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1961
JOINT ECONOMIC REPORT
REPORT
OF THE
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ON THE
JANUARY 1961 ECONOMIC REPORTOF THE PRESIDENT
- WITH
MINORITY AND OTHER VIEWS
Printed for the use of the Joint Economic Committee
U.S. GOVERNMENT PRINTING OFFICE
68180
WASHINGTON: 1961
NM,
I
1c.-
-
JOINT ECONOMIC COMMITTEE
(Created pursuant to see. 5(a) of Public Law 304, 79th Congj
WRIGHT PATMAN, Texas, Chairman
PAUL H. DOUGLAS, Illinois, -Vice Chairman
HOUSE OF REPRESENTATIVES
SENATE
RICHARD BOLLING, Missouri
JOHN SPARKMAN, Alabama
HALE BOGGS, Louisiana
J. W.- FULBRIGHT, Arkansas
HENRY S. REUSS, Wisconsin
WILLIAM PROXMIRE, Wisconsin
MARTHA W. GRIFFITHS, Michigan
CLAIBORNE PELL, Rhode Island
THOMAS B. CURTIS, Missouri
PRESCOTT BUSH, Connecticut
CLARENCE E. KILBURN, New York
JOHN MARSHALL BUTLER, Marylandt
WILLIAM B. WIDNALL, New Jersey
JACOB K. JAVITS, New York
WM. SUMMERS JOHNSON, Ezecutive Director
JOuN W. LEIIMAN, Deputy Executive Director-and Clerk
I
CONTENTS
Foreword--The economic situation and outlookActions for economic recovery and growth---Temporary extension of unemployment compensation
---Aid to education
---Urban renewal
---Social security liberalization
-10
Health program
---Natural resources
-10
Extension of FHA programs
-10
Summary ----Monetary policies
-13
U.S. balance of payments
-21
The Federal budgetFiscal policies
Tax reform and incentives to investment
---Committee recommendations
-37
Monetary policy
Balance of payments
:- --------------------------Fiscal policies and debt management --Local public capital improvements
---Continuing improvenients in meeting national needs
---Retraining and other aids to displaced workers
---Further aids to education
Development of retirement and recreational areas
--More flexible private pension systems
A capital bank for municipal securities
-41
A Federal capital budget
-41
Improving competition
-41
Note by Senator J. W. Fulbright
-41
Committee and subcommittee activities in the past year
--Subcommittee on Automation and Energy Resources
--Subcommittee on Economic Statistics
-44
Subcommittee on Defense Procurement
Staff studies
-45
Staff participation in meetings with outside groups
-Distribution of committee publications -46
Committee and subcommittee plans for the coming year
-47
Full committee
-- -----------------------------------------Subcommittee on Economic Statistics -47
Subcommittee on.Foreign Economic Policy -48
Siibcomimiittee onInternational Exchange and Payments -48
Subcommittee on Inter-American Economic Relationships
Subcommittee on Defense Procurement
-49
Subcommittee on Economic Stabilization, Automation, and Energy
Resources---49
Additional studies
-Individual views of Senator William Proxmire
-51
Minority views
-Individual views of Senator John Marshall Butler
-79
Individual views of Senator Jacob K. Javits
-113
Appendix-Staff memorandum on the relationship of the Federal budget
to unemployment and to economic growth
-119
The GNP framework of the analysis
-119
Characteristics of the present Federal budget structure -The Federal budget at potential output rates
-121
Publications of the Joint Economic Committee
-127
III
Page
1
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9
10
10
10
10
11
25
29
33
.. 37
39
39
39
40
40
40
40
41
43
43
44
46
47
48
49
59
120
IV
CONTENTS
CHARTS
Chart 1. Gross national product, actual and potential, and unemployment
rate -5---------------Chart 2. Rate of unemployment and- long-term bond yield, 1950-61Chart 3. Percent change from 1950 in money supply, rates of deposit
turnover, bond yield, and gross national product, 1950-60 --Chart 4. Yields on 3-month Treasury bills -19
Chart 5. U.S. gold stock, short-term liabilities to and claims on foreigners
Chart 6. Comparative gains in real GNP per capita from the 1950 levels
(1950= 100) Appendix Chart 1. Hypothetical yield of the Federal revenue structure,
first 16 years from enactment, calculated as a percent of potential GNP,
assuming seledted-growth rates of GNP per year-(national-income-andproduct-account basis) ' - -122:
Page
5
14
16
24
36
-
TABLES
Table 1. Interest rates, bond and mortgage yields -15
Table 2. Maturity distribution of U.S. Government securities held by
Federal Reserve banks 'Table 3. Market rates on U.S. Government securities, January-April 1961
'Table 4. Long-term bond yields, 1950-60 -20
Table 5. Money supply, rates of deposit turnover, and gross national
product
Table 6. Estimates of budget totals in the fiscal years 1961 and 1962
Table 7. Trust fund totals for the fiscal years 1961 and 1962 -26
Table 8. Summary of changes in Federal cash budget for fiscal years 1961
anfd 1962 -'Appendix Table 1. Illustrative budgets at potential output, selected years,
1954 to 1965
----------
18
18
20
25
26
120
87TH CONGRESS
18t Session
IOUSE OF REBPRESENTATIVTES
H
REPORT
No.
1961 JOINT ECONOMIC REPORT
MARCH -,
1961.-Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
Mr. PATMAN, from the Joint Economic Committee, submitted the
following
REPORT
with
MINORITY AND OTHER VIEWS
REPORT OF THE JOINT ECONOMIC COMMITTEE ON THE
JANUARY 1961 ECONOMIC REPORT OF THE PRESIDENT
FOREWORD
The Employment Act of 1946 declares it shall be the continuing
policy and responsibility of the Federal Governmentg
* * * to coordinate and utilize all its plans, functions, and
resources * * * to promote maximum employment, production, and purchasing power * *
By way of assuring systematic attention to the national policy
the act requires periodic examination of the state of the economy, of
the plans, policies, and resources of the Federal Government, and a
program for carrying out the national policy. Thus, the President is
required to submit to Congress at least once a year an Economic
Report setting out the levels of employment, production, and purchasing power, foreseeable economic trends, and his program for meeting
the stated objectives of the act. Similarly, the act requires the
Joint Economic Committee to make a continuing study of matters
relating to the Economic Report and, as a guide to the other com*mittees of the Senate and the House, to submit also at least once a
year a report of its findings and recommendations.
1
2
JOINT ECONOMIC REPORT
In drawing up its present report, the committee has had the benefit
the
of an unusually large variety of data and analyses, occasioned byboth
of
programs
and
analyses
that
circumstance
rather infrequent
an outgoing administration and a new administration have been available for considering essentially the same economic setting.
On January 18, President Eisenhower submitted his Economic
Report-a report which was predicated, among other things, on his
proposed budget for fiscal 1962 which had previously been submitted to
Congress on January 16, 1961. Since President Kennedy took office
of
on January 20, the new administration has submitted a number the
in
both
modifications
or
changes
out
economic messages, setting
previous appraisal of the economy and in the programs proposed for
meeting the economic objectives of the Employment Act. These
later changes and modifications result in part from a reevaluation of
the economic outlook presented in the Economic Report of January
18, while other program changes and modifications reflect, quite
naturally, the distinctive policies and emphases of one administration
as contrasted to those of another.
In addition to the Economic Report of January 18, the committee
has had the benefit of President Kennedy's economic message of
February 2, several other Presidential messages on specific economic
topics, and an exhaustive economic statement presented by the new
Council of Economic Advisers. During the past few weeks we have
had testimony not only from the Council of Economic Advisers, but
Board
also from the Secretary of the Treasury, the Chairman of the of
the
of Governors of the Federal Reserve System, the Director
a
and
Defense,
of
Secretary
Bureau of the Budget, the Assistant
number of highly qualified experts from business, farm, labor, and
testiacademic organizations. In addition, in December we heard labor
mony from several academic, Government, business, and
economists on many of the subjects with which we are now concerned.
We now make our report.
THE
ECONOMIC SITUATION AND OUTLOOK
-The 1960-61 recession is, we believe, and hope, at a turning point.
However, of all the expert witnesses we have heard, the most
',optimistic expected that, by the end of the year, 6 to 7 percent of the
labor forice will still be' unemployed and unemployment would not be
,reduced to as low as 4 percent by the end of 1962. These expecta-tions are based, moreover, on the assumption that the' administration's
-legislative program will -be promptly enacted, and that there will be a
'continued substantial increase in expenditures by State and local
:governments.
.Although a moderate rise in production is expected throughout
*the remainder of the year-and beyond-this will hardly do more
--than provide jobs for the normal growth in 'the labor force. -In
-other words, while the economy is expected to-run faster, it will run
.only fast enough to stand still. In fact, the gap between the Nation's
production and its capabilities to produce could widen. -There is no
*doubt that the Nation's capital resources will be greater, and no
doubt that productivity per worker will increase. And, whereas at
last count (March) almost 5 million members of the work force were
totally unemployed (on a seasonally adjusted basis)' and another
:3 million were working on part-time jobs or short workweeks-a 6-to:.7-percent rate of unemployment by the end of the year will mean total
unemployment for 4 to-5 million members of the-work force.
But these figures, based on the official definition of unemployment
-and labor force, substantially understate the. unemployment problem.
'The labor force figures include the self-employed and unpaid members
of their families to the extent of over 10 million. If these individuals
are subtracted from the "labor force" figure of 71 million, then we
find -that the unemployment rate (without seasonal adjustment) 'was
not 7.7 percent as usually-reported, but 9.1 percent. This is indeed
a serious situation.
Experts testifying before the committee in )-ecember and again in
the past 2 months expected an economic recovery during 1961, 'beginning not later than midyear. (Some-analysts -now conclude that
'the low point already has been reached and possibly passed.) These
experts expected recovery to be brought about 'by(1) A continued rise in Federal, State and local government
payments to consumers and business-amounting to $6 to $9
billion per year between the fourth quarters of 1960 and 1961;
(2) A turn around ini business inventory activity-from liquidation at a rate of $3 billion per year in the fourth quarter of
:1960 to accumulation at a rate of $2 to $3 billion per year by the
end of this year;
(3) A rise in business spending for new plant and equipment to
a year-end rate about equal to that at the end of 1960; and
(4) A rise in consumer spending in response to rising' personal
incomes, bolstered by increased unemployment compensation
payments, increased homebuilding activity, and an end to the
exceptionally unfavorable weather of midwinter.
4
JOINT ECONOMIC REPORT
In total, these prospects suggest a recovery, measured by gross
national product, from an annual rate of about $499.5 billion in the
first quarter of the year to about $520 to $530 billion in the fourth
quarter of the year.
The revenue estimates for fiscal 1962 presented by the administration assume an average GNP for calendar 1961 of $510 to $513 billion.
Since the first quarter figure is $499.5 billion, it would be necessary for
GNP to rise to a level between $520 and $530 billion by the fourth
quarter in order for the year to average $510 to $513 billion. This
would be in line with the outlook summarized above.
This would mean a rise in output of only 3 to-5 percentlfrorn'the
fourth quarter 1960 recession level to the fourth quarter 1961 (measured in current prices). In real terms it would more likely mean
an increased output of only 2 to 3 percent, as some rise in the implicit
price deflator for the GNP is generally expected, although the Federal
programs which have been proposed are not a significant factor in this
expectation.
An economic recovery of such magnitude will not wipe out the employment deficits of the past year, nor at best, do more than keep pace
with the Nation's growing labor force.
Recovery from the 1960-61 recession, if there is recovery, emphasizes
a singular and most disturbing fact. Since 1953, each recessioi( has
been followed by less and less complete recovery. Each recovery
period has left a higher percentage of the labor force unemployed than
before, and a wider gap between the Nation's production and its
productive capabilities.
Thus, in the first 9 months of 1953, unemployment never rose to as
much as 3 percent. In the recovery period following the 1953-54
recession, however, unemployment fell to only 4 percent (in the first
half of 1957). Then, following the 1957-58 recession, the rate of
unemployment fell to only 5.2 percent (in the first half of 1960).
From the beginning of the economic downturn in May of last year
to February 1961, industrial production dropped by 7.2 percent;
retail sales by 3.2 percent; and nonagricultural employment by 2.1
percent, all on a seasonally adjusted basis.
Economic losses in the calendar year 1960 alone were staggering.
Had unemployment been maintained at an average rate of, say, 4
percent, instead of the actual rate of 5.6 percent, the gross national
product for the year would have been $30 to $35 billion'more, thanwwas.
actually produced. Similarly, personal disposable (after tax) income
would have been about $14 billion more; business profits would have
been about $12 to $13 billion more, and the Federal, State, and local
governments would have taken in about $13 to $15 billion more in
tax revenues.
The loss of $30 to $35 billion in unused potential last year is equal
to $500 per American household. It is almost twice the amount spent
on public education; about 1 4 times the amount spent on new homes;
or about two-thirds the amount spent on national defense. We
agree with the Council of Economic Advisers that: "Even the world's
most prosperous nation cannot afford to waste resources on this scale."
Nor can the Nation afford the human misery-which attends such wast,.
even if it could afford the economic waste.
5
JOINT ECONOMIC REPORT
Using calculations contained in one of the committee's recent staff
reports,' the Council of Economic Advisers has illustrated in chart
form the amounts of real goods and services lost to the Nation in
the past 8 years through failure to maintain "reasonably full" employment, production, and purchasing power. (See chart 1.) Specifically, 3 ; percent annual growth rate is taken as a conservative
estimate of the Nation's economic growth potential, and a 4-percent
unemployment rate is taken as a "reasonable target for full utilization
of resources consistent with reasonable price stability"-a "target"
which was surpassed in 1951-53 and approached in late 1955 and
early 1956.
As compared to what would have been produced if these "targets"
had obtained during the past 8 years, the Nation's actual production
has involved an average annual loss of $17 billion (in 1960 prices).
But what is of more concern, our production gap has been widening.
Thus, at the level of unemployment prevailing at the end of the
first quarter, 1961, our current production gap is about $50 billion
annually.
On the basis of past and expected trends, what, then, does a projected 2 to 3 percent real increase in GNP between the fourth quarter
of 1960 and the fourth quarter of 1961 portend for employment
prospects in the longer run?
CHART 1
Gross National Product, Actual and Potential,
and Unemployment Rate
BILLIONS OF DOLLARS
600
latio scale)
GROSS NATIONAL PRODUCT
IN 1960 PRICES
1
POTENTIAL '
500
C:>
<
y
1957
1958
'
~ACTUAL_
~o0
1953
1954
1955
1956
1959
1960
1961
1 3!% trend line through middle of 1955.
'Seasonally adjusted annual rates.
NOTE.-A, B, and C represent GNP in 1961 IV assuming unemployment rate of 5%, 6i%, and 8%,
respectively.
Sources: Department of Commerce, Department of Labor, and Codncii of Economic Advisers.
a See "The Potential Economic Growth in the United States," Study Paper No. 20, prepared by lames
w. Knowles in connection with the Study of Employment, Growth, and Price Levels (86th Cong., 2d sess.
1960).
6
JOINT ECONOMIC REPORT
Assuming, for illustrative purposes,. that the excessive -unemployment at present is that which exceeds an unemployment rate of 4
percent, then it is evident that an increase in real output of 2 to a
percent by the fourth quarter of this year will not provide sufficient
employment to absorb the present excess unemployed plus the normal
annual 1f2 to .2 percent increase in the labor force. Furthermore, if
we assume, without good basis, that next year a further increase in
production of 7 to 8 percent is achieved (the maximum rate at which
real output has increased during any postwar recovery period), thetotal increase in output for the 2-year period would be only 6 to 7
percent more than the 2-year growth in the labor force. In the 2
years in which such an increase in production might be achieved,.
however, output per man-hour could be expected to increase by at
least as much as the long-run average 2 percent per year. (In
previous recovery periods output per man-hour has risen two or threetimes as fast.) Furthermore, it must be expected that average hours.
of work per worker would rise-as is always the case when the economyis in a period of recovery.
In summary, if the most optimistic estimates we have heard are
realized, more than 6 percent of the labor force will be unemployed
at the end of this year, and unemployment will not be reduced to a
level as low as 4 percent by the end of 1962.
While large-scale unemployment continues to be in prospect,.
witnesses testifying before the committee have expressed conflicting
views concerning the nature of the unemployment and hence the
policies which are appropriate for reducing unemployment to reasonable levels. These differences of opinion revolve around questions
as to how much of the increasing unemployment of recent years is of a.
"structural" nature-that is, to what extent the skills of the unem-ployed have been rendered obsolete by automation and other technological and market changes-and to what extent the unemployment.
results simply from an insufficiency in overall demand.
Thus Chairman Martin of the Federal Reserve Board has expressed
the view that structural unemployment "is manifest in the higher total
of those left unemployed after each wave of the three most recent
business cycles," and has expressed apprehension that conventional
monetary and fiscal policies, to have an important effect, would have
to be applied in such massive doses "as to create serious new problems.
of inflationary character."
On the other hand, Chairman Heller of the President's Council of
Economic Advisers, has expressed the view that 4-percent unemployment is an adequate estimate to cover both structural and frictional
unemployment and has suggested that a rate of 4 percent is attainable,
with reasonable price stability, though he has not suggested when.
such a target might be adopted.
E
The committee is undertaking -an inquiry to develop information on
the extent to which unemployment is due to frictional and structural
causes, on the one hand, and to inadequate demand on the otherSuch information should be most useful in future assessments of the
problem, as well as in suggesting the extent to which retraining
programs should be undertaken. We do. not, however, recommend
that substantial monetary and fiscal actions be deferred while. this
new study is going forward. On the. contrary, the urgencies of both
our domestic and international responsibilities suggest that an interim
JOINT ECONOMIC
REPORT
7
target of a 4-percent unemployment rate could and should be adopted
now for achievement at some time in the not indefinite future.
We have no doubt about the inherent strength of the American
economy, and we have no doubt about the inherent abilities of the
American people. Our wartime experiences offer spectacular proof
that technicians and workers can be trained to do a wide variety of
new jobs, and in short order. When the underlying demand for goods
and services has been adequate, workers have usually been able to
adjust to the jobs to be done; and business firms have usually found
incentives to invest and, where sufficient competition was present,
to make cost-saving innovations.
We have no doubt, either, that if both monetary and fiscal policies
are properly used the economy can be brought to a rapid recovery
without a substantial increase in the price level. If contrary to our
belief, there are sound reasons why monetary policies cannot now be
adjusted to the requirements of the U.S. economy, then surely additional acceptable activities in the fiscal field can be found for offsetting
the drag of monetary policies, without creating any need for intervention in private price and wage decisions. Already proposals have
been advanced which would offset the drag of present, high interest
rates on home purchases and on investment in new plant and equipment. The weeks ahead surely will produce other good ideas for
compensating for the drag of monetary policies on other sectors of
the economy.
On the other hand, there is no doubt that the advancements in
science and technology which are taking place are increasing the
educational and skill requirements of our people. And there is no
doubt that the Nation's ability to keep abreast of the space age will
depend in very large measure upon its ability to make substantial
advancements in education, mental and physical health, and in
technical training. For these reasons it is essential for the future
that we adopt now such measures as have been proposed for aid to
education and to the distressed areas, and that we turn our attention
to programs for retraining workers whose skills are about to become
obsolete.
Our recommendations for achieving these and our other economic
goals are set out in the final section of this report.
ACTIONS FOR EcoNoMIc RECOVERY AND GROWTH
Imperfect as our national policies for economic stabilization may
be, and imperfect as economic wisdom is for designing and using such
policies, a backward glance will suggest that both our economic
wisdom and policies are vastly improved from times past. As late
as only 30 years ago, the orthodox view held that in times of economic
recession the appropriate action of Government was to slash its own
expenditures and, above all, to balance its budget. Inevitably, such
fiscal policies accentuated recessions in the private economy and at
other times accentuated inflationary booms.
We are pleased that in his budget message of March 24, 1961, the
President has declared as his policy several key principles of modern
economic thought which this committee has frequently endorsednamely, Federal revenue and expenditure levels must meet effectively
and efficiently essential national needs for public programs; the budget,
apart from a new threat to national security, should be set so as to
incur deficits in recessions, to counter declines in private spending, and
to produce surpluses in prosperous years, to curb inflation, reduce the
public debt, and free funds for private investment; and, Federal tax
and expenditure programs should contribute to economic growth and
maximum employment within a setting of reasonable price stability.
Immediately after taking office on January 20, the new administration acted to speed up programs for which obligational authority was
already available, such as Federal highway and post office construction, and other Federal agency procurement and construction
programs.
Executive orders were issued to speed up the return of funds owed
the public. Thus the Veterans' Administration was directed to
advance the payment of $258 million of veterans' life insurance
dividends, and the Treasury was asked to institute a program for
earlier tax-refund payments. The. policy, of deferring part of. the
payments due Department of Defense contractors was suspended.
In addition, several actions were taken, to speed up housing. programs and ease housing credit. The maximum interest rate on
FHA-insured loans was reduced from 53% to 5fi percent, and an
educational campaign was instituted to encourage mortgage lenders.
to reduce their rates. As a step toward possible adoption of monetary policies to lower actual mortgage rates-and indeed all long-term
interest rates-the Federal Reserve announced it would abandon its
"bills only'", or "bills mostly"; policy..
All of these actions.to speed up activity on Federal projects, speed
up the return of funds to the private sector, and-as far as they
go-to lower interest rates, unquestionably are serving to stimulate
the private economy and increase employment.
The principal stimulant which the economy so desperately needs
at this point is, however, to be found in the President's legislative
program. -Of the President's recommendations made up to and
9
10
JOINT ECONOMIC REPORT
through April 20, 1961, the most important in terms of their general
impact on the economy are:
Temporary extension of unemployment compensation.-Extending
up to 13 weeks the period during which the unemployed may draw
benefits will not onlv relieve the hardship of individual families but
contribute importantly to maintaining consumer demand.
Aid to education.-The President's program in this field would give
an immediate and substantial boost to the economy by stimulating
needed school construction and increasing incomes of teachers. But
beyond that, such a program is vital to the Nation's future economic
growth. As we have said before, we believe that the greatest potential
for economic growth lies in the improvenment of our human capital.
Urban renewal.-The President's message calling for a $2.5 billion
4-year commitment for urban renewal, long-term loans for rental and
cooperative housing, slum clearance, expanded insurance and home
improvement loans, public housing for the aged and others, and
additional aid for city planning, community facilities and housing
research, is likewise most heartening. Clearly, the need of our people
for the things envisioned by this program should not be allowed to go
begging while such large percentages of our human and material
resources are going idle.
Social security liberalization.-The President's proposals to increase
minimum social security benefits, to provide for reduced retirement
age of men, and to increase benefits for widows are not only a humane
step toward raising the dignity and level of comfort of our older
people, they also offer an opportunity to obtain a large stimulant to
consumer demand for each dollar transferred.
Health program.-The President's recommended program in this
field would provide a general economic stimulant by increasing construction of hospitals, nursing homes, and stimulating related
activities. It would also increase services in a field where the public
need is manifestly great.
Natural resources.-The President's legislative program calling for
increased aid for waste treatment and air pollution, expansion of the
saline water program, accelerated forest planting and related matters,
would also have generally wholesome economic effects as well as accomplish programs which are much needed.
Extension of FHA programs.-The administration's proposals to
extend the general FHA insurance program to permit a 40-year
maximum mortgage period (instead of the present 30-year maximum),
to remove the downpayment requirement, and to make other changes
to ease housing credit are consistent with the congressional goal,
expressed in 1949, of "a decent home and a suitable living environment
for every American family." The proposed legislation will directly
help the 14 million families who now live in substandard or deteriorating homes. Housing has been a strong countercyclical force in
each previous postwar recession, adding stability to the economy
generally. The proposed program will have a particularly favorable
effect upon employment in the construction industry, which currently
has the highest rate of unemployment in any major industry.
In addition, the administration has acted and made recommendations in other fields to meet national needs which will have important
short- or long-run economic effects. Thus President Kennedy's
Executive order speeding up the Polaris and airlift programs, while
JOINT ECONOMIC REPORT
11
-taken only to step up our defense capability, will inevitably have
:some stimulating effects. The depressed areas bill, while small in
terms of Federal outlays, will assist areas of high structural unemployment along the road to recovery. Legislative programs for
Federal participation in aid to children of unemployed parents will
improve the Nation's human capital.
SUMMARY
All of the administration actions taken to date and all of the
legislative programs which the President has recommended-including
.a substantial increase in defense expenditures-are expected to cost
$1.3 billion in the fiscal year ending next June and $3 billion in fiscal
1962. Total budget deficits in these years are expected to be $2.2
billion in fiscal 1961 and $2.8 billion in fiscal 1962.
It is heartening to note that the revised budget for fiscal 1961
and fiscal 1962 reflects a reordering of the national priorities such as
we have previously recommended. Comprehensive programs for aid
to education, depressed areas, slum clearance, health, and other
activities which promote improvements in our human capital, and
programs for resource development such as we have recommended
in the past, have indeed been recognized in this budget.
Furthermore, we are, as indicated, in hearty agreement with the
principles enunciated in the President's budget message of March 24,
1961. Certainly no dollar should be spent merely as a recessionary
cure. Rather, every dollar spent should be prudently spent for
proper and useful accomplishments. At the same time, however, we
cannot help noting that the total effects of all the actions so far taken
and proposed will be small as compared to the gap between the Nation's
expected economic performance and its economic potential.
We appreciate that the legislative committees of Congress must, in
acting upon the President's program, consider many questions of merit
and public policy which this committee cannot presume to have con:sidered. As to whether our economy can. afford the measures in this
]program, however, we urge that our economy cannot afford to be
denied them, and it cannot afford to have them long delayed. This
program is both proper and needed to help carry out our national
policy of promoting maximum employment, production, and purchasing power""* * * in a manner calculated to foster and promote free
competitive enterprise and the general welfare * *
We urge that as a first step toward restoring economic recovery and
,setting the free enterprise economy on the road to a continuous and
rapid rate of economic growth, the President's program be enacted
promptly.
MONETARY POLICIES
In the post-Korean period, the monetary authorities have followed
a policy of suppressing increases in the money supply-and raising
interest rates-in periods of economic expansion, then adding reserves
to the credit potential of the member banks,.fliius tending to-reduce
interest rates, in periods of recession. While thus varying the level
of interest rates from recession to recovery and back again, however,
monetary policy has also pursued an upward trend in interest rates.
Just as each recession has brought a higher rate of unemployment
than the previous recession, so, too, has each recession witnessed
higher interest rates than the previous recession. Similarly, just as
there has been a larger percentage of the work force unemployed than
in the previous recovery period, so, too, have interest rates been higher
than in the previous recovery period. (See.chart 2.)
Throughout this period, progressive reductions in the effective
money supply have been made, continuing a trend begun at the end of
World War II. Thus, demand bank deposits plus currency in circulation was reduced from 37.4 c'ents per'dollar of GNP in 1952 to' 28.6
cents per dollar of GNP in 1960. Similarly, as the trend of interest
rates has been up, so, too, has there been a steady increase in interest
income. Personal income from interest rose from $12.1 billion in
1952 to $26.8 billion in 1960, an increase of 121.5 percent, or nearly
2fi times the rate at which total personal income increased.
At the conclusion of our Study of Employment, Growth, and Price
Levels last year the committee made a report expressing strong objections to what we believed had been too great a reliance on monetary
policies, to achieve stabilization and growth, and a corresponding
neglect of fiscal policies'. Thiis, amohg~other things, we recommended:
Greater reliance on fiscal policy so that monetary policy.
will not have to carry so much of the burden to achieve any
desired restraint on total money demand. This means that
we should aim for higher budget surpluses during periods of. prosperity and a lower level of interest rates than have been
achieved in recent years.
In recommending. that the Federal Government put heavier reliance
on fiscal' policies-a recommendation we still urge-we Were'-not unaware of the formidable restraints which high interest rates-.place on
economic activity. Most certainly we did not mean to suggest that
monetary policies should be frozen in a posture suitable to a period
of serious overemployment-if suitable ever-during' a period of
acute recession.
On the contrary, in our annual report of last year we repeated our
recommendations for improving monetary practices in the hope that
monetary policies would become more flexible and capable of playing
13
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JOINT ECONOMIC REPORT
a proper role in maintaining stability and growth. Specifically, we
recommended that the Federal Reserve:
(a) abandon its discredited "bills only" policy,
(b) agree to build up its portfolio of long-term bonds, and
(c) use open market operations rather than lowering reserve requirements as the means of bringing about the
secular expansion of credit which the Federal Reserve and
the banks desire.
Finally, we recommended that the Federal Reserve permit the money
supply to increase, over the long run, at about the same rate as the
gross national product increases, "allowing for normal velocity."
Throughout the 1960-61 recession, interest rates have been maintained at levels suitable for helping combat overemployment in the
economy. As compared to a Federal Reserve discount rate of 1.5
percent adopted in the 1953-54 recession, and a rate of 1.75 percent
adopted in the 1957-58 recession, the discount rate has been held at
3.0 *percent throughout the present recession. The highest percentage of the labor force unemployed during the 1953-54 recession
was 6.2 percent; in the 1957-58 recession,. 7.5 percent, while in March
of this year 6.9 percent of the labor force was unemployed.
Indeed, even today the "prime" lending rate of the banks, at 4.5
percent, is equal to the highest reached in 1957, when- monetary policies were aimed at checking what was, relatively speaking, a runaway
boom. Bv the same token, market yields on corporate bonds have
continued above the highest peak reached in the 1957 period.
TABLE 1.-Interest rates, bond and mortgage yields '
[Percent per annum]
Cyclical "low"
Cyclical "high"
1953-54 1957-58 1959-61 1953-54 1957-58 1959-61
U.S. Government securities:
3-month bills -2.42
Long-term bonds --Corporate Aaa bonds (Moody's)
-3.42
State and local Aaa bonds (Moody's)
:------------ FHA home mortgages
"Prime" rate --:----------------------------------Discount rateI Adapted
3.19
2. 73
4.87
3.25
2.00
3.66
3.76
4.14
3.45
5.63
4.50
3.50
4.67
4.42
4.61
3.65
6.24
5.00
4.00
0.62
2.45
2.85
1.90
4.56
3.00
1.50
0.64
3.07
3.55
2.64
5.35
3.50
1.75
2.13
3. 75
4.23
2.99
6.00
4.50
3.00
from hearings, p. 348.
Between the fourth quarter of 1959 and the fourth quarter of 1960,
while GNP increased by 3.5 percent, the money supply decreased by
$1 billion. Thus, instead of allowing for normal velocity, the Federal
Reserve has pursued an interest rate policy which helped to push
velocity up to a new high record for the postwar years. (See chart 3.)
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JOINT ECONOMEC REPORT
17
As to our recommendation that the "bills only" (or "bills mostly")
policy be abandoned, we are pleased that the policy has now been
abandoned-to whatever extent it has been abandoned. It might be
noted, however, that our recommendation was based on the experiences
over the decade in which this policy has been pursued-not on the new
balance-of-payments problenm Which now gives added reason for
abandoning this policy. Since changes in interest rates operate chiefly on the level of investment, it is the long-term rate, rather than the short-term rate, which
most directly affects the activities the monetary authorities have
sought to control. These authorities have considered that an increase
in interest rates has little, if any, immediate effect upon consumer
purchases of nondurable goods, although an increase in rates held for
a protracted period manifestly affects consumer demand for all goods,
because of the regressive shifts in consumer purchasing power which
higher rates bring about. Long-term interest rates do, of course,
have both immediate and drastic effects on consumer purchases which
involve long-term financial commitments, such as in the purchase of
a house. Indeed, the administration's recent proposal for stimulating
housing demand, by increasing the FHA mortgage term from 30 to
40 years, and-by removing the downpayment requirement, rests on
the-fact that this will cut the monthly mortgage payment of the
average FHA home buyer by 10 percent. The same result could be
had by reducing the actual mortgage rate from the present 5ki percent
to the 434 percent level which prevailed as late as December 1956.
This, too, would reduce monthly mortgage payments by 10 percent.
The problem which has arisen now-since the unusual run on our
gold reserves in the latter half of last year-is how to reduce long-term
rates, not after short-term rates have come down, but while holding
short-term rates up. On February 20, the Federal Reserve announced
that the Open Market Committee would begin purchasing long-term
Government bonds-thus shifting some of its holdings from short-term
to long-term securities-so as to reduce long-term rates without also
reducing short-term rates.
Accordingly, during the following week, the Open Market Committee began purchasing long- and intermediate-term bonds, seemingly carrying out the announced policy. In this week, there was a
significant drop in the market yields on long-term Government bonds.
For example, yields on bonds of over 10-year maturities dropped from
3.81 percent on February 18 to 3.76.percent on February 25.
When the Federal Reserve's subsequent weekly report was published, however,. it turned out that-it, had-bought a total of only $13
million in bonds-$7-million in the 1- to 5-year maturity range, $6
million in the 5- to 10-year range, and none of longer maturity.
In the next week, the Open Market Committee bought bonds in
more substantial amounts-but these amounts were still inconsequential. Market yields on all maturities rose slightly within the week.
The report for that week revealed to the market that the Federal
Reserve had bought only $81 million of bonds-$77 million in the 1- to
5-year bracket and $4 million in the 5- to 10-year bracket-in pursuit
of the new program of reducing long-term rates.
Between February 22 and April 12, the Federal Reserve's total
increased, holdings of Government bonds amounted to only $500
18
JOINT. ECONOMIC REPORT
million in the over-5-year maturity range, and to only $200 million
in the 1- to 5-year bracket.
TABLE
2.-Maturity distribution of U.S. Government securities held by Federal
Reserve banks
[In millions of dollars]
Total
Date
Jan. 1,1960 -$26,
Jan. 1, 1961-----------27,
Feb. 1,1961 -26,
Feb. 8,1961 -27,061
Feb. 15, 1961 -27,161
Feb. 22, 1961 -26,
Mar. 1, 1961-26,
Mar. 8, 1961-26,
648
384
695
701
667
920
$1,470
1,440
1,410
1,450
1,450
1,456
1, 460
1, 495
Total
Date
Over 5
years
Mar. 15, 1961 -27,014
Mar. 22, 1961----------26, 719
688
Mar 29, 1961 -26,
Apr. 5, 1961 -27,127
Apr. 12, 1961 -26,809
Apr. 19, 1961
Apr. 26, 1961-
Over 5
years
1,513
1,1513
1, 5122
1,914
1,956.
-
Source: Board of Governors, Federal Reserve System.
Meanwhile market yields on the 10-year bonds had risen again..
On April 8, for example, the yield was above the yield which had
prevailed on February 18, before the new program was announced
In this same 7-week period, market yields on 3- to 5-year issues had
been reduced from 3.56 to only 3.45, while the yield on 91-day
Treasury bills had increased from 2.462 percent to 2.470 percent.
TABLE
3.-Market rates on U.S. Government securities, January-April 1961
[Per annum basis]
Week
ending-
3-month
bills (rate
on new
issues)
3- to 5-year
issues
Long term
(10 years
or more)
Jan. 7
Jan. 14
Jan. 21Jan. 28
Feb. 4
Feb. 11
Feb. 18.----
Percent
2.234
2 385
2.358
2.230
2.299
2.374
2.462
Percent
3.39
3.52
3.59
3.57
3.57
3.56
3.56
Percent
3.84
3.90
3.92
3.89
3.88
3.84
3.81
Week
ending-
3-month
(bills rate
on new
issues)
3- to 5-year
issues
Feb. 25 -Mar. 4
Mar. 11..Mar. 18 ---Mar. 25
Apr. 1
Apr. 8 .
Percent
2.496
2.594
2.485
2.352
2.278
2.392
2.470
Percent
3.48
3.49
3.36
3.44
3.45
3.43
3.45
Long term
(10 years
or more)
Percent
3.76
3.77
3.75
3.78
3.80
3.81
3. 82
Source: Federal Reserve Board.
Recent sharp declines in European short-term interest rates, as
well as the recent improvement in the U.S. balance of payments,
would strongly suggest that Federal Reserve actions might have been
taken to bring about a substantial reduction in rates in all ranges
during recent weeks, and most especially in long-term rates.
Yet long-term rates are substantially where they were at the beginning
of the year, while short-term rates have been substantially increased.
- On March 7, Chairman Martin gave the committee a supplemental
statement
saying that
`* * * the Federal Reserve is currently
following a monetary policy aimed at combating unemployment
arising from contraction of overall demand." Yet, as we have pointed
out, it is difficult to distinguish between the results of the policies
being followed today and those followed in the past for the thenannounced purpose of combating an overabundance of overall demand.
JOINT ECONOMIC REPORT
19
CHART 4
Yields on 3-Month Treasury Bills
Per Cent
Selected Countries
Per Cent
6
6
4
4
2
2
0
1958
[L
1959
1960
1961
0
Monthly Averages of Weekly Figures
Latest data plotted: March
12 End of Month Figures on 60-90 Day Treasury Bills
Latest data plotted: March preliminary
t
Monthly Averages of Daily Figures
Latest data plotted: March preliminary
Source: Prepared by Research Department, Federal Reserve Bank of St. Louis.
The new policy of trying to reduce long-term rates without causing
short-term rates to decrease is admittedly experimental. We cannot
say what part the failure of this policy may be due to technical difficulties, what part is due to the Federal Reserve's belief that the
unemployment is a "structural" matter, rather than a result of
insufficient demand, and what part is due to its long' established
pursuit of an ascending level of interest rates.
We appreciate that international balance-of-payments position
may indeed restrict somewhat the Federal Reserve's freedom to reduce
interest rates as low as would be appropriate for recession in the
domestic economy. However, it is manifest.that the purchase of
long-term bonds, for the purpose of reducing long-term interest rates,.
has been pursued with something considerably less than vigor.
We strongly urge that the Federal Reserve reduce long-term interestl
rates promptly and substantially. This can be done most effectively
20
JOINT ECONOMIC REPORT
by (a) supplying the banks with adequate reserves and (b) engaging
in rather substantial open-market operations in long-term securities.
More specific recommendations on this matter are set out in the
final section of this report, where we also repeat our recommendations
of last year with renewed emphasis.
TABLE
4.-Long-term bond yields, 1950-60
Change from 1950
(1950=100)
Annual average yield
(percent per annum)
Year
U.S.
Government I
1950-2.32
1951 -2.
1952-2.68
1953 -2.
1954-2.55
1955---------1956---------1957-3.47
1958-3.43
199-4.08
-------1960 -
57
94
2.84
3.08
4.02
State
and local
high 2
grade
1.98
2.00
2. 19
2.72
2.37
2.53
2.93
3.60
3. 56
3.95
3.73
U.S.
Govern-
Corporate 3
Aaa
2.62
2.86
2.96
3. 20
2.90
3.06
3. 36
3.89
3.79
4.38
4.41
Baa
3. 24
3.41
3.52
3. 74
3.51
3. 53
3.88
4. 71
4. 73
5. 05
5.19
ment
100.0
110.8
115.5
126. 7
109.9
122.4
132.8
149. 6
147.8
175.9
173.3
State
and local
high
grade
100.0
101.0
110.6
137.4
119.7
127.8
148.0
181.8
179.8
199.5
188.4
Corporate
Aaa
Baa
100.0
105. 2
108.6
115.4
108.3
109.0
119.8
145.4
146.0
155.9
160.2
100.0
109.2
113.0
122.1
110.7
116.8
128.2
148. 5
144. 7
167.2
168.3
' Taxable, due or callable after 10 years (prior to 1953-12-15 years).
'Standard and Poors.
' Moodys Investors Service.
Source: Economic Report, p. 177.
TABLE 5.-Money supply, rates of deposit turnover, and gross national product
Change from 1910 (1950=100.0)
Year
Money
supply
(billions
of dollars) I
Annual
rate of
deposit
turnover 2
Gross
national
product
(billions
of dollars)
Long-
term
bond
yield
(corporate
Aaa) '
Money
supply
Annual
rate of
deposit
turnover
Gross
national
product
100.0
107.0
107.0
109.9
111.6
118.6
126. 7
1,33.7
133.1
142.4
149.4
100.0
115.6
121.9
128.4
127.6
139.7
147.3
155.6
156.1
169.4
176.8
Longterm
bond
yield
(corporate
Aaa) '
Percent
1950---------1951 --------1952 1953 ----------1954 1955 1956 1957--------1958-140.8
1959-141.5
1960 --------------
115.3
122.0
126.5
128.1
131.8
134.6
136.5
135.5
140.4
17.2
18.4
18.4
18.9
19.2
20.4
21. 8
23.0
22.9
24.5
25:7
284.6
329.0
347.0.
365.4
363.1
397.5
419.2
442.8
444.2
482.1
503.2
2.62
2. 86
2.96
3.20
2.90
3.06
3.36
3.89
3. 79
4.38
4.41
100.0
105.8
109.7
111.1
114.3
116.7
118.4
117.5
122.1
122. 7
121.8
100.0
109.2
113.0
122.1
110.7
116.8
128.2
.148.5
144. 7
167.2
168.3
' Seasonally adjusted currency outside banks plus demand deposits at all commercial banks, December
each year.
2 Annual rate of turnover of demand deposits except interbank and U.S. Government deposits in 337
reporting centers exclusive of New York, Boston, Philadelphia, Chicago, Detroit, San Francisco, and Los
Angeles.
Average for year.
Source: Federal Reserve Bulletin.
U.S.
BALANCE OF PAYMENTS
From 1951 through 1957, the United States had an average balance
of payments deficit of about $1 billion annually, but these deficits
neither reduced U.S. gold reserves nor seemed to raise any questions
abo'it the soundunes, qf tlie dollar as.?air'mrtional curre y.In
fact, U.S. gold holdings rose slightly-.fromL
28..t&:$22nbiIliobetween the end of 1950 and the end of 1957, while foreign official and
private holders increased their dollar holdings in the same period from
$8.4 to about $15 billion.
In 1958 and 1959, due in substantial part to a decline in exports
coincident with a rise in imports, the U.S. payments deficit rose to
$3.5 and $3.8 billion, respectively. As a result, there was a gold
outflow in these years of $2.3 billion in 1958 and $730 million in 1959.
During the first half of 1960, a strong recovery in U.S. exports
reduced the U.S. payments -deficit to an annual rate of about $2.5
billion. The gold outflow, was reduced 'to -a trick]e.
U.S. rmerchandise -expotri s' timulath&-by"' bo;oming- coiditions in
Europe, continued to expand in the second half of 1960, to a nearrecord annual level of $20 billion. Imports, on the other hand, declined, with the result that the U.S. surplus on merchandise account
rose to more than $6 billion by the end of the year 1960. During the
year as a whole, receipts for exports of goods and services exceeded
payments for imports, including military expenditures abroad, by
$3.8 billion, compared with a small deficit for the same items-in 1959.
Nevertheless, the overall deficit in the last two quarters of 1960
rose to an annual rate of almost $6 billion. Nearly all of the $1.7
billion gold outflow for the year took place in these months. Except
for a single long-term investment transaction of $370 million which
occurred toward the end of the year, the increase in the deficit was
largely attributable to the flow, abroad of short-term funds. For the
year 1960, the payments deficit totaled $3.8 billion,- whereas the basic
deficit is estimated to be not more than $1.5 billion.
The spurt in U.S. short-term investments seems to have had its
main source- in spbculati-ve activities awl-; in-differ
&9s:between ,eco
nomic conditions in the United States and those in Western Europe
and Japan. Further, relatively high interest rates prevailing in some
Western European countries induced transfers of funds. With the
reestablishment of convertibility, international movements of shortterm funds became more sensitive to interest rate differentials and an
active market for dollars deposited in Europe (the so-called Eurodollars) developed and attracted U.S. funds in search of returns higher
than those available in the United States. At the same time, lower
rates here than those prevailing abroad encouraged foreign official
and other borrowers to borrow here. There were added to this
outflow of funds large speculative movements of "hot money," going
principally-to-Germany; Switzerland,'and the United Kingdom. Some
of these funds were used to bid up the price of gold .a European gold
markets, for a brief period, to more than $40 per ounce. Further
21
322
JOINT ECONOMIC REPORT
:speculation occurred when it appeared likely that long-term interest
rates in Germany and the United Kingdom would be reduced, with an
accompanying rise in capital values of securities.
A main problem facing the United States is that of achieving a longrun equilibrium in our balance of payments within a framework of
growing international trade and investment. -A part of this problem
can be met by unilateral action, while other.aspects require the action
-or cooperation of other countries, particularly those whose surpluses
are the counterpart of our deficits.
Promising steps of both kinds have been taken. The President,
in his balance of payments message of February 6, 1961, declared that
.all the resources available to the U.S. Government would be used in
maintaining the integrity of the dollar. He ruled out restrictionist
measures as unnecessary and unwise, and outlined a program which
-places primary emphasis on expanding :exports through vigorous
export promotion by American businessmen, assisted by increased
Government services to exporters, export credit insurance to U.S.
business firms, and a new tourist program. The requirement that
foreign aid'funds be spent primarily in the United States was retained
as a temporary measure, and a reduction in the duty-free U.S. tourist
allowance has been proposed.
Short-term interest rates have been maintained at levels higher
than would otherwise have been typical for a recession period. An
order banning private gold holdings abroad by U.S. citizens was
continued.' Meanwhile, Germany has agreed -to increase its foreign
aid and undertake other actions which will help alleviate our balance
of payments problems. Both the German and Dutch Governments
have revalued their currencies upward by approximately 5 percent,
a step which will make prices of U.S. goods more competitive in world
markets. Furthermore, substantial reductions in short-term interest
rates have been made throughout Western Europe. The combined
effect of these actions is yet to be determined, but they do not appear
adequate.
An important area which has had insufficient attention is the need
for substantial unilateral tariff reductions by the two European
preferential trading areas, the Common Market and the EFTA.
Such reductions in tariffs and increases in quotas (or better, their
removal) are essential to offset the inherent discrimination against
outside trade, including that of the United States, as internal tariffs
and restrictions of the two areas are reduced. In addition, the Common Market external tariff will result in substantial tariff increases
for a significant portion of U.S. exports and, unless adjustments are
made, U.S. industrial and agricultural exports may be reduced and
undue incentives given for U.S. firms to establish subsidiary plants
within the trading area.
U.S. capital investment abroad, particularly in underdeveloped
areas, serves national purposes even though it may temporarily add
to total U.S. payments. However, U.S. tax laws should not give an
undue incentive to American firms to set up subsidiaries in industrialized areas, such as the Common Market. Such subsidiaries may
then cut into export markets for our domestic producers and ship into
this country goods formerly made in American factories by American
labor. The committee favors the recommendations of the President's
tax message with respect to taxation -of earnings abroad of U.S.
JOIT ECONOMIC REPORT
23
.subsidiaries which are not repatriated. Further, we believe that
consideration should be given by the industrialized countries, possibly
in the OECD, to a code of fair practices which would prevent the
luring of industry by tax or loan incentives, where this would cause
unemployment in the country of origin. The anti-pirating provision
*of the distressed areas legislation before the Congress offers a possible
analogy.:Another problem, the inadequacy of present international monetary
arrangements anchored on the.dollar, presents a danger not only of
potential drains. on -U.S. gold reserves, but a danger to the- entire
system of- international reserves and payments which is---based in
large part on an expansion of U.S. dollar liabilities to the rest of the
world. The events of 1960 illustrate what can happen if holders of
dollar balances should elect to make large-scale conversions of dollars
into gold,..even while the U.S.' balance of payments situation was
steadily -improving.
While it is essential that hasty unilateral action. by the United
States, and makeshift, multilateral adjustments be avoided, in
striving -to achieve a balance in our payments relations--with- other
countries, it is equally essential that confidence be maintained in' the
dollar as the key international currency.
This committee has newly established a Subcommitteeon International Exchange and Payments to study all of'the essential aspects
of the world payments problem.
24
JOINT ECONOMIC REPORT
CHART 5
U. S. Gold Stock, Short-Term Liabilities to
and Claims on Foreigners
Billions of Dollars
Ratio Scale
30
,
Billions of Dollars
.31
Total Gold Stock*
12A
v
?A
Z~
_ Short-Term Liabilities
to Foreigners
_
10
10 He
I
'! ~
~
>
5
5
2
1
.. _
1957
1958
_I
1959
1960
*Includes Gold in Exchange Stabilization Fund
Latest data plottedt Gold Stock, March estimated
Free Gold. February
Claims & Liabilities, January
Source: Prepared by Research Department, Federal Reserve Bank of St. Louis.
,
1
1961
THE FEDERAL BUDGET
The Federal Government now (April) expects to incur budget
deficits of approximately $2.2 billion and $2.8 billion in the fiscal
-years 1961 and 1962. The previous estimates submitted by.President
Eisenhower in January 1961 had anticipated surpluses of $7 'million
-and $1.5 billion for-th tV/&ficqal years. About half of the difference'
-in the :two sets of- budget 'Ikures,'iilts frdnic'nekes sary revisions in
E6stimates of expected revenues and expenditures under existing programs. In addition, some expenditures have been accelerated and
;some new expenditures have been proposed.
The changes in anticipated total revenues reflect both newer
information from tax returns now being filed and changes in economic
projections. For the fiscal year 1962, revenues would be lowered by
:$1.8 billion if no changes were made in the expenditure programs
proposed by President Eisenhower. However, with the changes in
.expenditures proposed by the Kennedy administration, improved
.economic activity is expected to raise revenue by $900 million from
,thf6lower! estimate.
'Revisions in estimates for existing prograins for the fiscal year
-1961 include $560 million more I'or the Department of Defense,
:$140 million to the Post Office Department in lieu of postal rate
increases, $423 million less for farm price supports, and several
smaller changes. In the fiscal year 1962, the revised estimate includes
$235 million more.for. present defense programs, $249 million addi-tional fof farm -price-supports; $100i-million more for interest on the
-public dew, antim
nmu'biber of small :rcductions.
TABLE 6.-Estimates of budget totals in the fiscal years 1961 and 1962
[In millions]
Revenues
Fiscal year J1961:
January 1960 estimate
Reestimate for previously existing programs--: :
New
and speedup of previously existing
~rogrlegams,
. _gra;_s_ _:.
.
.
Surplus or
- deficit (-)
$;79024
-2C00
$78, 945
401-
524
80,693
-2, 169
82, 333
,800
80,865
417
1,468
.
.
Fiscal year 1962:
January 1960 estimate :
Reest=mate for previously existing programs
New programs and speedup of previously existing programs-,
$79
.
Current'istimates -78,
Current estimates -81,433
Expendi.
tures
--
900
2 977.
84,259
-2,826
Administrative actions and new programs which have been recommended include, in fiscal 1961, added defense outlays of $239 million,
additional advances from general revenues to unemployment trust
funds of $588 million,
.epandedCommodity Credit Corporation
:activities amounting to .$225 million, and several smaller items.
25
26
JOINT ECONOMIC REPORT
In fiscal 1962, the new proposed outlays include expansion and.
acceleration of defense outlays of $655 million, aid to elementary and
secondary schools of $500 million, an additional $478 million foragricultural programs, $214 million for housing assistance, and a.
.
..
number of smaller items.
In order to measure fully the fiscaldimpn'ct of the Federal Government on the economy, trust fund receipts.and outlays should be added
to the conventional budget figures. Current e ntim~ates of trust fund
receipts in each of the two fiscal year's 19161 and 1962 are higher than the.
and
January 1961 estimates:because 6f' new administrative acti6fio
administration,
Kenfiedy
the'
by.
recommended
changes
program
The principal change is the estimnated receipt fromg-eneral funids of
$564 million in fiscal 1961 and $446 million in fiscal i962 for expansionr
of temporary unemployment compensation. Trust fund expenditures
are also niow expected to be higher than the January estimates because
of changes made .by the new administration. The major item is the
estimated increase in temporary unemployment. conipensation pay-ments of $509 million in fiscal 1961 and $453 'million' in fiscal 1962.
TABLE
7.-Trust fund totals for theJfiscal years 1961 and 1962
[In millions]
Receipts
Fiscal year 1961:
January 1961 estimates -$24,
Reestimate for existing programs
Acceleration and new programs -
ExpeAditureg:
$24, 102:
431
877
239
---
587
24,154
Current estimates -24,826
Fiscal year 1962:
January 1961 estimatesAcceleration and new programs-Current estimates--
25,189
480
.25,155
1, 528
25,669
26;683:
The net result of all these changes in estimated receipts friom thei
public and estimated payments to the public is shown in table 8.
TABLE
8.-Summary of changes in Federal cash budget for fiscal years 1961 and
1962 1
[In millions]
Fiscal 1961
Total receipts from public:
January 1961 estimate
Present estimate -----------Change-501
--
$99, 005
58,504
_-9--------------
-------------------------------
931.
10,2
101,832
106,-330
------------------------------------------------ 1,606
4,495
.
1,074
-1,033
I
1'31.3
L-4, 029
.
.
*-Net surplus or'deficit (-):
January1961 estimate Present estimate-----------------------------Chang'e --
$103,145
102,301
844
-----
Total payments to public:9731
January 1961 estimate -97,
-----Present estimate-Change -
Fiscal 1962
----------------------------------------- -
.
2,10342
* I These figures have been adjusted to take account of intragovernmental transactiofns; seigniorage, excess
of interest accounts over payments, etc.
JOINT ECONOMIC REPORT
27
The automatic adjustments probably have had more significant.
economic effects than deliberate countercyclical fiscal policies. As.
personal and corporate incomes fall, taxes on these incomes fall more
than proportionately, thereby easing the financial pressures on individuals and businesses. At the same time, Government payments
under certain social security programs, notably unemployment compensation, automatically increase as economic conditions worsen..
The Council of Economic Advisers and others have estimated that.
the built-in flexibility of the present tax structure and social security
programs offsets between 25 and 30 percent of any change in gross
national product. Federal receipts alone are estimated to decline
$3.4 billion for every 1-percent increase in the rate of unemployment.
- FISCAL POLICIES
Several'witnesses expressed concern that the Federal budget has
become too restrictive in recent years. They pointed out that the
budget.now tends' to come into balance at excessively high rates of
unemployment, and to produce too large a surplus even at moderately
full employment-say 4 percent. In recent years the budget has
tendej'to produce smaller. and smaller deficits when unemployment
is serious. To illustrate, in the first quarter of 1958, when unemployment averaged 6.3 percent, the budget showed a deficit of about
$8 billion per year (national income and produce account basis). In
-contrast, by the fourth quarter of 1960 the deficit was only about
$0.6 billion per year while unemployment was about the same, or
6.4 percent.
Several witnesses estimated that in 1960 and 1961 a 4-percent unemployment rate would produce a budget surplus as high as $10 billion
or more. They attributed the recent recession, in part, to this fact
of an overly restrictive budget. The analysis of recovery prospects
suinriarrized earlier in this.report suggests that unemployment is likely
to reain -high throughout 1961 and possibly through 1962. The
recent tendency of the budget to come into balance at higher and
higher rates of unemployment, suggests a growing divergence between
budgetary changes produced automatically by a growing economy and
requirements for full employment and stable economic growth. The
divergence arises because- governmentaI policies serve not. merely the
im'nEii ta.hebi'ectives of Government administration-national defense, regulation and promotion of commerce and trade, etc.-but also
(a) act as automatic stabilizers to counteract fluctuations in economic
activity and (b) stimulate and/or regulate the economic growth of the
Nation as a whole.
Federal fiscal policies make important contributions to economic
stability-the expansionary influence of recession-born deficits partially offsets declines in privately produced incomes; and surpluses in
prosperity,. or inflationary periods, help to curb excessive demand and
mi&ag6ssfle'bt reduction. To -a large-degree this happens automatically through the effects of changes in employment on revenues
and on payments for unemployment compensation. Thus in the
current recession, the budget shifted from a cash surplus of about $6
billion per year in the second quarter of 1960 to a cash deficit of about
$1 to $2 billion per year in the first quarter of 1961.
But the economy not only fluctuates, it also grows. Each year
the labor force increases, the stock of capital rises, and all of our
productive resources become more efficient. At sustained full employment, tlie economy therefore can produce more each year.
Economic growth combined with fiscal policies designed to stabilize
automatically the economy will produce over time, however, a gradual
rise in the ratio of total Federal receipts to the GNP. Reasons for this
are outlined in greater detail in a staff memorandum appearing in
the appendix of this report. As shown there, at a 1-percent rate of
68180-61
29
30
JOINT ECONOMIC REPORT
growth, for example, in 11 years the average ratio of receipts to GNP
would rise by about three-fourths of 1 percent of GNP, or from 17.8
percent to 18.5 percent. At a 5-percent rate of growth, the percentage would rise from 17.8 percent in the beginning year to 20.7 percent
in the 11th year. In terms of the Internal Revenue Code of 1954,
this would mean a time span ending in 1965.
This'rise in.-the average rate of- taxation reflects -the facts that the
Federal revenue structure exempts- a large portion of incomes from
tax and has a marginal -rate of tax. on additions to incomes of 20 to 91
percent for individuals and of 30 -and 52. percent for corporations.
The average-ratio of receipts to GNP-at full employment would have
been about -17.8-percent'at the: time: the -Inteinal -Revenue Code of
-1954 .was enacted.
.
Unless, therefore,. Government expenditure, programs rise faster
than national output grows at full employment, thus. keeping up with
the'growth of revenue, the Federal budget .under present tax legisla.tion will show a.rising.surplus at-full employment. The surplus will
constitute a rapidly rising percentage of GNP. If expenditures were
-kept at a constant percentage of GNP, the- dollar volume of Federal
expenditures would rise faster than any current proposals for the. years
immediately ahead, unless the rate of growth of the economy falls to-or significantly-below-the past 50-year average of 3,percent per year.
Therinescapable conclusion is that to maintain reasonably full employment the -Government, regularly. :miust_ readjust 'its fiscdidl and
monetary. policies to suit. ithe requirements-- of a-growing economy.
Otherwise in each. recovery period, the automa-tic-stabilizer features of
the structure-will start putting the brakes. on expansion, at higher and.
higher rates -of.unemployment, as some witnesses asserted happened
-in 1955-60.2 Similarly,.the:bidget will begin- to offset-declinesjn- enployment..ohly after they- become. unreasonably- seveteii;lI:a'tlt-i6: budget.
will -be balanced at -a -higher rate - of. unemployment in each news recession. .
.;
.:
. ,.
- -- ' .
. . . ;
The Governihent-can make the-necessar.y.adjustments and adaptations in its fiscal programs by (a) periodic downward adjustments. of'
the - average --yield .of, the Federal tax structiire-a procedure. thiscommittee has suggested-.on other occasions,' .(b) .boosting- Federal
-spending programs fast enough-to absorb, the growin'g flow of revenues
-generated by economic growth, or (c) following. some combination- of
-the two.. Whatever form,. or: combination of formsi'ithe!;adjustments
take, it-will be appropriate in. the interest- of economic growth, sound
monetary.policy, and, avoidance of inflation to.consider the need for-budget surpluses -at.'full employment.- Budget. surpluses can.-helpprevent inflation in boom.times and reduce the Federal debt.
. :
Along the first-or expenditure-route of. -adjustment, socially. desirable Government- activities in addition .to tthose already proposed
might be initiated. - Much miore could. be donhe in the areas of flood.
control and water and soil conservation, uirban-renewal, public and
private housing, educational.assistance,, health progrMs,.and other
fields. Expanded activity in any of'thesetareas would not only in-crease employment, and aggregate demand in the .private sector but.
also. contribute to .more rapid ;long-run- growth of our -Nation. -So-long-as resources are available, w.hich can .be employed .in :these acr
tivities, the inflationary dangers. from. these types of increased Gov:ernment expenditures would appear to be slight.
JOINT ECONOMIC REPORT.
31
Action in the second direction, tax reduction, would influence
expansion of production in the private sector of the economy-which
also seems desirable. A tax reduction would be reflected in increased
demand for the goods and services produced in the private sector.
Of course, numerous alternative tax changes might be made to serve
the purpose. One change which would have an immediate effectand probably the most direct effect upon consumer demand-would
be a reduction in the withholding rate on wages and salaries and a
corresponding change in the first bracket rate on individual income.
All taxpayers would be benefited by this type of change and the psychological as well as the economic effects of such a change could multiply
rapidly through the economy.
This committee has recommended in the past that discretionary
countercyclical tax changes should be used either to ease tax burdens
in a recession or to raise tax restraints in an inflationary period. We
again recommend that the Congress examine the possibility of using
such discretionary tax changes. Whatever discretionary action might
be considered to deal with the immediate situation confronting us
this year, we must not lose sight of the longer range problem created
by the tendency of Federal revenues to rise as a percentage of GNP.
It would seem inescapable that consideration be given to a regular,
periodic reassessment of the tax structure-for example, every 5
years.
TAX REFORM AND INCENTIVES TO INVESTMENT
On April 20, the President sent to the Congress a message on
taxation. This message includes recommendations on tax administration, correction of structural defects, tax treatment of foreign
income, and tax incentive for modernization and expansion of private
capital. We have not yet had the time to analyze the message in
detail. Moreover, it is not the function of this committee to assess
the specific form of tax legislation, but to appraise the economic
impact of tax changes.
It should be noted that the President has also directed the Secretary
of the Treasury to prepare a comprehensive tax reform program for
consideration in the next session of the Congress. In the past this
Committee has frequently indicated its support for tax reform. Hence,
we are pleased to see that the administration has made suggestions in
this area and that more recommendations can be expected in the
future.
The present tax recommendations are not intended as countercyclical ineasures. No reduction in total revenues is contemplated;
no direct stimulus to consumption is provided; and no temporary
adjustments are suggested. Hence, the discussion earlier in this report
about the possible need for countercyclical tax changes is not affected
by the current proposals.
The proposals for changes in tax administration are essentially
matters for the tax-writing committees of the Congress. We will
make no comment on these features of the recommendations, except
to point out that improved administration may improve taxpayer
morale and thereby pave the way for more effective tax policy in the
future.
The major structural proposal is probably that for repeal of the
present dividend credit and exclusion. Such a change is supported
primarily on the grounds that dividends represent income to the recipients exactly like any other forms of taxable income. Furthermore,
the present law tends to favor higher income taxpayers. Dividends
are not subject to "double" taxation to the extent the corporation tax
is passed on to the general public by higher prices or other means.
In any case, there are many other instances of "double" taxation,
for example, consumption taxes and income taxes on the same individuals, which are not recognized in our Federal tax structure.
Restrictions on deductions of expense account items, another proposed structural change, will undoubtedly reduce the amount of our
national resources which are now devoted to providing lavish and
elaborate entertainment. Moreover, such restrictions should largely
eliminate the inclusion of personal expenditures as business expenses,
thereby raising both tax revenues and-more importantly-taxpayer
morale. This has been a highly publicized area of tax abuse.
Another proposed structural change involves profits on the sale of
depreciated assets. Under present law, accelerated depreciation
methods permit business taxpayers to reduce rapidly the tax basis of
88
34
JOINT ECONOMIC REPORT
assets by deducting a major portion of an asset's cost against current
income in the early years of the asset's life. If such depreciation
reduces the book value below market value, and the asset is sold,
the profit on the sale is subject only to the capital gains tax, despite
the fact that the depreciation deductions were charged against ordinary taxable incomes. The potential tax advantages of accelerated
depreciation in the early years of an asset's life would be augmented
by the proposed investment tax credit. Therefore, the recommendation is to tax the profits on sales of assets as ordinary income.
The recommended changes in tax treatment of foreign income areintended to obtain greater equity between U.S. investment abroad
and investment in our own economy, as well as between personal income earned abroad and at home. Present law tends to encourage
overseas investment and to favor our citizens who work in foreign
countries. This preferential treatment, it is argued, creates tax inequities and stimulates various tax avoidance devices which artificially
reduce domestic income and increase the amount of income allocated
to foreign subsidiaries. Elimination of the preferential treatment
will presumably provide greater tax equality between domestic firms
operating abroad and those operating only domestically, as well as
greater tax equality among our own citizens. A major advantage
of the proposed changes is that they should improve our balance-ofpayments position by reducing the tax stimulus to foreign investment
and also increasing the amount of foreign income which is returned
to this countrv. No basic change in present law is recommended
for investment and employment in developing economies. The
changes apply only to investment and employment in developed
economies, where there may be less need for a tax stimulus.
The administration has recommended that the increased revenue
from all of the above proposals be offset by granting a tax benefit
to business investment. The principal objective of this tax benefit
is to stimulate modernization and expansion of plant and equipment.
This Committee has frequently indicated the desirability of improving
and increasing our private capital, and we believe that expanded
private investment is an important national objective. At the same
time, however, it is necessary to assess as fully as possible the economic consequences which will stem from the use of the proposed
tax-reduction device.
An increase in investment creates an initial increase in the demand
for workers. To the extent that investment is stimulated by the
proposed change, employment may increase by 500,000 new jobs.
On the other hand, it must be recognized that modernization of
plant and equipment typically involves the substitution of capital
for labor and therefore unemployment. Recognition of this fact
should not lead us to discourage modernization, but it does impose
a responsibility to adopt measures, such as retraining and relocating
aids to assist workers in acquiring new jobs.
Additional investment is desirable because it can raise productivity
and lower costs. If these lower costs are translated into lower prices,
consumers can be benefited and total demand for goods and services
can be expected to increase. However, the principal inducement to
expansion of capital must be the prospect of increased demand for
products which capital produces. It may be that a tax incentive to
a faster rate of investment will have relatively little stimulus to
JOINT EDCONOMIC REPORT
35
investment unless final consumer demand is stimulated. For example, it appeared that consumer demand failed to keep pace with
capacity expansions in the 1955-57 period, as a result of which the
Federal Reserve adopted policies to constrain the investment "boom"
of that period.
It may be that alternative tax reduction to stimulate consumer
demand might, in the long run, do more to induce the desired expansion of capital. In this connection, several witnesses before the
committee have pointed out that a substantial amount of excess
capacity presently exists. . Businesses presumably will have little
incentive to make further investments in added capacity so long as
existing capital is not being fully utilized, or there is no reasonable
expectation that it will be in the near future. In February 1961,
total metal production was equal to only about 55 percent of capacity,
textiles were at 70 percent, and the paper industry at 82 percent.
The McGraw-Hill survey shows general use of manufacturing capacity
at about 77 percent.
It is important to note, however, that modernization and expansion of capital can lower costs and prices of goods sold abroad. The
proposed investment credit could serve to improve our balance-ofpayments position by improving the competitive position of domestic
firms in world markets. Other countries, especially some of those
with whom we are in most vigorous economic competition, now use
tax incentives similar to the one that has been proposed.
In connection with countercyclical policies, the proposal may tend
to accentuate fluctuations in business activity. Investment normally
increases in periods of rapid economic expansion. In these periods,
therefore, the investment tax credit would provide a greater tax
reduction than it would in recessions. These greater tax reductions
would occur precisely when we might wish Government revenues
to rise, in order to offset inflationary pressures. Also, in an expansion period, the Federal Reserve System may adopt a policy
of high interest rates to curb investment, at the same time that the
tax structure is providing the greatest stimulus to investment. This
was a matter of concern to manv observers of the 1956-57 and
1959-60 periods, after -the adoption of accelerated depreciation
methods in 1954. Some economists have urged that, since investment is a relatively volatile section of the economy, the appropriate
tax procedure would be to vary the tax stimulus to investment inversely to changes in business conditions. An example of this
approach would be automatic countercyclical changes in depreciation
rates.
In the longer run, it must be emphasized that investment is an
essential ingredient of economic growth. Increased consumption does
not represent any general increase in our ability to produce goods and
services. Increased investment provides the expansion of capital
which, along with an expanding work force, will allow us to satisfy
our wants more fully in the future. Modernization and expansion
of capital are essential not only to maintain consumption, but also
to keep abreast in military potential. As a number of witnesses before this committee have pointed out, our growth rate-that is our
increase in ability to satisfy all of our wants-has risen at a relatively
low rate in recent years compared to a number of other countries.
36
JOINT ECONOMIC -REPORT
Chart 6 shows this comparison for several European countries, begnning in 1950 after a substantial amount of the postwar recovery
had already occurred.
CHART
6
Source: Federal Reserve Bank of New York, Annual Report 1960.
It is clearly desirable for the Congress to examine a range of alternative tax-reduction proposals at this time. The investment tax
credit is one of these alternatives. All of these alteratives will have
to be assessed in terms of their relative effects, both on the short-run
problems of moving the economy out of the present recession and
stimulating long-run growth.
COMMITTEE RECOMMENDATIONS
The Nation's responsibilities both at home and in the world setting
call for vigorous action to begin promptly closing the gap between
our economic performance and our great economic potential. Indeed, the Nation's future in the space age may well depend upon the
wisdom and vigor with which we act to achieve full economic recovery and a high rate of economic growth.
Moreover, we point out that our economic gap is cumulativewhat we failed to do last year and the year before is reflected in the
larger and more stubborn problems confronting us this year, and what
we fail to do this year will be reflected in still larger and more stubborn
problems next year.
As a first step toward economic recovery and growth, we recommend
that the President's program as already discussed be promptly enacted.
Further, we add the following:
MONETARY POLICY
The Employment Act's command that all of the plans, functions,
and resources of the Federal Government shall be coordinated and
utilized to achieve the high objectives specified in the act is not a
command to be taken lightly. We would be remiss, furthermore, if
we failed to observe that present coordination of monetary and fiscal
policies appears to be less than could be desired. We hope, therefore,
that the Federal Reserve authorities will find it possible to cooperate
in fuller measure with the administration in trying to achieve substantial increases in employment, production, and purchasing power.
To the extent that this effort is not supported by a lower interest rate
policy, it must necessarily be supported by correspondingly greater
Federal deficits-to achieve, a given degree of improvement in economic activity. This will not only mean increased Federal spending,
but higher interest costs to the taxpayers per unit of Government services obtained. It may also mean activities of a less desirable sort than
would take place if interest rate levels permitted a more rapid rate of
private investment in new, more modern business equipment and in
housing, as well as increased construction of community facilities by
the State and local governments.
In any case, the Nation cannot afford to have the highest policymaking bodies of the Federal Government following conflicting policies, supported though they may be by different assumptions as to
what the economic facts are. The Council of Economic Advisers
may be wrong, as the monetary authorities seem to think, in believing
that substantial improvement in employment, production, and purchasing power can be achieved through conventional monetary and
fiscal policies. We do not think, however, that the Council is wrong;
and we do not think that the policies currently being followed by the
Federal Reserve are appropriate to "combating unemployment arising
from a contraction of overall demand."
87
38
JOINT ECONOMIC REPORT
We recommend, therefore, that for the immediate future the Federal
Reserve authorities pursue monetary policies appropriate to reducing
unemployment to a rate of 4 percent of the labor force, rather than
monetary policies appropriate to eliminating only such unemployment
as these authorities conceive to be "nonstructural."
More specifically, we recommend that the Federal Reserve take the
steps normally taken by central banks to bring down interest rates,
for the purpose of reducing interest rates to the lowest levels that our
international balance-of-payments -position permits, which means,
putting particular pressure on long-term interest. rates. For this.
purpose the Federal Reserye should(1) supply the member banks with adequate reserves to permit
a competitive reduction in interest rates; and '
- (2) make exchanges of securities in the open market, so. as toshift the Federal Reserve's portfolio of some $27 billion of Government securities (now mostly short-term securities) to include
substantially more long-term securities.
These steps will.(a) put downward pressure on interest rates, particularly
long-term interest rates, and thus spur private investment.
in business plant and equipment, stimulate housing, -and
encourage expansion of State and local government improvements;
(b) increase consumer demand by restoring purchasing
power to the low- and middle-income groups;
(c) decrease the staggering carrying charges on the Federal
debt; and
(d) enable the Treasury to lengthen the average maturity
of the debt-even during the period of economic recovery.
*
(3) take simultaneously, a third appropriate step, which is to
lower the Federal Reserve discount rate. It is doubtful that the
discount rate has much, if any, direct influence on other interest
rates. Yet the discount rate is, as it is sometimes called, a "clear
signal," discernible to the financial community, indicating -the
direction which current monetary policies intend interest rates
to take. Accordingly, the discount rate should promptly give a
"clear signal" that the Federal Reserve authorities are returning
to a less stringent money and interest rate policy and hence reduce the upward pressures arising from market expectations that
further increases in interest rates may be in the offing.
In addition to the above recommendations for immediate actions
appropriate to a period of high unemployment, we repeat our previous
recommendations for appropriate continuing practices. The Federal,
Reserve authorities should(4) bring about long-run increases in. the money supply at approximately the same rate at which the gross.national product
increases. This will avoid pushing up interest rates, over the
long run, and, similarly, avoid pushing up the rate of deposit
turnover.
'Mr. Patman adds: Agreed, the Federal Reserve must promptly bring interest rates down and allow
the money supply to increase. However, it should not increase the money-creating potential of the commercial banks in a way which will permit these banks to acquire more Government securities. The Federal Reserve should itself acquire these securities, if for no other reason than that the interest cost to the
taxpayers will be returned to the Federal Treasury, instead of going into bank profits. But, more important, the banks should use the money-creating powers which Congress has delegated to them to help business and consumers in their local communities, which is the only justification for their having these powers.
I believe that the failure of the banks to use the money and credit powers for this purpose is a main cause
of the deterioration of community life in the towns and rural areas, as well as the overcrowding of the cities
and the deterioration of community life there.
JOINT ECONOMIC REPORT
39
(5) purchase Government securities and thus increase bank
reserves as a method of increasing the money supply, rather thia'n
lowering reserve requirements: This will mean that in the future
the private banks'will acquire less Government securities, on
bank-created'money, and that the Federal'Reserve will acquire
correspondingly more, in which case the interest payments will
be returned to the Treasury instead of going into, bank profits:
(6) abandon its discredited "bills only" policy finally, and
without reservation. A policy of conducting open market
operations freely in all maturity ranges of Government securities
would restore to monetary policies needed flexibility and-bence an
effectiveness which has not yet been achieved by what-seems
only a token suspension of the "bills only" policy made in face
of the recent acute, but presumably temporary, balance-ofpayments problem.
BALANCE OF PAYMENTS
1. In order to permit the United States to correct its present basic
payments imbalance and to assure continued expansion of U.S.
exports, we urge that strong and continuing efforts be made to induce
the member countries of the Common Market and the European
Free Trade Area to liberalize import quotas and to reduce their
external tariffs and import taxes on a more-than-reciprocal basis.
2. Improvements are needed in the international mechanisms for
payments and liquidity to accommodate a growing volume of trade
and an increasing range of fluctuations in external payments, and
we urge that improvements be sought.:
3. We recommend elimination of the dollar gold reserve requirement, now equal to 25 percent of Federal Reserve notes and deposits.
This requirement is.irrelevant to both the supply of and the value of
the dollar, and removing the requirement will reenforce the President's
pledge, made in his state of the Union message, that the full strength
of all our reserves stands behind the value of the dollar for use if
needed.
FISCAL POLICIES AND DEBT MANAGEMENT
We recommend that the Treasury:
Review the tax structure with a view to recommending a downward
revision of taxes-not a temporary "tax cut"-and that it make
further periodic reviews for the same purpose, say, every 5 years.
In addition, we repeat our recommendations of last year that the
Treasury(a) take vigorous steps to achieve a broader and more competitive market for Federal securities and work toward the adoption of the auction method of marketing all Federal securities;
and
(b) establish as soon as practicable, a regular, predetermined
schedule for refunding maturing securities.
LOCAL PUBLIC
CAPITAL IMPROVEMENTS
We recommend that legislation be enacted:
To 'provide, for a limited time, for Federal grants on a matching
basis to local communities (other than those with no serious unem-
40
JOINT ECONOMIC REPORT
ployment problem) for immediately needed improvements-such as
police stations, fire stations, streets, parks, water and sewerage
systems. The program should be confined to projects that can be
started quickly, say within 90 days, and finished quickly, say within
12 months. Such a program would help reduce unemployment and
spur local public improvements needed now but postponed, or slowed,
because of limitations on local financial resources.
CONTINUING IMPROVEMENTS
IN
MEETING
NATIONAL NEEDS
We recommend that prompt consideration be given to:
1. Retraining and other aids to displaced workers.-While rapid
technological progress increases the Nation's productive capabilities
and standard of living, it does cause large-scale displacement of
workers whose productive efforts and creative abilities are lost to the
Nation if not trained for the jobs to be done in an advancing society.
Congress and the administration ought to develop immediately a
program for large-scale cooperative efforts for retraining workers,
and where necessary relocating them. We repeat our previous recommendation for(a) A permanent liberalization of unemployment insurance to
replace the present temporary plan;
(b) Coordination of the activities of the State employment
,agencies into an "effective national system in which information
about job opportunities and available workers will be provided
to both employers and workers throughout the country." (1960
Joint Economic Report, p. 19.)
In addition consideration should be given to(c) A new kind of "GI bill" for retraining and education,-not
limited to war veterans, but available to all employees who are,
or are about to be, casualties of the advancing business technology.
(d) Incentives for business firms to establish training schools
to retrain workers who are about to be displaced because of new
business methods and processes. The business firm itself
usually has the best advance knowledge of a change in its production techniques and what its new labor requirements will be.
2. FUrther aids to education.-Alternatives include, for example,
expanded national defense education scholarships, subsidies to institutions of higher learning, and tax deductions to families to reflect
personal educational investments. Education represents one of the
major investments which can be made to provide long-run growth. 2
3. Development of retirement and recreationalareas.-Retired people,
as well as the frequently unemployed, are overcrowding our cities,
largely because of the better social services the municipalities provide,
but also because of restrictions against movement imposed by the
old-age assistance programs. Impossible burdens on the municipalities are building up, pleasant rural areas and small towns offering
lower living costs are being deserted, and older people are frequently
living in not the most suitable city surroundings. Consideration
should be given to a cooperative Federal, State, and local program to
develop retirement and recreation areas in pleasant, uncrowded parts
2 Senator Douglas, Senator Proxmire, Congressman Reuss: We urge great caution in using the tax deduction or tax credit method for financing education or other worthy causes. In general, such deductions
go in large proportion to high-income groups and to those who list deductions rather than to those who
file the short forms. It would be better to close existing loopholes, make the tax system fairer, lower tax
rates, and thus spread the burden for schools and other needs in a more just way.
JOINT ECONOMIC REPORT
41
of the country and to ease the restrictions against migration of older
people.
4. More flexible private pension systems.-Too many workers in the
executive brackets are unable to move to new jobs, or obtain a job
when unemployed, after reaching the age of 40 or 45-by reason of
the restrictive nature of the corporate pension systems. Consideration should be given to removing the tax deduction given for pension
contributions except in those cases where the pension funds are fully
vested. This would increase worker mobility and restore job opportunities to the more mature workers who have lost their jobs.
5. A capital bank for municipal securities.-Despite the tax-exempt
status of securities of the State and local governments, interest costs
on these securities are high and thus restrict the building of needed
community facilities. A Federal agency or bank might be created to
assure an orderly organized market for these securities and thus reduce
the interest burden on State and local governments.
6. A Federalcapital budget.-This long overdue development would
not only permit better management and better public understanding
of the Federal Government's fiscal affairs; it would most likely lead
to actions to take important capital items out of the annual cash
budget and to financing them by private means. A specific matter for
consideration now is a central agency, or bank, to finance capital
equipment now being purchased, and overhauled, by the military
agencies for use by defense contractors.
IMPROVING COMPETITION
Finally, we would like, as a minimum, to see a program for accelerated enforcement of the antitrust laws and budgets for the antitrust
enforcement agencies which are more realistically related to the
magnitude of the tasks these agencies have been given to perform.
We believe that dollars spent on effective antitrust are the least costly
dollars of all, because dollars spent for this purpose will, in the long
run, have the greatest multiplier effect of all in stimulating private
economic activity, promoting self-adjustments in the economy, and
relieving strains on the budgets of Federal, State, and local governments.
The committee adopted a resolution, on March 14, 1961, suggesting
that the President order the publication of all bid lots received by
Federal agencies under the competitive bid procedure, whenever any
two or more of the bidders submit identical bids. The President has
now issued such an order, and we hope that this will be implemented
and made a permanent feature of the Federal Government by enactment of such a bill as H.R. 4570, introduced by the committee chairman. It is believed that public information and publicity concerning
the names of the bidders and other intimate details of the bids, such
as the specific products for which bids are made and the prices asked,
will have a wholesome effect. We understand that a reporting program such as we have suggested is being developed. We will welcome
this, and we will also welcome additional specific proposals for bringing
about more effective competition.
In a related field, we heartily approve the President's appointment
of a labor-management advisory committee, and will welcome the
committee recommendations on price and wage policies that will
combat inflation.
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JOINT ECONOMIC REPORT
We do not underestimate the part which inadequate competition
plays in creating the problems the Nation faces in grappling with the
inflationary bias in our economy and achieving high rates of employment, production, and economic growth. Nor do we underestimate
the fact that private initiative and free, competitive enterprise are
and must continue to be the primary and predominant sources of our
Nation's vitality and strength.
NOTE.-Senator Fulbright, because of the extraordinary press of' other congresqional duties, was unable to participate in the hearings or committee meetings
on this report. For that reason, the findings and conclusions herein set forth are
neither approved nor disapproved by him.
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COMMITTEE AND SUBCOMMITTEE ACTIVITIES IN THE PAST YEAR
The Joint Economic Committee is diricted by the law creating it
-(Public
Law 304,-79th Cong.) to report to the Congress on' the main
recommendations of' the President' Economic Report and to make a
" continuing.study" of the
, economy.
During January and February of 1960 the committee held hearings
and prepared its report on the 1960 Economic Report of the President.
That report, which was transmitted to the Congress on February 29,
announced a number of studies to be undertaken by subcommittees
and by the committee staff during the year. The activities of the
subcommittees' and the conmIittee' staff for the period March 1960April 1961 are sumniarized below. Except for the current hearings
and report on the 1961 Economic Report of the President, the only
*hearings held by the full committee were on December 7 and 8, 1960,
-on the "Current Economic Situation and Short-Run Outlook." Experts from Government, industry, labor and the universities presented
analyses of the various strengths and weaknesses in the economic
situatiohnand short-run outlook at that time.
SUBCOMMITTEE
ON AUTOMATION AND ENERGY RESOURCES
* The Subcommittee on 'Automation and Energy Resources was com-posed of Representative Wright Patman, chairman; Representatives
Henry S. Reuss,. Clarence E. Kilburn, and William B. Widnall; and
Senators Joseph- C. O'Mahoney, John F. Kennedy, and John Marshall
Butler.
In 1955 a Subcommittee on Economic Stabilization heard 35 witnesses on the subject, "Automation and Technological Change," and
in the intervening years similar subcommittees have periodically in-quired into the changing impact of technological change and automation on longrun employment and investment levels. In its 1960
Economic Report (S. Rept. No. 1152, 86th Cong., 2d sess.), the joint
committee 'requested the Subcommittee on Automation and Energy
Resources to bring up to date the information supplied in the 1955
hearings and in the subsequent inquiries. The staff, acting under the
.guidance of the chairman, wrote to the same experts who had testified
at the previous hearings, requesting their views on the problems of
automation and' technological change in the light of developments
during the interim. The statements of these labor leaders, businessmen, and engineering experts were published as a committee print,
"New Views on Automation," in October.
The Subcommittee on Automation and Energy Resources was also
*requested by the joint committee-to continue its studies of energy
resources with an examination of the relationship of Government to
energy resources. In carrying out its assignment, the subcommittee
sent a list of questions to the heads of Federal agencies having regulatory or related responsibilities in connection with the distribution or
development of energy resources. Inquiries were-also sent to selected
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JOINT ECONOMIC REPORT
State agencies of those States which are large producers, have large
potential reserves of fuel or fuel power sources, and are large consumers
of power. The materials submitted by the Federal and State agencies
were published as a committee print, "Energy Resources and
Government," in December.
SUBCOMMITTEE
ON ECONOMIC STATISTICS
The Subcommittee on Economic Statistics was composed of Representative Richard Bolling, chairman; Representatives Hale Boggs,
Frank M. Coffin, and Thomas B. Curtis; and Senators John Sparkman, J. W. Fulbright, Prescott Bush, and Jacob K. Javits.
In response to the subcommittee's request, made during the subcommittee's 1959 hearings on "Comparisons of the United States
and Soviet Economies," Director Allen W. Dulles of the Central
Intelligence Agency submitted a statement on "Costs and Benefits to
the Soviet Union of its Bloc and Pact System: Comparisons with the
Western Alliance System." This study was released as a committee
print in July.
-In accordance with instructions of the full committee, the subcommittee arranged for a 1960 revision of the "Historical and Descriptive Supplement to Economic Indicators," which was prepared during
the year and released in December.
The staff, under the direction of the subcommittee and with the
assistance of the Bureau of the Budget and the President's Council
of Economic Advisers, conducted one of its periodic reviews of the
committee's monthly publication, "Economic Indicators."
Improvements made in the statistical series in the monthly "Economic Indicators" and the "Supplement" .include new tables on balance of payments and on unemployment insurance programs; more
data than shown previously on average weekly hours of work, construction, and sales and inventories in retail trade and in manufacturing; and a better presentation of data on prices. These changes were
incorporated in the November 1960, and subsequent issues of the
Indicators.
The Subcommittee on Economic Statistics also began hearings January 24, 1961, on "Government Price Statistics." The focus of these
hearings is the report entitled "The Price Statistics of the Federal
Government: Review, Appraisal, and Recommendations" submitted
to the Bureau of the Budget by the Price Statistics Review Committee of the National Bureau of Economic Research. The subcommittee has scheduled further hearings on this subject on May 1-5.
SUBCOMMITTEE
ON DEFENSE PROCUREMENT
The Subcommittee on Defense Procurement was composed of
Senator Paul H. Douglas chairman; Senators John Sparkman,
Joseph C. O'Mahoney, and Jacob K. Javits; and Representatives
Wright Patman, Richard Bolling, Thomas B. Curtis, and William B.
Widnall.
Hearings on "The Impact of Defense Procurement" were held
January 28-30, and the subcommittee issued a report on "Economic
Aspects of Military Procurement and Supply" in October.
JOINT ECONOMIC REPORT
45
In connection with the subcommittee's hearings the staff prepared
a study of "Background Material on Economic Aspects of Military
Procurement and Supply," which was issued as a committee print
in February 1960.
STAFF STUDIES
A study of the dealer market for FederalGovernment securities
In connection with the committee's hearings conducted as part of
the study of employment, growth, and price levels (pt. 6B, "The
Government's Management of Its Monetary, Fiscal and Debt
Operations," August 5, 6, 7, 1959), the 17 firms dealing in Federal
Government securities were asked to submit detailed information on
a number of aspects of their business over the last 10 years.
"A Study of the Dealer Market for Federal Government Securities,"
which was issued as a committee print in January 1961, is an analysis
based on a series of financial reports which the 17 dealers in the
Government securities market voluntarily submitted at the request
of the Joint Economic Committee.
-Economic policies for agriculture in the 1960's, implications of four
selected alternatives
On the full committee's instruction to the staff, a series of papers
were prepared by leading agricultural economists presenting a review
of the current status of agriculture and four alternative economic
policies for agriculture in the 1960's. The papers were published as
a committee print in November.
Subsidy and subsidylike programs of the U.S. Government
On direction of the full committee, the staff, with the assistance of
the Legislative Reference Service of the Library of Congress, prepared
materials on subsidy and subsidylike programs of the U.S. Government. This study, which was issued as a committee print in December, is designed primarily to bring together into compact form a checklist and, where possible, provide some measure of the magnitude of
-the assistance by the Federal Government to private enterprise
deemed advantageous to the public good. The study does not
attempt to appraise the merits of the various programs but simply
provides a basis for more detailed studies of the individual programs
should this prove desirable.
Economic programs for labor surplus areas in selected countries of
Western Europe
This report was assembled by the staff of the Joint Economic
Committee with the assistance of the Office of Area Development of
the Department of Commerce and the Legislative Reference Service
of the Library of Congress. It presents a summary of the results
of the conferences that were held and materials obtained during the
summer and fall in eight European countries on their programs for
aiding areas with surplus labor.
Index, hearings on employment, growth and price levels
The staff prepared a consolidated index of the 13 volumes of the
hearings and tables of contents of the study papers and reports issued
during the Joint Economic Committee's study of "Employment,
68180-61
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4JOINT"ECONOMIC
REPORT
Growth and Price Levels," conducted in 1959 pursuant o "Senate
ConcurrentResolution 13, 86th Congr&s- 1st session.
STAFF PARTICIPATION IN
MEETINGS WITH OUTSIDE GROUPS
In addition to conducting formal studies and arranging hearings
for the committee; the staff participated in discussions of economic
roblems and research techniques with outside groups. The following
fist of meetings illustrates the nature of these activities in which the
staff took part during 1960: Economic workshop, West Virginia
University, annual sessions of the National Tax Association, Investment Bankers Association, Mortgage Bankers Association of America,
the National Bureau of Economic Research, National Industrial Conference Board, Federal Statistics Users' Conference, American
Economic Association, American Statistical Association, the National
Association of State Tax Administrators, American Society for Public
Administration, and the National Planning Association; conferences
with groups of foreign economists brought here under the sponsorship
of the-State Department and the International Cooperation Administration; seminars of the Industrial College of the Armed Forces and
the conference program of the Brookings Institution; meetings of
local chapters of the American Statistical Association and other
meetings of business groups, civic organizations, and university
classes.
DISTRIBUTION
OF COMMITTEE
PUBLICATIONS
In the period March 1960 through March 1961 the Joint Economic
Committee and its subcommittees issued 14 publications. Over
260,000 copies of current and previous committee publications were
distributed during the year to fill individual requests. Committee
publications are also on sale by the Superintendent of Documents.
In the past year, individual copy sales and quantity orders of committee publications, current and past, exceeded $44,000. This figure
does not include the 8,800 paid subscriptions for the monthly publication Economic Indicators. A checklist of committee publications
will be found at the back of this report.
COMMITTEE
AND SUBCOMMITTEE
PLANS
FOR THE COMING
YEAR 1
FULL COMMITTEE
Study of the dealer market for Federal Government securities
The committee's analysis last year of questionnaires submitted by 17
dealers in Federal Government securities has laid the foundation for
further study and hearings in regard to that market. The study raised
a number of questions about the way the market operates and how to
improve it from the standpoint of the dealers, the Federai Reserve
System and the Treasurv. The issues involve not only the Government's monetary and debt management policies but also appear to
have important implications for the process of savings and investment
which iare crucial to the stability and growth of the economy. The
committee believes it would be useful to hear from the dealers, other
participants in the market, and officials in the Federal Reserve System
and the Treasury.
Review of annual report of the Federal Reserve System
The committee will hold a brief set of hearings to review actions of
the Federal Reserve Board and the Open Market Committee as
reported in the Board's annual report to see, in retrospect, the
relationship of these actions to economic growth and stability.
Variability of private investment in plant and equipment
In 1950 a subcommittee of this committee undertook to hold
hearings on the volume and stability of private investment. The
subcommittee limited its investigation, because of time, to examining
the supply of funds but listed nearly a hundred questions which needed
study. These questions will be reviewed and the most significant
selected for detailed analysis.
Inventory movements, accumulation, and liquidation
Inventory fluctuation and behavior will be studied to try to determine the extent to which changes in them are causes of instability and
to what extent they are in themselves affected by other forces inherent
in the business cycle. The committee will be concerned with such
areas as merchandising and production planning to see what influences
and what can be done to regularize purchasing so that characteristically wide swings in the direction of inventory adjustments can be
minimized.
SUBCOMMITTEE ON ECONOMIC STATISTICS
Government price statistics
This subcommittee already has underway an examination of a
report on Government price statistics which was prepared for the
Bureau of the Budget by the National Bureau of Economic Research.
Hearings are scheduled for May 1-5, 1961.
' Three new members of the Joint Economic Committee were appointed to fill vacancies at the beginning
of the 87th ConF. Senator William Proxmire and Senator Claiborne Pell were appointed t fill vacancies
in the Senate Democratic membership and Representative Martha W. Griffiths was appointed to complete
the Democratic membership from the HouseJ
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JOET ECON03MIC REPORT
Study of unemployment
This study will examine the cyclical, secular, and structural character of unemployment and the adequacy of our unemployment
statistics for such analysis.
Productivity, prices, and incomes
It is planned to update. and extend the committee's 1957 studyin this area, including unit cost indexes, unit value added indexes,
contributions to price change, etc.
The Federalbudget as an economic document
This study will try to determine how the President's budget may
be made a more useful document for analysis of its impact upon the
economy. Questions of the kind of obligations, orders, and expenditures statistics needed will be examined, as well as liabilities versus.
*cash flows, prices of Government purchases of goods and services and
seasonal adjustment.
Members of the Subcommittee on Economic Statistics are Senator
William Proxmire, chairman; Senators Paul H. Douglas and J. W.
Fulbright; and Representatives Richard Bolling, Thomas B. Curtis,
and William B. Widnall.
SUBCOMMITTEE ON FOREIGN ECONOMIC POLICY
The subcommittee will conduct studies and hold hearings on such
subjects as trade, trade agreements, international investments, U.S.
imports and exports, and U.S. foreign aid.
Members of the Subcommittee on Foreign Economic Policy are
Representative Hale Boggs, chairman; Representatives Henry S.
Reuss and Thomas B. Curtis; and Senators John Sparkman, J. W.
Fulbright, Claiborne Pell, Prescott Bush, and Jacob K. Javits.
SUBCOMMITTEE ON INTERNATIONAL EXCHANGE AND PAYMENTS
The subcommittee will conduct a comprehensive study of recent
imbalances in international payments, measures to correct them, and
proposals for safeguarding the dollar through improving present
international monetary mechanisms. The subcommittee will hold
hearings in June. U.S. Government officials, leading specialists from
outside the United States, economists and representatives of U.S.
industry, private banking, and labor will be invited to participate.
Members of the Subcommittee on International Exchange and
Payments are Representative Henry S. Reuss, chairman; and Representative Hale Boggs; and Senators Paul H. Douglas, William Proxmire, Claiborne Pell, Prescott Bush, John Marshall Butler, and Jacob
K. Javits.
SUBCOMMITTEE ON INTER-AMERICAN ECONOMIC RELATIONSHIPS
This subcommittee is asked to examine the economic inter-relationships between Latin America and the United States with particular
reference to long-term trade potentials, mutually advantageous development of economic resources, and economic stabilization mechanisms. The subcommittee plans to hold on-the-spot discussions in
Latin America with key government officials, labor and business leaders, and experts from academic life, as in the committee's 1958 study
of "Economic Policy in Western Europe."
JOINT ECONOMIC REPORT
49
Members of the Subcommittee on Inter-American Economic
Relationships are Senator John Sparkman, chairman; and Senator
John Marshall Butler; and Representatives Richard Bolling, Hale
Boggs, Martha W. Griffiths, and Clarence K. Kilblurn.
SUBCOMMITTEE ON DEFENSE PROCUREMENT
The subcommittee will carry out the committee's continued interest
in this field. The program will be announcedas it is developed.during
ithe year.
Members of the Subcommittee on Defense Procurement are Senator
Paul H. Douglas, chairman; Senators John Sparkman, William Proxmire, and Jacob K. Javits; and Representatives Wright Patman,
Martha W. Griffiths, Thomas B. Curtis, and William B. Widnall.
SUBCOMMITTEE ON ECONOMIC STABILIZATION, AUTOMATION,
ENERGY RESOURCES
AND
After preliminary staff study, hearings will be held to determine
which industries are likely to adopt new technologies in the near
future and to determine also the kinds, volumes, and locations of
probable labor-displacement. It is hoped that the information thus
assembled will lead to proposals for minimizing, by anticipatory
measure, employee dislocations.
As a separate item, the subcommittee will study and hold hearings
on the effect of the private pension systems on employee mobility,
-particularly as to scientific, technical, and other professional skills,
-and on the extent to which private pension systems, as presently
arranged, militate against the reemployment of seasoned and older
employees who have been separated from their jobs.
Members of the Subcommittee on Economic Stabilization, Auto-mation, and Energy Resources are Representative Wright Patman,
chairman; Representatives Henry S. Reuss, Martha W. Griffiths,
Clarence E. Kilburn, and William B. Widnall; and Senators William
Proxmire, Claiborne Pell, and John Marshall Butler.
ADDITIONAL STUDIES
The studies of "Variability of Private Investment in Plant and
-Equipment" and "Inventory Movements, Accumulation and Liquidation" listed above under the full committee are part of a series of
studies of some of the most volatile or troublesome elements of the
economy as a followup to the study of "Employment, Growth and
Price Levels."
Other elements of variability which need to be studied include
(1) variability of private investment in building, especially housing;
'(2) consumer behavior as a factor in stability; (3) the importance of
the magnitude and variations in the export market; and (4) planned
*and unplanned effects of changes in government demand. The
export market will be studied by the International Exchange and
Payments Subcommittee in connection with their analysis of the
balance of payments. One aspect of the problem of interpreting the
effects of Government demand, the recasting of the budget estimates
to make them better portray their influence and impact upon economic
-activity, will be examined as part of the program of the Subcommittee
-on Economic Statistics. Elements (1) and (2), building and consumer
behavior, will be considered if time and funds permit.
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INDIVIDUAL VIEWS OF SENATOR WILLIAM PROXMIRE
I dissent from. the views of.the committee majority with reluctance..
I do so for these reasons:
(1) The report underestimates the.two big economic problems facing
America. It fails to recognize the enormity of the unemployment
dilemma in its full long-term. significance. It does not face up to the
full implications of America's feeble growth record as compared to
other industrial countries.
(2)- The report assumes that tools. are readily available to solve
these problems, that the country only needs action-not answers.
The real problem is that neither the administration nor this report has.
even come close to providing the answer to our massive unemploy-ment or our perplexing growth problem. Before we act, we must;
know what to do. *Neither this committee nor the administration
knows.
Once we acknowledge this, then we can begin where we should.
begin-that is to search vigorously for answers.
FUTILITY
OF "BOOTSTRAP
HOISTING"
I vigorously disagree with the committee report's assertion that:
We have no doubt, either, that if both monetary and fiscal
policies are properly used the economy can be brought to a
rapid recovery.
This is a flat assertion wholly unsupported by American economic.
experience. The fondest illusion of modern economic policy in a free
society is that this kind of "bootstrap hoisting" will do the-job. The
record indicates it would leave us where most "bootstrap hoisting"
does-standing still.
AMERICAN ECONOMIC EXPERIENCE
There is not a single comparable instance when fiscal and monetary
policy can be shown to have achieved rapid recovery. American
experience in the great depression, when deficit spending and falling
interest rates had a 10-year opportunity, was a dramatic example of
its failure. Fiscal and monetary policy didn't do the job then, and
no one is suggesting that the present administration contemplates.
running deficits in relation to our gross national product. that would
be comparable with that period.
Expressed as a percentage of gross national product, the Federal
Government consistently ran heavy deficits for 10 consecutive years,
from 1931 through 1940. These deficits averaged 4 percent of gross
national product. But unemployment was not reduced below 14
percent-twice the present level-during the entire 10-year period.
Comparable Federal deficits today with our $500 billion economy
would be a mammoth $20 billion per year, a gigantic $200 billions in
10 years.
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JOINT ECONOMIC REPORT
Fiscal policy did not work then. How can we be so sure it will work
now?
Also, the capacity of reduced interest rates in connection with heavy
budget deficits to stimulate the economy was tested in that period.
Indeed, interest rates steadily dropped from 3.7 percent on longterm bonds in 1932 (close to the present 3.8 percent) to 2.3 percent
in 1940. But unemployment continued at depression levels until
the outset of World War II.
What is there in this grim picture to warrant the blithe report
assertion thatif both monetary and fiscal policies are properly used the
economy can be brought to a rapid recovery?
Of course, it will be argued that with budget expenditures varying
between 8 to 10. percent of the gross national product in the thirties,
the governmental impact was far less than today when Federal expenditures are about 16 percent of gross national product. The
answer to this platitude is that the critical relationship in fiscal policy
is the ratio of the budget deficit or surplus to the gross national
product. And, on this score, the Government would have to run
deficits for 10 years averaging $20 billion a year to have an impact
on the present economy comparable to the deficitsof the thirties.,
That impact was inadequate to solve unemployment in the last
American economic experience unaffected by the immediate aftermath
of war.
If the experience of the sixties with fiscal and monetary policy
should follow that of the thirties, the national debt could be increased
by a mammoth $200 billion in the next 10 years without solving the
unemployment problem.
This is why the committee should warn the Congress that fiscal
and monetary policy may not be enough, and that other policies to
expand demand should be vigorously explored.
HARMFUL CONSEQUENCE OF POLICY
I assert this vigorous disagreement for two reasons:
(1) Reliance on the assertion by the Joint Economic Committee
that fiscal and monetary policy could solve our unemployment problem might persuade Congress to try them. Such a course might lead
to an enormous increase in the national debt, and persuade the Government to dig itself into a deeper and deeper fiscal hole.
(2) I think it is far more likely, however, that Congress will reject
this assertion by the Joint Economic Committee. This policy is
simply not going to be sold to the Congress or the people of the United
States in a time of relative prosperity in spite of our serious unemployment problem. When the country is at peace and incomes are
at a near record high, prudent men will not adopt a policy that argues
for additional deficits as good things in themselves.
The report asks Congress to adopt a sophisticated, novel, and undemonstrated theory-i.e., forget any attempt to balance the budget.
Instead, calculate a point where inflationary and deflationary forces
balance and adjust your spending and taxing so the budget will be
in balance at that figure.
JOINT ECONOMIC REPORT
53
MN'onetary policy offers far more short-term promise. But it is.
much too weak a reed even when combined with fiscal policy to pull
our economy to the "rapid recovery" promised by the report.
ALTERNATIVES
TO FISCAL
AND MONETARY POLICY
A healthy and realistic recognition of the limitations of fiscal and
monetary policy is the first prerequisite to the kind of inquiry our
Government should undertake on how we do solve this immensely
serious problem of idle men and resources.without interference with
economic freedom.
The most promising alternative is the strengthening of the automatic stabilizers as contrasted with the conscious management of
fiscal policy. The most significant statement in our hearings was the
assertion of the Council of Economic Advisers that the built-in flexibility of the present tax structure and social security programs offsets.
between 25 and 30 percent of any change in gross national product.
MORE SPENDING VERSUS LOWER TAXES
But the majority report fails to present a balanced picture. It
argues vigorously for higher spending or lower taxes or both so that.
the deficit will increase at a lower level of unemployment and will
continue to stimulate the economy until unemployment drops to say
4 percent-i.e., gross national product increases by a fat $50 billions.
The report, however, fails to consider the Federal debt burden if
unemployment simply doesn't drop to this level.
NO PREFERENCE FOR PRIVATE
USE OF RESOURCES
The report reflects the attitude expressed to the committee during
our hearings by Budget Director David Bell when be said:
The relevant criterion in determining the desirability of a
proposed use of resources for a public purpose is its value to
the country in comparison to the value of using the same resources for other purposes, public or private.
This statement and the whole tenor of the report imply that there
should not be a presumption, and a strong presumption, on the side of
using resources for private rather than public purposes.
In a free society faced with the inevitable tendency for government
to grow and extend, the individual is sure to be dwarfed by the mammoth size of the Federal Government unless there is such a presumption.
The report concludes* * * private initiative and free, competitive enterprise are
and must continue to be the primary and predominant
sources of our Nation's vitality and strength.
This excellent assertion is meaningless, however, unless private
rather than public enterprise is given consistent preference.
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JOINT ECONOMIC REPORT'
DISSENT FROM COMMUNITY FACILITIES RECOMMENDATIONS
What -I have said immediately above is why I dissent from the
committee's recommendation of a grant program for such local purposes as "police and fire stations, streets and parks."
The necessities of national defense, interest on the huge national
-debt and such necessarily national programs as the farm dilemma and
*care of veterans have enormously swollen the size and cost of the
Federal Government. But, these are national problems bearing a
national responsibility that can be met only by the Federal
-Government.
It is true that CWA and WPA engaged in local projects at the depth
-of the great depression with great benefit to the idle men who were
taken off a dole and provided with useful, constructive work.
Today our unmet need for national defense, including civil defense,
in an increasingly perilous world, is immense.
The responsible and expert Gaither and Rockefeller reports both
-call for a far greater national defense effort than we are now making.
If the Federal Government is to step up its participation in our
-national economy it should be in the field that is peculiarly its respon:sibility-providing a surer and safer national defense.
CLOUDED CRYSTAL BALL
What is happening to the economy in the current quarter is an excellent example of the harmful consequences of Government economic
policy based on short-run prediction.
The committee warmly praises the action of the administration in
attempting to stimulate the economy as soon as it took office by
speeding up Government spending. Hearings before the committee
.revealed, however, that almost none of this speedup was effective in
the first quarter of calendar 1961 when unemployment and idle plant
capacity reached their peak. Testimony also suggested that virtually
the full impact of this speedup in Federal spending will be in the
current quarter. Furthermore, it will coincide with the exact period
during which the Government will already have by far the greatest
-expansionary impact on the economy in many years.
Accordingly, we can expect a sharp increase in demand during the
current quarter but a serious letdown in the impact of the Government on the economy after July 1.
Here is a case study in economic policy gone wrong:
.. (1) Virtually the full impact of the $600 million increase in Federal
spending resulting from President Kennedy's order to agencies to
speed up their spending to help put men back to work will be in the
-current quarter. This will be borrowed largely. from periods later in
the current calendar year.
(2) The real sledge-hammer impact of the Government on the
economy is in defense procurement. Obligations for procurement,
-research and development, testing and evaluation, and construction
are expected, according to testimony by Defense Department Comptroller Charles Hitch, to soar from $5 billion in the past quarter to
-$8i billion in the current quarter. In the coming fiscal year, beginning
-July 1, they will drop by a billion dollars.
Mr. Hitch reported to the committee for the Defense Department
that the current fiscal year just ending would provide the greatest
-obligation to spend by Defense since the end of World War II with
JOINT ECONOMIC REPORT
55
the single exception of 1952, the peak year of the Korean war buildup.
He further stated that it would be higher than in fiscal 1962.
(3) A few weeks ago the Defense Department ended the requirement for a 20 percent set-aside by defense contractors and immediately
began a process of contract settlement that will greatly increase
private cash income primarily in the current quarter.
All of this adds up to the fact that the Government is heavily stimnulating business in the current quarter, but that the sure drop in this
spending beginning July 1 will act as a contrasting brake on the
economy at a time when it is now certain there will still be heavy
unemployment and idle plant capacity.
PRESIDENT 'S TAX RECOMMENDATIONS
I would emphasize far more strongly than does the report the
unfortunate fact that the President's proposal for a tax credit to
provide incentives for business investment would tend to deepen
cyclical swings.
The thrust of the committee's report is to promote for Government a more aggressive role in ironing out the business cycle. Spending, taxing, and interest rate policies have been primarily evaluated
in the report in terms of their contribution to expanding the economy
in times of recession and contracting it in times of inflation.
The President's tax credit proposal would have a precisely contrary
impact. Business would be offered a superincentive to expand in
prosperous times when its profits and taxes are rising. It would have
.a sharply reduced incentive for investment in recession periods when
profits and taxes are low.
The President's tax credit proposal, therefore, would tend to aggra-vate inflation in boom times and subsequently exaggerate unemployment in bad times.
In spite of this significant weakness, the President's proposals do
have the great merit of providing: (1) encouragement for long-range
growth; (2) an effective reduction in the excessively high corporation
income tax; (3) no loss of revenue because of balancing tax recovery
proposals; (4) greater equity in the tax structure because special tax
-advantages to some forms of income would be reduced or eliminated.
-I protest the absence in the President's recommendations for closing
tax loopholes of any reference to that most notorious and unjustified
of all tax loopholes, the 27f percent depletion allowance for oil. The
failure to recommend that this be reduced to the 15 percent level of
most other minerals passes up some $400 million of additional Federal
revenues and leaves the oil industry with its income taxed at only
about one-third the taxes imposed on the rest of American industry.
AUTOMATION-UNEMPLOYMENT
DILEMMA
Our unemployment problem is caused by the very productivity and
efficiency that must be the basis of the victory for freedom in the
world.
America's automated farms and factories have brought us the
richest material blessings in the history of mankind. They will also
predictably contribute to the waste of unemployment in our free
society, unless we master the problems they pose.
56
JOINT ECONOMIC REPORT
The American farm economy is the supreme example. Our farmers
have increased their efficiency three times as rapidly as the rest of
America. 'Nowhere is this country's economic superiority to the
Soviet Union more pronounced than in the great productivity of our
electrified, power-driven, privately owned family farm.
And yet, this very automated efficiency is contributing vastly to
unemployment by driving farmers off the farm where their work is not
needed into the cities where automated factory unemployment is
already large and growing. Here is the most dramatic illustration of'
our dilemma. Where our technological advance has been our greatest,
our unemployment problem is the most acute.
The answer is not to stop or'even slow down technological advance..
We look over our shoulder at the onrushing surge of the Communist.
economic tyrannies of China and Russia with their forced economic
growth. And we know that American economic superiority is what.
makes our Nation the arsenal of freedom.
Indeed, efficiency and productivity must be fostered and speeded.
This, then, is the tough economic dilemma which this report and
the administration have not frankly faced:
(1) A heavy and voluminous increase in the American work force'
is certain.
(2) Automated unemployment on the farm and in the factory is,
sure to increase.
(3) Our national obligation for world freedom imposes on theFederal Government the policy of encouraging the very productivityand efficiency that is causing unemployment.
The administration and this committee must come up with far more.
precise and promising answers to this dilemma than the vague proposals for retraining, research, and education proposed to date.
CONCLUSION
My strong dissent from the majority of the committee should not
be misinterpreted:
(1) I have the deepest regard for the remarkable ability and judg-ment of the majority who have joined in this report.
(2) Although I am highly critical in this dissent of the adininistration's policies, I recognize a unique excellence in the appointments thePresident has made to the highest positions of economic policy in his.
administration. I also admire the zest and determination with which
the administration has tackled the No. 1 problem of our economy::
getting the economy moving. Growth and a massive increase ins
employment have been the administration's proper objectives.
But the administration and this report make two serious errors::
(1) They have grossly underestimated the dimensions of the
problem.
(2) They have overestimated the ability of the Government tosolve it.
These errors if they persist will prevent those responsible for
economic policy in our Federal Government from recognizing that the
big fact is we have not come up with any real answers to our very
large unemployment that grows with each swing of the business cycle.
A frank acknowledgment that we don't have the answer is an essentialh
first step toward solving-the problem.
JOINT ECONOMIC REPORT
57
Also, we have not faced up. to the enormously tough problem of
how we can achieve an economic growth comparable ,to that of the
,other leading free industrial countries of the world, or our chief
adversary Russia. The terrible fact is that America is, and has been
for several years now, at the very bottom of the pole in economic
growth.
There is nothing either in the administration's program or in this
report to indicate that this big fact has even been recognized.
Faith in our free economic system is essential. The administration,
and I am sure every member of the committee, has it.
But that faith should not persuade us-as it has-to say that these
massive problems can be solved simplyv by the'kind of prescription the
administration has offered and the committee has generally accepted.
We should have the courage to face up to the problems of growth
and unemployment in all their immensity. We should admit that
we haven't the answers-and not even much of a clue to the answersand then seek as aggressively and vigorously as we can to develop
some.
MINORITY. VIEWS
The Employment Act' of'1946 directs that'"'The President shall
'trinsmit'to 'the' Congress not'later'han January 20 each year an
economic report * * *" containing a program to carry out the policy
declarations'of the' act.. This President Eisenhower did on January
18, 1961.. "
.
The rejort;,:while pointing out that "to a considerable extent the'
Federal policies needed to help achieve sound and rapid growth can
be. applied administratively and require no, legislative action,", made
A. nuimber of legislative proposals for congressional, consideration
. They are set forth in.a' sgum~ary check list in an appendix to these
views.
h Ji
Eom
-. ,The Employment Act further' directs. :6A the Joint. Economic
,Co~mmitt~ee,,as a "guide'" 'to,the.c6mmiittees'of C6ngress. "* * , no~t
laterrtbe ~March 1 ,6f each year" file'a report containing its. findings
withfirespect.. to, each.: of 'the, main recommendations made. in the
Economic Report..,' This the'Joint ,Economnic..Conmmittee did not dd.
'Although the committee had a prograrn:before it for cOnsideration,
the majority of the committee chose to ignore' completely'the timely
economic r ecommendations submitted,.by .thle, executive branch pursuant to law. In spite of the fact Ithat the econom'y had then been
*undergoing:a-slowdown'for several months; .the,'Democraticmajority
-of the comimittee'deemed; it-expedient to :delay reportingwhile.the
:new administration.could observe the economy.anddevelop 'measures
of its own.'
l (.
1
'.
.
1.,
Meanwhile; the current.c ongressiohab'session' has, run more than
.half.its. expected course-assuming recent,sessions offer some measure
of length, even if the timely adjournment called for -bystatut.eisagain
disregarded. : It should hardly, be necessary, incidentally, -to remind
the .DMoi`ratic majority responsible forr this parti a. delay and
neglect df'ifs own erstwhilet imjpatience with' similar delaysf in the
past. Its fretfu1ness' at' delayr on earlie';r'occ-ai'6ns' led,' inded, to
amendment of the Employment--Act 'reqiiring that' the ']?rPesident's
report be. filed not laterthan January 2,. instead of.at ,thp..begignning"
of the session as had pre~viosly..been the lp
,.
'
.
Happily,,. the vitality .and nafural worlkingg of the ,free enterprise
system,-itself have, Jn the interim' 'brought. increaising ,se of economic recovery without material aid from Government, .,One'of the
President's closest unofficial advisers is reported to have charactcrized
the'ad 'unisti'ation's an'tirecession measure as-"a placebo'prokramnfor
recovery"'-a pr"ogram' that has depended on 'inakinig the patient feel
'better without 'doing'anything:
'
'Temporary. supplements to the regular benefits of' unemployment
compensation and' aid -to areas of persistent unemployment will,"in
due course, undoubtedly prove helpful and were recommended in the
January 18 President's report. Appropriate under the circumstance
I
See Economic Report of the President, January 1961, pp. 64-67.
60
JOINT ECONOMIC REPORT
also were efforts to speed tax refunds, to enlarge the distribution of
surplus foodstuffs to the needy, to speed early payment of dividends
on veterans' life insurance, to speed procurement which had already
been scheduled, and to accelerate Government lending under existing
programs.
The improvements in economic indicators thus far have nonetheless again justified confidence in the faith underlying President
Eisenhower's Economic Report. of January 18: That faith holds
thatIn our free economy, economic growth,. and the improvement of living' standards.depend,.not primarily on what
Government does but mainly on what is'done 2by individuals
.and groups acting in their private capacities.
In any case, the committee has now had placed before it a piece-meal economic program, which skips lightly over the recession, as
such, and calls for a larger longrun role for Government and public
expenditures.. This program is partially set forth in more than a
score of Presidential pronouncements supplemented by testimony
of administration spokesmen.. This includes the public testimony
of the President's Council of Economic Advisers presenting to the
committee something which may, not unfairly, be viewed as the
-theoretical foundations and philosophy which. underlie,the economic
'policies of the new administration.
THE STAGNATION
THEORY AND ITS SHORTCOMINGS
This economic program leans heavily oh the premise that the
country is suffering from a chronic "slack" in production, that is
"gap"' between- aVual output atd--growing
to say,.that there is a
national economic "potential."
Perhaps the administration's position can be best conveyed by a
few excerpts from the statement of the Council of Economic Advisers.
According to the Council-the American economy today is beset not only with a recession * * *but with persistent slack in production and
employment, a slowdown in -our rate of growth.
Further, according -to the-Councileconomic recovery in 1961 is far more than a cyclical problem. It is also a problem of chronic slack in the economythe growing gap between what we can 'produce and what we
since 1955, the gap has shown
do produce * * * Especially
a distressing upward trend.3
The Council informs us that "the problem of unused potential
becomes continually more urgent." In the Council's view the gap
between actual and potential output has not only been growing, but
J.-s, iecome very large. - The -gap is said to 'have 'been $32 billibn for
1960 as -a whole. Using annual rates, the gap- is estimated at $40
billion for the fourth quarter of 1960 and at $50 billion for the first
quarter of 1961.
.
.
2 Ibid., p. 57.
o Hlearigs, Joint Economic committee, "January 1961 Economic Report of the President," pp. 314, 321,
and folldwing.
61
JOINT ECONOMIC REPORT
What might have been in the past, and what a different economy
might be like in the future, are always thought-provoking speculations.
However such speculations can be harmful when cloaked with
statistics of precision, and made the foundation for public policy and
planning.
Before any speculative premise downgrades the accomplishment
of the dynamic free system in a call for more governmental intervention, we would be well advised to study with care the assumptions
behind the major premise. Before accepting economic nostrumsmuch less prescribing them-we need to ask many questions. Examination of just two of these will serve to illustrate the frailties of
the "gap" analysis. Let us look at the validity and meaning of the
concepts, first of economic "growth" and second, of economic
"potential."
GROSS NATIONAL PRODUCT IS AN INADEQUATE
WELL-BEING
MEASURE OF NATIONAL
In its second appearance before the committee, and in written
reply to questions of committee members, the Council of Economic
Advisers has done a considerable public service in characterizing
GNP, the frequently applied measure of economic growth. In doing
so, they have done no more perhaps than summarize what the professional economist alreadv knows. But, for the layman and the
general public, they have underscored the shortcomings and pitfalls
of this accepted measure when put to use as a cornerstone for determining public policy. We can hardly do better than commend
attention to the Council's entire response and quote several of their
general caveats. 4
Gross national product, like any aggregative index of
economic activity, is an imperfect measuring rod. Most
of its limitations are inherent in trying to describe a complex
economic system by a single number. Inevitably much that
is important and interesting is left out. Other difficulties
and limitations stem from:
l. The very concept of production (e.g.,. the omission of
leisure), the exclusion of manynonmarket activities (e.g., the
services of housewives), and the necessity of imputing
values to other goods and services that do not pass through
the market (e.g., the services of owner-occupied. homes).
2. The often tenuous distinction between final and intermediate output (in particular the treatment of government
expenditures, the replacement of plant and equipment,, and
research and development expenditures).
3. Questions of valuation and price correction, and the
related.problems posed by product changes.
*
*
*
*
*
Each of the difficulties mentioned above becomes more
substantial as the time scale of comparisons is lengthened.
For this reason GNP, like any summary measure, is a saferguide to short-range comparisons than to very long-range
ones.
hearings, ibid., pp. 564 566.
681S0-61--5
62
JOINT ECONOMIC REPORT
Gross national product is thus concerned only with the quantities
of goods and services as measured by the expenditures by which these
goods are acquired; it is not concerned with the mix between economic
and noneconomic satisfactions. It includes, for example, at cost
wasteful production such as agricultural excesses and military equipment technologically obsolete, even though such items may be a net
loss to the economy.
On the other hand, it either neglects entirely or imperfectly reflects.
all nonpecuniary "products" including such highly valued intangibles
as paid vacations, quality differences both in goods and services at the
same cost, superior working conditions, improved diet, and entertainment possibilities, improved medical attention per dollar of expenditure, feelings of personal security, or the influence on individual
welfare of the distribution of income. Think, for example, of the
improvements and pleasures arising from do-it-yourself construction
and repair which appears in GNP only in terms of tools and materials.
purchased.
Genuine economic growth is thus not adequately reflected in our
present limited tools for measuring economic phenomena statistically.
Meaningful economic growth is something more than massive economic activity which may be going nowhere or even going backward.
Gross national product measures only this massive economic activity.
Meaningful economic growth is to be found in the new and improved
goods and services available on the market for more and more of our.
people.
Meaningful economnic growth is to be found in increased economic
flexibility, more and better transportation, communication, power
and its availability, a more mobile labor force which can shuck off
skills that have become obsolete and learn new and higher skills.
Meaningful economic growth is to be found in a shift of employment
from the manufacturing sector to the distributive and service sectors,
and a shift within manufacturing itself from blue-collar workers to
white-collar workers.
Meaningful economic growth is to be found in increased productivity which, in turn, is found in more availability and cheaper power
per person, more training, better health, better housing, better recreation, more leisure time, in fact all things that go not only to meet the
needs of technological progress, but to increase the standard of living
of more people. Increased productivity means utilization of disabled
workers and older workers, not merely shucking them off and removing them from the labor market by a policy promoting earlier retirements.
Meaningful economic growth is to be found in increased activity in
the fields of research and development, particularly in the field of
basic research. Meaningful economic growth is to be found in freeing the individual so that he can make more economic and other
choices for himself. Increased leisure time widely diffused in a society'i is an indicator of economic progress. It is especially so when
it permits and encourages scholarship since the search for truth, is the
source of all progress, economic or otherwise.
Bv all of these indicators our society has had enormous economic
growth in the past few decades. Today we stand upon the threshold
of a new era if we will only take fair stock of ourselves. Finally,
meaningful economic growth is to be found in a change of attitude
JOINT
63
ECONOMIC REPORT
towards one's fellow man-an attitude of appreciation that a coworker
has for a fellow coworker, in place of an attitude of distrust, contempt,
or envy.
Once all of these reservations are clearly set forth and understood,
it is perhaps only fair to concede with the Council "that GNP corrected for price changes is the best overall measure. of economic
activity that we possess." 5 The question is whether it is good enough
for policy guidance, especially when compounded with an equally
suspect concept of economic potential from whence measured against
actual GNP comes the assorted gap.
THE CONCEPT OF "POTENTIAL"
AS A CORNERSTONE OF PUBLIC POLICY
The theoretical and statistical procedures underlying estimates of
future potential output and hence the degree of slack performance
yesterday, today, or tomorrow, are, in the words of the Council of
Economic Advisers, "at best hazardous and uncertain." 6 This kind
of warning from high professional authority should, taken alone, make
the policymaker in and out of Congress extremely wary of action
taken on the strength of statements that the "unused potential is
equal to $500 per American household, * * * almost twice the
amount spent on public education," or "one and a half times the
amount spent on new homes last year
*
*
*.)
7
Projections of economic potential can be neither estimated nor
adequately explained by passing a line through data portraying the
past-as the technicians would say, by simple extrapolation.' There
is a wide and varied range of possible, and often equally plausible,
assumptions upon which to project in the future.
The particular gap model presented to the committee assumes a
3.5 percent trend in gross national product as the measure of potential
made up of a 1.5 percent per year upward trend in labor force, a
secular increase in real gross national product per man averaging 2
percent per year, projected from a base of actual economic performance in mid-1955.
Why, it may be asked, does the curve depicting potential output
start in the middle of 1955? The reason is that unemplovment was
then approximately 4 percent of the labor force, and the Council
regards a 4 percent unemployment rate as a "reasonable target for
full utilization of resources."
An(I why is this curve of potential output allowed to rise at an
annual rate of 3.5 percent? Because, this rate, we are toldrepresents the rate of advance of gross national product
(corrected for price changes) that our economy now achieves
when it operates at reasonably full employment.
Once the curves of actual and potential output are drawsn, the gap
between them is obtained by subtraction. The first and perhaps the
most important question raised by this arithmetical exercise is why
the curve of potential output is passed through the middle of 1955.
ibid., p. 567.
H
Hearings,
ibid., p. 373.
Hearings, ibid., p. 325.
' The minority invites attention to a penetrating analysis of the Council of Economic Advisers' "gap"'
of "stagnation' theory, as presented by Prof. Arthur F. Burns of Columbia University and president of the
National Bureau of Economic Research. The speech given at the 10th Annual Business Economic Conference, University of Chicago, Apr. 21, 1961, is reproduced in the Congressional Record, Apr. 27, 1961,
appendix, p. A2885.
5Hearings,
7
64
JOINT ECONOMIC REPORT
True? the unemployment rate was about 4 percent in mid-1955 and
actual output may therefore be taken as equal to potential output at
that time. But the unemployment rate was about 4 percent also in
the second quarter of 1947, in the second quarter of 1957, and in other
scattered quarters of the postwar period. Any one of these quarters
or dates could have served just as well as mid-1955 for the starting
point of the 3.5 percent curve of potential output.
The results, however, would have been very different. As the
Council draws, the 3.5 percent curve, the gap between actual and
potential output in 1960 comes out $32 billion. But if the curve had
been started in the second quarter of 1957, when we also had a fullemployment output by the Council's criterion, the gap would have
been only $20 billion. If the curve had been started in the second
quarter of 1947, when we likewise had a full-employment output,
the gap would have vanished. In fact, we would then have to say
that actual output in 1960 exceeded potential output by over $2 billion.
It is plain from these calculations that by merely varying the starting
point of the 3.5-percent curve, and doing so without departing from the
Council's logic, we can easily draw a more encouraging picture of the
recent past than the Council has drawn.
It is not that the plausibility of the 3.5-percent annual rate is in
question, but that a somewhat lower or somewhat higher figure would
be equally plausible. The point to be underscored and remembered
is that small differences in the growth rate are capable of making very
large differences in making projections of national output.
If it be assumed that a full-employment output exists when the
unemployment rate is 4 percent, then every figure of the gross national
product at times when unemployment is at this level must express a
full-employment output. A curve linking such figures will then automatically show the rate at which real output advances when our
economy operates at reasonably full employment. Unhappily, however, numerous pairs of such figures can be found in the postwar
period, and some pairs yield a growth rate of less than 3.5 percent
while others yield a higher rate.
Reliance upon the gap concept, based as it is upon a trend. line,
depends, in large measure, upon the further questionable assumption
that demand and supply relationship do not change. Unly in a static
economy would relationships of the past be meaningful in prescribing
for the future.
The fact is that the composition-"the mix"-going into a given
gross national product never has stayed the same but changes from
year to year and day to day. Changes of the same magnitude in
aggregate gross national product-up or down-need not be and, indeed, would scarcely ever affect various segments of the economy in
the same way. It is quite possible to have varying rates (and structure) of unemployment with the same GNP output, apart from
changes in the value of the dollar. It is equally possible to have an
expanded output with the same rate of unemployment or a changed
rate (and structure) of unemployment with either an expanded or
shrunken output.
As the Federal Reserve Bank of Philadelphia points out* * * Consumers themselves are changing and so are their
spending habits. Spending has shifted away from some old
JOINT
ECONOMIC REPORT
65
standbys and this could be an important cause of the current business setback. Some of our present excess plant
capacity and unemployment certainly are located in industries whose products consumers no longer favor * * *
The shift away from these hard goods may have a significant
effect on the course of business. The products and services
consumers covet today do not have the explosive impact on
the economy that durables and housing have. 9
Consumers stocked up on housing and durables in the decade
following the war. Now that this backlog demand for housing and
hard goods has become largely a replacement demand, it would be
unrealistic and misleading to plan on a potential as an expansion of
trends along the past lines projected. Now that consumers are free
to turn their choices to another order of preference it seems reasonable
for example that one of these new high order demands may be increased spending for college education for the rising population in the
15- to 24-year-old group. We may, as a consequence, have overcapacity and unemployment in durable goods manufacture, and undercapacity and shortages on the campus. This is only one example
illustrating the point that attempts to deal with slack judged from
an aggregate base line passed through historical data-no matter how
impeccable the mathematics-is likely to add to, rather than cure,
our economic problems. The problem, incidentially is aggravated by
the fact that policy decisions founded upon a projected potential
are themselves influential in bringing about changes in the product
mix.
A final observation about the uncertainties inherent in potential
analysis as a basis for public policy is that no two economic cycles in
the past have followed the same course and there is no reason to expect
that the current recovery will not follow a still different pattern. As
evidence of the refusal of the economy to follow old channels, consider the last two cycles.
From the trough of the recession to the recovery, gross national
product in constant dollars increased by about the same percentage1953-57, 10.6 percent; 1957-60, 10.9 percent. Although the aggregate
change was thus similar there were very substantial differences between
the two cycles in (1) the behavior of fixed business investment which
increased 13.4 and 0.8 percent, respectively; (2) in consumption which
increased 9.9 and 7.8 percent, respectively; (3) in residential construction which increased 22.9 and 32.9 percent, respectively; and
(4) in Federal purchases which increased 9 and 2.8 percent, respectively.'° Only history can tell us the pattern of recovery now
underway.
The Council also cites as evidence the progressive decline in the
duration of business-cycle expansions in the postwar period. The
expansion of 1949-53 lasted 45 months. The expansion of 1954-57
lasted 35 months. The expansion of 1958-60 lasted 25 months.
In other words, successive upswings have been progressively shorter,
and this is a symptom of noncyclical or secular slack.
i See "The Royal Family Grows Restless" (i.e., consumers), Federal Reserve Bank of Philadelphia
Bulletin, February 1961.
'D Hearings, Joint Economic Committee, "Current Economic Situation and Short-Run Outlook," Dec. 7,
1960, p. 117.
66
JOINT ECONOMIC REPORT
In judging this evidence, it is necessary to recall that the expansion
from 1949-53 was dominated by the Korean war. This expansion
might well have been shorter if the war had not lasted so long.
Historically, wartime expansions have always been exceptionally
long.
Indeed, the expansions of 1861-65, 1914-18, 1938-45, and
1949-53 are the longest business-cycle expansions that we have had.
Since the expansion of 1949-53 is clearly an abnormal case, it is
best to put it aside. We are then left with the fact that the most
recent business-cycle expansion was shorter than its immediate
predecessor. There is nothing remarkable about this fact. Of itself
it surely provides little reason to expect or to fear secular stagnation.
The Council cites, however,, another piece of evidence, namely,
unemployment was approximately 3 percent at the peak of business
in 1953, but about 4 percent at the business-cycle peak in 1957, and
about 5 percent at the business-cycle peak in 1960. This evidence
seems to suggest that successive upswings are becoming weaker.
However, the peak in 1953 was a wartime peak of activity. It
seems more sensible to regard the 3 percent unemployment rate of
1953 as an exceptional case than to take it as a yardstick of economic
performance.
This is as clear when we look back of 1953 as when we look forward,
for the employment rate was about 4 percent at the business-cycle
peak of 1948 just as it was 4 percent at the peak of 1957. It is true
that the unemployment rate was appreciably higher in 1960 than in
1957. This comparison is entirely valid. But a single instance of
higher unemployment of itself gives fragile support to the generalization that successive upswings are becoming weaker or to the theory
that the gap between actual and potential output has a distressing
upward trend.
THE MAJORITY REPORT IS CAUGHT UP IN "THE
GAP TRAP"
The majority report of this committee following quite closely the
line of the testimony of the Council of Economic Advisers, fails to
present a broad and fair appraisal of the U.S. economy in 1961.
Such an appraisal would include recognition of the good features which
we should preserve and strengthen, as well as the weak spots which
we should strive to correct.
The majority report is.a narrowly partisan political document which
follows the line of carping and negative criticism of the Eisenhower
administration which was the hallmark of the approach taken by the
Democratic leaders during the past 6 years when they controlled the
Congress. This negative line of approach, downgrading the United
States and the private enterprise system, was carried over into the
presidential campaign of 1960 by the Democratic candidates and remains dominant in President Kennedy's economic messages so far
delivered to the Congress.
* This narrow approach to the problems of the sixties by the Kennedy
administration, almost an apology ahead of time for not meeting the
problems that face us, is dangerous to the welfare of our country.
We can readily understand the natural desire of a new administration to make everything look as dark as possible at the time of take-
JOINT ECONOMIC REPORT
67
over so that whatever progress is achieved from then on becomes of
greatest possible credit to the new administration. And conversely,
if things go badly this process of downgrading our present situation
makes it easy to cast blame on that which has gone before. Howevery, this tendency should be curbed in the interest of our Nation's
welfare. We do need to know what is good about our system so we
can build on its goodness, just as we need to know what is wrong so
we can correct it. Furthermore, the good reputation of the private
enterprise system is particularly important in the international picture
today. Much damage has already been done to the United States by
the Democratic leaders through their failure to keep what might be
just criticisms of the inadequacies of the private enterprise system in
context with its achievements.
The proposals of the Kennedy administration shorn of their
semantics turn out to be an inadequate carryforward of the Eisenhower proposals, watered down, without any real shift in emphasis.
However, it is possible that the economic philosophy propounded
by the Kennedy administration in words could become translated
into legislative proposals. To forestall such an inauspicious and
dangerous shift it is important to contradict this underlying philosophy.
The economic philosophy advanced, although not yet fully implemented by the Kennedy administration is bottomed on the hypothesis
that unemployment and economic growth are solved by increasing
aggregate consumer purchasing power and that the Federal Government is the primary institution to bring about this increase. This
philosophy is based upon the premise that increased consumer
purchasing power. is for all practical purposes automatically transmitted into consumer demand. It is a philosophy that stems from
19th and early 20th century classical economics which dealt with
a world of constant scarcities of goods and services desired by an
ever-hungry consuming public.
However, it is becoming quite apparent that the dynamic economy
of the United States based upon the free enterprise system is moving
us, or has moved us into a new era, an era where consumer purchasing
is based upon adequate power to spend and now depends upon consumer choice and decision freed from economic necessity and not
upon injections to increase consumer purchasing power. The consumer mav have the dollars to buy but he does not choose to buy.
This is. something to be thankful for, not something to be regretted.
LBut, an economy based upon plenty instead of scarcity creates
problems of its own. These are new problems in many respects
and we must show imagination in discovering them and dealing with
them. We have new wine and we can no longer put it into old
bottles; labeling it "New Frontier" does not solve the bottling
problem.
Continued economic growth of the wholesome kind creates two
major problems. And the more rapid the growth the more aggravated
these two problems become. The first problem is that of technological
employment and unemployment. Technological advancement, by
its very nature, while creating a need for new skills makes obsolete
various ways by which men have been making their livelihood.
Those wavs of making a livelihood most affected are concentrated in
the unskilled and semiskilled occupations. The President's Council
68
JOINT
DCONOMIC REPORT
of Economic Advisers, in their testimony on the subject of unemployment, largely overlooked the impact of technological advancement on the unskilled and semiskilled labor force. Technological advancernent hits at all levels of employment but strikes at the least
skilled the most.
Throughout the majority report runs an almost morbid concern
with the economic disruption and displacement that lie in the wake
of economic progress. Instead of dwelling on the hardships that
attend shifting employment resulting from technological advancement we should point to the new life that has been born as the result
of this progress. Nothing has been developed in all the discussion by
the majority of technological unemplovmient about the new and better
jobs that have been created. Nothing is said about finding out the
number of jobs that are available and unfilled as a result of technological advancement. All attention is instead directed to the incidence of the unemployment which we have. The number of unfilled
jobs is a statistic that should be considered at all times alongside of
our unemployment figures. The fact that we are not today adequately
keeping statistical account of new skills in demand by types, and
location only attests to the morbid approach taken toward technological advancement.
We do not share the pessimistic assumption of the Kennedy administration that technological advancement creates less jobs than it
displaces. We think that only a failure to study fully the process of
technological advancement in detail leads to such a pessimistic and
untrue conclusion.
The best answer is to observe the jobs that exist in our economy
today that did not exist in the past when the economy was less
advanced. Studies should be made by this committee of the process
by which new jobs are created. We need to know more about how
and where technological advancement creates new and more jobs.
Instead of studying failures and talking in terms of accepting 4 percent
unemployment as inevitable, let's start studying success and build
upon it. We see no reason why advanced technology should create
any real unemployment if we recognize those in the process of retraining as gainfully employed which, indeed they are, economically
speaking.
The problem lies in the process of training and retraining for the
new skills which are constantly being created. This is a happy
problem to deal with, though by no means an easy one or one that
does not require considerable effort upon the part of the individuals
within our society who must buckle down and start using more of
their brains and less of their brawn.
The second major problem created by rapid technological growth
is increased price of goods and services. The greater the rate of'
growth the more obsolete machinery there will be, the more obsolete
skills there will be, and hence the more need there will be for capital
to replace machines with better machines and to replace the old skills~
with the new, greater, and more costly skills now needed. The
greater the advancement the more effort must have been spent in
research and development. All of these costs must be recouped in
the marketing of the new product or new service which constitute
economic advancement, if we are to maintain a meaningful system
of social accounting. And indeed the costs involved in advertising
JOINT ECONOMIC REPORT
69
and marketing a new product or new service must also be reflected
in the price.
The costs of economic advancement are more than recouped by the
society as a whole in the economic progress that results. However,
within the society the increased price of the new goods or service
creates problems.
The Consumer Price Index is not adjusted in any real sense for economic advancement-in quality, choice, and the many intangibles which
make it up. Therefore, some of the price problems that we see in rapid
economic growth as measured by this indicator have been misunderstood. We have used the Consumer Price Index primarily as an
indicator of the purchasing power of the dollar, as a thermometer,
as it were, to measure the fever symptom of the monetary disease
inflation. From its inception this index was related to the cost of
living rather than to the standard of living. The CPI almost presumes a constant standard of living and naturally in a period of
rapidly increasing standard of living, its effectiveness as a measuring
stick has been weakened.
Rapid economic growth does not necessarily bring inflation since
the improved quality or choice involved in the new product or service
is more than worth the increased price that it demands. This committee, by suggesting revising the Consumers Price Index has directed
attention to the bias in this valuable indicator in failing to adjust for
Teal economic growth."
The lack of understanding of a dynamic economy operating on a.
basis of plenty as, opposed to one of scarcity is most forcefully demonstrated by the previously discussed abstract model the President's
'Council of Economic Advisers have developed to "prove" a gap
between the economic potential 'ana the economic achievements in
our society.
The very idea of proposing a model as abstract and as removed
from reality as this one is to provide the base for an entire legislative
program for the Federal Government is amazing. Aside from the
fact that the model is based upon limited means of measuring
aggregates * * * GNP, and unemployment, the idea of trying to
measure economic potentials in terms of aggregates and basing
legislation on such evidence is fantastic.
At the cost of some repetition let us remember that the majority
report falls into the "gap trap" founded on a model which leaves out
of consideration all that is most meaningful in creating jobs, creating
economic activity. It ignores the basic economic process of putting
skills together with machinery to produce, of putting skills together
to distribute production, of putting human skills together to provide
services.
it Congressman Curtis makes the further observation on this point:
Increased price, even though quality is improved commensurately does of course create problems. A
mycin drug costing $10 is worth 20 times more than-really an infinite number of times more than-a St
bottle of patented medicine from the standpoint of health. However, before the mycin drug was available
it cost the sick person only $S for the best medicine that money could buy. Consumers do have a problem
of keeping up with the increased prices of the new and better goods and services now available. To them
the problem is one of keeping up with the increased standard of living now available to the society, not
keeping up with the cost of the old standard of living.
Efforts to adjust the money supply to keep up with economic growth should accordingly not be limited
to following the GNP indicator, but should be related also to some factor which recognizes changes in the
standard' of living. Money supply should be increased, that is, in accordance with increases in aggregate
economic activity but should also, as best it can, provide for increases in the cost of living resulting from
increases in the overall standard of living of our people. In this fashion we will ease the price problem
inherent in rapid innovation and increased quality of goods and services available in the marketplace.
70
JOINT ECONOMIC REPORT
In a dynamic economy leisure time is not waste.
Retooling time is
not waste. Abandoning obsolete skills and obsolete machinerv is not
waste. The steel shavings from processing a steel bar is not economic
waste. Yet that is the assumption of the economic model purportingto show a gap between the economic achievements of our society and.
the economic potential.
Contrary to the premise underlying the majority report and the
administration's philosophy, there is no definable economic gap in oursociety. We can surely improve our economic process, but not by
destroying that which is good by calling it bad. Nor can we improve
ourselves by ignoring the real problems that a fast-moving and highly
productive economy creates by a morbid concentration on the wake.
that follows in the sea left behind.
MONETARY POLICY
The Board of Governors of the Federal Reserve System, speaking
through their Chairman, ever since the adoption of the "bills prefer-ably" policy as the best open market device for supplying reserves,
have consistently and repeatedly stated that the policy was not rigorously held, but would be varied from time to time as changing condi-tions warrant. On several occasions in the past, purchases have been
made of longer term securities. It was therefore to be expected that.
a situation such as the gold problem of late 1960 would be met by a
change within the framework of "bills preferably" which, incidentally,.
is sometimes incorrectly referred to as a "bills only" policy.
While the majority of this committee continues to repeat its.
recommendations urging the abandonment of this policy, we cannot
help but express the hope that the important considerations inherent.
in the balance of payments problem will soon be lessened, so that
it may be possible for the System to return to the general rule of
supplying reserves and leaving to market forces the determination of
relative interest rates.
Our concern is not, of course, with the objective or the desirabilityof the lower long-term rates of interest so vigorously recommended
in the majority report. It rises rather from the fear that once the~
moorings and discipline of the market have been cast off, the drift.
into evermore rate tampering and "price rigging" of interest costs.
will be hard to control and even more difficult to reverse.
The 'majority report is almost obsessive in urging that monetarypolicy be directed at "nudging" long-term rates downward. This.
reflects the same economic philosophy that required the Federal
Reserve System, prior to 1951, to peg the Government bond marketa policy which resulted in serious inflationary pressures.
Just how far this nudging shall go short of outright "pegging,'
as was done prior to 1951, no one has said and, presumably, would
not now be willing to suggest. Surely we may expect that less,
rather than more, private capital will be attracted into the long
term market by the lower rates now proposed. If, as seems reasonable,.
lower long term rates do fail to attract short and intermediate into thelong term market, the temptation to follow the path of still more
Government intervention in the effort may sooner or later challenge;
anew the defenders of free capital markets.
JOINT ECONOMIC REPORT
71-
We hope that the administration, in spite of the urgings of our
committee majority, will have sufficient confidence and respect for
free markets and the statutory independence of the Federal Reserve
System to withhold pressing for a continual departure from the "bills
preferably" or other "soft money" policies.
PRICE STABILITY
In view of its interpretation of recent history, the Council of
Economic Advisers logically concludes that "the expansionary effects
of Government programs will be welcome even if they occur well
after the recession has been reversed."
The mildness of the recent recession supports the thesis that the
underlying forces of economic expansion are strong and that they have
of late been only temporarily suppressed. Signs of economic recovery
are already here and are rapidly multiplying. In view of these facts
and 'in view also of the substantial increases of Federal spending recently
initiated, it would be courtingj inflation and a new gold crisis to plan
now new governmental spending programs which would mature when
the economy was already advancing without them.
With the Government again facing deficits and proposals for larger
and larger spending being met at every turn, it is time that we reassure
our savers and the foreign owners of dollar balances that price stability
is a serious objective of the American people. To argue that it is
implicit in the Employment Act of 1946 is effectively to sweep it
under the carpet without laying to rest once and for all time the doubt,
however well or ill founded, whether we really mean what we say about
stabilizing the value of the dollar. We concur therefore in the recommendation repeated in the Economic Report of January 18, 1961, that
the Employment Act be amended to make the maintenance of a
reasonable stable price level an explicit aim of Federal economic
policy.
JOINT ECONOMIC
COMMITTEE PLANS
While it is essentially an intracommittee problem, we find it
difficult to reconcile some of the majority report's glib recommendations with the announced program of committee activities for the
remainder of the year. In more than one instance, the majority
appears already to have arrived at firm conclusions which its contemplated studies may or may not support.' 2
1. The entire majority report is based on the premise that "structural" unemployment is relatively unimportant while the committee's
plans propose a study by a subcommittee to examine "the cyclical,
secular, and structural character of unemployment."
2. The majority report makes the recommendation that the 25
percent gold reserve requirement against Federal Reserve notes and
deposits be eliminated, along with several other recommendations
with respect to the balance of payments. A subcommittee is already
at work under a directive "to look into the gold and balance-of-payments question." It will be surprising if this subcommittee's activities
are not hampered by the fact that the majority has already announced
its conclusions in this complicated area.
12Committee report, pp. 47-5O.
JOINT ECONOMIC REPORT
3. The majority report recommends more flexible private pension
systems and urges specific recommendations respecting vesting of
pension rights. At the same time the program of work for the
coming year states that a subcommittee "will study and bold hearings
on the effect of the private-pension system on employee mobility."
4. The majority report makes quite specific recommendations in
the field of foreign trade policy. In doing so, they are surely prejudging evidence to be sought and weighed by a subcommittee, which
it is said, "will conduct studies and hold hearings on such subjects
as trade, trade agreements, international investments, U.S. imports
and exports, and U.S. foreign aid."
5. The majority report recommends the introduction of a Federal
capital budget while the program for future activities proposes a study
which will try to determine how the budget can be made a more
useful document.
6. The majority report, grasping at administration proposals, thus
far revealed recommends a number of incentives to investment while
the committee's program speaks of full committee hearings on the
volume and stability of private investment.
It is difficult to see the purpose of or how these studies can be
useful if the committee is already in a position to state its conclusions
in such substantial areas.
Since these studies and inquiries are yet to be made, we of the
minoritv have reserved judgment on these points at this time and
have concentrated our major attention on the "slack" and "gap"
contention which underlies the administration's economic policy.
CONCLUSION
The economy is apparently on the way to recovery. It is important to note that this turnabout has been substantially the product
of the dynamic enterprise system itself with, up to this point, at
least, little direct help from Government. The present administration admittedly has not addressed itself to the problem of recession
so much as it has to what it chooses to regard as the problem of longrun growth and gap closing.
In a free society economic development comes naturally in the
direction and magnitude that the people want, as evidenced by their
saving and investment decisions. We have no quarrel, nor does
anyone, with the ideal of growth, but we do question the tendency
to set it up as a goal in itself and to ascribe an increasing share of the
responsibility for attaining it to Government.
Considering the inherent frailties of the measurement of growth
and of the calculated mathematical "potential" which we have discussed at some length, we believe that Members of Congress may
safely judge various legislative proposals in the several areas on
their respective merits without being too concerned about their alleged
need for, or defense as a contribution to, "gap closing."
We are, accordingly, skeptical of the view that greater Federal
investment in education, health, housing, research, and resource
development will accelerate the Nation's long term economic growth.
Some of these types of expenditures, may be justified on grounds of
social welfare and others on grounds of improved economic efficiency,
but it is hard to see how all of them can accelerate the Nation's long
term economic growth merely because we call them "investment."
73
JOINT ECONOMIC REPORT
Efficiency and productivity are undoubtedly promoted by some
types of investment but they can also often be promoted without any
additional outlays or even with reduced outlays. If we seriously
want to accelerate economic growth we should search out and remove
many existing impediments to efficiency whether they arise from careless supine business management from the coercive power of trade
unions or from governmental legislation itself.
In discussions and programs which turn upon the premise of
"slack" and "slowdown " there seems indeed to be a disposition to
look askance at the dynamic economy and. assert a need for tinkering
with it since it sometimes makes mistakes and proceeds by spurts.
The majority report of this committee for example refers to this as
an "affliction." We believe that the touchstone for judging legislative
proposals may nevertheless be better directed toward maintaining
the goal of a dynamic economy since dynamics and change are precisely what is necessary to support the private efforts to grow and
realize our maximum product and well-being.
HOUSE OF REPRESENTATIVES
SENATE
THOMAS B. CURTIS,
PREscoTT BUSH,
E. KILBURN,
WILLIAM B. W1DNALL.
JOHN MARSHALL BUTLER,
CLARENCE
APPENDIX TO MINORITY VIEWS
LEGISLATIvE
RECOMMENDATIONS IN JANUARY 18,
REPORT OF THE PRESIDENT
1961,
ECONOMIC
I. Employment and unemployment:
1. Extend coverage of the unemployment compensation
system to about 3 million additional workers, most of
whom are employed in firms having fewer than four
employees.
2. Give consideration to a program which would temporarily
supplement regular benefits in some such manner as
was done with good effect in 1958.
3. Enable the Federal Government to assist areas that experience high and persistent unemployment, directing
funds to localities of greatest need and avoid spreading
available Federal funds too thinly over a large number
of areas.
4. Extend coverage of the Fair Labor Standards Act to
several million workers not now receiving its protection; and make a moderate adjustment in the minimum
wage provided in the act.
5. Establish a statutory commission on equal, job opportunities under Government contracts and enact legislation for carrying out the proposal of equal pay for
equal work without discrimination because of sex.
6. Remedy the serious defects in the legislation enacted in
1958 to protect the interests of the Nation's working
men and women in private pension and welfare plans;
and revise the outmoded provision of the 8-hour laws
applying to Federal and certain federally assisted
construction projects.
II. Federal fiscal policy:
1. Hold appropriations for fiscal 1962 within the limits of
expected revenues.
2. Extend present tax rates on corporation income and
excise taxes for another year.
3. Enact measures to charge users for special benefits which
they derive from particular Government activities.
4. Raise highway fuel tax to 454 cents per gallon to provide
funds in the highway trust fund sufficient for construction of the Interstate, Highway System -on schedule;
and rescind the action.taken by the Congress in 1959
which diverts funds from the general fund of the Treasury to build this road system.
5. Raise the excise tax on aviation gasoline from 2 cents to
4% cents per gallon, impose the same tax on jet fuels,
and retain the receipts from these taxes in the general
fund to help defray the cost of the Federal airways
system.
75
76
JOINT ECONOMIC REPORT
6. Provide a rate increase which will put the postal system
on a self-supporting basis, apart from specified public
services.
III. Monetary legislation:
1. Give wthe Secretary -of the Treasury authority to raise
funds in the long-term capital market when, in his
!judgient,.thisisin -the public interest, even-if -the cost.
of the funds is above 4% percent.
2. Make reasonable price stability an explicit goal of national economic policy.
.
.
-
..
:..
:K:11V: H usin~g!:, ..
: ...
Js. en: ,s .li.'--Repeal~statutory;termination datesion-existing programs,
*,,:. .;: its .. :for'housing.and community development and provide
for their control through normal appropriation processes: rather -than- by 'limitations i.on authorization
amounts..
2. Eliminate oradjust maximum permissive interest rates
to levels that will not- bring about a. restriction from
:
-- '
'-.
timeto time in the flow of investment funds.
-3. Remove limitations -on tile amount of mortgages that
*-can-be'insured bythe Federal Housing Administration
4. Remove legislative limits on grants -for urban renewal
projects.and substitute permanent authority for annual
' appropriations.
i . 5. Maike permanent the program to insure loans on home
improvements.
- 6.' Present ceilings on interest rates-should .be.6liminated or
lsubstantially raised for loans made or guaranteed by
-:
the Veterans' Administration and for mortgages insured -bv the Federal Housing Administration on
rental housing. especially housing for the -elderly, and
-on family -housing built for occupancy by members of
-the armed services:
,V. Agriculture:
- -. 1: Modify price support laws to reflect-unit cost reductions
resulting from .increasing-,technological efficiency on
commercial farms and thereby reduce budget expendi-t-ures for the stabilization of farm prices and support
of farm income.
-2. Make maximum effort to use more of our.'accrued agricultural-surpluses in the food for peace program.
VI. Competition:
1. Require firms .of significant size engaged in interstate
':.E s--
:
ire.. " -
~~commerce and proposing to- merge to notify the anti-
*- al -
trust agencies of their intention.
--2. Give the Federal Trade Commission -authority to seek a' preliminary injunction in the case- of mergers likely to
violate the-antitrust laws.
"
3. Give the Attorney General the tpower to issue civil investigati~ve demands for the necessary facts when civil
procedures- are contemplated in antitrust cases.
.
-.
JOINT ECONOMIC REPORT
77
VII. Education and health:
1. Supplement the Federal Government's established programs for assisting education by aiding States and
local communities and institutions of higher education
to provide needed educational facilities.
2. Amend and expand the program of Federal assistance
for medical care for older persons under the regular
old age assistance program and the new program of
medical assistance of needy older people who. are not
recipients of public assistance so that more older. people
will be able to obtain needed protection to cover major
hospital and medical costs incurred because of serious
illness.
68180-61-6
-INDIVIDUAL VIEWS OF SENATOR JOHN MARSHALL
BUTLER
1. FOREWORD
The majority's report in its foreword shows: a complete lack of
un3erstniiding of the concep'ts .lich were adopted: by the Congress
after heated and prolonged debate in 1945 while World War II was
still in progress to establish a free enterprise economy. Although
-subsequent chapters of its report refer to private enterprise, there is
nothing in the foreword outlining the objectives of the Employment
Act of 1946 to indicate that it provides that:
SEC. 2. The Congress hereby declares that it is the con,tinuing policy and, responsibility of the Federal Governiment to use. all practicable means consistent with its' needs
and.obliga-tions and other 'essential consideration of national'
policy, with the assistance and cooperation of industry,
agriculture, labor, and State and local governments, to co*ordinate and utilize all its plans, functions, and resources
for the purpose of creating and maintaining, in a manner
.calculated to foster and promote free competitive enterprise
..and the general, welfare, conditions under which there will
a'e
f'aforded us'eful employment opportunities, ihnfhding
self-employment, for those able, willing, and seeking to work,
and to promote maximum employment, production, and,
purchasing power.'
There is normally no mass unemployment in Communist-dictated
-countries. It is a phenomenon of freedom and results from the
fact -that individual consumers 'are. the. arbiters of our economy.
Theyare the- ones. who.determine8*h'ere: the'-adividu~al shall ''work
and the type of occupations. in which they shall be employed. Unless
we are ready to abdicate this essential and basic principle, it is futile
to talk. of proposing a-governmental organization which will supply
a job for everyone. In fact, mere.employment is not an end in itself.
Rather it is the fruits that society gains from such employment. that
energizes our economy and provides the incentives and goals..that
lead to a useful and productive life for all.
President Eisenhower, on January 18, 1961, transmitted his final
Economic Report to the Congress of the United States: A reader
of the majority's report would gain the impression that we have
been woefully lacking in utilizing our resources or in providing adequate employment for our people. In order to set the record straight,
it is important to note that in terms of dollars of constant purchasing
power, the gross national product increased from 1953, at the time
when President Eisenhower assumed office; until 19'60 by 18.3 percent.2
Furthermore, the majority's report'implies that theie has not been
a substantial number of new jobs created which have added to our
"'Current Price Developments and the Problem of Economic Stabilization," hearings before-the Joint
Committee on the Economic Report, 80th Cong., Ist sess., pt. 1, June 24, 1947, p. 1.
2 Economic Report of the President, transmitted to the Congress January 18, 1961, p. 128.
'{1)
80
JOINT ECONOMIC REPORT
personal welfare, our educational facilities, our national health, and'
our armed strength. In 1953, at the time when President Eisenhower
assumed office, the total civilian labor force was 63,815,000.3
At present, it is more than 70 million people, an increase of 7 million,.
or'rhore' than '10'percent durii&' his te'r1''f b.ffice. ' Alt ough.therehave been some changes in the concepts used to measure employment
by Government agencies and the compilation of data during this.
period is not consistent, nevertheless -the fact remains that since 1953.
the number of those employed has increased by 4.4 mnilliQn. 4
:Any 2discussion .of -these-figures overoks-the f'a'ct'Ait ;diufiig- the
period im'ediattely prior to 'the inauguration of PTegidkiit ~isenhower.
lour-country'was engaged in a' war with Korea; a-nd-ma-ny- jobs had been
!icreated in order to supply our Armedi Forces.' All through thet
f--Eisehhower; years -we enjoyed a substantial -neasdre of prosperity
'without sacrificing the lives 'of 'our Loved ones: Regardless of hdw
the majority may attemrpt -to 'twist these' datait is'still 6 fact t hat,
prospegity was attained without sacrificigg our ytonuth., aMd we are
confident that histoxy.will recorid this, as a major acenomplrib:1ent.
TI
Dorder ;to place these -conivilatious in some perspetive. it dis worth
notiig .thatitnemiployment as a perqeit io'f the civiian 4laf1or
force
from 1933 when the Roosevelt administration first took.office until
the-start of World War1i niever'reached asgow a level'as'was achieved
during {the Eisenhower yeass.. We would hate tpo think that ,the only
means wt our -disposl t.o irestore and 'maintain .a level, of usefiul and
gainful -employmnent,, as provided 'in the Etn-ploymlent.Act.of .&'946, is.
to involve our countryin- a major. holocaust.
-
. :2. JECONOMIC 8SITUATION. ANI .OJUTLOOK,
.
The majority's report in its calculated effort to
tisparagethe
accomplishments of the past 8 years attempts to deict' the' peent.
economic o6utlook'as -one -marked by catastrophe and 'failure: A
inoth'ing could 'be furither from the truth. -.
' '
Great emphasis has been placed in it's report on' -the 'cuirent levels.
of unemnplo3n"6nt. However, these data are not 'necessarily-hdmo*geneous figures. In-fact, du'ring :the hearings 'before the Jint 'EC6noi'ic.Committeeion -December 7,1960, Seymour L. Wolf'beiii, Deputy
Assistant Secretary. of Labor, stressed -the -fact -that our current rate
of unemployment may largely 'be attributed 'to the 'fact.that we ai-e
presently absorbing 'the unusual number of young people who have
just beco"m'e 18 years of'age-into the 'lablor nmarket: In'-his'testinmony
he said that:
You see back in 1950 we were running about 2 million
young people becoming 18 years of age each year. . Now we
are getting: dose to 3nmillionsa yearand; come 1965, we really.
almost go off the ch~art when we
Mi4it almost 4 million o.ung.
people.bec6ming t8 years of age eachyear.
'What we are' really doing, of course, is reaping the .results
of the postwar high birth rates.
This, 'of course, means that we are already beginning- to'
get a real big increase in the number of new young workers
coming in for jobs.
-
Ibid., p. 146.
4 Ibid.
3
JOINT ECONOMIC REPORT
81
Our estimate as a matter of fact in that there are going to
be 26 million young workers entering the job market during
the 1960's, way, way more than we ever had before, and that
is something that began this year.
As you can tell, that is only the beginning and as we look
into the immediate years ahead this is going to be a very
important phenomena with which we are going to have to
deal.t
The problem is complicated by the fact that at the present time
there are many people who lack skills that are badly needed. Until
they have been acquired, new entrants into the labor market will be
unable to carry their weight in our economy. Insofar as this fact is
true, it is no reflection on the ability of the American free enterprise
system to discharge its obligations of providing jobs and the goods
,and services which our people demand. On the contrary, this is a
temporary situation and one which presents a challenge to the leader,ship of our country, as there are many tasks to be done at a time
when the world is involved in' so many difficult situations.
In the roundtable discussion which followed the presentation of
expert testimony during the December hearings before the Joint
Economic Committee, Representative Thomas B. Curtis raised a
pertinent question with regard to unemployment. He said:
Have we ever tried to measure the excess? That is what
I wonder.
I ga.ve a subjective test. I said I read the New York
Times want ads and you see just long lists of demands.
That, of course, is just a straw in the wind. But has there
been an attempt to measure any of that and "moonlighting,"
too? 6
Prof. Charles L. Schultze was unable to supply any enlightenment
,on this basic point. The following colloquy is pertinent:
I may confess my ignorance of some professional reading.
I do recall a British article which attempted to measure this
where the British have numbers which give job vacancies;
so that you can match job vacancies against unemployment.
My own impression is that while it alwavs occurs even in
the depths of a recession, you are going to find some industries short of labor in the sense they cannot get the kind
-of labor they want.
This is why the mix of unemployment is so important to
know.
'My own feeling would be that this has not increased so
'substantially, however, if at all, that we can now say that we
'ought to be satisfied with 6 percent unemployment because
really from an aggregate standpoint it is no worse than 4
percent.
It simply means there is more dynamism in the economy.'
"Current Economic Situation and Short-Run Outlook," hearings before the Joint Economic Commrittee, 87th Cong., 1st sess., Dec. 7, 1960, pp. 4-5.
6 Ibid., p. 112.
7Ibid., pp. 112-113.
82
JOINT ECONOMIC REPORT
Congressman Curtis also stressed the fact that the average individual
today has more attractive alternatives available to him. For example,.
he said:
The advancement in the field of health, which is to a large
degree technological, does not show up.
I always think of when I first came to Washington 10 years
ago it took 53i hours to fly down here and now it is usually
under 3 hours.8
Mr. Wolfbein was in basic agreement with Representative Curtis..
that the problem of unemployment is not a lack of jobs for those with
skills but, on the contrary, the availability ot employment for those~
who have yet to master a trade. Mr. Wolfbein said:
For example, Senator Sparkman, you will find that a very
considerable portion as you know of the unemployed people,
and this subject was brought out, are teenagers. They have
the highest rate of unemployment of any group.
When we ask ourselves why is this and we try to trace it
back, you find that you always come inevitably to this group
you call dropouts, young people who don't finish high school.
The unemployment rate these days is 6f2 percent. Among
young people who have dropped out of school it is as high as
30 and 35 percent.9
The majority's report states thatThe 1960-61 recession is, we believe-and hope-at a
turning point.
However, of all the expert witnesses we have heard, the
most optimistic expected that, by the end of the year, 6 to
7 percent of the labor force will still be unemployed and
unemployment would not be reduced to as low as 4 percent
by the end of 1962. These expectations are based, moreover, on the assumption that the administration's legislative
program will be promptly enacted, and that there will be a
continued substantial increase in expenditures by State and
local governments.'1
It engages in a totally unwarranted castigation of those substantiar
achievements that have been made, and it appears to destroy thehope of those who are seeking work by insinuating that the American
free enterprise economy has seen its best days. No responsible
leadership can adopt such a course, as it is at variance with the facts.
Better vocational training and higher educational standards are themeans of securing employment for those who are presently finding it
difficult to become members of the labor force.
There is one further comment that is in order, namely, the strongemphasis placed on growth as measured by the gross national product.
As with so much other Government data, this figure too has now
become a mystical number the average citizen would find difficult to
define or explain. Actually, this sum is computed by the. Depart-ment of Commerce. This concept was defined in the "1947 Statisti6alI
Supplement to the Survey of Current Business." It stated thatIbid., p. 106.
9Ibid., pp. 116-117.
101961 Joint Economic Report, report of the Joint Economic Committee, Congress of the United Stateson the January 1961 Economic Report of the President, 87th Cong., 1st sess., p. 3.
JOINT ECONOMIC
REPORT
83
* * * Gross national product or expenditure is the market
value of the output of goods and services produced by. the
Nation's economy, before deduction of depreciation charges
and other allowances for business and institutional consumption of durable capital goods. Other business products used
up by business in the accounting period are excluded. The
Nation's economy in this context refers to labor and property
supplied by residents of the Nation. Gross national product
comprises the purchase of goods and services by consumers
and Government, gross private domestic investment, and
net foreign investment.',
In other words, there is no attempt to measure the extent of the
depreciation in real assets which has occurred.
If we consume our productive plant and thus actually reduce our
ability to meet Communist aggression, it is possible under the concepts devised by these statisticians for the gross national product to
rise and for the President of the United States to claim that our
national growth has risen to an alltime high. This is an absurdity
with which no sound economist or Member of the Congress would
wish to associate himself.
The gross national product is also increased whenever Americans
invest their funds abroad, and most importantly, it can be raised
rather drastically by merely increasing the amount of Government
payments, including wage rates. This measure is in sharp contrast
to national income which is seldom discussed today. This same
supplement defines national income as follows:
* * * National income is the aggregate earnings of labor
and property which arise from the current production of
goods and services-by the Nation's economy. The Nation's
economy refers to the labor and property supplied by residents of the Nation. Earnings are recorded in the forms
in which they accrue to residents of the Nation, inclusive of
taxes on those earnings. They consist of compensation of
employees, the profits of corporate and unincorporated enterprises, net interest, and the rental income of persons."2
Obviously, the use of this latter figure will obviate many of the
problems that are inherent in measuring growth in terms of an increase
in the gross national product.- It would also focus attention on the
fact that in many industries our profits have been overstated, and
capital is being consumed today in order to make a temporary record.
America's industrial might was not established in this fashion.
What is perhaps more important in terms of America's well-being
is the increase in our physical facilities that have taken place during
the period 1952 through the end of 1960. After all, money is important, but it is still only a means of exchange. All of us require
food, homes, schools, telephones, automobiles, and gasoline. A few
I "1947 Statistical Supplement to the Survey of Current Business," U.S. Department of commerce
Bureau of F9reign and Domestic commerce, 1948, p. 182.
12Ibi
84
JOINT ECONOMIC REPORT
of the salient physical measures of the progress that has been achieved
during the past several years are listed in the following chart.
Selected indicators of economic progress
[Millions]
Percent
incerase
1959
1953
Number of families owning automobiles I------------
31.0
39. 0
25.8
Number of homes with television sets3------------Number of telephones 4--------------------Steel capacity (net tons)5-------------------U.S. petroleum production (barrels)5-------------Domestic petroleum demand (barrels) 7-------------
27. 7
45. 5
64. 3
40. 1
25. 6
9.2
23. 9
Number of nonfarm owner-occupied dwelling units 2.....
22.7
5.
117. 5
2,357. 0
2, 775.0
28.0
70.6
147. 6
2,575.0
3, 439.0
23.3
Report of the President transmitted to tise Congress, Jan. 29, 1960, p. 137.
Ibid., p. 138.
Ibid., p. 139.
of the United States, Colonial Times to 1957,"1 U.S. Bureau of the Census, W~ash4"Historical'Statistics
ington, D.C., 1960, p. 480. "Statistical Abstract of the United States: 1960," U.S. Bureau of the Census
(81st ed.), Washington, D.C., 1960, p. 512.
AAnnual Statistical Report, American Iron and Steel Institute, 1958, New York, pp. 8. 9.
"Petroleum Facts and Figures, Centennial Edition 1959."1 American Petroleum Institute, New York,
P. 41. Oil and Gas Jotirnal, the Petroleum Ptislishing Co., Tulsa, Okia., vol. 59.,No.5, Jan. 30, 1961. p. 121.
"Petroleum Facts and Figures," op. cit., p. 259. Oil and Gas Journal, op. cit., vol: 58, No. 4, Jan. 25,
1960, p. 171.
IEconomic
2
The economic theorists who have prepared the majority's report
are so preoccupied with the artificial measures of well-being, that, they
have neglected the actual physical facts of life that determine whether
we are moving forward as a country or are losing our position in the
race for world leadership. For example, during the course of the
hearings by the Joint Economic Committee, testimony was received
from Dr. George Cline Smith, vice president and chief economist of
the F. W. Dodge CQrp. of New York City. There are few more
knowledgeable individuals concerned with the construction industry
in this country. Dr. Smith testified as follows:
* * * As I stated to this committee a year ago, a fairly
large proportion of consumer spending is not really discretionary. Food, for example, accounts for nearly half of
nondurable goods spending and in the services sector, the
largest housing expenditure is a purely theoretical conceptthe imputed rental value of owner-occupied dwellings..
Few consumers have ever heard of this concept and~ of~,
course no actual money payment is ever made. Neverthi-'
less, this one item accounts for more than 20 percent of all
consumer expenditures for sevce.
In other words, what Dr. Smith is saying is that the owner of a
hontie who,, of course, pays no rent, as he has purchased. his dwelling;is earning an imputed' rent based on what this dwelling would rent
for if it were placed on the rental market. Therefore, the gross
national product and national income figures include entirely fictitious
data that have no bearing, on the real facts of life with which- most
consumers and voters deal.
1i January 1961 Economic Report of the President and the IEconomic Situation` and Oufilok,'hearings
before the Joint Economic Committee, Congress of the United States, 87th Coisg., 1st seas., Feb. 9, 1961,
JOINT ECONOMIC REPORT
85
It is important that the Congress clarify these misconceptions that
exist between the theories of some academicians and those citizens
who are required to earn their living in a normal way and pay their
taxes.
3. ACTIONS FOR ECONOMIC RECOVERY AND GROWTH
The majority's report, in dealing with programs for economic
recovery and growth, is mainly preoccupied with the role of Government. Our economy has grown to its present position largely because
it has harnessed the efforts of individuals under our free enterprise
system.
Although lipservice is frequently paid to this theory, there are scant
recommendations in the chapter devoted to this subject in the majority's report. On the contrary, it is confined to a recasting of
various administration programs, including the extension of temporary
unemployment compensation, aid to education, urban renewal, the
liberalization of social security, a new health program, assistance for
depressed areas, improvements in FHA, and measures dealing with
natural resources.
It would be futile to say that none of these measures have merit,
but in and of themselves, they cannot bring this Nation to the standard
of living which it has a right to enjoy.
An examination of President Eisenhower's Economic Report which
was submitted to the Congress on January 18, 1961, reveals a number
of factors that might have a far more reaching effect over the long run.
Although our society is one in which private enterprise based on risktaking by capital is the motivating force, there has been little expansion in the profits of those corporations, after the payment of income
taxes, that have contributed so much to the growth of our economy in
the postwar years.
Taxes
In table C-57 of the President's Economic Report, it shows that
*the total corporate profits after taxes in 1960 were $23 million."4
This is approximately what they were in 1950 at the start of the Korean
war. In the meantime the national income has risen from $241.9
billion to $418.4 billion, or an increase of 72.9 percent.1 5
If profits are to provide the primary stimulus for capital creation
and the impetus -to finance new undertakings, there must be a sharp.
-reversal in this trend. For a decade this has been lacking, and it is
one of the most serious problems facing our ceonomy at the present
time. Yet, it is not even mentioned in the majority's report.
Furthermore, according to those who have endeavored to study
this whole area of capital formation, there is little question but that
the profits that are reported are vastly overstated inasmuch as depreciation allowances, because of inflation, do not replace those assets
that have worn out over the years.
America requires a highlv dynamic economy. There are millions
of our workers who are employed in the steel industry, in the metalworking industry, and in other crafts that would normally be engaged
Report of the President, January 1961, op. cit., p. 192.
Is Ibid., p. 138.
24 Economic
86
JOINT ECONOMIC REPORT
in producing the new facilities that a more realistic depreciation
allowance in the tax laws would make possible. If those who express
such concern for the employment of our citizens and economic wellbeing in terms of a more productive economy adopted a tried-and-true
method of depreciation, more progress would have been made.
Although complete and detailed data of Federal tax receipts by
income classes is not available beyond 1957, an examination of the
basic allocation of tax receipts toward certain Federal programs is
most revealing.
On the expenditure side are listed the items in terms of priority.
Interest payments must be met if the Government is to remain solvent. General Government expenditures are shown next; major
national security is our next order of priority; international affairs
and finance come next; followed by veterans' services and benefits.
Then other domestic programs are considered in their order of interest
to the Congress, such as agriculture and agricultural resources, labor
and welfare, commerce and housing, and natural resources.
On the receipt side are listed the income by source in the following
order: First, there is income from corporation income taxes, then excise
taxes; followed by estate, gift, customs, and miscellaneous taxes; and
then the receipts from the personal income taxes, which are shown in
terms of income tax brackets. This table reveals some startling facts.
If the first four expenditure items are taken; namely, interest payinents, general Government expenses, major national security programs, and international affairs and finance expenditures in the year
1957, we find that they preempted all of the receipts from the corporate income tax, all the excise, estate, and gift taxes, customs and
miscellaneous receipts, as well as the receipts from personal individual
income taxes down to the $7,000 to $8,000 brackets. By adding the
next two priorities of budget expenditures-veterans' services and
benefits and agriculture and agricultural resources-we then find
the Congress has authorized the use of the receipts from all corporate
income taxes, excise, estate, and gift taxes, customs, and miscellaneous
receipts, as well as the payments to the Federal Government through
personal income taxes down to the $5,000 bracket. Expenditures
for labor and welfare, commerce and housing, and natural resources
were paid for by taxes received from those citizens with taxable incomes of less than $5,000.
There follows a table which indicates the actual budget expenditures and receipts in 1957, showing the breakdown of individual
personal income tax receipts by the various brackets:
87
JOINT ECONOMIC REPORT
Dollars
(billions)
Expenditures:
Interest -------------------------------------------General Government Major national security -43.3
International affairs and finance -2.0
Veterans' services and benefits --------Agriculture ---Labor and welfare -----Commerce and housing -1.4
Natural resources -1.3
Total --
-------
----------
7.3
1.8
-------------------------
-------------------------
Receipts:
Corporation income tax -21.2
Excise and miscellaneous taxes -14.2
Individual income tax:
$100,000 to $1,000,000 and over-1.9
$50,000 to $100,000 -2.2
$25,000 to $50,000 -3.
.$15,000 to $25,000 -2.7
$10,000 to $15,000-3.9
59,000 to $10,000 -1.
$8,000 to $9,000 ---------------------------------$7,000 to $8,000 -2.8
$8,000 to $7,000 -3.
$5,000 to $6,000 -3.4
$4,000 to $5,000 -3.2
$3,000 to $4,000 Under $3,000 ----------------------------------------------Total ----------------------
Percent of
total
4.8
4.5
3.0
69.4
10.5
2. 6
62.4
2.9
6.9
6.5
4. 3
2.0
1.9
100.0
30.4
20.4
1
7
2. 2
3
2. 2
1. 7
69. 7
2. 7
3. 2
4.4
3.9
5.6
2.4
3.2
4.0
4. 7
4. 9
4.6
3.2
2.4
100.0
NOTE.-Of the $35,000,000,000 derived from the personal income tax, $28,000,000,000 (or 80 percent of the
:total) was in the personal income tax brackets under $25,000.
Although attention has been focused on the corporate income tax,
-our present personal income tax structure also has become a bar to
new investment in profitmaking job opportunities. In fact, our
. economy is plagued by double taxation at every point.
Those who invest their savings in American industry so as to pro*duce jobs are not only subject to the corporate income tax but to
-personal income taxes upon any dividends received. The magnitude
of this double taxation is clearly illustrated in the following table.
Percent of earnings paid
'Taxable income derived entirely from common dividends; incore tafe8 to the Fedno allowance for deductions or personal exemptions:'
eral Oovernment
$2,000059. 7
4,000 ---------------------------------------------60. 2
6,000061. 0
8,000 --
61. 8
10,000012,000014,000016,00 00
18, 000-
62.
63.
64.
65.
66.
20,000022,00026,0000-
32,000038,000044,000050,000060,000 -70,000 -79.
80,000 --------------------------------------------90,0000100,000150,0000200,000- -------------------- ----- -------- -------------- ------'t
8
7
7
7
6
67. 5
68. 4
69. 9
71. 8
73. 3
74. 6
75. 8
77. 5
0
80. 2
81. 3
-82. 4
85. 9
87. 7
It is assumed that such deductions and exemptions equal the amount of income other than dividends.
88
JOINT ECONOMIC REPORT
If the Congress is to fulfill its mandate of providing a maximum
number of opportunities for employment in private enterprise, it must
soon initiate genuine tax reform that will not reduce revenues, but, on
the contrary, will increase them, as tax rates will not be designed to
punish success but rather to stimulate more productive effort.
Housing
It should be noted that the majority's report places undue emphasis
on the interest rates on FHA insured loans. In doing so, it completely
neglects the fact that Government underwritten mortgages in 1960
totaled $56.3 billion, although all nonfarm properties had mortgage
debts of $193.3 billion." In other words, the Government portion of
the total was only 29.1 percent.
Depressed areas
The majority's report also endorsed the administration's plans for
aid to depressed areas. However, once again it overlooks the fact
that many communities that have been able to meet their problems;
would become depressed if they were forced to absorb the taxes;
necessary to enable others which have been less prudent to finance
their recovery.
Social security
At a time when the needs of mobilizing -the resources of the free
world are at an all-time high it seems almost incredulous that the
majority's report would state that* * * the President's proposals to increase minimum social
security benefits to provide for reduced retirement age of
men and to increase benefits for widows are not only a humane step toward raising the dignity and level of comfort of
our older people, they also offer an opportunity to obtain a.
large stimulant to consumer demand for each dollar
transferred."'
During the 86th Congress, a report was submitted by the Subcommittee on Problems of the Aged and Aging of the Committee on Labor
and Public Welfare, the chairman of which was the senior Senator
from Michigan, Senator McNamara. The majority's report proposed
that* * * the subcommittee recommends the establishment of
a senior citizens service training program for the purpose of
recruiting and training willing and able older persons to serve
in specified community activities, the personnel for which
are otherwise in short supply.' 8
The individual views filed by Senators Dirksen and Goldwater also
supported this.same contention. In fact, they said:
No evidence has been presented to justify new Federal
programs to further the employment -of personnel who are
in short -supply. On the contrary, -there is every -indication
that private agencies, the States, and the communities have
sufficient incentives to mobilize the resources of those whose
10Economic Report of the President, op. cit., p. 181.
"191I61Joint REonomic Report,-op. cit., p. 10.
"."The Aged and the Aging in the United States: .A National Problem," report by the Subcommittee
on Problems of the Aged and Aging, Committee on Labor and Public Welfare, U.S. Senate, 86th Cong.,
2d sess., committee print, 1960, p. 4.
JOINT ECONOMIC REPORT
89
skills are in great demand. There would be more justification, for concern if the majority's report directed its attention
to individuals whose skills were not in great demand. It is
very difficult to find any justification to establish a new
program for those who admittedly are in a position to supply
needed services."
There is no indication that increasing social security benefits would
.actually create any new wealth, and those who are presently gainfully
*emploleed, would have to share their income in order to create the
additional consumer demand which the majority's report proposes.
Deficit financing
Although it is apparent that the new administration has once again
adopted the timeworn axiom of deficit financing, it is amazing that
the majority's report finds fault that apparently the deficits planned
are not sufficiently large to close the spending gap which it foresees.
It states that:
* * * All of the administration actions taken to date
and, all of the legislative programs which the President has
recommended-including a substantial increase in defense
expenditure-are expected to cost $1.3 billion in the fiscal
year ending next June, and $3 billion in fiscal 1962. Total
budget deficits in these years are expected to be $2.2 billion
in fiscal 1961 and $2.8 billion in fiscal 1962.
* * * we cannot help noting that the total effects of all
the actions so far taken and proposed will be small as compared to the gap between the Nation's expected economic
performance and its economic potential. 2 0
All of our experience defies acceptance of these time-worn recommendations which have not proved useful in the past. Future gener.ations of Americans have a right to expect that their Government
will meet the problems of our times in a realistic fashion.
Any considered analysis of the problehis facing our economy
clearly shows. that it will be necessary to spend a far larger amount in
order to employ our expanding working force. This can only be
accomplished through the investment of capital and the provision
-of jobs that are needed in order to provide us with the goods and
services that constitute America's standard of living.
Antitrust
The majority's report also recommends that:
Finally, we would like, as a minimum, to see a program
for accelerated enforcement of the antitrust laws and budgets
for the antitrust enforcement agencies which are more realistically related to the magnitude of the tasks these agencies
have been given to perform. We believe that dollars spent on
effective antitrust are the least costly dollars of all, because
dollars spent for this purpose will, in the long run, have the
greatest multiplier effect of all in stimulating private ecoIbid.. p. 180.
O°
19F)1Joint Economic 11eport, op. cit., p. 11.
90
-
JOINT ECONOMIC REPORT
nomic activity, promoting self-adjustments in the economy,
and relieving strains on the budgets of Federal, -State, and
local governments.2 '
On this subject, it is important to note that the most important.
antitrust actions that have been taken in recent years were initiated
by the previous administration. In fact, certain important cases,
which laid the groundwork for subsequent private treble' damage
suits may be attributed to the resourcefulness and. hard work of the
Antitrust Division under its tornier head, Mr. Bicks. .
During the confirmation hearings by the Senate Committee on
the Judiciary of the present Attorney General, Robert F. Kennedvr
the following pertinent colloquy occurred:
Senator CARROLL. Mr. Chairman, I previously expressed
my opinion, approval of the present Attorney General and
his staff. I think he has an excellent record. And as a
member of this committee and on several subcommittees, on
every occasion when I have called into a different administration, that is, a different political faith, I have had the
cooperation by talking either to Bill Rogers or to the Deputy
Attorney General, Judge Walsh, or to Robert Bicks.
Would you continue to give that sort of a service to legislators .who seek the advice of the Attorney General's Office,
to keep a close liaison and a working liaison with the legisla-tive branch?
Mr. KENNEDY. Yes, Senator. I think that it is essential
for the success of the Department of Justice, without any
question.
Senator CARROLL. Following the line of questioning of
Senator Kefauver, Robert Bicks, I believe, is only about
34 years of age.
He has had a most excellent record in the
field of enforcement -and -antitrust.
pursue that with the same vigor?
Mr.
KENNEDY.
Do you intend to
We do.22
President Eisenhower's budget for the fiscal year 1962, submitted1
to the Congress on January 16, 1961, expressed a desire for an increasein new authorizations for the Antitrust Division. Although actuaL
expenditures in fiscal year 1960 were $4,325,000, President Eisenhowerrequested that they be increased to $5,322,000 in fiscal 1962.23
In this field, it is impossible merely to add personnel. It is neces-sary that they be trained and that they be thoroughly knowledgeable..
with regard to the problems and questions with which they deal..
It is also futile to institute new cases unless there are sufficient addi-tional judges appointed to expedite the handling of these cases.
Under these circumstances, it would seem that the preceding
administration had taken every conceivable step to further the
implementation of our antitrust laws which constitute a charter of'
economic liberties.
21 Ibid., p. 41.
22 Robert F. Kennedy, Attorney-General-designate, hearing before the Committee, on the Judiciary,.
U.S. Senate, 87th Cong., 1st sess., Jan. 13, 1961, pp. 20-21.
2" The Budget of the U.S. Government for the Fiscal Year Ending June 30, 1962, p.- 795.
JOINT ECONOMIC REPORT
91
Summary
After the record of accomplishments that we have achieved over
the past 8 years, it is disturbing that the present administration would
state in a message to the Congress on the budget and fiscal policy on
March 24 that:
(1) Federal revenue and expenditures levels must be
adequate to meet effectively and efficiently those essential
needs of the Nation which require public support as well as}
or in place of, private effort. * * *
Certainly every member of the Joint Economic Committee has an
obligation to determine which functions can better be performed by
governmental action in the future than through private enterprise.
This is a task for the Congress, and there has been no convincing
evidence submitted by the administration that the American economy
has proven itself incapable of meeting those tasks which our people
expect of it.
4. MONETARY POLICY
The majority's report endeavors to attribute all economic action to
expansionist monetary policies. If this theory had been proven correct, then those countries in the Western World-namely, Western
Germany, the United Kingdom, and Japan-would now be experiencing economic problems.
The First National City Bank of New York in its March 1958 issue
of its Monthly Letter made an extensive and penetrating analysis
of "the economic problems of Western Germany which had been
generally regarded as depressed and needing our aid and assistance.
It said:
: The economic choice faced by West Germany, after the
currency reform..and granting of substantial autonomy in
1948,- was a basic one. * * *'
The decision to adopt the marktwirtschaft-the free,'.Iuiarket -economy-has paid off handsomely.
West Germany, phenixlike, has risen from the rubble of World War
II to economic and financial preeminence in Western
Europe-a rise that has been aptly called the German
miracle.
This particular miracle lends itself to statistical measure-
ment. * * *
West German workers' real wages (adjusted for price increases) advanced 99 percent between 1948 and 1957. In
Britain real wages went up only 11 percent measured from
1946, 2 years earlier, when its postwar expansion began:
Industrial production in Germany in 1948-57 soared 254
percent while in the United Kingdom (1946-57) it went up
only 70 percent. Per capita output of goods and services
(1949-57), in constant prices, rose 115 percent in Germany as
against 15 percent in the United Kingdom.
In the early postwar years, of course, West Germany's level
of production was small in relation to Britain's so its per,
centage increases would naturally be larger.
But it is significant that Germany has kept right on
progressing at a more rapid rate. Between 1954 and 1957,
92
JOINT ECONOMIC REPORT
gross national product, in real terms, rose more than 25
percent in Germany-as against only 4 percent in the
United Kingdom.
In the field of particular industries, there has been similar
dramatic improvement. West Germany in the past 7 years
has built more housing than the United Kingdom built in 11.
Since the population in both countries is the same-about
51 million-per capita housing output in Germany has also
run well ahead. Starting from scratch in 1948, West
Germany last year had moved up to third place among the
world's shipbuilders. In 1948 some 328,000 autos rolled off
assembly lines of British factories while only 30,000 were
produced in West Germany. Last year German auto output
amounted to 950,000 cars-some 100,000 above the United
Kingdom's.
In the field of world-trade, German exporters, combining
high quality with attractive prices, have been able to acquire
a growing share of world commerce. While the United
Kinrgdom's share of world exports slipped from 12. percent
in 1949 to 10 percent in 1956, Germany's share advanced
from 2 percent to 8 percent.
The success of Germany's export drive enable it to nearly
triple its imports between 1950 and 1957 and still make
solid additions to its gold and foreign exchange holdings.
Starting from practically nothing in 1948, these reserves at
latest count amounted to $5.7 billion-.well over double
those of the United Kingdom.
The German mark has become one of the world's most
respected currencies. An important reason for this has been
Germany's application over the postwar period of orthodox
financial policies to contain inflation-i.e., restraint on,,,
government spending to produce an overbalanced budget
and tight credit policies to limit borrowing and encourage,
savings. Moreover, German labor leaders, unlike their
British counterparts, have exercised restraint in wage
demands. Thus, while the cost of living has gone up 44
percent in the United Kingdom since 1950, it has increased
only 18 percent in Germany. * * *
In 1948 West German tax rates went as high as 95 percent.
However, an elaborate system of special exemptions for
saved and invested income largely nullified the impact of
these high rates. Beginning in 1950 the rates themselves
were gradually revised downward until now the top rate is
55 percent. This compares with a maximum rate of 92/1
percent or higher maintained in Great Britain over this
period.
. Capital investment is the sine qua non of economic
expansion. The amount of investment, in turn, depends on
incentives and savings-both of which are heavily influenced
by the tax system. High tax rates not only blunt the desire
to work and to take risks for profit, but they siphon off funds
that could otherwise be available to launch new ventures.
The figures tell the story: investment in West Germany, in
constant prices, nearly tripled between 1949 and 1950. In
JOINT ECONOMIC REPORT
the United Kingdom in the same period it increased only
about one-half.
Dr. Robert G. Wertheimer, of Babson Institute, recently
completed a 5-year study of the postwar German tax structure. His statement last month before the House Ways
and Myleans Committee concisely spells out what was accomplished by the German tax reforms:
"Not only did the economy grow more rapidly than ever
in a climate of stable prices but total public revenues also
expanded and secured a balanced budget. Income-tax
reductions set free entrepreneurial initiative which created
a flexible economy providing full employment (in spite of the
influx of 10 million destitute persons), steadily rising standards of living and a rapidly growing domestic and foreign
investment.
"Taxpayers again could show their incomes and profits
without the fear of seeing most of them taxed away. The
lowering of the tax rates rapidly increased the ability of all
classes to save. Institutionalized saving, for example,
increased from 4 percent of the disposable income in 1950
to 8 percent in 1955. Business saving in the form of retained
profits and depreciation allowances rose even more rapidly.
These savings made possible the financing of the German
reconstruction without inflation.
"The lesser dependence of the Federal Government on
personal income taxation as source of tax revenues also
solved the plight of the small businessman by permitting
him to keep most of his gross profits as seed capital for
expansion. The lower income tax burden stimulated the
general willingness and ability of people to take risks and
to establish new business or to expand existing ones. Wage
earners and the professions also became more productive
and were eager to work longer hours, overtime, and on outside
projects to expand incomes that would accrue to themselves."
The huge sums poured into new factories, machines,
equipment, and processes (gross investment of $50 billion
in Germany between 1949 and 1956 as against $43 billion in
Britain) played a big role in the phenomenal increase in German worker productivity. Output per man-hour in Gernany between 1948 and 1957 increased 116 percent-as
against only 37 percent in Britain between 1946 and 1957.
Increases in worker productivity, while heavily influenced
by the flow of investment, also depend on other factors; e.g.,
the rate of modernization of tools and equipment and the
general attitude of labor. * * *
One objection often made to the comparison of West
Germany and the United Kingdom is the presence for the
United Kingdom of a great armaments burden. It should
be noted, however, that Germany had more reconstruction
to do, relatively speaking, than the United Kingdom.
Peter Thorneycroft, who resigned in January as Chancellor
of the Exchequer in a dispute over a continued rise in Governmient spending, lists the defense burden as only one of
the reasons for Britain's financial troubles. The New
6S8SO-61-7
93
94
JOINT ECONOMIC REPORT
York Times of January 24 carried this account of Mr..
Thorneycroft's penetrating analysis:
"First we have sought to be a nuclear power, matching
missile with missile, and missile with antimissile and with
large conventional forces in the Far East, Middle East,.
and Atlantic.
"At the same time we have sought to maintain a welfare
state at as high level,.sometimes even at a higher level than
the United States. We have been trying to do these things
against a background of having to repay debts abroad
during the next 8 years at a total equal to the whole of our
existing reserves.
. "It was not a mean thing to have attempted these things
but no politician should be under any illusions as to what
it has meant.
"It has meant that for 12 years we have slithered from one
crisis to another-sometimes a balance-of-payments crisis,
sometimes an exchange crisis, but always it has been a.
crisis. It has meant a pound sterling which has sunk from
20 shillings to 12 shillings.
"This is not a picture of a nation we would wish to see.
It is a picture of a nation in full retreat from its responsibilities. It is the road to ruin."
A number of important lessons can be drawn from the
sharply contrasting German and British postwar experiences.
One is the vital role of free enterprise in providing the
incentives and the competitive effort which deliver a growing
and widely diffused prosperity while preserving individual
freedom.
Ludwig Erhard, Germany's Economics Minister and a
stanch supporter of the free market economy, pointed this
up in the October 28 issue of Time:
"The most successful means for the achievement and retention of prosperity is competition. Only by competition
can an economy expand to serve all people, especially in
their capacity as consumers, and dissolve all advantages.
which do not result directly from higher performance. Free
competition thus leads to progress and profits for the whole
social order."
Another lesson is the clear impetus given to production
and workers' rewards by labor policies which do not impede
technological progress. German labor's receptive attitude
toward industrial innovation has paid off in rapid wage
increases times over. * * *
Finally, there is a lesson for socialist planners who, in
striving for income equality, use extortionate tax rates to
take away income from the gifted, hard-working individual
and spread it around to' the less fortunate through various
government welfare schemes.
Germany, as we have seen, has chosen a different routeone that has vielded more income for everybody. With
sharply reduced tax rates and heroic work effort, Glermany
has achieved unparalleled prosperity.
JOINT ECONOMIC REPORT
95
Germany serves, thus, as a prime example of what Prof.
Henry C. Wallich, of Yale University, pointed up in the
autumn 1956 issue of the Yale Review:
"If we try to even up income distribution by means of
progressive taxation, wve reduce savings and curtail investment incentives and so slow down growth. If we want to
accelerate growth, we have to accept inequality of income.
"From a dollars-and-cents point of view, it is quite obvious
that over a period of years, even those who find themselves
at the short end of inequality have more to gain from faster
growth than from any conceivable income redistribution. A
speedup in real output of only 1 extra percent per year will
soon lift even the economically weakest into income brackets
to which no amount of redistribution could promote them."
After 3 years it is more than evident that the policies adopted by
Chancellor Adenauer and his economic minister, Ludwig Erhard, have
not only proved successful, but in fact it has become necessary for
our own Government to send its high officials to Germany in order to
secure assistance in meeting the needs of defending Western Europe.
On February 6 the administration sent a message to the Congress
on "Balance-of-Pavments and Gold." It-reaffirmed our determination to maintain the U.S. official dollar price of gold at $35 an ounce.
However, it also indulged in a number of pious platitudes which would
make it virtually impossible to achieve this objective. The administration's message included the following statement:
* * * Our domestic policies, of government, of business
and labor, must be directed to maintaining competitive costs,
improving productivity and stabilizing or where possible lowering prices. * * *
It seems difficult to reconcile this worthy objective with the plans
that have been proposed to change the Fair Labor Standards Act so
as to increase minimum wages and extend their coverage to more
workers as well as many other steps that ultimately must be reflected
in the prices of all goods and services.
Americans, by and large, have not worked as hard as their counterparts in Western Europe who had the problem of rebuilding a war-torn
economy. All of us want more leisure, but the way to achieve this
worthy goal is through the traditional American concept of furnishing
every worker with additional capital. This can only be accomplished
by new incentives for investment and a change in our tax laws.
Although a message has been sent to the Congress on the broad
subject of taxes, it only partially deals with the basic problem of
meeting underdepreciation for those who must assume the risks of
establishing new enterprises. Furthermore, the same message while
holding out hope to some would establish new burdens for others and
on balance might actually result in a slowing of our national growth
rather than in its increase.
On the basis of experience, all of the theorizing that has been so
elaborately contrived in the majority's report may be dismissed as an
economic exercise of scant importance. It is unfortunate that the
experience which is available to all by observing the German economy
was not the basis for the programs propounded by President Kennedy
and his advisers.
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JOINT ECONOMIC REPORT
5. BALANCE OF PAYMENTS
The majority's report attempts to eat its cake and have it too.
It hopes to expound the theory of low interest rates while at the same
time inducing more confidence in the Aenerican dollar. Those who
are well acquainted with monetary policy know that there are certain
inexorable laws that govern the flow of gold between free countries.
President Kennedy is to be commended for having stressed his determination to maintain the solvency of our currency and the strength
of the dollar. However, mere words will not accomplish these purposes. More appropriate interest rate policies will attract foreign
funds to this country and will restore the balance that prevailed for
many years when there was no doubt as to the strength and security
of our currency.
In an address which was delivered in Pittsburgh on March 21, 1959,
I indicated the extreme danger that our country was facing by the
continued loss of gold. Again, although 2 years have elapsed, it is
worth repeating the statements that were made at that time, as they
have equal validity in dealing with the problems that we face at the
present time.
American citizens are not permitted to convert paper
dollars into gold; however, foreigners have this opportunity.
In recent years we have been providing them with dollar
resources to enable them to draw on our gold balances.
Unless we maintain competitive prices in world markets and
bring about a balance in terms of our international payments
our economy is headed for serious trouble.
In 1948 U.S. gold stocks reached a postwar high of $24.6
billions. At the end of last year they stood at $20.6 billions,
a decline of $4 billions. The reduction in 1958 alone totaled
$2.3 billions. In fact, the monthly figures show a falling gold
stock for every month since January 1958. While a $20 billion gold stock provides an adequate base for our currency,.
it must be self-evident that a decline of about 10 percent
a year can no longer continue without completely destroying
our own economic system. This, perhaps, is the best way for
us to fully appreciate the impact of unsound economic policies,
since an excess of demands for dollar payments abroad over
purchases from us will sooner or later be reflected in our
monetary reserves. 24
Basically the problem of foreign exchange stems from the fact
that our short-term liabilities to foreigners reported by banks have
risen by almost 50 percent in the period between December 1956 and
January 1961.25 On the other hand, our long-term claims on foreigners have increased, and coupled with our own substantial gold
reserves should enable us to manage our affairs in such a manner that
there could be no question as to the strength and stability of our
currency.
In. order to accomplish this, it will be necessary to reject many
attractive proposals that have been advanced for years by those who
believe in "money magic."
24 Butler, John Marshall, "The Defense of the Free World," Vital Speeches of the Day, vol. XXV,
No. 14, May 1, 1959, p. 448.
2SFederal Reserve Bulletin, vol. 47, No. 3, March 1961, p. 372.
JOINT ElCONOMIC REPORT
97
As we face the problems of a troubled world, it becomes even more
necessary that we exercise every possible restraint and discretion in
handling our own affairs in order that we may provide a bulwark of
strength for the free world.
A very careful perusal of the comments and suggestions that have
been developed in the majority's report as well as the extensive
testimony by economists and experts does not alter the economic
facts as they were presented in Pittsburgh in 1959. Either we are
sincere in our determination.to defend the integrity of the dollar, or
we are merely indulging in expounding words and ideas without any
regard for the sacrifices that their implementation will require.
6. FEDERAL BUDGET
The majority's report indulges in fanciful estimates of receipts
and expenditures for the coming fiscal year. However, there is nothing
in its report which indicates the true nature of the problems that we
face in preserving free, private enterprise in the United States as was
stipulated in the Employment Act of 1946.
President Eisenhower's budget receipts for fiscal 1962 were estimated
to total $82.3 billion.2 6 Over and above this amount there were trust
fund receipts of $25.2 million in order to finance social security, the
highway fund, Federal employees retirement, railroad retirement, and
veterans' life insurance, as well as other trust funds.2"
Actually, all of these expenditures involve the collection of taxes
from the American people, and they total more than $107.5 billion.
On the basis of 1959 data for expenditures by State and local governments, there will probably be new obligations in this area totaling
$50 billion in fiscal 1962.
The total cost of Government is approximately $157.5 billion. If
this is compared with the national income estimates for 1960 of $418.4
billion, it appears that Government is absorbing 37.6 percent of the
earnings of the American people. 28 On the other hand, this only
leaves 62.4 percent of our national income for investment in private
enterprise as well as for all of our personal needs. A serious question
is raised as to whether it is possible to operate a private enterprise
economy under such conditions.
At this time it seems appropriate to quote once again from a
distinguished economist, Mr. Colin C. Clark, presently director of
research for the Econometric Institute, Inc. Mr. Clark stated that:
I first reached this conclusion about 25 percent of the
national income's being the safe limit for taxation in an
article published in the Economic Journal in 1945. And it
is an interesting point that the editor of the Economic
Journal who published the article was Lord Keynes, and in
addition he wrote me a personal letter in 1944 in which he
said that he agreed with my conclusions. In fact, during
the last vears of his life Kevnes went out of his way to say
that he himself was not a Keynesian, and he did not agree
with the ideas which were being advocated in his name. 29
261962 Federal Budget in Brief, Bureau of the Budget, Executive Office of the President, p. 9.
a7Ihid., p. 48.
2' Economic Report of the President, January 1961, op. cit., p. 138.
2' 1960 Joint Economic Report, Report of the Joint Economic Committee, Congress of the United States,
on the January 1960 Economic Report of the President, 86th Cong., 2d sess., Rept. 1152, Feb. 29, 1960, p. 82.
98
JOINT ECONOMIC REPORT
In spite of the fact that we are already approaching a perilous
point in terms of maintaining a private enterprise economy, the
administration has recommended for nondefense purposes a net
increase over the budget proposed by President Eisenhower of $2.7
billion.3 0 On March 28, the administration in a special message
confined to the defense budget recommended a further increase in
appropriations and obligational authority of $1,954 million. 3 '
In other words our budget and obligationary authority as recommended by President Kennedy total $85.5 billion, or $4.6 billion more
than the Eisenhower budget, which represents a startling increase
during a period of approximately 90 days. If this trend continues,
there will be serious problems ahead for the American economy.
Obviously, any program which has been underway for a long period
of time cannot be reduced drastically without undue suffering. However, it is imperative that our national income be increased through
every incentive for more productivity and that every new spending
program be examined with the care that befits the situations in which
we now find ourselves.
7. FISCAL POLICIES
The minority takes strong exception to the views expressed that
a balanced budget is incompatible with a sustained economic growth.
This is a thesis that has been advanced repeatedly by the majority
members of this joint committee. However, there is no convincing
proof that it would bring about a return of prosperity or provide jobs
for those now unemployed.
.At least one thing is clear: If these policies had been adopted
during the past 8 years, our present gold situation would be catastrophic, and there is no evidence whatsoever to support the theory
that deficit financing will create jobs. In fact, it was tried repeatedly
through the New Deal years, and it was found wanting until war and
the needs of mobilization once again reactivated our economy.
It is difficult to find a stronger tribute to the success of the policies
that have been followed during the past 8 years than the fact that
unemployment has been maintained nationally at a fairly low level
without creating a serious budget deficit. Any tendency to reverse
this trend would be a marked disservice to all Americans and would
jeopardize the confidence of foreigners in our currency and in the
statements of our leaders as to our economic policy.
8.
TAX REFORMS
It has long been the view of many members of the Joint Economic
Committee that tax reform is the most important goal before the
American people. Hence, we applaud the statement by President
Kennedy in his "Message on Taxation" sent to the Congress on April
20 to the effect that:
I am directing the Secretary of the Treasury, building
on recent tax studies of the Congress, to undertake the research and preparation of a comprehensive tax reform program to be placed before the next session of the Congress.
30"January 1961 Economic Report of the President and the Economic Situation and Outlook," hearings
before the Joint Economic Committee, op. cit., Mar. 27, 1961, p. 513.
31The White House, "Special Message on Defense Budget," delivered to the Congress of the United
states, Mar. 28,1951.
JOINT ECONOMIC REPORT
99
Although tax relief is urgently needed, it is imperative that any
:action that is taken be well considered, and it should not be hastily
drawn. We are, therefore, more than willing to -see major revision
*of the Revenue Code deferred to the next session of the 87th Congress.
In this same "Message on Taxation" the President made a number
of other proposals, and presumably he expected that they would be
enacted into law by the present Congress. First, he proposed "a
tax incentive for modernization and expansion." This euphemistic
phrase has great appeal, but it falls short of meeting the needs of
American industry in maintaining its physical plant and also its competitive position in terms of our relations with other countries of the
world.
The First National City Bank of New York, in its monthly letter
.of September 1960, outlined the problem which confronts American
industry as follows:
The importance of liberalized depreciation has been
recognized all over the world because of its influence on
investment which in turn is the core of the growth process.
Business finances capital investment from a variety of
sources-sales of stock, borrowings, retained earnings, and
depreciation allowances. The biggest source is depreciation
which, if earned, gives back to a company a portion of its past
investments. The more freedom a company has in the
timing of depreciation charges, the more opportunity it has
to grow. One of the considerations dictating liberalization
,of depreciation rules is the fact that, in this age of dynamic
change mixed up with inflation, large amounts of capital,
beyond depreciation allowances, must be poured into a
:company to replace its plant and keep up with the times.
Industrial firms find that allowances made for depreciation in the past two decades fall far short of meeting replacement needs at current inflated costs. George Terborgh,
research director of the Machinery and Allied Products
Institute, estimates that costs of replacement are outrun-ning depreciation allowances in American industry by $6 to
$8 billion a year. A distinguished accountant, Prof.
William A. Paton of Michigan, has put the total bill for
capital replacement not covered by tax writeoffs at $40 to
$50 billion since World War II. Testifving before the Ways
and Means Committee last fall, he said:
"Plant assets don't grow on the bushes; they must be
provided either from business revenues or from the additional savings of investors. And it seems very clear to me
that restricting the depreciation deductions to the number
*of dollars invested, regardless of dates of acquisition and
the varying values of the dollars, makes it impossible to
replace the plant capacity consumed, to say nothing of
expansion of facilities, without drawing on net earnings as
reported or raising additional capital."
Another factor is the increased rate of obsolescence.
With the transformation of manufacturing methods, and
introduction of new products developed out of research,
capital equipment gets out of date or becomes economically
'useless long before it wears out physically. A survey by
100
JOINT ECONOMIC
REPORT
McGraw-Hill indicates that the costs of replacing facilities
that are presently obsolete would amount to about $95
billion. And the rate of obsolescence is expected to increase
in coming years. One expert has forecast that machine tools
installed in the next decade will typically become obsolete
within 5 years; in the 1940's, machine tools could be used
twice as long before becoming outdated. 2
In sharp contrast to our policies are those which have been followed
by other leading industrial nations which were also set forth in this
same monthly letter of the First National City Bank of New York
as follows: 3
United Kingdom
Though the United Kingdom is regarded as having the least liberal
depreciation allowances of the European countries, its practices are
far more encouraging for private investment than those of the United
States. Basic rates, developed in consultation with various trade
associations, are set at 7/4, 10, 12fi, and 20 percent for various categories of industrial machinery and equipment. Applied on a decliningbalance basis, they are increased by one-fourth; this makes the
effective rates 9%, 1234, 15%, and 25 percent. Individual companies,
it should be noted, are not firmly bound to these schedules and may
be able to justify higher rates.
Over and above the regular rates, additional tax inducements to
investment are offered-"investment allowances" and "initial allowances." An investment allowance is given over and above the original
cost which can be recovered in full irrespective of the investment
allowance. An initial allowance is available, in the first year, against
the original cost, in addition to the regular allowance. In subsequent
years the regular allowances are applied to the cost thus reduced.
In the years since the war there have been numerous changes in these
two allowances, intended to achieve both counter-cyclical stabilization
and long-run increases in investment.
Among the combined allowances established in 1959 and unchanged
in the April 1960 budget, is an investment allowance of 20 percent
plus an initial allowance of 10 percent on new machinery and plant.
For machinery receiving the basic 12'S-percent rate, this gives a total
allowance in the year of acquisition of 45% percent, made up on the
declining balance basis as follows: 20 percent investment allowance,
10 percent initial allowance, and 15% percent regular depreciation
based on 1% times 1254 percent. If the basic rate were 10 percent,
the first year allowance would still be 42/2 percent.
In sum, the most striking features of British depreciation practice
are the use of broad categories of depreciable property and the extremely liberal allowances in the year of acquisition.
France
On the whole, depreciation practices in France are more liberal than
in the United Kingdom. France, besides providing initial allowances
for new investment, permits more rapid rates of writeoff and also
revaluation of property to compensate for past inflations.
32First National City Bank Monthly Letter, "Business and Economic Conditions," September 1960,
pp. 102-103.
33Adapted from a private memorandum prenared by Prof. Dan Throop Smith of the Harvard
Graduate School of Business Administration and formerly Deputy to the Secretary of the U.S. Treasury
(in charge of tax policy).
JOINT. ECONOMIC REPORT
101
Allowable rates of depreciation for each individual company are
subject to determination on the basis of the particular operation. But
tax officials have published rates appropriate for various industries
that have been agreed upon after discussion with trade associations.
These rates can be counted on as acceptable to tax officials. Ordinary
machinery is given a 15 percent rate on a straight line basis, a rate of
writeoff consistent with a life of less than 7 vears. When such machinery is used for multiple-shift operations, the rate may be increased
to 20 or 30 percent.
On top of this, a double allowance is given in the first year. For
ordinary machinery, this means a 30 percent allowance with the remaining 70 percent depreciable at 15 percent of original cost and
written off in less than 5 more years. Heavy machinery, such as
steel mill equipment, is given a 10 percent rate, also with a double
allowance in the first year. In addition, for various classes of machinery, an initial allowance of 10 percent is given.
Last December, France went even further by authorizing depreciation. on a declining-balance basis. Under this svstem, straight line
rates may be increased by 1 times for property with a life of 3 or 4
years, doubled for a life of 5 or 6 years, and raised by 2+S times for
lives of more than 6 years. If used, these higher rates supplant the
initial allowance and double allowance in the first year. They result
in a lower. deduction in the first year, but higher allowances in the
second and third years. Under the straight line system, property
with a 10 percent rate would get 28 percent of cost written off in the
first year (10 percent initial allowance plus double the 9 percent allowed on the balance of cost spread over 10 years) and 9 -percent in
each succeeding year. Under the new method, however, the allowances in the first 3 years would be 25, 18.8, and 14 percent, respectively,
or a total of 57.8 percent in the first 3 years, compared with 46 percent
under the previous method.
Aside from rapid recovery of original costs, France also permits
revaluation of assets by applying factors ranging from 1.0 for assets
acquired in 1959 to 234.0 for assets dating back to 1914 and earlier,
and in the case of inventory from 1.0 for 1959 to 388.9 dating back to
1914 and prior years. These factors are applied to both historic cost
and annual depreciation allowances since the 'date of acquisition.
Even property written off completely can have a restored value for
additional depreciation.
-Germany
Tax policies to encourage private enterprise, beginning in 1948,
played a central role in the dazzling recovery of the German economy.
Apart from easier rates of tax than we apply, the German industry is
permitted more rapid writeoff of new plant.
Following the CuiTency Reform Act in 1948, revaluation of assets
was authorized for depreciation and tax purposes and special initial
allowances for new equiprilent, running up to 50 percent, were brought
into play for a number of years. These have now lapsed.
Regular depreciation rates in Germany are determined in the light
of the particular circumstances of each taxpayer, but 2 years ago a
series of allowable rates were published as guidelines. Taxpayers can
count on these rates being accepted, but they may use even higher
rates if they can justify them. For machinery, a basic rate of 10 per-
102
JOINT ECONOMIC REPORT
cent is common for straightline depreciation. But under a decliningbalance formula, this may be increased by a multiplier of 23S, thus
giving a writeoff of 25 percent in the first year and about 58 percent
of cost in the initial 3 years. The Government recently has recommended to the legislature that the multiplier be pared to 2 on the idea.
that the allowance is unnecessarily generous and has contributed to,
excessive pressure on capital goods industry.
Sweden
Wide leeway in the timing of deductions has long been a distinctive
feature of depreciation practice in Sweden. Up to 1956, business was
was permitted complete freedom; any amount up to the full cost of
plant, machinery, and equipment was allowed in any year at the
taxpayer's discretion. This system of "free" depreciation was regarded as the ultimate in liberality.
The freedom was somewhat curtailed 4 years ago. Two alternative
methods are now used: depreciation according to plan and depreciation on a bookkeeping. basis. Basically, a write off rate of 20 percent
(consistent with a 5-year life) can be applied to the historic cost of
plant and equipment. On the bookkeeping basis, the taxpayer may
write off 30 percent of book value at the beginning of the year, plus,
the cost of acquisitions and minus any realizations during the year.
If this formula fails to yield a write off of 20 percent, then the taxpayer may use 20 percent of historic cost as his depreciation rate.
The principal requirement in using this formula is that the taxpayer
use a method of bookkeeping that will permit gains from sales of
depreciated assets to be brought into account.
But beyond liberal depreciation of actual cost, Sweden permits. a.
tax deduction of up to 40 percent of net income for reserves to stabilize
economic activity. Forty percent of the amount deducted (or 16
percent of profits) must be invested with the central bank, for use as:
permitted depending on the level of economic activity and employment. The company is free to use the rest of the money as it sees fit.
Such liberal treatment of investment does not represent favored
treatment of "big business." Sweden's programs were all developed
under a labor-socialist government with the aim of increasing productivity through more investment.
Belgium, the Netherlands, and Italy
In Belgium, assets for depreciation purposes are grouped in broad
categories with rates ranging from 10 to 25 percent for machinery.
In 1954-56 and again since 1959, special investment allowances of
up to 30 percent have been granted. These have been limited to
new ventures or very large expansions of existing plants.
In the Netherlands, both initial and investment allowances are
used to spur investment. Since 1949, initial allowances have been
33Y percent with varying requirements for spreading the allowances.
over the early years. Both the initial allowance and regular depreciation mav be taken from the time that a contract is placed, not, as.
with most countries, when it is actually put to use. Depreciation
allowances which are not covered by profits in any one year may be
taken in succeeding years.
In Italy, the rates of depreciation as laid down by the tax authorities vary from 3 to 20 percent per year. However, accelerated depre-.
ciation on new plant is provided for by a form of initial -allowance,
JOINT ECONOMIC REPORT
103
which reduces the normal depreciation period by two-fifths. This 40
percent "initial" allowance may be spread over the first 4 years of
the life of the asset (subject to a 15 percent maximum in any one year)
in addition to regular depreciation. 3 4
It is a source of satisfaction that at least the problem of depreciation
has been recognized by the new administration, but it is most unlikely
that the proposals that have been advanced will meet the needs that
are so urgent in establishing- our maximum industrial potential.
Still another phase of President Kennedy's "Message on Taxation"
deals with the tax treatment of foreign income. There are many
important considerations involving our relations with other countries
and the reciprocal treatment which we may expect if we alter the
tax treatment afforded American subsidiaries operating abroad unilaterally on the basis advocated by President Kennedy.
There are numerous other methods by which it would be possible
for us to stimulate foreign investment without at the same time
incurring any discrimination. Among them is one proposed by Dr.
Robert Strausz-Hupe, director of the Foreign Policy Research Institute at the University of Pennsylvania, before the Boggs committee
in December of 1958. He stated that:
Foreign subsidiaries of American industrial enterprises are
seldom completely independent operations. Even though
they may produce goods especially designed for the local
market, they remain, and it is economic for them to do so,
dependent on the parent company for many technical and
managerial services. The parent company may even provide
distribution services for the product in other foreign markets.
These integrated international operations contribute strength
and stability to the domestic units of industry in the underdeveloped countries-a particularly important factor in this
period of rapid technological progress and widespread
economic dislocation.
Almost without exception, local capital has not been permitted to participate in the foreign subsidiaries established
by American companies. Although recognized as politically
desirable for the parent company and economically desirable
for the country concerned, local stockholders can create
management problems which are insurmountable. The
presence of local investment in a subsidiary introduces problems of prices for technical services, use of patents, remuneration of foreign personnel, territory to be served, pricing on
interdivisional sales, dividend and reinvestment decisions
and other matters.
The interests of local shareholders and the parent company will frequently differ, reducing the flexibility of the
parent company. In cases, where parent companies have
taken a minority interest in a foreign operation, price fixing,
territorial limitations and other undesirable arrangements
have been present.
A completely common and beneficial interest between
local and foreign stockholders could be established if parent
company equity stock could be sold to local stockholders.
The advantages of such a system are:
'4
Ibid., pp. 104-105.
104
JOINT ECONOMIC REPORT
"During the initial starting period of a new operation,
earnings might be low; for a much longer period earnings
might be needed for expansion and thus not available for
dividends. In contrast, parent company stock has immediate dividend potential. Furthermore, parent company dividends, being in foreign currency, would immediately add to
the Nation's foreign credit balance, whereas direct benefits
from the new operation might be considerably delayed.
Whenever foreign dividend payments were not needed to
meet other obligations, they could be used to acquire more
parent company stock.
"In starting a new operation or expanding an existing
one, parent company stock could be sold for local currency
to cover all local costs such as land, buildings, services, etc.,
and to provide operating capital. In fact, if at the time of
organization such dividends were pledged to the acquisition
of additional parent company stock, such stock might be set
aside as in an option plan at a fixed price for future delivery.
This arrangement might not come under the jurisdiction of
exchange controls, if any existed, as no income is available to
the local stockholder until the purchase has been completed.
Parent company investment in foreign currency could be
limited to those items for which foreign exchange is required, such as equipment and materials from foreign
sources. While it is true that the use of local capital would
reduce the amount of foreign capital made immediately
available to the Nation, it would reduce a future obligation
incidental to the export of earnings or the repatriation of
original capital.
"In most cases, a manufacturing operation with considerable local participation could be established without cost to
the nation in foreign exchange. Ultimately, the remittance
of dividends would require the loss of some foreign exchange,
but this would be offset partially by foreign dividends
received.
"By participation in the parent company, local stockholders would have benefits comparable to a 'diversity of
investment' and would be less subject to local economic
cycles. If such international investment could be carried far
enough, it would have a stabilizing effect on the whole world
economy.
"Through acquisition of parent company stock, either
through providing local capital when needed or the use of
foreign exchange balances when available, local participation
can ultimately become sufficient to absorb the average local
profits. As previously mentioned, parent company stocks
have immediate dividend potential and such dividends are
in foreign exchange. If not otherwise needed, they could
be used to acquire more parent company stock. In contrast,
if local investment is confined to the local operation, dividends
may be long deferred, will be in local currency, and will
always be entirely dependent on the local economy." 3
105
JOINT ECONOMIC REPORT
Once again, before accepting the views advanced in the President's
"Message on Taxation," it is well to examine the level of taxation
imposed by central governments on corporate profits distributed as
dividends, as shown in the following table:
Maximum
rate paid and
withheld by
corporation
Credit
allowed
individual
shareholder
Percent
France-62
Netherlands United States -52
United Kingdom
-Japan
-Canada
-50
Belgium ----------------------------------------------------------------GermanySweden---Australia
-40
Switzerland
-35.60
Norway
Union of South Africa
Italy---20
Percent
1224
215
4
' 38.75
30
20
230
2 25
54.95
51.25
50.90
45.31
'42.58
40
0
0
2 27
30
25
0
33. 33-100
S
1 Credit is 8 percent against taxable income and 16 percent against personal tax liability.
' Deducted at source and credited to individual shareholder.
3 The individual, if subject to surtax rates on his personal income tax return, must, however, pay the
surtax on the gross dividend actually declared rather than the net dividend actually received.
4 Ignoring the variable effect on the tax base of property tax on net worth. First National City Bank
Monthly Letter, "Business and Economic Conditions," January 1961, p. 7.
Also, in order to complete our perspective of the problems of a
potential corporate investor, it is well to review the maximum marginal
rates of personal income taxation imposed by central governments
elsewhere, as indicated below:
Percent
United States
-United Kingdom
-Puerto Rico
-Canada
-80
Ireland
-France ------------------------------Netherlands ------------Japan
-70
Australia -------------------------------------------Belgium
-65
Sweden
-65
Greece
-2
Austria
--
91
8& 75
82.95
77. 50
73
72. 50
66. 67
63
59. 34
Italy -----------------------------------------
Mexico ----------------------------------------
NorwayGermany
Denmark
-Union of South Africa
Switzerland
-
58
3
33-55
55
-53
--
4
-
' Includes an 8-percent complementary tax on nonwage income.
2 Includes a 3-percent tax on investment income.
3 Tax rate applicable; depends upon source of income.
4 Effective maximum, allowing for deductibility of previous year's tax, where income is stable.
52. 38
47. 50
8
Ibid.
Unless the rates of taxation prevailing i the United States are
reduced, it is impossible to adopt policies to maximize the productive
abilities of the American economy.
""International Industrial Investment," a statement by Dr. Robert Strausz-Hupe, director, Foreign
Policy Research Institute, University of Pennsylvania, prepared for the Subcommittee on Customs,
Tariffs, and Reciprocal Trade Agreements of the House Ways and Means Committee.
106
JOINT
ECONOMIC REPORT
In this same message, President Kennedy once again reiterated his
recommendation that withholding taxes be imposed on interest and
dividends and that the 4-percent dividend credit enacted by the
Congress in the 1954 Tax Code should be abolished. Each of these
points was discussed at length by former Under Secretary of the
Treasury, Fred C. Scribner, Jr., whose ideas were quoted in the
individual views of Senator John Marshall Butler in the report on
"Employment, Growth, and Price Levels" of the Joint Economic
Committee issued on January 26, 1960. Under Secretary Scribner
stated that* * * Studies made in the past both by the Treasury
Department and by outside sources indicate that a substantial gap does exist between dividends and interest paid to
individuals and dividends and interest reported by individuals on personal income tax returns. While there is some
dispute as to the exact amount of the gap, there is, we
believe, agreement that it is substantial. However, there is
much uncertainty as to how much of the unreported dividends and interest would be taxable if reported.
For example, individuals are now entitled to a dividend
exclusion of $50. It is known that some individuals who
receive less than $50 in dividends do not report such dividends on the assumption that since they are less than the
amount of the exemption it is not necessarv to report the
dividends on the tax returns. While such dividends should
be reported, a correct reporting would not result in additional tax.
In the interest field it is believed that a large portion of
the nonlieported interest is paid to those who because of the
additional personal exemrtion allowed for all over 65, retirement income credits or other exemptions or credits, are
either in a nontax bracket or in a very low tax bracket.
Further studies are being made at this time to attempt to
arrive at proper estimates of the amount of additional tax
which would be collected if all dividends and interest paid
were properly reported.
It appears that some of the nonreporting in the interest
field is due to an erroneous assumption that interest credited
but not withdrawn is not taxable. We are working with
various interest-paying associations to develop educational
programs which will remove any misunderstanding which
may exist. Changes have also been made in the tax forms
and taxpayer instructions for the year 1959, and we believe
these steps will be helpful in reducing the nonreporting gap.
A special study is now being made of the tax forms directed
to possible additional changes in the forms for 1960.
We also are engaged in joint studies concerning voluntary
action which may be taken by those paying dividends and
interest to assure proper reporting of amounts paid and the
proper payment of taxes due.
Proposals to extend the withholding at source program
to interest and dividends have been considered bv the
Congress and the Department on various occasions in the
past. Each time that the subject has received ccnsidera-
JOINT ECONOMIC REPORT
107
tion, it has been recognized that withholding on dividends
and. interest would create hardship due to withholding in
the case of tax-exempt institutions, and nontaxable individuals and overwithholding in the case of elderlv and
retired persons, many of whom would be in low-income
brackets. Hardships would arise if individuals were deprived of overwithheld funds until such time as claims were
filed and processed and refunds were paid. Legislation
designed to avoid overwithholding by setting a realistic
ceiling under which amounts distributed would not be
subject to withholding might well render the legislation
ineffective.
To summarize, withholding legislation can be enacted.
However, it will further complicate our tax structure, will
add to the expenses incurred by dividend- and interestpaying organizations and, because of the delays and necessary technicalities of refund procedures, may tend to discourage savings. We believe that every effort should be
made to work out effective voluntary means of eliminating
the gap between dividends and interest paid and dividends
and interest reported before legislation is enacted which
would provide for mandatory withholding at the. source of
income taxes on dividend and interest pavments.A6
He also said:
* * * The Treasury Department does not favor repeal
of the 4-percent dividend credit. This credit, authorized
in the first instance by the Internal Revenue Code of 1954,
deals with a longstanding feature of our tax laws which has
resulted in double taxation of dividend income. Under
existing law the earnings of a corporation are taxed twiceonce as corporate income and again as income to the individual shareholder when paid out as dividends. This is due
to the fact that dividends, unlike interest, do not constitute
a deduction to the corporation which pays the dividends.
The resulting double taxation imposes a higher combined
tax burden on distributed corporation earnings than on any
other form of income. The 4-percent dividend credit
affords partial relief from this double taxation.
A dividend credit is desirable not onlv for reasons of lairness and equity but also becauxe it encourages more widespread stock ownership. Further, it tends to encourage
equity financing in lieu of borrowing.
It is encouraging to note that in the last 5 vears the number of individuals owning shares of stock has increased by
more than 4 million. MAlost of these own very few shares of
stock and are trulv small taxpayers. We believe that enactment of the 4-percent dividend credit was a step in the right
direction. We know of no developments which have occurred since the adoption of the 1954 Code which lead us to
believe that a change in our position on this particular credit
is desirable.37
3" Employment, Growth, and Price Levels," report of the Joint Economic Committee, Congress of the
United States, 86th Cong., 2d sess., Rept. No. 1043, Jan. 26, 1960, pp. 116-117.
37 Ibid., p. 119.
108
JOINT ECONOMIC REPORT
President Kennedy made one further suggestion which was also
discussed by Secretary Scribner, namely:
* * * Under existing statutes, "ordinary and necessary"
business expenses may be deducted for the purpose of determining the net income of business taxpayers. Difficulties
have been created for the Revenue Service by a number of
judicial decisions holding expenses disallowved by the Service
to be "ordinary and necessary," and therefore deductible.
Many of the cases frequently cited as glaring examples of
the improper allowance of business deductions involve court
decisions and not rulings by the Revenue Service.
We are here concerned with business morals. Our experience is that the great bulk of business organizations have
strict, equitable rules concerning business expenses and do
play fair with the Government. The trouble is caused by a
small minority of business organizations which do allow items
to be deducted as business expenses which clearly do not
qualify as such. The problem is to make rules which will be
effective in preventing abuse by a few without imposing expensive and time-consuming burdens on the great majority
who have been consistent in properly operating their companies and properly reporting their expenses and profits.
In the 1958 tax returns the burden for properly auditing
employees' expense accounts was placed on the employers
by a proviso that if an employee does not receive from his
employer payments for expense in excess of expenses incurred
and the employee is required to report fully to the employer,
the employee is not required in his tax return to duplicate
the accounting which he gives to his employer. The checking here is then done through the employers' records. This
procedure is intended to relieve the burden on employees
while still making certain that full auditing takes place. It
will only be effective if employers do, in fact, insist on accurate and complete expense accounts and carefully check the
same. The Revenue Service is now engaged in studying the
results of this approach as disclosed by the 1958 tax returns.
Following the auditing of the 1958 returns the Service will
be in a position to evaluate the effectiveness of this method
of control.
You are, of course, familiar with S. 2040 which, if enacted,
would have disallowed certain entertainment expenses specified therein. Under this bill no deduction would have been
permitted for the expense of entertainment at nightclubs,
theaters, sporting events, or other places of public amusement. The bill would also have disallowed expenditures
for the maintenance of operation of yachts, or vacation
lodges, for gifts, for dues and initiation fees in country clubs
or other social organizations, and for traveling expenses to
conventions outside the United States.
The denial of a tax deduction for expenditures which the
taxpayer can prove were incurred as a necessary business
expense rather than as a personal expense is contrary to the
existing concept of an income tax on net income. Moreover, to impose such a rule on certain types of business ex-
JOINT ECONOMIC REPORT
109,
penses and with respect to certain classes of taxpayers would
justify a charge of discrimination.
Such a major change in the tax law should be undertaken
only after full consideration of all of the problems involved.
We believe that the hearings before the Ways and Means
Committee which will be concerned with these problems
will provide helpful material on this very subject. You can
be sure that we welcome the opportunity to.work cooperatively with the Ways and Means Committee and with you
and others to develop solutions in this area and, if it is ultimately concluded that legislation is necessary, to work out
appropriate legislation which would be effective.
As Commissioner Latham has already told you, the Revenue Service is making every effort to make certain that only
proper and reasonable deductions are allowed. The Commissioner tells us that he believes he is making progress,
and for the present we believe the matter should continue to
be handled by the Commissioner through regulations,
rulings, and auditing procedures. 8
Every Member of the Congress has an obligation to see that the
laws of the land are enforced impartially and fairly. Insofar as this
message on taxation is concerned with furthering this objective, there
can be no quarrel with it. However, the underlying premises of a
steeply progressive and punitive income tax structure are not accepted
as in the best interest of the average person in terms of stimulating
our economy to produce more jobs and a higher standard of living
for all.
9. CONCLUSIONS
The legislation which requires that the Congress file an economic
report was originally proposed at a time when our Nation was at
war, and there were grave doubts as to whether we would be able to
make the transition to a peacetime economy. Many prophets of
doom and gloom were certain that we would always have at least
10 million people unemployed. During this period, former Vice
President Henry Wallace presented a blueprint to produce 60 million
jobs. This goal was achieved by 1951 and it has been exceeded in
every year since that time.
The Employment Act of 1946 was originally introduced as the full
employment bill of 1945. There were many proponents who believed
that it was the responsibility of the Federal Government to make a
job for everyone regardless of the consequences to our form of government or our way of life. Fortunately for all concerned, there were
enough wise Members of the Congress to amend this measure so that
it would also include as a part of its declaration of policy the following
language:
* * * to coordinate and utilize all its plans, functions,
and resources for the purpose of creating and maintaining,
in a manner calculated to foster and promote free competitive
enterprise and the general welfare, conditions under which
there will be afforded useful employment * * * for those
able, willing, and seeking to work, and to promote maximum
as
Ibid., pp. 117-118.
6S180-61-8
110
JOINT ECONOMIC
REPORT
employment, production, and purchasing power. 39 [Italic
added.]
There are some who undoubtedly believe that the inclusion of this
language represented a retreat from the principles that has been
sponsored by the proponents of this legislation. On the other hand,
the first Council of Economic Advisers, of which Edwin G. Nourse
was the Chairman, made a report to President Truman onl December
iS, 1946. This sttftemernt had the concurrence of Leon G. Keyserling
and John D. Clark. They said:
The measure which finally emerged from this process of
legislative coalition was a well-balanced and carefully drawn
piece of legislation. Although frequently referred to as a
"much watered-down version" of the original proposal, it is
in fact a broad enabling act of great flexibility as well as
vigor. It is far from being a meaningless verbal compromise.
The present act does not mnake any particular method mandatory. Nor does it legislate any specific remedy into use.
Instead, the law states quite fully and clearly the general
purpose and intention of the Congress and lays down the
principle that the executive and the legislature shall seek
diligently for any method which, in the peculiar circumstances of any given situation, appears to them to be sound
and to promise helpful results. It is hard to see how a
measure can be regarded as "watered down" which so
.clearly states the "responsibility of the Federal Government
to use all practicable means consistent with its needs and
obligations and other essential considerations of national
policy * * * to coordinate and utilize all its plans, functions, and resources" for the stated purposes of the actmaximum production, employment, and purchasing power.
As a result of lengthy deliberations over the bill, and the
collaborative process of drafting, many individuals and
groups gained a profound understanding of the problem and
the purposes of the act. Furthermore, such persons and
groups succeeded in removing ambiguities of language or in
the elimination of what they regarded as dangerous or doubtfful provisions. Beyond this, these participants contributed
to the final draft such ideas or phraseology that in many cases
they not merely ceased to oppose the bill but actually became
supporters of the measure which was finally adopted. Thus,
the Employment Act of 1946 has an extraordianry amount
,of friendlv interest and approval among the public, and it
was passed in the House of Representatives by a vote of
.320 to 84 and in the Senate by a unanimous voice vote. In
signing the act on February 20, President Truman commented:
"In enacting this legislation, the Congress and the President are responding to an overwhelming demand of the
people. The legislation gives expression to a deep-seated
desire for a, conscious and positive attack upon the everrecurring problems of mass unemployment and ruinous depression. * * * I am happy that the Senate adopted
3oFirst Annual Report to the President by the Council of Economic Advisers, December 1946, p. 22.
JOINT ECONOMIC REPORT
this legislation unanimously, the House of Representatives
bv a large majority. * * *
"The Employment Act of 1946 is not the end of the road,
but rather the beginning. It is a comnuitment by the Government to the people-a commitment to.take any and all of
the measures necessary for a healthy economy, one that
provides opportunities for those able, willing, and seeking to
work. We shall all try to- honor that commitment." 40
*Chairman Nourse and his associates also said:
This broad concept of national economic life we find to be
written securely into the Employment Act of 1946. The
act states clearly at the very outset that the objectives of
maximum employment, production and purchasing power
are to be pursued in ways "calculated to foster and promote
free competitive enterprise and the general welfare." But,
.at the same time, there is a "continuing policy and responsibility of the Federal Government." This is not an intention to create.jobs artifically or pad the Government payroll, but "to create and maintain conditions under which there
will be afforded useful employment opportunities, including
self-employment. for those able, willing, and seeking to
work." It accepts the well-known fact that Americans
-by and large are a nation of businessmen, whether in overalls or white collars, alert to see and skillful to develop op-portunities for better income. It assumes also something
that is not as yet proved as fully as we might wish. They
still have to demonstrate that, in claiming for themselves
the right to embrace these opportunities, they display an
.adequate understanding of fundamental economic forces
and of how to work out such mutual wage, price, and profit
relationships as will correlate an efficient system of production with a fluid and vigorous market. It is an integrated
consideration of private and public functioning in the eco
:nomic sphere that the act is designed to promote.
To achieve such a system of broad-viewed organization ol
the Nation's business, with the maximum of individual free.dom but the degree of self- and group-discipline necessary
for high efficiency is the challenge of our democratic system.
'The war experience gave us a great lesson as to the productive
power wve develop when private enterprise is harnessed to a
unified national effort. The Employment Act of 1946
.enunciates sustained peacetime utilization of our productive
resources as a no less important national purpose and proposes a concerted effort to develop an equally good coordination of effort among all agencies, without the legal controls
-which were both endurable and necessary in the face of our
war danger. The Congress in this act did not either exclude
Government nor put exclusive reliance on this single means of
attacking the problem of stabilizing the practically attainable
maximum of production or utilization of the Nation's resources. Far from shutting out other measures or means of
approach, the act plainly invites the Council to pursue its
40Ibid., p. 3.
ill.
112
JOINT ECONOMIC REPORT.
studies and make its recommendations "with the assistance
and cooperation of industry, agriculture, labor, and State
and local governments" and to proceed "in a manner calculated to foster and promote free competitive enterprise and
the general welfare." 4
Based on the statements of those who were first charged with the
administration of this act, it is quite clear that it was never the
intention of the Congress to have the Federal Government absorb
the productive efforts of America's working people. On the contrary,
our Government exists for its citizens. This is in sharp contradiction
to the totalitarian system of production that has been followed in
many other countries. As we start a new administration, it is to be
devoutly hoped that these precepts will be followed and that we will
not lose the priceless heritage that has been bequeathed to this generation by the Founding Fathers.
4' Ibid.,
pp. 15-16.
0
INDIVIDUAL VIEWS OF SENATOR JACOB K. JAVITS
I find much to be commended in the spirit of the minority views and
consider them superior, in practical applicability, to the majority
views. Especially is this true in respect of the consistently pessimistic
picture presented by the administration on the place and vitality in
the national scene of our private economic system and in the majority's
main reliance on public investment as the means to accelerate productivity and growth. I believe, however, that both the majority
and minority views do not give enough weight to what should be the
main objective of this report. They fail to present a grand design
to meet the challenge to our economy of the major Communist
economic offensive now in progress.
A statement in the Christian Science Monitor of March 22 sums up
the challenge we face:
* * * on the industrial front, in specialized and concentrated areas of power, the U.S.S.R. is forging ahead. It is
using its concentrated industrial power as an instrument
of economic competition in the world, as a means of bringing
weak nations into its industrial orbit * * *. Furthermore,
the U.S.S.R. uses its need for industrial products and raw
materials as a means of currying favor with weak nations.
It has developed a credit system to enable them to "buy"
Soviet goods, and it uses its credit, barter, and industrial'
system to knit weak economies to its own. This is a practice
also of Communist China.
Eliminating inefficiency and impediments to productivity in the
private economy as counseled by the minority is sounder than counting
on Federal Government investment to act as the basic stimulant to
productive growth-though public investment areas are an essential
element; but neither represents a national economic strategy in the
development and coordination of which the Federal Government
must have a vital part. The Eisenhower administration recognized
this need in its Commission on National Goals.
The automatic adjustment of the economy theory alone is not
adequate to the problems and responsibilities we have today, nor to
the acceleration of timing brought on by the Communist economic
offensive-we need government-business coordination to make our
economy operate to produce enough and in the right lines to meet our
economic responsibilities in the public interest. I am convinced that
the techniques to achieve this purpose are available without such
Federal Government direction and control as will seriously endanger
individual freedom and it is this concept which should be the basis for
our report and to which I shall endeavor to contribute in these additional views.
Great anxiety has been spread in our country about the way in
which to meet the Communist challenge of aggression, infiltration, and
subversion, and some have counseled adopting the same methods in
113
114
JOINT ECONOMIC REPORT
the cause of freedom. Certainly, defense against these methalls may
on occasion involve forceful means, but to adopt the Communist
techniques would only result in our surrendering the decisive strengths
of our own. Our strength is production based on the dignity of the
individual and on the good faith of credit. We have overwhelhing
economic power to make this principle good in terms of the wellbeing of peoples in the neutralist areas and in the areas, newly selfgoverning, which will determine which way the world goes. Our
Government's policy must be the recognition of this essential base for
the free world's success, and the determination to marshal our resources,
public and private, with the boldness, vision, and discipline required
for their effective utilization for this grand design-and for their
coordination with the similar resources of the other leading industrial
nations for the same purpose-as, for example, in the newly organizing
20-nation OECD (Organization for Economic Cooperation and Development). Nothing less will do, and nothing less can be justified
in the name of the New Frontier or any other slogan for an American
administration which wants to qualify for the job the people have
given it.
The basic problem of our country is to effect an adequate mobilization of our resources, public and private, to support our role for effective peace leadership in the free world and for the development,
proportioned to this leadership, of our American society. The difficulty with the administration's approach is its emphasis on public
investment on a forced draft basis in order to meet a recession emergency, without adequate regard either to the phasing out of temporary,
antirecession programs or to the overall posture of the American
economy in terms of our responsibilities and opportunities.
The testimony before the Joint Economic Committee by the
Council of Economic Advisers, the Secretary of the Treasury, the
Chairman of the Federal Reserve Board, the Director of the Bureau
of the Budget, and other high administration officials made it clear
that we have been in a real recession, and that we must act accordingly. But let us not so overstate the problem as to undermine confiedence in the economic system itself. Let Americans know the
truth; but let us not leave them bewildered.
We have been in a real 'recession; but conditions are very far from
being the worst since the great depression of the 1930's, as one administration spokesman has said. Nor is it necessary to make a.
partisan comparison between the 1947 to 1953 and 1953 to 1960
periods, by not making clear that the trough of the 1949 to 1950 recession was sandwiched in between two boom periods-the first caused
by the pentup demand after World War II and the second by the
Korean war.
On the basis of unemployment and initial balance-of-payments
figures, the current recession appears to approximate conditions of
the 1958 recession. It is not as bad as the 1949 recession and cer-tainly does not resemble the depression conditions of the 1930's.
Unemployment is the key of today's recession and Unbalanced international payments were its complication, until the first quarter of
1961 when the latter substantially improved.
Notwithstanding, continued high unemployment and a failure to
fully utilize our economic potential, there are also many indications
which were brought out during the hearings, that the worst part of
JOINT
BCONOMIC REPORT
115
the recession had been reached and that the economy was on the upswing. It is unfortunate that the administration appeared to have
omitted, in its analyses of the recession before this committee and
elsewhere, the strong factors of the economy which had served to
lessen the inpact on the public of the adverse economic conditions
which have existed. For while I do not feel that we can be talked
into a recession, or talked out of recovery, I do feel it would have been
a far healthier approach for the administration to present a less-colored
picture of our economic situation.
It is not too early to sound a warning, just as warnings are being
sounded on Presidential appointments-warnings that we should not
permit the "honeymoon" period of the new administration to encourage improvidence. As Dr. Burns stated in his speech at the 10th
Annual Business Economists Conference of the University of Chicago
at Chicago on April 21, 1961:
I believe that the mildness of the recent recession supports
the thesis that the underlying forces of economic expansion
are strong and that they have of late been only temporarily
suppressed. I believe that signs of economic recovery are
already here and are rapidly multiplying. In view of this
fact and in view also of the substantial increases of Federal
spending that were initiated in the closing months of the
Eisenhower administration and the further increases that
have been set in motion by President Kennedy, I think that
we would be courting inflation and a gold crisis if we now
arranged new governmental spending programs so that they
would mature when the economy is already advancing without them.
The constructive opposition has a duty to oppose when opposition
is needed, to suggest new initiatives or feasible alternatives that can
do the job better, and to support what deserves to be supported even
when the administration may not have that support within its own
party.
The real issue is in the majority's position that the main reliance
for increasing economic growth will be on Federal Government action
rather than on incentives to the private economic system and leadership by Government. Federal Reserve Chairman, William McChesney Martin, and Secretary of the Treasury, Douglas Dillon, have
both made this point in their recent testimony before the committee.
The fundamental differences between the Democratic national administration and what I consider to be a proper Republican position,
become evident in the following positive programs:
1. A U.S. productivity drive is essential. Step 1 is to increase our
productivity through a more rapid modernization of our industrial
plant which during the past 50 years has actually been aging perceptibly because of inadequate investment in new capital equipment
and facilities. A 1959 McGraw Hill publications survey shows that
one-third of our over $300 billion industrial plant is becoming obsolescent and depreciation allowances lag $4 to $6 billion a year behind
our replacement needs. The Kennedy proposals for "tax credits" are
estimated by administration spokesmen to provide incentives for
enough new investment to make up only about one-half of this lag.
We provided for an increase in the minimum wage during this
116
JOINT ECONOMIC REPORT
-session; then surely in view of world competition, a productivity drive
is vital.
President Kennedy has proposed a program of tax incentives to
stimulate investment in plant and equipment. Such legislation is
most desirable, but the specific program seems inadequate. It will
be necessary to ascertain that its effects will be directed toward those
segments of the U.S. business community-small- and medium-sized
enterprises-that are most in need of tax incentives. In this way we
can assure that the greatest national benefit will be derived for the
tax revenue lost.
Tax incentives with respect to oversea private investment in
underdeveloped nations need also to be considered; these are generally
incorporated in the concept of H.R. 5, 86th Congress, the Boggs bill.
The restrictions on investments and earnings abroad in the developed
and industrialized nations which the President has proposed must be
coupled with such a program for the expansion of investment in the
underdeveloped countries.
Countries such as the Soviet Union which represent our "survival"
competition in the "cold war," and West Germany and Japan, who
are our friendly competitors in the field of commerce, have had annual
economic growth rates of between 6 and 10 percent during the past
decade-two to three times the U.S. rate. These nations have been
annually investing between 20 and 30 percent of their gross national
product in new capital equipment, as compared to a U.S. investment
of 11 percent per year during the same period.
2. Enlistment of the cooperation of labor and management is
essential for the fullest utilization of our economic potential. This
means cooperation in retraining programs for workers who are unemploved as a result of technological progress; it means elimination of
featherbedding practices by both labor and management, some of
which are legalized by outdated laws that require revision; and it
means the application of new ideas and skills in the research for more
efficient methods and new products.
The achievement of such cooperation requires much more than an
Executive order to establish an Advisory Committee on Labor-Management Policy, as created by President Kennedy on February 16.
I have introduced a bill that would establish a National Productivity
Council with authority to organize voluntary councils on a community,
regional, or industry basis throughout the country. This would
implement the White House Committee by law-to get the needed
money for it to operate, to get it down to the plant and local level,
to bring about grassroots participation and to mark the whole effort
as an expression of the national will. These councils would act to
accelerate national productivity by promoting peaceful labor-management relations, by solving problems caused by inflexible prices, the
wage-price squeeze, featherbedding, and other economic sore spots
that have been slowing the U.S. productivity rate.
Increased productivity cannot be assured by increased capital
investment alone. The very nature of automation which is the instrument of greater productivity requires high morale and this means
that labor must not be thrown on the scrap heap by automation but
workers must be retrained, financed during the transition period,
and again placed in jobs.
JOINT ECONOMIC REPORT
117
3. A national policy of affording equal opportunity in employment,
education, housing, and the exercise of their civil rights to all elements
of our population, regardless of color or religion is basic, also, to the
entire effort toward productivity expansion. Such a policy must be
expressed in positive terms through Government employment policies,
the policies on Government contracts, appropriate legislation, and
Executive orders.
As demonstrated in the testimony of the Council of Economic
Advisers, there is a tendency to understate the importance of civil
rights in education and employment in connection with manpower
utilization. This is done despite the fact that 15 percent of our
population represents minorities subjected to disadvantages in both
these areas of economic progress. Eleven percent of our population
belongs to the nonwhite minority whose 13.9 percent rate of unemployment today is nearly twice the national 7 percent average for
white workers. This is a major national economic problem and
should be dealt with.
A nation engaged in an epic struggle for the maintenance of free
institutions in the world is seriously prejudiced if it deprives great
minorities of its own of the full benefit of these institutions-especially
when it needs to lead in a world, two-thirds of whose inhabitants have
skins that are brown, black, or yellow. The United States can win
the struggle for freedom through the utilization of all its talents; and
this means the extension of all their rights equally to all of its people.
4. U.S. peace leadership requires a great expansion of our foreign
trade, which represents our largest economic commitment to world
affairs except for defense expenditures. Our current annual foreign
trade is $35 billion-nine times greater than our economic and military
foreign aid expenditures combined, and nine times greater than our
annual private overseas investment. Our exports of $19.6 billion in
1960 were five times greater than our balance-of-payments deficit
Our imports from the developing nations enabled them to buy more
than- twice as much of the goods which they require for their economic development than did our economic aid program.
The export expansion policy announced by President Kennedy must
be implemented by legislative action to augment and coordinate the
export services provided by the Government, if it is to succeed in
materially reducing the U.S. balance-of-payments deficits over the
years-a deficit which if long continued at a high rate could seriously
erode the value of the dollar upon which the economic survival of the
entire free world depends.
Furthermore, export expansion, which is becomingly increasingly
important to the domestic economic growth of the United States,
requires an import policy meeting international as well as domestic
needs. It must also maintain our markets abroad by preventing the
economic isolation of the United States which would result from acrossthe-board protectionism by us or others not now practicing it. Such
an important policy must gear up domestic industry to meet the
challenges of international competition and must assist the workers,
businessmen, and communities adversely affected to make the needed
adjustment with the least possible hardship.
5. The international economic policy of the United States requires
new media for coordinating the economic efforts of the free world.
118
JOINT ECONOMIC REPORT
It has already included ratification of the OECD which will coordinate
the economic power of the industrial nations of the free world-their
annual GNP is approaching $1 trillion, of which more than half belongs
to the United States-so that it will become the determining factor in
free world economic development. Within this organization concrete
U.S. proposals must take shape to coordinate, with our friends, aid,
trade, credit, and fiscal policies which will assure dollar stability and
sound economic expansion. U.S. leadership and experience must be
made freely available to this organization in providing Marshall plan
type regional development programs in Latin America, south Asia,
and Africa -programs of self-help and mutual cooperation.
6. U.S. policy must lead, on even a broader scale, toward the establishment of international banking and credit facilities which will
provide for the increase of liquidity which is the essential basis for
the rapid expansion of international trade. Mechanisms must be
worked out which will enable the limited amount of hard currencies
available to serve as the meditun for the greatly increased international transactions on long enough credit terms to form the basic
fabric of free world economic strength.
7. There must be a constant effort to draw upon the economic
strength, technological skills, and managerial know-how of the private
sector of our economy in carrying out of our international economic
policies. This can be accomplished by mixed systems management
groups acting in combined foreign aid operations of Government and
business; by stimulation of a massive pool of private capital for over.seas investment, perhaps through a publicly financed World Development Corporation; by providing tax incentives for overseas private
investment in developing areas; and by enlisting the private economic
system on a contract basis to give technical assistance to less developed areas.
A successful policy of stimulating private participation, however,
will require governmental agencies to go. out of their way to cooperate
with management and labor in foreign economic policy. This goes
beyond the export promotion effort which I have advocated-it
means a basic change in operating procedures on the part of Government officials in important aspects of foreign relations.
These, then, are some of the ideas we have, some of the opportunities we can take to spur the economic progress of the American
people and the world, not now being brought forward and developed
by the administration. They are more than just the immediate
measures needed to deal with the recession. They represent the real
essence of the economic struggle. And they would demonstrate that
we understand the basis for free world stability and that we are determnined with all our resources to join with the rest of the free world
in building that basis on a solid foundation.
APPENDIX
STAFF MEMORANDUM ON THE RELATIONSHIP OF THE FEDERAL BUDGET
TO UNEMPLOYMENT AND TO ECONOMIC GROWTH '
Several witnesses, appearing before the committee in December
1960 and in February 1961, expressed concern that the Federal budget
has become too restrictive.'
In part, they attributed the recent
recession to the overly restrictive budget.
These economists pointed out, as did Chairman Heller of the
President's Council of Economic Advisers, that the Federal budget
in recent years tends to come into balance at excessively high rates
of unemployment, to produce too large a surplus even at moderately
full employment-say 4 percent-and to produce smaller and smaller
deficits when unemployment is serious. To illustrate the point,
unemployment of 6.3 percent (seasonally adjusted) in the first quarter
of 1958 was accompanied by a Federal deficit of about $8 billion
(seasonally adjusted annual rate), computed on the national income
and product accounts basis. 3 In contrast, by the fourth quarter of
1960 when unemployment was again at about this same level (6.4
percent), the deficit, figured on the same basis, was less than a billion
or about one-sixteenth to one-eighth of that realized in the first quarter
of 1958.
Furthermore, the economic outlook presented to the committee
implies continued high unemployment through this year and possibly
through 1962, accompanied by very modest deficits compared to experience at similar rates of unemployment in previous years. In fact,
it was estimated that the budget may come into balance with unemployment still as high as 6 percent (seasonally adjusted). 4
What is the explanation and significance of this tendency of the
Federal budget? This memorandum tries to answer this question by
an analysis of the relationship of Federal revenues and expenditures
to GNP and unemployment. To do so, it is necessary at first to set
down several characteristics, of the Federal budget structure and some
simple assumptions about the variation of GNP over the years in
relation to unemployment.
THE GNP FRAMEWORK OF THE ANALYSIS
First, it is necessary to explain the GNP framework of this analysis
and the assumptions used. In what follows, changes in Federal
I Prepared by James W. Knowles.
2 See "Current Economic Situation and Short-Ran Outlook," hearings before the Joint Economic Cornmnittee, Dec. 7-8 1960 (86th Cong., 2d sess.): testimony of Joseph A. Peckman (pp. 112-114, 132-134), and
Charles L. Schultze (pp. 114-122, 132-134). See also "January 1961 Economic Report of the President and
the Economic Situation and Outlook," hearings before the Joint Economic Committee, Feb. 9, 10, Mar. 6,
7, and Apr. 10, 1961 (hereafter referred to as Hearings): testimony of Herbert Stein, Feb. 50, 1961 (pp.
209-225).
3 Computations here and elsewhere in this memorandum, which involve the Federal budget, are carried
through on a national income and product basis rather than an administrative or cash budget basis. This
is done to make the data directly comparable to the GNP as to concept, coverage, and.timing. They are,
therefore, to the extent possible, on a current (accrued or liability) basis and cover not only regular budget
transactions but also those involving trust accounts.
4 See statement of Dr. Heller, Hearings, pp. 173.
-
'
~~~~~~~~~~~~
120
JOINT ECONOMIC REPORT
revenues and expenditures are related to changes in GNP as a measure
of the Nation's total output and incomes. All data are expressed in
current prices, i.e., those prevailing in each year studied.
The basic idea is to separate changes accompanying growth of the
economy along a full employment trend line-potential output-from
those associated with departures from full employment. For this
purpose, table 1 shows in current prices actual GNP for selected years
during 1954-65, potential GNP, and the dollar difference between
the two.
APPENDIX TABLE 1.-Illustrative budgets at potential output, selected years, 1954
to 1965
NATIONAL INCOME AND PRODUCT ACCOUNT BASIS
[In billions of dollars]
Calendar years
GNP-Current prices:
Actual
-363.1
Potential
-Actual-potentialPercent of potential -Federal budget on GNP basis:
Expenditures:
Actual-
At potential--------------69.
Percent of potential GNP Receipts:
----------------Actual At potential
Percent of potential GNP -----Surplus (+) or deficit (-):
Actual
At potential
Percent of potential --
1954
1957
1958
1960
1961
1962
369.2
-6.1
-1.7
442.8
458. 9
-16.1
-3.5
444. 2
484. 8
-40.6
-8.3
503. 2
541.1
-37.9.
-7.0
568.0
595.0
69.6
79.7
87.9
92.3-
90. 0
16. 6
96.0
16.9
101.0 110.0-115.0
17.0 15. 9-16. 7
63.8
65. 6
17.8
81.8
87. 7
19. 1
78.6
94.1
19.4
195.3
108. 0
20. 0
114.0
20.1
120.0 143 0-146.0
20.2 20. 7-21.2
-5.8
-3.5
-. 9
+2.1
+8.2
1.8
-9.3
+8.5
1.8
+3.0
+18.0
3.3
+18.0
3.2
+19.0 +28.0-36.0
3.2
4.1-5.2
1
618.7
79. 5
17.3
85.6
17.7
---
1965
690.0
-
X Preliminary.
The potential' GNP estimate used here assumes that full employment
can be defined arbitrarily as implicitly 4 percent unemployment,
though other working assumptions could be used. The potential is
derived by procedures set forth in Study Paper No. 20, prepared for
the use of the committee. 3 The estimates for recent years are in
rough agreement with the Council of Economic Advisers' estimates
presented to the committee during its hearings.6
Changes in Federal revenues and expenditures, therefore, are related: (a) to full employment or potential GNP; and (b) to the difference between actual and potential GNP, taken as a measure of cyclical
fluctuations in aggregate output and incomes.
CHARtACTERIST1CS
OF THE PRESENT
FEDERAL BUDGET STRUCTURE
The characteristics of the Federal budget relevant to the present
discussion are:
A. As to revenues
(1) Federal tax receipts fluctuate more violently than national
income or GNP, reflecting the fact that the marginal rate on changes
5"The Potential Economic Growth in the United States," Study Paper No. 20, by James W. Knowles,
prepared for the Joint Economic Committee in connection with its Study of Employment, Growth, and
Price Levels, 86th Cong., 2d sess.
Hearings, pp. 290 ff., especially pp. 294-295 and 318-329.
JOINT ECONOMIC REPORT
121
in incomes or profits is larger than the average rate. Since 1954,
when the present code was adopted, it appears that the average take
of Federal revenues out of the cyclical difference between actual and
potential output has been about 36 percent.
(2) As the economy grows along the full employment or potential
trend, Federal revenues rise by about one-fourth or 25 percent of the
rise in potential GNP.
(3) It is estimated that at 4 percent unemployment, the basis for
computing potential GNP, Federal revenues would have amounted to
about 17.8 percent of potential GNP in 1954 or in year "0" in some of
the analysis to follow.
(4) Potential Federal revenues are an estimate of the yield of the
existing tax structure as it would be if output were always at the
potential rate of output.
B. Federalexpenditures
(1) The defense component of Federal spending is assumed to change
solely for national security reasons, hence is not necessarily correlated
with changes in potential or actual GNP, though changes in the two
sometimes correspond.
(2) Federal nondefense spending is separated conceptually into
two parts: one of which includes longer run programs not sensitive to
cyclical fluctuations in output; the other includes the countercyclical
items, especially unemployment compensation programs.
(3) Potential expenditures are estimated by adding to the defense
and noncyclical nondefense items an estimate of the countercyclical
items corrected to correspond to an unemployment rate of 4 percent.
THE FEDERAL BUDGET AT POTENTIAL OUTPUT RATES
The reaction of the Federal budget to economic changes accompanying growth can be shown by illustrative calculations of revenues and
expenditures corresponding to potential output. Appendix chart 1
shows the estimated yield of the Federal tax structure for the first
16 years following its enactment, calculated as a percent of GNP,
and on the basis of five assumptions as to the rate of growth of potential GNP, ranging from 1 to 5 percent per year.
This chart reveals three facts about the Federal tax structure, long
known to students of tax policy. First, in all cases the average effective rate of taxation rises if the economy grows. It will remain
constant only if the economy always yields the same identical total
output and incomes-that is, if there is no growth in potential output.
Second, the average tax rate (percent of GNP) rises more rapidly as
successively higher rates of growth in output of the economy are
assumed. Third, for all rates of growth, the rise in the average tax
rate tends to slow up as time passes. If these curves were carried
out to over much longer time-spans (25 to 50 years) the average tax
rates would gradually tend to flatten out at a maximum rate somewhat
122
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JOINT ECONOMIC REPORT
123
below the assumed marginal rate of 25 percent. This is due to the
effects of exemptions, exclusions, etc., in putting some drag on tax
yields and to the fact that the average rate cannot exceed the marginal
rate.
This illustration is particularly interesting, because roughly it is
applicable to the present Federal tax structure with 1954 used as the
"0" in the chart. It can be translated into illustrative estimates of
the Federal budget for selected calendar years on a national income
and product basis. Such data are presented in table 1. The potential
revenues are based on the same assumptions as already outlined.
The potential expenditures at full employment assume(a) that expenditures are adjusted to reflect an unemployment
rate of 4 percent, particularly as to the rate of payments for
unemployment compensation;
(b) estimates for calendar years 1961 and 1962 are roughly
consistent with the revised data for fiscal years 1961 and 1962
presented to the committee by Budget Director Bell; and
(c) for 1965, the estimates assume a further substantial rise in
expenditures, but not in the ratio of expenditures to GNP.
It will be noticed that at potential or assumed full employment
levels of activity the Federal budget on a national income and product
basis would have shifted from a deficit of about 1 percent of total
output or $3.5 billion in 1954 when the current tax law was first put
into effect, to a surplus of about 1.8 percent or about $8.5 billion by
1958, and to about 3.3 percent or $18 billion by calendar 1960. On
the basis of these potential estimates. the surplus would continue at
about 3 percent or more of potential GNP in 1961 and 1962, and then
would rise to between 4 and 5 percent by 1965, or to about $28 to
$36 billion per year. These estimates, of course, assume current tax
laws and do not allow for increases in revenues that would come
about as a result of additional taxes levied to finance the new programs
that have been proposed or enacted in the fields of unemployment
insurance or social security.
The estimates would be affected significantly, of course, if other
assumptions were made as to Government expenditures and growth
rates. For example, for the same expenditure levels in calendar 1965,
a reduction in the annual growth rate by 1 percentage point from
1954 to 1965 would reduce the surplus by 2 to 3 percentage points in
1965. On the other hand, for any given annual growth rate a rise or
fall in the estimated Government expenditures by $5 billion in 1965
would cause the surplus as a percent of GNP to change in the opposite
direction by 0.7 percent to 1.1 percent of GNP.
For the surplus in 1965 to be as low as 1.5 percent of potential
GNP, therefore, either the growth rate (in current prices) must not
exceed 3.2 percent per year (1954 to 1965) or expenditures must rise
above those assumed in table 1 by about $18 billion or to about $133
billion in 1965. It is significant that the growth rate of actual GNP
in current prices has been about 5 to 6 percent per year since 1947
and has averaged about 4 to 5 percent per year since 1953.
Since these calculations are in current prices, they make allowance
for the rise in prices since 1954 amounting to 2.3 percent per year and
assume a 1 percent per year rise in the GNP deflator from 1960 to
1965-mostly to take into account the effect on the deflator of statis-
124
JOINT ECONOMIC REPORT
tical bias and the long-run bias of a rise in real wages (in line with
productivity) which exerts an upward influence on the deflator,
particularly in the Government and service categories of output.
Implications
The committee staff has indicated on previ6us 'occasions the implications of this difference between marginal and average rates in a growing economy at full employment. For example, in the 1954 study by
the Joint Economic Committee staff, entitled "The Potential Economic Growth of the United States During the Next Decade," it was
stated that"Further reductions in Federal tax rates are assumed in addition to
those that have become effective this year and those which are incorporated in the Internal Revenue Code of 1954. The reductions are
assumed to be such that by 1965 the Federal budget will be balanced
but the combined State and local government deficit would be about
$2 billion on an income and product basis. The tax reductions have
been spread somewhat arbitrarily across all sources of Federal revenues
except social security contributions. These assumed reductions in
taxes would lower the combined total of Federal, State, and local
revenues in 1965 perhaps 15 to 20 percent below the hypothetical yield
that could be expected from present rates (including the Internal
Revenue Code of 1954) at levels of output and incomes estimated for
1965" (pp. 10-11).
This assumption of tax reductions over the 11 years 1954-65 was
essential to the projections in that study. Moreover, the estimated
15 to 20 percent reduction in total Federal, State, and local revenues
below the 1965 yields from the 1954 tax structure was a very conservative estimate of the Federal tax revisions which would be needed
during the decade now over half gone. First, it made no allowance
for rising prices which may tend (with bigh marginal rates of taxes) to
raise revenues faster than expenditures. Second, allowances for rising
State and local tax rates now appear to have been low. Third, since
the total was assumed to fall 15 to 20 percent, while State and local
revenues and rates rose, the Federal tax cuts would have to exceed
15 to 20 percent.
Under the immediate postwar conditions, a rather substantial
budget surplus was highly desirable in order to hold in check the
inflationary forces the Nation had inherited from the war and the great
depression. And indeed this was the case. The Federal surplus on
income and product account was about 1 percent of national product
of 1946, about 5 percent in 1947, about 3 percent in 1948, and again
about 3 percent in 1950. These relatively large budget surpluses
contributed substantially to the prevention of a runaway inflation at
the time.
But today, after the postwar inflationary forces have subsided, it
seems hazardous to assume that the economy can rise to full employment (i.e., 4 percent unemployment) while a steadily rising State and
local tax structure bears with increasing severity on consumption and
Federal fiscal policies are geared to produce a surplus at full employment which may be of the order of magnitude of 2 to 3 percent of the
gross national product. It is even more hazardous to assume that the
economy can achieve full employment over the next 2 to 4 years with
Federal fiscal policies geared to produce at potential output rates
JOINT ECONOMIC REPORT
125
(4 percent unemployment) a steadily rising surplus approaching the
4 to 5 percent rate, or in the range of $25 to $40 billion per year. To
maintain a sensible monetary policy, and to give the Federal Reserve
authorities freedom to maneuver without producing excessively restrictive credit conditions and too high interest rates, an appreciable
budget surplus at the full-employment level is needed-perhaps equal
to at least 1 percent of the potential gross national product and possibly
as high as 1.5 percent of the potential gross national product. It is
impossible, of course, to pinpoint an exact target percent, but a-.
combination of tax and expenditure policies that can produce a rising
surplus, at potential gross national product already at 3 percent and
rising steadily toward 4 to 5 percent of gross national product, almost
certainly threatens an insuperable barrier to the achievement of full
employment.
68180-61-10
PUBLICATIONS OF THE JOINT ECONOMIC COMMITTEE
January 1947-April 1961
Single copies of the publications listed may be obtained from the Joint Economic
Committee except as otherwise noted. Additional copies of committee publications may be purchased from the Superintendent of Documents, Washington 25, D.C., at the price given. The prices shown are for single copies.
There is a discount for quantity orders. Out-of-print publications are denoted by an asterisk. Publications available only from Superintendent of
Documents are denoted by a dagger (t)
*Declaring a National Policy on Employment, Production, and Purchasing Power (Report of the Joint Committee on the Economic
Report), Senate Report No. 11: January 1947.
*Food Prices, Production,and Consumption (Report of the Joint Com* mittee on the Economic Report), Senate Document 113: April 1957.
*Hearings on Current Price Developments and the Problem of Economic Stabilization (June 24, 25, 26, July 2, 8, 9, 10, 14, 15; 16,
and 17, 1947): July 1947.
*Interim Report on the President's Program To Deal With the Problems
qf Inflation (Report of the Joint Committee on the Economic
Report), Senate Report 809: December 1947.
*Hearings on Anti-inflation. Program as Recommended in the President's Message of November 17, 1947 (November 21, 24, 25, 26,
28, December 2, 3, 4, 5, and 10, 1947): December 1947.
*Allocation and Inventory Control of Grainfor the Production of Ethyl
Alcohol (Report of the Joint Committee on the Economic Report),
Senate Report 888: February 1948.
*Hearings on Allocation of Grain for Production of Ethyl Alcohol
. (February 5 and 6, 1948): February 1948.
*High Prices of Consumer Goods (Report of the Joint Committee on
* the Economic Report), Senate Report 1565: June 1948.
Hearings on Increases in Steel Prices (March 2, 1948).
*point Economic Report (Report of the Joint Committee on the
Economic Report on the January 1948 Economic Report of the
President),- Senate Report 1358: May 1948.
*Hearings on Credit Policies (April 13 and 16, May 12, 13, 27, 1948):
July 1948.
*Statistical Gaps, Current Gaps in Our Statistical Knowledge (materials
assembled by the staff of the Joint Committee on the Economic
Report), committee print: July 1948.
Consumers' Price Index (materials assembled by the staff of the Joint
Committee on the Economic Report), committee print: December
1948.
*HeariDngs on Profits (December 6, 7, 8, 9, 10, 15, 16, 17, 20, 21, 1948):
December 1948.
Profits (Report of a Subcommittee of the Joint Committee on the
Economic Report on Profits Hearings), committee print: FebruWr
- 1949.
127
128
JOINT ECONOMIC REPORT
*Hearings, January 1949 Economic Report of the President (February
8, 9, 10, 11, 14, 15, 16, 17, 18, 1949): March 1949.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the January 1949 Economic Report of the President), Senate Report 88: March 1949.
Joint Economic Report (minority views of the Joint Committee on the
Economic Report on the January 1949 Economic Report of the
President), part II of Report 88: April 1949.
*Employment and Unemployment (initial report of the Subcommittee
on Unemployment), committee print: July 1949.
*economyof the South (the impact of Federal policies on the economy
of the South), committee print: July 1949.
Factors Affecting the Volume and Stability of Private Investment (materials on the investment problem assembled by the staff of the Subcommittee on Investment), Senate Document 232: September 1950;
reprinted from committee print of October 1949.
*Hearings, Subcommittee on Monetary, Credit, and Fiscal Policies,
Federal Expenditure and Revenue Policies, September 23, 1949
(containing National Planning Association reports prepared by
Conference of University Economists): October 1949.
*Selected Government Programs Which Aid the Unemployed and LowIncome Families (materials assembled by the staffs of the Subcommittee on Unemployment and the Subcommittee on Low-Income
Families), committee print: November 1949.
Low-Income Families and Economic Stability (materials on the problem
of low-income families assembled by the staff of the Subcommittee
on Low-Income Families), Senate Document 231: September 1950;
reprinted from committee print of November 1949.
Compendium of Materials on Monetary, Credit, and Fiscal Policies (a
collection of statements submitted to the Subcommittee on Monetary, Credit, and Fiscal Policies by Government officials, bankers,
economists, and others), Senate Document 132: January 1950;
reprinted from committee print of November 1949.
Hearings, Subcommittee on Investment, Volume and Stability of
Private Investment, Part 1 (September 27, 28, 29, 1949): November
1949.
Basic Data Relating to Steel Prices (materials assembled by the staff
of the Joint Committee on the Economic Report for use in steel
hearings), committee print: January 1950.
Highways and the Nation's Economy (materials assembled by the staff
of the Joint Committee on the Economic Report), Senate Document
145: January 1950.
*Hearings, Subcommittee on Monetary, Credit, and Fiscal Policies,
Monetary, Credit, and Fiscal Policies (September 23, November 16,
17, 18, 22, 23, and December 1, 2, 3, 5, 7, 1949): January 1950.
*Monetary, Credit, and FiscalPolicies (Report of the Subcommittee on
Monetary, Credit, and Fiscal Policies), Senate Document 129:
January 1950.
Employment and Unemployment (Report of the Subcommittee on
Unemployment), Senate Document 140: February 1950.
*Hearings, Subcommittee on Investment, Volume and Stability of
Private Investment, Part 2 (December 6, 7, 8, 9, 12, 13, 14, 15, 17,
1949): February 1950.
Hearings, Subcommittee on Low-Income Families, Low-Income Families (December 12, 13, 14, 15, 16, 17, 19, 20, 21, 22): March 1950.
JOINT ECONOMIC REPORT
129
*Hearings, January 1950 Economic Report of the President (January
17, 18, 19, 20);: February 1950.
Hearings, Deceniber 1949 Steel Price Increases (January 24, 25 26,
27): March 1950.
s (4
*Low-Income Families and Economic Stability (final report of the Sub-committee on Low-Income Families), Senate Document -146:
March 1950.
Volume and Stability of Private Investment (final report of the Subcommittee on Investment), Senate Document 149: March 1950.
December 1949 Steel Pricek Increases (Report of the Joint Committee
on the Economic Report), Senate Report 1373: March 1950;
*Handbook of Regional Statistics (material assembled by the staff, of
the Joint Committee on the Economic Report), committee print:
April 1950.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the January 1950 Economic Report of the President), Senate Report 1843: June 1950:
*Generjal Credit Control, Debt Management, and Economic Mobilization
(materials prepared by the staff of the Joint Committee on the
Economic Report), committee print: January 1951.
Underemployment of Rural Families (materials prepared by the staff
of the Joint Committee on .the Economic Report), committee
print: February 1951.
*The Economic and Political Hazards of an Inflationary Defense Economy (materials prepared by the staff of the Joint Committee .on
the Economic Report), committee print:-February 1951.
*Hearings,January 1951 Economic Report of the President (January
22, 24, 25, 26, 29, 31, February 2): March 1951.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the January 1951 Economic Report of the President), Senate Report 210: April 2, 1951.
Making Ends Meet on Less than $2,000 a Year, Case Studies of 100
- Low-Income Families (communication to the Joint Committee on
the Economic Report from the Conference Group of Nine National
Voluntary Organizations Convened by the National Social Welfare
Assembly),'committee print: July 1951.
Prevalence of Price Cutting of- Merchandise Marketed Under PriceMaintenance Agreements, May 28 through June 25, 1951 (study prepared for the Joint Committee on the Economic Report and the
Select Committee on Small Business), committee print: July 195f.
The Need for Industrial Dispersal (materials prepared for the Joint
Committee on the Economic Report by the committee staff), Senate
Document 55: August 1951.
*National Defense and the Economic Outlook (materials prepared for the
Joint Committee on the Economic Report-by the committee staff),
committee print: August 1951.
Inflation Still a Danger (report of the Joint Committee on the Economic Report together with materials on national defense and the
economic outlook included in committee print mentioned above)-,
Senate Report 644: August 1951.
*Questionson General Credit Control and Debt Management (prepared by
* staff of the Subcommittee on General-Credit Control and Debt
Management of the Joint Committee on the Economic Report),
committee print: October 1951.
130
JOINT ECONOMIC REPORT
Monetary Policy and the Management of the Public Debt. Their Role
in Achieving Price Stability and High-Level Employment (replies
to questions and other material for the use of the Subcommittee on
General Credit Control and Debt Management), Senate Document
123, Parts I and II: February 1952.
Hearings, January 1952 Economic Report of the President (January
23, 24, 25, 26, 28, 30, 31, February 1): February 1952.
ConstitutionalLimitation on FederalIncome, Estate, and Gift Tax Rates
(materials assembled for the Joint Committee on the Economic
Report and the Select Committee on Small Business of the House
of Representatives), committee print (sale price 15 cents): February
1952.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the January 1952 Economic Report of the President together with National Defense and the Economic Outlook for
the Fiscal Year 1953, material prepared for the Joint Committee on
the Economic Report by the committee staff), Senate Report No.
1295: March 1952.
The Taxation of Corporate Surplus Accumulations, The Application
and Effect, Real and Feared, of Section 102 of the Internal Revenue
Code dealing with Unreasonable Accumulation of Corporate Profits
(study prepared for the Joint Committee on the Economic Report
by Dr. J. K. Hall), committee print: May 1952.
*Hearings, Subcommittee on General Credit Control and Debt Management, Monetary Policy and the Management of the Public
Debt (March 10, 11, 12, 13, 14, 17, 18, 19, 20, 21, 24, 25, 26, 27, 28,
and 31, 1952): May 1952.
Monetary Policy and the Management of the Public Debt (Report of the
Subcommittee on General Credit Control and Debt Management)
Senate Document No. 163: July 1952.
Federal Tax Changes and Estimated Revenie Losses under Present Law
(Materials prepared for the Joint Committee on the Economic
Report by the committee staff), committee print: November 1952.
Sustaining Economic Forces Ahead (Materials prepared for the Joint
Committee on the Economic Report by the committee staff), committee print: December 1952.
tPensions in the United States (A study prepared for the Joint Committee on the Economic Report by the National Planning Association), committee print (sale price 30 cents): December 1952.
*Index of Joint Economic Publications:January 1947 through December 1952. Committee print: January 1953.
Historicaland Descriptive Supplement to Economic Indicators:December 1953.
*Hearings, January 1954 Economic Report of the President (February
1, 2, 3, 4, 5, 8, 9, 10, 11, 15, 16, 17, 18): March 1954.
*Joint Economic Report (Report of the Joint Committee on the
Economic Report on the 1954 Economic Report of the President),
House Report No. 1256 (sale price 30 cents): February 1954.
Hearings, Subcommittee on Economic Statistics, Economic Statistics
(July 12 and 13, 1954): August 1954.
Economic Statistics (Progress Report prepared by the Subcommittee
on Economic Statistics). House Report No. 2628: August 1954.
JOINT ECONOMIC REPORT
131
CongressionalAction on Major Economic Recommendations of the President, 1954 (Materials prepared by the Joint Committee on the
Economic Report by the Committee Staff), committee print:
September 1954.
tPotentialEconomic Growth of the United States During the Next Decade
(Materials prepared for the Joint Committee on the Economic
Report by the Committee Staff), committee print (sale price 15
cents): October 1954.
*Hearings, Subcommittee on Economic Stabilization, United States
Monetary Policy: Recent Thinking and Experience (December 6
and 7,1954): December 1954.
*Trends in Economic Growth, A Comparison of the Western Powers,and
the Soviet Bloc (Materials prepared for the Joint Committee on the
Economic Report by the Legislative Reference Service of the Library
of Congress), committee print (sale price $1): January 1955.
*Hearings, January 1955 Economic Report of the President (January
24, 26, 27, 28, 31, February 1, 2, 3, 8, 9, 10, and 16, 1955) (sale price
$3.50): February 1955.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the 1955 Economic Report of the President),
Senate Report No. 60 (sale price 30 cents): March 1955.
*Historical and Descriptive Supplement to Economic Indicators: November 1955.
*Hearings, Subcommittee on Economic Stabilization, Automation
and Technological Change (October 14, 15, 17, 18, 24, 25, 26, 27,
and 28, 1955) (sale price $2.00): November 1955. (Reprinted September 1959.)
Automation and Technological Change (Report of the Subcommittee
on Economic Stabilization) committee print, November 1955 (sale
price 10 cents): became Senate Report No. 1308, January 1956.
Hearings, Subcommittee on Economic Statistics Reports of Federal
Reserve Consultant Committees on Economic Statistics (July 19
and 26, October 4 and 5, 1955) (sale price $2.25): November 1955.
Hearings, Subcommittee on Economic Statistics, Employment and
Unemployment Statistics (November 7 and 8, 1955) (sale price 45
cents): November 1955.
1955 Report on Economic Statistics (Report of the Subcommittee on
Economic Statistics) committee print, November 1955: became
Senate Report No. 1309, January 1956.
*Federal Tax Policy for Economic Growth and Stability (Papers submitted by panelists appearing before the Subcommittee on Tax
Policy), committee print (sale price $2.50): November 1955.
(Reprinted September 1959.)
tHearings, Subcommittee on Tax Policy, Federal Tax Policy for
Economic Growth and Stability (December 5, 6, 7, 8, 9, 12,13, 14,
15, and 16, 1955) (sale price $2.00): January 1956.
Federal Tax Policy for Economic Growth and Stability (Report of the
Subcommittee on Tax Policy) committee print, December 1955
(sale price 10 cents): became Senate Report No. 1310, January
1956.
*The Federal Revenue System: Facts and Problems (Materials assembled for the Subcommittee on Tax Policy by the committee staff),
committee print (sale price 55 cents): January 1956. (Reprinted
May 1959.)
132
JOINT ECONOMIC REPORT
tCharacteristicsof the Low-Income Population and Related Programs
(Materials prepared by the staff of the Subcommittee on LowIncome Families), committee print (sale price 60 cents): October
1955.
tHearings, Subcommittee on Low-Income Families, Low-Income Families (November 18, 19, 21, 22, and 23, 1955) (sale price $2.00):
' December 1955.
A Program for the Low-Income Population at Substandard Levels of
Living (Report of the Subcommittee on Low-Income Families),
committee print, December 1955 (sale price 10 cents): became
Senate Report No. 1311, January 1956.
Hearings, Subcommittee on Foreign Economic Policy, Foreign Economic Policy (November 9, 10, 14, 15, 16, 17, 1955) (sale price
$1.75): December 1955.
Foreign Economic Policy (Report of the Subcommittee on Foreign
Economic Policy), committee print, December 1955 (sale price
15 cents): became Senate Report No. 1312, January 1956.
Hearings, January 1956 Economic Report of the President (January
31, February 1, 2, 3, 6, 7, 8, 9, 14, 15, 17, and 28, 1956): March 1956.
*Joint Economic Report (Report of the Joint Committee on the Economic Report on the 1956 Economic Report of the President):
Senate Report No. 1606 (sale price 35 cents): March 1956.
Hearings, Subcommittee on Economic Stabilization, Conflicting
Official Views on Monetary Policy: April 1956 (June 12, 1956)
(sale price 20 cents): June 1956.
tHearings, Subcommittee on Foreign Economic Policy, Defense
Essentiality and Foreign Economic Policy (June 4, 5, 6, and 7,
1956) (sale price $1.50): July 1956.
Defense Essentiality and Foreign Economic Policy, Case Study: Watch
Industry and Precision Skills (Report of the Subcommittee on
Foreign Economic Policy), Senate Report No. 2629, Parts I and II
(sale price 15 cents with Part II): July 1956.
Hearings, Subcommittee on Economic Stabilization, Monetary Policy:
1955-56 (December 10 and 11, 1956) (sale price 45 cents): January
*1957.
Hearings, Subcommittee on Foreign Economic Policy, World Economic Growth and Competition (December 10, 12, and 13, 1956)
(sale price 45 cents): February 1957.
tHearings, Subcommittee on Economic Stabilization, Instrumentation
and Automation (December 12, 13, and 14, 1956) (sale price 75
cents): February. 1957.
*Employment Act of 1946, as Amended, and Related Laws, and Rules
of the Joint Economic Committee (prepared by staff of the Joint
Economic Committee) committee print: January 1957.
tHearings, January 1957 Economic Report of the President (January
:28, 29, 30, 31, February 1,4, 5, 6) (sales price $2.25): February 1957.
Joint Economic Report (Report of the Joint Economic Committee
on the 1957 Economic Report of the President): House Report
'No. 175: February 1957.
Fiscal.Policy Implications of the Economic Outlook and Budget Develop-
~ ments (Report of the Subcommittee on Fiscal Policy), House Report
No. 647 (sale price 10 cents): June 1957.
JOINT-T ECONOMIC REPORT
133
Hearings, Subcommittee on Fiscal Policy, Fiscal Policy Implications
of the Economic Outlook (June 3, 4, 5, 6, 7, 13, and 14, 1957) (sale
price $1.00):.June 1957.
tProductivity, Prices, and Incomes (Materials prepared for the Joint
Economic Committee by- the committee staff), committee print
(sale price 70 cents): June 1957.
Soviet Economic Growth: A Comparison with the United States (A study
prepared for the Subcommittee on Foreign Economic Policy of the
Joint Economic Committee by the Legislative Reference Service of
the Library of Congress), committee print (sale price 40 cents):
September 1957.
1957 Historical and Descriptive Supplement to Economic Indicators
(Prepared for the Joint Economic Committee by the Committee
Staff and the Office of Statistical Standards', Bureau of the Budget),
committee print (sale price 40 cents): September 1957.
tFederal Expenditure Policyfor Economic Growth and Stability (Papers
submitted by panelists appearing before the Subcommittee on Fiscal
Policy); committee print (sale price $3.25): November 1957.
tHearings, Subcommittee on Fiscal Policy. Federal Expenditure Policy
for Economic Growth and Stability (November 18-27, 1957) (sale
price $2.00): January 1958.
FederalExpenditure Policiesfor Economic Growth and Stability (Report
of the Subcommittee on Fiscal Policy), committee print (sale price
10cents): January 1958.
tPolicy for Commercial Agriculture: Its Relation to Economic Growth
and Stability (Papers submitted by panelists appearing before the
Subcommittee on Agricultural Policy), committee' print (sale price
$2.25): November 1957.
Hearings, Subcommittee on Agricultural Policy, Policy for Commercial Agriculture: Its Relation to Economic Growth and Stability
(December 16-20, 1957) (sale price $1.00): January 1958.
tPolicy for Commercial Agriculture: Its Relation to Economic Growth
and Stability (Report of the Subcommittee on Agricultural Policy),
committee print (sale price 15 cents): February 1958.
tHearings, Subcommittee on Economic Statistics, The National Economic Accounts of the United States (October 29 and 30, 1957)
(sale price 75 cents): December 1957.
Hearings, Subcommittee on Economic Stabilization, Automation and
Recent Trends (November 14 and 15, 1957) (sale price 30 cents):
December 1957.
Automation and Technological Change (Reprint of S. Rept. 1308 of the
Joint Committee on the Economic Report, January 1956) (sale price
10 cents): January 1958.
International Economic Statistics (A Memorandum prepared for the
Subcommittee on Economic Statistics of the Joint Economic Committee by the Office of Statistical Standards of the Bureau of the
Budget), committee print (sale. price 25 cents): February 1958.
Hearings, January 1958 Economic Report of the President (January
27, 28, 29, 30, February 3, 4, 5, 6, 7, and 10) (sale price $1.50):
February 1958.
tJoint Economic Report (Report of the Joint Economic Committee on
the 1958 Report of the President): House Report'No. 1409 (sale
price 20 cents): February 1958.
134
JOINT ECONOMIC REPORT
*The Relationship of Prices to Economic Stability and Growth (Papers
submitted by panelists appearing before the Joint Economic Committee), committee print (sale price $2.00): March 1958.
tHearings, Relationship of Prices to Economic Stability and Growth
(May 12, 13, 14, 15, 16, 19, 20, 21, and 22, 1958) (sale price $1.25):
July 1958.
The Relationship of Prices to Economic Stability and Growth (Commentaries submitted by economists from labor and industry appearing before the Joint Economic Committee), committee print (sale
price 65 cents): November 1958.
ilearings, Relationship of Prices to Economic Stability and Growth
(December 15-18, 1958) (sale price $1.25): February 1959.
tIlearings, Subcommittee on Fiscal Policy, Fiscal Policy Implications
of the Current Economic Outlook (April 28, 29, 30, and May 1,
1958) (sale price 55 cents): July 1958.
Frequency of Change in Wholesale Prices: A Study of Price Flexibility
(A study prepared for the Joint Economic Committee by the U.S.
Department of Labor, Bureau of Labor Statistics), committee print
(sale price 30 cents): January 1959.
Economic Policy Questionnaire (Tabulation of replies submitted to the
Subcommittee on Economic Stabilization of the Joint Economic
Committee), committee print (sale price 15 cents): February 1959.
*Hearings, January 1959 Economic Report of the President (January
27, 28, 29, 30, February 2, 3, 4, 5, 6, 9, 10, 1959): March 1959.
Joint Economic Report (Report of the Joint Economic Committee on
the 1959 Report of the President): Senate Report No. 98 (sale
price 25 cents): March 1959.
*The Federal Revenue System: Facts and Problems (Materials assembled for the Subcommittee on Tax Policy by the committee staff),
committee print (January 1956) Revised May 1959 (sale price 65
cents): May 1959.
Economic Policy in Western Europe (Report based on conferences on
economic policy matters held in seven countries of Western Europe
late in 1958 together with selected materials assembled by the
committee staff), committee print (sale price, $1.25): July 1959.
tHearings, Subcommittee on Economic Stabilization, Automation and
Technological Change (October 14, 15, 17, 18, 24, 25, 26, 27, and 28,
1955) (sale price $2): (November 1955) Reprinted September 1959.
*FederalTax Policy for Economic Growth and Stability (Papers submitted by panelists appearing before the Subcommittee on Tax Policy),
committee print (sale price $2.50): (November 1955) Reprinted
September 1959.
Comparison of the United States and Soviet Economies (Papers submitted by panelists appearing before the Subcommittee on Economic Statistics), committee prints.
tPart I (sale price, $1.00): October 1959.
tPart II (sale price, 45 cents): November 1959.
tPart III (sale price, 25 cents): November 1959.
tHearings, Comparison of the United States and Soviet Economies,
hearings before Subcommittee on Economic Statistics, November
13, 16, 17, 18, 19, and 20 (sale price 70 cents): November 1959.
Comparisons of the United States and Soviet Economies (Supplemental
Statement and Costs and Benefits to the Soviet Union of its Bloc
and Pact System: Comparisons with the Western Alliance System
JOINT ECONOMIC REPORT
135
prepared by the Central Intelligence Agency in Cooperation with
the Department of State and Department of Defense for the Subcommittee on Economic Statistics for the Joint Economic Committee) committee print (sale price 20 cents): June 1960.
Hearings, Energy Resources and Technology, hearings before the
Subcommittee on Automation and Energy Resources, October 12,
13, 14, 15, 16 (sale price, $1.25): November 1959.
Employment Act of 1946, as Amended, and Related Laws, and Rules
of the Joint Economic Committee (prepared by staff of the Joint
Economic Committee), committee print: 1960.
Joint Economic Report (Report of the Joint Economic Committee on
the 1960 Report of the President): Senate Report 1152 (sale price
30 cents): February 1960.
*Hearings, January 1960, Economic Report of the President (February
1, 2, 3, 4, 5, and 16, 1960) (sale price $1.50): March 1960.
Background Material on Economic Aspects of Military Procurement
and Supply (Materials prepared for the Subcommittee on Defense
Procurement), committee print (sale price $1): February 1960.
tHearings, Impact of Defense Procurement, hearings before Subcommittee on Defense Procurement, January 28. 29, and 30 (sale
price $1.75): March 1960.
jEconomic Aspects of Military Procurement and Supply (Report of the
Subcommittee on Defense Procurement), committee print (sale
price 35 cents): October 1960.
REPORTS,
HEARINGS, AND STUDY PAPERS FROM THE STUDY OF
EMPLOYMENT, GROWTH, AND PRICE LEVELS
*Staff Report on Employment, Growth, and Price Levels (committee
print) (sale price $1.50): December 1959.
tEmployment, Growth, and Price Levels (Report of the Joint Economic
Committee, pursuant to Senate Concurrent Resolution 13, 86th
Congress, 1st session): Senate Report No. 1043 (sale price 50 cents):
January 1960.
Part 1. The American Economy: Problems and Prospects, March 20,
23, 24, 25, 1959 (sale price 60 cents): April 1959.
Part 2. Historical and Comparative Rates of Production, Productivity,
and Prices, April 7-10, 1959 (sale price $1.00): May 1959.
Part 3. Historical and Comparative Rates of Labor Force, Employment,
and Unemployment, April 25, 27, and 28, 1959 (sale price 35 cents):
June 1959.
Part 4. Influence on Prices of Changes in the EfJective Supply of Money,
May 25, 26, 27, 28, 1959 (sale price 75 cents): July 1959.
Part 5. International Influences on the American Economy, June 29,
30, July 1, 2, 1959 (sale price 50 cents): September 1959.
Part 6A. Government's Management of its Monetary, Fiscal, and Debt
Operations, July 24, 27, 28, 29, 1959 (sale price $1.25): September
1959.
Part 6B. Government's Management of its Monetary, Fiscal, and Debt
Operations, August 5, 6, 7, 1959 (sale price 75 cents): November
1959.
Part 6C. Government's Management of its Monetary, Fiscal, and Debt
Operations, Replies to Questions on Monetary Policy, and other
materials (sale price 65 cents): November 1959.
136
JOINT ECONOMIC REPORT
Part 7. The Effect of Monopolistic and Quasi-MonopolisticPractices
Upon Prices, Profits, Production, and Employment, September 22,
- 23, 24, and 25 (sale price $1.25): November 1959.
Part 8. The Effect of Increases in Wages, Salaries, and the Prices of
Personal Services, Together With Union and Professional Practices
- Upon Prices, Profits, Production, and Employmnent, September 28,
29, 30, October 1 and 2 (sale price 75 cents): November 1959.
Part 9A. Constructive Suggestions for Reconciling and Simultaneously
Obtaining the Three Objectives of Maximum Employment, an Adequate
Rate of Growth, and Substantial Stability of the Price Level, October
26, 27, 28, 29, 30, November 2, 3, 4, 5, and 6 (sale price 70 cents):
December 1959.
Part 9B. Same. title as 9A. (Materials submitted by 12 organizations at the invitation of the Joint Economic Committee) (sale price
45 cents): December 1959.
Part 10. Additional Materials Submitted for the Record (sale price 60
cents): January 1960.
Questions on Monetary Policy and Debt Management (sale price 10
cents): August 1959.
tNo. 1. Recent Inflation in the United States by Charles L. Schultze
(sale price 40 cents): September 1959.
Nos. 2 and 3 Steel and the Postwar Inflation by Otto Ecksteinfand Gary
Fromm; An Analysis of the Inflation in Machinery Prices by Thomas
A. Wilson (sale price 25 cents): November 1959.:
Nos. 4 and 5 Analysis of the Rising Costs of Public Education by
Werner Z. Hirsch; Trends in the Supply and Demand of Medical
Care by Markley Roberts (sale price 30 cents): November 1959.
No. 6 The Extent and Nature of FrictionalUnemployment by the Bureau
of Labor Statistics (sale price 25 cents): November 1959.
tNos. 7, 8, and 9 The Incidence of Inflation: Or Who Gets Hurts by
Seymour E. Harris; Protection Against Inflation by H. S. Houthakker; The Share of Wages and Salaries in Manufacturing Incomes,
1947-66 by Alfred H. Conrad (sale price 45 cents): November 1959.
Nos. 10 and 11 Potential Public Policies to Deal With Inflation Caused
by Market Power by Emmette S. Redford; A Brief Interpretive Survey of Wage-Price Problems in Europe by Mark W. Leiserson (sale
price 25 cents): December 1959.
Nos. 12 and 13 The Low Income Population and Economic Growth by
Robert J. Lampman; The Adequacy of Resources for Economic
Growth in the United States by Joseph L. Fisher and Edward Boorstein (sale price 25 cents): December 1959.
Nos. 14 and 15 Financial Aspects of Postwar Economic Developments
in the United States by John Gurley; Profits, Profit Markups, and
Productivity: An Examination of Corporate Behavior Since 1947, by
Edwin Kuh (sale price 35 cents): December 1959.
No. 16 International Effects of U.S. Economic.Policy, by Edward M.
Bernstein (sale price 30 cents): January 1960.
No. 17 Prices and Costs in Manufacturing Industries, by Charles L.
Schultz and Joseph L. Tryon (sale price 20 cents): January 1960.
No. 18 National Security and the American Economy in the 1960's
- by Henry Rowen (sale price 25 cents): January 1960.
No. 19 Debt Management in the United States by Warren L. Smith
(sale price 40 cents): January 1960.
No. 20 The Potential Economic Growth of the United States by James
W. Knowles (sale price 20 cents): January 1960.
-
JOINT DCONOMIC REPORT
137
No. 21 Postwar Movement of Prices and Wages in Manufacturing
Industries by Harold M. Levinson (sale price 40 cents): January
1960. No. 22 An Evaluation of Anti-Trust Policy: Its Relation to Economic
Growth, Full Employment, and Prices by Theodore J. Kreps (sale
price 20 cents): January 1960.
No. 23 The Structure of Unemployment in Areas of Substantial Labor
Surplus by the Bureau of Labor Statistics (sale price 15 cents):
January 1960.
tNew Views on Automation (papers submitted to the Subcommittee
on Automation and Energy Resources), committee print (sale price
$1.75): October 1960.
tEconomic Policiesfor Agriculture in the 1960's, Implications of Four
Selected Alternatives (mhaterials prepared for the Joint Economic
Committee), committee print (sale price 25 cents): November 1960.
1960 Descriptive Supplement to Economic Indicators (Historical and
Descriptive Background) (Prepared for the Joint Economic Committee by the Committee Staff and the Office of Statistical Standards, Bureau of the Budget), committee print (sale price 60 cents):
December 1960.
Energy Resources and Government (materials submitted to the Subcommittee on Automation and Energy Resources by Federal and
State Regulatory and Developmental Agencies), committee print
(sale price $2.00): December 1960.
Subsidy and Subsidy-like Programs of the U.S. Government (materials
prepared for the Joint Economic Committee), committee print (sale
price 25 cents): December 1960.
Economic Programs for Labor Surplus Areas in Selected Countries of
Western Europe (materials prepared for the Joint Economic Committee), committee print (sale price 25 cents): December 1960.
Index to Hearingson Employment, Growth, and PriceLevels (with Tables
of Contents of Study Papers and Reports) (prepared for the Joint
Economic Committee), committee print (sale price 30 cents):
December 1960.
A Study of the Dealer Market for Federal Government Securities (materials prepared for the Joint Economic Committee), committee
print (sale price 40 cents): January 1961.
tHearings, Current Economic Situation and Short-Run Outlook,
December 7 and 8, 1960 (sale price 70 cents): January 1961.
tHearings, Government Price Statistics, Subcommittee on Economic
Statistics (January 24, 1961) (sale price, $1.50): March 1961.
Hearings, January 1961 Economic Report of the President and the
Economic Situation and Outlook, February 9, 10, March 6, 7, and
April 10, 1961 (sale price $2.75): April 1961.
Joint Economic Report (Report of the Joint Economic Committee on
the 1961 Economic Report of the President), House report
(sale price
cents): April 1961.
The Federal Revenue System: Facts and Problems (materials assembled
by the committee staff for the Joint Economic Committee), up
dates 1957 and 1959 prints by the same title. Committee print
(sale price 70 cents): April 1961.
138
JOINT ECONOMIC REPORT
ECONOMIC INDICATORS
Economic Indicators (a monthly publication of the Congress under
Public Law 120, 81st Cong., 1st sess.) (sale price 20 cents a copy,
$2.00 a year): Issued monthly.
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