2 ) Aggregate monetary and fiscal policies alone

23

have been unable to achieve full employment, produc­

24

tion, and real income, balanced growth, adequate pro­

25

ductivity growth, proper attention to national priorities,

26

and reasonable price stability, and therefore must be




281
1

supplemented by other measures designed to serve these

2

ends.

3

(3) Attainment of these objectives should be fa­

4

cilitated by setting explicit short-term and medium-term

5

economic goals, and by improved coordination among

6

the President, the Congress, and the Federal Reserve.

7

(4) Increasing job opportunities and full employ­

8

ment would greatly contribute to the elimination of

9

discrimination based upon sex, age, race, color, religion,

10

national origin, and other improper factors.

11

(c) The Congress further finds that an effective policy

12

to promote full employment, production, and real income,

13

balanced growth, adequate productivity growth, proper at­

14

tention to national priorities, and price stability should ( 1 )

15

be based on the development of explicit economic goals and

16

policies involving the President, the Congress, and the Fed­

17

eral Reserve, with full use of the resources and ingenuity

18

of the private sector of the economy, and ( 2 ) include pro­

19

grams specifically designed to reduce high unemployment

20

due to recessions, and to reduce structural unemployment

21

within regional areas and among particular labor force

22

groups.

23

(d) The Congress further finds that full employment,

24

production and real income, balanced growth, adequate pro­

25

ductivity growth, proper attention to national priorities, and

26

reasonable price stability are important national requirements




282
1

that will promote the economic security and well-being of

2

all our citizens.

3

TITLE I—ESTABLISHMENT OF GOALS AND

4

GENERAL ECONOMIC POLICIES

5

STATEMENT OF PURPOSE

6

7
8j

S e c . 101 . It

is the purpose of this title to declare the gen-

eral policies of this A ct; to provide an open process under
which economic goals and policies are proposed, reviewed,

9

and established; to provide for yearly review of national

10

economic policies to ensure their consistency with these goals

11

to the maximum extent possible; and generally to strengthen

12:

13

and supplement the purposes and policies of the Employment
Act of 1946.

14
15
16
17

d e c la r a t io n
S e c . 102 .

o f p o lic y

Section 2 of the Employment Act of 1946

is amended to read as follows:
“ S e c . 2.

(a) The Congress hereby declares that it is the

18

continuing policy and responsibility of the Federal Govem-

19

ment to use all practicable means, consistent with its needs

20

and obligations and other essential national policies, and with

21

the assistance and cooperation of industry, agriculture, labor,

22

and State and local governments, to coordinate and utilize

23

all its plans, functions, and resources for the purpose of creat-

24

ing and maintaining, in a manner calculated to foster and

25

promote free competitive enterprise and the general welfare,

26 conditions which promote useful employment opportunities,




283
1

including self-employment, for those able, willing, and seek-

2

ing to work, and promote full employment, production, and

3

real income, balanced growth, adequate productivity growth,

4

proper attention to national priority needs, and reasonably

5

stable prices as provided for in section 5( b) of this Act.

6

“ (b) The Congress further declares and establishes as

7

a national goal the fulfillment of the right of all Americans

8

able, willing, and seeking to work to full opportunities for

9

useful paid employment at fair rates of compensation.

10

“ (c ) The Congress further declares that inflation is a

11

major national problem requiring improved government poli-

12

cies relating to food, energy, improved fiscal and monetary

13

management, the reform of outmoded Government rules and

14

regulations, the correction of structural defects in the econ-

15

omy that prevent or seriously impede competition in private

16

markets, and other measures.

17 1

“ (d) The Congress further declares that it is the purpose

18

of the Full Employment and Balanced Growth Act of 1977

19

to improve the coordination and integration of the policies

20

and programs of the Federal Government toward achieve-

21

ment of the objectives of such Act through better manage-

22

ment, increased efficiency, and attention to long-range as well

23

as short-range problems.

24

“ (e) The Congress further declares that, although it

25

is the purpose under the Full Employment and Balanced

26

Growth Act of 1977 to seek diligently and to encourage the




284
1

voluntary cooperation of the private sector in helping to

2

achieve the objectives of the Act, no provisions of the Act

3

shall be used, with respect to any portion of the private

4

sector of the economy, to provide for Government control

5

of production, employment, allocation of resources, or wages

6

and prices, except to the extent authorized under other

7

legislation.

8

“ (f) The Congress further declares that it is the pur-

9

pose of the Full Employment and Balanced Growth Act of

10

1977 to maximize and place primary emphasis upon the

11

expansion of private employment, and all programs and

12

policies under that Act shall be in accord with that purpose.

13

Toward this end, the effort to expand jobs to the full employ-

14

ment level shall be in this order of priority to the extent con-

15

sistent with balanced growth:

16

tional private jobs through improved use of general economic

17

and structural policies; (2) expansion of private employ-

18

ment through Federal assistance in connection with the

19

priority programs in such Act; ( 3 ) expansion of public

20

employment other than through the provisions of section 206

21

of such Act; and (4)

22

President under section 206 of such Act and subject to the

(1) expansion of conven-

only when recommended by the

23 limitations therein, the creation of employment through the
24

methods set forth in such section.” .




/

285
1

ECONOMIC REPOET OF THE PRESIDENT AND SHORT-TERM

2

ECONOMIC GOALS AND POLICIES

3

Sec . 103. The headings preceding section 3 and section

4

3 (a) of the Employment Act of 1946 are amended to read

5

as follows:

6

“ ECONOMIC REPORT OF THE PRESIDENT AND SHORT-TERM

7

ECONOMIC GOALS AND POLICIES

8

“ Sec . 3. (a) The President shall transmit to the Con­

9 gress during the first twenty days of each regular session an
10

economic report (hereinafter called the Economic Report),

11

together with the annual report of the Council of Economic

12

Advisers submitted in accord with section 4 (c) ( 2 ) of this

13

Act, setting forth—

14

“ ( 1 ) the current and foreseeable trends in the levels

15

of employment, unemployment, production, real income,

16

productivity, and prices, and a review and analysis of

17

recent developments affecting economic trends in the

18

United States;

19

“ ( 2 ) annual numerical goals for five years for em­

20

ployment and unemployment, production, real income,

21

and productivity. The goals for the calendar year in

22

which the Economic Report is transmitted and for the

23

following calendar year, designated as short-term goals,
shall be consistent with achieving as rapidly as feasible




286

1

the goals of full employment, production, and real in­

2

come, balanced growth, adequate productivity growth,

3

and proper attention to national priorities.«

4

“ (3) the program and policies which the President

5

deems necessary to achieve the goals of paragraph ( 2 )

6

of this subsection, and to achieve reasonable price

7

stability as rapidly as feasible as provided for in section

8

5 (b) of this Act.

9

“ (4 ) for all of the purposes of the Pull Employ­

10

ment and Balanced Growth Act of 1977, the percentage

11

rate of unemployment at any given time shall be the

12

rate of unemployment as a percentage of the civilian

13

labor force as set forth currently by the Bureau of Labor

14

Statistics in the United States Department of Labor.” .

15

FULL EMPLOYMENT AND BALANCED GROWTH:

16
17

MEDIUM-

TERM ECONOMIC GOALS AND POLICIES

Se c . 104. The Employment Act of 1946 is amended

18

by adding a new section 4 as follows:

19

“ f u l l e m p l o y m e n t a n d b a l a n c e d g r o w t h : m e d iu m -

20

t e r m ECONOMIC GOALS AND POLICIES

21

“ Se c . 4. (a) In each Economic Report after enactment

22

of the Full Employment and Balanced Growth Act of 1977,

23

the President shall incorporate (as part of the five-year

24

numerical goals in each Economic Report) medium-term

25

annual numerical goals covering the same items* and for the




287
1

same purposes as the goals specified in paragraph ( 2 ) of

2

subsection 3 ( a) , but for the three calendar yearp subsequent

3

to the two years referred to in such paragraph, and the pro­

4 grams and policies the President deems necessary to achieve
5 such medium-term goals, and to achieve reasonable price
6

stability as rapidly as feasible as provided for in section

7

5(b) of this Act.

8

“ (b) The medium-term goals in the first three Economic

9 Reports after enactment of the Full Employment and Bal­
10

anced Growth Act of 1977 shall include (as part of the five-

11

year goals in each Economic Report) the interim numerical

12

goal of reducing unemployment among Americans aged

13

twenty and over in the civilian labor force to not more

14

than 3 per centum and to reduce unemployment among the

15 entire civilian labor force aged sixteen and over to not more
16

than 4 per centum within a period not extending beyond

17 the fifth calendar year after the first such Economic Report,
18 counting as the first calendar year the year in which such
19

Economic Report is issued. Upon achievement of the 3 and

20

4 per centum goals as specified above, each succeeding

21

Economic Report shall have the goal of achieving full em­

22

ployment as soon as practicable and maintaining full employ­

23

ment after it has been reached. In the third Economic Report

24 after enactment of the Full Employment atnd Balanced
25

Growth Act of 1977, the President shall review the numeri-




288
1

cal goals and timetables for the reduction of unemployment,

2

report to the Congress on any obstacles to their achieve-

3

ment, and if necessary propose corrective economic measures

4

toward achievement of such goals and timetables: Provided,

5

That beginning with such third report and in any subse-

6

quent reports, if the President finds it necessary, the Presi-

7

dent may in his or her judgment recommend modifications

8

in the numerical goals and/or timetables for the reduction

9

of unemployment, and the Congress may take such action

10

as it sees fit by the method set forth in title III of the Full

11

Employment and Balanced Growth Act of 1977.

12

“ (c)

In moving to reduce unemployment in accord

13

with the numerical goals and timetable as called for in sub-

14

section ( b) , every effort shall be made to reduce those dif-

15

ferences between the rates of unemployment among teen-

16

agers, women, minorities, and other labor force groups and

17

the overall rate of unemployment which stem from any

18

improper factors, with the ultimate objective of removing

19

such differentials to the extent possible. Insofar as these dif-

20

ferences are due to lack of training and skills, occupational

21

practices, and other relevant factors, the Secretary of Labor

22

shall take such action as he or she can to achieve the objec-

23

tives of this subsection; shall make studies, develop informa-

24

tion, and make recommendations toward remedying these

25

differences in rates of unemployment, and include *these in




289

1

the annual Employment and Training Report of the Presi­

2

dent; and, if deemed necessary, make recommendations to

3 the Congress related to the objectives of this paragraph/’ .
4

PROVISIONS APPLICABLE TO SHORT-TERM AND MEDIUM-

5

TERM GOALS

6

Sec . 105. The Employment Act of 1946 is amended by

7 adding a new section 5 as follows:
8

“ PROVISIONS APPLICABLE TO SHORT-TERM AND MEDIUM-

9

TERM GOALS

10

“ Sec . 5. (a) To aid in determining the short-term and

11

medium-term goals for employment, production, and real

12

income, analysis shall be presented in the Economic Report

13

with respect to major aspects of the appropriate composition

14

or structure of each goal, and as to the appropriate apportion­

15

ment of total national production among its major compo­

16

nents (private investment, consumer expenditures, and public

17

outlays) as affected by relative income flows and other

18

factors, in order to promote balanced growth, reduce cyclical

19

disturbances, and achieve the other purposes of the Full Em­

20

ployment and Balanced Growth Act of 1977.

21

“ (b)

The objective of achieving reasonable price

22

stability as soon as feasible, as set forth in section 3 (a) (3)

23

and section 4 ( a) , shall be sought by vigorous efforts through

24 the methods set forth in section 109 and elsewhere in the
25

Full Employment and Balanced Growth Act of 1977, and by




290
1

such other means as the President may find necessary, includ-

2

ing recommendations to the Congress. In choosing means

3

to achieve the goal for the reduction of unemployment and

4

choosing means to achieve the goal of reasonable price

5

stability, those means which are mutually reinforcing shall

6

be used to the extent practicable.” .

7

NATIONAL PRIORITY POLICIES AND PROGRAMS REQUIRED

8

FOR FULL EMPLOYMENT AND BALANCED GROWTH

9

Sec . 106. The Employment Act of 1946 is amended by

10

adding a new section 6 as follows:

11

“ NATIONAL PRIORITY POLICIES AND PROGRAMS REQUIRED

12

FOR FULL EMPLOYMENT AND BALANCED GROWTH

13

“ S e c . 6. To contribute to the achievement of the goals

14 under the Full Employment and Balanced Growth Act of
15

1977, the Economic Report shall include priority policies

16

and programs to encourage productive nonwasteful jobs and

17 help to reorder national priorities and employ the jobless in
1® the production of goods and services which add to the

19 strength of the economy, the wealth of the Nation, the well20

being of the people, and the restraint of inflation. Such

21

policies and programs shall not be set forth in the program-

22

matic detail developed by specialized Federal agencies, and

23 by others in the public and private sectors, but only suffi24 ciently to furnish an integrated perspective of our needs and
25

capabilities and as a long-run guide to relevant national




291
1

economic policies and programs. The national priority

2

policies and programs dealt with in the First Economic

3

Report under the Full Employment and Balanced Growth

4

Act of 1977 shall include those listed below, but in sub-

5

sequent Economic Reports the President may deal with them

6

more selectively as he or she finds desirable:
“ ( 1 ) development of energy, transportation, small

7
8

business, and environmental improvement;

9

“ ( 2 ) proper attention to the needs of rural America,

10

related to (a) nationwide food and fiber requirements

11

and the labor force and capital needed to meet these

12

requirements, (c) the income needs of farmers to encour-

13

age production in accord with the above requirements

14

and moving farm families toward parity of income, (d)

15

encouragement of supplementary nonfarm work and in-

16

come for farm families, and (e) other policies and pro-

17

grams for rural people outside of agriculture;

18

“ (3) the quality and quantity of health care, edu-

19

cation and training programs, child care and other human

20

services, and housing, essential to a full economy and

21

moving gradually toward adequacy for all at costs within

22

their means;

23

“ (4) Federal aid to State and local governments,

24

especially for public investment and unemployment

25

related costs;


3-5 0 - 7 - 0
044
82


292
“ (5) national defense and other needed interna­

1
2

tional programs; and
“ (6) such other priority policies and programs as

3
4

the President deems appropriate.” .

5
6

7

THE PRESIDENT’ S BUDGET

Sec. 107. The Employment Act of 1946 is amended

by inserting a new section 7 as follows:

8

“ t h e p r e s id e n t ’s b u d g e t

9

“ Sec. 7. (a) The President’s Budget shall recommend

10

levels of outlays and receipts which shall be consistent with

11

the short-term economic goals of subsection (a) (2)

12

section 3.

of

13

“ (b) The President’s Budget shall provide five-year

14

projections of outlays and receipts consistent with the

15

medium-term goals of subsection (b) of section 4.

16

“ (c) The basic elements in the President’s Budget shall

17

be set forth briefly in each Economic Report, toward the

18

end of making clear the relationship between the President’s

19

Budget and the goals and policies set forth in such Economic

20

Report. Both the expenditure and the tax sides of the Presi­

21

dent’s Budget, as set forth briefly in the Economic Report,

22

shall be geared to the purposes of the Full Employment and

23

Balanced Growth Act of 1977. The size of the President’s ex­

24

penditure and tax proposals, and the relationships between

25

the two, shall be determined in a manner which pays due




293

1 attention to the needs of the economy and the people in the
2 priority areas set forth in section 6, and the relationship

3 between the President’s expenditure and tax proposals shall
4

be guided accordingly.” .

5

6

MONETARY POLICY

Sec. 108. The Employment Act of 1946 is amended by

7 inserting a new section 8 as follows:
8

9

“ m onetary

p o l ic y

“ Sec. 8. The Board of Governors of the Federal Re-

10 serve shall transmit to the Congress, within one month after
11 the transmission of the Economic Report, an independent
12

statement setting forth its intended policies for the year

13

ahead, and their relationship to the short-term goals set

14

forth in the Economic Report pursuant to subsection (a)

15

(2) of section 8. The Congress shall then take such action

16

as it finds necessary to insure closer conformity to the pur-

17

poses of the Full Employment and Balanced Growth Act of

18

1977.” .

19
20
21

OVERCOMING INFLATION

Sec. 109. The Employment Act of 1946 is amended by
inserting a new section 9 as follows:

22

“ OVERCOMING INFLATION

23

“ Sec. 9. (a) The Congress hereby determines that the

24

objective of achieving reasonable price stability as soon as




294
1

feasible, as set forth in section 3 (a) (3) and section 4 ( a ) ,

2

shall be pursued by the methods and subject to the require-

3

ments of section 5 ( b ) .

4

“ (b)

The Congress finds that, in addition to the co-

5

ordinated use of fiscal and monetary policies to combat

6

inflation, structural measures are also needed. The President

7

shall initiate as appropriate, including recommendations to

8

the Congress where necessary, and included within the

9

Economic Report to the extent practicable without excessive

10

delay, structural policies to reduce the rate of inflation,

11

embracing but not necessarily limited to—

12

“ ( 1 ) an effective information system to monitor

13

and analyze inflationary trends in individual economic

14

sectors, so that the President and Congress can be alerted

15

to developing inflation problems and bottlenecks;

16

“ ( 2 ) programs and policies for increasing the sup-

17

ply of goods, services, labor, and capital in tight mar-

18

kets, with particular emphasis on food, energy, and

19

critical industrial materials;

20

“ (3) the establishment of stockpiles of agricultural

21

commodities and other critical materials to help stabilize

22

prices, meet emergency needs, and promote adequate

23

income to producers;

24




“ ( 4 ) encouragement to labor and management to

295

1

increase productivity within the national fraxriework of

2

full employment through voluntary arrangements in in­

3

dustries and economic sectors;

4

“ (5) recommendations to strengthen and enforce

5

the antitrust laws and such other recommendations as

6

are necessary to increase competition in the private

7

sector;

8

“ ( 6 ) removal or proper modification of such Gov­

9

ernment restrictions and regulations as add unneces­
sarily to inflationary costs;

10
11

“ (7) such other administrative actions and recom­

12

mendations for legislation as the President deems de­

13

sirable, to promote reasonable price stability.”

14

COUNCIL OF ECONOMIC ADVISERS

15

Sec. 110 . (a) The second sentence of section 4(a)

of

16 the Employment Act of 1946 is amended by inserting “ full”
17 immediately after “ promote” .
18

(b) 'Section 4 (c) (4) of such Act is amended by insert­

19 ing “ full” immediately after “ maintain” .
20

(c) ( 1 ) Section 4( e) ( 1 ) of such Act is amended by

21

inserting immediately before the semicolon a comma and the
following: “ and shall consult with the Board or Boards
established under section 11 .” .




( 2 ) Section 4( e) of such Act is amended by striking

296
1

out the period at the end of paragraph ( 2 ) and inserting in

2

lieu thereof a semicolon, and by adding after such paragraph

3

( 2 ) the following:

4

“ (3) In its work under this Act and the Full Em-

5

ployment and Balanced Growth Act of 1977, the Council

6

is authorized and directed to seek and obtain the coopera-

7

tion of the various executive and independent agencies in

8

the development of specialized studies essential to its

9

responsibilities.”

10

11
12

13

ADVISORY BOARD OR BOARDS

Sec . 111. (a) Sections 4 and 5 of the Employment

Act of 1946 are renumbered sections 12 and 13.
(b ) The Employment Act of 1946 is amended by adding

14 a new section 11 as follows:
15

16

“ ADVISORY BOARD OR BOARDS

“ Sec. 11 . (a) The President shall establish, in not less

17 than three months prior to the first Economic Report under
18 the Full Employment and Balanced Growth Act of 1977,
19 an advisory board or boards to advise and consult with one
20

or all of the following periodically at reasonable periods of

21

time as he or she shall determine: The President, the

22

Council of Economic Advisers, and such other departments

23 and agencies of the executive branch of the Government as
24

the President shall determine. Such advisory board or boards




297
1
2

agriculture, consumers, State and local officials, and the

3

public at large, and shall advise and consult with respect to

4

?

shall include appropriate representation of labor, industry,

matters related to the Full Employment and Balanced

5

Growth Act of 1977 and other appropriate matters related

6

to national economic programs and policies. The President

7

shall take the steps necessary to provide appropriate com-

8

pensation to the members of such advisory board or boards.

9

TITLE

II—STRUCTURAL

ECONOMIC

POLICIES

10

AND PROGRAMS, INCLUDING TREATMENT OF

11

RESOURCE RESTRAINTS

12
13

STATEMENT OF PURPOSE

Sec. 201 . The Congress recognizes that general economic

policies alone have been unable to achieve the goals set
15 forth in this Act related to full employment, production,
16 and real income, balanced growth, adequate growth in pro17 ductivity, proper attention to national priorities, and achieve18

ment of reasonable price stability as provided for in section

19 5( b) of the Employment Act of 1946. It is therefore the
20

purpose of this title to require the President to initiate as

21

he or she deems appropriate, with recommendations to the

22

Congress where necessary, supplementary programs and

23 policies to the extent that he or she finds such action neces24 sary to help achieve these goals, including the goals and




298

1

timetables for the reduction of unemployment. Insofar as

2

feasible without undue delay, any policies and programs

3 so recommended shall be included in the Economic Report.
4

COUNTERCYCLICAL EMPLOYMENT POLICIES

5

Sec. 202 . (a) Any countercyclical efforts undertaken

6

l

to aid in achieving the purposes of section 201 shall consider

7 for inclusion the following programmatic entities: accelerated
8

public works, including the development of standby public

9 works projects; countercyclical public service employment;
10

State and local countercyclical grant programs as specified

11

in section 203; the levels and duration of unemployment in­

12

surance; skill training in both the private and public sectors,

13 both as a general remedy and as a supplement to unem­
14 ployment insurance; youth employment programs as speci­
15 fied in section 205; community development programs to
16 provide employment in activities of value to the States,
17 local communities (including rural areas), and the Nation;
18 and augmentation of other employment and manpower pro­
19 grams which would help to reduce high levels of unemploy­
20 ment arising from cyclical causes.
21
22

(b)

In any countercyclical efforts undertaken, the Presi­

dent shall consider a triggering mechanism which will im­

23 plement the program during a period of rising unemploy­
24 ment and phase out the program when unemployment is
25 appropriately reduced, and incorporate effective mej^ns to




299
1

facilitate individuals assisted under programs developed pur-

2

suant to this section to return promptly to regular private

3

and public employment as the economy recovers.

4

COORDINATION

5

AND

WITH

PRIVATE

STATE

AND LOCAL

SECTOR ECONOMIC

GOVERNMENT

ACTIVITY

6

Sec. 203. (a) As an integral part of any countercyclical

7

employment policies undertaken in accord with section 202 ,

8

the President shall to the extent he or she deems necessary

9

set forth programs and policies, including recommended leg-

10

islation where needed, to facilitate harmonious economic ac-

11

tion among the Federal Government, regions, States and

12

localities, and the private sector to promote ’achievement of

13

the goals of this Act and an economic environment in which

14

State and local governments and private sector economic

15

activity and employment will prosper and essential services

16

will be maintained.

17

(b) In any efforts under this section, the President shall

18

endeavor to meet criteria that establish programs which are

19 funded to take account of the fiscal needs and budget condi20

tions of the respective States and localities and their own ef-

21

forts, with special attention to the rates of unemployment

22

in these States and localities.

23

regional and structu ral e m plo ym en t policies

24

Sec. 204. To the extent deemed appropriate by the

25 President in fulfillment of the purposes of section 201 , the




300

1

President shall initiate, and recommend legislation to the

2

Congress if necessary, regional and structural policies and

3

programs. In formulating the regional components of ,any

4

such programs, the President, to the extent he or she deems

5

it desirable, shall encourage new private sector production

6

and employment to locate within depressed localities and re­

7

gions with substantial unemployment. Any regional em­

8

ployment proposal of the President shall also include an

9

analysis of the extent to which Federal Government tax, ex­

10

penditure, and employment policies have influenced the

11

movement of people, jobs, industry from chronic high un­

12

employment regions and areas, and proposals designed to

13

correct Federal policies that have an adverse economic im­

14

pact upon such regions and areas.

15
16

YOUTH EMPLOYMENT POLICIES

Sec. 205.

(a) The Congress finds and declares that

17

serious unemployment and economic disadvantage of a

18

unique nature exist among youths even under generally

19

favorable economic conditions; that this group constitutes a

20

substantial portion of the Nation’s unemployment, and that

21

this significantly contributes to crime, drug addiction, and

22

other social and economic problems; and that many youths

23

have special employment needs and problems which, if not
promptly addressed, will substantially contribute to more
severe unemployment problems in the long run.




301

1

(b) To the extent d
eerjried necessary in fulfillment of the

2 purposes of this Act, the President shall iniprove and expand

3 existing youth employment programs, recommending legis4 lation where required. In formulating any such program, the
5 President shall include provisions designed to fully coordi6 nate youth employment activities with other employment,
7 and manpower programs; develop a smoother transition
8 from school to work; prepare disadvantaged and other youths
9 with employability handicaps for regular self-sustaining
10

employment; and develop realistic methods for combining

11

training with work.

12

JOB TRAINING, COUNSELING AND RESERVOIRS OF

13

EMPLOYMENT PROJECTS

14

Se c . 206. (a) Further to promote achievement of full

15

employment under this Act, the President through the Secre-

16

tary of Labor shall develop policies, procedures, and pro-

17

grams to provide employment opportunities to Americans

18

aged 16 and over in the civilian labor force able, willing, and

19

seeking to work but who, despite serious efforts to obtain

20

employment, remain unemployed.

21

(b) In meeting the responsibilities to provide job oppor-

22

tunities under subsection (a) and after full utilization of the

23

Comprehensive Employment and Training Act of 1973 and

24

other relevant provisions of law, the Secretary of Labor

25

shall, as appropriate—




302

1

( 1 ) assure that counseling, training, and other sup­

2

port activities necessary to prepare persons willing and

3

seeking work for employment under relevant provisions

4

of law including the Comprehensive Employment and

5

Training Act of 1973 (including use of section 110

6

of such Act when necessary) ; and

7

( 2 ) refer persons able, willing, and seeking to work

8

to job opportunities in the private and public sectors

9

through the existing public employment placement fa­

10

cilities and through the United States Employment Serv­

11

ice, including job opportunities in any positions created

12

pursuant to sections 202 , 204, and 205 of this Act.

13

(c) Only to the extent that Americans aged sixteen

14

and over and able, willing, and seeking work are not and

15 in the judgment of the President cannot be provided with
16 private job opportunities nor provided with job opportunities
17 under other programs and actions in being, in accord with
18 the goals and timetables set forth in the Employment Act
19

of 1946, the President shall establish reservoirs of public

20

employment and private nonprofit employment projects,

21

to be approved by

22

form of expansion of

the Secretary of Labor,
CETA

in the

and other existing em­

23 ployment and training projects and/or through such new
24 programs as are determined by the President to be needed
25 and which the Congress authorizes and provides funds for.




303

1

Such new programs as require authorizations under this Act

2

shall not be put into operation less than two years after the

3

enactment of this Act, nor without a finding by the Presi­

4

dent, transmitted to the Congress, that other means of em­

5

ployment are not yielding enough jobs to be consistent with

6

attainment of the goals and timetables for the reduction of

7

unemployment set forth in the Employment Act of 1946.

8

The Congress hereby establishes the policy that such new

9

programs for reservoir projects shall be so designed as

10

not to draw any workers from private employment to

11

the reservoir projects thereunder. The jobs under such new

12 program reservoir projects shall be useful and productive
13

jobs. Nonetheless, such jobs shall be mainly in the lower

14

ranges of skills and pay, and toward this end the num­

15

ber of reservoir jobs under such new programs shall,

16

to the extent practicable, be maximized in relationship to

17

the appropriations provided for such jobs. The projects

18

under this subsection relating to such new programs

19

shall be phased in by the President as .necessary, in

20

conjunction with the employment goals under sections 3 (a)

21

(2) and 4 (b) of the Employment Act of 1946.

22

(d)

The Secretary, in carrying out the provisions of

23

this section, shall establish such regulations as he or she

24

deems necessary. Such regulations shall include provisions

25

for—




304
1

(1) an initial determination of the job seekers'

2

ability to be employed at certain types and duration of

3

work, so that he or she may be appropriately referred

4

to jobs, training, counseling, and other supportive

5

services;

6
7

(2) compliance with the nondiscrimination provi­
sions of this Act in accordance with section 401;

8

(3) appropriate eligibility criteria to determine the

9

order of priority of access of any person to any new

10

program under subsection (c) requiring authorization

11

by the Congress, including but not necessarily limited

12

to such criteria as household income, duration of un­

13

employment (not less than five weeks), and the number

14

of people economically dependent upon such person;

15

and denial of access to any person refusing to accept or

16

hold a job other than a job under subsection (c) except

17

for good cause as determined by the Secretary of Labor,

18

including refusal to accept or hold a job subject to

19

reference under subsection (b) paragraph (2 ), in order

20

to seek a reservoir project job under subsection (c) ; and

21

(4) such administrative appeal procedures as may

22

be appropriate to review the initial determination of the

23

abilities of persons willing, able, and seeking to work
under clause (1) of this subsection and the employment
need and eligibility under clause (3) of this subjection.




305
CAPITAL FORMATION— PRIVATE AND PUBLIC j

1
2

Sec . 207. (a) The Congress finds that—

3

(1) promotion of full employment and balanced

4

growth is in itself a principal avenue to high and sus­

5

tained rates of capital formation;

6

(2) high rates of capital formation are necessary

7

to ensure adequate rates of capacity expansion and pro­

8

ductivity growth;

9

(3) an important goal of national policy shall be to

10

remove obstacles to the free flow of resources into new

11

investment; and

12

(4) while private business firms are, and should

13

continue to be, the major source of investment, the

14

investment activities of the Federal, State, and local

15

governments play an important role in affecting the level

16

of

17

achieving other national purposes.

18

(b)

19

output,

employment,

and

productivity

and in

The Economic Report shall, as appropriate, review

and assess existing Federal Government programs and

20 policies which affect business investment decisions, includ­
21

ing, but not necessarily limited to, the relevant aspects of
the tax code, federal regulatory policy, international trade
policy, and federal support for research, development, and
diffusion of new technologies. In addition, the Economic




306

1

Report shall assess the effect of the overall economic policy

2

environment and the rate of inflation on business investment.

3

The President shall recommend, as appropriate, new pro-*

4

grams or modifications to improve existing programs con­

5

cerned with private capital formation.

6

(c)

The Economic Report shall review and assess, to

7

the degree appropriate, federal policies and programs which

8

directly, or through grants-in-aid to State and local govern­

9

ments, or indirectly through other means, affect the ade­

10 quacy, composition and effectiveness of public investments,
11 as a means of achieving the goals of this Act. The President
12

shall recommend, as appropriate, new programs and policies

13

or modifications to improve existing Federal programs affect­

14

ing public investment.

15

TITLE III—POLICIES AND PROCEDURES FOR

16

CONGRESSIONAL REVIEW

17

STATEMENT OF PURPOSE

18

Se c . 301. (a) The purposes of this title are to establish

19

procedures for congressional review and action with respect

20

to the Economic Report, the report of the Board of Gover­

21

nors of the Federal Reserve System, and the other policies

22 and provisions of this Act and the Employment Act of 1946.
23

(b) To provide for comprehensive national policies to

24

meet the objectives of this Act and the Employment Act of

25

1946, and to provide the Congress with guidance on these




307
1

matters, the appropriate committees of the Congress shall

2 review and revise, to the extent deemed desirable, the
3

economic goals, priorities, policies, and programs proposed

4

under such Acts by the President and the Board of Gover-

5

nors of the Federal Reserve System. Furthermore, the Con-

6

gress shall consider the implications of the short-term goals

7 and related policies for the Concurrent Resolutions required
8

under the Congressional Budget Act of 1974. The Congress

9 shall initiate or develop such legislation as it deems neces10 sary to implement these proposals and objectives, after such
11 modification in such proposals as it deems desirable. Nothing
12

in this Act shall be construed to prevent the Congress or any

13

of its committees from considering or initiating at any time

14

action to implement this Act.

15

REVIEW OF ECONOMIC REPORT BY JOINT ECONOMIC

16

COMMITTEE

17

Sec . 302. (a) In conjunction with its review of the

18

Economic Report, and the holding of hearings on the

19

Economic Report as required under the Employment Act of

20

1946, the Joint Economic Committee shall review and

21

analyze the policies and programs recommended by thp

22

President and the short-term and medium-term goals for

23

employment, production and purchasing power under sec-

24

tions 3 (a) (2) and section 4 (b) of the Employment Act of

25

1946.

30-454 0 - 78 - 21



308
1

(b) The Joint Economic Committee shall hold hearings

2

on the Economic Report for the purpose of receiving testi-

3

mony from Members of the Congress, appropriate repre-

4

sentatives of Federal departments and agencies, such repre-

5

sentatives of the general public and interested groups, and

6

such others as the joint committee deems advisable. The

7 joint committee shall also consider the comments and views
8

on the Economic Report which are received from State and

9

local officials.

10

(c) Within thirty days after receipt by the Congress

11

of the Economic Report, each standing committee of the

12

Senate and the House of Representatives and each joint

13

committee of the Congress shall submit to the Joint Eco-

14

nomic Committee a report containing its views and recom-

15

mendations with respect to aspects of the Economic Report

16

which relate to their respective jurisdictions.

17

(d) Not later than ninety days after the submission of

18

the Economic Report to the Congress, the members of the

19

Joint Economic Committee who are Members of the House

20

of Representatives shall report to the House, and the mem-

21

bers of the joint committee who are Members of the Senate

22

shall report to the Senate, a concurrent resolution which shall

23

state in substance that the Congress approves or disapproves

24 in whole or in part the programs, policies, and goals in the
25

Economic Repoft, and which may contain such alternatives




309

1

to, modifications of, or additions to the Economic Report as

2

the joint committee deems appropriate and in accord with

3

the purposes of this Act and the Employment Act of 1946.

4

The report accompanying such concurrent resolution shall

5

include findings and recommendations of the joint committee

6

with respect to each of the main recommendations contained

7

in the Economic Report.

8

(e) (1) When a concurrent resolution referred to in

9

subsection (d) has been reported to the House of Representa­

10 tives it shall at any time thereafter be in order (even though
11 a previous motion to the same effect has been disagreed to)
12 to move to proceed to the consideration of the concurrent
13

resolution. The motion shall be highly privileged and not

14

debatable. An amendment to the motion shall not be in

15

order, nor shall it be in order to move to reconsider the vote

16

by which the motion is agreed to or disagreed to.

17

(2)

General debate on any such concurrent resolution

18

in the House of Representatives shall be in the Committee

19

of the Whole House on the State of the Union, and shall be

20 limited to not more than ten hours, which shall be divided
21

equally between those favoring and those opposing the con­

22

current resolution. A motion further to limit debate shall not

23

be debatable.

24

(8) Except to the extent specifically provided in the

25

preceding provisions of this subsection, consideration in the




310
1

House of Representatives of any such concurrent resolution

2

and amendments thereto (or any conference report thereon)

3

shall be governed by the Rules of the House of Representa-

4 tives applicable to other bills and resolutions, amendments,
5
6

and conference reports in similar circumstance.
(f) (1) Debate in the Senate on a concurrent resolution

7 referred to in subsection ( d ) , and all amendments thereto
8 and debatable motions and appeals in connection therewith,
9

shall be limited to not more than ten hours. The time shall

10 be equally divided between, and controlled by, the majority
11 leader and the minority leader or their designees.
12

(2) Debate in the Senate on any amendment to any

13

such concurrent resolution shall be limited to two hours, to

14

be equally divided between, and controlled by, the mover

15

and the manager of the concurrent resolution. Debate on any

16

amendment to an amendment, and debate on any debatable

17 motion or appeal shall be limited to one hour, to be equally
18

divided between, and controlled by, the mover and the man-

19

ager of the concurrent resolution, except that in the event

20

the manager of the concurrent resolution is in favor of any

21

such amendment, motion, or appeal, the time in opposition

22

thereto shall be controlled by the minority leader or his

23

designee. No amendment that is not germane to the provi-

24

sions of the concurrent resolution shall be received. Such

25

leaders, or either of them, may, from the time linder their




311

1

control on the passage of the concurrent resolution, allot

2

additional time to any Senator during the consideration of

3 any amendment, debatable motion, or appeal.
4

(3) A motion in the Senate to further limit debate is

5 not debatable. A motion to recommit (except a motion to
6

recommit with instructions to report back within a specified

7 number of days, not to exceed three, not counting any day
8 on which the Senate is not in session) is not in order. De­
9 bate on any such motion to recommit shall be limited to

10 one hour, to be equally divided between, and controlled by,
11
12

the mover and the manager of the concurrent resolution.
(4)

The conference report on any such concurrent

13 resolution shall be in order in the Senate at any time after
14

the third day (excluding Saturdays, Sundays, and legal

15 holidays) following the day on which such a conference
16 report is reported and is available to Members of the Senate.
17 A motion to proceed to the consideration of the conference
18 report may be made even though a previous motion to the
19 same effect has been disagreed to.

20

(5) During the consideration in the Senate of the con­

21

ference report on any such concurrent resolution, debate

22

shall be limited to two hours, to be equally divided between,

23 and controlled by, the majority leader and minority leader
24

or their designees. Debate on any debatable motion or ap^

f

25 peal related to the conference report shall be limited to thirty




312

1 minutes, to be equally divided between, and controlled by,
2 the mover and the manager of the conference report.
3

( 6) Should the conference report be defeated in the

4 Senate, debate on any request for a new conference and the
5 appointment of conferees shall be limited to one hour to be
6 equally divided between, and controlled by, the manager
7 of the conference report and the minority leader or his

8 designee, and should any motion be made to instruct the con9 ferees before the conferees are named, debate on such motion

10 shall be limited to thirty minutes, to be equally divided
11 between, and controlled by, the mover and the manager of
12 the conference report. Debate on any amendment to any such
13 instructions shall be limited to twenty minutes, to be equally
14

divided between, and controlled by, the mover and the

15 manager of the conference report. In all cases when the
16 manager of the conference report is in favor of any motion,

1 ^ appeal, or amendment, the time in opposition shall be under
18 the control of the minority leader or his designee.
19

(7) In any case in which there are amendments in

20 disagreement, time on each amendment in the Senate shall
21 be limited to thirty minutes, to be equally divided between,
22 and controlled by, the manager of the conference report and
23

the minority ileader or his designee. No amendment that is

24

not germane to the provisions of such amendments shall be

25

received.




1

313

1

(g) Upon adoption of a concurrent resolution under

2

this section with respect to any Economic Report, the con­

3

current resolution shall serve as a long-term guide to the

4

Congress with respect to legislation relevant to the goals,

5 priorities,, policies, and programs recommended in such re­
6

port, as modified by the concurrent resolution. A copy of

7

the concurrent resolution shall be transmitted to the Presi­

8 dent by the Clerk of the House of Representatives or the
9
10

Secretary of the Senate, as appropriate, for such actions as
the President deems appropriate.

11
12
13

EXERCISE OF RULEMAKING POWERS

Sec. 303. (a) The provisions of this tide are enacted by

the Congress—

14

( 1 ) as an exercise of the rulemaking power of the

15

House of Representatives and the Senate, respectively,

16

and as such they shall be considered as part of the rules

17

of each House, respectively, or of that House to which

18

they specifically apply, and such rules shall supersede

19

other rules only to the extent that they are inconsistent

20

therewith; and

21

(2 ) with full recognition of the constitutional right

22

of either House to change such rules (so far as relating

23

to such House), at any time, in the same manner and
to the same extent as in the case of any other rule of
such House.




314
1

REVIEW OF ECONOMIC REPORT BY COMMITTEES ON THE

2 •

3

BUDGET OF BOTH HOUSES

S e c . 304.

(a) Section 301 (a) of the Congressional

4 Budget Act of 1974 is amended—
(1) by striking out “ and” at the e$d of clause

5

6

(5);

7

(2) by redesignating clause 6 and clause 7, and

8

(3) by inserting after clause (5) the following

9

new clause:

10

“ (6) the policies, programs, and goals set forth in

11

the Economic Report of the President, and” .

12

(b) The second sentence of section 301 (c) of the Con-

13

gressional Budget Act of 1974 is amended to read as follows:

14

“ The Joint Economic Committee shall submit to the Com-

15

mittees on the Budget of both Houses its recommendations

16

as to the policies and programs and the short-term and

17 medium-term goals set forth in the Economic Report. These
18

recommendations shall be incorporated by the Committee on

19

the Budget of each House in the first concurrent resolution

20

on the budget referred to in subsection (a) reported by that

21

committee, with modifications if necessary to fulfill the ob-

22 jectives of the Full Employment and Balanced Growth Act
23

of 1977. In the event that the Committee on the Budget of

24

either House modifies the recommendations of the Joint

25

Economic Committee, that Budget Committee shall provide




315
1 its reasons for such modification in the report accompany2 ing the first concurrent resolution.
3

TITLE IV —GENERAL PROVISIONS

4

NONDISCRIMINATION

5

S e c . 401. (a) No person in the United States shall on

6 the ground of sex, age, race, color, religion, or national
7 origin be excluded from participation in, be denied the bene8 fits of, or be subjected to discrimination under any program
9 or activity funded in whole or in part with funds made avail10 able under this Act, including membership in any structure
11

created by this Act.

12

(b) Whenever the Secretary of Labor determines that

13

a recipient of funds under this Act has failed to comply with

14

subsection ( a ) , or an applicable regulation, he or she shall

15

notify the recipient of the noncompliance and shall request

16 such recipient to secure compliance. If within a reasonable
17 period of time, not to exceed sixty days, the recipient fails
18 or refuses to secure compliance, the Secretary of Labor is
19 authorized (1) to refer the matter to the Attorney General
20 with a recommendation that an appropriate civil action be
21 instituted, (2) to exercise the powers and functions pro22

vided by title V I of the Civil Rights Act of 1964 (42 U.S.C.

23

2000d), or (3) to take such other action as may be pro-

24 vided by law.
25

(c) When a matter is referred to the Attorney General




316
I

pursuant to subsection ( b ) , or whenever he or she has rea-

2 son to believe that a recipient is engaged in a pattern or prac,
3

tice in violation of the provisions of this section, the Attorney

4

General may bring a civil action in the appropriate United

5

States district court for any and all appropriate relief.

6

(d) To assist and evaluate the enforcement of this sec-

7

tion, and the broader equal employment opportunity policies

8

of this Act, the Secretary of Labor shall include, in the an-

9 nual Employment and Training Report of the President, a
10 detailed analysis of the extent to which the enforcement of
II

this section achieves affirmative action in both the quantity

12

and quality of jobs, and for employment opportunities

13

generally.

14

LABOR STANDARDS

15

Sec . 402. Any new programs provided for and imple-

16

mented by this Act, and funded in whole or in part through

17

this Act, shall provide that persons employed pursuant to

18

such policies and programs are paid equal wages for equal

19

work, and that such policies and programs create a net in-

20

crease in employment through work that would not other-

21

wise be done or are essential to fulfill national priority pur-

22

poses. The President shall insure that any person employed

23

in any such reservoir project undertaken under section 206

24

(c) as require new authorization by the Congress, or in any

2^

other job utilizing funds provided in whole or in part under




317

1

this Act, shall be paid not less than the pay received by

2 others performing the same type of work for the same em­
3 ployer, and in no case less than the minimum wage under
4

the Fair Labor Standards Act of 1938 as amended. No

5 person employed under section 206(c) shall perform work
6

of the type to which the Bacon-Davis Act, as amended (40

7 U.S.C. 276a-276a-5)
8

applies. Any recommendation by

the President for legislation to implement any program under

9 this Act, requiring the use of funds under this Act, and sub­

10 mitted pursuant to the requirements of this Act, shall contain
11

appropriate wage provisions based upon existing wage stand­

12

ard legislation.

13
14

AUTHORIZATIONS

Sec . 403. There is authorized to be appropriated such

15 sums as may be needed to carry out the provisions of this
16 Act. Notwithstanding any other provisions of this Act, no
provision shall be construed to require expenditures in
excess of amounts appropriated pursuant to this Act.




318

American Paper Institute, in c .
260 Madison Avenue. N ew York. N Y 10016/(212) 340 0600
cable address AM PAPlNST N ew York

March 8r 1978

The Honorable William Proxmire
Chairman
Committee on Banking, Housing and
Urban Affairs
United States Senate
Washington, D.C. 20510
Dear Chairman Proxmire:
On behalf of the American Paper Institute, the national
trade association representing the pulp, paper and
paperboard industry, I am pleased to have this opportunity
to submit our statement on S.50, the Full Employment
and Balanced Growth Act of 1978. Our 200 member firms
provide over 90% of all the pulp and paper manufactured
in this country. Our industry employs nearly 700,000
people in virtually every state in the union. In
1976 we paid about $9.5 billion in salaries and wages
and $1.4 billion in income taxes.
Our detailed statement for the record is attached.
following is a summary of that statement.

The

Summary
An economic system ought to provide job opportunities
for all who wish to work. That is why the HumphreyHawkins bill has such a nice sounding ring to it. It
promises full employment in precise statistical measures;
it is concerned with price stability and worries about
urban problems as well as those of the chronically un­
employed. So why should anyone even question such a
worthy piece of legislation?
Looking at the practical aspects of this legislation,
however, one finds it simply cannot deliver what it
promises.




319
1.

It sets an unrealistic target of 3% unemployed
for adults (individuals over 20) and 4% for
the total population to be achieved within a
five year period. The problem with the target
is that the low figures ignore the realities
of the composition of the present labor force.
The current large inflow of work seekers is
in part the echo of the early Post World War
II baby boom, and in part results from the
larger participation of women and minorities
in the labor force. Despite the bulge in the
size of the labor force last year, the economic
recovery reduced unemployment by 1.1 million
people. About 4.1 million more people were
employed at the end of 1977 than at the beginning
of that year.
With the larger participation of women and
minorities in the labor force expected to con­
tinue, it is more difficult to project changes
in the labor force than before.
So how can one
plan for a specific number* when that number
cannot be predicted with a reasonable accuracy?
More significantly, the discretionary aspects
of the present mix of unemployed people makes
an evaluation of appropriate policies difficult.
Do women want to work full-time or part-time?
What jobs would they like to have and at what
pay?
While a system should provide opportunities for
all who wish to work, it cannot guarantee a job
for all who wish to work under his or her own
conditions.
A numerical target must take account of these
nuances in the quality of unemployment if it
is to be realistic.
Such minute adjustments
are not possible.

2.

The existence of an unrealistic target will
be frustrating. The target creates an ex­
pectation of fulfillment, an expectation that
cannot be met with the economic tools now
available.
It will focus attention on a
statistic rather than performance. Furthermore,
as it becomes apparent that the numerical goal
is not being reached, more government action
will be called for. Harmful trade-offs can
result as the Administration and Congress seek
quick ways to meet the targets.




320
3.

It creates
government
as the job
who cannot
sector.

distortions in wage rates,
determining the wage rates
opportunities for millions
find the jobs they want in

with the
as well
of people
the private

4.

It will prove to be inflationary. The government
will be forced to make decisions that involve
a trade-off of inflation for what it considers
equity.

The solution to the problems raised in the HumphreyHawkins bill is basically a two-fold one:
1.

More investment in job creation is needed and
this requires a better investment climate.
Taxes are burdensome and should be reduced to
encourage private spending and investment.
If
companies were convinced that their businesses
would expand in the year ahead - and reduced
taxes will help assure them of such growth aggressive manpower recruitment and training
programs would be undertaken.
Regulations should be made compatible with
growth. Many of our important government regu­
lations are tuned in to the philosophy of
sharing scarcity and taxing output. Why should
industry plan for growth or more jobs in this
climate?

2.

A better focus on some of the structural pro­
blems in unemployment is urgently needed.
Overall teenage unemployment, now a major part
of total unemployment, will probably ease after
1981 when the number of teenagers grows more
slowly.
In the meantime, the steady increase
in the labor cost of teenagers built-in by the
rising minimum wage and advancing payroll taxes,
acts as a deterrent to aggressive hiring of
youths.
The proposed programs of job credits
and wage subsidies are expensive and can lead
to abuse. Waiving the minimum wage for teen­
agers and substituting more liberalized tax
treatment for their earnings may be a way to
, encourage more employment of teenagers.




321
In short, the passage of this bill will clearly reveal
that the tools for meeting the full employment target
do not exist; that forcing the economy to overperform
will result in actions that would retard the higher
confidence so badly needed in the private sector to
achieve growth, job opportunities and a better standard
of living in the U.S. Why fool the American public?
We thank you for this opportunity to submit our views.
Sincerely

Norma Pace
Senior Vice President
and Chief Economist
cda
Attachment
cc:

The Honorable Gaylord Nelson
Chairman, Subcommittee on Employment,
Poverty and Migratory Labor
United States Senate
The Honorable Harrison A. Williams
Chairman, Committee on Human Resources
United States Senate
Members of the Committee on Human Resources
United States Senate
Members of the Committee on Banking, Housing,
and Urban Affairs
United States Senate




322

American Paper Institute in c .
l5ll»M
ilss«K
'hlis<’lts.W '. NW,Wsh flU VD . 2 X i
rniK
a ta M C < ).H
U021332 1050

STATEMENT OF THE AMERICAN PAPER INSTITUTE ON S. 50, MARCH 8, 1978

Senator Humphrey’s public service was dedicated to helping the poor,
the unemployed and the disadvantaged.
This bill which bears his
name will not only accomplish little; it may move the country
further away from its objective of full employment.
Our concern with this bill reflects several real deficiencies in
it:
1.

IT IS UNREALISTIC.
It is a statement of full employment goals but its recom­
mendations are diffused and in many ways conflicting.
It
is a mixture of concern with cyclical and structural unem­
ployment and is imprecise in both areas.
It assumes that
conflicts can be resolved by the government in a manner that
will result in nohinflationary full employment growth.
But
the realities of the political processes are such that the
economic decisions made by government are not always based
upon efficiency.
Trade-offs are often needed in the pursuit
of what is considered equity.
For example, the bill calls
for a monitoring system on inflation.
But what can be done
about the one-Hatlf percent a year inflation resulting from
higher payroll taxes? What about the impact oh inflation
of an increase in energy Costs resulting from legislation?
Income taxes could be cut but what about government spending
and deficits? The trade-offs go on and on.
The bill requires that the budget be supportive of the goals
and purposes of the act but what about other considerations
such as the impact of deficits on the value of the dollar?
The budget process itself leaves much to be desired.
Federal
spending has fallen short of estimates for two years running.
Congressional budget procedures have been tightened con­
siderably since the Budget Control Act but budget busting
by the Congress persits.
There is no such thing as fiscal
policy under these conditions.

2.

IT ENDANGERS THE INDEPENDENCE OF THE FEDERAL RESERVE SYSTEM.
Under this bill the Federal Reserve is to report to the
Congress on its goals and monetary targets for the year
ahead, a process that has been going on for years.
But
implicit m this bill is the conviction that the Federal
Reserve can control the money supply and in that w a y con­
tribute to full emplqyment.
The recent volatility in money




323
supply figures shows how difficult achieving stated monetary
goals can be in a large complex monetary system such as ours
which is becoming more interrelated with foreign economies.
Furthermore as Chairman Burns has repeatedly testified in
Congressional hearings, the rate of use of money is as im­
portant as the quantity of money.
Synchronizing monetary
policy with fiscal policy, a major aim of this bill, may not
bring the economy one step closer to full employment.
If
the confidence of individuals and business is not good, then
money supply increases can be offset by a reduced rate of
use of money and the economy will surely not grow.
Recent developments in the U.S. economy have clearly shown
that the theories on growth which seemed to work m the
1950’s and 1960's are not working today.
With this experi­
ence at hand why should we jeopardize the independence of
the Federal Reserve system and risk a worldwide loss of
confidence in the U.S. and its currency?
3.

IT GENERATES THE DANGER OF UNFULFILLED EXPECTATIONS.
To set a numerical target is to create an expectation of
fulfillment, an expectation that cannot be met with the
economic tools at hand.
No model predicted the 1974-75
recession within a reasonable degree of accuracy, or for
that matter the 1973 boom which brought unemployment down
to 4.9% that year.
The net result of these statistical
objectives will be a diversion of policymakers' attention
to the nation’s statistical performance rather than
to the solution of our real and basic problem and that is
structural unemployment.
Furthermore, as it becomes ap­
parent that thdse numerical goals are not being t-eached,
more government action will be called for to satisfy the
level of expectations on the unemployment rate.
Harmful
trade-offs can result as the Administration and Congress
seek quick ways to meet the targets.
There is nothing wrong with the nation establishing a goal
of providing employment for all who wish to work but there
can be a lot wrong with a statistical goal that can be based
upon imprecise measurements of the source of unemployment
and its contribution to economic distress and poverty.

4.

IT CREATES DISTORTIONS IN WAGE RATES.
This bill can result in a debilitating rigidity in wage
rates, a process that will surely increase unemplovmcnt
rather than reduce it.
Labor costs account for close to
70« of the cost of producing final goods and >ciuu"> in
the U.S.
If these costs get out of line with productivity,
then inflation uill result.
Job creation must be matched
by productlvity; this is the reason economists favor private
investment incentives for creating jobs.
Such investments
always provide the promise of more pr< ductivity.

30-454 0 - 78 - 22




324
5.

IT IS INFLATIONARY.
This bill which aims at promoting price stability will in
fact lead to more inflation.
It is a sad truism that an
advantage for one sector can generally only be accomplished
at the cost to another. Farm price increases improve the
income of farmers but have a significant impact on the
cost of living and inflation. Fortunately the market mech­
anism is an objective, although at times painful, way to
correct severe imbalances when they occur. In 1977 the
steep advances in coffee prices curtailed consumption; the
reduced demand coupled with’ higher supply turned prices
downward again. How can the government perform this function
efficiently? It can ameliorate in times of distress; it can
* help with any adjustment required by the market but it cannot
and should not make the market decisions. Given the pressures
on public policymakers, their market decisions result in an
inevitable trade-off of inflation for what they consider
equity.

If government attention to all the details of the economy were neces­
sary to attain a climate where the individual gets the advantage of
a rising standard of living and job opportunities, an elaborate
government involvement might be warranted and acceptable. But such
involvement is not only unnecessary, it is counterproductive.
UNEMPLOYMENT RATES REMAIN HIGH AMONG NON-WHITES
In 1977 the U.S. economy found job opportunities for 4.1 million
more people according to data of the Bureau of Labor Statistics, a
new record. Although the growth in the labor force was unusually
large; namely 5 million last year, the number unemployed dropped by
1.1 million.
This is good performance by any standard but it still leaves the
problem of 5.9 million unemployed as we entered 1978. Furthermore,
the labor force will grow by another 2.5 maybe even 3 million this
year so that the pace of advance in employment must be brisk if the
countrv is to make progress toward reducing unemployment even more
m 1978.
Measures of unemployment are never quite adequate in the story they
tell on the economic and sociological impact of unemployment. We
can, however, obtain some measure of the pressures and the solutions
to the problem by noting the following figures of unemployment.




325
UNEMPLOYMENT AT YEAR-END
(millions of people)
1976

White Males, 20 years and over
White Females, 20 years and over
White Teenagers

2.6
2.1
1.4

Total Black 5 Other Minorities
Source:

.5

2.0
1.9
1.0

6.0

Total White
Black Males, 20 and over
Black Females, 20 and over
Black Teenagers

1977

4.9

.6
.5
.5
.5
_______
1.5

1.5

Bureau of Labor Statistics, Seasonally adjusted data.

While there has been significant improvement in the unemployment
status of white participants in the labor force, the same is not
true for minorities.
The country cannot remain indifferent to the
persistence of unemployment among minorities.
But this is not the
time for a restatement of goals; it is a time for action on five
fronts.
1.

ENCOURAGE MORE AGGRESSIVE GROWTH.
Taxes must be cut to permit more spending and investment m
job creating ventures.
Growth is the answer to more employ­
ment and growth has been stalled by burdensome taxes on both
individuals and business.
Urgent and immediate attention
must be given to tax cuts that will stimulate production and
jobs.
The President's program is a start in the direction
but more can be done.
Private industry will respond quickly
with training programs when its order books increase and
pressure the available manpower.
Unemployment among blue
collar workers was reduced by 700,000 during 1977:
the re­
serve of skilled workers is shrinking.
If companies were
convinced that their businesses would expand in 1978 and
beyond - and reduced taxes will help assure them of such
growth - then aggressive manpower recruitment and training
programs would follow.
Bu-siness does not need government
to underwrite the risks, but it does need assurance that
government will not continue to penalize growth through
excessive taxation and other restrictions to growth, such
as burdensome and costly regulations.

2.

IMPROVE THE REGULATORY CLIMATE.
The regulatory climate in this country often works against
the goals of full employment.
This is in contrast with m a n y
other industrial countries where regulations are made com­
patible with growth and full employment.
Excessive regu­
lations reduce confidence and slow dc, n investment.
r
The




326
paper industry is a good example of the restraining effect
of excessive environmental, energy and safety regulations
on the industry's expansion.
Our annual capacity survey
shows average growth in paper and paperboard capacity of
2.4% a year between now and 1980, a rate that is almost
lo lower than a reasonable long range growth target.
The
reasons for the lag in investment are many but a burdensome
regulatory climate contributes significantly. The industry
is a heavy user of energy and the President's energy program
adds dollars to our costs and uncertainty over new supply.
An industry such as ours that is threatened with a tax on
its output in the mistaken belief that such a tax would
solve the solid waste problem of cities is in no mood to
expand aggressively.
With important government programs
tuned in to the philosophy of scarcity and taxing output,
why should this industry - or any other - plan for growth
and more jobs?
A balanced approach to regulations when needed is a way to
achieve growth without any cost to the taxpayer and the
consumer.
3.

REDUCE PAYROLL COSTS FOR TEENAGERS.
Teenage unemployment will best be helped if labor costs, in­
cluding payroll taxes do not become burdensome.
Increases
in the minimum wage and social security taxes act as a dis­
incentive for employment in these age groups.
A teenager
working a 40 hour week costs his employer $113 a week this
year, including social security but excluding other fringes;
by 1980 that cost will rise to $132.
The President has
requested some tax cuts to offset higher payroll taxes but
the amounts suggested are simply not enough.
Job tax credits
and wage subsidies have also been proposed but these can be
expensive to administer and can lead to abuse.
One solution
is to waive the minimum wage requirement for teenagers and
substitute more liberalized tax treatment for their earnings.
This would focus tax relief on a major trouble spot in
unemployment.

4.

ENCOURAGE TRAINING PROGRAMS WITH A GOVERNMENT -BUSINESS
PARTNERSHIP.
Lack of skills and initiative among the uneducated and poor
often contribute to prolonged unemployment and eventually
permanent discouragement.
Programs are needed to help this
segment of the population and a partnership of government
and business involvement and commitment can accomplish a
great deal.
Recent experience with job programs for black
teenagers in ghetto areas J.s encouraging.
We can build on
this desire to work but we must do it with meaningful pro­
grams that create permanent jobs.




327
The Committee for Economic Development in a recent report
indicates limited but encouraging success with combined
efforts of business and government, both federal and local,
to reduce unemployment by creating permanent jobs. This
should be the focus of government action.
Business recQgnizes that persistent unemployment and "turned-off" indivi­
duals, particularly the teenagers and minorities who cannot
find employment, create major social and political problems
for the nation.
If businessmen could spend less time on
regulations (which now range from 35-501) they would have
more time for constructive solutions to these basic problems.
5.

BETTER MANAGEMENT OF THE CHRONIC POVERTY IN THE U.S.
There are segments of the working age population which simply
cannot be helped within a specified time frame. We do not
know what proportion of the unemployed individuals are m
this category.
As a matter of fact many of these people are
probably not even counted in the unemployment figures.
Yet
they need help.
Sociologists believe that the time span
for getting many of these people into meaningful and desirable
jobs may be very long.
Enlightened and efficient welfare
programs are needed to help this group until a combination
of better iducation, better attitudes, mobility and all the
other influcences can come together to move them into the
working force.
HEW is the agency that must deal with this
problem in a responsible way.




328
In summary this bill has three functional aspects:
1.

To determine when the system is not up to its potential;

2.

To determine why;

3.

To set out on a correction course.

The first challenge of determining when the system is not up to
its potential is well met by our present network of economic intel­
ligence and statistics. There are perils in quantification and
data always have limitations but this country has plenty of good
statistics on its performance. So lack of knowledge on performance
has not been a limitation.
The real short-fall is in the second objective; namely why the
economy is off course. While answering this question provides the
opportunity for a wide diversity of opinion and conflicting evidence,
the solutions generally accepted by government have tended to in­
volve more government in the process than was needed. No one
really believes that the free market system is perfect; it is
efficient but it is also imperfect: yet these imperfections have
not been corrected by government policies, instead they have been
magnified. Fiscal policy has given us $300 billion of deficits
over the period 1970-1977 and we have had unemployment in excess
of 4.0o all during that period. Traditional monetary policy has
given us recessions alternating with sprees of monetary creation
that financed inflation which averaged 6.6% during that same
period.
The third objective; namely mapping out a correction course, will
not be met with this bill. The tendency will be to continue to
use fiscal and monetary policies in the standard way with the same
disappointing results.
Consumers can generally be counted on to spend a fairly steady
proportion of their income. They are rarely a problem.
It is m the area of business spending and investment that unstable
conditions develop with the economy experiencing bouts of heavy
investment alternating with underspending for inventories, plant
and equipment. The net result is that the long-term potentials
are never met. Business confidence fluctuates in a wide band with
significant highs and lows; this affects the pattern of business
spending which in turn affects jobs, income and consumer spending.
Business spending must be stabilized, yet the thrust of government
actions since the mid-1960's has had the opposite effect as
described earlier. Although this bill tries to provide assurances
by placing a high priority on private capital formation as the
best means to create jobs, it also lists a series of government
programs that will prove not only expensive but as ineffective as
they have historically been in dealing with the problem.
It continues
to put government m competition with the private sector on how
incomes of individuals and business will be spent. Who will decide




329
on which sector should take the lead? To put that solution m
the hands of government is akin to letting a dope fiend loose in
a doctor's office.
Until the role of government policy .in creating jobs is properly
made secondary to the more powerful role of the private sector in
generating growth through the millions of spending decisions it
makes, then a Humphrey-Hawkins bill remains a threat to long-term
investment. But having said that the private spending can do the
most efficient job in generating a full employment economy, we
must still recognize two fundamental weakenesses in that position.
1.

Individuals and businesses with money do not feel and pres­
sure to spend it at a constant rate. If for any reason
they feel threatened, they will reduce their spending rates
and this will contribute to unemployment. Some way must be
found to entice money into investment when such spending lags.
The government should not conveniently accommodate this non­
spending mood of the private sector by running big deficits
so that individuals can "invest in governments" rather than
in productive facilities. Adequate returns on investment
will go a long way toward meeting the need.

2.

The availability and efficient allocation of the nation's
resources is becoming a more vital concern for the nation's
future growth. Some one has to orchestrate the relative
supply of different raw materials and there is merit m having
one agency reporting to the Congress that combines the mon­
itoring activities now performed by many disparate groups
already existing in federal government. Thus an efficient
organization of existing monitoring groups would go a long
way toward meeting many goals of this bill.

In short, passage of this bill will show that in time its goals will
have to be implemented with actions and there is little to indicate
that such actions would be conducive to the higher confidence so
badly needed in the private sector to achieve the employment goals
of this bill.




330
STATEMENT

THE

The
an

Associated

Builders

opportunity

Growth

Act

of

ASSOCIATED

to

organization

is

construction

industry

a potential

As

make

are

are

concerned

wave

federation

on

the

aware
with

that,

of

inflation

it

is

of

S

Inc.

50,

(ABC)

the

12,000

throughout

position

upon

sympathatic

gravely
new

we

a

our

impact

employers,

and

CONTRACTORS,

Full

INC.

is

pleased

to

Employment

have

and

Balanced

1978.

the

and

AND

Contractors,

comments

Our

interest

BUILDERS

and

submit

OF

and

on

of

the

member

all

of

enacted,
further

We

engaged

follow

legislation

in

with

which

could

have

industry.

unemployment

intent

firms

country.

construction

the
if

known

the

the

this

problem

proposal

weaken

facing

legislation.

the

would

economic

the

nation

However,
touch

we

off

stability

are

a

of

the

country.

Further,
resources
What

is

by

needed

stimulation

One

need

have
of

only

to

British

have

and

results

fiscatory
once

examine

approaches.

proud

the

tax

utilized
are

rates

the

determine
than

government
to

create

record
to

of

allocation
market

expenditures

lasting

a number

curb

the
the

in

and

of

place.
the

jobs.

of

other

unemployment

countries

who

to

learn

futility

the

of

Creat

Britian

is

a classic

government

to

solve

employment

problems.

the

and

to

rather

cr a g i c c a s e

of

there

industrial

in

programs

"he
r

failure




process

industry

government

of

precedent

a reduction

private

example

the

political

is

of

adopted

such

a dangerous

the

an

kind
for

of
all

annual

complex

has

schemes
to

outlined

see.

Soaring

inflation
become

rate

of

depressed

in

S . 50

public
25
and

for
debt,

percent.

The

years
con­
Their

unproductive.

331
Only
key
We

massive

infusions

industries
certainly

embark

on

have

would

of

kept
be

government
many

wise

a similar

with

to

course

agreement

of

funds

their

learn

which

from

can

and

the

businesses
their

only

nationlization
even

of

marginally

viable.

experiences
to

lead

before

disastrous

the

same

we

results.
We

are

in

promote

free

purchasing

power;

of

formation."

capital

bill

proposes

For

the

t he

issue

by

the

While

to

with

of

the

of
be

available

we

of

statement,

this
we

do

which

would

employment,

stability,

these

which

and

not

encourage

agree

"foster

production

with

high

the

arid

and

rates

ways

the

objectives.

are

most

wages

on

Davis-Bacon

to

prevailing
formulas,
the

hire

of

wage
that

union

nation




objective

of
Act

self-defeating

If s D e p a r t m e n t

the

price

However,

Davis-Bacon

prime

inclusion

in

promote

maximum

we

will

familiar,
any

job

confine
that

which

of

uses

our
the

arguments

to

requirement

funds

provided

of
for

legislation.

actually

with

b i l l ’ objectives
s

promote

achieve

purposes

payment

the

enterprise;

bill

is

provisions

since

to

put

people

governing

it w i l l

result

to

work,

construction

in

fewer

the
will

dollars

being

workers.

Labor,

rates
many

which

under

decry

rates
such

the

as

rates

as

is

the

in

Davis-Bacon

inequitable,

prevailing.
are

charge

not

In

of

determining

Act

by m e a n s

almost

literally

prevailing.

As

so-called

of

inevitably
thousands
a result

regulatory
come
of

any

up

counties
work

done

332
Federal

Government,

therein

for

the

is

at

in

money

less

done

an

being

assisted

inflated

available

or

cost.
to

insured

by

the

Government,

The
the

hire

inflation

naturally

disadvantaged

and

results

the

un-

employed.

The

recent

proposed
hiring
was
that
the

stymie

of

the

so-called

example

a perfect

of

how

this

that

the

a supposed
a

bill

trades

had

unions,

struction

with

clear

public

and

to

works

of

the

However,

to

the
the

works
In

union

case,

the

was

available

for

leaders,

the

There

trades

real

interests

is
it

persons.

building

when

special

program

that

be m a d e

disadvantaged

leaders

struck.

contrary

became

rates,

to

in

but

other

are

to

new

productive,

The

interference

in

create

market,

Davis-Bacon
rates

downward .




are

the

not

impact

but
if
new

many

economists,

federal,

artificially

state

unions

purpose

of

the

of

building

proposal

came

to

the

construction

run

defeat

they
net

increase

fatal

witn

productive
useful

many

wage

are

it

as
is

definitely
local

not

wage

industry.

only

private

the

costs

respect

facilities

to
the

con­

rates

Wage

purposes
as

of

well.

motivating

Such
industry

very

area

in

which

damaging

also

to

the

made.

structure

contractors

requirements
increased,

jobs

are
and

increased

of

market

since

of

of

only

long

the

long-term

in

opinion

affect

sections

dampening

commerce

wage

the

legislation

and

competitive

the

they

pressures

current

increases

for

jobs,

out

increases

Once

of

public

works.

halt1
.

inflationary,

meeting

been

draftsmen,

Davis-Bacon

pushes

portions
unemployed

agreement

bargain

a sudden

the

certain

long-term

"soft"

mechanism

is

are

detrimental
extremely

reluctant
to

their

difficult

to
own
to

undertake
operations.
revise

them

333
Moreover,
Labor

to

wages,

the

mandate

these

Under

under

this,

laborer
job.

if

to

install

jurisdiction

no

authority

We

can

Bacon

wage

cite

granted

many

problems

of

the

of
prevailing

legislative

generally

union

union

work

recognized

by

classifications.

practices

construction

of

the

an

workers

piece

employer

are

in

also

a local

task,

the
This

not

productivity,
for

our

members

year,

pay

the

disrupts

a

simple

carpenters

have

laborer

company

but,

even

such

imposing

where

must

only

uses

a very

agreement

employer

Act

last

normally

of ma teri al ,

bargaining

carpenters.

in

hi s

of

well.

where

local

stifles

examples

in

used,

arise

the

for

extend

Secretary
theory

agreements.

type

and

to

as

the
the

traditional

a prefabricated

this

practices,

also

be

are

can

under

over

prevailing

payment

if

to

a minority

a situation

However,

fit

only

Under

classifications

tend

bargaining

not

benefits.

practices

trade

Labor

only

requires

seen

work

classifications

even

work

of

Act

fringe

has

construction

required
area

and

determine

Department

Where

the

Davis-Bacon
wages

Secretary

and

Standard
the

the
set

requirements.

encountered

particularly

in

the

more,

there

serious

area

of

is

Davis-

construction

definitions.
Anotner

raccor

which

flationary

impact.

the

to

Nation

if

not

of

increase.

six

impossible

escalators.




Only

must
It

percent
for

considered

been

of

bonds,

to
our

in

predicted

inflation

people

a few

Stocks,

be

has

or

even

protect
citizens

saving

this
that

legislation
the

worse.

themselves
are

deposits

bill
It

and

is

against

protected
life

is

could

by

its

in­

commit

difficult,
this

kind

cost-of-living

insurance

policies

334
normally

do

not

yield

interest

inflationary

spiral.

particularly

burdensome

evitable

results

in

job-creating

In

the

In

summary,

of

this

cannot
for

public

be

we

are

reasons

It w o u l d

be

in

Americans

we

not

to

believe,

to

our

where

the

competition

We

urge

this

Committee

new

aDproach

The

Associated

to

submit

its

fair

to

the




to

an

time

approach
us

in­

investments

happen.

that

type.

tested
by

which

put
and

creating

the

of

compensation

dollars

oppose

and

let

in

unemployment

Builders
v i ews .

rates
for

of

is
The

unemployment.

laudable

Davis-Bacon

this

that

it

objectives
simply

Accordingly,
provision

of

bill.

instead,

accomplished

value

the

the

embrace

through

at

the

we

climate

fair

with

to

this

be

employment

this

of

in

tax

incomes.

of

legislation

can

taxpayer

allow

offset

a reduction

levels

conclude

This

full

not

concurrance

system.

and

rates,

higher

fixed

to

countries,

work

on

to

hidden

compelled

included

a mistake

other

a

by

cited,
be

in

enough

living

even

should

are

high

actually

interest

and

we

accomplished

should

failed

interest

is

persons

higher

legislation,

the

S . 50

are

on

verntures

while

rates

Inflation

market

all

has
able

proven

repeatedly
and

free

a favorable

place
and

willing

enterprise
economic

will

result

give

the

in

consumer

expended.

S . 50

in

its

present

form

and

take

problem.

Contractors

appreciate

this

opportunity

a




335

MACHINERY and A LLIED PRODUCTS INSTITUTE
1200 EIGHTEENTH STREET, N.W. WASHINGTON, D.C. 20036 202-331-8430

M a y 17,

1978

The H o n o r a b l e W i l l i a m Pr o x m i r e
Chairman
S e nate Co m m i t t e e on Banking,

Housing

and U r b a n Affa i r s
Wa s hington, D.C.
20510
Dear Chairman Proxmire:
In c o n n e c t i o n w i t h

recent

public

h e a r i n g s b y your

C o m m i t t e e o n the p r o p o s e d " F u l l E m p l o y m e n t and B a l a n c e d
G r o w t h A c t of 1 9 7 7 , " w e w i s h to c o m m e n t on this bill.
It
is r e q u e s t e d t hat t his l e t t e r , the full text of the a t t a c h e d
m e m o r a n d u m , a n d the e n c l o s e d s t u d i e s by G e o r g e Terbo r g h ,
M A P I E c o n o m i c C o n s u l t a n t , b e a d m i t t e d in the pu b l i c r e cord
b e i n g c o m p i l e d b y the C o m m i t t e e .
Th e s t u d i e s ar e e n t i t l e d
" I n f l a t i o n a n d P r o f i t s , " u p d a t e d to A p r i l 1978; " C o r p o r a t e
Earning Power m
the S e v e n t i e s :
A D i s a s t e r , " A u g u s t 1977;
a n d " C h a n g i n g T h e o r i e s of F i s c a l P o l i c y , " A p r i l 1978.
M A P I ' s S t u d y of the
Proposed Legislation
T h e I n s t i t u t e , w h i c h is the n a t i o n a l s p o k e s m a n for
t he c a p i t a l g o o d s a n d a l l i e d p r o d u c t s i n d u s t r i e s of the U.S.,
h a s f o l l o w e d the d e v e l o p m e n t of " f u l l e m p l o y m e n t " l e g i s l a t i o n
closely.
T h e e n a c t m e n t of b r o a d e c o n o n i c p o l i c i e s m
this
f i e l d w o u l d h a v e o b v i o u s a n d f a r - r e a c h i n g i m p l i c a t i o n s for
the e c o n o m i c s y s t e m of the U.S. and for o u r m e m b e r c ompanies.
A l t h o u g h the a t t a c h e d m e m o r a n d u m e n t i t l e d "Fu l l E m p l o y m e n t
a n d the B a l a n c e d G r o w t h A c t of 19 7 7 " w a s p u b l i s h e d on F e b r u a r y
6, 1 9 7 8 b e f o r e the H o u s e of R e p r e s e n t a t i v e s p a s s e d H.R. 50,
the c o m m e n t s o f f e r e d in th i s m e m o r a n d u m a r e g e n e r a l l y still
r e l e v a n t to t he l e g i s l a t i o n b e f o r e the S e n a t e C o m m i t t e e o n
Banking, H o using and Urb a n Affairs.
We c a l l a t t e n t i o n
p a r t i c u l a r l y to t he c o n c l u s i o n of the m e m o r a n d u m w h i c h is
r e p r o d u c e d bel o w :
S e t t i n g g o a l s and t a r g e t s m
p l a n n i n g is,
of co u r s e , d e s i r a b l e .
Imposing inflexible
s t a n d a r d s is not.
To the e x t e n t that the
revised H u m p h r e y-Hawkins compromise recognizes
this, it is e n c o u r a g i n g .
E s t a b l i s h i n g the
d u a l i m p o r t a n c e of p r i c e s t a b i l i t y and full

(ft

M
ACHINERY & ALLIED PRODUCTS INSTITUTE AND ITS AFFILIATE0 ORGANIZATION COUNCIL FO
R
TECHNOLOGICAL ADVANCEMENT ARE ENGAGED IN RESEARCH IN THE ECONOMICS OF CAPITAL GOODS
(THE FACILITIES OF PRODUCTION, DISTRIBUTION, TRANSPORTATION, COMMUNICATION AN0 COM ERCE)
M
IN ADVANCING THE TECHNOLOGY AND FURTHERING THE ECONOMIC PROGRESS OF THE UNITED STATES

fl)

336
employment is also appealing in concept as is the avoidance
of wage and price controls.
Moreover— and perhaps the most
positive element of the new "Humphrey-Hawkins"— there is the
recognition of the importance of private capital formation
as an essential ingredient to increased employment.
Having said this, the question then becomes: what does
Humphrey-Hawkins add? The goal of increased employment—
reduced unemployment— was established in the "Employment Act
of 1946." Since that time, and in fact much earlier, the
government has never knowingly encouraged unemployment as a
solution to inflation, or for any other reason. Moreover,
certain target rates of acceptable economic activity are
known and widely accepted.
They are under constant review
as conditions change and policy planning focuses on these.
Since this is the case, one could argue that the proposed
legislation is merely redundant.
Unfortunately this is not
true.
First, there is the danger that it might be perceived
as the solution to a serious problem.
It is not.
Second,
the unemployment goal it sets— 4 percent of workers over 16
to be attained in 1983 if the legislation is passed in 1978—
is unrealistic.
The goal will not be met.
The difficulty is
that this failure could well precipitate unwise economic policy
and programs resulting in increased deficits, inflation, and
even more unemployment. The proposed legislation sets no
specific price stability goal; inflation and unemployment are
not considered to be of equal importance— language in the
legislation notwithstanding— thereby really having only one
target, which is the unrealistic unemployment goal.
Further,
if the intent in the process is to reduce central bank inde­
pendence, an important check on inflation could be lost.
The notion of increased private capital formation is a
good one; however, no specific mechanisms or changes are
suggested.
This, like price stability, comes out of the
legislative proposal as so much "lip service."
Finally, to a certain extent the proposed legislation
is misleading.
Proponents claim it to be a significant and
meaningful step forward— an important piece of major policy
shaping and problem solving legislation.
Others maintain
that it is an exercise in rhetoric; nothing is really required;
goals can be modified to suit existing conditions; and the
Act is for the most part "toothless." One of these assessments
may be correct; certainly they both cannot be.
Either way,
someone is being misled.
However, one thing is clear.
Even though the bill has
been "toned down," it may be a dangerous launching pad for
extremely inflexible economic goals and programs.




337
The MAPI Position In Brief
The memorandum referred to represents a policy position of the
Institute which is in opposition to the enactment of the proposed legis­
lation, even in its modified form.
We do wish, however, to acknowledge that it has been a constructive
exercise for the Congress and its cognizant committees, through considering
such legislation, to examine some of the most important economic issues
confronting this country. We refer particularly to inflation, unemployment
and employment, the structural unemployment aspect of the total unemployment
issue, capital formation, and reasonable coordination of economic policy
making within government.
Although we have not had an opportunity to
examine the full legislative record, it appears that insufficient attention
has been given to corporate profits which are the engine of our economic
system and, more particularly, the impact of inflation on profits. With
this in mind, we have, as indicated above, enclosed as a part of this
communication the MAPI economic studies on profits and inflation.
Issues Deserving Special
Emphasis
The Committee record is replete with comprehensive presentations
by business and by those who support the proposed legislation.
As already
indicated, we have studied most, if not all, of this testimony before the
Committee on Banking, Housing and Urban Affairs.
Having engaged in this
review, our position remains unchanged.
It seems appropriate, however,
even in such a brief communication as this one, to underline a few points
which are referred to in the hearings but deserve further emphasis.
They
are as follows:
1.

This country in a general sense is suffering in a number
of public policy areas from the results of government
"promising too much," raising expectations of the
potential beneficiaries of such promises, and then
being embarrassed by the failure to keep the promises
and adopt cost-effective programs to carry them out.
There is more than embarrassment involved under such
circumstances because at times government feels obliged
to take certain steps, in many cases for political
reasons, which will be counterproductive.

2.

The announced goal in the bill of a 4 percent unemployment
rate by 1983 is not achievable and, in addition, represents
the implied or direct promise that aggravates the unemploy­
ment problem and the morale of those who are unemployed.
Aside from the lack of realism in stating a 4 percent
unemployment goal by 1983, there is an implicit incon­
sistency between such a goal— even if it were achievable—
and containment of inflation.




338
3.

Some witnesses have questioned the desirability of using
numerical goals for any purpose in the legislation. MAPI
is concerned about overdoing so-called federal planning,
and the corollary to that concern is that in most cases
when federal planning is broadened and made more definitive,
government bureaucracy— which is already far too large and
costly— becomes almost overwhelming and unmanageable.
It
is extremely difficult to engage in effective national
planning, even though such planning is flexible, under the
aegis of a government which has grown to such an enormous
size at the federal level alone and even more so when the
federal system is considered together with state and local
governments.

4.

We are concerned about any further limitation of flexibility
in the Executive Branch with regard to adopting national
policy and goals.
In this connection, there seems to be a
tendency in the bill to attempt to bring Congress into a
position of greater participation in the planning process
or oversight of that process. We do not favor this trend.
In this connection, we are negative in our view with respect
to any increased role of the Joint Economic Committee of the
Congress.
Generally speaking, we support independence of
the Federal Reserve Board, but certainly it would be diffi­
cult to argue against some coordination between the Federal
Reserve Board and the Executive Branch in connection with
economic planning and decision making.

5.

As already indicated, as this legislation has been subjected
to public hearings of the Congress and to independent study
by organizations representing all interests in the country,
improvements have been made in the proposed bill.
Inflation
has been given more prominent recognition.
Capital formation
as a very high priority has been embraced by the proposal.
Unfortunately, this process of recognizing national goals
and priorities has been carried to an extreme so that the
bill is now burdened, as described by some within the
Congress as a "Christmas tree." In our view, some of the
provisions which are peripheral and of a lower priority
should be deleted if the legislation is to be enacted at
all.

6.

We have referred above to the need for flexibility in the
Executive Branch in connection with economic policy and related
decision making.
The Administration now states unqualifiedly
that the number one economic problem in the United States is
inflation.
Since the proposed legislation was first introduced
and especially in recent months, substantial progress has been
made in reducing unemployment and very significant progress has




339
been made in increasing employment which, of course, can be
achieved only through creating new jobs and maintaining jobs
already in the system.
It is absolutely necessary, as we
have suggested previously, for the President to be able to
make a shift in economic planning and decision making when
changes in the economic picture of a substantial nature
occur. Another example of such a fairly short-term shift
is the current consideration of what action should be taken
in the tax area.
7.

Experience over the last decade with certain programs addressed
to socioeconomic objectives, including special efforts to deal
with unemployment and certain specific aspects of unemployment,
have not been cost-effective.
There seems to be a consensus
on this point.
Cost-effectiveness, particularly when this
country is carrying an almost unbearable debt and year-to-year
deficit, becomes critical.
Cost-effectiveness analysis should
be prepared and thought through before actions— legislative or
executive in nature— are taken.
Further, any related program,
if it is promulgated, should be studied on a continuous basis
from a cost-effectiveness standpoint.
Government has failed
pitifully in this regard.
It follows that reduction in gov­
ernment spending not only has a critical bearing on inflation
but also is a condition precedent to bringing government’s
size down to manageable levels.

Restatement of the MAPI View
Finally, we wish to repeat the last point made in the conclusion
in our Memorandum G-98 which is not only attached as a part of this presen­
tation but was transmitted for the record to the Senate Human Resources
Committee on March 10, 1978:
"Even though the bill has been ’toned d o wn,’
it may be a dangerous launching pad for extremely inflexible economic goals
and programs."

We appreciate this opportunity to make what we hope is a useful
contribution to consideration of the full employment and balanced growth
proposals now before the Congress.
Respectfully,

P r e s i d e n t

30-454 0 - 78 - 23




340

MACHINERY**
Allied Products
IN S T I T U T E

M
API

lit
1200 EIGHTEENTH STREET, N W

(202) 331-8430

February

FULL

EMPLOYMENT AND BALANCED

WASHINGTON, D C 20036

6,

1978

G R O W T H A C T O F 1977

(The N e w A d m i n i s t r a t i o n - E n d o r s e d
" Humph r e y - H a w k i n s " Compromise)

Modifications

m

Latest

Version

Represent

Improvement;

H o w e v e r , B i l l N o t N e e d e d and C o u l d
Be C o u n t e r p r o d u c t i v e

Introduction
The E m p l o y m e n t Act of 1946
. . d e c l a r e s that it is the c o n ­
t i n u i n g p o l i c y a n d r e s p o n s i b i l i t y of the F e d e r a l G o v e r n m e n t to use all
practicable means . . .
to p r o m o t e m a x i m u m e m p l o y m e n t , p r o d u c t i o n , and
p u r c h a s i n g powe r . "_A
S i n c e t hat time, t h i s o v e r a l l o b j e c t i v e ha s b e e n
p u r s u e d w i t h v a r y i n g d e g r e e s of s u c c e s s .
W i t h r e s p e c t to e m p l o y m e n t , a g e n e r a l l y a c c e p t e d lev e l of "full
e m p l o y m e n t " h a s b e e n a s s o c i a t e d w i t h a n u n e m p l o y m e n t r a t e of some 4 pe r ­
cent.
T h i s t a r g e t r a t e r e m a i n s e v e n t h o u g h the a v e r a g e a n n u a l rat e m
the
p o s t w a r p e r i o d of 1 9 4 7 - 1 9 7 7 h a s
16 y e a r s of a g e a n d over.
Less

b e e n 5 p e r c e n t of t he c i v i l i a n l abor force
t h a n o n e - t h i r d of t h e ti m e has the 4 per­

c e n t r a t e b e e n a t t a i n e d — r o u g h l y a s s o c i a t e d w i t h w a r t i m e — and not at all
s i n c e 1969.
T h e r a t e for t h e 1 9 7 0 s t h u s far h a s a v e r a g e d w e l l ove r 6 p e r ­
cent w ith

rate

a 1975

p e a k of 8 . 5

This recent
of 4 p e r c e n t h a s

percent.

i n a b i l i t y to e v e n a p p r o x i m a t e a t a r g et u n e m p l o y m e n t
f o s t e r e d s e v e r a l p i e c e s of p r o p o s e d l e g i s l a t i o n in­

t e n d e d to a m e n d — a n d g e n e r a l l y m a k e m o r e s p e c i f i c — the E m p l o y m e n t Act of
1 946.
Of t h e s e , t he " F u l l E m p l o y m e n t a n d B a l a n c e d G r o w t h Act of 1976"
(S. 50, H .R. 50) i n t r o d u c e d b y S e n a t o r H u m p h r e y and C o n g r e s s m a n Ha w k i n s
h a s b e c o m e t h e m o s t c e n t r a l ./2

1/ P u b l i c L a w 3 04 (S. 3 80), Sec. 2.
2_/ O t h e r s i n c l u d e the " E q u a l O p p o r t u n i t y a n d Fu l l E m p l o y m e n t A ct"
(H.R. 1547 6 ) m
19 7 4 b y C o n g r e s s m a n H a w k i n s a nd the " B a l a n c e d Grow t h
a n d E c o n o m i c P l a n n i n g A c t of 1 9 7 5 " (S. 1795, H.R. 7678) by Sena t o r
H umphrey and Congre s s m a n Harrington.

AI
P

M ac h i n e r y & A llied Pr o d u c t s I t i t u t e an o its affiliated organization Council f o r T e c hn old gi cal A ov a n c e m e n t ,
ns
ARE ENGAGED IN RESEARCH INTHE ECONOMICS O CAPITAL GOODS (THE FACILITIES OF PRODUCTION DISTRIBUTION TRANSPORTATION
F
COMMUNICATION A O COMMERCE) IN ADVANCING THE TECHNOLOGY A O FURTHERING THE ECONOMIC PROGRESS OF THE UNITED STATES
N
N




341
Various versions of this proposed "full- e m ployment" legisl a t i o n
have received attention in Congress.
For example, h earings w e r e held by
the Joint Economic Committee in the summer of 1975 und e r the title:
"A
Full-Employment Policy:
An E x a mination of Its Im p l i c a t i o n s . ” Moreover,
"Humphrey-Hawkins" was a major part of the Democra t i c Party p l a t f o r m in
1976.
However, until very recently all this prop o s e d l e g i slation was
a pparently judged to be unacceptable by the several A d m i n i s t r a t i o n s in
office.
This was the case until November of last year w h e n President
Carter sent a message to the Congress endorsing a m u c h revised c o m promise
"Humphrey-Hawkins" bill.
Senator Humphrey and Con g r e s s m a n Hawkins stated
that they were "pleased" with the agreement reached w i t h the President on
the compromise version and predicted favorable act i o n by the Congress
early in 1978.
Hearings on this latest version, the "Full Employment
and Balanced Growth Act of 1977", are being held cur r e n t l y in b oth the
H ouse and Senate.
Congressman Hawkins plans to hav e the proposed l e g i s ­
lation on the House floor by Easter.
In brief,

the bill according to its sponsors n o w provides:

—

an unqualified affirmation of the right of all
Americans to a useful job at a fair wage;

—

a new process for the coordinated and comp r e h e n s i v e
development of national economic policy;

—

an interim goal of reducing unemployment to 3 p e r ­
cent among adults and 4 percent for the entire
labor force as soon as possible and in any case
within 5 years;

—

a commitment to achieve reasonable price s t ability
as rapidly as feasible, and an anti-inf l a t i o n a r y
program to move the nation toward this goal; and

—

that if the President determines that the private
sector and traditional types of public employment
are unable to do so, the government will take direct
job-creating action to meet the employment goals
established as national policy.

After a brief review of the provisions of this latest v e r s i o n
of the "Humphrey-Hawkins" bill, this m e m o r a n d u m presents an assessment
and some concluding observations.




342
The "Full Employment and Balanced
Growth Act of 1977"
Declaration of Policy
The "Full Employment and Balanced Growth Act of 1977" is designed
1 . . . to provide an open process under which economic goals and policies
1
are proposed, reviewed, and established; to provide for yearly review of
national economic policies to ensure their consistency with these goals to
the maximum extent possible; and generally to strengthen and supplement
the purposes and policies of the Employment Act of 1946."
Further, the Act:
—

declares that it is the continuing policy and respon­
sibility of the federal government to use all practi­
cable means, consistent with its needs and obligations
and other essential national policies, to promote full
employment, production, real income, balanced growth,
adequate productivity growth, proper attention to
national priority needs, and reasonably stable prices;

—

establishes as a national goal the fulfillment of the
right of all Americans able, willing, and seeking work
to full opportunity for useful paid employment at fair
rates of compensation;

—

recognizes that inflation is a major national problem
requiring improved government policies;

—

declares that although it is the purpose of the Act to
encourage the voluntary cooperation of the private sec­
tor in achieving its objectives, no provisions of the
Act are to be used, with respect to any portion of the
private sector of the economy, to provide for government
control of production, employment, allocation of re­
sources, or wages and prices, except to the extent
authorized under other legislation; and

—

declares as its purpose to maximize and place primary
emphasis upon the expansion of private employment, and
all programs and policies under the Act are to be in
accord with that purpose. However, only to the extent
that Americans age 16 and over and able, willing, and
seeking work are not, and in the judgment of the Presi­
dent can not be provided with private job opportunities
nor provided with job opportunities under other programs
must the President establish reservoirs of public em­
ployment and private nonprofit employment projects which
the Congress authorizes and provides funds for.




343
Major Provisions
Unemployment rate targets.— Central to the proposed legislation
is the establishment of specific numerical goals in terms of target un­
employment rates and a timetable for their achievement. In its latest
version, for the calendar year in which legislation takes effect and the
following year, the "short-term” interim unemployment rate goals are to
be "consistent with achieving as rapidly as feasible the goals of full
employment." In the first three years in which the legislation is in
effect, the "medium-term" goal shall be to reduce unemployment among the
adult civilian labor force (age 20 and over) to not more than 3 percent,
and for the entire civilian labor force (age 16 and over) to not more than
4 percent within a period not to extend beyond the fifth calendar year
that the legislation is in effect ./I Upon achieving the 3 and 4 percent
goals, the goal then becomes one of achieving "full employment" as soon
as practicable and maintaining full employment after it has been reached.
In the third year that the legislation is in effect, the Presi­
dent must review the numerical goals and timetables for the reduction of
unemployment, report to the Congress on any obstacles to their achievement,
and if necessary propose corrective economic measures toward achievement
of such goals and timetables. At that time, he may also recommend that
the existing goals be modified./2
Price stability.— The new bill views inflation as a serious
concern, stating that: M[t]he objective of achieving reasonable price
stability as soon as feasible . . . shall be sought by vigorous efforts.
. . ." The proposed legislation outlines a seven-point program, including:
—

an effective information system to identify and analyze
inflationary trends in individual economic sectors;

—

programs for increasing the supply of goodsK services,
labor, and capital in tight markets;

—

the establishment of stockpiles of agricultural commodi­
ties and critical materials;

—

encouragement to labor and management to increase pro­
ductivity within the framework of full employment through
voluntary arrangements;

—

recommendations to increase competition in the private
sector;

1/ An earlier version of the bill called for achieving a 3 percent adult
unemployment rate within 18 months after enactment. Later versions,
prior to the current one, extended that period to 4 years for adults
20 years or older. These earlier bills were not as specific with
respect to requirements for the 16-to-20-age group.
2/ No such review was provided in earlier versions of "Humphrey-Hawkins."




344
—

removal or modification of cost-increasing government
restrictions; and

—

other such actions the President may deem desirable
to promote reasonable price stability.

In all of this, the proposed legislation suggests that " . . .
[i]n choosing means to achieve the goal for the reduction of unemployment
and choosing means to achieve the goal of reasonable price stability,
those means which are mutually reinforcing shall be used to the extent
practicable.M/1
"Economic Report" of the President.— The proposed legislation
would require that, during the first 20 days of each regular congressional
session, the President submit, along with the annual report of the Council
of Economic Advisers, an "Economic Report" which would set forth:
—

trends in the levels of employment, unemployment, pro­
duction, real income, productivity, and prices, and a
review and analysis of recent developments affecting
those trends;

—

annual numerical goals for five years for employment
and unemployment, production, real income, and
productivity;
the program and policies that the President considers
necessary to achieve the goals listed above; and

—

the basic elements of the President’s Budget— both the
expenditure and tax side— as they relate to full em­
ployment and other economic goals.

Monetary policy.— Within one month after the transmission of the
President’s "Economic Report," the Federal Reserve Board must submit to
the Congress an "independent" statement of its intended policies for the
year ahead and their relationship to the "short-term" goals set forth in
the "Economic Report." The Congress is to then take such action as it
finds necessary to ensure closer conformity of the Board's policies to the
purposes of the Full Employment and Balanced Growth Act of 1977.
Advisory Board or Boards.— Within three months after his first
"Economic Report," the President is to establish an Advisory Board or

1/ The language of earlier versions of the bill was much different. In
one we find: ". . . the President shall include the objective of hold­
ing the annual rate of consumer and other price increases to levels
consistent with reasonable price stability." However, "[achievement
of reasonable price stability . . . shall not be sought through any
weakening of the goals and timetable relating to the reduction of un­
employment." [Underscoring added.]




345
Boards with appropriate representation of labor, industry, agriculture,
consumers, state and local officials, and the public at large to consult
with the President, the Council of Economic Advisers, and other concerned
parties./I
Job programs.— The direct employment-generating provisions of
the proposed legislation are of three types.
1.

In any countercyclical efforts undertaken, the President
is to "consider" a "triggering mechanism" to phase in
public works, public service, and community development
programs to provide jobs in periods of rising unemploy­
ment and then they are to be phased out as unemployment
is reduced.

2.

The proposed legislation recognizes that even under gen­
erally favorable economic conditions unemployment for
youth may remain a problem, and the President is in­
structed to ". . . improve and expand existing youth
employment programs, recommending legislation where re­
quired."/^ These activities are to be coordinated with
other manpower programs; to smooth the transition from
school to work; and to prepare— disadvantaged and other
youth— for regular self-sustaining employment.

3.

After all portions of existing manpower training and
-Employment programs are fully utilized and the President
has made a judgment that sufficient private job oppor­
tunities can not be developed, the President must estab­
lish "reservoirs" of public and nonprofit private employ­
ment projects to be approved by the Secretary of Labor
in the form of expanding existing employment and train­
ing projects and/or through creating such new programs
as are determined by the President to be needed and which
the Congress authorizes and provides funds for.

Coordination with state and local governments. The proposed
—
legislation calls for increased coordination of programs at all govern­
ment levels. Obviously this particularly would be the case if counter­
cyclical public employment or community development projects are to be
undertaken. Federal funding associated with such activities is to take
1/ Beyond this, existing institutions are to be used for planning and

review. This is unlike earlier versions of the proposed legislation
that would have also, among other things, created new offices within
the Department of Labor and the Congressional Budget Office.
2/ In an earlier version of the bill we find the stronger statement:
"The President shall transmit to Congress . . . legislation creating
a comprehensive youth employment program." [Underscoring supplied.]




346
account of the fiscal needs and budget conditions of the respective states
and localities and their own efforts, with special attention to the rates
of unemployment in these states and localities.
Capital formation.— A significant addition in the latest version
of the proposed legislation is the recognition of the importance of capi­
tal formation in job creation. In the language of the bill: ". . . high
rates of capital formation are necessary to ensure adequate rates of
capacity expansion and productive growth; . . . an important goal of
national policy shall be to remove obstacles to the free flow of re­
sources into new investment. . . . "

Assessment of the Full Employment
and Balanced Growth Act of 1977
Useful Modifications
In many respects, this latest compromise version of the bill is
an improvement compared to earlier proposals. These modifications include:
—

Extending the time period for attaining the target
rate of unemployment to five years— 1983 if the
legislation is enacted this year. Earlier versions
of the proposed legislation required a much shorter
time period.

—

Providing for review and possible modifications of
the employment and other economic goals in the third
year the legislation is in effect.

—

Less emphasis on the concept of centralized economic
planning.

—

Greater concern for price stability— a change in
emphasis insisted upon by the Administration as a
key condition for compromise. The economic distor­
tions that result from too rapid a rate of inflation
retard growth and create even more unemployment.

—

Explicitly precluding wage and price controls.

—

Recognizing the importance of capital formation in
increasing employment. The language of the Act is
nonspecific; however, the intent is clear and cer­
tainly in the right direction. At the same time
that increased capital formation creates new jobs,
it adds to productivity and is anti-inflationary.AL

1/ For a discussion of the relationship between fixed investment and pro­
ductivity, see MAPI Capital Goods Review No. 102, "Fixed Investment and
Productivity Growth in Major Industrial Countries, 1960-73," February 1976.




347
Negative Aspects
Possible misinterpretation.— There isva danger that some may
view the passage of the proposed legislation as a sure solution to the
problem of unemployment. In fact, the bill as structured actually requires
almost nothing in the way of new program formation and certainly no guaran­
tee that the unemployment rate will be sharply reduced. Proponents of the
proposed legislation refuse to accept this interpretation. For example,
Jacob dayman, President and Secretary-Treasurer, Industrial Union Depart­
ment, AFL-CIO, in testimony before the House Subcommittee of Employment
Opportunities in January states: "To its credit, the Humphrey-Hawkins
bill would bring us to the 3 percent [unemployment] level by 1983." There
is a real danger in people thinking that the legislation requires something
that it does not.
The, same type of problem exists regarding the question of infla­
tion. One of the key aspects of compromise needed for Administration en­
dorsement was a definite emphasis on holding down the rate of inflation.
Yet by setting a target unemployment rate goal with no corresponding goal
for the acceptable rate of inflation, the bill has a clear bias in the
direction of reducing unemployment vis-a-vis inflation. The bill's pro­
ponents argue in favor of this bias. For example, again in House testi­
mony, AFL-CIO’s legislative director, Andrew Biemiller, said that the antiinflationary segments of the bill must be "consistent with the primary
emphasis of this legislation on achieving full employment" and "We want
this interpretation to be clearly established in the legislative record
because there are some people who believe that full employment and fight­
ing inflation should have co-equal status in the bill. We don’t agree
with any such interpretation and we oppose any efforts to force this bill
to establish or to justify such an interpretation." Whatever the real
intent of the bill is with respect to the employment-inflation tradeoff,
it is clear that not everyone is reading the proposed legislation in the
same way.
Lack of realism. The bill adds specificity to the Employment
—
Act of 1946 by setting target goals for unemployment— yardsticks for mea­
surement— and demands annual accountability. These unemployment targets—
not more than 4 percent unemployment for the civilian labor force age 16
and over and 3 percent of the adult civilian labor force (age 20 and
over) to be attained by 1983 if the legislation is passed this year—
are not realistic; they will not be achieved.
Less than one-third of the time in the 30-year postwar period—
1947 through 1977— has the unemployment rate for persons aged 16 and older
been 4 percent or lower, and those cases were roughly associated with war­
time periods. In the first five years of the 1970s, unemployment averaged
5.4 percent, and in the most recent period— 1975, 1976, and 1977— it has
been 8.5, 7.7, and 7.0 percent, respectively.
Moreover, the argument that a 4 percent unemployment rate is
unrealistic is based on more than historical precedent. Increases in the




348
general level of economic well being itself, which implies the ability to
accumulate savings, tend to modify the personal impact of unemployment.
At the same time, improved social welfare and unemployment benefit pro­
grams— in 1975, 77 percent of the civilian labor force was covered by some
type of unemployment insurance program compared to 57 percent in 1947—
provide a cushion in the case of job loss. There is also the increase in
the number of multiple wage earning families— 58 percent of "heads of
households" had at least one additional family member in the labor force
in 1975 compared to 40 percent 20 years earlier— that permits a great deal
of earning flexibility./I Related to this is the significant increase in
the number of young people and women in the labor force. For example, in
1955,5.9 percent of civilian workers were between 16 and 19 years old; by
1975, 8.3 percent were of this age group. Over the same 20-year period,
women— of all ages— in the labor force grew from 31 to 40 percent. Stating
the situation for women differently, in 1955 less than 36 in 100 women were
in the labor force compared to over 46 in 1975. Both women and younger
workers— due to lack of skills or job experience— are more apt to be
unemployed.
These changes are both sociological and demographic. The impact
of the sociological part— for example, the adoption of a new "life-style"
by women, to the extent that this has happened— is hard to predict. The
demographics are not as difficult, and based only on these factors (e.g.,
a lower proportion of teenagers in the labor force) economists estimate
that changes in the work force alone will reduce unemployment significantly
by 1983. However, an overall unemployment rate of 4 percent is still
highly unlikely by 1983.
Further, some would argue that it is not even desirable. It has
been estimated that pushing the unemployment rate to 5.5 percent or below
in today’s economic climate could result in unsatisfactory rates of infla­
tion. Moreover, the proponents of the bill— regardless of the legislation’s
proposed timetable— have urged for a very quick reduction of the rate as
soon as the legislation is passed. This would surely compound the danger
on the inflationary side. Even President Carter in his 1977 Economic Re­
port to Congress set a goal of gradually reducing the unemployment rate,
although the 1983 goal is roughly consistent with the proposed legislation.
In the same vein, it is also to the credit of the Administration that as
a condition for endorsing the proposed legislation a flexibility in goal
setting— a review in the third year— was insisted upon. This recognizes
the fact that as the inflation picture and other conditions change the
unemployment rate goal may require modification.
However, any discussion of whether the unemployment rate goal
is realistic or not based on changes over the past several years and may
or may not be inflationary tends to mask a fundamental point. The important
considerations in the matrix of economic relationships are not arbitrary

1/ For these and other reasons it should be noted that the unemployment
rate is not an index of economic hardship.




349
goals but underlying market realities. These will be the dominant force
in determining employment and price behavior in the future with or with­
out the proposed legislation. On the employment side, the past record
should be examined. Nonagriculture civilian employment numbered 89.3
million persons in December 1977. This represents an increase of just
under 8 million jobs from the average of 1975, an achievement no govern­
ment program could match. At the same time, the unemployment rate has
dropped from a peak of 9.1 percent in May 1975 to 6.4 percent last Decem­
ber. Moreover, civilian employment as a percent of the noninstitutional
population is at a postwar record— 58 percent in December 1977 compared
to a 1975 average of 55.3 percent. The fact that, even with this impres­
sive record over the past two years, the unemployment rate still remains
between 6 and 7 percent is probably the most telling indicator of how un­
realistic the 4 percent unemployment rate goal is.
Possible government action.— An important concern must be the
possible government response when— in the annual reviews— it becomes clear
that the target unemployment rates are not going to be met. One provision
included in the proposed legislation is the possible expansion of public
employment./I This could well be counterproductive. The past record for
public employment is not good./J2 Moreover, there are difficulties in
properly timing government job programs in the employment cycle. There
is both a recognition and implementation lag. Together they often cause
programs to come into play too late. In addition, programs once estab­
lished tend to develop their own constituencies, become imbedded and out­
live any usefulness they may have once had. Moreover, when job programs
are channeled through state or local governments— which is common practice—
the net result is apt to be federal funding of local employment which would
have occurred anyway.
More important, an effective public employment program— one that
actually hired new workers— would be expensive. This is particularly the
case since the bill provides that new workers would be hired for some pub­
lic jobs at rates that would exceed those of many employed in the private
sector. The associated increase in the federal deficit would be inflation­
ary, and its financing would compete with capital needed for private sector
job expansion— a situation in direct contradiction to the stated policy
of the proposed legislation.
The inflation goal. There is another contradiction in the pro­
—
posed legislation. The bill clearly states the dual importance of price

1/ The bill does establish an "order of priority" for job expansion that
puts expansion of conventional private jobs and expansion of private
employment through federal assistance ahead of any type of public
employment programs.
2/ In a "Report to the Congress" by the General Accounting Office in the
spring of 1977 (HRD-77-53) we find the summary statement: "Much money
has been appropriated for public service employment programs, but they
have not reduced unemployment very much."




350
stability and full employment. However, only a target rate of unemploy­
ment is specified— no acceptable rate is set for inflation. This clearly
suggests an order of priorities— regardless of the language of the bill.
And, as stated earlier, the problem is not one of trading inflation for
employment. The inflation generated by striving for unrealistic rates of
unemployment will itself create still more unemployment. There should be
equality of treatment for inflation and unemployment.
The role of the Federal Reserve.— The proposed legislation re­
quires the Board of Governors of the Federal Reserve to transmit to the
Congress an annual report setting forth its "intended policies" for the
year ahead. Such reporting presumably is to ensure that central bank
policy is consistent with employment and other economic goals. This is
not only in sharp contrast to the basic principle of central bank inde­
pendence, but could well make a mockery of it. Already, high administra­
tion officials have stated publicly that Federal Reserve autonomy and the
goals of the "Humphrey-Hawkins" bill are not consistent. The clear impli­
cation is that monetary policy is to be used as a tool for employment
policy.
This suggests— like so much of the other structure of "HumphreyHawkins"— that the real intent is that all policies be directed toward
achieving the unemployment goals. If this j s the case, the proposed
i
legislation is a mistaken and dangerous endeavor indeed.

Conclusion
Setting goals and targets in planning is, of course, desirable.
Imposing inflexible standards is not. To the extent that the revised
Humphrey-Hawkins compromise recognizes this, it is encouraging. Estab­
lishing the dual importance of price stability and full employment is
also appealing in concept as is the avoidance of wage and price controls.
Moreover— and perhaps the most positive element of the new "Humphrey- Hawkins".— there is the recognition of the importance of private capital
formation as an essential ingredient to increased employment.
Having said this, the question then becomes: what does HumphreyHawkins add? The goal of increased employment— reduced unemployment— was
established in the "Employment Act of 1946." Since that time, and in fact
much earlier, the government has never knowingly encouraged unemployment
as a solution to inflation, or for any other reason. Moreover, certain
target rates of acceptable economic activity are known and widely accepted.
They are under constant review as conditions change and policy planning
focuses on these.
Since this is the case, one could argue that the proposed legis­
lation is merely redundant. Unfortunately this is not true. First, there
is the danger that it might be perceived as the solution to a serious
problem. It is not. Second, the unemployment goal it sets— 4 percent of




351
workers over 16 to be attained in 1983 if the legislation is passed in
1978— is unrealistic. The goal will not be met. The difficulty is that
this failure could well precipitate unwise economic policy and programs
resulting in increased deficits, inflation, and even more unemployment.
The proposed legislation sets no specific price stability goal; inflation
and unemployment are not considered to be of equal importance— language
in the legislation notwithstanding— thereby really having only one target,
which is the unrealistic unemployment goal. Further, if the intent in the
process is to reduce central bank independence, an important check on in­
flation could be lost.
The notion of increased private capital formation is a good one;
however, no specific mechanisms or changes are suggested. This, like price
stability, comes o.ut of the legislative proposal as so much "lip service."
Finally, to a certain extent the proposed legislation is mislead­
ing. Proponents claim it to be a significant and meaningful step forward—
an important piece of major policy shaping and problem solving legislation.
Others maintain that it is an exercise in rhetoric; nothing is really re­
quired; goals can be modified to suit existing conditions; and the Act is
in fact "toothless." One of these assessments may be correct; certainly
they both can not be. Either way, someone is being misled.
However, one thing is clear. Even though the bill has been
"toned down," it may be a dangerous launching pad for extremely inflexible
economic goals and programs.




352

M
flp i

MACHINERY&
Allied Products
INSTITUTE
1200 EIGHTEENTH STREET, NW

(202) 331-8430

•

WASHINGTON, D C 20036

Originally published January
Revised and republished July
December
April
October
April
April

1974
1974
1974
1976
1976
1977
1978

INFLATION AND PROFITS
by
George Terborgh
M A P I Economic Consultant

M a c h in e r y a n d A ilifd P roducts I n stitu te

M
achinery 6 Allied Products Institute

fp
li

and its affiliated organization C
ouncilfqrT echnological Advancement,
ARE ENCAGED IN RESEARCH INTHE ECONOMICS O CAPITAL GOODS (THE FACILITIES OF PRODUCTION, DISTRIBUTION TRANSPORTATION
F
COMMUNICATION AN COMMERCE), IN AOVANCING THE TE CHN LOGY AN FURTHERING THE ECONOMIC PROGRESS OF THE UNITED STATES
D
O
D




353
INFLATION AND PROFITS

The effect of rising price levels on the accounting of profits
is not a new subject. During the sharp postwar inflation of 1946-48 it
generated a lively discussion in accounting and management circles. This
was revived, on a lesser scale, by the price run-ups of 1950-51 and
1956-57. But under the relatively stable price level of 1958-64 interest
waned. It was widely believed that inflation was a thing of the past,
that the after-effects of earlier inflation would gradually wear off, and
that no corrective action was needed. This proved to be an illusion. By
1965 inflation was under way once more, and it has continued at a dis­
tressing pace ever since. It is now high time to take another look at
the problem.
The Principle
The overstatement of profits during and after a period of infla­
tion arises from the practice of charging only the historical cost of
physical asset consumption (fixed assets and inventory). When the pur­
chasing power of the dollar is shrinking, the charging of historical
costs— reflecting earlier, and hence lower, price levels— is insufficient
for the restoration of real assets used up in production. A proper reck­
oning requires the restatement of previously incurred costs in the dollars
of realization, that is to say, in the revenue dollars against which they
are charged. Only when costs and revenue are measured in the same dollars
can the difference between them (profit) be correctly determined.
It follows that when the real cost of physical asset consumption
is undercharged the shortfall is accounted as profit. It follows also
that this much of the reported profit is fictitious, representing simply
the understatement of costs.
The Project
The foregoing statement of principle refers to the conversion of
historical costs into their equivalents in current dollars. This implies
the use of an index of the general purchasing power of the dollar. Unfor­
tunately from our standpoint, the official conversions are based on a
multiplicity of specific price indexes purporting to reflect the current
replacement costs of the individual items or classes of items processed.
We refer to the Department of Commerce conversions, which are applied both
to fixed-asset consumption (in the Capital Consumption Adjustment) and to
inventory consumption (in the Inventory Valuation Adjustment) by means of
such replacement-cost indexes. While we prefer the use of a single compre­
hensive index of prices, the overall results obtained from a multiplicity of
specific indexes are not far different. In any case, we are constrained




354
by the nature of the available data to use the latter, which represents a
conversion of income-tax costs into current-cost equivalents, rather than
into current-dollar equivalents./I
In the project in hand, we propose to compare current-cost depre­
ciation with tax depreciation and current-cost inventory consumption charges
with their tax counterparts. We can then see what difference the conversion
makes in the profit figures. The study is limited to the corporate system
because profit as such is not available for the unincorporated sector, and
more specifically to nonfinaneial corporations, the category principally
concerned with physical asset consumption. It is limited also to the
inflation of 1965-77.

I.

FIXED ASSETS

The Department of Commerce computes annually current-cost depre­
ciation on the fixed assets of nonfinancial corporations, using two write­
off methods (straight-line and double-declining-balance) and a variety of
service-life assumptions. It has expressed its preference in service-life
assumptions (85 percent of Bulletin F lives), and we shall use that assump­
tion in conjunction with the double-declining-balance writeoff./2
A word on the choice of writeoff. Notwithstanding the Depart­
ment's use of the straight-line method in its own current-cost calculations,
we entertain no doubt that that writeoff is in most applications a griev­
ously retarded measure of capital consumption, and that the doubledeclining-balance method is in general more realistic. This is not the
place to argue the issue, which we have done at length elsewhere./3
Suffice it to say that this writeoff conforms quite well to both theoret­
ical and empirical evidence on the typical course of capital consumption,
especially for capital equipment (as distinguished from structures), which
accounts for around five-sixths of corporate tax depreciation.
The following table compares the Department's computation of
current-cost double-declining-balance depreciation with its estimate of
the depreciation allowed for income tax purposes.

2J For a discussion of this issue, see Realistic Depreciation Policy,

MAPI 1954, Chapter 12.
2/ The double-declining-balance method is applied with a straight-line
switch.
3/ Realistic Depreciation Policy, Chapters 3, 4, and 5.




355
Table 1
Comparison of the Current-Cost Double-Declining-Balance Depreciation
of Nonfinancial Corporations With the Depreciation Allowed
Them for Income Tax Purposes
(Billions of Dollars)
(2)
Income Tax
Depreciation

(1)
Current Cost
DDB

$ -1.5
-0.8
0.0
0.4
1.0
3.2
4.1
1.7
3.2
9.2
17.9
19.7
21.5

$ 36.4
39.5
42.9
46.7
51.3
54.6
58.7
65.3
70.5
77.7
85.3
92.5
99.6

$ 34.9
38.7
42.9
47.1
52.3
57.8
62.8
67.0
73.7
86.9
103.2
112.2
121.1

1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977

(3)
Excess of
(1) over (2)

Note that the excess of current-cost DDB over tax depreciation
has grown from a negative amount in 1965 to $22 billion in 1977.

II.

INVENTORY

As indicated earlier, the conversion of tax inventory consump­
tion charges to their current-cost equivalent is computed by the Department
of Commerce as the Inventory Valuation Adjustment (IVA). The calculation
allows for inventory consumption presently charged for income tax purposes
by LIFO and similar current-costing procedures, and converts only the
balance under historical-costing systems. The results follow.
Table 2
Inventory Valuation Adjustment for Nonfinancial Corporations
(Billions of Dollars)
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977

30-454 0 - 7 8 - 2 4




$ 1.9
2.1
1.7
3.4
5.5
5.1
5.0
6.6
18.6
40.4
12.0
14.1
14.6

356
Here again we have a gradual rise in the excess of current-cost
over income-tax charges, culminating in this case in a sudden surge to
nearly $40 billion in 1974, with a 1977 level of $15 billion.

III.

ADJUSTMENT OF PROFITS

We are now ready to put the pieces together and adjust profits
as reported for income tax purposes.
Table 3
Adjustment of Reported Profits of Nonfinancial Corporations
(Billions of dollars)
(1)

(2)

(3)

(4)

(5)

(6)

Profits
Before
Tax as
Reported

Income
Tax
Liability

Profits
After
Tax as
Reported

Un d e r ­
statement
of Costs/a

Profits
Before
Tax as
Adj usted

Profits
After
Tax as
Ad just ec

(1) - (4)

(3) - (4)

$ 64.0
68.2
63.7
68.1
61.9
46.8
54.2
67.6
70.9
53.3
72.4
96.8
105.7

$ 36.8
38.7
36.0
34.5
28.6
19.5
24.3
34.1
31.3
10.6
31.6
43.1
48.7

(1) - (2)
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977

$ 64.4
69.5
65.4
71.9
68.4
55.1
63.3
75.9
92.7
102.9
102.3
130.6
141.8

$ 27.2
29.5
27.7
33.6
33.3
27.3
29.9
33.5
39.6
42.7
40.8
53.7
57.0

$ 37.2
40.0
37.7
38.3
35.1
27.8
33.4
42.4
53.1
60.2
61.5
76.9
84.8

$

0.4
1.3
1.7
3.8
6.5
8.3
9.1
8.3
21.8
49.6
29.9
33.8
36.1

a/ The sum of the excesses of current costs over tax costs shown in
Tables 1 and 2.
b/ Since this is a retrospective recomputation of profits, it takes as
given the corporate income taxes actually paid.
If tax liabilities
had been figured on the adjusted pre-tax profits, the after-tax effect
of the adjustment would, of course, have been reduced by the tax sav-“
ing resulting therefrom.
But since they were actually figured on the
reported profits throughout, there were no such tax savings.
Adjusted
after-tax profits are simply adjusted pre-tax profits minus actual
taxes on reported profits.




357
Here is a startling picture. Adjusted after-tax profits started
out in 1965 about even with the reported figure. They wound up in 1977 only
57 percent as large./I
Restatement of
Retained Earnings
An even more startling picture emerges when we subtract dividend
payments from adjusted after-tax profits to derive adjusted retained
earnings.
Table 4
Adjusted Retained Earnings of Nonfinancial Corporations
(Billions of dollars)

(1)
Adjusted
After-Tax
Profits
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977

(2)
Dividend
Payments

(3)
Adjusted
Retained
Earnings

$ 36.8
38.7
36.0
34.5
28.6
19.5
24.3
34.1
31.3
10.6
31.6
43.1
48.7

$ 17.2
18.1
18.9
20.7
20.7
19.9
20.0
21.7
23.9
26.0
29.0
32.4
38.2

$ 19.6
20.6
17.1
13.8
7.9
-0.4
4.3
12.4
7.4
-15.4
2.6
10.7
10.5

1/ It should be acknowledged that there is a slight duplication in combin­
ing the depreciation and inventory adjustments. Practice differs widely
with regard to the treatment of depreciation, some companies charging it
into cost of sales, others treating it as an expense. Overall figures
on the relative prevalence of the two procedures are not available. To
the extent that depreciation is included in the cost of sales, there is
of course some duplication of the separate adjustment for depreciation.
It is not important, however. Even if all depreciation were so charged,
it would make up only 5 or 6 percent of total inventory-consumption
charges, and the maximum duplication would therefore be this percent of
IVA, a relatively insignificant amount. Since the actual duplication
is only a fraction of this, it can safely be disregarded.




358
Over the past eight years adjusted retained earnings have been
almost negligible (averaging about $4 billion a year). Nonfinancial cor­
porations have been distributing nearly all of their adjusted earnings,
their reported savings representing little more than the amount required
to cover the understatement of costs.
Adjusted Profits and Retained
Earnings in Constant Dollars
To make the horror story even worse, the dollar has been shrink­
ing over the interval and it is necessary to adjust for this by stating
the results in constant dollars. We use for this purpose the GNP deflator
(1972 = 100).
Table 5
Adjusted Profits and Retained Earnings of Nonfinancial
Corporations in 1972 Dollars
(Billions of Dollars)
(1)
Adjusted
After-Tax
Profits
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977

(2)
Adjusted
Retained
Earnings

$ 49.5
50.4
45.6
41.8
33.0
21.3
25.3
34.1
29.6
9.1
24.6
32.2
34.5

$ 26.4
26.8
21.6
16.7
9.1
-0.4
4.5
12.4
7.0
-13.3
2.0
8.0
7.4

In constant dollars, the adjusted earnings of 1977 were only
70 percent of 1965. As for retained earnings, the comparison is even more
dismal. Here the 1977 figure was only 30 percent as large.

IV.

EFFECTIVE INCOME TAX RATES ON ADJUSTED PROFITS

Since the income tax liability (federal and state) is computed
on overstated historical-cost profits it is obvious that the effective
rate on profits adjusted for the overstatement is higher than the rate
reported. The following table shows the difference.




359
Table 6
Effective Tax Rates on the Pre-Tax Profits of Nonfinancial
Corporations as Reported and as Adjusted/a

( 1)
On Profits
As Reported
(Percent)

(2)
On Profits
As Adjusted
(Percent)

42.2
42.4
42.4
46.7
48.7
49.5
47.2
44.1
42.7
41.5
39.9
41.1
40.2

42.5
43.3
43.5
49.3
53.8
58.3
55.2
49.6
55.9
80.1
56.4
55.5
53.9

1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977

a / Column (2) of Table 3 as percentage of Columns (1)
.
and (5), respectively.

It is obvious at a glance that effective tax rates on real
profits have moved away from those on reported profits. In 1974 the
rate reached 80 percent. For 1977 it was 54 percent.

V.

WHAT DOES IT MEAN?

It is clear that American business has not yet learned how to
protect itself against inflation. Overall, it has been unable to maintain
normal margins even in the overstated profits of conventional accounting.
In terms of real profits, the shrinkage has been drastic./I
It is difficult in many situations to protect even nominal profit
margins in the face of inflation. The difficulty arises when price-setting
takes place in advance of cost incurment. Under prevailing practice this
is a fairly common phenomenon. There may be long-term fixed-price sales
contracts outstanding; catalogs may be issued only annually or semi-annually;
seasonal merchandise may be priced months in advance of delivery; longcycle production may be quoted before work is started; etc. Unless such

1/ See Corporate Earning Power in the Seventies:
August 1977.




A Disaster, MAPI,

360
advance pricing is based on the costs that will be incurred later (as
distinguished from those prevailing at the time of quotation), even
historical-cost profit margins will be squeezed.
Overall, however, the protection of nominal margins is a minor
problem compared with the protection of real margins. The lead of price
determination over cost incurment varies widely from one industry to
another. In many it is negligible, in some even negative. But the lead
of cost incurment over receipts from sales, though likewise variable, not
only averages far longer, but is almost universal. Correction for both
leads is accomplished by pricing on replacement costs anticipated as of
the time of sale. This is done by basing prices and prospective profit
margins on those costs.
It must be acknowledged of course that such a pricing policy may
be impracticable for an individual company in a market where the competi­
tion is pricing on understated costs. The real remedy lies in the reform
of policy across the board. If all competitors are targeting their prices
on fully stated costs, there is a better chance that they can make them
stick.
Let us add in closing that the present situation is bad not only
for business, but for the nation as a whole. Despite the suspicion and
disfavor that attach to profits in the eyes of many politicians and of a
considerable part of the public, it is vital that they be large enough not
only to motivate the expansion of productive investment, but to finance a
substantial part of it. It is frightening from the public-policy stand­
point that the reinvestment of corporate earnings, realistically measured
has become almost negligible. If this continues it will cost the country
dearly.
Let us add further that the Alice-in-Wonderland accounting of
costs and profits that now passes for orthodoxy is a problem not only for
business management, but for the accounting profession, the regulatory
agencies of the government, and, not least, for the tax authorities. It
is high time for concerted action by all concerned.
It is gratifying in this connection that both the accounting pro­
fession and governments appear at last to be grappling with the problem.
The Securities and Exchange Commission has required large companies to
file supplemental statements on the current-cost inventory and fixed-asset
consumption. There is much activity on the subject among accounting bodies
here and abroad, and in several countries by government commissions.
These are first steps, to be sure, but we may hope that others
will follow. We may hope also, and even more fervently, that the tax
authorities will not be far behind. For the evils of undercosting are
compounded by the present practice of taxing capital consumption as income.
No reform of costing procedures can be more than partially successful so
long as this practice continues./I
1/ See Inflation and the Taxation of Business Income, MAPI, January 1976.




361

MACHINERY AND ALLIED PRODUCTS INSTITUTE

RECENT MAPI STUDIES DEALING WITH CAPITAL FORMATION,
"REAL PROFITS." AND THE IMPACT OF INFLATION
AND RELATED ACCOUNTING AND TAX ISSUES

"Changing Theories of Fiscal Policy," by George Terborgh, April 1978
"The Favorable Impact of Direct Investment Abroad on the U.S. Balance of
Payments: A Bright Spot in An Otherwise Dreary Picture," MAPI
Capital Goods Review No. 108, April 1978
"Inflation and the Taxation of Capital Gains," by George Terborgh,
March 1978
"Federal Anti-Inflation Policy," by George Terborgh, December 1977
"Corporate Earning Power in the Seventies:
Terborgh, August 1977

A Disaster," by George

"Thirty Years of Corporate Fixed Investment," MAPI Capital Goods Review
No. 107, September 1977
"Unwinding the Present Inflation," by George Terborgh, March 1977
"Inflation and Profits," by George Terborgh, MAPI Memorandum G-70 of
January 1974, Revised and Republished in July and December 1974,
April and October 1976, April 1977, and April 1978
"The Sad Story of Corporate Profits," by George Terborgh, March 1976
"The Behavior of Prices, Labor Cost, and Profits in an Inflationary
Economy," MAPI Capital Goods Review No. 106, June 1977
"A Mystery In Federal Profit Reporting," by George Terborgh, May 1976
"Inflation and the Taxation of Business Income," by George Terborgh,
January 1976
"The Case for the Single-Index Correction of Operating Profit," by
George Terborgh, October 1976
"SEC Amends Its Regulations To Require Supplemental Disclosure of
Certain Replacement Cost Data.," MAPI Bulletin 5418, March 26,
1976
"Fixed Investment and Productivity Growth in Major Industrial Countries,
1960-1973," MAPI Capital Goods Review No. 102, February 1976




362
"Corporate Financing of Economic Growth: Some Questions About the Mix
of Internal and External Financing," MAPI Capital Goods Review
No. 101, October 1975
"Corporate Saving and the Capital Shortage," by George Terborgh, MAPI
Capital Goods Review No. 100, September 1975
"Another Part of the Story . . . Capital Formation and Exports," MAPI
Capital Goods Review No. 98, June 1975
"Business Capital Formation— Putting It In Perspective (1925-1970),"
MAPI Capital Goods Review No. 94, December 1973
"Inflows and Outflows Arising From U.S. Direct Investment Abroad,
1960-1975," March 26, 1978
"Capital Formation and Legislative Proposals for Tax Revision,"
March 30, 1976
"The Favorable Impact of Direct Investment Abroad on the U.S. Balance
of Payments: Spending More To Get More," MAPI Capital Goods
Review No. 103, June 1976
"Recent Changes In Capital Equipment Activity— A Puzzling Divergence In
Two Widely Used Measures," MAPI Capital Goods Review No. 104,
October 1976




363

CORPORATE EARNING POWER
IN THE SEVENTIES:

A DISASTER

by
George Terborgh
M API Economic Consultant

August 1977

M a ch in e ry




and

A llie d

P rodu cts

In stitu te

1200 EIGHTEENTH STREET, N.W.
WASHINGTON, D.C., 20036

364
CORPORATE EARNING POWER IN THE SEVENTIES:

A DISASTER

History is not given to sudden discontinuities, but the period
of the seventies to date (1970-77), chosen for this analysis of corporate
earning power, comes as close to one as we are likely to get. Certainly
it is distinctive enough to justify separate treatment, its distinction
being that real profitability has been at a disaster level throughout.
The reference to "real" profitability suggests that there are
unreal or fictitious measures of earnings, and indeed there are. In fact
the most commonly cited profits statistics are of this character. The
reason is simple: they fail to adjust for the effect of inflation on the
accounting of operating costs. Since this failure results in the under­
statement of these costs, the derivative profits are overstated, deceiv­
ing investors, politicians, academicians, and the public alike.
The present study attempts to gauge the magnitude of profit
overstatement in the seventies and, for comparative purposes, over the
preceding postwar period. A word on the line of march. Section I deals
with the effect of inflation on the measurement of costs, and presents
the record of profits before and after adjustment for this effect.
Section II examines adjusted profit margins on both output and equity.
Section III analyzes the failure of management to cope with inflation.
Finally, Section IV considers the implications of this failure.

I.

ADJUSTMENT OF PROFITS FOR INFLATION

The student of corporate earnings is offered these days two
official profits series, both from the same source, the Department of
Commerce. The first, and basic, series is derived (after several adjust­
ments) from income tax data, which are based, with one exception, on
historical costs._A A second series is derived from the first by the
application of the Capital Consumption Adjustment (CCA) and the Inventory
Valuation Adjustment (IVA). These adjustments are the difference between
the estimated replacement cost of the fixed assets and inventory consumed
in production and the costs charged for income tax purposes.
Why the Adjustments?
The reason for the two adjustments is of course inflation.
They are necessary because of the time difference between cost incurment

1/ The exception is the allowance of LIFO inventory accounting to the
extent actually practiced, a method believed to cover currently about
a quarter of corporate inventory. While this is really a deferred
historical-cost system, its immediate impact is broadly equivalent to
true current costing.




365
and cost recovery. If all costs were recovered at the time of incurment,
no adjustment would be required. But it is the nature of business opera­
tions that there is a lag between the two. This lag, which may be re­
ferred to as "cost lead time," varies all over the map, ranging from
years (fixed-assets), to weeks or months (inventories). But whatever
its duration, the effect of inflation is the same: the cost of replacing
the assets consumed in production is higher than the historical-cost
charges for the purpose. The latter provide only a partial replacement
in real terms.
Since there can be no true profit until the assets consumed
have been fully restored (or until full provision for their restoration
has been made), the failure of historical costing to meet this require­
ment results in the overstatement of profits. What gets reported under
this procedure is a mixture of true profits and unrecorded costs. It is
the object of the Commerce adjustments to subtract out the latter./I
Adequacy of the Adjustments
While the two Commerce adjustments are generally acceptable so
far as they go, they are incomplete. For they ignore the lead time of
costs not charged into inventory. We refer to the category usually
accounted as "expense"— selling, promotion, research and development,
interest, rent, royalties, taxes (other than on income), insurance, con­
tributions, general administration, etc. That such costs are important
is sufficiently indicated by the fact that for nonfinancial corporations
as a whole they constitute 25-30 percent of the total. They too have an
average lead time of substantial magnitude, which calls, no less than the
lead time of inventoried costs, for inflation adjustment.
Unfortunately, no one has figured out a practical way to derive
the average cost lead time of expensed items, and we imply no criticism
of Commerce on this score._/2 It is well to remember, however, that its

1/ Since we are using Commerce adjustments in this study, we have stated
the rationale for the specific-replacement-cost approach. It seeks
fixed-asset and inventory consumption charges that will restore the
amounts withdrawn in physical terms. In pursuit of this goal, it em­
ploys a multiplicity of self-duplicative price indexes. Those familiar
with our writings on this subject will realize that we prefer, on both
practical and theoretical grounds, to adjust for cost lead time by the
application of a single index of the general price level. Conceptually,
this calls for capital maintenance in terms of general purchasing
power, rather than in physical quantities. Fortunately for our present
purpose, the overall results of the two approaches are not far differ­
ent. For a discussion of the issue, see The Case for the Single-Index
Correction of Operating Profits, MAPI, October 1976.
2/ The depreciation adjustment is carried out by breaking down depreciable
assets into year-of-origin groups, restating each group at current re­
placement cost, and computing depreciation on the restated amounts. The
cost lead time for inventories is derived from turnover rates. This
measure is of course unavailable for expenses.




366
two adjustments yield a correction that is inadequate by an unknown, but
certainly significant, amount, and that a full correction would yield
adjusted profits even lower than those shown./I
The Results
With these preliminary explanations, we turn to the results of
the Commerce adjustments, which appear below.
CHART 1
Adjusted and Unadjusted After-Tax Profits From the Domestic
Operations of Nonfinancial Corporations, 1947-76/a
(Billions of dollars)

a / Since the adjustments relate to physical-asset consumption only, and
.
since there is relatively little of this in the financial sector, we
shall deal throughout with nonfinancial corporations. The circled dots
show the first quarter of 1977 at seasonally adjusted annual rates.

1/ There is another cause of undercorrection, though of much less impor­
tance, the use by Commerce of full-life straight-line depreciation as
the basis for its inflation adjustment. The straight-line writeoff is
in most applications a grievously retarded measure of capital consump­
tion, the double-declining-balance method being in general more realis­
tic. This is not the place to argue the issue, which we have done
elsewhere. See Realistic Depreciation Policy, MAPI, 1954. For a cor­
rection of profits using double-declining-balance depreciation, see
Inflation and Profits, MAPI, April 1977.




367
An interesting picture. The adjusted profits started out in
1947 at half the unadjusted, after which the two series gradually con­
verged. They then ran along pretty much together until the late sixties,
when accelerating inflation produced a divergence, explosive after 1972.
Since that year, unadjusted profits have risen by more than 70 percent,
while the latest figure for adjusted profits is actually off a little.
The substantial equivalence of the two in the early and middle
sixties reflects in part the relatively low inflation rates of 1958-65,
in part the increase in tax depreciation following the introduction of
the Guideline Life System in 1962. The shortening of tax depreciation
lives by that system, plus the availability of accelerated writeoff
methods, kept tax allowances above the Commerce replacement-cost esti­
mates for several years. The further boost in those allowances through
the Asset Depreciation Range System of 1971 was soon overwhelmed by
accelerating inflation, and by 1976 the CCA had grown to $16 billion./I

II.

ADJUSTED PROFIT MARGINS

Chart 1 shows the absolute amounts of adjusted and unadjusted
profits. To get an informative picture of what has happened to adjusted
profits (with which we shall be exclusively concerned from now on), it is
necessary to convert them into profit margins. Two such margins will be
computed, one on gross product, one on adjusted net worth.
Margins on Gross Product
The first of these calculations appears on page 5.
From 1947-1969, profit margins ranged between 6 and 10 percent,
averaging 7.75. From 1970-76, they ranged between roughly 2 and 5 percent,
with an average of 4.25. By this measure, corporate earning power in this
period was only 55 percent of its prior long-term average, and even in the
most recent year (1976) it was no better than that. In the first quarter
of 1977, it was only 44 percent as large.
Margins on Adjusted Net Worth
Suppose we look next at the second margin calculation, Chart 3
(also on page 5), which relates adjusted profits to adjusted net worth,
that is to say, net worth with tangible assets (land, structures, equip­
ment, and inventory) restated at estimated replacement cost.
The showing here is generally similar to the preceding one.
Against a base-period average return of 5.90 percent, the 1970-76 period
rates only 3.55, this time 60 percent of the base level. Again the 1976
figure is no better than the recent average. Worse still, the first
quarter of 1977 is only 47 percent of base.
1/ It may be added that the CCA for book profits (not computed by Commerce)
was at least $30 billion for that year, the difference reflecting the
excess of tax over book depreciation.




368
CHART 2
Adjusted Domestic After-Tax Profits of Nonfinancial Corporations
as a Percentage of Their Domestic Gross Product/a

a/ It is customary to compute profit margins on sales rather than on gross
product (value added), but the former is a duplicated figure, including
purchases from outside the universe covered (here nonfinancial corpora­
tions) and transfers between enterprises within it. The gross product
avoids distortions from shifts in the relative importance of these pur­
chases and transfers.

CHART 3
Adjusted Domestic After-Tax Profits of Nonfinancial Corporations
as a Percentage of Their Adjusted Domestic Net Worth/a

a. Adjusted net worth is from the flow-of-funds reports (Federal Reserve
/
Board), Balance Sheet of Nonfinancial Corporations, December 1976.
Since the profits are from domestic production only, net worth was
reduced by the excess of claims against foreign affiliates over obli­
gations owed to them. Net worth is the average of opening and closing
amounts. The 1976 and 1977 figures are partly estimated.




369
III.

FAILURE OF MANAGEMENT TO COPE

It is evident that even after a decade of inflation American
management (with some exceptions of course) has not yet learned to cope
with it.
It is difficult in many situations to protect even nominal
(historical-cost) profit margins in the face of inflation. The difficulty
arises when price-setting takes place in advance of cost incurment. Under
prevailing practice this is a fairly common phenomenon. There may be
long-term fixed-price sales contracts outstanding; catalogs may be issued
only annually or semi-annually; seasonal merchandise may be priced months
in advance of delivery; long-cycle production may be quoted before work
is started; etc. Unless such advance pricing is based on the costs that
will be incurred later (as distinguished from those prevailing at the time
of quotation), even historical-cost profit margins will be squeezed.
Overall, however, the protection of nominal margins is a minor
problem compared with the protection of real margins. The lead of price
determination over cost incurment varies widely from one industry to
another. In many it is negligible, in some even negative. But the lead
of cost incurment over sale, though likewise variable, not only averages
far longer, but is almost universal. Correction for both leads is accom­
plished by pricing on replacement costs anticipated as of the time of sale.
This is done by basing prospective profit margins on those costs.
It must be acknowledged, of course, that such a pricing policy
may be impracticable for an individual company in a market where the com­
petition is pricing on historical costs. The real remedy lies in the re­
form of policy across the board. If all competitors are targeting their
prices on replacement costs, there is a better chance that they can make
them stick.
It is probably fair to say that by and large American management
has not even been trying to price on replacement costs. If it had been
there should be by now some reflection of its efforts in the improvement
of real profit margins. As we have seen, there is no such evidence in
the record: real margins so far in the seventies have, if anything,
been drifting downward.
Reasons for Not Trying
A major reason for this failure to try replacement-cost pricing
is ignorance. Many managements— probably most of them in medium-sized
and small companies— simply do not realize the phony character of the
profits they are reporting. If their historical-cost margins fall in
the target range, they think they are doing well, hence see no reason to
alter their pricing policy. There is a second, and much smaller, group
of managements that have been exposed to the gospel of current-cost
pricing but reject it on principle. They still believe that a dollar is
a dollar. Finally, there is a third group that accept the gospel on




370
theoretical grounds, but for practical reasons do not apply it. Obviously
none of these groups contributes to the restoration of real profit
margins.
Among the practical reasons just referred to is the extraordi­
nary difficulty of computing reliable replacement costs for individual
companies, particularly in the case of fixed assets. This was forcefully
illustrated by the results of the replacement-cost calculations mandated
by the Securities and Exchange Commission (SEC) for the 1976 10-K reports
of large corporations. There was the greatest diversity of method and
approach (both left largely to the respondent), and much complaint about
the cost of the operation and the uncertain validity of the results. The
fact is that replacement costing is a headache, and most companies don’t
know how to do it.
The solution, in our opinion, is to give up the specific
replacement-cost approach and correct for cost lead-time by the use of
a single index of changes in the general purchasing power of the dollar.
Not only would this vastly simplify the operation, it would facilitate
the adoption of current costing for income tax purposes, a consummation
devoutly to be wished./I
Effect of Disclosure
Many managements that accept current costing in principle are
averse to the disclosure of current-cost profits in their financial state­
ments. They may have substantial stock positions in their companies and
fear the effect of disclosure on market prices. They may hold stock
options, the value of which could be impaired. They may enjoy bonuses
geared to present profit accounting, and so on. But even apart from self
interest, they may feel that they owe it to outside stockholders to main­
tain this accounting, believing that they too would suffer from the dis­
closure of real profits.
Whether these fears are justified is an open question, long
debated by securities analysts, accountants,and economists, though with
little empirical evidence to go on. Fortunately, such evidence is now
coming to hand. While the SEC forbade the formal restatement of profits
by those participating in its 1976 project, the data on replacement costs
in their 10-K filings and annual reports permit anyone else to do it, and
securities analysts have been busy at it for months. Moreover, tabula­
tions of sample companies have already been published./2
With what result? Notwithstanding a fantastic dispersion in
the ratios of adjusted to unadjusted profits, the stock market response
to the disclosure has been slight to negligible. Either the market has

1/ See Inflation and the Taxation of Business Income, MAPI, January 1976.
2J See, for example, Business Week, The McGraw-Hill Publishing Co.,
June 29, 1977.




371
uncannily discounted the differing quality of reported profits, or it is
relatively indifferent to this factor. In any event, management concern
over the effects of disclosure appears to be exaggerated./I
If the SEC continues to mandate the estimation and reporting of
replacement costs, the question of disclosure will become academic, for
large companies at least. The adjusted earnings will be disclosed whether
they like it or not. For those not subject to the mandate, the answer
is different. If they fear the effect of disclosure on their stock prices,
they can keep their estimated current costs an internal secret used only
for pricing policy. The important thing, with or without disclosure, is
that managements try to price on these costs. In the end, this is the
only way they can cope with inflation.
Governmental Obstacles
Unfortunately, the federal government handicaps this effort by
its adherence to historical costing for income tax purposes./2 Since the
excess of current costs over tax costs is not deductible, it requires
twice as much added revenue to build up current-cost profits as it would
with deductibility. This doubles the difficulty of restoring real margins.
There is a second handicap imposed by the government. We refer
to its propensity to publicize nominal profits and profit margins. While
it uses adjusted pre-tax profits in the GNP accounts, it avoids the pub­
lication of adjusted after-tax prof its . / This means that if American
j3
management did manage to get its real profit margins up to normal levels,
the nominal margins reported in official publications would appear ab­
normally, and embarrassingly, large. Notwithstanding their phony charac­
ter, they would be used by politicians, labor leaders, and others to beat
business over the head. If the government wants corporate management to
cope with inflation, it had better switch to the publication of real
profits.
After this recital of obstacles, it is evident that the
generalization of efforts to price on current costs will be slow in com­
ing. In the meantime American industry can be expected to continue with
abnormally low real profit margins.

\J An earlier tabulation of adjusted and unadjusted profits, this time

by a different method of conversion, showed a comparable dispersion
of results, with little stock market response. See Financial Account­
ing Standards Board, Research Report, May 1977.
2/ Except for the availability of LIFO inventory accounting when taken
bookwise.
3/ See A Mystery in Federal Profit Reporting, MAPI, May 1976. Since this
was written, two minor concessions have been made. Adjusted after­
tax profits now appear in Business Conditions Digest, and in an
inconspicuous addendum to one table on the GNP accounts. Elsewhere
"profits after tax" are unadjusted.

30-454 0 - 7 8 - 2 5




372
IV.

IMPLICATIONS

What if the real earning power of the corporate system continues
at the depressed level that has characterized it so far in the seventies?
The most obvious and certain effect will be a retardation of the growth
and improvement of its productive capacity.
While the capital expenditures of nonfinancial corporations
were well maintained in the early years of the seventies (before 1975)
notwithstanding the low level of their real profits, this was accomplished
by resort to unsustainable financing arrangements. Because the real re­
tained earnings of the system averaged less than $7 billion a year over
the full period 1970-76, and its net new stock issues less than $9 bil­
lion, most of its capital expansion was financed by borrowing, as a re­
sult of which its outstanding debt mounted at an average annual rate of
roughly $60 billion.
This has resulted in a substantial rise in the overall debitequity ratio on the historical-cost balance sheet of the system. While
the ratio has remained fairly stable on its replacement-cost balance
sheet, most credit appraisals (insofar as they turn on asset coverage)
are based on the former. From their standpoint, therefore, creditworthi­
ness has been impaired.
But this is only the tip of the iceberg. Far more important,
as a rule, than the asset coverage of the loan principal is the earnings
coverage of interest requirements. Here the deterioration has been dras­
tic. The decline in the coverage multiple began in the second half of
the sixties, reflecting falling profit margins (Charts 2 and 3), expanded
borrowings, and rising interest rates; it then continued irregularly in
the seventies./I Note the following:
Earnings Coverage of Net Interest Payments,
Nonfinancial Corporations
(Multiples)
1965
1966
1967
1968
1969
1970
1971

11.8/a
10.6
8.7
8.1
6.1
4.0
4.3

1972
1973
1974
1975
1976
1977 (1st q.)

4.8
4.3
3.1
3.4
3.7
3.4

a/ The 1965 figure is only slightly above the average
for the first half of the decade (11.3). Prior to
1960 the multiples were uniformly higher than in
1965.
1/ The coverage multiple is adjusted pre-tax profits plus net interest
payments, divided by these payments.




373
It is obvious that earnings-coverage multiples cannot continue
indefinitely the decline of recent years. By the same token, the expan­
sion of corporate capital cannot be indefinitely sustained by the inordi­
nate borrowing that characterized the period. If the multiples do not
improve, there will be increasing pressure on lenders and borrowers alike
to cut back debt expansion, and with it the financing of new capital for­
mation. To avoid this adverse development, it is vital to lift real cor­
porate earnings from the depressed level prevailing so far in the seven­
ties, and to raise real retained earnings from their even more depressed
level. The higher earnings are necessary to increase the coverage of in­
terest and facilitate further debt expansion; the higher retained earnings
are required to reduce the need for such expansion.
The depressed level of real profits is bad not only for the
corporations affected but for the nation as a whole. Despite the suspi­
cion and disfavor that attach to profits in the eyes of many politicians
and of a considerable part of the public, it is essential that they be
large enough not only to motivate the expansion of investment, but to
finance a substantial part of it. The present level falls short on both
counts.
Would the Normalization of Real
Profits Be Inflationary?
We should like in closing to comment briefly on a common objec­
tion to the restoration of real profit margins; namely, that it would be
inflationary.
It is true, of course, that if nonfinancial corporations were
suddenly to raise their real after-tax margin on gross product from the
average of the seventies, 4.25 percent, to the base-period average of
7.75 percent (Chart 2), it would require an increase of 7 percent in the
average of prices charged for that product. (Since the added revenue
would not be shielded by added deductions, it would require this much to
yield the 3.5 percentage-point increase in the after-tax margin.)
This 7 percent increase is misleading, however. For the added
corporate taxes associated with the normalization of the real margin would
permit an equal relief of personal taxes, either by their reduction or by
the abatement of increases that would otherwise occur. This gain to
personal disposable income would offset half of the price increase, leav­
ing the net impact 3.5 percent.
Moreover, this would be a one-shot, nonrecurrent effect. Once
accomplished, it would give no further impulse to inflation. Real infla­
tion is generated by sustained and continuous forces, such, for example,
as excessive monetary expansion or excessive wage increases, which can go
on year after year.J_l Without such forces, it would quickly come to a halt.
1 / See Unwinding the Present Inflation, MAPI, March 1977.




374
But this is not all. The restoration of real profit margins,
even if attainable, would stretch over a period of years. It is not at
all improbable that the gains in productivity during the transition period
from the investment induced by the restoration would offset most or all
of the price effects that would otherwise occur. In any event, the net
impact on inflation would be small.
Conclusion
It would be pleasant to conclude this essay on an optimistic
note, but we cannot, in honesty, do so. For reasons already set forth,
the prospect for the normalization of real profits and profit margins is
dismal. With the general disinclination of mangement even to try
replacement-cost pricing, and the obdurate refusal of the federal govern­
ment to recognize replacement costing for tax and regulatory purposes,
the cards are stacked against success. Without it, the economy will con­
tinue to fall short of its growth potential, with serious consequences
for production and employment alike. It is a spectacle to make angels
weep.




375

CHANGING THEORIES OF FISCAL POLICY

by
George Terborgh
MAPI Economic Consultant

April 1978

M a ch in e ry




and A llie d

P rodu cts

In stitu te

1200 EIGHTEENTH STREET, N.W.
WASHINGTON, D C., 20036

376
CHANGING THEORIES OF FISCAL POLICY

by
George Terborgh

It is always hazardous to assume that political actions are
guided primarily by theoretical or philosophical principles. These do
have some impact, varying from case to case, but in general the dominant
motivation is political advantage. Certainly this is true of actions in
the field of fiscal policy. Although it is customary for politicians to
rationalize their decisions in this area by reference to prevailing
theory, and to claim conformity thereto, their real motives are usually
more practical.
This does not mean, however, that theory is of no consequence.
Politicians are not immune to the contagion of widely held ideas, and
when an orthodoxy develops on the proper role of fiscal policy they are
likely to believe it themselves. Further— and more important— the fact
that it i£ an orthodoxy can affect the calculus of political advantage.
The public, or at least its more articulate elements, may be critical of
departures from accepted doctrine, thus creating an objective pressure
to reinforce subjective belief. While the conformity of political action
to prevailing doctrine is often loose, and sometimes nonexistent, theory
undoubtedly has some normative influence.
Over the past 50 years there has been a succession of dominant
theories or schools of thought on federal fiscal policy. These are, in
chronological order: (1) annual budget balancing; (2) pump priming;
(3) anti-stagnation budgeting; (4) the stabilizing budget; (5) fiscal
activism; and (6) the present theory (at the moment nameless).
While our principal interest here is in present theory, it will
help to put it in perspective if we review briefly the history of its
predecessors.

I
EARLIER PHILOSOPHIES OF FISCAL POLICY
1.

ANNUAL BUDGET BALANCING

Prior to the mid-thirties, federal budget deficits (except in
time of war) were generally regarded as deplorable, if not downright sin­
ful. Save for this single exception, the conventional wisdom called for
annual balancing regardless of the state of the economy.




377
That this view was bipartisan is demonstrated not only by
President Hoover’s valiant, if vain, struggle to maintain a budget balance
during the great depression, but also by Mr. Roosevelt’ castigation of
s
the unwanted deficits in the campaign of 1932 as a proof of fiscal ir­
responsibility. Notwithstanding their apparent agreement in principle,
however, both presidents were overwhelmed in practice by the exigencies
of the depression. Federal deficits persisted from fiscal 1931 to the
beginning of World War II (after which, of course, they fell under the
wartime exception). For 10 consecutive years the earlier canons of fis­
cal orthodoxy were honored in the breach.

2.

PUMP PRIMING

It is not to be expected that a government will live in selfconfessed sin for 10 years in a row. Repetition dulls the sense of
guilt; rationalizations develop. As Pope put it:
Vice is a monster of so hideous a mien,
As, to be hated, needs but to be seen;
Yet seen too oft, familiar with her face,
We first endure, then pity, then embrace.
The embrace in this case was not long in coming. The first
rationalization of peacetime deficiteering appeared during the economic
expansion of 1933-37 in the form of "pump priming" theory. As its name
implies, this envisaged the depression economy as a dry pump that needed
priming by the stimulus of federal deficits. It was, of course, a basi­
cally optimistic view of the situation, implying a need for only temporary
stimulation. It assumed that once the economic pump "took hold" the in­
herent dynamism of the system would carry it upward to full prosperity.
What was needed was an initial push.
This pleasant dream was shattered by the sharp recession of
1937-38, which interrupted the recovery in midcareer (the unemployment
rate before the decline being still around 13 percent). Apparently the
pump refused to stay primed. But why? It was not long before an explana­
tion was forthcoming in the theories of economic maturity and secular
stagnation unveiled before the Temporary National Economic Committee in *
1939.

3.

ANTI-STAGNATION BUDGETING

In contrast to the cheerful optimism of the pump-priming theo­
rists, the new revelation proclaimed a dismal doctrine indeed. We quote
a thumbnail sketch from an earlier work:
Formerly youthful, vigorous, and expansive— the
theory runs— the American economy has become mature.
The frontier is gone. Population growth is tapering




378
off. Our technology, ever increasing in complexity,
gives less and less room for revolutionary inventions
comparable in impact to the railroad, electric power,
or the automobile in earlier times. The weakening of
these dynamic factors leaves the economy with a dearth
of opportunity for private investment, which is in­
creasingly confined to the mere replacement of exist­
ing capital assets upon retirement. This replacement,
and such limited expansion as remains, can be financed
largely from the depreciation accruals and retained
earnings of business enterprises, hence absorb little
or no personal savings.
Meanwhile these savings accumulate inexorably,
unaffected by the attrition of investment opportunity,
and pile up as idle funds for which there is no outlet
in new physical capital, their accumulation setting in
motion a downward spiral of income and production. The
decline of investment for expansion which characterizes
the mature economy thus precipitates chronic oversaving,
and ushers in an era of secular stagnation and recurring
crises from which there is no escape except through the
intervention of government, which must either tax out
of existence the excess savings that are poisoning the
economy or absorb them itself. In short, the private
economy has become a cripple and can survive only by
reliance on the crutches of government support./I
This, in the view of these stagnationists, was the reason for
the aborted recovery of 1933-37. It was, moreover, a portent of the
future. Save for the redeeming power of government support, they foresaw
only a succession of long and severe depressions, punctuated by brief and
anemic recoveries. The fiscal-policy implications of these doctrines
were painfully clear. Most of the time, the federal government would
have to absorb excess savings with its own deficits. This meant to the
stagnationists both the enlargement of federal expenditures (euphemisti­
cally called "public investment"), and tax reductions if necessary, in
order to provide the necessary absorption.
The golden age of the stagnationists was from 1939 to World
War II. True, they continued their gloomy prognostications throughout
the war, and especially when the great game of postwar forecasting warmed
up, but their following failed to match their frenzy. The climate was
inhospitable. The war had snapped the economy out of the doldrums,
carried production into new high ground, and virtually eliminated unemploy­
ment. It was followed, after a brief reconversion period, by a peacetime
boom. This experience went far to dissipate the depression psychology
that provided so fertile a soil in earlier years. Moreover, by the end

1/ The Bogey of Economic Maturity, MAPI, 1945, pp. 2-3.




379
of the war economists of other persuasion had subjected stagnationist
doctrines to critical analysis./I Buffeted by^these adverse developments,
the cult never regained its prewar position, but instead faded rapidly
into obscurity.

4.

THE STABILIZING BUDGET

The waning of stagnationist philosophy opened the way for other
views on the economic role of federal fiscal policy. While no consensus
emerged, there can be little doubt that the dominant school of thought
until the appearance of "fiscal activism" in the early sixties was the
"stabilizing-budget" concept launched in 1947 by the Committee for
Economic Development./2
The basic idea of the stabilizing budget was to set tax rates
at a level that would yield a "moderate" surplus at high employment (de­
fined as 4 percent unemployment), and then to leave them alone except for
periodic adjustments to maintain this calibration and except for extraor­
dinary emergencies. The object was to balance the budget over the business
cycle. It was not contemplated that the rates would be varied in response
to ordinary cyclical swings in the economy. The contracyclical effect was
to be achieved primarily through the working of the "built-in stabilizers"
and through monetary policy.
In promulgating this concept the CED expressly repudiated the
alternative of "managed compensatory budget policy," described as "the
policy of adjusting tax rates and expenditure programs as often as neces­
sary and to the extent necessary to keep employment and the national in­
come steady at a high level." Such a policy had to be predicated on
business forecasts, a fatal defect in the then-existing state of the
forecasting art. Moreover, frequent changes in tax rates were disturb­
ing to business, and if mistimed might have a destabilizing effect on
the economy./3

5.

FISCAL ACTIVISM

This concept of fiscal policy, sometimes called the "new
economics," came into dominance in the early sixties, under the leader­
ship of Walter Heller, then Chairman of President Kennedy's Council of
Economic Advisers. It is best expounded in the Council's own words:

1/ For example, The Bogey of Economic Maturity, already cited.
2J Taxes and the Budget: A Program for Prosperity in a Free Economy
(Committee for Economic Development, New York, 1947).
3/ We should add that this capsule description of the stabilizing-budget
concept is not offered as a complete account of the CED position on
federal fiscal policy, which had other aspects as well.




380
Built into the Federal fiscal system are several
automatic defenses against recession and inflation.
. . . Tax revenues change proportionally more than
GNP. Furthermore, certain Federal expenditures, such
as unemployment compensation payments, are automati­
cally affected by the state of the economy. . . .
These built-in stabilizers moderate the severity of
cyclical swings. . . . But if the forces causing the
downturn are strong and persistent, they may not suf­
fice to prevent a large and prolonged recession, Fur­
thermore, they are blindly symmetrical in their ef­
fects. When economic activity quickens after a slump,
the rise in Federal revenues begins immediately and
slows the recovery in employment and incomes. For
these reasons, the task of economic stabilization
cannot be left entirely to built-in stabilizers. Dis­
cretionary budget policy, e.g., changes in tax rates
or expenditure programs, is indispensable— sometimes
to reinforce, sometimes to offset, the effects of the
stabilizers.
To be effective, discretionary budget policy should
be flexible. In order to promote economic stability,
the Government should be able to change quickly tax
rates or expenditure programs, and equally able to re­
verse its actions as circumstances change. . . .
If
moderate fiscal action can be taken quickly and can be
speedily reversed when circumstances warrant, the dan­
gers of overstimulating or overrestricting the economy
are much smaller than if fiscal responses are sluggish
and difficult to reverse./I
It should be said .that the "fine-tuning" version of fiscal
activism propounded in 1962 by the Council was never effectively imple­
mented, nor could it have been without bypassing the slow and erratic
procedures of congressional enactment. This was recognized at the outset
by President Kennedy, who introduced in 1962 a proposal authorizing him to
reduce personal income tax rates by 5 percentage points at his discretion,
subject to congressional veto within 30 days. The scheme was so over­
whelmingly rejected by the House Ways and Means Committee that no succeed­
ing President has dared to make a similar request.
It should be said also that the life of activist theory was
comparatively brief. A few years later the Council was backtracking:
In principle, such fluctuations [in private demand]
could be offset by expansionary fiscal and monetary
policies if the course of demand could be perfectly

1/ Economic Report, 1962, pp. 71-72.




381
foreseen. But it can't and nobody is more aware of
that fact of life than the Council of Economic Ad­
visers. We have never claimed or attempted to engage
in the practice known as "fine tuning." I freely
plead guilty to the wish that our predictive tech­
niques and our policy instruments were up to that high
standard, . . . but in the present state of the arts,
the application of fiscal and monetary policy offers
us only limited protection against the impact of
fluctuations in private demand./I

6.

EFFECT OF E A R L I E R THEORIES

It is doubtful if the various fiscal theories that succeeded
each other during the great depression of the thirties had much effect on
actual budget results. As recalled earlier, the Hoover regime ran defi­
cits notwithstanding its devotion to annually balanced budgets. The New
Deal deficits of 1933-1937 were probably little-affected by pump-priming
theory, which served mainly to rationalize what the Administration was
already doing. It is debatable also whether the mature economy doctrines
had any significant impact on the deficits of 1939-40. Here too the role
of theory was largely the rationalization of budgetary actions taken for
other reasons.
To what extent was this true of the postwar stabilizing-budget
doctrines? No one can say with certainty, of course, but there is reason
to believe that their influence was appreciable, and possibly substantial.
In the words of a former CED official, "In key respects the stabilizingbudget policy comes pretty close to explaining the practice of 1947-64.
At least it comes closer than any competing theory of policy. . . .
I
would say that it was followed with many lapses and transgressions."/2
As for fiscal activism, we have already noted that it was never
really implemented. The Council of Economic Advisers favored a stimula­
tive tax cut in the summer of 1962, but the President declined to go
along at that time. When the cut did come, it was for the fiscal year
1964, hardly an example of activism. In January 1967 President Johnson
urged Congress to enact a restrictive tax increase for fiscal 1968 (an
appeal renewed in August and November), only to have it deferred to fiscal
1969. Again, a poor example. Subsequent efforts to gear changes in the
federal budget position to the alleged needs of the economy fared little
better. Any resemblence to the theoretical requirements was largely
coincidental.

1/ Arthur M. Okun (then Chairman, CEA), Issues in Preserving Prosperity,
Economic Club of New York, March 6, 1968, pp. 3-4 (mimeo). The concept
also came in for congressional criticism. See the statement by Wilbur
Mills, then Chairman of the House Ways and Means Committee, The New
Economics, MAPI, 1968, p. 169.
2/ Herbert Stein, then Vice President and Chief Economist (from correspondence).




382
ii

PRESENT THEORY
In our earlier listing of fiscal-policy theories, we left the
present one nameless. This for good reason: it is hard to label. His­
torically, it is a derivative of fiscal-activism theory; it is what re­
mained after the flexible, or fine-tuning, approach was abandoned. Per­
haps it can best be described as a sedated, or tranquilized, version of
that approach.
This is obviously a change in the application of fiscal policy,
not in its basic theory. The latter remains essentially the version pro­
pounded by the early activists. Since there is no difference in principle
between frequent shifts in the federal budget position and once-a-year
changes incorporated in the forthcoming budget (the prevailing pattern
today), it has not been deemed necessary to rework the theory, and com­
paratively little has been done in that direction.
We observed earlier that there is often little relation between
what theory calls for and what actually happens. Certainly it has been
true of this modified version of fiscal activism. Presumably, it has
shared the assumptions and expectations of its predecessor that its appli­
cation would result in an irregular alternation of budget deficits and
surpluses. / L Yet if we were to infer the theory from actual fiscal
J
behavior, we would have to describe it as a theory of continuous deficiteering. The entire decade of the seventies (including 1978 and 1979)
will show an unbroken string of deficits. If the string is extended
through 1982, as now projected, it will complete a period of 22 consecu­
tive years with only one surplus./2
Neo-Stagnationism?
The only one of the earlier fiscal-policy philosophies that
could rationalize such behavior is the theory of secular stagnation.
The stagnationists alone premised the necessity for almost continuous
deficiteering, in keeping, of course, with their views on the chronic
weakness of the private economy and the consequent need for sustained
government support. What we have done over the past couple of decades
is to apply stagnationist policy without espousing the theory that
rationalized it. The theory died a generation ago, and it is safe to say
that few of those responsible for subsequent def iciteering even gave it a
thought. Yet the stagnationists could not have conceived in their wild­
est dreams a more faithful application of their policy prescription.

1/ An assumption shared, you will recall, by the earlier stabilizingbudget school, which contemplated a balance over the business cycle.
2/ Fiscal years, unified budget basis.




383
This is well exemplified by recent developments. We have now
completed three full years of recovery from the recent recession and are
approaching the point where the expansion of the economy, which has aver­
aged 5.5 percent per annum over the interval (in real GNP), should be
tapered down toward a more sustainable rate. Yet the budget for fiscal
1979 (starting October next) calls for a deficit of $60 billion. This
during the fourth and fifth years of recovery. But that is not all.
Deficits (hopefully diminishing) are expected to continue through 1982.
This projection of massive deficits into the advanced stages of
recovery (and beyond) may be attributed by some to the cowardice and irre­
sponsibility of politicians, but it is well to remember that the program
has been vigorously supported by eminent fiscal-policy theorists, their
thesis being, apparently, that the private sector lacks the energy and
vitality to recover in the face of the "fiscal drag" from declining federal
deficits./l^ Having become addicted to the fiscal stimulant during the
recession, in other words, it cannot kick the habit without traumatic
consequences.
In one respect, this implicit stagnationism is more extreme than
the original version. While the proponents of that version premised a
dearth of investment opportunities in the private sector, and distilled
their pessimism therefrom, they never held that recoveries from recessions
required undiminished federal deficits all the way up to (and even into)
the succeeding boom. Yet their current successors, most of whom strongly
reject the idea of inadequate investment opportunities, appear to have
adopted the thesis for the present recovery (through 1979 at least), if
not, indeed, more generally.
Fuzzy Picture
As noted earlier, present fiscal-policy theory is poorly ration­
alized and hard to label. While fiscal behavior during its period of domi­
nance has conformed to the expectations of the stagnationists, the fact
that it has not been motivated by their doctrines leaves us guessing.
What j s the rationale for the continuous deficiteering we have indulged
i
in over the past couple of decades? Or to come down to date, what is the
rationale for running undiminished deficits into the fifth year of recov­
ery? Why is it that the economy cannot do this time what it has repeat­
edly done before: recover in the face of an improving budget posltion?/2
If the private sector has become too weak to overcome "fiscal drag,"
what is the nature of its malady? We are not told.

1/ The "private sector" as used here is really the non-federal sector,
including state and local governments.
2/ It did so in all previous postwar recoveries save the one following
the minor recession of 1969-70, when a sizable deficit persisted
throughout the move.




384
In the absence of answers to such questions, contemporary fiscal
theory remains fuzzy. It would be a great service both to politicians
and to the public if it were more clearly articulated.

Ill
CONCLUSION
As its title indicates, this essay is a quick review of the
fiscal-policy philosophies, or schools of thought, that have successively
attained dominance over the past half century. This is not the place for
a systematic critique of these changing orthodoxies, which we have offered
elsewhere./I We should like, however, to close with a few observations
on deficiteering in general.
It Has Been Oversold
There is a tendency among the proponents of def iciteering to
regard it as a sure-fire panacea for whatever ails the economy. This is
an illusion. We noted earlier that in the great depression of the thirties
there were deficits in 10 consecutive peacetime years. They were, more­
over, relatively large, averaging 2.6 percent of GNP, not far from the
estimated average for fiscal years 1975-79. Yet the period ended with an
unemployment rate of 15 percent. It took World War II to pull the economy
out of the doldrums. Something was wrong with the system that counter­
acted and frustrated the fiscal stimulus. The same must be true of today’s
economy under the massive deficiteering of recent years. If it needs un­
diminished support into the fifth year of recovery, it must have maladies
that do not respond to fiscal medicine.
One possibility rarely considered by fiscal theorists is that
the maladies may be, in part, a side-effect of the medicine itself. Far
from being a panacea, deficiteering can set up countervailing forces that
reduce the overall, or net, stimulus to a fraction of the theoretical im­
pact, and a variable fraction at that. Much depends, for example, on the
way the deficit is financed. If it leads to a more rapid expansion of the
money supply than would otherwise be appropriate, it can inject a stimulus
(at the risk of inflation of course) without countervailing offsets. If,
on the other hand, it is financed from the capital market, it raises in­
terest rates above what they would be in its absence and diverts savings
from other claimants, to the detriment of private capital formation,
especially in interest-sensitive sectors. Moreover, it raises the thresh­
old (required return) for equity commitments. This weakening of the in­
vestment sector of the economy runs counter to the strengthening of the
consumption sector through the deficit and reduces the net stimulative

1/ The New Economics, MAPI, 1968.




385
effect. While the reduction is likely to be small during recession and
the early stages of recovery, it becomes increasingly substantial as the
expansion develops. In the present situation, the deficits projected
for the fourth and fifth years of recovery are likely to yield a low
net-benefit ratio.
We are speaking here of the short-run benefit. Over the long
run, sustained deficiteering can have a negative effect on the economy.
By reducing the amount of savings available to the private sector, and
with it the amount of private investment, it slows the secular growth of
productivity and output to the detriment of all. This can be particularly
serious in the case of the United States, which has one of the lowest
investment-to-GNP ratios in the industrialized world.
Rethinking Needed
We have not mentioned the practical difficulties in applying
current fiscal-policy theory— the inevitable reliance on economic fore­
casting a year or more ahead, the uncertainty as to what the economy would
do in the absence of fiscal stimulation, the equal uncertainty about the
size of the deficit appropriate to the given situation, etc. These and
other application problems can be as important as the theory itself, but
since the latter is our concern here, they are only noted in passing.
One thing can be said with certainty, however: they can bedevil the
implementation even of a correct theory.
As for contemporary fiscal-policy theorizing, it is often sim­
plistic to the point of naivete. Not only has it been oversold to the
public and to politicians; it has been overapplied in practice. If the
economy needs all the fiscal stimulation it is scheduled to get in the
years immediately ahead, something is wrong with it. Whatever the retardative factors— monetary policy, inflation, low real profits, high
interest rates, depressed equity values, low business confidence, over­
regulation, adverse trade balance (the list could be extended)— they
need separate diagnosis and treatment. They cannot be eliminated simply
by running the fiscal pump full blast, particularly when this aggravates
many 'of the maladies it seeks to cure.
We remarked earlier that the exponents of contemporary fiscalpolicy theory would do the public a favor by clarifying it. We may add
that they would do it an even greater favor by rethinking it.




O