The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
joint economic report 1
Joint Economic Committee/ Congress of the United States/House Report No. 95-995
,8UMmYnM
/
fQU~©00H
Union Calendar No. 498
95th Congress, 2d Session -
- - -
House Report No. 95-995
THE 1978
JOINT ECONOMIC REPORT
REPORT
OF THE
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ON THE
JANUARY 1978 ECONOMIC REPORT
OF THE PRESIDENT
TOGETHER WITH
MINORITY AND ADDITIONAL VIEWS
MAcH
21, 1978.-Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
U.S. GOVERNMENT PRINTING OFFICE
23-928 0
WASHINGTON: 1978
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402
Stock No. 052-071-00558-7
JOINT ECONOMIC COMMITTEE
(Created pursuant to see. 5(a) of Public Law 304, 79th Cong.)
RICHARD BOLLING, Missouri, Chairman
LLOYD BENTSEN, Texas, Vice Chairman
SENATE
HOUSE OF REPRESENTATIVES
JOHN SPARKMAN, Alabama
HENRY S. REUSS, Wisconsin
WILLIAM PROXMIRE, Wisconsin
WILLIAM S. MOORHEAD, Pennsylvania
ABRAHAM RIBICOFF, Connecticut
LEE H. HAMILTON, Indiana
EDWARD M. KENNEDY, Massachusetts
GILLIS W. LONG, Louisiana
GEORGE McGOVERN, South Dakota
PARREN J. MITCHELL, Maryland
JACOB K. JAVITS, New York
CLARENCE J. BROWN, Ohio
WILLIAM V. ROTH, JR., Delaware
GARRY BROWN, Michigan
JAMES A. McCLURE, Idaho
MARGARET M. HECKLER, Massachusetts
ORRIN G. HATCH, Utah
JOHN H. ROUSSELOT, California
JOHN R. STARK, Executive Director
Louis C. KRAUTHOFF II, Assistant Director
RICHARD F. KAUPMAN, General Counsel
ECONOMISTS
G. THOMAS CATOR
THOMAS F. DERNBURG
ROBERT D.
HAMRIN
KENT H.
HUGHES
L. DOUGLAS LEE
DEBORAH NORELLI MATE
GEoRaG R. TYLER
PHILIP MCMARTIN
MINORITY
CHARLES H. BRADFORD
M. CATHERINE
STEPHEN J.
MILLER
ENTIN
(II)
GEORGE D. KRUMBHAAR,
MARK R. POLICINSKI
Jr.
LETTER OF TRANSMITTAL
MARCH 21, 1978.
Hon. THOMAS P. O'NEILL, Jr.,
Speaker, U.S. House of Representatives,
Wa8hington, D.C.
DEAR MR. SPEAKER: Pursuant to the requirements of the Employment Act of 1946, I hereby transmit the report of the Joint Economic
Committee containing its findings and recommendations with respect
to each of the main recommendations made by the President of the
United States in his 1978 Economic Report. This report is to serve
as a guide to the several committees of Congress dealing with legislation relating to economic issues.
Sincerely yours,
DICK BOLLING,
Chairman,JointEconomric Committee.
(m)
CONTENTS
I. Introduction ---------II. The economic situation and outlook -_-__-_-_-__-_-_-__-__-__
1977 ---------------------------------------------------- _
1978 _
1979 ----------------------------------------------------_
The longer term-____--_--_----__----------_-__-___
III. Goals for economic policy __-- _-- __-_-_-_-_-_-__-_-_-_
Growth and employment goals for 1978 and 1979 -_-_-______
Longer term economic goals -_--__-___-_-_-__-___
The Full Employment and Balanced Growth Act -_-__-_-__
The path to a high employment economy--__-_-_-_-__-___
Full employment budget estimates-__-__-_-__-_-_-_-_
IV. Monetary and fiscal policy -_---__-_-_-_-_-__-_-_
Monetary policy ------------------------------------- -Policy in 1977 and 1978 __---- _-- _-_-_-_-_-___
Obstacles to monetary expansion: The international position
of the dollar - _-- _---___----------_-----Fiscal policy ----------------------Expenditure policy -__---___---------_____-__-__Economic priorities in the budget-__-_-_-_-___
Urban policy and housing __-__-_-_- __-___
Total spending -_----------------___-Tax policy -__--_------------------_
Crowding out _--------------_-_-_-_------------ -Improvements in policy coordination __-__-_-_-__-_-___
V. The control of inflation -__--------_---_-___-_-_-___
Inflation and recovery -----------------------------_Inflation prospects--_---------------------Indexation and incomes policy--_--VI. Structural unemployment -_--__--_--_-_-__-_-_
-_-_-_
Youth unemployment -_--------------__
Adult women -61
Eliminating bottlenecks _-- _--_--_
----- _-__
Geographic employment problems-_-___- __
VII. The current services budget -_--_-_-_-_-_
-_-_-_
Additional views of Vice Chairman Lloyd Bentsen _-___-_--- _
Additional views of Representative Henry S. Reuss _-_-_-_- Additional views of Representative Lee H. Hamilton
-__-Additional views of Senator William Proxmire
_-_-_-_-_--- __-_78
Additional views of Senator George McGovern
___- __-_---_-__80
Minority views on the 1978 Economic Report of the President --- Additional views of Senator Jacob K. Javits
__-_-_-_--_-___
Additional views of Representative Clarence J. Brown
-_-_Additional views of Senator William V. Roth, Jr ----------------Additional views of Senator James A. McClure and Senator Orrin G.
Hatch-____-- _--__-----_--_--------______---Committee and subcommittee activities-__-___-_-_-_-_-_-_
Subcommittee membership, 95th Congress, 1st session _-_-_-__-_
(v)
Page
5
10
10
14
15
16
17
17
22
23
25
26
29
30
31
34
37
37
38
40
42
42
45
46
49
49
50
53
58
61
62
63
66
69
70
72
83
131
135
136
140
143
157
Union Calendar No. 498
95TH CONGREUM
2d Sat88io
HOUSE OF REPRESENTATIVES
I
Rmoiro
R
No. 95-995
REPORT ON THE JANUARY 1978 ECONOMIC REPORT
OF THE PRESIDENT
MARCH 21, 1978.-Committed to the Committee of the Whole House on the State
of the Union and ordered to be printed
Mr. BoILING, from the Joint Economic Committee,
submitted the following
REPORT
together with
MINORITY AND ADDITIONAL VIEWS
[Pursuant to sec. 5(b) (3) of Public Law 304 (79th Cong.)]
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 1978
Economic Report of the President
I. INTRODUCTION
The U.S. economy made substantial progress in 1977.
Unemployment for the year fell to 7 percent and dropped
at yearend to 6.4 percent. The number of employed people
increased by more than 4 million. Real gross national product (GNP) grew about 5 percent, while gross private
domestic investment rose about 13 percent in real terms.
Profits improved substantially.
Although these developments are gratifying, we cannot
forget that the Nation has still not fully recovered from
the worst recession since the Great Depression. The national economy has come only about 60 percent of the way
back to full employment. The capacity utilization rate is
83 percent, several percent below the desirable level, and
unemployment is still above 6 percent. Inflation continues to
be a stubborn problem; the increase in consumer prices of
6.8 percent is much too high, and the productivity increase
of 2.4 percent for the year is not reassuring.
Employment - Unemployment
MILLIONS OF PERSONS 116 and Older)
100
100
a~~~~~Cviftn Labor Force
90
_
S..
~~~~~unemployment
I
5_10
Employment
IdIIIIII
1975
1976
SOURCE: Departrnent of Labor
(5)
1977
6
Our overall progress should not conceal the serious situation of certain groups and certain sectors of our economy.
The unemployment rate for blacks and for black teenagers
is far above the average. In the absence of specific structural programs unemployment for minorities can be expected to remain chronic and severe. In many cases structural unemployment has been exacerbated by serious urban
problems. Many central cities have not recovered from the
recent recession. Public services have been reduced, local
taxes are high, and urban infrastructures are deteriorating. Our national transportation system is deficient. An
energy program is urgently needed. Certain industries have
required government assistance, and there are sections of
the country that are plagued by stagnation.
The international economy gives rise to difficulties for
U.S. policy. Our balance-of-payments deficit caused by slow
recovery in Europe and heavy oil imports will continue.
Serious credit problems among the developing nations persist. Energy dependency makes our economy vulnerable to
external shocks.
The Administration has addressed itself to most of these
problems in a responsible manner. Its program has much
to commend it. With the stimulus of the proposed tax reduction, the Administration projects a real growth rate of 4.7
percent for 1978, with unemployment dropping to the
6-61/4-percent range. For 1979, a similar rate of growth is
projected, with unemployment falling below 6 percent.
The basic question is whether or not our economy can do
better. We believe that it can. With the proper policy mix,
real growth rates of 5 to 5.5 percent in 1978 and 1979 are
attainable, and should be our national goal. Our analysis of
the outlook and the policy mix leads us to the conclusion
that such goals can only be reached if the President's tax
proposals are accompanied by a monetary policy that will
move short-term interest rates in the direction of 1977
levels.
Additional stimulus is definitely needed for 1979. That
stimulus, however, should come in the form of an expansionary monetary policy that will reverse the recent rise in
short-term interest rates. Even if monetary policy should
become gradually more restrictive, greater reliance will
have to be placed on increased Federal spending or larger
7
tax cuts. And even then, a restrictive monetary policy could
prevent the achievement of 1979 goals for production and
employment, enlarge the Federal deficit, and retard needed
capital formation.
An examination of the President's discretionary budget
choices reveals little evidence that a major change in priorities is taking place. There are some signs that a foundation
is being laid for future changes. But so far, this year's
priorities are similar to those of prior budgets. Further,
there is likely to be less economic stimulus in the budget
requests than is apparent from the figures because of the
composition of the increases.
Inflation will continue to concern U.S. policymakers as
it does the rest of the world. Obviously, it cannot be cured
overnight. It requires a composite of measures, both public
and private, and substantial public consensus. We believe
that the Administration's initiatives, while in the right direction, can be improved. We urge strengthening of the
Council on Wage and Price Stability and greater efforts to
reduce the inflationary impact of Federal programs.
We recognize that full employment and price stability
cannot be achieved by fiscal and monetary means alone.
Only with a coordinated program of structural measures
dealing with such problems as manpower, investment, supply bottlenecks, international factors, and the like can we
accomplish high employment objectives in a balanced and
stable setting. In carrying out our role under the Employment Act we have stressed the importance of a longer term
perspective and of improved coordination of public programs.
In this Report, as in previous ones, we have attempted
to provide longer range insights, and we commend the
Budget Committees for placing emphasis on five-year projections in their forthcoming review of the Budget. At the
same time, we see obvious need for improving substantially
our national capacity for the planning and coordination of
policy to meet the objectives of the Employment Act of 1946.
For that reason, we accord high priority to enactment of the
Full Employment and Balanced Growth Act (generally
referred to as the Humphrey-Hawkins bill).
The major recommendations of the Joint Economic Committee are set forth below. These and additional recommendations are discussed in the following chapters.
8
We strongly endorse the Humphrey-Hawkins bill
and urge its swift enactment by the Congress. The
Congress should enact specific, quantitative longterm economic goals that will serve as the basis
for congressional fiscal, monetary, and other economic policies.'
Economic stimulus, in addition to that proposed
in the Budget, is needed in 1978 and 1979. This
should be implemented through an expansionary
monetary policy. To achieve this stimulus, the
growth of the money supply should be such that
the rise in short-term interest rates is reversed.
Policy in 1978 should tend to move short-term rates
toward their 1977 levels. Interest rates should be
maintained at these lower levels in 1979.23
Domestic recovery is too important an objective
to permit monetary policy to be diverted to other
goals. We therefore oppose the recent increase in
the Federal funds and rediscount rates because
they represent deliberate attempts to use domestic
monetary instruments to achieve an international
purpose. Intervention in foreign exchange markets
should be strictly limited to measures designed to
correct "disorderly markets."
In fiscal year 1979, total Federal expenditures
should fall within a $500-$505 billion range and
total tax receipts should be approximately $440
billion. This fiscal policy, combined with the monetary policy discussed above, will achieve the economic goals set forth in this Report.4
Congress should immediately begin a review of
the social security financing legislation recently
HSenator Proxmire states: "In addition to an unemployment goal, the HumphreyHawkins bill should include a complementary specifit goal for the rate of Inflation, the
equally overwhelming problem our economy faces.,
SRepresentative Moorhead states: "Here and subsequently the Report recommends a
strongly expansionary monetary policy for 1978 and 1979. I do not believe that the Federal
Reserve should be a slave to Its present targets for growth of the monetarV aggregates and
concur that these targets might properly be raised somewhat in the period ahead to assure
continued expansion of the economy. I would hope that the outcome would be lower interest
rates. But I would regard as too risky a monetary policy expliitly aimed at driving down
the present level of short-term rates regardless of the consequences In the growth of the
aggregates. Given the present and prospective rate of inflation the Report implies a negative real rate of interest for a sustained period, and this may not he a realistic target.
' Senator Bentsen states: "I support an expansionary monetary policy as long as that
policy is consistent with the goal of a reduction in the rate of inflation.
Senator Proxmire states. "This level of spending Is excessive. There Is hardly a program
In the Government which could ftot be Improved through a cut in expenditures. attention to
detail, and a reduction In Inefficiency and waste. A $25 hilllon, or 5 percent, cut should
he achievable."
9
enacted. Special attention must be given to the
long-term macroeconomic consequences of any financing proposal.
The Federal Reserve should issue a written report to the Congress shortly after the receipt of
the Economic Report of the President. After consultation with the House and Senate Banking Committees, the Joint Economic Committee would review this report and make its recommendations.
The Federal Reserve's report would be expected
to meet three basic requirements:
(1) Analyze the desirability, consistency,
and feasibility of the quantitative goals for
employment, growth, and inflation for the
forthcoming fiscal year as set forth by the
President.
(2) Provide the Federal Reserve's own quantitative forecast of economic activity for the
forthcoming year on a quarterly basis.
(3) Discuss in exact quantitative terms how
the proposed monetary policies are designed to
reconcile the President's targets and the Federal Reserve's own forecast.,
As part of its annual report to the Congress, the
the Council on Wage and Price Stability should
determine whether Federal actions have resulted
in a net reduction or increase in inflation. Any
specific actions which have had a significant impact should be thoroughly discussed and these impacts should be quantified.
5
Senator Bentsen states: "While I understand
need for coordination of monetary and
fiscal policy, these proposals could undermine thethetraditional
independence of the Federal
Reserve System and hence I reserve judgment on them."
II. THE ECONOMIC SITUATION AND OUTLOOK
1977
The turnaround in the economy that began in mid-1975 continued
through 1977, making it a year of good and reasonably balanced economic growth. Real GNP grew at an annual rate of 4.9 percent in
1977, compared with a 6.0-percent increase in 1976. The continued
recovery was led by the strength of the household sector-especially
in the demand for consumer durable goods and housing. However, the
business sector has not responded vigorously. Nonresidential construction has not yet reached its 1974 peak and producers' durable equipment only matched its 1974 level. Business fixed investment in the current recovery has continued to lag behind the performance that other
business cycles have taught us to expect.
The current economic recovery has depended heavily upon consumer spending, which was spurred initially by the personal income
tax reduction in the spring of 1975. In 1976, nominal personal consumption expenditures grew by 11.6 percent while personal income
grew only 10.3 percent. This caused the personal saving rate to drop
sharply, reaching the extremely low level of 4.1 percent in the first
quarter of 1977. During subsequent quarters, consumers slowly returned to more normal patterns of saving. The preliminary figures
for the fourth quarter of 1977 estimate a savings rate of 5.7 percent.
For the two-year period 1975-77, consumption grew more rapidly
than income, leaving consumers with a large burden of debt.
In real terms, business fixed investment rose by roughly 81/2 percent
in 1977-about the same as 1976. Compared with previous recoveries,
this reflects a very sluggish pace. Although 81/2 percent does not sound
like a poor growth rate, it must be remembered that in the fourth
quarter of last year, investment was still below its previous peak.
At this stage in previous recoveries fixed investment had exceeded its
earlier peak by an average of 14 percent. Investment in nonresidential
structures has been particularly poor; 'the increase was only 3.5 percent in real terms in 1977.
After almost no change in 1976, nonfarm inventory accumulation
increased substantially in 1977. The ratio of inventories to final sales,
however, has shown a gradual decline since the third quarter of 1976,
indicating that the inventory buildup has not been excessive. In fact,
the sharp drop in the fourth quarter figures-partly attributable to
the coal strike and some auto plant closings-set the stage for some
inventory building in the first half of 1978.
The year 1977 proved to be good for the home construction industry.
Although the record-setting levels of 1972 were not matched, privately
owned housing starts were estimated at 1.986 million units, 29 percent
above the level for 1976. By far, the largest increase was in the South
where 274,000 new units were started from December to December.
(10)
11
Residential and Nonresidential
Fixed Investment
BILLIONS OF DOLLARS
100
90
Residental Fixed
80
_Invaomstmo
70 -
Nonresidential
Fixed in vestment
60 -sw
50
,
-
- - mm
50
1975
1976
1977
SOURCE: Department of Commerce
Spending by Federal, State. and local governments was another important source of expansion in 1977, increasing 2.5 percent in real
terms as compared with 0.5 percent in 1976. The growth occurred
largely in the Federal sector which had experienced a decline in 1976.
Purchases at the State and local level grew very slowly although they
did speed up as the year progressed. As a result of this slow spending
growth, the surplus in State and local government operating budgets
increased almost $10 billion. National Income and Product Accounts
(NIPA) estimates are not available on a State-by-State basis, and certainly not all States are in surplus, but other information indicates
that the general surplus condition is widespread. This condition will
probably lead to some moderate tax reductions or foregone tax increases in 1978. Further expenditure growth will depend heavily on
grants supplied by the Federal Government.
Because of the strong economic growth, total employment increased
during 1977 by about 4 million, bringing civilian employment to 92.6
million persons by the end of the year. Substantial gains were made in
reducing unemployment as well, with the unemployment rate declining from 7.7 percent in 1976 to an average of 7.0 percent in 1977. Using
the newly revised seasonal adjustment factors released in December by
the Bureau of Labor Statistics, the unemployment rate showed a
steady decline beginning in July. The December rate of 6.4 percent
was good news, marking the lowest rate since late 1974. The decline
was sustained in January 1978 as the rate dropped slightly to 6.3 percent. Over the year, the number of unemployed persons dropped by
more than 1.1 million.
23-928
0 - 78 - 2
12
Most groups in the labor force enjoyed lower unemployment rates.
From January 1977 to January 1978, the rate for all male workers
declined from 5.8 percent to 4.7 percent, while female unemployment
dropped from 6.9 percent to 6.1 percent. However, the unemployment
rate for minorities was virtually unchanged and the rate for minority
teenagers increased from 36.2 percent to 38.7 percent.
The labor force participation rate continued to rise throughout the
year, reaching an alltime high of 6-2.8 percent in November and December. This is primarily a reflection of the increasing number of
women entering the labor force. By yearend there were 98.9 million
persons in the civilian labor force.
Although 1977 was a very good year for employment gains, unemployment remains a serious problem. It is not only a racial and demographic problem, it is also a geographic problem as described in detail
in Chapter VI. Unemployment in the older U.S. cities during 1977
bears this out, with unemployment rates that are typically higher than
the national average.
The Consumer Price Index rose 6.8 percent from December 1976 to
December 1977. This does not compare favorably with the increase of
4.8 percent in 1976. The acceleration in 1977 was due primarily to food
prices which rose 8.0 percent in 1977, following a rise of 0.6 percent in
1976. Prices rose in 1977 for many grocery store foods, such as meats,
poultry, processed fruits and vegetables, sugar, fats and oil products,
and cereal and bakery products. Prices for new cars, fuel oil, and gasoline increased more in 1977 than in 1976, but used car prices declined
in 1977 after a substantial rise in 1976.
The Finished Goods Index, which is a better indication of prices
paid by producers than the All Commodities Wholesale Price Index,
rose 6.6 percent from December to December. The Bureau of Labor
Statistics began emphasizing the Finished Goods Index in August because it includes only changes in prices received by producers for
those commodities that are in the form in which they will eventually
be sold to users. In this calculation, price changes are not counted repeatedly as goods move through various stages of processing. Producer finished goods were 7.2 percent higher in 1977, consumer food
prices rose 6.6 percent, and the index for consumer finished goods excluding food rose 6.1 percent.
While consumer prices rose 6.8 percent during 1977, adjusted hourly
earnings for private nonagricultural workers rose by 7.5 percent, resulting in a real gain for the consumer of 0.6 percent. This was much
smaller than the gain last year when real hourly earnings rose 2.3
percent.
Productivity growth in the private business sector in 1977 did not
match the pace of 1976. The 2.4-percent increase in 1977 reflected a 6.0percent increase in output and a 3.6-pereent increase in hours worked.
During 1976, productivity rose 4.2 percent. The growth of hours
worked by all persons accelerated in 1977-the largest increase since
1973. The durable goods sector, which is typically the most sensitive
to cyclical fluctuations, showed an increase in productivity of 1.5 percent in 1977 compared with 7.2 percent in 1976.
13
Consumer Prices
INDEX, 1967=100
190
-onI
lw
F
A# ftems
00
170
160
000000'
15 0L
MILLIONS OF PERSONS (16 and Over)
10O
1975
1976
1977
SOURCE: Departmnent of Labor
In contrast to 1976, the external sector acted as a brake on economic
expansion in 1977. Net exports of goods and services fell from a 1976
surplus of $7.8 billion to a deficit of $10.1 billion in 1977. A $4.1 billion
improvement in the surplus on services from $17.1 billion in 1976 to
$21.2 billion in 1977 was more than offset by a $21.2 billion increase in
the merchandise trade deficit. With U.S. exports concentrated in the
agricultural and capital goods manufacturing sectors, slow growth
abroad meant weak export markets for the United States. Sharply
increased imports of oil also contributed to the widening deficit. The
$10 billion in added oil imports amounted to roughly half the larger
merchandise trade deficit and well over half of the $17.9 billion swing
that marked the shift from surplus to deficit on the balance of goods
and services.
Deficits in the balances for merchandise trade, goods and services,
and the current account are likely to continue through 1978 and beyond. However, there may be some reduction in all three deficits during 1978.
Because there is a considerable lag between rising import -prices and
the substitution of domestic for imported goods, a depreciating dollar
could upset this calculation. The dollar value of 1977 imports was
given a boost by the 5.4-percent fall in the multilateral trade weighted
value of the dollar. Large trade and current account deficits in 1978
coupled with persistent inflation at the 6-percent level could lead to
further depreciation of the dollar in 1978.
14
Somewhat more rapid growth abroad should result in a higher level
of U.S. exports. Nonfuel imports can be expected to fall slightly as
growth in this country slows in 1978 and 1979. Imports of oil jumped
20 percent in 1977 in response to cold weather, stockpiling, and a decision to build up strategic reserves. North Slope production and the
existance of adequate stocks will tend to stabilize the level of U.S. oil
imports. The major imponderable remains the price decision that will
emerge from the midyear meeting of the Organization of Petroleum
Exporting Countries (OPEC).
The money supply grew at the relatively rapid rate of 7.4 percent
from the end of 1976 to the end of 1977. This growth rate, however,
did not prevent short-term interest rates from moving up sharply. The
three-month Treasury bill rate rose from 4.4 percent in December 1976
to 6.1 percent in December 1977. Long-terrA rates, however, fell during the year. Monetary policy and its relationship to overall economic
performance is discussed in detail in Chapter IV.
1978
Looking ahead into the remainder of 1978, we foresee a continuation of recovery. The Administration's forecast of 4.7 percent real
growth is within a reasonable range of probable outcomes. The unemployment rate should therefore decline gradually, falling to the neighborhood of 6 percent by the end of the year. While we wish the
President success with his incomes policy, we do not consider it strong
enough to produce a dramatic change. Barring uncontrollable events,
prices should increase approximately 6 percent in 1978.
Although we do not have any serious differences with the Administration over its view of the economic outlook, we sense a tendency
to accept this economic performance as the best that can be expected.
We believe that economic performance can be improved. In the following chapter we recommend more ambitious goals for both the near-term
and the more-distant future.
Fiscal policy for 1978 has been largely determined. If the proposed
tax reduction goes into effect October 1, most of the economic impact
will occur in 1979. Expenditures have been set by the Second Concurrent Resolution and even if they are raised moderately as the President's Budget indicates, this will only validate existing policy. As
indicated in Chapter IV we have no serious problems with the fiscal
policy implied by the President's Budget for fiscal year 1979.
Monetary policy is far more flexible than fiscal policy and offers
a much greater opportunity to influence economic activity in the second
half of the year. If short-term interest rates continue to rise through
1978 as they did in 1977 and as the Council of Economic Advisers and
others expect in 1978, there would be a serious impact on economic
growth in 1979. An analysis prepared by the Committee staff, discussed
more fully in Chapter IV, concludes that unless short-term interest
rates stabilize and begin to decline it will be difficult to reach the
Council's growth projections.
In accepting the Administration's view of the economic outlook for
1978, we are quite cognizant of the pressures now developing in finan-
15
cial markets. We are aware that loan demand has been increasing and
that foreign funds which in the past have helped finance part of the
Federal deficit may not be depended upon this year. Nevertheless, we
have concluded that the dangers of financial "crowding out" are minima;l this year. We are confident that with cooperation from the
monetary authority, both the Federal deficit and private demands for
funds can be accommodated without sharp increases in interest rates.
The pattern of the recovery in 1978 promises to be erratic. The coal
strike will have an adverse impact on output in the first quarter. The
severity of this impact will, of course, depend upon how long it takes
to get production moving again, but we can easily foresee a significant
national effect. This factor alone would tend to reduce growth in the
first quarter and raise the growth rate in the second and third quarters
as inventory rebuilding occurs.
The social security tax increases which became effective January 1,
1978, will also have a dampening effect. Growth in the final quarter
of 1978 will remain strong if, as expected, consumption is stimulated
by a combination of tax reductions, social security benefit increases,
and Federal pay increases.
Despite the likelihood of strong growth rates in the second half
of the year than the first, fundamental forces in the economy could
weaken as the year progresses. If interest rates are allowed to rise, this
would have an adverse impact on business investment in 1979. If they
rise enough to cause the ow of funds into savings institutions to be
curtailed, housing, which has a significant impact on other sectors of
the economy and which is already expected to be weaker in 1978, will
drop substantially. If consumers decide to repay debt or increase
saving, or if energy prices are increased significantly, these factors
will also dampen economic growth in late 1978 and set the stage for
a weak performance in 1979.
1979
As usual it is difficult and risky to project events more than a year
into the future. On the other hand, our ability to influence the path of
economic growth increases as we look further into the future and take
steps to prepare for it.
The Administration has forecast real growth of 4.8 percent in 1979
coupled with an inflation rate of 6 percent and an unemployment rate
of 5.8 percent.. We believe that this forecast is achievable-in fact we
have recommended more ambitious goals. Nevertheless, there are many
potential problems which could cause 1979 to be far weaker than
expected.
As indicated earlier, economic growth in 1979 is heavily dependent
upon the path of monetary policy in 1978. If interest rates are stable
or decline moderately in 1978 and remain stable in 1979, we could
reach a growth target of 5 percent in 1979; if interest rates rise
throughout 1978 it will be impossible to achieve this target without
an unacceptably large deficit in the Federal budget. In our judgment,
if interest rates are allowed to rise further, we run a serious risk of
growth below 31/2 percent in 1979.
THE LONGER TERM
The years 1978 and 1979 are critical in accomplishing our long-term
objectives of moving the economy back to full employment. If we
achieve the targets suggested by this Committee, we will be within 2
percent of potential GNP by the end of 1979. As we approach this
goal, we must be careful that Federal policies do not overstimulate
demand while creating capacity shortages. It is for this reason that
we stress the need to rely more heavily on monetary policy for stimulus
in 1978 and 1979. Lower interest rates will stimulate investment and
expand capacity thus reducing the problems that might be encountered
as we approach potential output. If we do not expand industrial
capacity and if we rely solely on fiscal policy to stimulate demand,
we risk creating a situation where a small amount of excess demand
two or three years from now will set off a new inflationary spiral that
will trouble us for years to come. It is essential to change the mix of
policy to provide a balanced expansion.
III. GOALS FOR ECONOMIC POLICY
Despite steady improvement in the economy during 1977, the
economy is still a long way from full recovery. To make satisfactory
progress in sustaining further growth and reducing unemployment,
the Congress should adopt specific targets for 1978 and 1979.
In proposing economic goals to the Congress, we must be careful
not to put excessive emphasis on a particular policy instrument, and
we must be vary careful not to confuse means with ends. Just such
confusion may have been created by the present system of congressional oversight of Federal Reserve monetary policy. Current law
instructs the Fed to maintain growth of the monetary aggregates
commensurate with the growth of potential output." As a result,
monetary aggregates have been treated as the targets rather thanthe
as
instruments of monetary policy. By relating monetary policy only to
long-run objectives, no real burden has been placed on the Fed to
relate its monetary policies to such economic goals as the growth in
production. the level of unemployment, or the rate of inflation. In
Chapter IV we present specific recommendations to remedy this
situation.
The Administration came perilously close to confusing means and
ends by making a balanced budget a key target of national economic
policy. Balance in the budget should be a secondary aim of economic
policy. The budget deficit or surplus should be determined by the fiscal
needs implied by current economic conditions.
During the past year, the Administration has put its goal of a
balanced budget in a clearer perspective. Although budgetary balance
remains a matter of importance to the Administration, this view is
now put forward with considerably less rigidity than earlier and the
size of the deficit is to be determined with an eye first to the overall
performance of the economy. We note that the Report of the Council
of Economic Advisers conceded, as our staff argued in an evaluation
of the 1981 targets, that structural weaknesses may be such that it
might be unwise to balance the budget even at full employment.
The President's Economic Report and Budget place considerable
emphasis on reducing the Federal Government's relative role in the
economy. While a variety of factors could combine to alter the components of Federal expenditures, the total should be determined by
the needs of the Nation and the economy. In setting national economic
goals, we should keep in mind that it is rising production and employment that are the principal measures of economic well-being and not
the size of the budget deficit or the level of Federal expenditures.
GROWT
AND EMPLOYMENT GOALs FOR 1978 AND 1979
In its 1977 Annual Report, the Joint Economic Committee recommended specific goals for real growth in GNP and the rate of unem(17)
18
ployment. For 1977, we recommended a real rate of growth of 6 percent and a reduction in the unemployment rate to 6.5 percent by year
end.
As a result of moderate fiscal stimulus and the strong performance
of the private sector, the economy has come quite close to meeting those
goals. Real GNP grew by almost 5 percent. Although somewhat below
our recommendation, the U.S. performance still exceeded that of all
her major trading partners except for Japan. The record of unemployment reduction was even better. Overall, the rate of unemployment fell 1.4 percentage points in 1977 and exceeded our goal by onetenth of 1 percent.
The relatively strong performance of the economy in 1977 partly
reflected the establishment by the Administration and the Congress
of specific quantitative goals. By focusing on ambitious but attainable
goals, the Congress and the Administration have a clearer basis on
which to build economic policy. The Administration's endorsement of
the Full Employment and Balanced Growth Act (generally referred
to as the Humphrey-Hawkins bill) indicates a clear commitment to
continue and improve this process.
We strongly recommend that the Congress formally establish specific targets for employment, growth of real output,
and productivity.,
Employment and unemployment goals should be broken
down into goals for specific demographic groups, so that
programs for aiding specific groups and for reducing differential unemployment rates can be developed.
As the United States becomes more involved with foreign economies,
the success or failure of many domestic policies will depend on decisions made in foreign capitals. Similarly, U.S. economic policies will
have a significant impact on the economies of other countries. While
each country must consider its own domestic interests, growing interdependence makes greater international coordination of domestic economic policies vital. At the London summit in May 1977, the President
and the leaders of the major Western industrial powers took a step
in this direction by establishing goals for real growth of GNP in their
respective countries. The attempt was far from successful. Only the
United States achieved its goal for growth, and then only after revising it downward. The existence of goals can invite public pressure by
one country on another, but their absence would do nothing to promote
international coordination. Despite the disappointing performance in
1977, it is highly desirable that the process be continued.
At special economic meetings and through the Organization
for Economic Cooperation and Development (OECD), the
United States should encourage the major industrial powers
to set specific quantitative goals for growth in real GNP.
As we have already noted in Chapter II, there is a broad consensus
that without stimulus, the economy will begin to weaken in the latter
part of 1978. If its proposals for net tax reductions are adopted, the
1Senator Proxmire states: "Congress would be remiss if It did not also establish goals
for a decline in the rate of inflation.I
19
Administration anticipates real GNP growth for 1978 in the range of
41/2 to 5 percent with the unemployment rate declining to between 6
and 61/4 percent.
Barring any unexpected shocks, the Administation foresees a similar
performance in 1979 with real GNP growth in the 41/2- to 5-percent
range. The rate of unemployment would continue to decline to a rate
somewhere between 51/2 to 6 percent at yearend. We agree that growth
should slow somewhat as the economy approaches potential GNP.
Nevertheless, we favor somewhat more ambitious goals than the
Administration.
Real GNP growth between 5 and 5Y2 percent in calendar
year 1978 is a desirable and attainable goal. This growth
target is consistent with an unemployment rate averaging no
more than 6.4 percent during the year and falling to 6 percent
or less by yearend.
If 1978 is marked by a strong economic performance, we
would endorse a growth target in the neighborhood of 5 percent for 1979. This would reduce the unemployment rate to
approximately 5Y/2 percent by the end of the year and place
economic output within 2 percent of potential by yearend.
Fiscal and monetary policy should be structured to achieve
these goals.
In setting economic policy, the Congress must also consider other
problem areas that may not lend themselves to specific quantitative
goals. The Congress is concerned about the composition as well as the
level of Federal spending. Likewise, adequate and balanced levels of
consumption and investment in the private sector are a matter of congressional interest. The persistent problems of inflation and structural
unemployment and local economic development also warrant congressional attention. The growing importance of world markets for the
U.S. economy has raised new questions about the U.S. position on international trade and payments.
The President's program is based on a particular mix of tax, spending, and monetary policies. Chapter IV discusses a staff study which
explored three specific alternatives to the Presidential program. The
economic effects of a more expansionary monetary policy, a larger tax
cut, and somewhat greater spending were analyzed in turn.
After considering these alternatives, we are convinced that greater
reliance should be placed on monetary policy. By pursuing a monetary
policy which will reverse the rise in short-term interest rates and
move them in the direction of the average level of 1977, the economy
could grow and invest more while actually decreasing the level of the
budget deficit.
Throughout the 1970s, rising prices have created a whole series of
economic problems. In 1977, consumer prices grew by 6.8 percent, a
sharp increase over the 4.8 percent rate recorded for 1976. The prospects for significantly reducing inflation in 1978 are not bright. The
underlying rate of inflation and the rate of increase in unit labor costs
are both over 6 percent. A depreciating dollar, increases in the minimum wage, rising payroll taxes, and a number of other policies will
all push prices upward. The Administration hopes to achieve a modest
Potential and Recommended GNP Growth
$BILLIONS (1972 Dollars)
' 1,
to
<0)
1,1501
1972
II
1973
,
I
1974
1975
1976
1977
1978
1979
SOURCE: Joint Economic Committee, Department of Commerce, Council of Economic Advisers.
1980
1981
1982
1983
21
reduction in the rate of consumer price increase to about 6 percent a
year. We agree that this is a reasonable target. To reach that and future targets for reducing inflation, the Congress should begin to explore several methods of directly attacking the problem of rising
prices. Chapter V examines a variety of potential policies and solutions.
Despite a record increase of 4.1 million jobs and a steady drop in
the unemployment rate during 1977, serious employment problems
continue to exist for several groups. Members of minority groups,
teenagers, and women all suffer significantly higher rates of unemployment than do adult males. Although steady growth in GNP is a precondition to opening employment opportunities for these groups, in
many cases structural measures must be adopted. The need for structural programs will become particularly acute as the economy approaches the stage where rising demand begins to create serious inflationary pressures. In Chapter VI, we assess a number of present and
potential structural programs.
The very large trade and curent account deficits pose serious problems for U.S. policymakers. As the trade deficit approached $30 billion
for 1977, the dollar began to fall in value against the Japanese yen
and several European currencies. The Treasury and Federal Reserve
Board both moved to intervene in foreign exchange markets to stabilize the international value of the dollar. In addition, the Federal
Reserve raised the Federal funds and discount rates in an attempt
to increase the demand for the dollar. Because the current account
deficit drains aggregate demand away from the domestic economy,
compensating fiscal action is needed. Faced with inadequate demand
Unemployment - Whites, Minorities
(Unemployment rates, seasonally adjusted)
PERCENT
PERCENT
40
40
40
WHITES
MINORITIES
30
-30
Dec. 1976
20
_
10
0
Dec. 1.977
20
10
Adult
Males
Women Teenagers
SOURCE: Department cf Labor.
22
elsewhere in the economy, the current account deficit necessarily increases the size of a compensating fiscal stimulus package and budget
deficit. In Chapter IV, the domestic impact of a depreciating dollar is
discussed in more detail.
Developments in the international economy now have such a pervasive impact on the U.S. economy that international issues are discussed throughout this Report. We wish to place particular emphasis
on two points.
First, the principal causes of the trade deficit are slow growth
abroad and an increased reliance on imported oil. The deficit reflects
a faster pace of growth and greater economic strength of the United
States relative to the rest of the world. In addition, the current dollar
deficit also reflects the large oil price increase. This large deficit does
not warrant or justify a turn toward protectionism. This is not to say
that individual industries are not experiencing considerable pressure
from import competition. However, specific industry problems should
be handled on a case-by-case basis in the context of a carefully designed
policy for economic adjustment.
Second, we strongly advise against using domestic monetary policy
for international purposes. 2 An increase in domestic interest rates to
stabilize the dollar would vitiate the President's tax incentives for
investment, slow the pace of the economic recovery, and raise the
budget deficit.
LONGER TERm EcONOMIc GOALS
The achievement of longer term growth and employment goals is
heavily influenced by current fiscal and monetary policy. By establishing specific quantitative longer term goals for economic performance,
fiscal and monetary policy can be better tailored to assure steady, noninflationary growth.
As the economy approaches a high-employment level, the existence
of structural imbalances increases the dangers of inflation. A five-year
perspective can help focus attention on the sectoral and industrial
imbalances that would disrupt growth.
Present-day labor policy can also be improved by viewing the problem from a longer range perspective. A shortage of skilled workers
can create inflationary bottlenecks and regional imbalances in the
supply and demand for labor. This implies labor shortages and wage
inflation in some areas and unemployment and lost production in
others. A long-term goal for employment and GNP growth would
help to determine the appropriate timing and composition of structural programs needed to improve labor market conditions.
During the past three years, capital formation has been very disappointing relative to previous recoveries. Part of the explanation lies
in the severity of the recession which forced the recovery to start
from a base of very low capacity utilization levels. Various sources
of increased business uncertainty have also deterred capital investment. Through the use of specific long-term goals, the Government
could sharply reduce uncertainties that arise from the confusion about
the nature and intention of the Federal Government's economic policy.
2 Senator Ribicoff states: "This statement is too strong. I would agree that monetary
policy should not be used primarilyfor international purposes."
23
TmE FuLL EMPWY&EENT
AND
BAAwNcEm GRowTH Acr
The Employment Act of 1946 established the Council of Economic
Advisers and the Joint Economic Committee of Congress, and required the President to submit an annual economic report to the Congress. It was landmark legislation that for the first time acknowledged
the responsibility of the Federal Government for promoting "maximum production, employment, and purchasing power." Although the
Act has served the country well, it is clear that the increasing complexity of economic policymaking demands that the Employment Act
be augmented by supplemental legislation. This is the purpose of the
Humphrey-Hawkins bill.
The bill has undergone many revisions. In an earlier form, the
present CEA Chairman testified that it carried with it potentially
disastrous inflationary effects. Yet today Chairman Schultze endorses
the bill. Earlier provisions-such as the right of an individual to use
courts of law to sue the Federal Government for satisfactory employment have been discarded. In its present form it is a blueprint for
economic progress that sets larger objectives, provides for their implementation through a coordinated approach, and places the responsibili*y on policymakers for failures to achieve its targets.
Specifically, the Act requires the President to state explicit shortterm goals and to recommend the fiscal and monetary policies needed
to achieve these goals. It also requires the President to set forth his
five-year goals each year. This must be consistent with the Act's objective of reducing the overall unemployment rate to 4 percent within
5 years following enactment.
The bill itself does not contain specific, job-creating programs.
Rather, the legislation establishes the structure and the procedures
with which the Administration and Congress, with the cooperation of
the Federal Reserve, will determine the state of the economy, will
identify problems, and implement the comprehensive and coordinated
policy and program mix necessary to help guide the economy toward
our national goals. It is within this framework that specific, job-creating tax and spending proposals would be considered and enacted.
Unlike the Employment Act, which is silent on the subject of inflation, the Humphrey-Hawkins bill establishes the goal of price stability as a high priority objective.3 The bill proposes to deal specifically
with inflation by instituting early warning systems to detect impending capacity shortages, by stockpiling of agricultural and other critical
raw materials, and by vigorously enforcing antitrust laws.
The Act is flexible enough to allow for alternatives should the
quest for full employment prove to be incompatible with inflation
control. Beginning in the third year after enactment of the bill, the
President may propose to the Congress modifications of the employment goal to delay the time of its achievement if economic circumstances require it.
Second, the bill recognizes the likelihood that its employment
inflation targets will ibe very difficult to achieve simultaneouslyand
as
long as a purely macroeconomic approach to policy is employed. It
3 Senator Proxmire states: "But It does not establish a goal for decreasing the
rate of
inflation, as It does for reducing unemployment,
and Is flawed by that omission.-
24
therefore recommends to the President a large number of "structural"
options. Among these options are countercyclical employment programs including public works and public service employment, countercyclical revenue sharing, and regional and structural employment
policies to reduce unemployment among particular groups and in
particular places. Youth employment, training, counseling, and other
options are included in the provisions to achieve the goals of the Act.
The bill's stated order of priorities places primary emphasis on
promotion of private-sector performance to create the bulk of the job
opportunities needed to meet the legislation's employment goals. This
would be done through general and targeted fiscal and monetary
policies and programs aimed at simultaneously reducing both cyclical
and structural unemployment. The next levels of priority action prescribed focus on expansion of employment in the private sector through
Federal assistance and through the use of existing Federal jobs and
job training programs. New programs could be proposed no sooner
than 2 years following enactment in order to give the private sector
an opportunity to respond to employment needs. Jobs provided
through new programs, for the most part, would be confined to lower
paying and lower skilled levels. Thus, the legislation guards against
the automatic increase of the bureaucracy or the creation of massive
new programs.
While the bill emphasizes private sector performance, it also contains a clear prohibition against government interference with private
sector activity. It states that "no provision of the Act shall be used,
with respect to any portion of the private sector of the economy, to
provide for government control of production, employment, allocation
of resources, or wages and prices, except to the extent authorized under
other legislation."
The process for implementing the Act begins with the Economic
Report of the Pre8ident which is sent to the Congress each January.
Under the new law, the Report will discuss the goals of the Act and
how the Administration proposes to meet these goals. Part of the latter
must include an outline of budgetary policy for the next five years as it
relates to the intent of the bill. Shortly after submission of the President's Report, the Federal Reserve System will be required to report
how its intended monetary poliices support the President's stated
numerical goals for employment, production, and prices.
The expanded Economic Report of the President will be sent to the
Joint Economic Committee. The Committee will seek the views of
various legislative committees and expert witnesses. The Joint Economic Committee will then report a concurrent resolution endorsing
or modifying, as appropriate, the President's numerical targets, as
well as his intended policies. Changes in these targets will be recommended when they are needed.
The Joint Economic Committee will discuss with the Budget Committees the relationship between appropriate goals and their constistency with the First Budget Resolution. Under the proposed procedure
the Budget Committees will be better able to make their decisions because more information about the course and intention of monetary
policy will be made available to them. This will permit them to develop
a more reliable set of economic assumptions on which to base their
outlay and revenue targets.
25
If we resort to tight fiscal and monetary policies as the only way
to control inflation, then the twin goals of low inflation and low unemployment will be unattainable. The Humphrey-Hawkins bill offers a
realistic solution to this unpleasant problem. In Chapter V we outline
ways of approaching inflation control without resort to the harsh traditional remedies, and in Chapter VI we outline the policy requirements that are needed to bring more of the structurally unemployed
back into the mainstream of our national economic life.
We strongly endorse the Humphrey-Hawkins bill and urge
its swift enactment by the Congress.
Tnm
PATH TO A
HiGH
EMPLOYMENT
EcoNoMy
According to estimates in the President's Economic Report, last year
the American economy was operating almost $75 billion dollars or 5.3
percent below its full capacity. The Administration expects that the
economy will reach its high employment potential sometime in late
1981. Adopting the Committee's goals would speed up this timetable.
In the 1977 Economic Report of the Pre8ident,the historic series for
potential GNP was substantially revised. For a number of years the
benchmark level of resource utilization implicit in the Council of
Economic Advisers' estimates was an overalI unemployment rate of
4 percent. The new estimates assume that full employment of fixed
capital is reached when the manufacturing capacity utilization index
calculated by the Department of Commerce reaches 86 percent. This
new definition of potential GNP is consistent with a 4.9 percent unemployment rate in 1977 and 1978 and a rate of 4.8 percent in 1981. The
unemployment rate consistent with a specified capacity utilization rate
will vary as the composition of the labor force changes.
The present Council of Economic Advisers has examined these revisions and has concluded that they represent a major improvement. The
Council notes, however, that further improvements are possible. We
agree that the accurate definition of potential GNP and the high employment-unemployment rate are matters that demand further analysis. The Council of Economic Advisers and the Joint Economic Committee should continue to refine their analysis of this issue.
Regardless of the final determination of an appropriate high employment-unemployment rate, it seems clear that the dangers of triggering additional inflation increase as the unemployment rate falls
below 5 percent. The "full employment" estimates presented below accept the Council's definition of potential GNP as a reasonable guide
to the output levels we can expect to achieve through macroeconomic
policy tools without creating excess demand inflation. However, we do
not accept the associated 4.9 percent unemployment rate as an appropriate goal for social policy. We believe that the 4.9 percent level of
unemployment can be reached using macroeconomic policies and that
an interim target of 4 percent unemployment can be achieved by adding appropriate structural programs. The key to achieving low levels
of unemployment with stable prices is to supplement sound fiscal and
monetary policies with structural programs designed to attack unemployment and inflation. In Chapters V and VI, we explore a number
of possible approaches to these problems.
26
FULL EMPLOYMENT BUDGET ESTIMATES
The full employment budget estimates can be quite helpful in understanding the direction and magnitude of fiscal policy changes. These
estimates are more complicated than usual this year and therefore must
be interpreted with care.
Part of the confusion arises from the different methods of calculating the full employment budget estimates. The budget document shows
such estimates on a unified budget basis for fiscal years. The unified
'budget basis estimates show the full employment deficit increasing
each year from 1977 to 1979. In the report of the Council of Economic
Advisers, full employment budget estimates are shown on a national
income and product accounts (NIPA) basis by calendar years. These
estimates show the deficit increasing between 1977 and 1978, then declining between 1978 and 1979. Both sets of estimates are shown in
Table III-1.
TABLE 111-1.-HIGH EMPLOYMENT DEFICIT(-)
ln billions of dollars]
Unifiedbudgetbasis(fiscalyears)
National Income and product account basis (calendar years) --
1977
1978
-10
17.9
-32
-26.9
1979
-37
-22.6
Source: "The Budget of the United States Government, Fiscal Year 1979"; the "Economic Report of the President"
January 1978.
Confusion can be reduced by focusing attention on only one set of
estimates. Economists generally regard the NIPA estimates as being
the most useful for judging macroeconomic policy. This is because the
NIPA attempts to measure current income and production. Transactions which represent an exchange of existing assets such as loans are
not included in the NIPA. Income and outlays are recorded in the
NIPA when the income is earned or the liability is incurred without
regard to when the transaction actually occurs. This method of
accounting gives a better indication of when Federal policy affects the
economy than alternative methods that record transactions at the time
checks are written. Other major differences between unified budget
and NIPA estimates relate to timing adjustments and the accounting
treatment of asset sales.
Estimates of full employment receipts and expenditures have been
prepared by the Joint Economic Committee staff on a half-yearly basis
and are shown in Table III-2. These estimates assume the President's
budget policy for 1979 is enacted but they adjust 1978 expenditures to
reflect the lower levels currently anticipated.
TABLE 111-2.-HIGH EMPLOYMENT BUDGET ESTIMATES
[NIPA basisnbillions of dollars, annual rates, half yearns
1977:2
Receipts -406.0
Expenditures-435.1
Deficit (-) -Source: Joint Economic Committee staff.
29.1
1978:1
1978:2
1979:1
1979:2
434.7
449.6
450.5
483.3
464.8
449.2
495.2
552.5
-14.9
-32.8
-34.4
-27. 3
27
To utilize the full employment estimates as a measure of discretionary fiscal policy, one should look at changes in the deficit. The movement from a $15 billion deficit in the first half of 1978 to a $33 billion
deficit in the second half indicates an $18 billion movement in the
direction of greater fiscal stimulus. This is the result of the President's
proposed tax reduction which would become effective in the fourth
quarter of 1978. After the middle of 1978 the changes in the deficit are
very small, indicating that discretionary fiscal policy will be relatively
neutral. However, by the last half of 1979 the various sources of fiscal
drag begin to exert a restraining force, which causes the full employment deficit to diminish.
The full employment budget surplus, as well as changes in that
surplus, are fiscal policy indicators that have been asked to supply
more information than they can reasonably be expected to provide. On
the one hand it is important to know what the budget surplus or deficit
would be if the economy were at full employment. If this computation
discloses an alarmingly large deficit, we might wish to avoid the addition of sizable new permanent expenditure programs. Such programs
would be ill-advised because they would add to the fiscal base. Recovery in the private sector might then cause total expenditure in the
economy to be excessive and therefore inflationary.
However, it is very important that estimates of what the budget
surplus would be if the economy were at full employment are not
affected by new expenditure programs if these programs are to be
phased out as full employment is approached. The obvious reason for
this is that the programs neither add to nor subtract from the budget
deficit or surplus at full employment.
To estimate full employment revenues, the added revenues that
would result from a movement to full employment are estimated and
are added to actual revenues to obtain full employment receipts.
Similarly, on the expenditure side the reduction in unemployment
compensation that would occur from moving to full employment is
calculated and this is deducted from actual expenditure to obtain the
estimate of full employment expenditure.
Unfortunately, the treatment of other expenditure components is
not consistent with this procedure. Programs such as countercyclical
revenue sharing; extended unemployment compensation benefits; outlays on food stamps, welfare, and medicaid; and even social security
benefits are either deliberately triggered by the unemployment rate
or automatically fluctuate with it. Yet no account is taken of this in
the full employment budget computation.
On the other hand, because we also wish to measure the magnitude
of the impact of discretionary fiscal policies, the CEA calculations
raised the full employment deficit when, for example, countercyclical
revenue sharing programs were introduced. This would have no effect
on the full employment surplus since the revenue sharing grants are
eliminated as full employment is approached.
This hodgepodge approach should be changed. Full or high employment budget computations should be clean, clear, and consistent estimates of where the budget would stand if the economy were producing
at potential levels of GNP. This should be separated from measures of
discretionary fiscal impact. It is unrealistic to ask one calculation to
describe movement in fiscal policy and to tell us what the budget
23-928 0 - 78 - 3
28
would look like if the economy were operating at potential levels of
output.
Table III-3 below shows the levels of receipts and expenditures
which might be expected if the economy were operating at potential
levels of output and if the foregoing recommendations were put into
practice. The level of receipts is unchanged from that shown in Table
III-2 but expenditures are lower because many programs -. g., Aid
to Families with Dependent Children (AFDC), Aid to Families with
Dependent Children-Unemployed Fathers (AFDC-UF), food
stamps, medicare, countercyclical grants-are sensitive to the unemployment rate. As Table III-3 shows, beginning with the tax reductions in the second half of 1977 and continuing through 1979 the
Federal Government is providing substantial support to the economy.
AND EXPENDITURES AT POTENTIAL LEVELS OFGNP
TABLE 111-3.-FEDERAL RECEIPTS
INIPA bsis,billions of dollars, seasonally adjusted annual ratel
1977:1
Receipts
-398.5
Expenditures -396.4
Deficit (-)
+2.1
1979:1
1977:2
1978:1
1978:2
406.0
429.3
434.7
444.6
450. 5
479. 0
464. 8
495.6
-23.3
-9.9
-28.5
-30. 8
1979:2
495.2
519. 4
-24.2
the fiscal year 1979 budget isadopted asproposed by President Carter.
Note: This table assumes
Committee.
Source: Joint Economic
It would be a mistake to interpret this support as stimulating economic growth because both the net export sector and the State and
local sector are draining purchasing power away from the economy.
For example, in 1977 State and local governments ran a surplus of
$29.2 billion-almost three times as large as the deficit shown in Table
III-3 above. If the net export deficit of $10 billion is included, one
quickly reaches the conclusion that in 1977 the purchasing power
supplied by the Federal Government was grossly inadequate to offset
that being drained way by other sectors.
The foregoing discussion raises an important question: Can we
expect to balance the budget as we return to potential levels of output?
The answer depends largely on the behavior of other sectors of the
economy. State and local governments are currently running a surplus
of $13.7 billion in their operating budgets. This will not continue indefinitely, but neither do we expect it to disappear in 1978. At the same
time, they are running a surplus of $15.5 billion in their social insurance funds. This surplus has grown slowly and can be expected to continue-in fact, for the next several years it will rise faster if State and
local employment continues to expand. Our net export position deteriorated rapidly in 1977-as recently as the fourth quarter of 1976.
we were running a $3 billion surplus-and this situation could turn
around again. Although we expect net exports to remain in deficit in
1978, as the economies in the rest of the world improve and as we learn
to conserve energy, our net exports should return to a position close
to balance. Taking all of this into consideration we cannot reject
the conclusion that it will be necessary to run a deficit in the Federal
budget even after we return to potential levels of output in order to
offset purchasing power drains from other sectors of the economy.
However, as the economy returns to full capacity, the amount of support necessary from the Federal Government (measured as a percentage of potential GNP) should diminish.
IV. MONETARY AND FISCAL POLICY
The best economic news about the last year is that from the fourth
quarter of 1976 to the fourth quarter of 1977 almost four million new
jobs were created in spite of the relatively modest 5.7 percent real
growth rate over the same time span. Unfortunately this combination
was made possible by very slow productivity growth.
Much of the productivity lag occurred because production and employment growth in 1977 were heavily concentrated in low productivity sectors-wholesale and retail trade, services, and government.
It is this fact, too, which explains why manufacturing capacity utilization rates have not risen as sharply as might have been expected in
correspondence with the huge increases in employment. Finally, this
situation threatens future stagnation of real wages and more inflation
as money wage increases add to unit labor costs without the benefit of
moderation by productivity growth.
Unemployment is still excessive among most groups in the labor
force. Many adult males are unemployed because our manufacturing
establishment is still well below its potential and because industrial
construction remains depressed. Nevertheless, more balanced growth
of demand could quickly reduce excess productive capacity in the near
future. Because our labor force has grown so rapidly, we may be in the
Increased Employment
January 1977-January 1978P
(Seasonally Adjusted)
THOUSANDS OF PERSONS
2,500
2,000
.
204
1,500
1,000
.___
500
0
Service Producing
(P) Preliminary
SOURCE: Bureau of Labor Statistics
(29)
Goods Producing
30
process of creating structural imbalances that will combine future
capacity shortages with labor surpluses, thereby producing continued
stagflation.
The paradox of our present situation is that future considerations
point to the need to raise the share of investment in the GNP, whereas
the continued presence of excess capacity, together with other factors
that have created an inclement investment climate, have caused the
performance of capital spending to be exceedingly disappointing.
Nonresidential fixed investment in 1977 was only 8.8 percent of
GNP-far too little to provide the plant and equipment needed to
provide jobs and rising real incomes for a growing labor force.
It goes without saying that the task for monetary and fiscal policy
is to sustain the recovery of the economy without exceeding inflationary speed limits. To do this, special attention must be paid to the
lagging capital spending sector. This is essential to provide the demand needed for sustained growth and to avoid impending structural
problems.
MONETARY POICTY
It is fair to say that the brunt of support for recovery in the last
three years has come from fiscal policy while monetary policy has
remained preoccupied with the problems of slowing inflation and with
the international condition of the dollar. The rate of real M1 (currency
plus deposits) growth was negative in 1975; it became barely positive
in 1976; and it reverted to zero in the first half of 1977.1 One consequence of this one-sided monetary-fiscal policy mix is that consumption and government spending have expanded strongly, while investment and net exports have been retarded. Housing, to be sure, has
made a good recovery, but one has to bear in mind how far it had to
come from its depressed conditions of 1975.
The budgetary and international consequences of monetary policy
are explored in subsequent sections of this chapter. Here we are concerned with the effect on capital spending. Restrictive monetary
policies have raised interest rates, thereby lowering bond prices. While
many factors have acted to depress the stock market, tight money
certainly cannot have helped. High interest rates and low bond prices
attract funds to the bond market and this exerts downward pressure
on stock prices.
The combination of high interest rates and low stock prices creates
an environment that is exceedingly inhospitable to capital spending.
High interest rates make borrowing costly, and low stock prices make
the flotation of new capital issues difficult and unrewarding. As measured by stock and bond prices, the market value of firms' physical assets is now very low relative to their physical replacement costs. As
long as that continues to be the case, the incentive to construct new
capital facilities will be very weak.
The clearest and most immediate way to alleviate this situation is
through more expansionary monetary policy. Without an expansionary
monetary policy, the growth and unemployment goals set forth in
Chapter III are not attainable.
I Senator Bentsen states: "There is, however, considerable disagreement among monetary experts regarding whether the real rate or the nominal rate of growth of the money
supply is the proper index by which monetary policy should be judged.'
31
Interest Rate Changes - Treasury Bills
PERCENT PER ANNUM
7
1975
1976
1977
SOURCE: Federal Reserve Board.
Composite Stock Price Index
INDEX, Dec.31, 1965=50
601
-
50
40
30
1975
SOURCE:
1976
1977
New York Stock Exchange
Policy in 1977 and 1978
The nominal stock of money, as measured by Ml, grew 7.4 percent
between the fourth quarter of 1976 and the fourth quarter of 1977.2
This is the fastest rate of monetary growth since 1972. Despite this,
and despite any spectacular growth in real GNP, short-term interest
rates (as measured by the Treasury bill rate) rose from an average of
5.0 percent in 1976 to 5.3 percent in 1977. At year end the bill rate was
over 6 percent.
The quarterly pattern in 1977 was even more puzzling. Whereas the
annual rate of M1 growth was 6.2 percent in the first half of the year,
the growth rate rose dramatically to 11.0 percent in the third quarter.
Nevertheless the Treasury bill rate in September was more than 70
basis points above its June level even though GNP growth in the third
quarter was unspectacular. The economy experienced a paradoxical
situation in which faster monetary growth was more than offset by
a slowing of velocity growth. The result is that the rate of monetary
growth has had an unpredictable effect on interest rates and on the
rate of economic expansion.
What is the explanation for the third quarter that found a higher
rate of monetary growth associated with higher short-term interest
rates? Monetarists maintain that an increase in the nominal rate of
monetary growth raises inflationary expectations and that this puts an
2 Senator Proxmire states: "This growth of the money supply over the past year has
exceeded the high end of the target goals. I question if different managers
would have
changed this policy more than marginally."
32
inflation premium into interest rates. However, that hypothesis would
imply a rise in long-term interest rates, and these rates moved very
little in 1977.
At quarterly appearances before the Banking Committees, the Chairman of the Federal Reserve Board announces its targets for the growth
of the monetary aggregates for the coming quarter. However, there
generally is no explanation of how the Fed intends to react if the actual
rate of monetary growth deviates from its targets. This fact created a
great deal of trouble in the last half of 1977 when the rate of M1
growth was much higher than the target ranges. In the third quarter,
for example, the target range for M1 was from 4 to 61/2 percent, whereas the actual rate of monetary growth proceeded at an annual rate of 11
percent.
In this situation the Fed could have announced that it had decided
to support economic growth and was therefore raising its targets. But
this option was not available because the Chairman had consistently
maintained that growth of the monetary aggregates had been excessive
throughout the recovery. Under these circumstances, a rise in the announced monetary growth targets would surely have been interpreted
as evidence that the Fed was letting up in its battle against inflation.
In the third quarter the rate of monetary growth and the targets
went their own separate ways. The Fed claimed that it could not really
exert effectieve control over the money supply. Convinced that the Fed
would not raise its targets, the sharp divergence between the actual
and the target rates of monetary growth produced the general belief
in financial markets that the Fed would subsequently squeeze down the
rate of monetary growth in order to get back on target. This created
the expectation of an impending monetary crunch and caused an unloading of various types of assets in favor of cash balances. There was,
in more traditional words, a sharp increase in liquidity preference.
The result was a slowdown in the rate of velocity growth combined
with a very steep rise in short-term interest rates.
This diagnosis suggests that monetary policy may have inadvertently short-circuited itself. Because of the low target range and the
expectations created by an above target rate of monetary growth, the
faster rate of monetary growth caused velocity growth to decline.
This was not accompanied by the usual expected decline in short-term
interest rates. In fact, in the third quarter, interest rates actually rose.
This causes a serious problem for the economy since it means that we
cannot enjoy the benefis of a faster rate of monetary growth because
they are automatically offset by countervailing movements in velocity.
The present system of congressional oversight of the Federal Reserve System is clearly in need of reform. It produces the kinds of unfortunate events described above, and it has not served to inform the
Congress adequately of the intentions and consequences of monetary
policy. Our recommendations for reform are presented below.
As noted in our discussion of the outlook, the 4.5 to 5.0 percent real
growth projection for 1978 and the 4.0 to 5.0 percent projection for
1979 presume the adoption of the President's Budget, including his
proposal to reduce taxes by about $25 billion on October 1, 1978. Without the tax reduction, the economy would be very weak at the end of
1978; even with the reduction a marked slowdown is expected in 1979.
33
Presently planned fiscal policy for fiscal year 1979 is certainly not
sufficient to reach our growth targets. It must be recalled that the upper ranges of our forecast presumed a reasonably accommodative monetary policy throughout the period.
For reasons discussed subsequently, most forecasters do not expect
monetary policy to be highly stimulative in 1978. Data Resources, Inc,
(DRI), for example, looks for the rate of Ml (currency plus deposits)
growth to fall from its 7.4 percent rate of 1977 (fourth quarter over
fourth quarter) to rates of 5.7 and 6.3 percent in 1978 and 1979 respecteively. These monetary growth rates, combined with the Administration's fiscal proposals, are not sufficient to finance projected
nominal GNP growth without a continuation in the updrift of shortterm interest rates. This is consistent with the expectations that the
Council of Economic Advisers outlined in its Report. As a result of
this inappropriate policy mix, DRI forecasts a real GNP growth rate
of about 4.5 percent in 1978, and an even less satisfactory rate of 3.9
percent in 1979. Unemployment under these conditions will still be
well over 6 percent in 1979, and capital spending will continue to lag
as the consequence of high borrowing costs and low stock prices. It
must be remembered, in appraising this issue, that under the President's Budget proposals the economy will receive no additional fiscal
stimulus until late 1978.
A Joint Economic Committee staff analysis compared the effects of
a monetary policy that would bring short-term interest rates back to
the average Treasury bill Tate of 5.3 percent in 1977 to a DRI baseline
solution. The attainment of the interest rate target would require the
fourth-over-fourth quarter rate of Ml growth to be stepped up to
about 7 percent of 1978, and to 8 percent in 1979.
It is important to note that "stepping up" means raising the rate of
monetary growth relative to the forecasted rates of monetary growth
and not relative to the 1977 rate. Indeed, if the 7.4 percent rate of 1977
could be maintained, the Committee's goals would very likely be met.
Meanwhile, however, it is very important that the Fed's monetary
growth targets be raised so as to avoid the problems created by divergence of the actual from the target rate noted above. We believe that
the 1977 Ml growth rate would probably be adequate to achieve the
interest rate policy recommended below.
Since monetary policy affects the economy with a considerable lag,
the staff analysis shows that it has little effect until late in 1978. But in
1979 GNP would be $40 billion higher, the real growth rate would be
increased a full percentage point, and the unemployment rate would
be one-half of one percentage point lower. Thus, monetary growth
above 7 percent can eliminate all risk of recession in 1979 and contribute some 500,000 additional jobs.
The effect of this change in the policy mix would be to provide impetus to the investment sector. Nonresidential fixed investment 'may
be $7 billion higher in 1979 and homebuilding may rise by more than
$13 billion. Because of the clear need to stimulate investment, a more
expansionary monetary policy should be high on our list of policy
priorities.
Expansionary monetary policies tend to reduce the Federal budget
deficit while expansionary fiscal policies do the opposite. Our staff
34
estimates that attainment of a 5.3 percent short-term interest rate target will reduce the deficit by between $10 to $15 billion in 1979. The
stronger economy will generate additional revenue from all taxespersonal, business social insurance, and indirect-and it will reduce
outlays for unemployment compensation and welfare. In addition, the
lower interest rates will reduce the cost of financing the national debt.
The growth of the money supply should be such that the
rise in short-term interest rates is reversed. Policy in 1978
should tend to move short-term rates toward their 1977 levels.
Short-term interest rates should be maintained at these lower
levels in 1979.
Obstacles to Monetary Expansion: The InternationalPosition
of the Dollar
Witnesses before the Committee have suggested that the principal
reason for expecting monetary growth rates to be held back in 1978
is the Federal Reserve's perceived need to prevent the dollar from
falling relative to foreign currencies. Recent inceases in the Federal
funds and rediscount rates bear witness to the desire to shore up the
dollar even at the expense of domestic expansion. If this orientation
of monetary policy is continued, the pessimism expressed by some of
our witnesses will be justified.
On the other side of this debate are those who believe that our large
trade deficit implies the need for a decline in the international value
of the dollar. This policy would tend to improve the competitive position of our export industries and would raise the cost of imports,
thereby diverting employment from foreign to domestic production.
We believe that so many special factors presently influence our trade
balance that neither of these views is acceptable without modification.
Flexible exchange rates play an important role in allowing gradual
adjustment to take place before severe imbalances develop. But depreciation of the dollar to such an extent that it would eliminate the
deficit is simply not feasible or desirable. The prospect of continuing
current account surpluses for the OPEC cartel implies continuing
current account deficits for the rest of the world. If the United States
experiences satisfactory rates of growth, it will bear a substantial
share of that deficit.
Much of the trade deficit stems from the fact that the United States
is at a stage of the business cycle different from her major trading
partners. Relatively strong growth in the United States has led to a
rapid increase in U.S. imports. Slow growth abroad has meant weak
markets for U.S. exports. Since the volume of trade adjusts slowly to
exchange rate variations, a sharp drop in the value of the dollar would,
in the short run, simply lead to higher prices for imports (and thus
more inflation) and greater turbulence in international money markets.
Because of the dollar's role as the world's principal reserve currency,
severe fluctuations in its value can impede orderly world economic
growth by distorting trade and investment decisions.
The faster the dollar drops, the greater are the risks that the OPEC
cartel will raise its prices. Rising oil prices would further depress the
dollar and this could then lead to another round of increases in oil
35
prices. A lthough domestic fuel prices are almost certain to rise in the
future, it is preferable that this be brought about through a
and-planned domestic energy program, rather than through reasoned
the kind
of external shocks that were visited upon us in 1974. It will be several
years before a national energy policy can significantly reduce our imports of energy. But by signaling the adoption of a long-term strategy
to reduce the U.S. trade deficit, a national policy would help stabilize
the international value of the dollar.
The view that the dollar must be rigidly defended at all costs is
equally unacceptable. Directing monetary policy towards
such a goal
would return us to the Bretton Woods system in which international
considerations took priority over domestic economic objectives. Such
a policy would perpetuate the trade deficit, even as it eliminates the
overall deficit by artificially stimulating capital inflows. It would
be deflationary not only because a perpetual trade deficit represents
a perennial net purchasing power drain, but also because it implies
high interest rates and therefore vitiates the important role that
monetary policy should play in reviving capital spending.
The Joint Economic Committee has long been on record as opposing the use of monetary policy for international purposes. Similarly,
we have been opposed to the use of foreign exchange market intervention for the purpose of achieving a domestic monetary objective.
We reaffirm this view.'
Domestic recovery is too important an objective to permit
monetary policy to be diverted to other goals. We therefore
oppose the recent increase in the Federal funds rate and the
rediscount rate because they represent deliberate attempts to
use domestic monetary instruments to achieve an international purpose. Intervention in foreign exchange markets
should be strictly limited to measures designed to correct
"disorderly markets." 4
Our deteriorating foreign trade position is a source of serious concern. We believe that, over time, a part of our trade deficit can be
remedied by the speedy adoption of a national energy policy and that
the remainder of the problem is inherently temporary and external
in origin. Once growth rates abroad pick up, the U.S. current account
will strengthen, as will the dollar. Sound policy calls for patience and
the resistance of efforts to restrict trade by resorting to protectionist
measures. Dumping is to be deplored and may require an appropriate
response if the countries involved refuse to change their trade practices. On the other hand there is little evidence that American industry
is losing its international competitive edge. Efforts to limit imports
would surely be offset by foreign retaliatory responses against our
exports. Protectionism might not increase the number of jobs in the
U.S., and it could well undo the very significant progress we have
made through the years in liberalizing trade.
It is important to the maintenance of the international value of the
dollar that capital be encouraged to flow into the United States. Howa Senator Ribicoff states: "This statement is too strong. I would agree that monetary
policy should not be used primarily for international purposes."
'Senator Ribicoff states: "Monetary policy is inherently both
a domestic and international instrument. We certainly have disorderly
markets."
36
ever, as we have stated many times, this should not be done through
monetary policies because such monetary policies would necessarily be
restrictive and interfere with domestic recovery. 5
Under the circumstances it seems entirely appropriate for this Committee to urge American banks to reconsider their lending policies in a
way that would reduce their foreign lending operations somewhat in
favor of more generous lending policies to domestic business. A moderate shift in bank portfolios in the recommended direction would take
a great deal of pressure off the dollar and would help to finance the
capital spending we so badly need. It would also take considerable
pressure off the Federal Reserve because it would permit interest rates
to be brought down without excessively rapid growth in the money
supply.
This is a reasonable request to make of our banking system. The
United States provides an investment climate of political and economic stability not common elsewhere. Taking this into account, interest rates are not unfavorable. Lending opportunities surely abound.
Further, with the new Witteveen facility, foreign credit demands
should be eased. It will then make sense for our banks to look homeward more than they are presently doing.
Correction of our international trade imbalance necessitates that
we take measures to restrain our huge appetite for foreign oil. The
United States enjoyed a net export surplus of $7.8 billion (NIPA
basis) in 1976, at which time we were spending $35 billion on foreign
oil. However, the trade surplus moved into a deficit of $10 billion in
1977; $10 billion out of the total swing of $16.8 billion was attributable
to increased oil imports. Until recently, we were able to pay for our
imported oil by our export sales. However, it is also quite clear that
we cannot hope to continue to increase our oil imports by $10 billion
each year. Fortunately, much of this increase in 1977 was attributable
to special factors including the stockpiling program, the very harsh
winter of 1976-77, and the drought in the West which forced utilities
to resort to oil to supplement their inadequate hydroelectric resources.
In 1978, Alaskan oil and the hoped-for OPEC price freeze provide
reasons for optimism.
There is no doubt that we must develop an energy program that
reduces our reliance on imported oil. Such a program must consist in
part of reduced consumption of oil and of greater domestic production of oil and substitute fuels. Producers must be provided with incentives to raise production and consumers must be provided with
incentives to curtail consumption. It seems inevitable that this cannot
be done without substantial increases in fuel prices. Although the
Members of the Committee have varying views about the President's
energy program, we strongly believe that energy price increases should
be phased in slowly. Abrupt price increases would produce a sharp
reduction in consumer real income and needlessly subject the economy
to the same kind of stagflation-producing shocks that were experienced
in 1974. We are also persuaded that the fragility of the recovery makes
it absolutely imperative that energy taxes be handled in such a manner
that they impose no fiscal drag on the economy.
5 Senator Ribicoff states: "This statement is too strong. I would agree that monetary
policy should not be used primarily for international purposes."
37
Balance of Trade 1976,1977
BILLIONS OF DOLLARS
200
-
976
196
_
175.5
..............
162.9
100
_
Trade Surplus
$7.8
_
7
197
........ :
.:.::,,:::.:.
.. .:.,,,.
.:..: ,:,:,...
0
100
_
EXPORTS
2
IMPORTS
Trade Deficit 155.1
200
185.6
SOURCE: Departments of Commerce and Energy
FISCAL POLICY
The President's budget proposal for FY 1979 is for outlays of
$500.2 billion and receipts of $439.6 billion, implying a deficit of $60.6
billion. This deficit is roughly the same as the Administration's estimated deficit of $61.8 billion for FY 1978 and suggests that planned
fiscal policy, despite a major proposed tax reduction and reform program, is to be neutral in FY 1979. That is, it will neither add to nor
subtract substantially from aggregate demand, relative to the budget
for FY 1978.
Expenditure Policy
The Administration estimates that expenditures will total $462.2
billion in fiscal year 1978 and $500.2 billion in fiscal year 1979. After
allowance for inflation, this implies an expenditure increase in real
terms of roughly 2 percent. It should be noted, however, that the
$462.2 billion estimate is $4 billion above the level specified in the Second Concurrent Resolution on the Budget for fiscal year 1978. In order
to spend this amount, Congress would have to pass a Third Concurrent
Resolution on the Budget. Further, current spending is running slightly below the $458 billion level approved in the Second Concurrent
Resolution. According to the Congressional Budget Office, the rate of
spending is currently in the $45 -$455 billion range. This implies that
the President's outlay estimates for FY 1978 are too high and that
spending in fiscal year 1979 will grow 4 to 5 percent in real terms
rather than the 2 percent that has been claimed. Comparisons of the
Second Concurrent Resolution and the President's estimates for fiscal
year 1978 are shown in Table IV-1.
38
TABLE IV-I.-FEDERAL OUTLAYS-FISCAL YEAR1978
[In billions of dollarsl
2d concurrent
resolution
President's
budget
1.0
16.8
107.9
6.5
4.8
20.2
9.1
19.8
10.6
26.7
44.3
147.6
18.9
4.0
3.9
9.8
43.8
0
-15.6
105.2
6.3
4.7
18.8
9.8
19.1
11.7
26.2
44. 3
146. 2
19.1
3.9
3.7
9.6
42. 4
.9
-17. 0
462 2
454.9
National defense -110.1
International affairs-6.6
General science, space and technology -4.7
Natural resources, environment and energy -20.0
Agriculture -6.3
Commerce and transportation -19.6
Community and regional development -10.6
Education, training, employment and social services -26.4
Health -44.2
Income security -146.1
Veterans benefits -20.2
Law enforcement and justice -4.0
General government -3.9
Revenue sharing and general purpose fiscal assistance-9.7
Interest -41.7
AllowancesUndistributed offsetting receipts -Total -458.3
Potential
status
Note: The functional categories listed here are those shown in the 2d concurrent resolution. Presidential budget estimates
have been adjusted accordingly.
Sources: 2d concurrent resolution on the budget, and Senate Budget Scorekeeping Report, Mar. 6, 1978.
Although the President's Budget appears reasonable in light of
historical spending patterns, there are several areas where the spending estimates could prove to be too low. For example, the President
has proposed a program to aid college students from middle-income
families. According to the Budget, funds for this program were included in the $1.7 billion contingency fund. This same contingency
fund is also supposed to include money to pay for the urban program
scheduled for presentation later this year. Inasmuch as the original
urban aid program called for additional spending of $3-4 billion, it is
difficult to see how the $1.7 billion contingency fund will prove to be
adequate to fund these two initiatives, as well as the other contingencies which will arise during the year.
Elsewhere in this Report, we recommend new initiatives to address
our structural unemployment problem. If adopted, these programs
would add about $1.5 billion to 1979 expenditures.
ECONOMIC PIORITIES IN
TM
BUDGET
The best way to understand the Government's priorities is through
an examination of the annual budget. As the President stated in his
message, this year's proposed budget "is the Administration's first full
statement of its priorities, policies, and proposals for meeting our
national needs."
The key to judging budgetary priorities in any given year is an
analysis of the planned use of discretionary budget authority. Budget
authority gives the best indications of future plans because it often
carries over from one year to the next; outlays in the current year are
heavily influenced by earlier decisions on budget authority. Discretionary budget authority represents the amount in requested appropriations over and above what the Government is required to request
because of past decisions. The budgetary consequences of past decisions are contained in the Office of Management and Budget's
(OMB) current services estimates.
39
The current services estimates are based on the anticipated costs of
continuing ongoing Federal programs and activities at 1978 levels
without policy changes. 0MB characterizes the estimates as an answer
to the question, "How would the budget come out if we simply left the
Federal Government on automatic pilot through next year?" The
discretionary budget proposals are the difference between the current
services estimates and the amounts requested in the Budget.
Table IV-2 shows a breakdown of government functions and compares current services estimates with the President's actual requests.
Column 3 in the table shows the incremental differences. For example,
the request for National Defense is $2 billion higher than what would
have been spent had the program been left on automatic pilot.
Similarly, an additional $4.5 billion in new budget authority is being
requested for Education, Training, Employment, and Social Services.
TABLE IV-2.-CURRENT SERVICES ESTIMATES AND PRESIDENTIAL BUDGET
PROPOSALS FORFISCAL YEAR 1979
BUDGET AUTHORITY BY FUNCTION
[in billions of dollarsi
Current
services
National defense -126.4
International affairs-11.5
General science, space, and technology -5.2
Energy
and-environment----------------------Natural resources and environment
Agriculture -6.6
Commerce and housing credit -6.5
Transportation --Community and regional development----------------Education, training, employment, and social services -29.1
Health - - - - - - - - - - - - - - - - - - - - - - - - - - - - -Income security-189.2
Veterans' benefits and services-18.6
Administration of instice -3.9
General government -4.2
General purpose fiscal assistance -9.5
Interest-48.7
Undistributed offsetting receipts ---------------------------
6.9
12.2
52
7.2
52.1
-16.0
Total -538.3
Presidential
proposal
Discretionary
change
128.4
13.8
5.2
9.5
12.7
7.2
6.6
18.6
7.7
33.6
52.6
190.9
19.1
4.1
4.4
16.6
49.0
+2.0
+2.3
+2.6
+.6
+.6
+.I
+3.1
+. 5
+4.5
+.5
+1.7
+. 5
+. 2
+.2
+7. 1
+. 3
-1640
+3.0
568.2
30.2
Source: Special Analyses of the Budget of the U.S. Government, Fiscal Year 1979.
Two cautionary notes must be made about these figures. First, the
current services estimates for a number of functions are questionable.
As a general rule, current services estimates include anticipated inflation. Where inflation is not taken into account-principally, Veterans' Benefits and General Purpose Fiscal Assistance-the current
services estimates are understated and the differences between them
and the budget requests are overstated. Secondly, the figures by themselves may be misleading unless one understands the context of the
program and how the funds are intended to be spent.
Large amounts of discretionary budget authority are being requested for functions that produce relatively little domestic economic
activity. In this category are National Defense ($2 billion), International Affairs (which receives $2.3 billion, mostly for the Witteveen
facility) and Energy ($2.7 billion, mostly to import and store foreign
fuel).
40
The growth in Defense appears to be primarily in the support
categories for a wide variety of conventional forces. This growth is
partially ofset by a large decline in strategic forces caused largely by
a planned reduction in the number of Trident submarines to be built
this year. The reduction in Trident construction tends to understate
the overall increase in Defense.
The largest single increase is for General Purpose Fiscal Assistance
($7.1 billion). This item consists of the proposed taxable municipal
bond option intended to provide interest rate subsidies to States and
municipalities who want to sell taxable bonds. Although the bonds
would be used mostly to finance capital improvements, it is not clear
that a greater volume of improvements will be undertaken just because they are financed in the taxable bond market. It is also interesting to note that despite the large request for budget authority, the
Administration anticipates spending very few of these funds.
Large increases in discretionary authority are being requested for
Transportation ($3.0 billion) and Education, Training, Employment,
and Social Services ($4.5 billion). Most of the Transportation increase is the result of changing the Urban Mass Transportation's
funding from contract authority to annual appropriations. While this
represents an improvement in the presentation of the budget, it does
not indicate a commitment of increased resources to Transportation.
The increases requested for Education, Training, Employment, and
Social Services are spread across a number of programs. In the employment area, however, the proposed increase in budget authority
provides no additional public service employment jobs. Budget authority requests are actually being reduced slightly for the Youth
Employment and Demonstration Act and significantly for the Jobs
Corps program. The requested increase for the Comprehensive Employment and Training Services Administration may not be adequate
to cover the increased costs of Title I that will result from the rise in
the minimum wage.
There are relatively small discretionary increases requested for the
Agriculture, Community and Regional Development, and Health
functions. The request for Veterans' Benefits would show a decline if
inflation were taken into account. The increase requested for Income
Security will mostly be absorbed by inflation. Much of the large request shown under Allowances is to pay for Federal Government
civilian pay raises.
-An examination of the President's discretionary budget choices
reveals little evidence that a major change in priorities is taking place.
There are some signs that a foundation is being laid for future
changes. But so far, this year's priorities are similar to those of prior
budgets. Further, there is likely to be less economic stimulus in the
budget requests than is apparent from the figures' because of the composition of the increases.
URBAN POLICY AND HOUSJNG
The President has stated his commitment to the revitalization of
declining urban economies. The Budget, however, contains no major
initiatives for the cities, does not redirect Federal assistance into areas
of greatest need, and does not provide for improved coordination of
41
existing programs.6 We await the announcement of the Administration's urban policy, but remain doubtful that urban problems can be
significantly reduced without eliminating the shortcomings in the
existing programs.
Despite the NIPA data which indicate an annual State and local
government surplus of $30 billion, many localities still face serious
fiscal problems. These data should be collected and released on a Stateby-State basis indicating operating revenues and pension trust fund
accounts for each State. Many proposals to assist urban areas have been
brought to our attention. The following deserve serious consideration:
As a general rule, Federal programs in urban areas could target
assistance to people in greatest need. Too often government funds
have been distributed in a way that does not achieve the objectives
that Congress intended.
The Countercyclical Fiscal Assistance Act of 1977 expires on
September 30, 1978. This Act could be made permanent. Assistance could be made available by using local unemployment rates
as the trigger rather than a national rate which masks high rates
of local unemployment.
The Administration has proposed extending the Investment Tax
Credit to apply to industrial and utility structures as well as plant
and equipment. It is feared that the effect may be to divert private
investment away from older cities. Consideration could be given
to adjustments which place investment in rehabilitation on a net
equal footing with investment in new construction.
The deterioration of public facilities in the cities has been exacerbated by the recent recession. The deferral of maintenance
and repair of roads, sewers, and bridges poses a grave threat to
the cities' greatest asset-their infrastructure. The Federal Government -could provide guidelines for localities to inventory their
public facility maintenance, repair, replacement, and expansion
needs. Such an inventory could be required for participation in
the Community Development Block Grant and Economic Development Assistance programs.
The existing housing rehabilitation program could be significantly expanded to improve the housing stock and increase job
opportunities in cities with deteriorating residential areas.
The Public Works and Economic Development Act of 1965
could be funded at its authorized level of $1 billion. An increase
from the budgeted amount of $533 million would require no new
legislation and would assist distressed areas in revitalizing their
economies.
Many of the cities which are experiencing population growth
are finding it difficult to meet the increased demands for housing,
roads, sewers, schools, and other public facilities. Every effort
must be made to prevent these cities from developing the problems which confront our older cities. The Department of Housing
and Urban Development could provide extensive technical assistSenator Proxmire states: "The cities now receive $65 billion or more a year from the
Federal Government. This is ample and should not be Increased. Instead, a major effort
must be made to reorder priorities and to channel funds into areas of greatest need,
rather than to meet the demands of the most affluent and political powerful groups in the
cities who have clout all out of proportion to their numbers.
"The emphasis by the Secretary of Housing on new starts, the change In the formula for
Community Development, and the effort to get FNMA to do its job are correct and the kind
of reordering of previous priorities which can get the job done."
42
ance to these areas. Preventing blight is less costly and less difficult than eliminating it.
A National Domestic Development Bank could provide longterm, low-interest loans to municipalities, private industries, and
nonprofit organizations for economic development purposes. This
Bank could provide municipal loans for development of public
facilities as well as business loans, including venture capital for
business investment in high unemployment localities.
Many small cities are beset with serious problems. Small cities,
however, find it difficult to compete with larger cities for Federal
funds. Special consideration may be necessary to ensure that small
cities are able to meet their needs.
TOTAL SPENDING
In broad terms we endorse the tax-expenditure policy mix proposed
by the Administration. This does not imply that moderate expenditure
increases and tax reductions are the only means of providing economic
stimulus. Certainly the alternative of greater spending and lower tax
reduction deserves consideration, and we have clearly indicated that in
any event monetary policy must be expansionary.7
Tax Policy 9
It may seem surprising that the 1979 Budget provides almost no net
additional stimulus in calendar year 1979 even though it contains a
proposed income tax reduction of about $25 billion. The reason is that
the tax reduction is largely offset by tax increases that will take place
automatically in 1978 and 1979.
The possibilities for expanding existing spending programs are
limited. We have recommended increases in public sector job programs
and countercyclical grants, and we have also indicated areas where
the President's Budget estimates appear to be low. These proposals
yield a total expenditure estimate of $500-$505 billion.
'Senator Proxmire states: "I reject this alternative. We should cut spending, and if
possible, increase tax cuts, not the other way around."
9 Senator McGovern states: "The Joint Economic Committee does not discuss the Administration's individual tax proposals in this Report. However, there is one reform proposed by the President that is so urgent and so long overdue that I feel it is my
responsibility to call attention to it and to urge its enactment.
'The proposal in question is the President's plan to scrap the present system of providing each family with exemptions of $750 per dependent and to replace this with a per
capita tax credit of $240. This reform would greatly Improve the equity of our income
tax system since the exemptions are of principal benefit to high income taxpayers. To illustrate, if a high-income family that pays a marginal rate of 40 percent has an additional child, that family will save 40 percent of $750 or $300 in taxes. On the other hand,
a low income family paying a 10 percent marginal rate would save only $75. This is clearly
an unfair system. If it were replaced by the $240 tax credit, both families would save
$240 if they gained an additional dependent.
I would like to carry the President's proposal one step further. A low income person
whose computed tax liability (prior to deduction of the credit) does not come to $240,
cannot avail himself of the full amount of the credit. I therefore propose that the credit
be made fully refundable. This would further improve the equity of the tax system: it
would provide a family of four with a minimum income of $960 and therefore establish
the basis for a rational start towards welfare reform. It would provide an incentive for
more low-income persons to file a simple tax return and to acquire social security numbers. This would be of tremendous assistance to the so-called 'outreach" programs that
presently spend large sums attempting identify and locate low-income persons so that
they can receive the various benefits to which they are entitled. Finally, by consolidating
the present $30 per capita credit with the new $240 credit, combined with the elimination
of the exemption, the personal income tax would be greatly simplified.
"I have asked the staff to estimate the budget cost of this proposal and have learned
that Its cost would be about $21.5 billion in calendar year 1978. In view of the very
serious danger of a recession in 1979, it seems to me that this proposal would not only be
humane and improve the equity of our tax system, but would be very sound fiscal policy
as well."
43
If we choose to rely exclusively on spending increases to provide
economic stimulus, we would need to consider major new initiatives.
While we are not prepared to make specific recommendations at this
time, there is certainly no shortage of opportunities. National health
insurance and welfare reform are two issues which have been debated
and which, depending upon the specific proposal, could imply
able spending increases. We are also very aware of the deficienciessizein
our transportation infrastructure and of our enormous urban needs.
Many farmers are also in trouble and need help.
There are, obviously, many ways to raise spending should
decide
to do this rather than lower taxes. The problem is to buy be
the time
necessary to plan the programs so that the funds will be spent
productively and at the same time provide a speedy economic impact.
In fiscal year 1979, total Federal expenditures should be
between $5004,505 billion and total tax receipts should be
approximately $440 billion.8 This fiscal policy, combined with
the monetary policy discussed above, will achieve the economic goals set forth in this Report.
If social insurance payroll taxes were to rise by the same percent
as the forecasted rise in nominal GNP in calendar year 1978, the taxes
would increase by about $13 billion. However, the forecasted increase
is closer to $19 billion. The extra increase of about $6 billion is attributable to the fact that both the social security tax rate and base rose
at the beginning of 1978 and to the fact that the minimum taxable
Federal base for unemployment insurance increased from $4,200 to
$6,000, thereby raising Federal payroll taxes on employers, and forcing many States to raise their unemployment insurance payroll taxes.
Because of the progressivity of the personal income tax,
tax
tends to rise automatically by 1.5 to 1.6 times the percentagethis
rise
in
nominal personal income. If income taxes were proportional, they
would rise by about $19 billion in calendar year 1978. But because
of the progressivity factor they will rise by $29 billion. The difference
of $10 billion between the two figures is the fiscal drag attributable to
the personal income tax. Added to the substantial payroll tax increase,
this amounts to a net fiscal drag from these two sources of about $15$16 billion, and wipes out about two-thirds of the stimulus that would
be provided by a $25 billion tax reduction.
Those who propose to reduce taxes by more than $25
certainly have a strong case. They can point to the severe billion
fiscal
drag
that will occur in 1978. They can also emphasize that this drag
be magnified to $30 billion in 1979 when the new social security will
law
begins to affect the level of payroll taxation.
In general we are favorably disposed toward the Administration's
specific tax reduction proposals. Because of the combination of tax
reduction with controversial tax reforms, a somewhat larger tax reduction than the President's $25 billion may emerge.
Congress has recently enacted a social security financing
that
relies entirely on increased payroll taxation and that is likelybill
to
have
very serious economic consequences. Payroll taxes charged to em8 Senator Proxmire states: "I believe expenditures are
at least $25 billion too high and
that the Government could be more efficient
at the lower figure.
23-928 0 - 78 - 4
44
ployees are generally regressive so that income tax relief may not provide an adequate offset. Payroll tax increases on employers raise labor
costs and are passed forward into higher prices. This reduces consumer real income and consumption and therefore simultaneously adds
to inflation and unemployment.
We are impressed by the proposal to fund Hospital Insurance under
Medicare (HI) and Disability Insurance (DI) through general revenue. For calendar year 1978 this would eliminate the need to raise $33
billion in payroll taxes.
Serious consideration should be given to a $33 billion reduction in
payroll taxes as a substitute for the Administration's tax proposals.
Since business costs would be reduced by about $16 billion, corporate
tax liability would rise by about $5 billion, so that the net revenue
loss would be about $28 billion. Employers would benefit from lower
labor costs and higher profitability; output and employment would
expand; inflation would be slowed; and our tax system would become
far fairer and more equitable. Unlike the retirement system, benefits
from DI and HI are not closely linked to contributions and therefore,
there is no particular justification for financing these programs from
earmarked payroll taxes.
Fortunately, there is ample time to undo the harm of the recently
passed social security bill because Congress wisely delayed the addition of any new taxes until 1979. Some provisions of the bill, such as
the elimination of double indexation of benefits, were badly needed
changes which should be retained.
Congress should immediately begin a review of the social
security financing legislation recently enacted. Special attention must be given to the long-term macroeconomic consequences of any financing proposal.
Because of the extraordinary drains caused by the deep and protracted recession, the Unemployment Insurance (UI) system is in
financial distress. State and Federal Governments have raised their
payroll taxes on employers. This has been very harmful to the economy
because it raises labor costs and therefore adds to inflation and unemployment.
The Administration's proposal to reduce the Federal tax rate on
employers from 0.7 percent to 0.5 percent of taxable wages merely
reverses the rate increase that went into effect in January 1977. It
would be more useful to rescind the Federal tax base increase (from
$4,200 to $6,000) that went into effect in January 1978 since this base
increase raises the minimum taxable base for the States and therefore
forces many of them to raise their UI taxes.
Additional measures to assist UI are urgently needed. Specifically:
(1) Federal Trust Fund deficits attributable to Extended
Benefit and Supplementary Benefit Programs should be forgiven by a one-time emergency transfer from the general
fund to the Federal UT Trust Fund. Such a transfer is entirely appropriate since UI was never intended to deal with
long-term unemployment. The transfer would add nothing
to the budget deficit.
45
(2) Assistance to the States in reducing present debt should
be provided by transfers from the general fund. So-called
"cost equalization" grants are entirely appropriate. These
grants should be allocated on the basis of the amount of
extraordinary unemployment suffered in a State during the
recent recission. It is important that the allocation not be
related to the size of a State's Trust Fund deficit, since that
would penalize those States that have worked to maintain the
financial viability of their UI systems and would be a "bailout' for States that have not.10
(3) The present system of imposing Federal penalty taxes
on employers in States whose UI systems are in debt to the
Federal Trust Fund accounts should be discontinued because
it causes States to raise employer payroll taxes during
periods of high unemployment. This system should be replaced by a 5 to 10 year repayable loan program, and the
incentive to repay should be provided by a modest interest
charge rather than by harmful taxes on employers. The term
of the loan should be extended by one year for any year in
which unemployment in a State exceeds 6 percent.
(4) General funds should be infused into the State UI system whenever the unemployment rate in the States rises above
6 percent. This would enable States to avoid tax increases
during periods of high unemployment.
We believe that these reforms are extremely important. The viability
of our unemployment insurance system makes it imperative that
the Federal Government assume major financial responsibility during
periods of economic emergency Failure to do so merely means higher
burdens of payroll taxation on employers with the consequence of more
inflation and higher unemployment.
CROWDING OUT
The prospect of a $60 billion deficit has caused renewed expressions
of concern about the possibility that Federal competition for funds
would raise interest rates and "crowd out" private investment spending. It is therefore important to reexamine this issue.
Crowding out would certainly be the consequence of an increase in
government spending or a reduction in taxes at a time when the
economy's resources are fully utilized. Under such circumstances, the
share of national output that accrues to one sector of the economy
cannot be expanded without reducing the share that goes to other
sectors. However, this is not currently a problem because the presence
of idle resources makes it possible for all sectors to expand
simultanously.
To conduct a greater volume of business, individuals and businesses
will need more money in their pockets and in their bank accounts.
When the Federal Reserve fails to supply this accommodation, interest rates rise. To get the money balances which they need, people will
1I Senator
Bentsen states: "I disassociate myself from this recommendation."
46
attempt to borrow and to sell some of their earning assets-bonds,
stocks-and as a result, bond prices will fall and interest rates will rise.
This produces monetary crowding out of interest-sensitive expenditures. However, such crowding out is entirely avoidable by sufficiently
accommodative monetary policy. On March 7, 1975, we reported to
the Senate Budget Committee as follows:
If heavy government borrowing does drive up interest
rates, it will be because the Federal Reserve has not made
sufficient credit available, not because the financial system cannot handle the flows.
We continue to subscribe to this view.
Nevertheless, one may ask why the budget deficit remains so large
despite substantial economic recovery. One answer is the bias of recent
years towards restrictive monetary policy combined with expansionary fiscal policy. This policy bias has weakened investment. A second
reason is the very sizeable surplus that is now being run by State and
local governments. This surplus came to $29.2 billion in calendar year
1977 on an NIPA basis and represents a net withdrawal of purchasing
power that is appropriately offset by the Federal deficit. A third reason is our foreign trade deficit. As long as imports exceed exports,
there will be a net drain of purchasing power out of the United States.
Unless we are willing to let such a drain slow the economy, we will
have to offset it either with a deficit in our Federal budget and/or with
other measures that stimulate spending in the private sector of the
economy.
IMPROVEMENTS IN POLICY COORDINATION
Many committees in the Congress are concerned with economic
policy. It is the unique responsibility of the Joint Economic Committee to review the overall economic situation and to ensure that policies
are adequate, consistent, and properly coordinated. Under the Employment Act of 1946, the Joint Economic Committee reports to Congress
early in the year on the President's Economic program, and in this
Report the Committee provides its own evaluation and recommendations on the entire program and its component parts.
Monetary policy is a central ingredient in the annual policy strategy,
and it is therefore essential to review monetary policies in detail and
to consider their impact and interrelation with other elements in the
economic outlook. Of particular concern to us is the appropriateness
of the monetary-fiscal mix. We must ensure that monetary and fiscal
policies do not work at cross purposes. To see that these policies are
coordinated in the common interest is one of the essential functions of
the Joint Economic Committee.
Over the years we have frequently called attention to serious inadequacies in the coordination of monetary and fiscal policy. It was
this concern that led us in 1975 to urge that the Federal Reserve report regularly to the oversight committees on its monetary policies
and the operation of such policies. Subsequently, legislation was enacted to require quarterly reporting to the House and Senate by the
Federal Reserve.
While the legislation has represented a great improvement over past
practice, subsequent experience has disclosed imperfections. An ex-
47
perience such as that of the third quarter of 1977, which was described
earlier, leads us to urge further changes in the oversight process of the
Federal Reserve. As noted earlier, there are some technical deficiencies
of the Federal Reserve's reporting system, and we are also concerned
with the development of a rational monetary-fiscal strategy. To deal
will both of these problems, we make the following recommendations:
The Federal Reserve should issue a written report to the
Congress shortly after the receipt of the Economic Report of
the President. After consultation with the House and Senate
Banking Committees, the Joint Economic Committee will review the report and make its recommendations. The Federal
Reserve's report would be expected to meet three basic
requirements:
(1) It would analyze the desirability, consistency, and
feasibility of the quantitatve goals for employment
growth, and inflation for the forthcoming fiscal year as
set forth by the President.
(2) It would provide the Federal Reserve's own quantitative forecast of economic activity for the forthcoming
year on a quarterly basis.
(3) It would discuss in exact quantitative terms how the
proposed monetary policies are designed to reconcile
the President's targets and the Federal Reserve's own
forecast.
This reform would eliminate many serious problems. It would provide this Committee with the information it needs to perform its
policy coordination role effectively. It would also ensure that monetary
and fiscal policies aim at the same goals rather than work at cross
purposes as has happened all too frequently in the past. Such biases
as the one that has supported consumption but held back investment
during the course of the current recovery would be eliminated.
It should be understood that the Federal Reserve System
is responsible and accountable to the Congress. In the event
that there is conflict between the targets of the Administration and the goals of the Congress, the Federal Reserve must
be guided by the will of the Congress."
Finally, in the past the Budget Committees have been hampered in
their attempts to estimate future expenditure and revenue levels because these variables depend on the state of the economy, and that cannot be known with any certainty as long as there is no precise
knowledge about the intentions of monetary policy. We therefore make
the following recommendation:
The timing of the Federal Reserve's reporting cycle should
be changed to coincide with the congressional budget cycle.
The Chairman of the Federal Reserve would therefore appear
before both Banking Committees in time to permit these com21 Senator Riblcoff states: "We should not forget the benefits of an
independent Federal
Reserve System. While I support moves toward Increased communication
and coordination. I would oppose any attempt to eliminate or seriously damage the Independence
of the
Federal Reserve System."
48
mittees, and the Joint Economic Committee, to report to the
Budget Committees on monetary policy prior to the First and
Second Concurrent Resolutions on the budget.'2
None of these proposals is in any way inconsistent with, nor are
they meant to change, any of the requirements of the Full Employment and Balanced Growth Act described in Chapter III. It is essential to reform the present Federal Reserve reporting system and to
ensure the planning and coordination of monetary and fiscal policies
in the national interest. Passage of the Full Employment and Balanced Growth Act would greatly facilitate the aims set forth here.
12 Senator Proxmire states: "This recommendation is subject to the actions of the House
and Senate Banking Committees. As Chairman of the latter I reserve judgment on it."
V. THE CONTROL OF INFLATION
Inflation continues to be among the most serious and
problems confronting our economy. Under the impact ofintractable
increased
oil prices and poor world food harvests, consumer prices rose 11.0
percent in 1974. In 1975, despite enormous slack as the economy reached
the bottom of the worst recession since the Great Depression, the
Consumer Price Index (CPI) still grew 9.1 percent. Substantial improvement occurred in 1976 with a slowing of the inflation rate to 5.8
percent, but this once again gave way to a worrisome rise of 6.5 percent in 1977. It is important to note that none of the cited years could
be regarded as years in which aggregate demand was excessive.
The central theme of our 1977 Midyear Review of the Economy 1
was that inflation is the principal impediment to the recovery
of the
economy. That theme is still valid. In 1975 it was thought that an
annual real growth rate of 7 percent was feasible and that full employment could be restored no later than 1980. Because of the failure of
inflation to abate, policymakers are fearful that rapid rates of real
growth will set off new waves of inflation. This fear has been
impediment to the adoption of stimulative policies designed atoserious
speed
the recovery of the economy.
INFLATION AND
RECovERY
Excessive unemployment calls for expansionary policy,
this
risks renewed inflation, while a high rate of inflation calls forbut
restrictive policy, thereby risking higher unemployment. Unfortunately,
during the 1970s inflation has hampered the implementation of the Employment Act by fostering the adoption of economic policies that
slow economic growth and increase unemployment.
A notable example is the Federal Reserve's action to reduce the real
quantity of Ml by a full 9 percent from the end of 1972 to the middle
of
1977. Another is the cautious fiscal policies pursued during this same
period. We have had very large budget deficits, but these have been the
automatic consequences of the recession. The recession has depressed
revenues from all tax sources, and it has raised outlays
unemployment compensation, welfare, food stamps, and the like.for
The bulk
of the deficits have been due to these automatic factors which overshadow the effects of the discretionary policies that have been put in
place. Although Congress has granted tax relief and has created new
public service and youth employment programs, it is nevertheless true
that the budgets of the last few years have provided very little new
net fiscal stimulus, and the budget for fiscal year 1979 is no exception.
Fear of inflation has been the principal source of this fiscal caution.
1 The 1977 Midyear Review of the
Report of the Joint Economic Committee,
Congress of the United States, togetherEcconomy,
with Minority and Additional Views, September
30,
1977.
(49)
50
Inflation produces restrictive effects that automatically slow growth
and raise unemployment. It lowers the real quantity of money, raises
interest rates, and reduces investment. It also reduces the real value of
public debt and has an adverse wealth effect that may lower consumption. Perhaps worst of all, it moves taxpayers into higher brackets,
even without benefit of any rise in real income, so that their average
tax rate increases, real disposable income therefore declines, and
consumption expenditure is curtailed.
We have repeatedly pointed out that inflation cannot be dealt with
through demand restriction without exacting intolerable costs in
terms of lost production and employment.
Dr. Otto Eckstein, President of Data Resources Incorporated, has
made the results of a DRI study of stagflation available to the Committee. This study shows that inflation could be reduced to about 4
percent by 1981 by restrictive policies that would steadily raise the
unemployment rate to about 10 percent. In an alternative, but equally
unacceptable scenario, it was calculated that inflation can be reduced
to about 4 percent by 1983, but at the cost of an immediate sharp rise
in unemployment to about 8 percent and subsequent indefinite maintenance of the unemployment rate at that level. Analysis by other competent researchers are consistent with these unacceptable trade-off
estimates.
Clearly, demand restriction is not the answer to a cost-push inflation triggered by sharp increases in oil and raw materials costs
and propelled onward by subsequent spirals of wages and prices attempting to keep up with each other. We have maintained our opposition to demand restriction consistently and we are gratified that the
present Administration is in full agreement. In his Economic Report,
the President states (p. 17):
Recent experience has demonstrated that the inflation we
have inherited from the past cannot be cured by policies that
slow growth and keep unemployment high. Sinc 1975 inflation has persisted stubbornly at a 6 to 61/2 percent rateeven though unemployment went as high as 9 percent and
still stands above 6 percent, and even though a substantial
proportion of our industrial capacity has been idle. The
human tragedy and waste of resources associated with policies of slow growth are intolerable, and the impact of such
policies on the current inflation is very small. Moreover, by
discouraging investment in new capacity, slow growth sows
the seeds of future inflationary problems when the economy
does return to high employment. Economic stagnation is not
the answer to inflation.
In view of the basic agreement that stagnation is not the answer
to inflation, the question before us is how to stop inflation without
resorting to the tight budgets and monetary restriction that have
been the centerpieces of the futile and costly antiinflation policies
of the last several years.
INFLATION PROSPECTS
Earlier in our Report, we accepted the Administration's goal of a
6-percent rate of inflation in both 1978 and 1979 as a limited improve-
51
ment that is attainable. As a goal, 6 percent is realistic. As a projection,
it can only be termed optimistic. There are several reasons for this
conclusion.
If recovery proceeds as hoped we may run up against specific capacity bottlenecks. Such a prospect sounds remote with unemployment
still above 6 percent, but the lagging capital spending that we discussed in the preceding chapter makes it entirely possible. If reliance
is placed exclusively on monetary and fiscal policy, we cannot expect
the inflation rate to decline as the economy approaches full employment and full capacity because this will be accompanied by tightening
of labor, materials, capital goods, financial, and product markets.
In addition, government policies keep pushing up costs and prices.
While some of these policies may be unavoidable and justifiable, they
nevertheless raise prices. Even when the price increase comes from a
one-time change such as a decision to increase a payroll tax, or a decision by a State to increase its sales taxes, the higher prices become a
part of the cost of living. This affects subsequent wage negotiations
which in turn, affects the behavior of unit labor costs, and therefore
is likely once again to show up as a price increase. 'Consequently, even
one-time changes that raise the price level tend to become embedded
in the wage-price spiral.
To cite a few examples of inflationary Federal policies, in 1977 the
importation of color television sets was sharply limited by a quota
system, and at present a new program is being implemented that would
deny domestic consumers the option of using low-cost foreign steel.
Import quotas were also placed on shoes, and the International Trade
Commission has been pressured by demands for protection from the
manufacturers of a wide variety of products. As our Midyear Review
noted, "One of the best ways to slow domestic inflation is to avail ourselves of inexpensive supplies of foreign goods." 2 Recent trends have
moved in the opposite direction and, in the light of our trade deficit,
there is little ground for hoping that this situation will change in the
near future.
During 1977 price supports on milk and other agricultural products
were raised. Although we do have a serious farm problem at the present time, it is important to recognize that the traditional approach
of raising farm prices through supply restriction contributes to inflation. Farming is a hazardous occupation, and farm income is volatile
and in need of stabilization. But certainly in the era of rapid and stubborn inflation, it would be preferable to achieve income parity by
means other than price supports. 3
2 The 1977 Midyear Review of the Economy, p. 60.
3Senator McGovern states: "The committee Report
is correct in its statement that we
now have a serious farm problem. I take issue, however, that traditional approaches necessarily contribute to inflation. In the first place, the Committee print does not address itself
to posing an alternative to the necessity for raising net farm income nor does it recognize
that it is more probable that any inflationary tendencies that result from price supports
are ascribable to other sectors within the food chain. Adjusted net farm income for 1977
fell to $20 billion. It was $30 billion in 1973. Farmers cannot produce for a market whose
prices are below their cost of production. I feel that it is shortsighted for the Committee
to conclude that it is preferable to achieve parity by means other than price supports
without considering what means of achieving parity it would consider to be in the national
Interest.
"May I further point out that in my judgment the Committee has failed to focus on
the intensity of the present farm crisis. My years of public service indicate to me that
the present day revolt is more serious than anything the Congress has seen since the 1930s.
For these reasons, I respectfully wish to disassociate myself from that paragraph of the
Report relating to agricultural prices."
52
Environmental regulations are laudable but they deter investment
and they raise prices. More careful scrutiny of the employment and
inflation generating effects of such regulations is badly needed.
Minimum wages were raised during 1977 from $2.30 to $2.65 (effective January 1, 1978), and under the new law additional increases are
scheduled for 1979 and 1980. While designed to provide minimum income to low-income workers, it tends to decrease their prospects for
employment. In addition, higher labor costs are transmitted into
higher prices, and this may tempt the Federal Reserve to pursue more
restrictive monetary policies.
Some people are harder to employ than others and minimum wage
legislation often creates the severest employment problems for those
it most intends to assist. We therefore suggest that an experimental
system of wage subsidies for employers be designed for high unemployment labor markets that would equalize employment opportunities
for unskilled teenage Americans. Hopefully, this would remove many
of the present obstacles to the hiring of young people-especially
minority teenagers-and it would permit them to develop work habits
and skills that would provide future value to the economy far in excess
of the cost of the program. 4
In January 1977 the Federal payroll tax on employers that finances
the Federal Government's share of the unemployment insurance (UI)
program was raised from 0.5 percent of taxable wages to 0.7 percent.
This past January the taxable wage base increased from $4,200 to
$6,000. In combination, the two changes doubled the payroll taxes per
worker that employers must pay to the Federal Government for unemployment insurance. Since the Federal base sets a minimum base
for the States, the rise in the base is forcing many States to raise their
payroll taxes. As noted in the previous chapter, employer payroll tax
increases raise labor costs, are pushed forward into higher prices, and
lead to additional inflation and unemployment.
Similarly, the new social security law has adverse consequences for
growth and price stability. The legislation calls for steady increases
in both the tax rates and the taxable wage base for both employers and
employees. For employees the tax is generally regressive and burdensome. For employers it implies a tripling in the payroll taxes per
employee they have had to pay to finance social insurance in the last
decade. This substantial rise in payroll taxes will raise labor costs, it
will contribute to the curtailment of production and employment, and
it will increase the level of prices. This legislation poses a serious
threat to growth and price stability throughout the indefinite future.
Congress has yet to pass an energy bill. Necessary as it is, the legis-
lation will surely cause the prices of oil, natural gas, and other fuels
'Representative Reuss and Representative Long add the following: "Should such a program prove successful on an experimental basis, yielding demonstrable increases in em.
ployment without displacing workers who do not qualify for subsidy, then we recommend
further experimentation with a differential minimum wage for new teenage workers in
certain job classifications in, say, three selected labor markets. Such experimentation
would serve to test whether any benefit may be had by allowing young people to earn
pocket money at subminimum rates in jobs that might not otherwise exist. Such a program should be designed with the strictest safeguards against any undermining of wage
standards for those already employed or likely to become employed by the natural growth
of employment in existing organizations. If experimentation with wage subsidies shows
that such safeguards can be designed, then it Is our opinion that differential minimum
wages offer the prospect of a sufficiently attractive alternative (at no cost to the budget)
to outright unemployment, to justify such limited experimentation."
53
to rise. It is important that these price increases take place slowly so
that consumers of energy, whether industrial or residential, can adjust
to the higher costs with a minimum of disruption.
At present, there is no program that offsets the inflationary impact
of such essential measures as the proposed energy program and the
other price raising policies that have been noted above. We should
adopt policies that would help to offset the inflationary impact of
other government programs. As noted in Chapter III, the proposed
Humphrey-Hawkins bill enumerates a number of direct anti-inflationary measures that could be taken. We urge the Administration
to move expeditiously on such programs even before enactment of the
Humphrey-Hawkins bill.
Apart from overall fiscal and monetary policies, Federal actions
have tended to raise rather than lower the rate of inflation. This situation needs to be reversed. The specific measures that raise prices
either need to be more carefully considered or to be offset in a systematic and intelligent manner.
One example of a policy that would act as an offset to Federal price
level raising programs would be a payroll tax reduction. As discussed
in the previous chapter, $33 billion in payroll taxes could be eliminated
by removing hospital and disability insurance from social security.
This would reduce Federal payroll taxes by almost one third and
would have enormously beneficial consequences for production, for
employment, for business profitability, for equitable taxation, and
finally, for slowing inflation.
INDEXING
AND INCOMES POLICY
There are two approaches to inflation that do not rely on policies
that slow growth and raise unemployment. One is to learn to live with
inflation by moderating its harmful effects through programs of inflation correction or "indexing." The other approach is to attempt to
stop the inflation by an incomes policy. The two approaches are not
incompatible. European economists have tended to view indexing of
the personal income tax as an indispensible ingredient of a successful incomes policy because high marginal rates of taxation are among
the principal factors that disrupt incomes policy agreements. In the
United States we have tended to view the two approaches as incompatible and conflicting in economic philosophy. That is because we
have foolishly permitted indexing to become an ideological issue.
As noted in the previous chapter, the Administration's tax proposals will offset the unfortunate impact of inflation on our tax system
in 1978. However, Congress should begin giving consideration to measures which will offset these effects without requiring annual legislation. For example, we might consider following the Canadian practice
of changing the exemption level, bracket limits. and tax credits of the
individual income tax at a rate equal to the rate of inflation. In this
way the real values of the exemptions, brackets, and credits would remain constant, and the average tax rate would not rise unless the real
income of the taxpayer increased. Such "indexing" of the individual
income tax would eliminate one of the major sources of automatic restriction discussed in Chapter IV.
54
Another reform is to discontinue taxing nominal capital gains.
When a capital asset rises in value at a rate no greater than the rate
of inflation there is no real gain. The current practice of taxing nominal capital gains is, therefore, a capital transfer tax that varies arbitrarily in response to the rate of inflation. Whether or not real capital
gains should be taxed is a separate issue.
A third possibility is to discontinue the taxation of nominal interest
and replace this by a taxable real interest rate equal to the nominal
rate of interest minus the rate of inflation. This would eliminate such
inequities as those that occurred in 1974 when small savers earned
nominal (and taxable) interest of 6 percent, but lost ground in real
terms as their savings were eroded by an inflation rate that greatly
exceeded the nominal rate of interest.
A final proposal is to provide small savers with an opportunity to
inflation-proof their savings by making available Federal Government
purchasing power bonds in small denominations. This would be particularly helpful to the small savers who do not have the resources to
overcome the fixed brokerage costs that full access to capital and real
estate markets provide. This change would create difficulties for savings and loan institutions and, therefore, would have to be accompanied by changes in Regulation Q. The latter is a reform that many
believe to be overdue, but it should be accompanied by measures that
ensure an adequate supply of mortgage credit.
We are quite aware that proposals to provide for inflation correction are gaining support, and we realize the need to moderate the
arbitrary redistributive effects of inflation. At the same time, we cannot yield to inflation. Incomes policy, defined as direct government
involvement in the wage-price determination process, is employed in
various forms in nearly every industrial country. It was tried in the
United States in the early 1960s and it helped hold back inflation during the period of rapid economic expansion of 1961 to 1965.
Conventional incomes policies tend to break down when demand in
the economy is so strong that employers gladly grant wage increases
that exceed the guideposts in order to retain valued employees. Foreign
experience suggests that incomes agreements tend to break down under
the pressure of unanticipated and sharp cost-of-living increases such
as those that occur when the costs of imported food and fuel rise suddenly. It has also been clear from the experience of foreign countries
that conventional tax policies may be incompatible with an incomes
agreement. Such agreements generally imply a willingness to accept
a freeze in the relative shares of the national income between wages
and profits. However, high marginal income tax rates and increases
in social security taxes raise the Government's share of national income which puts pressure on the incomes agreement.
Aggregate demand in the United States is not excessive at present;
yet cost-push factors kep the inflation rate rising at an annual rate of
6 percent. Since demand restriction is a costly and inefficient way to
slow this kind of inflation, this is the time to consider the reintroduction of an incomes policy.
We have long been on record in opposition to comprehensive wageprice controls and we do not recommend them now. However, we are
deeply concerned that pressures will mount for such policies if we do
55
not get inflation under control. We should therefore implement an
incomes policy now so that we will not be driven into more drastic
measures later. There is no anti-inflation program that, by itself, is
adequate to reduce the inflation rate significantly. Many anti-inflation
initiatives must be pursued if progress is to be made in slowing the
rise in prices.
At present, the Council on Wage and price Stability (CWPS) is the
principal government agency responsible for analyzing the inflationary effect of public and private sector activities. Under its statutory
authority, CWPS reviews the inflationary impact of government
policies, programs, and regulations, and together with the Office of
Management and Budget, reviews the inflationary impact statements
now required of Federal agencies. The Council also monitors and reviews private sector price and wage increases.
We believe that public policies designed to contain inflation must
contain both short-run and long-run strategies. We have previously
recommended that the functions of CVVPS must be strengthened and
expanded in order to enforce the Federal Government's commitment
to reduce inflation. Last year in our Report, we stated:
Legislation should be enacted authorizing the Council on
Wage and Price Stability to require prenotification of planned
price increases from selected industries and to delay for
modest periods wage or price increases which could have serious inflationary effects on the economy.
The President should support the efforts of the Council on
Wage and Price Stability by directing all government agencies to cooperate with it and to make available such information and assistance as the Council may require. The President
should also be prepared to help make available to the public
the facts, findings, and recommendations developed by the
Council.
We continue to believe that prenotification and delay of wage and
price increases in selected industries is a reasonable start toward an
incomes policy, short of voluntary or mandatory controls, which
would allow the Council to review and comment on the justification
for wage and price increases. In addition, prenotification and delay of
wage and price increases would help give the Administration and
the Congress time to consider and develop long-run measures to reduce
inflation.5' 6
We also support the Administration's effort to require Executive
Branch agencies to prepare an economic analysis of proposed regulations and to submit it to CWPS for review. This procedure will help
check the Federal Government's additions to inflation. CWPS could
focus more national attention on the Federal responsibility to fight inflation by including in its annual report an analysis that would summarize Federal actions which either raised or lowered prices.
Representative Reuss states: "Prenotification is a useful idea under certain circumstances. However, the present nervous business climate is such that prenotifictaion
requirements may do more harm than good. Such requirements may impair the willingness
of business to undertake new ventures and to expand their capacity, and as a consequence,
impede the attainment of full recovery and full employment."
Senator Bentsen has provided additional views on this recommendation at the end of
the Report.
56
As part of its annual report to the Congress, the Council on
Wage and Price Stability should determine whether Federal
actions have resulted in a net reduction or increase in inflation. Any specific actions which have had a significant impact
should be thoroughly discussed and these impacts should be
quantified.
Increasing the power and authority of CWPS alone is not sufficient.
Additional measures must be adopted which will attack the structural
underpinnings of inflation. One idea which deserves serious consideration is a tax-based incomes policy (TIP). Governor Henry Wallich
of the Federal Reserve Board testified before the Committee and discussed two basic versions of TIP.
One has been characterized as the carrot approach, while the other
has been characterized as the stick approach. The approaches are not
incompatible and could easily be combined. There is a central theme
to raise the demand for labor and to raise employment, it is important
to reduce the real labor costs that confront employers. On the other
side, the desire of workers for higher Teal compensation works against
the expansion of employment. By using the tax system to lower real
labor costs to employers while raising the real after tax compensation
to employees, both higher employment and wage-price stability can
be attained.
The stick proposal is commonly known as the Wallich-Weintraub
plan. It would impose a tax penalty on firms that grant wage increases
in excess of a predetermined Government guideline. It would therefore
provide employers with incentives to resist excessive wage demands.
As Governor Wallich pointed out, this proposal would restrain
wages but because the penalty tax would be paid by employers, evenhandedness would be maintained. Because compensation of employees
comprises 75 percent of national income, reducing wage increases
would necessarily slow price increases. The proposal is highly flexible
in that the tax could be imposed as an increase in the corporate income
tax, as a payroll tax, or through disallowance of tax deductions of any
excessive wage increase.
The so-called carrot proposal associated with Arthur Okun is a second TIP variant specifically directed to the present economic situation.
However, except for numerical details, its application is general.
Okun's plan is to provide tax relief as an incentive to workers and
businesses to "enlist in a cooperative anti-inflation effort." For 1978
Okun proposes that participating firms pledge:
. . . to hold its employees' average rate of wage increase
below 6 7percent and its average rate of price increase below 4
percent.
In return for voluntary participation in this plan, employees of the
firm would receive a tax rebate of 1.5 percent of their wage incomes
with a ceiling of $225 per person. At the same time, the participating
firm would receive a tax rebate on its business income tax liabilities
of 5 percent.
7Arthur M. Okun, "The Great Stagflation Swamp," The Brookinga Bu~letin, vol. 14
No. 3 (fall, 1977), p. 6.
67
One of the advantages of the Okun plan is that it is voluntary. The
basic idea is that wage bargains should be based on 'a target inflation
rate. The workers who agree to -bargain on the basis of this target rate
will not be penalized if the actual inflation rate exceqds the target rate
because their participation in the wage-price restraining program entitles them to tax rebates that make up for any wage losses incurred by
less aggressive bargaining.
Okun estimates that his plan will cost about $15 billion a year in
tax reductions. A second attraction of the proposal therefore is that
while it slows inflation it also stimulates production and employment.
The Wallich-Weintraub and Okun proposals rely on market incentives rather than on coercion and control. We are aware that each
program has many shortcomings and administrative complexities.
Dr. Rudy Oswald, Research Director of the AFL-CIO, brought
many potential problems to our attention. Nevertheless, inflation is
so serious and pervasive that we must address these problems and design a program which can be implemented in the near future. We
believe it is time for the Congress to consider some such proposal. We
prefer the Okun-type approach because it is voluntary. Yet it is an
approach that has genuine force and could be quite effective. 8
Instituting a tax-based incomes policy and increasing CWPS
power and authority are just a few promising examples of a direct
attack on inflation. In Chapter III, we emphasized the contribution
the Humphrey-Hawkins bill could make by focusing on a series of
specific policies that could contain and reduce inflation without restricting aggregate demand. The Administration has taken several
steps in the right direction on the inflation front. We would like to
see them take several more. As we argued elsewhere, the Council on
Wage and Price Stability should be greatly expanded and strengthened. The inflationary impact of Federal programs must be carefully
assessed, and price reducing Federal policies should be given priority.
The key point is that a series of individual programs can make a
substantial contribution to reducing overall inflation.
Representative Reuss adds the following suggestion: "Undoubtedly it
take considerable time before we and the Administration are fully convinced that will
TIP is an appropriate means of controlling Inflation. Meanwhile,
It is Important that we learn more
about TIP. I therefore recommend that the council on Wage and Price Stability (CWPm)
be asked to study various TIP proposals and report to us on their effectiveness and on
their ability to be implemented in practice. Further, I ask for periodic reports from CWPS
estimating the extent to which the Inflation rate would have been altered had a TIP
policy been In place, Its effect on incomes, and its budget costs, if any. Adoption
of this
proposal would be an important and appropriate step in making CWPS the inflation monitoring agency we have always intended it to be."
VI. STRUCTURAL UNEMPLOYMENT
The economy is now in its 35th month of recovery following the
trough of the 1974-75 recession. Employment has increased by a total
of 7.8 million persons since the bottom was touched in early 1975.
More than half of the total increase in employment, 4.1 million,
occurred in 1977, the largest annual increase on record. All major
demographic occupational groups, except farmers, experienced substantial employment gains.
Joblessness has declined from a recession peak of 9 percent in May
of 1975 to 6.3 percent at the end of January 1978. The prospects for
continued expansion of employment and continued reduction of unemployment as we approach potential levels of real output will depend heavily upon carefully designed policy.
Primary reliance on aggregate fiscal and monetary policies, while
needed to continue to raise employment, may begin to generate new
inflationary pressures as the economy approaches full capacity. Given
the combination of rapid labor force growth and slow capital stock
growth, the risk will be especially great if the policy mix continues
to be characterized by almost total reliance on fiscal policy for economic stimulus. The overall unemployment rate for January 1978 is
less than 1.5 percent from the point (4.9 percent) where tightening
labor market conditions for prime age workers are expected to begin
bidding up wages. Consequently, expansion generated -by general
macroeconomic policies and programs may only reach the periphery
of the Nation's deep and chronic joblessness caused by structural,
demographic, and geographic problems. However, it must be emphasized that no structural programs will be effective unless there is sufficient overall activity to create a demand for additional workers.
As the slack in the economy declines, greater stress must be placed
on microeconomic approaches targeted at the structurally unemployed.
Concern for the welfare of such potential workers should dictate action regardless of the state of the economy. But the need to supply
continuing labor market demands for qualified workers, and to check
the inflation that would otherwise occur, provides any additional incentive needed to move in this direction.
The employment gains for all nonf arm workers during the recovery
were accompanied by very rapid increases in civilian labor force participation. As a result, the number of new job seekers and labor market reentrants equaled or exceeded the expansion of job opportunities
in some important areas. As indicated by Table VI-1 the unemployment rate for minority women remained unchanged while the jobless
rate for minority teenagers actually increased since the recession
trough. Intolerably high levels of joblessness continue to exist for
minorities, teenagers, and women. In fact, in relative terms only the
unemployment rate for white males has improved and all other groups
are worse off. Table VI-1 shows a two-tier labor force, one which is
(58)
59
white and male and benefits the most from stimulative macroeconomic
policies, and one which is composed of minority workers many of
whom require effective, targeted structural programs if they are to
be permitted to enage in productive employment.
TABLE VI-I.-SELECTED UNEMPLOYMENT INDICATORS
Ratio of unemployment rate to national
unemployment rate
Unemployment
rate
1975:2
White total-8.
White males, 20 plus White females, 20 plus
White teenagers
Black and other total Black males, 20 plusBlack females, 20 plus Black teenagers-36.
1977:4
1975:2
1977:4
Percent of
civilian
labor force
Percent of
unemployment
1975:2
1977:4
1975:2
1977:4
2
5.8
0.92
0.88
88.7
88.3
81.7
76. 9
6.5
8.0
18.3
4.2
6.0
14.1
.73
.90
2.06
.64
.91
2.14
49.4
30.9
8.5
48.1
3.18
8.5
36.4
27.8
17.5
30. 2
28.7
18. 0
14.2
13.3
1.60
2.02
11.3
11.7
18.1
23.6
12.0
11.8
7
10.1
11.8
38.3
1.35
1.33
4.12
1.53
1.79
5.80
5.6
4.7
1.0
5.7
5.1
1.0
7.6
6.2
4.3
8.6
9.0
6.0
Source: Unpublished Bureau of Labor Statistics data and Joint Economic Committee staff.
The ratio of the unemployment rate of minority adult women and
minority teenagers to the national unemployment rate increased significantly during the recovery period. The ratio of the unemployment
rate of minority women to the national unemployment rate increased
by nearly 35 percent, from 1.3 to 1.8 by the fourth quarter of 1977.
The minority unemployment rate ratio increased by more than 40
percent.
As emphasized throughout this Report, monetary and fiscal policies
designed to promote vigorous and sustained economic expansion are
essential to lower both the national unemployment rate and the unemployment rates for various groups in society. Table VI-2 indicates
that the economy still has an ample supply of unemployed labor in
all categories. The second quarter of 1969, shown in the first column
of the table, is the prerecession quarter with the lowest unemployment
rate. The second column shows the unemployment rates at the beginning of the recession. As shown in the last column, all of the fourth
quarter 1977 unemployment rates, except that for white teenagers,
were higher than the comparable rates in either of the base periods.
There are presently no tight labor markets as measured either by
demographic groups or occupational classifications.
Increased aggregate demand will also serve to reduce joblessness
among minority workers, teenagers, and others who fall into the category of the structurally unemployed. However, these reductions will
be less than the reduction in the unemployment rate of white adult
workers. During the Committee's annual hearings, the Secretary of
Labor, estimated that potential output will be achieved when overall
unemployment is reduced to 4.75 percent. Yet as indicated by Table
VI-3 which presents hypothetical jobless rates in 1983 and assumes an
overall unemployment rate of 4.75 percent, unemployment will continue at unacceptable levels for teenagers and all minority workers.
Special measures are needed to aid the structurally unemployedthose who remain jobless when the economy reaches potential output
23-928 0 - 78 - 5
60
TABLE Vi-2.-UNEMPLOYMENT RATESBY SELECTED CHARACTERISTICS,
[Selected quarterly averages, seasonally adjusted]
1969 :2
1974 :3
1977:4
Selected characteristics:
Total, 16 yr and over -3.4
5.6
6.6
Men, 20 r and over -2.0
Women, 20 yr and over --------------------------------------Both sexes, 16to 19yr ---------------------------------------
3.7
5.5
16.3
4.8
6.8
16. 7
5.1
3.5
5.1
14.2
9.7
6.7
8.1
33.3
5.8
4.2
6.0
14.1
13.3
10.1
11.8
38.3
3.3
2.3
1.8
4.0
4.8
6.8
4.4
8.2
4.9
10.6
6.4
2.9
4.1
2.9
2.7
4.9
5.7
7.6
5.3
9.2
5.7
11.4
7.9
4.1
----------------------------W hite, 16 yrand over
Men, 20 yr and over-1.8
Women, 20 yr and over-Both sexes, 16 to 19 yrBlack and other, 16yr and over-6.4
Men, 20 yr and over -3.6
Women, 20 yr and aver. Both sexes, 16 to 19yr -25.0
Occupations:
White-collar workers
-1.
Professional and technical workers
--Managers and administrators, except farm --------------Sales workers
-Clerical workers .---Blue-collar workers
-Craft and kindred workers ------------------NA
Operatives, except transport
-NA
Transport equipment operatives
Nonfarm laborers ------------4.4
Service workers
-1.9
Farm workers
3.7
12.2
3.1
3.4
10.6
6.1
2.0
3
.9
2.8
2.8
3.8
2.1
6.4
Source: Bureau of Labor Statistics, unpublished data.
TABLE VI-3.-HYPOTHETICAL UNEMPLOYMENT RATESIN 1983
Rate
Level
(thousands)
5,044
Total, 16 yrs and over -4.8
-----White -Men, 20yr and over -...
Women, 20 yr and over
Both sexes' 16to 19yr-11.0
Black and other -9.2
Men, 20 yr and over-7.2
Women, 20 yr and over-----------------------------------------Both sexes, 16to 19 yr-..---------........
4.2
3.1
4.2
9.4
22.1
3,854
1,566
1,459
829
1,190
463
523
204
Note: This table assumes an overall unemployment rate of 4.75 percent and no change in historical structure.
Source: Testimony of Secretary of Labor Ray Marshall. Joint Economic Committee Annual Hearing, Feb.10, 1978.
levels. These special measures can dramatically help reduce overall
unemployment and the unemployment rate differentials between particular demographic groups. As the Secretary of Labor testified:
If, by structural programs, we are able to reduce the 1983
differential between the black and white rates of umemployment from a ratio of 2.2 to 1.0 to a ratio of 1.5 to 1.0, the overall unemployment rate would fall by 0.4 of a percentage
point..
If we develop programs that cut in half the differential
between the unemployment rate for those aged 16-24 and
that for adult men, the unemployment rate would fall by
0.6 of a percentage point.
61
If the adult female unemployment rate could be reduced
from 30 percent higher than the male rate to 1.5 percent
higher, the overall unemployment rate would fall by 0.25 of
a percentage point.
These illustrations show the important role that structural unemployment programs can play in improving the operation of the labor
market.
YOUTE
UNEMPLOYMEN T
Although teenage employment grew last year by 341,000, these gains
were disproportionately enjoyed by whites, and youth unemployment
still accounted for nearly one-half of all unemployment in 1977. The
jobless rate for workers aged 16 through 24 was 13.6 percent. For
teenagers alone it was 17.7 percent and for young persons 20 to 24
years old the rate was 10.9 percent.
Black teenage unemployment increased by 23,000 in 1977 and averaged 41.1 percent for the year. Joblessness among Hispanic teenagers
increased slightly, but their unemployment rate decreased to 22.3 percent because their labor force expanded even more rapidly. Unemployment among American Indians on reservations is also exceedingly
high-about 40 percent in 1977.
Several reasons have been suggested as causes of youth unemployment. It has been asserted that the minimum wage has caused youth
unemployment to increase. However, in the 1970s the minimum wage
has been lower relative to the average wage of production workers
than it was throughout most of the 1950s and 1960s. Therefore, based
soley on relative wages, there has been a comparative advantage in
hiring young people in the 1970s. Most studies show that the significance of the minimum wage is small, and the testimony of Dr. Joseph
Kasputys of Data Resources, Inc. confirmed this fact.
The problem of teenage unemployment is not the inability to hold a
job, but to get one in the first place. In 1977, 42.8 percent of total teenage unemployment was among youths who had never worked before.
The situation was even more critical for minority teenagers. Nearly
one-half of minority teenage unemployment in 1977 was among persons who had never worked before.
ADuLT WOMEN
The unemployment and employment problems of women are similar
to those of young people. Since 1970, the female unemployment rate
has been higher than it was in the latter half of the 1960s. The disparity between the female unemployment rate and male unemployment rate has worsened. As testimony from Dr. Beatrice Reubens
indicated, in the 15 years from 1947 to 1961, the women's rate exceeded
the male rate by 1 percent or more in only 2 years. In the succeeding 16 years, the differential exceeded 1 percent or more in every
year. She concluded, "It appears that a new higher level of female
unemployment rates in relation to male unemployment rates may
have been established.
Much of the disparity between the male and female unemployment
rates is accounted for by a widening gap between female and male
62
rates in the 25-44 year old age group, probably because reentrants to
the labor force form a larger share of female unemployment than
male unemployment and reentrants are most likely to fall into the
25-44 year old age group. In 1977, 37.3 percent of the unemployed
females 20 years and older were reentrants into the labor force, while
19.3 percent of the unemployed males 20 years and older were
reentrants.
Two other factors should be noted with respect to female unemployment. First, hidden unemployment-defined as persons too discouraged to look for work and therefore not counted as labor force
participants-is much greater among women than among men. According to the Bureau of Labor Statistics, during 1967-76 there were
approximately twice as many female discouraged workers as male
discouraged workers. Consequently, the official unemployment rates
underestimate the disparity between female and male unemployment
rates.
Second, although 36 percent of the women who were unemployed
in 1977 had employed husbands, this does not mean that joblessness
is not a serious problem for such women. In many families it is essential for the wife to supplement the husband's income in order to attain
an adequate standard of living. The frequently propounded notion
that all women job seekers are not seriously in need of employment
would make them second class citizens. Needless to say, this attitude
and its implications are unacceptable.
In the case of both youth and women whose primary labor market
problem is a lack of job skills and a relative lack of job experience,
easing their entry and re-entry problems into the labor market is the
necessary first step towards reducing their unemployment.
ELIMINATING BOTTLENECKS
The central focus of eliminating these problems must be to provide
better mechanisms to match job seekers with jobs. Much of the present
responsibility for this task lies with the U.S. Employment Service.
But the Service's link with private employers has not been fully and
effectively developed. An understanding between the Employment
Service and private business of each other's needs and services is
necessary before job seekers will be effectively matched with job opportunities. Congress should consider increasing employment service funding to improve and expand the services it offers to private business.
Schools, businesses, and unions should expand the scope of the activities that link classroom activity to work. There are approximately
600,000 persons enrolled under Titles II and IV of the Comprehensive Employment and Training Act (CETA) who could be matched
with private sector job opportunities. Greater coordination between
CETA Prime Sponsors and private business should be developed to
place these persons in the private sector when their public service employment ends.
To help offset wage and fringe benefit costs, CETA Prime
Sponsors should be given the resources for provision of "bonuses" to private employers for employment of selected hardto-employ workers in the private sector.
63
Such a program could easily be monitored by local Prime Sponsors
to prevent abuse and it would fit into the existing CETA framework.
Prospective employees must have the requisite skills for employment.
Public service employment and manpower training programs must be
geared to providing the skilled labor which meets the needs of
employers.
Current Federal manpower training programs provide the
basic training and retraining necessary to equip unemployed
workers with skills to meet entry level requirements, but these
programs are inadequately funded. Such programs should be
expanded by about $1.5 billion over the next two years. Training programs should also put more emphasis on upgrading
employees from entry level jobs in order to assure their employability. Career ladders should be developed to give employees greater incentive to remain with an employer.
GEOGRAPHIC EMPLOYMENT PROBLEMS
Many areas of the country continue to face high rates of unemployment and net employment losses. At the same time they suffer from
relatively slow or even stagnant economic growth.
Between 1960 and 1970, employment in central cities in the East
declined 2.4 percent, while it rose by 7.0 percent in the Midwest, 23.1
percent in the South, and 28.0 percent in the West. The 1974-75 recession induced further job losses in the East, but it also aggravated the
situation in central cities across the country.
The decline in central city employment opportunities is especially
serious for minorities. In 1977, 54.4 percent of the nonwhite civilian
labor force resided in central cities, while minority central city unemployment accounted for 60.2 percent of total minority unemployment. Concurrently, the central city minority teenage unemployment
rate increased from 40.5 percent to 43.0 percent and employment has
declined. The nonwhite teenage central city employment-population
ratio has declined from 22.1 percent in 1975 to 21.2 percent in 1977.
Although the unemployment prbolem for minorities is primarily an
urban problem, the geographic aspects of structural unemployment
are significantly related to poverty areas. In 1977, nearly 15 percent
of the white civilian labor force and 39.9 percent of the nonwhite
civilian labor force resided in urban and rural areas officially designated as poverty areas. Among blacks and other minorities, most of
the civilian labor force living in poverty areas resided in metropolitan
areas; among whites, most of the civilian labor force living in poverty
areas resided in nonmetropolitan areas.
As Table VI-4 shows, in metropolitan poverty areas the overall white
and nonwhite unemployment rates were significantly higher than their
respective rates in metropolitan nonpoverty areas. The greatest differentials in both cases occurred among adult males and teenagers. In
nonmetropolitan areas, with the exception of nonwhite adult females,
the unemployment rates in poverty areas were actually lower than
their corresponding rates in nonpoverty areas.
Structural changes in the economy have created growth differences
between regions. First, there has been a pronounced regional shift in
64
AND OF UNEMPLOYMENT IN POVERTY AND NONPOVERTY
TABLE V1-4.-DISTRIBUTION OF THE LABOR FORCE
AREAS
Nonmetropolitan areas
Metropolitan areas
Poverty
areas (9
Nonpoverty
areas
Nonpoverty
areas
Poverty
areas (I
1976
1977
1976
1977
1976
1977
1976
1977
10.5
3.3
4.6
9.7
8.8
8.8
19.0
62.8
51.9
7.0
5.4
6.7
17.3
56.9
49. 3
6.1
4.5
6.1
15.4
8.6
6.9
6.1
4.4
6.4
15.7
8.5
6.7
5.b
3.8
5.9
14.7
19.6
16.9
6.6
5.0
6.9
15.3
20.0
17.8
6.3
4.6
6.3
15.0
2.9
7.4
17.6
15.1
14.1
45.4
5.9
8.9
11.5
9.2
10.1
35.2
6.0
9.8
11. 4
8.4
10.3
37.3
1.7
2.6
12.2
7.7
12.7
33.8
1.7
2.8
12.0
8.0
12.8
30.7
.9
1.5
13.5
10.5
12.8
30.8
.9
1.6
12.4
8.
11. 5
34. 7
WHITE
Percent of total civilian labor force-3.4
Percent of total unemployment -4.6
Unemployment rate (percent) --Male, 20 and over -9.4
Female, 20 and over-9.1
Both sexes, 16 to 19-22.9
--
NONWHITE
Percent of total civilian labor force -3.0
Percent of total unemployment -6.6
Unemployment rate (percent) -16.9
Male. 2Oand over -15,1
Female, 20 and over-12.6
Both sexes, 16 to 19-43.3
1Poverty areas are those census geographical divisions in which 10 percent or more of the residents were poor according
to the 1970 census.
Source: "Employment and Earpings," Bureau of Labor Statistics, January 1978, p. 173.
the distribution of manufacturing employment over the last 20 years.
New England, Mid-Atlantic and East-North Central States have lost
a large share of manufacturing employment since 1956. The largest
loss has been in the Mid-Atlantic States which had 25.2 percent of
manufacturing employment in 1956 but have only 18.4 percent today.
Other changes in manufacturing employment by region during the
period 1956-76 are indicated in Table VI-5.
TABLE VI-5.-MANUFACTURING EMPLOYMENT
(Percent dintribution]
1956
Total, United States -100.0
New England -8.7
Mid Atlantic -25.2
East North-Central-27.9
West North-Central -5.7
South Atlantic -11.2
East South-Central -6.4
West South-Central -----------------------------Mountain -1.3
Pacific-
1976
100.0
4.7
9.0
7.0
18.4
24.8
6.6
14.5
7.9
7.3
2.3
I1.
Source: U.S. Department of Labor, Bureau of Labor Statistics.
To aid in the fight against structural unemployment, the Committee
supports the Administration's recommendation for continued funding
of 725,000 CETA public service employment jobs through fiscal year
1979.
The Committee recommends two steps to help insure that public
service employment achieves this goal:
First, the "overhead" payments permitted to Prime Sponsors should not be made on the basis of wages paid. Existing
65
legislation permits overhead payments for nonwage costs
equal to 15 percent of the wage bill. This provides that the
largest overhead payments will be for highest paying jobs,
exactly those jobs not matched for the structurally unemployed. As an alternative, the overhead payment could be
made to vary on the basis of an employee's labor market skills
or could be made to vary inversely with the wage level.
Second, tenure in public service employment should be limited to 18 months. Requiring this periodic turnover would increase the public service job opportunities and the availability
of on-the-job training for the structurally unemployed.
Expansion of public service employment as a countercyclical tool
has created a dependency among many local governments on CETA.
In some cities, up to one-third of the city work force is composed of
CETA employees. Many of these cities still suffer from revenue shortfalls, the need to maintain current levels of municipal services, and
a declining tax base. The continued decline in unemployment raises
the prospect of the termination of CETA programs in many localities.
If this happens, the severe fiscal conditions of some of these localities,
now partially relieved by CETA funding, will become even more intense. Therefore, consideration should be given to new programs
which would provide fiscal relief to localities that will be affected by
loss of CETA funding before that loss occurs.
The Administration's budget contains $400 million in outlays to
provide incentives for private business to hire the hard-to-employ.
We strongly support this effort. Private business involvement in manpower training programs for the hard-to-employ is less today than
it was a decade ago. The Administration's proposal to create local
Private Industry Councils, made up of business and labor representatives, to provide local job training slots is a positive step toward
increasing private sector involvement in this area. We call attention
to an extensive list of successful job training and employment programs which are being operated by many companies in cooperation
with local councils throughout the Nation. A useful survey of those
programs has been published by the Committee for Economic Development. Such efforts should be encouraged and expanded. The longterm solution to the unemployment problem resides in the private
sector, which employs 5 out of 6 Americans.
VII. THE CURRENT SERVICES BUDGET
Section 605 of the Congressional Budget Act of 1974 requires the
Office of Management and Budget to submit by November 10 of each
year "the estimated outlays and proposed budget authority which
would be included in the Budget . . . for the ensuing fiscal year if all
programs and activities were carried on during such ... year at the
same level . . . and without policy changes." It further requires that
the Joint Economic Committee "shall review the estimated outlays
and proposed budget authority so submitted, and shall submit to the
Committee on the Budget of both Houses an economic evaluation thereof on or before December 31. . . ." The following discussion is presented in accordance with this requirement.
When the Joint Economic Committee presented the first Current
Services Budget estimates in December of 1973, they were explained as
follows:
The figures for 1975 in this study are baseline projections.
They are not an attempt to predict the future or to anticipate
the official 1975 Budget. However, they represent an effort to
show how existing programs will change based on current law
and projected changes in prices, wages, and workloads.1
In subsequent reports we elaborated on this idea:
A baseline, or Current Services Budget, is especially helpful
in calculating alternative budget proposals made by the President and Congress. Since the baseline assumes no policy
changes, the difference between an up-to-date baseline and the
Budget estimates presented in the Presidential recommendations submitted in January would be the policy proposals of
the President. 2
The problem generally encountered in trying to apply these ideas
to the actual numbers was that up-to-date estimates were seldom available. The Current Services estimates were prepared in November or
December of each year, but by the tme the President's estimates were
submitted in late January or February, the economic assumptions had
changed enough to keep the numbers from being'precisely comparable.
The result of this procedure was that the estimates were not as helpful
as Congress had hoped when the Congressional Budget Act, which
required their submission, was passed.
In 1977, in an effort to improve the usefulness of these figures, the
Director of the Office of Management and Budget requested permission
to engage in a one-year experiment. During this experiment, the Cur"The 1975 Budget: An Advance Look, a staff study prepared for the use of the Subcommittee on the Priorities and Economy in Government of the Joint Economic Committee,
Congress of the United States, December 27, 1973, p. 10.
2 An Economic Evaluation of the Current Rervices Budget, Fiscal Year 1977, a staff
report prepared for the use of the Joint Economic Committee, Congress of the United
States, December 22, 1975, p. 4.
(66)
67
rent Services estimates would be presented as part of the President's
Budget submission and would therefore be based on the same economic
assumptions as the President's policy recommendations. This experiment was undertaken with the concurrence of the Chairman of the
Joint Economic Committee, the House and Senate Budget Committees,
and the House and Senate Appropriations Committees.
In our judgment, this experiment has been a success. The presentation of the Current Services estimate in the Budget Summary clearly
shows the impact of the President's policy recommendations on the
Budget. The discussion in 'Special Analysis A, which compares the
Current Services estimates with the President's Budget request on a
program-by-program basis, is a significant improvement over previous
reports.
Presenting the Joint Economic Committee's views in the context of
our Annual Report has the added advantage of allowing a more complete evaluation of the economic analysis underlying both the Current
Services estimates and the President's recommendations. We have
therefore focused our comments in this section of the Report on specific
recommendations regarding the Current Services estimates and have
left the economic analysis for earlier sections.
The Congressional Budget and Impoundment Control Act
of 1974 should be amended to allow the President to submit
Current Service Budget estimates concurrently with his
Budget proposals and to allow the Joint Economic Committee to submit its evaluation of these estimates concurrently
with its Annual Report to the Congress.
Although the reporting procedures have been improved, we still consider the Current Services estimates inadequate. Our primary objec-
tion is to the treatment of inflation. The current practice is to include
an allowance for anticipated inflation in the Current Services estimates
for those programs where inflation adjustments are mandatory under
existing law or those programs included in the Department of Defense. Estimates for programs which are not military or are not linked
by law to the cost of living include no inflation allowance.
This unequal inflation treatment means that the Current Services
estimates are sometimes misleading and unnecessarily difficult to use.
For example, if one compares the Current Services outlay estimate for
the Department of Defense-military ($114.3 billion) with the President's request ($115.2 billion), one could correctly conclude that the
President has requested a Teal increase in military spending. However,
a similar comparison for the Veterans' Administration (a Current
Services estimate of $18.9 billion compared to a presidential request of
$19.2 billion) could lead to the erroneous conclusion that the President
has requested a real increase here as well. If the Veterans'-Administration estimate had included an inflation allowance, the Current Services
figure would have exceeded $20 billion and, by comparison, the Administration's estimate would appear to be a real reduction. By the Administration's own estimates, if an inflation adjustment had been made for
all programs not limited by statutory ceilings, the Current Services
outlay total would have been about $3 billion higher than the estimate
presented.
68
The Administration's treatment of inflation in the Current
Services estimates is misleading and confusing. All programs
in the Budget should receive comparable inflation treatment
in the Current Services estimates.
Since 1963 when we held hearings and issued a report on the "Federal Budget as an Economic Document," the Joint Economic Committee has stressed the need to view the Budget in the context of a
broad, long-range set of projections. Gradually, with the adoption of
Planning-Programming-Budgeting (PPB) systems in 1965, the Legislative Reorganization Act in 1970, and the Budget and Impoundment Control Act in 1974, the executive branch of Government has
moved in the direction of providing more long-range estimates. The
fiscal year 1979 budget which provides Current Services estimates on
an aggregate basis through 1983 is a further step in this direction.
The usefulness of five-year budget projections is not to predict what
budget totals will actually be in future years but to examine the scope
for and desirability of changes in budget policy. Since no one can foresee policy changes several years into the future, we are convinced that
the Current Services projection method is the most sensible way to
make long-range budget projections. We commend the Administration on the work done thus far and recommend that it be extended.
In future budgets, the five-year Current Services estimates
should be expanded to include functional and agency-level
detail.
ADDITIONAL VIEWS OF VICE CHAIRMAN LLOYD BENTSEN REGARDING THE PRENOTIFICATION RECOMMENDATION
I disassociate myself completely from this proposal which I regard
as a very serious mistake. Despite its reluctance to admit it, this Committee is recommending mandatory price and wage controls. The
Report recommends that the Council on Wage and Price Stability be
given authority "to delay for modest periods wage or price increases."
The authority to delay wage or price increases is logically the authority
to fix and control wages and prices. So despite the Report's disclaimer
that this proposal is "a reasonable start toward an incomes policy, short
of voluntary or mandatory controls," the Committee is in fact calling
for mandatory wage and price controls.
Government dictation of wages and prices has never worked to control inflation in peacetime. Wage and price controls attack the symptoms of the disease, but not the disease itself. They may provide a
temporary disguise, they may present a comforting illusion, but sooner
or later consumers will confront the harsh reality of shortages, low
quality products, and hundreds of devices designed to circumvent
the controls. Price and wage controls put the economy in a straightjacket which invariably results in inequities among both workers and
business enterprises.
We should have learned by now that wage and price controls cannot be imposed on our economy without exacting a heavy cost in the
form of serious misallocation of resources, inefficient production, and
the potential domination of our daily lives by faceless government
bureaucrats. We should have learned by now that excessive government
regulation of business, which results in waste and inefficient production, is one of the major reasons for our inability to bring down the
cost of living. It is, therefore, fundamentally unsound to recommend
additional bureaucratic authority to regulate the private enterprise
system in the name of fighting inflation.
Most leaders of business and labor strongly oppose the concept of
wage and price controls. Businessmen fear that controls will result in
less investment, low productivity, and slow growth. Labor leaders
know that it is more difficult for workers to circumvent wage controls
than it is for business to get around price controls. Both business and
labor leaders correctly recognize that there is no easy, simple solution to the problem of inflation. We will bring inflation under control
when we reduce excessive government regulation of business, which
drives up the cost of doing business; when we develop ways to encourage competition through the entry of new businesses into our Nation's
marketplaces; and when we provide adequate incentives for business
to invest in more productive machinery and equipment.
LLomD BEwNsrN.
(69)
ADDITIONAL VIEWS OF REPRESENTATIVE
HENRY S. REUSS I agree with the analysis and major conclusions of this report. It
lacks only a concise statement on an action program for the economy
that is required. In my view, the key elements of such a program are
these:
Unemployment.-We need a maximum attack on structural unemployment suffered by young people, minorities, and residents of the
central cities. The President should detach his proposal to double public service employment, from 700,000 jobs to 1.4 million, from his welfare reform program and send it to Congress for immediate action.
Measures to stimulate private-sector employment: wage subsidies, tax
credits for new hiring, and (on an experimental basis in several labor
markets) minimum wage differentials for high unemployment areas
or new labor market entrants. Taxes.-The rate increases recently effected in the Social Security
payroll tax should be rolled back. Additional scheduled rate increases
should be repealed. The difference ($5 billion in 1979) should be collected from general revenues, with a compensating reduction in the
amount of personal income tax relief proposed by the Administration.
The proposed extension of the investment tax credit to structures
should be dropped. Instead of this measure, which will exacerbate the
decline of job opportunities in the central cities, job-preserving measures should be enacted: a tax credit for rehabilitation only, for
example.
Monetary Poliqy.-I agree with the report's assessment that a
moderately expansive monetary policy is needed in the year ahead.
The shift to relative monetary ease, should, however, be accompanied
by some relative fiscal restraint. This can be achieved by substituting
direct job creation measures for a larger dollar volume of less effective tax reduction.
Energy.-The proposed wellhead tax on domestic crude oil has
become a political stumbling-block and should be dropped. The energy
bill with the remaining four elements of the President's plan should
become law promptly. Work should then begin on a Phase Two energy
program, including more support for the development of alternative
energy sources, such as solar, wind and geothermal, and a standby
gasoline rationing system to ensure fair allocation in the event of a
supply shortage.
Agrilture.-As the report points out, higher price supports are
an inefficiency and inflation-causing way to ensure a decent income
to farmers. The Administration should develop instead (1) a supplementary program of direct income supports, enabling the family
farm to weather bad years without imposing unnecessary costs on
consumers or socially wasteful restrictions on production; and (2)
a meaningful war-on-hunger program.
(70)
71
Internatina Policy.-We must continue to resist protectionist, interventionist, and inflationary measures designed to close out our
trade gap or support the precarious level of the dollar. Such measures
are ineffectual or undesirable or both. In the short run, the pressure
on the dollar will continue, and there is little the monetary authorities can or should do about it, disorderly markets aside. In the long
run, if our trading partners expand their economies, our exports
will pick up; and if our energy policy succeeds in reducing our reliance
on imported oil, our import bill will decline. These two measures
can cure the patient: tinkering with the thermometer cannot.
HENRY S. REuss.
ADDITIONAL VIEWS OF REPRESENTATIVE
LEE H. HAMILTON
I generally support the goals and recommendations of the Committee's Annual Report. The Report provides a clear view of many of
the major economic problems that confront the Nation and suggests
new and promising directions for economic policy. My additional
views reflect a desire to emphasize some of the added complexities that
lie in the path the Committee recommends. Because any report must
narrow its focus, I also want to mention economic problems that should
be considered by future Joint Economic Committee reports.
HUMPHREY-HAWKiNS
The Committee Report strongly endorses the Full Employment
and Balanced Growth Act of 1977, better known as the HumphreyHawkins bill. I find myself in sympathy with the broad purposes of
the Act and many of the specific proposals it contains. The emphasis
on setting long-term goals as a guide for year-to-year policy is basically sound. There is a definite need to assure coordination of monetary
and fiscal policies. The bill pushes our view beyond the traditional
remedies of macroeconomic policy to the need for specific structural
programs to attack inflation and unemployment. Nonetheless, I do
not share the unrestrained enthusiasm that some of my colleagues have
for Humphrey-Hawkins and I do have reservations about it. My
reservations boil down to two interrelated points.
First, can we deliver on the promises that Humphrey-Hawkins is
making to the American public? Is it desirable, in a day of deep public
cynicism about Government's performance, to encourage the view that
it is possible to reach a 4-percent overall rate of unemployment by
1983 without a serious outburst of inflation? Second, does the bill provide enough emphasis on fighting inflation?
If we succeed in achieving the goals contained in this Report, the
economy will reach its full potential some time in 1981. At that point,
there will still be millions of Americans out of work and the unemployment rate should be in the neighborhood of 4.8 percent.
The hard fact is that it is unlikely that we will be able to achieve
all of our desired economic goals. The likelihood is that we will have
to face difficult trade-offs among program goals, full employment, inflation, and balanced budgets. I am not at all sure that HumphreyHawkins treats the American people with the candor about our central
economic realities that they deserve.
How can we go beyond the short-term goals of this Report and not
trigger new inflationary pressures? The answer has always been that
specific structural programs will get us the rest of the way without
pushing up prices.
At the annual hearings of the Joint Economic Committee we heard
extensive testimony about what structural programs had worked in the
(72)
73
past, how existing programs could be improved, and even what approaches we might adopt in the future. It is also a possibility that the
added pressure of our ambitious employment goal will force the Administration and the Congress to be more imaginative with regard
to employment programs. In effect, goals may become the mother of
invention.
But we must keep in find that the Humphrey-Hawkins bill sets an
extremely ambitious target. We may not be able to meet it. The bill
itself recognizes that economic circumstances of one sort or another
may force a delay in reaching the 4 percent goal. We should be honest
with the American people about how difficult it will be to reach the 4
percent unemployment rate in 1983 and tough with ourselves in moving away from the goal if economic reality dictates.
Usually viewed as just a full employment bill, Humphrey-Hawkins
also puts considerable emphasis on reducing inflation. However, the
bill specifically directs the President to adopt a number of policies that
will tend to lower prices. I am in full sympathy with many of the
specific proposals for fighting inflation and the importance the bill
assigns to reducing inflation. Nevertheless, I still have some reservations about whether the bill can effectively reduce the price level.
Reaching a 4 or even a 4.8 percent unemployment level will tighten
labor markets and strain productive capacity. That is a situation that
could well lead to more inflation. The individual programs contained
in the bill promise some relief, but may simply not be enough.
I just do not have any feeling that the President's anti-inflation program is succeeding. With the basic inflation rate stuck at at least 6
percent, we are getting no relief from inflation, and I have no confidence that relief will come soon. Inflation apparently is the most intractable of all our economic challenges. Most of the witnesses before
this Committee suggested inflation is more likely to accelerate than
to decelerate.
I am not comfortable with an exclusive emphasis on growth and investment as the way to cure inflation any more than I am comfortable
with the view that restrictive policies applied long enough will wring
inflation out of the economy. I think we must be willing to try other
approaches. I approve the Report's interest in the proposal to grant
tax relief for price and wage restraint. It would probably be
imprudent to introduce such relief before subjecting it to much wider
discussion and evaluation with regard to its effectiveness and administrative feasibility, but the momentum of inflation is so great this
proposal should be seriously considered immediately.
Other steps must also be taken. Those of us in government must become much more serious about assuring that government action does
not raise costs. So often, government regulatory and tax policies generate their own inflationary pressures. I like the Committee's proposal
that the President's Council on Wage Price Stability report annually
on which government programs have raised prices and which have
lowered them. It may be too soon to adopt Arthur Okun's suggestion
that we should set a target of zero new Federal impact on the price
level, but we should begin to move in that direction.
We must set our course for declining Federal deficits coupled with
the skillful use of a wide variety of employment programs designed
74
to deal with structural unemployment. Well tailored training, public
service employment, youth programs antidiscrimination laws, and better labor market information can all help us achieve full employment
without adding to inflation. I was particularly impressed with the recommendations of the Committee for Economic Development to encourage private sector jobs for the hard to employ through the use of incentives such as tax credits, stipends for trainees, or an exemption
from the minimum wage.
During the annual hearings of the Joint Economic Committee, a
number of witnesses stressed the fact that we just did not know how
to control inflation as effectively as we could the level of production
or employment. I do not disagree with that. But we must also recognize that in many cases inflation is less a result of ignorance than of
political expediency. As Gardner Ackley has reminded us, the major
obstacle to containing inflation is not a lack of knowledge, or even a
lack of devices to deal with it, but a lack of political will and leadership to take the right action at the right time. If the HumphreyHawkins bill is to be an effective guide to fiuture public policy, it will
require both good judgment and rare political courage.
DEFICIT
For fiscal year 1979, the President has proposed taxing and spending policies that will result in a deficit of just over $60 billion. Although I am uneasy about a large deficit this far into the recovery, I
am prepared to tolerate a deficit of that size for this year. So long
as unemployment is high and there is slack capacity in the economy,
there is a little danger of inflation from excess demand. What I do
not accept is one deficit after another, and we are perilously close to
that situation.
The principal targets of national economic policy are growth, low
levels of unemployment, and price stability. It can be costly and selfdefeating if these goals are sacrificed for admitted secondary targets
like the balanced budget. But the costs of budget deficits cannot be
ignored. If we continue to run massive budget deficits year in and
year out we run the risk of further eroding public confidence in the
Government. The size of the deficit may not worry the professional
economist, but it does worry the average American. By one recent
poll, 65 percent of all Americans think a balanced budget is a "very
important" goal and another 24 percent think it is a "fairly important" goal. The huge deficits may have more to do with the lack of
confidence in the economy than many experts realize. Within the
bounds of prudent economic policy we should begin to get serious
about moving to reduce our dependence year after year upon these
huge deficits. By relying principally on the private sector for growth
and the new jobs demanded by a growing labor force, we can begin
to reduce our dependence on Federal spending. The President has
taken the right tack in emphasizing the private sector and working
to reduce the share of Federal expenditures in our gross national
product. And the cost of interest on mounting Federal debt can be a
burden on the taxpayer for years to come. Within the bounds of
prudent economic policy we have to start moving toward a balanced
Eudget.
75
TiE INTERNATIONAL VALUE OF THE DOLLAR
In recent months the value of the dollar has decreased relative to
the Japanese yen, the Swiss franc, the German mark, and European
currencies tied to the mark. The fall has been steep and disorderly.
For several years now, the United States and other major economic
powers have lived in a world of flexible exchange rates. By and large,
they have served us well. High levels of world demand coupled with
the oil shock of 1973 led to high and widely divergent rates of domestic
inflation. The Bretton-Woods system that assumed only occasional
changes from otherwise fixed exchange rates would have been hardpressed to function in the early 1970s.
The sharp fall in the value of the dollar against certain key currencies should not be interpreted as a fundamental weakness of the
dollar. It may be regrettable, but it is not disastrous. Compared to
the currencies of all our major trading partners, the dollar fell by
about 5 percent in 1977-far less than the 20 percent fall against
the yen. It should also be remembered that the dollar and other key
world currencies have fluctuated in value several times since the
Bretton-Woods System ended in 1971.
At the same time, we cannot turn our back on a special international
responsibility that comes with the dollar's role as the world's principal
reserve currency. Sharp and disorderly fluctuations in the dollar create the kind of uncertainty that can affect trade and investment decisions. In turn, such decisions could lead to a loss of growth and employment opportunities for many nations.
If the decline of the dollar continues, it could cause severe political
difficulties for many of our allies. The sheer rapidity of the dollar's
fall against the currencies of Germany and Japan has already created a severe threat to their export industries. Slow growth and painful adjustments for their major industries could be the result.
The steady erosion of the international value of the dollar is also
of understandable concern to the OPEC cartel. Not only is oil priced
in terms of dollars, but many of the OPEC members have substantial
dollar denominated assets. A further drop in the value of the dollar
could precipitate an increase in the price of oil and a movement away
from American investments.
The fall in the international value of the dollar, therefore, is a matter that demands the careful consideration of the Administration.
On the other hand, it is not so serious as to constitute a crisis either
for the domestic or international economies. In addition, we must
recognize that the United States is limited in what it can do to control
the international value of the dollar. The Joint Economic Committee
is properly critical of using domestic monetary policy to stabilize
the dollar. By tending to attract more foreign capital to the United
States, higher domestic interest rates would tend to increase the foreign demand for dollars and therefore the value of the dollar relative to other currencies. That process is both uncertain and costly.
There is already a substantial interest rate differential between the
United States and Western Europe. That has not been enough to
overcome the expectations that additional decreases in the international value of the dollar are sure to come. Higher domestic interest
23-928 0 - 78 - 6
76
rates will also come only at the expense of slower growth, less investment, and higher rates of unemployment. The international economy
is crucially important to the United States-the value of our exports
is now almost 50 percent greater than the total value of residential
construction. But the domestic economy remains our principal focus.
Using monetary policy to stabilize the international value of the dollar
would be a case of allowing the international tail to wag the domestic
dog.
We can intervene in foreign exchange markets to make sure adjustments in the international value of the dollar are smoother. I support recent activities of the Department of the Treasury and the Federal Reserve System that move in this direction. Intervention designed
to actually support a currency, however, is costly and only temporarily
effective.
We should also do everything we can to deflate widespread expectations that the dollar may fall further in value. The President's recent
strong commitments to maintain a sound dollar are helpful. Although
a national energy program will not have a direct effect on the trade
balance for some time, it would be an unmistakable signal that the
United States has begun to adopt a long-term strategy to reduce its
oil imports and its trade deficit. The same could be said about aggressive and imaginative plans to reduce inflation and increase exports.
We should also exercise our imagination in the international arenasearching out those policies and proposals that can help stabilize the
dollar without sacrificing domestic growth. In any case, the United
States should make it clear that it understands the pressures on German and Japanese industry that have come from such a rapid increase in the relative value of the mark and yen.
PROPOSED
DIRECTION
FOR
FutruRE JEC REPORTS
Traditionally, the Annual Report of the Joint Economic Committee has dealt with specific economic problems as well as the broad
macroeconomic issues. With a strong emphasis on the need for structural programs to fight both inflation and unemployment, this year's
Report is very much in that tradition. Looking ahead to future Committee reports, I would like to suggest some areas that merit detailed
study by our Committee.
Research and Development.-Research and development (R&D)
have played a critical role in American growth since the end of World
War II. New products have expanded vastly the range of choice confronting the American consumer, and new processes have steadilv reduced the amount of labor, capital, and material needed to produce
American goods. By contributing to increase productivity, R&D fights
inflation and makes American goods more competitive in foreign
markets.
The need for further R&D is evident in almost every industrial sector of the country. American productivity is no longer growing as
rapidly as it did for most of the post-World War II period. Many
industries must find more efficient ways to function or face constant
pressure from foreign imports. America's longstanding strength in
high technology items can only be maintained by a constant R&D
77
effort. The sharp increase in energy prices forces us to find new
sources of fuels as well as new ways to conserve energy. The Joint
Economic Committee should take a detailed look at the current status
of future prospects for R&D in the United States.
SnagZ Busine88.-Too often the serious problems of small business
are lost in a focus on broader, more abstract poblems. But small business occupies a unique and valuable role in the American economy. In
many ways, small business is the urban equivalent of the family farm.
For generations of Americans, small enterprises have offered everyone the opportunity to build his own future. In addition, small businesses have been the source of a considerable share of the Nation's
new inventions. There can be no doubt that the small businessman is
under intense pressures, many of which are caused by government
policy. It is time we took a detailed look at the problems that beset
small business in America and what public policy can do about them.
Agriculture.-Administration after Administration has been content to keep American agriculture on a roller coaster that mixes sudden prosperity with hard times. We need to take a close look at the
changes that are sweeping American agriculture. Support. programs
should be designed to assure the American farmer an adequate income
without relying solely on price increases. Mechanisms to stabilize agricultural prices and income should also be explored. America has been
blessed by unparalleled bounty in agricultural resources. It is a part
of the, economy that we neglect at our peril. The farmer, as well as
the small businessman, deserves our sympathetic consideration of his
problems.
LEE H. HAmILToN.
ADDITIONAL VIEWS OF SENATOR WILLIAM PROXMIRE
and
I believe that both the President's proposed $500 billion budget
are
billion
$505
to
$500
of
this Committee's estimate of expenditures
Ameron
burden
enormous
an
represent
too high. These expenditures
$25 billion and
ican taxpayers. They should be cut by a minimum of on
Federal outfreeze
a
provide
to
order
in
better yet, by $35 billion
Henry
expert
financial
lays of about $465 billion as the distinguished
Budget.
the
on
Committee
House
the
Kaufman proposed before
a 5 to 7
First of all, this is an achievable cut. It represents only for
total
provide
would
and
budget
percent cut in the President's
has
who
one
as
Further,
level.
1978
fiscal
the
about
at
outlays
budget
as
agencies
Government
numerous
of
routinely examined the budgets
without
assert
I
Committee,
Appropriations
Senate
the
of
a member
Government
fear of contradiction that there is not a single generalnot
result in a
could
funds
the
of
cut
percent
7
to
5
a
function where
service to
better
with
combined
more efficient or less wasteful program
foreign
function-defense,
the
name
can
One
public.
the American
enforcement,
law
education,
aid, delivery of mails, welfare, housing,
subsidies, etc.highways, public, works, reclamation, sugar or mineral
without harmcut
be
could
and know from experience that the budget
ing the function.
looked at the
Second, modern economists have for too long merely
if any,
attention,
little
Very
spending.
of
overall or "macro" effects
outlays.
in
increase
proposed
the
of
benefits
genuine
the
to
paid
is
to "keep
They are justified on such spurious grounds as necessary
fiscal
offset
to
economy
the
stimulate
to
inflation,
of
because
even"
Budget.
Services
Current
a
by
drags, or as no more than provided
for
The general has overcome the specific. Spending is justified
justifying
arguments
few
or
any
these economic purposes without
military projtheir specific benefits. We are urged to keep wasteful
public works
barrel
pork
continue
ects going to avoid cuts in jobs, to
to universaland
them,
want
communities
local
the
because
programs
it will
proposal
the
on
in
cut
ize spending because if all 50 states aren't
Fedthe
by
taxed
are
which
money
of
amounts
fail of passage. The
Amerimillion
220
of
eral Government from the earnings or savings
on
cans for inefficient purposes has grown beyond any justification
macro-economic grounds.
we buy
It is true, as Justice Holmes remarked, that with taxes
or
bloated
or
wasteful
civilization. But we are not required to buy a
super-civilization.
Henry KaufThird, the new totals are essentially unprecedented.
CommitBudget
House
the
before
man put it succinctly in testimony
said:
he
what
Here's
6,1978.
tee on February
The sharp acceleration in Federal expenditures during
fiscal 1978 and 1979 has few parallels in the postwar years.
(78)
79
Judged against the size of the economy, Federal budget
outlays in fiscal 1978 represent a record postwar high of
22.6 percent of total GNP. While this ratio is expected to decline to 22 percent in fiscal 1979, it will still be the fourth
highest in the last 25 years.
The yearly percentage increase in officially projected expenditures, totalling 15 percent for fiscal 1978, has been exceeded only twice in the past 25 years, once in a recession year
(1975) and another in a war-related year (1967). It is twice
as large -as the average annual rate of increase over this 25year period.
The officially proposed increases in Federal expenditures
are far greater on a percentage basis for this time in the
business cycle in the present economic expansion than in the
previous four business recoveries.
Finally, I wish to remind my colleagues and the public of what
former Senator Paul H. Douglas, once Chairman of this Committee
said on this subject. The phrase he coined was that "A liberal need not
be a wastrel." Wasted funds build no schools, feed no hungry children,
clothe no person, and help no one in need.
There is now general agreement that proper and appropriate Government functions are far greater than ever envisaged by the Founding
Fathers or by the so-called rugged individualists of the industrial age.
That is no longer in question.
But what is in question is our ability to live within our means, to
use public funds wisely and efficiently, and whether the Government
is to provide subsidies to everyone everywhere.
We are probably providing more welfare for the well-to-do than for
those in genuine need.
I believe we should carry out Lincoln's definition of the legitimate
objects of Government as doing for the people "whatever they need to
have done, but cannot do at a 1, or cannot so well do for themselves
in their separate and individual capacities."
Even a generous interpretation of that sentiment would allow us
to reduce Government spending by more than the $25 to $35 billion I
have proposed.
WILLiAm PROXMIRE.
ADDITIONAL VIEWS OF SENATOR GEORGE McGOVERN
The President's Economic Report of 1978 is obviously less restrictive than those of the last few years. I believe it provides a useful
starting point for budget policy considerations, and this Joint Eeconomic Committee Report, by and large, represents an excellent positive
critique of the budget as a document of economic policy.
In some respects the President's Budget is encouraging. I am heartened by the Administration's recognition of the need for a fiscal stimulus to reduce projected unemployment rates that are still disgracefully
high. It is also worth special note that the fiscal 1979 military budget
would have been some $2.9 billion higher if the B-1 bomber had not
been cancelled.
My basic concern is that the Presiden't 1978 Economic Report represents too cautious and traditional an approach to curbing inflation
and lowering unemployment. It has provided very little new fiscal
stimulus, and 'thereby lacks almost entirely any social vision. Events
have brought us beyond the luxury of viewing fiscal and monetary
policy as socially neutral blueprints.
As a result, I have to say that I am in sharp disagreement with the
Administration's approach on several fundamental questions.
First, we have already raised a regressive tax-the social security
payroll tax; now we hear that part of the justification for a $25 billion
cut in the more progressive income and excise taxes is to compensate
for the payroll tax hike. The combination makes no sense. It will make
a bad tax system worse. In part, middle-income workers will be paying more to finance a new tax break for people in higher brackets. I
will propose instead that we forgo the $25 billion tax cut, and that we
pay $7.7 billion of the savings into the social security trust fund so
we can cancel next year's increase in payroll taxes.
Second, with the remaining $17 billion in savings, as well as with
funds which can be saved by permitting a smaller increase in military
spending, I believe we ought to move to stimulate the economy through
direct investments in high priority public investment.
There are a number of other pressing needs that cry out for
attention.
One area of emphasis should be a systematic effort to help our major
cities through their severe financial crises. A substantial public sector
contribution to urban transportation, housing, and other public services would both help meet that crisis and provide millions of jobs
where they are most needed. I note that the National League of Cities
and Conference of Mayors has just recently called for an $11.3 billion
commitment beyond that proposed by the President to enterprises of
this tkind. That is the kind of program we could afford if we were to
forgo a quick tax cut as the standard remedy to a sluggish economy.
Research and development in the use of renewable energy resources
could pay the highest of dividends-by helping to provide thousands
of jobs while at the same time eroding our terrible growing reliance
on imported oil.
(80)
81
I would also favor a substantial program to bolster farm income.
The national farmers' strike has helped spotlight the fact that the new
farm program adopted last year, while a distinct improvement, is still
gravely insufficient. We are in real danger of losing the family farm
structure that is central to a productive, efficient agriculture. And if
that happens it will be a crushing blow to farmers and consumers
alike.
Another priority investment should be in rail transportation-particularly in reconstructing and upgrading rail lines. Here, too, we
could provide large numbers of jobs, while at the same time investing
in the kind of energy-efficient transportation the country urgently
needs.
What I want to underscore is my firm conviction that a tax cut now
is not the wisest method to achieve economic stimulus and social progress. A properly conceived budget can both stimulate the economy
and set hopeful new priorities.
Certainly no taxpayer will turn down a tax cut. But I believe the
American people also understand that their country needs things
which personal spending cannot give it. I think they understand that
healthy cities, employed workers, prosperous farms, and efficient rail
lines will enrich us all far more than a few dollars in tax cuts for each
family or business.
In my opinion this Annual Report is excellent. The only shortcoming I wish to dwell upon is its failure to specify and discuss in
detail those areas of social and human needs which deserve our priority
attention. I see no reason why we can't develop priorities for addressing public needs (energy, for example) and analysis of how treatment
of these needs will affect employment, inflation, balance of payments,
capital development, etc. Unless we create a mechanism for this kind
of evaluation and coordination, our most serious social and economic
problems will continue to be discussed and treated separately, which
cannot be in our best interests. It is my hope that in the future the
Members and staff will use this Report to comment more explicitly on
the President's Economic Report as a blueprint for meeting the unmet
needs of our people.
I believe the Joint Economic Committee has been especially perceptive in outlining ways to attack inflation directly and in explaining
the role that monetary policy can and should play in stimulating the
economy. Finally, by clearly pointing out that rising productivity and
employment are the true measures of our economic well-being, not the
size of the deficit or the level of Federal expenditures, the Committee
has correctly redirected our attention to the basic issues at hand. Hopefully, all this effort will help to create a new and wiser public understanding of our economy.
GEORGE MCGOVERN.
Minority Views
on the
1978 Economic Report
of the President
CONTENTS
I. Introduction -------------------------II. Review and outlook for 1977-78 -_-___-___-_-__-_-_____-__
III. Economic growth: Why and how
_-_-___-__-__--__- ___
The need for growth - ____-- _-- ____--__-_-_-____-_-__
Savings and growth - _____--__--__-----___-_______-_
Productivity and savings__-__---- __-_-__- ____
Fiscal policy and growth -_--_---__-__-__-______-__-_
Inflation and growth _-- __---- ___-- ____-_-__-____
IV. Monetary policy: Domestic and international ________
Recent history __-- ______-- _______-_--_-_--____
Money and investment - ______--_______-_____-__-__-_
International considerations ------------------------------- _
Exchange rate policy -___----__--________-_____-____-__-_
V. Tax policies -------------------------------------- _-__-_
Effects of social security, increases on tax policy -_-__-__-_
The Carter tax package -______-__-----__________-__-_
Tax policies affecting small business-_-_-___-___-__-__-_
VI. Employment -________--______--____________--_________-____
The employment situation in 1977 - ____________
Policies for full employment -____-__-_____-__-_____-____
VII. Agriculture __-- ____--__________--__----_____--_-__-__-_
Legislative proposals in keeping with the free market conceptEnhanced marketing ____--_---_--_---____-__-_-__-_
Expand commercial export markets ________-______-____
The farmers' heavy costs __-- __--_--___-__-___-____
VIII. Urban policy-____________----_-____-- _______-___-____
Additional views of Senator Jacob K. Javits ------------- Additional view of Clarence J. Brown______--_--__------------------Additional views of Senator William V. Roth Jr
_-- __ Additional views of Senator James A. Mc~lure and Senator Orrin G.
Hatch ---------------------------------------------------(85)
Page
87
88
93
93
94
95
96
97
101
101
102
102
104
107
107
109
116
118
118
119
121
122
123
123
124
126
131
135
136
140
I. INTRODUCTION
The picture on economic growth is not encouraging, and
the policies being proposed by the Administration will not
meet our goals." However, we believe there are policies that
will meet our growth objectives without threatening price
stability. We believe that such noninflationary growth is
possible, that it is desirable, and indeed that our major
social and economic problems can be solved if we pursue
sound policies. Savings and investment are needed to produce growth without inflation, and these are the focus of
this report.
See the Additional Views of Representative Clarence J. Brown of Ohio on the seriousness of the economic outlook.
(87)
II. REVIEW AND OUTLOOK FOR 1977-78
1977 was a moderately good year. Although the rate of growth
slowed appreciably from the first to the fourth quarter, annual real
GNP grew a respectable 4.9 percent for the year as a whole. Unfortunately, the slowing of activity was accompanied by an increase
in the rate of inflation (as measured by the chain price index) to an
annual rate of 6.2 percent in the fourth quarter. The inflation rate
reflected an acceleration of farm prices the Government pay increase,
and rising prices for housing and business investment. Employment
for the year expanded at a fast clip-3 million workers-but because
of the large increase in the labor force, the unemployment rate dropped
only 1 percentage point by the yearend. Industrial production grew
almost 6 percent; auto unit sales increased 11.1 percent over 1976;
and housing starts edged over a 2 million unit rate in the latter half
of 1977. State and local expenditures accounted for substantial increases in government spending. The fourth quarter ended with a net
export deficit of $15 billion in current dollar terms. The personal savings rate has increased from a low of 4.1 percent in the first quarter of
1977 to 5.5 percent in the fourth quarter.
The outlook for policy for the rest of 1978 and 1979 is influenced by
two main factors; namely, the shape and condition of the current expansion and the narrowness of the gap believed to exist between potential and actual GNP. The Administration has proposed three general
conclusions concerning the expansion. (1) The expansion has been
largely "uncoordinated." Some sectors have provided a substantial
pus throughout its three-year cycle, while other sectors have either
grown slowly or have remained stagnant. (2) This imbalance may
prolong the expansion beyond the average postwar recovery period of
four years. Because not all sectors have exceeded their past peaks of
activity, growth in the lagging sectors will provide continuing stimulation to the economy. (3) There is additional room for economic
stimulation because capacity constraints have not begun to exert themselves, and so there is less danger of a reignition of inflation.
The Administration has made little attempt to harmonize the growth
of the various sectors. As a result, the last year has been characterized
by the continuation of sudden spurts of economic growth and periods
of flatness. Personal consumption expenditure increases and accelerated inventory investment spurred GNP growth in early 1976 and
the first half of 1977, but 1978 should witness slower increases. Residential investment made a strong recovery (averaging over a 2 million
unit rate in the last half of 1977) but is not expected to continue at that
pace through 1978. Business investment has continued to lag, although
desultory promises of accelerated activity from orders for capital
goods emerge occasionally. The outlook for State and local spending is
(88)
89
not very promising, and the sluggish growth of exports is expected
to continue exerting a significant drag on the economy, though perhaps
less than in 1977.
The Administration has proposed a nonstimulative tax program,
which only offsets the increasing tax bite from social security taxes
and the impact of inflation on tax rates. The Administration has admitted that their tax cut proposals will not be sufficient to encourage
economic growth; it is quite probable that additional stimulus will be
necessary in 1979. At best, we must expect 1978 and 1979 economic
activity to do well in spite of the government and not because of it.
The extent to which capacity utilization of business has risen has
direct implications for the Administration's conclusion that excess
dustrial capacity presently leaves room for additional stimulus inout increasing inflation. The industrial production index for total withmanufacturing reached 82.8 in the fourth quarter of 1977. For industrial
materials, the index stood at 82.3 for the same period. It is generally
understood that operating rates in harmony with moderate price behavior are well below 100 percent of capacity utilization, e.g. 88 percent was the peak rate for manufacturing in 1973, when inflation
reached 8.8 percent, as measured by the Consumer Price Index.-Moreover, the aggregate capacity utilization indices often do not
portray the situation in the individual industries. Some accurately
industries
may already be experiencing capacity constraints even though
industries are operating at capacity rates well below the average. other
If capacity bottlenecks occur in selective basic industries,
ary pressures could occur which also would exert pressure inflationon other
sectors. In addition, capacity utilization indices do not measure
things as distribution systems which could impose significant such
constraints upon manufacturers. For example, a recent shortage of available railroad cars in the West curtailed needed coal shipments to the
Midwest which was suffering from a shortage of coal.
Inflationary pressures also can emerge from sources other
-capacity problems. Agricultural prices have been depressed forthan
the
greater part of 1977. However, farm prices are expected to rise more
rapidly in 1978 and will exert upward pressure on consumer food
prices. As discussed in more detail in the agricultural section,
the
Administration has not addressed this issue. The only major Administration proposal for the agricultural sector is set-asides, and
these will neither assure adequate supplies, nor protect the viability of
farms and farmers. More important to this discussion, set-asides will
possibly increase inflationary pressures.
Another source of inflationary pressure is Federally mandated cost
increases-that is, the bigger bite of social security taxes, the increase
in the minimum wage, and the requested, although undetermined, new
energy taxes. These measures will cause significant upward movement
in business costs and will consequently push upward on prices. Unfortunately, the Council on Wage and Price Stability continues to
have an uncertain mission and even less certain powers. Witnesses
before the JEC have described the Administration's anti-inflation program as largely worthless. Moreover, witnesses feared any discussion
of wage or price guidelines might fuel fears of eventual price controls.
90
Dr. Gerard Adams from Wharton Econometric Forecasting Associates stated that "some (government policy impact) is unavoidable.
but it is terribly important for Congress to realize and the President
to realize that many of the regulatory measures which have been imposed on the economy do have an inflationary impact." He stated that
"I am very skeptical that voluntary price-wage guidelines .
.
. lead
anywhere, and I am even more skeptical of price-wage ceilings or
freezes or anything else." Dr. Jack Carlson of the U.S. Chamber of
Commerce named still other cases of Federal inflationary pressurefarm price supports, Federal pay increases, and labor law refom as
legislative measures with an inflationary impact.
Another source of inflation is the continuing depreciation of the
dollar, a development for which there is no fully acceptable solution.
Imports are costing business and consumers more. For businesses, the
higher costs of materials, parts, and subassemblies will have to be reflected in higher domestic prices. For consumers, the higher prices
may well generate increasingly aggressive wage demands in the near
future.
Wage settlements are a key element of cost pressures. For example,
whatever the final resolution of the coal strike, one aspect is clear:
the terms of the original contract rejected by the workers called for a
37 percent wage increase over three years. Such a settlement necessarily would have inflationary implications for the remaining collective bargaining agreements to be negotiated in 1978.
Because 1978 will be a light bargaining year, deferred increases and
cost-of-living adjustments will be major elements in the total wagerate increase for the year. New contract negotiations are expected to
affect about 2 million workers with the largest groups in construction,
food stores, transportation equipment and Postal Service workers.
From already existing contracts at least 6.3 million employees will
receive deferred wage increases averaging 5.1 percent (In 1977, the
average deferred wage increase was 5.9 percent). Moreover, 4.1 million of these workers probably will receive cost-of-living increases.
The Consumer Price Index went up at an average rate of 6.5 percent
in 1977 (6.8 percent December 1977 over December 1976) compared to
4.8 percent the previous year. Contract formulas typically do not
provide for one-to-one increases, but the growing use of cost-of-living
escalator clauses in collective bargaining does result in a more ingrained momentum.
The life expectancy of the business cycle is also involved in the
Administration's conclusion concerning capacity constraints. As mentioned previously, the average postwar upswing has lasted four years.
In the present case, recovery has continued for three years, although
there have been several hesitations. However, not all upswings will
last the average length, and there is no convincing rationale for
believing expansions must continue until full utilization of all sectors
occurs. Recoveries have disintegrated in the past, even though some
sectors had not yet reached their full capacity.
In addition to the shape of the current expansion so far, the outlook
for policy changes for the rest of 1978 and 1979 is influenced by the
size of the gap between actual and potential GNP. In their Annual
Economic Report, the Council of Economic Advisers presented a chart
91
(shown below) that showed GNP growth to be within a range of 3:3
to 3.8 percent through 1981. However, in the Outlook section, the
Council of Economic Advisers maintained that a "seven-year growth
path" for GNP of 5 percent per annum was both the best that could
be done and the minimum necessary to meet the Administration's
employment and budget goals. This implies that the expected actual
growth rate on a long-term basis (i.e., seven years) is faster than the
potential rate-an event impossible by definition-at the same time
it is supposedly impossible to reach potential GNP for the next five
years! Clearly, the concept of potential GNP-which was never too
sharp-is becoming steadily more confused.
CHART
II-1.-Actual and potential gross national product
BILLIONS OF 1972 DOLLARS (RATIO SCALE)
1,700
1,600
,
PROJECTED P0TENTIAV
GNP RANGE..,.I
1,500
1,400
-
POTENTIAL GNP /
/
\
1,300
/
R
4
C
ROJECTEW
ACTUAL GNP
1,200
ACTUAL GNP
1,100
,II
1,000
1968
I, II I I I1I
1970
1972
1974
1976
1978
1980
Sources: Department of Commerce and Council of Economic Advisers.
Potential GNP is an estimate of what the economy could product at
high rates of utilization of the available factors of production-labor,
capital, and natural resources. It follows that the factors of production must be present in order to be utilized or fairly accurate estimates of future availability must be made. It can be argued that because of the severity of the last recession, the level of the capacity of the
U.S. economy was permanently lowered. (As an illustration, the line
in the chart representing potential GNP should be shifted downward
so the line is more nearly parallel to actual GNP from 1974 to pres-
23-928
0 - 78 - 7
92
ent.) Because the capital base required as underpinning for the projection of potential GNP over the next several years (as shown in the
chart) was simply never put in place as a result of the last recession,
current estimates of the level of potential GNP must be lowered, and
therefore the size of the gap must be smaller.
If the projection of the level of potential GNP is shifted downward,
it suggests an entirely different situation than the 3.3 to 3.8 percent
range proposed by the Administration. (The CEA has assumed that
the track for potential GNP remained the same even after the 197475 recession.) More properly, the projection should have a lower
starting point and a faster rate of increase-according to the Council itself, something very close to 5 percent. Using the chart again as
an illustration, the line for potential GNP should be lower, but its
slope should be steeper. Without this adjustment, one is inclined to ask
just what the potential line represents for 1978, 1979, and 1980? If
we cannot reach the potential level for at least several years, but we can
grow faster than potential for more than five years, just what is the
Council's concept of potential GNP growth? Is it something more
properly called "unattainable potential" ?
The implications of the two perspectives concerning GNP potential
are significant. The capacity limitations for the economy may be much
closer than is presently assumed, and perhaps resources, other than
labor, are being utilized more heavily. If there is not as great a gap
between actual and potential GNP, inflationary pressures may be an
even more imminent problem. If the growth rate of potential GNP
over the next five to seven years is not between 3.3 and 3.8 percent, but
closer to 5 percent, policymakers should take extreme care to tailor
the economic stimulus to the real needs of the economy. Excessive
short-term stimulus eould exacerbate inflation very quickly, yet insufficient longer-term stimulus would allow the gap to widen even more
than portrayed under the current projection. Specific policies to deal
with this potential anomoly are discussed in the following chapters.
94
anticipates. If wages can be encouraged to grow, revenues will rise
without a tax rate increase.
The Minority believes that it is far better to increase real wages by
50 percent more than the Social Security planners predict, than to impose a 50 percent increase in the tax rate on currently expected real income. An increase in the annual U.S. growth rate by only 0.6 percent
would produce such a wage increase within the '70-year planning
period. We urge that steps be taken (as described below) to bring -about
the needed increase in the rate of economic growth.
SAVINGS AND GRowTH
Anyone hoping for more rapid economic growth must be concerned
with savings. Only that part of national income which goes into savings
is available to cover investment and the government deficit.
Once the government chooses a. deficit, the only -way to get more investment without expanding our foreign debt is to raise savings. The
ratio of investment to GNP basically determines the country's growth
rate. Only by increasing savings can the real growth rate be raised.
This is especially true in the face of a massive diversion of investment
to non-growth uses, such as pollution control and the coal conversion
portion of the Energy Program.
The government could help growth by reducing government spending to lower the deficit. However, a tax increase to reduce the deficit
would also reduce saving by reducing the after-tax return to saving
and would be counterproductive.
As described below, one way of encouraging saving is to lower
personal income tax rates across the board. This would allow every
taxpayer to keep a higher percentage of the additional interest or
dividends earned from additiomnl saving, and thus, would make
saving more attractive.
Another approach would be to tax income only when it is spent,
thereby not taxing net savings. A tax deduction for savings would be
created. For savings accounts, the deduction would be interest plus
deposits minus withdrawals. For stocks and bonds, the deduction
would be purchases and reinvested dividends minus sales. (Net withdrawals or sales would be negative deductions and would be added
to taxable income.)
Other nations have out-saved and out-grown the U.S. by wide
margins over the years. Table III-1 shows the results of the relatively low saving rate, which the Energy Plan, and higher social
security and income taxes, threaten to make worse.
TABLE 111-1.-WAGE INCREASES, INVESTMENT, AND SAVING
Investment as percent of
1965-75
GNP-Averages, 1960-73
perceotchange
in real wages
Total minus
and fringe
Total homebuilding
benefits X
United States -15.7
Canada -48.5
Japan -138.9
France-----------------------------------------Germany Italy -116.4
United Kingdom -53.9
1Includes pension programs and other fringe benefits.
Sources: Bureau of Labor Statistics. OECD.
77.4
78.1
17.5
21.8
35.0
24.5
25.8
20.5
18.5
13.6
17.4
29.0
18.2
20.0
14.4
15.2
Household
savings
ratios, 1976
estimate
(percent)
6-8
10-12
24-26
16-18
14-16
22-24
12-14
III. ECONOMIC GROWTH: WHY AND HOW
TIM NEED FOR GROWTH
The United States is about to experience its first year of a $2 trillion
GNP. It could have been $3 trillion.
Since 1950, the average annual growth of the U.S. economy in real
terms has been 3.7 percent. Many other major industrialized countries
have grown at annual real rates averaging in excess of 5.5 percent, and
some have averaged more than 6 percent. If the United States had
grown on average 1.5 percent faster each year since 1950, at a rate of
5.2 percent, its GNP would now be $3 trillion.
With a $3 trillion economy, incomes would be 50 percent higher than
at present. Jobs would be plentiful. Federal revenues this year would
be $200 billion higher, enough to provide for a balanced budget, welfare reform, national health insurance, and unquestioned military preeminence, with enough left over to let us reduce payroll and income
taxes instead of raising them. Of course, price stability would have
been another spin-off of the growth of real output and the balanced
budget.
The Minority does not mean to cry over spilt milk. Our purpose is to
illustrate the power of compound interest, and the benefits to be had
within a generation from faster economic growth.
Faster growth, higher incomes, and plentiful jobs are exactly what
the unemployed, the underprivileged, and the minorities of this country have been seeking for many years. It is no accident that the greatest gains in income, jobs, and dignity for minority workers have come
during periods of rapid economic expansion. In recent weeks, the
NAACP has issued a clear call for a return to rapid economic growth
and the creation of real jobs in the private sector. Bitter experience
with unproductive, dead-end public jobs programs has convinced many
black leaders that young people need the skills which can be learned
and benefits which can be earned in the production of goods and
services.
The social security tax increases just enacted are drawing sharp
criticism even before they go into effect. In fact, these tax increases are
but the tip of the iceberg.
Benefits currently promised will require increases in social security
taxes by 50 percent, from 12 percent of payroll to 18 percent of payroll,
over the next 70 years, if real wages grow only as rapidly as the Social
Security Administration predicts (1.75-2 percent per year). It is
widely assumed that the next generation will be unwilling to pay such
taxes, either in the form of payroll taxes or sharply higher income
taxes. Recent polls already show a decline in public support for the
Social Security System. For these reasons, some have suggested reducing benefits or raising the retirement age to 68 for workers just entering the System. But this assumes that nothing can be done to get
income to rise more rapidly than the Social Security Administration
(93)
95
PRODUCTIVI
AND SAVINGS
Once saving is stimulated, it must be put to work creating capital
investment and jobs.
A higher rate of investment is necessary in the short run to bolster
our current economic expansion. But in the long run as well, we need
massive capital outlays. Various studies in recent years have pointed
to the huge volume of capital investment needed over the next decade-trillions of dollars-to expand, replace, and modernize our production facilities to accommodate economic growth, to help us reach
full employment, to achieve greater energy independence, and in general, to raise our standard of living. (Even for those who advocate
"zero economic growth" as a way of enriching our overall quality of
life, huge amounts of capital formation are still essential in order to
develop new products and new processes of production which are more
economical in their use of resources and less damaging to the
environment.)
Increased productivity (output per unit of input) is the key to economic growth and more jobs. Over the past 25 years, improvement in
labor productivity has accounted for more than two-thirds of the
growth in the real gross national product.
From 1949 to 1968, private non-farm productivity increases averaged about 2.6 percent per year. From 1968 to 1977, productivity rose
by only 1.4 percent per year. This slowdown in the growth of output
per worker hour is one of our most serious economic problems. Without faster gains in productivity, inflation is aggravated, and improvement in real incomes, if it comes at all, comes to some at the expense
of others.
Productivity depends on: (1) increases in the amount of physical
capital per worker; (2) technological innovation that brings more
output from each unit of resources, capital, of labor; (3) qualitative
improvements in the labor forces through better education, motivation, and manpower training; (4) improved mobility of labor and
capital, permitting resources to shift from low productivity sectors
to high productivity sectors; and (5) management innovation to improve the way labor and capital are used.
Of the factors listed, increased and improved capital per worker is
one of the most potent forces for productivity and economic growth.
From 1949 to 1968, the capital-labor ration grew at an annual rate
of about 3 percent. Over the last decade it has grown much more
slowly, about 1 percent a year. If capital required to meet governmentimposed pollution and abatement regulations is deducted, the capitallabor ratio growth is even less.
The slower growth of the capital-labor ratio in the past decade is
at the root of our recently reduced rate of productivity increase.
We must turn our productivity, trends around through large-scale
investment in new business plant and equipment. This can best be accomplished by direct tax rate reduction to increase the after-tax return
to saving and investment. Tax rate reduction, plus measures to reduce
the risks associated with the regulatory climate, can promote the expansion of business plant and equipment spending needed for economic growth.
96
FISCAL PoUcY AND GROWTH
Demand or Supply Problem~s
Every administration witness to appear before the Joint Economic
Conmmittee discussed proposed tax changes in terms of aggregate demand, or total spending. Herbert Stein has questioned this approach,
asking how demand can be stimulated by a tax cut if the Government
does not reduce its spending. What the Government gives away with
the tax cut, it must take back with increased borrowing to fund the
spending.
Other economists have pointed out that the Administration approach fails to take account of the impact of tax rates on aggregate
supply. For example, in every year without a tax rate reduction, inflation pushes people into higher tax brackets, even when they have
no increase in real income. Their average tax rate rises, which means
that their tax burden rises faster than inflation, and they have less to
spend. However, there is an additional effect which demand theorists
tend to overlook.
Inflation raises the average tax rate by raising the mnargival tax
rate. It is marginal income, the last few hundred dollars of the taxpayer's earnings, which falls into higher brackets and is taxed at a
higher rate. The Government takes a larger slice out of the last few
hundred dollars of each person's wages, profits, interest, and dividends. These higher rates also apply to any increase in wages, profits,
interest, and dividends which could be earned by working longer,
saving more, or investing more.
The problem of higher tax rates resulting from inflation is not a
minor matter. Inflation is producing real tax increases of $7 to $9
billion per year on individuals. Millions of workers have seen their
incomes taxed in higher and higher brackets.
Furthermore, the change in marginal tax rates can affect behavior.
At the margin, leisure might be substituted for labor, because the reward to labor has fallen. Consumption could tend to replace saving
and investment because the reward to saving and investment falls. On
the other hand, higher real tax rates will tend to force workers to ask
for higher pay increases than might otherwise have been the case, in
order to compensate for their lowered real after-tax incomes. In any
event, these shifts in behavior cause real 'GNP, investment, and job
creation to drop, even if the Government spends the money to keep
nominal demand constant. Nominal demand cannot offset the shift
away from productive activity as taxes reduce the rate of return to
labor, saving, and investment.'
This adverse effect on GNP occurs whenever a tax is imposed. For
example, a payroll tax reduces the after-tax wage of labor, and raises
the after-tax cost of labor to the firm. The supply and demand for
labor fall. So do employment and GNP.
Similarly, a tax on the use of oil and gas reduces the after-tax
receipts of the producers, and raises the after-tax prices of goods and
services to consumers, which reduces the value of their wages. Output
of gas and oil falls. The supply of labor falls. Employment and GNP
fall.
I See
the discussion of marginal tax brackets in the additional views of Senator Javits.
97
This drop in output will occur even if the energy taxes are handed
back to consumers in some fashion unrelated to work effort. Demand
may be maintained, but the supply disincentives remain. Furthermore,
we know all too well that when money is poured through Washington, a substantial amount of it, in effect, "sticks to the funnel." There
is considerable waste in any such income transfer. For this reason, the
Administration is wrong to think that the proposed energy taxes and
energy rebates will have no net impact on economic activity. Consequently, netting these tax changes out in the presentation of the budget
gives a misleading picture of the budget's economic impact.
The inability to take account of the supply of productive effort is
the biggest failure of demand management economics. Unfortunately,
this shortcoming is shared by most of the major econometric models
used by policymakers.
INFLATION AND GROWTH
Personal Taxes
In the short run, the impact of inflation on personal income taxes
can destabilize the economy. Many economists believe that the higher
personal income taxes generated by inflation between 1972 and 1974
contributed heavily to the recession of 1974-75. In a study prepared
for the Joint Economic Committee, Thomas Dernburg concluded that
the tax code should be adjusted (indexed) annually for inflation to
keep tax rates from rising without an open debate and vote by the
Congress. He suggests that "an indexed personal income tax would
have helped to avert the collapse of 1974, that it would tend to stabilize the level of economic activity, that there is little presumption
that it would contribute to inflation, and that it might, indeed, do the
opposite if it relieved cost and supply pressure."
The reason that inflation is a tax problem is that the tax system
treats every increase in income as if it were real income. The tax system does not take into account the fact that a worker's real income has
increased less than his or her nominal income-the entire nominal
income gain is taxed. Thus, with the sustained high inflation of recent years, workers have had wage increases reduced not only by inflation but also by the higher taxes that must be paid as inflation
pushes incomes into higher tax brackets.
As high inflation continues, as marginal tax rates remain high, and
as decreasing productivity gains reduce the real component of wage
increases, the economic effect on taxpayers becomes more severe.
James T. Lynn, former Director of the Office of Management and
Budget, estimates that during this decade inflation-induced taxes will
take $82 billion from the American taxpayer, if Congress does not take
compensating action.
In the long run, inflation has another effect, a subtle but devastating
influence on saving. Inflation acts through the tax system both to reduce personal saving, and to misdirect what saving is done into inefficient, even unprofitable investments, thereby reducing economic growth.
It is not commonly realized that inflation and the tax changes since
1964 have had the effect of raising marginal tax rates in spite of the
fact that average tax rates have been held fairly steady. Increases in
the standard deduction, and adoption of the general tax credit, have
*
98
held down effective tax rates, while increased nominal income has been
taxed at higher marginal rates.
Economists have long warned that a broad tax base with low tax
rates is less disruptive of economic growth than a narrow base with
higher rates. Unfortunately, the tax system has been moving in the
wrong direction since 1965.
It begins to pay a taxpayer to look into the use of tax shelters when
his income rises to the point where it is being taxed at marginal rates
a bit in excess of 30 percent. The number of taxpayers in those brackets
has risen dramatically in the last 12 years. In 1965, less than 2 percent
of taxable returns reached brackets above 30 percent. By 1974, 7 percent of returns were in that category. This year, the figure is nearly 10
percent. Taxpayers in these brackets have incomes roughly three times
the median income. Thus, the share of national saving done by these
taxpayers is likely to be at least three times higher than their share of
the number of taxable returns filed would indicate. The percent of total
personal saving which potentially could be lured into tax shelters has
risen from perhaps 10 percent to about 30 percent since 1965.
At the present time, less than $3 billion is collected in tax revenues
on existing taxable income by having marginal tax rates in excess of
50 percent. Much of the potentially taxable income in these brackets
has been sheltered or simply not earned. To increase the taxes on this
income group will only result in a lower tax take, as more of their income would be shifted to non-taxable forms of income.
The amount of income actually being directed into certain types of
tax shelters has risen several hundred percent in the last few years.
Many brokerage houses are finding it harder to interest customers in
common stock, while finding it very difficult to keep up with the demand for tax exempt bonds and tax exempt mutual funds and unit
trusts.
It is very likely that marginal tax rates have risen to the point where
they are causing a substantial reduction in this country's growth rate.
There. is even a reasonable possibility that marginal tax rates are so
high that they have actually reduced Federal revenue. The Minority
strongly urges the Treasury and the Joint Economic Committee to investigate these possibilities.
Corporate Taxe8
Inflation depresses the growth of business activity, job formation,
and wages by interfering dramatically with depreciation. The tax code
only permits a tax deduction of the historical cost of plant and equipment. When inflation increases the cost of new plant and equipment,
the firm finds that the money it has set aside for replacement is inadequate. It must use taxable income to supplement its depreciation allowances just to maintain its productive capacity-just to stand still.
Thus, actual economic depreciation is understated, and corporate profits are overstated. Inflation "disallows" the deduction of a real cost of
doing business, increases the firm's tax liability, and reduces its ability
to grow.
The Bureau of Economic Analysis regularly reports a data series
designed to show the true value of corporate profits after allowance
99
for real depreciation and the cost of replacing inventory. The goal is
an accurate measure of business health. Reported profits are reduced
by the "capital consumption allowance adjustment" and by the "inventory valuation adjustment." What remains are true "economic
profits." These may be reduced by corporate tax payments to produce
"economic profits after tax," or set out in constant dollars to produce
"real economic profits."
Treasury Secretary Blumenthal has been quoted as saying, "I can't
explain the stock market. I didn't understand the market when I was in
business, and I don't understand it now." Yet, there is nothing mysterious about the behavior of the stock market. The broadly-based
Standard and Poor's 500 index, expressed in real dollars, shows that
stock prices have been accuratey matching changes in real economic
profits for years. After-tax real economic profits are well below the
levels of 1965 to 1968. The stock market is reflecting that fact.
TABLE 111-2.-ECONOMIC PROFITS OF DOMESTIC CORPORATIONS
[Calendar years in billions of dollarsl
1960 -44.
1962 -44.6
19632
-1964--------------------------------------1964-63.9
1965 1966----- ------ ------ ---------- ---- --- --- --- ---- --- --- --1967 -1968 -82.6
19701971
--------------------------------------------------------------------------1972------------1973
---------------------------------------------------------------------------.
1974-------------------------------------------------------92.2
1974-74.0
1975-93.1
1977----------------------------------------------------119.9
Current
dollars
1972 dollars
7
65.1
52.3
57.0
73.8
79.8
76.3
77.7
164.1
72.6
87.2
129.8
64. 3
74.1
79.6
87.8
99. 3
104.0
96.5
.100.0
89.6
70.2
75.6
87.2
87.1
63.8
73.2
89.6
91.8
The market is also reflecting a sharp rise in the effective corporate
tax rate, defined as taxes paid divided by economic profits. Two tax
rate series are presented. One is based on economic profits, as described above. The other is based on a profit series with one further
adjustment. The capital consumption allowance adjustment estimated
by the BEA appears to many observers to be too small. Recently,
the SEC was empowered to require large corporations to file a special
report on the cost of replacing their existing equipment. The results
of the survey suggest that the BEA allowance may be only half the
proper amount. Profits in the second series have been adjusted accordingly, by doubling the capital consumption allowance adjustment.
Either way one looks at the depreciation allowance, one sees a
sharp rise in the effective tax rate on pre-tax economic profits. The
rate increased from roughly 40 cents on each dollar, after the tax cuts
of 1962 and 1964, to roughly 50 or 60 cents by 1977. These are increases
of 25 to 50 percent over the 1965 rate.
The stock market is reflecting real factors and will continue to be
depressed as long as real economic profits are expected to remain at
very low levels. The expected increase in energy taxes, social security
100
TABLE 111-3.-EFFECTIVE TAX RATESON U.S.CORPORATIONS BY FISCAL YEAR L-FEDERAL, STATE, AND LOCAL
Tax collections (percent)
NIPA
profits'
1960--------------------------------------1961
-53.1
19621963-42.7
-41.2
1964
1965
-40.4
1966
-40.9
1967
-46.8
1968 -39.4------------1969
-48.4
19701971
-44.9
1972-46.3
1973
1974--------------------------------------1975-64.7
1976-42.6
1977
-50.8
95
44.1
52.6
45.4
52.2
Adjusted
economic
profits 3
52.4
55.8
44.5
41.5
39.6
38.5
39.0
44.6
37.6
46.3
50.7
44.3
45.6
44.252.0
72.5
48.7
58.8
I Courtesy of House Republican Research Committee Economic Task Force.
2 NIPA profits are pretax economic profits-national income and products accounts domestic corporate profits after
inventory valuation and capital consumption allowance adjustments.
'Adjusted economic profits equal NIPA profits less an adjustment to the capital consumption allowance adjustment
implied by the new SECreplacement cost data. The added annual "adjustment" equals 100percent of the old adjustment
taxes, and underdepreciation over the next few years are sufficient to
explain the market's continued pessimism.
Minimizing the Damage
The best way to end the damage which inflation is doing to the
economy is to move toward price stability. This will require a gradual
reduction in the rate of growth of the monetary aggregates over many
years.
In the meantime, other steps should be taken. The Congress should
reduce marginal personal income tax rates and should examine the tax
code annually to make sure that increases in nominal income do not
expose taxpayers to increasing marginal tax rates in the future. On the
corporate side, replacement cost depreciation should be considered, to
allow firms to set aside sufficient funds to maintain and modernize our
stock of productive capital. These two steps would go a long way
toward guaranteeing rapid increases in jobs and after-tax wages.
IV. MONETARY POLICY: DOMESTIC AND
INTERNATIONAL
Great concern has been expressed in many quarters that monetary
policy has not been easy enough in recent months to produce rapid
economic growth. This concern has intensified since the beginning of
the year, when the Federal Reserve moved to strengthen the dollar in
relation to foreign currencies.
The Minority feels that this concern is unwarranted. Indeed, rising
inflation at home and reduced demand for the dollar overseas indicate
that the dollar is, if anything, in excess supply. The recent very modest
increases in interest rates are clearly signs that the public expects a
rise in the rate of inflation. The increases in interest rates are due to a
rise in the inflation premium, not to an incipient credit crunch.
RECENT HISTORY
Durng 1977, Ml (the narrowly-defined money stock consisting of
currency plus demand deposits) grew at a rate of nearly 71/2 percent.
This rate was even higher, in excess of 81/2 percent, for the first three
quarters of the year. In the last 13 weeks. Ml has grown at a 4 percent
annual rate. Judging from other figures, this lower rate may be an
aberration.
Also during 1977, M2 (a broader money measure made up of Ml
plus time deposits at commercial banks) grew 9 percent. Since the
turn of the year, M2 has grown at an annual rate of about 61/2 percent.
Historically, M2 has moved more closely with GNP than has Ml.
While Ml and M2 rose rapidly in 1977, they have occasionally
grown faster, though not often. At the same time, the monetary base
(bank reserves and currency, the base on which bank credit, Ml, and
M2 are built) was setting growth records. It rose about 9 percent in
1977, and its major component, Federal Reserve credit, rose at least
10 percent on the year, and at a 12 percent rate in the last half. Since
the turn of the year, the monetary base has grown at a 15 percent annual rate. This too is an aberration due to a short-term surge in reserves
in January, but it does indicate that no great tightening of monetary
policy has occurred.
In fact, continued expansion of the monetary base and Federal Reserve credit at 1977 rates would be contrary to the Fed's announced
intention to reduce the rate of growth of the monetary aggregates in
order to curb the rate of inflation and to halt the decline of the dollar
on the foreign exchange markets.
There are other reasons for believing that the monetary aggregates
are growing rapidly enough to sustain the economic recovery. Liquidity can be assured through a variety of means:
(101)
102
(1) Velocity of circulation may rise. It has proven to be flexible
in the past, usually rising with inflation and interest rates as
people try to shift out of money into interest bearing assets.
(2) Many foreign governments, especially those with heavy oil
revenues, continue to be large buyers of U.S. government securities, recycling petrodollars and shifting investment money to the
U.S., the most rapidly growing major Western nation. Admittedly, how much longer these countries will hold American securities is problematical if the dollar continues to decline.
(3) Many private holders of dollars have reduced their demand
for the dollar as it has declined in value. Multinational firms and
foreigners can transact business in a wide variety of currencies.
When the dollar appears unsettled, they can and do go elsewhere.
This frees large sums for use in the U.S. money markets.
MONEY AND INVESTMENT
The Administration hopes that new management at the Federal
Reserve will produce an easier monetary policy. It hopes to lower shortterm interest rates to stimulate investment. If recent history is a guide,
this policy will not work.
Nominal short-term interest rates have little to do with real longterm investment in plant and equipment. Real long-term interest rates
are the rates relevant to investment decisions.
Easy money will generate inflationary fears which will raise nominal short-term interest rates. Eventually, nominal long-term rates
will rise as well. The effect on real long-term interest rates (nominal
interest rates minus the expected inflation) is unclear.
Inflation increases uncertainty and raises the tax burden on individuals and businesses. It understates depreciation and reduces the real
return on all forms of business individuals into higher tax brackets,
reducing their after-tax return on stocks and bonds. Whatever all this
means for real interest rates is immaterial, since it also implies less saving and less investment regardless.
In testimony before this Committee, Joseph Kasputys of Data Resources, Inc., presented DRI's comparison of two methods of inducing
a given amount of investment. One method was to reduce the corporate
tax rate or alter the investment tax credit. The other was to increase
the money supply in an effort to reduce interest rates.
The tax reduction method resulted in a drop in the rate of inflation
by nearly 1 percent over a five year period, compared to the baseline
forecast. The easy money method raised the rate of inflation by between
1 and 2 percent.
Clearly, tax policy is a far less inflationary way to increase investment than is monetary policy, even assuming an easy money policy
could work. In fact, a moderate monetary policy may be used to curb
inflation (a move which would also help investment) while a properly designed tax policy could simultaneously increase investment and
real growth.
INTERNATIONAL
CONSIDERATIONS
The Administration's faith in an easy money policy may be misplaced for still another reason. Such a policy would conflict with
103
the Administration's international economic goals of a
strong dollar,
stable exchange markets, and a coordinated
economic
recovery of
allied and Third World countries.
Easy money would produce a declining and erratic dollar.
clining and erratic dollar would wreak havoc with all nations' A deexports,
imports, and employment in the short run, and with the
U.S.
rates of
inflation in both the short term and long term. A falling dollar
hurts
U.S. consumers and does not produce jobs for
American workers.
A falling dollar does threaten worldwide
trade disruption and
recession.
The Administration has decided not to intervene
to support the
value of the dollar in relationship to other
currencies.
The President
has recently restated the position that the U.S.
foreign exchange markets to offset disorderly will intervene in the
to affect basic trends. The success or failure of conditions, but not
upon a clear understanding of the processes at work.this policy depends
Many observers apparently believe that the Federal
Reserve has
raised interest rates to support the dollar -by
attracting
an
inflow of
investment funds. These observers fret about the
impact of the higher
interest rates on the domestic economy. Other observers
feel that the
Federal Reserve can buy dollars on the foreign
support the exchange rate, while creating dollarsexchange markets to
down short-term interest rates. Both views are off in the U.S. to hold
Interest rates have not risen by more than the mark.
inflation. This has produced no added drawingexpected increases in
power for foreign
funds. Strengthening the dollar is done by restricting
the supply of
dollars on the world market, not by raising
interest
rates.
The market for dollars is worldwide. The world
supply of dollars
and the world demand for dollars determine
the
value
of the dollar
in terms of other currencies. All transactions impact
on the exchange
rates-trade and capital flows affecting demand,
and other currencies affecting relative supplies. creation of dollars
There is no rigid
segmentation of the market into domestic and
foreign
Two types of operations affecting the world supply sectors.
of dollars are
carried out by the Federal Reserve Bank
of
New
York.
Through the
Foreign Exchange Desk, the Bank can engage
with foreign central banks, acquiring foreign in swap arrangements
currency with which
to buy dollars on the foreign exchange markets.
reduce the world supply of dollars and support These purchases
the dollar's value.
Through the Open Market Desk, the Bank increases
or decreases the
quantity of dollars by buying or selling
Treasury
securities.
This is
how monetary policy is normally conducted.
A dollar is a dollar is a dollar. It would make
no sense for the Bank
to be reducing the world supply of dollars through
change Desk while increasing the supply through the Foreign Exthe Open Market
Desk. Consequently, the two Desks are under
one management. Their
activities are coordinated. The Foreign Exchange
Desk, dealing in
terms of a few hundred million dollars, hasbeen
used on a day-to-day
basis to smooth out disorderly conditions in
the exchange markets.
However, such sums are dwarfed by the billions
of dollars which are
created or destroyed each week at the Open Market
Desk. Only as the
Fed moves gradually to slow the growth of the
monetary aggregates
through its open market operations will the
basic trend in the value
of the dollar be altered.
104
EXCHANGE RATE POLICY
International economic policy, and especially exchange rate policy,
are intimately connected with monetary policy.
In 1977, the U.S. had a trade deficit on the order of $30 billion.
However, there is more to the balance of payments than the trade
account. The trade deficit was partially ofset by a surplus in services
of approximately $9 billion. The remaining current account deficit
was covered by earnings on foreign assets and by capital inflows (borrowing or sale of equities) from abroad. Stocks, bonds, and government securities are, in a sense, our biggest "export."
The dollar has not fallen simply because of the U.S. trade deficit.
The U.S. had a trade deficit every year from 1776 to 1914. However,
because this was a rapidly growing country with great investment
opportunities, capital inflows covered these deficits. Foreign lenders
kinew that their investment would be backed by increased real output,
and they had no hesitation in buying American bonds.
Over the past 10 years, excessive dollar creation has generated inflation, lower real profits, higher taxation, and higher real costs of
production in the U.S. The reduced after-tax returns have led to savings and investment rates that are the lowest in the developed world,
and our long-term growth prospects are poor. These facts and prospects are a direct threat to our ability to fund our trade deficit with
"exports" of commercial paper, bonds, and government securities.
The U.S. current account deficit is largely the result of the growth
of the U.S. economy at a time when other pations are in recession
or are growing only slowly. Many of our largest trading partners,
including Canada, Germany, Japan, Britain, France, and Italy, suffered falling real output in one or more quarters of 1977. Consequently,
our purchases of their products grew normally, while their purchases
of our exports lagged. As the world economy recovers, the U.S. deficit
will fall.
To use the current trade deficit as the primary reason for passage
of the Administration's energy proposals is faulty logic from two perspectives. First, only one-third of our increased import bill since 1975
is due to oil. There is an energy problem in our balance of payments,
but it is clearly not the only problem, and its resolution will not resolve
the trade deficit. Second, the heavy taxes proposed in the energy
plan will raise U.S. production costs, reducing our competitive position. Furthermore, the plan's emphasis on energy conservation rather
than production will result in more oil imports than strictly necessary.
Congress should not be pushed into hasty action on the energy program.
Over the last year, the dollar has slipped in value approximately
5 percent relative to other currencies, on a trade-weighted basis. This
drop has increased the rate of inflation in the U.S. Robert Solomon, a
recent witness before the Committee, has stated that the recent drop
in the dollar has already added about 1.2 percent to the U.S. price
level.
A falling dollar is far more inflationary than is commonly realized,
and far less likely to improve trade balance than is commonly supposed.
105
The devaluation theory which has been dominant since the 1930's
had no real test until the collapse of the Bretton Woods system of fixed
exchange rates in the currency disorders of the late 1960's. This theory
held that a devaluation would discourage imports by raising their
price and make exports relatively cheaper for foreigners to buy. If
domestic and foreign buyers reacted strongly enough to the price
changes, the trade balance would eventually improve.
The theory predicted a rise in prices generally limited to imports.
Thus, we see calculations that a 5 percent fall in the dollar will raise
prices on the 7 percent of our spending which goes for imports, with a
price level impact of $0.35 percent (035 x 0.07). Spillover effects on
other prices are assumed to be minor.
In fact, the situation is more complicated.
When the dollar declines, about 60 percent of any price adjustment
occurs in the U.S. and about 40 percent in the rest of the free world.
(The adjustment burden is distributed inversely with the sizes of the
economies involved. The U.S. has roughly 40 percent of free world
GNP. A very small country, with little impact on world prices, would
bear nearly the entire burden of adjustment.) The 60-40 ratio means
that a 5 percent decline in the dollar will cause world prices of traded
goods to rise about 3 percent more than normal in terms of dollars and
about 2 percent less than normal in terms of other currencies. These
changes will have spillover effects which will help to increase U.S.
prices generally by the same 3 percent over a two year period, while
helping to reduce general inflation in other countries by about 2
percent.
First, both U.S. import and export prices will tend to rise by about
3 percent in dollar terms to the new world price. Why would exporters
charge less than the going world price ? Then prices of close substitutes
for imports, and of products similar to exports, will also rise. For example, wheat bound for Boston and wheat bound for Bombay sell for
the same world price in Chicago. Domestic steel and auto prices will
firm in response to higher prices on imports. All tradeable commodities,
whether exported, imported, or produced and consumed domestically,
will trade at the world price.
These predictions are firmly grounded in the law of markets and in
historical observation. Efficient, centralized markets with modern
communications bring all world buyers and sellers into contact. Then
the law of one price dictates that identical products sell for identical
prices at any moment in time.
Once basic commodities and large numbers of manufactured goods
rise in price, cost of living allowances and wage negotiations bring
matching wage increases and extend the price increases into the service
sector. With raw materials and wages rising, costs catch up with prices,
and any initial stimulus to exports, or disincentive to imports, is
undone.
Most of a devaluation is uselessly spent in raising domestic prices
and costs, with little improvement in our competitive posture or trade
balance.
The price impact from the recent fall in the dollar is already well in
excess of the predictions of traditional theory. The price increases following the U.S. devaluations of the early 1970's also tend to support the
106
Mexican
modern view. Another recent case in point is the substantial
percent
32
a
by
year
a
within
devaluation, which was quickly followed
prices.
rise in Mexican
fundamental
Debasement of a nation's currency is not a cure for
neighbors'
their
at
themselves
enrich
cannot
policy errors. Nations
reduces
expense. A declining currency increases inflation, raises taxes,
internationeconomy
country's
a
weakens
and
saving and investment,
ally and domestically.
A drop in
Strengthening the economy requires another approach.
persubstantial
permit
would
GNP
of
percent
a
as
spending
Federal
drop
a
in
result
would
This
reduction.
tax
sonal, payroll, and business
the trade
in the real costs of production in the U.S. It wouldin help
econU.S.
the
confidence
restore
balance, increase our growth rate,
any
cover
to
bonds
our
sell
to
easier
it
make
and
dollar,
omy and the
residual deficit.
V. TAX POLICIES
EFFEcrs OF SOCIAL SECURrrY INCREASES ON TAX POLICY
The President has stated that his tax cut would offset the higher social security taxes and the effects of inflation on the progressive income
tax system. These two effects have a serious impact on the taxpayers of
this country.
The social security tax increases were proposed as a solution to the
financial instability of the social security system. The bill the President signed into law is, in essence, a "tax solution." This piece of legislation increases the tax burden on the public by almost one-quarter of a
trillion dollars by 1987.
The new social security legislation will increase both the tax rate and
the maximum wage base that can be taxed. The tax rate (to both employers and employees) increases from 5.85 percent to 7.15 percent by
1986. The tax rate is boosted dramatically in 1981 and 1985, which will
present the winners of the 1980 and 1984 national elections with grow-
ing taxpayer resentment.
Under the new legislation the wage base will increase very rapidly
by 1981. In 1977, the wage base was $16,500 and indexed by the rate of
wage increase. The new legislation will increase the wage base to $17,700 this year, $22,900 next year, $25,900 in 1980, and $29,700 in 1981.
After 1981 the wage base will then again be indexed by the wage rate.
The rate and base increases will greatly increase the tax take from social security participants. Over the next 10 years, the new social security legislation will amount to approximately $227 billion in
increased taxes on payrolls.
The increase in social security taxes will have its largest effects on
taxpayers in the next three years because of the boost of the tax rate
by 0.8 percent (on 'both employer and employee) and the lifting of the
base by $13,200. And the brunt of the new Carter taxes fails in the
same old place-on the middle-income taxpayers. The President's plan
assures this heavy burden on the middle-income group by increasing
the maximum wage base to levels that are in the middle-income range.
Consequently, as the rate increases, the middle-income people will be
hit the hardest because theirs will be the highest salaries below the
maximum wage base. Conceivably, a social security tax of any level
could be acceptable, if presented as a purchase of a good: one's pension.
The more generous the pension, the larger the tax. However, the Social
Security System is more in the nature of a simple income transfer program; wage earners currently pay social security taxes for today's, not
tomorrow's, annuitants. Policy should therefore concentrate on how
this burden should most equitably be spread.
The Minority does not believe that the wage base should be increased to higher levels to redistribute the tax burden. The Minority
seeks to reduce the Carter tax burden for all taxpayers, not to increase
(107)
108
it for a few taxpayers. The Minority is particularly concerned with reducing that burden on the middle class because the new social security
taxes are especially harmful to them.
The following table shows how the middle class will be affected by
the new legislation signed into law by President Carter. It is safe to
assume that a social security taxable income of $13,000 would be in the
middle-income range. If we assume that the median wage will increase
by 8 percent per year between 1977 and 1981, we can determine the
effect on this middle-income group in the near future.
TABLE V-I
1978
1977
6.05
17,700
14,040
849
Tax rate -5.85
Wage ceiling -16,500
13,000 covered income-13,000
FICA tax/13,000 -760
1979
1980
6.13
12,900
15,163
929
6.13
25,900
16,376
1,003
1981
6.65
29, 700
17,686
1,176
Notice that the tax on this income level increases by 55 percent.
While this is bad enough, we must consider that the income range
of the middle class has a much higher limit than the $13,000 in covered
income. Most experts would include an income of $20,000 (in covered
income; in 1977 dollars) in the middle group. Because a portion of
their salary was exempt from social security taxes before the new
legislation, this middle-income level has even larger percentage increases in their tax.
Table V-2 shows that the social security tax increases by 88 percent
between 1977 and 1981 for an income of $20,000 indexed at an 8 percent annual wage increase. The new legislation is very harmful to
those middle-income individuals who had a portion of their income
exempt from OASDI taxes or those middle-income individuals who
through pay increases would have moved above the maximum wage
base. The latter would include a large number of the middle-income
group.
TABLE V-2
Rate -----------------Wageceiling -16,
$20,000
FICA taxi2,000 -965
1977
1978
1979
5.85
500
20,000
6.05
17,700
21,600
1,070
6.13
22,900
23,330
1,403
1980
6.13
25, 900
25, 194
1,544
1981
6.65
29, 700
27,209
1,809
The social security tax is shared equally by employer and employee.
Each group will seek to recoup their share of the $227 billion of their
wages or profits lost to these higher taxes in the next 10 years. The
employee will demand higher wages which will be paid by the employer partly out of higher prices. The employer will also have to
offset his higher labor costs with higher prices. While the tax reduction offered by the President (and still pending in Congress) will help
to ease the pressure on prices, by 1979 the pressure will increase as a
majority of the taxpayers will experience an increase in taxes.
The employment effects of the large increases in social security are
of major concern to the Minority members of the Joint Economic
Committee. As the social security tax that the employer must pay on
109
each employee increases, the employer will be less willing to keep
present employees or to hire additional workers. Also, as the employee's
social security tax increases, he will experience a drop in the reward
to work. Because the incentive to work has been reduced, the employee
may seek not to work at all and rely on government aid, or he may
seek compensation in the form of leisure (such as longer vacations).
These effects on inflation and unemployment caused by the social
security tax increases should not be taken lightly. The Committee has
heard testimony supporting this belief from a wide range of experts
both in and out of the Administration.
THE CARTER TAX PACKAGE
While the Carter tax plan offers a net aggregate tax reduction in
1979, there are serious deleterious effects on specific income groups.
In truth, the Carter tax plan is a tax increase for many persons
in our economy who are sacrificed to reduce the taxes of other taxpayers. It is structured around the erroneous belief that to provide
tax relief for some Americans and to pay for bloated government
expenditures, the Government must increase the tax burden on other
Americans. While it is important to identify those who will have
their taxes increased, the Minority feels that at this time any increases
in taxes for anyone in our society is wrong. In addition, it is an illfounded belief that increasing the taxes on the upper-income groups
will result in vast tax revenues that can then be ' returned" to lowerincome groups in the form of new government programs or tax reductions. The fact is there is just not that much money in the higher
income brackets because there are not that many people earning these
high incomes.
Size of the Package
Most economic forecasters have been warning for more than a year
that some form of additional economic stimulus will be needed if the
economy is to remain strong through 1980. Significant tax cuts are necessary if social security and inflation-induced tax increases are to be
offset and if the tax burden, as a percent of GNP, is to fall. The tax
cut must be larger still to offset the major energy taxes proposed by the
President and modified by the Congress become law.
Unfortunately, the Administration's tax package does not offset
the tax increase that will be occurring over the next several years.
The Administration promises that there will be further tax cuts several years down the road. Nonetheless, most individuals and businesses
face substantial tax increases by 1980. These tax realities outweigh
vague promises in the formation of consumer confidence and business
investment plans.
The accompanying table compares the impending social security,
inflation-induced, and energy tax increases with the net tax cuts in
the Carter tax package. Compared with fiscal year 1977 tax rates, the
President's package will increase taxes by $0.8 billion in 1979, $7.4
billion in 1980, $21.4 billion in 1981, $21.6 billion in 1982, and $18.4
billion in 1983.
The size of the Carter tax package does not appear to be adequate
to keep the economy moving. This is a serious problem. The economic
110
TABLE V-3.-TAX CHANGES '
[in billions of dollars]
Fiscal year-
Pending tax increases:
-9.
Social security
Inflation 3_________________________________
Energy taxes 4-2.9
1979 2
1980
1981
1982
1983
Total
5
13.4
12.7
9.0
12.3
24.2
10.4
15.4
32.6
12.1
7.7
35.3
13.8
4.2
114.3
58.7
42. 5
34.0
50.0
52.4
53.3
215. 5
Carter tax package:
Tax cuts -30.4
Tax increases -5.3
37.1
10.4
41.9
13.2
46.4
15.6
52.4
17.5
208.2
62.0
Total -25.0
26.6
28.6
30.8
34.9
145.9
34.0
26.6
50.0
28.6
52.4
30.8
53.3
34.9
7.4
21.4
21.6
18.4
Total -25.8
Pending increases minus Carter net tax cuts:
Tax increase -25.8
Tax cut -25.0
Total tax increase -.
8
I Prepared by the staff of the Joint Committee on Taxation.
Includes fiscal 1978 increase of $7,200,000,000 and fiscal 1979impact of $18,600,000,000.
3 Estimate based on 5- to 6-percent inflation rate.
4 Based on energy tax bill passed by House.
2
indicator which has historically given the longest warning time of
approaching recession is formed by dividing the BEA index of coincident indicators by the index of lagging indicators. That ratio has
turned down. It peaked in April of 1977. Many observers believe that
a recession, or at least a serious reduction in economic growth, is
likely by mid-1979. The economy cannot wait until 1980 for a second
tax bill to remedy the shortcomings of the first.
The President has stated that the Federal Government must reduce
the size of its tax take, as a percent of the gross national product. We
agree with that view.
Shape of the Package
The size of the Carter tax package is merely inadequate. The shape
of the package is actually harmful.
Across tax brackets, the package discriminates against middleincome taxpayers and especially those covered by social security.
Within tax brackets, it discriminates against taxpayers with large
families, households with two workers, workers dependent on overtime to make ends meet, and taxpayers in the middle or top portions
of many of the brackets.
Average Tax Burdens
Treasury Secretary Blumenthal told the Committee that all but
a handful of taxpayers would benefit from the Carter tax package.
Unfortunately, this is true only if the analysis is restricted to the
income tax. Social security tax increases will completely offset the
benefits from the income tax cuts for most workers with income above
$25,000 by the end of 1978 and above $20,000 by 1979. Even more amazing, when the effect of inflation on the tax rates over the next two years
is added in, we find that families earning only $17,000 in 1979 will be
paying a higher real tax than they do today.
[JOINT COMMITTEE PRINT]
ERRATUM
The following table, which appears in Chapter V of the AMinoritv
Views of the 1978 Joint Economic Committee Report, is amended
to present the cumulative impact of inflation on tax rates from the
base year instead of the year-to-year increments incorrectly reported
in the original table. This change affects lines labeled "Inflation",
the first "Total", and "Total tax increase".
TABLE V-3.-TAX CHANGESI
lIn billions~of dollarsl
Fiscal year-
Pending tax increases:
Social security
Inflation
Energy taxes '
1980
1981
1982
1983
9.5
13.4
2.9
12.7
22.4
12.3
24.2
32.8
15.4
32.6
44.9
7.7
35.3
58.7
4.2
114.3
172.2
42.5
47.4
72.4
85. 2
98.2
329.0
37.1
10.4
41.9
13.2
46.4
15.6
52.4
17.5
208.2
62.0
26.6
28.6
30.8
34.9
145.9
47.4
26.6
72.4
28.6
85 2
30.8
98.2
34.9
.
20.8
43.8
54.4
63.3
.
Total-25.8
Carter tax package:
Tax cuts
Tax increases
Total
19792
30.4
5.3
Total -25.0
Pending increases minus Carter net tax cuts:
Tax increase -25.8
Tax cut -25.0
Total tax increase
.8
' Prepared by the staff of the Joint Committee on Taxation.
aIncludes fiscal 1978increase of $7,2008000,000 and fiscal 1979impact of $18,600,000,000.
3Estimate based on 5to 6 percent inflation rate.
4 Based on energy tax bill passed by House.
25-657-78
0
TABLE V-4.-EFFECT OF INCOME AND FICA TAX CHANGES ON EFFECTIVE TAX RATES,1977 LAW TO PROPOSED
1979 LAW (4-PERSON FAMILY, I-EARNER)
[Money amounts in dollars]
1977 taxes
1979 taxes
X
Com-
1979 income level
$5,000--Calculate
$10,000 ------------------$12,000 ------------------$15,000 ------------------$17,000-15,----------------$20,000 ------------------$25,000 ------------------$30,000 ------------------$40,000--------------------
Equivalent
1979incomelevel
Income
1977Inome
I tax 3
4,440
8,800
10, 656
13,320
096
17,759
22, 199
26, 639
35, 519
-356
259
567
1,070
1,345
1,788
2,603
3,503
5,606
FICA
tax 4
260
519
623
779
883
965
965
965
965
bined
effective
Total tax rate
tax (percent)
-96
778
1,190
1,849
2,228
2,753
3,568
4,468
6,571
law in effect Dec. 31, 1977.
Deflated by expected increase in CPI from 1979 levels shown in col. 1.
Assumes itemized deductions equal to 23 percent of gross Income In1977and 20 percent of gross
income under the proposed 1979 law.
' Calculated unoder
1977 wage base ($16, 500) and tax rate (5.85 percent). Employee share only.
ITax
2
-2.16
8.76
11.17
13.88
14.75
15.50
16.07
16.77
18.50
1979
income
ncome
tax 3
FICA
tax 5
5,000
10,000
12,000
15,000
17 0
20, 000
25,000
30,000
40,000
-300
134
502
1,072
,430
1,910
2,830
3,910
6,630
306
613
736
920
1,02
1,226
1,404
1,404
1,404
Combineo Combined tax
effective liabil It with
Total tax rate 1977effective
tax (percent)
tax rate
6
747
1,238
1,992
2 7
3,136
4,234
5,314
8,034
0.12
7.47
10.31
13.28
4 42,
15.68
16.94
17.71
20.08
-108
876
1340
2,082
509
3,100
4,018
5,032
7,400
~ ~~~~~~~~~~~~~~Cha
is tax
Amount
p114
-129
-102
-90
-37
36
216
282
634
Effective
lax rate
(percent)
2.289
-1. 29
-.85
-. 60
-- 20
.18
.86
.94
1.59
a Calculated under 1979 wge bane($22,900) and tax rate (6.13 percent). Employee share only.
5 Under the adminintrationo, welfare proposal, taxpayers in thio income class will have a net tax
reduction from the liberalized earned income credit.
Source: Office of the Secretary of the Treasury. Office of Tax Analysis.
i.
112
Median family income in 1978 is estimated to be between $15,000 and
$16,000 (the last precise figures available from the Census Bureau are
for 1976). By 1979, median income will be somewhere between $16,500 and $18,000. This means that by 1979, the majority of American
families will be paying a higher percent of their income in Federal
taxes than they do today.
The picture is even worse if we look only at taxpaying families.
People in roughly the bottom fifth of the income distribution pay no
income tax. The median income of taxpaying families is about $3,000
higher than median family income. Thus, the majority of taxpaying
families will earn more than $18,000 or $19,000 in 1978 and more than
$19,500 or $21,000 in 1979.
Well over half of all taxpaying families will experience a real increase in their tax burdens by 1979, even with the Carter tax package.
The exceptions (allowing some leeway for differences in family size)
will be those approximately $14,000 to $15,000 (less if single) and
those not subject to social security taxes.
Thus, it is apparent that the Carter tax package fails dramatically
when it comes to providing tax relief for middle-income families,
especially those who pay social security taxes.
Tax Rates on FutureIncome
Whatever one thinks of the desirability of greater income redistribution, the move to a more steeply progressive tax schedule poses certain problems. It increases the rate at which any given level of inflation pushes people into higher tax brackets. In fact, with many
people being dropped from the tax rolls, and with government spending still growing, many taxpayers must, of necessity, be pushed into
higher brackets to pay the bill. While the rates in each tax bracket will
be reduced under the President's proposal, inflation will soon move
millions of taxpayers into higher brackets and higher tax rates than
they have ever paid before.
Thus, while it may appear that the reduction in marginal tax rates
in each bracket by 1 to 4 points proposed by the Administration will
raise the after-tax reward to greater work effort and saving by a substantial amount, inflation, plus the rise in progressivity in the tax
plan, will work to offset this effect.
Progressivity is increased by the proposed switch from the $750
personal exemption to a $240 credit. While the $240 credit would lower
the tax burden for most taxpayers below the 32 percent bracket, it
would also eliminate the $750 deduction from taxable income. In many
cases, this would move families into higher tax brackets.
For example, elimination of $3,000 in deductions for a family of
four which used to have $2,500 in taxable income, would raise that
family's taxable income to $5,500. The $2,500 in taxable income is now
taxed at marginal rates of 16 percent. The $5,500 taxable income, now
taxed at a 19-percent marginal rate, will only be taxed at an 18-percent marginal rate under the President's plan. Nonetheless, 18 percent
is higher than the original 16 percent. For this family 's marginal tax
rate, the move to a higher tax bracket more than offsets the proposed
rate reduction in that bracket. Their average tax rate and total tax
TABLE V-5.-MARGINAL TAX RATES, JOINT RETURNS, AFTER RATE REDUCTION AND CHANGEOVER TO $240 CREDIT
Family of 2
Marginal rate
Current taxable income (')
S0
to $500
:::::::::
$S00to $1,000
$1,000 to $2,000-- - - - - -- - - - - S2,000 to S3,000 --- -----------------$3,000 to $4,000
$4,000 to $8000
$8,000 to $5100O
$12 000 to $16,000
$16,000 to $20,000
$20,000 to $24,000
$24,000 to $28,000
$28,000 to $32,000
$32,000 to $36,000
$36,000 to $40,000
$40,000 to $44,000
$44,000 to $48,000
$48,000 to $52,000
$52,000 to $54,000
$54,000 to $62,000
$62,000 to $64,000
$64,000 to $76,000
$76,000 to $88,000
$88,000 to $90,000
$90,000 to $100,000-$100,000 to $110,000
$110,000 to $120,000
$120,000 to $130,000
$130,000 to $140,000
$140,000 to $150,000
$150,000 to $160,000
$160,000 to $175,000
$175,000 to $180,000
$180,000 to $200,000
$200,000 and over.
Presentlaw Tax proposal
14
14
15
16
17
19
22
25
28
32
36
39
42
45
48
50
50
53
53
53
55
58
60
60
62
62
64
64
66
66
68
68
69
70
12
12
14
16
17
18
19
20
23
27
32
36
39
42
44
48
48
51
51
51
54
57
57
60
60
62
62
64
64
65
65
65
66
68
Taxable income after loss of
$1,500 exemption
$1,500 to $2,000
$2,000 to $2,500
$2,500 to $3,500
-16/17
$3,500 to $4,500--------------$4,500 to $5,500 -:-::::-- -'$5,500 to $9,500$9,500 to $13,500
-19/20
$13,500 to $17,500
-20/23
$17,500 to $21,500
-23/27
$21,500 to $25,500
-27/32
$25,000 to $29,500 ------------$29,500 to $33,500-$33,500 to $37,500-------------$37,500 to $41,500
-42/44
$41,500 to $45,500
$45,500 to $49,500
-48
$49,500 to $53,500----------$53,500 to $55,500-------------$55,500 to $63,500
-51
$63,500 to $65,500$65,500 to $77,500-$77,500 to $89,500
-57
$89,500 to $91,500------------$91 500 to $101,500
$101500 to $111,500--60/-------$111,500 to $121,500------- -8----$121,500 to $131,500 --------$131,500 to $141,500 ----------$141,500 to $151,500
$151,500 to $161,500
-65
$161,500 to $176,500-----------$176,500 to $181,500 -----------$181,500 to $201,500-66/68
$201,500 andover
-68
I The zero bracket in not shown in this table. To include the zero bracket, increase all taxable
2'Tbe $2.40
credit eliminates tax for retarns with total taxable income falling in thin bracket.
Incomes sbown by $3,200.
Family of 4
Marginal
rate
2
14
16
17/18
3-18
3
18/19
332/36
36/39
39/42
44/48
348/51
51
3
51/54
54/57
357/60
60
362
362
33--62/64
3 64
64/65
3
65/66
66
Taxable income after loss of
$3,000 exemption
$3,000 to $3,500
$3,500 to $4,000
$4,000 to $5,000
$5,000 tn $6,000 -------------21
$6,000 to $7,000 ---:-::- -2
$7,000 to $11,000
-3
$11,000 to $15,000 ---$15,000 to $19,000
-20/23
$19,000 to $23,000
-23/27
$23,000 to $27,000 $27,000 to $31,000 ------------$31,000 to $35,000
-$35,000 to $39,000 ------------$39,000 to $43,000
-42/44
$43,000 to $47,000$47,000 to $51,000
-48
$51,500 to $55,000
$55,000 to $57,000 -----------$57,000 to $65,000
$65,000 to $67,000
$67,000 to $79,000
$79,000 to $91,000
$91,000 to $93,000
$93,000 to $103,000
$103,000 to $113000$113,000 to $123,000 -------'---$123,000 to $133,000 $133,000 to $143,000
$143,000 to $153,000
-64/65
$153,000 to $163,000
-65
$163,000 to $178,000------------$178,000 to $183,000------------$183,000 to $203,000
-66/68
$203,000 and over
-68
Marginal
rate
2
2
17
17
18
8
3 18
18/19
19/20
27/32
32/36
36/39
39/42
3
40/48
3 48/51
51
51/54
54
* 54/57
357/60
3 60
3 60
360/62
362
62/64
64
65/66
66
3 Brackets in which many taxpayers could experience either no reduction, or an increase, in marginal rates.
I'
CAD
114
will be lowered by the switch to the credit. But any additional earnings acquired by working overtime, or having both spouses work, will
be taxed more heavily at the margin.
For as many as one-half of all taxable joint returns, the switch
to the credit will cause a rise in taxable income sufficient to push the
family into a higher tax bracket. In perhaps half of these cases, onequarter of the total, the new tax rate in the new bracket will be as
high or higher than the old tax rate in the old bracket. This effect is
less pronounced for single taxpayers, and more pronounced for larger
families than for smaller families.
The Administration could have avoided most of this mess, while
still helping lower-income taxpayers, if it had kep the exemptions
while raising the minimum value of the general tax credit by an appropriate amount. If it had, the incentive effects of reduced marginal
tax rates would not have been lost in such a peculiar fashion for so
many taxpayers.
It is particularly unfortunate that the failure to reduce marginal
tax rates begins to be especially pronounced in the 32 to 42 percent
tax bracket, exactly the region in which people start to profit by
switching into tax shelters. To remedy the problem, the Minority
recommends that, if the $240 credit is adopted, families be allowed the
option of retaining the current $750 exemption or switching to the
Credit.
Business Tax Changes
The Administration has proposed net tax cuts for business valued at
$5.7 billion in 1979, $7.2 billion in 1980, and $6.7 billion in 1981. These
involve a reduction of 4 points in the corporate tax rate, and an expansion of the 10 percent investment tax credit (now limited to equipment) to cover structures and to offset a larger share of taxes. The
reductions will be partly offset by a reduction in DISC export subsidies, elimination of deferral of taxes on foreign source income, reduced business entertainment deductions, elimination of the minimum
tax deduction for ordinary taxes paid, and other tax reforms.
Unfortunately, the tax cuts being promised are more than offset by
increases in social security taxes and proposed energy taxes. Business
can expect an additional burden of more than $6 billion in 1979, $20
billion in 1980, and $27 billion in 1981 in these new taxes.
Thus, business is facing net tax increases of a few hundred million
in 1979, $13 billion in 1980, and $20 billion in 1981. This comes on top
of the severe erosion of the value of depreciation allowances by inflation described above.
Business tax relief should be larger than that proposed by the Administration. Replacement cost depreciation and deeper corporate tax
rate reduction would be most helpful in spurring producivity, reducing unemployment, and raising wages.
Investment Tax Credit
The extension of the investment tax credit to structures, and to
offset larger percentages of profits, is possibly an inefficient use of tax
reduction dollars, compared to deeper cuts in the corporate tax rate.
The investment tax credit as a tool for promoting growth is viewed
with suspicion by some economists. The credit is not a reduction in
115
marginal taxes on production and does not act directly to stimulate
output. It is equivalent to a lump sum payment to the firm for employing a particular type of input.
Milton Friedman has pointed out that the quantity of investment
depends on the amount of investment funding available. The ITC does
little to increase national savings. Thus, the primary effect may well
be a shift of investment from ineligible to eligible equipment, from
structures, inventory, and added manpower training to new machinery.
Norman Ture has compared the ITC with corporate tax rate reduction and finds the reduction in the marginal tax rates to be a far more
effective stimulus to output and job creation.
Chase Econometrics reaches similar conclusions. The ITC is of little effect at low rates of capacity utilization, while a reduced corporate tax rate raises the rate of return to production at all levels of
output. In addition, businesses surveyed to Chase appeared to view
the credit as too changeable to be relied upon in investment planning.
Furthermore, urban development experts are concerned that the
extension of the ITC to structures will make it more attractive for
firms to build from scratch in the suburbs rather than remodel older
buildings in depressed urban areas.
Deferralof Taxe8 on Foreign Income
The proposal to eliminate the deferral of taxes on foreign source
income is ill advised. Foreign subsidiaries of American firms are an
important source of export orders. It is unwise to put these firms at a
competitive disadvantage overseas.
Furthermore, the Treasury may end up losing money on this reform. If U.S. subsidiaries repatriate foreign earnings, they will face
higher foreign taxes on remitted dividends. This will increase amounts
claimed under the foreign tax credits. Alternatively, if U.S. firms try
to pay the U.S. taxes out of domestic income, they will have less
money available for domestic job formation.
Alternative Tax on Capital Gains and Elimination of Deductions
for Regular Taxe8
Current law allows a deduction from preference income subject to
the minimum tax of an amount equal to regular taxes paid. The Administration proposes to end this deduction, as well as the alternative
tax on capital gains. The chief impact will be to raise further the tax
buredon on capital gains, which are a large part of preference income.
This can only serve to reduce economic growth.
Capital gains are already overtaxed. They
not ordinary income,
and we should not be trying to tax them as ifare
they were.
Capital gains occur when the price of an earning asset rises. The
price increase is generally caused by a perceived increase in the
future earnings of the asset. Those future earnings will be taxed when
they occur. To tax the rise in the asset's value as well as the future
earnings is to double tax those earnings. For this reason, no major
nation treats capital gains as ordinary income.
Any move to increase taxes on capital gains will worsen the existing double taxation of saving, as compared with consumption spending. Income is taxed as it is earned. It may be spent or used to
23-928 0 - 78 - 8
116
purchase an income earning asset. Ideally, the tax system would be,
neutral between the choices. However, if income is spent, only a
small sales tax is levied. But if it is saved, a substantial share of the
earnings are taxed. If the saving is in the form of a fixed dollar
asset, such as a bond or savings account, inflation erodes the principle. If not, any gain in price, whether due to inflation or a real
increase in value, is taxed as a capital gain. The tax code discriminates
against growth activities in favor of consumption.
Budget Totals, Tares, and Rebates
The Administration has placed much emphasis on the small rise
in real terms of Federal outlays for 1979. The real increase is roughly
2 percent. Unfortunately, the full impact of the President's budget
proposals is not reflected in the budget totals.
One glaring example of the problem is the netting out of the energy
tax and rebate proposals before they appear in the budget totals.
The Administration proposes to increase taxes on energy production and use by some $8.3 billion. They also propose to provide
rebates and credits on the order of $7.2 billion. All that appears is a
net increase in receipts of $1.1 billion.
While it is technically correct to subtract the rebates and credits
from the receipts column, it is also true that the economic impact
of a tax and transfer program is the same whether the transfer is
effected by outlays or credits. The tax burden on producers of energy
and industries which use energy still results in less energy production
and higher product prices. The transfer of money to consumers of
heating oil or the buyers of coal-burning equipment does not undo
this impact, whether it is done by tax rebates or by Federal check.
Thus, the budget looks as if it has revenues of $439.6 billion and
outlays of $500.2 billion. In fact, the budget behaves as if it has
receipts of $446.8 billion and outlays of $507.4 billion.
When off-budget items and the true economic impact of the proposed energy tax credits are factored into the budget totals, we see
little evidence of a firm hand on expenditures, and no sign that the
much-heralded zero-based budgeting concept has produced any results
to date.
TAX PoLIcIEs AFFECTING SMALL BusiNESS
Small business provides employment for over half of the workers
in the private sector and contributes 43 percent of our GNP. Thus,
small business is an important contributor to the economy; if small
business is healthy, it is a major boon to the health of the economy
as a whole; if small business is sick, it is a drag on the economy.
The one overriding problem facing small business in the United
States is external financing, especially equity financing. This is a
problem for business as a whole but especially for small business.
The cost of floating securities is prohibitively higher for small firms
compared to large firms. Security offerings by small firms may be so
unusual as to require a separate market mechanism. Small businesses
are perceived as being, ipso facto, more risky than large businesses,
and therefore, risk premiums are higher. And finally, what external
financing is done is usually in the form of debt rather than equity-
117
for several years now the stock market has presented a nearly impossible environment for raising capital via new equity for small
businesses.
At the same time that external financing is a difficult problem for
small businesses, especially new companies. Internal funds from aftertax earnings are becoming more difficult to achieve due to increasingly
big bites of corporate income and other taxes. Our tax laws have
methodically eroded traditional incentives for investment. For example, the 1969 Tax Reform Act increased capital gains taxes from
25 percent to a 35 percent maximum. In addition, the minimum tax
provisions have raised the potential capital gains tax to 49 percent.
At the same time, the risk of any investment has been doubled by
permitting only a 50 percent write off of capital losses.
Increasing the differential between the tax rate on realized capital
gains (by eliminating or reducing the capital gains tax), and that
paid on ordinary income, would be one solution-this would encourage
companies to retain and reinvest their earnings in new plant and
equipment rather than paying them out in dividends.
But the best route to stimulate small business capital formation
and provide the necessary internal financing for other business purposes is substantial reduction in the corporate tax rate. Moreover,
the small business exemption should be raised from the current
$50,000 to a minimum of $150,000 of taxable income.
Although such a reduction would help all corporations, it especially
would help small companies that do not have large incomes and must
rely heavily on retained earnings.
Other tax provisions that would help small business are:
Adjust depreciation schedules to reflect replacement costs of
assets, with carry-forward provisions to aid firms that are not
yet profitable.
Defer capital gains taxes if the proceeds from an investment in
a qualified small business concern are reinvested within a limited
period of time in another small business concern.
The foregoing proposals would be helpful to small business and,
in turn, would contribute to the health of the whole economy. Cost
estimates for these proposals have not been developed, but they would
not cost as much as the Carter tax package, and they would be more
helpful in stimulating long-run economic growth and employment.
As discussed in a previous section, the Minority members of the Joint
Economic Committee also strongly recommend an across-the-board
reduction in the marginal rates of personal taxes, which also would
aid unincorporated small businessmen.
One serious problem facing all business, but which small business
may find especially hard to deal with, is the heavy cost of Federal
regulation. We note the study on Federal regulation being prepared
by the Senate Governmental Affairs Committee. We urge that particular consideration be given to the impact of regulation. We note
the study on Federal regulation being prepared by the Senate Governmental Affairs Committee. We urge that particular consideration
be given to the impact of regulation on small business, and to the
comparative disadvantage of small business in contesting unreasonable agency rulings.
VI. EMPLOYMENT
THE EMPLOYMENT SITUATION IN 1977
Over 1977, employment grew by 4.1 million, or 4.7 percent, marking the largest numerical 12-month gain ever reported in the postWorld War II period. Employment for adult men grew by 1.8
million, for adult women by 1.7 million, and for teenagers by nearly
650,000. Employment in blue-collar and service work grew relatively
more than other occupations.
Accompanying this substantial increase in employment was a correspondingly large increase in the civilian labor force, which ended
the year at 98.9 million persons. The 12-month rise was nearly 3
million. The labor force participation rate in December eased back
to 62.8 percent, just below the all-time high of 62.9 percent in
November.
Because of the large labor force growth, the numbers of unemployed dropped by only 1.1 million, and the unemployment rate was
6.4 percent, a decline of 1.4 percentage points from December a year
ago. Over the year, jobless rates dropped markedly for white men,
women, and teenagers, and black adult men, while no downtrend was
evident among black women and teenagers.
These statistics underscore some of the concerns expressed at the
White House Conference on Balanced National Growth and Economic
Development. Vernon Jordan of the National Urban League maintained that a large part of minority unemployment, especially for
minority youth, still is due to discrimination. Statistics show that even
with the same amount of education, blacks suffer disproportionately
higher unemployment rates than whites.
Another graphic illustration of the variance of employment opportunities for blacks is the situation in the Sunbelt regions. Although
many new industries, and consequently new jobs, have settled in those
areas, black unemployment remains very high in that region. This has
happened even though minorities represent a larger share of the
population. Unfortunately, they also constitute the isolated rural poor,
the least skilled, and the most poorly educated.
The evidence that minorities and youth have not participated as
freely as have other groups in the jobs created by the expansion of
the economy over the last several years does not come as any real
surprise. These are precisely the groups with characteristics that
make them harder and more costly to absorb into the ranks of the
employed workers. What does cause concern among black leadership
occurs in the discussion surrounding policies to achieve full
employment.
The first point of concern is that the full-employment-unemployment rate will be set so high that it will be virtually meaningless as an
(118)
119
appropriate goal. Some of these fears were sharpened by the Council
of
Economic Advisors' acceptance of the benchmark unemployment rate
at 4.9 percent in 1977 (compared with 4.0 percent in 1955) after adjustment in the age-sex composition of the labor force. There is no doubt
that a fixation upon one number can be misleading and result in misdirected policies.
What may be more important, however, is the possible relaxation
of public policy once a politically acceptable number is reached. For
example, once the unemployment rate reaches 5.0 percent, just how
much pressure will be put on government to achieve a lower rate,
particularly if meeting that goal might induce additional inflationary
pressure?
POLICIES FOR FULL EMPLOYMENT
While debate still rages about the specific target for the unemployment rate under conditions of full employment, agreement on the
necessity for a double-pronged attack to reach full employment has
gradually evolved. This involves: (1) A high enough rate of economic
growth to absorb the growing number of entrants in the labor force
and to reduce the present high number of unemployed, (2) structural
programs that target on groups with specific unemployment problems
such as minorities, youth, and older workers.
Although economic expansion is a crucial element in the movement
of disadvantaged groups in the labor force into jobs, the purpose of
this section on employment policies is to treat structural problems
exclusively. Suggestions on structural programs have come from witnesses before the Joint Economic Committee and from the White
House Conference on Balanced National Growth and Economic Development. One theme stressed repeatedly was that the structural
programs must involve a high degree of local initiative and authority. In addition, structural unemployment programs should be incorporated within other regional and urban strategies.
Another element was the involvement not only of large firms but
small businesses. The latter have many of the added job opportunities,
particularly in the fast expanding service sector. John Burns, from
the Committee on Economic Development, pointed out that half of
the jobs in this country are in firms with a hundred employees or less
and that three-quarters of the jobs are in firms with fewer than five
hundred employees.
Not much emphasis was placed on the development of new initiatives. It was more of a commitment to use tools already established
in a more flexible framework. A wider dissemination of information
about workable programs, a concerted effort to involve business leadership on local and national levels, and the use of intermediate organizations that would serve as liaisons between businesses and the disadvantaged were recommendations to better implement training and
education programs.
Beyond a grass roots approach, effective incentives for employers
to participate in these programs can be created by tax credits and
subsidies from the Federal Government. These incentives can suit
various alternative purposes:
120
(1) Tax credits to encourage business to locate in central cities.
In the Administration's tax program, the investment tax credit
is available both for the construction of new utility and industrial
structures and the rehabilitation of existing structures so the
proposal will have no anti-urban bias. If the investment tax
credit spurs rebuilding in central cities, jobs will flow to the areas
of concentrated high unemployment. It has been suggested that
the investment tax credit be channeled more narrowly by limiting it to areas with high unemployment rates. However, the more
restriction and consequently, more expensive paperwork, put on
the use of such a credit, the less businesses will be disposed to
take advantage of the credits.
(2) Employment tax credits. These have been directed to youth,
the hard-core unemployed, and minorities. An example is S. 2436,
proposed by Senator Javits, which provides a refundable tax
credit to business, equal to one-half of the increase in unemployment insurance wages over a base period. This credit is appplicable
to youth aged 16 to 19 who have been either unemployed 15 weeks
or longer or enrolled in a CETA employment or training prograi-m
for at least 15 weeks.
(3) Wage subsidies. One of the assumed effects of the increased minimum wage is that the marginal productivity of
many new entrants into the labor force, especially youth, does not
equal their marginal cost for businesses. A wage subsidy would
allow businesses to recoup part of the wages paid and, thus,
encourage employers to hire youth.
(4) We continue to believe that a viable system of local labormanagement-government committees as described in the section
on urban policy action can have a favorable impact on the amount
of structural unemployment.
Participants in JEC hearings and in the White House Conference
made it clear that a training element must be associated with all tax
incentive and subsidy programs or the employment gains would
prove illusory in the long run.
There is a brick-and-mortar policy aspect that national, State, and
local government bodies also must undertake. Businessmen pointed
out that while tax and subsidy incentives were very important, a
basic and suitable infrastructure had to be available to encourage the
relocation of business to a new area. The necessary infrastructure
would include a transportation network, adequate housing for workers, effective police, fire, and sanitation support, and effective insurance at reasonable rates.
VII. AGRICULTURE
Some of America's farmers are hurtihg. In fact, grain farmers and
farmers in several other sectors of agriculture are desperate. Livestock and poultry farmers, dairymen and fruit and vegetable farmers
had a pretty good year in 1977, but these bright spots in agriculture
do not offset the overall negative atmosphere in the farm sector.
Net farm income (including net inventory change) has dropped
from a peak of $33.3 billion in 1973 to $20.6 billion in 1977. Of course,
1973 was a good year for farmers and perhaps an unfair base year
comparisonl.But, even with that perspective, farmers are restless.
The squeeze comes in prices received by farmers for their products
versus the prices paid by farmers for costs of production and household operations. For example, the Prices Received index (1967 = 100)
rose sharply in 1973 and averaged 179 that year; it rose further to
192 in 1974. The Prices Paid index, on the other hand, averaged only
144 in 1973. Since then, the relative position of these indices has
fully reversed itself, with Prices Received dropping to 183 in 1977painand
Prices Paid rising very sharply to an index of 202 last year. In 1973,
the parity ratio, adjusted for government payments to farmers, stood
,at 94. By January 1978 it had dropped to 67, the lowest level in 45
years.
The problem is that commodity surpluses have depressed prices,
leaving many wheat and feedgrain farmers in financial difficulty. For
many, especially some new farmers, debt-to-equity ratios are reaching precarious levels, threatening both their financial stability and
the stability of those financing them.
The plight of farmers has brought forth many proposals for solving the problems-some good, some bad, some drastic. Some call for
making it illegal to sell any agricultural product below 100 percent
of the parity price. Others call for a return to high price supports,
set-asides, and the controls of the 1950's and 1960's.
In the interests of farmers, consumers, and taxpayers, we should
be careful to avoid policy mistakes like those made after World War
II. Farmers don't want the government again to become the dominant
force in the market. The policies and programs of the 1950's
primarily concerned with attempting to assure fixed returnswere
to
farmers, but they had the effect of insulating agriculture from the
need to adjust to changing conditions. This only delayed the time
when adjustments had to be made. One of the adjustments was that
thousands of small farmers went out of business.
Small bureaucratic errors in program formulation during that era
resulted in substantial costs to taxpayers and also damaged the Nation's pre-eminent position as the world's greatest agricultural
exporter.
(121)
122
Holding prices at levels that are inconsistent with the underlying
demand and supply situation creates excess capacity and requires
strict controls on the amount produced. This leads to all kinds of
mischief, loss of freedom, inefficiencies and frustrating farm policy
administration. Farmers should be free to control their own operations and permit market prices to play their traditional role in directing production and consumption.
Within this concept, there is a role-but not a dominant one-for
government. Government should be responsible for placing a floor
over the pit of disaster, but beyond this, government should devote
itself to improving the functioning of the marketplace. Examples of
useful government services are negotiation of sales abroad, market
supervision, supervision of grades and standards, outlook information, relatively low loan levels and target prices that would permit
prices to fluctuate freely most of the time, and overseas food aid, such
as Public Law 480.
Market-oriented agricultural policy would involve less government
involvement than we had in the 1950-70 period. But within that
market concept, there are specific things that can be done to bolster
farm incomes:
(1) Let farmers intelligently choose the proper level of output
of their products, in keeping with supply/demand conditions
and relatively free market prices.
(2) Develop and strengthen marketing organizations, structures, and programs for both domestic and foreign farm product
sales.
(3) Expand agricultural exports.
(4) Bolster agricultural credit programs to help deserving
farmers meet current financial crises.
(5) If we hope to help agriculture or any other sector of the
economy, we must control the overall rate of inflation.
In the following paragraphs we elaborate on some of these points:
LEGISLATIVE PROPOSAL IN KEEPING WITH THE FREE MARKET
CONCEPT
The current set-aside program is not working well because the incentives don't attract many farmers. On the other hand, increasing
the incentives too much would pose the danger of excessive government involvement in commodities. One possible compromise has been
proposed which deserves careful debate and consideration. Under this
proposal, S. 2481, the government would establish a flexible schedule
of prices and production set-asides that would permit an individual
farmer to choose his own target price, up to parity: however, the
higher he went up the price scale, the lower his permitted production
would be. Thus, farmers would have a flexible mechanism whereby
they could voluntarily control their production, and each individual
could reflect the target level and set-aside that was best for his farm
operation, based on the sliding scale.
Under this type of program a farmer could achieve parity without
corresponding price increases to the consumer and with only relatively
modest outlays-from the Federal Treasury.
123
ENHANCED MARKETING
Government can do more than it has been doing to aid farm marketing. We need better information, research, and regulatory services.
Through their organizations, farmers must develop the capacity to
understand the market system, to manage their production, and to
form associations to negotiate contracts with handlers in advance of
production.
Agricultural cooperatives can be a dynamic force in farm marketing in keeping with the preservation of our competitive enterprise
system. These cooperatives can provide business units large enough to
compete effectively with other enterprises. Government should not
intrude into the operation of cooperatives.
EXPAND COMMERCIAL EXPORT MARKETS
The expansion of commercial exports is the key hope for prosperity
in American agriculture.
U.S. agricultural exports have increased for seven consecutive years
now, reaching $24 billion in 1977. However, indications are that exports will trail oil slightly in 1978, to about $23 billion.
Our highly efficient agricultural system enables us to compete for
export markets in spite of the fact that many U.S. exports are subject to some form of restriction in foreign countries. But what we
have done so far is not good enough. We must do more to expand our
foreign markets. We slipped badly in grain exports last year (ending
June 30). While Canada, Australia, and Argentina increased their
wheat shipments by 3.7 million metric tons, U.S. wheat exports fell
by 5.8 million metric tons. Fortunately, 1978 looks much better, and
we should substantially regain the ground lost in 1977.
There is an urgent need to increase sharply our promotional efforts.
The $23.5 million that the U.S. will spend this year to promote some
$23 billion of exports is an investment of only one-tenth of 1 percent.
Our competitor, Australia, by contrast, will invest ten times as much
on a proportional basis. A recent House Agriculture Committee study
shows that U.S. export promotion expenditures totalled $16.8 million
in 1970. The $21.4 million spent in 1977 is only $13.6 million in 1970
dollars, a real dollar reduction in effort.
Actually, farmer organizations have been much more aggressive
in promoting and marketing American farm products than has been
the government itself. Export promotion by co-ops and organization
of "Unitrains" to carry carloads of a single commodity direct from
farm areas to export ports have helped keep American agriculture
moving abroad.
One thing we should not do is rely on a declining dollar to stimulate
export sales. As the dollar declines in value, it raises inflation and inflationary expectations in the United States. Energy prices, materials
prices, and wages build upward momentum as inflationary expectations continue even after the initial devaluation of the dollar, eliminating any benefit to farmers from the farm price increases a devaluation may bring. Therefore, in the long run there is no benefit to farm-
124
ers from a weaker dollar. What is needed is a direct drive on export
promotion by the government, without regard to the status of the
dollar on world markets. (See other observations on this point in the
section on International Considerations.)
Specifically, the Minority members of the JEC recommend the following six-point program to help sell American agricultural products
abroad:
(1) Liberalize restrictive trade barriers which limit the flow
of agricultural exports. Emphasize to importing countries that
we can guarantee them a dependable supply of farm commodities.
(2) Provide short- and intermediate-term government credit
(through the Commodity Credit Corporation) to other countries
for the purchase of U.S. farm products.'
(3) Expand Export-Import Bank financing of loans for farm
commodity exports commensurate with agriculture's share of
total U.S. exports.
(4) Implement existing legislation that permits foreign nations to purchase our grain and store it in the U.S. for subsequent
export.
(5) Push for steady and regular annual export sales over long
periods, rather than huge bulges from year to year.
(6) Expand our agricultural trade missions.
THE FARMERS' HEAVY COSTS
Rising farm costs in the face of falling prices received by farmers
are putting a squeeze on many otherwise sound farm operations. It
now costs more to process, transport, and distribute food each year
($58 billion) than to produce the food itself on the farm ($56 billion).
Food processors, marketing firms, and distributors-the middlemen in
the agribusiness world-receive a bigger share of the food dollar than
do the farmers. And while the farmer has recently been subject to
falling profits and profit margins, profits earned by middlemen continue their upward trend. Like the farmer, the middleman faces
higher costs for labor, energy, materials, construction, and government regulation. But unlike the farmer, the middleman is able to pass
along his higher costs to the consumer.
For example, in 1977 the averag'e family paid $41 more for its
domestically-produced food than it did in 1976. But $39 of that increase
went to the processors and other middlemen, not to the farmers.
Thus, the villain in the farm economy is inflation. Increases in the
minimum wage, huge jumps in 'social security taxes, and proposed
energy taxes will create even larger costs for farmers and middlemen
alike.
' Representative Clarence J. Brown recommends that we permit these CCC loans to
totalitarian economies such as the People's Republic of China the Soviet Union. and the
Eastern European nations. In addition, Mr. Brown recommends that we adjust our tariff
policy to provide most favored nation tariff status to certain countries, Including some
communist countries (although not such countries as Cuba, North Vietnam, or North
Korea until other disputes are settled). Such sales can help pave the path for peace by
increasing the dependence of these nations on America for their food. Moreover, these sales
agreements should comport with recommendation five (5) below,
125
It is better to raise parity for farmers by reducing prices paid by
farmers than to raise prices received by farmers.
In this regard the Minority emphasizes a major item in the cost of
food production and distribution, i.e., the cost of over-regulation by
government. The GAO has estimated that the annual tax cost of government regulation of the food industry is nearly $1 billion. At least
75 Federal agencies have the power to control rural Americans
in
some way or another. The need for "sunset" legislation in the agriculture and food industry is obvious.
The goal for U.S. farmers is rising real income. This can best be
accomplished in an atmosphere of freedom, which admittedly has its
fluctuations, but allows for real gains over the long run. Prices must
not be dictated by government. This stance, combined with aggressive
export promotion and government policies that attack, rather than
promote, inflation are the sure path to prosperity for American
agriculture.
VIII. URBAN POLICY'
The near bankruptcy of New York City in 1975 and the prospect
of another New York City crisis this year underscore an unfortuate
aspect of our political life-that the United States lacks a national
urban policy.
By virtually every statistical measure, America's larger-and
especially her older-cities display the symptoms of economic waste
and stagnation. As the following analysis shows, the problems of
urban areas have been building up for several decades. Furthermore,
the problems are not confined simply to the so-called northern tier
states but instead can be found in cities of all sizes in virtually every
part of the country.
Most of the problems of society, from ancient times on, have been
the problems of cities. "Congestion" is really urban congestion; air
and water pollution is usually urban pollution; crime rates in urban
areas are higher than in rural ones. Ironically, the rising expectations
of our affluent society have generated accelerating demands for services which many cities, given their relatively fixed tax base, cannot
afford. Cleaner air, better education, modern medical care, efficient
transportation systems, and an effective police department able to
cope with modern society's problems are typical of the expensive
demands which we place on governments; yet each of these examples
is also typical of the items with which mayors must deal in making up
their own budgets.
There was a time when economic trends could have kept up with
these aspirations of modern urban society more easily than they can
now. Urban development during the 19th century was relatively well
balanced. and our cities as a whole continued to grow vigorously into
the 1920's. During this time, growth in the cities was faster than
growth in the United States as a whole. This was the period when
our urban industrial centers attracted millions of foreign as well as
displaced domestic agricultural workers. The growth sectors in our
geography were urban, and not suburban.
According to Census Bureau figures, suburban growth had begun
to outpace growth in central city areas by 1930, and this trend has
accelerated up to the present day. The disparities became so great that
cities such as New York, Chicago, Philadelphia, Detroit, and Pittsburgh actually lost population during the 1950's. During the 1960's,
according to Census Bureau statistics, 70 major core cities lost population. A greater consequence, the urbanized areas of the country-the
New England and mid-east states-also lost in overall population
during this period.
A breakdown of these population movements also reveals a disturbing pattern of income levels and employment. Fragmentary surveys indicate that core city areas in all parts of the country today are
senators Hatch and McClure have additional views on urban problems..
(126)
127
showing fewer and fewer employment gains than suburban areas regardless of the overall level of economic activity at the national level.
Rates of unemployment are also higher in central city areas than in
the suburbs regardless of the city's size or its location; fragmentary
data suggest that non-white unemployment in core city areas is also
higher tMan non-white suburban unemployment. Finally, central city
residents have lower incomes than their suburban counter-parts and a
lower share of the higher-paying jobs.
As a result, many of the nation's cities, especially its central cities,
are caught in a mire of stagnation, dragged down by high tax rates
on an inadequate tax base on the one hand and by the lack of
competitive public facilities on the other. As we have noted, these
conditions are exacerbated by national population trends and by the
economic principles which favor growth outside the central city areas.
Policymakers have not ignored these problems. Thus, the 1930's
saw precedent-setting legislation in the field of housing, and the 1960's
witnessed the growth of Great Society programs. With an increased
emphasis on the fiscal problems of State and local governments per se,
the early 1970's have produced the general revenue sharing program,
counter-cyclical fiscal assistance, and several examples of grant-in-aid
consolidation. Increases in aid to State and local governments, in fact,
claimed approximately 40 percent of the Federal government's budget
increases in the decade 1965 to 1975.
Most of this assistance has been in the form of categorical grantin-aid programs, block grants, and revenue sharing (including countercyclical fiscal assistance). The common denominator to this
assistance -was money, whether in the form of grants, loans, or loan
guarantees. Relatively little consideration has been given to urban
policy per se.
We now see how shortsighted this approach has been; because in
fact we have had a Federal "urban policy," a de facto urban policy
which was well intentioned, but which has brought many central
cities to where they are today.
Most urban economists acknowledge that Federal policies are in
a large part responsible for the poor fiscal condition of many urban
governments. For example, a Rand Corporation study cites Federal
grants for sewage and water treatment facilities, the investment tax
credit, the national highway program, mass transit, airport subsidies,
pollution control, and the minimum wage as examples of Federal
policies which either have or may have affected central cities adveresly, in favor of suburbs. A recent study by the Urban Institute concludes that "directly or indirectly, provisions of the Federal tax code
have tilted the terms of economic competition in favor of suburban
development and development of new regions of the country, thereby
accelerating the abandonment of central city housing, contributing
to the deterioration of the existing urban capital infrastructure, and
precipitating the decline of the central city tax base."
Federal macroeconomic policies have a major impact on local economies as well. The statistics on urban employment and business
formation tend to correlate to the swings in the national economy.
Furthermore, we are concerned that a national economic policy which
fails to promote business confidence will also fail to promote'the
urban economy itself.
23-928
O - 78
-9
128
There have, of course, been some positive aspects of Federal urban
policy. Transfer payments-i.e., social security, unemployment compensation, and SSI payments-have prevented the urban poor from
becoming totally destitute. In some cases, the existence of a widespread system of transfer payment support has meant a significant
difference in the overall health of the urban core economy itself. For
example, a survey of personal income growth in five older cities between 1970 and 1975 shows that the largest gain in income during this
time came from increases in transfer payments than from private
sector wages, salaries, and other income. By extension, Federal aid
other than cash transfer payments-such as medicaid, housing subsidies, food stamps-has also helped urban areas generally as well as
the residents of these areas.
The thrust of recent Republican policy initiatives such as general
revenue sharing, countercyclical fiscal assistance, and the grant consolidation proposals 2 contained in President Nixon's special revenue
sharing program have all been directed at increasing the freedom of,
and reducing the red tape associated with, the administration of local
government. We still believe that greater progress in reducing the
amount of Federal involvement in local decisionmaking is necessary.
In reaching our recommendations on urban policy, we take note of
the following findings and conclusions:
(1) Federal urban policy is poorly coordinated and inadequately monitored. The fact that the Treasury Department
administers the New York City program and that the Commerce
Department has considerable urban development responsibilities
indicates that urban policymaking is fragmented at best. The
same fragmentation is reflected, though to a lesser degree, in the
congressional committee structure. Furthermore, we do not know
the effects on our urban areas of various Federal policies. The
congressional statement of policy for the Department of Housing
and Urban Development itself makes little distinction between
the smallest community and the largest city. The New York City
crisis is an example of a national issue which found the Federal
government bereft of appropriate policies; the Seasonal Loan
Program that was finally adopted has proved to be only a stopgap
measure.
(2) Confusion in urban policy often arises from the failure
to distinguish between income support programs and economic
development activities. In our view, urban policy should avoid
concentrating so much on income maintenance for urban populations as to become a means of perpetuating the urban poor.
(3) The urban economy is closely tied to that of the country
as a whole. A recent study indicates that core city job levels were
sustained during periods of rapid economic growth but fell during recessionary times. The same study indicates that industries
showing rapid national growth also show more growth in cities.
In other words, balanced and continued national economic growth
is the single most effective urban policy we have today.
(4) The most important single factor affecting urban development in the past 10 years has been population shifts from urban
2 Senator Javits states: "I support the efforts at grant consolidation, provided there
Is no tendency to reduce improperly the overall amount of support, under cover of grant
consolidation'.
129
to suburban areas and from the slower growing to the more
rapidly growing regions of the country. Commerce Department
statistics indicate a direct relationship between population
growth on the one hand and growth in real personal income on
the other. Those sections of the country with the slowest or with
negative population growth, have also experienced the slowest
rates of growth in per capita personal income. By contrast, the
so-called "sunbelt" states, including the Rocky Mountain states,
have had above average growth in both these categories.
The President's urban policy recommendations were being finalized
as these views went to press. However, certain aspects of these recommendations have been in the public domain for some months, and
the general outlines have been described by Administration spokesmen. In our view, the important aspects of a national urban policy
are as follows:
The most effective and fool-proof urban policy is a 8ustained level
of balanced economie growth. Therefore, our taco, Pscal, and monetary
policy recommendations also constitute the chief recommendation of
this urban. policy section. We know that urban areas respond un-
evenly to changes in economic growth, and do not conform precisely
to the ups and downs of the business cycle in the Nation at large.
In other words, there are leads and lags in the response of cities in
all parts of the country. However, a sustained period of growth helps
urban areas regardless of size or location. Several specific tax proposals in these views would also help serve the needs of urban development. In particular, we cite the tax proposals with regard to small
business and to reducing structural unemployment.
Urban areas are especially hard-hit by inflation. Therefore, an
effective anti-inflation policy is a necessary component of a national
urban policy. Because the urban tax base is relatively rigid and does
not respond to sudden changes in the economy, the inflationary shocks
of the past, decade have been especially severe. For example, the real
purchasing power of urban areas actually declined between 1970 and
1974, as fuel costs sky-rocketed and labor costs rose in an attempt by
municipal unions to keep pace with inflation. The additional fuel bill
for New York City alone in 1974 was estimated at $250 million.
Municipal employees' salaries constitute the largest single item
in any urban budget, and hence the biggest opportunity for savings.
Nevertheless, there are not sufficient incentives for urban governments
to resist unnecessarily large wage demands. We affirm that the appropriate salary level for municipal employees must be set through collective bargaining between the appropriate governmental body and
the municipal employee union. We also accept the principle that differences in salary levels across the country will arise because of many
factors, including the existence of different salary levels in private'
industry. However, we also believe that greater attention needs to be
paid to the productivity of municipal workers and to the economic
impact of the Federal and local regulations and programs which many
of them have been hired to enforcew
3 Senator Javits states: "While municipal employee salaries
may possibly constitute an
area for savings, they can be a shrinkage base where, as
the New York City, major lay-offs
have already been necessitated. Hence, other economies
must
be sought in those situations, as well as a buildup of municipal revenues themselves, preferably
through enhanced
business activity".
130
We believe that part of the problem of national urban policy is one
of organization. Our government is poorly organized for making
policy. Thus, we recommend that greather efforts be made to co-
ordinate the adminitration of Federal urban
policy.
4
We do not know adequately the effects on our cities of legislation
which may have been enacted in pursuance of widely differing policy goals. Therefore, we recommend that the President assess the
impact which those legislative programs with major urban effects
have made on our cities. We also recommend that major legislative
proposals by the Administration carry an urban impact statement so
that the unwanted effects of legislation can be avoided.
While we support the concept of welfare reform, we urge that welfare refrom per se not be used as a substitute for a bold and innovative
urban policy. Because welfare expenditures constitute a large percentage of urban budget, there will be a temptation to look upon welfare
reform as the preferred means for helping out our cities. This route
must be avoided. Otherwise, we consign our cities to the role of warehouses for the Nation's poor and frustrate any progress toward other
meaningful reforms in urban administration and finance.
The distribution of Federal grants-in-aid and Federal procurement must be rigidly scrutinized and re-assessed with a view towards
determining whether urban areas and the urban regions of the country have been unfairly discriminated against. There is ample evidence
to support the view that military bases and Federal grants-in-aid
favor those parts of the country which are already faster growing.
On the other hand, several innovations have been made in recent
years to introduce criteria into grant-in-aid distribution formulas
which recognize the problems in older sections of the country and
the problems of urban areas where prices are often higher. We urge
that work be continued in developing suitable criteria for Federal
spending that our urban areas not be shortchanged.
Above all, we believe that national urban policy must affirm the
central role of private enterprise in developing and maintaining the
economic base of our cities. This means that urban governments must
actively cooperate with business and with non-municipal employee
unions in developing strategies for growth which are appropriate to
the peculiar conditions in the city at hand. While the Federal role
in this process must necessarily be minimal, there is conceivably room
for Federal assistance in developing city-wide business-labor-government councils to give this form of cooperation the high profile that
it needs. Such councils should actively advise City Hall on means to
attract and hold the high quality labor force-both professional and
blue collar-that private firms must count on. Past experiments with
municipal councils of this kind -have shown that they can be instrumental in providing training programs, attracting new business,
clarifying the needs of the business and labor communities, and improving the labor climate and business confidence in the area.5
'Senator Javits and Representative Heckler recommend an Office of Urban Affairs in
the White House in order to provide the requisite high-level coordination and support of
a national urban policy.
6 Senator Javits states: "I support the concept of an Urban Development Bank. Stch a
bank should be a major vehicle for Federal loans and loan guarantees in promoting development in our cities. The bank should be equipped with the appropriate technical expertise
for engaging in technical assistance in municipal development and finance."
ADDITIONAL VIEWS OF SENATOR JACOB K. JAVITS
Traditionally, the Minority report has served the valuable function
of challenging the Majority's viewpoint and recommendations.
Because of the grave dangers that I see on the international economic
front in 1979, I feel compelled to assume that role.
The evidence of the problem is all around us: the weakness of the
dollar; the lagging recovery and the relatively low level of capital
formation in the industrialized countries; the problems of
the vast accumulation of financial resources in the hands ofrecycling
a small
number of oil exporting countries of the Persian Gulf; and the
sistent coupling of unacceptable unemployment and inflationperin
industrialized countries.
The choice of the solutions that the developing and developed
countries make in solving these problems will determine the health
and stability of the U.S. economy. Because of the interdependent
economic relationships between the U.S. and the rest of the world,
the U.S. and the other industrialized countries must provide the basis
for the cooperation in chartering a course to establish a viable world
economy rather than one which faces recession, even depression in
the next few years.
My proposals touch several strategies-financial assistance
trade policy with separate elements for the developed and for and
the
developing countries.
1. In spite of efforts by oil-importing countries to increase their
exports to OPEC and Third World countries or to increase their
international debt to finance their oil bills, OPEC's
surpluses
amounted to almost $133 billion in 1974-76, with a surplus
an
additional $45 billion estimated for last year. OPEC countriesofhave
placed their investment funds largely in short-term assets, deposited
in the industrialized world's financial intermediaries (mainly
mercial banks). Because of the nature of short-term instruments,comthe
"recycling of OPEC funds" has become a game of balance-of-payments accounting with every dollar of deficit being balanced by a
surplus dollar. There is no guarantee that this money will be used
for capital equipment investment to stimulate noninflationary and
productive growth. If this type of investment does not take place,
oil-importing countries will have no way to establish a higher growth
rate and to build up their industrial capacity to pay off their debts.
Because of the danger of potential disruptions of world
markets if OPEC managers rapidly shift these short-termfinancial
we must develop a large pool of capital using at least half assets,
the
reserves of Western currency-mainly dollar denominated-thatof are
being held by the surplus OPEC countries. These funds must be converted from short-term assets to long-term investments.
However, governments of the industrialized countries must be prepared to meet OPEC's legitimate concerns for the preservation
of
(131)
132
the value of their funds. A guarantee of a rate of interest reflecting
expected inflation rates and a formula which allows the withdrawal
of surplus funds in an orderly manner should ease any initial misapprehension of the OPEC nations.
This capital pool which should be about $150 to $250 billion
(representing conservatively 50 percent of OPEC's surpluses over
the next 10 years) should be used to stimulate investments in return
for a pledge from developing countries to establish rational trade
policies. Country criteria for investment funding should include evidence of high product demand and insufficient industrial capacity
and the maintenance of a favorable investment climate.
2. In addition, we must increase on a bilateral basis all forms of
our aid programs, international lending, direct private investment
and bond financing. We must improve the delivery of the U.S. aid
program, i.e., the International Development Cooperation Act of 1978,
which I have cosponsored.
On a multilateral basis, we must provide greater capital to the
international financial institutions such as IBRD and the World
Bank. Also, the Congress should authorize immediately the $1.7 billion requested by the Administration for the Witteveen Facility of
the International Monetary Fund.
3. In addition to the aid mentioned above, we should help the developing countries increase their export earnings by providing economic
opportunities in the developed countries. This can be accomplished by
programs which seek to stabilize commodity prices. We should engage
in specified commodity agreements, provide some financing of selected
buffer stocks and underwrite some export earnings through economic
programs similar to the Stabex Plan under the Lome Agreement.
Some accommodation must be made with the developing countries on
a "second window" that will provide soft technical assistance to commodity producers covered by the Common Fund. We should expand
our system of Generalized Trade Preferences, which will permit the
LDC's to increase their exports of manufactured and semi-manufactured products.
4. The spin-off to the U.S. from encouragement of productive investment and greater economic development to take place in the
developing countries is the provision of expanded markets for U.S.
and other industralized countries' products.
I believe that one of the problems which impedes U.S. industrial
growth is the lack of sufficient overseas markets for U.S. products.
The Administration must develop a serious export expansion program and create greater interest on the part of U.S. industry and
agriculture in exporting.
The Government especially should encourage small- and mediumsized firms with no prior international experience to explore the overseas market potential for their products.
Because I believe that the Administration should improve business
confidence through tax policy, I do not favor the elimination of DISC
(Domestic International Sales Corporation) and the ending of tax
deferral on undistributed profits earned abroad by affiliates of U.S.
businesses.
133
DOMESTIC ECONOMIC SITUATION
I applaud the key points made in the Minority Report that greater
productivity resulting from increased investment is needed to finance
our economic growth. Unless we, as a Nation, maintain our competitive edge by improving productivity, U.S. business will be unable to
take advantage effectively of the growth of foreign markets for its
products. Investment in human capital is the cornerstone in achieving
productivity growth. As an added bonus, increased productivity,
combined with substantive growth in technological development, can
counter the erosion of business profits through inflation.
As my legislative record makes very clear, I have sponsored LaborManagement Committees and pushed profit sharing and pension reforms in order to involve workers in the mainstream of corporate
activity. The Human Resources Committee, on which I am Ranking
Minority Member, continues to examine these proposals for LaborManagement Committees and expects to act on them in the 95th Congress. Not only will advantages accrue to the business community, but
the human needs of workers also can be satisfied. It is the marginal
worker, the one who needs to develop skills, that we want to incorporate into the ranks of productive employment.
On the issue of the Minority Report's recommendations for social
security, I must separate myself from my colleagues. The Minority is
opposed to increasing the wage base for social security. If there is a
change to be made, the wage base should be increased, not decreased.
This opinion stems from my fundamental belief that the increases in
social security taxes were legislated after congressional realization
that the cost of higher benefits must be paid by the recipients of those
benefits. Increases in the wage base will mean ultimately larger benefits to the workers on retirement. We could not continue to legislate
a system that permitted higher and higher benefits without recovering
the costs.
We must consider the plight of the low- and middle-income taxpayer. In February of this year, I cosponsored S. 2503, a bill which
would have substantially eased the burden of social security taxes on
low- and middle-income taxpayers. This proposal would have removed
the disability insurance and hospital insurance (Medicare) programs
from payroll tax financing and, instead, funded these programs from
Federal general revenues. Payroll taxes would continue to finance old
age and survivors benefits.
S. 2503 will reduce the payroll tax burden by almost one-third;
make the Social Security System actuarially sound for the next 75
years; re-establish a 100 percent reserve fund to protect beneficiaries
from inflation and recession; and return the system to its original
design as a retirement program.
As a result of my position on social security financing, I would
rearrange some of the incremental components of the Administration's Tax Reform Package. Inflation has boosted taxpayers' incomes
into higher marginal tax brackets without a corresponding increase
in real living standards.
While I believe that some of the tax cuts should offset this phenomenon, the rest of the package should be shifted largely to busi-
134
ness tax cuts. As explained in my earlier section, we desperately need
more business investment. Personal consumption has not lagged in
this recovery, but investment spending has. We need to cut corporate
tax rates, increase the investment tax credit, accelerate( the depreciation rate, and give incentives which stimulate further increases in
research and development. Business means jobs, and while governmlelnt
programs can aid the structurally unemployed as well as maintain
adequate levels of economic activity, there is no substitute for private
sector initiatives.
In addition, I cannot agree with the doctrine put forward by
supply-side economists. It is conceivable that high marginal tax rates
could encourage, some to substitute "leisure for labor" because the
reward to labor has fallen, as the Minority Views point out. I would
even add that this phenomenon is more likely to take place in afiluent
countries where people can more easily afford to forego the small
amounts of additional real income they would receive from working
for extra earnings at these high marginal tax brackets. But it is just
as possible that a worker whose real after-tax income falls might be
forced to work harder-perhaps at a second job-in order to keep up
with inflation, the mortgage payments, the new car, etc.
With regard to savings and consumption being affected by marginal
tax rates, I am not sure that the relationship is all that simple. The
incentives from a combination of inflation and high marginal tax
rates could be just as strong to change one's pattern of saving (e.g.,
municipal bonds, real estate, etc.) as to substitute consumption for
saving. Ultimately I am concerned that the real after-tax incomes
of workers have fallen substantially over the past 10 years. High
marg-inal tax rates have prevented workers' pay increases from keeping pace, with inflation. It is this fact, in my view, which underscores
a asic failing in our economic policy.
As a final note,, I would urge additional consideration of the need
for planning with regard to an urban policy, balanced national
growth, structural unemployment, and other domestic issues. The
White House Conference on Balanced National Growth and Economic Development emphasized repeatedly that meeting national
employment and unemployment goals could only be made within the
context of national, regional, and local planning. It has become absolutely apparent to me that our problems cannot be solved on an
ad hoc basis, but instead must be interwoven in order to gain maximum results for the time, money, and involvement put into their
development.
JACOB JAVITS.
ADDITIONAL VIEWS OF REPRESENTATIVE
CLARENCE J. BROWN
Noting the importance of timing in making decisions designed to
affect the economy, I feel that it is already too late to avoid
the sequonce of inflation and recession over the next two to three years.
This
all-too-familiar cycle of the past decade is the result of the routinely
high rates of inflation which have affected the U.S. economy as
result of the steadily growing Federal deficits since the beginning a
of
the Vietnam era. Federal tax and spending policies
predicated
on the experiences of the Great Depression should havestill
changed
a decade ago when it became apparent that inflationbeen
had
become
endemic to the United States and other deficit-ridden national
economies. Germany and Japani-even Great Britain and France-have
faced up to the need for spending restraint and, as a result, their
currencies are showing more relative strength than ours. Our economy
an(l our dollar would be even weaker but for the fact
we are still
the largest and the most self-contained of all the world'sthat
major trading
nations.
The evidence of wrong-headed policy is all about us and hardly
needs to be emphasized: Trie Administration's energy proposals,
growth of Federal regulation, the growing real tax burden, the the
impact of two severe winters, the coal strike, the lack of competitiveness
in many major industries (the ones whose under utilization pull down
total plant capacity utilization figures), the rising wholesale
and the lack of investment, and on and on-many of which haveprices,
been
dealt with in this Report.
Exacerbating the present situation is a growing sense of drift produced by an absence of decisiveness in national leadership. This same
situation (for different reasons) worsened the slide of 1974.
Psychological factors can be significant to economic change. Disillusionment and frustration with the ability of government
all "the heartache and the thousand natural shocks that flesh tois cure
heir
to" has been evident for some time. And very few things have happened in the year since the last of these annual reports was published
to offer any reasons to change that perception. However, am
confident that traditional American self-reliance will pull usI through
whatever lies ahead. At the very least, a government that cannot help
should not be permitted to hinder.
CLARENCE J. BROWN.
(135)
ADDITIONAL VIEWS OF SENATOR WILLIAM V. ROTH, JR.
I concur generally with the views expressed by the Minority, but
I believe the need for substantial and permanent tax rate reductions.
and for strengthened international economic policies deserve further
emphasis.
As the Minority Views correctly point out, the President's proposed
tax package will not offset the increased social security taxes and inflation-induced( tax increases. In addition to being too small, the President's tax prol)osals will soak the middle-income taxpayers of this
country. In paiticllar, his proposal to replace the $750 personal
exemption with a $240 tax credit and his proposed changes in itemized
deductions will substantially increase the tax burden on middleincome taxpayers.
LARGER TAX Curs NEEDED
The President's claim that 96 percent of all taxpayers will benefit
from his tax cut proposal is simply not true. By failing to take into
account the impact of inflation and the social security tax increases,
every family of four now earning more than $17,250 will be paying
hi'hIer taxes under the President's proposal. By 1980, every family
of four now earning $10,000 or more will be paying higher taxes
under the Presidents proposal.
The following table shows the net impact of the President's tax
program on families of four at various income levels whose income
merely kept pace with the Administration's own inflation estimates
of 5.9 percent in 1978, 6.1 percent in 1979, 5.7 percent in 1980, and
5.2 percent in 1981. The figures represent tax cuts (-) and tax
increases (+).
TAX PROGRAM
IMPACT OFCARTER
1979
1977 income
$8,000
$10,000---$I5,000-------$17,500
21,000
30,000-3-
----
-----------
--------- -------0
35
---------
3000--710
---------
--------------------
--------- -
-
-98
-100
-37
+14
1826
-549
1980
1981
-61
+16
25
-92
+.7+270
+51
I
-II
-157
257
-449
+6638
+1410
+960
+1,129
1,389
+1, 661
As the table shows, middle-income taxpayers face substantial tax
increases over the next three years under the President's tax proposals, and the President is misleading the American people by claiming they will be paying lower taxes.
The following table compares the Administration tax cut claims
with the actual tax cuts (-) or tax increases (+) which will occur
next year. As the table shows, the Administration has overestimated
the impact of its tax cuts for virtually every income level.
(136)
137
COMPARISON OFCARTER TAX CUT CLAIM AND ACTUAL TAX CUT/TAX INCREASE
Income---
,,,,,-------
,-
8,000 ------------------------ ------------------------ -----------------115,000
---------- -------- ---------,----,------,
1,00 - ---- ---------------,--------------17500 ---------- --- -------------- ------------- -------------- --------$20,000---------------------_..............
$25,000- ,,--------,,,
,,,,,,,----------,,,
$30,000--,,,
,,,,,,
435,000
-,,,--,--,,,,,,,,,,,,,,,,--,--,,,,----,,,----,,,--,,,,,
40000,----,------------, ,-,-,-,---,-,-,-,-,-,-----,,
----------------,---- ,,
-22
Administration
claim
Actual tax
cut/tax
increase
98
-284
-2166
1 86
-150
-98
-100
-37
14
+186
+247
+377
+549
+710
-24
+24
+80
As the figures show, the President's tax cuts are not large enough
to offset the social security and inflation-induced tax increases. We
need a tax cut which will both offset these tax increases and substantially reduce the total tax burden on the working taxpayers of this
country.
THE TAX REDUCTION ACT
The Roth-Kemp Tax Reduction Act (H.R. 8333; S. 1860), which
I have introduced with Congressman Jack Kemp, is expressly designed to restore incentive to the economy by increasing the after-tax
reward for work, production, and investment. This bill, which is
cosponsored by 163 Members of Congress, would provide substantial
tax relief to all Americans, and its adoption would stimulate economic growth and create millions of new jobs in the private economy.
The Tax Reduction Act would provide across-the-board tax rate
reductions for both individuals and businesses, phased-in over a
three-year period.
For individuals, the bill would reduce tax rates by an average of
33 percent, reducing the present tax rates which range between 14
and 70 percent to rates ranging between 8 and 50 percent.
For businesses, the tax rates would be reduced from 48 to 45 percent and the small business surtax exemption would be increased from
$50,000 to $100,000.
The immediate adoption of the Tax Reduction Act would assure
the type of long-term economic growth needed to create jobs in the
private economy. The principal obstacle to strong economic growth
is the excessive tax burden imposed on the American economy. The
high rates of taxation now imposed on the economy are strangling
economic growth, increasing inflationary pressures, and choking off
private initiative, investment, and the creation of jobs. An acrossthe-board tax reduction is the best way to remove these restraints
on economic growth.
The Tax Reduction Act is modeled after the legislation proposed
by President Kennedy in the early 1960's to get this country moving
again. Kennedy realized then, as we should realize now, that the
largest single barrier to a higher rate of economic growth is the heavy
drag of Federal income taxes. The Kennedy tax rate reductions reduced individual tax rates from a range of 20 to 91 percent to the present range of 14 to 70 percent, and reduced corporate tax rates from 52
to 48 percent. These across-the-board tax rate reductions stimulated
a five-year period of unprecedented economic growth, low inflation,
and high employment.
138
The Tax Reduction Act would provide substantial relief to all
taxpayers, with the largest percentage tax cuts going to lower- and
middle-income taxpayers. When fully effective, the bill would reduce
the tax burden on a family of four earning $8,000 by 90 percent, reduce the tax burden on a family of four earning $10,000 by 50 percent, and reduce the tax burden on a family of four earning $15,000
by nearly 40 percent. Those earning more than $20,000 would have
this tax burden reduced by about 33 percent.
The economic impact of these across-the-board tax reductions would
be enormous. By reducing the tax burden on the economy, the cost
of working and producing would be reduced, and production, employment, investment, and wages would increase substantially.
According to one econometric projection, the Tax Reduction Act
would increase this country's gross national product by $43 billion
and result in the creation of 1.2 million jobs by the end of 1978. By
1985, the bill would increase GNP by $240 billion and create 5.5 million jobs.
Although critics contend these tax reductions would increase the
budget deficit, history proves otherwise. In every tax rate reduction
enacted since 1946, the estimated revenue losses have not occurred, and
in fact revenues have increased because of the tax rate reductions.
This is because tax rate reductions expand the economy, create taxpaying jobs, reduce Federal spending on unemployment benefits, and
expand the Federal tax base. In the case of the Kennedy tax rate reductions, the Treasury Department estimated a six-year revenue loss
of $89 billion. But the tax reductions stimulated the economy so much
that revenues actually increased by $54 billion.
As President Kennedy said 15 years ago, we must free up the private
sector to give consumers, workers, and employers the opportunity to
get this country moving again. Instead, of relying on increased government spending, we should reduce the tax burden on the private sector.
The massive increases in government spending, and the budget deficits
we have experienced for 18 out of the last 19 years, have drained resources out of the private economy, resulting in higher taxes, higher
prices, and higher levels of unemployment. The American people do
not want a bigger government with bigger government deficits. They
want less government spending and lower taxes, and tough controls
are necessary to reduce the growth of Federal spending. Working
Americans need this kind of relief, and the American economy needs
it in the interests of jobs, equity, and real economic growth in the
private sector.
INTERNATIONAL TRADE POLICIES
Turning to international economic policy, I believe that the United
States will be facing much tougher international competition in the
coming years. International economic policy has become much more
complex, but at the same time, there are increased opportunities for
the United States to create jobs and promote sound growth through the
sale of American industrial and agricultural goods and services.
I am'deeply concerned that the United States is not properly organized to cope with a rapidly changing international economic environment much less to take advantage of the great opportunities in
139
that environment. We have seen that in a few short years, the Japanese
can virtually destroy an American industry, but we have paid very
little attention to how to forecast such dangers, to give our industries
early warning, and to provide them with the kind of protection or
help they need to make appropriate adjustments.
Time and time again, U.S. effectiveness in the international economic
arena is sapped by bureaucratic turf fights. This kind of wrangling
can only weaken our ability to bargain effectively with foreign countries. As Harold Malmgren, a former Deputy Special Trade Representative, recently testified:
In fact, my own negotiating experience is that if the man
across the table senses divisions behind the U.S. negotiator,
he will exploit them. He will try to bring one U.S. agency into
conflict with another, if he can. If he senses a way to peel away
one issue from another, he will.
I believe that in addition to strengthening coordination on broader
international economic policy issues, we should consolidate into a
single Department of International Trade and Investment the many
existing offices and agencies dealing with foreign commercial and investment policy issues. The International Trade and Investment Reorganization Act, S. 1990, which I have introduced together with Senator
Ribicoff, would create such a Department by joining together the
Special Trade Representatives with the international, commercial, and
investment functions of the Departments of State, Treasury, and Commerce. The statistical functions of the International Trade Commission
would also be placed in the Department, and the Export-Import Bank
and Overseas Private Investment Corporation would be semiautonomous elements of it.
This Department would reduce duplication and streamline decisionmaking on international trade and investment issues. It would
join the trade negotiating and the retaliatory functions, thus strengthening U.S. bargaining leverage in trade negotiations. By consolidating the offices and people who collect trade and investment statistics
and make analytical studies, it should help develop improved forecasting of potential trouble areas and the development of intermediate and long-range strategies for avoiding serious adjustment problems and taking advantage of new market opportunities for U.S.produced goods and services.
I firmly believe that if the United States is going to have a first-rate
foreign economic policy, we need a first-rate governmental apparatus
for developing and implementing those policies. Like the other major
economic powers, we should have a single agency for helping promote
U.S. exports, protecting U.S. industry from unfair competition, and
negotiating with foreign countries.
W. V. RoT~H, Jr.
ADDITIONAL VIEWS OF SENATOR JAMES A. McCLURE
AND SENATOR ORRIN G. HATCH
EcONOMETRIC
MODELM
We are in strong agreement with the Minority Views on supply
problems and taxes and on the need for economic growth. We want
to express our concern that policymakers are reducing job opportunities, Living standards, and the growth of the economy by relying on an
economic policy that neglects the economics of supply.
The econometric models used in the formulation of public economic
policy assume that the levels of GNP and employment and the rate of
economic growth are demand-determined. Following the view that
the greater the spending, the greater that GNP and employment will
be, economic policy focuses on increasing aggregate demand. Policymakers are preoccupied with shifting the aggregate demand schedule
along the aggregate supply schedule, largely through the use of fiscal
policy
Policyiakers have ignored the fact that fiscal policy produced
shifts in aggregate supply in addition to shifts in aggregate demand.
Fiscal policy affects the tax burden and produces incentive or disincentive effects that affect aggregate supply. For example, if marginal
tax rates are changed, two important relative prices that affect output
are altered. One is the price that governs the choice at the margin
between additional current income or additional leisure. The other
governs the choice between additional future income (savings) or additional current consumption. The higher the marginal tax rates, the
less after-tax reward there is to saving and work, and the less that
additional leisure and current consumption cost in terms of foregone
after-tax current and future income.
A fiscal policy that raises tax rates reduces work effort and the
supply of savings for investment and reduces the level of aggregate
supply. Thus, it is possible for fiscal policy to retard production even
as it increases aggregate demand. If the real tax burden is, as Milton
Friedman and other distinguished economists say, equal to total government spending, a fiscal policy designed to increase government
spending may shift the supply schedule backward as it shifts the demand schedule forward. This would explain why fiscal policy in recent years has increasingly worked to raise the price level rather than
to raise the real output of goods and services.
A fiscal policy that reduces tax rates would increase the likelihood
that aggregate supply would respond to an increase in aggregate demand. Traditional multiplier analysis ignores the supply-side effects
of fiscal actions. As a result, it does not give an accurate comparison
of the effects on the economy of increases in government spending and
reductions in personal income tax rates.
(140)
141
Traditional economic policy has a problem of transition from the
short run to the long run. In the short run, policymakers try to maximize demand. According to a recent report by the Congressional
budget Office, a savings rate in excess of 7 percent of consumers' disposable income is bad for the performance of the economy ("Closing
the Fiscal Policy Loop: A Long-Run Analysis," December 1977).
According to the CBO report, which purports to he a long-run
analysis, the economy will be strong if the savings rate is less than
6 percent.
The problem with this view, if carried to its logical conclusion, is
that if all income is spent in order to maximize demand, there cannot
be savings to finance the investment that increases the productivity of
labor and makes the economy grow. More attention to supply-side
economics may let policymakers escape the short-run treadmill in
which business will not invest unless consumer demand is strong, and
strong demand means a savings rate below 6 percent and few real resources for investment.
The neglect of supply-side economics is best illustrated by the forecasts in recent years by two of the three big commercial econometric
models of the result of a reduction in corporate income taxation. According to the econometric simulations, the result of increasing the
after-tax profitability of business investment would be a decline in
investment and GNP! This bizarre prediction illustrates the pitfalls
in an economic theory based on the assumption that output is demanddetermined. It is this kind of misguided theory that has led to big
spending, big government. and big trouble.
URBAN POLICY
Whereas we agree with the statement that "urban policy should
avoid concentrating so much on income maintenance for urban populations as to become a means of perpetuating the urban poor," we believe that most of current and proposed policy perpetuates the urban
poor. and the financial plight of urban centers.
Many economists believe that our large cities are becoming warehouses for the poor because political entrepreneurs saw opportunities
to build their spending constituencies and acted upon them. Politicians and welfare bureaucracies have been successful in causing migrations of poor to their constituencies by offering a higher living
standard in terms of welfare benefits and leisure than could be obtained by working in lower income areas from which they came. Once
there, handouts are traded for votes, and the political machine rolls
on. As the machine rolls on, it rolls over the productive citizens and
the taxpayers, and they respond to the rising tax rates and deteriorating police and educational services by removing themselves from the
machine's jurisdiction. As the Minority Views point out, "a survey of
personal income growth in five older cities between 1970 and 1975
shows that the largest gain in income during this time came from increases in transfer payments rather than from private sector wages,
salaries, and other income."
The other part of the machine's constituency has been municipal employees. As the Minority Views point out, "municipal employees' salaries constitute the largest single item in any urban budget .. . Never-
142
theless, there are not sufficient incentives for urban governments to
resist unnecessary large wage demands." Of course there are not, because politicians in pursuit of their self-interest trade benefits in the
form of current salaries and future pensions for the bloc vote of a large
and well organized group.
Strangely, the Minority Views suggest that the urban problems of
escalating budgets and declining tax base are a result of affluence which
has generated accelerating demands for services such as "cleaner air,
better education, modern medical care, efficient. transportation systems,
and an effective police department." The question is: Has affluence
made our cities poor by generating demands that they could not afford,
or have politicians made our cities poor by building their spending
constituencies and securing their political future at the expense of the
economic viability of the cities? Are some cities in trouble because
they have provided quality educational and police services, or because
increasingly their budgets have been allocated to their spending constituencies and not to their taxpaying constituencies?
A first principle of economics is that subsidies increase the supply
of that which is subsidized. If we subsidize with Federal bailouts the
political behavior that has contributed to the plight of some of our
cities, then we can expect an increase in this kind of behavior. If we
make it pay, it will spread to additional cities. If we establish incentives that will generate this behavior nation-wide, we will succeed in
ruining the entire country. As the Minority Views point out, "increases
in aid to state and local governments, in fact, claimed approximately
40 percent of the Federal government's budget increases in the decade
1965 to 1975." And things got worse. Obviously, by subsidizing the
growth of political spending constituencies, the Federal government
insured that they continued to grow.
We should not make it pay for cities to conduct their financial afflairs
in irresponsible ways nor help them keep large numbers of people in
welfare-dependent positions. Unfortunately, under current policy,
*Whencities succeed in getting into financial difficulties, Federal money
is their reward. This policy means success for urban politicians and
ruin for the country.
The Minority Views point out that the older urbanized areas of the
country are losing population from their privately-employed and taxpaying ranks, but the Minority Views fail to relate these facts to the
taxing and spending policies of these urbanized areas. Instead, it is
suggested that the loss of working population is the result of some
"economic principles which favor growth outside the central city
areas." If the relative decline of central city areas is not related to the
taxing and spending policies of those areas, and if the relative growth
of suburban areas is due to some inherent economic advantage that
makes them more efficient in the use of resources, then to adopt a
policy that would interfere with the shift of resources out of urban
and into suburban areas would reduce the overall economic performance and rate of growth of the national economy. We believe that our
urban areas are more likely to be restored by reestablishing in them
incentives for financial and political discipline than by underwriting
on the Federal level the kind of incentives that have led them to their
present plight.
ORRIN
G.
HATCH.
JAXEs A. MCCLURE.
COMMITTEE AND SUBCOMMITTEE ACTIVITIES
IN THE PAST YEAR
Public Law 304, 79th Congress (the Employment Act of 1946), directs the Joint Economic Committee to report to the Congress by
March 1 each year on the main recommendations of the President's
Economic Report. The Committee's 1978 Economic Report is submitted in accordance with that requirement. Due to the late filing of
the President's Economic Report, the Joint Economic Committee's
filing date was extended to March 31, 1978. It is intended to serve as
a guide to the several committees of the Congress dealing with legislation relating to economic issues.
Under the Congressional Budget Act (Public Law 93-344) the
Committee is also required to submit reports to the Budget Committees each year setting forth the Committee's view of the economic
outlook and recommendations regarding relevant economic policies
and to supply to the Congress an annual economic evaluation of the
President's Current Services Budget estimates.
In addition, the Committee is required by the Employment Act to
make a "continuing study" of the economy and to report to the Congress in midyear and at other times when deemed necessary.
In fulfillment of the Committee's responsibilities, the work of the
full committee and its subcommittees for the past year is summarized
below.
FULL COMMITrEE
1977 JointEconomic Report
The Committee conducted nine days of hearings during January
and February 1977 in its annual review of the President's budget and
economic report.
Testimony was received from spokesmen for the new Administration, including the Chairman and a member, as well as a former
Chairman of the Council of Economic Advisers; the Chairman of the
Board of Governors of the Federal Reserve System; the Director of
the Office of Management and Budget; and the Secretaries of Commerce, Labor, and Treasury. The Committee also heard from representatives of business, management, and the academic community.
The 1977 Joint Economic Report was filed with the Congress on
March 15,1977.
Price8 and Proflt8 -of Leading Retail Food Chains, 1970-74
The Committee held two hearings in late March and early April in
relation to a study analyzed at the. University of Wisconsin over a
two-year period and based on confidential company records dealing
with food chain store profits and prices. Also discussed were mergers
between food chains and market concentration. Testifying were
spokesmen from the Univerity of Wisconsin, Harvard, and the Vir(143)
23-928
0 - 78 - 10
144
ginia Polytechnic Institute. Contributing to the discussion were representatives from the Department of Agriculture, the Bureau of Competition of the Federal Trade Commission, the Food Marketing Institute, and the Consumers' Union.
The study on which the hearings were based, "The Profit and Price
Performance of Leading Food Chains," was released on April 12.
The Economics of Solar Energy
Hearings were held in early April based on a study dealing with the
economics of solar energy development and investigating the state of
the art and recommendations relating to the ability of the United
States to achieve widespread solar utilization.
Prior to the hearing, the Committee released a study entitled "The
Economics of Solar Home Heating." The study was prepared by researchers at the University of New Mexico and revealed that Minnesota and the Northern United States are currently the most feasible,
practical locations for solar energy use. The economic feasibility of
solar space and water heating on a State-by-State basis under a variety of assumptions regarding energy price control and deregulation
was reviewed. In summary, the study contends that solar energy is
more practical, economically, in the colder northern portions of the
United States.
Issues at the Sum/mit
In late April the Committee held three consecutive days of hearings on many of the issues to be discussed by the President with foreign heads of state in London at an upcoming Summit Conference. A
Japanese economist, an adviser to the German Government, the Director of the New York office of the United Nations Conference on
Trade and Development (UNCTAD), and the Secretary General of
the Commonwealth Secretariat, London, testified, along with academicians and American spokesmen for Business and labor, as well as
representatives from the banking and investment communities.
Bipartisan views and recommendations on a number of economic
issues likely to be discussed at the summit conference were sent to the
President in early May. Additional and supplementary views were
also submitted by several of the Committee's Minority Members.
The Economics of the President'sProposed Energy Policies (May 20
and May 25,1977)
The two hearings held in late May reviewed the specific goals and
provisions of the President's program to see how they fit together as a
national energy policy. The. progIam's effects on income, employment,
prices, how it would influence the economy's structure between now
and 1985, and alternate schemes for rebating the massive energy taxes
the President proposed were also examined.
The first hearing's witnesses included: an Assistant to the President, the Secretary of the Treasury, and representatives from Data
Resources, Inc., the Brookings Institution, MIT, and the University
of Southern California. The Chief Executive of Middle-South Utilities, the Chief Executive of Kaiser Aluminum, and representatives
from Resources for the Future, the, Environmental Defense Fund,
and FEA presented testimony at the second hearing.
145
The 1977 Midyear Review of the Economy
The Committee held four days of hearings on the Midyear Review
of the Economy in June and July. Testimony was received from
the
Director of the Office of Management and Budget and representatives of academia and the Brookings Institution.
The Midyear Report was filed with the Congress on September 26,
1977, and focused oln the long-run outlook for investment, on Federal
budget policy and inflation. It contained additional and Minority
views.
Five-Year Budget Projections: Fiscal Years 1979-83 (December
5,
1977)
The Director of the Congresional Budget Office testified before
the Committee in December to present CBO's Five-Year
Budget Projections. The hearing marked the beginning of congressional
evaluation of the budget for fiscal year 1979 and the following four years.
Employment- Unemployment (Monthly)
The Commissioner of the Bureau of Labor Statistics
his
monthly testimony before the Committee in its review continued
the unemployment situation. In addition to the Commissioner's ofappearances
oil January 12, February 4, March 4, April 1, May 6, June 3, July
August 5, September 2, October 7, November 4, and December 8,
2, a
Professor of Economics from Yale University testified on his report,
"The Wholesale. Price Index: Review and Evaluation" oln August
5,
and the Chief Economist vith the Department of Commerce testified
on the Department's statistical programs and procedures oln November
4.
Special Studies
Economic Planning in Five Western European Countries:
An
Overview
In early January, the Committee released this study involving
France, The Netherlands, Norway, West Germany,
Great
Britain. The study is a handy review of the successes as and
well as the
disappointments that Western European countries have experienced
in developing workable government planning.
The FederalReserve System
A comprehensive study was released in January
to the
Federal Reserve System. Initiated by the former JEC relating
the
late Wright Patman (D-Texas), the study reflects many Chairman,
years
of
study
of the central banking system and traces the history of the Federal
Reserve System from its establishment in 1913 to the mid-1960's.
The Impact of Macroeconamic Conditions on Employment Opportunities for Women
The recession cost women 1.8 million jobs, according
this study
released in late January by the Committee. It examines to
the
extent to
which the state of the overall economy affects the success of women
in
the labor market. Written in two parts, the first deals with what happened to women in the labor market since tihe start of the recession
in
late 1973. The second examines their employment prospects
through
146
the remainder of the decade under alternative assumptions about overall economic conditions and about women's own interest in participating in the labor market.
Some Questions and Brief Answers About the EurodollarMarket
The Committee released this staff study on February 11th which
deals with commonly asked questions about the Eurodollar market.
U.S. Economic Growth From 1976 to 1986: Prospects, Problems, and
Patterns
During the year the Committee released four more volumes in this
series of studies discussing the factors and processes which will shape
long-run U.S. economic growth. This is an effort by the Committee to
provides a comprehensive view of the U.S. economy from many
perspectives.
The volumes released this year include:
Volume 9-Technological Change (January 1977)
Volume 10-The Quality of Economic Growth (May 1977)
Volume 11-Human Capital (May 1977)
Volume 12-Economic Growth in the International Context (May
1977)
Youth and Minority Unemployment (July 6, 1977)
Four Republican Members of the Joint Economic Committee released this study reviewing some of the current literature on the effects of minimum wages on youth unemployment. Adverse employment effects from market control by unions, the Davis-Bacon Act, job
discrimination, licensure, inadequate education skills, and present
manpower policies are also surveyed by this study.
The Macroeconomic Goals of the Administration for 1981: Targets
and Realizations (August5,1977)
This study was prepared by Committee staff to supplement the Committee's midyear hearings on the state of the economy. It examines the
Carter Administration's budget goals to determine if they are consistent and attainable. It concludes that reaching all of the goals
simultaneously in 1981 is not possible, and confirms the views expressed
by several of the hearing witnesses that the key to continuing recovery
lies in more expansive monetary policies.
East EuropeanEconomies: Post-Helsinki (August 1977)
A factual and interpretative assessment of the policy and performance of the East European economies, this compilation of invited
papers is designed to meet the interests of the Committee and the Congress by providing an up-to-date body of data and comment on the
domestic and foreign economic relations of the countries of Eastern
Europe. These countries include: Bulgaria, Romania, Hungary,
Czechoslovakia, Poland, the German Democratic Republic, Albania,
and Yugoslavia.
Recent Experiences With National Planning in the United Kingdom
(September 16,1977)
This study was prepared by a professor at the University of California for the Committee. It examines the different planning exercises
undertaken in the United Kingdom since 1962 and concludes that while
147
successful intermediate-term comprehensive planning is probably not
yet feasible, there has been success in providing a hospitable environment for government officials, leaders of private industry, and labor
to meet, share information, and cooperate in planning their future
activities.
Work, Welfare, and the Program for Better Job8 and Income (October 14,1977)
The Committee released this study prepared by professors from
Brandeis University which concentrates on the labor market implications of the Administration's welfare reform proposals, particularly
the work requirement, job creating, and work incentive components.
The Program for Better Jobs and Income-A Guide and a Critique
(October 17,1977)
Written by professors from the University of Wisconsin for the
Joint Economic Committee, this study discusses the strengths and
weaknesses of both the present welfare system and the Adiiiinistration's welfare reform proposal. It also reviews some of the key economic issues which should be considered in a discussion of welfare
reform.
SUBCOMMITTEE ACTIVITIES
In early March the Chairman of the Committee announced the reorganization of the Subcommittees and subcommittee membership. The
number of Subcommittees was reduced from nine to five, and three
of the Subcommittees are now headed by cochairmen. The Subcommittees on Economic Progress, Economic Growth, and Consumer Economnics were merged into the Subcommittee on Economic Growth and
Stabilization; the Subcommittees on Fiscal Policy and Urban Affairs
were merged into the Subcommittee on Fiscal and Intergovernmental
Policy; and the Inter-American Economics Subcommittee was merged with the Subcommittee on International Economics.1 A list of
subcommittee membership follows this section on Committee Activities.
SUBCOMMITTEE ON FISCAL AND I NTERGOVERNMENTAL POLICY
FinancingMunicipal Needs
Testimony was received by the Subcommittee in late July, jointly
with the Subcommittee on Economic Growth and Stabilization, on
financing municipal needs. The hearing focused on the proposed National Development Bank, which would provide long-term, low-interest loans to municipalities as well as to certain private businesses.
Witnesses included representatives from three research organizations
and the academic community.
Studies
The Current Fiscal Condition of Cities: A Survey of 67 of the 75
Largest Cities (July 28, 1977)
At the Subcommittee hearing mentioned above, the Subcommittee
released the results of a Joint Economic Committee survey on the
I The Subcommittee on Priorities and Economy
In Government and the Subcommittee
on Energy remained the same.
148
fiscal health of U.S. cities. The survey found, among other things,
that capital needs in the surveyed cities are extensive, the combined
service budgets have increased by only 5 percent, and the aggregate
level of municipal employment has remained relatively constant between fiscal years 1976 and 1977.
Members of the Subcommittee: Representatives Richard Bolling and William S. Moorhead, Cochairmen; Representatives
Henry S. Reuss, Otis G. Pike, Clarence J. Brown, and John H.
Rousselot; and Senator James A. McClure.
SUBCOMMWrFEE ON ECONOMIC
GROWTH AND STABILIZATION
Economic Problems of Rural America
In mid-June the Subcommittee held two days of hearings focusing
on the major economic problems that rural communities across the
country face and what Congress and the Administration can and
should do to foster balanced growth in rural areas. Witnesses included
the Chairman of the U.S. House of Representatives' Rural Caucus,
another Member of Congress, representatives from the Department
of Agriculture, two national "rural" organizations, the academic community, and several local officials.
Assessment of Public Opinion and Public Expectations Concerning
the Government and the Economy
In hearings in mid-June, the Subcommittee received a comprehensive report on what the American public thinks is right and wrong
with Federal economic and energy policies and programs and what it
expects and wants in these areas from the Government and the private sector. Representatives from six prominent polling organizations
testified at this hearing.
The Role of Federal Tax Policy in Stimulating Capital Formation
and Economic Growth
Simplification of the Internal Revenue Code and the effect of proposed tax measures on the levels of saving and investment were discussed, among other subjects, by the Subcommittee in four hearings
held in mid-July. Three former Commissioners of the Internal Revenue Service, and representatives from the academic community, private industry, and national associations testified at these hearings.
American Women Workers in a Full Employment Economy
A hearing held by the Subcommittee in mid-September focused on
the theme of a compendium of papers released by the Subcommittee
under the same name, listed below. The hearings highlighted the basic
economic and social facts about women's participation in the labor
force as well as those factors responsible for changing the role of
women in the work force.
Witnesses at this hearing included representatives from several national organizations, the academic community, and private industry.
Joint Small Business and Joint Economic Committee Hearings
In June and July joint hearings of the Subcommittee with the
Small Business Committee's Subcommittee on Government Regulation and Small Business Advocacy were held to discuss, particularly
S. 1726, The Small Business Economic Policy and Advocacy Reorganization Act of 1977, introduced by Senators Humphrey and McIntyre.
The first hearing consisted of testimony from representatives of na-
149
tional and regional small business organizations, and the second heard
from Administration witnesses, with invited comments requested
from the Council of Economic Advisers and the Departments of Labor
and Agriculture.
Conference on Measuring Progress in Participationby Minority and
Female Contractorsin FederalProcurement
In late September the Subcommittee sponsored a conference which
focused on problems of measuring the share of total Federal purchases
fulfilled by minority and female firms which, as a result of past discrimination and other barriers, are today socially disadvantaged. Federal procurement officials representing most major departments and
agencies of the Government and a selected panel of individuals with
research or advocacy interests in the field participated in the
conference.
Studies
Foundations for a National Policy to Preserve Private Enterprise in
the 1980's
A study prepared for the use of the Subcommittee and released in
early April was based on the premise that the survival of the free enterprise system depends on the volume and vitality of small business
in the next decade. The author's findings and recommendations are
aimed at providing an improved climate for small business in terms
of capital formation and government regulation.
Toward a National Growth Policy: Federal and State Developments
in 1975
In mid-May the Subcommittee released a study documenting significant actions taken in 1975 that have an effect on national growth
and development. By relating these actions to one another and to the
various elements of a national growth policy, the report is intended
to provide an information base that should be helpful in developing
coherent and comprehensive policy governing the future growth and
development of our Nation.
In addition, the report contains a very extensive annotated bibliography, broken down by policy area, covering books, articles, research
papers, and other major works published during 1975, as well as a
list of research projects under way in 1975.
American Women Workers in a Full Employment Economy
A compendium of 17 papers, released by the Subcommittee in midSeptember, draws on leading authorities in the private sector and
academic circles to provide an analysis of the past, present, and foreseeable job roles of American working women and potential workers.
Among other findings, the compendium concluded that there is still
a wide gap between the goal of job equality between men and women,
and its fulfillment, and that the lack of career-oriented education and
training is one of the strong root causes of women's inability to establish themselves in upwardly mobile careers.
Recent Developments in French Planning: Some Lessons for the
United States
The Subcommittee released, in mid-December, a study prepared for
its use which reviews the most significant developments in the evolu-
150
tion of French national planning and suggests several conclusions for
planning in the United States. One of the study's conclusions is that
U.S. planning should be restricted to fundamental questions of economic development, rather than the intricate general equilibrium
approach of setting total demand equal to total supply, by sector.
Members of the Subcommittee: Senators Hubert H. Humphrey
and Lloyd Bentsen, Cochairmen; Senators Abraham Ribicoff,
Jacob K. Javits, and William V. Roth, Jr.; and Representatives
Richard Bolling, Lee H. Hamilton, Garry Brown, and Margaret
M. Heckler. (Senator McGovern joined the subcommittee following Senator Humphrey's death in 1978.)
SUBCOMMI=rEE ON INTERNATIONAL
ECONOMICS
Recent Development in Mexico and Their Economic Implications for
the United States
During two days of hearings in mid-January the Subcommittee
focused on the major economic developments in Mexico, the broad outlook under the new administration in Mexico, and its effect on the
areas of the United States along the Mexican border, including the
agricultural situation.
Witnesses included Senator Llyod Bentsen (D.-Texas), a JEC Committee Member; the Governor of Arizona; representatives from the
Mexican Government, from the State of New Mexico, and the academic community.
Issues in North-Sou7th Dialog
The Under Secretary of State for Economic Affairs testified before
the Subcommittee in mid-June on the results of the Conference on
International Economic Cooperation (CIEC). Among the issues discussed at the Conference were proposals to stabilize commodity prices,
financial and debt problems of the developing countries, proposals on
international economic assistance, and the continued discussion of international energy issues, particularly OPEC's prices.
The Trade Deficit: How Much of a Problem? 'WhatRemedy?
The implications and impact of a growing United States trade deficit were the subject of a Subcommittee hearing in mid-October.
Among other subjects, the witnesses discussed the outlook for the U.S.
trade balance in 1978 and 1979, the impact of OPEC and other foreign
nations' investment in the United States, and what, if anything, the
United States should do to reduce the trade deficit.
Witnesses included a member of the Council of Economic Advisers,
representatives from the Departments of Treasury, Labor, and Commerce, research groups, and the banking and academic community.
Studies
The United States Response to the New International Economic
Order: The Economic Implications for Latin America and the
United States
In early March the Subcommittee released a study which reviewed
the key economic issues between the United States and Latin America
in the context of the New International Economic Order, a program
151
put forward by the developing countries. The study describes the background of the demands being made by the developing countries, analyzes the issues, and sets out the position adopted by the United States.
Living With the TradeDeficit
A report on the trade deficit, based on a hearing held in mid-October
on the same subject, was released by the Subcommittee in mid-November. The report recommended, among other things, that other industrial countries with trade or ourrent-account surpluses stimulate their
economies, that major industrial countries adopt a "clean" floating exchange rate regime and permit rates to adjust promtply in response to
market forces, and the adoption of an energy policy that would be
effective in halting the growth of oil and natura gas imports.
Members of the Subcommittee: Representatives Henry S. Reuss
and Gillis W. Long, Cochairmen; Representatives William S.
Moorhead, Lee H. Hamilton, Margaret M. Heckler; and Senators
Abraham Ribicofi, John Sparkman, Hubert H. Humphrey,
William V. Roth, Jr., and Jacob K. Javits.
PRIORITIES AND ECONOMY IN GOVERNMENT
Allocation of Resources in the Soviet Union and China
During two days of hearings in late June, which were Executive
sessions, and one day of open hearings in early July, the Subcommittee
discussed how much the United States knows about the state of the
economy in the Soviet Union, the principal gaps in our information,
the prospects for Soviet economic growth and development, and the
economic effects of the U.S.-U.S.S.R. arms control agreements. Excerpts of the Executive sessions were later released by the Subcommittee Chairman.
Witnesses included the Directors of the Central Intelligence Agency,
Defense Intelligence Agency, and the Arms Control and Disarmament
Agency, as well as representatives from the Library of Congress and
two research organizations.
The Role of Wosmen in the Military
The present policies of the military regarding women was the subject of two days of hearings, one in late July and the other in early
September. Representatives from the Departments of the Army, Navy,
and Air Force testified on such subjects as new job classifications for
women, recruitment, retention, promotion, and efforts to eliminate discrimination. Other witnesses included representatives from several
women's organizations and the American Civil Liberties Union.
Strategic Mobiaity and Military Airlift to Europe
Representatives from the Department of Defense and the General
Accounting Office testified before the Subcommittee in late December
concerning the development of information about the budgetary and
economic consequences of current and alternative strategic mobility
requests.
Shipbuilding Claims Against the Navy
The Subcommittee held a hearing in late December to consider the
backlog of pending claims against the Navy by private shipbuilders as
well as problems in the management of the Navy's shipbuilding proSUnBCOwMITTEE ON
152
gram and potential financial losses for the shipyards and the Government. Three representatives from the Department of the Navy testified at the hearing.
Studies
Soviet Economic Problems and Prospects
In early August the Subcommittee released a study, prepared for
its use by the Central Intelligence Agency, which presented a comprehensive assessment of current trends and future prospects of the
economy of the Soviet Union. The study concluded, among other
things, that the Soviet economy faces unusually serious strains in the
decade ahead, including a sharp decline in the rate of the growth
of the labor force and a shortfall in crude oil production.
Members of the Subcommittee: Senator William Proxmire,
Chairman; Senators Lloyd Bentsen, Edward M. Kennedy, and
Orrin G. Hatch; and Representatives Otis G. Pike, Garry Brown,
and John H. Rousselot.
SUBCOMMITTEE ON ENERGY
Energy Independence or Interdependence: The Agenda with OPEC
The Subcommittee, during two days of hearings in mid-January,
heard testimony from representatives of the energy industry, academia, and research groups on the future of the Organization of Petroleum Exporting Countries (OPEC) and U.S. policy choices with
respect to energy independence or interdependence
Impact of the President's Energy Plan on the Northeast
The impact of the President's energy plan on the Northeast region
of the country was the subject of a hearing held in Boston by the Subcommittee in mid-May. Because New England was harder hit than
most other regions by the rise in energy prices brought on by the
OPEC price rise, and is expected to bear an additional burden because of the proposed conversion of utilities' and industries' energy
systems from oil to coal, New England seemed a suitable place to
begin the Subcommittee's deliberations as a laboratory of how the
economy might adjust to the higher prices envisioned in the President's plan.
The Administrator of the Federal Energy Administration led off
the hearing and was followed by representatives of regional and local
community groups, regional energy industries, and the Federal Reserve Bank of Boston.
The Economics of the President's Proposed Energy Policies
In mid-May the Subcommittee held two days of hearings to examine the feasibility of the President's energy plan and its consequences
for various sectors of the economy. In particular, cogeneration and
the proposed conversion of industry from oil to coal were discussed.
The first witness was the Secretary Designate of the proposed Department of Energy, followed by representatives of industry, research, and environmental groups.
153
IndustrialEnergy Conservation
In late July the Subcommittee held a hearing to consider roadblocks to improved conservation of energy in industry, a sector of
society which accounts for 40 percent of energy consumption. Institutional, technical, and financial impediments, as well as improved means
of reporting on energy use, were discussed by the witnesses who included a U.S. Senator from Colorado, and representatives from the
Federal Power Commission, private industry, and the academic
community.
Studies
Achieving the Coals of the Employment Act of 1946: Thirtieth Anniversary Review. Volume 2-Energy-PaperNo. 2. Energy and
Econormic Growth
According to this study, released by the Subcommittee in midSeptember, the Nation can continue to enjoy "a robust economy" while
cutting energy consumption growth substantially by 1985. The authors
who submitted the paper for the use of the Subcommittee claim that
two trends, slower population and labor force growth, and a long-term
shift from energy-intensive primary production toward greater dominance of less energy-intensive fabrication and service industries, will
cut the annual growth in energy use from its historical level of 4
percent from 1960 to 1973 to 2.3 percent from 1985 to 2000.
The Econornics of the Natural Gas Controversy
A staff study, prepared for the use of the Subcommittee and released in mid-September, was highly critical on economic grounds of
proposals to deregulate natural gas prices. Among other things, the
report reiterates the conclusion that natural gas reserves in the United
States are limited, and that total gas production is likely to decline in
the future under any price scheme.
Members of the Subcommittee: Senator Edward M. Kennedy,
Chairman; Senators John Sparkman, William Proxmire, James
A. McClure, and Orrin G. Hatch; and Representaitves Gillis W.
Long and Clarence J. Brown.
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 the groups in whose
activities the staff took part in 1977:
American Economic Association Convention, New York City
American Enterprise Institute
American University Washington Seminar
Atlantic Richfield Company
Brookings Institution
Center for Integrative Studies
Central Intelligence Agency
Chase Econometric Outlook Seminars
Chemical and Engineering News
154
Conference Board Conference
Conference on National Energy Plan
Conference on Tax Policy and Economic Growth, sponsored by National Journal
Congressional Tax Group Seminars
Cornell University, School of Industrial and Labor Relations
Council on Foreign Relations
Data Resources Outlook Conferences
Department of the Treasury
DuPont Company
Federal Staff Seminar-Georgetown University Center for Strategic
and International Studies
Harvard University
Hill and Knowlton
International Management and Development Institute
International Monetary Fund
Kansas State University
LBJ School of Public Affairs
Life Cycle Planning for Full Employment Conference
Mount Holyoke College
National Association of Business Economists
National Economists Club
North American Conference on Labor Statistics
Oberlin College
Overseas Development Council
Participation, Profit Sharing and Employee Stock Ownership Conference
Philip Morris
United Nations
Urban Institute
U.S. Conference of Mayors
Wharton Econometric Forecasting Associates Conference on the Economic Outlook
World Bank
The Executive Director and other professional staff members addressed or presented papers to a number of groups including:
Alternatives to Growth Conference
American Association for the Advancement of Science, annual meeting, Denver
American Studies Program
Aspen Institute for Humanistic Studies Seminar
Atlantic Richfield Company Annual Corporate Planning Division
Meeting
Council on Trends and Perspectives, U.S. Chamber of Commerce
George Washington University
National Forum on Jobs, People and Money
St. Olaf College
Taylor University
University of Chicago
University of Missouri
U.S. Civil Service Seminar Center, Oakridge, Tennessee and Kings
Point, New York
155
The International Forecasting Seminar in London was attended by
a member of the research staff in May. On the same trip, the staff member consulted with representatives of the Organization for Economic
Cooperation and Development in Paris and with government officials
in London.
The Committee had a staff member representing it in early September at the International Economic Association meeting in Tokyo.
Economic development and resource allocation in the Soviet Union
were the topics of discussion for a staff member visiting France, Belgium, the United Kingdom, Sweden, and West Germany in midyear.
Government officials and private experts were consulted relating to
economic trends in Asia, including the People's Republic of China, by
a staff member visiting Taiwan, Hong Kong, and Tokyo in late 1977.
The Executive Director, while on personal travel in Europe in the
fall, visited Brussels, Basel, and Paris and conferred with economic
and finance officials regarding long-range policy issues.
A staff member traveled to Europe in late 1977 to attend the OECD
Youth Employment Conference in Paris. While on the Continent, he
discussed employment issues with British business, labor, academic,
and government experts and conferred on economic -growth and trade
issues with EEC officials in Brussels.
A staff member visited the European Communities as their guest
in May and was briefed on methods used by the Communities to coordinate the national energy policies of their member states. Also, discussions were held with German officials regarding the prospects for
the German economy. The cities visited were Brussels, Strasbourg,
Bonn, Paris, Amsterdam, London, and Copenhagen. Consultations
were held with government officials and members of the business and
academic communities concerning issues of mutual concern.
CHANGES IN COMMITTEE MEMBERSHIP
During early 1977 Senator Percey (R-Ill.) left the Committee membership, and Senators McClure (R-Idaho) and Hatch (R-Utah)
joined the Committee membership.
CHANGES IN COMMITTEE STAFF
During 1977, several staff members left the Committee to work
in the new Administration, including: Lucy Falcone Hamachek, research economist, presently Deputy Assistant Secretary of Commerce
for Policy Development and Coordination; Sarah Jackson, international economist, presently Deputy Assistant Secretary of Energy for
International Policy Development; John Karlik, international economist, presently Deputy Assistant Secretary of Treasury for International Economic Analysis; Ralph Schlosstein, economist, presently Associate Director of the Domestic Policy Staff in the White House, and
Courtenay Slater, senior economist, presently Chief Economist at the
Commerce Department.
Also leaving were administrative staff members Elaine Allen, Christal Blakely, Melissa Chambers, Beverly Mitchell, Vicky Ramos, and
Robin Stein, secretaries; Libby Gotschall, receptionist; Michael
Runde, administrative assistant; and Martha Vinograd, research
assistant.
156
William Buechner, staff economist, left the Committee to join the
staff of the Small Business Committee.
The following joined the staff in 1977: Margaret Akra, David Battey, Carole Geagley, Linda Maisel, Eileen Murray, Michael Nardone,
Patricia Ormond, Jody Reed, and Mary Sutton, administrative staff;
and Thomas Dernburg, senior economist; Imogene Holmes, executive
secretary; Kent Hughes and Deborah Norelli Matz, staff economists;
Edward Jacobs and William D. Morgan, Professional Staff Members.
In mid-1977, Congress created as part of the Joint Economic Committee the Special Study on Economic Change. The new staff members are Charles S. Sheldon II, Research Director; Robert Wallace,
Assistant Research Director; Albert Sayers and Paula Dobriansky,
research assistants; Lorren Roth, secretary; and Cathy Pennock
Runde, clerk.
DISTRIBUTION OF COMMITTEE PUBLICATIONS
In 1977 the Joint Economic Committee distributed over 150,000
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
28 committee prints and has held 23 sets of hearings, (59 days).
I Economic Indicators, which are sold by monthly subscription
through the Superintendent of Documents, were received by 12,000
subscribers and distributed through the Committee to 1600 persons.
In addition, committee prints, released by the Joint Economic Cominttee, are mailed to over 700 depository libraries throughout the
country by the Government Printing Office.
SUBCOMMITTEE MEMBERSHIP, 95TH CONGRESS,
1ST SESSION
FISCAL AND INTERGOVERNMENTA,
POLICY
REPRESENTATIVES
SENATORJ
Mr. Bolling, Cochairman
Mr. Moorhead, Cochairman
Mr. Reuss
Mr. Pike
Mr. Brown of Ohio
Mr. Rousselot
Mr. McClure
ECONOMIC GROWTH AND STABILIZATION
SENATORS
Mr.
Mr.
Mr.
Mr.
Mr.
REPRESENTATIVES
Humprey, Cochairman
Bentsen, Cochairman
Ribicoff
Javits
Roth
INTERNATIONAL
Mr. Bolling
Mr. Hamilton
Mr. Brown of Michigan
Mrs. Heckler
ECONOMICS
REPRESENTATIVES
SENATORS
Mr. Reuss, Cochairman
Mr. Long, Cochairman
Mr. Moorhead
Mr. Hamilton
Mrs. Heckler
Mr.
Mr.
Mr.
Mr.
Mr.
Ribicoff
Sparkman
Humphrey
Roth
Javits
PRIoRmTS AND ECONOMY IN GOVERNMENT
SENATORS
REPRESENTATIVES
Mr. Proxmire, Chairman
Mr. Bentsen
Mr. Kennedy
Mr. Hatch
Mr. Pike
Mr. Brown of Michigan
Mr. Rousselot
ENERGY
SENATORS
Mr.
Mr.
Mr.
Mr.
Mr.
REPRESENTATIVES
Kennedy, Chairman
Sparkman
Proxmire
McClure
Hatch
(157)
0
Mr. Long
Mr. Brown of Ohio
@FedFRASER