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7.7

1976

JOINT
ECONOMIC
REPORT
Joint Economic Committee
Congress of the United States
Senate Report No. 94-690
..................
.......................................................

......

SENATE

94TH CONGRESS

Sd Session

J

I
l

REPORT
No. 94-690

THE 1976
JOINT ECONOMIC REPORT

REPORT
OF THE

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ON THE

JANUARY 1976 ECONOMIC REPORT
OF THE PRESIDENT
TOGET[HER WiTH

AN INTERNATIONAL SECTION IN WHICH MAJORITY
AND MINORITY CONCUR, AND MINORITY,
SUPPLEMENTAL, AND ADDITIONAL
VIEWS

MARCH 10, 1976

Printed for the use of the Joint Economic Committee

U.S. GOVERNMENT PRINTING OFFICE
67-73 0

WASHINGTON: 1976

For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402 -Price $2.80

JOINT ECONOMIC COMMITTEE
(Created pursuant to see. 5(a) of Public Law 304, 79th Cong.)
HUBERT H. HUMPHREY, Minnesota, Chairman
WRIGHT PATMAN, Texas, Vice Chairman
SENATE

HOUSE OF REPRESENTATIVES

JOHN SPARKMAN, Alabama
WILLIAM PROXMIRE, Wisconsin
ABRAHAM RIBICOFF, Connecticut
LLOYD M. BENTSEN, JR., Texas
EDWARD M. KENNEDY, Massachusetts
JACOB K. JAVITS, New York
CHARLES H. PERCY, Illinois
ROBERT TAFT, JR., Ohio
PAUL J. FANNIN, Arizona

RICHARD BOLLING, Missouri
HENRY S. REUSS, Wisconsin
WILLIAM S. MOORHEAD, Pennsylvania
LEE H. HAMILTON, Indiana
GILLIS W. LONG, Louisiana
CLARENCE J. BROWN, Ohio
GARRY BROWN, Michigan
MARGARET M. HECKLER, Massachusetts
JOHN H. ROUSSELOT, California

JOHN R. STAaK, Executive Director
SENIOR STAFF ECONOMISTS
WILLIAM A. Cox
JERRY J. JASINOWSKI
LoufnLIN F. MCHUGH

JOHN R. KARLIK
COURTENAY M. SLATER

RICHARD F. KAUFMAN, General Counsel
ECONOMISTS
WILLIAM R. BUECHNER
ROBERT D. HAMEIN
RALPH L. SCHLOSSTEIN

LUCY A. FALCONE
L. DOUGLAS LEE
LARRY YUSPEH

SARAH JACKSON
GEORGE R. TYLER

MINORITY
CHARLES H. BRADFORD (Senior
GEORGE D. KRUMBHAAR, Jr.

(Counsel)

Economist)

M. CATHERINE MILLER (Economist)
(II)

CONTENTS
I. Introduction and summary-----------------------------------Main recommendations-----------------_____-----------II. Economic situation and outlook------------------------------Outlook for 19760
_________________- ____-- --------------Will the recovery 'be sustained? ------------------------Energy

_______--__-

___--

--

-

Longer-run growth prospects
__________________--______
III. Fiscal, monetary and price-incomes policies---------------------_
Goals of economic policy--------------------------------Fiscal policy

_____________-_______--___________

Price-incomes policy -------------------------------------Monetary policy-___-- ___________________________-___
Coordination of economic policy -_____________________-___
IV. Special policies to achieve full employment
__________-- -------The high cost of extended unemployment ---------------The proper role for unemployment compensation ----------A program of job creation ________________-__
Economic planning-__------------_----____
V. Federal budget priorities---------------------------------------Expenditures ---------------------------------------- ____
Income security ----------------------------_-____
Housing ----------------------------------------Energy -----------------__-------------------____
Agriculture ------------ _--__---_-------------------____

Defense spending-------------Tax reform--________________________________
Small business ------------------------------------____
VI. Investment requirements and capital sufficiency -------------Investment needs--_______________--_______
Availability of funds--__________--________________________
Can business finance needed investment?--------------------Broadening the ownership of new capital__________----------VII. Economic problems of regions, States, and cities------------------Operating budgets
____________----------------------Sustaining State unemployment funds----------------------The municipal bond market -___________---___________--Chronically depressed regional economics-------------------The need for regional economic information-----------------VIII. International economic issues----------------------------------Monetary reform
___-__________--___________________
Coping with oil deficits ------------------------------------Commitment to concessional aid----------------------------Consumer-producer conferefices-----------------------------International energy policy---------------------------------Achieving world food security ----------------------------Supplemental views of Vice Chairman Wright Patman ----------------Supplemental views of Senator William Proxmire-------------------Supplemental views of Senator Abraham Ribicoff--------------------Supplemental views of Senator Lloyd Bentsen
__________-- --------Supplemental views of Senator Edward M. Kennedy-----------------Supplemental views of Representative William S. Moorhead-----------Supplemental views of Representative Gillis Long--------------------(III)

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w
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Minority views------------------------------------------------------I. Introduction--_____________________________.___
II. Economic outlook-----------------------------------------------

157
161
163

III. Monetary policy------------------------------------------------

166

IV. Fiscal policy--------------------------------------------------V. Employment - -- ------------------------------------------VI. Energy -------------------------------------------VII. Capital formation-------------------------------------VIII. State and local governments-------------------------------------Supplemental views of Senator Jacob K. Javits…-----------_____________
Additional views of Senator Charles H. Percy--------------------------Additional views of Representative Garry Brown-----------------------Additional views of Representative John H. Rousselot------------------Committee and subcommittee activities in the past year_-____________-__
Subcommittee membership, Ninety-fourth Congress----------------------

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94TrH CONGRESS
2d Sesmion

t

SENATE

3

4

REPORT

I

No. 94X690

REPORT ON THE JANUARY 1976 ECONOMIC REPORT
OF THE PRESIDENT

MAncH 10, 1976.-Ordered to be printed with illustrations

Mr. HuMprnxy, from the Joint Economic Committee, submitted the

following

REPORT
together with

AN INTERNATIONAL SECTION IN WHICH MAJORITY
AND MINORITY CONCUR, AND MINORITY, SUPPLEMENTAL, AND ADDITIONAL VIEWS
[Pursuant to sec. 5(a) of Public Law 304, 79th Congress]

This report is submitted in accordance with the requirement of the
Employment Act of 1946 that the Joint Economic Committee file a
report each year with the Senate and the House of Representatives
containing its findings and recommendations with respect to each of
the main recommendations made by the President in the Economic

Report. This report is to serve as a guide to the several committees of
Congress dealing with legislation relating to economic issues.
(1)

Report of the
Joint Economic Committee
on the
January 1976
Economic Report of the President

I. INTRODUCTION AND SUMMARY
The condition of the United States economy continues to
be a matter of distress to Members of this Committee. Despite recent signs of improvement, seven million people remain out of work by official count. If discouraged and
underemployed workers are included, the figure exceeds 10
million. An estimated 60 to 75 million people in 1975 were
members of families in which someone was unemployed. No
one can be complacent about the recent gains when full employment is still years away.
To inform itself first hand on the extent of the economic
crisis, the Committee held a series of hearings on unemployment in cities throughout the country. It traveled to Chicago, New York, Atlanta, Los Angeles, Boston and Fall
River, Massachusetts to hear testimony, including statements by unemployed persons, State and local officials, and
others. This testimony was very useful, and some of the
recommendations in this Report were developed from ideas
presented at these hearings.
The problem of unemployment is especially acute in the
case of young people. In January, 3.7 million persons under
the age of 25 were unemployed. Indeed, this prolonged recession threatens to spawn a large disenchanted group of
young adults-out of the work force, without opportunity
for adequate self-support, and alienated from the society
that fails to accord them a productive role.
The Great Recession of 1973-1975, as Chart I/1 starkly
shows, dwarfs all previous postwar recessions in depth and
duration. Two and one half years after this recession began,
the economy has not yet returned to its 1973 income levels.
Meanwhile, the Nation's economic potential has grown
faster since 1973 than during most previous downturns.
Lost income and production since the start of the recession
now totals some $400 billion in constant 1972 dollars, and
further losses by 1980 will run in the range of $600 to $900
billion depending on the speed of recovery. In either case,
this unnecessarily severe recession continues to involve a
monumental waste of national resources.
(5)

Chart l/1

POSTWAR RECESSION AND RECOVERY PATHS
Index of real GNP
(Previous peak = 100)
103

1960.61102

-

101

-

100

1957

58 41'

1969-70

0,90
NMI

98

1953d54

1973-75

97

95

I
Source: Department of Commerce

11

111

IV

V

TIME INTERVALS IN QUARTERS

VI

Vil

Vill

7

It is in this light that the recommendations of our Report
must be viewed. It is true that the economy has made good
strides toward recovery in recent months. But no one should
forget that it still has very far to go before its resources will
be fully utilized and before inflationary shortages could recur on any significant scale. Stimulative economic policies
at a time like this create jobs, productivity and income; not
inflation.
The President's Economic Report is a blueprint for recession-level unemployment and high inflation for several
years ahead.
The President's 1977 budget is so restrictive that it does
not serve as a useful starting point for budget policy deliberations. His proposals to cut spending by $25 to $30
billion below the level needed to maintain current government services would mean a very sharp shift toward recession while the economy remains underutilized and
unemployment remains above 7 percent. Compared with
this irresponsible proposal, our recommendations may look
quite stimulative. Compared to the projected needs of the
economy, however, our recommendations are moderate.
If the President's tax and spending recommendations are
followed, the Committee projects that the unemployment
rate will stabilize at a high level, as discouraged workers reenter the labor force, and will rise again in 1977. As Chart
I/2 indicates, the rate would decline by only 0.6 percentage
point from the fourth quarter of 1975 to the same quarter
of 1977, remaining close to 8 percent. Under those policies,
the Committee estimates that the inflation rate would fall
by only one-half percentage point and would remain above
6 percent, and that production would rise by less than 10
percent.
In contrast, if the Committee's recommendations are followed, we project a drop in the unemployment rate by over
21/2 percentage points from its level in the fourth quarter
of 1975 to a level of 6 percent by the end of 1977. Inflation
would decline by 2.8 percentage points to 4 percent, and
production would rise by 14 percent.
The President's estimate of the budget deficit based
on his policies, moreover, is so optimistic that it cannot
be taken seriously. After correcting for this overoptimism, this Committee estimates that the President's
deficit would be nearly $60 billion-not $43 billion, as he
states. The Committee's recommendations, after counting

Chart 1/2

POLICY TARGETS: JEC COMPARED WITH ADMINISTRATION
(Percent Changes, 4th Quarter, 1975 to 4th Quarter, 1977)

UNEMPLOYMENT RATE
percentage points

INFLATION RATE
percentage points

4I 4I
E
*

00

PRODUCTION
percent
ADMINISTRATION POLICIES
JOINT ECONOMIC COMMITTEE TARGETS

9
additional tax revenues from higher income and employment, would not materially enlarge the deficit, yet more
than 11/2 million more jobs would be available under the
Committee's program, real output would be 4 percent
higher and the inflation rate 2 percentage points lower.
The long-awaited recovery from recession is less assured than the President and his economic advisers
would have us believe. Although an important element
of confidence is returning, capital investment still is
languishing; housing construction is far below what it
should be with a record number of young people forming
new households; and consumer intentions remain uncertain. We expect improvement in economic performance in the next several months, but we are very concerned that the President's restrictive 1977 budget, if
accepted, would remove the supports from beneath the
recovery at a critical time. Unless economic policies are
substantially more stimulative than the Administration
proposes, the recovery could founder in 1977. It is distressing to realize how long and slow that recovery will
be even if more stimulative fiscal and monetary policies
are adopted.
The severe recession of the past two and a half years
need not have been so drastic. Its severity is a direct
result of economic misunderstanding and mismanagement by the Administration and the Federal Reserve.
The Nation is a victim of misguided policies.
Administration officials would have us believe that such
a recession was the unavoidable consequence of an inflation which stemmed from profligate government spending. This myth has been repeated so often from such
high pedestals that many otherwise well informed people
believe it. The truth is that the inflation of 1973-1974
derived not from government profligacy but largely from
factors such as grain, oil, and dollar devaluations that
did not reflect generalized excess demand.' The recession
has been gravely prolonged by failure to understand this
in the Administration and the Federal Reserve. Eagerness to believe their own preconceptions has blinded them
to reality.
In spite of warnings from many economists and from
this Committee, the Administration and the Federal Re1 See Joint Economic Committee, Achieving Price Stability Through Economic Growth,
December 1974, Chapter 11.

10

serve continued in 1974 to apply restrictive fiscal and
monetary policies to an already collapsing economy. As
late as November of 1974, the President and his advisers
referred to inflation as "public enemy number one" with*out mention of rising unemployment. December, the
President still was calling for a tax increase (surcharge)
when a tax cut clearly was needed to bolster the economy
against collapse. Congress fortunately rejected this
request.
The bitter results of overly restrictive policies are still
with us. This is the cause of today's enormous budget
deficits, occasioned by recession-induced outlays and
revenue shortfalls. Every percentage point in unemployment costs the U.S. Treasury an estimated $17 billion$12 billion in lost tax revenues and $5 billion in food
stamps, unemployment insurance, and other support programs. The recession also is the main cause of the persistent decline in real capital formation.
The Nation has failed consistently to meet the objectives of the Employment Act of 1946 under which this
Committee was established. After 30 years, it is evident
that we must improve our capacity to manage the economy to achieve full employment. To attempt less would
be an inexcusable failure to use our ingenuity to build a
more rational and humane society.
This objective will require nothing less than fundamental reform of the institutions and policies we employ for making national economic policy. Among the
new initiatives needed to achieve full employment are
the following:
A national commitment to all adult Americans
able, willing, and seeking to work, to provide opportunities for useful paid employment at fair rates of
compensation;
The establishment of annual economic goals jointly
by the President, the Congress, and the Federal Reserve to achieve full employment, production, and
purchasing power;
The use of fiscal and monetary policy to meet the
annual economic goals with provisions to encourage
the Federal Reserve to pursue monetary policies that
support these goals and that achieve full employment as promptly as possible;

11

The establishment of a process of long-range economic planning to analyze developing trends and
economic conditions; to recommend long-term goals
for full employment, production, and purchasing
power; and to propose policies and programs to
achieve such goals;'
The establishment of supplementary employment
policies to close the gap, if one should exist, between
employment levels achieved through aggregate monetary and fiscal policy and the goals adopted to achieve
full employment as promptly as possible. Supple.mentary employment programs should be designed
to reduce unemployment due to recessions and to
structural barriers within regions and among particular labor force groups; and
The establishment of comprehensive anti-inflation
policies that directly moderate price increases in
noncompetitive industries which threaten to undermine national progress toward price stability.
In submitting its recommendations on economic policy
to the Congress, the Joint Economic Committee must deplore the continual statements of Administration officials
that purvey ignorance and misinformation to the public
on matters of economic policy. Despite its deficiencies,
economics has become a highly developed discipline. Administration officials often speak as though they had
heard nothing of its progress in the past 40 years. To
illustrate:
In dealing with the large deficits of recent years,
the Administration ignores the fact that they result
directly from recession and not vice versa. When
unemployment mounts, tax revenues decline and
spending on unemployment compensation, among
other things, rises. This process is one of the socalled "automatic stabilizers" of the economy. Each
percentage point of unemployment, as noted above,
increases the Federal deficit by about $17 billion. If
unemployment in fiscal year 1976 had been at 4 percent instead of its projected level of about 8 percent,
the deficit would have been very largely eliminated.
Yet the Administration spreads the erroneous notion
that the deficit is caused by "wasteful spending."
2

See Representative Long's comments, p. 15 footnote.

12

Another distortion of fact lies in constant allusions to massive growth in Federal spending. The
Federal Government is not gobbling up the national
pie. As a proportion of gross national product
(GNP), in fact, the Federal budget has maintained
a roughly constant 20-pereent share from 1953 to
1973. Federal employment has fallen steadily over
the same period as a share of the civilian labor
force, from 4 percent to 3 percent.
Inflation cannot be talked down by castigating the
Congress for its budget decisions. Congress now has
a rigorous process for regulating the budget. Dealing
with inflation responsibly requires public action to
ease supply shortages, to curb excessive wage and
price increases, and to cushion the domestic effect of
world price fluctuations.
It is time to stop misleading statements on the significance of the national debt. The facts are that the
debt has dropped sharply from 82 percent of annual
GNP in 1950 to 26 percent in 1974.
There are other illustrations of poor economic analysis
by the Administration, such as warnings that Federal
borrowing will "crowd" private investors out of the
credit markets at a time when credit is overly abundant;
and such as unnecessary alarms about social security
financing and proposals to raise social security taxes
needlessly while the economy remains weak.
Constant reiterations of archaic and erroneous notions
mislead the public. They are divisive and harmful to the
formulation of reasoned economic policy. We call on the
Administration to cease these proclamations and to elevate the discussion of economic policy to a more informed
and productive level.
MAIN RECOMMENDATIONS

For the immediate future, the Committee recommends
a number of essential policy initiatives:
* Current services budget estimates prepared by the
Congressional Budget Office, rather than the President's
budget, should serve as a starting point for congressional
decisions on the 1977 budget. Congress should make
reductions from current services outlay levels wherever
such reductions are consistent with efficient maintenance

13
of necessary government services. Because of the high
unemployment which will still persist in 1977, a large
part of the savings achieved in this way should temporarily be invested in programs to deal with unemployment.3 Adoption of our recommendations would result in
an estimated outlay total of $412 to $418 billion.4 6
* Action should be taken prior to July 1 to provide for
continuation at least through the end of 1977 of the personal income tax reduction which has been in effect during 1975 and the first half of 1976.
* The strength of the recovery should be carefully
monitored during the next few months. Should output
growth appear to be dropping below the 7-percent rate
needed to bring unemployment down appreciably, an
additional tax cut should be enacted for 1977. This additional reduction should be of a type which will act
directly to reduce costs and prices. An income tax credit
against some part of social security taxes paid would
meet this requirement.
* No increase in the social security tax rate is necessary or desirable in 1977, nor should the Federal unemployment insurance tax rate be increased at that time.
* The President should establish and vigorously support a voluntary program designed to ensure that price
increases are held to a necessary minimum during 1976
and that real wage increases are in line with productivity
gains, taking into account the expected rate of price inSenator Proxmire states: "I object to using the current services levels-that Is, last
year's programs increased for population and price levels-as a starting point. This is a
mindless method. It legitimizes all those programs and expenditures-good and badnow in the budget. I advocate zero-based budgeting, strict benefit-cost analyses, determining the economic costs of alternative programs, and cutting back or ending inefficient and
useless agencies and outlays."
4 Senator Sparkman states : "It is most disturbing to see continuing increases in Federal spending. I believe that the Congress and the Administration must make greater
efforts to limit this spending growth. For that reason, I would place particular emphasis
on the proposal in the Report that immediate efforts be made to reduce spending for
programs that do not have high priority. I believe we should do this with even greater
efforts than stated in the Report.
"Also, I would hope that the strength of our recovery and the wise use of monetary and
tax policy could speed up the recovery and thereby reduce the deficit. An economic recovery
will automatically increase incomes, which in turn leads to higher revenues. Likewise, it
should greatly reduce the need for spending on such programs as unemployment, welfare,
food stamps and emergency employment. In this way, there would be a healthy force
working to reduce public spending. It must be remembered that the recession has been
very costly to the Federal Government as well as to the other sectors of our economy."
a Senator Proxmire states: "I strongly oppose such a high budget outlay. See my supplemental views on p. 136."

6 Representative Hamilton states : "Although I favor a more stimulative program for
the economy than the President has proposed in order to sustain and quicken the recovery
now underway. I am concerned with the magnitude of the stimulus proposed by this Report.
I am hopeful that the recovery will be vigorous enough to avoid reaching the spending
target recommended In this Report. For that reason, I will reserve judgment at this
moment on the specific expenditure figure recommended herein.
"The report also recommends the enactment of a large number of legislative proposals.
While I subscribe to the objectives of these proposals. and may very well support them
when they come before the Congress for consideration, I do not want my general approval
of the Majority Report to be construed as an unreserved endorsement of each such
proposal."

67-573 0 - 76 - 2

14
crease. The Council on Wage and Price Stability should
be given full Presidential support in the use of its authority, including its subpoena authority, to investigate
price increases and to seek compliance with price and
income standards. Tax policy should also be used to contribute to the achievement of a satisfactory rate of increase in workers' real disposable incomes. We believe
such a program can succeed in reducing the inflation rate
to 5 percent this year and 4 percent by the end of the
next year. This goal can be achieved without resort to
comprehensive price or wage controls, to which we are
opposed.
* During the remainder of 1976, monetary policy
should be conducted so as to avoid any substantial rise
in short-term interest rates and to encourage reductions
in longer-term rates. Temporary fluctuations in the rate
of growth of the monetary aggregates should not precipitate monetary policy changes so long as the pattern
of interest rates is satisfactory. Over the longer run, however, growth of the monetary aggregates must be in line
with potential growth of real output.
* The costs to the Nation of prolonged unemployment
are unacceptable. The goal of economic policy should be
to reduce the unemployment rate to 6 percent by the end
of 1977 and eventually to achieve an unemployment rate
no higher than 3 percent of the adult labor force.
* A comprehensive strategy for dealing with unemployment is essential to overall economic recovery. An
antirecession program should place primary emphasis on
providing jobs-in the private sector to the extent possible, but supplemented by emergency public works jobs
and public service jobs as necessary. Unemployment compensation should be used to assist workers who are jobless
for relatively short periods of time. Until enough jobs
are provided, however, unemployment compensation or
other income support must be extended. Federal supplemental unemployment benefits should be phased out with
the implementation of an adequate jobs program.
7 Senator Proxmire states: "This could become a very costly program unless done right.
I advocate that the Government become the employer of last resort by providing useful
work at the unemployment compensation rates of those laid off (plus the cost of getting
to work) and at the minimum wage for those with no unemployment compensation eligibility who are entering the labor force. In this way useful work can be performed for the
society at little added cost."

15
* Emergency job programs should be expanded to provide additional jobs for the cyclically unemployedthose who normally could find jobs when the economy is
operating near capacity. The additional jobs created by
this program expansion should be in special projects
lasting from one to two years and having a useful and
identifiable output. The jobs should be clearly temporary
and should make use of skills which the participants
already have. This emergency program should be in addition to the existing CETA job training and public service employment programs. Appropriations should be
provided to create a total of one million jobs during
1977, including the 600,000 jobs which would be provided
under legislation recently passed by the House of Representatives extending and enlarging Title VI of CETA.
* Congress should quickly reenact and the President
should sign legislation providing for(a) countercyclical aid to State and local governments, and
(b) an emergency public works program designed
to fund high-priority local work projects.
* Nearly one-half of the total unemployed are persons under 25 years of age. Extended idleness for young
people with little past work experience will result in
severe social and economic costs. Congress should give
high priority to developing a comprehensive program
targeted specifically at the unemployment needs of young
people.
* Congress should enact legislation establishing Federal planning procedures to develop long-range policies
for balanced economic growth and full employment.
These procedures should provide roles for Congress and
the Executive Branch as equal partners in the planning
process and should provide for full participation by the
private sector and by State and local governments. The
goals of full employment and price stability should8 be
high priorities in any system of economic planning.
* The Social Security Trust fund is in basically sound
condition. The single most important thing that can be
8 Representative Long, La., states: "I believe that the thrust of this recommendation is
to coordinate the activities of the Federal Government so that the private sector will
have a better idea of exactly what Federal policy is and what the intentions of the Federal
Government are."

16
done to ensure the continued soundness of the social insurance system is to restore health to the overall economy. Even so, some changes will be necessary to avert
problems in 1980 or after, but Congress has time to give
careful consideration to the full ramifications of these
changes.
* Congress should enact policies designed to increase
the rate of housing starts to levels that are consistent with
a national goal of 2.3 million units annually. This level
of production is sufficient to meet the demand created
by net new household formation and replacement of the
existing housing stock. Top priority should be given to
programs designed to make new and existing housing
affordable to more families. As a first step toward implementing this recommendation, the $2 billion available
for use in the Govermnent National Mortgage Association tandem plan should be released immediately.
* Congress should give energy conservation higher
priority, moving promptly to consider economic incentives and assistance to realize energy efficiency in residential and commercial buildings, industrial processes,
transportation, and electric power generation. While
pursuing promising technology development based on
nuclear and fossil fuels and the development and production of synthetic fuels from nonpetroleum feedstocks,
Congress should provide adequate funding for research
and development on energy conservation and the use of
renewable energy sources.'
* To gain control of the tax expenditure budget and
to ensure that each provision serves a useful purpose
equitably and effectively, Congress should direct its taxwriting committees to report on all tax expenditures
within five years. After critical examination, each item
should either be reauthorized with or without modification for a period not to exceed five years, or else eliminated. A regular five-year review cycle should be
established.
* Tax reform should be given high priority on the legislative agenda in 1976. Actions should be carefully
considered which would provide a more effective and
equitable tax system. Any revenue-raising changes should
be offset by general tax reductions.
D Representative Moorhead, Pa., states: "To provide for added emphasis to conservation
R. & D. is good as far as it goes, but much of the answer to the Nation's energy needs
rests with commercialization of already existing synthetic fuels technology. See my supplemental views on p. 152."

17
* Congress should review the Federal laws, agencies,
and regulations affecting small business. This review
should develop a National Small Business Policy that
will foster a dynamic small business sector.
* Small firms, which need high retained earnings to
finance operations, pay far more of their earnings in
taxes than big businesses. The Treasury Department,
Federal Trade Commnission, and Securities and Exchange
Commission together should review the reasons for this
phenomenon and make recommendations for tax code
revisions to make the effective rates more equitable.
* Business investment may need to be proportionately
greater in the next several years than in the past decade.
The most serious obstacle to the achievement of needed
investment is the underutilization of existing capacity
and the lack of promising markets for the output of
new factories. A shift in demand growth from basic
materials toward less capital-intensive sectors could reduce total capital needs significantly.
* Private saving augmented by shifts in international
capital flows should remain adequate to fund desired
investments at reasonable interest rates at least well
into the year 1977, given proper monetary policy. If
congestion appears in credit markets later in the recovery, new savings incentives or an adjustment of the Federal budget toward surplus would become desirable.
* Effectively designated proposal to stimulate capital
formation should be given careful consideration. There
are a number of tax preferences in today's corporate tax
code, however, that are poorly designed or outmoded and
do not serve this purpose effectively. In view of the redistribution of the tax burden that already has occurred
from corporations to individuals, the revenue loss from
any new corporate tax incentive should be offset by closing these ineffective loopholes. Any corporate tax reduction should emphasize reductions at the small-business
end of the spectrum."0
* To provide a realistic opportunity for more U.S.
citizens to become owners of capital, and to provide an
expanded source of equity financing for corporations, it
should be made national policy to pursue the goal of
broadened capital ownership. Congress also should re'° Senator Proxmire states: "The corporate income tax is not a progressive tax. Its Incidence falls on consumers and employers far more than on stockholders. It Inhibits investment. It should be reduced as the President has requested. I would favor an even greater
reduction."

18
quest from the Administration a quadrennial report on
the ownership of wealth in this country which would
assist in evaluating how successfully the base of wealth
was being broadened over time.
* As long as the economy operates significantly below
capacity, the real value of Federal assistance to State and
local governments should not be allowed to decline. Congress should reject changes in Federal policies that significantly increase the costs and reponsibilities of State
and local governments.
* The countercyclical grant-in-aid program should be
reenacted by Congress and signed by the President. It
should remain in effect as long as the national unemployment rate remains above 51/2 percent.
* The General Revenue Sharing Program should be
extended for three years so that State and local governments are assured of receiving this source of Federal
assistance to meet current services needs without substantially increasing taxes."
* State and local governments should be offered the
option of issuing taxable securities accompanied by a
Federal subsidy of about 40 percent of the interest payment. The option of issuing a taxable bond with an
interest subsidy should be available to all general purpose units of government but should not affect existing
provisions of law that permit these governments to issue
tax-exempt securities.
* As an initial effort to encourage the development of
private sector job opportunities in chronically depressed
areas, Congress should consider establishment of a regional economic development bank. The bank should
be designed to make low-interest loans to businesses and
State and local governments for the purpose of encouraging investment in chronically depressed regions or
areas.
* The Congress should enact promptly in 1976 the
legislation required to amend the IMF Articles so as to
permit early full implementation of the agreement on
monetary reform announced in Kingston, Jamaica, on
January 8. This legislation should include provisions requiring congressional approval of any proposal to dis"Senator Proxmire states: "I disagree. Revenue sharing should be ended
forthwith
and Federal tax sources should be shifted to the States instead.
Revenue sharing severs
the ability and the advantage of spending from the discipline and
pain
of
raising the
taxes."

19

pose of the remaining 100 million ounces of Fund gold
or of a proposed return to a par value for the dollar.
It should also include instructions to the Secretary of
the Treasury indicating that any intervention in exchange markets conducted by or cooperatively participated in by U.S. monetary authorities should be short
term, for the exclusive purpose of combating disorderly
conditions in exchange markets, and should under no
circumstances attempt to alter the trend of exchange
rates.

II. ECONOMIC SITUATION AND OUTLOOK
In the second half of 1975, the United States economy began a
recovery from the worst recession in the postwar period. Federal tax
reductions and spending increases set in motion during 1975 will sustain that recovery throughout 1976, although its pace could slow in
the second half. The support which these fiscal measures provided to
real income will boost consumer spending and, combined with greater
availability of credit, should help to maintain the modest recovery
in housing which began at the end of 1975. These improved prospects,
aided by returning confidence, may provide the impetus for business
investment increases later in 1976. The budget policy decisions that
must be made in 1976 will determine whether the recovery will maintain its momentum in 1977 or whether growth will slow, causing inflation and unemployment to persist at high rates.
The 1973-75 recession was not only the most severe in the postwar
period, but the economy's rebound from this sharp decline could leave
some productive labor and capital idle for the rest of this decade. In
the final quarter of 1975, real output was still below the levels which
prevailed in late 1973. This is the only postwar recovery in which the
economy did not reach its prerecession levels within the first nine
months of recovery. As Table 11/1 indicates, output dropped twice as
far in the 1973-75 recession as in any other postwar decline. In the
early stages of the four previous postwar recoveries, furthermore, the
economy's growth rate was twice or three times as high as the rate
of decline in the recession. In 1975, this has not been true.
The loss in gross national product (GNP) from underemployed
capacity from the start of the recession to the end of 1975 sums to
nearly $400 billion-a monumental total of wasted opportunity. Even
if the economy experiences a sustained recovery, another $600 billion
to $900 billion in output could be lost by 1980, depending on the speed
of recovery.
In judging the present situation and policies to deal with it, one
must be fully aware of how far the economy remains from the limits
of its capacity.
TABLE 11/1.-CHANGES IN REALGROSS
NATIONAL PRODUCT
IN POSTWAR
RECESSIONS
AND RECOVERIES
,
fin percentl
Recession Recovery
in
decline
Iot 9 months

Period
1953-54 -3
1957 58-3.
1960-61 1969-70
1973-75

3
2
-1I.2
1
6.6

--.
--

' See chart 1/1.
Source: Department of Commerce.

(20)

5.9
5.8
3.7
3.7
5.1

21
The unemployment which accompanied the 1973-1975 declines in
output was more severe than at any time since the Great Depression.
The official unemployment rate rose to a peak of 8.9 percent in May and
declined to just under 8.0 percent at the beginning of 1976. However,
when one includes discouraged workers who have dropped out of the
labor force and part-time workers who want full-time jobs, the unemployment rate climbed to nearly 12 percent and still remains in
early 1976 over 91/2 percent. Recent improvements in the overall unemployment rate, moreover, mask the hardship suffered by several
labor force groups: in January, the unemployment rate for blacks was
over 13 percent; for teenagers it was almost 20 percent; for black teenagers, it was 35 percent; among construction workers was still above 15
percent. As pointed out in the Committee's recent regional hearings,
unemployment rates in cities and in certain regions of the country are
sharply higher than the national average. The Committee's program
to accelerate the return to full employment is outlined in Chapter
III and IV.
THE QuToOK FOR 1976
In our judgment, real output may be expected to grow by about 6
percent in 1976, if the Administration's proposed policies are followed.
Other forecasts of real output growth range from 5 to 7 percent, with
the average a bit more pessimistic than our own. Those predicting
growth rates approaching 7 percent generally assume a somewhat
more expansive policy course than the Administration has
recommended.
During the first half of this year, economic events will be determined
largely by decisions which already have been taken. Important tax
decisions yet to be taken could affect the economy beginning in the
third quarter, and by the fourth quarter decisions relating to the fiscal
1977 budget will begin to have their effect. A sharp shift toward a
restrictive budget policy such as the Administration recommends could
materially weaken the prospects for continued economic recovery late
this year in 1977. By contrast, the supportive budget policy and other
recommendations contained in this report would, we believe raise the
output growth rate for 1976 as a whole to about 7 percent and would
provide for the continuation of a strong recovery in 1977.
Consumer spending in real terms is expected to rise by 5 to 6 percent
this year, led by a strong increase in purchases of durable goods. Extension of the 1975 income tax reduction plus an historically high savings rate and the deferral of many major purchases during the past
two years are factors contributing to a rebound in consumer spending.
While the consumer sector should provide the bulk of the real growth
in the economy this year, a renewal of inflationary expectations would
weaken the still fragile improvement in consumer confidence.
The outlook for private investment-which includes plant and
equipment spending, residential construction, and inventory investment-is less certain. A modest rise in housing starts to a level above
1.5 million by the end of 1976 will contribute to higher investment.
This recovery will be hastened if the Federal Reserve pursues monetary
policies which lower long-term rates throughout the year. The rebuilding of inventories also will contribute to GNP growth during the year.

22
At the present time, however, business plans for investment in plant
and equipment remain weak. The latest Commerce Department survey
of spending plans indicates a decline of 4 percent in real investment
in 1976. While these plans may be revised upward as the year progresses, investment in plant and equipment cannot be expected to make
any significant contribution to the growth in real output during the
first half of 1976.
Although the sharp drop in unemployment to 7.8 percent in January was welcome, it was so large that there may be a tendency in succeeding months for the rate to remain at this level or even to rise
slightly. It is not uncommon for the unemployment rate to move in
step-like fashion; that is, to drop sharply and then remain on a
plateau for several months. It is possible that the drop in unemployment during January will be the major improvement that we will see
this year.
A recovery path which increases output by only 5 to 6 percent in
1976 is unlikely to reduce the unemployment rate below 7.5 percent by
year's end. In 1975 unemployment averaged 8.5 percent. Normally, a
4-percent growth in output is required to maintain the current unemployment rate; and for every additional three percentage points of
real GNP growth, the unemployment rate drops about one percentage
point. By this rule of thumb, growth in real GNP of 6 percent in 1976
would reduce the unemployment rate by about two-thirds of one percentage point from last year's average, or to an average of about 7.8
percent in 1976.
WILL

THE RECOVERY BE SUSTAINED?

The continuation of a strong recovery into 1977 is in doubt at this
time. According to the majority of forecasters, the adoption of a 1977
budget that cuts the level of real government services, such as the
budget proposed by the President, will reduce the 1977 growth rate
in real GNP to well below the 5- to 6-percent rate projected by the
Administration. If the President's budget of $395 billion is adopted
a growth rate of only 3 to 4 percent in 1977 appears probable. Those
forecasters who predict 1977 growth rates close to the Administration's 5- to 6-percent projection uniformly assume that more stimulative budget policies will be adopted.
A growth rate of 3 to 4 percent would lead to an increase in the gap
between actual and potential GNP and to a continuation of an un-

employment rate well above 7 percent-and probably above 71/2
percent-throughout 1977.
Several of the sectors that are expected to lead the increase in GNP
during 1976 will not be as strong in 1977. The rebuilding of business
inventories in the early stages of recovery will be largely complete by
the end of this year. The strong rate of increase in residential construction expected in 1976 is unlikely to be maintained in 1977 both because this year's spurt in homebuilding can hardly be repeated and
because the high price of housing seriously limits demand. Real outlays at the Federal level and grants to State and local governments
would be sharply reduced under the Administration's budget. Thus
the government sector would be a source of weakness in 1977 if this
budget were adopted.

23
This would leave consumer spending and business investment to lead
any growth of output. But the strong stimulus given by the 1975
tax cuts and rebates to 1976 consumer spending will not be repeated
in 1977. The income tax cuts recommended by the Administration for
1977 would be substantially offset by recommended increases in social
security taxes. The reduction in transfer programs implied by a $395billion budget would further reduce the gains in consumer income. If
inflation continues at the 6-percent rate expected by the Administration, this too would cut real incomes and also would mean that the
personal savings rate, which is expected to decline somewhat in
1976 from its present very high level, would be unlikely to decline
further in 1977. The combination of high inflation and the threat of
unemployment, which has buffeted American families for the last three
years, is likely to preclude a swift return to personal savings rates
in the prerecession range of 6 percent of disposable personal income unless strong evidence emerges that both inflation and unemployment
are being permanently reduced. All these restraining factors suggest a
decline in the growth rate of consumer purchases to the 3- to 4-percent
range in 1977 from the 5-percent growth we anticipate in 1976.
The outlook for investment in plant and equipment in 1977 remains
relatively strong. Sharp increases in corporate profits during this year
will provide the impetus for gains in business spending. Because of the
time lags involved in actually executing increased investments, the
influence of higher profits will be realized primarily in 1977. However,
even an assumption of 10-percent growth in business investment, given
the expected slowdown of the other major sectors, would be insufficient
to raise the overall growth rate in real GNP above 3 to 4 percent.
Although it does not appear probable at this time, there is a possibility, which should not be excluded, that a restrictive budget policy
combined with tighter monetary policy could halt the growth in output
in 1977.
In sum, the continuation of a satisfactory pace of recovery in 1977
requires a set of economic policies -which both provide support to the
economy and instill confidence in consumers and businessmen that
neither inflation nor recession threatens again. We recommend such a
set of policies in this report. We want to stress that policies operate
with a time lag. Action in 1976 is needed to support continued recovery in 1977.

Prices
Prices at both wholesale and retail levels rose considerably more
slowly in 1975 than in 1974. Consumer prices rose by 7 percent, compared to 12.2 percent in 1974. Wholesale prices rose only 4.2 percent,
down from 20.9 percent in 1974.
As Table 11/2 shows, the components of the consumer price index
rose at similar rates in 1975. The 6.5 percent rise in food prices during
the year was primarily due to sharply higher prices for meats, while
other food items generally rose by less. The other two items causing
the largest increases in consumers' budgets were fuels and medical
care, which rose 11 percent and 10 percent, respectively.
In spite of the overall improvement in wholesale price behavior,
there wvere increases among individual sectors that are cause for con-

24
cern. As Table II/3 shows, the wholesale prices indexes for industrial
commodities accelerated from the second quarter of 1975 to the end
of the year. Price increases were greatest in lumber products (10.7
percent during the year), machinery and equipment (7.7 percent),
mineral products (8.3 percent), and fuels (12.7 percent). The acceleration in many wholesale prices during this period of slack demand
and low capacity utilization suggests strong market power on the part
of a number of basic materials industries. A major factor contributing
to the improved performance of wholesale prices was the modest increase in farm product prices and the 3.8-percent decline in processed
food and feed prices during the year.
TABLE 11/2.-PERCENT CHANGE IN PRICEMEASURES,
1973-75
Year

Consumer Price Index:
Allitems Food
Energy (gasoline, motor oil, fuel oil and coal, gas and
electricity)-16.8
All items less foodAll items less food and energyWholesale price index:
All commodities -15.4
Farm products, processed foods and feeds Industrial commodities -10.7
Fuels, related products and power -24.

1975, by quarters I

1973

1974

1975

1

8.8
20.1

12.2
12.2

7.0
6.5

6.6
5

5.6
4.7

21.6
12.2
11.3

11.6
7.1
6.7

26.7

20.9
11.0
25. 6
51.2

3

11

Ill

IV

7.0
9.7

7.4
8.0

7.3
8.3

1.4
7.1
9.4

17.0
7. 2
5.1

23.6
7.6
5.8

6.0
6.7
7.1

4.2 -6.3
-. 3 -27. 6
6.0
4.2
12.7
.3

7.2
17.0
2.6
16.0

11.1
26. 8
7.3
25. 5

5.6
-7. 9
10.1
10.2

XQuarterly changes at seasonally adjusted annual rates.

TABLE 11/3.-PERCENT CHANGE IN WHOLESALE INDUSTRIAL PRICES
(SEASONALLY ADJUSTED ANNUAL RATES)
1974
2d half
All industrials -------------------By stage of processing:
Crude materials, excluding foods and feeds -6.7
Intermediate materials, excluding foods and feeds -21.5
Producer fisixhed goods -24.
Consumer nonfood finished goods -15.
Textile products and apparel -Fuels, related products and power -23.5
Chemicals and allied products -50.9
Lumber and wood products -Pulp, paper and allied products -31.4
Metals and metal products -16.3
Machinery and equipment -26.
Motor vehclesand equipment-------------------------------------Other industrial products I-15.1

19.5

5
6
3. 2
18.9
5
21.4

1975
1st half

2d half

3.4

8.7

1.5
2.2
8.4
3.9
-5. 0
7.9
6.8
9.4
.8
-3. 3
8.7
6.0
5.4

7.6
8.8
7.9
9.6
13.9
17.6
4.0
12.0
6.2
6.2
6.6
8.7
5.2

I Not seasonally adjusted; includes hides, skins, leather, rubber and plastic products, nonmetallic mineral products,
furniture and household durables and miscellaneous products.
Source: Department of Labor, Bureau of Labor Statistics.

The Administration's forecast of 6-percent inflation in 1976 and 1977
is plausible if one assumes sluggish growth and the complete absence
of any anti-inflation policy. Several factors will contribute to slightly
better price performance this year than last. Food prices are not expected to rise more than 4 to 5 percent according to the latest Department of Agriculture forecast, although the current drought in the
grain belt or other unfavorable weather developments could change
this outlook substantially. Average crude oil prices should not rise and

25
may decline somewhat as a result of the domestic price rollback. The
gains in productivity which usually accompany the early stages of re.
covery should hold down unit costs of output in most sectors.
Private forecasters and several witnesses before this Committee
have emphasized the possibility of reducing the inflation rate below
the Administration's 6-percent forecast. Stronger GNP growth in the
second half of 1976 and early 1977 would hold down unit costs through
greater increases in productivity. A stronger government role in restraining prices in concentrated industries, where prices rose even at
the bottom of the recession, could hold price increases to 5 percent this
year and improve the possibility for an inflation rate in the 4-percent
range by the end of 1977.
Wages
Wage settlements over the life of union contracts rose by 7.8 percent
in 1975 compared to 7.3 percent in 1974. These increases in wages and
in wages combined with benefits were more modest, however, than one
would have expected considering the declines in real income which
E workers have suffered. Real hourly earnings-that is, earnings adjusted for inflation-declined 1.1 percent in 1973 and 3.4 percent in
1974. A high unemployment rate combined with falling corporate
profits in 1975 limited the size of settlements during the year. As Table
II/4 shows, increases in overall compensation for the entire economy
in 1975 averaged 9 percent compared to 9.7 percent in 1974.
TABLE 11/4.-ANNUAL RATESOF CHANGE IN COMPENSATION, 1973-75
IPercentl
Measure of compensation
1.Wages (1,000 workers or more):
Ist year adjustment -5.8
Average ever life uf contract
11.Wages
andbenefits combined:
Ist year adjustment-7.1
Average over life of contract-6.1
111.Aggregate compensation measures:
Total compensation per hour, all employees, private nonfarm
economy
-7.
Average
hourly earnings, production ornonsupervisory workers,
private nonfarm economy -7.0
Realadjusted hourly earnings --

1973

1974

1975

5.1

9.8
7.3

10.2
7.8

10.7
7. 8

11.2
8.0

9

9.7

9.0

1.1

8.3
-3.4

7.0
2.2

Source: Bureau of Labor Statistics.

This year the collective bargaining calendar is especially heavy
with 4.4 million workers affected by contract expirations, compared
to 2.5 million in 1975. Major industries facing contract negotiations
include automobiles, trucking, construction, electrical machinery, meat
packing, rubber, farming, and construction machinery. Rising corporate profits and an attempt to catch up with past price increases,
especially by unions without cost-of-living escalators in their existing
contracts, will put strong upward pressure on wage settlements. Continued high levels of unemployment will exert some pressure in the
opposite direction, but the factor which could have the greatest effect
in encouraging moderation in wage settlements would be confidence
that the rate of increase in consumer prices will continue to decline.
A price-incomes policy designed to provide that assurance is discussed
in Chapter III.

26
ENERGY

The 1975 Joint Economic Committee Report focused on the potential
economic impact of the oil pricing proposals announced by the President in January 1975. These included heavy new tariffs and excise
taxes on oil and removal of price controls from oil and gas. The
Administration claimed that these steps would reduce oil imports by
one million barrels per day by the end of 1975 and by two million
barrels per day by January 1977.
The Committee pointed out the arbitrary nature of the proposed
oil import reductions. To this day no justification of these objectives
has been presented. It also emphasized the damaging economic effects
of adopting the Administration's energy program. It was calculated
that the President's package would have added between 3 and 4 percent to the inflation rate in 1975 and would have diverted up to $55
billion in purchasing power annually from the consumption spending
stream to the Government and sellers of oil. Given the depth of the
recession one year ago and the persistence of unacceptably high
inflation, enactment of the President's energy program would have 0
dealt a catastrophic blow to the economy.
A congressional energy program provided an alternative to the
President's proposals and laid out the framework for the Energy
Policy and Conservation Act that was passed in December. 1 A number
of important provisions, many of them recommended in the Committee's annual report, were incorporated in the final version of this Act.
These included automotive fuel efficiency standards, requiring doubled
fuel efficiency 'by 1985; mandatory energy efficiency labeling for
major home appliances; energy efficiency targets for the 10 energyintensive industries; conservation standards for Federal agencies;
standby presidential authority for national emergencies; provisions to
expand coal production and its use in electric power generation; and
authorization for a strategic petroleum reserve. Despite persistent
Administration opposition to the oil pricing provisions during most
of the year, the President's reluctant decision to sign this measure
enacted legislation that shields the economy from unwise energy price
increases and also sets in place essential pieces of a balanced and
comprehensive long-term energy strategy. 2
The Senate and House next must resolve differences over the prices
of natural gas in both interstate and intrastate markets. It is inappropriate for this Committee to suggest the components of an acceptable compromise prior to action by the Senate-House Conference Comnmittee. At a minimum, however, the average price approved for
natural gas should not exceed the average price per Btu for oilunder
the compromise agreed to in the Energy Policy and Conservation
I The Congressional Program of Economic Recovery and Energy Sufficiency, first published
in
February
1975.
Renresentative Gills Long states: "While I generally agree with this analvsis, I am
concerned with several aspects of the oil price mechanism. and I was very disappointed
when the President signed the bill. For one thing. the
$7.55
composite nrice does not
provide enough
incentive for increased domestic production esneciallv for the
independent
producers who found 94 percent of all new domestic
oil fields
1974.
in
When the House
of Representatives passed
its
version of the Energy Policv and ConservAtion Act, I was
able to pass an amendment
that
would have encouraged
increased domestic production so
that we would be less dependent on foreign oil, which is so expensive and unreliable.
Unfortunately, the final bill did not contain the necessary provisions to achieve these
goals,
and I could not support the bill."

27
Act. The natural gas pricing provision should cover both intrastate
and interstate gas. Protection against exorbitant price increases, combined with fair incentives for producers to expand supply, should
continue to be the objectives
Despite settlement of some of the contentious energy policy issues
of the past two years, much remains to be accomplished. There is no
presently apparent way at any reasonable cost to reduce U.S. dependence on Arab oil greatly by 1985.4 We may be doing well to hold
imports to a constant fraction of consumption. Many of the energy
production options that were viewed with enthusiasm in the initial
response to higher energy prices-especially the technology development projects for synthetic fuels, shale oil, and nuclear power-now
are seen to involve much more time and far higher costs than were
anticipated. 5 Creation of a strategic petroleum reserve, authorized
by the Energy Policy and Conservation Act, will provide more prompt
and economical insurance against threats of supply interruptions than
an array of crash programs to develop advanced technologies. While
these options should be pursued, their cost effectiveness should now
be reassessed against that of more prosaic but eventually high-payoff
possibilities such as conservation, coal, and solar heating and cooling.
Given the present production-oriented Federal energy policy, we believe that some shift in the emphasis, which will be described more
fully in Chapter V, is appropriate.
LONGER

RUN> GROWTH

PROSPECTS

One of the fundamental questions for economic policy is whether
the economy can and should continue in the longer term to grow at
the rates of the past two decades. The desirability and the possibility
of continuing rapid growth has been questioned in recent years far
more than in the past. Most people until recently supported rapid
growth while only a few analyzed its costs. Now, however, these questions have become very widespread. Recognizing the need for a fair
distribution of employment and income, many people have begun to
doubt that continuing growth brings overall increases in the quality
of life. In addition to the ultimate physical limits imposed by nature,
moral, social, and cultural limits to growth are coming to the forefront
of the argument.
For the medium term, trends in economic activity are determined
largely by the development of the Nation's maximum productive potential based on the growth of the labor force, the number of hours
worked, and labor productivity, which reflects the rate of investment
and the development of technology. Since the end of 1968, potential
output has been growing at about 4 percent per year. As we move
toward the 1980's however, the growth of this potential is expected
a Renresentative Gillis Long states: "I strongly support the Pearson-Bentsen and Krueger
bills which would deregulate natural gas over a 5-year period. I believe that deregulation
of natural gas will ultimately result in assuring the American people a steady supply of
natirnl gas at reasonable prices."
I Representative Gillis Long states: "I believe significant gains can be made to reduce
U.S. dependence on foreign oil by increasing domestic production, as I indicated in a
previous note."
Representative Moorhead. Pa.. states: "I believe significant advantages can be gained
through the commercialization of existing synthetic fuels technology, involving much less
time and expense than predicted, as noted in my supplemental views on p. 152."

28
to decline, primarily because the large number of people born in the
decade after World War II will have entered the labor force, and the
flow of new manpower will then drop off. In the 1980-85 period, therefore, growth of potential output should decline to 3 to 31/2 percent. 0
The potential growth rate also could be affected in the medium term
by other factors: (1) Lower rates of investment, foreseen by some,
and correspondingly lower productivity advances; (2) a possible decline in dramatic technological innovations; (3) saturation of markets
for certain products, particularly consumer durables; (4) a potentially
limited capacity of service industries to employ an ever larger share
of the labor force; and (5) higher prices of raw materials, largely from
less developed countries.
In the long run, limits to growth in the world at large may be posed
by the availability of raw materials and energy, by the limits to environmental tolerance of pollution, or by the rise of a conservation ethic
replacing the traditional growth ethic. Whether or not this will occur
depends on a large number of unforeseeable variables, primary among
which are the course of future technological progress and the ability
of policymakers to foresee and adapt to the evolution of circumstances.
At the very least, a basic consensus, stated at a recent Committee
hearing by Louis Lundborg, retired Chairman of the Bank of America,
seems to be emerging. Mr. Lundborg testified that "Our present exponential rate of industrial growth, based on nonrenewable natural resources, simply cannot be sustained." This view was supported by other
witnesses at the hearing.
Although recognizing that serious impediments to maintaining recent growth rates may be on the horizon, the Committee still believes,
as reflected throughout this Report, that healthy U.S. economic growth
is necessary over the medium-term future. This statement does not
imply, however, that future growth patterns should be the same as
growth patterns of the past. Rather, the Committee supports the idea
that the qualitative dimension of economic growth-the way we growmust become an integral part of economic analysis and policymaking.
If an adjustment must be made to a slower growing economy or to a
different kind of growth, this adjustment may be one of the most profound since the industrial revolution began. In this case, the question
of the timespan over which such an adjustment must happen and what
forms it may take becomes one of the most important for scientists and
social thinkers to address.
In this spirit, the Committee has launched an extensive study series
entitled U.S. Economic Growth, 1975-1985: Pro8pects, Problem8, and
Patterns. This series will present the research results of more than 50
authors from diverse disciplines in both the social and physical sciences. Many issues will be examined from both traditional and new
perspectives. These papers will be published by the Committee beginning in the spring of 1976.
OMore detailed projections are to be published in the Monthly Labor Review in the
spring of 1976. These projections will update a similar study published in the same Review
in December 1973.

III. FISCAL, MONETARY, AND PRICE-INCOMES POLICIES
In 1976 and 1977 the opportunity will be present to make significant
progress toward both lower unemployment and less inflation. This
desirable progression of events will not occur spontaneously, however. Federal policies must be consciously directed toward specific
targets for output, employment, and prices. This chapter describes
the targets which we believe to be appropriate for 1976 and 1977 as
well as the fiscal, monetary, and price-incomes policies needed to
achieve those targets. Subsequent chapters describe the direct labor
market policies and other supplemental policies which are also necessary for achieving the recommended goals.

THE

GOALS OF EcoNoxIc POLIcY

The 1975 Annual Report of the Joint Economic Committee recommended that policy in 1975 be directed toward an output target for
the fourth quarter of 1975 which would be consistent with an unemployment rate of 7.8 to 8.1 percent. Actual output in the fourth quarter
of last year was very close to the recommended target, and the unemployment rate, although it remained above the target in the fourth
quarter, has subsequently fallen to 7.8 percent in January. This time
lag between output changes and changes in the unemployment rate
is to be expected in the early stages of an economic recovery.
Targets for 1976
Last year we also recommended that policy be directed toward
achieving real output growth of 8 to 9 percent from the fourth quarter
of 1975 to the fourth quarter of 1976. We continue to believe that such
rapid growth of output would be desirable. It would pose no threat of
accelerating inflation.' Indeed, the productivity gains associated with
rapid growth would help reduce the rate of price increase.
It does not presently appear, however, that 8 to 9 percent output
growth is at all likely in 1976. It would be a disservice to advocate
short-term policy targets which have such slim hope of realization.
The maximum output growth which it seems reasonable to expect,
during 1976 is about 7 percent. We recommend this as an appropriateo
policy goal for this year.
0 Eimploynwnt Targets.-Achievement of this output target would
still imply an unemployment rate of 7.2 to 7.3 percent at the end of
this year. This we do not regard as satisfactory. Our short-run goal
should be to bring the unemployment rate below 7 percent by the end
I Representative Gillis Long states: "Generally, I support increased output as an essential element of economic recovery : however, I am concerned about a resurgence of inflation
which could possibly result from this. I would not go so far as to say that increased output
poses no threat of accelerating inflation, but I recognize fully the need for increasing
output."
(29)

67-573 0 - 76 - 3

30

of this year. To do so will require supplementing monetary and fiscal
policy with special emergency job programs. These programs are discussed in Chapter IV.
0 Price Targets.-Measured by the deflator for gross national product, prices rose 6.5 percent from the fourth quarter of 1974 to the
fourth quarter of 1975. The Administration projects further price
increases of 5.9 percent in 1976 and 6.3 percent in 1977; in other words,
no further dimunition of inflation either this year or next.
We believe that both tax policy and price-incomes policy can be
utilized in ways which will significantly increase prospects for regaining price stability. The setting of specific price targets is necessary to
provide the guidance which business and labor need in order to join
in a cooperative voluntary effort to further reduce inflation. With
proper policies, the rate of inflation should not exceed 51/2 percent for
1976 as a whole. By the fourth quarter the inflation rate should be no
higher than 5 percent.
In recommending specific price targets, we wish to stress, however,
that some causes of inflation lie essentially outside the control of
economic policy. Our recommended targets assume an adequate harvest
and the absence of new external price shocks. Should some major unanticipated event, such as the world oil price increases of 1973-74,
occur in 1976, these price targets will require amendment.
Goals for 1977
Policies adopted now will have more influence in 1977 than in
1976. As discussed in the previous chapter, the present outlook is for
output growth to slow significantly in 1977 and for unemployment
essentially to remain stuck at a rate above 7 percent. Obviously, this
is not a satisfactory outlook. Policy actions are needed now to support
a stronger economy in 1977.
Policies should be directed toward continuation of a 7 percent rate
of growth of real output in 1977. Policy should also aim to reduce the
rate of unemployment to 6 percent or less by the fourth quarter of
1977. As in 1976, this will require augmentation of fiscal and monetary
policy with a temporary program of direct job creation.
Neither labor nor capital resources can be expected to approach full
utilization in 1977. Hence continued rapid output growth poses no
danger of worsened inflation. Rather, rapid growth coupled with appropriate tax policy and voluntary price-incomes policy can reduce
the inflation rate to no more than 4 percent by the end of 1977. Again,
this inflation goal assumes adequate harvests and the absence of major
external price shocks.
Table III/1 summarizes our suggested policy goals for 1976 and
1977. These targets are ambitious, but they are not unattainable. With
unemployment still well above the levels of past recessions and with
prices still rising at a rate which prior to the 1970s would have been
regarded as intolerable, there is no room for complacency about the
economy. To aim at targets which represent anything less than the
maximum progress which can be achieved would be to turn our backs
on the Employment Act mandate to promote "maximum employment,
production and purchasing power."

31
The benefits of achieving these targets are well worth the effort.
By the end of 1977, more than 11/2 million more jobs would be available than would be the case if the Administration's policies are followed. The unemployment rate would be 1.7 percentage points lower,
real output 4 percent higher, and the rate of price increase 2 percentage
points lower. The Administration's program would keep unemploynent stuck very close to its present 7.8 percent rate. Our proposals
would bring unemployment down steadily and fairly rapidly.
TABLE 111/1.-OUTPUT, EMPLOYMENT, AND PRICE TARGETS, 1976-77
4th quarter

Potential GNP (billions of 1972 dollars) Projected GNP (billions of 1972 dollars)-$1,
Percent change
in projected real GNP I2
GNP gap (percent) -12.4
Unemployment rate (percent) ---Inflation rate 3
Projected GNP (billions of current dollars)-$1,
X From 4th quarter to 4th quarter.
2Difference between actual and potential

1975
actual

1976
target

1977
target

$1,388.8
215.9
2.5

$1,444.4
$1,300.0
7.0
10.0
7.0
5.0
$1,768.0

$1,498.6
$1,390.0
7.0
7.2
6.0
4.0
$1,970. 0

8.5
6.8
572.5

GNP as a percent of potential.

3 GNP deflator, percent change during quarter, seasonally adjusted annual rate.

Sources: Department of Commerce, Council of Economic Advisers, and Joint Economic Committee.

Returning to Potential Output: Goal8 for 1980
Chart III/1 compares potential output through 1982 with expected
actual output under two different assumptions. The output path labeled
"desired recovery path" assumes that our recommended output targets
for 1976 and 1977 are achieved. From 1978 through 1982, it is assumed
that the rate of growth of real output is gradually reduced from the
7 percent of 1977 toward the 31/2 percent which will approximate the
growth of potential in the early 1980s.2 In this way the economy enters
its potential zone growing at a rate sufficiently moderate that sudden
demands are not imposed on scarce resources. With a growth pattern
of this type, inflationary bottlenecks can be avoided, and continuing
operation of the economy within the zone of its potential should be
compatible with reasonable price stability.
The output path labeled "unstable recovery" does not bring the
economy to its potential zone until 1981. Furthermore, potential would
be reached in a way which would both increase the cumulative loss of
output prior to 1980 and greatly enlarge inflationary risks. This path
assumes that output growth will drop below 4 percent in 1977, a pattern which in our judgment must be expected if Administration
policies are adopted. It is then assumed that, beginning in 1978, the
economy grows steadily at 6.5 percent per year until the zone of
potential output is reached. This is the type of path which is assumed
for planning purposes in the Administration's five-year budget pro-

'

The potential growth rate is defined as the rate of real output growth necessary to
keep the economy operating at a constant level of resource utilization. It is determined
by growth of the labor force, changes in average hours worked, and growth of output
per hour (productivity). The potential growth rate is presently about 4 percent per year
but, because of slower growth of the working age population, it is expected to drop gradually
to about 3'A_ percent by 1980.

Chart ll/i1

ALTERNATIVE RECOVERY PATHS
Billions of 1972 Dollars

1972

1973

1974

1975

1976

Sources: Council of Economic Advisers, Joint Economic Committee

1977

1978

1979

1980

1981

1982

33
jections. Judging from historical experience, such a pattern is extremely unlikely to be achieved. If it were to occur, it would cause
output to come up against its potential while still growing rapidly,
creating inflationary pressures which would prevent the maintenance
of a stable full employment growth pattern.
Even based on the path labeled "desired," the cumulative loss of output resulting from the recent recession will approach $1 trillion
through 1980 (measured in 1975 prices). This enormous loss is all the
more tragic because much of it could have been avoided if wiser and
more foresighted policies had been adopted in time to head off or
minimize the recession. If the alternative path labeled "unstable
recovery" is followed, the cumulative loss of output would be increased
a further $300 billion.
FISCAL POLICY
Present expectations are that real output will grow about 6 percent
this year, that unemployment will still be above 7 percent at year-end,
and prices still rising at about a 6-percent rate. Policy changes adopted
at this time canmot achieve dramatic departures from this path within
the remaining nine months of this year. As discussed in the previous
section, however, proper policies can raise the growth of real output
to about 7 percent while at the same time gradually setting in motion
further reductions in the inflation rate. Even more important, policies
adopted at this time can lay the foundation for continued rapid growth
and greater price stability in 1977.

The Fiscal 1976 Budget
The Second Concurrent Resolution on the 1976 Budget embodies
congressional decisions on the proper levels of outlays and receipts.
These decisions are appropriate to the needs of the economy. Tax and
spending decisions made by Congress during the past year, sometimes
in the, face of determined opposition by the Administration, have
served to halt the worst recession in 40 years and initiate a recovery.
Two vital pieces of legislation remain necessary to achieve the
budget policy established in the Second Resolution. The first of these
is the extension and expansion of the Emergency Public Jobs Program.
Legislation providing for this has now passed the Hlouse and is pending in the Senate. The second legislative need is for the provision of
special antirecession aid to State and local governments. Legislation
containing provision for such aid was recently passed by Congress but
was vetoed by the President. As discussed more fully in Chapter IV,
this assistance to State and local governments is a vital part of an overall strategy for economic recovery. We urge the Congress to again
enact and the President to sign legislation providing for this program.
Provision for fiscal 1976 outlavs for both these programs was contained in the Budget Resolution. Thus enactment will represent a
carrying out of previously determined policy, not a new addition to
planned outlays. It will also represent adoption of essential components of a program to reach our recommended goals for economic
performance this year.

34

The Fiscal 1977 Budget
As discussed above, present expectations are that the economv will
weaken in 1977. If Administration policies are adopted, output growth
can be expected to drop to 4 percent or less. To achieve instead the 7percent growth which we recommend will require supportive policies.
Much can be accomplished through a monetary policy which accommodates private investment and through a price-incomes policy which
reduces inflationary expectations. Fiscal policy too much play a
supportive role.

Administration recommendations
The Administration has proposed a highly restrictive budget for
1977. Examination of the recommended quarterly pattern of outlays
and receipts is instructive. As can be determined from Table III/2, the
Administration recommends that expenditures rise only 4 percent
from the first half of 1976 to the first half of 1977. With prices expected to rise about 6 percent under Administration policy, this implies an actual decline of about 2 percent in the real level of government services. Such a decline, coming at the very time when the
economy most needs support in order to add vigor to the recovery,
represents extremely poor timing of fiscal policy.
TABLE 111/2.-FEDERAL RECEIPTS AND EXPENDITURES, ACTUAL AND FULL EMPLOYMENT, ASSUMING ADMINISTRATION BUDGET
INIA basis, billions of dollars, seasonally adjusted annual rates]
Actual
Calendar years

Receipts

1976:
1-----------------II
-.-.-.-.-11 -328.9
IV

1977:

1------------------

I -----II -388.9
IV-NA

Full employment

Surplus(+

---

311.1
322. 3

Expenditures

deficit(-)

Receipts

Surplus(+
Expenditures

deficit(-)

342. 5

384.6
391. 4
391.8
394. 5

-73. 5
-69.1
-62. 9
-52. 0

365.5
375. 2
379. 6
390. 3

375. 4
382. 4
383. 3
386.6

359. 4

401. 5

-42. 1

403. 3

393.7

415.1
NA

398. 8

-26. 2
NA

+15. 9

426. 5
NA

407.-8
NA

+18. 7
NA

372. 4

406. 3

-33. 9

414. 7

-9.9
-7.2
-3.7
+3. 7
+9. 6

Source: Office of Management and Budget, Joint Economic Committee.

It is also helpful to look at the budget as it would be at "full employment," that is as it would be if the unemployment rate could be kept
constantly at 4 percent. The estimates shown in Table 111/2, which
have been prepared by the Committee staff, indicate a swing of almost
$30 billion in the full employment surplus over the seven quarters
shown in the table. 3 The most recent past experience of a large swing
in the full employment budget is found in 1972-1974, when the full
employment surplus rose by over $40 billion during the six-quarter
JEstimates supplied by the Council of Economic Advisers Imply an even larger ewing
In the Full Employment Budget during 1976. The Council has supplied the following
estimates of the full employment eurplus (+) or deficit (-) by quarter (in
ot
dollare) : 1976-I, -16.5 ; 1976-IT, -12.9; i976-III, -7.7; and 1976-my, + 3.2.billions
No estimates were eupplied for 1977.

35
period from the fourth quarter of 1972 to the second quarter of 1974,
helping to precipitate the severe recession of 1974. The tragic experience of this recent recession provides persuasive evidence that sudden
swings in fiscal policy can have devastating economic effects and must
be avoided.
The Administration's budget recommendations are inadequate both
as regards total receipt and expenditure levels and with respect to
the composition of spending. The Budget contains individual recommendations which deserve serious consideration, but taken as a whole
it does not constitute a helpful guide to the Congress in setting budget
policy.

The Current Services Budget
Congress has available this year two estimates of the Current services Budget, one prepared by the Congressional Budget Office (CBO)
and the other by the Office of Management and Budget (OMB) under
the provisions of the Congressional Budget Act of 1974. These provide
estimates of the cost of maintaining the present real level of governinent services, making allowance for expected changes in economic
conditions and for case-load changes under entitlement programs. The
two estimates differ slightly in concept. Of the two the CBO estimates
are somewhat more satisfactory for use as a baseline budget since they
have been recently updated and since they make consistent inflation
adjustment for all programs, rather than limiting the adjustment, as
OMB did, to those programs where such adjustment is required by law.

Current services budget estimates prepared by the Congressional Budget Office, rather than the President's budget,
should serve as a starting point for congressional decisions
on the 1977 budget.4 Congress should make reduction from
current services outlay levels wherever such reductions are
consistent with efficient maintenance of necessary government
services. Because of the high unemployment which will still
persist in 1977, a large part of the savings achieved in this
way should temporarily be invested in programs to deal with
unemployment. These programs should include:
Antirecession grants to State and local governments,5
and
An emergency jobs programs designed to provide about
one million temporary jobs in 1977.6
Senator Proxmlre states: "I object to using the current services levels, that Is, last
year's programs increased for population and price levels, as a starting point. This is a
mindless method. It legitimizes all those programs and expenditures-good and bad-now
In the budget. I advocate zero-based budgeting. strict benefit-cost analyses, determining
the economic costs of alternative programs, and cutting back or ending inefficient and
useless agencies and outlays."
Senator Proxmire states: "The States and localities now get $6 billion In revenue
sharing funds and $3 billion in community development funds. Nine billion Is enough.
The proposed antirecession grants would violate the sound fiscal principle that those who
spend money should be required to raise the money."
e Senator Proxmire states: "I am against a job program of this size which is accomplished through public works, which is wasteful and too slow, or through public service
jobs where there Is a big substitution effect If it gets too large. Instead, I believe we
should provide for jobs through a shallow housing subsidy where one job can be created
for about $50O, instead of $8,000 per public service job, and as high as $25,000 for a
public works job."

36
As recently estimated by the CBO, the spending level needed to
maintain current services in fiscal 1977 would be about $425 billion.
We believe program cuts of at least $4 billion and possibly as much as
$10 billion from this total are possible. Examples of cuts which would
total about $4 billion are described in Chapter V. It is important to
note that these program reductions, if enacted promptly, could lead
to budget savings of as much as $25 billion by 1981. The examples we
cite are by no means an exhaustive list of possible program reductions.
We anticipate that scrutiny by the Budget Committees and others will
lead to identification of many other needed reforms and reductions,
as well as some areas where increases are needed. A net reduction in
permanent programs of at least $4 to $10 billion below current services
levels appears to be a desirable and appropriate objective.
In addition to the savings which can be made in 1977 through
program reduction, the lower inflation rate which would result from
our recommended policies would reduce budget outlays by $7 to $8
billion.

At expected levels of unemployment, continuation of antirecession
aid to State and local governments will cost about $1 billion in fiscal
1977. An emergency jobs program for close to 1 million persons would
have a gross cost of $8 to $9 billion. Some allowance for these temporary antirecession programs is already contained in the current
services budget. Our recommendation for an expanded program would
add about $6 billion to the amount already assumed. As shown in
Table III/3 below, the net result of the outlay changes which we
suggest would be a spending total of $412 to $418 billion.7 8
Tax Policy
The personal income tax rates presently in effect expire on July 1
and without new legislative action, taxes will revert at that time to
the higher rates which prevailed in 1974.
Table III/S.-Derivationof Joint Economic Committee Outlay Recommendation
fiscal 1977 (billions of dollars)
CBO Current Services estimate (Path B)----------------------------$425.0
Savings through program reductions-_-_____-_________-____ -4.0 to -10.0
Savings due to less inflation------------------------------------------ 7.5
Savings due to lower unemployment------------------------------------1.5
Additional cost of jobs programs-----------------------------+6.0
JEC recommended outlay level--________________

$412 to $418

7 Senator Sparkman states: "It it most disturbing to see continuing increases in Federal
spending. I believe that the Congress and the Administration must make greater efforts
to limit this spending growth. For that reason, I would place particular emphasis on the
proposal in the Report that immediate efforts be made to reduce spending for programs
that do not have high priority. I believe we should do this with even greater efforts than
stated in the Report."
"Also, I would hope that the strength of our recovery and the wise use of monetary and
tax policy could speed up the recovery and thereby reduce the deficit. An economic recovery
will automatically increase incomes, which in turn leads to higher revenues. Likewise, It
should greatly reduce the need for spending on such programs as unemployment, welfare,
food stamps and emergency employment. In this way, there would be a healthy force
working to reduce public spending. It must be remembered that the recession has been
very costly to the Federal Government as well as to the other sectors of our economy."
I Senator Proxmire states: "I strongly oppose such a high budget outlay. See my
supplemental view on page 136."
Sources: Congressional Budget Office, and the Joint Economic Committee.

37
Action should be taken prior to July 1 to provide for continuation at least through the end of 1977 of the personal
income tax reductions which have been in effect during 1975
and the first half of 1976.
The strength of the recovery should be carefully monitored
during the next few months. Should output growth appear
to be dropping below the 7 percent rate needed to bring unemployment down appreciably, an additional tax cut should be
enacted for 1977. This additional reduction should be of a type
which will act directly to reduce costs and prices. An income
tax credit against some part of social security taxes paid
would meet this requirement.
No increase in the social security tax rate is necessary or
desirable in 1977, nor should the Federal unemployment insurance tax rate be increased at that time.
The above tax actions are needed both to provide support to the
economic recovery and to help in achieving further progress toward
price stability. Care must be taken that restrictive fiscal actions do not
weaken or interrupt the moderately strong recovery now underway.
Failure to extend the tax reductions presently in effect would be very
damaging to the recovery. We urge prompt action to extend present
tax rates at least through the end of 1977.
When taken in conjunction with an outlay level of $418 billion, an
additional tax cut of approximately $10 billion will be necessary in
1977 simply to prevent fiscal policy from moving in a restrictive direction. Should outlays be held to $412 billion, a correspondingly
larger tax cut would be required to sustain a neutral fiscal policy. The
precise state of the economy in 1977 is impossible to predict at this
time. It may be that the recovery will gather such strength that a modest move toward restriction will be appropriate. However, history tells
us that in the past growth of output at the 7-percent rate we feel is
needed has been only rarely maintained over a period as long as 21/2
years.
Should output growth appear to be dropping below the 7-percent
target rate, an additional tax cut should be enacted in order to keep
fiscal policy on a neutral path which will not exert a drag on the private economy. Any such tax cut should be of a type which contributes
to greater price stability as well as to stronger growth. Discussion of
possible further tax reduction for 1977 should begin now so that Congress will be prepared to act quickly when and if the need for such
action becomes clear. In the past, fiscal policy has often responded far
to slowly to changing circumstances. With the new congressional
budget process now in place, continuous monitoring of the economy
and prompt response to changing policy needs should be more readily
achievable.
Anti-inflationary Imnpact of Tax Reduction
The stimulative effect of tax reductions is well understood. Tax
reductions result in more after-tax income available to individuals.

38
Most of this increase in disposable income is spent on additional purchases of goods and services. This in turn leads to increases in production and employment.
The use of tax reductions as an anti-inflationary tool is less well
understood. Indeed, conventional economic theory has maintained that
inflation can be controlled through tax increases which, by reducing
consumer spending, ease demand for goods and services in inadequate
supply. This traditional theory is not applicable, however, to a situation in which inflation is primarily due to cost pressures and is con-

tinuing in the face of obvious insufficiency of demand. Tax reductions
can be designed to make an important contribution to price stability.
Similarly, poorly designed tax increases can worsen inflation.
In considering changes in tax policy, the effect on the real level of
economic activity is normally thoroughly discussed. So too are the
distributional effects and the potential effects on business incentives.
Except at times when a tax increase is thought to be needed to restrict excess demand, as in 1968, the impact of a tax change on changes
in price levels seldom receives the same attention.
There are at least two major ways in which tax reductions could be
used as part of an anti-inflation policy. First, some taxes-such as
sales taxes and payroll taxes-enter directly into costs and pricing decisions. Reductions in these taxes have direct and important effects on
prices. Second, reductions in taxes imposed on workers-either income or payroll taxes-would have the effect of raising after-tax income and thereby reducing the need for money wage increases to sustain real disposable incomes. No serious recent effort has been made in
the United States to use tax policy as an integral component of priceincomes policy. However, a number of imaginative suggestions have
been made. These suggestions deserve serious study and exploration
during consideration of possible tax reductions for next year.
Among the possibilities which deserve consideration is the use of an
income tax credit against social security taxes. YlTe have discussed this
possibility in several past reports. The economic impact of this type of
tax reduction would be identical to that of a reduction in the social security tax itself. However, use of the income tax credit avoids any reduction in Social Security Trust Fund receipts. Maximum anti-inflation impact of this type of tax change would be achieved if it were
made an integral part of a voluntary price-incomes policy which also
established wage and price standards designed to preserve real aftertax income gains consistent with productivity trends.
An imaginative variant of the income tax credit against social security taxes has recently been suggested. This proposal would make
eligibility for the credit dependent on the individual firm's success
in adhering to agreed upon price and wage targets. Participation in
the plan would be voluntary, but the economic incentive to participate
would make it attractive to both labor and management. This proposal deserves serious consideration and discussion.
The Social Security Taxi
The Administration's request for a social security tax increase in
1977 is an example of a tax change which could only worsen inflation.
The employer share of the social security tax is a cost of production.

39

Increasing this cost would both force prices up and discourage growth
of employment.
Additional financing of the social security system may well become
necessary in the future. No evidence has been presented, however, that
this need is so urgent as to justify economically damaging tax increases
in 1977. The current imbalance between trust fund receipts and outlays is a direct result of recent high unemployment and high inflation.
The Secretary of the Treasury has informed the Committee that under
conditions of full employment social security trust fund receipts in
fiscal 1977 would be nearly $10.4 billion higher than the actual estimated level of $96.2 billion. This is substantially more than the $4.4
billion per year which the proposed tax increase would produce.
Surely the most desirable way to increase the surplus in the trust funds
is through higher employment and reduced inflation.
Chapter V (pages 70 to 74) discusses the status of the social security trust funds in greater detail. As shown in that chapter, it was
only with the high unemployment of fiscal 1976 that trust fund outlays
exceeded receipts so that the balance began to decline instead of rise.
A return to full employment would have a dramatic impact on future
trust fund receipts.
Similar agruments apply to the proposed increase in the unemployment insurance tax. It, too, would raise labor costs and thus both
worsen inflation and discourage increased employment. As discussed
in more detail in Chapter IV, there is no compelling reason why this
tax must be increased at this time.
Budget Totals
Table III/4 compares the Joint Economic Committee's economic
assumptions and estimated budget totals with the official Administration recommendations and with our own estimate of the results of
following the Administration's recommended policies.
The Administration has projected a deficit of $43 billion. As we
have discussed elsewhere in this report, however, the Administration's
unemployment assumption for 1977 is optimistic relative to the restrictive policies which are proposed. Our own estimate is that if
Administration policies are followed, unemployment will average 7.8
percent in 1976 and 7.9 percent in 1977. This would reduce receipts
TOTALS
TABLE 111/4.-ECONOMIC ASSUMPTIONS AND BUDGET

assumptions (calendar years)
Economic
Average unemployment rate(percent):
1976
--------------1977
7in GNP deflator (percent):
Percent change
1976-6.3
1977
Unified budget totals (fiscal year 1977) (billions):
------------------------Receipts
Outlays -394.2
Deficit--

-

JECestimate
Official
of impact of
administration administration
policies
estimate

JECpolicies

7.7
6.9

7.8
7.9

7.5
6.4

5.6

5.9
6.3

5.3
4.3

5351.3
$---------- $341.2
400.8
-59.6
43.0

Budget Office, Joint Economic Committee.
Sources: Office of Management andBudget, Congressional

$352 to $357
412 to 418
-60 to -61

40
and increase outlays for unemployment compensation. In addition, the
President's budget assumes receipts of $6 billion from off-shore oil
rents and royalties, whereas the CBO projection on which our estimates are based assumes only $1.9 billion. Off-shore oil receipts defy
accurate estimation. To facilitate accurate comparison of different
budget policies, however, columns 2 and 3 of Table III/4 assume $1.9
billion of off-share oil receipts. When this adjustment and the adjustment for what we consider more reasonable economic assumptions are
made in the Administration's budget, the deficit rises from the $43
billion shown in the budget document to almost $60 billion.
The estimated deficit which results if the JEC's proposed targets
for economic performance are achieved is also in the neighborhood of
$60 billion. Outlays are substantially higher than the Administration
has proposed, but so too are the receipts produced by a more prosperous economy. The estimates presented in Table III/4 assumes an
outlay range of $412 to $418 billion. The receipt estimates assume a
tax cut of $10 billion (annual rate) if outlays are assumed to be $418
billion and a correspondingly larger tax cut if outlays are lower.
Should the private economy develop more strongly than is assumed in
the table, a tax cut of this size would not be needed and the deficit
would be smaller.
The projected deficit is about $15 billion less than the $75 billion
deficit expected for fiscal 1976. Ironically, a major reason the deficit
does not drop further is the slower growth of receipts due to a falling
rate of inflation.
The virtually identical deficit which results from the Administration's policies and from our proposals is instructive. The immediate
choice facing the Nation is not the size of the deficit but the degree
of progress which can be made toward full employment and price
stability. That choice not only has far reaching consequences for the
personal well being of individuals and familites but important future
consequences for the Federal budget. With a healthy, growing economy
the deficit will diminish rapidly in future years. With the high unemployment and near stagnation which would result from Administration policies, the deficit could be expected to remain extremely
large indefinitely.
Estimated as it would be at full employment, the budget which
results from our policy assumptions moves from a deficit of $71/2
billion in the first half of calendar 1976 to an approximate balance
in the second half of calendar 1977. However the fiscal restriction
which this swing would normally imply is largely offset by the recommended expansion of emergency job creation programs (which do not
enter into the full employment budget estimate, because they automatically phase out as unemployment is reduced). Thus, the policies
we are recommending satisfy the need for supportive fiscal policy
at this time but do so in a way which does not jeopardize progress
toward a balanced budget as the economy moves toward full
employment.
PRICE-INCOMES POLICY

Continuing studies of inflation which this Committee has conducted
over several years have provided convincing evidence that inflation

41
has a multiplicity of causes. Anti-inflation policy must take into account the particular causes of inflation at any particular time. When
inflamation stems from an excess of consumer demand relative to the
immediately available supply of goods and services, policy must be
directed toward restricting demand until supply can be adequately
expanded. When inflation is coming from such special factors as poor
harvests or sudden increases in world prices of other important commodities, the options for dealing with it may be quite limited.
At the present time, inflation is not resulting from any excess of
consumer demand. Nor is it deriving from excessive government spend-,
ing. Nor are special supply problems in particular markets creating
unusual inflationary pressure.
Nor can inflation presently be explained in terms of rapidly rising
unit labor costs. Unit labor costs in the private nonfarm economy rose
at a rate of less than 2 percent during the last three quarters of 1975,
dramatically illustrating the point that recovery brings productivity
gains which hold costs under control and make greater price stability
possible. The puzzling and disturbing factor in the experience of this
recovery to date is that, while productivity and unit labor costs have
responded as expected, the rate of increase of many industrial prices
accelerated late in 1975.
It is difficult to find an explanation for this price behavior. It may
result from widespread expectations of future inflation. It may result
from anticipation of possible future price controls. It may stem from
a desire to boost profits or recover past cost increases. Certainly it
appears doubtful that prices in recent months have been rising at a
rate which has a good economic justification. This in itself indicates
that an active but voluntary price-incomes policy would be of great
benefit at this particular time. Such a policy should have two\elements-first, an investigation of the extent to which price and compensation increases are justifiable, and second, a program for voluntary
cooperation in holding such increases to the necessary minimum.
Two additional factors strengthen the case for such a policy. First,
profits are expected to rise rapidly this year. The Council of Economic
Advisers expects at least a 25-percent increase in operating profits.
Second, a large number of workers will be involved in major union
contract negotiations this year. Stronger profit positions will both
weaken employer incentives to resist union wage demands and increase
union incentives to seek generous contract settlements. Yet neither
labor nor business will benefit it both prices and wages continue to
rise rapidly.

Important progress toward price stability is possible this year and
next if proper policies are adopted. The proper policy is not, however,
restriction of aggregate demand. Demand is not excessive and is not
about to become so. Restrictive policies can only do more harm than
good.
The proper approach to reducing inflation at this particular time
lies in the enunciation of specific targets for wage and price adjustments, followed by vigorous efforts to achieve voluntary compliance
with these standards. It is clearly in the interest of all major elements
in the economy that the rate of inflation be further reduced. States-

42
manlike leadership by the President could achieve a high degree of
compliance with a voluntary price-incomes policy.
Comprehensive price or wage controls are neither necessary nor
desirable. We oppose both. However, should voluntary compliance
with reasonable price and wage standards prove impossible to achieve,
the provision of selective authority to delay price increases in instances
of signal importance to the economy would be preferable to the indefinite toleration of inflation at rates of 6 percent or greater. The
Chairman of the Federal Reserve Board of Governors expressed his
support for such a policy in recent testimony before this Committee,
stating:
* * * a policy that would permit modest delay in key
wage or price increases, thus creating opportunity for quiet
governmental intervention or for public hearings and the
mobilization of public opinion, may yet be of significant benefit in reducing abuses of private economic power and moving
our Nation towards the goal of full employment and a stable
price level.
Typical forecasts assume an increase in average hourly compensation of about 8 percent this year. However, this expectation is reasonable only if the rate of price increase declines. Given an expected rate
of productivity gain of more than 3 percent, if wage increases average
around 8 percent in 1975, there would appear to be no justifiable reason
for the average rate of price increase to exceed 5 percent. Put another
way, if the rate of price increase can be held to 5 percent this year,
both real wage gains in line with productivity trends and important
progress toward price stability can be achieved. As discussed earlier,
tax policy can also be used to further contribute to the maintenance
of workers' real disposable incomes.
During the second half of 1975 price development did not accord
with expectations as to a reasonable rate of price increase. As shown
in the Table in Chapter II (page 24), consumers prices rose at a rate
in excess of 7 percent in the second half of last year, and the rate of
increase for wholesale industrial prices rose to 10 percent in the fourth
quarter. The January price data were more encouraging, with the
consumer and wholesale industrial price indexes each rising only 0.4
percent (or at an annual rate of about 5 percent). Only limited
significance can be attached to any one month's data. Our analysis of
the underlying causes of inflation leads us to conclude, however, that
the chances of holding the inflation rate to about 5 percent this year
are quite good, provided an effective price-incomes policy is adopted.

The President should establish and vigorously support a
voluntary program designed to insure that price increases
are held to a necessary minimum during 1976 and that real
wage increases are in line with productivity gains, taking
into account the expected rate of price increase. The Council
on Wage and Price Stability should be given full Presidential
support in the use of its authority, including its subpoena
authority, to investigate price increases and to seek compliance with price and income standards. As discussed in the

43
previous section, tax policy should also be used to contribute
to the achievement of a satisfactory rate of increase in
workers' real disposable incomes. We believe such a program
can succeed in reducing the inflation rate to 5 percent this
year and 4 percent by the end of next year. This goal can be
achieved without resort to comprehensive price or wage controls, to which we are opposed.
The Council on Wage and Price Stability has conducted several
useful investigations and published some thorough and critical studies
of industry pricing practices. It could be much more effective, however,
in establishing a comprehensive price-incomes policy and achieving
cooperation with such a policy if it had the firm and unequivocal
backing of the President and other high government officials, and if
adequate staffing and resources were placed at its disposal.
Given the avowed concern of this Administration with the problem
of inflation and given the major contribution which we believe an
active price-incomes policy can make, it is both a surprise and a disappointment that neither the President's Economic Report nor the
accompanying Report of the Council of Economic Advisers contains
and discussion whatsoever of price-incomes policy. Several inflationary actions and proposals by the Administration are also puzzling.
The proposal for payroll tax increases next year and the recent veto
of legislation which would have facilitated reasonable wage settlements in the construction industry are examples.
The complacency exhibited by the Administration with regard to
its own forecast that the inflation rate will remain at approximately
6 percent throughout the coming two years is remarkable. It comes
very close to representing an open invitation to business and labor
to engage in competitive escalation of prices and wages. Nothing could
be more damaging to the economy at this time. The Administration
is correct in its contention that high inflation rates pose a threat to
the continuation of economic recovery. Yet the Administration is
content to leave untested the policy which in our judgment represents
the most promising approach to bringing inflation down.
MONETARY POLICY

The crucial importance of monetary policy in sustaining a strong
economic recovery can scarcely be overstated. The Federal budget
can provide extra temporary support in a time of recession, but steady
and continuing growth of output and employment must rest with a
strong private sector and especially with the business investment
sector. This is all the more true now that we have entered a period
in which State and local governments can no longer be looked to as
a strong growth sector.
The single policy tool of greatest importance in encouraging private investment is monetary policy. Tax changes can also affect investment, but their importance is dwarfed by the far greater importance of an adequate supply of money and credit. A monetary policy
which accommodates investment demands will be of key importance
not only this year but through the remainder of this decade.

44
TABLE 111/5.-MONEY SUPPLY, BANK LENDING, AND INTEREST RATES
[in percenti
December
1974June
1975

JuneDecember
1975

5. 7
10.0
-6. 8

2.8
6.6
1.6

Percent change (seasonally adjusted annual rate):
Maney supply (M,)I-----------------------------Money su ply plus net time deposits (Mo) Business Inans a-__
June
1975

Selected interest rates:
3-month treasury bill -5.2
Prime bank rate -7.0
Aaa Corp. bonds 4-8.8
Home mortgage yields -9.
X Currency

-

December
1975

2

5.5
7.25
8.8
9.4

_

January
1976
5.0
6.75
8.6
9.3

plus demand deposits.

2 Currency, demand deposits, and time deposits at commercial banks other than large CD's.
3 Commercial and industrial loans by commercial banks.

Moody's.
aFHA, new homes.
Sources: Federal Reserve Board of Governors, Treasury Department, Moody's Investor's Service, Department of Housing
and Urban Development.
4

Recent Financial Developnent
The behavior of the credit markets in recent months has surprised
most observers. During the second half of 1975, bank loans to business
grew scarcely at all, interest rates were virtually unchanged, and the
money supply grew at a less than 3-percent rate. In January both the
money supply and business loans actually fell and, as shown in Table
III/5, short-term rates dropped noticeably. While this combination
of developments might be expected at the trough of a recession, it is a
puzzling development six months into a recovery.
Several special factors offer a partial explanation of these events:
bank lending policies have been unusually selective, business financing has undergone a shift toward longer term instruments, changes in
Federal Reserve regulations have produced shifts from demand deposits to savings deposits. Even after taking these special factors into
account, however, loan demand still appears surprisingly weak for a
recovery period. This weakness underscores the need for a monetary
policy which encourages private investment.
Of particular concern is the fact that the money supply, however
measured, grew only very sluggishly in the second half of last year,
and not at all in December and January. This does not necessarily
represent a tightening of a monetary policy, but more probably the
surprising weakness in the demand for credit.

45
TARGETS AND ACTUAL PERFORMANCE
TABLE 111/6.-MONETARY AGGREGATES: FEDERAL RESERVE
Percent changes in monetary aggregates
Actual performance to date (seasonally adjusted annual rate)

Target ranges
Date target announced

Base period

May 1975
July 1975
November 1975 February 1976 -

March 1975-76 -5-73
2d quarter 1975-76 3d quarter 1975-76 4th quarter 1975-76- .

M2

M3

Ml

M2

Ma

8%-10
5-73 83-10
5-7y 73-103
73-103
434-7

10-12
10-12
9-12
9-12

4.8
4.9
2.5
NA

8.9
8.3
6.2
NA

11.9
11.7
9.5
NA

Ml

Definitions: MI: Currency plus demand deposits. M2: Ml plus time deposits at commercial banks other than large CDs.

Ms; M2plus deposits at nonbank thrift institutions.

Source: Federal Reserve Board of Governors.

Monetary Policy for 1976
The unusual behavior of the money supply poses a dilemma for

monetary policy during the remainder of this year. Output cannot
continue indefinitely to grow at a rapid pace while the money supply
grows so slowly. If the recovery continues at the desired place, the
demand for money will increase, perhaps quite suddenly. If so, this
demand should be accommodated, and accommodated at short-term
interest rates little if any higher than at present. Long-term interest
rates should be permitted and encouraged to decline. If accommodative
monetary policy causes the money supply to grow for a time at a rate
exceeding the Federal Reserve's targets, this should not be a cause of
concern. As shown in Table III/6, the Federal Reserve has recently
demonstrated its willingness to revise its targets downward when
money supply growth fell below expectations. The same flexibility
should be available with respect to the upper end of the range.
At times during 1976, money supply growth may be both rapid and
erratic. This should not be a cause for concern so long as interest rates
conform to a pattern which encourages the credit flows necessary to
economic recovery. This is not to say, however, that we have no concern about the rate of growth of the monetary aggregates. As the
economy returns toward full employment, money supply growth must
be brought into line with the economy's growth of potential.
During the remainder of 1976, monetary policy should be
conducted so as to avoid any substantial rise in short-term
interest rates and to encourage reductions in longer term
rates. Temporary fluctuations in the rate of growth of the
monetary aggregates should not precipitate monetary policy
changes so long as the pattern of interest rates is satisfactory.
Over the longer run, however, growth of the monetary aggregates must be in line with potential growth of real output.

67-573 0 - 76 - 4

46
COORDINATION OF ECONOMIC POLICY

Careful coordination of the three basic elements of aggregate economic policy-fiscal, monetary, and price-incomes policy-is essential
if the difficult and delicate task of restoring and maintaining full employment with reasonable price stability is to be accomplished. In the
past, the absence of systematic procedures for coordination has sometimes permitted monetary policy established by the independent Federal Reserve Board to work at cross purposes with the fiscal policies
established by the President and Congress.
Last year Congress acted to require Federal Reserve authorities to
appear periodically before the Banking Committees to discuss their
monetary growth targets for the year ahead. These appearances have
been very useful in informing the Congress of the intentions of the
Federal Reserve and providing opportunity for discussion. The question of what further action to take if the Federal Reserve's proposed
policies conflict with congressionally determined fiscal policy remains
unresolved, however, we repeat here the recommendations we made
in our 1975 Midyear Report last October.
The following steps should be taken to help establish the
proper degree of congressional control over monetary policy:
Congress should adopt systematic procedures for establishing output, employment, and purchasing power
targets.
The Administration should be required to present specific monetary policy recommendations to the Congress.9
The Federal Reserve should be required to present
targets for the monetary aggregates which are consistent
with congressionally determined output, employment, and
purchasing power targets.10
Proper congressional supervision of economic policy must begin
with a clear enunciation of specific short-run targets for the economy.
The Employment Act of 1946 requires the President to recommend
policies necessary to "promote maximum employment, production, and
purchasing power" and the Joint Economic Committee to report to the
Congress on the adequacy of these recommendations. In its Annual Reports, the Joint Economic Committee has typically presented the output and employment targets which it concludes to be realistic and desirable. The Employment Act does not require Congress to take any
specific formal action on the Joint Economic Committee's Annual Report. Hence, these output and employment targets, while they may
have the support of many individual Members of Congress, do not have
the formal endorsement of the Congress as a whole.
The fiscal policy adopted by Congress in the First Concurrent Resolution on the Budget in May 1975 was estimated by the Budget CoinDSenator
Proxmire states: "I object. Under Article I, Section 8, of the Constitution,
Congress, not the Executive, has the power to coin money and regulate
the value thereof.
It has established the Federal Reserve Board as its creature to carry that out. This is a
congressional responsibility, not that of the Executive. The Federal Reserve Board
Is
independent of the Executive under the Constitution."
lo Senator Proxmire states: "This recommendation, in practice, is meaningless. The range
of monetary aggregates 'consistent with' any output targets is so great as to be meaningless."

47
mittees at the time to imply an unemployment rate of about 71/2 percent at the end of 1976, and this might be regarded as at least an
indirect endorsement by the Congress of an employment target. It
could surely be argued, however, that it would be preferable to agree
upon the output, employment, and purchasing power targets first and
then to adopt a budget policy-and also monetary and price-incomes
policies-designed to reach the agreed objectives. Establishment of
these basic economic policy targets could be achieved through congressional debate on the adoption of the Joint Economic Committee's
Annual Report, through a planning process such as that provided for
in S. 2794, The Balanced Growth and Economic Planning Act of 1975,
or through other mechanisms.
Another obstacle to proper coordination of policy is the veil of
silence maintained by the Administration regarding monetary policy.
The original intention of the Emplyoment Act was that the President
would incorporate monetary policy recommendations into his annual
Economic Report. In practice, these recommendations have been either
extremely vague or missing entirely. This is again the case in this year's
Economic Report. In carrying out its oversight responsibility for
monetary policy, Congress should have the benefit of a detailed presentation of the Administration's analysis and conclusions in this area.
The President's Economic Report should contain recommendations on
montary policy, and these should be couched in terms of specific rates
of growth of the monetary aggregates, specific interest rate targets,
and/or such other specific dimensions of policy as the Administration
judges to be appropriate.
The responsibility for the detailed design and execution of monetary
policy has wisely been entrusted to the Federal Reserve. The Committee would oppose any effort by the Congress to legislate or otherwise
impose specific targets for growth of the money supply or any other
monetary variable. Congress should insist, however, that the Federal
Reserve periodically present a "plan of action" which is consistent
with congressionally enunciated targets for output, employment, and
purchasing power.
These action plans should be accompanied by documentation based
on the best available information demonstrating why and how these
monetary policies will contribute to the basic objectives sought by
Congress. At present Congress is considerably handicapped in evaluating monetary policy by the refusal of the Federal Reserve Board to
make staff economic forecasts and other similar material available to
Congress. The Federal Reserve has declined to make staff forecasts
available on the grounds that they are continually subject to revision.
However, the Congress regularly receives Administration and private
forecasts of which this is equally true. It is difficult for the Congress to
evaluate testimony when that testimony is not supported by any detailed evidence or analysis.
Changesin FederalReserve Structure
Coordination of economic policy would also be improved if Federal
Reserve procedures were revised to make continuing consultation
with Congress and the Executive Branch an integral part of the proc-

48
ess of determining monetary policy. In addition, the membership of
the Federal Reserve Board of Governors should be more broadly representative of the major elements in the economy.
Changes in the structure of the Federal Reserve System
are needed in order to achieve closer coordination of monetary
policy with other aspects of overall economic policy. Legislation is needed which would provide for the following:
Inclusion of the Secretary of the Treasury and the
Chairman of the Council of Economic Advisers in the
Membership of the Federal Open Market Committee;
Reduction in the term of office of Members of the
Federal Reserve Board from the present 14 years to 7
years;
Broadened composition of the Membership of the
Federal Reserve Board to better reflect the views of
various sectors of the economy, including labor, small
business, consumers, and agriculture; and
Submission of the Federal Reserve budget to the regular congressional appropriation process and periodic
congressional audit of the Federal Reserve."1 12
U Senator Sparkman states: "It
is my opinion that
Federal Reserve and its Board
Members have, since the system was put into operationthe
in
served this country well
because it has been independent and not subject to political1914,
I am not opposed
to the tenure of the Federal Reserve Board's members being pressures.
reduced
from 14 years to 7
years; however, I would like for a provision to be made that members
second term. As to the Secretary of the Treasury and the Chairman of could serve a
the Council of
Economic Advisers being made members of the Open
Market Committee, I am not sure
that this would serve any more meaningful purpose than under
the
present
this committee. My objection to the provision of the Federal Reserve coming operation of
to Congress
for its appropriations and being subject to periodic audit is again my fear
Reserve being unable to work independently and perhaps being subjected to of the Federal
more
political
pressures, especially to the pressures of the Administration (be it Republican
or Democrat)
that may be in office."
12 Representative Long, La., states: "I think these recommended
in the Federal
Reserve system will preserve the independence and integrity of the changes
Board and at the same
time increase opportunity for public input into this extremely important
coordination of policy, coupled with increased accountability to Congress andagency. Better
the American
people, will make our Federal Reserve system more responsive to our Nation's
monetary
needs and more in keeping with our democratic principles."

IV. SPECIAL POLICIES TO ACHIEVE FULL EMPLOYMENT
As Chart IV/1 shows, the official unemployment rate reported by
the Bureau of Labor Statistics reached a peak of 8.9 percent in May
1975 and has declined since then to 7.8 percent in January. The comprehensive unemployment rate, including allowance for discouraged
workers and persons limited to part-time work by poor economic
conditions, reached nearly 12 percent. If the President's proposals
for a more restrictive fiscal policy in 1977 are adopted, however, we
can expect little, if any, further decline in unemployment this year
or next. The human and economic costs of continuing high unemployment need not and should not be accepted. Not only would such unemployment seriously threaten the welfare of millions of American
families-and leave in want hundreds of thousands who will exhaust
their unemployment compensation in 1976-it also would do major
long run damage to the economy as productive capacity stands unused, national needs go unmet, and prolonged idleness erodes workers'
skills.
The policies described in this Chapter, together with the fiscal, monetary, and price-incomes policies described in Chapter III, should succeed in reducing unemployment steadily, bringing the jobless rate
down to 6 percent or less by the end of 1977. Equally important, these
policies can lay the foundation for continued progress toward full employment and price stability during the remainder of this decade.

TniE

HIGH COST OF ExTENDED UNEMPLOYMENT

A critical and often ignored effect of the 1973-75 recession is the
sharp rise in the duration of unemployment during the past year. In
January 1976, almost 2.8 million (36 percent) of the 7.3 million jobless had been idle for 15 weeks or more. By contrast, in January 1975,
only 21 percent of the unemployed were idle 15 weeks or more, and
during the 1967-70 period, the long-term unemployed averaged only
15 percent of the total.
The number unemployed for six months or longer has increased
even more sharply. In January 1975, 8.5 percent of the jobless had
been out of work for six months or more; in January 1976, it was 21.5
percent. The actual number unemployed six months or more was 1.6
million in January 1976, almost triple the number a year ago.
The persistence of long-term unemployment creates a serious danger
that much of what now is considered cyclical unemployment will become "structural," and the difficulties of solving the unemployment
problem will increase sharply.' Eliminating cyclical unemployment
'Cyclical unemployment refers to a situation in which workers are laid off or cannot
find jobs because of a general economic recession and an overall shortage of jobs. Structural unemployment refers to a situation in which certain groups of workers cannot compete successfully in the labor msrket because of a deficiency of skills or education, a
depressed regional economy, or discriminatory hiring practices. Such workers have difficulty finding satisfactory jobs even during periods of high overall employment.

(49)

Chart IV/1

UNEMPLOYMENT INDICATORS
Percent

C.R

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

Selected Quarterly Unemployment Rates
1 / Fifteen weeks or longer as percent of civilian labor force.
2 / Unemployed as percent of civilian labor force as reported monthly by BLS.
3/ Full-time job seekers plus one-half part-time job-seekers plus half of those working part-time for economic reasons plus discouraged workers.
Source: Bureau of Labor Statistics

51
requires recovery of the economy. Dealing with structural unemployment requires not only adequate overall job opportunities, it also
means providing workers with remedial education, job training or retraining, psychological assistance, motivation, and placement assistance to help them to compete in the job market. In the longer run,
the President's go-slow policies, which reduce unemployment only
gradually, will be more costly to the country than would an emergency
job creation program which provided immediate work for many of the
unemployed.
There are several ways in which cyclical unemployment can become
a more serious and lasting unemployment problem. For instance, during a protracted period of idleness, experienced workers lose job skills.
In addition, the psychological impact of enforced joblessness and dependence is demoralizing and affects attitudes toward work. The experience affects workers' fitness for work and creates problems for
some in getting and keeping regular jobs.
Second, many young workers entering the labor force for the first
time will not obtain needed work skills and experience. Often, the
first three or four years of full-time employment are used to experiment with different kinds of jobs and to become accustomed to the
demands of full-time work. Because of the high unemployment rates
expected for the next several years, many young people may reach
age 25 without ever holding a full-time job.
Third, although most firms can endure short periods of underutilization without impairment of their ability to recover, a longer period
of poor business may prove fatal to firms in tenuous financial condition. If such firms employ specialized skilled workers or are located
in cities or towns with few alternative employers, workers may then
need retraining, placement, and relocation assistance to regain prnductive jobs.

The costs to the Nation of prolonged unemployment are unacceptable. The goal of economic policy should be to reduce
the unemployment rate to 6 percent by the end of 1977 and
eventually to achieve an unemployment rate no higher than
3 percent of the adult labor force.
THE PROPER ROLE FOR UNEMPLOYMENT COMPENSATION

Until recently, the Administration's policy toward high unemployment has been (1) to extend unemployment benefits to cushion
financial hardship while waiting for the private sector to begin
rehiring, and (2) to accept reluctantly a modest program of public
job creation through emergency funding and diversion of funds
from training and other programs intended to deal with structural
unemployment.
The regular State unemployment insurance programs pay up to
26 weeks in benefits, plus an additional 13 weeks during periods of
high unemployment. The severity of the 1973-1975 recession, however,
made extending unemployment compensation imperative.
Early in 1975, Special Unemployment Assistance was enacted to
provide Federally funded compensation to some 12 million workers
not covered by State programs-mainly local government, farm, and

52
household workers. In addition, the maximum duration of benefits
for persons covered by State programs was extended from 39 to 65
weeks through the Federal Supplemental Benefits Program. Both
of these programs will expire in March 1977, unless they are extended
by Congress.
More than 24.5 million workers received unemployment benefits at
some time during 1975. The average weekly number receiving benefits
rose from less than 1.8 million in 1973 to almost 5.9 million at the
March 1975 peak, and it still exceeds 4 million. During 1975, however,
almost 1 million workers exhausted their 65 weeks of unemployment
compensation provided under the Federal Supplemental Benefits
Program.
In December 1974, Congress provided some 300,000 public service
jobs under Title VI of the Comprehensive Employment and Training Act, a new title added by Congress, in the Emergency Jobs and
Unemployment Assistance Act.
In his 1977 budget, however, the President proposes to cut both
public jobs and unemployment benefits at a time when both are still
badly needed. The Report of the President's economic advisers states
that "unemployment will almost surely remain distressingly high this
year" and that "the social hardships and economic waste associated
with the current level of unemployment should not be underestimated." 2 But the budget seems designed to prolong the unemployment
and to exacerbate the hardship.
The President proposes cutting almost every program assisting the
unemployed. Some 260,000 public service jobs out of a current total of
310,000 jobs would be cut by September 1977. The Federal contribution to the wages for these jobs would be slashed from $10,000 to
$7,000 per year. In addition, federally funded summer jobs for youths
would be cut by 100,000 in 1976 and by 70,000 more in 1977. Finally,
the President recently vetoed the $6.1 billion Local Public Works
Capital and Development Act, designed to create several hundred
thousand new jobs and to use unemployed resources to improve public
facilities.
Unemployment compensation also would be cut. The emergency,
federally funded benefits described above would be allowed to expire.
This would make some 450,000 jobless persons ineligible for further
payments.
We cannot accept this callous approach to the needs of the unemployed. While the Committee believes strongly that primary reliance
in treating unemployment should be shifted from benefit payments to
job creation, as will be outlined in the next section of this chapter, it
believes that unemployment benefits must continue to be provided
until an adequate jobs program is in place. It believes, moreover, that
some reforms in the unemployment insurance system are needed to
raise the ceiling on benefits and to create more uniformity in payments
among States.
The amount of benefits paid under current law is 50 percent of the
worker's average weekly earnings, up to a maximum that varies by
State. Because of the maximum, over 40 percent of all claimants in
fiscal year 1975 received less than 50 percent of the average earnings
2 Economio Report of the President, 1976, p. 12.

53
from their previous employment. In previous years this figure has
been higher (52 percent in 1970 and 1971).
A greater number of workers should be receiving 50 percent of their
average weekly wage. To achieve this goal, the States should be required by Federal law to raise the maximum weekly benefit to twothirds of the statewide average weekly wage in each State. The Federal Government should provide interim financing for two years to
give States time to change their laws. The cost of such a program
would be approximately $1 billion in fiscal 1977.
After a period of widespread use of unemployment claims, however,
it also is time for a basic review of the standards and operations of
these programs to assure that eligibility requirements are appropriate
and well enforced and to assess the future financial soundness of the
unemployment insurance system.

The maximum weekly unemployment benefit should be increased to two-thirds of the statewide wage in each State. Individuals should receive at least 50 percent of their previous
weekly wage up to the maximum. After this extended period
of high unemployment it is time for an in-depth review of
unemployment insurance programs, including eligibility
requirements.
The Committee believes, however, that a policy based on extending
unemployment insurance is totally inadequate as a primary response
to a deep, prolonged period of high unemployment such as the present
one. In this situation, jobs are needed. It is indefensible to pay people
for such an extended period and to keep them idle.
First, unemployment compensation is a very expensive way to deal
with long-term unemployment. Its cost will be over $18 billion in fiscal
year 1976, or $14 billion more than at full employment. The cost including food stamps, aid for dependent children, and other income
maintenance programs affected by the economic slump will be over
$19 billion more than at full employment. 3 The President's go-slow
policies would guarantee continuing high outlays for these purposes
for the rest of this decade.
Second, society receives no useful product from those on unemployment insurance. Reliance on this form of relief as the primary response to long-term unemployment constitutes a terrible waste of
manpower resources in view of the Nation's many unmet needs. The
300,000 jobs provided under the Emergency Jobs and Unemployment
Assistance Act are a great improvement over unemployment compensation, but this is a small program relative to the size of the
problem and leaves more than 7 million Americans still unemployed.
Moreover, the diversion into countercyclical public service jobs of
funds intended for job training and work experience under Titles I
and II of the Comprehensive Employment and Training Act (CETA)
thwarts the intent of that legislation, which was to provide jobs and
training to persons handicapped by poor education or other deficiencies. Although the CETA legislation contains safeguards against such
diversion of funds, data on program participants clearly indicate that
Title II funds, which were specifically allocated to train disadvana Congressional Budget Office.

54
taged workers for regular public employment, have gone recently to
employ persons not in this category. This policy reduces the funds
available to help structurally disadvantaged workers become selfsupporting.
A comprehensive strategy for dealing with unemployment
is essential to overall economic recovery. An antirecession
program, however, should place primary emphasis on providing jobs-in the private sector to the extent possible, but
supplemented by emergency public works jobs and public
service jobs as necessary. Unemployment compensation
should be used to assist workers who are jobless for relatively
short periods of time. Until enough jobs are provided, however, unemployment compensation or other income support
must be extended. Federal supplemental unemployment benefits should be phased out with the implementation of an adequate jobs program.4
A

PRoGRAMkii

OF

JOB

CREATION

The pessimistic unemployment projections for the rest of this decade
make job creation the vital issue facing Congress this year. Right now,
there are over 7 million Americans unemployed. In addition, about
21/2 million more workers can be expected to enter the labor force this
year. In light of this, we believe that it is important for economic policy to aim to expand employment by about 31/2 million jobs during
1976. Almost as large a growth of employment will again be needed
in 1977 if unemployment is to continue rapidly declining.
In addition to the fiscal and monetary policies described in Chapter
III, achievement of this job goal will require an enlargement of government job creation programs to about one million jobs in 1977. Such
programs should be accompanied by new incentives to step up private
sector hiring.
Public Job Creation
Direct public job creation, according to a number of studies including one recently issued by the Congressional Budget Office' is the
quickest and surest form of job stimulus the Federal Government can
undertake. An antirecession jobs program, according to these studies,
reduces unemployment more sharply than any other spending measure.
Currently, some 300,000 public service jobs are being funded under
Title VI of the Comprehensive Employment and Training Act. If
pending legislation is enacted, the funding level for this program
through fiscal 1977 will be $5.9 billion, or enough to enlarge the public
service employment to 600,000 jobs. Provision for fiscal 1976 outlays
under this program was included in the Second Concurrent Resolution
on the 1976 Budget. In fiscal 1977 we believe that it should be increased
to about one million jobs.
' Senator Proxmire states: "This could become a very costly program unless
done right.
I advocate that the Government become the employer
of last
by providing useful
work at the unemployment compensation rates of those laid offresort
(plus
the
cost
of getting
to work) and at the minimum wage for those with no unemployment
compensation
eligibility who are entering the labor force. In this way useful
work can be performed for
the society at little added cost."
5 Temporary/ Measure8 To Stimulate Employment, Congressional Budget Office,
Sept. 2,
1975.

55
Two objections often are raised against temporary government job
creation programs. One is that, although described as temporary, they
may be allowed to continue after the need for them has passed. For
this reason, we recommend again, as we have in the past, that countercyclical programs be tied explicitly to the unemployment rate. Then
the spending authority for 'these programs will expire automatically
when unemployment returns to more satisfactory levels.
As a formula to provide this link, we have suggested in past reports
that a temporary jobs program be funded to create 250,000 jobs for
each 1/2 percentage point by which the unemployment rate exceeds 5
percent in the absence of the program. With the unemployment rate
now expected -to average close to 7.0 percent in fiscal 1977, this formula
suggests a need for one million emergency jobs. With such a program
and with an overall economic policy which supports recovery, the unemployment rate can be reduced to 6 percent or less by the end of
calendar year 1977.
A second objection to emergency job programs is that these programs create public rather than private jobs. We share this concern
and have no desire to create public jobs at the expense of private jobs.
Both monetary and fiscal policy should be designed to encourage the
maximum feasible growth of private employment this year and next.
At the same time, we must face the fact that, even with the strongest
growth of private employment that is reasonable to anticipate, unemployment will remain much too high through the end of 1977. Temporary work opportunities in the public sector are far preferable to
continued reliance on income support for idle workers.
A third objection which has recently been raised against a public
jobs program is that its net contribution to new job creation is small,
because most of the jobs paid by the program existed anyway. For
instance, substitution of Federally funded employees for regular State
and local government personnel has been a problem in some places in
the past. However, the contention of the Council of Economic Advisers
that only one job may be added for every ten jobs funded is grossly
exaggerated. To the extent that funding substitution has been a problem, it can be greatly reduced by the adoption of antirecession grants to
State and local governments to avert the need for layoffs and the use
of the locally initiated work-projects approach to temporary job creation, which is described below.
To assert, as the Council of Economic Advisers has done, that it is
impossible to design an effective emergency jobs program is a counsel
of despair. The fact that unemployment is going to remain unacceptably high this year and next must be faced. Effective programs must
be adopted to provide temporary employment opportunities until an
adequate number of jobs become available in the private sector.
Nonetheless, to accommodate criticisms described above, the structure of the emergency jobs program should be modified as it is expanded. Simply increasing the funding for CETA's Title VI without
modifying the program has several disadvantages.
First, a further large expansion of the program, which is administered by the State and local governments, would strain the capacity of
many of these governments by confronting them with a large influx
of temporary workers. To some extent, this has already happened.

56
According to one study prepared for this Committee, 6 the need to
establish public service jobs quickly under CETA's Title VI early in
1975 led some local governments to develop make-work jobs for newly
available employees. Most local governments made good use of these
funds, but any make-work job creation resulting from a further expansion of the program could discredit a good method of creating jobs
during a recession.
Second, the existing program tends to create expectations of permanent government employment among persons hired for countercyclical
purposes. Since some CETA jobs-those under Title II-are intended
to lead to regular government employment, and since many employees
paid under CETA's Title VI are placed in jobs of a permanent nature
involving continuing governmental functions, both employer and employee come to expect that these arrangements may continue
indefinitely.
A detailed description of program modifications to avoid these problems and to minimize funding substitution was presented in the Committee's Midyear Report. Briefly, local or State governments, nonprofit organizations, Federal agencies, and even private businesses
could propose projects and apply to specially constituted regional administrative boards for project funds. Private business would be expected to undertake nonprofit projects. The work projects would have
to be activities which would not otherwise be undertaken, which could
be completed in one to two years, and which would provide socially
valuable goods or services to the community. Such projects might include rehabilitation of housing occupied by low-income persons, construction of bicycle paths, care of parklands and public spaces, construction of recreational facilities, and provision of care for the
chronically ill.
The distribution of funds should be based on local unemployment
rates, as is currently the case under CETA. Once a project is begun,
however, its funding should not be interrupted if the local unemployment rate falls. There should be a clear understanding from the beginning that employment will end with the completion of the project. No
individual should be employed under this program for more than two
years. Financial incentives should be provided to encourage individuals
to find regular private or public employment whenever jobs become
available. Employees under this program should be eligible for regular
unemployment benefits on completion of a project.
Clearly, not everyone currently seeking work could be employed
under this program. It therefore should be directed primarily at those
who have been unemployed for some time and who lack alternative
means of support.
During the past year, the Joint Economic Committee has conducted
regional hearings in six cities (Chicago, New York, Atlanta, Los
Angeles, Fall River, and Boston). In the course of these hearings, much
was learned about the operation of Federal training and employment
programs in different areas. The following conclusions emerged:
The need for a continued and expanded emergency jobs program
is keenly felt in all areas visited.
e Thomas A. Barocci, The Canadian Job Creation Model and Its Applicability
United States, Joint Economic Committee, 19T6.

to the

57
The existing CETA Title VI program is working reasonably
well in most places. It is succeeding in providing jobs for persons
who would otherwise be unemployed. In most cases, these persons
are performing highly useful work.
The program can be improved and made even more successful.
The program design described above stems in part from the evidence gathered at regional hearings and from studies commissioned by the Committee during the past year.
We are pleased to note that legislation which has recently passed
the House and is currently pending in the Senate would continue the
Title VI emergency jobs program and would expand it by providing
for locally initiated work projects of the kind we have suggested.
Enactment of this legislation should receive high priority.

Emergency job programs should be expanded to provide
additional jobs for the cyclically unemployed-those who
normally could find jobs when the economy is operating near
capacity. The additional jobs created by this program expansion should be in special projects lasting from one to two
years and having a useful and identifiable output. The jobs
should be clearly temporary and should make use of skills
which the participants already have. This emergency program should be in addition to the existing CETA job training
and public service employment programs. Appropriations
should be provided to create a total of one million jobs during 1977, including the 600,000 jobs which would be provided
under legislation recently passed by the House of7Representatives extending and enlarging Title VI of CETA.
While no public jobs program can be entirely free from criticism,
the approach outlined above would overcome many of the defects inherent in the existing program. Without a substantial and innovative
program similar to the one described, the United States will continue
to suffer high unemployment through the end of this decade. The
resulting loss in income and human dignity is unconscionable, as is
the erosion in the productive capacity of the labor force.
The emergency one million job program recommended above is only
one element of an overall strategy to reduce unemployment rapidly.
Countercyclical aid to State and local governments and an accelerated
public works program are two other equally essential ingredients.
Provision for both of these programs was included in the Second
Concurrent Resolution on the fiscal 1976 budget, and both programs
would have been authorized by a bill which Congress passed and sent
to the President in January. The President's veto of this bill has torn
a gaping hole in the comprehensive recovery program that Congress
had developed.
The proposed emergency public works program has been criticized
on the grounds that the projects would get underway too slowly to be
of real benefit in dealing with recession-induced unemployment. If the
7Senator Proxmire states: "I am against a job program of this size which is accomplished through public works, which are wasteful and too slow,, or through public service
jobs where there is a big substitution effect If it gets too large. Instead, I believe we should
provide for jobs through a shallow housing subsidy where one job can be created for about
$300 instead of $8,000 per public service job and as high as $25,000 for a public works
job.,

58
1974-75 recession had been as mild as other recessions experienced in
the postwar period, this criticism might be valid. However, the recent
recession has left an aftermath of high unemployment which will
remain throughout the remainder of this decade. Unemployment in
the construction industry is especially severe and appears likely to
remain so for quite some time. A program of high-priority local work
projects which can be initiated quickly and completed during the
present period of high unemployment is thoroughly justified and

badly needed.
Congress should quickly reenact and the President should
sign legislation providing forCountercyclical aid to State and local governments, and
An emergency public works program designed to fund
high-priority local work projects.
Providing Jobs for Young People
Teenagers and young adults have always experienced higher unemployment rates than adults. While the unemployment rate among
adults 25 years old and older was 5.4 percent in January 1976, that
among persons 20 to 24 years old was 12.7 percent, and among teenagers of 16 to 19 it was 19.9 percent. For black teenagers, the unemployment situation was much worse. In January, 34.6 percent of 16- to
19-year-old blacks could not find a job; in many inner city ghettoes,
the unemployment rate for teenagers exceeded 50 percent.
The total number of teenagers and young adults who were jobless
in January 1976 was 3.7 million-almost half the total number of
Americans unemployed. In addition, there are about 400,000 youths
who would be looking for work if it were available-discouraged
workers-who are not counted in the unemployment statistics. One of
the most tragic consequences of the 1975 recession and the severe unemployment projected through 1980 is the economic, social, and psychological impact it will have on many young people.
First, as noted above, many young people will lose the opportunity
to develop job skills and work experience, to experiment with different
kinds of jobs, and to adjust to the demands of the labor market-a
healthy process which normally precedes entry into a career job.
Second, many youths already have financial responsibilities without
having the savings to sustain them during a period of prolonged unemployment. This problem is underscored by the fact that, among
young adults (ages 20 to 24), 500,000 household heads are unemployed.
In addition, there are also teenagers with family responsibilities.
Among unemployed teenagers about 66,000 are household heads.
Third, younger workers are much less likely to be eligible for unemployment compensation. During 1975, only 30 percent of those under
25 were eligible for benefits, compared to more than 75 percent of
those over 25.
Finally, prolonged unemployment increases the incidence of crime,
drug abuse, and other forms of behavior that can ruin a person's
chance of achieving a productive life in the future and that seriously
increase the social costs of continued high unemployment.
High unemployment rates among youth result from many factors,
including lack of work experience, inadequate jobs skills, poor job

59
counseling, the weak work attachment of many students, and the rapid
influx into the labor market in the past few years of those born during
the postwar baby boom.
Data show that over 70 percent of the teenaged unemployed are
searching for a first job or are reentering the labor force after a
period in school or traveling. By contrast, almost two-thirds of 20- to
24-year-old men are unemployed by the loss of their previous jobs.
Among 20- to 24-year-old women, reasons for unemployment were
equally attributable to job loss and labor force entry.
About two-thirds of unemployed youths are seeking full-time work.
Among teenagers, roughly half are seeking full-time work; among 20to 24-year-olds, about 85 percent.
Although young workers are to be included in the general countercyclical job creation program described above, a separate program is
needed in recognition of the special employment problems faced by
youth.

Nearly one-half of the total unemployed are persons under
25 years of age. Extended idleness for young people with little
past work experience will result in severe social and economic
costs. Congress should give high priority to developing a comprehensive program targeted specifically at the employment
needs of young people.

Included in such a comprehensive youth employment program,
Congress should consider:
Continued funding for summer jobs for youth and improvement in the administration of this program. In the summer of
1975, 840,000 jobs for teenagers were funded. The President proposes to eliminate 170,000 of these jobs by the summer of 1977.
The serious unemployment problem among teenagers requires,
to the contrary, that summer jobs be expanded or, at the very
least, maintained at the 1975 level.
Establishment of a youth employment service within the
United States Employment Service to bring professional job
placement and job counseling services to youths while they are
still in school or when they are first entering the labor force.
Assistance should be provided to facilitate the transition from
school to work and to expand the availability of job apprenticeships in the private sector.
Creation of a permanent jobs program directed specifically at
young people. A project-type approach to public employment
suggested earlier as a countercyclical measure could be adapted
into a permanent youth employment program. Such an approach
would lend itself more easily to the part-time or temporary employment needs of teenagers and young adults. The need for
such a program is greatest in the next five years when the influx
of young people will be greatest. After 1980, teenagers will constitute a diminishing percentage of the labor force.

Stimulating Private Sector Employment
Almost 85 percent of American workers depend on the private
sector for jobs and income. Of the persons who are currently unemployed because they lost their jobs, almost 90 percent worked in the

60
private sector. Even with the large-scale public job program recommended above, most of these unemployed will depend on recovery in
the private sector for renewed job opportunities. In addition to
expansionary fiscal policy, we also must examine more direct methods
of stimulating employment in the private sector during the next few
years.
There are several reasons for providing incentives for job creation
and training in the private sector. First, a well-designed subsidy or
tax credit for hiring new workers, if effective, could entail a much
lower Treasury cost per job than providing comparable public sector
jobs. Second, the output of private jobs expands the supply of goods
and services available in the private market and helps to dampen
inflationary pressures. Finally, it is generally recognized that on-thejob training is the most effective means for upgrading workers' skills;
and this training can be carried on by the trainee's future employer.
While Congress continues to pursue traditional means of improving
employment opportunities in the private sector, including expansionary fiscal policies and incentives to business investment, new measures
to stimulate additional private job creation and training should be
explored.
In the fiscal 1977 budget, the President proposed a new accelerated
depreciation provision to encourage construction of new plants in
areas with unemployment in excess of 7 percent. While the concept
of providing special stimulus to job creation in depressed areas is an
attractive one, the President's proposal is unlikely to result in a significant net addition of jobs and would not distinguish effectively
between depressed areas and others. Furthermore, the proposal would
foster capital-intensive instead of labor-intensive operations. This
issue is discussed more fully in Chapter VII.
Another incentive to job creation in the private sector, which should
be considered by Congress, is an employment tax credit. For example,
such a credit could be designed so that any employer who increases
his employment in 1976 or 1977 over the previous peak level would be
eligible to receive the credit. To qualify, workers hired would have
to have been out of work for at least six weeks. An effective credit
would probably have to be set at a level close to $1,000 per newly hired
employee.
There are two problems with this proposal that should be pointed
out. First, there is a potential for significant windfall payments to
firms that would expand their employment during the economic recovery even without the employment tax credit. There is no way to
eliminate all such windfalls. Even with the possibility of some tax
windfall, the jobs created through this proposal still would involve a
relatively small cost to the Federal Government. At a maximum credit
of $800 per job, for example, if one-half of the jobs qualifying for
the credit would have been created anyway, the other half that were
due to the credit would involve an average Treasury cost of $1,600
each. If only one-quarter of the new jobs in 1976 were due to the tax
credit, each of these would cost $3,200, still less than half of the cost
of a public service job.

61
A second problem with such a proposal, however, is that one cannot predict how many jobs it would create or how swiftly it would
create them. In other words, one cannot tell how reliable such a
device would be in helping to reach our unemployment targets. The
Committee intends to study further the alternative methods for
stimulating employment in the private sector. In addition to the proposal described above, wage subsidies should be considered, especially
for improving job prospects for the structurally unemployed.
ECoNOMIC PLANNING
One of the most serious shortcomings of our economic policy institutions is the lack of mechanisms and procedures for developing longrange policies for balanced economic growth and full employment.
While the poor performance of the economy in recent years may be
attributed to some extent to international events and other actions
beyond the control of the Federal Government, much has been the
result of inattention to structural problems and a failure to act on the
basis of reasonable foresight.
We do not advocate centralized economic planning. Indeed, many
of our problems may be caused by overcentralization. For example,
economic policy in general is controlled on the Federal level by a
handful of influential officials in the Executive Branch. A brass quintet, made up of the Secretary of the Treasury, the Chairman of the
Federal Reserve Board, the Chairman of the Council of Economic
Advisers, the Director of the Office of Management and Budget, and
the President's White House Economic Counsel composes most of our
economic policy. Congress is excluded when possible and State and
local officials are rarely consulted.
These officials normally operate in a short-run context, reacting to
events, with no consistent framework of longer run objectives nor any
plan to achieve them. The market system can achieve much, but a
market economy develops distortions because its incentive structure
often fails to reflect social costs, and its time horizon also is quite
limited. Government's involvement, moreover, is inevitable and is
necessary to correct this incentive structure, to provide for public
services, and for other purposes. A primary problem for planning is
to channel the Government's involvement in ways that consistently
promote balanced growth and full employment.
Three critical questions must be asked about any system planning.
Who does the planning? What are we planning for? What gets
planned? The bill introduced by Senators Humphrey and Javits, S.
1795, sets up a planning board within the Executive Branch to draft a
proposed plan for long-range economic policy to be submitted by the
President to Congress and the Governors of each State. The proposed
plan would be coordinated with the Cabinet and approved, disapproved, or modified by Congress after obtaining the views of State
and local officials. Under the Humphrey-Javits bill, long-range policy
recommendations would be developed jointly by the President, the
Cabinet, Congress, and State and local officials.

67-573 0 - 76 - 5

62
-Broad-based, democratic long-range planning is intended to complement, not to replace, the market system. The Committee does not
envisage an expansion of the Government's role into the private sector. It does contemplate establishing procedures to deal in a systematic
long-range way with the problems of unemployment, inflation, and
structural change.
Congress should enact legislation establishing Federal
planning procedures to develop long-range Policies for balanced economic growth and full employment. These procedures should provide roles for Congress and the Executive
Branch as equal partners in the planning process and should
provide for full participation by the private sector and by
State and local governments. The goals of full employment
and price stability 8should be high priorities in any system of
economic planning. 9
s Senator Proxmire states: "I disagree. I oppose putting the Federal Government into
the business of planning for the economy. The Government is too big now. It interferes
too much, with mindless regulation and excessive paperwork requirements, with the free
market."
D Representative Gillis Long states: "I believe the thrust of this recommendation is to
coordinate the activities of the Federal Government so that the private sector will have
a better idea of exactly what Federal policy is and what the intentions of the Federal
Government are."

V. FEDERAL BUDGET PRIORITIES
ExPENurUiREs

As the President stated in his budget message to the Congress,
"The budget reflects the President's sense of priorities. It reflects his
best judgment of how we must choose among competing interests and
it reveals his philosophy of how the public and private spheres should
be related." This last statement concerning the division of resources
between the public and private spheres has become an increasingly
controversial aspect of the budget debate in recent years. For this
reason, the following discussion attempts to place the relationship
between the Government and the private sector in perspective before
discussing priorities-within the budget itself.
Many people seem to have the impression that the influence of
Government is expanding inexorably and threatens to overwhelm the
economy by consuming an ever-increasing portion of our national
output. This impression has been fostered by statements of government officials and by individuals' own perceptions of the influence of
the Government, especially government regulations, on their lives.
The result seems to be a widespread desire to curtail the Government's role. Before slashing the Federal budget, however, one must
ask whether a smaller Federal budget is the logical response to this
desire of some people for less government involvement in the private
sector. An examination of the sources of the increase in government
influence on the private sector is helpful.
Table V/1 shows the relationship of Federal spending and State
and local spending to the overall economy. The first three columns
show the relationship that would have been observed had there been
no cyclical fluctuations in the economy; the last three columns show
the actual relationship. As the table shows, the Federal share of total
output has been relatively stable (varying between 17 and 21 percent)
when adjusted for cyclical fluctuations. The State and local share,
however, increased steadily from about 71/2 percent in 1952 to almost
13 percent in 1970. The share of total output devoted to expenditures
by all governments combined increased from about 27 percent in 1952
to about 30 percent in the late 1960's and, since that time, has remained
relatively stable. Since there has been relatively little growth in
cyclically adjusted government spending as a percent of GNP, and
since a significant part of the increase which has occurred has resulted
from State and local spending, an attack on the Federal budget seems
unwarranted.
(63)

64,
TABLE V/1l-RELATIONSHIP OF GOVERNMENT EXPENDITURES TO GROSS
NATIONAL PRODUCT
[NIA basis, calendar yearsi
As percent of GNP
Adjusted for cyclical behavior

Year
1952----------------1953-21.0
1954------------------------------1955-1956-1957 -17.
1958---------------1959-17.8
1960 -17.2
1961-17.
1962 -18.6
1963----------------1964 .1965 1966 -19.4
1967 -20.6
1968 -21.0
1969 -20.1
1970 -1971----------------1972 -20.0
1973 -19.7
1974 -19.
19751-20.1
1976 -----

Federal
expenditures
20.8
18.5
17.0
16.8
3
18.1
9
18.5
18.0
17.8

19. 7
19.4
5
20.6

State and
local expenditures
7.5
7.6
8.0
8.2
8.4
8. 7
9.2
9.2
9. 3
9. 7
9.8
10.1
10.5
10.8
11.4
11.9
12.4
12. 5
12.9
13.3
13.5
13.5
13.2
12.9
12.9

Actual

Combined

Federal
expenditures

27. 5
27.8
25.7
24.5
24.5
25.1
26.2
25.6
25.2
26.4
27.1
27.1
26.9
27.1
28.8
30. 5
31.3
30.5
30.2
30.1
30.3
30.1
29.8
29.9
29.8

20. 5
21.1
19.1
17.1
17.1
18.0
19.8
18.7
18.4
19.5
19.6
19.2
18.6
18.0
19.1
20.6
20.8
20. 1
20.8
20. 7
20.9
20.3
21.3
23.8
23.6

State and
local expenditures
7.3
7.5
8.2
8.2
8.5
9.0
9.9
9.6
9.8
10.4
10.3
10.6
10.8
10.9
11.2
11.9
12. 3
12.6
13.5
14.0
14.0
13.9
14.3
14.8
14.6

Combined
27.1
27. 8
26. 5
24. 5
24. 8
26. 0
28. 4
27. 0
27. 0
28. 5
28. 5
28. 2
27.
27. 3
28. 4
30. 5
31.0
30. 5
31. 8
32. 0
31. 7
31. 0
32. 5
35.0
34. 2

I Preliminary.
Estimates from various budget documents, the Economic Report of the President, the Joint Economic Committee
staff, and the Council of Economic Advisers. 1976 outlays are based on the proposals in this report.

Often people observe past trends and project them into the future
without considering whether it is reasonable to expect that past trend
to continue. This is certainly reasonable for some elements of government spending. But an examination of the reasons for growth in
government spending shows that many of these sources of growth
will not exist in the future. For example, much of the growth in State
and local expenditures has been related to providing public education.
But the postwar baby boom now is moving into the labor force, and
the school-age population has ceased to grow rapidly. Hence it will
be unnecessary for State and local governments to devote so many
resources to providing public education. One of the major sources
of growth in Federal spending has been for retirement programs.
Social security benefits have been expanded to cover more and more
of the retired population. Today almost 100 percent of the retired
population is eligible for these benefits. Expanding coverage is not
expected to be a major source of expenditure growth in the future.
When these factors are considered, there is no reason to believe that
government spending is out of control or that it is likely to increase
as a share of total output. Projections published recently by the Congressional Budget Office demonstrate that the continuation of present
policies would result in a decline in Federal expenditures to about 20

65
percent of GNP in 1981. Adjusted for cyclical fluctuations, Federal
outlays would be only about 18 percent of GNP in 1981.'
A second and legitimate concern about the expanding role of Government centers around the effect of regulations. Federal and State
regulations influence most aspects of our daily lives-transportation,
communications, working conditions, power usage, and so on. Considering their far-reaching influences, regulatory agencies consume
a very small fraction of government expenditures. At the Federal
level, the regulatory agencies represent less than 11/2 percent of total
Federal expenditures. Clearly, an attack on Federal spending will
have little influence on the behavior of these regulatory bodies. Any
serious effort to reduce unnecessary regulation will require a commitment from the Administration to rewrite many regulations within
existing legal guidelines and cooperation from the Congress in changing legal guidelines that have proved unnecessarily restrictive.
We reject the notion that trends in total government expenditures
can best be controlled by focusing exclusively on the Federal budget.
State and local spending has played the major role in the growth of
total government outlays. It is also clear that a significant part of the
average citizen's interaction with the Government is not directly
related to budget outlays.
In preparing our recommendations on expenditure policy, we have
not found the President's budget very useful. One problem is the
unrealistically high estimate of the economic growth that would result
from the President's policies. As discussed in Chapter II, we estimate
that the President's policies would produce an average unemployment
rate exceeding 71/2 percent in fiscal 1977. Consequently, we regard the
budget estimates for unemployment compensation and related programs to be unrealistically low. Another area in which the Administration's estimates have been consistently poor is the receipts from
the sale of offshore oil leases. In fiscal year 1975 these receipts were
originally estimated at $6.3 billion; they are now estimated at $2.4
billion for that year. In fiscal year 1976 the original estimate was
$8 billion but it has now been revised to $3 billion. The fiscal year
1977 budget estimates next year's receipts at $6 billion, but we think
OBO's estimate of $2 billion is more realistic. A third problem with
the President's budget estimates is that they incorporate policy recommendations unlikely to be adopted. As discussed throughout this
report, many of those recommendations are unreasonable and should
not be adopted. For all of the above reasons, the Current Services
Budget provides a far better and more neutral starting point from
which to consider budget policy for next year.
Federal budget priorities are not made in a single year and rarely
are they changed radically in one year. Rather, they tend to evolve
gradually over constant and steady efforts over several years. Table
V/2 demonstrates how priorities have evolved since 1965 and how
I Five-Year Budget Projections, Fiscal Years 1977-1981, Congressional Budget Office,
January 26, 1976, "Path B" assumptions.

66
they would change if the President's 1977 budget proposals are
adopted. This table shows that about 391/2 cents of each additional
budget dollar spent between 1965 and 1970 went for national defense,
22 cents went for income security programs, 141/2 cents went to health
programs, and 10 cents went for interest payments. Between 1970
and 1975 there were major changes. Only about 51/2 cents of each
additional dollar went to national defense while income security
programs received about 51 cents and health programs received about
111/2 cents. If the projections presented in the President's 1977 budget
actually occur, priorities will shift again between 1975 and 1980.
National defense would receive 29 cents of each additional budget
dollar. Income security programs would receive about 39 cents, and
health programs would get about 10 cents. Other changes are smaller
and are shown in Table V/2.
TABLE V/2.-PERCENTAGE DISTRIBUTION OFCHANGE IN BUDGET
OUTLAYS BY FUNCTIONAL CATEGORY,
FISCAL
YEARS 1965-80
Category
National defense International affairs -.-General science, space,
andtechnology -Natural resources, environment, andenergy -1.0
Agriculture -1.7
Commerce
andtransportation -2.8
Community andregional development -2.7
Education, training, employment, andsocial servicesHealth-.---------------------------Income security-22.3
Veterans' benefits andservices-3.8
Law enforcement andjustice -.
General government -.
Revenue
sharing andgeneral purpose fiscal assistance -.
Interest-----------------------------Undistributed offsetting receipts-Allowances
Total'
X Individual

1965-70

1970-75

39.3
-.6
1.7

6
5
4
10.1
4.4

5.7
.6
-.4
4.3
-2.7
5.4
.9
5.7
11.3
51.2
6.2
1.5
.9
5.1
9.9
-5.9

29. 0
2.3
.3
3.4
.7
1.7
1.0
.1
10.0
39.0
-. 2
.3
.3
.6
10.1
-5.1
7

100.0

100.0

100.

7.4
14.5

-

-----------------------------------------------

-6.

1975-80

items may not sum to totals due to rounding.

Sources: "The Budget of the U.S. Government," fiscal year 1977,and the Office of Management and Budget.

Within the total level of spending suggested by the President in
fiscal year 1977, there are major changes which, if adopted, would
lead to significant shifts in budget priorities. As Table V/3 shows,
the increase in the total budget is about 4 percent. When compared
with the projected inflation rate of 6 percent, this implies a reduction
in real services. In the national defense portion of the budget, the
President has requested an increase in outlays of about 7.2 percent.
Thus national defense would increase in real terms. If the nondefense
portion of the budget is examined separately, it shows an increase
in spending of about 31/2 percent, or a reduction in real terms (assuming 6 percent inflation) of approximately 21/2 percent.
Another way to view the President's budget proposals is to compare his suggested expenditures with the level of outlays that is necessary to provide approximately the same government services in fiscal
year 1977 as in the current year. This comparison is one that this Committee has found useful for several years. The current services budget

67
provides a neutral baseline for analysis which does not contain the
policy changes incorporated in the President's budget. It is a projection of the spending that would result from an extension of existing
law, from changes anticipated in case loads of entitlement programs
such as social security and medicare, and from a continuation of other
policies now in effect.
TABLE V/3.-CHANGE IN FEDERAL OUTLAYS BY FUNCTIONAL CATEGORY, FISCAL YEAR 1977 OVER1976

Billions

Category --------------------National defense -8.4
International affairs --.
General science, space and technology -.
Natural resources, environment and energy-2.
Agriculture -Conmerce andtransportation -Community and regional development -.
Education, training, employment and social services-Health -2.3
Income security -8.6
Veterans' benefits and services -Law enforcement and justice -General government ------Revenue sharing and general purpose fiscal assistance-.
Interest -6.5
Allowances---------------------------------Undistributed offsetting receipts 3
Total ----------------------------------------

Percent (adjusted
for transition
quarter)

7.2
-2.3
3.6
13. 2
-31.9
-5.9
-3.7
-9.7
5.6
5.3
-7. 7
1. 8
() ------------2.6
- 1
2.0
2
14.6
2.1.---------18.7
-3.6
2
2
0
1.2
1.3
3
2.3

---------------

19.3

4. 1

' Includes Export-Import Bank in 1976 total for accurate comparison in 1977.
2 Less than $50,000,000.
a Includes a $3,000,000,000 increase in estimated receipts from sale of offshore oil leases.
4 Individual changes may not sum to totals due to rounding.
Sources: The Budget of the U.S.Government, fiscal year 1977, and the Joint Economic Committee.

By comparing the President's proposed spending for 1977 with the
current services level of spending for 1977, one can easily see where
the President has focused his recommendations for policy change. As
Table V/4 demonstrates, the total reduction in expenditures would be
about $29 billion, with the largest cuts occurring in income security;
health; and education, training, employment, and social services.
Table V/4 also indicates a decline in national defense, relative to the
current policy level. There is some distortion, however, in comparing
this category with other functions because of its different treatment of
pay increases. The increase in pay for all civilian agency employees is
lumped together in the line labeled "allowances," while the pay increase for defense employees is added to other spending in the national
defense category. Since the President has proposed as a policy change
to limit pay increases to an average of 4.7 percent, and the "current
services" level includes approximately a 12-percent increase in accordance with the current standard providing for comparability with the
private sector, there appears to be a decline in national defense. If an
adjustment is made for this different treatment of military pay increases, the President's proposed expenditures for national defense
would be slightly above current services levels.
Within individual program areas, there is certainly room for increased program efficiency and greater productivity. With personnel

68
TABLE V/4.-ESTIMATED OUTLAYS BY FUNCTION, FISCAL YEAR 1977
[In billions of dollars]

President's
budget
request
National defense -101.1
International affairs -6.8
General science, space, and technology -4.8
Natural resources --------------Agriculture Commerce and transportation -16.
Community and regional development-5.
Education, training, employment and social services -16.6
Health-34.4
Income security -136.5
Veterans benefits and services -17.2
Law enforcementGeneral government -3.4
Revenue sharing -------------Interest -41.3
Allowances
-----------------------------------------------Offsetting receipts-Total -393.6

13.5
1.7
5
5

3.4
7.4
2. 3
18.8

Projections
of current
policy I

impliedby
budget
requests

103.4
6.8
5.0
14.4
2.3
18.5
7.7
21. 5
37.6
143.4
18.8
3.7
3.6
7.3
42.2
2.0
-15. 5

-2.3
0

422.7

-29.1

-.

2

-. 9
-. 6
-2.0
-2. 2
-4.9
-3. 2
-6.9
-1.6
-. 3
-. 2
.1
-. 9
.3
-3. 3

1 This estimate provided by the Congressional Budget Office. It is based on the mean of Path "A" and "B" as described
in "'Five-Year Budget Projections, Fiscal Years 1977-81," Congressional Budget Office, Jan. 26, 1976.
Individual items may not sum to totals due to rounding.

costs running above $75 billion, it would be foolhardy to suggest that
improvements in efficiency and productivity are not attainable. This
Committee is willing to cooperate fully with the Executive Branch in
achieving those increases. In a staff study published last December, 2
changes in the budget were identified which, after a five-year period,
could reduce outlays by about $25 billion. Without endorsing these
particular changes, we feel that there is sufficient criticism of the
effectiveness of these programs to suggest that they be reexamined in
light of the competing demand for Federal dollars. To argue that the
changes should be made is not necessarily to say that the programs
are not useful but only that more efficient use could be made of these
Federal funds. Table V/5 shows the savings which might be realized
from an orderly reduction in the programs listed.
Another change not included in Table V/5 which needs to be considered is in the military retirement program. Unlike the civil service
retirement program, which is partly funded by employee contributions, military personnel make no contributions toward their pensions.
Yet military personnel usually retire earlier and draw much more in
pension payments than civilian employees. Benefits paid from general funds for retired military personnel in 1977 will total about $81/2
billion; by 1981 these expenditures will grow to about $131/2 billion
under current law. Since military pay now has been made comparable
to civilian pay, it may be appropriate for military personnel to begin
contributing to their own retirement benefits as their civilian counterparts do. Such a change might also involve altering the computation
of benefits. While drawing no conclusions on this issue, we urge Congress to examine the principle of comparable pay and benefits to
assure that it is being applied uniformly.
2An Economic Evaluation of the Current Servicea Budget, Fiscal Year 1977, a staff
report prepared for the use of the Joint Economic Committee, Dec. 22, 1975.

69
TABLE V/5.-POSSIBLE SAVINGS FROM
SELECTED
PROGRAM
CHANGES,
FISCAL YEARS 1977-81
{Outlays in billions of current dollarsi

National defense:
Manpower efficiency-$0.60
Procurement efficiency
Asian force reductions -.
Strategic force reductions -.
Regulatory changes:
ICCphaseout..---------------CAB phaseout -.
Retirement changes
I
Military annuitants-Civilian annuitants -.
Other:
Ship construction subsidies-.
Eaport-Import Bank loans -1.10
Impacted Area School
Aid 3-.
Total -4.06

1977

1978

1979

1980

.50
90
60

$1.20
.80
1.70
1.90

$2.00
1.00
4.20
3.50

$2.80
2.00
5.10
4.50

$3.80
2.00
8.10
48.0

.02
03

.03
.06

.05
.08

.06
.10

.07
.11

.09
08

.22
.27

.32
.41

.50
.84

.62
1.09

01

.09
2.10
.21

.18
2.80
.28

.27
3.40
.34

.30
3.80
.40

8. 58

14.82

19.91

25.09

13

1981

X Change
would

makeincrease in retirement benefits equal to increases
in the Consumer Price Index.
Loans would be reduced over a3-yr period with all current obligations fulfilled.
aThe portion of impacted aid for students whose parents do not both live and work on Federal property would be phased
out over 3 yr with all present hold-harmless provisions of the law maintained.

Income Security
The 1977 budget proposes several important changes in expenditures
for income security programs. The largest component of this category
is social security. Here the President would: (a) eliminate the provision that allows some new retirees to receive a lump sum payment in
exchange for permanently reduced future benefits; (b) convert the
retirement test from a monthly test to an annual one; (c) phase out student benefits; and (d) correct the provision which gives a double
inflation adjustment to current workers. All of these provisions deserve careful consideration by the Congress. Congress must realize,
however, that the initial impact of these changes on budget outlays
will be small. As time passes the outlay impact would certainly grow,
especially in the case of the double inflation adjustment.
Much concern has been expressed recently about the basic soundness
of the social security insurance system. Table V/6 shows that in fiscal
1976, for the first time, expenditures exceeded receipts, so that the
balance in the Social Security Trust Fund was reduced. If laws remain unchanged, the balance can be expected to decline again in 1977
and future years. We must point out, however, that the Social Security Trust Fund is in no danger of going bankrup in the next two
or three years. The balance at the end of 1976 will exceed $45 billion,
and under the economic assumptions in the President's budget, a
surplus of $23 billion is projected to remain in the trust fund in 1981
under current law. Adopting the President's proposals would increase
the surplus to an estimated $68 billion in 1981.
The declining trend in the Social Security Trust Fund balance is
disturbing, and Congress needs to begin consideration of the solutions
to this problem. If we begin now, there will be adequate time to solve
these problems before they reach a dangerous level.

70
TABLE V/6-FEDERAL OLD-AGE, SURVIVORS, AND DISABILITY TRUST FUND-RECEIPTS AND OUTLAYS, FISCAL
YEARS 1971-76
{Billions of dollarsi

Receipts
-$38.9
Outlays -35.9
Surplus or deficitBalanceatendofyear-40.8

1971

1972

1973

1974

1975

1976'

3.0

$43.2
40.2
3.0
43.8

$49.6
49.1
.5
44.3

$57.7
55.9
1.8
46.1

$66.7
64.7
2.0
48.2

$70.8
73.7
-3.0
45.2

' Estimated.
Source: Department of the Treasury.

The Social Security Trust Fund is in basically sound condition. The single most important thing that can be done to
ensure the continued soundness of the social insurance system is to restore health to the overall economy. Even so, some
changes will be necessary to avert problems in 1980 or after,
but Congress has time to give careful consideration to the full
ramifications to these changes.
The fact that the Social Security Trust Fund is declining is not
enough information to solve that problem. One must know the cause
of the decline. The single most important cause of the drop in the trust
fund receipts is the economic recession.
There is no doubt that a recession causes government receipts to fall
and expenditures to rise. This is observed for the Government as a
whole and the social insurance funds in particular. The Secretary
of the Treasury has estimated that, under conditions of full employment, social security receipts in fiscal 1977 would be nearly $10/ 2
billion higher than the actual anticipated level of $96.2 billion. Table
V/7 shows how seriously the current recession has curtailed the receipts of the social insurance funds as a whole. This table includes
funds for unemployment compensation, railroad retirement, supplementary health insurance and other purposes, in addition to social
security. The social insurance trust funds would have collected over
$40 billion in additional receipts had this recession been avoided.
The'tunusual'combination of high inflation with the current recession also has adversely affected, the Social Security Trust Fund. The
base on which social security taxes are levied rises automatically over
time as wages and salaries rise. Benefits paid out, however rise automatically as the Consumer Price Index (CPI) increases. From 1974
to 1975 the CPI increased 9.1 percent; at the same time wages and
salaries increased only 5.1 percent. This usual disparity between wage
increases and CPI increases placed an especially heavy burden on the
trust fund last year.
TABLE V/7-IMPACT OF RECESSION ON SOCIAL INSURANCE FUND RECEIPTS

INFA basis,calendar years, billions of dollarsl
Actual tax
collections
1973-79

1974-------------------------1975-93.5
1976 -

Tax collections at
full employment

Revenues lost due
to recession

4

92.0

26

104.0

107.5
121.1

14.0
7.1

89.4

96.9

'Estimated by JECstaf Assumes no increase in the *s0al wsurit tax rate and no change in unemployment taxes.

7.5

71
A second but less significant problem with the Social Security Trust
Fund is that it is called upon to provide more than just retirement
benefits. With the enactment of medicare in 1965 the trust fund was
expanded to finance hospital insurance for many elderly people. A_
special part of the payroll tax (1.8 percent of the 11.7-percent total)
is set aside to pay for hospital insurance. While we support the concept
that an individual makes a contribution toward his pension by paying
into the Social Security Trust Fund, we feel that it would be appropriate to change the present law so as to fund hospital insurance from
general revenues. The hospitalization benefits a person receives are determined by the reimbursable costs he incurs and bear no relationship
to his wages or contributions. Such a change in funding responsibility
would in no way alter the balance of the Federal budget on a unified
or national income accounts basis but, by holding the payroll tax constant, would increase the balance of the So'cial Security Trust Fund.
The health insurance contributions now comprise over $10 billion per
year. The 1975 Advisory Council on Social Security endorsed the idea
of general revenue funding for the hospital insurance program."
Since its'founding, the social security system has been expanded' to provide'far more than just retirement benefits for
those who contribute. Making'many people eligible for benefits who had contributed little has placed a heavy burden-on
the trust fund. To relieve'part of this-burden and to avoid
further increases in the regressive tax- that'fitances this system, funding responsibility' for the hospital. insurance program should be transferred from the tfust fund to; general
revenue s.Receipts currently collected for hospital insuranee
should be reallocated to-'the'Old Age and' Survivors Disability
Insurance Fund.
Houift#

In 1968 Congress stipulated the objective of "a decent home in a
suitable living environment for every American family'? and established a corresponding national goal of 2.6 million housing starts per
year. Two million starts were to be financed exclusively by the private
sector, while 0.6 million were to be government-assisted units. This
rate of building was sufficient to meet the demand for housing created
by net new household formations, to compensate for attrition from the
housing stock, and to replace gradually the units that were clearly
substandard.
Since the enactment of this goal, demographic changes and more
vigorous rehabilitation efforts have reduced the new building rates
necessary to meet the Nation's housing needs. These trends have
lowered the rate of new household formation and reduced attrition
from the housing stock. According to the Census Bureau, the average
annual increase in the number of households will be approximately
1.5 million from 1976 to 1980. In addition, approximately 0.8 million
housing units must be started each year to compensate for conversion,
destruction, and abandonment and to cover the natural growth in the
number of second homes. Thus, 2.3 million housing starts annually
3'Communication from Secretary of Health, Education, and Welfare transmittlng the
Reports of the Quadrennial Advisory Counodl on Bocial Security, Mar. 10, 1975.

72
are necessary to keep pace with the demand for new housing in the
near future.
In the past two years, new housing construction has fallen woefully
short of even the most modest projections of housing needs. In 1974
and 1975, housing starts averaged 1.25 million units annually, approximately 55 percent of prospective demand. In 1975, the annual
rate of housing starts was closer to 50 percent of the Nation's goals,
despite an increase that extended through the last three quarters of the
year.
The recovery in the housing industry will continue in 1976. Large
savings inflows into the thrift institutions will provide funds to increase mortgage loans and should depress interest rates somewhat. The
economic recovery also will increase the demand for housing by raising
consumer incomes. The trend toward smaller houses should broaden
the market for new homes. Nevertheless, the Committee expects only
1.5 million to 1.6 million housing starts in 1976, still far below necessary levels.
The high price of home ownership is responsible for the weakness of
the recovery in the housing industry. In addition to soaring construction costs, high land prices have raised the price of new housing, and
mortgage interest rates have remained high despite massive flows of
savings into thrift institutions. Operating expenses also have jumped.
These factors will continue to make homeownership hard to afford for
many American families and will moderate demand for new housing
construction in 1976. This fact was graphically made by a recent study
prepared for the Committee that showed that only 15 percent of all
families now can afford the median-priced new single-family home,
and only 21 percent can buy the median-priced existing home.
The Committee is concerned that these factors could become a serious impediment to achieving levels of housing construction consistent
with our national goals. We believe, therefore, that Congress must
develop proposals to make homeownership affordable for a larger
percentage of American families. Several initiatives could strengthen
the demand for and improve the affordability of housing:
The $2 billion available for use in the Government's National
Mortgage Association tandem plan should be released immediately
by the Administration. These funds have been appropriated by
Congress and could be used to purchase mortgages on singlefamily or multifamily dwellings at an interest rate of 71/2 percent.
A mortgage with rising monthly payments could be offered as
an alternative to the existing mortgage instrument. This option
could be used to minimize monthly payments at the beginning of
the mortgage by requiring only interest payments or even deferring part of the interest over the first few years. Later, monthly
payments could rise as the income of the mortgagee rises. This
type of mortgage instrument could be particularly useful to young
families purchasing their first home.
Mortgages with 7 percent interest rates could be offered to all
households with incomes less than 120 percent of the median income in a geographic area. The size of the mortgage should be
limited to the price of a median-priced home in the region. The
mortgages could be made available through thrift institutions
and could then be resold to the Federal Government.

73
Congress should enact policies designed to increase the rate
of housing starts to levels that are consistent with a national
goal of 2.3 units annually. This level of production is sufficient
to meet the demand created by net new household formation
and replacement of the existing housing stock. Top priority
should be given to programs designed to make new and existing housing affordable to more families. As a first step toward
implementing this recommendation, the $2 billion available
for use in the Government National Mortgage Association
tandem plan should be released immediately. 4
The Committee is particularly concerned about the millions of lowand moderate-income families living in substandard housing. Traditionally these people have benefited from rapid growth in the total
housing construction programs. In the last two years, neither of these
beneficial factors has existed.
Government-assisted housing starts have declined significantly in
the last five years from 400,000 units in 1970 to less than 100,000 units
in 1974 and 1975. While the budget of the Department of Housing
and Urban Affairs (HUD) indicates that more than 200,000 new
assisted units will be started in 1976, HUD's performance in the past
has been so erratic that the Committee has grounds for skepticism.
There are a number of actions that the Committee believes could be
taken to accelerate the construction of low- and moderate-income
housing units:
The Section 235 program,5 recently revived by HUD, could be
expanded and accelerated to provide 100,000 assisted housing
starts in 1976 and 200,000 starts in 1977. This program provides
5 percent mortgages to low- and moderate-income families. It is
a low-cost but effective program for encouraging the construction
of new government-assisted units.
State housing finance agencies should be encouraged to use the
Federal guarantee of taxable bonds with the 33-percent interest
subsidy provided for in the Housing and Community Development Act of 1974. At present, many State housing finance agencies
are unable to borrow, jeopardizing the construction programs that
they undertake. Utilization of Federal guarantees already enacted would ease this problem.
The Section 8 leasing program could be used to a greater extent
to encourage new government-assisted construction. Initially a
requirement could be imposed on HUD that 40 percent of the units
assisted under the Section 8 program be new units. This requirement could be gradually increased.
4Senator Proxmire states: "I agree strongly with the recommendations. Last year was
the worst year for housing starts since 1946. HUD produced less than 10 percent of the
600,000 goal for assisted housing.
"What we must have is a housing program which will meet three standards.
First, It should meet housing needs for both the society as a whole and for low- and
moderate-income families.
"Second, It should provide jobs through construction and not merely provide housing
allowances for shelter in existing structures. This could provide a great economic stimulus
at very little cost
"Third, we must choose those assisted housing programs which are the least costly to
the taxpayers. This means that public housing, the homeownership programs under both
HUD and Farmers Home Administration, and the Section 202 elderly programs are greatly
to be preferred over the new Section 8 programs, which appear to be exceptionally costly."
5 Under the Housing Act of 1974.

74

Congress should accelerate and expand housing construc.
tion programs that benefit low- and moderate-income families.
Top priority should be given to programs that expand the
supply of housing available to and affordable by. such
families."

Energy

Although the Administration continues to proclaim a goal of energy
independence by 1985, there appears to be no realistic way at any
reasonable cost to close the gap between domestic energy production
and U.S. energy demand over the next decade. Many of the production
options being considered, especially the large technology development
projects such as shale oil, synthetic fuels, and nuclear power seem to
involve much more time and far more cost than was anticipated even
a short while ago. It is now time, therefore, to place added emphasis
on other potentially high-payoff possibilities such as conservation and
coal. In legislating an energy policy in the long-term interest of the
United States, Congress must be vigilant to weigh the relative costeffectiveness of alternative strategies.
From this perspective, a number of approaches seem to make sense:
A strategic petroleum reserve, authorized under the Energy
Policy and Conservation Act, is the best insurance against threats
of another supply interruption and should receive high priority.
The President also should use the authority under the new Act
to seek oil supplies at lower prices, by agreement with the exporting countries if possible.
Conservation opportunities are widespread and in many cases
very cost-effective. Unlike emergency curtailment of use, many
conservation measures will create income and jobs. Much conservation will, be cheaper, quicker, and less environmentally damaging than a corresponding expansion of production. Most important, consumers will realize substantial money savings through
more efficient use of fuel that would not be made by expanding
supply at high prices to feed our wasteful habits.
Priorities in energy research development also are seriously
out of balance. The overwhelming bulk of R&D expenditures
continues to go to capital-intensive, production-oriented projects,
some 'of which promise uncertain benefits at very high cost. Extremely low priority, despite. much lip service, is afforded to R&D
in energy conservation and renewable energy sources.
Congress should give energy conservation higher priority,
moving promptly to consider economic incentives and assistance to realize energy efficiency in residential and commercial
buildings, industrial processes, transportation, and electric
power generation. While pursuing promising technology development based on nuclear and fossil fuels and the development and production of synthetic fuels from nonpetroleum
feedstocks, Congress should provide adequate funding for research and development on energy conservation and the use

of renewable energy sources 7

a See comments by Senator Proxmire, p. 73, footnote.
7 Representative Moorhead, Pa., states: "I believe significant advantages can be gained
by the commercialization of existing synthetic fuels technology. See my supplemental views,
p. 152."

75
Enactment of stripmining legislation is essential for the orderly
development of coal, the Nation's most abundant fuel.
The- continuing failure of the energy industry to expand
domestic production despite enormous fuel price increases raises
questions about the degree of competition within the industry.
Congress should consider legislation to separate the stages of
operation of integrated petroleum companies. to limit their ownership of competing energy resources, and to create a Federal oil
and gas corporation as a yardstick by which to measure performance in the private sector.
Agriculture
Retail food inflation moderated to 8.5 percent in 1975 from the high
14.5-percent rate of 1973 and 1974. Increased marketing spreads by
middlemen accounted for almost three-quarters of the retail price
rise. Consumers spent 17.1 percent of disposable incomes on food in
1975, up from 15.9 percent in 1973.8
The poor 1974 harvest and the 28-percent decline -during that year
in meat animal prices retarded meat supplies during much of 1975;
fall pig marketings fell to a 20-year low. As a result,. animal prices rose
23 percent in the, past year accompanied by a strong recovery in
slaughterings during the last quarter.
Realized net farm income in 1975 fell $2.7 billion from the 1974
level of $27.7 billion. Farm incomes have now fallen 13 percent since
1973. Higher livestock prices and grain marketings, including exports,
did not offset the deterioration in grain prices and a 9-percent rise in
the price of farm inputs. The strong late-summer surge in feed grain
prices due to Soviet purchases was temporary due to the bumper
American and Australian grain harvests and a good world rice crop.
These bumper crops permitted the August 11, 1975, embargo on Soviet
grain purchases to be lifted.
Under an October 20th sales agreement, the Soviets can. purchase
from 6 to 8 million metric tons of U.S. grain annually, beginning on
October 1, 1976. They may acquire 3 to 4 million more tons of grain
this spring and summer to supplement purchases of 13.4 million tons
since July 1975.
Several factors indicate reduced farm incomes in 1976 if favorable;
weather again brings large crops and lower prices. Prospective
planting intentions in January indicated a rise of about 4 percent in
acreage devoted to field grains and cotton; only soybeans were down,
under price pressure from foreign palm oil.9 Domestic retail food
demand, after two years of recession, will be close to 1974 levels. Restoration of depleted inventories by the 1975 bumper crop also will
curtail growth in domestic grain demand this year.
A slow world economic recovery could hold exports in 1976 to our
traditional Organization for Economic Cooperation .and Development (OECD) trading partners at 1974 levels. In fact, continued deterioration in grain prices and- stabilized export quantities could result in: agricultural exports in the range of only $20 billion this year,

8 T7.9.

Denartynent of AgrHilture. Aoricultura.1 Igituation, Jnnuarv-February 1976, p. 1.5.

9 USDA Crop Renorting Board, Prospective Plantings,Jan. 21, 1976. This projection will

be updated in April.

76
the lowest level in three years. Offsetting these negative factors will be
rising feed grain demand if fed animal prices continue strong in 1976.
Stable or falling grain and livestock prices will permit the moderation in retail food Inflation to continue through 1976. With good growing conditions, that inflation could be held to 4 or 5 percent, largely
attributable again to rising middlemen's margins.
Mi/idmizing AgriclturalUncertainty
American agricultural markets remained in disarray during 197$.
Sharp price gyrations confirmed once again that the domestic food
industry is at the crack-end of the world food whip.
Farmers continued to operate under conditions of uncertainty in
which shocks affecting production intentions and income can originate
from around the world. This exposure needlessly exacerbates traditional uncertainty associated with the weather. It is an uncertainty
only modestly reduced by recent grain sales agreements with Japan,
Russia, Poland, and Romania. It is an uncertainty aggravated by the
depletion of government food stocks, by the diminution in acreage
set-asides and by domestic agricultural policies of OECD nations.
This uncertainty has caused severe fluctuations in farm prices. Just
since 1973, cattle prices have varied from $28 to $65 per hundredweight; cotton has fluctuated from 35c to 80c per pound. In 1975, soybeans varied from $6.25 per bushel to $4.25; and, as already noted,
feed grain prices are down 40 percent since 1973.10 In short, A~merican

agriculture is now exposed to a degree of uncertainty and of price
volatility not experienced since prior to 1950. This volatility was
markedly diminished by the stabilization policies in effect from 1950 to
1971.
One major source of uncertainty is the readv accessibility of domestic
commodity markets to foreign customers. While continued access by
these customers is vital to the economic health of agriculture, this access should not be so unfettered that it permits minor shifts in foreign
demand or supply to cause major domestic commodity price
fluctuations.
The most. effective price stabilization technique is the maintenance
of international and domestic commodity reserves. These reserves
should be acquired during-bumper harvests and released according to
specific reserve-stock or price triggers. As much as two-thirds of these
reserves should be held in private hands.
A national food policy should be established to reduce the
magnitude of commodity price fluctuations through the maintenance of international and national commodity reserves.
Private holdings of such reserves should be promoted by the
establishment of three-year nonrecourse price-support loans.
InternationalFood Information Systemn
In combination with the present weekly reporting requirement for
large export contracts and the Soviet and other long-term sales agreements. a commodity reserve system may obviate the need to institute
export licensing for food in short supply situations.
101U.S. Department of Agriculture,

Agriculture Outlook, November 1975.

77
At the same time, it is necessary that more complete information on
prospective food supplies be available to private holders of food
reserves if their actions are to promote price stability. Last year the
Committee urged the establishment of an international food information system, including participation by India, the Soviet Union, and
China. Such a system is still necessary, but progress toward establishment of that system has been slow; the call for its establishment is
renewed.
An international early warning food information system
should be established to provide holders of private commodity
stockpiles and the Government with information on emerging
worldwide supply and demand relationships to promote commodity price stability.
Maximizing Agricutural Production
The Administration and Congress are unified in support of full
agricultural production as the most effective damper to retail price
inflation. Production could be maximized by price support (loan)
levels equal to variable production costs of commodities. That level
would enable small farmers to endure low prices due to bumper crops,
it would encourage maximum planting, and it would promote reasonable retail prices without discouraging the export of bumper harvests.
As shown in Table V/7, a significant increase in loan levels for corn,
wheat, and cotton is necessary to cover variable production costs.Y0a
To support maximum agricultural production, agricultural
loan levels should be set equal to variable production. costs.
TABLE V/7.- VARIABLE COSTSOF PRODUCTION, 1975
State

Corn

Wheat

Cotton

Alabama --------------------------------------------------------------ArkansasGeorgia-----------------------------------------$1.95Indiana
2.04
S3.18
Iowa-1.82
Missouri
1.85
4.10
Nebraska -1.76
3.80.
Ohio2.42
4.13.
South Dakota1.80
2.80.
Present loan level1.
10
1.37

$0.35
.41
.52

.34

Source: "The Agricultural Situation," Hearings before the Joint Economic Committee, April 25, 1975, p.165.

Defemne Spending I"
The President's request for defense represents a significant shift in
national priorities. While inflation absorbs much of the dollar increase,
there will be a real increase in budget authority in fiscal 1976 over
19T5, and there would be a slightly larger real increase for fiscal
1977. In real terms,. outlays for national defense would rise very slightly
in fiscal 1976 and by-2 percent in. 1977. Budget authority in real terms
'°Administration endorsement of this concept did not prevent last spring's veto of the
Emergency Farm Act, an Act contnining loan levels well below variable production costs
in 1975. See Economic Report of the President, February 1905, p. 184.
at See qualifying comment by Representative Long in footnote on page 81.

67-573 0 -

7G
-

S

78
rises by 4.1 percent in 1976 and by 4.7 percent in 1977.12 In real terms'
outlays for the Department of Defense (DOD) alone decline by 1'percent in 1976 and rise by 2 percent in 1977; budget authority for DOD
would rise by 3 percent in 1976 and by 5 percent in 1977.
The disparity between defense and civilian expenditures is even
greater when personnel costs are excluded from the Department of Defense budget. Pay and allowancesaccount for 51.7 percent of the DOD
budget, down from 54.1 percent in 1976.. The President's proposed pay
cap on military and civilian pay increases is less than the estimated
inflation for next year. Thus the nonpay portion of the DOD budget
rises .by 16 percent in current dollars and by 9 percent in real terms.
The upward trend in defense spending is an outstanding feature of
the new budget. The fact that there is a substantial real increase in
DOD budget authority in the present fiscal year comes as something
of a surprise, because when Congress was acting just a few months ago
on the defense appropriation bill, many members believed that the
amount appropriated would not comprise significantly more in real
terms than in- the year before. This belief was based on information
supplied by the Department of Defense about the amount of inflation
for defense purchases. It turns out that the Pentagon overestimated
the inflation rate by a wide margin. The result is that the 1976 defense
budget shows real growth of over $3 billion in budget authority. The
need for a better estimate of inflation in the defense sector is discussed
below.
The President's 5-year forecast assumes an average real increase in
nonpay defense purchases of 4 percent annually. Total outlays for national defense would reach $142.8 billion in 1981; budget authority
would reach $151.5 billion. Defense outlays would rise from 26 percent
to 28 percent of -the Federal budget. As'shown in Table V/1 above, the
allocation of projected spending increases for defense and civilian
programs demonstrates dramatically the Administration's decision to
emphasize defense.
The wisdom and desirability of a rise in defense spending at the expense of other national needs must be questioned from an economic
standpoint. It should be self-evident, despite some recent debate, that
enlarging the defense budget is not an appropriate way to effect economic stimulus. Defense spending does not yield the goods and services
that people need in peacetime. Its level should be determined with only
national security needs in mind. The economy should be managed using
other tools of fiscal policy and other macroeconomic measures. This is
particularly true when, as in the new budget, the purchase of weapons
takes up so -largea portion of the increase. Of the $14.4-billion increase
in DOD budget authority, $8.1 billion is for increased procurement.
Defense procurement continues to be plagued by cost overruns,
schedule slippages and performance failures. Problems in the aircraft
and shipbuilding industries strongly suggest that more efficient operations and improved management of government programs could
sharply reduce procurement costs.
2

7

The figures cited relate to the national defense

functional category In the Budget.

including atomic energy defense activities and other defense-related activities. Figures cited
subsequently In this section relate to the Department of Defense plus military assistance
alone.

79
For example, the large cost overrun in the C-5A cargo aircraft
program is well knowyn. Now, in addition to the overrun, structural
defects in the airor'afflhave resulted in a proposal to rebuild the wings
at a cost estimated by the Office of Secretary of Defense at $1.3 billion.
If this proposal is implemented, the total C-5A cost overrun, including
the extraordinary repair bill, will exceed $3 billion.
Navy shipbuilding programs have been characterized by cost overruns, lengthy delays, and large claims file by the contractors against
the Navy. A year ago the Navy asked Congress for $2.3 billion for the
"unanticipated" costs of ships under construction. This request was in
addition to the request for new ships. The unanticipated costs can be
broken down into the impact of inflation and inefficient government
mantgement and shipyard. operations. The Senate Armed Services
Committee attributed the cost increases, in part, to "low productivity,
construction delays, and Navy changes." 's
Congress approved $1.3 -billionof the Navy's request last year, deferring action on the remaining amount. The deferred amount has grown,
in the current request, from $1 billion to $1.6 billion, although the
overall impact of inflation on defense last year was less than expected.
If the current request is approved, a total of $2.94 billion will have been
spent for "unanticipated" costs of shipbuilding.'
Studies by defense experts and statements by defense officials show
that additional efficiencies can be achieved in the use of manpower and
military bases. More than four years ago the Deputy Secretary of
Defense estimated that justifiable base closings could save at least $1
billion annually. Such savings have still not been realized. It has often
been said that Congress prevents the Defense Department from closing
unnecessary bases. We disagree. Where it has been determined that
bases can be closed or realigned to achieve economies, the authority
to do so should be exercised. The costs of support and auxiliary functions have been reduced somewhat in the past 2 years but significant
reductions are still possible. For example, the ratio of students to instructors is about 1.5 to 1 in military schools compared to about a 15 to
I ratio in most colleges.
Inequities and anachronisms in the military pay system are also
costly. According to a recent study by the Brookings Institution, "As
matters now stand, the United States pays more than is necessary to
Additional savings are possible
field it military forces . . . ."
through lengthening tours of duty and reducing civilian manpower in
proportion to the reductions of uniformed personnel made over the
past several years. The Committee notes that the number of civilians
employed by the Defense Department (approximately one million)
exceeds the total number of civilians6 employed in all the other agencies
of the Executive Branch combined.1
lS Senate Armed Services Committee Report No. 94-196, p. 23.
sales is having an
14 It should be noted that the massive Increase in foreign military
adverse impact on the costs of our own defense procurement and thereby exacerbating the
cost overrun problem.
13Martin Birkin, The Militarg Pay Muddle (1975).
1'This comparison excludes the Postal Service, which no longer is part of the Executive
Branch.

80
A strong defense is necessary but the Nation cannot tolerate wasteful practices. The fact that a large sum was reportedly added to the
defense request by the President late in the budget cycle and that an
additional $3billion were tacked onto the request as insurance against
congressional cuts supports the conclusion that the budget is padded
and can safely be reduced.
Prime candidates for close examination in the defense budget are
certain portions of our strategic forces and our conventional forces for
an Asian contingency. For example, a slowdown in the B-1 bomber
program could result in substantial savings even when offset by the
costs of developing an alternative standoff-type bomber. Without
making a judgment as to the relative merits of the B-i versus a
standoff-type bomber, which would be far less costly to build, the
Committee notes that the latest versions of the B-52 bomber have a
useful life that will extend into the late 1990s, and current plans call
for retention of them even after deployment of the B-1. There may
not be adequate justification for moving immediately into production
of a new bomber that will cost in excess of $20 billion not including
armament, operating and support costs.
In addition, a cogent argument exists for slowing down or terminating further improvements in the capabilities of land-based intercontinental ballistic missiles, the phased withdrawal of some of 'the
older land-based missiles, the reduction of the older B-52 bombers,
and the slowdown of the advanced tanker aircraft program.
Costs of forces for an Asian contingency are estimated'as high as
$23 billion annually. In view of the changes that have taken place
in Asia with the end of the Vietnam war and our improved relations
with China, this huge expenditure should be reexamined. Not only is
China perceived as far less threatening to U.S. interests as a result
of diplomatic efforts but intelligence analysts no longer view China
as an expansionist nation. William E. Colby, former Director of Central Intelligence, testified before the Committee that China has been
in a defensive posture militarily for a number of years and that its
military procurement has declined sharply since 1970."7
There are at present about 140,000 military personnel in the Asian
region and, in addition, sizeable naval, air, and ground forces in
Hawaii and in the U.S. justified by Asian contingencies. Phased reductions without removing any U.S. troops from Japan or South Korea
could yield substantial savings. A cut of about one-fourth of these
forces, phased gradually over a 5-year period, would reduce outlays
by approximately $8 billion- annually by 1981.
Potential savings through 1981 from improved efficiency and changes
in strategic-and Asian forces are indicated in Table V/5. Such savings
could amount to $2.6 billion in outlays in 1977 rising, to $18.7 billion
in 1i81.1'8 If the amount of padding and "cut insurance" were- taken
out of the budget, greater savings could be achieved.
17Joint Economic Committee hearings, Allocation of Resources in the Soviet Union
and China-1975, Part I, pp. 45, 71, 75.
Is The changes are discussed in An Economic Evaluation of the Current Services Budget,
Fiscal -Year 1977, a Staff Report prepared for the use of the Joint Economic Committee.

December 1975.

81

Congress has' the responsibility to provide a defense budget
that will assure our national security. We believe that national
security can be assured at a 1977 spending level in the range
approved by Congress for fiscal year 1976 plus allowance for
current inflation. This would mean a reduction from the President's request for budget authority of approximately $6 billion. The remaining amount of about $198 billion would represent a substantial increase in the dollar budget. and would
provide the US. with the resources needed to maintain the
world's strongest military force. To achieve the budget reduction, Congress should eliminate waste and whatever
padding is in the budget and should scrutinize the requests
for new weapons development."s
Defense and Inflation
In earlier reports the Committee has discussed the subject of defense
spending and inflation. We pointed out in our 1973 report that no
adequate measures of price'changes in Federal defense purchases had
been developed, although the Committee had urged the Department
of Commerce to do so. We therefore questioned the.Defense Department's assumptions about the amount of inflation in defense purchases.
The Defense Department's approach was to rely primarily on the
nonpay component of the deflator for Federal purchases of goods and
services. This approach was defective because the Federal purchases
deflator does not separate defense from civilian purchases. The deflator
used for Defense Department military and civilian pay was also inadequate because no allowance was made for increases in productivity.
The Committee concluded that, until a defense deflator was developed and published on a regular basis, it would be impossible to know
how inflation is affecting defense spending, and we formally recommended that the Commerce Department develop such a deflator.
We are pleased to note that the Commerce Department has moved
forward on this project. Last year it published a comprehensive'-study
entitled Mea8uring Price Change8 of Military Expendituire,2 0 which
stated: "The most nearly universal conclusion, which can be drawn
from examination of existing military price indicators of all or part
of defense purchases, is that they are inadequate and possibly misleading as historical measures of price movement." 21
The Commerce Department, having, completed -its feasibility study
and'historical survey, now has begun a major effort, in cooperation
with the Defense Department,. to develop a defense deflator. The Committee is hopeful that the measure of price changes developed will
be specific and discrete enough to provide information about each of
the defense industries and by product lines. We look forward to significant progress by next year.
1 Representative Long states: "While I concur with the spirit of this recommendation,
I will make Independent judgments on defense spending as the appropriate congressional
committees make their recommendations. Whether or not the result of my judgments on
individual Items will be above or below the suecific totals listed here, I do not know. My
primary~concern Is the continued security of the United States."
20U.S. Department of Commerce, Bureau of Economic Analysis, 1975.
21 Ibid., p. 267.

82
TAX REFORM

The so-called "tax expenditure budget" accounts for tax revenues
lost through special tax preferences. This budget, as drawn up for
1967, consisted of 60 items with a total revenue loss of $36.6 billion.2 1a
The most recent listing of tax expenditures by the Congressional
Budget Office contains 82 items with a total revenue loss of $106 billion
for fiscal 1977.22
In a decade, therefore, tax expenditures have nearly tripled through
increased revenue losses from pre-existing tax expenditures and
through the addition of 22 new tax expenditure provisions. The
growth. in such revenue losses has been much more rapid than the
growth of Federal outlays. Unless tax reforms are enacted, the upward
trend will doubtless continue. By 1981, the total revenue loss from
existing items is projected to rise by 40 percent to $148 billion.
Although revenue losses from tax expenditures equal one-fourth of
budget outlays, they rarely come under close scrutiny or review. Many
tax expenditures have outlived their usefulness, others are ineffectual

in fulfilling their intended purposes, and many have very inequitable
distributions of benefits. All such provisions withhold revenue year
in and year out from the U.S. Treasury-revenues that other taxpayers must make up.
Congress is rightfully jealous of its appropriation prerogative. The
Committee believes that the time is long overdue for the Congress to

establish a procedure for a systematic review of the tax expenditure
portion of the Federal budget.
To gain control of the tax expenditure budget and to ensure
that each provision serves a useful purpose equitably and
effectively, Congress should direct its tax-writing committees
to report on all tax expenditures within five years. After critical examination, each item should either be reauthorized with
or without modification for a period not to exceed five years, or
else eliminated. A regular five-year review cycle should be
established.
Among the tax expenditures that cause the largest revenue losses,
the following ones would seem to merit reconsideration by the taxwriting Committees of Congress. 2 3
Exemption of Capital Gains at Death or Gift
Under present law, individuals can escape the capital gains tax on
the appreciation of assets by retaining them until death and passing
them on to their heirs for whom the appreciated value becomes the new

tax basis. In recent years this provision of the tax code has allowed
$10 to $15 billion annually in capital gains to go completely untaxed.
Many less wealthy taxpavers, however, may be forced by economic
necessity to sell their assets, incurring a capital gains tax at the time of

. J.oint Committee on Internal Revenue Taxation acknowledged that there are many
problems associated with adding up tax expenditure estimates, but the totals are useful to
illustrate the order of magnitude involved.
22 Five Year PRdoet Proiertinns. 1.977-81. January 1975. p. 59.

2' Representative Long states: "Certainly the Provisions listed below should he scrutinized carefully. However, I will comment on those specific items that particularly concern
me."1

83
sale. The failure to tax capital gains at death causes assets selection to
be based on tax avoidance rather than on pursuit of the highest current
return.
To rectify this situation, many analysts believe that capital assets
held at death should be taxed as if they had been sold just prior to
death. Unfair financial strains on beneficiaries' estates, particularly in
the case of family businesses and farms, could be avoided by amending
the tax code to make installment payments a feasible option to those
who need to extend their tax payments over time. The following two
exceptions also should be considered (1) Not taxing transfers to a
surviving spouse, and (2) allowing a lifetime exemption of $100,000
in capital gains from the disposition of a family farm, business or
residence.
Estate and Gift Taxes
An effective estate and gift tax is important to ensure that wealth is
'taxed at least once each generation. It reduces large concentrations of
wealth and has a minimal impact on incentives and risk-taking.
' Changes in three areas should be considered. First, the estate and
gift taxes could be unified into one tax schedule; the separate schedules
now in effect discriminate against persons who hold their weath until
death. Second, the generation skipping trust should not remain untaxed. It raises questions of tax equity by being much less valuable to
persons with smaller estates then to those with large ones. The trust
could be taxed under the estate tax as if it were the property of the income beneficiaries. A third problem is that the estate-splitting provision for married couples treats couples living in community-property
States differently from those in noncommunity-property States. This
could be corrected by considering husbands and wives as a single taxable unit under the estate tax, exempting transfers between spouses
from tax, but taxing transfers by couples to others on a cumulative
basis. Provision should be made in the estate tax to avoid tax-enforced
liquidation of small businesses.
Minimum Tax
A so-called minimum tax is levied on tax-preference income. The
nominal rate of the minimum tax is 10 percent, but the effective tax
rate has been as low as 2.5 percent. Contributing to this very low effective rate, for instance, were the 622 individuals who in 1973 had adjusted gross incomes greater than $100,000 and still managed to pay
no tax. There are three basic provisions permitting this tax avoidance:
(a) the $30,000 preference-income exemption, (b) the 100-percent
deduction of income taxes paid on regular income, and (c) exclusion
of certain tax preference-income from the tax base for the minimum
tax. Consideration should be given to altering these three provisions.
Allocation of PersonalDeductions Between Taxable and Tax-Exempt
Incom~e
Many taxpayers currently pay part of their expenses out of taxexempt income, such as interest on States and local bonds and the
tax-free half of long-term capital gains, while using the full amount

84
of deductible personal expenses to reduce their taxable incomes,
sometimes to zero. It would appear reasonable to require persons-with
tax-exempt income to scale down the total of their iteriized personal
deductions by the proportion of preference income to adjusted gross
income. An estimated two-thirds of the tax revenues raised by this
$25,000. It would be desirable to safeguard the incentive'for private
charitable contributions.
Tax Shelters
Tax shelter investments have had a phenomenal growth in recent
years. In general, they allow taxpayers to deduct certain artificial
"losses" on certain investments from their regular incomes, reducing
the tax on regular income.-Congress is'now considering a limitation on
artificiallosses, which would restrict the use of acceleraited.deductions
on such investments to offset unrelated income. Many types of investinents could be covered; but most' f'thie revenue gained would come
from the limitationfapplied. to real estate, farm operations, and oil
and gas property.
Dom8estc International Sales Corporation (DISC) 24
The DISC, provision has aroused much criticism since its enactment
on the following grounds: (1) DISC does little to stimulate exports
that would not take place. without it; less than 1 percent of the increase
in the value of exports since 1971 is attributable to the! establishment
of DISCs, (2) it is inefficient, costing the U.S. $2.6 billion in lost tax
revenues in 1974 for an estimated $1.6 billion gain in foreign exchange,
(3) export. subsidies no longer are needed since the overvalued dollar
has given Sway to flexible exchange rates, (4) DISC benefits primarily
the large corporations with one-third of total benefits going to the top
companies, (5) DISC violates the spirit, and perhaps the letter of the
(:eneral -Agreement on Tariffs and Trade (GATT), and weaken the
U.S. position as a defender of the trading principles embodied in
GATT, and -(6) its job creation impact is quite small relative to the
impact that expenditures could have in other areas.
"Intangible" Drilling Expenses 25
Oil and gas companies are not required, like other investors, to depreciate all of their investments over time; instead they are permitted
to -deduct as current business expenses their so-called "intangible"
drilling and development expenses on successful wells. There'are serious questions about whether immediate deductions for labor and supply costs incurred in drilling successful wells are needed as incentives
to exploration. The costs of drilling holes that turn out to be dry still
could be deducted as losses.
24Representative Long states: "I do not supPort repealing DISC at this time, and I
so voted when the House of Representatives considered the tax rqform legislation in late
1975."
2SRepresentative Long states: "I do not sunport this recommendation, and I so voted
when the, House of Representatives considered this in the tax reform legislation in late
1975. I believe that maintaining the current tax treatment of intanpihle oil and gas
drilling expenses will help encourage increased domestic production, which, in turn, will
help reduce our dependence on foreign oil."

85
Limitation of Mortgage Intere8t and Property. Tax Deductions
A change suggested for consideration which would not raise much
revenue butawould make the tax system more progressive relates to
interest and real'estate tax deductions. Under current provisions for
unlimited deductions the.wealthy not only-save more. dollars in tax
liability than those-with low incomes, but they actually save greater
proportions of :their'incomes. Individuals in the bottom half of the
income distribution get only about 8 percent of the tax benefits from
these deductions. Congress should consider placing. a ceiling on the
amount that can be deducted. An alternative that would.also make the
tax incentive more effective in encouraging homeowning would be to
establish a tax credit equal to 20 to 30 percent of the presently deductible outlays up to some limit.
If Congress acted on the total package of reforms cited above, it
would provide -as much as $11. billion of additional revenues to the
Treasury.. As the following table shows, nearly 806'percent of the in'
creased revenues would come from .wealthy individuals while 20 percent would be raised from corporations.
Tax reform should be given high priority on' the legislative
agenda in 1976. Actions should be carefully considered which
would provide a more effective and equitable -taixsystem. Any
revenue raising changes should be offset by general tax
reductions.
TABLE

V/8.-Potential revenues from taxz ref ox-m,

Reforms affecting individuals:

Taxation of capital gains, at death or gift -$2,
Estate and gift taxes -2--Minimum taxAllocation of personal deductions Limits on tax shelters ------Limits on mortgage interest and property tax deductions.-

Bi-ona Or dolvars

-Total -8.
Reforms affecting corporations:
DISC repeal -$1.
Capitalization of.intangible drilling and'development expenses-

b
-:6
1.'3
1. 9
05
8
5
0. 8
2.3

Total ------SMALL -BU'SINESS

Small business is vitally important to the performance of the-United
States economy. It accounts for one-half of private employment, 43
percent of business output, and one-third of-the Gross National Product. Ninety-seven percent of all businesses areclassified as small. Notwithstanding'the importance of the small business sector to the U.S.
economy, the.'Federal Government frequently. overlooks its needs.
A National Smll Businesm Policy
Althiough most.Congressmen.-profess a special concern for the small
business sector, many of Congress actions contain a big.business bias.

86
This is also true of the Executive Branch. The Commerce Department is primarily .oriented toward big business' problems. The Federal
Reserve Board does not even have one full-time employee responsible
for following the condition of small business.
The Small Business Administration has not filled this policy void.
It continues to be regarded primarily as a lending agency. As a small
business policy advisory -agency, however, it has been woefully inadequate.
Congress should review the' Federal -laws, agencies, and
regulations affecting small business. This review, should develop a National Small Business Policy that will foster a dynamic small business sector.
Capital Fomnation
Small business is generally last in line for borrowing from banks.
In addition, equity-financing for small business has been virtually-nonexistent over the -pasttwo years. There have only been ten public stock
issues during;that time by firms with net worths of $5 million or less.
Small business', capital- formation problems are magnified because it
must rely more heavily than big business on short-term bank financing
and retained earnings to fund future expansion and general operations. Data from the Federal Trade Commission indicate that manufacturing firms with assets of under $10 million had 41 percent of
'their debt in the form of short-term bank loans in the third quarter
of 1975. The share for firms with assets of $10 million to $25 million
is 37 percent; for firms with, assets of $50 million to $100 million is
only 27 percent; and for firms.with assets of $100 million to $250"million is 23 percent. Thus, small businesses are. much more dependent
than large firms on short-term borrowing and tend to be heavily indebted in this-form. Qn the other hand,.they have very limited access
to longer-term credit, especially through securities markets.
Federal Trade Commission data also show that small businesses pay
a higher effective tax rate than their larger competitors. Manufacturing 'firms-with assets under $50 million have an effective tax rate of
about 51 percent. Firms- with assets of $100-$250 million, however,
pay 46.1 percent. The largest firms with assets of $1 billion and above
pay much less--only 35.2 percent.
Small firms, which need high retained earnings to -finance
operations, pay far' more -of their earnings in taxes than big
businesses. The Treasury Department, Federal Trade. Commission, and Securities and. Exchange Commission together
should review' the reasons for this phenomenon and. make
recommendations 'for tax code revisions to make the effective
rates more-equitable.
The temporaryvincrease of the-corporate income exemption
from $25,000 to $50,000 should be made permanent. Also,"the
corporate income tax rate'schedule should be changed'to apply
the 48 percent maximum rate to'income levels ;well above the
present $50,000 lower bound-of the 48 percent bracket.'Rates

87
should be graduated-for incomes between the $50,000 level and
the new lower bound of the 48 percent bracket."
The Small Business Administration should create a secondary paper market for the 90 percent guaranteed portions of
its loan guarantees to small business.
E8tate Tawe8
Estate taxes adversely affect small business in-two main ways. First,
the laws may force liquidation of a small business to pay an estate
tax bill. Second, the blas of estate taxes toward liquid assets induces
owners of small. businesses to sell out to larger firms to convert their
liquid small. business assets into money or common stock.
The Federal estate tax laws need changes in several areas. The
estate tax exemption of: $60,OOO and the' $30,000 gift tax exemption
were set in 1942. Since that time, prices have risen 230 percent, but
the. exemptions have not been changed; Legislation has. been introduced to take account of inflation since these levels were set.
The standard estate tax and gift tax exemptions should be
increased to reflect the impact of inflation since 1942.
Under present law, estate taxes can be deferred if immediate payment would cause dire hardship such as the liquidation of a small
business or farm. The estate executor is responsible for payment of
the tax, however, and the deferral provision is almost never used because of the executor's desire to terminate this obligation.
Responsibility for payment of deferred estate taxes should
be transferred from the executor to the heir. The.interest rate
paid under the deferred estate tax payment plan should be
set at one percent below the prevailing prime interest rate.
Finally, property always is valued at its potential'market value
rather than its value in its existing use. If farmland is worth more
for housing development, for instance, it would be valued as development property for estate tax purposes. This provision can and has
caused the forced liquidation of small family farms to pay estate
by
taxes. Property values for estate tax purposes could be restricted
limiting future use.of the property through a legal covenant.27
Proxmire states: "The corporate income tax is not a progressive tax. Its
'Senator
incidence falls on consumers and employers far more than on stoockholders. It inhibits investment. It should be reduced more than the President has requested."
M7Representative Long states: "The potentially far-reaching implications of this recommendation cause me great concern; hence, I do not support the recommendation."

VI. INVESTMENT REQUIREMENTS AND CAPITAL
SUFFICIENCY
In 1973 and 1974, when goods were scarce and inflation was rampant, concern arose that a possibly chronic shortage of capital was
overtaking the United States or even the world economy. The controversy over this matter, however, has been much confused by a lack of
any clear definition of the issue.
Some observers foresee a general shortage of 8avings to fund an expected investment boom. The New York Stock Exchange, the ChaseManhattan Bank and some Administration officials are prominent
members of this group. They project that the future desire to invest,
including investments to meet requirements for pollution abatement
and greater energy production, will rise sharply above recent norms
and will outstrip the resources available for these purposes. If this
projection were to come true, the excess demand would create shortages, high interest rates and inflation, unless more capital goods were
imported from abroad or the government reduced its spending. Some
investments would be frustrated, and growth of output and employment ultimately would. be stifled. Many people propounding this view
add that Federal borrowing threatens to "crowd" private borrowers
out of the credit markets. They propose new incentives to save and
reduction of government spending.
Other observers suggest that although overall savings may be adequate, firms lack the incentive and the wherewithal to invest. This
proposition is based on the decline in the average return on investment in the 1966-73 period and the relatively modest level of returns
in several basic industries. It rests also on the general rise in prices
of business installations and machinery and the cost of pollution control in several industries. Recent experience with very high interest
rates and correspondingly low securities prices also has alarmed
corporate financial officials. Finally, there is much concern about the
basic financial health of many firms after several years of economic
turbulence and stringent financial conditions. In other words, there
may be a problem in transferring existing savings to would-be investors, given standards of creditworthiness for borrowers and the
liquidity needs of lenders. Many corporate spokesmen, especially those
for industries expecting rapid growth, adhere to this school of
thought.
Finally, there are those who fear that investment will be inadequate
due to inadequate market prospects for the output of new or expanded
facilities. This problem would not lead to product scarcities but
simply would be one more symptom of economic stagnation due to
timid government policy. Faster progress toward full resource use is
a necessary precondition for a strong recovery of business investment.
(88)

89
In examining these issues, one must constantly distinguish between
inadequate savings and inadequate investment. The Committee concludes, as discussed below, that savings are adequate and likely to remain so. A higher level of investment, however, is desirable. The
primary condition for the achievement of higher investment is a more
fully employed economy. Other special stimuli also may be required.
INVESTMENT NEEDS

Many recent projections have suggested that the volume of investment should be increased greatly over past levels. Several of these
"studies" have amounted to nothing more than aggregated wish lists
or extrapolations based on very dubious assumptions.
An interesting recent study prepared by the Department of Commerce for the Council of Economic Advisers, however, has projected
the investment needed to accommodate a 5-percent unemployment level
in 1980 with allowance for legally required pollution control and an
ambitious energy program. The study projected that business fixed investment would have to increase as a share of GNP from its level of
10.4 percent in the past decade to more than 12 percent through 1980.
Given the lag in investment in 1976, such an increase would add over
$40 billion per year to investment needs for 1977 through 1980. Other
studies, for instance by the Brookings Institution and Data Resources,
Incorporated, concur that business investment should be higher in
the next several years.' Much of the resulting physical capital is
needed to accompany the employment of. our growing labor force.
The Committee agrees that a higher level of business investment
may be necessary during the recovery period, subject to some qualifications expressed below. If the recovery is robust, a somewhat higher
investment rate will occur normally as the upswing progresses. The
main problem that exists regarding investment incentives and opportunities stems from the fact that the economy has been permitted
by timid policies to decline so far below its capacity, and that it will
recover very slowly if these policies are allowed to continue. How can
investment in business plant and equipment be expected to go ahead
of the recovery of overall demand?
To illustrate this point, current business investment remains quite
depressed due to the recession. The latest survey of investment intentions by the Department of Commerce shows that real investment in
new plant and equipment for 1976 is projected by businessmen to be
4 percent below 1975 and 16 percent below the level of 1973. The results
of this survey for the past several years are shown in Table VI/I.
The Council of Economic Advisers has projected that real business
fixed investment will increa8e by 4 to 5 percent from 1975 to 1976. If
the economic recovery continues strong, business spending intentions
will be revised upward over the course of the vear, but actual outlays
during 1976 probably will not rise by as much as the Council expects.
2 (See Economic Report of the President, 1976, pp. 41-47; also Bosworth, Duesenberry and
Carron. Capital Needs in the Seventies, Brookings Institution. 1975: and Rinai and Brinner,
The "Capital ghortiege": Near-Term Outlook and Long-Term Prospects, The Data Resources
U.S. Long-Term Review, Summer 1975.

90

Even if they do, investment will remain well below necessary levels
primarily because of underutilization of existing capacity and uncertain future market prospects.
One important qualification concerning projects of investment requirements should be noted. The Council of Economic Advisers states
in its Report that future investment requirements to match any given
employment level are quite sensitive to the distribution of future
economic growth among sectors! On this score,. there is reason to
believe that the growth of demand may not be so concentrated in the
capital-intensive basic materials sectors as is often assumed. Because
of a radical and persistent reduction in the size of automobiles and an
only partial recovery in both residential and heavy construction, prospects of scarcity may not soon recur in such materials as steel, aluminum and glass. As a result, the investment booms widely foreseen for
these basic sectors may be lesstvigdrous than expected. A shift in the
distribution of demand growth to less capital-intensive sectors during
the upswing would reduce the volume of investment required.
TABLE VI/I.-SPENDING FORNEWPLANT\AND EQUIPMENT BYU.S.BUSINESS
Total spending Percent change in Percent change in Percent change in
(billions of.dqllars)
spending
Pvices real investment
1976 (projection) -119.7
1975
-1113.5
1974 -112.4
1973-

99.

5.5
1.0
92.7

9.7
'12. 2
15.0

-3.8
-10.0
-2.0

I Preliminary.

*For first 11 months only.
Source: Department of Commerce.

Business investment may need to be proportionately greater
in the next several years than in the past decade. The most
serious obstacle to the achievement of needed investment is the
under-utilization of existing capacity and the lack of promising markets for the output of new factories. A shift in demand
growth from basic materials toward less capital-intensive sectors could reduce total capital needs significantly.
AvAILABILITY OF FUNDS

The development of U.S. saving and investment rates since 1960 is
shown in Table VI/2. Gross private saving as a percentage of GNP
was at a quite extraordinary level in 1975 both relative to its own
past levels and relative to 1975 investment. It jumped beyond all
previous bounds to 19 percent of GNP in the second quarter and
remained at 18 percent in the third quarter. Saving apparently
remained high in the fourth quarter, although complete figures are
not yet in. Gross private investment meanwhile dropped oA sharply
from the normal 15 percent range to only 11 percent in the second
quarter, recovering to 13 percent in the third and fourth quarters.
According to the latest figures, therefore, savings are very high
relative to desired investment. Meanwhile, utilization of industrial
capacity stands between 70 and 80 percent. Hence present saving rates
can hardly be considered deficient.

91
Throughout 1975, concern was voiced in some quarters that large
government borrowing would "crowd" private borrowing out of the
credit markets, hampering the financing of the private sector. As the
year progressed it became apparent that the private demand for
credit, especially bank credit, was extraordinarily weak and that
crowding out was not an immediate problem. Concern then shifted to
the prospect that crowding out would become a problem in 1976 as
private credit demand revived.
TABLE VI/2.-PRIVATE SAVING AND INVESTMENT RATES, 1960-1975
[Percentages of GNPI

Gross private savingNoncorporate saving -7.4
Corporate saving (including IVA) Gross private domestic investment -14.9
Business fixed investment-9.2
Residential investment ----Inventory change -.

---

1960-64

1965-69

1970-74

1975'

15.4

16.1

15.7

17.6

8.0

7.8
8.3
15.7

8.7
7.0
15.4

9.9
7.6
12.2

4.9
8

10.5
4.0
1.3

10.1
4.5
0.8

9.9
3.3
-0.9

'Comprises private saving and noncorporate capital consumptinn allowances.
a Comprises undistributed crporate profits, excluding inventory profits, plus corporate capital consumption allowances.
3 Fourth quarter data for 1975 are preliminary. Undistributed corporate profits for 1975 are based on rates for first 3
quarters only.

So far in 1976 the problem has been rather the puzzling failure of
private credit demand to revive. It remains reasonable to expect that
it will pick up later this year and in 1977. Credit institutions appear
to be in a good position to meet these demands. Commercial banks and
savings institutions have substantially increased their liquidity. The
Chairman of the Federal Reserve Board recently stated that financial
markets "are more comfortable now than at any time in the past two
years."
Tables VI/3 and VI/4 present the Treasury's estimates of expected
sources and uses of funds in 1976 compared with earlier years. As
Table VI/3 indicates, savings institutions are expected to be in a position to supply growing amounts of credit in 1976. Funds supplied by
commercial banks are expected to rise sharply from depressed 1975
levels but to remain below the 1973 peak. Even if the Federal deficit
is somewhat larger than the Administration's projections used in these
estimates, it can be accommodated without impinging on private
borrowing, provided that monetary policy is not unduly restrictive.
If the Treasury estimates are correct, funds flowing into home mortgages (see Table VI/4) will rise strongly, while corporate bond issues
will drop to normal levels from the extraordinary levels of the 1975
corporate long-term refinancing efforts. This is not a picture which
suggests crowding out.
With financial institutions now in a more liquid position, we believe
that long-term interest rates will move down during the year despite
the growing demand for credit. This should be particularly true if
our targets for the reduction of inflation are met. We urge the Federal
Reserve to conduct its open-market operations and the Treasury its
debt management operations in such a way as to facilitate and encourage this trend.

92
TABLE VI/3.-TOTAL FUNDS SUPPLIED TO U.S. CREDIT MARKETS, 1972-1976
[In billions of dollarsl
Supplies

1972

1973

1974

19751

1976 '

Savings institutions -

87.9

74.6

69.5

103.5

115. 0

Contractual type- Deposit type -49.9
Other-3.1
Bank' -75.7
Business -18.7
Government-13.2
Foreign -10.8
Households (residual)-

34.9

37. 2
35. 4
2.0
92.5
15.9
23. 7
3.5
22.6

40. 6
27.1
1.8
68.4
12.0
31.8
12.0
18. 7

46. 2
59.6
-2.3
29.9
12.4
25. 7
11.2
18.6

51.8
64. 5
-1.3
74.7
22.9
29. 5
14.4
24. 5

201.3

281.0

1.8

Total funds supplies -208.1

232.8

212.4

' Preliminary.
XProjected
I Insurance companies, pension funds, etc.
'Including Federal Reserve Banks.
Source: Office of the Secretary of the Treasury, Office of Debt Analysis.
TABLE VI/4.-TOTAL FUNDS RAISED IN U.S. CREDIT MARKETS, 1972-1976
[in billions of dollars]
Category of funds

1973

1974

Long-term funds -102.6

94.0

82.5

98.1

110.3

Mortgages-68.8
Corporate securities -33.8
Bonds -20.2
Stocks -13.6
Government securities-38.3

71.9
22.1
12.5
9.6
43.3

54.5
28.1
23.4
4.6
51.5

52.8
45.3
36.2
9.1
110.6

71.8
38.5
25.5
13.0
120.9

29. 3
14.0
95.5

33.3
18. 1
78.2

93.9
16.7
-7.4

107.4
13.5
49.8

66.6
22.9
7.9
-3.6
232.8

62.9
9.6
7.6
-3. 5
212.4

-18.6
5.2
0.3
2.7
201.3

24.2
16.5
0.5
6.0
281.0

U.S. Government and Federal agencies -23.6
State and local governments -14.7
Short-term funds 'Business credit -29.2
Consumer credit-19.2
Foreign loans-3.7
Other loans-13.3
Total funds raised -208.1

1972

67.2

1975'

1976 '

' Preliminary.
' Prjected.
Including foreign securities.
4 Including bank term loans and long-term Federal credits.
Source: Office of the Secretary of the Treasury, Office of Debt Analysis.

Private saving is presently very large relative to intended
investment and the level of economic activity. Action is
needed to bring about a more rapid recovery and to encourage
private investors to put these savings to use. There is no danger that the credit needs of the Federal Government will
"crowd" other borrowers out of the credit markets in 1976,
provided monetary policy is not unduly restrictive.'
1 Representative Gullsi Long states: "I do not support an interpretation of this recommendation that nays in essence 'private savings are undesirable.' I support private
savings wholeheartedly. I interpret this recommendation to mean that more economic
recovery will not only encourage private savings, but also will facilitate the use of these
savings by private investors and investment institutions. This in turn will also expedite
economic recovery. I think we need to find specific ways to use these savings to stimulate
growth in the private sector."

93
What about the long-term outlook for funds to finance domestic investment? The Council of Economic Advisers projects that the rate
of saving will recede soon toward its historical level, as people become
less apprehensive about a loss of income through unemployment and
about erosion of their assets through inflation. While savings rates
will decline from today's exceptional levels, the factors detailed below
indicate that we are entering an era in which savings will remain
above their historical rate of 15 to 16 percent of GNP. Both corporate
and personal savings rates may be expected to contribute to this
higher rate.
Personal Saving8
The recent rise in the personal savings rate often is attributed to
the recession-generated apprehensions referred to above. They undoubtedly have played a role. But the personal savings rate has shown
an upward trend over a long period from 3.4 percent of GNP in 1960
to 5.1 percent in 1970 and 6 percent in 1975. There are underlying
reasons for this rising secular trend that persist beyond any cyclical
swings.
Important among these reasons for higher personal savings is the
propensity among the swelling ranks of young couples to have fewer
children at later ages and a related trend toward two-income families
and, in general, a society in which women spend more of their lives
in the labor force. The increasing frequency of working wives has
boosted median fa'mily incomes 50 percent faster than individual earnings have risen in recent years and undoubtedly has increased average
savings rates (in some families by reducing dissaving or accumulation
of debt).
Beyond these trends, the expansion of tax-deferred retirement plans
both for employees and for the self-employed provides a rising incentive to save as well as a new source of savings, namely, the defe red
tax payment. To the extent that government adjusts its expenditures
to offset the loss in tax revenues (see comments below on congressional
budget reform), the rise in personal savings would be available at
least in part to finance private investment. It is estimated that tax
deferrals through employer pension plans will rise by more than $700
million or by more than ten percent per year for the next several years.
In the recent years, moreover Congress has consistently liberalized
the tax treatment of pension contributions, and each such step yields
a one-time jump in tax deferrals and contributes to their subsequent
growth. A factor offsetting these positive influences on savings rates
will be the incipient decline in the number of people of middle age
who have the highest propensity to save.
Corporate SalVing8
Profits are making a sharp recovery from the recession as productivity, price mark-ups, and sales volumes expand simultaneously.
After declining from late 1973 to early 1975, labor productivity in
the private economy advanced smartly during mid-1975, and unit labor
costs therefore stabilized. In fact, data for nonfinancial corporations

67-573 0 - 76 - 7

94
show that unit labor costs for these firms actually declined at an annual
rate of 5.4 percent during 1975's middle two quarters. These data indicate that nonlabor costs per unit also stabilized. Thus total unit costs
in nonfinancial corporations declined by 3.6 percent in the middle half
of the year.
Except for interest costs, which have declined absolutely, these productivity advances are due largely to fuller use of underutilized resources as output expanded. With the use of industrial capacity still
only between 70 and 80 percent, productivity from this source can continue to suppress cost increases and enhance profit levels for some time
to come.
Despite the stabilization in production costs prices continued to rise
somewhat throughout the nonfarm sector, following their very large
increases in 1974. This divergence of prices from costs has widened
profit margins. Profits per output unit for nonfinancial corporations
jumped by 58 percent from the first quarter to the third quarter of
1975 and reached their highest levels since 1968. As output expands,
these unit profits will be translated into very healthy rates of return
on capital.
Most of the slump in operating profits during the recession came out
of retained earnings, while dividends were reduced little. Likewise, the
profits rebound is being largely retained at first. Thus the undietributed profits of all corporations, excluding inventory gains, rose in
1975's first three quarters by nearly 150 percent from their 1974 level
as a fraction of GNP. They comprised a larger share of GNP in the
third quarter of 1975 than at any time since 1968.
Economists testifying before the Joint Economic Committee concurred in the judgment that American business seems to be headed for
a very profitable period. The Council of Economic Advisers has projected a further 25-percent rise in operating profits of nonfinancial
corporations in 1976. If this occurs, and if two-thirds of this sum is
retained, then undistributed earnings would rise by 30 percent. This
may be conservative. A sharp upward trend in profits, moreover, could
extend well beyond this year if the recovery continues. Given these
prospects, the apprehension that has been expressed about the adequacy of rates of return on capital and of corporate internal sources of
finance may well prove to be based more on hindsight than on foresight.
Internation

Capital Flow8

Devaluation of the dollar and relatively greater recent inflation
abroad have improved the competitiveness of the U.S. economy and
thereby enhanced its attractiveness for investment. Therefore, corporations are likely to divert fewer domestic resources than in the past
to foreign investments and, indeed, can be expected to augment
domestic resources with earnings and possibly with capital from
abroad. This is especially so if a sustained expansion is foreseen for
the United States. Recovery in many other industrial countries is
likely to be delayed and more restrained.
The countries of the oil cartel, moreover, are extracting money from
the consumption stream around the world and diverting it in part to
investment in the West. The U.S. Treasury estimates that these coun-

95
tries will have an investable surplus of $45 billion in 1976. The sum
can be expected to increase for several years. In the recent past, up to
one-fifth of this surplus has been invested in various forms in the
United States.
Although the inflow of funds from abroad itself may be offset by
the Federal Reserve and thus may not be an addition to total funds,
it supports the dollars exchange rate, thereby freeing real resources
through reducing U.S. exports and permitting an expansion of U.S.
imports to satisfy domestic needs.

Government Saving
A fundamental change in the outlook for credit availability at full
employment is likely to come through better control of the Federal
budget. The need and the public demand for spending control and
economic stability, together with the strong congressional budgeting
procedures established under the Budget Control Act of 1974, make
it quite probable that the budget will be better adapted to economic
conditions in future full employment periods.
Proper budget management means a sizable deficit at a time like
the present, when private spending is deficient and unemployed resources are widespread. Just as clearly, it means that deficits should
be eliminated as the economy moves back into the full employment
range and it means budget surpluses if and when prosperity begins
to spill over into shortages and excessive inflation. Some analysts have
urged a Federal surplus, if full employment is achieved in the next
several years, to ease credit markets and to facilitate the high level of
private investment which they foresee.

Private saving augmented by shifts in international capital
flows should remain adequate to fund desired investments at
reasonable interest rates at least well into the year 1977, given
proper monetary policy. If congestion appears in credit markets later in the recovery, new savings incentives or an
adjustment of the Federal budget toward surplus would become desirable. The private savings rate, however, is hard to
manipulate by policy. An appropriate budget adjustment
would have a prompter, surer effect.
CAN BUSINESS FINANCE NEEDED INVESTMENT?
As discussed in the previous section, business is expected to enjoy
a highly profitable period in the next several years as the economy
recovers. Undistributed corporate profits, excluding inventory profits,
are expected to reach close to 3 percent of GNP in 1976, a level not
achieved since the war except in the boom periods of the mid-1950s
and mid-1960s. Corporate capital consumption allowances, which have
crept upward gradually since 1960 as a share of GNP should remain
above 5.5 percent.2 Undistributed profits and capital consumption
2 Capital consumption allowances have ranged above this level every year since 1968,
running over 5.8 percent in 1975.

96
allowances together would cover over two-thirds of the investment requirements projected by the Council of Economic Advisers.
As indicated in the previous section, moreover, multinational firms
can be expected to shift some investment resources to the United States
that earlier would have been invested abroad. The augmentation of
domestic corporate resources in this way serves to finance some of the
investments needed in the United States without new borrowing by
the firms or issuance of new shares.
However, the challenge posed to business by the rise in prices of
plant and equipment, not to mention the long-term rise in interest
rates, is quite considerable. The prices of business fixed investment
goods have risen somewhat faster over a long period than the prices
of consumer goods and services. The contrast, of course, has been
especially great since 1972. The rates of change in consumer prices,
plant and equipment prices, and interest rates are summarized for the
past decade in Table VI/5.
TABLE V1/5.-RATES OF CHANGE IlN.CONSUMER PRICES, INVESTMENT GOODS
PRICESAND INTEREST RATES
1965-75
[Compound annual rates]
Price category

1965-68

Consumer purchases
-3.1
Business fixed investment-3.5
Structures -4.5
Durable equipment -2.7
Interest rates onAaabonds-11.16

1968-72

1972-75

4.3
4.9
7.3
3.5
4.0

7.9
9.8
12.3
8.5
7.0

Source: Department of Commerce
andthe Board of Governors, Federal Reserve.

The average cost of business investment goods has risen by 78 percent over the past decade, compared to a 63 percent increase for consumer purchases. Within the investment category, the prices of structures have risen much more sharply (115 percent) than those of
machinery and equipment (58 perecnt), which were relatively stable
until 1974-1975. The steep increase in construction costs may cause
a greater propensity in the future to modernize facilities within existing structures in preference to erecting new buildings.
For some sectors, the increase in the costs of new capacity has been
especially large. This has been true of oil, steel and electric power
generating. These same sectors, plus nonferrous metals and paper,
have been the most affected by capital requirements for pollution
control.
It is equally significant for the cost of new capacity that interest
rates have nearly doubled in the past decade. Rates on Aaa-rated
corporate bonds went from an average of 4.5 percent in 1965 to 8.8 percent in 1975. Thus, while the price of the facilities rose over the past
decade by an average of 78 percent, the amortization costs of these
facilities increased by nearly 120 percent.
As one factor to relieve recent pressure on capacity costs, the Committee expects a significant decline in long-term interest rates from
their 1970-1975 levels. The trend in interest rates does not reflect a
capital scarcity but rather rising premiums that lenders have de-

97
manded to offset a rising rate of general price inflation. Inflation
is now.declining. Short-term interest rates already reflect this fact.
In longer-term credit markets, lenders take account not only of present inflation but seek a margin of insurance against a possible resurgence of inflation during the life of the loan. Thus, the decline
in longer-term rates lags the progress of price stabilization. The
decline in short-terin rates will spread to the longer maturities, however, as lenders become more confident that inflation is subsiding
permanently. The decline should be encouraged by the Federal
Reserve.
Just as soaring interest charges pushed up business costs and prices
in 1974-75, declining interest rates should help to stabilize costs and
prices during the recovery. This role of interest rates in the cost
structure of industry is one more reason why it is vital to keep inflation under control and to hold rates-down.
It has been pointed out widely that corporate debt-equity ratios
have risen quite substantially over a long period. According to Federal Trade Commission data for all manufacturing corporations, the
ratio of long-term debt to equity rose from about 20 percent in 1965
to about 30,'percent in 1970 and remains at'about this level. -It is not
clear whether this ratio is close to a maximum viable level, as is often
intimated, but considerable resistance to further increases has
appeared in the behavior of many borrowers. As a result, firms undoubtedly will turn more often to fund-raising through equity issues
in the- next several years than in the recent past. Of course, the
expected shkilp increase in corpo'rate retained earnings-a form of
new equity finanicing-will permit firms to increase borrowing without increisi gstheir debt-equity ratios.
One reason for the increase in d ebt-equity ratios is the asymmetry
in the tax code between the deductibility of interest payments from
corporate taxable income and the nondeductibility of profits paid to
equity investors in the form of dividends. This asymmetry tends to
raise the cost to firms of equity financing relative to debt financing.
While the Committee does not consider this asymmetry to represent
a fundamental barrier to adequate funding of corporate investment,
it is time for Congress to undertake a basic reconsideration of this
feature of the tax code.
The effective tax rate on corporate income, however, has declined
over the past 15 years from a plateau of 45 perceit, or more (e.g.
47' pecent in 1960) to 39.2 percent in 1975. In 1974, for the first time
in 25 years or more, the effective corporate tax rate fell below 40 percent. The'share of total Federal tax collections received from corporate incomes has declined from 25 percent of total revenues in 1960
to 17 percent in 1970 and is projected to drop to 13 percent in 1980.
This decline in the effective corporate tax rate is traceable to a
number of new tax preferences extended to corporations, such as the
investment tax credit, the Domestic International Sales Corporation
(DISC), and accelerated depreciation range provisions. While the
effective tax rate on corporations has declined, that on individuals
has. tended to increase as inflation lifts taxpayers into ever higher
tax brackets.

98
Effectively designed proposals to stimulate capital formation should be given careful consideration. There are a number of tax preferences in today's corporate tax code, however,
that are poorly designed or outmoded and do not serve this
purpose effectively. In view of the redistribution of the tax
burden that already has occurred from corporations to individuals, the revenue loss from any new corporate tax incentive
should be offset by closing these ineffective loopholes. Any
corporate tax reduction should emphasize reductions at the
small-business end of the spectrum.3 4
Today's fears of capital shortage may turn out to be reminiscent
of the growth-rate controversy of the early 1960q. In the wake of two
back-to-back recessions from 1957 to 1961, many observers feared that
the American economy was trapped in a pattern of sluggish growth
and was destined to lose ground on its world-market competitors and
perhaps even to be overtaken by its adversaries of the Communist
world. America's confidence in her technological leadership was
shaken by the early successes of the Soviet space programs. In fact,
however, the American economy at that time was on the brink of one
of its most prolonged periods of growth and prosperity with rapid
investment and productivity gains.
Today again, after two business recessions between 1969 and 1975,
separated by a period of great economic turbulence and very high
interest rates, many observers fear that investment levels will not be
adequate to avert future shortages and the associated inflationary
pressures. The financial strength of many businesses has been sapped,
and they are uncertain about the future. Substantial investment resources must be diverted for pollution control and expansion of energy
supplies.
Again, however, the economy has the potential for sustained growth
and productivity gains with subsiding inflation. A significant advantage over the earlier period is the present rapidly growing labor force.
Thus, policies should be tailored to generate a prompt recovery of
output and a sustained longer-run expansion.
BROADENING THI

OWNERSHIP OF NEW CAPITAL

Wealth in the United States is concentrated in the hands of a relatively small fraction of the population. Unfortunately, the data on
wealth are sparse. The last comprehensive attempt by the Federal
Government to measure its characteristics and distribution was made
by the Federal Reserve Board in 1962. It was estimated that more
than three-quarters of the country's total wealth was owned by less
than one-fifth of the people, while more than one-quarter was owned
by just the top 0.5 percent. The Federal Government should remedy
aSee recommendations for changes in taxes on small business in the section
subject at the end of Chapter V.
'Senator Proxmire states: "The corporate income tax is not a progressive
incidence falls on consumers and employees far more than on stockholders.
It
investment. It should be reduced as the President has requested. I would favor
greater reduction."

on this
tax. Its
inhibits
an even

99
the lack of up-to-date information on personal wealth through periodic surveys and comprehensive reports on this subject.
The distribution of wealth reflects in large part the pattern of ownership of non-residential capital with corporate shares being one of its
principle forms. This category of wealth is much more concentrated
than total wealth, with the top percentile of the personal income distribution owning 51 percent of the market value of individually owned
corporate stock and receiving 47 percent of the dividends. Meanwhile,
the new capital assets generated by businesses, which in recent years
have averaged well over $100 billion annually, redound largely to the
benefit of these persons who already have great wealth.
The number of shareholders, moreover, declined by some 18 percent
from 1970 to 1975, and data suggest that young people today are not
purchasing stocks in significant volume. Balancing this declining role
of the individual investor has been the rise of financial institutions,
which since 1950 have more than trebled their share of the market
value of stock holdings.
To begin to diffuse the ownership of capital and to provide an opportunity for citizens of moderate incomes to become owners of capital rather than relying solely on their labor as a source of income and
security, the Committee recommends the adoption of a national policy
to foster the goal of broadened ownership. The spirit of this goal and
what it purports to accomplish was endorsed by many of the witnesses
at our regional hearings.
Without getting into specifics, the types of programs which could be
established to help meet this goal will be outlined. Such alternative
methods of broadening capital ownership are under study by the
Committee.
In the individual firm, employee ownership can be encouraged directly through tax incentives to the employees to purchase stock or to
firms to place newly issued stock into the hands of their employees.
The latter approach, known as Employee Stock Ownership Plans
(ESOPs), was examined in recent hearings by the Committee.
An alternative plan involves multifirm funds which would receive
tax-favored contributions from affiliated firms and issue nonnegotiable
fund certificates to the employees. This type of fund, which has been
in operation in France and West Germany, may diversify its portfolio, although it may 'be limited to particular industries and regions.
Providing ownership opportunities not just to employees but to
citizens at large could be accomplished through various devices. One
example would be the establishment of funds which would accumulate
personal savings on a tax-preferred basis and use them to acquire a
diversified portfolio of equity shares in corporations. For instance, individuals with earned income not exceeding $20,000 could be allowed
to save up to $3,000 a year in one or more funds and to deduct this
amount from their taxable incomes.
Whatever the means used, a basic objective should be to distribute
newly created capital broadly among the population. Such a policy
would redress a major imbalance in our society and has the potential
for strengthening future business growth.

100

v

To provide a realistic opportunity for more U.S. citizens to
become owners of capital, and to provide an expanded source
of equity financing for corporations, it should be made national policy to pursue the goal of broadened capital ownership. Congress also should request from the Administration
a quadrennial report on the ownership of wealth in this country which would assist in evaluating how successfully the base
of wealth was being broadened over time.

VII. ECONOMIC PROBLEMS OF REGIONS,
STATES, AND CITIES
OPERATING BuDGETs

The rise in outlays needed to keep pace with inflation and the shortfall in tax receipts caused by recession undermined the ability of
State and local governments to maintain balanced budgets in 1975.
Inflation increased expenditures faster than it increased revenues,
particularly for local governments that were dependent on property
taxes as a major source of revenue.' Recession had several adverse
effects. First, it precipitated significant shortfalls in receipts from
taxes that are sensitive to the level of income and employment, particularly income and sales taxes. The Economic Report of the President estimates that -State and local receipts in 1975 were $27.4 billion
below full employment levels. Second, recession increased the number of property tax delinquencies in areas where unemployment rates
were high. Finally, the economic downturn increased expenditures for
unemployment-related social programs such as welfare and public
health.
Early in 1975 many State and local governments used previously
accumulated surpluses to finance their current account deficits. As the
recession deepened and previously accumulated surpluses were depleted, however, State and local governments were forced to impose
tax increases and make expenditure cuts to keep their budgets in balance. 2 These budget adjustments prevented State and local government budget deficits from exceeding manageable proportions. However, they also necessitated a major reduction in the level of public
services provided by these jurisdictions.
Table VII/1 shows the aggregate fiscal position of the State and
local governments in the National Income Accounts (NIA). It supports this interpretation of their adjustment to deteriorating economic
conditions. 3 In 1972 and 1973, the enactment of general revenue sharing and strong economic growth combined to yield these governments
large surpluses in operating accounts. These surpluses were used in
1974 and in the first half of 1975 to offset operating deficits. By mid1975, however, the accumulated surpluses were depleted, forcing
State and local governments to reduce the widening gap that had
developed between current receipts and current expenditures. Thus,
small surpluses reappeared in the accounts in the second half of 1975.
I Lags in the reassessment of property values typically cause property tax revenues to fall
behind inflation.
2 For a detailed description of State and local government budget adjustments during
the current recession, see The Current Fiscal Position of State and Local Government,
Joint Economic Committee, May 1975.
8While the national income accounts do not measure accurately the budget balance of
State and local governments, these data can be used to gauge the direction and extent
of changes in this balance.

(101)

102
Several unique factors contributed to the shift in the fiscal position
of State and local governments in the second half of 1975. First and
most important, Federal grants-in-aid increased throughout 1975. As
Table VII/2 demonstrates, increases in Federal grants-in-aid accounted for the entire improvement in State and local operating budgets from the first quarter of 1975 to the fourth quarter of 1975.
Second, tax increases and expenditure cutbacks were significant
TABLE VII/1.-SURPLUS ORDEFICIT IN STATE AND LOCAL GOVERNMENT OPERATING ACCOUNTS
(NATIONAL INCOME AND PRODUCT ACCOUNTS, ANNUAL BASIS)

X

lIn billions of dollarsi
Surplus t+Surls=
4
deficit tl
Quarters
Year:
1972 -+5.6
1973 1974 1975 ----------------------

1974:1
+4.1 1974:11
-1.7 1974:111
1974:V

-1.

1975:1

1975:11
1975:111
1975:IV

dla.cit

+B. 1
-1.4
-. 9
-4.3
-5.0
-2.2
+1.7
+1. 4

Doesnot include surplus or deficit insocial
insurance trust funds.
Source: Survey of Current Business.
TABLE VII/2.-QUARTER-TO-OUARTER CHANGES IN 'FEDERAL GRANTS-IN-AID AND IN BALANCE IN STATE
AND LOCAL OPERATING BUDGETS (NIA BASIS)
[In billions of dollars]
1974: IV to 1975:1
Grants-in-aid Surplusordeficitinoperatingaccounts

1975:Ito1975:11 1975:11to1975:111 1975:1110t19751:V

+4.7
-7

+2.7
+2.8

+4.0
+3.9

+. 3
-3

Source: Bureau of Economic
Analysis, Department of Commerce.

factors in narrowing State and local budget deficits. Without these
adjustments, State and local operating balances would have been much
lower in 1975. Finally, the economic recovery began to increase tax
receipts in the second quarter. Despite the contribution of economic
recovery, however, it is clear that tax increases, expenditure cutbacks,
and grant-in-aid increases were the primary factors in the improvement in State and local government balances in the second half of
1975.
In 1976, if the economy recovers at projected rates, the outlook for
the aggregate State and local government sector should improve
slightly. Expenditures should increase by 8 to 9 percent, while receipts
from taxes and fees should increase by a slightly larger percentage.
Since grants-in-aid are expected to increase by 9 to 10 percent from
1975 to 1976, the aggregate State and local government sector should
be in balance or experience a slight surplus in 1976 if present tax
rates and expenditure rates are continued. Many individual governments, however, will continue to experience financial difficulties.
However, this balance in the State and local government sector
can be accomplished only by holding services at levels significantly
below those provided prior to the recession. Thus, while the aggregate

103
State and local sector will experience an easing of budget pressures
in 1976, there is no prospect of returning to balanced budgets and also
providing prerecession service levels.
The outlook for State and local governments in 1977 will be considerably more bleak if the President's budget proposals are adopted.
The slow growth rate in gross national product associated with the
President's restrictive budget would cause State and local government
receipts from their own revenue sources to grow more slowly than
current services expenditures. Thus the gap would widen once again
between State and local receipts and expenditures, precipitating a
new round of tax increases and service cutbacks. These budget adjustments can be avoided only if the economic outlook improves more than
projected or if Federal grants-in-aid are increased sufficiently to reduce the budget deficits that will otherwise develop.
The level of grants-in-aid suggested in the Administration's budget
would not be sufficient to stabilize State and local government finances
in 1977. Federal grants-in-aid to State and local governments are
projected to remain essentially unchanged in current dollars from FY
1976 to FY 1977. Even with the most favorable assumptions about
inflation during this period, real grants-in-aid to State and local governments would decline under the President's request by 4 to 5 percent
from FY 1976 to FY 1977. This decline in the real value of Federal
grants-in-aid would exacerbate thetfinancial difficulties that State and
local governments already would experience if the economy's growth
rate slows markedly in 1977.
Moreover, the President's budget also contains several proposals
that would increase the costs and responsibilities of State and local
governments significantly. Four of these changes would be particularly significant in 1976 and 1977. First, the President's proposal to
increase the social security tax rate would require State and local
governments to increase their annual contributions to the Social Security Trust Fund in behalf of their employees by $300 million. Second, the proposal to reduce the portion of transportation block grants
that can be used for mass transit operating subsidies from 90 percent to 50 percent could require local governments to increase their
own expenditures for mass transit above expected levels by as much
as $250 million. Third, the President's proposal to phase out extended
unemployment compensation benefits and public service employment
programs could transfer as many as 600,000 households to the welfare rolls by mid-1977 thus increasing State and local government
expenditures for public assistance by as much as $1 billion. Finally,
the four grant consolidations proposed by the President would reduce
total outlays in FY 1977 for the programs they combine by $1.35 billion without an offsetting change in the responsibilities of State and
local governments. These changes are summarized in Table VII/3. If
carried out, they would increase the pressure on State and local government budgets as their financial positions weaken in 1977.
As long as the economy operates significantly below
capacity, the real value of Federal assistance to State and
local governments should not be allowed to decline. Congress
should reject changes in Federal policies that significantly increase the costs and responsibilities of State and local
governments.

104
TABLE VII/3.-EFFECT OF PROPOSED
GRANT CONSOLIDATIONS ON FEDERAL OUTLAYS IN FISCAL 1977
[in millions of dollarsi

Financial assistance
for health care act
-$9,
Child nutrition reform act-2,
Financial assistance for elementary andsecondary education act -294
Financial assistance for community services act
Total -14,162

Proposed
block
grant

Programs prior to
consolidation

Change
in outlays
due to
consolidation

001
367

9,629
3,107

-$628
-740

2,500

322
2,460

-28
+40

15,518

-1,356

Source: Budget of the United States, fiscal year 1977.

While the fiscal position of the aggregate State and local government sector should improve in 1976, there are many jurisdictions that
still will experience major budget difficulties. In particular, central
cities in the Northeast and Midwest and several States in the Northeast will experience continued budget pressures because unemployment rates in these areas will remain high and revenue shortfalls will
persist. Moreover, many of these governments currently are experiencing budget deficits that will have to be offset by balanced budgets
or surpluses next year necessitating further tax increases andwiexpenditure cutbacks.
Last year, this Committee recommended that Congress enact a countercyclical revenue assistance program to mitigate the impact of high
unemployment on State and local government receipts and expenditures. The Committee suggested that this program could be used to
prevent State and local government tax increases and employee layoffs during periods of high unemployment. Congress recently approved this proposal as Title II of the Local Public Works Capital
Development and Investment Act of 1975. Unfortunately, however,
the bill was vetoed by the President on February 13, and Congress
failed to override the President's veto. Since this legislation is part of
the congressional budget and since many State and local governments
will continue to experience unemployment-related budget difficulties,
the Committee continues to favor enactment of this important program. Countercyclical assistance should remain available as long as
the national unemployment rate exceeds 51/2 percent.
The countercyclical grant-in-aid program should be reenacted by Congess and signed by the President. It should
remain in effect as long as the national unemployment rate
remains above 51% percent.
This year, Congress also must decide whether to extend the General
Revenue Sharing Program. This program has provided approximately
$6 billion annually to 39,000 State and local governments from which
the recipient governments could meet locally determined priorities.
The program, which has been in existence for five years, is due to expire in December, 1976.
Since its enactment General Revenue Sharing has become an increasingly important component of State and local government operating budgets. While many governments initially used revenue shar-

105
ing funds for capital construction projects, this assistance recently has
been relied on heavily for operating purposes. This trend accelerated
in 1975 as the combination of inflation and recession required State
and local governments to marshal every available source of* funds
merely to maintain reasonable levels of public services. Moreover, this
shift can be expected to continue in the next two to three years as the
budget pressures on these governments persist. Thus a failure to renew
the General Revenue Sharing Program in 1976 would significantly
weaken the halting progress toward stability in State and local government finances and would precipitate large tax increases and expenditure cutbacks in 1977. For this reason the Committee supports a
three year extension of general revenue sharing.
Several minor changes should be made in the program as part of the
three year extension. First, the provision in the existing program
which limits the per capita allocation to individual local governments
to 145 percent of the statewide average per capita allocation should
be eliminated. This provision has reduced. the amount of assistance
that otherwise would be available for the most financially distressed
local governments. Many central cities in the Northeast and Midwest
would receive increased allocations if this artificial constraint were
removed. This limitation should remain in effect, however, for local
governments that have adjusted taxes in excess of $400 per capita due
to large concentrations of industry and small populations. Second, the
constraint mandating that all local governments receive a per capita
allocation of at least 20 percent of the statewide average per capita
allocation should be removed. This provision provides excessive assistance to jurisdictions that perform only marginal functions, thus
encouraging a proliferation of local governments with few responsibilities. Finally, the civil rights enforcement and public participation
requirements in the existing legislation should be strengthened and
enforced.
The General Revenue Sharing Program should be extended
for three years so that State and local governments are assured of receiving this source of Federal assistance to meet
current services needs without substantially increasing taxes.
The artificial constraints on per capita assistance that limit allocations to financially distressed local governments and increase allocations to governments that perform only marginal
functions should be phased out. The civil rights enforcement
and public participation requirements should be strengthened. 4
While the General Revenue Sharing program currently is an integral component of most State and local government budgets, the Committee believes that two major changes should be incorporated in the
program as the economy returns to full employment. First and most
important, the allocation formula should be altered to reflect the disproportionate financial burden that low-income families impose upon
'Senator Proxmire states: "I disagree. Revenue sharing should be ended forthwith
and Federal tax sources should be shifted to the States Instead. Revenue sharing severs
the ability and the advantage of spending from the discipline and pain of raising the
taxes."

106
State and local governments through their greater requirements for
services and lower contributions to revenues. This change should make
the revenue sharing formula more redistributive, allocating a larger
percentage of shared revenues to the most financially distressed State
and local governments.
Second, the revenue sharing program should incorporate financial
incentives to encourage the reform of State and local government revenue systems. At the State government level, these incentives should
favor State governments that rely more heavily on progressive income
taxes as a source of revenue. At the local level, they should encourage
regional cooperation among local governments through tax base sharing, consolidation, annexation or other methods designed to distribute
local government tax burdens more equitably.
Any further extension of general revenue sharing beyond
three years should incorporate the following changes in the
program:
(a) Inclusion of incentives to induce greater State use
of progressive personal income taxes and more regional
cooperation among local governments through tax base
sharing, consolidation, or other methods which distribute
local government tax burdens more equitably.
(b) Alteration of the allocation formula to direct a
larger portion of shared revenues to those local governments that have higher percentages of low-income families
within their boundaries, thus reflecting the disproportionate financial burden that low-income families impose.
SUSTAINING STATE UNEMPLOYMENT FUNDS

One of the most critical problems of 1975 was the heavy strain
placed on State unemployment insurance funds due to severe unemployment levels. Fifteen States were able to maintain unemployment
benefit payments during the year only by borrowing from the Federal
Government, and by the end of 1976 approximately 30 States will
require Federal assistance.
In the 1977 budget, the President has proposed replenishing State
unemployment insurance funds through an increase in the unemployment insurance tax rate on employers and an increase in the maximum
income on which the tax is collected.
The President's proposal, however, would increase the cost of unemployment insurance to the Nation's employers by $2.1 billion in
1977 alone. Like the proposed increases in social security taxes, it
would significantly increase the cost to firms of hiring new workers
and would discourage new private sector jobs in the early stages of
the recovery.
The proposed increase in the unemployment insurance tax
rate and tax base should be postponed until the economy returns to fuller use of capacity. Until that time, State benefits
should continue to be funded when necessary by borrowing
from the Federal Government or by direct Federal grants.

107
THE MUNICIPAL BOND MARKET

In 1975, the municipal bond market was characterized by strains
and disorders of unusual severity for this normally stable market.
Many institutional investors demonstrated a reluctance to increase or
even maintain investments in tax-exempt securities. Underwriters
reduced their participation in certain new offerings, resulting in a
larger share of new issues sold through negotiated rather than competitive bids. Even activity in the secondary market for outstanding
municipals was slowed during the periods of heightened uncertainty.
Much of this disarray in the tax-exempt market can be attributed
to developments which were unique in 1975. The temporary default of
New York State's Urban Development Corporation early in the year,
New York City's financial crisis, and the borrowing difficulties of two
States and several large cities contributed to an erosion of investor
confidence in tax-exempt securities. Investors demanded greater risk
premiums as concerns, however unjustified, developed about the credit
worthiness of State and local governments in general.
Due in part to these concerns, yields on tax-exempt securities rose
relative to yields on comparable corporate securities to their highest
levels since 1969 and 1970. The increase in relative yields in 1975 was
evident for both high-grade issues and low-grade issues and accelerated
as New York City sfinancial difficulties developed. Even when New
York City's immediate problems were resolved at the end of the year,
relative yields on tax-exempt securities declined only marginally and
the risk premiums required to interest investors in lower grade, taxexempt securities remained virtually unchanged.
The market's lack of response to the resolution of New York City's
problems suggests that other longer-term trends in the tax-exempt
market also have placed upward pressure on tax-exempt interest rates
by increasing the supply of and decreasing the demand for these securities. With respect to supply, the dollar volume of long-term, taxexempt issues has increased at a compound annual rate of 11 percent
from 1970 to 1975. Much of the increase in volume can be attributed to
an expansion in State and local government construction activity.
This increase is unlikely to be duplicated in the next year or in the
period from 1976 to 1980.5
Another component of the growth in volume of tax-exempts, however, is the increase in State and local government borrowing for nongovernmental purposes, particularly to finance private sector investments in pollution control. 6 While the expansion that has occurred
in this use of tax-exemption could hardly have been anticipated when
it was first authorized by Congress in 1969, the passage of environmental protection legislation has caused an enormous increase in taxexempt borrowing for this purpose. The total volume of reported tax5 A reduction in the rate of growth in State and local government construction programs,
the demonstrated reticence by voters to support new bond issues, and more cautious expenditure programs by State and local governments should contribute to a reduction in the
future rate of growth of new tax-exempt issues for government purposes.
6 As a result of Provisions in the Tax Reform Act of 1969, State and local governments
can Issue tax-exempt securities and use the proceeds to purchase and lease pollution control
equipment to private industry. Through this method, private Industry Is able to finance
pollution control expenditures at below market interest rates.

108
exempt bonds issued for pollution control purposes has increased
from $93 million or 0.3 percent of all long-term bonds issued in
1971, to approximately $2.5 billion or 8 percent of long-term issues in
1975. According to available evidence the total volume of unreported
issues, if it were known, would increase this total significantly.
Environmental protection is a laudable and legitimate public purpose, but the use of tax-exempt securities to subsidize these expenditures is undesirable for several reasons. First, the expanded use of
tax-exempt securities to finance private sector pollution control investments has significantly increased the supply of tax-exempts, increasing borrowing costs to State and local governments. Most estimates
suggest that the use of tax-exempts for this purpose will continue to
expand through the remainder of the decade unless it is legally restricted. Second, the use of tax-exempt bonds is an inefficient means
of subsidizing pollution control investments because a sizable portion
of the subsidy is received by the purchaser of the bond. Third, this
practice discriminates against smaller companies that are unable to
prevail upon municipalities to issue tax-exempt bonds in their behalf.
Finally, this practice could encourage the use of capital-intensive pollution control techniques even where material-intensive or labor-intensive processes may be more efficient.
The practice of permitting funds to be raised in the taxexempt bond market for private, profitmaking corporations
to make pollution control investments should be gradually
curtailed. Congress should develop more efficient and equitable methods for subsidizing pollution control expenditures.
There also have been major changes in the demand for tax-exempt
securities which have increased State and local government borrowing costs. Commercial banks which in the past have been the largest
purchasers of municipal bonds, held 45.7 percent of the outstanding
tax-exempt securities in 1975. In recent years, however, as volume has
increased in the municipal market, banks actually have reduced the
dollar volume of net new issues that they have purchased from $12.6
billion in 1971 to less than $6 billion since 1973.
The main reason for the decline in bank purchases is the wide range
of new tax shelters the Bank Holding Company Act has made available. Under this Act, banks can qualify through holding companies for
accelerated depreciation, investment tax credits and other shelters for
their earnings. This reduces the banks' dependence on tax-exempt
securities as a shelter.
It is unlikely, moreover, that the decline in bank demand for taxexempts will be offset by an increase in demand by the other major
purchasers of tax-exempt securities without even higher interest rates
for these issues relative to others. Fire and casualty companies, that
held 15.5 percent of the outstanding municipal bonds in 1975, have
reduced their demand for these bonds as the rate of growth in their
profits declined. Individual investors, who held 32.4 percent of the
outstanding tax-exempt bonds in 1975, are unlikely to be attracted
in greater numbers to the tax-exempt market unless tax-exempt interest rates rise sufficiently to attract individuals in marginal tax brackets

109
lower than those of current tax-exempt investors. Individual investors,
moreover, are likely to be particularly apprehensive about the general
solvency of State and local governments.
The Committee is concerned that State and local government borrowing costs may remain high because the demand for tax-exempt
securities remains weak. This problem could be alleviated by broadening the demand for State and local government bonds by offering these
governments the option of issuing taxable securities with a Federal
subsidy of approximately 40 percent of the interest costs.
These taxable securities with an interest subsidy would have several
advantages. First, they would broaden the market for State and local
government securities. At present, pension funds, life insurance companies, and other institutions do not purchase State and local bonds
because their own tax-exempt or tax-sheltered status has made the
lower yield on municipal bonds unattractive. Most families are not in
high enough marginal tax brackets to be attracted to tax-exempt
securities.
Second, a taxable bond option would reduce State and local government borrowing costs by permitting these governments to issue
securities in whichever market offers the lower interest rates. If a
40 percent subsidy is adopted, State and local government borrowing
costs should never exceed 60 percent of comparable taxable borrowing
costs.
Third, this proposal would increase the progressivity of the Federal
income tax system. At present, 70 to 80 percent of the income from taxexempt bonds goes to households with marginal tax rates above 50
percent. To the extent that State and local governments use the taxable
option, this inequity will be eliminated.
Finally, a taxable bond option would increase the efficiency of the
subsidy to State and local government. Various studies have demonstrated that the net revenue loss to the Treasury due to tax-exempt
bonds, significantly exceeds the interest savings realized by State and
local governments. If a taxable bond option were utilized, the interest
savings to State and local governments would be substantially greater
than the amount of Federal subsidy.

State and local governments should be offered the option of
issuing taxable securities accompanied by a Federal subsidy
of about 40 percent of the interest payment. The option of
issuing a taxable bond with an interest subsidy should be
available to all general purpose units of government but
should not affect existing provisions of law that permit these
governments to issue tax-exempt securities.7
Senator Kennedy and Representative Reuss state: 'The Committee's Annual Report
provides strong additional support for the legislation we have introduced in the Senate
and the House of Representatives to establish the taxable municipal bond as an alternative
to the traditional tax-exempt bond approach to State and local financing. To gain acceptance
by State and local governments, the taxable bond option (TBO) should meet three key tests:
(1) to avoid unnecessary Federal intrusion into State and local affairs, the interest subsidy should be automatic and nondiscretionary, in the sense that jurisdictions electing to
issue taxable bonds will automatically qualify for the subsidy; (2) to avoid the vagaries
of the annual appropriations process, the subsidy should be funded through a permanent
appropriation; and (3) the subsidy should be set at a level high enough to establish its
use as a viable method of State and local financing, but not so high that it disrupts the
existent taxexempt market or causes unnecessary Federal expense-we believe that a 40
percent level for the subsidy meets this requirement."

67-573 0 - 76 - 6

110
At present, there is very little accurate, comparable, and timely
information with which to evaluate the fiscal condition of the State
and local governments as a whole or to ascertain the budget position
of specific jurisdictions. This information would be useful to Congress,
the Executive Branch, and the public in several respects. First, accurate and timely information about the fiscal positions of State and
local governments is needed to develop and evaluate Federal assistance
programs more effectively. Second, a timely financial reporting program could act as an early warning system, identifying potential
financial problems before they occur. Third, accurate and timely information about the finances of individual State and local governments would improve the quality of credit ratings and make credit
analysis more meaningful. Finally, this information could be used to
identify clearly the relationship between the State and local government sector and the national economy.

State governments and local governments with populations
in excess of 25,000 should be encouraged to submit annual
reports to the Federal Government which provide accurate,
timely, and comparable information about their current and
future financial positions.8
CHRONICALLY DEPRESSED REGIONAL EcoNoMIEs

While the national economy will continue to gain strength in 1976,
not all regions and areas within regions will participate equally in
this recovery. Many regions and areas will approach full utilization
of labor and capital resources early in the recovery. Others will lag
well behind the national recovery rate, experiencing unacceptably
high unemployment rates even as the national economy approaches
full utilization of labor and capital resources.
Overall fiscal and monetary policies are not designed to respond
to the widely varied economic conditions that individual regions experience. These policies attempt instead to regulate aggregate demand
in the hope that all regional and local economies will be reached by
their effects. As this Report suggests in other sections, monetary and
fiscal stimulus is necessary now and will continue to be appropriate
as long as the economy operates significantly below capacity. As the
national economy approaches full employment, however, additional
fiscal and monetary stimulus would only place upward pressure on
wages and prices in tight labor markets, while doing little to reduce
unemployment in depressed areas. Therefore, regional economic policies should be developed to reduce unemployment in regions and areas,
particularly core areas of central cities that will not share fully in
the recovery.
Chronically depressed regional and area economies are characterized
by exceptionally high unemployment rates, net losses of private sector
jobs, rapidly declining shares of national income, growing percentages
of the National poverty population, and deteriorating public and
private infrastructure. Generally, these regions and areas already were
s Representative Long states: "I am not convinced of the necessity of requiring State
and local governments to report their financial condition. As I indicated in my supplemental
views, I believe the autonomy of State and local governmental units must be preserved."

ill
experiencing relative economic decline prior to the 1973-1975 recession, and the disparity in economic welfare has widened in the past
two years.
The Northeast, and to a certain extent the Great Lakes and MidAtlantic regions, have experienced the most significant declines in
relative economic growth. In the past 15 years-and more rapidly in
the last 5 years-the growth in private sector jobs and population has
shifted from those regions to the South, Southwest, and West. This
trend was exacerbated by the recession, because these regions contain
the oldest, least efficient manufacturing facilities, which are the first
to be closed as production is reduced. The relative decline is particularly acute in the central cities of these regions, because they have
been affected by intraregional migration to suburban and outlying
portions of metropolitan areas, as well as interregional migration.
To a large extent, the migration of population and employment
opportunities is occurring in response to real economic forces affecting
the cost and efficiency of production. The widespread availability of
air conditioning since 1960, lower wages in some areas, lower tax
burdens, relatively lower energy costs, and the availability of cheap
land for new plants have contributed to the movement of jobs and
people. The migration that has occurred in response to these factors
has contributed to overall efficiency and productivity in the private
economy and should not be discouraged. This movement also increases
the total cost of delivering public services, however, by allowing underutilization of public infrastructure in areas experiencing outmigration, while requiring large expenditures for new infrastructure in
rapidly growing areas.
While the tradeoff between private benefits and public costs is difficult to evaluate, the Committee is concerned that these shifts among
regions are creating a mismatch between the location of jobs and the
location of individuals seeking work, posing a potential obstacle to
the achievement of full employment. For this reason, the Committee
believes that it may be necessary to initiate regional economic development programs in chronically depressed regions as the economy recovers. These programs should focus first on reducing or stabilizing
the outmigration of jobs and skilled people.

Federal Government efforts to promote economic recovery
should be accompanied by programs designed to reduce unemployment in regions and in areas within regions that experience chronically high unemployment rates.
The first initiative necessary to prevent a further decline of these
chronically depressed areas is to insure that the State and local governments can provide adequate public services without imposing excessive tax burdens on businesses and residents. Past decline already
has undermined the ability of some local governments, particularly
the central cities, to maintain public services. Outmigration has raised
the per capita cost of providing essential services and has eroded the
tax base so severely in some cases that the absence of services itself
now is contributing to the exodus of jobs and people. This secondary
movement, unlike previous migrations, is not only a result of businesses seeking more efficient locations and individuals seeking better
jobs, but it is also a flight away from low-quality public services and

112
onerous tax burdens. Continuing budget pressures on States and localities in declining regions augur further tax increases and service
cuts, ultimately leading to further decline in these regions.
This secondary movement should be discouraged because it contributes little or nothing to overall efficiency. The Committee believes
that additional Federal assistance must be made available to these
areas to arrest this downward spiral by preventing severe public service declines or major tax increases. The Committee realizes that the
Federal Government cannot completely offset the effects of economic
decline but believes that it is necessary to provide stabilization assistance to cushion the impact of decline on public services. The stabilization assistance could be provided by funding public service employees
in these jurisdictions, by increasing revenue sharing assistance to
these governments, or by developing a new program of stabilization
grants.
The deterioration of public services and the escalation of
taxes in chronically depressed areas should be slowed to reduce further migration of employment opportunities and
people from these areas.
Federal employment and procurement can be an effective tool for
increasing economic activity in chronically depressed regions and
areas. In recent years, however, the largest increases in direct Federal
employment have occurred in precisely those regions that are experiencing the greatest private sector growth. Federal nonmilitary
payrolls as a percentage of nonfarm income is often three to four
times higher in growing States (i.e., Colorado, Arizona, New Mexico),
than in stable or declining States (i.e., New York, Ohio, Illinois).
Federal procurement expenditures also tend to be concentrated in
growing regions.
Many of these contract and payroll expenditures could be shifted
feasibly to high unemployment areas. Regional unemployment rates
could be used as one criterion in allocating these expenditures. For example, the Federal Government might accept bids that are up to 10
percent higher than the lowest bid, if this would shift work into
chronically depressed regions. While there is certainly a limit on the
level of additional cost that is acceptable, concentrating Federal Government purchases of goods and services in chronically depressed
regions could make a contribution to increasing employment in these
areas.
Federal contract and payroll expenditures should be concentrated, wherever costs are reasonable, in regions or
areas within regions that experience chronically high unemployment.
While maintaining public services and targeting Federal Government contracts and payroll expenditures will assist in stabilizing these
declining regions, private sector investments also must be made if
the chronically high unemployment rates are to be reduced significantly. Several Federal initiatives could encourage the development
of private sector employment opportunities in these regions. Without
examining all of these proposals in detail, the Report will specify
criteria that should be met by any proposal designed to encourage
private sector investment in depressed areas.

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First, any program to encourage investment in depressed regions
should be designed to provide the assistance only to chronically depressed areas, thus minimizing the cost and maximizing the effectiveness of the program. For instance, targeted investment programs
could be applicable only in areas that have had unemployment rates at
least 1 percent above the national average and growth in total employment below the national average in each of the previous three
years. This will prevent areas that have experienced sharp but brief
cyclical fluctuations from becoming eligible. Second, the assistance
should be concentrated in as small a geographic area as is feasible.
This will encourage investment close to the unemployed workers,
minimizing transportation costs and maximizing accessibility. It also
will concentrate investment within the boundaries of the local governments that are experiencing the greatest fiscal difficulty. 9 Third,
targeted investment programs should encourage the development of
labor-intensive as well as capital-intensive activities. If preferential
treatment is available only for capital investments, its effectiveness
will be weakened, particularly in central cities where the large amounts
of vacant land necessary for modern manufacturing processes arc
difficult to assemble.
The President's budget for fiscal 1977 contains a proposal to encourage investment by offering rapid amortization of newly constructed buildings and capital equipment in areas with unemployment
rates above 7 percent. While the Committee supports the objective of
encouraging investment in high unemployment areas, it is clear that
this proposal would not effectively target investment into those areas
that need it most. According to the Treasury Department, investment in
areas containing approximately 80 percent of the labor force would be
eligible for rapid amortization. Thus, the President's program fails to
separate chronically depressed areas from areas that have unemployment rates below the national average. Entire labor market areas
would be eligible, moreover, which would allow investments to occur
in low unemployment jurisdictions of metropolitan areas that may
not be accessible to people seeking employment. Third, the President's
proposal for rapid amortization of facilities is most attractive to
activities that are capital-intensive.

Proposals to encourage investment in high-unemployment
areas should be accepted only if the proposal targets assistance to the most chronically depressed regions and areas.
As an alternative to rapid amortization, the Committee recommends
that Congress examine the feasibility of a development bank. Such a
bank could encourage investment in chronically depressed areas by
making available low-interest loans to businesses. The bank could also
make loans to State and local governments for investments in public
infrastructure in chronically depressed areas that may be necessary
to encourage private sector development. The interest rate on all loans
should not exceed the Treasury's borrowing costs plus a small service
charge.
9 A wealthy suburb with low unemployment rates that is located In a metropolitan area
with high unemployment should not be eligible for preferential treatment.

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The bank initially could be capitalized with public funds and with
receipts from a public stock offering. After its initial capitalization,
the bank should be made self-sustaining as a revolving fund. State and
local governments also could be required to support the bank by contributing a small percentage of the increment in tax receipts that
results from development.
This proposal, if structured correctly, could meet all the criteria
established to evaluate programs to encourage investment in depressed
areas. Loans could be limited only to jurisdictions with unemployment
rates that are consistently above the national average. Assistance could
be made available for land and working capital as well as for investment in plant and equipment. Finally, as the bank developed an effective analytical capability, it could channel its assistance to encourage
investments that otherwise would not occur.

As an initial effort to encourage the development of private
sector job opportunities in chronically depressed areas, Congress should consider establishment of a regional economic
development bank. The bank should be designed to make lowinterest loans to businesses and State and local governments
for the purpose of encouraging investment in chronically depressed regions or areas.
THE NEED FOR REGIONAL ECONOMIC INFORMATION

In the past economic policy deliberations have focused little consideration on the impact of economic policies on regional economies and
the location of working and living opportunities within and among
regions. Despite this lack of consideration of regional and area economies, Federal tax, expenditure, credit, and employment policies have
been influential factors affecting the location decisions of individuals
and businesses. For instance, Federal policies have encouraged new
housing construction at the expense of rehabilitation; they have supported the rapid turnover of real estate and investment holdings;
they have provided the transportation facilities necessary for the decentralization of housing and jobs. Moreover, procurement, and employment have contributed to rapid economic growth in some regions
while exacerbating economic decline in others.
Not enough is known about the extent to which national economic
policies affect the economies of regions and areas within regions. This
information would be gathered if the economic planning proposals in
Chapter IV of this Report were fully implemented. Until that time,
however, the Committee believes that major economic programs and
policies should be preceded by a special analysis of their impact on
regional and local economies.

Major executive and legislative proposals should be accompanied by an analysis of their impact on economic activity in
regions and in areas within regions.
The failure to develop economic policies that recognize regional
economic variations can partially be attributed to the unavailability
of accurate, comparable, and timely information about regional and
local economies. Information about local unemployment rates, the

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composition of local labor forces, the availability of underutilized
public infrastructure, the composition of local industrial bases, the
availability of vacant land, or other important factors is difficult to
obtain.
Federal Government data on regional and local economies should
be improved. Better information is required to evaluate the efficacy of
Federal, State, and local government programs. Second, programs
that are targeted to meet specific regional needs are dependent on the
availability of accurate and timely information to identify regions or
areas with critical needs. Finally, the increasing reliance on formula
allocations (block grants) as a method for redistributing Federal assistance to State and local governments requires timely and accurate
information to insure proper allocations.

A commission should be appointed to make recommendations for improving the accuracy, timeliness, and comparability of information available on regional and local economies.
The commission's recommendations should include proposals
designed to provide the Congress, the Executive, and the public with whatever information the commission believes necessary for the development and evaluation of effective regional
economic policies.

VIII. INTERNATIONAL ECONOMIC ISSUES***
MONETARY REFORM
On January 8, 1976, the Interim Committee of the International
Monetary Fund (IMF), meeting in Kingston, Jamaica, announced
agreement on a set of reforms that members of the Fund had been
struggling to devise since the summer of 1972. The compromise includes an increase in IMF quota contributions and hence the Fund's
lending capability, an amendment to the Articles recognizing the right
of member countries to let their currencies float rather than establish
par values, and an arrangement to disperse some of the Fund's gold
in a manmer that will assist low-income countries. The Congress will
be called upon to approve the quota increase and various amendments
to implement the other provisions of the Kingston accord.

The Congress should endorse promptly in 1976 the legislation required to amend the IMF Articles so as to permit early
full implementation of the agreement on monetary reform
announced in Kingston, Jamaica, on January 8. This legislation should include provisions requiring congressional approval of any proposal to dispose of the remaining 100 million
ounces of Fund gold or of a proposed return to a par value for
the dollar. It should also include instructions to the Secretary
of the Treasury indicating that any intervention in exchange
markets conducted by or cooperatively participated in by U.S.
monetary authorities should be short-term, for the exclusive
purpose of combating disorderly conditions in exchange markets, and should under no circumstances attempt to alter the
trend of exchange rates.
The features of the Kingston agreement, its impact, and the reasons
why the Congress should approve it-given adequate safeguards-are
explained be ow.

The Quota Increase
The International Monetary Fund obtains from quota contributions
most of the assets that it in turn lends to member countries. The size
of an individual member's quota is determined by its gross national
product (GNP), per capita income, its proportionate share of world
trade, the fraction of its total output that is traded internationally,
and a few other factors. The Fund Articles provide for a general review of quotas every five years. Two kinds of adjustments are made
during these reviews.
First, the quotas of virtually all members are increased absolutely
in order that the Fund's total lending capacity will expand as seems
:See Senator Humphrey's remarks at the end of Chapter VIII.
'These views are endorsed jointly by the majority and minority members of the
Committee.

(116)

117
appropriate in light of growing international trade and capital flows.
The last general quota increase occurred in 1970. The expansion agreed
to in Kingston would increase total quotas by 9.8 billion Special Drawing Rights (SDRs) l, or by just over a third, from 29.2 to 39 billion
SDRs. In previous years 25 percent of each member's quota subscription was, according to the requirements of the Articles, paid in gold.
The amendments in the Articles now contemplated will abolish this
gold subscription requirement, and future quota contributions will be
made entirely in national currencies.
The second type of adjustment undertaken during general quota
reviews is to modify the proportionate share of certain members'
quotas in the total to reflect significant changes in their relative positions in the global economy. As a reuslt of the substantial increase in
the revenues of oil-producing countries since 1973, the quotas of the
12 members of the Organization of Petroleum Exporting Countries
that belong to the IMF will be increased from 5 to 10 percent of the
total. While this change increases the voting power of the oil producers in the IMF, it is also intended to expand the ability of the
Fund to draw upon the financial resources of those countries and to
use these assets to assist other nations suffering the balance-ofpayments consequences of high oil prices.
The United States quota is projected to drop from 22.9 to about 20
percent of the total. Since the most important decisions on the part
of the IMF will require approval by nations with 85 percent of the
aggregate voting power, the United States will retain a veto capability with respect to critical decisions.

Exchange Rate8

/

The Joint Economic Committee has supported the March 1973
decision to let the dollar float in exchange markets, i.e., to let its value
be determined primarily by the interaction of private supply and
demand. In June 1973 and again in July 1975, the Subcommittee on
International Economics conducted hearings to determine how well a
floating dollar was working for the United States and for the international monetary system as a whole. The conclusion reached from
both these investigations was that the advantages to the United States
of floating have outweighed the disadvantages and that the dollar
should continue to float for the foreseeable future. Moreover, U.S.
monetary authorities should attempt to influence the external value
of the dollar through intervention in exchange markets only to combat
disorderly conditions in those markets. In a report published in
August 1975, the Subcommittee on International Economics of the
Joint Economic Committee and the Subcommittee on International
Trade, Investment and Monetary Policy of the House Committee on
Banking, Currency and Housing jointly recommended thatThe United States monetary authorities should intervene
in exchange markets only to combat or to prevent the emergence of disorderly conditions. Intervention should not attempt to influence the trend of exchange rate movements.
'Special Drawing Rights are currently worth about $1.17 apiece. Thus, the total quota
Increase will amount to approximately $11.5 billlon.

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Swap borrowings and loans entered into between the Federal
Reserve and foreign monetary authorities should normally
be liquidated, i.e., the position fully reversed within six
months of the initial transaction. Only as a result of the most
extraordinary circumstances should swaps remain outstanding for more than a year. U.S. monetary authorities should
not accumulate additional reserves in the form of foreign
exchange.
What are the advantages and the disadvantages of floating versus
fixed exchange rates? In general they can be summarized as follows:
First, national monetary authorities enjoy greater independence for
implementing monetary policy under floating than under fixed rates,
because external conditions need not induce purchases or sales of the
domestic currency that can decrease or increase commercial bank
reserves in conflict with domestic policy objectives.
Second, private speculative capital movements are smaller under
floating than fixed rates because individuals with liquid assets can no
longer be certain which way an exchange rate reflecting current economic conditions will move.
Third, since rates of productivity growth, inflation, and wage rate
increases will inevitably differ among countries, exchange rates can
never remain constant for long, and some type of adjustment mechanism is essential. The small continuous exchange rate adjustments
permitted by floating are less costly to international traders and
investors and to central banks than large abrupt changes.
Fourth, with floating exchange rates, nations can make smaller
investments in stocks of monetary reserves than if rates are fixed.
Fifth, under floating exchange rates, controls over international
capital movements are likely to be less extensive than if rates are fixed.
Some of the consequences of the move from fixed to floating exchange rates are subject to conflicting interpretations. Among the
major questions are the following:
First, floating exchange rates have been described as more inflationary than fixed rates due to a "ratchet effect." Since prices and wages
in industrial countries are generally rigid downward, cyclical variations in exchange rates produce price increases in nations with depreciating currencies but no corresponding reductions in other countries
whose monies are appreciating. On the other hand, it has been maintained that the fixed exchange rate system of the late 1960s and early
1970s became an engine of inflation as a result of very large increases
in the exchange reserves and, consequently, the domestic money
supplies of some surplus countries.
Second, some analysts have maintained that floating rates discourage international trade because of the increased costs of covering
exchange risks. But until the onset of the recent recession, trade continued to expand briskly.
Third, it is sometimes maintained that floating exchange rates
complicate medium- and long-term planning for businessmen. But
exchange rate adjustments must occur: the choice is whether they take
place in small continuous steps or in major jumps.
Aside from this theoretical accounting of the pros and cons of
different exchange rate regimes, what has been the practical impact

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on the United States of the adoption of a floating dollar? The most
dramatic impact of the decline in the external value of the dollar
under floating exchange rates can be seen in the reversal of the net
merchandise trade balance. During the late 1960s the dollar became
seriously overvalued. Consequently, U.S. export growth stagnated,
imports surged, and Americans invested abroad at cut-rate pricesall of which destroyed jobs in the United States. In 1971 the United
'States suffered a merchandise trade deficit of $2.3 billion, and this
deficit grew to $6.4 billion in 1972. By 1973 the effects of exchange
rate changes were becoming evident, and a $1 billion surplus was
recorded. The quadrupling of oil prices in 1973 forced the merchandise
trade balance into deficit for 1974 to the extent of $5.3 billion. By
contrast, 1975 marked a record $9.1 billion trade surplus for the United
States. This reversal in the U.S. trade position was a consequence
of several factors, including abundant U.S. harvests when foreign
crops failed and stagnant domestic demand for imports during the
recent recession. But a reversal of these dimensions surely would not
have come about without the exchange rate changes that have occurred
since 1971.
The Exchange Rate Arrangement8 Agreed To In Kingston
Released in Kingston was the text of the proposed new Article IV
of the IMF's charter, the article specifying the obligations of members regarding exchange rate arrangements. One of the chief obstacles
to agreement on reform of the International Monetary Fund had
been a disagreement between the United States and France on the
right of member countries to let their currencies float. The United
States had insisted on the right to float in part because it is a large
country with most of its GNP generated by domestic transactions.
U.S. international trade constitutes only 18.5 percent of our total
output of goods. Thus, for the United States to expand or deflate
its economy in order to correct a trade or payments imbalance is far
less efficient than for, say, France whose combined exports and imports total 35 percent of GNP. Preserving the option to float within
the IMF is therefore critical to the United States.
The meeting of the heads of state of six industrial countries at
the Chateau de Rambouillet from November 15-17, 1975, produced
a compromise under which France relinquished its demand that the
members of the IMF pledge a general return to par value exchange
rates by a specific date. This compromise paved the way for the
Kingston agreement and adoption of an Article IV that preserves
the option to float for IMF members.
The philosophy behind the new Article IV is that stability in exchange markets is tenable only if it results from stability in underlying
economic and financial conditions. Furthermore, the goal of stability
should not be used as a rationale for imposing strictures on domestic
economies that would force nations to depart from their own individual objectives regarding employment and price levels. The proposed Article IV does allow for a general return to par values in the
event that countries with 85 percent of the voting power in the Fund
agree. Even if a general return to par values is voted sometime in

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the future, an individual country will still be able to elect to float;
that decision also can only be overturned by the Fund in the event
of an 85 percent majority vote. Since the United States will retain
over 20 percent of the voting power, it will under all circumstances
preserve its option to float. Legislation ratifying the Kingston agreement should provide for congressional approval in advance of any
decision by U.S. monetary authorities to return to a par value
exchange rate for the dollar.
The draft of the proposed Article IV obliges Fund members toAvoid manipulating exchange rates or the international
monetary system in order to prevent effective balance-ofpayments adjustment or in order to gain unfair competitive
advantage over other members.
Precisely what is an "unfair" competitive advantage is not defined,
but it would apparently result from intervention that depressed the
external value of a nation's currency in order to foster exports and
expand domestic employment. Apparently the drafters of the proposed Article IV did not feel compelled to include an injunction
against the opposite type of exchange rate manipulation. A country
with excess domestic demand could export some of its incipient
inflation by holding the exchange value of its currency at an artificially
high level.
The practical meaning of the strictures against exchange rate
manipulation must be that, except for brief periods of disruption,
the market must be allowed to determine what exchange rates are
appropriate. The choice is between the collective outcome of the decisions of thousands of exporters, importers, and investors, on the one
hand, and bargains struck by five or ten finance ministers, on the other
hand. Errors by the former private interests come as losses out of
their own pockets; errors on the part of officials tend to be sustained
by the expenditure of -billions of dollars worth of national treasure
and by the imposition of restrictions upon international transfers
of goods and capital.
The Treasury agrees with the Joint Economic Committee's view of
the respective roles of commercial interests and monetary authorities
in exchange markets. In answer to a question asking whether the
Treasury subscribed fully to the Joint Economic Committee recommendation on intervention in exchange markets cited on page 116
above, the Secretary responded as follows:
We agree fully that the purpose of these swaps should be
to finance market operations undertaken to counter disorderly conditions and not to influence the trend of exchange
rate movements. Swap positions should normally be reversed
in the short term-say, six months.

What Happens When The Dollar Appreciates?
Since 1971, when the post-World War II monetary system began
to fall apart, the foreign exchange value of the dollar, weighted according to the volume of trade with our major commercial partners,
has declined by some 10 or 12 percent. As noted above, this depreciation in the value of the dollar has helped stimulate sales of American

121
exports, has protected domestic industries from foreign competition,
has discouraged U.S. investment abroad, and has encouraged foreigners to buy financial assets and productive facilities in this country.
Although these exchange rate changes helped fuel the boom and accelerate the rate of inflation before the onset of the recent recession,
during 1975 the export sector lent considerable strength to the U.S.
economy. The question quite logically arises, therefore, will U.S'
official advocacy of a floating dollar reverse when, as will inevitably
happen sooner or later, the dollar begins to appreciate in exchange
markets and exporting becomes more difficult, the price of imports
decreases, and investment abroad becomes relatively more attractive?
The real economic consequences of a rise in the exchange value of
the dollar will vary depending upon what produces that rise. If the
dollar is strong internationally because wage rates have risen less in
the United States than in other countries and because the rate of inflation in this country is lower than in others, then dollar appreciation
will most likely only offset in part a competitive advantage that the
United States has already captured. On the other hand, if the appreciation is the result of capital inflows responding to higher interest
rates in the United States than abroad, a boom in the New York stock
market, or a faster growth rate in the United States than elsewhere,
the impact on output and employment in the United States will tend
to be more severe. In either case, however, the effects can be absorbed.
Merchandise exports and imports (including military equipment) are
equivalent to about 18.5 percent of U.S. output of goods. Dollar appreciation will have a marginal impact on that proportion. Moreover, the
Trade Act of 1974 liberalized the provisions for granting adjustment
assistance to workers, firms, and communities injured by import competition. If necessary, such assistance can be granted.
The benefits the United States has gained and is likely to realize
under the floating exchange rates substantially outweigh the prospective costs. The greatest single advantage is that floating rates have
freed the U.S. economy from politically imposed constraints on this
Nation's ability to compete internationally. While the market can be
influenced temporarily by major private transactions and official intervention, neither of these can easily displace the trend of exchange rate
developments. The market establishes rates impersonally and without
regard to the appeals of major industry groups or labor unions to their
respective governments. A decision by governments to allow exchange
rates to be determined by the interaction of supply and demand in the
market constitutes a decision by political authorities to keep hands
off. An agreement of this type is much the same as the resolve expressed
within the GATT to lay down guidelines under which governments
mutually agree to desist from certain trade practices defined as unfair.
Public authorities then largely withdraw and let the producers of
each member country compete equally in determining what the eventual outcome shall be regarding trade patterns and volume.
Legislation ratifying the amendments to the Fund Articles required
to implement the Kingston agreement should include instructions to
the U.S. monetary authorities specifying that intervention in exchange markets should be short-term, i.e., normally reversed in a matter of months, and should not attempt to alter the trend of exchange

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rates. Exchange markets may from time to time become disorderly
in reaction to abrupt changes in economic conditions or extreme uncertainty. Disorderly markets are characterized by an unusually low
volume of transactions and abnormally wide spreads between bid and
asked prices for at least some currencies, i.e., there is a heavy supply
of some currencies but virtually no purchasers, while other monies
are in strong demand but only small amounts are offered. When markets are disorderly exchange rates are likely to fluctuate erratically.
The purpose of intervention should be to combat disorder and to facilitate the efficient working of exchange markets. Monetary reform
legislation should include guidelines establishing for U.S. monetary
authorities the circumstances under which intervention may be desirable, and by contrast, the purposes for which intervention ought not be
used.

The Gold Accord
The IMF's Interim Committee agreed substantially on arrangements regarding gold last summer and announced their consensus on
August 31, 1975. It was the question of acknowledging the right of
IMF members to float that held up endorsement of a complete package
until January 1976. The gold agreement contains three major parts.
(a) The official price of gold will be abolished, members of the IMF
will no longer be required to use gold as a portion of their quota
contributions or in other payments to the Fund, and central banks
will be able to buy and sell gold at whatever price they choose. (b)
One-sixth or 25 million troy ounces of the IMF's gold will be sold in
the market over a four-year period. The profits, determined by the
difference between the sale price and the official price of about $42
per ounce, will be used to benefit developing countries. About 70 percent of these profits will be placed in a trust fund. This facility should
be used to subsidize the interest cost of regular IMF loans, given the
usual repayment criteria, to poor countries experiencing exceptional
payments deficits.2 The remainder of the profits will be distributed to
the developing country members of the IMF in proportion to their
quotas. (c) Another 25 million ounces of the Fund's gold will be sold
to members at the official price and in proportion to their current
quotas. This transfer is referred to as "restitution."
Abolition of the official price of gold and of the requirement that
members make certain gold payments to the IMF will require amendment of the Articles. According to the Bretton Woods Agreements Act
of 1945, U.S. approval of amendments to the Articles requires that the
proposed change be endorsed by a majority of both the House of Representatives and the Senate. Sales of gold for the benefit of developing
countries and restitution, on the other hand, do not require the formal
approval of the Congress. The Fund has under the existing Articles
the authority to sell gold in exchange for the currency of member
states. Thus, by interpreting broadly this authority, it can finance the
Trust Fund and accomplish restitution. Title to the gold being sold
2 Senators Ribicoff, Taft, and Fannin and Representatives C. Brown, G. Brown, and
Rousselot state: "It is the Treasury's understanding and intent that the Trust Fund be
administered with the same care and conditionality as the IMF's normal loan facilities.
Nonetheless, there are Indications that many other members of the IMFB view the Trust
Fund as a source of inexpensive loans not necessarily tied to balance-of-payments problems
or to efforts to correct those problems. The outcome of the debate Is far from certain."

123
is held by the IMF. Under the existing Articles, only a majority of
the Board of Executive Directors is needed to approve sales of gold
in order to "replenish" Fund holdings of national currencies. According to the revised Articles, however, the approval of countries holding
85 percent of the voting power in the Fund will be necessary to dispose
of the remaining two-thirds or 100 million troy ounces of IMF gold.3
Approximately 28 percent of the 25 million ounces of gold that is
scheduled for "restitution," or about 7 million ounces, will be distributed to developing countries, since this is their proportionate share
of total IMF quotas. Conseqcuently, about 32 million of the 50 million
ounces of gold that will be dispersed by the Fund will benefit developing countries either directly or indirectly.
In order to begin the process of diminishing the international monetary role of gold, and more immediately, to provide additional financial resources for the developing countries in 1976 as a substitute
for the expiring Special Oil Facility, Fund officials expect to begin gold
sales and establish the Trust Fund early this year. The distribution of
profits from gold sales both directly and through the Trust Fund, and
the restitution of gold to developing countries could yield a maximum
of $3 billion in additional funds for these nations over four years, or an
average of $750 million annually. Of course, if the market price of
gold declines substantially in the face of sales by the IMF, the additional funding available will be correspondingly reduced.
The primary reason the Fund is divesting itself of one-third of its
gold stock is to begin the process of replacing the gold with SDRs in
international reserve stocks. Supporting the market price of gold at
a high level would be contrary to this objective. Adjusting the schedule
of IMF gold sales according to the level of market prices would be
much the same as establishing an official floor under the market. The
market would then dictate the pace of sales. No such development
should be permitted, and under no circumstances should be the schedule of IMF sales be extended beyond the four-year period announced.
During the interim before the IMF Articles have been amended
to abolish the official price of gold, it will continue to be illegal for
monetary authorities of IMF member countries to purchase gold at
above $42 per ounce official price. The January 8 communique of the
Interim Committee states, "it is understood that the Bank for International Settlements would be able to bid in these [IMF gold] auctions."
While the Bank for International Settlements (BIS) is not a member
of the IMF or a monetary authority of any member country, it is controlled by the central banks of Fund members. The BIS may well
purchase some IMF gold for its own account, but if it acts as the agent
ofa.member's central bank, that members will be violating the existing
IMF Articles. The Secretary of the Treasury in his February 3, 1976,
letter to the Chairman of the Subcommittee on International Economics stated that:
The fund will not knowingly sell gold [at] above the official price to the monetary authorities, or the agents of
monetary authorities, of IMF countries prior to amendment
of the IMF Articles abolishing the official price of gold.
The use of gold in "regular" operations will require only a 70 percent majority.

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In answer to another question, the Secretary said:
We would expect the IMF to state, in connection with any
auctions, that it would not accept bids above the official price
from the monetary authorities, or the agents of monetary
authorities, of IMF member countries, and to request bidders
to specify the capacity in which they are bidding. We will
seek the inclusion of such a provision when details of auction
procedures are discussed in the Board (of Executive
Directors).
Under the amended IMF Articles, approval of countries with 85
percent of the voting power will be required before disposing of the
remaining two-thirds or 100 million ounces of Fund gold. Thus, such
a decision is being recognized as an important policy question, which
has not formally been the case in deciding upon sales of 25 million
ounces for the benefit of developing countries or in voting a similar
amount for "restitution." Although these decisions have in fact required virtual unanimity, they will be approved formally by a simple
majority in the Board of Executive Directors.
In the future the United States will have the capability to veto any
plan for further distribution of Fund gold. Since a decision of this
type will entail a policy choice rather than a day-to-day question of
Fund management, the legislation approving the proposed amendments to the IMF Articles should include a requirement to obtain
congressional approval before the Secretary of the Treasury instructs
the 6.S. Executive Director to the IMF to vote in favor of any proposed gold distribution.
COPING WITH OIL DEFiciTs

In 1975 the industrialized countries managed their external deficits
resulting from higher oil import costs far more successfully than was
expected. The countries of the Organization for Economic Cooperation
and Development (OECD) as a group narrowed their current account
deficits from $32.5 billion in the previous year to $5 billion. The United
States and Germany will achieve estimated surpluses of $12 billion
and $4 billion respectively. While energy conservation efforts have
had some impact on narrowing payments deficits, the economic slowdown in most of these countries was responsible for cutting further the
demand for energy imports. At the same time, exports to the Organization of Petroleum Exporting Countries (OPEC), particularly
from the larger industrialized countries, rose far more rapidly than
had been projected. While recovery is likely to increase the deficits of
the industrialized countries, concern that these countries would be unable to meet the strains caused by the quadrupling of world oil prices
during 1973 has now abated.
The $25 billion Financial Support Fund, first proposed by the
Secretary of State in November 1974 and finally negotiated by the
OECD in March 1975, was designed to insure that no industrialized
country would be threatened with financial collapse. as a result of increased. oil import costs. This Fund, which would provide collective

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guarantees for member borrowings, contingent upon acceptable programs for adjusting to higher oil costs, has yet to be endorsed by Congress. During the first two years after the oil shock some countries like
the United Kingdom, Denmark, and Italy had extraordinary financing
demands arising from their oil deficits; they were able to draw on the
IMF's Oil Facility. Today's financing problems in the OECD countries, however, are more the consequence of other structural problems
rather than high oil import costs. Italy's recent foreign exchange losses,
for example, result largely from political uncertainties and a recent
surge of inflation. To meet such financing needs regular IMF drawing privileges should be exhausted before the proposed Financial Support Fund would be utilized.
Potential OPEC surpluses, though still large, no longer seem unmanageable. OPEC nations have shown themselves far more capable
than expected of accelerating their development plans. In Iran, with a
prospective deficit for 1976, imports are already approaching a limit.
As recovery in the industrialized economies proceeds, increased demand
for oil could lead to higher prices and thus potential larger surpluses.
OPEC countries have diversified their investments more than was
initially expected. The global financial system bolstered by flexible exchange rates has financed during the past two years an enormous increase in payments deficits. OPEC has limited ability to wreak havoc
on exchange markets.
The burden of the adjustment to higher oil import costs has fallen
most heavily on the developing countries that have no oil. Their
cumulative current account deficit rose from $2.5 billion in 1973 to
$17.5 billion in 1974 and further to an estimated $27 billion in 1975.
Not only have these countries had to adjust to the quadrupled price of
oil imports, but they have suffered a sharp decline in export earnings
due to the economic slowdown in the industrial world. They have been
forced to scale down development plans made in the boom years (197273) of skyrocketing commodity prices.
Economic recovery in the industrialized nations will help the developing countries by increasing the demand for the latters' exports.
But poor countries' payments gap will be among the serious economic
problems of 1976. Although the two-year authority for the IMF's
Oil Facility ended in December 1975; countries that have not exhausted their normal IMF drawing rights can turn to the Fund to
meet their payments deficits. At its January meeting in Jamaica, the
IMF Interim Committee agreed to expand regular credit lines by 45
percent to tide countries over until the recently approved quota increase has been ratified by national legislatures. The Interim Committee also agreed to move ahead promptly with the sale of IMF gold
and provide some resources for developing countries (as described
above). The Trust Fund, which will be established outside the formal
IMF structure, will use the profits of IMF gold sales, as well as contributions from member countries, to subsidize interest rates on regular

IMF drawings.
During 1974 and 1975 the richer developing countries borrowed
heavily in the Eurodollar market and in the United States against

67-573 0 - 76 - 9

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reserves accumulated during the previous years of high commodity
export prices. As a result of these borrowings, albeit at relatively high
interest rates, many of these countries have been able to put off the
ultimate adjustment to higher oil import costs. Now, still faced with
a problem of curtailing development expenditures in favor of current
consumption, these countries must begin repaying the heavy borrowings. Existing private loans to countries unable to repay are likely
to be extended. But because the outlook for the developing countries
will not be reversed as quickly as it has been in the industrial nations,
there is likely to be a substantial drop in new private bank lending,
even to the richer developing countries.
Poor countries will be under great pressure to make the adjustments
to higher oil prices and to use their available resources as efficiently
as possible. Failure to do so can lead to economic stagnation, famine,
and widespread political crises. The danger for the rich countries is
that large scale default by the poor could send tremors through financial mar ets or lead to demands for large infusions of aid to maintain
political stability. This situation will require very careful monitoring
in an effort to prevent such a deterioration.
COMMT=MENT TO CONCESSIONAL AID

Economic growth in the poor countries is unlikely to proceed satisfactorily without maintaining the flow of real resources from the
industrialized world. During 1975 the International Bank for Reconstruction and Development (IBRD) opened its Third Window to
provide loans for development at interest rates below those for regular World Bank projects but higher than the concessionary rates of
the International Development Association (IDA). Several OPEC
countries and industrial nations have already contributed to this facility. The OPEC nations have agreed to establish a development fund
of $800 million to assist the poorest countries; this fund is in addition
to individual bilateral development aid efforts. Some rich countries
are considering donating to poor countries the profits from the sale
of gold "restituted" to them under the recent IMF agreement. This
example, if followed by the United States and other countries, could
achieve the goal of giving all the windfall gains from the sale of gold
to those who need it most.4
'The Minority Members of the Joint Economic Committee, except Senator Javits,
state: "We are unaware of any countries who have announced their willingness to donate
their share of the profits, but even if there are such countries, we dissent from implication
that the United States should donate to the poorest countries our share of the gold returned
to us under the recent IMF agreement. To give these profits away confuses the issue of
international monetary reform and development aid, and also fragments our own aid
program Into a noncoordinated complex of regular and special aid efforts. In fact, we
believe that development aid should be restricted to fewer individual authorization and
appropriation measures, so that the true dimensions of our total aid program can be
better understood. In this regard, we share the sentiments of the Senate Report on the
Foreign Assistance Appropriations Bill of 1975: 'in the past, an unnecessary fragmentation
of U.S. foreign assistance has been the source of much confusion and has led many to
charge that the U.S. is doing less than its fair share in responding to the needs of the
wVorlds less fortunate nations.
. . . Much of the confusion arises from the fact that major components of U.S.
foreign assistance are considered in several different authorization and appropriations bills.
In annual budget presentations, the multitude of agencies and departments which administer foreign assistance programs quite naturally justify only their part of the total
program, often neglecting its relation to the whole. This separate and selective justification
of individual programs frequently blinds the Congress and the American public to the
totality of foreign assistance.'

127
The proliferation of aid-giving efforts does not eliminate the need
for commitment of additional funds for low-interest development
loans. The Joint Economic Committee has continually supported concessional assistance to properly managed multilateral development
banks. Congress should promptly appropriate its fiscal '76 contributions to IDA and to the Asian, African, and Inter-American Development Banks.
This year donor countries will be deciding on their commitments to
the Fifth Replenishment for IDA. Even to maintain the current level
of IDA disbursements without providing for an increase in the transfer of real resources will require a 50 to 60 percent increase over the
$4.5 billion total to be paid in under the Fourth Replenishment. Because of the tremendous need to increase IDA's resources, a coordinated effort should be made to expend the number of countries
contributing to IDA to include those which are newly rich. Kuwait
participated in the Fourth IDA Replenishment. It is hoped that other
wealthy OPEC states will contribute to the Fifth Replenishment.
Criteria need to be established now for the progressive inclusion of
richer developing countries in the process of assisting the poorest.
The United States will not make the last of its payments to the
Fourth Replenishment until fiscal 1979, two years after other IDA
donors. Our appropriations were delayed on the Third Replenishment, and the U.S. contribution was deliberately stretched out over
an additional year for the Fourth Replenishment. Whether or not
the United States is willing to use additional resources-such as
profits from the sale of its share of IMF gold "restitution"-to catch
up with other donors, it must now consider the appropriate level of
U.S. participation in the Fifth Replenishment so as not to delay the
aid-giving efforts of other countries.

The President, in consultation with the Congress, should
forthwith determine the appropriate level of U.S. participation in the Fifth Replenishment of the International Development Association. 5 6
CONSUMER-PRODUCER

CONFERENCES

OPEC's price revolution has led to increasing demands by the poor
countries for other changes in the international economic system to
benefit them. Even though the quadrupling of oil prices has hurt the
poor countries severely, they have allied themselves with OPEC in a
joint campaign for a so-called "new international economic order,"
s The Minority Members of the Joint Economic Committee, except Senator Javits, state:
"This section of the Report, dealing with the International Development Association, does
not accurately reflect our views on development aid. First, we would stress the fact that
the United States has consistently supported channelling a portion of our aid through
well-managed regional developemnt banks such as the Asian Development Bank, the International Development Bank, etc. Second, we believe that the new-found wealth of the oil
rich countries places a responsibility on them to assume a greater share of the aid burden;
this point should enter into any calculation of how much development aid should be
undertaken by this country."
6Senator Fannin and Representative C. Brown state: "We favor the phase-out of
foreign aid on an instrument of national policy. We would support a multilateral approach
through the use of development banks and private investment, which would better develop
foreign markets and establish improved overall trade opportunities for the developing
nations."

128
including higher prices for their export commodities. To provide a
forum for discussion of energy prices as well as related issues, the
Conference on International Economic Cooperation (CIEC) was
established last fall. With a limited number of industrial countries,
oil producers, and developing countries represented, the CIEC has
been organized into four commissions on the following subjects: (1)
energy, (2) other raw materials, (3) development problems, and (4)
financial aspects of the other three issues.
Of particular concern to the developing countries has been the
vulnerability of raw materials prices to market fluctuations. The recent
decline of most commodity prices during the recession, combined with
high and inflexible prices or oil, has heightened their concern. Unable to achieve the shift in the terms of trade that OPEC has obtained,
the other developing countries want commodity price stabilization
agreements to protect them from sharp declines in the prices of their
exports.
in May 1975, the Secretary of State announced that the United
States would be willing to consider commodity price stabilization
agreements on a case-by-case basis. Since then the President has announced that he will seek congressional ratification of U.S. participation in the International Tin Agreement. The United States, however,
has decided not to participate in the recent cocoa agreement and has
asked for renegotiations because its pricing provisions are considered
too rigid. If the United States is going to consider commodity agreements individually, Congress must still determine what criteria should
be used to determine U.S. participation.
The Joint Economic Committee believes that commodity price agreements that fix prices at artificially high levels or that seek to transfer
resources would not be successful over the long run in providing the
development benefits sought by poor countries. Instead, such agreements would lead to substitution of alternative products, uneconomic
investments, and threats of politically motivated disruption of trade
By contrast, commodity agreements whose objective is to stabilize
prices around an underlying price trend could facilitate planning both
in developed and developing countries and help control inflation.
Identifying and agreeing upon this underlying trend of market equilibrium prices, however, is almost impossible. The problems of policing
agreements on commodity prices are even greater. The required production controls and the financing of buffer stocks would be a continuous source of dispute. Furthermore, commodity price arrangements, and even an integrated commodity scheme such as that proposed by the United Nations Committee on Trade and Development
(UNCTAD), would tend to benefit rich raw material producing countries, including the United States, rather than the poorest with scant
resource endowments.
While recognizing the difficulties price fluctuations can cause exporters, the United States has favored efforts to provide compensation
for lost export earnings rather than fix prices. In his September speech
to the Seventh United Nations Special Session, the Secretary of State
announced U.S. support for expansion of the IMF Compensatory

129
Financing Facility. The IMF Facility compensates for export losses
due to forces beyond a member country's control and is based on the
expectation that such earnings declines will be reversed. The Facility's
use has been limited, and the IMF's Executive Board has now moved
to liberalize the borrowing requirements. However, this Facility is not
meant to provide long-term transfers of resources to poor countries.
Trade liberalization and concessional aid should be the sources of
permanent benefits for the poor countries. In January 1976, Generalized Special Preferences (GSP) went into effect. Under this scheme,
tariffs on many manufactured goods from developing countries were
unilaterally cut. The United States is now participating in a new round
of multilateral trade negotiations (MTN) in Geneva. In his September U.N. speech, the Secretary of State also recommends the elimination of duties on topical products exported from many poor countries.
Reduction of tariffs on processed raw materials would likewise help by
permitting the poor to develop local industries.
As a means to protect poor countries from sharp fluctuations in export earnings, the United States should continue to
support the expansion of the IMF Compensatory Financing
Facility rather than endorse commodity price stabilization
agreements. The United States should reduce tariffs on topical
products and processed raw materials. 7 8
INTERNATIONAL ENERGY POLICY

Since OPEC's quadrupling of world oil prices, the United States
has sought to bring together the industrialized consuming nations in
the International Energy Agency (IEA) to present a common front
in dealing with the oil producers. With the passage of the Energy
Policy and Conservation Act in December 1975, the Congress ratified
U.S. participation in the TEA and its emergency oil sharing program.
In January the TEA Governing Board agreed to a long-term energy
program which provides for cooperation in research and development,
a joint program of guarantees for development of synthetic and conventional fuels, continued efforts at energy conservation., and maintenance of an oil floor price (termed a minimum safeguard price).
While a framework for cooperation in energy planning is essential,
the effort to set a price floor under oil imports is ill-advised. In a report issued in June 1975, the International Economics Subcommittee
opposed the oil floor price as an inappropriate means for encouraging
development of conventional energy resources. The Secretary of State
has indicated that he will come to Congress if implementation of the
oil price floor becomes necessary. While, an oil floor price level of $7
per barrel (f.o.b. Persian Gulf) does not threaten to lock the United
States into particularly high-cost energy, the floor price could be
raised by a majority vote of the IEA Governing Board to a higher
7 Senator Humphrey states: "I believe that such reductions should be undertaken only
after careful analysis of the impact of such action on American farmers or raw materials
producers, and on a cgse-bv-cqse basis."
8Representetive Gillis Long states: "This entire question needs further study by the
appropriate Congressional committees before I can endorse such sweeping proposals."

130
level. Since a floor could encourage investment that would otherwise
be uneconomic, the Congress should reject the proposed floor price
agreements
Now that some unity among consumer countries has been achieved,
this bloc has turned to a dialogue with the oil producers in the Conference for International Economic Cooperation as discussed above.
This conference will place the major consumers face-toface with
OPEC to discuss energy problems. The producers continue to seek a
longer term guaranteed return for their resources. With the renewal of
economic growth in the industrialized countries, demand for energy
will rise despite accelerated domestic energy development and conservation efforts. Under these conditions, some countries may find it
difficult to resist demands to fix prices as an assurance against sharp
short-term increases. But since real energy prices can be expected to
fall over the long run, any U.S. commitment to import predetermined
quantities of OPEC crude or to insure continued high prices under a
commodity agreement would be counter to our national interest.
The United States should not support an energy agreement
between oil producers and consumers which would fix or index
future energy prices. Moreover, the Congress should reject
legislation to implement the oil floor price recently agreed to
in the International Energy Agency Governing Board.' 0
AcHnIEVING WoRLD

FOOD

SECURITY

The United States continues to support the proposal to eliminate
world hunger made by the Secretary of State at the World Food Conference in Rome in November 1974. Among other things, this proposal
included the establishment of an international system of nationally
held grain reserves. These reserves were meant primarily to insure the
availability of adequate resources to meet potential shortfalls in food
grains production and particularly to insure against famine in the
poorest developing countries. With improved -harvests the United
States has already begun to replenish its stocks. U.S. stockpiles alone
are not enough; an international system which will provide for the
broadest participation of producting nations and clear guidelines for
building up and distributing reserves is essential.
The United States, as a major food producer, remains committed
not only to providing food aid for the neediest but also to assisting
rural development programs that will lead to greater agricultural
production worldwide. The United States has concentrated its aid
efforts on technical assistance and research on fertilizer, storage, transportation, and pest control. The OPEC nations also have proposed a
Senators Taft and Fannin and Representatives C. Brown, G. Brown, and Rousselot
state: "Phase deregulation of energy prices would provide further incentives for both
production and conservation of energy."
10 Representative Gillis Long states: "While I oppose energy price fixing as a general
rule, I support the concept of a floor under international oil prices. This will guarantee a
minimum price for oil that will encourage increased production-and should oil prices
fall in future years, the international price floor will help stabilize prices. I do not wish
to associate myself with any specific international oil price to be used as the floor price,
but I do support the concept."

131
new International Fund for Agricultural Development. The United
States has indicated its willingness to participate in this Fund when
other contributions are forthcoming.

The United States should continue to seek early establishment of an international system of nationally held grain
reserves. It should also seek speedy establishment of the
International Fund for Agricultural Development*
Senator Humphrey states: "Looking ahead, there is need for clearer perspective in our
international economic policies. Too often in recent years we have moved with timidity and
uncertainty. Events in the past five years have dramatized the growing interdependence
of world economies. In the past, America, Europe, and Japan have pursued Independent
economic policies, often at each others' expense, as was Illustrated in the worldwide boom
of 1971 and 1972 and the recession that followed."
"The United States, Europe, and Japan must make a greater effort to coordinate their
domestic economic policies. I believe the United States should take greater Initiative to
develop such coordination, working closely with the OECD. We have some precedents, of
course, but it seems to me essential to discuss mutually acceptable policies for energy,
food, employment, trade, and inflation. Such coordination within OECD can also serve to
bring about a more rapid growth of markets for both OECD and Third World products.
"I also think America has a significant role to play in creating a strategy to meet the
development needs of the poorest nations. The cornerstone of that policy should be increased food production.
"Industrialized nations now have a unique opportunity to increase agriculture production in the developing world through the International Agricultural Development Fund.
But unless we act promptly, world food deficits might run as high as 71.6 tons of grain
by 1986. If prompt action is taken, it can be held as low as 15.8 million tons.
"The development of a self-sufficient food policy for the Third World should be accompanied by creation of a world food policy in which the United States plays a major role.
The major components of this policy, in my view, must be International food reserves and
a full and free exchange of food production and marketing information."

SUPPLEMENTAL VIEWS OF VICE CHAIRMAN
WRIGHT PATMAN
For the most part, I am in full agreement with the findings and
recommendations of this Report which reflects the high degree of leadership and competency of the Committee Chairman and the Committee staff.
In particular, I wish to applaud the Committee for recommending
significant structural changes in the Federal Reserve. Among these
are proposals to reduce the terms of Federal Reserve Board members
from 14 to 7 years, to provide representation for labor, agriculture,
consumers and small business on the Board, to require that Federal
Reserve operations be funded through congressional appropriations
and that the system undergo periodic audits by the General Accounting Office.
These are meaningful, long-needed steps to assure that monetary
policy is conducted in a way which is consistent with congressionally
determined economic goals. To these recommendations for structural
change I would add only the recommendation that the term of Federal
Reserve Board Chairman be made coterminous with that of the President so that appointment can be made as soon as possible following inauguration. Ideally, the terms of Board members should be reduced
from 14 to 5 years so that the President can appoint and the Senate can
confirm a majority of Board members during the President's first term.
However, a reduction of these terms by one-half, from 14 to 7 years, as
the Report recommends, draws very close to this target.
I wish I could say at this point that the recommendations of the
Report regarding the Federal Reserve and other Federal agencies
having responsibility for the Nation's banking industry were complete.
Unfortunately, the recent series of major bank failures and public
disclosure by the press that a large number of major banking organizations are on the problem lists of regulatory agencies makes this
impossible.
It is obvious that to a very large extent, these banking disasters and
the poor financial condition of many other large banks reveals serious
inadequacies. In the way in which all of the Nation's banks, subject to
Federal regulation and insurance, are examined and supervised. The
failure of the Franklin National Bank of New York, U.S. National
Bank of San Diego, Hamilton National Bank of Chattanooga and
others, and the fact that more than 60 of the Nation's holding company banks are on the problem lists of bank regulatory agencies, along
with several hundred other banks, makes additional reform legislation
imperative.
At the very least, the Report's legislative recommendation to require
the Federal Reserve to undergo periodic and full-scale audits, including
bank examination activities, must be extended to all activities of the
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133
other Federal bank regulatory agencies; namely, the Office of the
Comptroller of the Currency, and the Federal Deposit Insurance
Corporation.
Just as it is of vital importance that the Federal Reserve be accountable for its activities and expenditures through full-scale GAO audits,
so too is it equally important that the other banking agencies be held
fully accountable to Congress and the public through comprehensive
GAO audits which would include a thorough evaluation of examination procedures, findings, and corrective actions.
Equally important, the issue of inadequate bank regulations goes directly to the question of conflict of interest among the directors and
officers of the Federal Reserve district banks, the Office of Comptroller
of the Currency and the Federal Deposit Insurance Corporation.
Each Federal Reserve district bank has a nine-member board composed of three "A" class directors representing member banks of the
district, three "B" directors representing commerce and industry in
the district, and three "C" class directors representing the public interest in the district.
All of the "A" and "B" directors are elected by member banks of the
district. "B" directors are prohibited from being an officer, director, or
employee of a bank.
"C" directors are elected by the Federal Reserve Board and are prohibited from being an officer, director, or employee of a bank or owning
stock.
Although "B" directors are prohibited from being an officer, director, or employee of a bank, they nevertheless can own bank stock. In
reality, "B" directors represent some of the largest borrowers of the
member banks which elected them to the Federal Reserve Board. The
relationship is made even closer in instances when "B" directors own
stock in, and are employed by companies having substantial loans or
lines of credit outstanding with banks represented by "A" directors
on the Federal Reserve bank board.
The conflict of interest potential is tremendous. For example, the
Federal Reserve district banks have primary responsibility for examination and supervision of all bank holding companies and all State
chartered member banks in their respective districts.
Thus, the "A" directors and their "B" director friends control the
board of the Federal Reserve district banks which have primary responsibility for examining and supervising the commercial banks
which employ the "A" directors and provide loans to the companies
employing the "B" directors.
An example of these classic conflict-of-interest situations is provided by none other than David Rockefeller, Chairman of the Board
of the Chase Manhattan Corporation, parent holding company of the
Nation's third largest commercial bank. Rockefeller sits as a director
of the New York Federal Reserve Bank whose examiners have placed
Chase Manhattan on the Federal Reserve's list of problem bank holding companies because of poor management and inadequate
capitalization.
Another example is presented by J. Wallace Ely, President of Security Trust Company, owned by the Security New York State Corporation, a holding company located in Rochester. Ely is a director on

134
the board of the Buffalo Branch of the New York Federal Reserve
Bank. His holding company is also on the Federal Reserve problem
list.
The responsibility for examination and supervision of bank holding
companies and State chartered member banks is shared by the Federal Reserve district banks with the Federal Reserve Board in cases
involving problem banking organizations. Structural conflict-of-interest situations similar to the ones indicated above, extend to the Federal Reserve Board through the Federal Advisory Council. The Council, as its label implies, is designed to assist the Federal Reserve Board
in its deliberations. Twelve representatives of the banking industry,
one from each of the Federal Reserve districts, comprise the Council.
Conflict of interest on this level within the System is exemplified by
cases like that of Richard D. Hill, Chairman of the Board of the First
National Bank of Boston, a bank holding company which is on the
Federal Reserve's problem list. Another case is that or James F. Bodine, President and Chief Operations Office of the First Pennsylvania
Corporation, of Philadelphia, which is also on the problem list. The
corporation is the parent of the First Pennsylvania Bank of Philadel phia. Both men are members of the Advisory Council.
Conflict-of-interest situations some times extend directly to the very
bank examiners employed by bank regulatory agencies. For instance,
Richard Spencer was among the examiners of the staff of the Office of
the Comptroller of the Currency assigned to evaluate the condition of
U.S. National Bank of San Diego during the 1960's when millions were
being funneled out of that institution in fraudulent loans. Spencer was
appointed a vice president of the bank in 1973, the same year it collapsed as the result of one of the biggest banking scandals of the
century.
The possibility of conflict-of-interest extends to the highest levels
of bank regulatory agencies, as indicated by histories of J. Dewey
Daane, former Federal Reserve Board Member, and James Smith, currently Comptroller of the Currency.
Daane retired from the Federal Reserve Board in February of 1974.
Three months later he was elected vice chairman and a director of the
Commerce Union Bank of Nashville, the 114th largest commercial
bank in the Nation. In 1975, he was elected vice chairman of the Tennessee Valley Bancorp, parent bank holding company of Commerce
Union.
Smith assumed his present position after serving as a lobbyist for
the American Bankers Association.
The cases of Spencer, Daane, and Smith make it clear that more than
thorough evaluation of bank examination and supervisory practices by
the GAO is needed. To avoid even the appearance of conflict of interest, all retiring officers, directors and employees of Federal bank regulatory agencies should be prohibited from employment by banking
organizations for a period of at least two years after leaving the
agencies.
A note of caution is warranted regarding the Committee's recommendation for use of variable interest rate residential mortgages as
an alternative to fixed-rate mortgages in order to stimulate housing
production and homeownership for low- and moderate-income fam-

135
ilies. Such proposals provide that interest rates on such loans would
rise as the cost of money increases, regardless of whether the income
of the borrower has improved. In such a situation, the home loan borrowers are required to shoulder the risk of future market uncertainties with little, if any, expertise to guide them. By the same token, lenders can make such loans on a virtually risk-free basis since they are
assured that mortgage interest rates on outstanding loans will increase
as the market interest rates and the cost of money to them increases.
The result can prove disastrous for low- and moderate-income families who could find themselves having to cut back on expenditures for
essential items in order to meet mortgage payments or even be forced
to sell homes they no longer can afford.
Finally, I wish to congratulate the Committee for proposing establishment of a National Development Bank to provide adequate credit
on reasonable terms for State and local governments and for business in depressed areas. Adoption of this proposal, which calls for
creation of a Federal bank as a lender of last resort for priority area
borrowers, is long overdue. The chronic financial problems of State
and local governments, small business and industry, and the urgent
need for low- and moderate-income family housing graphically illustrate the need for such an institution.

SUPPLEMENTAL VIEWS OF SENATOR
WILLIAM PROXMIRE
I have no disagreement with the general thrust of the Committee's
Economic Report, but I disagree about methods and policies.
The country needs a higher rate of economic growth than the President's policies call for. Unemployment is excessive and will continue
to be excessive even if the President's goals are met. I must reduce it
further and more rapidly than he proposes. Inflation, which has not
been caused by too much money chasing too few goods as in periods
of wartime and shortages, must be reduced to historical American
levels. This can be done by attacking inflation where it exists-in
sticky industrial prices and excessive energy costs.
Thus while I agree with the Report with respect to goals-faster
growth, less unemployment, lower inflation-I advocate* a different
prescription to achieve them.
DON'T SPEND MORE

There is too much emphasis in the Report on spending-on the
fiscal stimulus. The $412 to $418 billion outlay level recommended by
the Report is excessive. President Ford's proposal of $394.2 is much
preferable, and even it could be cut by a critical congressional analysis of the individual programs from the bottom up. While I am not
specifying any particular cuts, it is public knowledge that several
billion was added to the defense budget above the figure recommended
by the Office of Management and Budget, foreign military aid is often
counterproductive, and many civilian programs have not met the
test of efficiency or effectiveness.
Government at all levels is too big. Further, anyone who has examined the budget requests of a particular department or agency
knows that 5 to 10 percent of the funds could be cut without harming
the efficiency of the agency and, in fact, would most likely improve
its performance.
In addition, many of the specific proposals to increase the budget
and produce jobs are self-defeating. They cost too much to produce
a job-often as high as $25,000-there is a considerable substitution
effect, especially in the public service job area, and much of the proposed spending advocated in the Report would take effect two or three
years after the need exists.
A CoNsTRucTIvE ALTERNATIVE
What then do we advocate to stimulate economic growth, reduce
employment, and inflation, and get the economy moving again?
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137
A tight budget and strict fiscal policy-which can reduce inflationary expectations-must be accompanied by a much more stimulative monetary policy. Further, budgetary savings should also be
returned to the public and taxpayer through larger personal and
business income tax cuts than the Report proposes. Tax cuts are as
stimulative as spending increases and have the virtue of letting private individuals rather than Government make more of the basic
economic decisions. Strict budget limitations also make it possible for
a far more expansive monetary policy without rekindling inflation
than would otherwise be the case.
Such policies should have the desired effect of stimulating the
economy, reducing unemployment, lowering interest rates, and reducing price levels.
What additional government stimulus is needed should be done
through an emergency housing program where a job can be created
for about $500 instead of the $8,000 to $9,000 cost of a public service
job, the $16,000 cost of a highway job, or the $25.000 cost of many
public works jobs. A small interest subsidy for housing has the additional advantage that 98 to 99 percent of the total cost of the house
comes from the private sector. In addition, unlike added spending
for weapons and many public works, housing fulfills a basic family
need and the funds are committed and spent quickly.
CONCLUSION
For all these reasons I much prefer holding the line or cutting
the President's budget while stimulating the economy through an
easing of monetary policy and tax cuts, plus small additional outlays
($300 million would stimulate 500 new units and produce 1. million
jobs) for housing.
This is the effective and noninflationary way of getting the economy
moving again.

SUPPLEMENTAL VIEWS OF SENATOR
ABRAHAM RIBICOFF
Although I generally support most of the recommendations in the
Committee's Annual Report, I am presently opposed to the establishment of a system of international and national commodity reserves
which would be promoted by a three-year nonrecourse price support
program.
In my view, agricultural price supports are anticompetitive and lead
to higher food prices for the consumer.
Our farmers have the ability to compete in domestic and international markets without raising loan levels considerably above their
present level.
I am pleased that the Committee has given high priority to the enactment of sound tax reform legislation. The Senate Finance Committee plans to consider this important issue this year.
Many of the tax expenditures and preferences need study and review. Each needs to be looked at on an individual basis.
Only after this is done can the Federal tax system be made more
equitable for our citizens.
(138)

SUPPLEMENTAL VIEWS OF SENATOR
LLOYD BENTSEN
I believe that the Joint Economic Committee in its Annual Report
has, once again, focused much better than the President on the need to
put America back to work and get our nation's economy back on the
path to longrun stable economic growth with balanced budgets.
But I am sufficiently at variance with some of the Committee's
recommendation that I do not feel that I can associate with the Report
in its entirety.
There are areas in the Report, however, where I am in substantial
agreement with the Committee's recommendations.
MONETARY POLICY

The Nation's recovery from the 1974-75 recession will be inadequate
unless long-term interest rates fall enough to spur business investment
and new homebuilding. These two sectors have led us out of past recessions, yet during this recovery both remain in the doldrums, with real
business investment in 1976 predicted to be 10 percent below the 1974
level and new homebuilding actually declining for each of the past
four months. Recovery in these sectors is highly sensitive to longterm interest rates, and these remain too close to their 1975 peaks.
Therefore, I agree with the Committee's recommendation that monetary policy this year be conducted with a view not only toward
keeping down short-term interest rates, but, more important toward
bringing down long-term rates.
YouTr

EMPLOYMENT

High and prolonged unemployment among young people will impose a tremendous cost to the Nation long after we return to full employment. Without jobs during the first years after high school or
college, young people lose the priceless opportunity to develop job
skills, to experiment with different jobs, and to become productive,
wage-earning, tax-paying members of our society. As a result, many
will become wedded to a life of dependency, on welfare, with no ties to
the dreams and aspirations of the vast majority of Americans.
Our young people are desperately in need of help, and I believe that
the Committee's recommendation that Congress develop a comprehensive program aimed at the job needs of youths is an excellent one.
In particular, I believe that a Youth Employment Service within
the United States Employment Service, or any appropriate agency,
is needed to bring job counseling and job placement services to young
(139)

140
people when they are still in school and just entering the labor force,
and long before they get trapped in low-skilled, boring, poorly paying
jobs-or even worse, experience years of debilitating unemploymentsimply because they never had the chance to talk with a trained guidance counselor or placement officer. I have introduced a bill which
would establish a Youth Employment Service, and I welcome the
Committee's support.
STIMULUATING JOBS IN THE PRIVATE SECTOR

As the Committee points out, over 85 percent of American workers
depend on a vigorous and healthy private sector for their jobs. Stimulating recovery in the private sector is the best way of providing unemployed Americans with the jobs that use their skills and fulfill their
job goals.
An employment tax credit, as discussed in the Report, would be an
excellent way of stimulating the development of new jobs in the
private sector, and I wish the Committee had made a forceful recommendation of an employment tax credit as a major priority of this
Congress. In my supplemental views to the Committee's Midyear Review, I urged adoption of an employment tax credit similar to the
one discussed by the Committee in this Report, and I reiterate what
I said then:
We should concentrate on providing more incentives for
the creation of new jobs in the private sector. Private jobs
do not have to be phased out during a recovery; the Treasury
cost is much less than comparable public service jobs; and by
expanding the supply of goods and services they help dampen
inflationary pressures.
An employment tax credit, allowed to any firm which increased its employment in 1976 over its 1975 or 1974 peak,
would be a very effective incentive for firms to accelerate their
hiring plans, especially during a recovery. A credit equal to
10 percent of the wages of each new position, up to a maximum of $800 per year, could create up to 400,000 more jobs in
1976 than we would otherwise have, at a cost to the Treasury
of less than $600 million.
To reduce the likelihood of firms receiving windfall tax
credits for hiring workers that would have been hired anyway, an employment tax credit bill should also specify that
firms must hire the long-term unemployed to qualify for the
credit, and that firms must plow the credit back into new
capital investment.
Even with the possibility of some people being hired who
would have been hired in the absence of the credit the average
Treasury cost per job through an employment tax credit is
$1,400 compared with perhaps $8,000 for public service jobs.
I favor a continuation and improvement of the public service
job program. However, we should not neglect opportunities to
move the unemployed back into permanent private employment and to do so as quickly as possible.

141
Finally, I believe we must reform the tax system to provide more
incentives and resources for business investment in new productive
capacity-especially during the remainder of this decade-than are
contained in the recommendations in Chapter VI of the Committee
Report. My Subcommittee on Financial Markets of the Senate Finance
Committee is currently engaged in a review of the effect of the tax
system on investment incentives to determine what changes are
needed.

67-573 0 - 76 - 10

SUPPLEMENTAL VIEWS OF SENATOR
EDWARD M. KENNEDY
I generally support the goals and recommendations of the Committee's Annual Report, but I believe it is worthwhile to state these
separate views on two key aspects of the issues addressed by the Report.
TmE

EcoNomIc MYTHs OF 1976

To a person in public life, nothing is more distressing than the massive cynicism, hostility and outright distrust of government that is
threatening our Nation's basic faith and confidence today.
A recent issue of the widely respected journal, The Public Interest,
was devoted to a survey of the state of the American Commonwealth
in 1976. One distinguished contributor, Harvard's newest professor
and our former ambassador to the United Nations, Daniel Patrick
Moynihan, puts the thought as darkly as any I have heard. "Democracy
on the American model," he says, "has simply no relevance to the
future. America is where the world was going in the past, not where
it is goin in the future."
I would venture that our economic troubles are at the heart of these
pessimistic views about the condition of America and its implications
for our leadership in the world.
Nothing is more responsibile for this pessimism in recent years than
the inability of government to keep the economy on an even keel, with
stable prices, with jobs for all who want them, with reasonable interest
rates. with taxes people can afford to pay.
Second only to the responsibility of government to maintain law
and order is government's responsibility to keep the economy strong
and healthy, by establishing the framework that allows private enterprise and human progress to flourish side by side.
The most difficult economic challenge we face is not jobs, or prices,
or taxes, or interest rates, or energy, or agricultural policy, or foreign
trade. The most difficult challenge is a psychological one-the challenge to overcome the pervasive economic myths that undermine the
people's confidence in the economy and that cripple our efforts to deal
sensibly and realistically with basic human needs like prices and
unemployment.
One of the President Kennedy's most famous speeches was the
commencement address he gave at Yale University in 1962. He spoke
about the misconceptions and distortions that plagued the economic
policies of his Administration. His remarks helped to dispel the fog
and cobwebs. They led to a better public understanding of the complex
economic issues of the 1960's, and helped to set the stage for what
became the longest uninterrupted period of economic growth and
price stability in our history.
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143
We can do the same today. But first we have to dispel the distortions
of our own day and generation. The answers of the Sixties will not
work. But nothing else will work either unless, as many distinguished
economists have argued, we clear the air and dispel the fog that keeps
our modern economy sick.
In testimony before our Committee, Professor Walter Heller of
Minnesota, put it well. Professor Heller, a former Chairman of the
Council of Economic Advisers, spoke of his concern over what he
called "the distressing tendency in recent years to miseducate and,
wittingly or unwittingly, mislead the American people on vital issues
of economic policy and fact.
Professor Heller persuasively articulated several key examples
which may be summarized as follows:
The first and most damaging misconception is the myth of the
mushrooming Federal government. The Federal budget is an easy
target to hit on many things. But one of them is not the growth of
Federal spending. Of course, federal spending has grown in recent
years. But so has the economy. The only valid comparison is the ratio
of spending to GNP. And that proportion has remained almost precisely constant, at about 20% ever since the early 1950's.
The most serious problem of federal spending in the past was not
the fact of growth, but the fact that the growth was undirected. The
new congressional budget reform procedures of the past two years
have brought this problem under control. The process is working, and
I am confident that Congress intends to keep it working well in future
years.
We should reject the counsel of those whose policy on federal spending is to cut for the sake of cutting. Asking the federal government
to go back to the spending levels of earlier, simpler eras of American
life is like asking Detroit to go back to the Model T. It can't be done.
And even if it could, we wouldn't like the ride.
The second myth is the so-called "crushing burden of federal debt."
In 1950, when the country emerged from World War II, the federal
debt was an incredible 82 percent of the Nation's GNP. In 1974, the
level was a modest 26 percent. To hear the Treasury describe it, you
might think Washington was wallowing in red ink. But the truth is
vastly different. The debt is at a very manageable level now, and it is
going to stay that way.
A third and related myth is the myth of the dangerous deficit. The
federal deficits of recent years are a symptom of our sick economy and
the serious recession of the past two years. Those deficits have been
swollen by the inability of our economic policies to bring the economy
promptly back to health.
We will have a $70 billion deficit for the present fiscal year, the
largest deficit in our history. But if the economy were at full employment now, the deficit would be close to zero. All of that $70 billion in
red ink is accounted for by the recession and unemployment. If America were back at work, the Treasury would be taking in $50 billion
more in revenues. It would be paying out $15 billion less in unemployment compensation, and $5 billion less in related programs like Medicaid and food stamps, whose costs are higher because of the recession.
The point is obvious. The way to cut the deficit is to put America
back to work. It is time for this country to provide jobs for those who

144
want them. The dole is bad for the health of the human spirit, and it
is just as bad for the health of the American economy.
A fourth myth, one we are hearing much about today, is that the
Social Security System is nearly bankrupt. They say we need a payroll tax increase at once, to save the system for the future.
There are problems with Social Security. But they are long range
problems that cannot be cured overnight. They cannot be cured by a
sudden tax increase on workers' wages, an increase that might well
make today's recession worse.
We must take appropriate steps to keep the Social Security System
sound. But we must also avoid the sort of loose-talk and precipitate
proposals that scare the daylights out of senior citizens, the millions
of men and women whose lifeline is their Social Security check.
A fifth myth is the myth of America's declining role in the world
economy. Our economy is still the strongest in the world. Of course,
the nations left prostrate after World War H have made a strong
recovery. They are growing stronger every year. Of course, some can
point to apple-and-orange figures comparing American investment
and American rates of growth with those of other nations in other
states of development.
Other comparisons are more meaningful and reliable. In recent
years, the United States has actually been growing more competitive
compared to other industrial nations. Our unit labor costs rose only
10 percent from 1970-74, at a time when the costs were rising 29 percent for Canada, 90 percent for Germany, and 100 percent for Japan:
America's productivity is still the highest in the world. France and
Germany may be the economic wonders of modern Europe, but theirz
productivity is still only 80 percent of the level we have achieved at
home.
In drawing the lessons from these myths and their perpetuation,
Professor Heller made an additional telling comment:
One hesitates to fix the blame for this retrograde movement in the economic education of the American public.
Much of it stems, as it has from time immemorial. from the
self-serving efforts of particular groups to "sell' particular
policies, positions, preferences, and prejudices. Note how
many of these positions serve a bias toward smaller government, cutbacks in federal spending, tax reductions for business, preferential tax treatment of capital investments and
restrictive fiscal and monetary policies.
We need a new and wiser public understanding of our economy.
We need policies capable of meeting the Nation's basic goals-and
capable of getting the Nation there by responsible steps that do not
make inflation worse, that do not jeopardize the recovery from the
recession, and that do not impose unfair burdens on New England or
any other section of the country.
No one wins if there is constant antagonism between Congress and
the Administration. It is through cooperation, not confrontation,
that we can best achieve the goals we seek.
We can put America back to work. We can end the tragedy of unemployment for millions of our people. We can restore the people's
confidence, and bring the economy back to health. We can do all the

145
other things we have to do in areas like health and education, housing
and crime control, transportation and the environment.
There is no cause for serious pessimism about our country's future,
so long as we can debate the issues responsibly, and find persons
willing at every level to join in the search for answers adequate to our
modern needs.
TAX REFoRmr-DREAu

OR REALrry

I also endorse the important thrust of the Committee's major recommendation on tax reform. But what I welcome most of all is the
signal by the Committee that it will be active this year in the drive
for tax reform.
Two prominent economists, Joseph Pechman and George Break,
entitled their recent book, "Tax Reform: The Impossible Dream?"
In view of the fate of tax reform efforts by Congress in recent years,
the question cannot be regarded as simply part of a catchy title. The
question is a serious one. A review of the tax legislation enacted since
the 1969 Tax Reform Act by and large would suggest that the dream
is in fact an impossible one.
True, Congress has enacted badly needed tax reductions for low and
middle income workers. But apart from these worthwhile structural
actions, the tax legislation passed by Congress in the past six years
has generally been the antithesis of tax reform. Indeed, a major tax
reform bill could be enacted if we simply repealed the tax legislationother than the structural tax reductions-enacted since 1969.
However, the Senate is now presented with the opportunity to turn
"tax reform" from an impossible dream into reality. My purpose here
is to outline the constructive steps that I believe, can and should be
taken to give American taxpayers the reality of true tax reform.
THm

OPPORTUNT

FOR TAX REFORM

Tax reform is one of the most important domestic issues facing the
United States. Perhaps the most important legislation this session of
Congress will adopt in 1976 is the major tax bill now pending in the
Senate Finance Committee-H.R. 10612, "The Tax Reform Act of
1975." That bill passed the House of Representatives last December.
It represents a significant and valuable cornerstone on which the
Senate can build. It contains provisions to reform our income tax laws
in many critical areas. In several respects, the measures contained in
the House bill are close to the reforms that many of us in the Senate
have recommended previously, such as the provisions dealing with
tax shelters and the minimum tax. Even here, however, the provisions
can and should be strengthened and improved.
In the coming weeks, I intend to provide detailed and specific suggestions to insure that the use of syndicated "tax shelters" will be
eliminated and that the minimum tax will realize its full potential for
insuring that wealthy Americans pay their fair share of income taxes.
In addition, I will propose that the Senate add significant reforms in
other areas of tax injustice that are in glaring need of change-most
notably the taxation of capital gains on transfers at death or by gift.

146
But I hope we can join now in recognizing that the House-passed
bill represents a solid step in the direction of tax reform-a step that
gives us a real chance this year for a constructive effort to improve
our federal income tax system. If all we do is extend the tax reductions scheduled to expire this June, the effort will have failed. The
opportunity is at hand to do a better job. We owe it to the American
people-especially the lower and middle income workers who pay a
disproportionate share of total income taxes-to see that-the opportunity is not wasted.
THE NEED FOR TAX REFORM

The data that regularly issue forth from the Treasury and other
sources provide continuing evidence of the need for tax reform. In
1973, over 3,000 persons with adjusted gross incomes in excess of
$50,000 paid no Federal income tax at all. This privileged group
represents the wealthiest one-half of one percent of all families in the
United States. Yet they paid not one dime in Federal income tax.
What do these data-drawn from dry statistical tables-mean to
the average wage earner in real everyday terms? The data mean that
average working families making $7,500 to $15,000 per year must pay
higher taxes than they should have to pay for Federal programs, or
that they must accept reduced Federal services. The average taxpayer
does not have to be-and should not be-put to this choice.
The House Ways and Means Committee examined actual returns
filed by some of these wealthy "nontaxpayers." The picture painted
by these returns constitutes a source of discouragement and cynicism
for the average worker, who pays his income taxes at the rates prescribed by the Internal Revenue Code. Consider these actual cases:
A corporate executive with $155,000 of income paid no taxes
because of tax shelters in movies;
A lawyer with $151,000 of income paid no taxes because of tax
shelters in cattle; and
A businessman with $262,000 and a doctor with $105,000 of income paid no taxes because of tax shelters in real estate.
Of course, the operation of income tax preferences and tax shelters
is not limited to those instances in which the combination of tax
preferences produces no Federal tax liability. These cases are only the
tip of the iceberg. Beneath the surface is the massive corrosive influence of many more thousands of wealthy individuals, paying tax
at effective rates equal to/or lower than those paid by the lowest
bracket wage earners in the United States. Other examples tell the
story:The corporate executive with $448,000 of income who paid tax
at an effective rate of 3/10 of 1 percent;
The stockbroker with $181,000 of income who paid tax at an
effective rate of one-half of one percent; and
The corporate executive with $1,875,000 of income who paid
tax at an effective rate of 5.3 percent.
Nor is the need for income tax reform confined to the individual
income tax. The corporate income tax system reveals equally great
inequities. Basically, the corporate income tax provides for a 48 per-

147
cent rate on net profits by large corporations-historically those with
taxable incomes above $25,000. Until last year, small corporationsthose with taxable income below $25,000-were taxed at a 22 percent
rate. But information filed with the Securities and Exchange Commission reveals how far the reality of the corporate income tax
deviated from this norm.
For example, in 1974, Westinghouse, one of the nine largest corporations in the country, paid tax on its net profits at a rate of only
16.1 percent-25 percent less than the rate applicable to small
corporations.
The corporate income tax not only fails to operate fairly between
large and small companies-it is not even equitable between companies competing in the same market. For example, among banks in
1974, the effective tax rates ranged from 35.7 percent paid by Citicorp,
to 18.1 percent paid by Manufacturers Hanover, to 3.6 percent paid
by Wells Fargo.
In the weeks ahead, as the Senate moves more deeply into the process
of considering the tax reform bill before it, I shall present in more
concrete detail the case for Federal income tax reform. But these data,
even in this brief form, demonstrate clearly the pressing need for tax
reform.
AcHIEVING TAX REFORM

The Senate has the opportunity for tax reform and the need is clear.
Concrete and constructive actions are necessary, however, if tax reform is to become a reality.
First, we must articulate and apply clear and consistent principles
in voting for tax reform measures.
Taxation has come to represent a dense and virtually incomprehensible subject to the average American. But it is essential that we
speak plainly and simply to the American people if we are to achieve
any significant tax reform. The language of the tax laws may be sophisticated and complex, but the principles of tax reform need not
be incomprehensible to the ordinary citizen who pays the tax.
We can best achieve this goal if we reaffirm the two basic principles of tax fairness that govern our Federal income tax system:
Persons with the same amount of net income should pay the
same amount of Federal income tax;
Persons with greater amounts of net income should make a
relatively greater tax contribution for public needs than persons
with lesser amounts of income.
These are simple, clear and straightforward propositions. If the
Senate will test proposals that come before it in light of these basic
principles, we can readily demonstrate to the American people whether
or not we are moving in the direction of real tax reform.
I do not expect us to achieve a perfect income tax system in the
current tax hill. I am not urging a utopian approach to tax reform
that, upon closer examination, holds out no real hope for progress.
But it is helpful to use these principles as signposts to guide us in
our tax reform deliberations. We can test particular proposals against
them to determine whether they constitute genuine "tax reform."

148
If the Senate accepts these principles, then it must reject the cynicism that says tax reform "means anything that can muster 51 votes
in the Senate." To call a tax measure "tax reform" does not make
it so. A measure that secures 51 votes on the Senate floor is not tax
reform if it moves in the opposite direction from the principles just
stated. And a measure that gets only one Senator's vote remains a
true "tax reform" if it would move toward fulfillment of those
principles.
The American people understand that not every change in the tax
laws is "tax reform." To create a new tax loophole and then call it
tax reform turns the dream of tax reform into a nightmare of tax
loopholes. This kind of tax change actually shortchanges millions of
average taxpayers, and makes them pay more taxes than they would
if the laws were fair and just.
In the coming weeks, the Senate Finance Committee will conduct
its hearings and markup of the pending bill. I hope that all Senators
will make known to the Committee their views on tax reform, and
that all Senators will measure the results of the Committee action
against the standards of true "tax reform"-standards that have
ided congressional deliberations on those occasions in the past when
Congress has enacted legislation that has produced a fairer tax
system.
I also hope that Senators concerned about this issue will be prepared to work together on the Senate floor, to ensure that the bill
that finally passes the Senate is worthy of the title "tax reform."
In this connection, it is important that there be ample opportunity
for 'adequate discussion and debate on the Senate floor. Since the
present tax reductions expire on June 30, it is clear that legislation
must be enacted before that date. The Senate and the American people
are entitled to an unhurried, reflective, and constructive discussion
by the full Senate on this bill.
Second, we mtust develop concrete proposals to build upon tax
refirm efforts begun by the House. In the weeks ahead, I will offer
to the Finance Committee and to the full Senate the specific actions
that I believe are essential to ensure that H.R. 10612 emerges as an
affective tax reform measure.
In broad terms, the proposals will fall into four categories. In the
first category are measures that the Senate should add to the House
bill where it has failed to take needed action, such as taxation of
gains at death or upon gifts; repeal of the maximum tax on earned
income; and reforms to ensure that the major oil companies and the
large multinational corporations pay their fair share of taxes, including changes to restrict the use of the deduction for intangible drilling
and development expenses and to end the abuses of deferral of U.S.
income tax on income earned abroad by such corporations.
In the second category are proposals to improve basically sound
actions adopted by the House. We should tighten the tax shelter rules,
strengthen the minimum tax, and make the investment and child care
credits more equitable and effective.
In the third category are provisions passed by the House that the
Senate should eliminate from the bill, such as the expansion of the
use of capital losses against ordinary income.

149
Finally, we must reject proposals to amend the bill-advanced
principally in the so-called energy tax bill and by the President and
his tax advisers-for the addition of new tax loopholes, such as the
massive tax relief for corporate dividend. payments.
Third, we must use the reformed Congregsional budget process to
enhance the cause of taxc reform. The Budget Reform Act of 1974
formally stated what had been obvious for some time-that the Federal income tax system is itself a vehicle for vast Federal spending
programs. These "tax expenditures," in the aggregate, disbursing
more than $100 billion in Federal funds each year. These tax expenditure programs operate in the same areas as direct expenditures for
regular budget items. Therefore, the 1974 Budget Reform Act properly
recognized that Congress must deal with both tax expenditures and
direct expenditures if it is to achieve effective oversight and control
over total federal spending.
The relevance of budget reform to tax reform is clear when we
recognize that almost, every tax reform adopted by the House reuresents a change in a Federal tax expenditure. In some instances, the
tax expenditure is reduced in amount. In others, it is increased. But
the central point is that when the Senate considers tax reform, it is
considering changes in the levels of tax expenditures.
This point has some important implications for tax reform efforts
this year. It is essential that Members of this Committee work closely
with the Senate Budget Committee to ensure that the First Budget
Resolution provides significant tax reform, and that tax reform proposals presented in the Finance Committee or on the Senate floor
are consistent with the Resolution.
In 1975, in its first-year of operation, the Senate Budget Committee moved with extraordinary effectiveness to hold down direct expenditures, and I hope the Committee will do the same this year
with respect to tax expenditures. During the past decade, direct Federal spending rose 130 percent. But in the same period,' spending via
the tax system increased even faster, rising by 180 percent. Tax
expenditures now amount to $100 billion, on top of direct spending
of $400 billion. Total Federal spending is thus $500 billion a year.
If we are concerned about the level of Federal spending, we cannot
deal only with direct expenditures. We also have to be concerned with
tax expenditures, which are running out of control today and have
been out of control for many years.
The Budget Committee clearly understands the need. The Committee signaled its intent during debate on the Second Concurrent Resolution for Fiscal Year 1976 last November. Although that Resolution
did not deal with tax expenditures, the Committee Report states the
Committee's intention to deal with the issue this year:
The Committee believes the Congress should address the
issue of major tax reform to promote prosperity and eliminate serious inequities * * *
Most tax expenditures are enacted for indefinite periods.
of time and resemble permanent authority for direct expenditures in that they continue in effect year after year at a substantial cost of budgetary resources until they are amended
or terminated 'by specific legislation. Therefore, tax ex-

150
penditures have important long term impacts on the Federal
budget which the Committee will take into account in future
resolutions.
The Committee will be examining both tax expenditures
and the operations of off-budget agencies. Thus, the Committee will be able to evaluate the economic effects of congressional action whether or not the action results in a specific
budget outlay. These additional dimensions will allow the
Committee to take a long-range comprehensive view of national priorities in arriving at its First Budget Resolution for
Fiscal Year 1977.
And, during the Senate floor debate, the Committee Chairman,
Senator Muskie, emphasized the Committee's "intent to deal forcefully with tax expenditures in the future."
My hope is that the First Concurrent Budget Resolution in fiscal
year 1977 will provide for a significant reduction in tax expenditures.
It should begin with the $1.5 billion reduction in the House bill, and
it should reflect substantial additional reductions to be achieved in
the Senate bill.
My preliminary estimate at this time is that a realistic target for
a reduction in tax expenditures, reflecting responsible Senate action
on tax reform, would be in the vicinity of a $2.5 to $3 billion for calendar year 1977, representing additional Senate reforms of $1 to $1.5 billion over and above the House bill. This calendar year figure for
reduction in tax expenditures would translate into somewhat lower figure in the Budget Resolution, which applies to the fiscal year.'
With respect to many of the proposed reforms, the revenue effects
in future years will be substantially larger than in fiscal year 1977,
as the reforms are gradually phased in or achieve their full impact.2
The fact that tax reform involves changes in tax expenditures also
requires that in evaluating a particular tax reform proposal, we ask
not only whether it represents a stop in the direction of greater tax
equity, but also whether the change in Federal spending policy is
sound. The same questions must be asked of tax expenditure programs
as we routinely ask of direct expenditure programs:
(1) Is Federal financial aid needed?
(2) Do the benefits of the program justify its costs?
(3) Are the benefits equitably distributed among income
groups?
Some of the tax expenditures that will be considered in the current
tax reform bill fail all three tests. In these cases, the Federal tax
expenditure should be eliminated. The DISC provision appears to
be a prime example in this category, although further study may be
appropriate with respect to continuing it for a limited time for small
businesses, until a more effective small business export incentive can
'The figure is lower in the Budget Resolution because not all of the calendar
year 1977
revenues from tax reforms will be received
in
fiscal year 1977.
full $1.5 billion
in
House-passed reductions will be received in fiscal year 1977, sinceThe
the
reforms
will take
effect on January 1, 1976. But the additional Senate reforms will probably
take
effect
on
Jan. 1, 1977. Only part of the revenues from such reforms will be received
in
the fiscal
year, which ends on Sept. 30, 1977; the remainder will be received
in
the
fiscal
year,
which
ends on Sept. 30, 1977; the remainder will
be
received in fiscal year 1978.
2 With respect to capital gains at death for example, the current
tax expenditure
is
estimated at $7.28 billion for fiscal 1977, but a realistic reform
would
in
all likelihood
produce negligible revenues in fiscal 1977 and more modest revenues
in future years.

151
be developed. The argument presented to the House-that the repeal
of DISC will result in a loss of jobs for American workers-now
appears to have been a red herring, designed to divert attention from
the inequity and inefficiency of the DISC provision.
In other cases, it may be appropriate to reduce or eliminate the tax
expenditure program-because it costs outweight its benefits, or because its benefits are distributed unfairly-but part or all of the revenues saved need to be added to more efficient and more equitable
Federal programs in the same budget areas. For example, tax shelters
for real estate should be eliminated because they are a source of serious
tax inequity and because there is substantial evidence that the tax
expenditures involved in real estate tax shelters are inefficient and
counter-productive. But, the revenues gained by reducing this tax
expenditure must be committed by Congress to direct spending programs for the construction and rehabilitation of low and middle income
housing. This simultaneous action is required to meet our housing
needs and to ensure that needed tax reform does not produce unnecessary disruption in the construction industry.
It is important that we amend the House bill by developing stronger
antitax shelter rules ready to go into effect. But the House bill wisely
delays until 1981 the imposition of its tax shelter rules in the case of
the construction of low income housing. In the interim, Congress should
require HUD to develop and submit an alternative direct spending
program to encourage construction and rehabilitation of low income
housing.
We should not support any proposal to change the present tax benefits for low income families until a better alternative program is designed. We can then use the revenues gained from closing down tax
shelters to help fund more effective and more equitable methods of
providing low income housing. In this way, tax reform and spending
reform can go hand in hand.
In other instances, the tax expenditure techniques may offer the
best means of providing Federal financial assistance. I believe that the
investment credit is one such provision. But changes can and must be
made to ensure that this tax expenditure does not operate to violate tax
equity. I will propose changes in the investment tax credit-to make
it refundable and to ensure that it becomes a more effective and equitable Federal program to encourage needed investment, and to ensure
it will not be a source of tax inequity. I will propose similar improvements in the tax credit for child care expenses.
MAKING TAX REFoRM A REALITY

In sum, the necessary ingredients for the Senate to convert the
"impossible dream" of tax reform into a reality are present. We have
the opportunity, the need, and the tools to do the job. The Committee's
Annual Report is an excellent guidepost for the effort. The Senate
should act this year to fulfill the long-neglected promise of tax reform
to the American people.

SUPPLEMENTAL VIEWS OF REPRESENTATIVE
WILLIAM S. MOORHEAD
What this country needs-and needs desperately-is a good synthetic fuels program. The problem is not technological. At today's
OPEC oil prices commercially competitive synthetic fuels can be
produced.
The problem and its solution are both economic.
Many businessmen would be willing to invest in the synthetic fuel
production plants were it not for the fear that the OPEC countries
might arbitrarily drop their oil prices which would make the synthetic fuel no longer competitive and wipe out an investment of many
millions of dollars. One way of protecting the investment in synthetic
fuel plants would be to set an international floor price for oil. I agree
with the Committee that this is the wrong thing to do.
The correct economic solution would be for the Government by contract commitment or otherwise to protect the synthetic fuel investment from the very remote possibility of an OPEC drop in oil prices.
This could be done under the principles of the Defense Production
Act. To that end, I have introduced H.R. 11494 which would amend
the Defense Production Act to include synthetic fuel in the same
manner as other vital commodities are covered.
This would give all U.S. industries, large or small, the financial confidence-security if you like-they need to spend the vast amounts of
money required for investment in producing and developing synthetic
fuels.
Last year President Ford said Americans needed many American
coal gasification plants.
Today, a year later. we do not have any even under construction.
Europe and South Africa have in operation coal gasification plants
built with American technology.
We also need plants to produce synthetic gasoline made from nonpetroleum feedstocks. The technology exists today to make large quantities of methanol and benzene from coal and solid waste. Methanol,
for example, is much more widely used in Europe where plants exist
to produce it. Without modification, today's automobiles can operate
with 5 percent of their fuel consisting of methanol at an estimated
retail cost of 40¢ per gallon. Why is our government so unwilling
to make a commitment similar to European nations, or even establish a climate whereby such U.S. industries and the financial community could join hands to produce synthetic fuels on a large scale?
The time for talk is long past. What is needed now is action.
We can reduce U.S. dependence on Arab oil earlier than 1985, despite this report's assertion to the contrary, if we are willing to make
the commitment. And we must do so. Failure to take such a step will
imnerial our countrv-economically, militarily, and perhaps even
politically.
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SUPPLEMENTAL VIEWS OF REPRESENTATIVE
GILLIS LONG
In my ppinion, this Report presents an accurate assessment of the
present condition of the economy, as well as the alternatives for national economic policy-and I believe the Committee's primary recommendations will help achieve the kind of healthy, sustained economic recovery America needs.
Of course, the American economy is a very complex creature. No
single set of policy initiatives can be easily and quickly designated
as 'the answer," because there are no easy answers. Policies to stimulate recovery always run the risk of stimulating too much. Policies
to curb inflation always run the risk of rejuvenating recessionary
pressures. And policies to reduce unemployment rapidly always run
the risk of too much government intervention.
Considering all of this, I still subscribe to the general approach used
by the JEC for its goals and recommendations for 1976 and 1977.
Certainly the Committee's goals represent a higher level of aspirations for America than the Administration's statement of economic
policy as set forth in the Economic Report of the President. By the
President's own admission, the Administration's policies would keep
inflation at 6 percent while the goal of the JEC's policies is to bring
the inflation rate down to between 4 and 5 percent. Where the Administration's policies should achieve a minimum real gross national
product (GNP) growth between 4 and 6 percent, the JEC's policies
should achieve a minimum real GNP growth rate of 7 percent. Where
the Administration's policies would keep unemployment at or above
7 percent, the JEC's policies should reduce unemployment to between
6 and 7 percent. The levels of the deficit would be approximately the
same under either set of policies. Clearly, the Committee's program
is superior.
I believe that the recommendations to curb inflation will be more
successful than those delineated by the Administration. Considering
the Administration's admitted concern with inflation, I thought it
was especially notable that the President's Economic Renort made
no mention whatsoever of the role of the Council on Wage Price
Stability. I concur with the JEC that the Council can be one of the
most important inflation-fighters in Government, and I support its
continued activity wholeheartedly.
I believe the tax policy set forth in Chapter III is prudent at this
time. The continuation of the tax cut we enacted last December is
necessary for the remainder of 1976 at least. As the year progresses,
we will continue to monitor the progress of the recovery and, if further cuts are needed for 1977. we will consider the questions of size
and duration later this vear when more data will be available on the
outlook for 1977. Certainly this is not only a prudent tax policy, but
a necessarily cautious one as well.
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The JEC's policy on jobs and unemployment is also a prudent one
considering the present levels of high unemployment, considering the
fact that unemployment has been extremely high for well over a year,
and considering that unemployment under the Administration's program is not expected to fall below 6 percent in the next several years.
Given these considerations, the Joint Economic Committee could
easily have opted for a much larger program that would have reduced
unemployment at a faster rate. However, the JEC chose a more cautious path because of budgetary and inflationary considerations.
While I have serious reservations about the magnitude and duration
of public works jobs programs (the primary emphasis should be on the
private sector rather than the public sector), I believe the JEC policy
is a far better alternative than the Administration program, which
is more welfare and fewer jobs. The social and economic costs of unemployment are devastating. I believe one of the most crucial factors
for a durable recovery will be a policy to put our people back to
work-to take them off the welfare and food stamp rolls and return
them to the tax rolls. This also will have beneficial effects on reducing
inflation.
For these reasons, I agree with the view of Arthur Burns, Chairman
of the Federal Reserve Board that when the private sector is unable
to provide enough jobs to keep unemployment at or below 4 percent,
the Federal Government has an obligation to become an employer of
last resort. That is precisely what the JEC is recommending, and I
believe our policy is an appropriate one.
Also in this regard, I am quite pleased to see that the Joint Economic Committee has recommended an in-depth review of eligibility
requirements for unemployment assistance. I think this is a proper
response to allegations of abuses in the unemployment assistance
system.
It also is important to take a long-range look at our economic prospects. The overwhelming majority of the witnesses who were questioned on this matter indicated that while the outlook for 1976 is
respectable (largely due to an economic upturn in the first half of
1976), the outlook for 1977 will be quite bleak if the Administration's
$395 billion budget for fiscal 1977 is adopted. Real GNP will plummet,
unemployment will soar, and inflation and the deficit will experience
little change from their present levels. As the Report states, we must
take actions in 1976 to help ensure sustained recovery in 1977. I believe
the JEC's recommendations will help achieve this goal.
Still, I would like to reiterate a caveat I made in last year's Joint
Economic Committee Report. I always am concerned about the degree to which the Federal Government intervenes in the private sector. In my own opinion, the success of the Nation's economic recovery
hinges on the ability of the private business sector to participate fully
in the recovery, so that the Nation can benefit from the many resources
and capabilities of our free enterprise system. I am one who believes
that the Federal Government cannot do everything, that the efforts of
State and local bodies are vital to the success of any program, and
that all Federal programs must be carefully constructed to preserve
the integrity and autonomy of State and local governmental unity.

155
While I have this general reservation about Federal intervention, I
believe that the condition of the economy is such that government support is warranted to some degree at this time. I believe prudent policy
will dictate that we watch the economy carefully, that we take a relatively cautious approach consistent with achieving a healthy recovery
and, as recovery appears stronger and more sustained that government
intervention should gradually recede.
The public works jobs programs in this Report manifest that kind
of cautious approach by using so-called "trigger mechanisms" that
automatically turn on and turn off programs as .needs indicate. I am
referring particularly to the programs that add on jobs as the unemployment rate climbs and terminate jobs as the unemployment rate
falls.
The same is true of our tax policy. The Committee has taken a
cautious approach that allows for consideration of the progress of the
recovery before recommending tax cuts for 1977. In this manner, we
can evaluate the state of the recovery before making decisions.
In sum, I believe the JEC has a sounder policy than the Administration for assuring the Nation's economic recovery. Primary emphasis
is on making the recovery healthy and sustainable so that the private
sector can assume the burden of the recovery as rapidly as possible. We
have designed a set of policies that will achieve specific goals: Reducing inflation, the deficit, and unemployment; keeping a watchful eye
on Federal spending and intervention; and increasing the levels of
real GNP growth. I am reasonably confident that these policies can
and will do the job, especially if they are expeditiously implemented,
carefully monitored, reviewed and revised as needed to meet changing
circumstances, and given wholehearted support by the American
people.

Minority Views
on the
1976
Economic Report of the President

67-573 0 - 76 - 11

CONTENTS
Page

I. Introduction--------------------------------------------------II. Economic outlook----------------------------------------------III. Monetary policy-----------------------------------------------IV. Fiscal policy---------------------------------------------------

V. Employment ------------------------------------------VI. Energy ----------------------------------------------------VIL Capital formation--------------------------------------------VIII. State and local governments------------------------------------Supplemental views of Senator Jacob K. Javits -----------------------Additional views of Senator Charles H. Percy-------------------------Additional views of Representative Garry Brown-----------------------Additional views of Representative John H. Rousselot------------------(159)

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205

I. INTRODUCTION
Optimism about the solid recovery which is now underway must be tempered somewhat by concern for the
lingering unemployment of Americans who have been
affected by the recent recession. And, the current M1/2
percent rate of inflation, though vastly improved over
last year's pace, still hurts us all, especially those on
fixed incomes. Many Americans have found it extremely
difficult to maintain their standard of living. For example,
after adjustment for inflation the per capita income for
Americans has stayed virtually constant for the last two
years.
But, as we seek to solve these serious problems and
to advance our economic growth, we must avoid creating
even more difficult problems in the future.
From a business point of view, there have also been
strains during the last decade. One need only read constituent mail to get an idea of the problems facing small
businesses in America today. The problems range from
inflation, how to comply with new and often costly Federal regulations, how to obtain credit when lenders have
tightened their guidelines, to how to survive in a stop
an go economy.
In this Bicentennial Year, it seems appropriate to affirm, or question, the presuppositions on which our
founding fathers based their idea of the American Revolution. In a passage which sounds surprisingly modern,
Alexander Hamilton pointed out that those governments
which foster commerce had a more viable economic
base whereas in some of the most fertile and populous
territories of Europe, governments which had failed to
foster commerce could boast but a meager base. (The
Federalist No. XII)
The same proposition holds true two hundred years
later. Commerce is best fostered in an atmosphere of
stability and certainty, and yet we have seen sharp gyrations in economic activity, and a legislative and regulatory climate that is stifling business. Commerce is at its
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best in an atmosphere where a business can expand
normally to meet market needs, and yet the energy crisis
and certain legislated costs, such as mandatory pollution
control equipment, have eaten substantially into the ability of businesses to increase production or reduce costs.
Although individual studies have been made of the
dollar costs of pollution control equipment, safety improvements, pension reform, new energy costs, and tax
increases (especially local taxes), we suspect that the
total costs which have been imposed on businesses as a
result of these measures exceed the sum of their parts.
Rapid change, whether induced by inflation or new government regulations, is usually accompanied by transitional inefficiencies as businesses and consumers attempt
to adjust to their new and uncertain situation.
One purpose of government is to induce stability
which is needed to foster increased business activity and,
hence, higher employment and wages. And yet, it is often
government which is the cause of unfavorable changes in
our society. As we review the economic policies which
are needed for 1976 and beyond, we strongly believe that
a conscious effort must be made to restrict those areas
which should be controlled by government and expand
those which can best be left to private markets. In this
context, we share the concern expressed in the President's *budget that, "* * * if we continue to increase
Government's share of our economy, we will have no
choice but to raise taxes and will, in the process, dampen
further the forces of competition, risk, and reward that
have served us so well."

II. ECONOMIC OUTLOOK
Following a year of difficult transition from recession to recovery,
the economy has turned around definitively and there is general agreement among economists that 1976 will see significant improvements
in employment, production, and prices without additional government
stimulus. History will probably record that the 1974-75 recession bottomed out in March 1975. Since then, figures on total nonagricultural
jobs, industrial production, output per man-hour, layoff rates and
gross national product (GNP) compare very favorably with the
experience of previous postwar recovery periods.
We disagree with those who maintain that this recovery is a fragile
one. With the exception of the two points discussed below, the economy
is following a typical recovery pattern, and there is every reason to
believe that the next 12 months will see sustained economic growth,
with record numbers being added to the job totals.
In only two respects is this recovery different from earlier expansion periods. Manufacturing and trade inventories usually start falling
some months prior to the trough of a recession, and usually bottom
out within six months after the trough. In 1975, however, liquidation
of total business inventories, which were at usually high levels at the
peak of economic activity, continued well into the fourth quarter of
last year. With regard to inventories of durable goods, the adjustment
process has lagged even further, with liquidation not really beginning
until the economy reached its trough in the spring of 1975.
This process of inventory adjustment has tended to mask the underlying movement of real final sales, since businesses have continued to
draw down their inventories to meet any demand until there have been
clear signs of a resurgence in new orders. However, economists generally expect that, with the increase in orders (which has already
begun for durable goods), and with potentially powerful inventory
stockbuilding on the horizon, this sets the stage for high levels of
production during 1976.
Monetary aggregates have also departed from the average experience of previous recession and early recovery periods., Since July, the
' Representative Rousselot states: "It is by no means clear that 'monetary aggregates
have . . . departed from the average experience of previous recession and early recovery
periods.' If Ml growth is measured over a one-year period beginning at the trough of the
recession, which occurred during the first quarter of 1975, the figure for Ml growth
following this recession would be almost exactly 5 percent (measured from mid-February
1975 to mid-February 1976), according to statistics provided by the Federal Reserve Bank
of St. Louis. Comparable figures from the past four recovery periods, calculated from
data supplied by the Federal Reserve System, are as follows: 3rd qtr. 1954 to 3rd otr.
1955, 3.2% : 2nd qtr. 1958 to 2nd qtr. 1959, 4.5% : Ist qtr. 1961 to ist qtr. 1962, 3.1%;
3rd qtr. 1970 to 3rd qtr. 1971, 6.5%. Thus, it will be observed that the Ml growth rate
of about 5 percent during the present recovery falls well within the range of previous experience. I would also observe that while the real growth of Ml, when considered along
with velocity, Is a relevant measure of the behavior of monetary aggregates, to use real.
rather than nominal, money supply growth as a target, would cause the same mischief
which results from using interest rate targets; namely, extremely rapid inflation or
deflation."

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rate of growth of cash plus demand deposits (Ml) has been only 2.5
percent on an annual basis, which, after being adjusted for inflation,
amounts to an actual decrease in the real money supply. Positive real
growth of Ml is more typical of this stage of a recovery. (A more
complete discussion of monetary policy appears below.) At the present
time, we feel confident that the technical reasons given by the Federal
Reserve System for the different behavior of the rate of money growth
are sufficient to justify the present course of Federal Reserve System
policy.
Our major concern is that massive borrowing by the Federal Government could have the result of crowding out private borrowers from
the capital markets, at a time when the private sector needs will be
growing strongly. Such a situation should be avoided. For this reason,
as we explain below, we believe that the Federal Reserve System must
continue to be flexible in its use of monetary aggregates in achieving
a noninflationary policy goal. 2
During the Annual Hearings of the Joint Economic Committee,
several Members questioned some of the Administration's economic
forecasts. One area of concern was that the proposed Fiscal Year 1977
budget calls for real Federal expenditures below the level of spending
assumed by private forecasters. In part, the issue revolves about the
levels of private business activity which economists see as probable
during 1976. The largest differences of opinion center about the
strength of investment in fixed assets in 1976. The Administration suggests that business will increase its spending on new plant and equipment by 4 to 5 percent in real terms over 1975. This figure is matched
by some private forecasts. Chase Econometrics and Irving Trust, for
example, currently project 5 percent real growth rates in business fixed
investment.

This projection is at the upper end of private forecasts, and is well
above present expectations of businesses themselves. However, levels
of business fixed investment typically exceed planned expenditures
during a recovery, and the Administration's own projections are moderate compared with the record of previous recoveries. This is due in
part to the behavior of consumer spending which, though predicted to
rise appreciably during 1976, will, be transplanted into- revised business investment plans only when these plans materialize.
2 Representative Rousselot states: "Excessive Federal spending is the primary cause
for crowding out to occur in private capital markets. Some believe that crowding out is the
result of two economic conditions: Deficit spending and rigid, noninflationary monetary
policy of the Federal Reserve System, While both indeed can be considered contributing
factors, I maintain that the primary and overriding reason for crowding out is to be found
In the practice of deficit spending and not in the nature of Federal Reserve monetary policy.
Moreover, when crowding out does occur, the Federal Reserve should not be encouraged
to Drint more money to make room for both government and private borrowing which
could serve to rekindle the fires of inflation. Funds which would tend to mitigate the cash
scarcity and renew borrowing would naturally be lured from foreign capital markets
because of the higher interest rates that would result, thus precluding the need of the Fed
to take any exceptional action to expand money supply. To avoid the problem of crowding
out entirely, and to ensure the availability of adequate funds to meet private sector
borrowing needs, Congress must eliminate budget deficits."

165
Consumers will enjoy increased real disposable income as progress
is made against inflation and as the recovery brings increased employment. Recent surveys also point to an increase in consumer confidence,
which usually translates directly into renewed spending. Furthermore,
figures on high personal savings levels during the recent recession, enhanced consumer liquidity in hand with a clear-cut moderation in consumer debt suggest that consumers are now in a position to help spur
the economy this year. Thus, the Administration's forecasts are attainable. However, we recommend that the Administration formally monitor the course of the recovery throughout 1976, and set intermediate
goals along the way, so that the progress which has been charted can
be compared with actual developments.

III. MONETARY POLICY
In view of the current rapid rate of growth of the higher order
monetary aggregates, the recent decline in interest rates, and the general availability of credit, the Minority feels that the present course of
monetary policy is consistent with a vigorous economic recovery. We
do not support demands that the Federal Reserve System become more
expansive at this time, nor are we alarmed by the recent drop in the
rate of growth of Ml relative to the other monetary aggregates, which
has caused concern in some quarters.
Because of the recent discussion of the zehavior of M, relative to the
gross national product (GNP), there have been recommendations that
the Federal Reserve System depart from an intermediate target based
on monetary aggregates in favor of one based on nominal interest
rates.
* The Federal Reserve System should not revert to interest rate
targets.
We agree with the large body of economic literature which concludes
that it is theoretically impossible for the Federal Reserve System to
control the real rate of interest (i.e., the difference between the nominal interest and the expected rate of inflation). Quite aside from the
disastrous historical experience we have had, particularly during the
World War II to Korean War period, in attempting to "peg" nominal
interest rates through the use of Federal purchases of government
debt, we believe that other more effective tools exist for congressional
oversight of a monetary policy which contributes to our economic
growth.' While it is possible to set and achieve interest rate targets, it
is possible only in the short run. As we state below, any departure from
the principle that the growth in monetary aggregates should be consistent with long-term growth potential of GNP poses serious risks
of either accelerating inflation or causing deflation. The danger of
hewing to an interest rate target is that this fundamental principle
gets lost.
For these reasons, we would oppose a return to an interest rate
formula. Instead, we continue to support H. Con. Res. 133, which calls
upon the Federal Reserve System to report semi-annually to each
House of Congress about its "objectives and plans with respect to the
ranges of growth or diminution of monetary and credit aggregates in
the upcoming 12 months." The resolution permits the Federal Reserve
System to deviate from its announced targets if the Fed determines
1 Representative Rousselot calls attention to an article which explains why monetary
policy cannot peg interest rates for more than very limited periods. See Milton Friedman,
The Role of Monetary Policy, The American Economic Review: Volume LVII, Number 1,
March 1968.

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"that they cannot or should not be achieved because of changing conditions" and provides that the Fed shall report to Congress "the reasons for any such determination during the next hearings held
pursuant to this Resolution."
In January, the Senate Banking Committee conducted its second set
of hearings under H. Con. Res. 133 and reported that, "The Federal
Reserve appears to have achieved its earlier announced target for
growth in the money supply . . . The Committee believes that this has
contributed to the Nation's economic recovery" (S. Rept. 94-591).
The Minority understands that the traditional relationship between
M1 and nominal gross national product (GNP) may be altered by consumer behavior and other factors. The public is economizing on demand deposits because of higher nominal interest rates on other forms
of assets and regulations which permit the wider use of time deposits
by corporations. In addition, better money management may be giving
an increase to velocity, thereby temporarily reducing the need for
normal rates of creation of M1, or even of M2 . For example, firms have
recently been permitted to switch their funds out of demand deposits
and into time deposits. This temporarily changes the traditional relationship between the level of M1 and nominal GNP. However, since
the deposits are primarily moving between one part of M2 and another, it leaves the relationship between M, and nominal GNP nearly
unchanged.
We would therefore understand if the Federal Reserve System
were to downplay somewhat the importance of M1 in its calculations,
and would not be particularly alarmed if the Federal Reserve System
placed greater emphasis on M2 or M,. In its deliberations concerning
the behavior of the monetary aggregates, the Federal Reserve System
should continue to take interest rate characteristics, velocity, rate of
inflation, consumer confidence, and the condition of inventories into
account as it formulates its policies, which are, after all, aiming at
more basic goals: Price stability and full employment.
Monetary targets should be consistent with long-term growth
potential.

Once these other considerations are taken into account, the weekto-week policy actions of the Federal Open Market Committee should
aim at reaching a monetary target consistent with the goals of stable
growth of GNP and reasonable price stability and full employment.
The Minority fully expects that (except for temporary adjustments
in monetary supply levels to allow for changes in the banking system
or consumer preferences among assets) such a monetary target will
involve the steady growth of the seasonally adjusted money supply
at rates comparable to the potential long-term growth rate of the
economy. While it is unrealistic to expect the Federal Reserve System
to be able to anticipate and counter random weekly movements in the
monetary aggregates, nonetheless, the Federal Reserve should make
every effort to smooth the growth of such aggregates on a quarterly
basis. In the long run, stable interest rates, stable prices, and full employment can best be promoted by the consistent pursuit of responsible
monetary and fiscal policies.

168
In the event that the historically stable relationship between the
monetary aggregates and GNP should change, the Federal Reserve
System should make a full report to the appropriate committees of
the Congress on the altered circumstances, as it has recently done. 2.

2 Senator Taft states: "Should a serious supply disruption, such as another oil embargo,
threaten to create a temporary upsurge in the price indices, the Federal Reserve should
not respond as if this were due to a demand-pull inflation. I agree with the 1975 Brookings
Institution report entitled, Higher Oil Prices and the World Economy, that the Federal
Reserve should be free to take appropriate measures to offset this real shock to the
economy. These measures should in the turn be offset as the situation returns to normal."
As the Brookings report states,
It becomes clear with the benefit of hindsight-and It should have been clear
at the time-that the uncompensated loss of consumer purchasing power stemming
from the OPEC price rise would generate a substantial reduction in aggregate
demand in the industrial countries. But the same price increase also gave an
additional jolt to an inflationary process that had already been accelerating
sharply * * *
Indeed, far from desiring to compensate for the loss In purchasing power,
some welcomed the oil price increases as an "excise tax" that imposed badly
needed demand restraints on an inflationary world in which political caution
prevented policy makers from pursuing sufficiently spartan economic polieies. In
most countries, therefore, not only was there no stimulative offset provided,
but fiscal and monetary policy became even more restrictive in response to the
increase in inflation that higher oil prices generated * * *
But the cost of pursuing this path was a large increase in idle resources and,
in some countries, the severest recession of the past 30 years.

IV. FISCAL POLICY
The $394.2 billion cap on Federal expenditures marks the determination of the Administration to set certain priorities for Fiscal Year
1977. These priorities'include: (1) slowing the trend of continually
rising outlays; (2) less intervention by Government in the private
sector and a concurrent stimulation of private enterprise; and (3)
a realistic appraisal of objectives needed to be achieved and those that
are possible to accomplish.
While there is congressional disagreement over the choice of certain
objectives, there is a consensus that the increasing rate of all government expenditures must be slowed significantly over the long term.
The major trend in the composition of budget outlays over the-last
20 years has been the rapid growth of domestic social assistance programs and a correspon ing relative decline in spending for direct
Federal operations, particularly defense. Over the past two decades,
outlays for domestic social assistance have far exceeded the rate of
expansion in the economy, and have grown more rapidly than total
Federal outlays.
Total government spending (Federal, State and local) averaged
about 35 percent of the gross national product (GNP) in 1975, compared to 27 percent in 1960, and 21 percent in 1950. If the same trend
continues for the next 20 years, it could mean that decisions for more
than half the economy will be made collectively by Government rather
than by individuals and business-an awesome prospect as we reflect
in the Bicentennial Year on the founding of our Nation to assure individual independence and initiative. In 1975, one out of six workers
was a government employee; in 1950, this ratio was only one out of ten.
In dollar terms, government spending on all levels has grown from
$61 billion in 1950 to $136 billion in 1960, and to $525 billion in 1975.
Use of total government expenditures tends to inflate the measurement
of outlays since a portion of Federal spending is reallocated to State
and local governments for their programs. (However, increases in
State and local spending have been spurred by Federal matching programs as well as Federally mandated expenditures for minimum
wages and social security.) Nonetheless, the increasing inroads of
decision-making by the Government sector into the private economy
raises concerns as to the course our country is taking.
One of the most difficult times to make the correct fiscal policy
decisions is in a period of transition between recession and recovery,
such as today. While unemployment is still high and expansion in
many industries is still spotty, timely policies must be developed to
stimulate the recovery while at the same time preventing the resurgence of inflation. Short-term and long-term priorities must be balanced
at every stage of our deliberations. Congress must evaluate every
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initiative to determine consistency with longer-term goals and reject
those policies that provide merely temporary relief or are actually
counterproductive. This hard decisionmaking will have its costs but
it is evident that those costs must be met.
In this regard, we believe that a definite consideration in the budgetmaking process must be a hard look at the way government affects
private decisionmaking. The domination of the Federal Government
in our society has become quite overwhelming. Policies must be pursued to permit the private sector to respond more freely to swiftly
changing economic developments.
There are three distinct areas of proposed changes that we support
as conducive to strengthening the private sector. The first is the continuation of the cut in personal income taxes which will assure a
fairly buoyant rate in personal consumption expenditures this year.
A further cut is justified if spending is also reduced so as not to enlarge anticipated deficits this year. In addition, lower business taxes
and other incentives would encourage business to raise its investment
plans, an essential step in stimulating growth in output, employment
and real wages.
The second area for emphasis is the encouragement of investment to
meet long-term economic objectives, especially energy. The history of
rising energy costs should continue to stimulate investment in capital
equipment which is less energy-intensive and more efficient.
A third area focuses on institutional reform, which touches on such
sensitive issues as environmental and safety costs and the role of Federal regulatory agencies. All of the above have grown to form substantial impediments to the efficient operation of private enterprise.
For example, we suspect that the benefits derived from many governmental regulations are exceeded by the costs of their administration.
We also believe that many actions of regulatory agencies, whose
powers may be justifiable as a constitutional delegation of congressional authority, should nonetheless be subject to congressional review
before being put into effect. And, at the very least, Congress should
exercise more oversight after the fact to determine the economic impact of regulation. Finally, we believe that the entire regulatory structure simply cries out for elimination of inefficiency. Paperwork
burdens, administrative delays and conflicting regulations-the result
of Federal actions-have caused hundreds of businesses to close their
doors. We welcome the exploratory initiatives already taken by the
Administration and congressional committees in this area.
The correct role of Federal fiscal policy in the development of the
private sector must be understood. The Federal budget is not an oversized family budget. Balancing the budget is not equivalent to balancing a personal checkbook. While many individual decisions of the
private sector create a certain forward thrust for the economy, the
Federal Government should aid our economic growth by providing a
healthy environment, as well as give some direction and guidance to
the private sector. The budget is the basic expression of government
priorities, jointly decided by the Legislative and Executive Branches.

171
And, it is the Federal budget which will help to mold the direction of
economic activity over the next few years. Thus, Congress must proceed with great care in enacting expenditure programs in the next
few months.
While we support the overall spending ceiling contained in the
President's budget for Fiscal year 1977, the ultimate test of our budget
is whether it will assist in producing the hoped-for results of increased
employment and renewed vitality in the private sector. Finally, we
renew our commitment to the reduction in the growth of government
spending and, accordingly, a decreasing role for the public sector.

V. EMPLOYMENT
After reaching a high of 8.9 percent last May, the unemployment
rate by January 1976 had dropped to 7.8 percent. Since October,
unemployment has declined by 770,000, after having held close to the
8-million mark since April. At 86.2 million persons, the employment
level was 2.1 million above last March's recession low and very close
to the rerecession peak reached in July 1974. While these few last
monthsv statistics are welcome news, we enter 1976 with the unemployment rate higher than the peak rate recorded at the trough of the four
previous recessions since 1950 (6.2 percent was the average). Even
after several more years of strong economic growth, the unemployment rate is still not expected to go below 5 percent until the early
1980s.
Contributing to this are structural factors. Changes in the structure
of the labor force in the last decade have increased participation rates
for female and teenage workers while the participation rates for male
workers have declined. Other institutional changes and different needs
of our society also call for greater urgency in reexamining the entire
issue of the opportunity for work in the United States. These longer
run issues cannot be forgotten while we continue to grapple with the
short-term problems that face us. Programs designed for short-term
countercyclical needs are becoming less appropriate as the recovery
progresses.
During the next few years Federal assistance for the unemployed
and for training in employment services will continue. Outlays provided to States and localities for training programs and employment
services as well as public service jobs are expected to be $5.0 billion
in 1977, $1.9 billion less than in 1976, because of the phasedown of
public service jobs as regular employment continues to increase. Temporary employment assistance has been provided by additional budgetary authority of $1.7 billion in 1976 which will permit the continuing
operation of the program until January 1977, with a gradual phaseout
through September 1977 as the economy continues to improve. In order
to focus this additional aid where the need is greatest, funds will be
distributed in areas with rates of unemployment over 6.5 percent.
Under the Comprehensive Employment and Training Act of 1973
(CETA), the Federal Government will expend $2 billion in 1977
which will provide 515,000 man-years of training and work experience
through institutional training, remedial education, on-the-job training, child development, vocational counseling, and supporting services.
In 1976, outlays for these programs are expected to be $495 million
higher due to the effect of startup delays in 1975 spending. A special
summer youth employment program will be funded in both 1976 and
1977. Outlay estimates for 1976 are $440 million to support 740,000
(172)

173
jobs, and for 1977, $400 million to support 670,000 jobs. These public
employment programs should continue to temper the cruel effects of
unemployment until the economy creates higher general levels -of
private employment.
In our Annual Hearings this year, the Council of Economic Advisers testified that several studies have indicated that public service
employment programs, when viewed as long-term unemployment measures, have exhibited two substantial problems. The first problem associated with these programs seems to be the large displacement ratio
of public service employment for other jobs in the public sector; that
is, out of every ten jobs created through these programs, only one is a
net new job creation. Secondly, public service jobs have an exceedingly
high cost per job. Unfortunately, the Council of Economic Advisers
studies analyze earlier programs of a smaller scope and extrapolate
these results to current programs. Also, a distinction between longer
term programs and countercyclical proposals was not made clear in
the Administration's testimony nor in material submitted later to the
Committee. Countercyclical programs, which seem to be more effective
and with lower displacement ratios, have occurred at a time when the
private sector was not creating jobs. Therefore, people were employed
when they would not have been otherwise, albeit not in producing
consumer or investment-oriented goods.
As the unemployment level continues to be too high through the
next several years, the inherent problems of these public service
programs will become manifest and unfavorable effects such as high
cost and the rising displacement ratio crop up. The Council felt that
the best way to combat unemployment was an indirect approach;
i.e., a tax cut which would assist the normal economic forces to
stimulate growth and employment. However, the Council has not yet
supplied this Committee with the estimated number of jobs that would
be created by a tax cut, or the speed with which they would be
produced.
* We recommend first of all that significant and substantial analysis be devoted to the relative cost effectiveness of these public service
job programs and private sector stimulation, with some comparison
of favorable and unfavorable effects, both in the short run and in
the long run.
* Second, after the above deficiencies are identified, we also recommend that new policies be formulated, if possible, that avoid these
detrimental effects.
* Third, stimulative policies such as tax incentives to business to
develop increased employment in the private sector should be
encouraged.
By mid-1976, there will be over one million peonle who have
exhausted their unemployment compensation benefits. Congress needs
to address this issue since some of these people may not qualify to
receive welfare payments. The Aid to Dependent Families with Children (ADFC) obviously would not apply to those individuals who
did not have children, and thus omits many unemployed. Although
there are other State and local welfare programs the tight fiscal
position of most municipalities has been well publicized. It would
be difficult for these municipalities to assume a large onslaught of

174
welfare dependents without some Federal aid. Many workers now on
unemployment compensation would fail the asset test now required
for welfare recipients. In other words, people who own their own
homes and own automobiles would not be eligible. Families might
also find it necessary to wait several months before applying for
welfare benefits under certain Federal programs such as ADFC, as
the past income from unemployment compensation would boost their
12-month average income above the permitted limit for eligibility.
The Joint Economic Committee has explored the employment experiences of some other countries such as the Canadian Local Initiatives Program (LIP) and Local Employment Assistance Program
(LEAP). Other alternatives to aid the unemployed, such as negative
income tax or a low-income credit, should also be studied. However,
a final judgment cannot be made until more evidence has been
gathered.
We recommend that Congress develop several alternate solutions
to our unemployment problems as quickly as possible.

VI. ENERGY
The Energy Policy and Conservation Act fell far short of our
goal to establish an effective national energy policy. The compromise
oil pricing provisions are counterproductive to achieving energy selfsufficiency and will escalate our level of oil imports, but the Act
incorporates other provisions that can contribute to the eventual realization of energy independence. These include the establishment of a
strategic oil reserve, conversion of oil and gas fired plants to coal,
and emergency standby authorities. It also provides for mandatory
automobile fuel economy standards, mandatory energy efficiency reporting by the ten most energy consumptive industries, energy labeling and efficiency targets for major home appliances and a technical
and financial assistance program to aid the states in developing and
implementing energy conservation programs.
We cannot be lulled into believing that this initial step can resolve
the Nation's energy problems. There remain several pieces of pending legislation which must be enacted to effectively complete the
energy program, building upon groundwork laid by the Energy
Policy and Conservation Act.
An adequate energy supply is the key to the future prosperity of
the United 'States. Sufficient domestic supplies of both oil and natural
gas are essential, as is the expeditious development of alternative
sources such as coal gasification and liquefaction, solar, geothermal,
and nuclear energy sources. Decontrol of oil and natural gas is fundamental to an energy policy.' Government policy must provide a conducive atmosphere within which these resources and alternative fuels
can be developed and brought to market.
The Emergency Petroleum Allocation Act fails to provide sufficient
incentives for increased domestic production to reduce foreign crude
oil imports. Last year the United States consumed approximately
16.3 million barrels of petroleum per day, for which declining domestic production accounted for only 10 million barrels. Petroleum
use represented about one-half of our total energy consumption.
It is clear that the world's fossil fuel supplies are limited. This
reality combined with our need to develop energy independence requires us to promote the development of alternative energy sources.
According to the Energy Research and Development Administration
(ERDA), 75 percent of the United States energy consumption is
based on petroleum and natural gas, with coal providing less than
20 percent of current needs although it represents about 80 percent
of the Nation's present energy resources. Development and use of
enhanced recovery technology for petroleum, and development of
alternative fuels, must be accelerated.

IReDresentative

Heckler Is In substantial disagreement with the proposal to decontrol
oil and natural gas prices.

(175)

176
Tax incentives for home and business use of solar and geothermal
energy could help to make these energy alternatives price competitive.
In addition, Congress should take steps to clarify the issue of whether
depletion of allowances and the write-off of intangible drilling costs
apply to geothermal energy, so the way can be cleared for further
utilization of this source.
Special efforts should be taken to assure the involvement of small
businesses in the expanding energy field. Voluntary programs to
enhance industrial energy efficiency should remain a high priority,
as should the education of the general public on conservation methods
in all forms of energy utilization.
As they have for the past two years, utilities will continue to suffer
from large fuel cost increases and difficulty in financing new construction for additional generating capacity. Consumers will be faced with
higher rates, even as coal conversion takes place, due to continuing
high costs of emission controls and the high cost of maintaining peakload capacity. To make power users more aware of actual service
costs, strong consideration should be given to the encouragement of
various pricing methods to even out power demands during the course
of the day. Hopefully, both industrial and residential users will adjust their demands accordingly, resulting in a significant reduction in
peak period demands.
The Administration has estimated that capital requirements for
energy over the next decade will total about $1 trillion. While other
studies vary somewhat from this' figure, each one proclaims substantial
investment needs. The pressure for capital investment in other sectors
is equally as great, as is discussed in the next section, and this only
serves to underscore the importance of a pricing structure for energy
that will attract capital.
Now that we have started to resolve some of the measures necessary
to achieve our national energy goals, we must continue to emphasize
that conservation is not only vital to the national welfare but also to
the economic self-interest of most individuals and businesses. We must
ensure the ability of industry to generate sufficient income for reinvestment. And, if we are serious about gaining energy self-sufficiency,
decisions must be made concerning incentives for massive investment
of new capital in the energy industry.
* We should continue to seek the gradual decontrol of oil and
natural gas prices as a means of encouraging both production and
conservation and enhancing the economic viability of alternative energy sources.2
* We recommend that tax incentives and additional research and
development programs be enacted to promote more sophisticated recovery technology of existing resources, primarily through the private
sector.
* Congress should be very careful to avoid tax reform provisions
that would tend to discourage the massive capital formation which
will be needed to expand future energy production.
2

Representative Heckler is In substantial disagreement with this recommendation.

VII. CAPITAL FORMATION
There is a long-term economic problem that needs careful attention-capital formation. In recent years, energy requirements, the need
for pollution abatement equipment, housing, mass transportation, and
the requirement to replace and modernize many existing production
facilities in basic industries have intensified the demand for industrial
capacity. It is difficult to put precise dollar figures on the amount of
investment needed. A New York Stock Exchange study has tallied the
requirement at $4.7 trillion over the next decade.
To accomplish this huge job, major changes in the tax structure and
a change in attitude concerning the relative importance of savings
versus consumption are necessary. Our present tax structure encourages consumption and discourages savings and investment by
placing a heavier tax liability on dollars saved or invested than on
dollars spent. This misdirected policy stifles needed capital formation,
a fundamental prerequisite for solid economic growth.
Regardless of the type of economic system, savings and investment
are necessary to job creation, economic growth, and the improvement
of the well-being of all people. Capitalist, socialist, and communist
societies all have this economic need in common. The difference is in
the manner in which resource allocation decisions are made. In socialist and communist economies, the government determines what portion
of the national income is saved, where it is invested and what is available for consumption. Capitalist societies, on the other hand, depend
on the mechanisms of diverse markets to allocate financial resources.
Government policies may affect those market allocation decisions, but
they do not mandate them. Individuals and businesses maintain the
prerogative to invest or consume as their needs demand.
There is a problem with regard to capital formation and we must
face up to it. Compared with other industrialized nations, the United
States is trailing in real economic growth. The average annual rate
of real economic growth during the decade of the 1960s for the 20
nations then in the Organization for Economic Cooperation and Development (OECD) ranged from a high of more than 11 percent for
Japan to a median of about 5 percent for Australia, the Netherlands
and Norway, to a low of 2.8 percent for the United Kingdom. The
United States during this time had an average growth rate of only 4
percent a year-ranking us 17th among the 20 nations. This is a poor
record for a nation of our abundant resources, labor talent, and productive history.
(177)

* 178
Over the long run, economic growth depends on many basic factors,
including the size and quality of the labor force, the availability of
land and natural resources, increases in output per man-hour (productivity) and many intangibles such as inventive genius, managerial
skills, the organization of the economic system, and the nature of the
infrastructure of transportation, communication, and financial facilities. Land, other finite natural resources and the size of the labor force
are relatively inflexible. However, we can affect productivity, chiefly
through policies which impact on the supply and utilization of capital
equipment.
Of all these factors, therefore, capital investment is probably the
key to economic growth. The United States retains a position of
economic leadership only because we have been building on a long
history of high levels of productivity and we have a large accumulated stock of productive assets. However, examination of the trends
in productivity and the relative rates of new capital investment during
the 1960s and early 1970s shows weaknesses in our economic underpinnings.

The United States ranks last in a list of seven major nations in
productivity growth over the period 1960-1973. Table 1 below shows
that growth of the U.S. gross domestic product per employed person averaged 2.1 percent annually over these 14 years, less than half
the average of the six other listed countries. When figures on manufacturing output per manhour are compared the rates of growth are
larger but the relative position of the United States is not changed.
TABLE VII/I.-PRODUCTIVITY GROWTH,
1960-1973
[Average annual percentage rate]
Gross domestic
product per employed person
United States -2.1
Japan -9.2
West Germany
-5.
France- --------------------------------------------------------Italy
UKingdom -2.8
Average for the six foreign countries -5.1

4
5.2
5.7

Manufacturing
output per
manhour
3.3
10.5
5.8
6.0
6.4
4.0
6.2

Source: U.S.Department of the Treasury.

It is not mere coincidence that comparisons on productivity and
comparisons on new capital investment go hand-in-hand, since capital
investment is such a key determinant of productivity.
There is a widening gap between United States investment as a
share of national output and the ratio of capital investment in other
industrialized nations. Treasury Department figures in Table II below
show that total U.S. fixed investment was 171/2 percent of real national
output over the period 1960-1973, ranking the United States last
among the listed nations.

179
TABLE VIl/ll.-INVESTMENT AS PERCENT OF REAL NATIONAL OUTPUT 1960-731
Nonresidential
fixed

Total fixed'
United States -17.5
Japan -35.0
West Germany -25.8
France-24.
Canada -21.8
ItalyUnited Kingdom

5
10.5
18.5

Average for the six foreign countries -24.4

13.6
29. 0
20.0
18.2
17. 4
14. 4
15.2
19.0

oOECD concepts of investment and national product. National output is defined as "gross domestic product," rather
than the more familiar measure of GNP.
2 Including residential.
Source: U.S. Department of the Treasury.

Data on per capita capital formation tell a similar story. While it is
true the United States still maintains a considerably higher overall
capital-to-labor ratio than the average for Europe or Japan, our
advantage has deteriorated as other nations have increased their
investment per worker. The Commerce Department estimates that
since 1960 the existing base of plant and equipment assets nearly
doubled in France and Germany and more than tripled in Japan. The
U.S. ratio increased only 50 percent over the same period.'
Capital formation requires the efforts of both individuals and corporations. Individuals make it possible to add to the capital base by
depositing money in savings accounts and purchasing securities,
thereby providing funds for borrowers to invest, and by investing directly in business ventures. Corporations add to the capital base in a
similar fashion, using retained earnings (corporate profits) and borrowed funds to invest in productive capacity. Retained earnings have
been the most important source. However, corporations have faced
growing difficulty in generating investment funds from earnings. In
1970, a total of 29 percent of the outlays for new plant, equipment and
inventories were financed by borrowed capital. In 1974, over 40 percent came from outside sources; and if this trend continues, it will be
over 50 percent by the end of this decade. Good corporate profits are
essential for capital investment and economic growth.
1 Senator Taft and Representative Rousselot state: "The capital-labor ratio has a great
Impact on real wages and per capita Income."
"Sweden and Switzerland have had investment rates similar to those of the rest of
Europe, and far higher than the U.S. rate. Since 1950. when per capita income In the
United States was nearly double that of Sweden and Switzerland, these countries have
crown more rapidly than the United States, and actually surpassed us In per capita Income
in 1974."
[Current dollars]
Per capita income
United States -$1,
Sweden -830
Switzerland-

1950

1974

890

$6,640
6,720
6,650

980

180
Basically, businesses rely on four sources of capital. However, there
are current problems associated with each source.
First, depreciation charges allow a business to set aside a certain percent of its income as a reserve to replace worn out equipment. But,
depreciation is based on historical costs, rather than replacement costs,
and the latter costs rise with inflation. Aggravating the situation,
profits during times of rapid inflation are artificially high, thereby
causing higher taxes and reducing net real cash for investment. It has
been estimated that corporations have understated "real" depreciation
by $29 billion in the first four years of this decade and have therefore
been short of the funds they really need to replace plant and
equipment.
Second, retained earnings are a major source of capital, with shareholders taking only about 40 percent of earnings as dividends. In recent years, as earnings have been depressed, dividend payments have
eaten into retained earnings. Thus, industry has been deprived of
needed capital from this source.
Third, needed funds can be obtained through the issue of new equity
securities. Although firms have tried to maintain dividends to keep
their shares attractive, it has become increasingly difficult to float new
issues except at prices unacceptable either to management or to shareholders, as the return demanded by potential investors has risen because of inflation, high interest rates and stock market uncertainties.
Fourth, and partly because of the above problem, a substantial proportion of companies are finding it necessary, yet difficult, to borrow
funds for investment. Many have already reduced their maximum debt
capacity, as the average debt-to-equity ratio for industrial companies
has increased from 25 to more than 40 percent in the last decade. In
addition, many businesses which would like to borrow more may be
crowded out as a result of extensive government borrowing.
Congress must take steps at once to modify our Federal tax policies
to direct more financial resources- into productive capacity. Any one,
or a combination, of several approaches could be taken, including: (1)
liberalization of the investment credit; (2) liberalization of depreciation allowances; (3) elimination of double taxation of corporate income and stockholder dividends; (4) reduction of corporate income
tax rates; (5) more favorable treatment of net operating losses; and
(6) tax incentives for personal savings.
These are types of tax incentives that will facilitate capital investment and thereby enhance the ability of the private sector to grow, to
provide new jobs, to increase productivity and wages, to help us
achieve energy independence, and in general to promote the economic
well-being of our citizens.

VIII. STATE AND LOCAL GOVERNMENTS
The healthy fiscal status that State and local governments enjoyed
in the early 1970s came to an abrupt halt in 1975. The recession, which
increased the level of welfare services, began to take its toll on accumulated surpluses, and the inflation raised the cost of services. As a
result, many State and local governments were forced into program
cutbacks and some into tax increases to maintain balanced budgets.
The New York City crisis also served as a catalyst to many State and
local public officials to put their fiscal houses in order.
OUTLOOK FOR FISCAL YEAR 1977

With the economy now in recovery, the fiscal outlook for State and
local governments is much improved. But, projecting the actual pace
of recovery is an imprecise task. While sales tax receipts and State
income tax receipts have dropped as the recession worsened, the major
source of local government revenues, the property tax, has remained
constant. Therefore, an improvement in the economy will have some
beneficial impact on State and local government budgets, but it will
not be a comprehensive increase.
The immediate impact of the recession unfortunately is the loss of
assistance to many individual recipients. But, there is a side benefit in
that many marginal programs, once subjected to the critical standard
of benefit versus cost, have been eliminated.
The necessary reduction in services at the local level has been accompanied by an Administration push for restructuring of Federal
assistance to State and local governments. Federal assistance should
be related to the type of services needed at the local level.
Although actual dollar transfers may decrease, the real value of
Federal assistance to State and local governments will increase if the
assistance reduces the costly administration of rigid categorical assistance, and reduces limitations on the use of such grants.
The 40 years of grant-in-aid proliferation to State and local governments has produced a system which does not respond to individual
State and community needs. It places an unbearable burden on local
government bureaucracy to cope with Federal standards and it does
not begin to approach cost-effectiveness.
The President has proposed four grant consolidations in health,
child nutrition, assistance to elementary and secondary schools, and
community services, which would reduce Federal outlays by $1.4 billion. Despite the reductions, these consolidations represent the direction Federal assistance should take in the years ahead.
Present Federal assistance in most areas is simply not doing the job.
By almost every standard, the quality of services delivered to the
American people has declined. This is due in significant measure to the
regimented nature of the programs imposed on local governments.
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67-573 0 - 76 - 12

182
Flexibility to respond to unique needs, broad guidelines for operation,
and -a reduction in the expensive administrative restrictions of categorical assistance should produce improved services. This improvement
will be further enhanced by economic recovery.
0 A form of countercyclical assistance should be enacted to cope
with unemployment in areas of especially high need.
The Senate recently sustained a veto by the President of H.R. 5247,
the Public Works Unemployment Assistance Act of 1975. Title II of
that legislation contained a proposal to provide additional fiscal assistance to local communities with severe unemployment problems. The
concept was appealing, but the procedure contained in H.R. 5247 was
not sound.
There is an opportunity now for the Congress to enact a countercyclical program that relates the assistance to the needs of individual
communities.
If it is to be truly countercyclical with regard to the capacity of
the local governments to render services, it must be related to a decline
in revenues of the recipients, and not exclusively to the percentage of
unemployed. The vetoed proposal did not make such a distinction.
* General Revenue Sharing should be immediately reenacted for
53/4 years.
By December 31, 1976, $30.2 billion of Federal revenues will have
been distributed to nearly 39,000 State and local governments under
the program known as General Revenue Sharing. Enacted in 1972,
revenue sharing represents the most significant change in FederalState-local relations since the implementation of the progressive income tax.
Regrettably, the Congress has not acted with dispatch in reenacting a program that has become an integral part of State and local
budget planning. Due to expire at the end of this year, revenue sharing cannot be incorporated into local Fiscal Year 1977 budgets until
the Congress acts.
State and local governments' budgets must be in balance before they
are approved by the appropriate local government organizations. The
lack of a definitive revenue sharing plan past December 31, 1976, will
force either an increase in local taxes or a further reduction in services. Neither prospect is likely to enhance the economic recovery now
underway.
To oppose renewal of the program for the full 53/4-year period
proposed in H.R. 6558 reflects a total lack of understanding of local
budgetary needs and requirements.
Advocacy of its elimination represents a return to categorical programs as the exclusive means of assisting State and local governments.
This would be a major blow to reform of State and local assistance.
It is important to examine several basic issues that have been raised
during the debate over renewal of revenuse sharing.
FORMULA CONSIDERATIONS

It is necessary to understand two basic features of the revenue sharing program. First, the amount of money in the annual distribution is
fixed. There are no cost-of-living escalators or other indexed incre-

183
ments. There is a flat $150 million added each year, which is only a
21/2 -percent increase.
The second basic feature is that if one jurisdiction gains, another
must lose. Therefore, any modification inevitably prod uces losers as
well as winners.
Simplistic suggestions that certain modifications will resolve existing problems with the formula reflect both a lack of understanding of
the formula and the basic thrust of the program. It was meant to be
general fiscal assistance to State and local governments. It is not a
welfare program. It is not a big cities program. It is not a small rural
development program. It is, and should remain, general fiscal
assistance.
THE 145 PERCENT CEILING RESTICTION
One element of the revenue sharing distribution formula is that the
highest allocation that any recipient government can receive shall not
exceed 145 percent of the average per capital entitlement for the State
in which a municipality is located. It has been argued by some that
this ceiling unfairly burdens jurisdictions that would be entitled to
more money if the formula were not constrained.
Several analyses have been done by the Intergovernmental Relations
Subcommittee of the House Government Operations Committee. The
results when the ceiling is raised to 175 percent produced some
surprises.
First, while some communities that were constrained increased their
entitlement, others that were similarly restricted did not. The reason
for this is the closed nature of the formula. When there is a modification in the distribution, every recipient's position changes relative to
every other recipient's. Therefore, some previously constrained communities wind up below the constraint level of 145 percent because
their position has changed relative to all other communities.
Second, advocates of a change in the ceiling predicate their recommendation on the theory that central cities will benefit. Some do;
others do not.
For example, the increase in the 145 percent ceiling shifts so much
of the entitlement in Pennsylvania and Missouri, that major cities such
as Pittsburgh and Kansas City lose while Philadelphia and St. Louis
increase their entitlement.
Generally, when this modification is made, very small municipalities
and counties, along with large municipalities and States gain, while
townships and small- to medium-sized cities and counties over 25,000
population lose.
ELIMINATING OR REDUCING THE 20-PERCENT FLOOR

Some critics of General Revenue Sharing contend that the program
props up insignificant units of government. This is accomplished, the
critics contend, by a provision that requires that any unit of local
government receive at least 20 percent of the average per capita entitlement if they would receive at least $200 under the formula.
When the 20-percent floor is eliminated, 14,000 units of local government are eliminated, primarily townships, and about $38 million is
redistributed to larger municipalities and counties.

184
This modification does not produce sufficient additional revenues to
significantly impact the winners and does not deal at all with the
question of the function of units of local government. It is related
exclusively to "how much" a unit receives and is, therefore, not a
realistic suggestion for modification.
INCREASING THE

$200

DE MINIMuS

RuLE

Closely related to the 20-percent floor is the provision that includes
any unit of local government if it is entitled to at least $200 under the
distribution formula. It has been suggested that this floor should be
raised to a more realistic figure, again with the goal of eliminating
small governments.
Increasing the $200 to $5,000 would eliminate over 17,000 units of
local government, without relating the elimination to the service load.
If would free up $32 million for redistribution. But here again, there
is no consideration of what the Government does. It is based instead
exclusively on size.
Service demands in smaller communities are as intense and require
as much attention as those in larger governments. Without relating
some modification of the formula to the service load of local governments, an arbitrary mathematical calculation will destroy the benefit
of revenue sharing to many of the rural sections of the country.
DEFINING NEED

There has been a substantial amount of discussion about the redistributive effects of revenue sharing. Some critics state that too much
money goes to the suburbs and not enough to the cities. An examination of the actual distribution belies that assertion. For example, in
Michigan, the City of Detroit receives $27.79 per capita: the suburb
of Grosse Point Farms receives $3.83 per capita. The following table
illustrates other examples.
TABLE

VIII/1.-Per capita revenue sharing entitlement in selected
central cities and their suburbs
Per cavita

Central city and suburban cities:
entitement
Los Angeles ---------------------------------------------------$12.56
Beverly Hills--------------------------------------------------4.33
Chicago ------------------------------------------------------19.89
Winnetka -_______________________________________________
3.68
Minneapolis ---------------------------------------------------14. 50
Edina --------------------------------------------------------4. 11
Cleveland -----------------------------------------------------18. 13
Shaker Heights------------------------------------------------2.97
Milwaukee ----------------------------------------------------19.38
Fox Point-----------------------------------------------------4. 55

The question must be faced as to whether the Federal Government
wants to once again encourage a policy which will soon place the
suburbs in the same position as the cities with regard to the property
tax. A substantial amount of General Revenue Sharing funds have
been used for property tax relief both in central cities and suburbs.
The regressive nature of the property tax makes this use a most important and productive one. We cannot afford to adopt national policies
which place the private ownership of real property outside the reach

185
of more and more people. A knee jerk reaction to redefining need in
the revenue sharing program would bring about that unfortunate
result.
CIvIL RiGxrS ENFORCEMENT

The one weak link in the operation of General Revenue Sharing
has been the system created to enforce the civil rights provisions of
P.L. 92-512, the original General Revenue Sharing legislation passed
in 1972. The Office of Revenue Sharing has relied almost exclusively
on complaints filed by individuals or organizations alleging discrimination in the use of revenue sharing funds.
There has been virtually no initiative by the Department of Treasury or the Office of Revenue Sharing to investigate possible discrimination at the State and local level. While several voluntary
agreements have been reached with violators, there has been no litigation initiated by the Treasury Department or the Justice Department.
For revenue sharing to function effectively, and instill new vitality
in the Federal system, the civil rights enforcement mechanism must
be improved.
CONCLUSION

General Revenue Sharing remains one of the most significant innovations in American domestic policy of the last 40 years. It is the
beginning of the end of rigid structuring of Federal assistance. In
reality, t ere is no such thing as "Federal dollars." There are only
taxpayers to supply those dollars. The relatively simple manner in
which funds are transferred from the Federal raising source to the
State and local spending outlet has a significant impact on the quality
of services. But, from 1933 to 1972, the major emphasis was on quantity of dollars rather than the results those dollars produced.
General Revenue Sharing, block grants, and grant consolidation
represent a hopeful beginning of a major restructuring of the interrelations of American units of government.'
1 Representative Rousselot asserts that the Federal Government's financial condition is
far more serious than that of State and local governments who benefit from the General
Revenue Sharing program and hence, the National Government can ill-afford to continue
this program beyond 1976. Representative Rousselot states: "Irrespective of the many
arguments surrounding the questionable value and worthiness of the Revenue Sharing
Program-and they are considerable-it is my opinion that on the basis of cost alone,
General Revenue Sharing should be discontinued. Without denying the good intentions
and worthy goals of the program, I believe that we simply cannot afford to 'share'
revenue that we do not have."
"When the program began to receive widespread attention in 1964, it was believed
it could be financed out of budget surpluses produced by an expanding economy. While
it is true that the Federal Government did realize a budget of $3.2 billion in Fiscal Year
1969 when President Nixon first submitted his General Revenue Sharing proposal to the
91st Congress, past experience has demonstrated that budgetary surpluses have been the
exception rather than the rule. And, there is no evidence to cause us to believe that this
trend is going to be reversed in the immediate future. Indeed, since the beginning of the
program in 1972, over $150 billion of debt has been incurred by Congress.
"While the condition of our Federal finances steadily worsens, there are valid reasons
to question whether State and local government financial needs still are as pressing as when
General Revenue Sharing was initially recommended. In the aggregate, and on a national
income and product accounts basis, State and local governments have run surpluses for
the last several years ranging from a high of $19.6 billion for the fourth quarter of 1972
(at a seasonally adjusted annual rate) to the most recent figures of $12.9 billion for the
third quarter of 1975. Compared with the multi-billion dollar deficits that the Federal
Government is accustomed to running, It would appear that perhaps the States are in a
better position to help than be helped.
"A better program to meet the needs of local governments would be to restore to them
a substantial part of the tax base which the Federal Government has preempted. State
and local governments would then be free to determine their own priorities and policies,
and could tax and spend accordingly. The results would be more responsive government and a healthy diversity, both of which are natural by-products of a dynamic Federal
system."

SUPPLEMENTAL VIEWS OF SENATOR
JACOB K. JAVITS
The Minority Report is well tempered and cautious, and contains
many statements with which I would agree, but I feel I would better
serve the public purpose this year by writing my own views on the
economy. This is because I feel that this year as we come out of the
deepest recession since the Great Depression of the 1930s, I must state
my independent views as to the role of the Federal Government in the
national economy. However, I wish to note, and to commend the excellence of, the analysis of the Minority's Report on unemployment compensation, productivity growth, investment and national outlook, and,
capital to labor ratio.
While the Majority places great emphasis on the reduction of unemployment through direct government intervention, the Minority seems
to believe that providing the proper climate and stability for expanded
business activity is the major function of government in relation to
the economy. Although the Minority Report mentions the "concern
for the lingering unemployment of Americans" and the President's
Economic Report speaks of "the social hardships and economic waste
associated with the current level of unemployment," both the Minority
views and the President's Economic Report move quickly to devote
their prime attention to stability for the business community, with
overwhelming emphasis on the need to check inflation through slower
growth.
I am as concerned as the other Minority Members about preventing
the resurgence of inflation, and I recognize clearly the terrible damage
to our economy and to consumer confidence wrought by inflation in
the last few years. But, I would hope we would not be like the mythical
generals who are continually fighting the battles of the last war while
losing the present one. Hence, I see other dimensions to the Government's role in the economy.
In my view, the big issues now paralleling the curbing of inflation
are: (1) Utilizing a greater percentage of our productive facilities in
this country; (2) more rapid reduction of unemployment; (3) a
quantum improvement in U.S. productivity; and (4) a resumption
of major technological advances through stimulation of research and
development.
I shall discuss my own views and the possibility of renewed inflation
in the context of my proposals for a more expansionary fiscal policy.
At this point, however, I would argue that we are dangerousjy wrong
to regard inflation as the chief cause of the recession we have recently
experienced. Rather, it seems to me that restrictive government
policies may have substantially deepened the recession in attempting
to fight worldwide food and energy price hikes through traditional
tools of monetary and fiscal policy.
(186)

187
Similarly, there is great concern about the magnitude of the Federal budget deficit and its relation to inflation. I would like to quote
what I wrote last year in my supplemental views to the Annual
Report: "The slow path of recovery advocated by the Minority will
further erode our tax base and cause huge outlays for unemployment
compensation and public service jobs. Recent testimony before the
Joint Economic Committee by Professor Walter Heller, former Chairman of the Council of Economic Advisors, was quite explicit on this
trend. He said: 'The $70-$75 billion deficit is being identified with
profligacy in spending and fiscal irresponsibility when, in fact, it is
almost entirely a hostage to recession. If we were operating at full
employment, tax revenues would be $50-$55 billion higher than they
are; unemployment compensation would be about $15 billion lower;
and other cyclically responsive outlays like, food stamps, Medicare
and Medicaid. and the like, would be about $5 billion lower. So almost
all of the deficit is the product of the recession."
The Minority Report reflects a strong feeling that the Federal Government is dominating our society and that we must turn to policies
that will strengthen the private sector at the expense of the Federal
Government. But, it is somewhat simplistic to believe that most of our
economic problems are the result of the confrontation between the
Federal Government and the private sector when the growth of government is in fact in response to the increasing complexity of the
economy. Dismantling the Federal machinery of government will not
cure the underlying structural defects of the economy nor is the health
of the business community an inverse relationship to the strength of
the Federal Government.
I am in agreement with policies that will stimulate the private
sector and lead to greater employment opportunities in this sector, but
we delude ourselves if we think that this alone is the answer to the
massive problem of unemployment that seems to promise to remain
with us until the end of the decade, even with the quite optimistic
growth rates projected in the President's Economic Report. Macroeconomic policies alone are insufficient to deal with present and projected levels of unemployment; hence the need for targeted public
service programs to deal with those people the private sector will hire
only in boom periods.
The Minority suspects, on what basis is not made clear, that the
total costs of various governmentally mandated measures relating to
pollution, safety, pension reform, and energy exceed the sum of their
parts. We cannot so easily forget that these measures were needed because business would not undertake them voluntarily, and as a group
was unlikely to undertake these reforms on a consistent and relatively
uniform basis. Thus, it is not enough to provide a climate for expanded
business activity and leave the rest to the free play of economic forces.
There are social costs and requirements for which the Federal Government must assume final responsibility. The debate over the size of the
Federal Government in the economy is a false one. The real debate
is over the effectiveness of government in meeting the needs of our
people.
The Minority has expressed certain major concerns. An important
example is the rapid growth of domestic assistance programs. In

188
order to deal with this problem, I have recently introduced legislation to federalize welfare benefits. My bill is similar to one introduced
by former Representative Martha Griffiths of Michigan, which is the
product of her former Subcommittee on Fiscal Policy of the Joint
Economic Committee. This bill is designed to provide a system of
rebatable tax credits and cash grants so that a family of four, for
example, would be guaranteed a minimum annual income of $4,300.
As an incentive to employment, cash grants could be supplemented by
earnings with the grant being reduced 50¢ for every dollar earned.
Because of the guaranteed minimum income, various Federal assistance programs, such as Aid for Dependent Children and food stamps,
would be abolished, and unemployment benefits would be reduced to
26 weeks, with the new program providing for the long-term unemployed. It is this sort of fundamental reform of the Federal system
that goes to the heart of the debate on the role of the Federal Government that is needed, and not the unproved assertion that the mere size
of the Federal Government can be reduced without though as to what
takes its place.
FISCAL POLICY

I do not share the Administration's optimism that the economy can
attain the growth rate target set by the President.
I am concerned that with such a large amount of slack expected to
remain in the economy throughout 1976, a harshly restrictive budget
would impede the return to full employment. Economists estimate that
even if the GNP growth rate target expressed by the President is
achieved-an improbability without unusual strength in consumer
and business demand-recessionlike levels of unemployment, capacity
utilization, and a gross national product (GNP) "gap" will prevail
well into Fiscal Year 1977.
The unemployment rate is now 3.3 percentage points above the level
associated with full employment. Assuming 41/2 percent annual GNP
growth as the minimum requirement to keep the unemployment rate at
its present level, at least 71/2 percent annual real growth will be required over each of the next three years to achieve full employment
by 1980. On this basis, I believe a significantly more rapid rate of
economic growth than that proposed by the President is required
for Fiscal Year 1977. Only in this way have we any hope of a return
to reasonably full employment in the early 1980s.
What of the danger that a more vigorous rate of growth will soon
reignite inflationary fires? Only when aggregate demand growth begins to press upon the limits of productive capacity can expansionary
fiscal policy precipitate demand inflation. The enormous amount of
idle productive capacity that is expected to persist for several more
years makes a reignition of demand-induced inflation most improbable.
Furthermore, the relative stability of unit labor costs indicates that
productivity growth is now capable of absorbing reasonable compensation increases, precluding the justification for cost-based price increases and preventing resumption of a wage-price spiral.
There is always the possibility, however, that inflation may develop
for reasons unrelated to demand and cost pressures. But, those varieties

189
of inflation do not lend themselves to macroeconomic or budgetary influence and arise from circumstances not germane to fiscal policy considerations. External or structural inflationary pressures resulting
from variable oil or food prices and from monopolistic elements in the
economy can be neither exacerbated nor alleviated by budgetary
policies. For this reason, restrictive fiscal policy ought not to be utilized
inappropriately to prevent their resurgence.
On the basis of these considerations, I advocate a Federal budget
rather more expansionary than that endorsed by the Minority Members of the Joint Economic Committee. To be sure, a more expansionary policy may very well be associated with some deficit in the full
employment budget. Nevertheless, such a discretionary deficit is mandated by the necessity of expediting the return to full employment. To
insist on balance in the full employment budget at this particular time
would, I feel, prevent the exercise of a fiscal policy capable of maintaining and ensuring the forward thrust of economic activity. The
President has proposed a budget that incorporates a $19 billion increase in the full-employment budget surplus in one year. I believe
this abrupt shift in fiscal policy runs the risk of choking off the recovery in early 1977.
Furthermore, I believe it is necessary to tolerate a deficit in the fullemployment budget as long as there persists a serious deficiency of
private investment with respect to private saving. In order to prevent
inflation, Federal outlays and revenues must be in balance at full employment, but private saving and private investment need to be in
balance as well. But, when it is apparent that private saving will far
exceed private investment through 1976 and well into 1977, a discretionary fiscal policy that is not arbitrarily restricted to the full employment budget balance is required for the restoration of full
employment.
In this context, it is important to address the question of the relative shares of the Federal and private sectors in the American
economy. The following Table on the share of the Federal Government
in the GNP from 1950 to 1975 demonstrates that the role of the Federal Government has remained relatively constant over the last quarter
century.
One thing is apparent from perusal of this table: the role of the
Federal Government in the economy has remained constant. Some increases have occurred when the GNP declined during a period of
recession-such as in 1953, 1958, and 1975. With a return of prosperity,
however, the underlying share of the Federal Government has returned to about 18 percent of the GNP.
A word of caution is in order in this regard. Experience has indicated that where the share of the Federal Government is permitted to
fill the vacuum created by the decline of the private sector in recession
periods, an environment of fundamental economic strength is maintained as an incentive for the post-recession growth of the private sector. The Federal Government is obliged, therefore, to preserve the
upward momentum of the general economy, so that the private sector
may reassert itself when confidence in the durability of the recovery
has been established.

190
TABLE 1.[in billionsi
Federal satla
as percent tfGNP

Federal Outlays

GNP

$42.6
67. 7
1

$284.8
328. 0
346. 0
365.0

15.0
14.0
19.5
20. 8

4
7

419. 0
441.0
447. 0
483.0
503.0
520.0
560. 0
590.0
632. 0
685. 0
750. 0
794.0
864.0
930. 0
977. 0
IC55. 0
1158.0
1295. 0
1407. 0
1499. 0

16.8
17.4
18. 5
19.
1
18.3
18.8
19.1
18.9
18.8
17.2
18. 0
20. 0
20.6
19.7
20.1
20.0
20. 0
19.0
19.0
21. 0

Year:
51-45.5
1952
--------------------------------------------1953------------------------------76.
1956 -70.
1957-76.
1958-82.6
1960------------196D
-------------------------------------------1961
-97.8
196--------------------------------------------1963-111.
1964-118.
1965 -118.4
19676
1968 -158.
1969---1--------1969 -184.
197 -196.
1972-------------------------------------------1973 ------------------------1974-- ------------------1975------------------------------268.4
1975
-------- ------------------------------------

92.
92.21
106.8
3
6
134.6
2
8
5
5
211.4
231.8
246.5
324.6

Premature dismantlement of the Federal Government's balancing
role courts the risk of stalling economic growth and destroying any
incentive the private sector may have to expand in Fiscal Year 1977.
MONETARY

POLICY

I do not share the belief that the technical reasons given for the different behavior of the rate of money growth are sufficient to justify
the present course of Federal Reserve policy. Since July, the growth
of M, has been about 2.5 percent, well below even the revised target
rate of 41/2 to 7½/2 percent. A justification of this slow money supply
growth rate in terms of the more rapid growth of M, appears to me to
miss the essential difference between Ml and M2 as these different
measures impact upon the level of spending in the economy. The
growth rate of Ml is not now sufficient to ensure continued economic
growth, and the presence of larger M5 balances does not remove the
need to fortify the most liquid balances.
I estimate that in order to achieve 7 percent to 8 percent real GNP
growth in 1976, assuming inflation of 6 percent and velocity increasing
by 5 percent, the money supply must grow at a rate of 7 percent to 9
percent in 1976. I agree with Chairman Burns that this kind of growth
rate cannot safely be maintained for an indefinite period of time. But,
the goal of full employment by 1980 requires a significant acceleration
in the growth of the money supply, if interest rates are to be prevented
from returning to the levels of 1974.
I urge the Federal Reserve System to examine the feasibility of
adopting interest rate targets during the coming year in the event
that the growth of demand for loanable funds begins to press upon
the available supply. I am concerned that if the Federal Reserve ad-

191
heres rigidly to the lower end of the target for growth of the monetary
aggregates, money supply growth may be insufficient to support the
growth of spending in the economy. I do not believe that the Federal
Reserve ought to attempt to "peg" real or nominal rates of interest
however. In an atmosphere of rising credit demands on the part of
the private and public sectors, such pegging could lead to excessive
monetary growth and, perhaps, a resurgence of inflation.
The Federal Reserve should follow a flexible monetary policy in
1976 and endeavor to prevent interest rates from rising prematurely.
As I have stated above, this can be achieved without reigniting inflation if money supply growth is kept in the 7 to 9 percent range.
EMPLOYMENT

The employment situation has somewhat improved, but many unanswered questions remain. Rates of unemployment that were seemingly unacceptable and intolerable in the recent past are now cited
as desired goals.
Notwithstanding the creditable improvements in our economy over
the past six months, with a commensurate drop in the unemployment
rate from a high in May 1975 of 9.2 percent (8.9 percent revised) to
the January 1976 level of 7.8 percent-7.3 million people still remain
jobless. Primary interest, on which the Congress must focus, centers
on the needs of those who will exhaust unemployment benefits during
the coming year and on the long-term unemployed.
The fact that this country has experienced excessively high rates of
unemployment for more than one year has produced enormous hardships for rising numbers of the long-term unemployed workers and
their families. We have, to a substantial degree, met the subsistence
income needs of many of the long-term unemployed through several
extensions of unemployment insurance. Unemployment insurance expenditures have nearly tripled to an annual level of almost $20 billion
as a result of persistent high unemployment rates. These expenditures,
which threaten the integrity of the entire Federal-State unemployment insurance system, can be reduced through more job creation
programs. These programs must supplement our manpower training
-programs.
Comprehensive manpower training services to the long-term unemployed, provided under the Comprehensive Employment and Training
Act of 1973 (CETA), should be made available and incorporated into
our present manpower system. Our policy should be to harness our
resources to provide additional training for those who have or are
about to exhaust these benefits. It is estimated that there will be at
least 21/2 million exhaustees in 1976, who will have no recourse but
welfare. There is a recognition that there will be no longer an attachment to the labor force for many of these exhaustees and that retraining and services should be provided to enable them to find suitable
employment again.
In this context, retraining and services should strive to increase education where the skills are needed, and not simply provide training in
upgraded skills for its own sake. It is time to begin to look at a system
for the training and relocation of displaced workers who have no hope
of regaining their former jobs because of the changing labor market.

192
The time for undiluted optimism about the economy has not arrived. The Administration's call for a continuation of Public Service
Employment through 1976, and then a total phaseout in Fiscal Year
1977 is premature and insensitive to the problem. With its program,
the Administration forecasts an unemployment rate of 6.9 percentabout 7 million unemployed-at the end of 1977. This is not a level in
which I find solace. Therefore, job creation at the Federal level must
continue to be a priority.
By designating a temporary program, with projects of limited duration-no longer than one year-job creation can be effectively maximized to provide those necessary public services not presently available
because of local budget limitations.
Ultimately the private sector must expand and provide more jobs
to reabsorb the unemployed. A proposal such as the Administration's
which provides for tax incentives to spur employment may offer some
long-term benefit, but does little for the immediate problem.
The Government's capacity to expand public service jobs employment, to provide useful and meaningful employment for the individual-and necessary services for the community-must be utilized.
The mechanism for the program is in place and the program can be
expanded to one million otherwise unemployed without additional administrative expense.
The problem of substitution of Federal funds for State and local
expenditures has been exaggerated by critics- of this approach. This
position is based upon studies of a program of limited size and scope
(the PEP program of 1971), and not on current information on the
present expanded public service employment program. And, if such
a problem does exist, it can be alleviated by restructuring part of the
program to a project oriented approach, such as the successful Local
Initiatives Program (LIP) carried out in Canada.
These initiatives can be undertaken immediately, with an average
cost of $8,500 per job per year, and have very little inflationary impact.
The argument against a public works program-that the impact can be
felt only in future years when the economy may not require any
boost-cannot validly be made. Our experience with Public Sector
Employment programs is by now considerable and solid.
Serious consideration must be given to areas of unemployment
which have not benefited from the upswing in the economy and are
sticky. Initiatives are needed in the area of youth unemployment,
which has remained around 20 percent throughout 1975. The staggering rate for minority urban youth is over 40 percent. Last year, funds
for the summer at the minimum wage for a nine week period provided
860,000 jobs, for this age group. The Administration's request is for
$440 million for Fiscal Year 1976 and $400 million for Fiscal Year
1977. The 1976 figure would provide for 740,000 summer jobs.
Again, these requests are based on assumptions of an improving
economy. The unemployment rate for this age group has remained
steady despite the improved economy. There should not be a decrease
in our funding for summer jobs. If anything, these tragic figures require an increase in appropriations for this purpose.
And, this realization requires further examination of our traditional
education system as it relates to the prospective work force. The rela-

193
tionship of school to work recently has been the subject of studies
which have restated the need for a reevaluation of our present system
to orient it more to work-study. The persistently higher rates of unemployment of this group is a telling indicator of what should be a
priority in our thinking.
THE CriTEs
Apart from the recession, the major economic event of 1975 was the
near-bankruptcy of the Nation's largest city. In part, the New York
City situation reflected the general economic malaise of the country:
A stagnant economy which tended to depress tax receipts and to increase spending, especially in such areas as unemployment compensation and welfare payments. In part, the New York City situation was
also the direct result of a system of financial mismanagement which
had been allowed to reach crisis proportions before comprehensive
steps of reform were initiated.
On another plane, however, the New York crisis illustrates the weaknesses of our Federal system. The way our tax system has grown, the
Federal Government has access to the most flexible and progressive
sources of taxation; on the other hand, the real problems facingAmericans on a day-to-day basis and to which they look to Government for
a solution more often than not become the responsibility of local government. By this I mean, the problems of demographic population
shifts, environmental pollution, congested traffic, rising crime rates,
education, health care, etc.
And, a related issue, and one which must be addressed by the Congress as its symptoms become more apparent, is the effect which regional and National growth patterns will have on the older more
crowded, less efficient cities of the Northeast and Northern States.
The New York City crisis was "solved" last December with the passage of the Intergovernmental Emergency Assistance Act, which authorized the Secretary of the Treasury to make direct loans to the
City for seasonal cash flow needs. The dollar limit of these loans is
$2.3 billion, and in keeping with the intent that these loans be for
seasonal financing only, they must be paid by the end of each Fiscal
Year. This congressional action is a part of a complicated financial
package involving the City, the State, major financial institutions
which have loaned to the City in the past, pension funds of public employees, and investors holding outstanding City notes.
The danger inherent in New York City's situation is that Congress
will believe that, having voted the $2.3 billion aid package, it has fulfilled all its obligations with regard to New York City. In fact, this is
far from the case. The revised financial plan which New York City
submitted to the Treasury Department on February 15,1976, is within
$62 million of meeting the projections on revenues and expenditures
contained in its $10 billion plan which forms an integral part of the
congressional aid package. In other words, the $2.3 billion aid figure
is proving at the present time to be just enough to enable New York
City to breathe-to scrape along. The City will be forced to meet this
kind of stringency over the three-year period covered by the financial
plan and the Federal legislation.

194
But, this begs the question of whether the New York City crisis
would have occurred if the proper Federal policies had been in effectand what should be such policies. For, in fact, this Nation has continued for some decades without a true urban development policy
designed to foster our metropolitan areas. Instead, we have a "de facto'
urban policy which encourages suburban growth at the expense of the
central cities. Bv this I mean the combination of a highway system
which facilitates commuting from relatively large distances outside
the cities, VA and FHA loans have helped spur the boom in suburban
one-family housing, a tax treatment of real estate transactions which
has encouraged real estate developers to build suburban-type housing
developments, etc.
I do not mean to belittle or criticize these measures, which have been
major factors in our post-war economic growth. However, I strongly
believe that the central city values are vital too, and that this country
suffers from a lack of a national policy on such urban affairs.
The enabling legislation of the Department of Housing and Urban
Development makes no distinction between small communities and
major urban centers such as New York City. Thus, I believe that Congress must direct its attention at the earliest possible time to developing a coordinated policy on urban affairs. This would involve the desn-.n"ion of an TTnder Secretary at HUD whose responsibility would
be for urban affairs exclusively, and a concerted Federal effort to
iclentiiy those present policies which help or hinder our metropolitan
areas. Such a recommendation is made with a long-range view.
Over the short-term, Congress must act on legislation which has
been proposed to help alleviate the financial squeeze facing many cities
and even States. In this regard, I fully support that part of the Minority Report which recommends a continuation of the General Revenue
Sharing Program and the establishment of a system of countercyclical
grants to State and local governments. General Revenue Sharing, if
continued on an automatic basis for another 53/4 years, will enable
State and local governments to continue planning their budgets with
the certainty that revenue sharing monies will be forthcoming. Should
Congress fail to enact the program, or enact a revenue sharing program
consisting of annual appropriations, this State and local planning
process will be disrupted, and revenue sharing monies will be devoted
to one-shot budget items of dubious value rather than being integrated
into the comprehensive budget process to be undertaken by each unit of
government.
A system of countercyclical grants, keyed to unemployment, to State
and local governments, such as was voted by the Senate last year, is
also essential to help enable governments across the country to weather
the hardships of the business cycle. Such governments do not have the
ability of the Federal Government to engage in Keynesian pumppriming during recessionary periods, and instead must cut back on
spending, thus doing the exact opposite of what is needed to get local
economies moving again. A system of countercyclical grants would implement the principle that State and local government spending can
help counter the effects of a business recession.
One lesson which the New York City crisis taught us is that the
country's tax-exempt markets can be a very unwelcome ally in times

195
of stress. As a technical matter, the New York City crisis flared up
when the city government found the private financial markets closed to
it, despite massive seasonal borrowing needs. Although there are many
reasons for this phenomenon, one important reason was the relative
thinness of the municipal bond market and its inability to respond to
the stress of the New York City situation. This thinness, according to
the experts, is a function both of a waning demand for tax-exempt
paper, and a rapidly growing need by the issuers of such paper for financing. Thus, many policies for future balanced urban living must
include a close examination of the municipal bond market and the
steps which could be taken to improve its efficiency. In this context, I
welcome the effort which is being made by the Administration, in the
establishment of a Municipal Finance Division within the Treasury
Department, to get to the heart of the problem.
Among the factors which this office should consider are the widening
of the emergency New York City legislation voted last year, in order
to provide aid to States setting up Big MAC-type agencies; the establishment of a Federal insurance facility for new tax-exempt issues
(which I proposed in legislation last year) ; the possibility of a taxable option feature, with a subsidized interest rate, for municipal securities; and the possibility of curtailing the tax-exempt feature of
industrial development and pollution control bonds. Each of these
measures would either widen the market for tax-exempt securities or
restrict the number of such securities being issued, and thus facilitate
financing of priority projects by State and local governments.
If we can learn from the New York City situation that the country
as a whole faces a critical problem of decaying urban centers, of which
New York City is only the tip of an iceberg, then the crisis of 1975 can
be turned to good use. If, however, New York City is considered to be
simply a unique case with no spillover effect on the rest of the country,
then I am certain that we face further crises as we once again fail to
measure up to the needs of our urban areas-and are doomed to repeat
the experience from which we will have failed to learn.
ENERGY

There are several points I want to add to the Minority Report on
energy. a great deal of which I agree with and want to second.
I believe the enactment of the Energy Policy and Conservation Act
is a turning point in American energy policy. We have resolved, at
least for 40 months, the most controversial political question relating
to energy-the price of gasoline. Although this issue will confront us
again and again over the next three years, the structure and constraints
have been set and will not be rethought.
This gives us the opportunity to deal more fundamentally with the
system and structure of American energy so that security and sufficiency of supply, at prices that are competitive and economic, will become our primary objective.
My main point of disagreement is in the Minority's recommendation
that we must press forward toward decontrol of oil and gas prices. I
would support decontrol only to the extent that there are structural
changes to guarantee the working of a truly open marketplace factor
in the production and sale of oil and gas.

196
We cannot decontrol the prices of a commodity as critical to our individual and national well-being as energy when there is an international cartel (OPEC) manipulating a shortage and dictating an
administered price to the world. This is not competition, and until
competition returns to the energy sector, I must support some
governmental input to control prices so they do not become any more
excessive.

I believe we must seriously study the proposals for restructuring
of our petroleum enterprises so as to provide a framework either for
the real working of the marketplace or for public assurance as to an
opportunity for product innovation and for establishing reasonableness in prices in the energy industry.
We must also not forget the lessons of the embargo: Our domestic
energy industry must invest its excess profits in activities that serve
the public interest of the American people. Either through tax recaptures or by direct regulation, we must insure that these profits are
invested in expanding our domestic energy sources and will help to
free us from insecurities in foreign supply.
Although this domestic investment must come primarily from the
private sector, I believe a role for the Federal Government is critical
to its success; and this may include viable public-private partnerships,
where the largest and riskiest of enterprises-but enterprises that contain the promise of commensurate public benefit in energy supplymay be financed. This should be done with due regard for environmental quality as an essential factor, too.
My final point relates to conservation, the method of achieving both
greater supply and reasonable environmental benefit in the shortand medium-term, the period we must concern ourselves with the most.
Conservation of insecure supplies involves both the elimination of
waste and inefficiency and the replacement of oil and gas with existing
alternative fuels. We should redouble our efforts to increase efficiencies
of the oil consuming sector, and similarly to increase the development
of better uses of coal to replace large portions of our imported petroleum. By finding and implementing methods for the clean burning
of coal, we will give ourselves the time we need to move rationally and
systematically into the era of renewable energy resources, such as
solar and fusion power.
HO-uSING

Housing is one sector of the economy that has suffered terribly in the
recession and has not made a strong recovery. At the end of January
housing starts were averaging 1,220,000 on an annual basis, which is
still far below a healthy level. Unemployment in the construction
trades is still 15.4 percent, far above the average for other sectors of
the economy. Adding to the problem is the fact that many State and
local housing agencies have experienced financial difficulties and cannot supply needed mortgage money to the housing markets.
On the Federal level, there is, for all practical purposes, only one
subsidy program that is being used to produce new or rehabilitated
housing; the Section 8 program which was established by the Housing
and Community Development Act of 1974. All the other subsidy programs have been phased out or are in the process of being phased out.

197
The Section 8 program, which provides a subsidy to low- and moderate-income tenants so they will not have to pay more than 25 percent
of their income (or less than 15 percent) for rent, has taken a very
long time to implement and has proven very costly. It cannot be
counted on to play a significant role in increasing housing production
and rehabilitation without additional tools.
First, the conventional public housing program should be significantly increased in size. This program was cut severely when the new
Section 8 program was enacted and has been limping along since that
time. However, conventional public housing has a fine record of production and operation among housing programs. Social services, security and adequate housing are provided to low-income tenants at
reasonable rents. The program is also one that operates at a lower
cost to the Federal Government than other programs like Section 8.
There are presently 155,000 families on the waiting list for public
housing in New York City alone and reinvigoration of the public
housing program would be extremely useful for New York and other
areas of the country with similar problems.
Second, a new program for rehabilitation of transition neighborhoods is needed to curtail the spread of decay in our urban centers.
Heretofore, national housing efforts have focused mainly on the production of new housing while neglecting the existing housing stock.
We need a new program which would deal with the problem of conserving existing low- and moderate-income housing stock and generating private capital for repairs and rehabilitation. This type of program could do much to stop the abandonment of hundreds of thousands of units in our central cities and thereby would provide much
needed housing at a lower cost.
Finally, new mechanisms must be found which will encourage a
larger flow of mortgage money into the housing market. Banks and
pension funds should be encouraged to invest in housing, and adequate
guarantees may have to be provided to make an investment in housing
more attractive to institutional lenders. Similarly, we must continue
the investment incentives for individual investors by tax advantages
if we are able to th 3reby increase the flow of dollars into low- and
moderate-income housing.
It is imperative that a greater effort be made in the public and private sectors so that housing construction and rehabilitation, which is
a critical part of our economy and means so much to many people, is
stimulated to proper levels.

67-573 0 - 76 - 13

ADDITIONAL VIEWS OF SENATOR CHARLES H. PERCY
I concur in large part with the views expressed by the Minority. I
do have differences on several significant points.
While I share the concern of my colleagues on the Minority about
restraining the growth of Federal spending, I believe that too restrictive a fiscal policy would endanger the economic gains made over the
past six months. A final decision on the appropriate fiscal stimulus for
Fiscal Year 1977 can be made better this May when the Congress must
establish Federal spending and deficit levels under the First Concurrent Resolution on the Budget.
Second, although I am encouraged by the recent decline in the unemployment rate, I believe that with the rate at an unacceptably high
7.8 percent level it is unwise to plan phasing down public service job
programs. Indeed, it may be that public service job programs should
be increased to assist those who will exhaust their unemployment compensation benefits during 1976. In my judgment, public service jobs
have generally proved to be an efficient and relatively noninflationary
means of aiding the unemployed.
Third, I agree with my Minority colleagues that a truly effective
countercyclical assistant program for local governments should be
related as directly as possible to the decline in revenues of the recipients. However, the locality-by-locality statistics that are necessary
for the use of such a distribution formula are not available at this
time. I believe the program is sufficiently important that it should be
enacted now in its admittedly less than perfect form. Such assistance
would be invaluable to depressed areas such as Rockford, Illinois,
where the unemployment rate is 11.8 percent and East St. Louis, where
unemployment is now 9.4 percent.
(199)

ADDITIONAL VIEWS OF REPRESENTATIVE
GARRY BROWN
It has been estimated that the Federal Government spends over
$130 bi llion annually in regulating our lives. Distributed among
America's families, that means each pays on the average of $2,000 a
year for Federal government regulatory activities.
CAN ANYONE SAY BENEITS ARE COMMENSURATE?

Yet, ironically, there persists, at the same time today, strong advocacy by the Majority Members of the Joint Economic Committee for
still new government agencies and regulations to protect the consumer.
I cannot help but think, however, that if the consumer knew in advance the cost of each new law and each new proposed rule, both of
which are borne by the public, that government regulations-to the
extent they are excessive-would definitely be curbed.
By far the most serious problem this Committee should highlight is
excessive government regulation. The Federal Government too frequently is found intervening directly in the marketplace, fixing prices,
erecting questionable barriers to entry, allocating markets, sanctioning collusive bidding, and delaying or even prohibiting necessary
technological progress.
Something is wrong when a small airline operating within a State
can profitably fly passengers for as little as $15 a trip, while an interstate airline, which must operate under regulations established by the
Civil Aeronautics Board, must charge $31 for the same trip. There is
something wrong when a company owning three small TV stations
must file a license renewal application with the Federal Communications Commission weighing 45 pounds.
There are few apparent benefits to the consumer from this kind of
interference.
Turning next to the question of economic stabilization, there is
obviously a decisive role to be played by fiscal and monetary policies
in smoothing out extreme moves in the economy. There have been
times, however, when such moves have been counterproductive. For
example, from the testimonv this Committee has heard, additional
"stimulus" (in the form of increased government spending) frequently takes effect at times when the total productive capacity of the
economy cannot absorb the increased demand for goods and services.
The result is inflation. dislocations in the economy, and unemployment.
We must avoid abrupt and excessive changes in government expenditures. No matter how well intentioned, such sharp swings in spending tend to accentuate rather than stabilize the business cycle and serve
to increase the uncertainty of developing policies to meet future needs.
(201)

202
In turn, this uncertainty is felt in the consumer markets, in the markets for capital goods, and in financial markets.
In addition to government expenditures, I am concerned with the
size of the Federal deficits, particularly the negative impact on financial markets and capital formation. The rise in Federal expenditures
has exceeded the growth in revenues resulting in Federal budget deficits in sixteen out of the last seventeen years.
It should be emphasized that the Federal deficit places the Department of the Treasury in a position of competing for funds with the
private sector. The recent avalanche of Treasury securities has created
distortions in the traditional patterns of funds being raised by various
sectors in the capital markets as well as in the sheer magnitude of total
funds raised. This, in turn, has contributed to making our financial
markets less efficient in channeling the savings of society to investment
opportunities.
The achievement of our capital formation goals depends on the necessary expenditures being financed in the private sector. In turn, the
adequacy of capital flows depends on the savings of society being less
and less used to finance Federal expenditures and more and more focused on capital formation. This is the only way we can sustain a durable recovery and bring down the level of inflation.
Finally, on the subject of unemployment, the Federal Government
does have an important role in providing temporary assistance to moderate the negative impact of economic recessions. However, many of
the programs enacted to supposedly assist the jobless end up being too
costly, poorly administered, and implemented too late.
In view of this problem, I recently introduced H.R. 11860, a bill developed after much deliberation which is a much more direct, effective,
efficient, and equitable program of relief for those areas and communities especially hard-hit by unemployment.
This proposal utilizes the existing distribution of funds mechanism
already included within the Housing and Communty Development
Act of 1974. This mechanism can provide the conduit for the immediate financing of projects on an accelerated basis, whereas many Federal programs are usually delayed for months while the necessary
guidelines, regulations, and qualification standards are being adopted
and promulgated.
Under my bill, the supplemental assistance could be activated when
the national unemployment rate is over 7 percent, as it is now, and
would make available for distribution each calendar quarter a sum
determined by multiplying $15 million by each one-tenth of 1 percent
by which unemployment exceeds 7 percent. Since under my proposal
distribution of funds is based on the next preceding quarter's unemployment, and since unemployment the last quarter of 1975 was 8.5 percent, as of April 1 of this year $225 million could be available for distribution for that calendar quarter-8.5 percent minus 7 percent equals
1.5 percent, and 15 times $15 million equals $225 million.
If unemployment remained at the 8.5 percent level, a total year's
funding of this type of program would, therefore cost $900 millionfour quarters multiplied by $225 million. However, since unemploy-

203
ment has been dropping and is expected to continue to fall during the
next year, the bill would call for a total authorization of $780 million.
Approximately 75 percent of the assistance could be provided to
cities and urban counties with unemployment over 8 percent, based directly and proportionately on the extent to which their unemployment
exceeds 8 percent. In the same manner, the remainder of the funds
could be distributed to States for distribution in nonurban areas having unemployment over 8 percent.
A program envisioned in H.R. 11860 would do much for the jobless,
and in a shorter period of time, than most of the other pieces of unemployment legislation urged this year.

ADDITIONAL VIEWS OF
REPRESENTATIVE JOHN H. ROUSSELOT
FISCAL POLICY

The $394.2 billion limit on Federal spending that the President has
recommended for the coming year is a commendable goal compared to
the budget ceilings offered to us by many majority congressional
leaders. It reflects sound and worthy fiscal priorities that are essential
to an effort to return to responsible government budgeting. It should
be pointed out, however, that Federal spending could-and shouldbe maintained at Fiscal Year 1975 levels.
There are those, for example, who believe that the United States
should easily be able to live on a budget equal to Fiscal Year 1976 outlay levels of $374 billion. A budget of this size would require noiadventurous cuts or rescissions, but rather simply a determination to
leave current budget expenditures at their present figures. Others,
however, believe that a further step should be taken toward responsible
government spending.
One hundred twenty-seven of us in the House of Representatives
insist that true fiscal responsibility involves more than just "reducing"
or "limiting" deficits; 1 it means eliminating them entirely and living
on a balanced budget. For the coming year that means running the
Government on anticipated revenues of $350 billion.
If we are in fact concerned about fiscal integrity and the profligacy
that has characterized Federal spending in recent years, then we must
start now to live within our means. In mv view, the Federal Government should be constrained to recognize the same economic rules as the
rest of society. Every American family, every small business and large
corporation, every State and local government agency and institution
is compelled by prudence and good economic judgment to spend no
more than it receives. The Government of the United States should be
no exception.
Some suggest that running the country on a balanced budget under
present economic conditions would create undue economic hardship
and unrest. This is not true.' It is, in fact, deficit spending that precipitates these problems, and not balanced budgets. The evidence of the
past 16 years, during which we have incurred 15 deficit budgets, shows
that bloated deficits-deficits that sap needed money from capital
markets and that aggravate inflation-have onlv exacerbated the
problems of unemployment and recession, and the burden of proof
1 Number of votes favoring the Balanced Budget Amendment to the Second Concurrent
Resolution to the Fiscal Year 19176 Budget (H.Con.Res. 466, Nov. 12, 1975).
2A balanced budget was run on the Chase Econometric Model in November 1975, at
the request of Representative Rousselot. The "run" was conducted by the staff of the
House Budget Committee and showed many extremely favorable results which would
stimulate the economy. Among them were: Increase In housing, massive budget surpluses,
rise in personal disposable income, and increased business profits for capital formation.

(205)

206
should rest with those who prescribe this cure for our economic ills to
prove otherwise.
EMPLOYMENT

The January 7.8 percent level of unemployment continues to be unacceptably high by any standards. While the January figures provided
welcome news after several months of 8 percent plus unemployment,
it is still a far cry from solving the problems of the millions who are
still without jobs and without paychecks.
Over the years, remedies to the dilemma of the unemployed have
been concocted under the headings of "public service jobs," "public
works projects," CETA, PWIP and others. No matter the. title,
though, they are all stopgap measures that merely seek to paint the
problem of unemployment a prettier color. When jobs have been
ostensibly absent in the private sector, a*cry is raised among many
to make the Government the emplover of those who have lost their
jobs or have been otherwise displaced. The decisionmakers in Washington have found comfort in assuring themselves that by pumping
taxpayer or borrowed dollars into such "make-work" programs they
have done their duty to alleviate the burden of the jobless. It is sad to
note that few realize that such an assumption is a dangerous and misleading one-dangerous in its effect on the economy, and misleading to
the faithful public ws~ho trust its elected officials to find genuine solutions to the Nation's unemployment problems.
Somehow we are slow to learn that the type of "countercyclical"
programs that are mentioned above, only disguise the underlying
problem of unemployment and in the end results are, counterproductive, the more so because the stimulative effects of programs enacted to
combat recession are often not felt until recovery is in full swing.
Public service jobs and public works programs are inordinately expensive. Some cost as much as $25,000 in taxpayer's money to create
one job with only one-tenth of the sum being used for the worker's income. Furthermore, few countercyclical programs have actually
created many new jobs. The National Planning Association concluded
that only one of every two public service jobs created by the Federal
Government represented a new increase in public employment. A
similar conclusion was reached in a study conducted by the Urban
Institute.

The lasting solution to the problem of unemployment is to be found
in the elimination of deficit spending, in tax policies that promote
savings and capital formation, and in other appropriate incentives
that would permit the private sector, rather than the Federal Government, to be the provider of jobs.
Public service jobs and public works programs currently in operation, or proposed for future enactment, should be carefully scrutinized
on a cost-benefit basis in an effort to determine which should be retained and which should be discontinued because of their ineffectiveness and high cost. Such a comprehensive review process should begin
immediately. Other government programs that ostensibly serve to
mitigate the painful personal effects of unemployment should likewise
be reevaluated.

207
One example of a program badly in need of reexamination is unemployment compensation, the funds for which could be better used to
finance capital growth and expansion in the private sector. It has been
observed that benefits offered under the unemployment insurance program are currently being ill-used to provide an artificial sense of
security for the individual who is unemployed. Knowing that gratis
income will be coming in for up to 65 weeks has led many to turn down
job offers early in their unemployment, saying in some cases that the
job is demeaning, only to find that after the chance has passed there is
nothing better available. It is too often the case that staying home to
collect tax-free government unemployment checks is more convenient
than working at what some might consider "undignified" work which,
in many cases, produces less net pay than the government-provided
insurance. I heartilv endorse Dr. Arthur Burns' recommendation,
given before the House Banking Committee." . . . to take a careful
look at the disincentive effects of our rapidly expanding unemployment compensation system."
Minimum wage laws also serve to aggravate the problem of unemployment. While many are of the belief that these laws promote a
higher standard of living and help to eliminate poverty, the opposite
is actuallv true. Through minimum wage laws, the, Government has
artifically mandated unrealistically high labor costs, as a result of
which many Americans are, denied employment simply because employers cannot meet the arbitrary wage standards set by law. For example, an individual who is only capable of producing goods and
services worth $1.50 an hour is prevented from being hired since the
Government says 'he must produce goods and services worth at least.
$2.30 an hour. (In the view of many, the minimum wage is actually
$3.22 an hour. Payroll taxes, indirect wages, overhead costs, plus the
employer's profits. increases the productivity needed to support the
official minimum ware of $2.30 an hour by at least 40 percent.) Thus,
workers who are unable to meet such a standard and produce goods and
services worth the government minimum wage, are forced onto welfare
rolls or into crime in order to sustain themselves since they are in fact
legally barred from working. Tragically, the burden falls most heavily
upon minority groups and young people. It is unfortunate to consider
that it is against the law to offer to underprivileged minority groups
work which pay $75 a week, thereby implicitly suggesting that it is
better to 'be prevented from earning $75 a week and go on welfare, if
one cannot earn the minimum wage of approximately $100 a week.
Such a capricious and arbitrary legislative decree encolurages slothfulness, fattens welfare rolls, and generally promotes unemployment
in our country.

COMMITTEE AND SUBCOMMITTEE ACTIVITIES
IN THE PAST YEAR
Public Law 304, 79th Congress, directs the Joint Economic Committee to report to the Congress by March 1 on the main recommendations of the President's Economic Report. Due to the late filing of the
President's Economic Report, the Joint Economic Committee's filing
date was extended to March 26, 1975. The Committee is also required
by the Law to make a "continuing study" of the economy. This report
is intended to serve as a guide to the several committees of the Congress
dealing with legislation relating to economic issues.
The work of the Full Committee and the Subcommittees for the
past year is summarized below.
FULL COMMITrEE

Review of the Economic Situation
In early January the Committee heard from two former Chairmen
of the Council of Economic Advisers and from a former Budget Director in response to the President's request that the Congress move
immediately to consider his economic proposals as presented in his
State of the Union Address.
1975 Joint Economic Report
The Committee conducted 15 days of hearings during January, February, and March 1975, in its annual review of the President's Budget
and Economic Report.
Testimony was received from private witnesses representing labor
and management, public utilities, small business and investment sectors, and was followed by testimony from academicians, local government spokesmen from various areas, and Administration spokesmen,
including the Chairman and Members of the Council of Economic Advisers, the Treasury Departmnent, the Office of Management and
Budget, the Council on Wage and Price Stability, and the Federal
Energy Administration. A panel of experts presented testimony on the
social costs of inflation and unemployment and another on the economic outlook based on alternative policy assumptions (econometric
forecasting organizations). The Committee heard also from senior citizen and retired persons organizations, members of minority groups,
and private forecasters.
International aspects of the President's Report were discussed by
private experts and academicians in early March before the Subcommittee on International Economics. A discussion of this day's hearings
appears under the activities of the International Economics
Subcommittee.
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210
The Annual Report of the Joint Economic Committee was filed with
the Congress on March 26, 1975 (S. Rep. 94-61). The Minority Members of the Committee released to the press separately the Minority
Views to the Committee's Report.
The fifth and final volume of the printed hearings on the President's
Economic Report contained invited comments from leaders of agriculture, banking, business, labor, and private research groups.
Ade quacy of U.S. Oil and Gas Reserves
The Committee held hearings in February on the adequacy of U.S.
oil and gas reserves, taking testimony from the Interior Department,
the U.S. Geological Survey, the National Academy of Sciences, and
from a representative from Resources for the Future. The hearings
were a result of a report of the National Academy of Sciences which
seriously questioned the adequacy of oil and gas resources to realize
the ambitions of Project Independence.
A Reappraisalof ProjectIndependence B lueprint
The project Independence Blueprint, the "Bible" of energy information, occasioned hearings in March to critique the projections of future
energy demand and supply. The Acting Deputy Federal Energy Administrator appeared before the Committee, along with a professor
from Massachusetts Institute of Technology, and a member of Battelle
Memorial Institute.
The Agricultural Situation
In April the Committee held hearings focusing particularly on the
deterioration in agricultural prices. The hearings were designed to
review the entire range of agricultural questions, including the widening farm-rental price spread, commodity reserves, agricultural trade
regulations, and the agricultural outlook for 1975. The Secretary of
Agriculture and Commissioners of Agriculture from Minnesota, Pennsylvania, and South Dakota testified, as well as economists from the
Universities of Minnesota and Chicago. Representatives from the National Farmers Union, the American Farm Bureau, and the Midcontinent Farmers Association also appeared.
FinancialA&pects of the Budget Deficit
The Committee heard testimony in April from experts on monetary
policy from Harvard University, Massachusetts Institute of Technology, and Yale University on the credit market outlook and monetary
and debt management policies. Preceding the hearing, a letter was
written to the Secretary of the Treasury asking for full, factual information on the credit market outlook. A number of economists and
financial experts were also asked for their views on this issue. The
Chairman of the Joint Economic Committee released in a floor speech
in May responses from the economists and financial experts in response
to his inquiry regarding the credit market impact of the budget deficit.
It was the consensus that the deficits can be financed without seriously
interfering with private credit demands. Twenty-eight individuals
responded to the inquiry-20 of whom held this view, 5 of whom dissented, and 3 who were uncertain.

211
Fast Breeder Reactor Program
Hearings in April and May elicited testimony from numerous Administration witnesses, including the Comptroller General of the
United States, the Director of the Office of Federal Activities of the
Environmental Protection Agency, and a representative from the International Research and Technology Corporation. Also testifying was
the Administrator of the Energy Research and Development Agency,
spokesmen for public citizen groups, the Natural Resources Defense
Council, and the President of the Atomic Industrial Forum. The focus
of the hearings was the economics of the liquid metal fast breeder
reactor, with particular emphasis on the consumption by this program
of over one-third of the Government's total energy R&D budget.
The Economic Situation
The Chairman of the Council of Economic Advisers testified before
the Committee in May on the economic situation and outlook in order
to assist the Committee in formulating its judgments regarding economic policy needs.
Monetary Policy and the Economic Outlook
In May a panel of economists discussed the impact of alternative
monetary policies on the vigor and duration of an economic recovery
as a result of the Federal Reserve Board's announced targets for monetary policy during the coming year.
The Secretary of the Treasury testified in early June on the outlook
in light of revised budget estimates and the policy targets of the Federal Reserve. In addition the hearing focused on the budgetary situation and debt management operations. Questions were asked regarding
the direction in which the economy is going and what further actions
are needed to insure a. strong and sustained recovery.
National Economnc Planning, Balanced Growth, and Full Employment
Mid-June hearings were held on the need for national economic
planning. Representatives from labor, banking, and manufacturing
testified, along with academicians and outside experts.
National Economic Planning
In November the Committee held additional hearings to examine
appraisals for and against national planning. The Novembe- hearin-s
received testimony from an outspoken opponent of national economic
planning, a member of General Motors Corporation, and from representatives of business and investment firms. The Governors of New
Jersey and Pennsylvania appeared, along with the Mayor of Detroit,
Budget Director from the City of Philadelphia, and a financial expert testified in late June on the question of the ability of the taxexempt market to provide sufficient financing of State and local
governments, and whether sufficient funds will continue to be available.
A report is described under the Urban Affairs Subcommittee's
activities and is titled, "The Current Fiscal Position of State and
Local Governments."

212
Availability of Ho'using for Middle-Income Families
A study prepared for the Committee by the Congressional Research
Service of the Library of Congress was released in April in which the
conclusion was reached that rising home costs, high interest rates, and
soaring utility bills have combined to price many middle-income families out of the single-family housing market. The study points out
that the minimum income required to afford a median-priced home has
risen 23 percent from 1973 to 1974.
Current Economic Situation and Outlook for the Housing Industry
A hearing in late June focuses on the housing sector and the present
situation in the housing industry. Testimony was received from the
National Association of Home Builders, the National Housing Conference, the National Savings and Loan League, and the United States
League of Savings Associations.
Housing Outlook
The Secretary of Housing and Urban Development appeared before
the Committee in July to comment on the role of the housing industry
in economic recovery and the Administration's initiatives for dealing
with the housing depression.
A letter from nine Members of the Joint Economic Committee was
sent to the President in mid-June urging him to sign the Emergency
Housing Act of 1975. The letter pointed out that the Act would create
important new jobs, assist middle-income families with home purchases, and prevent the foreclosure of mortgages held by unemployed
persons.
Private Sector Credit Availability
In mid-July a rural banker, a financial consultant and a professor
from Massachusetts Institute of Technology testified on the availability of credit to fuel a strong economic recovery and whether the
Federal Reserve Board is pursuing a monetary policy which will
accommodate the predicted surge in real economic growth.
The 1975 Midyear Review of the Economic Situation and Outlook
In late June the Committee began its midyear review of the
economy. Distinguished private economists and Administration
officials addressed such questions whether the economy had "bottomed
out," whether it would be vigorous enough to help bring unemployment down quickly, whether energy policy could be managed in such
a way as to help rather than harm the economy, and what new policies
are needed to insure that the recovery would be both strong and
sustained.
The Midyear Report on the Economy was issued in early October
as a a result of these hearings, accompanied by a separate release of
Minority views.
New York City Financial Crisis
The Chairman of the Committee sent letters in early September to
the Chairman of the Board of Governors of the Federal Reserve System and to the Secretary of the Treasury regarding the severity of
New York City's financial crisis. The letter from the Treasury Department in response to the Committee's inquiry was released in mid-September, followed by testimony from the Secretary shortly thereafter.

213
In early October, the Chairman of the Federal Reserve Board of
Governors testified on the economic and financial consequences of New
York City's financial situation.
Fourteen Mayors from various cities in the United States met with
the President in late September and appeared before the Committee
earlier the same day to testify about the national consequences of the
problems of New York City.
New York City's Financial Crisis: An Evaluation of Its Economric
Impact and of Proposed Policy Solutions
On November 2, the Committee released a study examining the economic consequences of New York City's financial difficulties. The report stressed the seriousness of the failure of the Federal Government
to provide a source of credit to New York City.
In a separate release, the Minority views on the New York City
situation were released to the public.
Jobs and Pricesin Chicago
The Committee on October began a series of regional hearings
focusing on unemployment, jobs, and prices, and on achieving full
employment and stable prices. The regional hearings are to be followed by a national conference and supplemented by a series of staff
economic studies, and will comprise the Joint Economic Committee's
Thirtieth Anniversary review of the Employment Act of 1946, the
principal Federal statute for managing the national economy.
The Chicago hearing devoted special attention to the unique economic aspects of the Chicago region, including problems of agriculture
and energy. The hearing, open to the public and televised over public
television, heard testimony from the Mayor of Chicago, representatives from labor, banking, farmers groups, local professors, a member
of the Chicago Board of Trade, and others.
Long-Range Economic Growth
Economic experts testified in late October on future economic
growth in the United States. The hearing was the first in a series of
hearings to be based on a recently launched study series related to
long-range growth.
Minnesota Energy Outlook
A hearing was held in Minneapolis in October in which testimony
was received from a panel of energy officials, including the Deputy
Administrator of the Federal Energy Administration, the Director of
the Minnesota Energy Agency, and the Chairman of the Minnesota
Public Service Commission. A second panel included representatives
from the Northern Natural Gas Company, the President of Q Petroleum Corporation, the President of the Minnesota Farmers Union, the
General Manager of Boise-Cascade, the Chairman of the International
Falls City Council, and Vice President of Koch Refineries.
The hearing was directed toward the energy problems confronting
the Upper Midwest and particularly the Northern Tier States. Other
hearings were planned for other sections of the country.
The President'sProposed Tax Cut and Budget Ceiling
Administration witnesses from the Council of Economic Advisers
and the Treasury Department testified in October and November an

67-573 0 - 76 - 14

214
the President's request for a $28 billion tax cut in 1976 and $395
billion spending ceiling in fiscal 1977. The Committee felt that careful
analysis of the President's proposal was essential and justification of
both short- and long-run consequence was necessary.
Pollsters Report on American Conswmers and Businessmen
The Joint Economic Committee received testimony on October 30th
from top pollsters in the United States on the mood of American consumers and businessmen. The Committee was hopeful that it could
learn more about what economic remedies consumers favor and would
be enabled thereby to formulate policies that a majority of the American people would support.
The Pollster hearing generated an unusual amount of public interest
and in November the Committee released a packet of their statements
for public dissemination.
Impact of New York City'8 Economic Crisison the NationalEconomy
On November 10th, the Committee held the second of its series of regional hearings in New York City. The Governor of the State and the
Mayorj of New York City were the leadoff witnesses, followed by a
panel discussing the general economic situation. The afternoon session
discussed policies for achieving full employment. As in other of the
Committee's regional hearings, statements were received from members of the audience who wished to be heard.
Impact of FederalEstate and Gift Taxes on Small Businessmen and
Farmers
An August hearing was held in Minneapolis, Minnesota, jointly by
the Select Committee on Small Business and the Joint Economic Comrmittee. Testifying were representatives from industry, local farmers,
insurance underwriters, and spokesmen from the legal, accounting,
and press sectors.
Joint Hearing To Assess the Capital FormationProblems of Small
Business
The Senate Select Committee on Small Business and the Joint Economic Committee in November held the second in a series of joint
hearings on the role of small and independent businesses in the
economy. The Secretary of the Treasury led off the hearings to present
the Administration's plans to resolve problems of the small business
sector. The Secretary was followed by a Governor of the Federal Reserve Board, President of the New York Stock Exchange, and the
Acting Administrator of the Small Business Administration.
Jobs and Prices in Atlanta
On December 8 the Committee continued its series of regional hearings in Atlanta, Georgia. The Governor and the Mayor of Atlanta
were leadoff witneses, followed by panels on 'the employment outlook,
the social impact of unemployment, and job creation programs. Statements were also taken from members of the audience.
Current Services Budget
The Director of the Congressional Budget Office, the Deputy Director of the Office of Management and Budget, and the Chairman of the

215
Council on National Priorities and Resources were joined by a professor from Oakland University in a hearing in December to evaluate
the current services budget for fiscal 1977. The current services budget
is an estimate of what spending would be in 1977 if there were no
policy changes. The questions addressed included what would be a good
budget policy for 1977 from the standpoint of overall fiscal policy and
how better to meet the essential public needs of the American people.
The Committee reviewed the policy changes which might be needed
in order to go from the hypothetical current services budget to an
actual budget which would support a continued economic recovery
and meet essential public needs in an efficient manner.
An Economic Evaluation of the Current Services Budget: Fiscal
Year 1977
A staff report analyzing the fiscal 1977 budget outlook and presenting estimates of budget receipts and outlays on a current services basis
for the next five years was released in late December. The study was
prepared under the provisions of the Congressional Budget Act of
1974, requiring the Committee to submit such an evaluation to the
Budget Committee in December of each year.
Employee Stock Ownership Plans
ESOPs-Employee Stock Ownership Plans-were discussed in
hearings in December by economists, lawyers, financial analysts, labor
and business representatives. The merits and deficiencies of the plans
were discussed in an effort better to judge whether such plans do or
do not have a potential for stimulating economic growth.
Employment-Unemployment
As in past years, the Committee continued its monthly review of unemployment, with appearances by the Commissioner of the Bureau of
Labor Statistics before the Full Committee on February 7, March 7,
April 4, May 2, June 6 (when it was announced that unemployment
had risen to 9.2 percent in May), July 3, August 1, September 5, October 3, 'November 7, and December 5.
Labor union officials 'appeared before the 'Committee in March to
discuss unemployment problems. The President of the Service Employees International Union, and the President of the Building and
Construction Trades Department of the AFL-CIO appeared.
Full Employment Conference
The Committee participated in an all-day conference in December
that was conducted by the Council for National Policy Planning from
New York City. The possibility of achieving full employment in the
United States without producing runaway inflation and related questions on the Nation's unemployment problems were discussed. Several
Members of Congress were cosponsors who brought together two
dozen of the Nation's leading economists, business leaders, and labor
experts to discuss the problems of chronic high unemployment. The
morning and afternoon sessions consisted of spontaneous, give-andtake discussions between Members of Congress and the visiting experts
on a wide range of subjects relating to national employment policy.

216
Special Studies
Studies in Price Stability and Economic Growth-Inflation and the
Consumer in 1974
In February the Committee released Paper No. 1, a staff study, on
the impact of inflation on consumers in 1974. Pointed out in the study
was the fact that the biggest increases in the middle-income family's
budget resulted from higher social security and income tax payments,
and the fact that taxes rose faster than any other consumer expenditure during this period of rapid inflation. The study was prepared for
the Committee under Senate Concurrent Resolution 93.
Economic Policy and Inflation in the United States
A study entitled "Economic Policy and Inflation in the United
States: A Survey of Developments From the Enactment of the Employment Act of 1946 Through 1974" was prepared for the Committee
by the Congressional Research Service of the Library of Congressunder S. Con. Res. 93. The paper, number 2 in the Committee's study.
series on "Price Stability and Economic Growth," was released on
April 17 as part of the Committee's mandate to make an "emergency"
study of the economy. The study is a valuable reference work regarding the history of economic policy over the last 30 years.
InternationalAspects of Inflation in Recent Years
Two studies, papers numbers 3 and 4 under S. Con. Res. 93, were
released in August. The analysts who prepared the studies for the Committee were, at the time the studies were done, employed by the Federal Reserve System.
Food PriMes in 1975
Also under S. Con. Res. 93, a study appraising the outlook for food
prices in 1975 was released. The-study is an evaluation of the impact
of poor crops in 1974 on prices and an estimate of the effects of exports
on food prices.
The Impact of Inflationon the Full Employment Budget
Two studies analyzing the usefulness and possible extension of the
full employment budget concept were released in early June by the
Committee. They are papers numbers 6 and 7 under S. Con. Res. 93,
The Committee Chairman, in releasing the studies. emphasized that
the studies are thorough and fair and will contribute to the Congress'
understanding of the significance of interyear budget comparisons.
JEC Recommendations to the House and Senate Budget Comamittees
on Fiscal Policy for 1975
The first in a series of yearly reports required under the Congressional Budget Act was presented to the Budget Committees in March.
The Report, supported by all Majority Members of the Committee,
contained the fiscal policy analyses and recommendations required by
the Act. Separate views of the Minority Members of the Committee
were filed with the Budget Committees prior to the March 15 deadline.
China: A Reassessment of the Economy
A compendium of papers prepared for the Joint Economic Committee was released in July in which there was a current reexamination

217
of U.S. Asian policy. A significant new factor emerged-the prospect
that the People's Republic of China may become not only one of the
world's leading oil producers, but a major exporter as well. The study
was prepared by the Congressional Research Service of the Library
of Congress.
Nine Members of the JEC Urge President To Extend Price Controls
on Old Domestic Oil
The Committee Chairman released the text of a letter sent in August
to the President, and signed by nine Members of the Committee, urging the President to extend price controls on "old" domestic oil for
six months.
Achieving the Goal of the Employment Act of 1946-Thirtieth Anniversary Review
A comprehensive investigation regarding the ills of the economy,
which would enable the Committee and the Congress to formulate
new economic policies to fulfill the goals of the Employment Act of
1946, was announced in September. The studies, to be prepared by the
JEC staff, the Library of Congress, and private experts from the
United States and abroad, will be released during the next year and
a half.
The Chairman of the Economic Growth Subcommittee released Lhe
first paper in this series, "On Giving a Job: The Implementation and
Allocation of Public Service Employment." As a result of this study,
the Subcommittee Chairman urged Congress to undertake a complete
reevaluation of public service employment. The first paper in this
series was prepared by a professor from the University of California
at Berkeley.
Totward a National Growth Policy: Federal and State Developments
in 1974
A study released in September was prepared by the Congressional
Research Service of the Library of Congress. The study was an update
of earlier reports and was presented with the view of being of value
to the Congress in developing coherent and comprehensive policies
governing the future growth and development of the United States.
Impact of Russian GrainPurchaseson Retail Food and Farm,Prices
A study released in October was prepared for the Committee by a
professor of Agricultural Economics at Pennsylvania State University and evaluated the impact over the next 12 months on food prices
and farm incomes of the sale of additional grain to the Soviet Union.
Wharton Analysis of Veto of Tax, Cut Fntension and Oil Decontrol
Legislation
An analysis prepared by the Wharton School of Finance was released in December showing the combined impact of a veto of both
the tax cut extension bill and the oil decontrol legislation. The study
concluded that these two vetoes would mean consumers would be hit
by a tax increase in January and that energy prices would take a
sharp increase upward. The effects of such vetoes, according to the
study, would increase unemployment by the end of 1977. The study
disagrees in several respects with the Administration's analysis of
the vetoes.

218
CONSUMER ECONOMICS SUBCOMMITTEE

Economic Impact of Forthcoming OPEC Price Rise and "Old" Oil
Decontrol
Two days of hearings were held in July to evaluate the economic impact of decontrolling so-called old oil and of a further rise in OPEC
oil prices. The hearings were designed to clarify Administration intentions regarding old oil decontrol and tax cuts or rebates to moderate the impact of decontrol. Administration witnesses from the
Council of Economic Advisers, Federal Energy Administration, and
Commerce testified, along with economic experts from The Brookings Institution, Data Resources, and Chase Econometrics.
Following the hearings, a study released in mid-July, compiled by
the staff of the Committee, pointed out that the Administration's oil
decontrol plan grossly understated the drastic consequences of the
program.
Members of the Subcommittee are: Senator Hubert H. Humpphrey, Chairman, Senators William Proxmire, Abraham Ribicoff, Edward M. Kennedy, Jacob K. Javits, and Charles H.
Percy; Representatives Richard Bolling, William S. Moorhead,
Gillis W. Long, Garry Brown, and Margaret M. Heckler.
ECONOMIC PROGRESS SUBCOMMITTEE
Credit Flows and Interest Costs

A staff study released in March under S. Con. Res. 93 measures
the flow of credit into each major economic sector over the past five
years, and particularly during the 12 months ending September 1974.
Members of the Subcommittee are: Representative Wright Patman, Chairman, Representatives Henry S. Reuss, Lee H. Hamilton, Gillis W. Long, Garry Brown, and Margaret M. Heckler;
Senators William Proxmire, Lloyd M. Bentsen, Jr., Paul J. Fannin, and Jacob K. Javits.
PRIoRIrrIEs AND ECONOMY IN GOVERNMENT

SUBCOMMITTEE

Five-Year Budget Projections
Administrat;on witnesses from Treasury and the Office of Management and Budget, along with the newly appointed Director of the
Congressional Budget Office, appeared before. the Subcommittee in
April to discuss the Administration's five-year budget projections.
This was the first time the Administration had presented to the Congress a detailed set of five-year projections. The hearing inquired into
the economic assumptions underlying the forecast and projections and
into the priority decisions implicit in the forecast.
Defense Procurement in Relationships Between Government and Its
Contractors
April hearings received testimony from the Acting Chairman and
members of the Renegotiation Board regarding Administration
"promises" to reinvigorate the Board. The economic effects of defense
procurement and the relationships that exist between the Government
and its contractors were discussed. The Board has responsibility for

219
recapturing excess profits on defense contracts. The Administration's
failure to appoint a new Board Chairman was also discussed..
The Director of the Naval Nuclear Propulsion Program also testified regarding the Board.
Midyear and Long-term Budget Projections
The Director of the Office of Management and Budget, the Chairman of the Council of Economic Advisers, and members of The Brookings Institution appeared before the Subcommittee in June regarding
midyear and long-term budget projections.
Allocation of Resources in the Soviet Union and China-1975
Hearings before the Subcommittee, held in Executive Session in
June and July, were released by the Subcommittee later in the year.
Testifying were the Director of the Central Intelligence Agency and
the U.S. Army Director of the Defense Intelligence Agency. U.S. and
Soviet military manpower costs were discussed, as well as cost and
maintenance estimates of various types of weapons systems.
Members of the Subcommittee are: Senator William Proxmire,
Chairman, Senators John Sparkman, Abraham Ribicoff, Hubert
H. Humphrey, Edward M. Kennedy, Charles H. Percy, and
Robert Taft, Jr.; Representatives Wright Patman, Lee H. Hamilton, Gillis W. Long, John H. Rousselot, Clarence J. Brown, and
Garry Brown.
INTER-AMERICAN ECONOMIC RELATIONSHIPS SUBCOMMm'EE

CanadianForeignInvestment Screeening Proceduresand the Role of
Foreign Inve8tment in the Canadian Economy
The Acting Chairman of the Subcommittee began a series of hearings in December to examine national regulation of foreign investment in the Western Hemisphere by considering the new Canadian
foreign investment screening procedures and the role of foreign investment in the Canadian economv. The Chairman of the U.S.-Canada
Committee of the U.S. Chamber of Commerce appeared, along with
academicians and the President of the Ford Motor Company of Canada, Ltd.
Members of the Subcommittee are: Senator John Sparkman,
Chairman, Senators Lloyd M. Bentsen, Jr., Edward M. Kennedy,
Robert Taft, Jr., and Paul J. Fannin; Representatives Gillis W.
Long, Lee H. Hamilton, Margaret M. Heckler, and John H.
Rousselot.
INTERNATIONAL EcoNoMIcs SuEcoMMrirEE

InternationalMonetary Situation and the Administration's Oil Floor
Price Proposal
International monetary conditions and proposals were reviewed
before the Subcommittee in late March. Testimony was received from
the Secretary of the Treasury and the Under Secretary of Treasury
for Monetary Affairs, who commented specifically on the outlook for
international monetary reform, U.S. policies regarding gold, intervention in exchange markets by U.S. monetary authorities, and international energy policy.

220
Subsequent hearings were planned to hear from private and additional official witnesses on these subjects.

Oil Floor Price Propo8al
An April hearing to consider the Administration's proposal for a
common oil price floor heard testimony from academic, industry, and
research organizations. The hearing examined domestic and international issues raised by the proposal.

The State Department Oil Floor Price Proposal: Should Congre88
Endorse It?
The Subcommittee released a report as a result of its hearings on
the oil floor price proposal. The report analyzed arguments for the
floor price and reached the conclusion that a minimum price for oil
imports is an inappropriate method of protecting domestic investments
in conventional energy resources from becoming noncompetitive if
world oil prices were to drop.

International Monetary Reforn

and Exchange Rate Management

Hearings in July were held jointly with the Subcommittee on International Trade, Investment, and Monetary Policy of the House Committee on Banking and Currency and focused on the problems of
international monetary reform and exchange rate management.
Discussed were floating versus fixed exchange rates; intervention
in exchange markets; the need for IMF authorization regarding floating versus fixed rates; and the sale of gold in the free market. Testimony was received from commercial bank officers, businessmen, importers, and economists, as well as from the Secretary of the Treasury
and a Member of the Board of Governors of the Federal Reserve
System.

Exchange Rate Policy and InternationalMonetary Reforrn
A report based on the July hearings was released in August. In the
report, the two Subcommittee Chairmen expressed strong support for
the Administration's position on floating exchange rates.

IMF Agreement on Gold
An October hearing to consider the gold agreement reached by the
International Monetary Fund Interim Committee received testimony
from the Executive Director of the IMF, academicians, investment
bankers, and an insurance representative.

The Proposed IMF Agreement on Gold
A report on the October hearing was released in December. The
report criticized the restitution provision of the agreement on gold
and recommended reconsideration and redrafting to eliminate inequities and to strengthen the commitment to phase out monetary gold.
Members of the Subcommittee are: Representative Henry S.
Reuss, Chairman, Representatives William S. Moorhead, Lee H.
Hamilton, Clarence J. Brown, Garry Brown, and John H. Rousselot; Senators John Sparkman, Abraham Ribicoff, Hubert H.
Humphrey, Lloyd M. Bentsen, Jr., Edward M. Kennedy, Jacob
K. Javits, Charles H. Percy, and Robert Taft, Jr.

221
FISCAL POLICY SUBCOMMmEE

The Equal Opportunity Program for Federal Nonconstruction Contractors Can Be Improved
A report was issued in May which was prepared by the General
Accounting Office at the request of the previous Chairwoman of the
Fiscal Policy Subcommittee and the then Ranking Minority Member
of the Committee. The report was occasioned as a result of hearings
held in 1973, and focused on Federal efforts to end job discrimination
and the enforcement of Executive Order 11246, prohibiting Federal
contractors from discriminating on the basis of race, sex, creed, or
national origin.
The report found that Federal enforcement efforts were riddled by
inefficiencies and that the Labor Department lacked the means for
evaluating the progress of Federal contractors in complying with the
Executive Order.

Studies of Public Welfare
In late May, the Subcommittee released Paper No. 20, the final
volume in its series "Studies of Public Welfare." The handbook, a
irevision of Paper No. 2, gives current information on income security
programs.

General Revenue Sharing Program
In June the Subcommittee held hearings focusing on evaluations
of the present distribution formula and suggested alternatives regarding the General Revenue Sharing Program. Principal researchers
of alternative formulae projects, funded by the National Science
Foundation, appeared to advance suggested alterations in the program based on their research and findings. An expert in the field of
public finance acted as discussant at each of the hearings.
Members of the Subcommittee are: Representative Richard
Bolling, Chairman, Representatives William S. Moorhead, Gillis
W. Long, Lee H. Hamilton, Clarence J. Brown, and John H.
Rousselot; Senators William Proxmire, Lloyd M. Bentsen, Jr.,
Robert Taft, Jr., and Paul J. Fannin.
URBAN AFFAIRS SUBCOMMITTEE

The Current Fiscal Position of State and Local Governments
A comprehensive study of State and local government finances was
prepared by the Staff of the Joint Economic Committee and released
in May. It presents the results of a survey of 48 State governments
and demonstrates the devastating effect the recession has had on State
and local government budgets.
Members of the Subcommittee are: Representative Williams S.
Moorhead, Chairman, Representatives Richard Boiling, Gillis W.
Long, Garry Brown, Margaret M. Heckler, and John H.
Rousselot; Senators Abraham Ribicoff, Hubert H. Humphrey,
Lloyd M. Bentsen, Jr., Edward M. Kennedy, Charles H. Percy,
and Jacob K. Javits.

222
ECONOMIC GROWTH SUBcoMMIrTEE

Labor Market Polieie8 for Full Employment
The Secretary of the Department of Labor and the President of
the AFL-CIO appeared before the Subcommittee in May to assist
in a thorough examination of the policies which are needed to begin
reducing unemployment quickly and keeping it coming down over the
next several years in ways consistent with regaining reasonable price
stability.
A panel of labor experts testified in early June regarding manpower
and labor market policies which could be developed and which would
work with fiscal and monetary policies to accomplish a goal of full
employment without inflation.
Employment Problems of Women, Minoritie8,and Youth
Two days of hearings were held in July regarding polices needed
to restore full employment, especially among women, minorities, and
youths. Representatives testified from academia, the National Urban
League, the National Association for the Advancement of Colored
People, leaders of recruiting and training programs, a former Assistant Secretary of Labor for Manpower, and the Secretary-Treasurer
of the American Federation of State, County, and Municipal Employees of the AFL-CIO.
Technology and Economic Growth
Three past Presidential Science Advisers testified in mid-July, along
with academicians, a former AEC Chairman, the Director of the
Office of Invention and Innovation from the National Bureau of
Standards, and a Winner of the Nobel Prize in Physics, on the lack
of a national technology policy and its impact on the economy. The
lack of a policy adapted to meet new emerging priorities-economic
growth, environmental soundness, export competitiveness, and social
welfare-were discussed. Also testifying was the author of a special
study, released concurrently and commissioned by the Committee, of
the U.S. technical progress and technology policy. The study is entitled "Technology, Economic Growth, and International Competitiveness."

Achieving the GoaIs of the Employment Act of 1946-ThirtiethAnniversary Review-Volume 1-Employment-Paper No. 1. On
Giving a Job: The implementation and Allocation of Public
Service Employment
The Subcommittee released in August the first paper in the series,
"Achieving the Goals of the Employment Act of 1946 . . ." The Subcommittee, as a result of this study, urged the Congress to undertake
a complete reevaluation of public service employment. The paper was
prepared by a professor from the University of Berkley.
Members of the Subcommittee are: Senator Lloyd M. Bentsen, Jr., Chairman, Senators William Proxmire, Abraham Ribicoff, Hubert H. Humphrey, Edward M. Kennedy, Jacob K. Javits,
and Charles H. Percy; Representatives William S. Moorhead,
Clarence J. Brown, and Margaret M. Heckler.

223
ENERGY SUBCOMMrrTEE
The Joint Economic Committee Chairman announced in July the
formation of a Subcommittee on Energy to deal exclusively with the
economic aspects of energy. The Subcommittee's role was envisioned
as analyzing the many complex economic aspects of the current energy
crisis in the Nation's domestic and foreign policy and finding a way
to end the impasse over energy between Congress and the Administration. Without jeopardizing the Nation's recovery from the current recession, the Subcommittee seeks to play a role in reaching solutions
to meet the goals of increased domestic energy production and increased energy conservation.
U.S. ForeignEnergy Policy
Two days of hearings in September received testimony from a
former Secretary of Commerce, the President of the Overseas Development Council, a professor from Yale University, focusing on a comprehensive reexamination of the U.S. foreign energv policv. Topics
discussed included whether the United States should be seeking to become self-sufficient in energy or working out cooperative relationships
with other countries.
On the second day of the hearings, the Secretary of State appeared
to testify on the Administration's policies in this important area. The
Secretary appeared before the Full Committee, chaired by the Energy
Subcommittee Chairman.
Achievinq the Coals of the Employment Act of 1946-Thirtieth
Anniversary Review-Volune 2-Energy Paper No. 1-Oil
Profits, Prices, and Capital Requirements
A staff study was released in September demonstrating that high oil
prices and windfall oil profits in 1973 and 1974 have resulted only in
a very high-cost energy industry instead of increased oil production
in the United States.
In a separate release, the Ranking Minority Member on the Joint
Economic Committee disavowed any Minority connection with the
study.
Control of Enerqy Resources
The Subcommittee held hearings in November on the control of
energy resources, focusing on the extent and significance of integrated
control by oil companies over competing energy fuels and how the
Federal Government in framing a national energy policy, should deal
with trends toward increasing concentration.
Testimony was taken from the Mayor of San Francisco, the Federal
Trade Commission, the Tennessee Valley Authority, academicians,
and industry experts regarding this significant aspect of the ongoing
debate over national energy policy.
Energy Conservation in Massachusetts
In mid-November, a hearing was held in Waltham, Massachusetts,
concerning energy conservation in the State. Testifying, among others,
were the Mayor of Waltham and the Assistant Administrator for
Conservation and Environment of the Federal Energy Administration. The hearing was an attempt on the part of the Subcommittee

224
to determine ways in which theFederal Government can promote and
encourage energy conservation at the State and local levels without
inflicting record-high energy prices on citizens least able to bear the
economic burdens. The Subcommittee hoped to learn how energysaving approaches and technologies being developed in the State of
Massachusetts could be applied for the benefit of all Americans..
Also testifying were the Director of the Massachusetts Energy
Office, a representative from the New England Center for Energy
Poliev, a member of the Massachusetts League of Women Voters, an
industry spokesman, and representatives of banking and realty trust
associations.
Members of the Subcommittee are: Senator Edward M. Kennedy, Chairman, Senators Hubert H. Humphrey, William Proxmire, Abraham Ribicoff, Jacob K. Javits, Charles H. Percy, and
Robert Taft, Jr.; Representatives Wright Patman, William S.
Moorhead, Lee H. Hamilton, Gillis W. Long, Clarence J. Brown,
Garry Brown, and John H. Rousselot.
STAFF PARTICIPATION IN MEETINGS

WITH OUTSIDE GROUPS

In addition to conducting formal studies and arranging hearings
for the Committee and Subcommittees, the staff participated in discussions of economic problems and research techniques with outside
groups. The following list illustrates the nature of these activities in
which the staff took part in 1975:
American Economic Association Convention, Dallas.
American Enterprise Institute.
American Institute of Architects.
Brookings Institution.
Carnegie-Mellon University-Rochester University, Joint Conference on Economic Policy Issues.
Chamber of Commerce of the United States.
Columbia University.
Conference Board, Capital Markets and Water Quality Needs
Conference.
Council on Foreign Relations 1980's Project.
Data Resources Conference-in New York and Washington.
Federal Deposit Insurance Corporation Seminar with Financial
Executives.
George Washington University Seminar on Developing a National Model for Public Policy.
Habitat Institute Seminar on Economic Growth.
Initiative Committee Conference on National Planning.
Library of Congress Conference on Urban Growth.
Limits to Growth 1975 Conference, Houston.
National Governor's Conference.
National League of Cities.
National War College.
North American Study Group of the Middle East, Columbia
University.
Organization of European Economic and Community Development.
Rutgers University.

225
Southern Economic Association Convention, Atlanta.
Taxation, Resources and Economic Development Conference,
Madison, Wisconsin.
Treasury Conference on the Eurodollar Market.
United Nations Association.
Urban Institute, Land Use Seminar.
Urban Institute, Seminar on Social Security.
Vail V Symposium, Vail, Colorado.
Wharton Econometric Forecasting Associates Conference on the
Economic Outlook.
World Bank Annual Meeting.
World Future Society General Assembly.
The Executive Director and other professional staff members addressed or presented papers to the following:
American Bar Association.
American Public Works Association.
American University Washington Semester.
Bluffton College, Bluffton, Ohio.
Civil Service Commission Executive Training Seminars.
Clemson University.
Conference of Democratic Mayors.
Council on Urban Economic Development.
Environmental Protection Agency Congressional Briefing Conference.
International Management and Development Institute.
International Monetary Fund, Washington, D.C.
Kennedy Institute of Politics, Harvard University.
Lintas Seminar, International Business Executives.
Midwestern Mayors and Local Officials, convened by Congressman John Dingell.
Minnesota Energy Conference.
Mitre Corporation, McLean, Virginia.
National Academy of Public Administration, Meeting on National Growth Policy.
National Association of State Budget Officers.
National Contract Management Association.
National Economists Club.
National League of Cities.
New York State Savings Bank Association.
Presidential Classroom.
WAMU Radio, American University.
The Executive Director accompanied the Chairman to a meeting of
the International Economic Association, in Stockholm, Sweden, where
he addressed the Association. The Executive Director conferred with
officials of the O.E.C.D. on matters of public economic policy.
A senior staff economist of the Joint Economic Committee spoke for
the U.S. Information Agency in Tokyo, Seoul, Hong Kong, Bangkok,
Vientiane, Kuala Lumpur, and Wellington, on international monetary
reform and the outlook for growth and inflation in the United States.
Another senior economist participated in a conference in Ditchley,
England, on the political problems of inflation. A staff economist
studied economic planning activities in Norway and Sweden.

226
CHANGES IN COMMITTEE MEMBERSHIP

There were no changes in Committee Membership during the 1st
Session of the 94th Congress. In July 1974 a Subcommittee on Energy
was formed to deal exclusively with the economic aspects of energy.
The Members of this Subcommittee are listed under Subcommittee
Membership, which follows.
CHANGES IN COMMITrEE STAFF

Leaving the staff during the year were: Anne Annette, Minority
Secretary; Leslie Bander, Minority Economist; Jeanine Drysdale,
Secretary, Gail McCallion, Research Assistant; John Raffaelli,
Intern; Carl Sears, Research Assistant; and Caterina Sparacino,
Financial Clerk. Additions to the professional and administrative
personnel staff include: William Buechner, Economist; Jane Harty,
Minority Secretary; Louis C. Krauthoff II, Professional Staff Member; Barbara Levinson, Secretary; Catherine Miller, Minority Economist; Beverly Mitchell, Secretary; Ralph Schlosstein, Economist;
Dee Roi B. Stewart, Secretary; and Milton Tillery, Intern.
DIsTRm3UTIoN

OF COMMIITEE PUBLICATIONS

In 1975 the Joint Economic Committee distributed over 350,000
copies of current and previous years' publications to individuals,
libraries, and organizations the world over.
Since the time of our last Annual Report, the Committee has
released 21 reports and studies and has published 53 sets of hearings,
for a total of 74 publications.
Also, during the past year, the Superintendent of Documents sold
over 135,000 copies of current and previous years' publications.
Economic indicators, which are sold by monthly subscription through
the Superintendent of Documents, were received by 12,000 subscribers
in 1975.
In addition, Committee prints, released by the Joint Economic
Committee, are mailed to over 700 depository libraries throughout
the country by the Government Printing Office.

SUBCOMMITTEE MEMBERSHIP,
NINETY-FOURTH CONGRESS
CONSUMER ECONOMICS
SENATORS

REPRESENTATIVES

Hubert H. Humphrey, Chairman Richard Bolling
William Proxmire
William S. Moorhead
Abraham Ribicoff
Gillis W. Long
Edward M. Kennedy
Garry Brown
Jacob K. Javits
Margaret M. Heckler
Charles H. Percy
ECONOMIC PROGRESS
REPRESENTATIVES

Wright Patman, Chairman
Henry S. Reuss
Lee H. Hamilton
Gillis W. Long
Garry Brown
Margaret Heckler

SENATORS

William Proxmire
Lloyd M. Bentsen, Jr.
Paul J. Fannin
Jacob K. Javits

PRIORITIES AND ECONOMY IN GOVERNMENT
SENATORS

William Proxmire, Chairman
John Sparkman
Abraham Rihicoff
Hubert H. Humphrey
Edward M. Kennedy
Charles H. Percy
Robert Taft, Jr.
INTER-A.ERICAN

REPRESENTATIVES

Wright Patman
Lee H. Hamilton
Gillis W. Long
John H. Rousselot
Clarence J. Brown
Garry Brown
ECONOMIC RELATIONSHIPS

SENATORS

John Sparkman, Chairman
Lloyd M. Bentsen, Jr.
Edward M. Kennedy
Robert Taft, Jr.
Paul J. Fannin

REPRESENTATIVES

Gillis W. Long
Lee H. Hamilton
Margaret M. Heckler
John H. Rousselot
(227)

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INTERNATIONAL ECONOMICS
REPRESENTATIVES

SENATORS

Henry S. Reuss, Chairman
William S. Moorhead
Lee H. Hamilton
Clarence J. Brown
Garry Brown
John H. Rousselot

John Sparkman
Abraham Ribicoff
Hubert H. Humphrey
Lloyd M. Bentsen, Jr.
Edward M. Kennedy
Jacob K. Javits
Charles H. Percy
Robert Taft, Jr.

FISCAL POLICY
REPRESENTATIVES

SENATORS

Richard Bolling, Chairman
William S. Moorhead
Gillis W. Long
Lee H. Hamilton
Clarence J. Brown
John H. Rousselot

William Proxmire
Lloyd M. Bentsen, Jr.
Robert Taft, Jr.
Paul J. Fannin

URBAN AFFAIRS
REPRESENTATIVES

SENATORS

William S. Moorhead, Chairman Abraham Ribicoff
Richard Bolling
Hubert H. Humphrey
Gillis W. Long
Lloyd M. Bentsen, Jr.
Edward M. Kennedy
Garry Brown
Margaret M. Heckler
Charles H. Percy
John H. Rousselot
Jacob K. Javits
ECONOMIC GROWTH
REPRESENTATIVES

SENATORS

Lloyd M. Bentsen, Jr., Chairman William S. Moorhead
William Proxmire
Clarence J. Brown
Margaret M. Heckler
Abraham Ribicoff
Hubert H. Humphrey
Edward M. Kennedy
Jacob K. Javits
Charles H. Percy
ENERGY
REPRESENTATIVES

SENATORS

Edward M. Kennedy, Chairman Wright Patman
William S. Moorhead
Hubert H. Humphrey
Lee H. Hamilton
William Proxmire
Gillis W. Long
Abraham Ribicoff
Clarence J. Brown
Jacob K. Javits
Charles H. Percy
Garry Brown
John H. Rousselot
Robert Taft, Jr.

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