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88th Congress 1
, 1st Session
}
SE N A TE
/ R eport
\ N o. 78
1963
JOINT ECONOMIC REPORT
REPORT
OP T H E
JOINT ECONOMIC COMMITTEE
CONGRESS OF TH E U N ITE D STATES
ON T H E
JANUARY 1963 ECONOMIC REPORT
OF THE PRESIDENT
W IT H
M IN O R IT Y AN D OTHER VIEW S
M arch 14, 1963.— Ordered to be printed
U .S. GOVERNM ENT PRINTING OFFICE
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JO IN T ECONOM IC CO M M ITTEE
(Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.)
P A U L H . D O U G L A S , Illinois, Chairman
R I C H A R D B O L L IN G , Missouri, Vice Chairman
H O U S E O P R E P R E S E N T A T IV E S
SENATE
JO H N S P A R K M A N , Alabama
J. W . E U L B R IO H T , Arkansas
W I L L I A M P R O X M I R E , Wisconsin
C L A IB O R N E P E L L , Rhode Island
J A C O B K . J A V IT S , N ew Y ork
J A C K M I L L E R , Iowa
L E N B. J O R D A N , Idaho
W R I G H T P A T M A N , Texas
H A L E B O G G S, Louisiana
H E N R Y S. R E U S S, Wisconsin
M A R T H A W . G R IF F IT H S , M ichigan
T H O M A S B . O U R T IS , Missouri
C L A R E N C E E . K IL B U R N , N ew Y ork
W I L L I A M B . W I D N A L L , N ew Jersey
J am es W . K nowi.es , Ezccutioe Director
H
CONTENTS
The condition of the economy___________________________________________
Reasons for economic slack_________________________________________
Role of taxes___________________________________________________
Role of structural changes_____________________________________
Role of monetary policy________________________________________
The economy in 1963_______________________________________________
Paths to full employment______________________________________
Fiscal policy________________________________________________________
Recommendations______________________________________________________
Fiscal policies______________________________________________________
Monetary and debt management policies___________________________
International policies_______________________________________________
Note by Representative Patman________________________________________
Note by Senator Fulbright______________________________________________
Individual views of Senator William Proxmire___________________________
Supplementary staff materials___________________________________________
The operation of multiplier and accelerator_________________________
Minority views_________________________________________________________
Additional views of Senator Javits______________________________________
Additional views of Senator Miller______________________________________
Committee and subcommittee activities in the past year_________________
Publications of the Joint Economic Committee, March 1962-March 1963..
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88t h C ongress
1st Session
SENATE
I
R eport
No. 78
1963 JOINT ECONOMIC REPO RT
M arch 14, 1963.— Ordered to be printed
Mr. D ouglas, from the Joint Economic Committee, submitted the
following
REPORT
together with
M IN O R IT Y AN D OTHER VIEW S
REPORT OF THE JOINT ECONOMIC COMMITTEE ON THE
JANUARY 1963 ECONOMIC REPORT OF THE PRESIDENT
[Pursuant to sec. 5(a) of Public Law 304, 79th Cong.]
T he C ondition of the E conomy
The economy has registered significant gains over the last 2 years.
However, during the past year the rate of economic expansion has
slowed while the economy was still substantially short of full employ
ment. This has not been exclusively a short-run cyclical development.
Rather, the symptoms are those of chronically inadequate demand.
Since the mid-1950’s there has been a persistent tendency for the
rate of use of labor and capital to be a little lower at the peak of each
successive cyclical expansion.
Unemployment averaged about 4.2 percent at the 1957 peak, about
5.2 percent at the 1961 peak, and about 5.6 percent over the last 13
months. Furthermore, the unemployment rate, seasonally adjusted,
has equaled or exceeded 5 percent of the civilian labor force in every
month but one since 1957, averaging 5.9 percent for the last 63 months
— a period of more.than 5 years. This is about 50 percent above the
interim goal of a 4 percent unemployment rate. When allowance is
made for the loss of employment through involuntary part-time work
l
2
JOIN T ECONOMIC REPORT
due to slack demand, the unemployment rate for these 5 years aver
aged about 7 percent.
In addition, the labor force has tended to rise more slowly than
expected so that it has been about 500,000 to 800,000 below the
long-run trends based on increases in the number of people of working
age, their distribution by age and sex, and trends in the rates of
participation in the labor force.1
The Nation for 5 years has been experiencing a widening gap be
tween total demand and potential output. Demand rose to about
2 percent above potential output in late 1955 and, although demand
continued to rise thereafter for 2 years, the rise was less rapid than
the accelerated rise in the Nation’s potential output. Demand, there
fore, was 3 percent under potential at the cyclical peak in 1957. At
the next cyclical peak in 1960, actual output was about 6 percent
below potential, and the percentage of slack so far has not fallen below
this. In fact, the ratio of actual to potential output has been stable
or drifting slowly downward since the fourth quarter of 1961.
This chronic slack has tended to hold down prices, consumption,
investment, savings, employment, and output. For example, prices
of raw materials fell by about 5 percent in the recent recovery in con
trast to the usual increase. The fall in stock prices in-1962 is also in
sharp contrast to the substantial increases usually appearing in cyclical
expansions.
Only in the field of services and some types of construction have
prices remained strong or rising. In these two areas the possibility of
upward bias in present price indexes is substantial. First, there is
the difficulty o f measuring quality changes. Second, in services,
rising prices reflect mainly rising wages and other incomes necessary
to attract labor and capital into these growing parts of the economy
and away from previously higher paid goods-producing industries.
Third, in both services and construction, statistical adjustments for
increased productivity are either minimal or nonexistent. In short,
in those areas where the facts are reasonably clear, prices have been
weak. In other areas where prices have shown a contrary tendency,
there is reason to believe that this is either a statistical illusion or
a belated adjustment to price rises that took place some years ago in
other parts of the economy.
REASONS
FOR
E C O N O M IC
SLACK
Bole of taxes
Several explanations have been offered for the deflationary ten
dencies of recent years. A growing consensus, however, has de
veloped that one of the most important factors has been the tendency
of Federal, State, and local tax structures to exert too powerful a
braking effect on the economy when domand is rising.
In general, State and local taxes tend to fall largely on consumption
or on private incomes usually devoted largely to consumption. Only
a minor part of these taxes, probably no more than 5 to 10 percent,
falls on either savings or investment.i
i Joint Economic Committee, bearings on “ State of the E conom y and Policies for F ull'E m ploym ent,"
87th Cong., 2d sess., testimony and discussion of Ewan Clague, Commissioner of Labor Statistics. U.S.
Department of Labor, pp. 735-774. Also see M r. Olague's testimony before tbe Joint Econom ic Committee
in bearings, “ January 1081 Econom ic Report of the President and the E conom ic Situation and O utlook,"
87th Cong., 1st sess., pp. 2311.
JOINT ECONOMIC REPORT
3
At the Federal level, tax policies since 1941 have been continuously
adapted to what were viewed correctly (until recent years) as in
flationary conditions. Taxes were adopted in an atmosphere of excess
demand, of almost constant pressure on productive resources, and of
excess liquidity sufficient to have generated a runaway inflation.
With the passage of time,1Federal tax policies have become outdated
and illadapted to present and prospective conditions. Probably as
much as 70 to 90 percent of the Federal tax burden falls upon con
sumption, and from 10 to 30 percent upon savings. Reasonable men
may come to different conclusions about the precise numbers. It is
clear, however, that Federal taxes, reinforced by the persistent rise
in State and local expenditures and taxes, have tended to shift an
increasing proportion of the combined Federal, State, and local tax
burden onto consumption. This is the prescription for an antiinflationary policy. It tends to encourage a significant rise in rates
of savings, both average and marginal, and a reduction in the ratio of
consumption and investment to the Nation’s full employment output
and incomes.
We need to remind ourselves how important it was in the wartime
and early postwar years to maintain a strong anti-inflationary fiscal
policy as a barrier to runaway inflation. Memories may now be dim,
but in 1944 the Federal deficit amounted to one-fourth of the gross
national product, while in the early postwar years the volume of de
ferred demands for consumer goods, capital goods, and government
projects, not merely in the United States but in all the free world, was
so overpowering that only the most careful guard against inflation
could prevent disaster. The earliest hearings of this committee, 15
years ago, were on this very problem of inflation. M ost of its activi
ties over its first 5 to 10 years of service to the Congress directly or
indirectly concerned the importance of guarding the Nation against
inflation.
Internationally, the United States in those early years had an excess
of liquidity and the rest of the world almost none, as indicated by the
so-called dollar shortage and the dominance of the United States as
holder of most of the world’s gold supply. Economies around the
world were disorganized, physical capital was substantially damaged
by war, and productivity in these countries was lower relative to the
United States than it had been before World War II.
^ But by the middle 1950’s these underlying inflationary and expan
sionary forces had been largely eliminated in these countries. The
United States had contributed to the restoration of the economies of
Western Europe and Japan, to the redistribution of international
liquidity and gold stocks, and hence to the convertibility of the
currencies of other trading nations. We had extended military assist
ance to our allies; extended economic assistance to developing and
newly emerging nations; rearmed at home; rebuilt most of our capital
facilities, both public and private; and satisfied the deferred demand in
this country for consumer goods and housing. As if this were not
enough, between 1946 and 1957 the Nation reduced the average annual
hours of work by about 7% percent, including an increase of about 50
percent in the average length of annual vacations per employee.
These accomplishments resulted in the elimination of the vast
deferred demands'and excessive liquidity that had been so inflationary
after World War II and during the Korean rearmament. Yet the
4
JOINT ECONOMIC REPORT
only revisions in taxes from the mid-1950’s to date were a rise of at
least $8 billion to $10 billion per year in increased social security
taxes— a regressive form of taxation— and the tax laws of 1954 and
1962. Both of these latter revisions tended in general to reduce
Federal taxes falling mostly on incomes, personal and business, that
were likely to be saved rather than on those that were likely to be
promptly spent.
Thus, the dominant economic fact in recent years has been a
steadily more oppressive burden upon the economy from Federal,
State, and local tax policies which tended to discourage consumption
: nd investment and to Encourage savings. With the inflationary
pressures conquered, the result has been to hold down demand so far
below full employment output as to produce unemployment of labor
and capital. It is indeed a tribute to the strength, vitality, and
dynamism of the American economy that these oppressive burdens
have so far failed to produce massive unemployment and financial
collapse.
Role o f structural changes
In stressing the now oppressive character of tax policies which once
served a valid national purpose, it would be a mistake to overlook
other developments that have also contributed in lesser degree to the
Nation’s, problems of unemployment and idle capacity. The major
problem is inadequate total demand, but the situation has been aggra
vated by some serious structural problems: immobility of labor and
capital; workers without the training and experience for new job
opportunities opening up in our economy; particular local areas in
which, for one reason or the other, dynamic changes in technology
and demand have left resources without profitable employment.
But these structural problems are not new. They have been reported
repeatedly by Government and private agencies for decades. These
structural changes are a significant impediment to further noninflationary expansion o f demand and output when unemployment is
at or below 4 percent. But persistent unemployment of 5-7 percent
reflects inadequate total demand— not these structural influences.2
Technological change has produced not only these structural imbal
ances, but also has reduced the costs of making adjustments. It now
costs less relative to today’s income levels for a worker to change his
job or his location than was true 25 to 50 years ago. Similarly, costs
to management in moving plant and equipment that would have been
prohibitive some decades ago are today economically feasible due to
improvements in technology. Nor does the matter end here. At
one time, to shift a worker from one trained occupation to another
would have involved several years of new training and experience
before the worker could earn his way in the new trade. Skills and
trades were highly specific, particularly in the mechanical pursuits.
Today most skilled jobs have more of a common core of skill require
ments, teaching techniques are better, and training programs can be
designed that will permit shifts of workers within a shorter time period
and at a cost which is feasible for society, the employer, and the
worker to meet.
* Subcommittee on E conom ic Statistics: “ E m ploym ent and Unem ploym ent,” a report to the Joint E co
nom ic Comm ittee, 87th Cong., 2d sess., and “ Higher Unem ploym ent Kates, 1957-60: Structural Trans
formation or Inadequate D em and,” 87th Cong., 1st sess.
JOINT ECONOMIC REPORT
5
While the major focus of policy this year— as the President has
indicated in his messages to the Congress— is on the problem of taxes,
we must not forget that the most successful tax policy cannot do the
whole job. Public and private policies must also be designed to deal
with the problems of structural rigidities and immobilities. For ex
ample, some programs proposed b y the administration are intended
to deal with the problem of young people with inadequate training.
Tax policy revisions are important in creating an atmosphere in which
adjustments of the system to full employment conditions are possible.
Structural revisions are also important and necessary, however, if
unemployment rates, below 4 percent, are to be achieved without
inflationary consequences.
Role oj monetary policy
Competent economists have testified before the committee that
monetary policies must bear some of the share of the responsibility
for the slowdown of recent years and the failure to restore full em
ployment during two successive cyclical expansions. Undoubtedly,
the overly restrictive monetary and debt-management policies of the
winter of 1959-60 contributed to the 1960-61 downturn. The com
mittee commented upon this point in earlier reports, particularly a
year ago when we stated:
First, Federal Reserve authorities have shown a stubborn
propensity to tighten credit and force up interest rates dur
ing each recovery period, notwithstanding the fact that each
recovery has begun from a higher plateau of interest rates
(and a money supply relatively smaller) than the previous
recovery. Interest rates have been trending upward again
throughout the 1961 recovery. Although the upward
movement, so far, has been at a comparatively gentle rate,
there are indications that the monetary authorities are al
ready impatient to have them resume their more accus
tomed pace.3
THE
ECONOMY
IN
1963
The evidence presented to the committee indicates that, at present,
economists generally look for continuing moderate gains this year.
Government purchases— Federal, State, and local combined— are
expected to rise at about $2 billion per quarter. Business investment
may average slightly above last year’s level. Home construction
should continue at about its fourth-quarter rate. Consumer purchases
should continue to rise, in line witli gains in disposable personal in
come generated by business and Government activity.
Economists differ as to how these factors will work out in terms of
specific numbers. Even the most pessimistic experts expect gross
national product this year to be about $565 billion, and even the most
optimistic do not expect it to average more than perhaps $580 to $585
billion. The President’s Economic Report and Budget are based on
the assumption of a gross national product of about $578 billion for
the calendar year 1963 (assuming his tax proposals are adopted),
compared to a"bout.$554 billion in 1962.
At the very best) no significant reduction in unemployed labor or
capital can be expected this year, even if the more optimistic experts
* Joint Econom ic Committee. Annual Report of tho Joint Econom ic Committee on tbe January 1062
E conom ic R eport of the President, 87th C ong., 2d 6ess., p . 8.
6
JOINT ECONOMIC REPORT
prove to be correct. Some rise in idle resources may occur, with
unemployment exceeding 6 percent sometime during this year, even if
taxes are reduced in accord with the President’s program.
The prospects, therefore, indicate that if no action is taken on fiscal
and other Government policies to remove the brakes which are
restricting private economic activity, the Government’s revenues
again will be seriously impaired. Indeed, a renewed downturn this
year in private economic activity would not be beyond the realm of
possibility. If this occurs, the deficit in the Federal budget would
mount beyond the most pessimistic expectations of the administration
or its clitics. Therefore, this year, short-run or cyclical and long-run
growth considerations both call for immediate tax cuts and revisions
together with complementary monetary and debt management
policies.
Paths to full employment
What is the magnitude, and speed of the expansion necessary if the
economy is to reach full employment in the foreseeable future?
Chart I shows the comparative movements of actual and potential
real gross national product. In the fourth quarter of 1902, demand
was soihe 7 to 8 percent below the full employment output potential.
Three paths from that point to full recovery are illustrated: “ A ” rep
resents full recovery by the fourth quarter of 1964; “ B ” represents full
recovery by the second quarter of 1965; and “ C ” represents full re
covery by the second quarter of 1966. The first pattern “ A ” , would
require that gross national product rise by 8.3 percent per year over
a 2-year period. The next, “ B ” , would require an average rate of
gain over 2% years, of 7.4 percent per year. The third, and slowest
pattern, “ C ” , could be realized if the recovery averaged 6.5 percent
per year over 3^ years.
Even the most rapid of these patterns, “ A ” , would not be unrealistic
if the proposed program of tax reduction and reform is adopted and is
accompanied by appropriate monetary and debt management policies.
Historically, output has tended to rise at a pace of between 8 and 13
percent per year during periods of recovery until the economy ap
proaches full employment of labor and capital. At this point the
rate of gain slows considerably, soon coming down to, or below, the
long-term rate, or to between 1 and 4 percent per year. The only
exception occurs when the economy, for some reason, reaches a cyclical
peak and turns down before full employment of productive resources
is reached. This happened in 1959-60. A similar slowdown short
of full recovery seems to have been happening during the past year.
Consequently, if the proposed fiscal program works— producing a
normal recovery movement toward full employment— then from past
experience it would be reasonable to expect a very high rate of gain in
demand, and hence in output, until unemployment begins to approach
4 percent, and real GNP approaches potential GNP. This would be
close to, if not faster than, the pattern labeled “ A ” on chart I.
Chart I
Actual and Potential Real Gross National Product,
Quarterly since 1947, at seasonally adjusted annual rates, and actual as percent of potential
&
Billions of 1954 Dollars
J O IN T
E C O N O M IC
REPORT
S o urce/ Departm ent o f Commerce and th e S ta ff o f the J o in t Econom ic C om m ittee.
8
JOINT ECONOMIC REPORT
Parenthetically, this analysis of recovery patterns implies that
under the President’s program the Federal budget on a national in
come account basis would tend toward balance by the end of calendar
1964. Historical precedent would be in favor of the budget (national
income account basis) showing a surplus in fiscal 1966 and subsequent
years unless: First, for reasons not contemplated under present
budget policies, it becomes necessary to sharply raise Federal expendi
tures for national defense, international affairs, or space; or second,
the economy experiences a renewed cyclical downturn. This latter
development would prevent the Government from realizing the full
revenues which the new tax structure would provide at fuff employ
ment levels. If the tax program works as can reasonably be expected,
however, a new cyclical downturn would not be likely to come soon
enough to affect Federal receipts significantly before fiscal 1966 or
later.
F IS C A L P O L IC T
The fiscal policies of the Federal Government concern much more
than the mere matter of financing those expenditures by the Govern
ment which are deemed desirable in the national interest. A two-way
interaction occurs between the Federal budget and the private
economy.; Receipts and expenditures in part reflect changes in the
general levels of privat e economic activity and also have a substantial
influence on the level and rates of change of total output, employment,
and purchasing power. We conclude:
Federal budget surpluses or deficits are unreliable
as indicators of whether budget policies are
expansionary or inflationary on the one hand,
or are deflationary or repressive on the other.
Most people believe, as does this committee, that fiscal policies
should be designed to produce regularly recurring surpluses during
prosperous years so that the Federal debt can be reduced. Most
people also believe that when the budget is balanced or shows a surplus
the Federal Government is not contributing to an inflationary situation
and that when it shows a deficit there is a definite contribution to
inflation. In a word, surpluses are considered synonymously with
fiscal restraint; exact balance with neutrality; and deficits with
expansive or inflationary policies. This is not always correct.
Budget surpluses and deficits can arise from a wide variety of
causes so that in some cases a budget surplus may occur when the
Government is following a definitely expansive and even inflationary
policy, while on the contrary, a deficit may reflect budget policies
that are definitely deflationary in character. Since most people
quite rightly are more worried at the moment about budget deficits
than about budget surpluses it may be useful to point out that a
budget deficit can arise, under at least three different types of
conditions:
First, expenditures and tax policies can be such that in the long
rim the budget will show an appropriate surplus in most years. But,
in any one fiscal year, the economy, for some reason independent of
fiscal policy, may experience a recession. Personal and business
incomes then will fall and Federal revenues will be too low to balance
the budget. This “ passive,” unplanned deficit would be the result
of a temporary decline in private economic activity. If, in this
JOINT ECONOMIC REPORT
9
circumstance, either expenditures are cut or taxes increased in an
effort to balance the budget in the face of falling receipts, the recession
would quickly spiral downward into a very large and prolonged depression.
But, if the Government “ sits tight’’ on the fiscal front and follows
an expansionary monetary policy, the deficit should be minimized.
With an early restoration o f prosperous conditions, a surplus will be
generated to make possible repayment of debt incurred in recession.
Second, the tax structure can be well designed but total expenditures
too large for the revenue structure to finance, even at full employment
levels. * This is typically the case in wartime. Whenever this
happens, the Government’s budget will develop an inflationary
deficit even at full employment. The obvious policy prescription for
such a situation is to raise taxes and tighten monetary policy as
severely as possible while exercising the utmost economy on the
expenditure side. This was the set of policies recommended vigor
ously by this committee when the Korean emergency arose in mid1950. We are still convinced that prescription was correct.
Third, a deficit can arise because the existing tax structure is too
repressive on private activity. Taxes may yield, at full employment,
such large revenues that the private economy simply cannot adjust to
the stringent tax burdens on private incomes and expenditures. This
is a chronic deflationary situation. Output, employment, and incomes
will tend to fall short of full employment levels. Consequently,
Government revenues will be inadequate. The budget will show a
deficit as a result not of inadequate taxes or, necessarily, of excess
expenditures (though expenditures could be excessive by standards of
efficiency or social policy). Rather, the deficit results from the
depressing effects of inappropriate tax policies on private economic
activity.
This last set of conditions can be remedied only by a revision in the
tax structure that reduces the repressive character of the tax law
and/or reduces the amount of revenue raised at each level of total
private incomes. A revision in tax structure and rates will produce
more revenue in these circumstances as a result of improved economic
conditions and can bring about a balanced budget or a surplus as
quickly as the private economy can respond to the change of policy.
Tax change in this case is the shortest and quickest way to a balanced
budget and the elimination of deficits. In these circumstances, the
' surest and quickest way, therefore, to hold both deficits and the na
tional debt to a minimum is to revise and reduce taxes.
Recent Federal deficits reflect fiscal policies which,
on net balance, have tended to hold down expan
sion of the private economy.
Recent deficits are largely the result of excessive and repressive
taxation. The economy could finance a higher level of Government
expenditures if this were desirable for reasons of national security or
social policy. But, the present structure of taxes is capable of pro
ducing, at lull employment, revenues which would produce too large
a surplus over recent and proposed levels of Federal Government
expenditures. Furthermore, the tax structure itself tends to be defla
tionary, as indicated earlier in this report. Postponing action to
correct the present deflationary fiscal policies will make the situation
worse, not better. The debt will go up least, and budget deficits
10
JOINT ECONOMIC REPORT
will be smallest and soonest eliminated, if there is now a broad and
thorough-going revision of fiscal policy.
Of course' it could be argued that the budget ought to be brought
into balance by raising taxes or reducing expenditures by enough to
eliminate the deficit of $9.2 billion in the fiscal year 1964 administrative
budget. When questioned about this possibility the Director of the
Bureau of the Budget estimated during our hearings that a rise in
taxes of $20 billion would be necessary to balance the budget in fiscal
1964. Alternatively, expenditures would have to be reduced by at
least $20 billion— and depending on the composition of the cuts,
perhaps more. Such a large rise in taxes or cut in expenditures,
he estimated, would increase unemployment by about 1K million
workers, and raise the unemployment rate to between 8K and
percent of the civilian labor force.
The unemployment resulting from such a reduction in Government
expenditures would be more than the total employment of all indi
viduals in, the San Francisco-Oakland region, or the total number'
employed in Boston, Mass. The total unemployed from this type
of Government expenditure reduction would be greater than all
individuals presently employed in Detroit.
We are:convinced that a reduction in Federal Government expendi
tures to the-.extent of $10 to $15 billion cannot be obtained without
severely curbing the amount of Government services now provided.
For example, the entire costs of operation and maintenance of the
Department of Defense are less than $15 billion. Total research
and development by the Department of Defense is about $7 billion.
Total expenditures for natural resources are about $2.6 billion.
Contemplated expenditures for commerce and transportation amount
to slightly over $6.5 billion. The point which we make is that Gov
ernment expenditures are basically beneficial to the Nation. Un
doubtedly, some economies can be made in all of these areas, but a
slash of major proportions would seriously reduce the level of serv
ices which the Nation now obtains from its Federal Government.
R
e c o m m e n d a t io n s
The President and his Council of Economic Advisers have produced
an excellent report. They have indicated their best estimates con
cerning future economic trends and also recommended specific policies
aimed at achievement of full employment and rapid economic growth.
The Economic Report concentrates attention largely on tax reduc
tion and reform. While wo generally agree with their discussion, tax
policies, while important, also must be coordinated with other
policies designed to meet the basic economic problems. Thus our
own recommendations cover not only the specific question of taxa
tion but also other economic issues on which decisions should be made
in the months ahead. '
F IS C A L
P O L IC IE S
We favor enactment as quickly as possible of
reforms which will tend to broaden the tax base,
reduce the complexity of the tax structure, reduce
overlapping with State and local tax structures,
and contribute to improved economic stability,
JO IN T ECONOMIC REPORT
11
full employment, and economic growth. Tax
reforms are essential. They involve many ques
tions of equity and social policy in addition to the
purely economic issues they raise.
The administration has wisely made reform of our complex, repres
sive, and often inequitable tax structure an integral part or its tax
program for this session of Congress.* Obviously, reforms are needed
and are always in order, as this committee has pointed out repeat
edly. Opinions vary widely as to the tax changes that would be
appropriate as parts of a tax reform program.6
It is important to recognize the distributional effects of the reforms
which have been proposed by the administration.
The proposed
revisions tend largely to close loopholes that exist with respect to
higher income individuals and corporations. The proposed tax reduc
tion is largely proportional by income groups. However, almost all of
the tax reductions which have been granted in recent years, specifically
in 1954 (particularly the depreciation changes) and in 1962 through
the investment credit and further depreciation revision, have been
for the benefit of higher income groups and corporations. The
changes in 1954 and 1962 probably involved net tax reduction to
these groups of as much as $10 to $12 billion per year. On the other
hand, social security taxes have been increased by at least $8 to $10
billion per year, and these fall almost entirely on lower income families.
Thus the reforms proposed currently tend, when considered in
conjunction with the tax reduction proposals, to redistribute the bal
ance by providing relatively greater net tax reduction for lower income
groups. These reforms are essential because they are the sole source
of the progression in the tax reduction proposed by the President.
The Congress should promptly enact a tax revision
program in line with the general economic prin
ciples underlying the President’s proposed lax
program. In view of prospective expenditure
programs and economic trends, this is the surest
path to full employment and rapid economic
growth; it is also the surest and quickest path
to achievement of budget surpluses and debt
retirement.
A reform of the Federal tax structure and a reduction in tax rates
can result in a rise in total Federal revenues whenever Federal revenues
take a substantial share of total incomes (gross national income,
* Senator Claiborne Pell: In any consideration of reform, serious consideration should be given to a sweep
ing simplification of the present tax rules. I would favor a framework in which a)) lax rates would be cut
as low as possible along with a drastic reduction in exemptions and deductions, making allowance only
for extreme hardship cases. T o my mind, such a svstem would be of great benefit to the Notion because
it would remove, In one sweep, the existing possibilities for nonpayment of tax, which result from the local
use of present loopholes or through outright evasion. Moreover, such a sweeping reform would make the
tax system vastly simpler to administer and it would make it vastly easier for the individual taxpayer to
com ply. Business and personal financial decisions would be based more on the economics of the market
lace and less upon tax consequences. The entire econom y—in addition to the P ublic Treasury—would
eneftt.
» Congressman Boggs believes tax reduction is sufficiently important to the N ation’s economic growth
that the President's tax reduction proposals should be separated from the tax reform recommendations.
Tax reduction should be considered expeditiously by the w a y s and Mean's Committee nnd the Congress;
tax reforms cun-then be examined later. The tax reduction program should be—as the President recom
mended—across the board to all income groups, although adjustments may have to be made to reflect the
fact that reforms will not be part of the tax reduction package. This position involves no commitment or
judgm ent concerning the merits of the various reforms proposed by the administration, each of which must
be considered in detail b y the W ays and Means Committee and the Congress.
E
12
JOINT ECONOMIC REPORT
before deductions of depreciation), and at least one of the following
conditions prevails: (1) Federal tax rates, in combination with sub
stantive provisions defining the tax base, are so repressive of private
economic activity that output and employment are held down below
full employment rates; and/or (2) the tax system is geared to produce
at full employment a surplus over expenditures too large for the
private economy to accommodate within prevailing private habits of
consumption, savings and investment.
These conditions have prevailed in the United States during recent
years. The present tax structure was largely designed as a vigorously
repressive component of a general anti-innation policy. Hearings and
reports of this committee between 1947 and 1953 testify to this em
phasis. Furthermore, the anti-inflation character of Federal tax
policies has been reinforced constantly by growing State and local
tax burdens which fall heavily on consumption and hghtly on savings.
The Federal Government is in a situation not unlike a private
business firm. Total demand for a firm’s product will change over
time with fluctuations in general business conditions, even though
the firm may maintain a constant price for its product. But the firm
may discover that its aggregate profits over the business cycle still
roduce less than an adequate average rate of return on its capital.
fader these conditions, a reduction in the price of its product may
serve, to increase the aggregate sales of its product by more than the
accompanying rise in costs— especially as fixed, or overhead costs
will be written off over a larger physical volume. Demand for the
product (at the lower price) will continue to fluctuate with cyclical
changes in business conditions. However, total sales and profits, at
each .point in the cycle, will now be greater than they would nave been
if the earlier higher price policy had been continued. Hence the
average rate of return on capital will be higher.
The basic reason for supporting tax revision— including provisions
to broaden the tax base and substantially reduce rates—is to eliminate
deficits and realize the budget surpluses which a healthy economy is
capable of producing. Such revision will free the private economy of
the irrational restraint of a repressive Federal tax system, permitting
a rapid rise toward full employment of labor and capital. This can
even result in revenues substantially larger than under present taxes
The administration’s tax program is designed, initially, to increase
consumer demand. The first effect of tax reduction is to place more
funds in the hands of individuals. Thus, a reduction in withholding
rates will serve week by week, and month by month, to raise the takehome pay of those receiving wages and salaries. Probably about 93
cents out of every dollar of tax savings will be spent by taxpayers.
The historical evidence seems overwhelming. Taxes were reduced in
1948 and, during the course of 1948 and 1949, personal consumption
expenditures continued to rise even in the 1949 recession, while the
ratio to disposable personal income averaged about 94 to 95 percent.
Again, in 1954, tax reduction occurred, and a percentage of about 93
prevailed.
While some individuals may choose to save— at least in the short
run— a larger than usual portion of their increased after-tax income,
it certainly seems reasonable to presume that others will be encour
aged by the permanent nature of the tax reduction to commit them
selves for new durable consumer goods bought on credit. This latter
P
JOINT ECONOMIC REPORT
13
will tend to increase the ratio of aggregate consumer outlays to dis
posable personal income.
But this is not the end of the story. For every buyer there must
be a seller. Every additional dollar spent from tax savings is received
by some business firm or individual in the form of increased gross
income. What will happen to this additional income? Much of it
will certainly be reflected in increased consumer demand. Some por
tion will be absorbed by business firms in the form of increased re
tained earnings.' Of the increased income, some portion will go to
governfnents (Federal, State, and local) in the form of increased tax
payments.7 Individuals will have a substantial amount that will be
reflected in a further increase in consumption expenditures. These
consumption expenditures, in turn, create a new round of additional
income. With each rotation of the funds, additional amounts are
drawn off so that the residual additions to consumption are progres
sively less. They are, however, positive and add with each circuit
through the economy some furtner increase in aggregate demand for
goods and services.
This is the first basic form of stimulus to the economy which can be
expected from tax reduction. It meets, directly, the problem of in
adequate demand by increasing the cash flows to individuals who will
increase their purchases from business. We estimate that the multi
plier increase in total demand stemming from tax reduction will
probably be in the order of 2H times the amount of the tax cut.*1
Moreover, additional consumer demand will undoubtedly encour
age businessmen to expand the amount of their investment in plant,
equipment, and inventories. This expansion in investment also will
generate additional income, and some of this income will be spent.
As a consequence, tax reduction serves both to increase after-tax in
comes directly, and also to raise incomes indirectly by encouraging
investment activity.
The fact is that our automatic stabilizers have developed too much
braking power. When the economy expands, total tax receipts in
crease more rapidly than incomes.' The result has been increased
stability, but at lower and lower rates of output of the economy’s labor
and capital. Effective automatic stabilizers are vital to a healthy
economy, but changes are now necessary in the tax structure to make
these automatic stabilizers operate around a full employment rate of
total output, rather than around a level reflecting substantial economic
slack.
The majority of this committee is in favor of general
tax reform. However, there is a question— both
within the nation generally and within this com
mittee— as to whether tax reform should be
enacted simultaneously with tax reduction. In
view of the fact that tax reforms may take con
siderable time to enact, Congress may decide to
separate from the major tax package some of the
• B u t this will presumably Influence nonconsumer decisions.
7 These Increased revenues at the State and local level m ay well b e used to expand governmental services,
providing an additional stimulative eSect.
1 See supplementary staff material, p. 45.
1 This result reflects primarily tbe (act that marginal tax rates are blgber than average tax rates under the
oxlstlng Federal tax statutes. See Report o f tbe Joint E conom ic Committee on tbe 1061 Econom ic Report
o f the President. Appendix "S ta ff M emorandum on the Relationship o f the Federal Budget to U nem ploy
ment and to E conom ic Growth,’ ’ 87th Cong., 1st sess., pp. 119-125.
9 58 5 6 — 63-------2
A1
iiu u N i
sux^Kjvi u iv l iu
r v n jir u n i
tax redaction and enact it quickly. If this
becomes necessary, the tax reduction selected for
quick enactment should concentrate the tax
savings largely in the lower income brackets.
While we strongly support the legislative approach of retaining
the President’s program in one package, it may become necessary, in
order to provide a powerful initial tax reduction in 1963, to separate one
iiece of the package and move it more expeditiously through the legisative process. We recommend, on economic grounds (i.e., maximiz
ing the stimulative effect), that if this becomes necessary, the proposed
tax reductions be such as to concentrate these first stage reductions
largely in the lower income brackets. Such action would also be
equitable since, as noted earlier, tax revisions since 1954 have benefited
high income groups and corporations while raising taxes on lower
income groups via higher social security taxes. Either a rise in the
personal exemption or a change in the first bracket rate would fit
this requirement.
If the proposed changes in the first bracket individual rate is tbe
part selected for quick action, then this will benefit all taxpayers, since
all taxpayers pay the first bracket rate. Thus, if the present first
bracket were split and new rates of 14 and 16 percent were immediately
applied to the present income ranges now subject to 20 percent, all
taxpayers would obtain some tax benefit, with the maximum amount
per taxpayer being $200 for all married couples with taxable income in
excess of $4,000. At the same time the major relative advantages
from such an approach will be felt by the lowest income groups.
Hence, the initial economic stimulus from such an approach would be
maximized.
This proposal could be fitted easily into the administration’s set of
recohtmendations, since the proposal merely accelerates one portion
of the final recommendation. All the rest of the recommendations,
including further rate reductions, could follow along the legislative
path at a more leisurely rate, and obtain the same final results. This
is a logical division since the other rate reductions affect the same
taxpayers who currently benefit from many of the “ loopholes” which
will be closed by the proposed reforms.
This suggestion also accelerates the amount of tax reduction con
sistent with our recommendation below. The aggregate initial reve
nue loss from our approach might be about $6 trillion in 1963, con
trasted with the administration’s recommendation for $2.8 billion.
Of course, a much greater “ feedback” of increased revenues at the
lower rates could be expected as a result of the greater economic
stimulus, so that the net revenue loss in fiscal 1964 might be quite
small— in fact, possibly smaller than under the administration’s more
conservative approach.
A revenue loss of about $10 billion under the pro
posed tax program, spread over 3 years as recom
mended by the President, would be of about the
right order of magnitude. But the proposed
schedule is too slow. The largest part of the
revenue lops (about $6 billion) should be con
centrated in calendar 1963, with progressively
smaller parts in succeeding fiscal years.
The President has recommended to the Congress that his $10 bil
lion tax reduction program become effective over a 3-year period,
f
15
JOINT ECONOMIC REPORT
beginning in calendar 1963 and ending in calendar 1965. This timing
is indicated in table 1. The timing of the tax changes over the 3-year
period can significantly affect the way in which the proposed program
will influence the economy.
T
able
1 .—
Tax program revenue effects by years
[In millions o f dollars]
C A L E N D A R Y E A R L IA B IL IT IE S
1963
1064
1065
•J
Individual: »
4
Corporations:
-2 ,7 6 0
-8 ,2 8 0
+2.330
-11,040
+2,330
-2 ,7 6 0
-5 .0 5 0
-8 ,7 1 0
-3 3 0
-1 ,2 5 0
+200
+1,300
-2 ,5 6 0
+200
+1,500
-3 3 0
+250
-8 6 0
P E R C E N T A G E O F T O T A L R E D U C T IO N
Individual: *
Tntfti
Corporations:
.
. ________
____
26.0
75.0
100.0
100
100
31.7
68.3
MO
1Z9
48.8
100.0
86.7
100
100
100
38.4
-2 9 .0
100
i Exclude capital gains changes
Source: President’ s 1003 Tax Message, hearings before the Committee on W ays and Means, House of
Representatives, 88th Cong., 1st sess., pt. I, p. 63.
The current problem is to move from a position of low activity to
a higher rate at which the economy will grow smoothly in line with
longrun trends. It would seem appropriate, therefore, to schedule
a substantial amount of the individual income tax reduction now when
there is the greatest amount of unused resources. Additional tax
reductions might then be tapered off as the economy moves closer to
a higher full employment rate of activity. Small initial injections of
tax reduction which become larger in later stages may serve to stimu
late the economy at an accelerated rate. The effect of this approach
could be to generate new cyclical fluctuations and perhaps a tempo
rary inflation. The largest doses should be given when the patient
is the sickest— not when he is almost well.
What time schedule has been proposed for the personal tax changes?
About one-fourth of the proposed tax rate cuts for individuals would
be made effective in calendar 1963; another one-half would become
effective in 1964; and the final one-fourth in calendar 1965. I f we
include the effect on personal tax liabilities of both changes in rates
and the proposed structural reforms, the net revenue loss would be
spread almost evenly through the 3 calendar years: i.e., about 32
percent in calendar 1963; about 36 percent in calendar 1964; and about
32 percent in calendar 1965.
A greater initial tax reduction may serve to increase the fiscal 1964
deficit. There comes a time when economic realities should outweigh
political considerations. The greatest likelihood of achieving the
smallest possible accumulated budget deficits over the next 3 fiscal
16
JOINT ECONOMIC REPORT
years and at the same time stabilizing the economy at the full em
ployment longrun trend of output can be realized through substantial
initial tax reduction in calendar 1963. We urge Congress to quickly
enact tax legislation providing about $6 billion of revenue loss in the
current calendar year 1963, and thereafter for progressively smaller
amounts during calendar 1964 and 1965.
There is one qualification to our general conclusion. Corporate
rate reduction is proposed in part on the grounds that it will benefit
small business firms by increasing their after-tax retained earnings.
For these small firms, almost their only source of funds for expansion
is their retained earnings. We accept this justification in its entirety.
Therefore, we support without qualification the proposal to reverse
at once tne present corporate normal and surtax rates of 30 and 22
percent.
The administration should amend its tax pro
gram to include reductions or eliminations of
some present Federal excise taxes. Such changes
should be promptly incorporated in pending tax
legislation by the Congress.
. ,
W e were disappointed to discover that no mention was made of
reductions in excise taxes in the President’s tax recommendations.
The reduction of excises would be ideally suited to meet the objectives
set out by the President in his tax message. These excises were
generally enacted under wartime or inflationary conditions as a means
of reducing consumption. Under present conditions of inadequate
consumer demand, this justification for them is no longer valid.
Obviously, we do not include in this category excises on alcohol,
tobacco, or excises paid into trust funds to pay for specific public
services, such as highways. We were impressed by the apparent
unanimity among our witnesses and our own committee members
that excise reduction and removal was appropriate in 1963.
There is unquestioned evidence to indicate that excise revenues are
obtained in large part from low-income groups. Thus, a reduction in
excises, when passed on in the form of price reductions, can benefit
consumers even more than commensurate reductions in income taxes.
From a stimulative standpoint alone, therefore, perhaps the strongest
case for tax reduction can be made with respect to excise taxation.
This is especially true since many of our present excises are imposed
on goods that pass through several succeeding levels of processing
and marketing. As a consequence, removal of excises may well
result in reductions in final consumer prices by more than the amount
of the excises. Furthermore, some of the present excises directly
raise business costs— for example, excises on automobiles, business
machinery, and telephone service— and thus affect final prices.
A more fundamental justification for excise reduction can also be
made. Excises, by their very nature, serve to distort price relation
ships in the economy. Thus, they tamper with the efficient alloca
tion of resources. Reduction or removal of selected excises, espe
cially those imposed at the manufacturer and wholesale levels, could
result in lower prices and a much more efficient provision of goods
and services to meet the demands of the consuming and investing
public.
A further reason for excise reduction concerns the efficient use of
resources by the Federal Government. Administrative costs, both by
taxpayers and by the Federal Government, are undoubtedly greater for
JOINT ECONOMIC REPORT
17
excises than for income taxes. Reduction or removal of excises Will
thus reduce the costs of paying taxes and the costs of auditing taxes.
Administration policy has been to concentrate
largely on tax redaction and reform to stimulate
private spending, holding nondefense expendi
tures constant, and providing only for the most
necessary increases for defense and space. This
committee believes that economies could be
found in some of the present spending programs
and that from such savings greater emphasis
could be given on the expenditures side of the
budget to the great priorities of national need:
Education, health, conservation, research and
development, urban renewal, worker retraining,
and area redevelopment, without increasing total
expenditures.
The administration has placed almost total emphasis upon tax
reduction as the means of stimulating the economy. In economic
terms this emphasis b y the administration reflects a decision that
increases in aggregate demand within the private sector will yield
greater benefits to the Nation than would be obtained if the tax
moneys were used to finance increased Government expenditures.
Reliance has, therefore, been placed upon the private economy
rather than the Government to further the satisfaction of individual
wants in the Nation. In general, we agree with this emphasis.
For years, this committee and other committees of the Congress,
have pointed out numerous ways in which expenditures can be reduced
through more efficient procurement and supply practices, elimination
of duplication of activities, wider use of competitive bidding, cutting
back old programs or activities no longer needed, and reductions in
some of the numerous subsidies to private groups and industries.
As one example, Secretary of Defense McNamara has already made
substantial economies along the recommended lines. More could be
done both in Defense and other departments and programs.10
No member of this committee would support increases in unneces
sary Government expenditures which had as their sole justification
an expansion of economic activity. This Nation has far too vast an
array of unmet needs to justify using any resources in sterile makework programs. Nor is there any excuse for inefficiency and waste
in the use of tax dollars under either defense or nondefense programs.
If additional Government expenditures yield no benefit to the Nation,
they should not be made. The criterion, however, is much stiffer.
Increased Government expenditures should not be made— even
though they provide social benefits— if the benefits derived from the
expenditures are less than those which would be obtained by com
mensurate expenditures in the private sector.
No simple comparison can be made of satisfactions obtained through
private and public means. We believe primary reliance should be
placed upon tax reduction. We believe also that some types of in
creased Government expenditures can provide a high rate of return
to the Nation.
Senator Olalboroe Pell: “ With regard to our essentia] national security expenditures, I believe potential
economies may be realized through a revamping of our civilian and military foreign aid programs. While
these programs must be oontinued* the emphasis should be placed Increasingly on education, technological
training and on pilot projects. Such a policy could lead to a reduction in the size of programs.1'
18
JO IN T ECONOMIC REPORT
Expenditure increases which can be justified on their own merits
have the advantage that they may be concentrated in certain geo
graphic or economic sectors of the Nation. For example, if depressed
conditions occurred in a large city, a new Government contract that
could be justified on other grounds would be of maximum economic
benefit if it could be made to private firms in that city. Similarly,
if a particular industry was suffering from a temporary reduction in
demand and Government expenditures justifiable on other grounds
can benefit this industry, sucn expenditures would have a maximum
economic effect.
The administration has made a conscientious effort to hold down
the increases in aggregate Government expenditures. However, the
net economic effect o f the 1964 budget will probably be moderately
expansionary even without tax reduction. Spending for defense and
space will be larger although, on balance, other expenditure requests
have been held constant.
In addition to this general recognition of the expansionary nature
of the proposed 1964 budget, there are expenditures which would
yield a high social return in the form of contributions to future eco
nomic growth. Those could be financed out of savings in present
programs of the type outlined above so that there would be no net
increase in expenditures. The result would come from some shift in
priorities. .
Public works
Needed public works are one of the primary wavs in which the
Federal Government contributes to economic growth, because those
projects,as well as private investment, expand the ability of the total
economy to produce goods and services in the future. It is unfor
tunate if these projects are curbed simply in order to obtain an aggre
gate budgetary figure which seems politically attractive. If public
works can be justified on their merits, the Nation is worse off if these
projects are not made. Moreover, at the present time when there
are high levels of idle resources, these projects, if they meet the
criterion we have indicated, will further serve to stimulate the econ
omy. Finally, these projects have another advantage in that they
can be concentrated in areas and industries which are currently
depressed.
In the public works area, we are concerned about the geographical
distribution of expenditures. Public works now are undertaken
largely in areas where there is considerable land rather than a substan
tial number of people. Virtually three-fourths of our citizens live in
urban areas that take up only 2 percent of the land. Public works with
highest social priority are most likely to be needed in those areas where
there are the greatest concentrations of population. Moreover, not
only should the social returns be the highest, but also the economic
returns, since it is in the areas of greatest population concentration
that the most severe problems of unemployment exist.
Urban renewal
The Federal Government presently has a program under which
urban renewal plans can be submitted by communities and, if appro
priate, receive Federal support. This program could probably be both
expanded and improved if the present law were expanded to permit
the Federal Government to more actively assist communities in the
19
JOINT ECONOMIC REPORT
preparation of potential urban renewal projects. Such promotion
by the Federal Government could yield high returns without significant
Federal expenditures. A vast need exists for private investment in
urban redevelopment, but the Federal Government must aid in
creating the opportunities for this private investment. Various
estimates have been given that a dollar spent by the Government in
directing urban improvement can stimulate between $2.50 and $3 of
private investment.11
Education
We will not comment in this report on the specific legislative pro
posals dealing with the Federal Government in the area of education.
However, we are concerned about the dominant place that education
has in our longrun economic growth. We are also concerned about
the tremendous needs that exist in the fields of education. Perhaps
in no other field can a dollar of additional expenditures yield as high
a longrun rate of return. It has been estimated, for example, that
at least 40 percent of the economic growth during the postwar period
is attributable to our expanding educational base. Additional Fed
eral expenditures designed to assist State, local, and private agencies
in meeting these needs should provide great benefits to the Nation in
the years to come.
Health
The economic returns from improved health are probably of the
same order of magnitude as improvements in education. In both
cases, the needs are great and the benefits to the economy substantial.
Without commenting upon specific legislative recommendations, we
emphasize the importance of these expenditures.
Encouragement o j private research and development
In addition to the development, of physical plant and equipment
through.public works and the improvement in our human resources
through expenditures for education and health, substantial gains in
economic growth can be obtained through improvement in the state
of technological knowledge. This is a threefold problem. First, we
must give encouragement to inventors and innovators. Second, we
must insure that increases in technical knowledge are widely dis
seminated. Technology develops in part from private sources.
However, the Federal Government, especially through its military
interest, significantly influences this development. More attention
should be directed to the subject of dissemination of research results
obtained in the first instance for the benefit o f the Government.*12
Third, the large Government share of research and development
activities has been administered in ways that have produced varying
and uneven impacts on the economy.
M ONETARY
AND
DEBT
M ANAGEMENT
P O L IC IE S
We do not agree with the Council of Economic Advisers that:
“ Monetary policy has remained favorable to economic expansion.” 13
The widespread urge for supplementary fiscal action is evidence of the
» See “ The Scope and Financing of Urban Renewal and Development/* a statement by the Business
Committee of the National Planning Association, Juno 1962.
>* Seo, for cxamplo, the report by the Bureau of the Budget on “ Government Contracting for Research
and Development," senate Subcommittee on Government .Operations, 87th Cong., 2d sess., S. Doe. No. 94.
i* Economic Report of the President, January 1968, p. 19*
20
JOINT ECONOMIC REPORT
general feeling that monetary policy has not been favorable enough
to bring forth enough expansion. Since mid-1962 active considera
tion has, accordingly, been given by the executive departments, by
Congress, and in public forums, to tax reduction and reform as
necessary Federal moves for reducing unemployment and stimulating
growth.
This shift in emphasis which has pushed fiscal policy to the forefront
in current policy discussion in no way eases, however, the responsi
bility of the Federal Reserve authorities to do more than in the past
to restore the desired growth pattern. Indeed, if there has ever been
any uncertainty as to the force of the public mandate in calling upon
the monetary authorities for stimulative measures, vigorously pursued,
that uncertainty can no longer exist. The widespread demands for
stimulative tax reductions are by the same token demands for stimula
tive monetary action. Monetary policy must now help fiscal policy
to do the stimulative job which, unfortunately, the monetary authori
ties have not done. Similarly, in these circumstances debt manage
ment should be handled so as to reinforce expansionary fiscal policies.
^W e recommend that the monetary authorities
follow a policy of assuring that the money supply
expands in line with the rising needs of an
expanding economy. Such a policy will rein
force the proposed fiscal policies and at the
same time spare the Federal Reserve System
their perennial explanations of why monetary
policy is blameless in the face of a lagging
economy.
The failure of monetary measures, unaided, to bring about a satis
factory reduction in unemployment and an improved rate of growth
stems in part from the policies which have been pursued. Increases
in money supply have been allowed to lag behind the growth of the
economy. Another aspect of recent policy involves the alleged
constraints imposed by the balance of payments.
The adverse effects on the economy, when emerging from recession,
of a tax system which operates to impose a drag upon the economy by
rolling up a disproportionately large tax “bite" out of the increased
activity are being recognized in current tax discussions. On the
monetary side, the economy has had to contend with a similar institu
tional drag. The “ money supply" has been allowed to level off with
each weakness in the economy but is not permitted to expand to
appropriate new high levels as the economy struggles to come out of
the downswings.
As the volume of transactions of goods and services grows, some
thing like a similar expansion in the media of exchange is necessary.
Under our banking system, this means an expansion of the volume of
credit. The Federal Reserve System was expressly designed— and is
expected— continually' to adjust the money supply to the increasing
needs of the economy. If an expansion in available reserves is not
forthcoming, either the volume of transactions must be curtailed or
the existing money supply called upon to do extra duty. But money
conservation measures are not costless. They are likely to be used
only when the needs of expanding trade strain the available means of
settlement. The upward trend in the turnover of demand deposits,
21
JOINT ECONOMIC REPORT
most rapid in years of monetary restraint, is thus an indication that
the public has not been supplied with sufficient amounts of new money
in relation to transactions and income.
The ratio of money supply, that is, currency in circulation together
with demand deposits, to gross national product, has steadily declined
since 1950 (table 2). At the end of 1954, when the distortions o f
the Korean war had been liquidated, the money supply amounted to
35.9 percent of gross national product. As recently as 1958 it was
31.1 percent, down more than 10 percent, while in 1962 it was down
to 26.4 percent, a decline of more than one-fourth in the decade.
T able 2.— M oney supply, total liquid assets, and gross national product xoilh
comparisons
[Amounts In billions of dollars; ratios expressed as percentages]
Period
Gross
national
product
1A«1 ... . . . . .
... ... ...
1AM .. _____
_____ _
1AM _________
_
________
IQM
1AM . . . ____
... . . . .. .
1AM
1Q57.................
1 A M .................
1AM .. ..
...
.... . . . ...
lQflfl .. ._
.
______
Him
..
...
1062.........- .........................................
329.0
347.0
365.4
363.1
397.5
419.2
442.8
444.6
4S2.8
£03.4
518.7
553.6
Ratio to gross national
Demand
deposits ad Total liquid
product
assets held
justed and
currency out
by tbs
Money
Total liquid
side banks
public1
assets •
supply
119.2
125.2
128.3
130.3
134.4
136.0
136.7
138.4
142.3
140.0
143.2
146.0
281.0
298.0
311.5
320.3
332.6
343.2
356.0
373.1
393.9
399.2
424.6
458.3
36.2
36.1
36.1
36.9
33.8
314
30.9
31.1
29.6
28.0
27.6
28.4
82.6
81.8
86.6
85.9
81.3
79.6
80.3
80.2
80.5
79.0
78.2
80.9
> December each year, seasonally adjusted.
Source: Federal Reserve System data.
Stated another way, at the end of 1954 the money supply was
called upon to support a gross national product 2.8 times its size.
Eight years later it was being called upon to do one-third more; that
is, the gross national product was 3.8 times the money supply.
If combined currency and demand deposits today had the same
ratio to business activity as they did a decade ago, the money supply
(demand deposits plus currency) would be over $200 billion instead
of $146 billion. No one would suggest that the postwar lag in the
money supply now dictates an immediate, or drastic, effort to catch
up. Congress and the people have a right to insist, however, that in
the decade ahead, the economy will not again have to make a 70-per
cent increase in gross national output of goods and services fit a 23percent increase in money supply.
An expanded concept of money, including other so-called “ liquid
assets," is often used by the Board of Governors in its annual report
discussions. The extent of the lagging financial means for carrying
on business is less marked with this concept, but nonetheless real.
Even when these other popular ways of holding substitute “ money"
balances are included, the liquid wherewithal for doing an enlarged
volume business has been declining relatively. From 1954, after the
Korean war, to 1961, total liquid assets held b y the public have fallen
from 85.9 percent to 78.2 percent of 1961 gross national product. It
has been up somewhat in late 1962, returning to the 1957 levels.
Chabt 2
t
t
Gross Nationol. Product, Money-Supply and Ratio of Money Supply to GNP
Billions of Dollars
Billions of Dotlors
600
600
400
.
• i
1
i
,
i
.
i
.
'
,
'
I t , 71
1___■
'
,
■ ■
i
i
i
___i
i
i
Money Supply
y
( Aveiage tot year)
T f u _ Mi l - U 1 1 l.JJ 1
Percent
■50
40
/
f
k
\ Money Supf ly os Percen of GNP
_L 1IJ..I.J IJ 1 J..LLL J 11-1 1111 .I l l 1 1111 JLL
*
1923 1925
1930
1945
1950
1955
Sources>Deportment o f Commerce end F ederot R eserve System.
Prepared by tbe Machinery and Allied Products Institute (See hearings, p. 7 8 2 ).
I960
1963
(est)
D T W O M O n r ir
100
/ 5
J ,H O « T (? W
T
200
.t a t t o o
Grj s s Notional 3roduct\
300
JOIN T ECONOMIC REPORT
23
.Recent evidence, coupled with the statement of the Chairman of the
Board of Governors that some lessening of ease was decided upon in
December 1962, shows that the authorities are already returning to
the pattern which prevailed before this yearend increase in the ratio
of liquid assets to gross national product.
We again recommend that the monetary authorities
provide the basis for secular increases in the
money supply as the economy grows, through
open market purchases of longer term Federal
securities, rather than by lowering reserve re
quirements.
We have in the past repeatedly recommended that the Federal
Reserve provide the basis for an expanding money supply for our
growing economy by open market purchases of longer term Federal
securities. This policy gives the taxpayer a break through return
to the Treasury of earnings of the Federal Reserve on such security
holdings, instead of providing a free gift of earnings to the private
banking system as occurs when expansion is provided through the
lowering of reserve requirements. In addition, such open market
purchases cf longer term securities help the Treasury lengthen the
debt, and tend to keep prices of longer term securities up and interest
rates on these securities lower than would otherwise be the case. In
turn, lower interest rates in the long end of the market tend to en
courage investment, particularly in plant, equipment, and housing,
which contributes to a higher rate of long-term economic growth.
We can see no excuse for any other policy.
The monetary authorities have been going directly contrary to this
committee’s recommendation on this matter. They have reduced
reserve requirements. The recent report of the Advisory Committee
on Banking to the Comptroller of the Currency14 indicates that
further reductions in reserve requirements are under consideration.
The Joint Economic Committee, therefore, requests that the monetary
authorities advise this committee before taking any further actions
which run contrary to this committee’s repeated recommendation
that secular increases in the money supply be provided through open
market purchases of longer term Federal securities rather than by
lowering reserve requirements.
We disapprove of the action of the Federal Reserve
Open Market Committee in December 1962 when
it moved to tighten monetary conditions. Tight
money is not now needed either to fight inflation
or to “ protect the dollar.”
The hope that monetary policy will aid, rather than hinder, fiscal
measures was vitiated by the ready confession of the Chairman of the
Board of Governors to this committee on February 1, 1963, under
questioning: “ I will say to you now that you are correct in your analy
sis that the Federal Reserve is pursuing a slightly less easy policy.” 15
This statement was made in answer to a question as to whether policy
had changed in December 1962 for the first time in 2% years. The
Chairman of the Board of Governors did not satisfactorily explain the
» “ National Banks and the Future," a report of the Advisory Oommlttee on Banking to the Comptroller
o f the Currency, Sept. 17, 1962.
n Joint Economic Oommlttee, hearings on January 1963 Economic Report of the President, 88tb Oong.,
1st sess., p. 348.
24
JOINT ECONOMIC REPORT
grounds for even a slight deliberate tightening of credit. The change
of policy was confirmed and reasons for the action were set forth in the
record of the Open Market Committee’s actions for 1962 that was
made available to the committee after the hearings in response to our
request. The action still seems to us both perplexing ana premature.
It is thoroughly irrational to tighten monetary conditions while
business activity’ is unsatisfactory, unemployment is high, large
amounts of our capacity are idle, and the price level is stable. We
hope that, if Congress should enact tax reduction measures, the mone
tary authorities will demonstrate enough faith in the judgment of
Congress to lend their active aid and cooperation well in advance of
the need for financing a deficit. They should not wait idly by while a
tight credit situation is allowed to develop because of rising business
credit requirements in an economy striving to grow.
N ot even the balance of payments argument about “ protecting the
dollar” provides excuse for tighter money and higher interest rates.
The extensive hearings of our Subcommittee on International Ex
change and Payments provided no evidence that differentials in
interest rates between United States and foreign countries provide
any substantial stimulus to capital outflows ana hence to gold losses
and a deficit in our balance of payments. Indeed, evidence points
to many other factors, such as the needs of trade, and so forth, as
being of far greater importance.
A distinguished Swiss economist, amplifying views expressed to the
committee by other international witnesses, emphasized that—
* * * In general, it must be recognized that international
capital flows do not depend just on interest rates, but on in; terest rates plus the state of confidence in the currency
concerned.
If this confidence is high, a country may be able to sustain
very low rates, thus Switzerland probably has about the
lowest interest rates anywhere.
If, on the other hand, this confidence is shaken, even
rather high interest rates may be insufficient to stabilize
capital flows. In fact, some of the money the United States
has been losing in recent months was going to a country
with even lower rates, that is, Switzerland. Conversely,
Germany found in 1960—61 that low rates did not stop the
influx of foreign money.18
Additional evidence against the overemphasis on differential inter
est rates lies in the relative smallness of recent differentials.17 When
the risks of foreign exchange are insured, rate differentials have at
times been in favor of New York. In any case the advantage or dis
advantage has been small and swinging back and forth, with major
differences easily accounted for by the special circumstances, e.g.,
those involving Canadian exchange, which have tended to outweigh
interest considerations.
Several empirical studies presented during the year likewise suggest
that the needs of commerce for strategically placed working balances,
tax considerations and other non-interest-rate factors are far more
is Hearings, "State of the E conom y and Policies for Full E m ploym ent," op. cit., p. 380.
» Hearings, 1063 Econom ic Report o f the President, op. cit., pp. 375-378.
JOINT ECONOMIC REPORT
25
likely to be primary'forces behind short-term capital movements than
are modest opportunities for interest arbitrage.1®
The Nation has now been brought to the active consideration of
tax reduction for economic stimulation. Even if such measures are
adopted and succeed, we will nonetheless require domestic monetary
expansion. Instead of continuing to rely upon an asserted need for
relatively high interest rates, we think that trade expansion and
other avenues offer the preferable approach to the serious balance-ofpayments problem.
Raising interest rates for balance-of-payments reasons can also
be ruled out because such action merely provides an opportunity for
other countries to raise interest rates. A competitive race toward
higher interest rates would not be in the interest of this country or
of other economies abroad. In fact, with postwar inflationary
pressures eliminated, the case for a somewhat lower structure of
interest rates is overpowering. T o the extent that international
capital movements provide any basis for corrective action at this
time, the appropriate remedy is to be found in a multilateral payments
agreement of the type suggested later in this report. The alternative
of stifling our economy through high interest rates is unconscionable.
The Federal Reserve must either be persuaded
or compelled by law to institute a better and
more timely system of reporting to the Congress
and the public the actions taken by the Open
Market Committee and the Board of Governors,
together with the specific reasons for such actions.
The Federal Reserve is a direct servant of the Congress. It acts
solely as the agent of Congress in carrying out its functions of con
trolling the supply of money. This power is given to Congress by
the Constitution and the Federal Reserve authorities merely act for
Congress under delegated powers. By both law and sound principle,
the Board of Governors and the Open Market Committee must report
their actions to Congress, together with their reasons for taking these
actions. This information must be so explicit and clear that Congress
can reasonably judge whether the monetary authorities have exer
cised the delegated monetary powers in accord with congressional
instructions and in the national interest. The reports also must be
timely, and hence should be submitted to Congress in time for their
review by this committee in connection with its annual hearings on
the President’s Economic Reports; that is, by January 20.
The report of actions, and the reasons for actions taken, as is set
forth in the Board of Governors annual report, have been notoriously
inadequate, uninformative, and confusing, as this committee has
noted in the past. We are guite disappointed to discover in the
record of actions for 1962 no significant improvement in this respect.
The meeting of December 18, 1962, at which a change in policy
took place is typical. A few phrases from that record are illustrative
o f the unsatisfactory character of the record. At this meeting it will
be remembered that while the country was talking about the need to
>■ See paper by Philip W . Bell, "Private Ospltal Movements and tbe U .8. Balance of Payments,’’ In
‘ ’ Factors Affecting tbe united States Balance o ' Payments," compilation of studies prepared for tbe Sub
committee on International Exchange and Payments of tbe Joint Economlo Committee, 87tb Cong., 2d
seas., pp. 89S-481, and subsequent hearings on "Outlook tor U.B. Balance of Payments," p. 124.
Bee also statement of Robert F. Oemmlll, "Interest Rates and Foreign Dollar Balances,"In hearings on
“ State ol the Economy and Policies lor Tull Employment," op. «lt., pp. B7&-981.
26
JOINT ECONOMIC REPORT
stimulate the economy b y tax reductions, the Open Market Com
mittee was deciding upon a contrary program of less monetary ease.
From the report of the meetings we learn what everyone knew, that
“ evidence of solid additional achievement was still limited,” or, to
use the words of the directive, “ recognizes the unsatisfactory level
of domestic activity, the continuing underutilization of resources,
and the absence of inflationary pressures.” In spite of these pre
ponderant considerations, clearly dictating no less “ ease” in the
money markets, that committee voted 7 to 5 for “ maintaining a firmer
tone m the money markets while continuing to provide moderate
reserve expansion in the banking system.” The contradiction in
this portion of the directive calling at once for a “ firmer tone” and
“ moderate expansion,” confusing as it is, does not obscure the fact,
as Chairman Martin told this committee in his oral testimony, that a
new policy of less ease had been instituted.
The most disturbing aspect of the problem is the conclusion im
plied by their 1962 report, if we can accept it as a complete, clear,
and accurate record. The confused nature of their annual report and
the vague words of the so-called “ directives” suggest that the monetary
authorities themselves have hazy and unclear concepts of what they
are trying to do. When one undertakes to give operational signifi
cance to such expressions as “ somewhat” less ease, “ moderate”
expansion or similar differences, the confusion is not necessarily that
of the observers but more probably that of the actors. We would
prefer to think that this is not the case but the alternative is to believe
that the authorities are unable to make an effective report on their
policies. This matter remains a troublesome issue involving the
relationship of Congress with one of its own agents.
Under present conditions of high unemployment and
excess capacity, debt management should be
handled so as generally to reinforce expansionary
fiscal and monetary policies.
A Federal deficit of sizable proportions must be financed during
1963-64, regardless of whether action is taken to reduce taxes. In
deed, as we have earlier pointed out, the cumulative deficit to be
financed over the next 3 fiscal years will be smaller if an effective
tax reduction and reform program is adopted, than if no such action
is taken.
Under present conditions of high unemployment and excess capac
ity, debt management must be handled in ways which generally
reinforce the needed expansionary fiscal and monetary policies.
Baseless fears of inflation or balance-of-payments considerations must
not be allowed to constrain public debt operations occasioned by the
transitional budget deficits.
These considerations dictate that “ lengthening the debt” should be
given less weight for a while. This is no occasion for large amounts
of Treasury borrowing"at long term, since this places the Treasury in
competition with the demands of private businesses and individuals
for investment funds. Furthermore, Treasury borrowing on short
term under these conditions may actually aid the balance of payments
by supporting domestic short-term interest rates while weakening
long-term rates. To the extent that changes in short-term interest
rates have any influence on international capital flows, such a policy
would be all to the good.
JOINT ECONOMIC REPORT
27
On the other hand, there is no reason to pursue a policy of extreme
shortening of the deist structure. To the extent that the Treasury
enters the long end of the market, they should do so via the auction
method of selling Government bonds. This is a policy we have urged
repeatedly in the past. The Treasury is commended for its initial
exploratory move in this direction, and for the success which attended
the sale of the $250 million issue of bonds of 1988-93 on January 8,
1963. We recommend that the practice of offering longer and
medium-term Treasury bonds at competitive bidding be employed
regularly and be made an established part of debt management
practices.
IN T E R N A T IO N A L
P O L IC IE S
The United States has for some years faced the problem of bringing
its balance of payments under control in a manner consistent with
its objectives of maximum employment and a more rapid rate of
growth of the domestic economy. We reject the notion that the
United States must raise domestic interest rates or follow restrictive
fiscal policies— causing a low growth rate and high domestic unem
ployment— in order to solve the U.S. balance-of-payments problem.
Indeed, the strength of the dollar ultimately depends on the strength
and growth of the underlying U.S. economy.
The committee is of the conviction— shared b y responsible authori
ties in Europe— that the United States must move rapidly toward
maximum employment, production, and more rapid growth. There
fore, we recommend the following international economic policies:
The United States should promptly seek a payments
agreement among the leading industrial countries
to neutralize destabilizing short-term capital
movements and to finance temporarily deficits
arising from more basic factors.
A payments agreement which will prevent international capital
movements from interfering with domestic policies for economic
stability and growth is a matter of urgent national interest. T o use
high domestic interest rates to check or reverse capital outflows is
wrong. Domestic high-interest rates simply increase unemployment
and retard growth, thus compounding the balance-of-payments
problem. To propose paying $30 to $40 billion per year in reduced
incomes to American workers and investors to obtain a $2 to $3
billion per year reduction in the payments deficit is to reduce eco
nomic calculus to absurdity.
Aside from the lack of proportion in the argument, there is no
reason to expect the policy to yield long-run success. The payments
deficit and accompanying capital movements have not been cured by
several years of high unemployment and slow growth, nor have
analysts been able to produce reasonable proof of significant response
of capital movements to moderate interest rate differentials.19 Other
factors, such as speculation, tax considerations, trade requirements,
and rising direct investment abroad, appear to outweigh any possible
interest rates effects.
« Contrary to widespread Impressions, U.S. Interest rates do not appear low compared to those in the
other highly industrialized countries. Recently, for example, short-term rates In Switzerland, Belgium,
Germany, and the Netherlands have tended to remain below the U.S. rates. Only in the United Kingdom,
France, and Canada have rates been higher than In the United States. If forward cover is taken into ac
count, the United Kingdom rate would be roughly the same as the U.S. rate.
28
JOINT ECONOMIC REPORT
Neither the IM F standby credit agreement negotiated in 1961 nor
the variety of bilateral short-term currency support arrangements of
the Treasury and the Federal Reserve meet the conditions for an ade
quate payments agreement. The conditions for a successful multi
lateral agreement were set forth over a year ago by our Subcommittee
on International Exchange and Payments as follows:
* * * The amount should be adequate, particularly in
currencies other than the dollar and the pound. * * *
Credits should be made promptly as needed. The size of
the credit in relation to the deficit should, by agreement, be
governed by the nature of the deficit: If the deficit is caused
by “ hot money,” the bulk of the outflow should be financed
by the credit; if the deficit is “ structural” (i.e., of the type
which requires correction through accelerated industrial
modernization), credit might be granted to cover a significant
fraction of the deficit over a period of several years; if, how
ever, the deficit is caused by inflationary policies on the part
of the deficit country, credit should be given for only a short
period and only if the deficit country agrees to take adequate
remedial measures.20
The United States should take the leadership in
establishing a mechanism which can add to inter
national reserves.
In the postwar era the principal source of expanded reserves needed
to restore international monetary liquidity and meet the requirements
of expanding world trade and payments was the export of gold and
dollars from the United States. This arrangement will continue to
work only as long as the United States provides an outflow of gold
or other trading countries are willing to hold an increasing proportion
of their reserves in the form of dollar balances.
In the long run a multilateral arrangement must be agreed upon
for strengthening the world monetary system, and adding to world
reserves as needed.
Such a plan should lessen dependence on gold as an international
monetary reserve. This might be accomplished by any of several
plans that have been proposed. We do not attempt here to prejudge
which plan will turn out to be best after this matter has been given
serious international consideration and study. W e are convinced,
however, that now is the time for the United States to take leadership
in establishing such a mechanism for the orderly expansion of inter
national reserves before an international liquidity crisis at some future
time provides a much less propitious atmosphere in which to negotiate
a workable long-term agreement.
The United States should promptly and vigorously
bargain for a reduction of the Common Market
external tariffs, and the Common Market should
be requested to make an immediate unilateral
reduction in its tariffs on a most-favored-nation
basis pending completion of the negotiations.
('Joint Economic Committee, report of the Subcommittee on International Exchange and Payments,
“ International Payments Imbalances and Need for Strengthening International Financial Arrangements,”
87th Oong., 1st sess., p. 22.
JOINT ECONOMIC REPORT
29
Our best hope to developing a constructive solution to the persistent
U.S. payments deficit is the development of policies to deal with
the basic sources of the present deficit. The first step in dealing
with the basic sources of our payments deficit is the development of
policies to expand our overall export surplus.
Fortunately, an expansion in our export surplus can be achieved
by the further removal of barriers to international trade. The first
step is the removal of the barriers to American exports into the Com
mon Market in Western Europe. These countries are among the
most rapidly expanding in the entire world. Over the years ahead
these nations will need to import more both because of their rapid
growth and because they face inflationary pressures. The tendency
for countries like West Germany, France, and other countries to
continue accumulating gold and dollars rather than to spend more
of their rising export income on imports, on capital investments in
other countries, and on foreign aid, nas been responsible for a large
part of the free world’s payments imbalance. If such surplus pay
ments countries would allow goods from the United States and
other countries to be sold more freely in their markets, their present
fully employed resources of capital and manpower could be devoted
to the most productive activities, including further domestic capital
investment essential for their future growth.
Consequently, the United States should promptly and vigorously
bargain for a reduction of the Common Market external tariffs. We
should not procrastinate until sometime in 1964 to begin negotiations
under the Trade Expansion Act of 1962. Action should be taken at
once which would lead to negotiations as soon this year as is prac
ticable under the act. In addition, the Common Market should be
requested to make an immediate unilateral reduction in those tariffs
on a most-favored-nation basis, pending completion of these negotia
tions. This is entirely equitable and caUed for in view of (1) the large
contributions of the United States toward the economic reconstruction
of Western Europe in the postwar period, and (2) the persistence of
balance-of-payments surpluses in Western Europe which, if allowed
to continue, threaten to disrupt the international currency systems,
and bring on inflationary conditions within these countries.
Legislation should be enacted this year to broaden
the 80-percent provision of the Trade Expansion
Act so that it can be used whether or not the Com
mon Market is enlarged.
When the 80-percent provision of the Trade Expansion Act was
adopted, the administration assumed that the Common Market would
be enlarged to include Great Britain and some other European coun
tries. Through trade negotiations with such an enlarged Common
Market, tariffs on such categories as coal, organic chemicals, trans
portation equipment, most kinds of machinery, photographic sup
plies, paints, cosmetics, miscellaneous chemical products, aircraft
parts and equipment, as well as a variety of other products could have
been reduced to zero. Through negotiations with the present Com
mon Market, only the tariffs on goods falling within the categories of
aircraft parts and equipment and margarine can be entirely elimi
nated. On most other nonagricultural commodities, reductions are
limited to only 50 percent.
958B6— 68------ 3
30
JOINT ECONOMIC REPORT
The members of the EEC have been rapidly eliminating trade
barriers among themselves. Once all internal barriers are eliminated,
possibly by the end of 1966, a common tariff wall will be erected
around all the member states applicable to nonmembers.
The members of the European Free Trade Association (EFTA)
have also been eliminating internal trade barriers. However, they
plan no common external tariff but the national tariffs of each member
state will apply to nonmembers. If Britain had become a member of
the Common Market, other EFTA countries might have followed.
The interplay between the establishment of a different externalinternal tariff places all outsiders at a competitive disadvantage.
Consequently, if no action is taken to extend the 80-percent provision,
U.S. exporters will face significant tariff discrimination.
Reductions of 50 percent in the Common Market tariffs and those
of the member countries of the European Free Trade Association may
not be enough to maintain, much less to increase, our exports to these
countries. This is necessarily so since we will, after 50-percent re
ductions, still have to cross tariff barriers while the member countries
of the Common Market and EFTA will have tariff-free entry in their
respective market areas. This disadvantage will place our exporters
in a relatively adverse competitive position.
Since 15 percent of our farm income is derived from
exports, a thorough study should be undertaken
by our special representative for trade negotia
tions to determine whether or not the agricultural
policies of the EEC are now or may be in the
future in violation of the requirements of GATT,
particularly article 24.
The recent exclusion of Great Britain from the Common Market
creates additional fears concerning American agricultural exports to
the Common Market. One of the primary reasons given for the
French veto was that Britain would not be able to accept the recently
adopted agricultural policies of the Common Market.
In January 1962 the EEC reached an agreement on the major
features of a common agricultural policy to replace the different
national systems of agricultural support of the member states. The
new policy is based largely on a system of target prices and variable
levies to be established by 1970. M any aspects of the program are
still uncertain and have not yet been formulated by the member
nations.
On July 30, 1962, national restrictions on imports of grain were
replaced by variable levies. These levies were calculated to offset the
differences between domestic market prices and the prices of foreign
imports. The levies on imports from the other member countries are
to be eliminated by 1970 .when a single price system will come into
effect throughout the,entire Common Market. Moreover, restrictive
import regulations were also adopted for poultry, eggs, and pork.
Similar restrictive measures are in prospect for rice, dairy products,
and other agricultural commodities. According to the Council of
Economic Advisers—
* * * The action program of the EEC Commission pro
poses as a goal that 90 percent of EEC agricultural
JO IN T ECONOMIC REPORT
31
production be covered by common policy regulations
of some kind. 21
Article 24 of the General Agreements on Tariff and Trade (G ATT)
provides that external customs tariffs, including those on agricultural
products, must “ not on the whole be higher or more restrictive than
the general incidence o f the duties and regulations o f commerce
applicable in the constituent territory prior to the formation of such
a union.” In other words, if the agricultural policies of the Common
M arketare more restrictive today, or will be more restrictive in 1970
than the individual agricultural policies of the member nations in
1957, they may be in violation of article 24.
Regardless of the legality of EEC agricultural policy, the adoption
of a protectionist agricultural policy would endanger not only agri
cultural exports but the liberal trading policies of the free world.
The United States would be forced to retaliate against the Common
Market if it adopts such a policy. This retaliation will probably be
extended beyond the agricultural sector.
The United States must continue to negotiate on a
most-favored-nation basis for ourselves and the
whole free world, with special emphasis on access
to the markets of highly industrialized countries
for the products of the developing nations of the
world. This policy rules out participation in
discriminatory trade blocs by the United States.
The traditional policy of the United States has been to promote
freer trade through tariff- and quota-reduction agreements, extending
the benefits of a trade agreement with any one country to all other
nations with which we maintain a reciprocal most-favored-nation
policy. This policy has been highly successful in promoting an
expansion of world trade to the mutual benefit of the United States
and our trading partners in the free world. This policy should be
continued. This does not mean, however, that the rich industrialized
countries can obtain the benefits of trade barrier reductions without
making appropriate contributions of their own. If, for example, the
Common Market is unwilling to make significant reductions in its
external barriers, then there is no obligation on this country to extend
most-favored-nation treatment to these countries in connection with
our trade agreements with other countries.
Those concerned with America’s international trade policies should
give particular attention to the problems of the developing nations
of the world. Typically, these countries have urgent import needs
and— with the exception of a few countries like Venezuela—meager
foreign exchange reserves. They consistently use all of their export
proceeds and foreign credits to keep imports at the highest possible
level. The volume of their imports is determined not b y restrictive
trade practices, but by the amount of each area’s exports plus net
capital flow. As a result, it is not in the present interest of the
United States to negotiate for lower tariffs or other concessions on
consumer goods. Such concessions could only be obtained at the
expense of more essential imports; for example, foodstuffs and capital
goods. Only the further development of the economies of these
countries will substantially increase U.S. exports.
u Eoonomlo Report of the President, January 1853, p, 113.
32
JOINT ECONOMIC REPORT
While our foreign-aid programs are of great importance in assisting
these developing nations to solve their economic development prob
lems, it is also true that access for their exports of tropical products
and raw materials to the markets of the United States and the other
highly industrialized trading nations is essential if these developing
nations are to obtain the foreign exchange needed to finance their
imports of capital. We should make every effort in the conduct of
our own policies, as well as in the conduct of negotiations with other
trading nations, to render assistance in this way to our less developed
associates of the free world.
We reiterate with special emphasis the earlier
recommendations of this committee and its sub
committees that the United States seek to
persuade our Western European allies to carry
a greater share of the burdens of the common
defense of the free world and the provision of
economic assistance to the developing nations.
Considerations of equity reinforce the necessity
of actions leading to the elimination of the deficit
in our balance of payments.
The committee is not satisfied with the contributions being made
toward mutual defense and economic aid by our Western European
allies. If the rapidly growing, highly prosperous countries of Western
Europe assumed a fair share of both these common obligations to the
free world, a substantial part of the present imbalance in payments
between the United States and Western Europe would be eliminated.
The administration must, therefore, press more vigorously to secure
such increased contributions from these allies.
N o t e .— Mr. Patman agrees generally with the tenor of the report but must
reserve judgment on the specific recommendations because pressure of other
congressional duties prevented his full participation in the hearings and com
mittee deliberations. In addition, he would like to call attention to the able
statement of the Honorable George W. Mitchell, member of the Board of Gover
nors of the Federal Reserve System, who testified before the committee on Febru
ary 1— in particular his presentation of the view that monetary policy could have
done more to encourage economio expansion in 1962, his enlightening account of
the very limited effectiveness of general monetary policy as a means of dealing
with basic balanoe-of-payments problems, and his unusual, if not unique, willing
ness to advance a proposal for dealing directly with the flow of funds abroad.
N o t e .— Senator Fulbright reserves judgment as to the details of the type of
tax reduction he would advocate should the tax reduction provisions of the
President’ s proposals be separated from the so-called reform provisions. As to
the excise tax reductions, he believes each of these should be considered on its
merits.
IN D IVID U AL VIEW S OF SENATOR W ILLIAM P R O X M IR E
TO THE M AJO RITY REPO RT OF TH E JOINT ECO N O M IC
CO M M ITTEE
T he C ase A gainst a T a x C ut N ow
O V E R W H E L M IN G
D R IV E
FOR
TAX
CUT
All Americans, of course, desire relief from the heavy burden of
taxes they must bear to support our Government.
A tax*cut now is powerfully supported by the President, leading
business organizations, top labor groups, a heavy consensus of econo
mists, and many of the most influential opinion-leading commentators.
TAX
CUT
NOT
R E S P O N S IB L E
But I submit that tax reduction under the following conditions
is not responsible in a period of relative prosperity in the economy:
1. The ^current deficit is expected to approach $9 billion.
2. The^administration plans to ask for an initial increase in
spending of about $4.5 billion. Based on past experience,
Congress is more likely to increase than to decrease the Presi
dent’s initial spending proposals.
3. The national debt exceedsi $300 billion. It is greater than
the national debt of all other nations in the world combined.
Service costs on the debt are already $10 billion.
4. The tax cut would increase the size of the deficit, the national
debt, and the burden of servicing the debt.
TAX
CUT
SURE
TO
IN C R E A S E
D E F IC IT
AND
N A T IO N A L
DEBT
The easy assumption has been made b y many administration
witnesses that the tax cut, far from deepening the deficit, eventually
would reduce it and, in fact, is the surest way to a balanced budget.
This is almost certainly wrong.
Calculations based on the whole sweep of witnesses appearing before
the committee show that the longrun net loss of revenues flowing from
the $10 billion tax cut would be between $1 and $6% billion.1i
i The most typical assumptions on the multiplier effect of the tax cut b y witnesses before the com m ittee
were that It would be between 2 and 2 H . In other words, that a $10 billion tax out would increase the gross
national product b y $20 to $25 billion.
The consensus was clear that monetary restraint of the kind the N ation's money managers told the com
mittee they expected to practice w ould reduce this multiplier. One monetary expert estimated that such
a monetary policy would probably result in a multiplier of
or a $15 billion increase in the gross national
product from a $10 billion tax cut. All things considered, a multiplier of 2 or a $20 billion gross national
product increase from a $10 billion tax cut would seem to be as reasonable a guess as any.
W hat would such an Increase in the gross national product flowing from such a tax cut mean to ultimate
Federal revenues?
Here again the expert witnesses differed. D r. Arthur Burns of Oolumbia University, and former Chair
man of the Council of Econom ic Advisers, estimated it would be about one-sixth. H is estimate is con
firmed by relating Federal tax revenues to the size of the gross national product. The relationship is about
one-sixth.
On the basis of such au estimate, the net loss from a $10 billion tax out allowing for a $3}$ billion increase
in revenues would be $6% billion.
On the other hand the Council o f Econom ic Advisers testified that the Federal tax recovery from in
creased gross national product is 30 percent. Even on this oheery basis, Governm ent revenues would
increase only $6 billion as a result o f tne $10 billion tax cut and the net loss would be $4 billion.
Even if we take the most optim istic multiplier assumptions of the Council: that the multiplier is 3 and that
a $10 billion tax cut will increase the gross national product by $30 billion, and apply the optim istic Council
30-percent figure for Federal tax recovery, the total recovery of revenues w ould still do $9 billion and the net
loss would be $1 billion. The Council has suggested that the multiplier m ay be somewhat higher than 2
because of induced investment through the so-called accelerator principle. T h ey have, however, wisely
refrained from estimating the quantity o f this additional amount since, with the present high levels of excess
capacity, it seems doubtful that any additional investment will be encouraged b y the tax reduction.
The conclusion that the kind of sharp across-the-board tax reduction reoommended b y the President
would result in an eventual as well as an immediate tax loss is borne ou t b y econom ic analysis as well as b y
oom mon sense.
38
JO IN T ECONOMIC REPORT
A D M IN IS T R A T I O N R E L I E S O N S T IM U L A T IO N F R O M D E F IC IT
Argument by administration witnesses for a tax cut has been made
primarily on the grounds that it would increase demand in the econ
omy, and that with unemployment close to 6 percent and plant
utilization at 82 percent, the economy needs a surging demand.
Indeed, most administration witnesses frankly see little difference
in economic impact between a reduction in Federal taxes and an
increase in Federal spending. Both, in their view, would increase
demand. Both would do so by increasing the Federal deficit.
The theoretical result: As the deficit increases, the Government
puts more into the economy in demand (spending) than it takes out
in taxing.
D E F IC IT S H A V E N O T B R O U G H T S O U N D E C O N O M IC G R O W T H I N T H E PAST
Will deficits in fact stimulate sound long-term growth? Our recent
history has plenty to say about the answer to this question.
In the past 32 years this Nation has become thoroughly experienced
in Federal deficits. Deficits have been a continuous way of life for
our National Government almost throughout this period. These
deficits have been so immense that the national debt has exploded
twentyfold since 1930: from $16 billion to over $300 billion.
With this experience, this Nation should be expert on the stimulative
effect of deficits on the economy. What has been the result?
Except in World War II when deficits were astronomical, there is
no evidence that continuous deficits have promoted economic growth.
The evidence is all to the contrary.
The biggest growth in peacetime Federal debt, for example, was in
the decade of the thirties and in the period since 1957. The thirties
period was characterized b y disastrous economic stagnation and
record unemployment, coinciding with 10 years of such heavy deficits
that they would be equivalent to. $20 billion annually today. From
1957 to date, Federal deficits have averaged a heavy $6 billion per year.
And yet, economic growth has been the slow-moving despair of
current economists during this very period.
Advocates of the deficit route point to the impressive economic
progress in Europe during the past decade to support the deficit
stimulus theory. The economic situation in European countries during
the past 10 years is so vastly different from ours— particularly in
terms of demand— that the comparison is not a valid one.
But even here what does the record show? The industrial star of
Europe, Germany, enjoyed a mammoth 92-percent growth in indus
trial production in the 8 years between 1953 and 1961 (most recent
year for which figures are available) compared to 20 percent in this
country; but its deficit averaged 0.1 percent of GNP during this
period compared to an average deficit of 0.4 percent of GNP in
the United States. In terms of GNP, Germany had one-fourth
the deficit and four times the growth of this country.
This is not to argue that deficits retard growth. It is to argue that
in a $550 billion economy, even the $12 billion deficit programed by
the administration is swamped by the impact of private economic
forces.
35
JOINT ECONOMIC REPORT
D E F IC IT
f o r
^g
r o w t h
:
a
r a d ic a l
d e par tu r e
Until this year, 1963, the President had contended that deficits
might be necessary public policy in periods of recession. But on the
upturn of the cycle, the Federal Government should run a surplus and
over the business cycle balance the budget.
But now we are asked to follow a radically new theory. The delib
erate deepening of the deficit this year is not planned for the purpose
of overcoming a recession. Indeed, the President talked of 22 months
of uninterrupted recovery in his state of the Union message. The
planned deficit is billed for the purpose of promoting long-term growth.
But sound long-term growth can no more be based on the deficit
gimmick than on any other easy panacea. Growth of an individual, a
Family, or a nation depends on the hard, long work of many years, on
the sacrifices and forbearance required for education, the gradual
development of skills, and the painful processes of research.
The preeminent economic success of America has been based squarely
on individual self-reliance, with minimum Government participation
and maximum individual freedom and incentive. Indeed, the starkest
economic difference in the world today is between the economic
stagnation of Communist collective economies and the dynamism of
free Western economies.
SO U N D
TAX
CUT
R E Q U IR E S
S P E N D IN G
CUT
F IR S T
All of this suggests that the right prescription should indeed be a
tax cut to free the economy’s productive force from the burden of
Government taxes but unless Federal spending is reduced— at least
to keep pace with the reduction in Federal taxes— the reduced burden
is a mirage.
Tax reduction with increased Government spending gives the im
pression of a lighter Government burden. But the lessened tax bur
den when spending is increased is then quickly translated into higher
prices and an evaporation of the increased purchasing power of the
tax cut. The taxpayer’s after-tax income may be higher. But his in
come buys no more.
The sure inflationary impact of a tax cut this year was freely con
ceded in the hearings by such an eminent authority as Professor
Duesenberry of Harvard. No economist disputed it.
S P E N D IN G
CAN
BE
CUT
If a tax cut with increased spending is not the answer, can, as a
matter of practical fact, spending be reduced or at least stabilized
without sacrificing major goals of this Nation such as national de
fense, space exploration, and indeed the development of skills through
education on which long-term growth must be based?
Can spending be wisely reduced? It can indeed.
Although the President implied that spending other than defense,
space, and interest will remain the same in 1964 as in the current
fiscal year, the fact is that this spending will increase by more than
$2 billion.
36
JOINT ECONOMIC REPORT
D O M E S T IC
S P E N D IN G T O
C L IM B
$2
B I L L IO N
T H IS Y E A R
This year’s budget by various bookkeeping transactions conceals
the real increase in spending in the domestic sector.
The reason the $2 billion increase doesn’t show up is because the
administration plans to sell $700 million of the cotton surplus, $423
million of Export-Import Bank holdings, $315 million of Federal
National Mortgage Association and Federal Housing Authority
mortgages, $300 million in Commodity Credit Corporation loans,
$150 million in farm housing loans, and $150 million in college housing
loans. This total of $2 billion of liquidated assets will be used to
offset increased spending in almost every department of Government.
G O V E R N M E N T SALE OP H OM E M ORTG AG ES SU R E TO SL O W D O W N R EC O VER Y
The administration’s announced intention of selling $315 million
of Federal National Mortgage Association and Federal Housing
Authority mortgages during the coming year is sure to tend to drive
up interest rates for home buyers.
The Budget Director told the committee at the hearings that the
general impact on interest rates would not be significant because in
the absence of the sale of mortgages the administration would be
required to sell other Federal securities (presumably Treasury securi
ties) to finance the deficit.
But the impact of the sale of such a large amount of mortgages
could be quite different from the effect of selling a similar amount of
Treasury securities. Interest rates on Treasury securities have only
a secondary effect on mortgage rates. Some Government experts
have testified to the committee the effect is relatively unimportant.
There can be no question, however, that the sale of more than $300
million of home mortgages by the Government will have a definite
tendency to drive up interest rates.
If interest rates on home mortgages do indeed rise, unemployment
would be sure to increase.
The biggest cost in home buying is interest. A rise in mortgage
interest rates will surely reduce home construction. Home construc
tion contributes directly and heavily to employment. Any cutback
in home starts would seriously retard economic recovery.
Government sale of $300 million of mortgages could significantly
reduce whatever expansionary effect the tax cut might have on the
economy.
B IG IN C R E A S E S I N
G O VER N M EN T PAYROLLS
Let us consider the surest index of expanded spending: The De
fense Department is the only department of Government which will
actually reduce the number pf its employees in the coming fiscal year.
Every other department, without exception, will increase its em
ployees in the coming budget year. Here are a few examples:
Agriculture by a whopping 5,000, or 4 percent; Treasury by 4,000, or
5 percent; Interior by 4,000, or 6 percent; Health, Education, and
Welfare by 6,000, or 7% percent; General Services Administration by
3,000, or 9 percent; Commerce by 3,500, or 11 percent; and Labor by
1,300 or 14 percent. All of these increases will come in a single
year—next year.
JOINT ECONOMIC REPORT
37
Asked about this sharp increase in employees in the coming year
when they appeared before the committee, the Secretary of Agricul
ture, the Secretary of the Treasury, the Secretary of Commerce, and
others all told the committee the increase was the result of new pro
grams the Congress had passed.
But the Secretary of Commerce was most revealing when asked to
defend the huge 11 percent increase in 1 year in personnel in his de
partment. He said that if he were given a free hand to reduce or
eliminate old programs he could, in fact, reduce personnel by 10
percent and operate a better department.
The Secretary of Commerce wisely pointed to the failure of the
administration and Congress alike to look with critical scrutiny to
economy in old programs which have developed powerful bureaucratic
and often special interest support but no longer serve our national
interest.
E X T R A V A G A N T S U B S ID IE S T O S P E C I A L I N T E R E S T S
The explosive expansion of some of the older programs with the
hell-bent support of special interest shows how extravagantly generous
with the taxpayer’s money Congress has become when it teams up
with subsidy-seeking interests.
For instance, just since 1957 (to the coming year’s 1964 budget),
Federal spending for water transportation subsidy to shipbuilders has
leaped from $365 to $677 million or 85 percent;2subsidies to privately
owned commercial aviation have zoomed from $219 to $885 million,
or fourfold; and promotion of business from $127 to $617 million, or
an incredible fivefold.
Reducing entrenched, special-interest-supported spending is one of
the toughest jobs of Government. It will become even tougher as
“ the establishment” persuades the Congress and the American people
to accept the theory that larger Federal deficits fed alike by tax cuts
and/or increased Government spending would lead to sound long-term
growth.
But the theory is wrong. In fact, reduction of unjustified Govern
ment spending not only won’t hurt economic expansion, it will help it.
Waste!ul Government spending diverts resources of skilled men and
scarce material from constructive private uses. As the Government’s
massive purchasing power moves in, prices move up. The eventual
burden on the taxpayer is sure and heavy.
SOM E
D O M E S T IC S P E N D IN G
E S S E N T IA L
This is not to say that all Government spending can only be an
anchor that private enterprise must drag along— far from it. Spend
ing that encourages manpower training, vocational education, indus
trial research, contributes to the very essence of a growing economy.
The tough job of Government is to adopt and advance the programs
that will, in fact, advance the economy as well as to eradicate the
programs that burden it.
There is no question in this Senator’s mind, however, that in every
phase of Government activity including defense and space, spending
can be reduced an aggregate of billions below the President’s requests,
possibly to a level permitting a sound tax cut.*
* These figures only include direct expenditure subsidies. In addition, the water transportation Industry
obtains substantial hidden subsidies in the form of preferential tax treatment.
38
JOINT ECONOMIC REPORT
E C O N O M IS T S
P A IL T O
PROVE
TAX
CU T W IL L
W ORK
The case for the proposed tax cut, timed to coincide with both a pres
ent deficit and increased spending, and calculated to deepen the
deficit, has not been made. It has not been made in these respects:
RECORD
O P P R E V IO U S T A X
CUTS
1. The tax cut may have little or no stimulative effect on the
economy. After only four of the nine tax cuts in the past 40 years did
business significantly improve. There were times it actually got
worse. This doesn’t prove the so-called stimulative multiplier didn’t
appear; it does show it can be washed out by other factors. This
would seem to be almost certain for the $2.7 billion net tax cut pro
posed for the first tax cut year in this $550 billion economy.
Even the ultimate $10 billion net tax cut would seem to be likely
to be washed out. For this ultimate grand total would amount to
less than 2 percent of the gross national product. During the thirties,
deficits that averaged more than twice this— 4 percent— of the GNP
seemed to have little effect on economic growth.
M ONETARY
R E S T R A IN T
W IL L
WEAKEN
TAX
C U T S T IM U L A T IO N
2. Any substantial stimulative effect of the tax cut would almost
certainly be sharply cut and perhaps even destroyed by the restraining
effect of monetary policy. The country’s top monetary authorities,
the Secretary of the Treasury and the Chairman of the Federal
Reserve Board, both told the committee that they expected interest
rates would be likely to rise if the economy moved ahead in 1963 and
1964. In view of tne monetary power of these gentlemen, it is almost
a sure thing that this expectation will be translated into reality.
Interest rates will go up. Monetary authorities have publicly indi
cated that they will raise interest rates on savings bonds to 4 percent
within the next year.
Monetary authorities appearing before the committee, other than
the Secretary of the Treasury and the Chairman of the Federal
Reserve Board, universally agreed that rising interest rates would
slow down economic expansion. Dr. Meltzer, of Carnegie Tech,
argued that the stimulative effect (multiplier) of the tax cut would
depend almost entirely on the degree of monetary tightness.
The virtual certainty of this monetaiy tightness will surely develop
for two reasons; (a) a policy of raising interest rates is regarded as the
prime weapon for diminishing the adverse effect of the tax cut on the
balance of payments; (b) rising interest rates are accepted as the ready
tool to try to forestall the inflationary effect of the tax cut.
The majority report, in my view, does an excellent job of describing
the problems of monetary policy with which we will be concerned in
the months to come. Moreover, it indicates clearly the weaknesses
in some of the monetary policies followed during the last few years.
I wish to be specifically on record in support of the monetary section
of the majority report.
39
JOINT ECONOMIC REPORT
T IG H T M O N E T A R Y
P O L IC Y W I L L
NOT
IM P R O V E
B A L A N C E -O P -P A Y M E N T S
P O S IT IO N
Incidentally, the preponderance of evidence from the joint com
mittee’s hearings last August and this year suggests that interest
rate differentials can have only secondary effects on the balance of
payments through influencing capital flows. Haverford professor
Philip Bell and Federal Reserve economist Robert Gemmill have
made the only available studies of the effect of interest rate differentials
on capital flows and they have found the effect is far less significant
than speculation and of far lesser significance than previously sup
posed. Neither of these studies was contradicted by any other studies
that were brought to the attention of the committee, although wit
nesses appearing before the committee were systematically challenged
to show any evidence to contradict the Bell and Gemmill studies.
This means the Government’s monetary policy will be restrictive,
will tend to counteract any stimulative effect of the tax cut, largely
because of a false assumption— now exploded— that interest rates
must be higher in this country to stem capital flows from this country
overseas.
As for using rising interest rates to forestall the inflationary effect
of the tax cuts, the principal architect of this policy, Chairman William
Martin of the Federal Reserve Board, himself indicated that the policy
would have only moderate effect in restraining rising prices. And
yet this policy of monetary restraint to raise interest rates is the
widely accepted answer to whatever inflation may develop in the
future: not reduced Government spending, not increased taxes.
Both are regarded as politically impossible.
The basic economic design— increased Government spending and
lower taxes to stimulate the economy and rising interest rates to
stabilize prices— is likely to lead to a cruelly oppressive debt burden
as rising deficits are matched by rising interest rates required to
service the heavier national debt.
What is worse, it means an economywide restraining force, slowing
down home building (where interest is the biggest cost), small business
borrowing, and generally shifting a heavier burden to such debtor
groups as farmers and consumers.
'
CASE
FOR
CORPORATE T A X
CUT NOT
M ADE
3.
The heaviest and most consistent support for the tax cut came
from those who argued that it was necessary to stimulate investment.
No witnesses contradicted the alleged wisdom of such a tax cut.
Almost all argued it was desirable to promote economic growth in
the economy.
And yet the case for such a tax cut this year seems to be even
weaker than it has been in the recent past. Let us review the record:
In 1954 the Nation enjoyed its last major tax cut. It was generally
agreed that the prime beneficiaries of that tax cut were corporations.
That tax cut was said to have been designed to stimulate investment
in view of both its individual impact (most of the benefits went to
persons in investment income brackets) and its large corporate
reduction.
40
JOINT ECONOMIC REPORT
Now, 9 years later, the Congress is asked to make another sizable
corporate tax reduction. One distinguished Senator remarked as the
committee hearing opened that the 1954 tax cut seems to have had a
long-term adverse effect on the economy because it stimulated invest
ment between 1955 and 1957 to such an extent that the economy has
been characterized by idle investment facilities, overbuilt plant
capacity, unemployment, and slow growth ever since.
Just last year investment was "stimulated” by two additional tax.
reductions. First, depreciation guidelines were revised to provide the
equivalent of a $1.5 billion stimulant to investment— and relief to
corporations.
Secondly, the investment credit was rifle shot into corporate taxation
to provide a specific and high-powered stimulus to investment through
a 7-percent tax credit for every dollar of investment made.
The argument for further stimulation b y tax cut is feeble indeed in
view of these facts: (1) the overwhelming preponderance of recent tax
reduction on the side of stimulating investment; (2) cash earnings in
1961 exceeded investment by a record absolute amount of $18K
billion and a record of 62 percent; (3) although later figures are not
available, cash earnings have been soaring since then while plant and
equipment outlays have been about the same. The result: corpora
tions have never been in a better cash position to invest in plant and
equipment.
All the tax-incentive stimulation of the past seems to have done
little to move business investment in plant and equipment ahead.
In view of the recency of the 1962 corporate tax reductions, it would
seem to be wiser to give these “ investment stimulants” a chance to
work rather than to hit again in a time of deficit spending with another
“ trickle down” investment tax cut.
M ANY
GROUPS
HURT
BY
TAX
CUT
Finally, there are many groups in the American society who would
be hurt, not helped, by this tax cut.
FUTURE T A XP A Y E R
BURDENED
The preeminent victim, of course, is the future taxpayer. As Dr.
James Buchanan, chairman of the Economics Department of the
University of Virginia, has written, the inevitable tendency of the
politician is to spend for the present voter, reduce taxes for the present
taxpayer, and mitigate the consequences by raising interest rates,
thereby passing the whole burden to the future taxpayer. When
Congress's economic experts on this committee, to whom Congress
must look for advice, contend that such a policy is sound economics
as well as effective short-run politics, the combination may be all
but irresistible.
FARM ER
H IT
Secretary of Agriculture Orville Freeman testified for the tax cut
but conceded that a substantial majority of America’s farmers owe
no income tax. Obviously for these farmers— who make a heavy
investment of work, property, risk, and efficiency in their farms—
the tax cut is meaningless. No one argues that America will buy or
consume more food because of the tax cut. To the extent the tax
JO IN T ECONOMIC REPORT
41
cut sparks inflation and forces increased interest rates— and it seems
certain to do both— the farmer is sure to be hit and hurt, and badly.
L IT T L E
B E N E F IT
TO
UNEM PLOYED
Above all, this planned tax-cut deficit has been justified in the
name of the unemployed. But the tough question that this Senator
has encountered in talking to unemployed in Wisconsin is, “ What
good is a tax cut to an unemployed man with no income? He doesn’t
pay any taxes now. He doesn't need a tax cut. He needs a job ."
An answer that the tax cut may stimulate the economy to provide
more jobs is, as the previous analysis suggests, far from perfect.
It is especially ironic for the three groups which the Secretary of
Labor told the committee form a disproportionately heavy part of
the unemployed: the high school dropout; the unskilled; the minority
groups. According to the testimony of the Secretary of Labor, each
of these groups suffors not 6-percent unemployment but more than
12-percent unemployment.
Tax cuts will not begin to solve the problems of high school drop
outs, unable to get jobs because of inadequate education and low or
zero skills. T a x cuts will do little to knock down the prejudice
barriers barring the minority groups from employment.
Few of the unskilled are likely to win jobs because of the tax cut.
Their barrier is their lack of skill in an automating, technologically
changing society.
These people need training. A tax cut to solve
their problem seems as heartless and stupid as Marie Antoinette’s
“ Let ’em eat cake," for starving Parisians.
The unemployed in these groups will enjoy little benefit in income
with a tax cut. They pay no Federal income tax; nor is it likely to
help them get jobs.
To the extent the deficit drives up interest rates, these people who
are likely to be debtors will suffer. To the extent the deficit drives
up prices, they will all be hurt as consumers.
OLD
P E O P L E H IT
HARDEST
Of all groups in America, the hardest hit by this tax cut-sparked
deficit wul be the retired old people.
On February 15, 1963, the Treasury Department released a fact
sheet showing that of the 18 million Americans 65 years old and over,
14K million, or 80 percent, have such low incomes that they pay
no Federal income tax now.
So 80 percent of the older people could not possibly receive any
benefit from an income tax cut. Since the overwhelming majority
of the 20 percent of oldsters who do pay income taxes pay very little,
the benefit would in aggregate be very small indeed.
On the other hand, many of these older people are debtors. The
rising interest rates which seem to be the certain concomitant of
the income tax cut will come out of their already pitifully inadequate
incomes. Rising prices— a likely companion of any Federal deficit
stimulation of the economy— would likewise diminish what little they
could buy with the income they have.
42
JOINT
e c o n o m ic
PROPOSED
TAX
reto rt
CUT
R E G R E S S IV E
Administration witnesses have contended that the proposed tax
cut. is a progressive one which will give low-income groups the greatest
benefit. This is simply not true.
The following table shows the benefits to various economic groups
from the personal income tax cuts— including the progressive re
forms recommended by the administration. This table shows a
precisely opposite effect from the table usually shown b y the ad
ministration. This is because the administration table shows the
percentage reduction of the income tax paid by persons in each income
bracket. Because persons in high-income brackets of course pay
higher income taxes, the administration table suggests the tax cut
would be progressive.
Incom e
sa.onn
fi,nnn
ih.nno
ifijnno
snjmn
.
Federal
income tax
...
_______
___
____
.............
________
_________
....
Other
taxes1
$60
420
1,372
2,616
4,124
T otal tax
before cut
T otal tax
after cut
$660
1,420
2; 872
4,316
6,024
$614
1,296
2,668
3,776
6,182
$600
1,000
1,600
1,700
1,000
Percent
reduction
7
8
10
13
14
Property (or Imputed rent), sales, excise, auto, etc.
That the tax cut is, in fact, regressive, is demonstrated in the above
table which shows the percentage reduction in all taxes paid that re
sults from the administration recommendations. Because all Federal
taxpayers pay heavy State and local taxes in addition to Federal taxes,
this table shows a far more accurate picture of what actually happens
to the taxpayer’s total liability.
The impact of the President’s tax proposal on various income
roups was dramatically shown in a table submitted to the committee
y Dr. Leon Keyserling. This table eloquently dramatizes the re
gressive effect of the proposed tax cut. The table follows:
§
President’s ’p roposed tax structure in 1966 compared with present structure (1968),
at various tax levels (for married couvle with 8 children)
(1)
Taxable Income level
$3,000...........................
$6,000...........................
$7.600...........................
$10,000.........................
$16,000.........................
$25,000 .........................
$36,000.........................
$60.000.........................
$100,000........................
$200,000........................
(2)
Present
tax 1
$60
420
877
1.372
2,466
6,318
9,037 ,
15,076
44,724
116,224
(3)
(4)
(5)
Present Proposed Proposed
tax «
Income
Income
after tax
after tax
$2,940
4,580
6,623
8,628
12,514
19,682
26,963
34,024
55,276
84,776
0
$280
668
1,088
2,076
4,605
7,814
13,837
38,542
95,072
$3,000
4,720
6,837
8,032
12,024
20,395
27,186
36,163
61,458
104,928
(6)
(7)
(8)
Percent
tax reductlon
Percent
increase
in aftertax
Income
Percent tax to
lnoome
100.0
33.3
24.4
2 2 .2
16.5
13.4
13.5
13.4
13.8
17.5
2 .0
3.1
3.2
8.6
3.3
3.6
4 .7
6.3
11.2
2 3 .8
Present
Proposed
2.0
8.4
11.7
18.7
16.6
0
6.6
8.8
2 1 .3
26.8
32.0
44.7
57.6
1 0 .7
13.8
18.4
22.3
27.7
38.5
47.5
> Assuming 10 porcent deduction for taxes, Interest, contributions, medical, etc.
* Assuming President’s proposal, as revised b y D illon's testimony, of $400 minimum deduction for married
couple and $100 for each child; 10 percent for Incomes between $6,000 and $10,000; $1,000 flat deduction
between $10,000 and $20,000; and 6 percent deduction for $20,000 and up.
Actual slight deviations from these workable assumptions would n o t In the slightest change the general
Import of the analysis.
43
JOINT ECONOMIC REPORT
Because tens of millions of American adults earn so little income
that they pay no Federal income taxes, it is obvious that a significant
share of our citizens will get no benefit but will almost certainly have
to pay higher interest rates because of the tax cut and, very possibly,
higher prices.
TAX
CUT
W ORSENS
ABVERSE
BALANCE
OP P A Y M E N T S
Witnesses were systematically asked what effect the proposed tax
cut would have on the balance of payments.
It was generally conceded that the tax cut would worsen our balance
of payments because the main thrust of the cut is to increase demand
in the consumer sector. This would mean that purchases of imports
would rise sharply.
On the other hand, far from reducing American prices to enable us
to sell more abroad and increase exports, this tax cut, as Professor
Duesenberry properly pointed out in the hearings, will certainly,
inevitably, tend to increase prices and reduce our exports.
So the proposed tax cut would worsen our balance of payments by
(1) increasing imports and (2) decreasing exports.
HEAVY
C O ST
OP T A X
CUT
F A IL U R E
Administration witnesses argued that if the tax cut fails to stimulate
the economy as advertised, little has been lost. This is emphatically
not true. If this highly questionable gamble, this radical new
departure from American fiscal policy, is adopted and fails, the
consequences will be serious indeed.
(1) The already heavy national debt will be even more burden
some.
(2) Our present progressive income tax system will have been
seriously jeopardized with little real political prospect of restoring
it. It is hard to imagine a more difficult political task than
increasing taxes back to their present rate once Congress cuts
them. The alternative frankly advocated by Dr. Burns and
other witnesses: a national sales tax. In the judgment of this
Senator, this would be a first-class economic disaster as well as
a gross injustice.
(3) . Our antirecession ammunition (the real justification for
a tax cut) will have been used up, leaving us far less equipped
to cope with economic adversity.
(4) Our balance of payments will have been worsened both
because imports will have been increased relative to exports and
because the great American economy will have failed to respond
to the prime economic prescription of its President and suffered
a growing deficit.
(5) The most essential ingredient jn economic success for a free
nation— public confidence— will have been severely and need
lessly damaged because of the failure of a highly advertised prime
economic policy of our Government.
(6) The essential ingredient for discipline in Federal spending—
that tax relief depends on spending reduction— will nave been
lost. This adverse consequence is even more sure to follow if
the tax-cut prescription succeeds than if it fails.
44
JOINT ECONOMIC REPORT
And, in the long run, this may be the most serious threat of all in
the tax-cut-for-a-deficit philosophy. For once the conviction takes
hold that economic prosperity can be firmly based on deficit financing
then the incentive to spending discipline will be lost and the trend
to bigger and bigger government that is the consequence of unre
strained spending could become irresistible.
SU PPLEM EN TARY STAFF M ATERIALS
O peration of the M ultiplier and A ccelerator 1
The primary reason for tax reduction is to stimulate the economy.
This stimulus will occur in large part through the so-called multiplier
and accelerator principles. These concepts have been discussed at
great length in the economic literature, but little attempt has been
made to quantify them.2 This appendix is designed to summarize
the concepts and to suggest some magnitudes that might be attached
to the concepts.8
Multiplier
The multiplier deals with changes in consumption that may be
expected from some initial change in economic conditions. The
multiplier coefficient indicates that the change in final consumption
will be the initial change in economic conditions multiplied by the
coefficient. The original formula for the multiplier was 1/(1—Au/AY)
where AC/AY represents the percentage of additions to income which
will be consumed. Thus, if 80 percent of additions to income will be
consumed, the multiplier formula would indicate that the total
increases in consumption would be five times the amount of the initial
change.
The multiplier assumes that, as a result of increasing incomes—from
tax reduction or any other source— individuals will spend more on
consumer goods and services.4 Therefore, in attempting to quantify
the multiplier, it is necessary to look at past relationships between
consumption and GNP.
Table I indicates the percentage of gross national product made up
by consumption demand in the years 1954-62. This table suggests
that the percentage relationship between aggregate consumption and
GNP has remained fairly stable over the past 8 years.** Thus, aggre
gate consumption seems to remain at about 65 percent of GNP as the
economy has grown over the years. The apparent stability of the
aggregate relationship suggests that the annual increases in consump
tion have averaged about 65 percent of the increases in GNP. As
i B y R oy E. M oor, assisted b y Gregory Guroff.
* For some analytical references, see: R . F . Kahn, "T h e Relation o f H om e Investment to Unemploy
m ent/* Econom ic Journal, June 1931; Oardner Ackley, M acroeconomic T heory (N ew Y ork, 1961), pp.
340-343, 486-487; John M . Clark, "Business Acceleration and the Law o f Demand: A Technical Factor in
Econom ic C y cle s /' to be found In American Econom ic Association, Readings in Business Cycle Theory
(Philadelphia, 1944). pp. 235-260; Evsey Domar, "Essays in the Theory o f Econom ic G row th" (New York,
1957), pp. 90-91; W illiam Fellner, "T rend s and Cycles in Econom ic A ctiv ity " (N ew Y ork. 1956). p p . 143,
309-319;Daniel Hamberg, "E conom ic Growth and Instability" (New York, 1956), pp. 216-218,268-270; John
P. Lewis, "Business Conditions A nalysis" (N ew York, 1959), pp. 155-156,497-501; Fritz Machlup, "P eriod
Analysis and M ultiplier T h eory ," article in American E conom ic Association, Readings in Business Cycle
Theory (Philadelphia, 1944), pp. 203-234; Paul A . Samuelson, “ Interactions Between the M ultiplier Analy
sis and the Principles of Acceleration," article in American Econom ic Association, Readings in Business
Cycle Theory (Philadelphia, 1944), pp. 261-270.
* This material is based generally on staff analysis plus the recent contributions o f a number o f our wit
nesses. See specifically material In the committee’s hearings on the 1963 Econom ic Report o f the President,
(hereafter referred to as “ hearings"), presented by Gerhard Colm , John Llntner, William HeUmuth, Neil
Jacoby, James Duesenberry, and Lester Chandler.
< There is a further assumption in the usual multiplier presentation that everything else In the econom y
remains constant.
* 8omewhat less stability would be shown If quarterly data were used, since yearly figures act to average
Intrayear m oves. H owever, in terms of the relationships being examined here, annual data seem adequate.
45
9Q856— 03-
■4
48
JOINT ECONOMIC REPORT
consumption goods,7 this would mean an initial increase in aggregate
demand of approximately $9.3 billion.
The initial increase in consumption will depend in part upon who
receives the tax reduction. Material submitted for the annual hear
ings indicates that the additional amounts of consumption out of
additional income vary substantially among income classes.8 If tax
reduction were concentrated entirely among low income groups,
virtually 100 percent of the tax reduction might be spent. The
93-percent figure assumes that the distribution of the tax reduction
is similar to the present distribution of incomes.
T a b le V .— Hypothetical increase in consumption'demand from 1-year tax cut
[In billions of dollars]
Period
T.
II............ , ....................
I l l ................................
IV .............. .................
V .................................
V I ....... ........................
V I I _________________
VTTT
IX__
X ..................................
X I _________________
Tax re
duction
Increases
In Q N P
Increases
Increases
Increases
in non Increases in per Increases In per
In per sonal tax
personal
sonal
Increases
la dis
Income
(13 per
savings
in G N P
sonal
posable
(22 .8 per income
cent of
lacomes
(7 per
cent of
personal
cent of
income)
D P I)
QNP)
10.00
0.30
5.83
3.66
2.30
1.44
.90
.57
.35
.21
.13
2.09
1.31
.82
.62
.32
.20
.13
.08
.05
.03
7.21
4.62
2.84
1.78
1.12
.70
.44
.27
.16
.10
0.94
.69
.37
.23
.15
.09
.06
.04
.02
.01
10.00
6.27
3.93
2.47
1.56
.97
.61
.38
.23
.14
.09
0.70
.44
.27
.17
.11
.07
.04
.03
' .02
.01
9.30
5.83
3.66
2.30
1.44
.90
.57
.35
.21
.13
24.97
5.62
19.35
2.62
26.83
1.88
24.97
•
Approximate
N o t e .— Assumes no change In (1) demand for Imports; (2) private investment or Government expendi
tures; (3) distribution of income; and (4) effective tax rates after tax reduction.
The $9.3 billion represents the initial increase in GNP. This in
crease constitutes a rise in incomes to those who sell the consumption
goods. Thus, if the various relationships described above held true,
the increase in consumption from this $9.3 billion rise in incomes
would be about $5.83 billion. These relationships are shown in table
V. It indicates the amounts out of each increase in GNP which will
go into various forms of income, including the incomes from increases
in consumption demand. The bottom line in table V shows the aggre
gate increases in GNP of $24.97 billion and in various types of in
comes as a result of the initial tax cut of $10 billion.®
7 This assumption m ay somewhat understate the Initial savings rate from Federal tax reduction, depend*
lng on who obtains the tax reduction. The average savings rate for the econom y as a whole is lower b y the
Inclusion of low income individuals who are not taxpayers. Rough calculations using material from the
Michigan Survey Research Center (see hearings, p. 335) suggests that the initial savings rate for taxpayers
would be about 10 percent. This would lower the final increase in gross national product to $24.13 billion.
8 See material from Survey Research Center, the University of Michigan, hearings, p. 336.
0 This table differs somewhat from that used In the hearings (see p. 10). T he table in the hearings was
for expositional purposes only and— while the percentages used can be supported—the relationships indi
cated In the above table seem more realistic. The results in the two tables are approximately the same.
JO IN T ECONOMIC REPORT
49
One quantitative question on table V concerns the length of time
involved in each of the periods. One way to estimate the length of
each of these periods is to apply the statistics available concerning
general turnover of money. In general, the money in our economy
turns over about four times a year. This would suggest that if the
entire $10 billion of tax reduction occurred in a lump sum at the
beginning of a year, four increases in GNP could occur from the tax
reduction in the year. Thus, each period would be about one-quarter
of the year. However, since the $10 billion would normally be spread
throughout a calendar year, the average tax reduction for the year
would only be $5 billion. Hence, the stimulative effects of only the
first two periods would be felt in 1 year.10 One of our witnesses
suggested that the tax reduction funds might change hands six or
seven times within a year; that is, each period would be about 2
months in duration.11
The Lax reduction proposals currently being discussed involve
permanent reductions rather than simply a 1-year reduction. The
tax reduction described in table V is for 1 year only. If the 1-year
reduction had been entirely in the form of a lump sum amount at the
beginning of the first period, the initial increase in GNP over the
pretax cut level would have been, as noted, $9.3 billion. In the
second period, however, the increase in GNP over the pretax level
would have only been $5.83 billion. Hence, GNP would eventually
return to its pretax level. By contrast, with a permanent $10 billion
tax reduction, the increases in GNP are additive. As a result, if $10
billion were given in a lump sum at the beginning of each period, the
total increase in GNP in the second period would be the $9.3 billion
stimulus from the second injection of $10 billion plus the $5.83
billion increase obtained in the second round from the first $10 billion
injection.
This additive effect from a personal tax reduction is shown in chart
1. The rectangles marked with a “ I ” are the successive effects of
the initial $10 billion tax reduction^ the rectangles marked “ II” are
the successive effects of the second injection of $10 billion; and so on.
As this chart indicates, GN P will reach a new level that is $24.97
billion higher than before the permanent tax reduction. This final
result is simply the addition of the increases in GNP obtained from
each of the preceding injections of $10 billion of tax reduction. It is
the addition of all the items shown in the last column of table V.
« This conclusion Is consistent with the estimate b y the Connell o f E conom ic Advisers that abont SO
percent of the stimulative effects o f ta i reduction w ould be felt in the first year.
u See Gerhard C olm ’ s testimony, hearings, p. 477.
50
JOINT ECONOMIC REPORT
Oh a b t
1
.—
In creases In GN P Perm anent T a x R edu ction
Billions of Dollars
The accelerator relationship refers to the fact that some changes in
investment will occur as a result of changes in aggregate demand.
The accelerator analysis assumes that increases m consumption
demand must be reflected in part by increases in the demand of firms
for capital goods to meet the additional consumer wants. The
multiplier implies that increases in final demand will be reflected by
increases in demands for labor services. The accelerator concentrates
on the effects of increased consumer demand on increased output of
capital goods. This latter change is important, just as the multiplier,
because a rise in demand for investment goods constitutes a source of
JO IN T ECONOMIC REPORT
51
additional income that can then be used in a multiplied way through
out the economy. Thus, an interaction occurs between the multiplier
and accelerator.
Historical data do not provide any simple and consistent relationship
between changes in aggregate demand and changes in investment.
Investment seems to move concurrently with consumption, blit the
quantitative relationships vary. If a comparison is made or changes
in investment and the aggregate amount of investment in the previous
period, no consistent relationship appears. If the changes in invest
ment relative to a base period investment are compared to changes in
consumption, no statistical relationship is apparent. Thus, as our
witnesses have pointed out, forecasting investment changes associated
with changes in consumption represents a hazardous undertaking.
This difficulty is not surprising. Unlike the relationship between
consumption and gross national product, which remains relatively
constant, investment fluctuates more erratically for at least two
reasons. First, the theoretical accelerator relationship only involves
investment induced by consumption changes. But, clearly, many
autonomous factors also influence part of the total changes in invest
ment. These autonomous factors include interest rate changes, rates
of innovation, the nature of shifts in consumer demands, the general
state of optimism and pessimism, and many other factors. Second,
even induced investment has a varying relationship to changes in
other economic magnitudes. Investment tends to increase more than
proportionately as the economy passes through recovery periods and
into prosperous times and falls more than proportionately as the
economy goes into recession periods.
Because of these difficulties, no claim of analytical or empirical
precision is made for the following material. Rather, the attempt is
merely to suggest how the accelerator might operate and to provide'
some rough calculations that may be suggestive of the possible mag
nitudes. The procedure has purposely been left simple, both for
expositional reasons and because more complex relationships do not
appear to provide greater precision with respect to future changes in
investment. Some of the factors that have been bypassed include the
changes in (1) cash flows, (2) prices, (3) Government outlays, (4)
technological relations, and (5) psychological attitudes.
While no relationships apparently exist over time, one consistent
relationship between investment ana consumption does seem to occur
at cyclical peaks. Table V I shows the ratio of investment to con
sumption in the four previous business cycle peaks.
T a b le
VI.— Relationship
o f investment to consumption at cyclical peaks (seasonally
adjusted annual rates)
[Dollar amounts in billions]
Cyclical peak
Novem ber 1948______________________________________________
July 1963________________________________________________ ___
July 1967.
_________ - ___ — ; — ...............................
M a y 1960............................................................................... ................
Consum ption
$180.8
234.1
288.3
32 9 .9
Investment
Percent of
investment to
consumption
$43.9
61.1
66.7
70.3
24.3
21.8
23.1
21.3
52
JOINT ECONOMIC REPORT
It would appear that a rough ratio of about 22.5 percent does occur
during relatively prosperous periods. By comparison, the ratio of
investment to consumption in the fourth quarter of 1962 was 20.9
percent.
For the following analysis, three assumptions are made: (1) tax
reduction begins at a time when investment is 20.9 percent of consump
tion, (2) no lags occur in the reaction of investment to changes in
consumption, and (3) after the full effects of the multiplier stemming
from tax reduction have occurred, the peak relationship of investment
to consumption will exist. With these assumptions, an accelerator
effect can be computed which will indicate the changes in investment
necessary with changes in consumption in order to obtain a relationship
of 22.5 percent when the economy reaches a peak from the tax stimulus.13
Following this analysis, the investment induced by the initial
increased consumption (or GNP) would be about $12.4 billion.13
Thus, the combined effect of the initial multiplier from the tax reduc
tion, plus the accelerator, would equal about $37.4 billion. Table
V II shows the combined effects of the initial multiplier and the accel
erator over time.
u T his approach assumes that all to vestment changes in the movem ent to the peak are Induced b y increased
consumption.
.
,
11 If at peak levels //C =.225 and the multiplier for coosam ption operates as is expected, then: assume
tim e (0 - fourth quarter 1062, AC j+ A / i represent initial changes in consumption and investment.
G A T P i-a i+ C rK i
then at the peak,
O N P peak- 0 p ea k + C F+ / »
where
£?«=<?,
where
W e know:
IT,-™
thus:
A = accelerator
K = multiplier related to the original tax cut
( ^ ■ ') - o r i g i n a l tax cut
Thus:
and
where
.93
where
O'* .627; See table V , thus
Jf=2.497
• A d /i+ /i“ .225 ( c , + 2 . 4 9 7 ^ ‘ )
C,=$363.5 billion
/ i —$76.0 billion
and 11 we assume a $10 billion tax cut at time (1), then A C ,—$9.3 billion.
substituting
A i l i=.225 (363.5+24.97)-76.0
See table V .,
53
JOINT ECONOMIC REPORT
' T
able
V II .— In itia l in creases in gross national product fro m $10 billion tax cut
[Billions ol dollars]
Period
Increase in
ONP
Increase In
consumption
Increase In
investment
I...............................................................................................................
TT
_____________________ ___________________ ___
TTT
TV
.
. .. ____
V
_____________________________________________
V I............................................................................................................
VTT
. . ___________ ___________ ________ ____ . . .
VTTT
TT
T
0.30
5.83
3.66
2.30
1.44
.90
.57
.35
.21
.13
4.62
2.90
1.82
1.14
.72
.45
.28
.17
.10
.06
13.02
8.73
5.48
3.34
2.16
1.35
.86
.42
.31
.19
Approxim ate total........ .............................. .......... ..................
24.97
12.40
37.37
Table V II does not indicate the full economic effects of a permanent
$10 billion tax reduction. As GNP rises the dollar significance of tax
reduction increases because the tax reduction is provided through
lower rates. The lower rates are now applied to greater aggregate
incomes. Hence, the aggregate revenue reduction is greater m later
years than in the first year of reduction.
Table VIII summarizes this factor. The table describes only the
cumulative effects from permanent tax reduction. Thus, Govern
ment expenditures and other factors not affected by the tax reduction
are held constant. The upper left-hand corner of the table indicates
the seasonally adjusted annual rates of GNP, consumption, and
investment in the fourth quarter of 1962. If a $10 billion tax reduc
tion were initiated at the beginning of 1963, the multiplier effects of
such a tax reduction are indicated in column 4.
A edescribed above,
these multiplier effects will begin immediately to stimulate investment,
as indicated in the last column in table VIII. Thus, in terms of
seasonally adjusted annual rates, GNP, consumption, and investment
will be larger in the first quarter of 1963. Since the tax rate reduction
is permanent, subsequent stimuli to consumption will occur in ensuing
periods and these will be steadily larger as the economy grows.
These increases are indicated generally in the remaining columns in
table VIII. It can be seen From this table that the increases in
consumption and in investment tend to taper off at new levels.
Thus, the new levels of GNP, consumption, and investment after the
reduction in tax rates will be as indicated at the bottom of the first
three columns of table VIII.
54
T
ablb
JOINT ECONOMIC REPORT
V III. — H ypothetical operation o f com bined m ultiplier-accelerator with in
creasin g O N P (seasonally adjusted annual rates )
[Billions of dollars]
Underlying assumptions:
Q N P ,-a .+ C ,+ I i
where
G.= '$123.50 billions
C.='C .+ A C
It* J .+ A J
where
/•■>$75.00 billions
CV >$363.60 billions
effective tax cut ((.) =.01779 O N P .
A C .+ i ~.627053ACi
If a peak exists at t ,• •$10.70 billions then
A C .* $28.68 billions
A /,* $12.78 billions
thus
C.-8390.18 billions
/.*>$87.78 billions
<3WJ>.-$601.46 blUions
A quostion frequently asked with respect to this type of analysis
is whether the stimulative effects expected from a tax reduction will
provide sufficient revenues to more than offset the cost of the initial
reduction. During recent periods of economic expansion the Govern
ment has generally taken about 36 percent of additions to GNP in
taxes.14 This percentage includes both increasing revenues from
individual and corporate taxes. Because the stimulative effects
described above are obtained through tax rate reductions, the 36percent figure has been reduced to 30 percent for purposes of this
analysis. Table IX indicates the anticipated revenue consequences to
the Federal Government from tax reduction, if GNP increased as
suggested in table VIII. In the fourth quarter of 1962 Federal
revenues were estimated to be $108.9 billion at seasonally adjusted
annual rates. Column 2 of table IX indicates how these revenues
would fall simply because of the rate reductions. The last column in
table IX indicates, the total revenues after both the reductions and
the increases due to expansion of the economic tax base.
■< See 1961 Joint Economic R eport, report o f the Joint Econom ic Comm ittee on the January 1661 E con
om ic R eport o f the President, p . 87th Cong., 1st Bess., 119.11.
55
JOIN T ECONOMIC REPORT
-T a b l e
I X .— Changes in Federal revenues with tax cut and expanding gross national
product
[Billions of dollars]
ONP
Period
TV
iwa*
.
Federal reve
nues less
tax cut
Total Fed
eral reve
nues
...................
562.00
108.90
108.90
..............................
______
_____
____
. . . . . .
575.02
584.00
590.87
594.48
696.94
598.51
509.71
600.24
98.90
98.65
98.49
98.89
98.32
98.28
98.25
08.23
102.99
105.52
107.15
108.12
108.80
109.36
109.56
109.70
Approximate levels...............................................................
601.46
08.20
110.04
t
TT
TTT
TV
IQfU- T
TT
TTT
TV
Several additional points should be made with respect to this
general analysis. First, the increases in investment induced by tax
reduction will themselves generate additional income and a multiplied
effect should be associated with these additional incomes. This effect
has not been quantified in this appendix.
Second, no attempt has been made to take account of changes in
psychology resulting from the economic stimulus of the tax cut. To
the extent that psychological attitudes toward consumption and
investment are favorably affected by the general rise in activity, some
relatively autonomous adjustments may occur in consumption and,
more particularly, in investment. But these are impossible to
quantify.
Third, this analysis has been based upon relationships expressed
in current dollars. The historical material is largely drawn from
periods when prices were not rising rapidly. No recognition has been
given in this analysis to the possible consequences of bottlenecks,
economies of scale, and other factors that may influence price changes
in the future.
JOINT ECONOMIC COMMITTEE
M INORITY VIEW S
on the
1963 A N N U A L ECONOMIC REPORT OF
THE P RESID EN T
M ARCH 13, 1963
Submitted b y :
Representative Thomas B. Curtis
Senator Jacob K. Javits
Representative Clarence E. K ilbum
Senator Jack Miller
Representative William B. Widnall
Senator Len B. Jordan
Donald A. Webster, Minority Economist
57
JOINT ECONOMIC REPORT
46
long as additional consumption is about 65 percent of additional
GNP as the economy grows, then the aggregate percentage of GNP
in consumption will remain at 65 percent.
T
able
I .— P ersona l consum ption expenditures related to O N P
[Dollar amounts In billions]
Year
195 5
1956
195 7
195ft
.................
...
IG ftft
1961
1962 1
ONP
___________________________________
_______
_____ _____ _ ______________
*
.
________
_____ ____ _
Personal
consumption
expenditures
$3 63 .1
3 9 7 .5
4 1 9 .2
44 2 .8
44 4 .5
48 2 .7
50 3 .4
51 8 .7
55 3 .6
.
............. ............
_____________ ________
_________________
$2 38 .0
25 6.9
2 6 9 .9
2 8 5 .2
2 9 3 .2
3 1 3 .5
3 2 8 .5
33 8 .1
35 6 .7
Percent
65.5
64.6
64.4
64.4
65.9
64.9
65 .2
65 .2
64 .4
i Estimated.
Source: Econom ic Eeport, table C-X, p. 171.
What happens to the 35 percent of increased GNP which does not
go into increased consumption? In a general way, this 35 percent can
be divided into three components. First, businesses rather than indi
viduals receive incomes from some portion of the increases in GNP.
Thus, incomes will be obtained in the form of corporate retained earn
ings, depreciation, corporate taxes, and similar items.6 Incomes re
ceived in these forms cannot be associated with increased personal
consumption and, as noted above, the multiplier deals only with in
creases in consumption. Table II indicates the amounts and per
centages of GNP which have gone into these nonpersonal forms of
income in recent years. Since nonpersonal income rises more rapidly
than GNP during expansion periods, the following material assumes
that additions to nonpersonal income during the next few years will
be about 22.5 percent of increases in GNP.
T
able
I I . — N on personal in com e related to G N P
[Dollar amounts in billions]
Year
1954
1959
1957
105ft
1959
199A
1992 1
___
..
_______ ______________
ONP
Personal
income
$363.1
397.6
419.2
442.8
444.6
482.7
603.4
618.7
653.6
$289.8
310.2
332.9
351.4
360.3
383.9
400.8
416.4
440.6
Nonpersonal
income
$73.3
87.3
86.3
91.4
84.2
98.8
102.6
102.3
113.1
Percent
20.2
20.6
20.6
18.9
20.6
9fi n
20.4
19.7
20.4
* Estimated.
Source: Economlo R eport, tables 0 -1 and 0 -1 4 . p. 171 and p . 188.
• This com ponent of Increases In O N P also Includes a proportion o f the amounts spent b y Individuals for
Increased Imports, since these are reflected In the national Income accounts b y changes In some business
profits, such as profits of banks engaging In International finance.
47
JGtttT ECONOMIC REPORT
Second, not all of the increases in personal income are reflected in
increased consumption. A portion of personal income is paid to
Federal, State, and local governments in taxes. This amount ob
viously is not available for consumption. Table III indicates the
amounts and percentage relationships of these taxes to personal in
come during the past 8 years. Since the general percentage relation
ship has been rising, the percentage of additions to personal income
taken in taxes must nave been higher than these general relationships.
It is estimated here that about 16.5 percent of additions to personal
income have been taken in taxes. However, a Federal tax cut will
clearly reduce this percentage in the future, probably to about 13
percent.
T
able
I II . — P erson a l taxes related to personal incom e
[Dollar amounts In billions]
P erson al
in c o m o
Y ear
$ 28 9.8
3 1 0 .2
3 3 2 .9
35 1 .4
36 0 .3
3 8 3 .9
4 0 0 .8
4 1 6 .4
4 4 0 .5
1JM6
__________________ .
..................................
IQfift
. . ................ ............... ..................
............
1957................................................................................................................. ...............
1058.................................................................................................................................
1QM
.
___ _____________________
________ ________
1962 *............................................................................................................ .................
i
P erson al
taxes
P ercen t
1 1 .4
11 .5
1 2 .0
1 2.1
1 1 .8
1 2 .2
1 2 .8
1 2 .7
1 3 .1
$ 3 2 .9
3 6 .8
4 0 .0
4 2 .6
4 2 .4
4 6 .8
5 1 .4
5 2 .8
5 7 .8
Estimated.
Sourco: Econom ic R eport, table 0-15 , p. 190.
Third, of individuals’ personal disposable income, some portion is
saved, rather than consumed. This proportion has been relatively
stable in recent years at around 7 percent, and the assumption is made
here that the percentage saved from additions to disposable income
will be about 7 percent.
T
able
IV .— P erson a l savings related to disposable personal incom e
[Dollar am ounts In billions]
Y ea r
1954..........................................................................................................
1955...................... ............................. ....................................................
1957.........................................................................................................
1958..........................................................................................................
1969........................................................................................................*
1960............................................... ..........................................................
1962 *.................................................... ..................................................
Disposable
personal
income
$266.9
274.4
292.9
308.8
317.9
337.1
349.4
363.6
882.7
Savings
$18.9
17.5
23.0
23.6
24.7
23.6
20.9
25.6
26.0
Percent
7.4
6.4
7.9
7.6
7.8
7.0
6.0
7.0
6.8
i Estimated.
Source: Eoonomtc R eport, table 0-15, p. 190.
If the Federal Government enacts an individual tax reduction with
a loss of revenue of $10 billion in 1963, this amount would be felt by
individuals in the form of increased disposable income. If 7 percent
of this amount were saved and the remaining amount spent for
CONTENTS
Page
Summary of recommendations__________________________________________
Introduction____________________________________________________________
Nature of our economic problems_______________________________________
Critique of the administration’s basic economic assumptions_____________
The administration's tax program_______________________________________
Inadequacies of the program_________
Minority tax policy recommendations__________________________
Encouraging savings and investment________________________________
Federal spending and prolonged budget deficits_____________________
Minority recommendations for expenditure control_____________
Balance of payments and gold outflow problems and monetary policy-----Balance of payments_______________________________________________
Minority recommendations_____________________________________
Monetary policy____________________________________________________
Agriculture____________________________________
Other recommendations for stimulating economic growth________________
Facilitating adjustment to technological change_____________________
Education and training_________________________________________
M o b ility .._____ _______________________________________________
Job information and research activities_________________________
Unemployment insurance______________________________________
Productivity________________________________________________________
Antitrust____________
National emergency strikes_________________ i ______________________
Discrimination in employment and training_________________________
Conclusion____ __________________________________________________________
59
61
63
65
67
72
72
74
75
78
84
85
85
87
87
87
89
89
89
91
92
92
92
93
93
94
94
MINORITY VIEWS
SUMMARY OF RECOMMENDATIONS
I. Tax recommendations: (a) Under stated conditions, support a
permanent reduction in personal and corporate taxes; (b) suggest a
1-year cut of $7 to $8 billion as possibly appropriate; (c) favor greater
incentives to save and invest; (d) suggest consideration be given to
new methods of taxing growth income; (e) believe some structural
reforms should be enacted in 1963; ( / ) question wisdom of enacting
future tax cuts now; 1 (g) if administration continues to press for 3-year
program, believe largest cut should come in first year; (h) must be
accompanied by expenditure control, noninflationary financing of
deficits, easing of the cost-price squeeze, and other measures vital to
economic growth.1
II. Expenditure control: (a) Support temporary ceiling of $95
billion on Federal spending; 1 (b) Congress should establish Joint
Committee on the Budget; (c) President should appoint an Advisory
Commission on Federal Expenditures to study the following areas:
(1) Establishment of spending priorities among Federal programs;
(2) appraisal of Federal activities to determine those which retard
economic growth; (3) improvement of Federal budgeting process;
(4) examination of Government functions which could be better per
formed by private economy; (5) review of Federal responsibilities to
determine which could be performed at State and local levels; (6)
determination of proper level of user charges and other fees charged
the public for special Government services; and (7) improvement in
Government operations to increase efficiency.
III. Balance o f payments: (a) Support greater efforts to “ set our
own house in order” as a means to eliminate our balance-of-payments
deficit, putting less reliance on negotiation and the hope that other
nations will change their conduct; (b) reject measures which would
in any way restrict the convertibility of the dollar.
IV. Agriculture: (a) Recommend gradual reduction in price sup
ports; (6) support efforts to develop new and improved uses for agri
cultural products; (c) urge setting up of soundly determined inventory
objectives; (d) recommend against permitting growing of surplus crops
on new reclamation and irrigation acres; (e) urge measures to assist
the farm unemployed in moving into productive employment; and ( / )
recommend stopping Government subsidy of crops m one area in
preference to another area.
V. Other recommendations:
A . Facilitating adjustment to technical change.—
1. Education and training.— (a) Broaden the Manpower Develop
ment and Training Act to include adult education courses in basic sub
jects; (6) expand Federal vocational and technical education programs;
(c) coordinate Health, Education, Welfare’s vocational education pro
gram and Labor’s apprenticeship program; (d) review draft law provi
sions as they impede education and employment of young men; (e)
amend Manpower Development and Training Act to authorize training
of more young people, particularly “ dropouts” ; ( / ) eliminate incon» See Senator Javlts* additional views.
61
0 5 8 5 6 — 63-------5
62
JOINT ECONOMIC REPORT
sistency among Trade Expansion Act of 1962, the Area Redevelopment
Act, the Manpower Development and Training Act, and unemploy
ment insurance programs; (g) amend tax laws to permit tax deduction
for education or training expenses and tax credit for individuals
training in either academic or vocational subjects at the post-high
school level; (A) provide incentives for companies to plan for tech
nological changes by encouraging States to broaden merit ratings
under unemployment insurance laws; (i) encourage States to permit
individuals undergoing training or retraining to receive unemployment
compensation up to normal amounts and limits; 1 (j) consider dis
qualifying from unemployment compensation workers who refuse
referral to training without good cause.
2. M obility.— (a) Amend tax laws to change definition of “ home”
to the place where a worker owns a home and maintains his family;
(b) eliminate barriers to mobility caused by pensions and job rights;
(c) pay subsistence or transportation allowances to unemployment
insurance claimants who look for work in areas beyond a predeter
mined distance from their home; (d) allow tax relief for moving
expenses involved in taking a new job.
3. Job information and research activities.— (a) Strengthen the
U.S.. Employment Service and private employment agencies; (b)
establish a nationwide “ early warning system” to allow preparation
for technological job displacement; (c) favor establishment of a na
tional clearinghouse of skills and job vacancies; (d) support permanent
State programs for temporary extension of unemployment insurance.
B. Productivity.— (1) Encourage research and development activi
ties in industries serving civilian markets; (2) create a National Produc
tivity Council; (3) support tax deduction as a business expense of
outlays for machinery and equipment; (4) review of depreciation
schedules; (5) encourage profit sharing by employees; (6) encourage
export expansion.
C. Antitrust.— Favor establishment of a Commission on Antitrust
Laws to review U.S. laws and procedures as they affect growth,
foreign economic policy, etc.
D . National emergency strikes.— Urge the administration to submit
new legislation to deal with national emergency strikes.
E. Discrimination in employment and training.— Require faster
progress in eliminating it, not only on the basis of race, but age as well.i
i See Senator Javits* additional views.
IN TRODU CTION 1
The American people have been told by spokesmen for this adminis
tration that 2 years ago, when it took over the reins of the Federal
Government, we were in the “ valley of recession.” The rate of unem
ployment was 6.7 percent. We had a “ slack” economy, and our
annual rate of economic growth was unsatisfactory. Our favorable
balance of exports over imports was not what it should be. Farmers
were being forced off their farms because they were not receiving
"full parity of income.**’ We had a serious balance-of-payments defici t.
And our gold supply was rapidly falling to an alarming level.
Now, after 2 years in office, during which it has had firm control
over both Houses of the Congress, by its own definition the administra
tion finds us back in a similar “ valley of recession.” Our rate of un
employment is 6.1 percent, notwithstanding the addition of over
186.000 more civilians to the Federal payroll 2 and an increase of over
192.000 in the armed services.3 We are in the grip of “ economic
lethargy” (as the Chairman of the President’s Council of Economic
Advisers termed it). Our favorable balance of exports over imports
declined in 1962 by over $700 million,4 and discriminatory policies and
actions of the Common Market against our agricultural exports
(unaccompanied by effective action of this administration) sound an
ominous warning for the future.8
Our balance-of-payments deficit was $2.2 billion in 1962 and would
have been nearly $700 million larger had it not been for the accelerated
repayment of debts owed us by certain foreign governments. Our
gold supply has gone down an average of nearly $900 million in each
of the last 2 years to a low as of March 4 of $15.8 billion, and the
drain is continuing. With $12 billion of this needed to back up our
currency, it is clear that this cannot continue much longer. Potential
claims by foreigners against our gold stock amount to over $20
i These minority views are not in response to the m ajority report. T he m inority began writing its sepa
rate views as the committee’s annual hearings closed on February 6. T h e m ajority began writing Its report
at the same tim e and completed and distributed to the m inority its final draft o n March 2. Since the m inor
ity views had to be completed b y M arch 8, to have prepared these views on the basis o f the m ajority report
would have given us insufficient time to properly develop the case w e wish to make. W hile agreeing with
some conclusions and disagreeing with others in the majority report, we wish to com m end the m ajority for
the format of its presentation. I t clearly poses the issues that must be dealt with in the debate now in prog
ress on our N ation’s econom y. T h e careful reader will he able to distinguish between the m ajority opinion
and our own, both as to the areas of agreement and disagreement.
1 Seasonally adjusted, U .8. Departm ent of Labor M on th ly Report on the Labor Force, January 1961 and
January 1963. I t is significant that the number o f employees in the U .S. E m ploym ent Service has increased
from 272 at the end o f fiscal 1961 to an estimated 330 at the end o f fiscal 1963, with expenditures during the
same period rising from $1,932,703 to an estimated $3,206,300.
* Ibid.
< T he balance o f merchandise exports over imports dedined b y $1.2 billion, but this was partially offset
b y an increase in balance on services.
• E ldon Griffiths, chief European correspondent for Newsweek magazine, recently wrote that the United
States stands to lose more than 30 percent o f all its exports to Europe if high Com m on M arket tariffs against
our agricultural exports are maintained. Prof. Lawrence B . Krause o f Yale Unlversity, in a study prepared
for the Subcommittee on International Exchange and. Paym ents of the Joint E conom ic Committee, 87th
C ong., 2d sess., stated (p. 126): ’ ’ T he near-term prospect for wheat imports into the Six from tho united
States are very poor and the com plete loss of the market must be contem plated.” Again (p. 128) he warns:
“ W hile in the very short run the value of U.S. exports of meat m ay increase to the E E O , the eventual loss
o f the entire market must be anticipated.”
64
JOINT ECONOMIC REPORT
billion.8 Senator Harry Byrd, Democrat of Virginia, chairman of the
Senate Finance Committee, has warned that devaluation of the dollar
might be the result. Prof. Paul Samuelson, one of the President’s
consultants on economics, recently suggested that the dollar may be
overvalued and that our policy should be to “ alter the parity of the
dollar.”
The Federal debt has increased nearly $14 billion,7 the consumer
price index has increased by over 2 percent, and general inflation has
reduced the purchasing power of our people’s money by $14 billion.
This record hardly justifies the President’s assertion that the past 2
years have brought the greatest record of price stability in the postwar
period. At the same time, although there has been some rise in the
standard of living, there are millions of less fortunate Americans whose
standard of living has not improved or has actually worsened.
Our annual rate of economic growth has been a little over 3 per
cent— far short of the administration’s goal of 5 percent.
There has been no real improvement in our basic industry— agri
culture. Additional net income from farming rose in 1961. How
ever, this was almost entirely attributable to land retirement pay
ments received during; 1961. In effect, farmers who received these
payments merely accelerated income that would otherwise have been
received in 1962 (from the sale of grain that would have been raised
in 1961 pn the retired land) into 1961. Similar acceleration of 1963
income into 1962 (in the case of farmers continuing in the land retire
ment program) merely replaced 1962 income which had been acceler
ated into 1961, so that net 1962 farm income remained at about the
same level as 1961 income. It should be noted that net farm income
rather than gross farm income is what counts when this basic indus
try^ share of the net national income is considered.
From December 31, 1960, to December 31, 1962, the net book value
of Commodity Credit Corporation stocks increased b y $735 million.8
During this period our farm population declined by 1,322,000 and the
number of farms decreased by 260,900. Over 367,000 farm operators
and farmworkers left the farm. Still, U.S. Department of Agricul
ture expenditures rose from $5.9 billion for fiscal year 1961 to an
estimated $7.5 billion for fiscal year 1963, and the Department added
over 16,000 employees to its payroll during the 2-year period ended
December 31, 1962. Income per capita of farmers has risen slightly,
but, as pointed out by the U.S. Department of Commerce, this is
“ due to the declining number of farms and farm population.” 8
Bringing agricultural production and consumption into reasonable
balance and assuring farmers a fair share of the net national income
by reducing the cost-price squeeze are fundamental objectives of our
farm policy.
It is our position that any program of governmental action to im
prove the economy must be premised on the stable purchasing power
of our money if it is to be meaningful. Inflation causes labor to de-•
0 Short-term liabilities to foreigners totaled $20.1 billion on D ec. 31, 1062. Of this amount, $12.2 billion
was to official holders (e.g., foreign central banks) and $7.9 billion to private holders. In addition, short
term liabilities to international organizations totaled $4.0 billion. Source: Federal Reserve Bulletin,
February 1963.
f From Dec. 31, 1960, to Dec. 31, 1962. the public debt of the Federal Government increased from $200.4
to $304 billion. Approval of the President’s deficit budget for fiscal year 1064 will increase the debt an
additional estimated $12 billion.
• Book value of surplus stocks of butter rose from $39.6 million on D ec. 31, 1060, to $207.1 m illion on
D ec. 31,1062. Soybean stocks went u p from $10.6 to $87.4 million.
Survey of Ourrent Business, Decem ber 1062 (p. 24).
JOINT ECONOMIC REPORT
65
•mand increased wages because it cannot make ends meet with the
reduced purchasing power of its wages. Escalation clauses in labormanagement contracts affecting thousands of workers automatically
result in wage increases as the cost of living moves upward. Millions
of our senior citizens living on retirement income and savings find
that the reduced purchasing power of their money keeps them from
an adequate diet and increases the cost of their medical and hospital
care.
It is in this setting that we now proceed to evaluate the specific
proposals of the a d m in istra tion and to advance our ideas for attain
ing the meaningful and sustained economic growth which the Ameri
can people deserve.
The administration refuses to recognize that the United States
today is experiencing the beginnings of an economic revolution that
already is altering fundamentally the way our people live and work.
Slowly and still dimly, the Nation— if not the administration— is
beginning to perceive the nature and extent of this revolution and the
magnitude of the social and economic problems it poses. We believe
it is urgent to focus public attention on these problems— and the
economic forces underlying them— and to begin a serious national
discussion on the course we must take to solve them.
To this end we shall: (a) Diagnose the nature of our economic
problems; (b) analyze the weaknesses of the administration’s basic
economic assumptions; (c) discuss the administration’s tax and spend
ing policies and recommend changes in them; (d) discuss the balanceof-payments problem and monetary policy; and (e) offer other appro
priate recommendations.
A.
NATURE
OF
OUR
E C O N O M IC
PROBLEM S
In our view, the major domestic problem of the present decade is
the adjustment required by the increasingly rapid pace of technological
change in our society. In his testimony before tne House Ways and
Means Committee on February 8,1963, Secretary of Labor W. Willard
Wirtz spoke of "a revolution in the replacement of men by machines.”
This phenomenon is so rapid and profound that a word— automa
tion—mas been coined to describe it.
With each passing year, less and less labor is required to produce
more of the products of our farms, mines, and factories. As relatively
less labor is required to satisfy our basic material needs, more labor—
but of a different kind— is called upon to satisfy the preferences that
arise out of the desire for a better and fuller life for ourselves and our
children.
That deep and pervasive changes are taking place in our economy
is beyond dispute. They are reflected in part by the changing occupa
tional structure of our labor force. For example, from 1950 to 1960,
the number of all employed persons increased by 14.5 percent. At
the same time, white-collar and service workers increased by about
26 percent; agricultural workers declined 41 percent; and manual
workers increased by only 5.8 percent.
Rapid technological progress is essential to maintain our economic
and military leadership ana to provide a higher standard of living for
66
JOINT ECONOMIC REPORT
our growing population. But it creates individual hardships and
demands difficult and often painful personal and family adjustments.
Automation, for example, creates demands for new and higher skills,
but it makes old skills obsolete. In the process, the person with no
skill, or with an obsolete skill, or in an area other than where the new
jobs are located, becomes increasingly subject to frequent and persist
ent periods of unemployment.
Rapidly advancing technology also results in new and improved
industrial processes and, by creating demands for new products,
changes patterns of consumption. Among other results, these de
velopments make obsolete much of our capacity to produce existing
products.
Our unemployment problem has been aggravated further b y bar
riers to worker mobility, industrial migration, featherbedding on the
part of both management and labor, foreign competition, multiple
jobholding by individuals, the movement of workers away from the
farm, inadequate attention to the rehabilitation of the physically
and mentally handicapped, discrimination based on age, sex, race,
and creed, weaknesses in our-educational system, particularly in the
area of vocational training, and a tax structure which discourages
industrial expansion. Compounding the problems caused by the
technological revolution and these other factors, we will soon face
an explosion in the size of our labor force as the large number of
babies born in the 1940’s reaches working age.
Clearly the primary challenge of the 1960’s is to ease and facilitate
the adjustment of our people to these economic forces of change.
Technological advances will provide opportunities for a fuller, more
satisfying and freer life for all of our people. But it will take imagina
tion and effort to insure that those lacking needed skills or experience,
those who are poor in talent and those who suffer discrimination in
employment share in the opportunities which these developments will
provide. Failure to adjust will bring untold human suffering as well
as blunt our efforts to achieve a higher level of sustained economic
growth. This need to adjust was forcefully pointed out recently by
Gosta Rehn, Director of Manpower and Social Affairs for the Organi
zation for Economic Cooperation and Development, who said:
New techniques are being developed and utilized at a
very high rate. All this means that the changes in economic
structure, to which States and individuals have to adapt, will
be very great. The rapid acceptance of such changes as
imply a reallocation of manpower and other productive
resources toward the most efficient sectors is a precondition
for maximum progress.10
We regret that the administration, while proclaiming a New Fron
tier, has not regarded with sufficient urgency the extent or depth of
the adjustments facing us in the decade ahead. Even worse, it has
either failed to grasp or has neglected the need to make the Nation
more fully aware of them.
t0 T he O E C D Observer, N ov. 15,1962.
JOINT ECONOMIC REPORT
B.
67
C R IT IQ U E O P T H E A D M I N I S T R A T I O N ’ S B A S IC E C O N O M IC A S S U M P T IO N S
The heart of the administration’s economic program consists of
efforts to increase consumer demand.11 This would be done by a
series of “ planned” but "temporary” budget deficits, partly resulting
from the proposed tax reduction. Basic to the administration's
program is a belief in the efficacy of budget deficits as a remedy for
our new economic problems, of which persistent and mounting un
employment and an apparent excess of industrial capacity are but
surface symptoms. The administration apparently has abandoned
the theory of balancing the budget over the business cycle. It now
asserts that we must run deficits in good times and bad until some
distant future when Federal revenues presumably— or hopefully—
will catch up with increasing expenditures.
It is curious that, in spite of the failure of a series of large and
steadily increasing budget deficits to stimulate a full recovery from
the last cyclical downturn, the administration still retains its faith
in the stimulative effect of “ temporary” deficits.12 Interestingly, the
current upturn is the only one in the postwar period which has not
developed a budget surplus.
The administration claims that deficits are “ passive” if caused by
a decline in economic activity. Passive deficits, the Council of
Economic Advisers has said, do not provide stimulus; only deficits
resulting from tax cuts or spending increases stimulate the economy.
If this were the case, the deficits of the past 2 years of cyclical
upturn should have stimulated the economy since they were caused
more by rapidly rising Federal spending than lagging revenues.
Expenditures increased by $13 billion from fiscal 1961 through the
estimates for fiscal 1963. At the same time, revenues were increasing
by $8 billion. If revenues were lagging, it was only in relation to the
sharp increases in Federal spending.
We think the administration overemphasizes the importance of
fiscal measures to increase consumer demand. More relevant— and
less costly in terms of budget impact— are those measures that would
sharpen incentives to superior economic performance and thus produce
the more vigorous expansion needed to reap the full benefits of the
economic revolution now underway.
As for the thesis that the overall magnitude of the Federal budget
deficit, per se, is a measure of governmental stimulus to the economy,
it is useful to note an analysis of the relationship between the Federal
budget (national income accounts basis) and economic activity
included in a paper presented to the committee by George Terborgh,
research director of the Machinery and Allied Products Institute.13
Terborgh’s analysis shows that there is no general pattern to support
the theory that deficits are stimulative and surpluses repressive. In
fact, in the postwar period, of 51 quarters with a rising gross national
product, Terborgh found that 28 were associated with a Federal
surplus, 23 with a deficit. Of 13 quarters with declining gross national
product, 12 were associated with a deficit.
» See Senator Javits’ additional views.
i* This theory was thoroughly discredited in the 1930’s when huge budget deficits in relation to gross
national product failed to “ cure” the depression and reduce unem ploym ent to an acceptable level. After
running deficits from 1031 to 1040 totaling $28 billion (3.6 percent o f total gross national product during this
period), unem ploym ent in 1940 was virtually the same (14.6 percent) as in 1931 (15.9 percent).
*’ Hearings before the Joint Econom ic Comm ittee on the 1963 E conom ic Report o f the President, pp.
773-785 (hereinafter referred to as “ Hearings” ).
68
JOINT ECONOMIC REPORT
Because of the lag between the budget position and the response
of the economy, Terborgh also compared the budget position with
the gross national product 6 months later. On this basis, of 51
quarters with rising gross national product, 24 showed surpluses in
the second quarter preceding and 27 showed deficits. Of 13 quarters
with falling gross national product, 7 showed surpluses, 6 deficits.
Terborgh ascribed the budget’s apparent lack of economic impact to
the offsetting effects of more powerful forces and to differences in the
way deficits are financed. We shall discuss problems of debt manage-,
ment under section C, below.
Neither do the facts bear out the administration’s contention that
aggregate demand is lagging. From 1947 to 1962 personal consump
tion expenditures and total Government demand for goods and services
averaged 84.5 percent of gross national product, in 1961 the figure
was 85.9 percent and in 1962, 85.7 percent. During 1961 and 1962
new construction was about 8 percent of gross national product— or
slightly higher than the postwar average. In its 1963 annual report
(p. 15), the Council of Economic Advisers itself acknowledged that
the failure of gross national product in 1962 to reach predicted levels
was not caused by a shortfall of consumption.
What has fallen behind is the percentage of gross national product
accounted for by producers’ durable equipment. This averaged 6.1
percent for the entire postwar period, but stood at 4.9 percent in 1961
and 5.2 percent in 1962. We shall discuss causes of this decline in
business investment later in these views.
An increase in aggregate demand may be helpful in attacking cy
clical unemployment, but this is not the current problem. Our econ
omy has moved in 24 months from the low point of the last cyclical
downturn— which was relatively minor by postwar standards— and
has now reached a new level of gross national product.
From the trough of the downturn in February 1961 through Janu
ary 1963, industrial production increased 15.1 percent. Yet, reflect
ing the ability of relatively fewer men to produce more goods, nonfarm
employment increased by less than 4 percent.
Although the Nation as a whole is prosperous, too many of our
citizens are not sharing in this prosperity. Unemployment from
February 1961 through February 1963 declined by only 500,000
(seasonally adjusted). In February, about 4.4 million persons (sea
sonally adjusted), or 6.1 percent of the civilian labor force, were still
unemployed.
It appears that increases in aggregate demand are having less and
less impact in reducing the level of unemployment. W e are learning
anew that an increase in the demand for commodities does not neces
sarily translate itself into increased demand for labor, or at least for
the labor of the unemployed.
In large part, this reflects structural changes in the economy. The
increasing importance of structural unemployment is clearly indicated
by the fact that the average duration of unemployment in 1962 (14.7
weeks) was higher, except for 1 year, than at any time since the end
of World War II. including during recession years.
In bis testimony before the committee, Secretary Wirtz stressed the
structural causes of the current unemployment by pointing out that
there is no “ single overall unemployment problem.” “ Rather, he said,
“ Hearings, p. 106.
JOINT ECONOMIC REPORT
69
unemployment is concentrated largely among young people, racial
minorities, and the unskilled. Secretary Wirtz added that we are
going to have to start hitting at these problems “ with rifles instead of
with a shotgun.” In other words, greater attention should be directed
to linking remedies for unemployment to its specific causes.
Contrary to his advice to the committee, the Secretary then recom
mended the administration’s shotgun approach of increasing consumer
demand.
The extent to which obsolete capacity, as opposed to inadequate
demand, may have been responsible for the low industrial operating
rates of recent years is indicated by the heavy emphasis manufacturers
have placed on modernizing their plant and facilities. The 15th
McGraw-Hill survey of business plans for new plants and equipment
showed that since 1958, manufacturing firms have devoted about 70
percent of their plant and equipment investment to replacement and
modernization of obsolete facilities. The need to produce new and
improved products more efficiently explains why the steel industry,
although operating at an average of 71.8 percent of capacity from
1957 to 1960, at the same time spen t over $5.5 billion on new plant and
equipment. The modernization trend in industry is expected to
continue at least through 1965. This fact reemphasizes the point
made earlier that our major domestic problem is the adjustment of
men to new technological conditions.
Even after this major program of modernization and replacement,
24 percent of our industrial plant predates 1945; about 40 percent of
our manufacturing capacity predates the Korean war.
While these figures show that we still have much old capacity,
McGraw-Hill cautioned that its survey may understate the level of
obsolete facilities because it covers only the larger companies in an
industry. It is likely that small- and medium-sized companies have
not replaced obsolete and antiquated facilities to the same extent as
the larger companies. In any event, while we do not know precisely
how much of our unused capacity is obsolete, it seems reasonable
that a large part falls into this category.
It is important to remember that excess capacity figures cited to
show a lagging economy are averages for all industries. Generally,
some industries are operating at or near their preferred rates, while
others are operating well below the desired levels. In a dynamic
economy both the size and shape of demand are constantly changing.
When growth increases demand for products already being produced
at capacity levels of existing plant, the mere existence of excess
capacity in other industries is irrelevant. Furthermore, it should be
clear that increased demand for the products of industries operating
at capacity can lead to inflationary pressures even though the overall
average indicates the existence of idle capacity.
The administration’s general approach to economic issues is based
on the assumption that our economy is stagnant, slack, and tired out.
It assumes that our economic growth rate has slowed considerably
and that there is a growing gap between actual and potential
production.
We wish to make clear that the desirability of achieving a higher
rate of economic growth is not at issue. A vigorous rate of sustained
economic growth facilitates adjustment to the technological revolu
tion. But we submit that the administration has incorrectly diag
70
JOINT ECONOMIC REPORT
nosed our problem as one of stagnation. W e have expressed our dis
agreement with its assumptions in our minority views to the 1961 and
1962 Annual Reports of the Joint Economic Committee. We wish
to call attention to these views here and to state, only briefly, some of
the reasons for our disagreement with the administration’s basic
assumptions.
One trouble with the gap theory is its use of gross national product
as the indicator of economic growth. The gross national product is
only one measure o f economic activity. It does not fully measure
true economic growth, by which we mean the attainment of a richer
and fuller life for more of our citizens. Gross national product rises
rapidly during a war, but no one would call this true economic growth.
Indicators of true economic growth, such as increased leisure time, new
and improved goods and services on the market, greater longevity,
better health, greater opportunities for education and travel, are not
reflected, or reflected only incompletely, in the gross national product.
By these and other measures, our economy has scored impressive
gains in growth in the past decade.
Even if we were to accept gross national product as a valid measure
of economic growth, the techniques used by the administration to
project our potential growth and thus to derive the magnitude of the
gap are questionable. Walter W. Heller, Chairman of President
Kennedy’s Council of Economic Advisers, told the Joint Economic
Committee in 1961 that the Council’s estimates of the gap were “ at
best hazardous and uncertain.” In the same vein, but while still
serving as professor of economics at the University of Minnesota in
1959, Dr. Heller acknowledged before the House Ways and Means
Committee that—
* * * we need to recognize the limitations of our knowledge
concerning the sources of growth and the precise methods
of accelerating it.
Dr. Arthur Burns, president of the National Bureau of Economic
Research and former Chairman of President Eisenhower’s Council of
Economic Advisers, has written two penetrating analyses of the Coun
cil’s gap theory1* in which he illuminates some of the hazards of
“ growthmanship.” For example, by starting from different postwar
years, but using the same logic and technique as the administration,
one can measure potential and actual output and get results which
differ significantly from those reached by the Council. In one case,
the results showed a level of actual output above potential output.
Dr. Burns has also pointed out that since 1947 our economy has
always operated below its potential, with the exception of the Korean
war years and a few months in 1955. Under the Council’s theory,
therefore, aggregate demand was lagging even in the boom years of
1947 and 1956. If the Government had followed policies to close the
“ gap” then, Dr. Burns believes that the pace of inflation might have
been very much faster, without appreciably lowering the average rate
of unemployment or raising the average rate of economic growth over
the entire postwar period.
m
Congressional Record, Jan. 28, 1063, p. 1103; Apr. 27,1061, p . A2885.
JOINT ECONOMIC REPORT
71
The gross national product analysis is a logical and statistical con
struct that has no real counterpart in a complex and dynamic economy
based on decentralized free choice and initiative. Free enterprise means
trial and error, change and adjustment. This is an inevitable aspect
of effective economic performance and, in fact, of managerial deci
sions generally. There is no reason founded on convincing evidence to
believe that the complex processes of any economy can work per
petually at an even pace or near some full employment or "potential”
trend line.
The administration’s gap theory and its insistence upon the idea
that our growth rate has fallen significantly below past levels is, at
best, a risky guide for policy. The administration must avoid the
oversimplification which results from too great a fascination with the
aggregates of the gross national product. I t must examine the comionents of our dynamic economy to see, specifically, where the trouble
ies.
As the Federal Statistics Users’ Conference noted in a paper pre
sented to the com m ittee:18
f
* * * There is a tendency on the part of some users
both in and out of the Government to find easy mechanistic
relationships among the components of the gross national
product and to make easy assumptions about the effect of
this or that possible public or private policy on the overall
total GNP.
Nothing could be more dangerous. There is no substitute
for penetrating analysis of GNP in detail. The very popu
larity of GNP should cause us all to be concerned about
changes taking place within the economy which are reflected
in the components of GNP but which are slow to make an
impact in the overall GNP figure.
The fact is that our economy, while beset with problems, is con
tinuing its steady growth. Our diagnosis shows that we are suffering
more from growing pains than tired blood.
As we emphasized earlier, this is not to say that we cannot and
should not improve our rate of growth. But we cannot encourage
faster growth and, at the same time, solve the problems arising from
growth by applying a treatment more appropriate to stagnation or
cyclical decline.
Our most fundamental criticism of the administration is that its
failure to identify the real nature of our economic problems diverts the
Nation’s attention from them and thus delays a genuine solution.
We cannot afford to mark time much longer. Labor’s call for
a 35-hour week and for industrial sabbaticals, as well as the recent
rash of serious labor disputes, make clear that uneasiness about basic
changes in the economy are spreading. The administration must
lead history, or it will find itself overtaken by it.
" Hearings, pp. 767- 768.
72
JOINT ECONOMIC REPORT
C.
THE
A D M IN IS T R A T IO N ’ S T A X
PROGRAM
The President has sent to the Congress a program Of individual
and corporate income tax reduction and reform designed to improve
our rate of economic growth and reduce the unemployment rate to
4 percent (a rate deemed by him to reflect “ full employment” ) .
We agree that our Federal tax structure discourages, rather than
encourages, sound business and business expansion with its attendant
employment opportunities. We support reform of our tax structure
and rates, but we have several reservations about the administration’s
program :
1. Even if we grant the administration’s assumptions that an
increase in consumer demand is needed to take up the alleged slack
in our economic performance, we have serious doubts that the
administration’s program would achieve this objective.
2. Our diagnosis of the Nation’s economic problems leads to
the conclusion that the administration’s tax program misses the
mark by failing to provide sufficient incentives for savings and
investment.
3. The tax reduction program— coupled with the lack of re
straint in spending which characterizes the administration and
the Democratic Congress— would result in a series of large.and
prolonged budget deficits. These would create difficult problems
of debt management, further increase the burden of interest pay
ments on the public debt, probably lead to renewed inflationary
pressures, and have an adverse effect on our persistent balanceof-payments and gold problems. Approval of the President’s
tax program should be contingent upon more vigorous steps to
hold the line on expenditures, with the objective of bringing the
budget into balance within the very near future.
We shall discuss each of these points in turn.
1. Inadequacies of administration tax program
We believe that the tax program, even while incurring heavy costs
in terms of budget deficits, will fail to remove the tax impediments to
growth in sufficient amounts to carry the economy to higher levels of
sustained activity. Our reasoning is largely, although not exclusively,
based on the 3-year stretch-out of the program, on the concentration
of the largest and most constructive reductions in the second and
third years, and on the excessive emphasis on stimulating consump
tion at the expense of improvements in our productive plant.
In his testimony before the committee, Dr. Heller conceded that
the program would have been somewhat different if the administration
lived by economics alone. A number of other witnesses who appeared
before the committee expressed doubts about the effectiveness of the
program. After 2 years of recovery, it is altogether possible that
counterexpansionary forces might seriously offset any beneficial effects
which could flow from the moderate and gradually applied tax
reductions.
Whatever one’s position on tax reduction, it cannot be justified on
the basis of the multiplier theory— as the administration and the
majority try to do. The serious problems connected with predicting
the multiplier effects of tax cuts were stressed in a statement presented
JOINT ECONOMIC REPORT
73
’to the committee by the Department of Commerce. As the Depart
ment said:
Theoretically the multiplier effects abstract from the
numerous other forces which are operating in the economy
at any given time. Additional expenditure brought about
by a tax cut, for example, must be superimposed upon esti
mates of the net effect of these forces before a realistic
appraisal can be made of the future behavior of the economy
subsequent to changes in the tax laws. A tax cut which is
too small or which is introduced at a time when the economy
is leveling off or even beginning to turn down m ay not lead
automatically to an increase in output. This is the reason
why an examination of the past relations involving tax cuts
or other multiplier-inducing actions on the subsequent
behavior of output is so inconclusive. We find a variety of
net effects arising from an expenditure which has multiplier
effects; namelv, output rising, leveling, and even turning
down. To fully appraise such changes in the tax laws or
other actions we would have to determine the most likely
behavior of the economy in the absence of such changes.
This is a difficult task.17 18
There are additional reasons why the administration’s program
might not do what is expected of it. For example, the effect of tax
reduction would be blunted if, contrary to the administration’s
expectations, consumers saved 1 or 2 percentage points more than
7 percent of total after-tax income. While recent experience indicates
that consumers save about this amount of total after-tax income, the
savings rate on marginal increases in income is probably greater than
7 percent. Moreover, the 7-percent assumption is related to all
individuals in the economy. However, many lower income individ
uals—who bring the average rate down— do not pay taxes. Therefore,
the savings rate among those who will obtain the tax reduction
undoubtedly is higher than 7 percent.
The effects of the tax cut also would be largely offset if consumers
used a significant part of their tax reduction to pay off existing debt.
In addition, a large part of the tax reductions will be offset by the $2
billion increase in the social security payroll tax which has already
taken effect this year and by those increases scheduled to take effect
in the coming years. Increases in State and local taxes and increases
in the consumer price index will further diminish the effect of tax cuts.16
An additional problem is posed by the method of financing the
deficits which, in part, would result from the tax cut. These problems
will be discussed in more detail below, but suffice it to say here that
the problem of financing the additional debt could lead to an increase
in interest rates and in the consumer price index that might deter
private investment.
■ We doubt that the administration’s fiscal program of moderate and
gradually applied tax cuts accompanied by increases in spending will
work. The chances of failure are compounded by the administration's
almost total neglect of other imports,nt actions which are required by *1
" See additional views of Senator Miller.
■’!• Hearings, p. 247.
11The Associated Press hes estimated that State tax increases m ay total $2.6 billion as a result of action
by State legislatures meeting this year.
74
JOINT ECONOMIC REPORT
the current economic situation. Some of these bear on the question
of why there is a drop-off in business investment. Psychological
factors, such as business confidence, and economic factors, such as the
risk of the rate of return, weigh heavily on investment.
If the administration’s program does fail, the Nation will be left
with a high level of unemployment, a prolonged series of budget
deficits, an increase in the economy’s inflationary potential, aggravated
problems of debt management, and a possible worsening of our balance
of-payments and gold problems.
Secretary Dillon told the committee that it would not be a catas
trophe if the administration’s program failed. Perhaps not, but w
wonder what the administration’s policy recommendations would b
in that event. Would it suggest that taxes be lowered even more
Or should taxes, in that instance, be raised? Or would we be com
pelled to sharply increase Federal spending? How large would tb
annual deficits be in that event? And how much would the nations
debt grow? Where would citizen and business confidence be then?
We regret to say that the administration’s tax reduction program i
neither fish nor fowl. Without offering substantial promise or doinj
what it sets out to do, it would intensify a large number of our existinj
economic problems and create new ones in the field of debt manage
ment. In no case should we adopt halfway measures which aggravate
present problems and create new ones.
We believe that our diagnosis of the economy and our recommends
tions for overcoming the Nation’s economic problems, both by incen
tive tax reduction and reform, as well as by other important measures
offer the best choice of policy and should be adopted by the admin
.istration.
Our recommendations on the general principles that should goverr
a tax program for 1963 are as follows:
a. We strongly favor enactment of a permanent reduction ii
personal and corporate taxes accompanied by expenditure control,
noninflationary debt financing, and additional actions to remove
impediments to growth. (See sec. g, below.) One-half of the annua!
reduction should take effect in calendar 1963, with the full reduction
talcing effect in calendar 1964.
b. The precise size of the tax reduction required to substantial^
reduce impediments to growth without leading to increased inflation
is not clear. However, we believe that it must be larger than the
$2.7 billion net cut for 1963 proposed by the administration. As
annual reduction of from $7 to $8 billion might be about right to do
the job, but no firm judgment can be made until the question has
been subjected to more searching examination by the Congress.20
c. While providing the largest amount of dollar reductions t«
individuals, we believe that a reform of tax rates to remove impedi
ments to growth and job-creating investment— as contrasted to tai
cut programs designed to inject mass purchasing power into the
economy— should provide greater incentives to save and invest than
does the administration bilk We explain our reasons for this position
on pages 75-78 of these views.
d. Consideration should be given to a new approach to provide
incentive taxation of growth income. Inasmuch as our objective is
growth, many individuals and corporations would be greatly encoui» 8ee additional views of Senator Miller.
JO IN T ECONOMIC REPORT
75
aged if, for example, the tax rates were cut with respect to the amount
of the annual increase in their income over that of the previous year.
Naturally safeguards would have to be written into such a plan to
revent avoidance of its policy through devices of whipsawing, articial inventorying, and the like.21
e.
Although rate reduction is the most important and needed tax
reform, we believe at least some structural reforms should be included
in the 1963 tax program. W e will not take a position here on each of
the administration’s proposed structural reforms: some appear desir
able; others, such as the 5-percent floor under deductions, would
retard economic growth and injure our private free enterprise system.
f.
We question the prudence of enacting tax cuts to take effect
2 or 3 years in the future. In a world characterized chiefly by change,
events move too rapidly to recommend such a policy. Although our
minds are not closed on this point, we believe enacting tax cuts on a
year-to-year basis is the sounder course. Accordingly— depending
upon the budgetary situation and the economic outlook— we believe
Congress should consider making further rate reductions and struc
tural reforms next year.
g.
Should the administration continue to push for a 3-year program,
we believe the largest cuts should be made in the first year, with
successively smaller cuts in the last 2 years when, under the adminis
tration's theory, the economy should be expanding vigorously. We
are in general accord with the majority on this point,
h. The tax program must meet the following conditions:
(1) Since any tax reduction will further deepen the large and
increasing Federal budget deficits, the administration must take
prompt and effective action— preferably along the lines of the
recommendations on pages 84-85 of these views— to bring the
rapidly rising level of expenditures under firm control in order
to minimize the size of the 1964 deficit and attain budget balance
in 1965 or, at the latest, 1966.22
(2) The administration must provide convincing assurances
that it will finance the 1964 budget deficit in such a way as not
to increase significantly the inflationary potential in the economy.
(3)
The administration must begin immediately to take some
of those other actions— as suggested in section F of these views—
which are necessary if we are to reach full employment, restore
vigor to our economy, and balance the Federal budget.
■ We believe a bold, balanced, and comprehensive economic program
such as we have outlined here offers the best hope of achieving the
goals which all Americans share— without exposing the Nation to the
serious economic risks of the administration’s program.
E
2. Encouraging savings and investment
Improving our rate of sustained economic growth depends upon an
expansion and improvement of our productive capacity and an in
crease in our productivity. These advances can in great measure be
attained through a greater development of our human resources.
In part, however, they depend on stepped-up private investment.
We are concerned that the administration’s proposals do not go far
enough in this key area of removing the impediments to expansion
of private investment.
» See additional views'of Senator Miller, which outline his plan for Incentive taxation of growth Income.
» See Senator Javits' additional views.
76
JOINT ECONOMIC REPOET
In its 1963 report, the Council of Economic Advisers recognized
that the failure of gross national product to reach the level predicted
for 1962 was caused by “ the failure of expenditures other than con
sumption to rise as far as had been expected. * * * The error,
then,” the Council said, “ was in the area of business investment.” 23
According to Dr. Burns, the reason for recent weakness in this area
can be found in the uncertainty and hesitation which has characterized
business expectations of the future. This hesitation and uncertainty,
he said, has been caused basically by the steady erosion of profit
margins and our continuing balance-of-payments deficits and the
resulting uneasiness about the strength of the dollar.
Too much attention has been directed to the point that aggregate
profit increases have been the highest in our history. Since sales and
investment have increased at a greater rate, however, the ratio of
profits to sales and investment has been declining.
The profits squeeze has particular relevance to the lag in business
investment. Profits after taxes per dollar of sales for all manufacturing
corporations fell from an average of 6.3 cents in 1947—51 to 4.8 cents
in 1952-56, and to 4.5 cents in 1957-61. Annual rate of profit after
taxes on stockholder’s equity dropped from an average of 14.1 percent
in 1947-51 to 10.9 percent in 1952-56, and to 9.4 percent in the
1957-61 period. Corporate profits after taxes as a percentage of
corporate sales show a similar decline.
According to a Department of Commerce study released November
27, 1962, the share of total corporate output returned to capital in
the form of profits declined by 25 percent from 1948 to 1962. Further,
while corporate tax liabilities were doubling over the period, after-tax
profits rose only 25 percent. It is no surprise that Secretary of Com
merce Luther Hodges told the committee on January 30 that invest
ment expenditures were lower than expected in 1962 because of
“ limited profit opportunities.” 2*
Although the Council agrees that the problem lies in the area of
plant and equipment expenditures, it argues that business investment
is restrained because of excess plant capacity. As already noted,
we believe that most of this excess capacity is obsolete or produces
goods for which there is no consumer preference, and in no event is
all of it usable.26
Neil Jacoby, dean of the Graduate School of Business Administra
tion, University of California, told the committee—
* * * the opportunities for stimulating investment in an
advanced economy with dynamic technology by offering
strong incentives are greater now than they have ever been
in the past. It would be unfortunate to forgo them because
of illusions of “ excess” capacity.28
As Gabriel Hauge has pointed out, idle capacity, where it represents
high cost or obsolescent facilities, is more a consequence of inadequate
investment than a cause. In his testimony, Dr. Burns pointed out
that the historical record shows that even after prolonged or severe
depressions, when idle capacity was larger than in 1961, business
investment has typically rebounded sharply when a resurgence of
business confidence ushered in economic recovery.
. 131063 E conom ic R eport of the President, p. 16.
. 11Hearings, p. 238.
« See Senator Tavlts’ additional views,
u Hearings, p. 641.
JOINT ECONOMIC REPORT
77
Moreover, even if we were to grant the administration’s primary
assumption that our problem is one of inadequate aggregate demand,
it would still seem more appropriate to increase aggregate demand in
the first instance in the investment sector. Increases in investment
demand not only raise aggregate demand: they also raise the ability
of the economy to satisfy the aggregate demand.
Specifically, how do we differ with the administration’s program as
it relates to incentives to save and invest?
The essential source of funds for accelerated investment must be
private savings. The administration’s combined program of tax
reduction and reform— as the majority clearly indicates— is designed
almost entirely to promote additional consumer purchasing power on
the assumption that it will be translated into consumer demand.
Such concentration might reduce the aggregate savings rate in the
economy. Yet, it would seem far more appropriate that in an expand
ing economy, savings rates should increase in order to facilitate the
rising investment requirements appropriate to an advancing economy.
The administration’s tax reduction proposals, if taken by them
selves, appear to benefit the middle and higher income groups, which
ordinarily provide the principal savings necessary to finance economic
growth. But the administration’s program proposes to take away
most, if not all, of these benefits to middle and higher income groups
through its so-called “ tax reform measures.” These tax increase pro
posals apparently have as their purpose the offsetting and elimination
of a large part of the advertised benefits implied by the tax reduction
features of the program.
The most outstanding example of this illusory approach is the pro
posed 5-percent limitation on itemized deductions. The Congress
has deemed it appropriate in years past to provide specific deductions
designed to reflect certain types of costs which individuals incur. In
large part, the justification for these itemized deductions has been to
romote certain economic goals. Interestingly enough, these goals
ave generally been associated with economic growth in the private
sector.
For example, the deduction for interest expenses serves to aid
homeowners. The deduction for charitable contributions permits
private assistance to charities in lieu of increased Government domi
nation of these charities. The deduction for State and local taxes
serves to strengthen these governments by protecting their revenue
sources. The medical deduction tends to aid individuals in meeting
medical expenses and, thereby, raises the general level of health serv
ices in the Nation.
All of these goals would be adversely affected by the proposed 5percent limitation. Moreover, this recommendation— more than
any other— would serve to wipe out or reduce the tax benefits that
might otherwise come from rate reductions.
Consistent with the objectives of increased availability of savings
in the economy, greater emphasis should have been provided in the
administration’s program on corporate and noncorporate business tax
reductions.
Under the administration’s program, large business corporations
would receive only a nominal cut in tax rates from 52 to 50 percent
of net income after January 1, 1964. Another 3-percent cut is pro
posed to take effect on January 1, 1965. In the meantime, the
E
95856— 63-------6
78
JOINT ECONOMIC REPORT
proposed 5-year acceleration in corporate tax payments to the
Treasury would largely offset the effects of the rate reductions until
1969.
In order to more effectively remove impediments to growth and
provide new jobs, we believe, as we have indicated earlier, that the
President’s tax program should provide earlier and larger tax rate
reductions on corporate incomes, as well as substantial reductions for
individuals.
A substantial and reasonably prompt reduction in corporate tax
rates would not only increase the after-tax cash flows to corporations;
it would also, if large enough, significantly raise the after-tax rate of
return on investment. Hence, corporate tax rate reductions serve
both to increase the ability and willingness of corporations to invest
and the incentives for individuals to invest in corporations.
Nevertheless, the administration has concentrated almost complete
attention on consumer purchasing power and has largely ignored the
need for encouragement to job-creating business investment. The
administration’s program— when and if it goes into effect— will, it is
true, change the role of Government for the first time since 1951 from,
that of a majority stockholder in corporations to that of a minority
stockholder. But every corporation in the country with over $25,000
of income will still have to pay to the Government stockholder 47 per
cent of its net earnings even if the President’s program is fully enacted.
While we strongly believe in the need for tax reduction for individuals,
we are also aware that the change from 52 to 47 percent will not go
very far in removing the impediments dampening the incentives of
corporations to add to plant and equipment or of savers to invest in
the stocks and bonds of corporate enterprises.
Imagine, however, the change in incentive and psychology that
would occur if corporations were told that they could retain, for
example, 60 percent of their earnings, rather than the present 48 per
cent. It seems clear that a reduction of this magnitude would en
courage a vast amount of additional investment which would imple
ment the production and distribution of new goods and services for
which our people would have a preference if they were available.
Similar results would occur if tax rates were substantially reduced
for individuals in noncorporate businesses. In these instances, even
more than in the case of corporations, investment decisions depend
upon the amount of after-tax savings that can be obtained from
internal sources. It is no exaggeration to say that a primary con
tribution to the effectiveness o f our entire competitive system could
be obtained if the tax “ brakes” — to use the administration's term—
were released for small- and medium-sized businesses. These busi
nesses constitute a balance wheel in our entire competitive system,
and it is here that tax burdens are now most oppressive. The admin
istration has proposed only a first and timid step in the alleviation of
the tax burdens on these businesses.
S. Federal spending and prolonged budget deficits
In his testimony before the committee, Dr. Burns said that “ the
major problem facing the country at the present time is one of limiting
the increase in the public debt.” 27 Using reasonably conservative
assumptions, he predicted that if the President’s tax program is
u Bearings, p. 503.
JOINT ECONOMIC REPORT
/y
approved and if Federal expenditures continue to increase as they
have in recent years, the budget would not balance until 1972 and the
increase in our debt would be about $75 billion over the period.*28
Secretary of the ;Treasury Dillon, on the other hand, has estimated
that under the tax program the budget would not balance before
1967 and probably rater without the tax cut. These new deficits
would be on top o f 4 years of steadily mounting deficits. In the fiscal
years 1961 through the estimates for 1964, these will total over $30
billion, or more than the total net deficit of the previous 10 fiscal years.
The deficits from fiscal 1961 through the estimates for 1964 will add
about $1 billion to the interest burden of the public debt.
The administration says that its tax program is the only way to
bring the budget into balance, even in periods of prosperity. It is
counting on the stimulative effect of tax reductions to result in a
higher level of Federal revenues than would be experienced without
the reductions. Elsewhere, we have expressed some of our doubts
about whether this would be the eff ect of the program as it now stands.
With or without a tax cut, we are in for a long spell of continuing
deficits unless firm and determined action is taken to control rapidly
rising Federal expenditures.
The administration asserts, however, that any reduction in expendi
tures would offset the stimulative effects of tax reduction. But this
is only begging the question upon which we and the administration
disagree.29 Is the primary problem of our economy inadequate de
mand? If, as we believe and as we have tried to show in these views,
the problem is not one of inadequate demand, then the administra
tion’s argument against expenditure reform is without merit.
Even if an inadequacy of demand were a major problem, tax cuts
accompanied by expenditure reform still would remove impediments
to savmgs and investment, which would serve to release job-creating
enterprise.
The reduction and earlier elimination of budget deficits by itself
would have salutory psychological and economic effects. It would
eliminate the dangerous side effects of financing high Federal deficits,
which we discuss on pages 81-84 of these views.
We have heard only words, but have not seen any concrete evidence,
that the administration and the Democratic-controlled Congress in
tend to make any serious effort at expenditure reform.
The administration’s 1964 request for new spending authority is
$107.9 billion. This is $4.7 billion over the 1963 level, of which $1.4
billion is earmarked for the Department of Agriculture and $1.8
billion for the Department of Health, Education, and Welfare. The
1964 level of new obligational authority is $21.2 billion— or nearly
25 percent— over the level enacted in fiscal 1961.
i* Maurice Stans, former Director, Bureau of the Budget, has recently said that he d id n ot believe the
budget could be balanced within 10 years under the President's fiscal program and that, in the meantime*
deficits would total $100 to $150 billion.
28 See Senator Javits' additional views.
80
JOINT ECONOMIC REPORT
T able I .— C om parison o f original 196 2 budget (as submitted by Presiden t E isen
hower) with 1964 budget— N ew obligational authority— Selected agencies and total
[Dollar figures In millions]
Departm ent or agency
D opartm entof Health, Education, and Welfare.
1962
1964
$5,500
612
42,812
4,026
Percentage
change
$8,144
081
63,327
7,158
1,270
365
627
371
11,297
2,893
810
659
829
$2,635
369
10,515
3,132
391
58
263
23
1,578
296
124
103
-1 1 9
+ 47 .8
+ 60 .3
+ 2 4 .6
+ 77 .8
+ 4 4 .0
+ 19.5
+ 99 .6
+ 6 .6
+ 16 .2
+ 11.4
+ 18.1
+ 18.6
-1 4 .4
5.101
6,712
£.680
4,602
479
+414.6
+ 9 .4
80,867
107,927
27,060
+ 33.6
888
207
264
351
0,710
2,598
686
656
948
National Aeronautics and Space Administra-
Increase
1,110
In addition to the increase in spending authority which the admin
istration is requesting, it is also planning to increase civilian employ
ment from 1963 to 1964 by 36,400. From June 30, 1961, through
the estimates for June 30, 1964, total civilian employment in the
executive branch will increase by 163,471. Only 25,000 of this increase
represents new employees in defense and space activities.
Both the increases in new obligational authority and in civilian
employment clearly show that the trend of Federal spending will be
sharply upward for years to come.
At the same time that it is requesting more spending authority,
the administration is planning to increase actual budget expenditures
in 1964. These will rise $4.5 billion over the 1963 level. At $98.8
billion, they will exceed spending at the peak of World War II. The
administration’s claim that civilian expenditures are being held below
the 1963 level is illusory and is largely achieved by selling off assets of
the Government to conceal increases in spending.
If we examine the sharp increases in actual budget expenditures from
fiscal 1961 through the estimates for the current fiscal year, the case
for expenditure control becomes convincing.
The administration’s excuse for its rising expenditure level is that
most of the increased spending has been devoted to defense, space,
interest, and veterans.30 However, increases in these expenditures
account for less than half of the total $13 billion spending increase from
1961 to 1963, while the rise in defense spending alone accounts for
only 29 percent of the total.
■
As table II shows, while the percentage increase in total Federal
spending was 15.7 percent over the 2-year period, 1961-63, the in
creases for many civilian agencies, such as Agriculture; Health, Educa
tion, and Welfare; Housing and Home Finance; Commerce; and In
terior, were considerably larger than the average. At the same time,
the percentage increase in defense spending was only 8.2 percent, or
far below the average.
Bince m any military space activities are included in tbe’ defense budget, we can see no reason for the
administration’ s practice o f linking space with defense, except possibly to confuse the public into regarding
space spending as “ untouchable” as defense apparently has become.
81
JOINT ECONOMIC REPORT
The fact is that from fiscal 1961 through the estimates for fiscal
1964, the administration will have increased Federal spending at an
average rate of 7 percent a year, contrasted to an average annual
increase of 2.2 percent from 1954 through 1960. The huge increases
in spending on certain programs in recent years makes this a par
ticularly appropriate time to stop and take stock of where we are
and where we may be heading.
T a b l e I I .— Budget expenditures by selected agencies
[Dollar figures in millions]
Department or agency
Veterans’ A dm inistration....'...........................................................
1961 actual
1963 esti
mate
$5,920
45,640
3,685
801
498
502
744
5,401
$7,493
49,406
5,048
1,054
745
1,088
2,400
8,532
9,800
81,515
64,311
6,100
Percentage
Increase,
1961-63
26.4
8.3
37.0
31.6
49.6
116.7
222.6
2.4
7.7
15.7
Source: The Budget of the United States for 1963 and 1964.
Such a review of expenditure policy should concentrate primarily
on civilian expenditures where recent increases in outlays have been
particularly sharp. But we should not permit any area of spending,
even defense, to become a “ sacred cow.” As former President Eisen
hower said recently:31
* * * no reasonable person wants to endanger national
security by cutting defense spending below safe Emits. The
Red threat will be with us for a long time, and we must main
tain a powerful military establishment— although, even here,
money alone cannot solve the problem, and to spend more
than necessary can damage our overall position as surely as
spending too little.
Defense expenditures should be subjected to the closest examina
tion in order to insure that we get the most from our dollars. Unless
this is done, programs may expand too fast and result in waste, which
in the final analysis may impair our national security.
The same is true in other areas. As an example, Basil O’Connor,
president of the March of Dimes and iormer president of the Ameri
can Red Cross, recently warned that in the area of medical research
alone much Federal money is often spent wastefully and on unsound
projects and “ constitutes a positive threat to excellence.32
The administration must recognize that rapidly rising expenditures,
just as surely as lagging revenues, can lead to budget deficits and an
intensification of our debt management problems. These are diffi
cult and important problems, which the administration has failed
to discuss.
Two questions must be considered: (A) How will the budget defi
cits be financed? and (B) What effects will the financing of these
« Saturday Evening^Post, A u gJll-18,1962.
a Washington Post,}Jan. 17, 1963.
82
JOINT ECONOMIC REPORT
deficits have on interest rates, on the level of private investments,
and on prices?
With respect to the first question, if the deficit is largely financed
out of savings, with the new Government securities sold to individuals
and nonbanking institutions, such as insurance companies, the effect
would be an increase in interest rates above what they would have
been without the Federal deficit. The reason for this is that the nonGovernment demand for loanable funds is likely to remain relatively
constant or increase. However, a new demand for loanable funds is
created when the Government enters the financial markets and bor
rows to finance the new deficits. As a result, the prices of Govern
ment securities— and ultimately all securities—must be driven down
and the interest rates must correspondingly rise.
To the extent that interest rates rise as a result of deficit financing,
an element of business costs— as well as Government costs— have been
increased. The same conclusion holds true with respect to financing
of consumer purchases. To the extent that interest rates on con
sumer borrowing are raised, the real income of consumers is lowered.
More important, however, is the effect of higher interest rates in
discouraging private investment. Since a rapid rate of economic
growth requires a high level of private investment, growth is slowed
when high interest rates deter investment and when savings are drawn
off to finance Federal deficits rather than investment. Discussing
the financing of deficits from savings, T. 0 . Yntema, Chairman of the
Research and Policy Committee of the Committee for Economic
Development, said in a statement to the Joint Economic Committee:33
We would not be growing as rapidly as we might because
we would not be investing the available savings. This is
the basic reason for not being satisfied to run deficits at high
employment. It is, in fact, the basic reason for not being
satisfied merely to balance the budget at high employment
but to seek a surplus, which will retire public debt and in so
doing add to the funds available for private investment.
In his statement presented to the Joint Economic Committee,
George Terborgh further explained the effect which Government
competition for available investment funds would have in depressing
private investment. He said:34
There is no hoard or pool of idle funds that the Treasury
can absorb without detriment to other borrowers. Under
these conditions, it is by no means certain that an added
Federal deficit financed from savings would be significantly
stimulative. In all probability, it would be substantially,
if not largely, offset by the displacement of non-Federal
investment.
Obviously,- such displacement is precisely what the
economy does not need.
Alternatively, what are the effects from that portion of additional
Government debt financed from banking institutions? Here the
answer depends on the actions of the monetary authorities. If the
monetary authorities place an absolute limit on the amount of total
banking reserves, then commercial banks are in exactly the same
"H earin gs, p . 698.
“ .Ibid.Ap. 779.
JOINT ECONOMIC REPORT
83
position as nonbank lenders, i.e., the amount of their total lending has
not been changed even though a new demand for loanable funds
has been created. The result in this instance must be exactly the
same as in the case of Government borrowing from nonbanlc insti
tutions.
However, if the monetary authorities permit an increase in reserves,
the banking system can simply create the additional funds necessary to
finance the new Federal deficits. The administration apparently
has assumed this situation, but it has neglected to mention that
newly created “ money,” whatever the amount or purpose, is just so
much added to the inflationary potential. The administration argues
further that “ no inflationary problems should arise so long as there is
unemployment and capacity available to produce additional goods
and services.” This is not necessarily true because the increased
demands of individuals and businesses may be for goods and services
where excess capacity and trained manpower do not exist, which an
analysis of our present situation reveals is the case. Further, if the
additional demand raises prices and costs in these areas, there may
be a “ spillover” effect toward increasing costs and some prices through
out the economy. Hence, some price rises may be expected even
with unused resourcesin the economy.
However, there is a further inflationary element. If the money
supply increases through deficit financing more rapidly than the rate
of change in real as distinguished from inflated gross national product,
then general inflationary forces will be felt even though there is a
substantial amount of unused resources in the economy.
Not one administration spokesman before the committee has given
any evidence that the financing of deficits will not result in increases
in money supply more rapid than the increases in real gross national
product. It seems clear that the administration’s policy of planned
deficits will intensify our inflationary problems long before we reach
a 4-percent unemployment level.36
Even with a high level of unemployment, the economy is experienc
ing moderate inflationary pressures. The consumer price index, for
example, continued its steady upward movement in 1962, rising 1.2
percent over the year.
The dangers and injustices caused even by modest doses of inflation
were highlighted by the majority of the Joint Economic Committee
in its 1960 report on “ Employment, Growth, and Price Levels.” In
that report, the majority said (pp. 9-10):
The acceptance of continuing increases, even though quite
modest, in the general level of prices may result in acceleration
of the inflationary pressures and lead to economic instability.
Inflation is unjust. This is true whether it creeps or
gallops. It redistributes income and wealth according to the
ability of people to protect themselves against its effects.
Because of this it benefits the strong at the expense of the
weak. The avoidance of inflation, therefore, is an important
goal of economic policy. [Italic ours.]
We are tempted to underscore for the benefit of the present ad
ministration this good advice from the Democratic majority of this
committee 2 years ago.
u See Senator Javlts’.additional views.
84
JOINT ECONOMIC REPORT
For the reasons stated above, and because of the balance-of-payments and gold outflow considerations to be discussed in the next
section, we believe that tax cuts without expenditure control would
create real and possibly permanent economic damage. We do not
suggest an across-the-board nor a dollar-for-dollar cut in Federalexpenditures. In view of the Nation’s present domestic needs and
international and security commitments— and the administration’s
political commitments— such an approach would be unrealistic.
What we do seek, however, is a reform of Federal expenditure
policy to effect important savings, without impairing the national
security, and which would stimulate rather than retard economic
growth. Indeed, thoughtful and selective control of, and judgment
in determining, Federal expenditures— with prudent establishment of
national priorities— can increase our national security and remove
impediments to our economic growth.
We believe that Federal expenditure policy requires thorough,
objective, and nonpartisan examination. Support for the principle of
tighter control and more effective use of Federal expenditures is
virtually unanimous; support for specific suggestions for achieving
it is more difficult to attain. The difficulty of the task, however,
should not deter us from making the attempt.
Three steps should be taken:
a. As the first step to controlling Federal expenditures, we
recommend that a ceiling of $95 billion 36 be placed on Federal
spending while the Advisory Commission on Federal Expendi
tures, suggested in point 3 below, is making its studies. This
ceiling should be strictly observed, except for such increases as
may be required to cope with national emergencies. Holding
budget expenditures to $95 billion— or slightly above the fiscal
1963 level— would enable budget balance to be attained in fiscal
1965 providing the tax program stimulates a moderately higher
level of economic activity, or in fiscal 1966 without such stimulus,
but barring recession.
b. Congress should establish a Joint Committee on the Budget
which could improve the appropriations process and congres
sional control over expenditure of Federal funds. Creation of
such a committee is provided for in S. 537, introduced by Senator
John L. McClellan and sponsored b y 76 other Members of the
Senate. The committee would serve in the area of appropria
tions roughly the same function which the Joint Committee on
International Revenue Taxation has in the field of taxation.
It should have a high level professional staff which includes
minority representation.
c. As the final essential step to a reform of Federal expenditure
policy, we suggest appointment of a Presidential Advisory
Commission on Federal Expenditures, composed of private
citizens from business, labor, education, the professions, and
Members of Congress equally from both parties. The work of
this Commission, assisted by a staff, should parallel the 3-year
eriod over which the tax program is scheduled to take effect,
ffiring this period, the Commission should conduct studies and
B
" See Senator Javlts’ additional views.
85
JOINT ECONOMIC REPORT
periodically make public its recommendations in the following
areas:
(1) Establishment of spending priorities among Federal
programs, separating the merely desirable from the essential,
in order to serve as a guide to the administration in drawing
up the budget, particularly in years of expected deficits.
(2) Appraisal of Federal activities in order to identify
those programs which tend to retard economic growth or
which have outlined their usefulness and for which ex
penditures should be reduced or eliminated.
(3) Improvement of the Federal budgeting process in
order to increase effective control of expenditures.
(4) Examination of responsibilities and functions which
are now assumed by the Federal Government, but which
could be performed with superior effectiveness by the private
economy.
(5) Review of Federal responsibility and functions in
order to determine which could be better performed at the
State and local levels.
(6) Improvement of Government organization and pro
cedures in order to increase efficiency and promote savings,
including a review of the recommendations of the first and
second Hoover Commissions, in order to determine how
those already implemented have worked out in practice and
whether those not yet implemented should be given further
consideration.
(7) Determination of policies with regard to the level of
user charges and fees to be made for special services furnished
to members of the public by the Government.
The recommendations of an objective and nonpartisan citizens’ com
mission of the kind described should command widespread support
among the public and within the Congress. Its proposals would offer
a sound basis upon which to begin the reform o f Federal expenditure
policy.
D.
BALANCE
OP P A Y M E N TS
AND
M ONETARY
GOLD
OUTFLOW
PROBLEM S
AND
P O L IC Y
1. Balance of payments
The administration’s hope of reducing the balance-of-payments
deficit in 1962 to $1 billion or $1.5 billion was not realized. Instead,
the deficit reached $2.2 billion and, according to estimates made by
the National Foreign Trade Council, the deficit will remain at about
the same level in 1963.
At the same time, the problem of the gold outflow continues. The
Treasury gold loss in 1962 amounted to $911 million, compared to
$878 million in 1961. Under Secretary of the Treasury Robert V.
Roosa has warned that we face a renewed heavy gold drain this year.
We should keep in mind that the balance-of-payments deficit in both
1961 and 1962 would have been considerably greater except for foreign
debt prepayments. Without these advance payments, the deficit
would have been nearly $700 million higher m both years. While
we can still expect some further help from early remittances, there is
obviously a limit to that means of softening the impact of adverse
balances. Prepayments on the scale of recent years would use up in
86
JOINT ECONOMIC REPORT
3 or 4 years the entire amount (with the exception of World War I
debts) owed to the United States b y the countries now in the financial
position to make prepayments.
Federal Reserve Chairman William McC. Martin told the committee
that the “ timebombs” that concerned him the most were inflation and
the balance-of-payments problem. A continuation of the balance-ofpayments problem and the related gold problem not only imperils the
free world’s trade and payments system, but it also serves to dampen
our domestic propsperity. Persistent balance-of-payments deficits
and fear for the strength of the dollar undoubtedly have restrained
business investment and growth in this country. As Chairman Martin
told the committee, “ one of the important deterrents to growth has
been the shadow that overhangs us from the balance-of-payments
problem.” 37
It is well to remember that the problems of balance-of-payments
deficits and domestic economic growth are two sides of the same coin.
Even after we solve the balance-of-payments problem, and are in a
position to pursue domestic economic policies with greater freedom,
balance-of-payments considerations will continue to exert some
restraint upon us.
A program of tax reduction and reform will have conflicting effects
on our balance of payments. Insofar as it encourages investment in
modern plant and equipment, and thus reduces costs, it will have a
strongly beneficial effect in improving our competitive position in
world trade.
What would happen, however, if we cut taxes and did not restrain
spending? In that case, prolonged budget deficits leading to con
tinued inflation or even the fear of inflation are likely to reduce ex
ports and increase imports, deepen our balance-of-payments deficits,
and cause a continuation of the heavy outflow of gold as foreign dol
lar holders see the purchasing power of the dollar drop.
It is significant that in 1962 our imports rose at a much more rapid
rate than our exports, narrowing our trade surplus and worsening our
balance-of-payments deficit. If our competitive position in world
trade should worsen, for whatever reason, chances of eliminating our
balance-of-payments deficit, while still carrying our defense and for
eign aid burdens overseas, would be remote.
Even without continued inflation, the gold outflow will be a seri
ous problem. Foreigners now hold more than $20 billion in short
term dollar balances. Since our gold stock is less than $16 billion,
of which about $12 billion is required by law to back our currency, a
continuation of the gold outflow could eventully lead to devaluation
of the dollar and a breakdown of the free world's trade and payments
system.
The possibility of an “ inward looking” Common Market, suggested
by the rejection of British membership, adds another element of
pessimism to our balance-of-payments and gold outflow problems.
We do not know what results recent events will have. Prudence,
however, would dictate that we follow a cautious and responsible
fiscal policy so as not to compound the possibly adverse effects of
developments in the Common Market.
As these remarks suggest, we are convinced of the urgency of cor
recting the balance-of-payments problem and believe that stronger
" Hearings, p. 362.
JOINT ECONOMIC REPORT
87
measures than have been adopted by the administration are called
for. While we share the view that we should improve our trade
balance, we feel that the administration and the Democratic Congress
must recognize their responsibility to put "our own house in order.’ ’
Accordingly, we would give a greater weight than the majority
apparently does to removing clearly and beyond all doubt, uncertain
ties and fears about the financial responsibility of the United States
and the soundness of the dollar in international trade. Worthy as
the hope may be, we fear that it is an insufficient and weak reed to
continue to place chief reliance on negotiation and on the hope that
other nations will change their conduct.
Further, considering the key role of the United States in the Western
community, we would immediately put to rest all suggestions that the
United States give serious consideration to restrictive moves, such as
prohibiting access by any foreign issues to the U.S. market or limiting
the direct U.S. private investments abroad. Before inhibitions are
put upon private placements or private investments, we suggest that
some of the Government programs involving expenditures abroad are
not beyond questioning.38
2. Monetary policy
We note the disappointment expressed in the majority report over
the failure of monetary policy to provide the stimulus necessary to
substantially reduce unemployment.
We are quite aware, however, of the constraints upon monetary
policy imposed for balance-of-payments reasons. Perhaps, as the
majority suggests, too much confidence has been placed in monetary
policy in recent years. Chairman Martin’s view is that monetary
policy in 1962 did "ju st about what could and should be expected of
it” 39 and that “ the domestic liquidity of our banks is now so nigh that
still further monetary stimulus would do little if any good— and
might do harm * * *.” i0 Notwithstanding these points, the ad
ministration recently reappointed Chairman Martin to another term.
Certainly one of the broad general controls available to the Govern
ment in fostering growth and stability is having to be deemphasized
while the Congress is being entreated to consider larger and larger
Government deficits as the chief effective instrument.
E.
A G R IC U L T U R E
Producing 70 percent of the raw materials used in the United
States, this Basic industry must be healthy if our national economy is
to prosper. Bringing production and consumption into reasonable
balance and assuring farmers a fair share of the national net income
by reducing the cost-price squeeze are fundamental objectives.
However, we oppose programs labeled with these objectives which
point in the direction of nationalizing this industry. We are en
couraged to note that, after 2 years of unsuccessful efforts to force
compulsory-type programs through Congress, this administration has
now recommended the “ voluntary” principle for future programs.
See Senator Javits’ additional views,
w Hearings, p. 33a.
« Remarks at the joint luncheon of the American E conom ic Association and the American Finance
Association, Pittsburgh, Pa., Dec. 28,1062.
88
JOINT ECONOMIC REPORT
We sound a warning, however, that difficult years lie ahead unless
the administration, with its broad discretionary powers and the strong
Democratic control over both Houses of Congress, takes coordinated
action along these lines:
1. Reductions in price supports should be gradual: Moving broad'
areas of agriculture (along with other types o j industry) toward a
position of independence of the Federal Government will take years
if harsh social consequences of such an adjustment are to be avoided.
Under the administration-backed farm bill of 1962, price supports of
feed grains can drop to 50 percent of parity commencing in 1964.
This is not a “ gradual” reduction. On the other hand, increases in
price supports should be avoided, since these encourage excess produc
tion, depress markets, and lead to Government controls requiring more
Government employees to enforce.
For example, dairy price supports have been manipulated during
the past 2 years with a resulting aggravation of the surplus problem.
Cost to Commodity Credit Corporation of the dairy program increased
from $277.8 million for fiscal 1961 to $532 million for fiscal 1962.
Over the objections of the soybean industry, the Secretary o f Agri
culture, on March 22, 1961, announced an increase in the support
price for soybeans for 1961 and 1962 crops. Despite large exports
of soybean oil, carryover Commodity Credit Corporation stocks
of soybeans has grown from 4.49 million bushels at the end of 1960
to 36.7 million bushels at the end of 1962. This has had an adverse
effect on the market, with the price per bushel falling from $2.68
before the announcement to $2.35 on December 15, 1962.41
2. Far greater efforts should be made to develop new and increased
industrial uses for agricultural products— especially those in excess
production. Emphasis in research activities should be shifted to
this objective away from one of increased production.
3. Soundly determined inventory objectives should be established
for all price-supported commodities. There has been too much loose
talk about “ surpluses” and practically no effort to compute reserve
stock levels required in the national interest. Only after such require
ments are reached is it meaningful to refer to “ surpluses.”
4. The expenditure of millions of dollars on reclamation and
irrigation projects, while at the same time permitting the growing of
crops (or substitutes) determined by the U.S. Department of Agricul
ture to be in surplus, is inconsistent, wasteful, and should be stopped.
5. Consideration must be given to programing specific counter
vailing action to offset the loss of U.S. export markets resulting from
the recent discriminatory action against imports of poultry 43 from
the United States by the Common Market. Such a policy could head
off similar actions against some of our other agricultural products
which would be invited by continued inaction of the administration.43
6. Programs such as the Emergency Public Works Act of 1962 and
the Area Redevelopment Act of 1961 should be amended to provide
for projects in agricultural areas which have suffered a sharp drop in
« In only 2 months since the announcement has the price n ot been under $2.68 per bushel.
« Examples of the ad valorem equivalent of variable import duties on poultry in effect today (with duties
rior to Jan. 1,1062, shown in parentheses) would include: West Germany—turkeys, 29 percent (15 percent),
rollers, 43 percent (15 percent); France—turkeys, 67 percent (20 percent), broilers, 45 percent (20 percent);
Italy—turkeys, 10 percent (none), broilers, 21 percent (none). Over $50 m illion in poultry exports is in
danger of being lost.
« Sec. 252(b)(3) of the Trade Expansion A ct of 1662 specifically empowers the President to take such
action. The Comm on M arket’s policy of self-sufficiency in agriculture (unrealistic though it Is when land
used to grow feed grains costs as much as $1,000 per acre) was a major factor in the adoption of this provision
which, incidentally, wasjnot included in^the.original.adminlstration^bill.
E
JOINT ECONOMIC REPORT
89
farm population. To limit projects to areas of so-called "chronic”
unemployment causes people moving off the farm to move into
industrialized areas, adding to the unemployment problem.
7: In the decade 1950-60, the number of persons employed in
agriculture declined by 41 percent. This structural dislocation re
quires consideration of measures to finance the voluntary transition
of such people to more productive employment in accordance with
traditional American practices.
. 8. In the absence of disaster-type situations, Government subsidy
of crops in one area in preference to another area should be stopped.
It is discriminatory and moves away from the market forces which
characterize our capitalistic economic system.
F.
OTHER
R E C O M M E N D A T IO N S
The administration’s almost exclusive emphasis on its tax program
raises the danger that exists in all panaceas. Even Gerhard Colm,
of the National Planning Association, told the committee, if we cut
the taxes without taking other important actions, the effect on
economic growth could be negative. Therefore, in addition to our
recommendations for tax and spending policies set forth above, we
wish to list briefly actions which should be pursued in other areas.
I. Facilitating adjustment to technological change
A.
Education and training.— Young people without job experience,
persons without skills or with obsolescent skills, and members of
minority groups suffer the highest rates and the longest duration of
unemployment. The direct relationship between the bulk of our
unemployment problem and lack of education and skills requires that
we focus our attack in the area of education and training.
The solution to the problem of technological displacement demands
a broad national effort to upgrade the labor force by small stages all
along the line— providing the unskilled with minor skills, preparing
the semiskilled for skilled work, and turning the skilled into advanced
technicians. Workers on all levels of the skill ladder must be en
couraged and helped to move up into higher and more demanding
jobs, leaving the positions which they once held to be filled by the less
skilled, but striving applicant. Every level of government and every
sector of the private economy must contribute in this national effort
to upgrade skills to the demands of our increasingly service-oriented
and technologically advancing society.
While these recommendations primarily concern activities by Gov
ernment, we must not lose sight of the primary role that business
with the cooperation of labor must play in smoothing the way to
technological progress. Business has long recognized that rapidly
advancing technology requires continual retraining of employees.
For example, Ford M otor Co. in 1960 retrained nearly 3,000 workers
to handle advanced hydraulic and electrical equipment. General
Motors, in addition to its broad apprenticeship program, retrains
about 7,200 employees a year. International Business Machines
trains about 100,000 workers each year in the operation of the com
puters and other equipment which it sells and leases. Even relatively
small companies have farsighted internal retraining programs. Xerox
Corp. of Rochester, N.Y., for example, trains certain employees to take
jobs that do not yet exist while it is preparing to introduce new proc-
90
JOINT ECONOMIC REPORT
esses and equipment that will eliminate their old jobs. Government
should encourage in every way possible such activities in the private
sector.
To promote the education and training required for these new skill
requirements, we suggest the following:
(1) One of the most important barriers to employment of the
chronically unemployed is lack of basic reading, writing and mathe
matical skills. Before many of the so-called unemployables can
benefit from training, they must remedy their deficiencies in basic
education. The Manpower Development and Training Act should be
broadened to include such adult education in basic subjects as is
required before an unemployed person who is accepted for training
actually begins his occupational training or retraining program.
(2) Vocational education has been treated as the stepchild of our
educational system for too long. It is of critical importance that the
Nation afford skilled craftsmanship the same dignity and worth as it
does to other forms of labor. Vocational education in our high
schools, in junior colleges, and in special technical institutes must
receive greater emphasis in order that our society do justice to the
millions of young people whose tastes or aptitudes enable them to
make their greatest contribution and receive their highest satisfac
tion in this type of work.
Broader opportunities for vocational education keyed to the Na
tion's need for skills would reduce the problem of the high school
“ dropout.” It would also provide a source of trained personnel at
the technical and semiprofessional level, where severe shortages today
often retard economic growth. This is primarily the job for local
and State governments, but the Federal Government can do much to
encourage greater activity on these levels. We accordingly recom
mend a substantial broadening of the Federal vocational and tech
nical education programs. Additional Federal expenditures in this
area, which would be growth inducing, should be offset by reduction
in, or elimination of, programs which exert a drag on growth.
The skill demands of our developing economy also require, of
course, that in addition to greater emphasis on vocational training,
the Nation must continue its progress in providing better general
educational opportunities for our young people at Doth the public
school and college levels.44
(3) We urge that the vocational programs of the Department of
Health, Education, and Welfare and the apprenticeship program of
the Department of Labor be coordinated to the fullest extent possible
with one another and with the vocational training programs of the
military services.
In addition, we urge the administration to review the statutes
bearing on military service obligations in order to determine how and
to what extent they interfere unnecessarily with the smooth transition
of our young men from school to civilian employment. Such a review
should yield recommendations for changes in the law, as well as in
procedures under the law, to minimize such impediments and to
promote more effectively the preparation of our young men for civilian
careers.
(4) The Manpower Development and Training Act should be
amended to authorize the training of large numbers of young men
u See Senator Javits’ additionalivlews.
JOINT ECONOMIC REPORT
91
and women, particularly high school “ dropouts” with no skills or
previous work experience, in order to prepare them for lives of useful
and productive employment. This would achieve— and more effec
tively— the objectives contemplated by the youth employment
opportunities bill.
(5) The redundancy and inconsistency which exist among the
adjustment provisions of the Trade Expansion Act of 1962, the
retraining features of the Area Redevelopment Act, the Manpower
Development and Training Act, and the unemployment insurance
program are impairing the effectiveness of our training and retraining
efforts. We believe it is urgent for the administration to examine
the relationship of these programs to one another and to provide for
their more effective coordination in order to better promote the
objectives of the programs.
(6) Our tax laws should be amended to eliminate obstacles in the
path of new skill development. For example, we should permit a
taxpayer to deduct, as a business expense, the. amount spent for
education or training to obtain a new or better job. Today such
expenditures are deductible only if required to maintain existing
skills or to keep a present job. Further, we should encourage indi
viduals to train, either in academic or vocational subjects, at the
post-high-school level by providing a tax credit of 30 percent of the
amount spent for such education or training up to a limit of $450 in
any one year. The credit could be taken either b y the student
himself, or by a parent or benefactor who is supporting such a student
in furthering his academic or vocational education.
(7) Companies planning technological changes should be given an
incentive to train for new jobs in the company the workers who
would be displaced, thereby keeping them off the unemployment roles.
To this end, States should be encouraged to broaden merit ratings
under the unemployment insurance laws to include the concept of
such on-the-job training so as not to penalize the employer who ex
tends this opportunity to his workers.
(8) Twenty States now permit an individual to receive unemploy
ment compensation up to the normal amounts and limits while under
going training or retraining. Efforts must be made to encourage all
of our States to take this vital step to encourage individuals to
upgrade their skills. Furthermore, an offer of suitable work should
not disqualify an individual from receiving unemployment benefits,
if the offer is refused during the period of training or if the job would
prevent him from completing the course.
(9) Just as workers who refuse employment without good cause
are disqualified from further unemployment insurance benefits, we
should consider disqualifying workers receiving such benefits who are
referred to training, but who refuse it without good cause.45
B.
M o b ility .— Mobility in the labor market is essential to smooth
adjustment in our changing economy. The following steps would
promote mobility:
(1) The tax laws should be amended to change the tax definition of
“ home” from the place of a worker's principal employment to the
place where a worker owns a home and maintains his family.
(2) We support the provision in the administration’s tax reform
bill which would permit new employees to exclude from taxable in
« See Senator Javits’ additional views.
92
JOINT ECONOMIC REPORT
come reimbursement received from their employers for moving ex
penses or permit a deduction for moving to a new job.
(3) In order to ease the impact of automation and other causes of
economic dislocation in a dynamic economy, both governmental and
nongovernmental means should be considered to encourage the trans
ferability of pensions and other job rights for individual workers who
must change jobs.
(4) We should consider paying subsistence or transportation allow
ances to unemployment insurance claimants who look for work in
areas beyond a predetermined distance from their home.
C.
Job information and research activities.— (1) The U.S. Employ
ment Service should be strengthened and encouraged to put more
emphasis on preventing unemployment, rather than on alleviating its
effects alone, as by increased emphasis on counseling. A t the same
time, it should provide encouragement— not competition— to private
employment services, which perform a key role in facilitating labor
market adjustments.
(2) The Department of Labor should pursue with great urgency its
efforts to establish a nationwide job displacement “ early warning
system” to facilitate advance planning for technological change by
business, labor, and government at the community level.
(3) In order to assure that training is in needed skills, we recom
mend the establishment of a national clearinghouse for the identifica
tion and classification of emerging skill requirements, of existing skill
needs, and of obsolescent skills. The clearinghouse should also
maintain a list of job vacancies throughout the country for the use
of the U.S. Employment Service, employers, private employment
services, and others, in matching the jobless man and the manless job.
,D. Unemployment insurance.— To alleviate the hardships resulting
from long-term unemployment, we believe that the States— not the
Federal Government— should adopt a permanent system of temporary
extension of unemployment insurance which would go into effect
when certain National or State indexes or recession-level unemploy
ment are reached.*6
I I . Productivity
In order to provide the maximum standard of living for our growing
population consistent with our international obligations and the
requirements of national defense, it is essential that we increase our
productivity. Increased productivity, which is one of the keys to a
higher rate of economic growth, depends largely upon invention and
innovation. In order to stimulate invention and innovation and
other activities to increase productivity we support:
A. The bipartisan objective of encouraging research and develop
ment efforts in industries serving civilian markets and to make the
fruits of military and space research more easily available for use by
civilian industry.
B. The creation of a National Productivity Council to promote the
organization of voluntary labor-management-public councils at the
industry, regional, and community levels. These councils would
provide a framework within which all interested parties could coop
erate in smoothing the adjustment to technological change by pro
moting worker training, eliminating make-work practices, stimulating
“ See Senator Javlts’ additional views.
JOINT ECONOMIC REPORT
93
■invention and innovation, and taking such other actions as would
promote increased productivity.
C. The proposal, which we have long supported and which is now
endorsed by the administration, to permit a tax deduction as a
business expense of outlays for machinery and equipment to be used
in research and development activities.
D. Constant review of depreciation schedules. In spite of the longneeded revision of depreciation schedules last year, it is not yet clear
that the new schedules will be sufficiently responsive to the needs of the
economy. Depreciation schedules must be Kept up to date to reflect
the economic reality of useful life. In addition, allowances for
obsolescence arising from advancing technology must be promptly
provided for. In this way, we can encourage investment in modern
and efficient plant and equipment and not only provide more and
better jobs for our people, but also strengthen America’s competitive
position in world trade.
E. Consideration of means to encourage profit sharing by em
ployees, including restricted stock options, stock-purchasing plans,
and other methods of stockholding, as part of or-in lieu of increases
in wages and salaries. Contrary to the administration’s tax philoso
phy, we believe tax policy should encourage—not discourage—such
activity.
F. Additional incentives and aids to encourage business participa
tion in the export expansion program initiated during the Eisenhower
administration—including constant review of the Export-Import
Bank and Foreign Credit Insurance Association export credit guarantee
program; consideration of tax incentives for exports, consistent with
our obligations under the General Agreement on Tariffs and Trade;
and coordination of all Federal programs for export promotion in order
to make them available to the maximum to the individual businesses
throughout the country.
II I. Antitrust
We recommend the establishment of a commission on antitrust laws
to determine the impact of antitrust laws upon U.S. productivity,
long-range economic growth, trade, and on foreign investment and
foreign economic policy generally. This commission, which should
be comprised of experts, selected on a bipartisan basis, from the
executive department, Congress, and private life, should make such
recommendations for changes in the substance and procedures of the
antitrust laws as seem necessary to promote our economic objectives.
IV . National emergency strikes
Loss of time through work stoppages constitutes a heavy drag on
economic growth. In fact, there is considerable opinion that the
protracted steel strike in 1959 has had this precise effect on our
economy.
Because the adjustments required by rapid technological advance
may contribute to a rise in serious and protracted labor disputes, we
strongly urge that the administration submit legislation to deal with
emergency strikes which cause nationwide economic paralysis or which
endanger the public health or safety.
85856— 63------7
94
JOINT ECONOMIC REPORT
V. Discrimination in employment and training
The Council of Economic Advisers on September 24, 1962, esti
mated the economic loss to the United States resulting from racial
discrimination in employment at about $13 billion a year. The full
utilization of the present capabilities of the nonwhite population, the
Council said, would increase gross national product by about 2.5'
percent and assist significantly in promoting a higher rate of growth
in the coming years. The drag which racial discrimination in employ
ment and training exerts upon our growth makes it imperative that
management and labor undertake a major effort to eliminate such
discrimination.
While we hear more about racial discrimination, we should also be
aware of the heavy costs involved in discrimination in employment of
the young and older workers of all races. The relatively heavy
concentration of unemployment among our young and older workers
makes it important for both labor unions and businesses to eliminate
bias against any person because of his age when no distinction is
warranted by the reasonable demands of the job. In the case of
labor unions, progress should be made particularly in opening up the
opportunities for union membership, and especially for apprenticeship
training, to young people. Further, we should consider the desira
bility of legislation to prevent businesses engaged in interstate com
merce or those holding Federal contracts or subcontracts from
practicing age discrimination.
C O N C L U S IO N
The main point of these minority views is that our economic prob
lems are deeper and moro complex than the administration would
have us believe. A simple increase in consumer spending, which the
administration proposes as the primary means to full employment and
faster growth, would fall far short or miss the mark entirely. What
we need is greater emphasis on measures to facilitate adjustments to
structural change, particularly rapid technological advancement, and
on tax rate reform to provide incentives to save and invest in jobcreating enterprises.
We agree with an editorial comment of the New York Times of
December 8, 1962, that—
* * * it is doubtful that resort to general economic poli
cies, whether through deficit spending or easy money or tax
reduction can solve the unemployment problem. A faster
rate of economic growth can ameliorate the situation, but
specific policies are needed to deal with the specific problems
of the jobless.
Besides failing to strike at the roots of our high unemployment, the
administration’s tax program could aggravate many of our other exist
ing economic problems. This danger would be especially great if
while reducing revenues through tax cuts, the administration failed
to control Federal spending ana bring the budget into balance in the
near future. In view of the Nation’s serious balance-of-payments
and gold outflow problems and continuing inflation, we oppose the
deliberate piling up of large so-called temporary deficits year after
year as far as one can see into the future.
JU 11N 1
i^ U l N U l Y L L U
XLUtrUXVX
O fJ
Therefore, while we agree with the administration’s goal of removing
some of the tax system’s built-in impediments to economic growth,
we believe the program should be revised along the lines we have
suggested to give greater assurance of attaining this objective.
At the same time, the administration and the Democratic Congress
must take determined action to hold the line on Federal spending
until the budget is balanced.
Measures to encourage growth, particularly those designed to
facilitate adjustment to the technological revolution which is altering
dramatically the way our people live and work, must be pursued.
In conclusion, legislative proposals such as the administration’s
tax recommendations, which could have such a critical and long-term
impact on our economy, must be considered in a calm and thoughtful
atmosphere rather than one of haste or panic. We should not forget
that these recommendations are designed to affect our long-term
economic position and would have relatively little influence on current
economic conditions. Whatever economic developments occur in the
near future will result principally from existing policies. Neverthe
less, the sooner the administration and the Congress act along the
lines we have recommended, the better off aU of our people will be.
ADDITIONAL VIEWS OF SENATOR JAVITS
I have joined in the minority report (having noted my differences
with it) because it does answer forthrightly the one overriding ques
tion raised by the tax reduction and reform program of the President
(his most important 1963 legislation) which is supported by the
majority: Will it be adequate to meet the issues of endemic unemploy
ment, underused production facilities, and a lesser rate of growth in
productivity than we can afford to accept? The minority says, and I
agree, that this economic program is likely to fail if it continues to
rely solely on a tax cut and tax reform to achieve its objectives and
does not undertake additional measures.
The minority suggests certain additional measures required for the
needed economic advance, and m y additional views hereinafter con
tain further specific recommendations. Also, there are certain points
of emphasis which I should like to make. M ost of these points are
appropriately noted in the minority report by reference to my addi
tional views.
I believe that the tax reductions proposed by the President can
serve to stimulate consumer demand for staples and for necessities
at the lowest income levels. In this way the role of excess capacity—
insofar as this excess capacity actually results from individual inability
to satisfy needs consistent with life in a relatively rich and growing
society— should be substantially reduced as a cause for lagging
economic growth. The excess capacity is, however, present for
another reason, too; excess capacity caused by obsolescence is also a
major factor. To stimulate the use of obsolescent facilities now
unused is uneconomic. Such excess capacity must be removed
through additional incentives for business modernization— tax incen
tives which are not adequately emphasized in the President’s program.
Although a reform of tax-law provisions should be undertaken
(provisions which now channel economic activity into areas not of
optimum benefit to the national interest in accelerated economic
growth), the greatest care must be exercised to prevent such reforms
from undermining the basic incentive purpose of the tax cut.
It appears to me that a temporary and limited budget deficit
cannot be avoided in carrying out a tax cut and in order to support
its objectives. Therefore, I consider the suggested $95 billion ceiling
on Federal expenditures not as doctrine but as representing a general
order of magnitude and a national goal. In proposing such a ceiling,
we must consider the effect of a cutback and a slowdown of Federal
programs both on basic national resources and on immediate economic
activity. Such Federal programs include the support of education
at all levels— education which increases our capacity to take advantage
of any stimulus a tax cut may provide. Further, we must consider
the manner in which reduced Federal expenditures in certain sectors
may affect individual businesses and persons which are supposed to
derive benefits from the tax cut.
98
JOINT ECONOMIC REPORT
Similarly, in considering foreign aid and defense expenditures
abroad, I believe that budgetary and balance-of-payments problems
must not deter us from making such sacrifices as are necessary for
the maintenance of the U.S. role as prime guarantor of free world
peace. Much can be done through a careful examination of individual
items and spending procedures within these programs to reduce their
budgetary impact. Also, an equitable sharing of foreign aid and
defense expenditures by our allies would both directly ana indirectly
assist the United States in meeting its own balance-of-payments
problems— but the role required of us by world peace, security, and
freedom must be fulfilled.
In the matter of unemployment insurance, I urge basic safeguards
to prevent injustice in tne means by which workers could be dis
qualified from receiving benefits for refusing to take certain retraining
courses. As has been demonstrated by the present system of depriv
ing workers of benefits for refusing to take available work, this require
ment can be evaded. On the other hand, problems of individual
freedom in choosing appropriate retraining programs may arise.
Therefore, although I support this suggestion in principle, I believe
the mechanism for its application must protect against abuse of author
ity or its arbitrary exercise. Further, I continue to support enactment
of permanent improved Federal standards of unemployment com
pensation to help those workers who, through lack of training and other
factors, find themselves at a disadvantage at the current stage of our
economic development without the penalties which inadequate
approaches exact in certain States.
I am pleased that the minority accepted my suggested additions to
the list of measures required to assure adequate economic growth—
■those on an antitrust law review; the transferability of pension rights
to aid worker mobility; stockownership and profit sharing; and added
incentives to engage in the export trade. In addition to the program
outlined in the minority report, I suggest two areas of activity needed
to supplement an effective incentive tax cut.
(1) Establishment of a Federal Limited Profit Housing Corporation
to finance middle-income housing through the sale of bonds in the
capital market; and
(2) Establishment of a Federal Council of the Metropolitan Areas,
representing both existing and to be created regional councils which
can handle problems— such as transportation, sewage disposal, water
supply, air pollution, etc.— extending across traditional lines of State
and city.
A t this point I also wish to express my agreement with the inter
national economic recommendations of the majority insofar as they
do not limit the free flow of capital. Of special importance are the
recommendations (1) to expand the international reserve base;
(2) to amend the Trade Expansion Act of 1962 to provide the Presi
dent with tariff negotiation authority broad enough to make U.S.
bargaining power effective whether or not the European Economic
Community (EEC) is expanded or cooperates fully in our efforts for
free world economic integration (I have offered a bill for this purpose
as has Senator Douglas of Illinois); and (3) to initiate a study to
determine whether or not EEC agricultural policies which have
already caused damage to our poultry exports and threaten our other
JOINT ECONOMIC REPORT
»»
agricultural exports are in violation of the General Agreement on
Tariffs and Trade.
Clearly, a tax cut cannot be relied upon as the sole needed remedy
for the slow economic growth experienced by our Nation. I have
supported an incentive tax cut and repeatedly urged the administra
tion last year to offer it or at least to present its program for public
discussion and congressional consideration substantially in advance of
the time for action. Unfortunately, we are now faced with the need
to act on a program which requires many changes and many addi
tions, if it is to succeed. We have not had the time for a mutually
beneficial exchange of views, and we must do the best we can with a
program which was not thoroughly exposed to preconsideration and
may be, therefore, both incomplete and not adequately conceived in
terms of the national interest. The situation is further complicated
by the President's proposals for tax reform— some of which are sound
and others of which I oppose— like the 5-percent gross income deduc
tion prior to itemized deductions. Many of these will probably have
to be separated from the incentive tax cut, and considered ana dealt
with parallel to it if we are to have any final action at all in 1963.
It is my hope that the minority report and the additional con
siderations presented by me will serve to place the President’s tax
program in perspective. Short as may be our time for positive
action, such a perspective should give us the opportunity to deal
realistically with the human and economic problems of our Nation,
and of our Nation’s position in the world.
ADDITIONAL VIEWS OF SENATOR MILLER
[These views relate to: (1) Incentive taxation of growth income;
(2) the Multiplier Theory; and (3) growth rate required to make
up for budget deficits and revenue loss from tax cut.]
Although I share the views of my Republican colleagues that an
annual tax reduction of from $7 to $8 billion, necessarily accompanied
by “ important savings” through expenditure control and policy re
form, “ might” be a desirable target, I am anything but optimistic
that those now in control of Congress, following the dictates of the
administration, will reduce expenditures enough to make room for
such a tax reduction in order to avoid aggravating our serious budget
deficit and promoting continued inflation.
The problem is that there is deep disagreement between those in
control of the “ majority” on the one hand, and those in control of
the “ minority” on the other hand, over just what expenditures can
be reduced “ without impairing the national security or retarding eco
nomic growth.” The President has submitted what he terms a
“frugal” budget, stating that it includes "only those expenditures
which meet strict criteria of fulfilling important national needs.”
However, Senator A. Willis Robertson, Democrat of Virginia, states
that almost $2 billion can be saved by eliminating new programs in
the budget, another $1.8 billion b y reducing foreign aid, and $1.2
billion by reducing Department of Defense requests. House Repub
lican leaders believe the budget can be trimmed b y at least $10
billion in spending and authorization requests.
I, for one, am not content to see us remain on dead center while
meaningful tax reduction awaits the outcome of debate over what
Federal expenditures are “ needed.” Accordingly, I have proposed a
tax reduction plan which will not interfere with the administration’s
spending program and will not, at the same time, aggravate the budget
deficit. I call it “ Incentive Taxation of Growth Income.”
(1) I ncentive T axatio n op G rowth I ncome
The word “ incentive” is usually associated with tax reduction,
either through outright tax rate reduction or so-called “ tax reform,”
or both. This assumes-that tax reduction will automatically be fol
lowed b y economic growth, but there is no guarantee that this will
happen. Most of us probably would anticipate an overall growth in
our economy if we had tax reauction accompanied by stable purchasing
power o f our money. However, there would probably be taxpayers
who would happily enjoy their tax reduction without seeking to con
tribute to economic growth. They would, so to speak, receive the
reward without having earned it. It seems to me that a true “ incen
tive” tax change should not give the reward of tax reduction unless
the objective of growth is fulfilled.
In a nutshell, my plan proposes to tax any increase in income of
individuals, corporations, trusts, and estates over that of the preced
ing year at on e-h a lf the rates that would otherwise apply. One
85856— 63-
8
101
JU U N T
J .U ii
tiUUJN UJVLKJ
KEFOKT
might liken such treatment to an excess profits tax in reverse. This
increase in income represents “ growth income,” and tax reduction
would take effect only with respect to it. The reward of tax reduc
tion would have to be merited.
E xam ples o f M iller plan f o r incentive taxation o f growth incom e
(effective J an. 1, 1968)
Individual, married, 4 children, using optional standard deduction, with
adjusted gross income from a salary, wages, profession, or business
Year
1962.
1963.
1964.
Adjusted
gross
income
Tax at old
rate
$1,108
2,304
3,740
$10,000
15.000
20.000
Increase in
tax over
prior year
at regular
rate
(>)
$1,196
1,436
Tax reduc
tion ( 1/2
Increase)
N e w ta i
(0
(')
$598
718
$1,705
3,021
Individual, married, 2 children, using optional standard deduction, with
adjusted gross income from a salary, wages, profession, or business
1962.
1963.
1964.
$5,000
5,500
$420
510
600
6,000
w
$90
90
0)
$45
45
0
$405
ft!
Corporation, taxable income as shown in 2d column (note 1st $25,000
taxes at 30 percent; all over $25,000 taxed at 52 percent)
1962.
1963.
1064.
$100,000
120,000
140,000
$46,500
56,900
67,300
«
$10,400
10,400
. w
$5,200
6,200
(’$51,700
>
62,100
. i Change not in effect.
From the Government’s standpoint, the Treasury would be assured
of the same amount of revenue from the same amount of income as the
previous year, so that the tax reduction under this plan could be
confidently predicted to not cause any loss of revenue. However, I
suggest that the prospect of paying tax at only one-half the regular
rate on growth income would be a tremendous incentive for taxpayers
to improve their income positions. Wasteful or marginal costs, which
too often are tolerated because they are “ tax deductible,” would be
avoided. Thus the plan contains its own built-in tax reform.
GROWTH
IN C O M E D E F IN E D
The definition of "growth income” must be precise and realistic
It should certainly include business and farming income. With re
spect to other items of income, either of two approaches may be used
One approach, which is simpler, would be to specify the items. Th(
other approach would be to include all income except certain items
which do not have any particular relevance to growth during the cur
rent year due to’ the taxpayer’s labor or capital; for example, pensions
and annuities, income in respect of a decedent, income from deatl
benefits, compensation from injuries, income from an estate or trust
alimony and separate maintenance benefits, income from the dischargi
of indebtedness, and the like. Even with these exclusions, however
we would still be faced with situations under which an incentive woulc
be extended to increase income that would be of marginal or question
JOINT ECONOMIC REPORT
103
able significance insofar as labor or capital are concerned, not to men
tion illegal income, which is nonetheless taxable.
Accordingly, I would propose that in addition to business and
farming income, wages and salaries, rents, ordinary dividends, royal
ties, and interest be specified as the only other type income which
can be used in computing growth in adjusted gross income (in the
case of individuals) or taxable income (in the case of estates, trusts,
and corporations) . These items constitute the major sources of income
of the vast majority of taxpayers and are relatively easy to ascertain;
and from the standpoint of administration, it is desirable to keep
them at a minimum. Moreover, all of them have a clear connection
with the utilization of labor or capital in the production of income.
Capital gains, including capital dividends, may happen to be realized
during the current taxable year, but they usually include growth
which has occurred prior to the current taxable year; moreover, they
already receive special incentive tax treatment. I would therefore
exclude them from the definition of growth income.
ADJUSTM ENTS
TO
B U S I N E S S IN C O M E
To have a realistic measurement of growth in business income,
certain adjustments should be made. For example, a lump-sum pay
ment received in the taxable year which reflects services rendered
over a period of several years cannot reasonably be attributed, in
its entirety, to growth during the taxable year. A ratable allocation
to the current year under the option available to the taxpayer should
be the limit. Income from a change in method of valuing inventory,
from a change in method of accounting, or from a change in method
of computing depreciation hardly reflects economic growth. Addi
tional income of a corporation resulting from another corporation
being merged with it, to the extent of the other corporation's income,
certainly does not represent growth of the first corporation’s business.
Additional income of an individual resulting from the transfer to him
(through dissolution) of the business of his corporation would not
represent his growth. These items of taxable income should be elim
inated in computing growth income.
To be fair, there are other adjustments that should be made to
eliminate deductions which are properly allowable for tax purposes
but have no essential relationship to growth. Thus net operating
loss carryover deductions or capital loss carryover deductions should
not be taken into account in determining growth income. It would
seem that a loss deduction attributable to fire, flood, windstorm, theft,
or other casualty, not covered by insurance or otherwise, should not
be permitted to destroy the growth a taxpayer may otherwise have
achieved and should also be eliminated.
Another adjustment appears to be desirable in the case of corpora
tions. Contributions to charitable, educational, religious, scientific,
and similar activities are becoming increasingly important and are to
be encouraged. If a corporation’s growth income could be enhanced
merely by cutting back its contributions, a longstanding policy of
Congress to encourage corporate giving would be frustrated. Ac
cordingly, it appears desirable to provide that growth income of a
corporation may not be so achieved.
Business income from illegal activities should be excluded alto
gether, for I presume this kind of growth is not to be encouraged.
104
JOINT ECONOMIC REPORT
PRIOR YEAR ADJUSTMENTS
Adjustments with respect to the current year are not the only ones
required to properly measure growth. Income of the immediately
preceding taxable year, which ordinarily would serve as the base for
measuring growth, also requires some adjustments. First of all, wemust decide whether a base year income of less than zero should be
permitted. Although I would admit that coming from a loss of
$10,000 in one year to a profit of $10,000 in the following year repre
sents $20,000 in growth, I do not believe it wise to permit growth
income to be measured from a loss position, particularly since a tax
payer already has the benefit of a net operating loss carryover or
carryback deduction.
Next, we should not measure growth income in the current year
from a fictitiously low economic income base. Thus, if income during
the preceding year has been lowered for tax purposes by taking into
account a net operating loss deduction, a capital loss carryover
deduction, a loss deduction arising from fire, flood, windstorm, theft,
or other casualty, not covered by insurance or otherwise, or a deduction
for the extra first-year depreciation allowed by section 179, these
adjustments should be added back.
Ia m dubious over permitting a lowering of the base year’s income by
eliminating income arising from a change in method of valuing
inventory, change in method of accounting, or change in method of
depreciation. Such changes are usually voluntary on the taxpayer’s
part and often are made with a view to improving his tax position.
Accordingly, I would propose that a lowering of the base year’s
income by eliminating such income be permitted only where the change
ip method has been forced on the taxpayer by the Government.
' Where a joint return is filed for the current taxable year, it would be
unrealistic to measure the income reported therein against the income
of only one of the spouses for the preceding year if separate returns
were filed by them (either as married or single persons) unless the
income on the joint return represents the actual income of only one
of them. I use the word “ actual” to make it clear that community
property law will not enter into this calculation.
P R E V E N T IO N
OP
W IN D F A L L S ,
W H IP S A W IN G ,
A N D . OTHER
U N D E S IR A B L E
R E SU L T S
In order to prevent windfalls, whipsawing (fluctuating income from
one year to another to take undue advantage of the reduced rates on
growth income), and other undesirable results, certain provisions are
necessary.
The question arises whether a taxpayer who becomes a wage earner,
salaried person, or business operator for the first time should be per
mitted to treat any or all of his first year’s income as “ growth income.”
The answer would seem to be “ no.” Birth of income is not the same
as growth in income. A similar answer should apply in the case of
the first year of operation of an estate, trust, or corporation. Accord
ingly, I would define growth income in such a way as to require it to
be measured against the first immediately preceding full taxable year,
so that at least 1 full year’s experience will be used as a basis for
calculating growth. But that first year's experience may represent
only part-time or nominal activity. To prevent a windfall by using
JOINT ECONOMIC REPORT
105
the income from such a year as a base, I would provide that the tax
reduction from the special rates on growth income not be in excess
of the amount of tax for the preceding year.
Example: B, a college senior, graduates in midyear and com
mences full employment, earning $5,000, with regular tax thereon
of $813. During the preceding year he worked part time, earning
$1,200 and paying tax of $98. His tax reduction for the current
year would be $98— not $357.50 (one-half the difference between
$813 and $98).
An individual in control of a corporation (or a corporation in control
of another corporation) might seek to obtain growth income by arbi
trarily having the controlled corporation declare extraordinary divi
dends. To prevent this type o f abuse, it would seem desirable to
limit the amount of dividends that could be counted for this pur
pose— say to 125 percent of those received from the controlled cor
poration during the preceding taxable year and, in any event, limit
such dividends to the amount of current earnings of the corporation.
In ascertaining whether or not a taxpayer is in control of a corpora
tion, constructive ownership of stock under the attribution rules of
section 318 should be taken into account.
With the “ payback” provision, which I shall presently discuss, the
graduated tax rates applicable to individuals, trusts, and estates do
not offer much opportunity for whipsawing. There is, however,
some opportunity for whipsawing in the case of corporations. To
discourage this, I would propose using as a base year the immediately
preceding full taxable year (as in the case of individuals, estates, ana
trusts), with the limitation that the taxable income for such base year
be not less than the taxable income for fiscal or calendar year 1962.
If the corporation was not in existence or active during fiscal or calen
dar year 1962, its first full taxable year would be used for this purpose.
However, one can conceive of situations where a corporation’s taxable
income for fiscal or calendar year 1962 might be abnormally high,
leaving little or no incentive to the corporation to seek growth
because of the arbitrary selection by Congress of the taxable income
of such year as a limitation on the base year. To cover these situa
tions, I would propose that in lieu of fiscal or calendar year 1962,
a corporation could elect to use (as a limitation against the taxable
income of the base year) the average taxable income of fiscal or
calendar 1962 and the 2 preceding taxable years (or the preceding
taxable year, if the corporation was not in existence or active during
the 2 years preceding fiscal or calendar 1962).
Example: Corporation X had taxable income as follows: (1960)
$75,000; (1961) $100,000; (1962) $200,000; (1963) $100,000;
(1964) $150,000. No adjustments were required to taxable in
come for 1963 and 1964. Obviously there was no growth income
for 1963 and no tax reduction. Growth income for 1964 cannot
be measured against taxable income of $100,000 for 1963, because
1963 taxable income cannot be less than the $200,000 taxable
income for 1962. However, the corporation elects to take the
average taxable income for 1960, 1961, and 1962, which is
$125,000, as the limitation below which base income for 1962
cannot go. Growth income for 1964 would be $25,000.
1U6
JOINT ECONOMIC REPORT
Deliberate whipsawing by taxpayers may possibly be attempted
notwithstanding the precautionary provisions built into this plan.
With a view to discouraging such efforts, it would seem proper to
irovide that where income or deductions have arbitrarily been shifted
rom one year to another by a taxpayer for no business purpose other
than reduction of taxes arising from the reduced rates on growth in
come, the Commissioner may make such adjustments as are necessary
to protect the revenue. The doctrine of “ business purpose” is reason
ably well settled by the tax law, regulations, and court decisions, and
such a provision should be unwelcome only to those who would seek
to frustrate the purpose of this new plan.
f
E L IM IN A T IO N
O F S M A L L R E D U C T IO N S
Elimination of tax reductions of under $5 in the case of individuals
and under $15 in the case of corporations would greatly reduce the
administration requirements of the plan. Cost-of-living wage in
creases under escalation clauses do not really represent economic
growth, and the $5 limitation would eliminate most of these cases.
TAX
R E D U C T IO N
PAYBACK
Not only do we wish to encourage growth: we wish to discourage
going'backward after growth. Such a policy, coupled with a policy
against whipsawing, prompts me to recommend what I call a “ tax
reduction payback” provision. It would require the voiding of a tax
reduction based on growth income if, in the following year, the tax
payer’s income decreases. The tax reduction would be voided ac
cording to the proportion that the decrease bears to the amount of
growth income on the basis of which the tax reduction was computed.
Example: Corporation A has taxable income (adjusted) of
$100,000 for 1962, $100,000 for 1963, and $100,000 for 1964. It
pays $46,500 tax for each year. It has no tax reduction for 1963
and 1964 because there is no growth income. On $200,000 com
bined income for 1963 and 1964 its combined tax is $93,000.
Corporation B has taxable income (adjusted) of $100,000 for
1962, $150,000 for 1963, and $50,000 for 1964. Its combined
income for 1963 and 1964 is $200,000, and its combined tax is
$93,000— the same as corporation A, computed as follows:
loea
$150,000
72,500
-1 3,0 00
1964
$50,000
20,500
Total
$200,000
93,000
+13,000
If, instead of a decrease from taxable income (adjusted) of
$150,000 for 1963 to $50,000 for 1964, corporation B dropped
only to $125,000, the tax reduction payback would be only $6,500
(one-half of $13,000 tax reduction for 1963 based on the propor
tion of the decrease of $25,000 in 1964 to the growth income of
$50,000 for 1963).
The amount of the tax reduction payback is to become a part of the
tax due and payable for the year of the decrease in income. I do not
O
u i i 'i
j.
u o v n w itu v
AVI
believe it is necessary to require payment of interest inasmuch as the
. taxpayer will already have lost the use of tax money paid on the
higher tax that would have been due for the growth year— even after
allowance of the tax reduction.
Conclusion
Like any other major plan of tax reform, this one has its minuses.
I recognize that a good many taxpayers would not benefit from it.
Some are in a declining income position which is beyond their control.
Others (including Members of Congress) are on a stable'income basis
with little likelihood for improvement— although this plan will provide
encouragement to make the most of opportunities for improvement.
However, similar criticism could be made of other tax reduction
provisions in the Internal Revenue Code. For example, faster de
preciation methods and rates are meaningless to a taxpayer caught
in the same tax bracket with or without them. Percentage depletion
does not benefit a taxpayer to the extent that it exceeds 50 percent of
net income. The deduction for medical and hospital expenses does
not help over half the taxpayers under 65, who either use the optional
standard deduction or find such expenses exceeded by 3 percent of
their adjusted gross income. M ost of the benefit arising from the
recently enacted investment tax credit will go to only a relatively few
taxpayers. Nevertheless, all of these have been enacted because
Congress considered that they were in the national interest.
In those situations where weather conditions can have an important
bearing on income— such as in the agricultural and construction in
dustries— growth (or decrease in income) will be affected regardless
of the capital or labor contributed. However, the plan does provide
relief for casualty losses; and where weather has had a severe impact
on business or wage conditions, there will be the incentive to work
harder to make up for it.
Incentive taxation of growth income is entirely workable and ad
ministratively feasible. It would be simple for most taxpayers to
compute their reduction because they would have few if any adjust
ments to make. Corporations and individuals operating a business
would, in some cases, find it a bit complicated. However, when we
recall how terribly complicated the excess profits tax law was, perhaps
we should not be too impatient with a far less complicated proposal
which will, unlike the excess profits tax law, reduce taxes.
(2) T he “ M ultiplier ” T heory
So much reliance has been placed by the majority on the “ multi
plier” theory that I believe a httle more refutation is in order.
The supplementary materials (p. 45) appended to the majority
report sets forth the theory of the “ multiplier” and so-called “ acceler
ator.” In a completely regimented country, where the government
controls wages, prices, profits, raw materials, etc., the theory might
work. In a capitalistic economic country like the United States,
deeply involved as it is in world trade, the theory will not work— at
least to any measurable degree.
In the first place, the theory depends on the psychology of the
people. No one can predict this with any accuracy. Consumers
may decide to save additional dollars resulting from a tax cut instead
of spending them. Businessmen may decide to not expand producive capacity and to not hire more people, especially if they believe
1 UU
UU-UNJ.
iMJUlN UiVLUJ
itU iJt'U itl*
that the administration has an “ antibusiness” attitude. Investors
may decide to not invest in new businesses or to not expand present
businesses, feeling that caution is warranted by both domestic and
foreign uncertainties.
In the second place, the theory must be premised on a stable dollar.
For example, the multiplier effect of extending to consumers $2.7
billion more purchasing power through the administration’s proposed
tax cut for fiscal 1964 would be frustrated if inflation during the same
period, generated by the administration’s proposed $12 billion deficit,
reduces purchasing power by $2.7 billion or more.
Those who adhere to the multiplier theory admit that it has its
limitations. When the suggestion is made that perhaps we should
have a tax cut of $20 billion in order to increase gross national product
by $40 billion or more, they express concern that this would “ over
heat” our economy. Oddly enough, all administration spokesmen
are in complete agreement that .a $2.7 billion tax cut for fiscal 1964
will provide just the right temperature; whereas the majority of this
committee is of opinion that a $6 billion tax cut for fiscal 1964 is
needed to properly warm up the economy.
(3) G rowth R ate R equired T o M ake U p for B udget D eficits
and R evenue Loss F rom T a x C ut P roposal
To make up the $10 billion net revenue loss involved in the Presi
dent’s tax reduction and reform proposal plus the current fiscal 1963
budget deficit of nearly $9 billion plus anticipated increases in Govern
ment expenditures (likely to run at least $5 billion a year under admin
istration policies) would require an increase in gross national product
on the order of $135 billion over the 3-year period to supply the tax
revenue. Such an increase would mean an annualfrate of growth in
excess of 7 percent. In the last year our rate was slightly over 3
percent, so we can hardly expect a 7-percent rate to be achieved under
this administration. It should be pointed out that even if the
President’s tax reduction stimulated an increase in rate to 5 percent,
the annual deficit could well exceed $10 billion or more if the spending
side of the budget is not brought under control. I t is hard, cold fig
ures like these, coupled with the Federal spending policies of the
administration and the Democratically controlled Congress, which
prompt the critical projections of Dr. Arthur Burns and Maurice
Stans in the minority report.
COMMITTEE AND SUBCOMMITTEE ACTIVITIES IN THE
PAST YEAR
The Joint Economic Committee is directed by the law creating it
(Public Law 304, 79th Cong.) to report to the Congress on the main
recommendations of the President’s Economic Report and to make a
“continuing study” of the economy.
The work of the full committee and the subcommittees for the
period March 1962 to February 1963 is summarized below:
F U L L C O M M IT T E E
January 1962 Economic Report of the President
During the latter part of January and the first part of February
the committee held 9 days of hearings on the 1962 Economic Report
of the President and the economic situation and outlook, at which
Government officials, academic experts, and representatives of business
and labor presented their views. A report was prepared and submitted
to the Congress on March 7.
State of the economy and policies fo r fu ll employment
In August the committee held 12 days of hearings on the “ State
of the Economy and Policies for Full Employment.” The purpose of
these hearings was to investigate current trends in the national econ
omy and to determine what changes in fiscal or monetary policies,
both; were needed to stimulate employment and economic growth.
Dimensions of Soviet economic power
During the fall of 1962 the committee issued a compilation of 24
study papers on “ Dimensions of Soviet Economic Power,” written by
experts on the subject of the Soviet economy. On December 10 ana
11 the committee held public hearings on the same subject.
Federal Reserve System Open Market Committee
During the year the committee continued its investigation of the
adequacy of the Federal Reserve’s reporting system, and in December
made public an extensive memorandum showing why more informa
tion should be provided to the public by the Board of Governors,
and setting forth reasons for publishing the condensed version of the
1960 minutes of the Open Market Committee.
S U B C O M M IT T E E
ON
E C O N O M IC
S T A T IS T IC S
Measures of productive capacity
Hearings on “ Measures of Productive Capacity” were held M ay 14,
22, 23, and 24 at which experts were asked to give their considered
judgments as to the uses that are made or could be made of measures
of productive capacity, the extent to which measures are now avail
able, the coverage and reliability of existing capacity measures, and
what should be done through public and/or private sources, if any
109
JLJ.U
JOINT ECONOMIC REPORT
thing, to improve data on productive capacity. The subcommittee
issued a unanimous report on this subject on July 24.
A Federal statistics program fo r the 1960’s
In October the subcommittee published a report prepared by the
Office of Statistical Standards, Bureau of the Budget, entitled “ A
Federal Statistics Program for the 1960’s.” This report describes
briefly the improvements recently made or currently underway in
each subject matter area of the Federal statistics program. It then
indicates the direction and nature of further development and im
provements which are viewed as objectives in years ahead.
Productivity, prices, and incomes
The subcommittee began work on bringing up to date the Joint
Economic Committee’s 1957 study of “ Productivity, Prices, and In
comes.” It is planned that this updating may include preparation of
unit cost indexes, unit value added indexes, contributions to price
change, and related materials.
Other subcommittee studies
The staff, under the direction of the subcommittee, investigated
suggestions for revisions in Economic Indicators and incorporated in
the November 1962 issue such additions and revisions as seemed
desirable. At the same time the staff, with the assistance of the
Bureau of the Budget, revised and brought up to date the “ Supple
ment to Economic Indicators Historical and Descriptive Background.”
Members of the Subcommittee on Economic Statistics were Senator
William Proxmire, chairman; Senators Paul H. Douglas and J. W.
Fulbright; and Representatives Richard Bolling, Thomas B. Curtis,
and William B. Widnall.
S U B C O M M IT T E E
ON
E C O N O M IC
ENERGY
S T A B IL IZ A T IO N , A U T O M A T I O N , A N D
RESOURCES
Continuing its study of “ Inventory Fluctuations and Economic
Stabilization” begun in 1961, the subcommittee obtained papers from
experts in government, the universities, and research organizations
which were printed in four separate parts. It also published two task
force reports on “ The Role of Inventory Changes During Expansion
and Contraction” and “ Inventory Fluctuations, Price Level Changes,
and Economic Growth.” Hearings were held July 9 to 13 at which
witnesses testified on the role inventory changes may play in magnify
ing economic recessions and booms, and perhaps in influencing the
turning points in business cycles.
Members of the Subcommittee on Economic Stabilization, Automa
tion, and Energy Resources were Representative Wright Patman,
chairman; Representatives Henry S. Reuss, Martha W. Griffiths,
Clarence E. Kilbum, and William B. Widnall; and Senators William
Proxmire, Claiborne Pell, and John Marshall Butler.
S U B C O M M IT T E E
ON
I N T E R -A M E R I C A N
E C O N O M IC
R E L A T IO N S H IP S
The subcommittee held hearings M ay 10 and 11 on “ Economic
Developments in South America” at which 10 witnesses submitted
apers and responded to questioning by the subcommittee. These
earings were conducted in two roundtable discussions: One, with
E
111
JOINT ECONOMIC REPORT
specialists on Latin American agriculture, taxation, and labor; the
’second with representatives of firms with long South American in
vestment and business experience. On July 20 the subcommittee
made a report containing summary comments on these hearings.
Representative Martha W. Griffiths, as a member of the subcom
mittee, in December 1962 held numerous conferences with embassy
and local officials in five cities in four countries of Central America,
including the Canal Zone and Mexico, and submitted a report based
on her observations, titled “ Economic Policies and Programs in
Middle America.”
Members of the Subcommittee on Inter-American Economic Rela
tionships were: Senator John Sparkman, chairman; Senator John
Marshall Butler; and Representatives Richard Bolling, Hale Boggs,
Martha W. Griffiths, and Thomas B. Curtis.
S U B C O M M IT T E E
ON
IN T E R N A T IO N A L
EXCHANGE
AND
PAYM ENTS
The subcommittee published a compilation of papers prepared by
experts from Government, universities, and research organizations as
part of its broadly based study of the need and means for reducing
the deficit in the U.S. balance of payments, as well as appraising the
opportunities for international trade and payments cooperation and
the usefulness of a policy of relatively high domestic interest rates
in stemming the recent dollar outflow. This publication is titled
“Factors Affecting the U.S. Balance of Payments.” Hearings were
held on December 12, 13, and 14 and later published as “ Outlook for
U.S. Balance of Payments.” Later in December the subcommittee
issued a report based on the study papers and hearings entitled “ U.S.
Payments Policies Consistent With Domestic Objectives of Maximum
Employment and Growth.”
Members of the Subcommittee on International Exchange and
Payments were: 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.
CHANGES
IN
C O M M IT T E E
M E M B E R S H IP
At the beginning of the 88th Congress, Senator Jack Miller, of
Iowa, and Senator L enB. Jordan, of Idaho, were appointed to fill the
two vacancies in the Senate Republican membership of the Joint
Economic Committee created by the retirement from the Senate of
Senator Prescott Bush, of Connecticut, and Senator John Marshall
Butler, of Maryland.
CHANGES
IN
C O M M IT T E E
STAFF
James W. Knowles was appointed executive director of the staff of
the Joint Economic Committee, effective February 1, 1963, to succeed
Wm. Summers Johnson, who resigned to become staff director and
clerk of the Committee on Banking and Currency of the House of
Representatives. John W. Lehman, deputy executive director,
resigned on September 17, 1962, to become director of the Cleveland,
Ohio, regional office of the Bureau of Labor Statistics of the U.S.
Department of Labor. Mr. Lehman came to the committee on May 1,
1947, as the first clerk of the committee.
PUBLICATIONS
OF TH E JO IN T ECO N O M IC
CO M M ITTE E
March 1962 to March 1963
Full Committee:
•(■Hearings, January, 1962 Economic Report of the President, Janu
ary 25, 26, 30, 31 February 1, 2, 5, 6, 7, and 8, 1962 (sale price
$2.25): March 1962.
Joint Economic Report, Report of the Joint Economic Committee
on the 1962 Economic Report of the President, House Report
1410 (sale price 50 cents): March 1962.
Inventory Fluctuations and Economic Stabilization, Part IV , Sup
plementary Study Papers (papers prepared for the Joint
Economic Committee by experts from the Government, univer
sities, and research organizations), committee print (sale
price 35 cents): M ay 1962.
The Role of Inventory Changes During Expansion and Contraction
(Report submitted to the Subcommittee on Economic Stabili
zation, Automation, and Energy Resources of the Joint Eco
nomic Committee), committee print (not on sale): July 1962.
Inventory Fluctuations, Price Level Changes, and Economic Growth
(Report submitted to the Subcommittee on Economic Stabili
zation, Automation, and Energy Resources of the Joint
Economic Committee), committee print (not on sale): July
1962.
Hearings, State of the Economy and Policies fo r FvU Employment,
August 7-10, 13-17, 20-22, 1962 (sale price $2.75): September
1962.
1962 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
65 cents): January 1963.
Dimensions of Soviet Economic Power (Compilation of studies
prepared for the Joint Economic Committee, combined with
Hearings, December 10 and 11, 1962) (sale price $2.75):
. January 1963.
Hearings, January 1963 Economic Report of the President: Part 1,
January 28, 29, 30, 31, February 1, 4, 5, and 6, 1963 (sale
price $1.75): March 1963; Part 2, Statements of Economic
Interest Groups (sale price 55 cents): March 1963.
1963 Joint Economic Report, Report of the Joint Economic
Committee on the 1963 Economic Report of the President,
Senate Report No. 78 (sale price 35 cents): March 1963.
t Economic Indicators (a monthly publication of the Congress
under Public Law 120, 81st Cong., 1st sess.) (sale price 25 cents
a copy, $2.50 a year): Issued monthly.
113
IX -i
JOINT ECONOMIC KEPOKT
Subcommittee on Economic Statistics:
Hearings, Measures of Productive Capacity, Subcommittee on
Economic Statistics, M ay 14, 22, 23, and 24, 1962 (sale price
45 cents): July 1962.
Measures of Productive Capacity (Report of the Subcommittee on
Economic Statistics), committee print (sale price 15 cents);
July 1962.
A Federal Statistics Program for the 1960’s (A Study prepared for
the Subcommittee on Economic Statistics), committee print
(sale price 25 cents): October 1962.
Subcommittee on International Exchange and Payments:
tFactors Affecting the United States Balance of Payments (Com
pilation of studies prepared for the Subcommittee on Inter
national Exchange and Payments), committee print (sale
price $1.75): December 1962.
TJ.S. Payments Policies Consistent with Domestic Objectives o]
Maximum Employment and Growth (Report of the Subcom
mittee on International Exchange and Payments), committee
print (sale price 10 cents): December 1962.
■(Hearings, Outlook for United States Balance o f Payments, Decem
ber 12, 13 and 14, 1962, Subcommittee on International
Exchange and Payments (sale price 65 cents): January 1963.
Subcommittee on Inter-American Economic Relationships:
■*Economic Policies and Programs in South America (Report oi
the Subcommittee on Inter-American Economic Relationships),
committee print (sale price 35 cents): January 1962.
(Hearings, Economic Developments in South America, Subcom
mittee on Inter-American Economic Relationships, May 10
and 11, 1962 (sale price 40 cents): June 1962.
tEconomic Developments in South America (Report of the Sub
committee on Inter-American Economic Relationships), com
mittee print (sale price 10 cents): July 1962.
Econom icPolicies and Programs in Middle America (Report of th^
Subcommittee on Inter-American Economic Relationships),'
committee print (sale price 15 cents): January 1963.
1
Subcommittee on Economic Stabilization, Automation, and Energjj
Resources:
Hearings, Inventory Fluctuation and Economic Stabilization, Sub
committee on Economic Stabilization, Automation, and Energj
Resources, July 9-13, 1962 (sale price 65 cents): August 1962.
Out-of-print publications are denoted by an asterisk. Publication!
available only from Superintendent of Documents are denoted by a dagger (j)
o
@FedFRASER