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[JOINT COMMITTEE PRINT]
96TH CONGRESS
2d Session

}NO.

SENATE

{

REPORT

96----

THE 1980
JOINT ECONOMIC REPORT

REPORT
OF THE

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ON THE

JANUARY 1980 ECONOMIC REPORT
OF THE PRESIDENT
TOGETHER WITH

ADDITIONAL VIEWS

FEBRUARY 28, 1980

Printed for the use of the Joint Economic Committee

U.S. GOVERNMENT PRINTING OFFICE

58-205 0

WASHINGTON: 1980

JOINT ECONOMIC COMMITTTEE
(Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.)
LLOYD BENTSEN, Texas, Ohadrman
RICHARD BOLLING, Missouri, Vice Chairman
SENATE
HOUSE OF REPRESENTATIVES
WILLIAM PROXMIRE, Wisconsin
HENRY S. REUSS, Wisconsin
ABRAHAM RIBICOFF, Connecticut
WILLIAM S. MOORHEAD, Pennsylvania
EDWARD M. KENNEDY, Massachusetts
LEE H. HAMILTON, Indiana
GEORGE McGOVERN, South Dakota
GILLIS W. LONG, Louisiana
PAUL S. SARBANES, Maryland
PARREN J. MITCHELL, Maryland
JACOB K. JAVITS, New York
CLARENCE J. BROWN, Ohio
WILLIAM V. ROTH, JR., Delaware
MARGARET M. HECKLER, Massachusetts
JAMES A. McCLURE, Idaho
JOHN H. ROUSSELOT, California
CHALMERS P. WYLIE, Ohio
ROGER W. JEPSEN, Iowa
JOHN M. ALBDRTINE, Executive Director
LOUIS C. KRAUTHOFF II, Assistant Director-Director,SSEG
RICHARD F. KAUFMAN, Asa8itant Director-Geaneral0ounsel
CHARLES H. BRADFORD, MXinorftj Oounsel
(II)

S

CONTENTS
I. Introduction
Senator Lloyd Bentsen, ChairmanRepresentative Clarence J. Brown, Ranking Minority Member.
II. Review and Outlook -11
Review of 1979 -11
Evaluating Economic Forecasts -18
The Outlook for 1980 -24
Long-Term Focus -30
III. The Design of Macroeconomic Policy for 1980 and Beyond -33
The Need for Consistent and Steady Long-Term Economic
Policies ---------The Design of Fiscal Policy for 1980 and Beyond -39
The Design of Monetary Policy for 1980 and Beyond -46
Macroeconomic Policy Objectives: An Overview -60
IV. Inflation, Productivity, and Regulatory Reform -63
International Comparisons of Inflation and Productivity -64
Recession, Inflation, and Productivity Capital Formation and the Productivity Slowdown -70
Inflation, Productivity, and Tax Policy -71
The Demand Rate of Inflation -71
The Shock of Inflation -72
The Core Rate of Inflation -72
Other Measures to Reduce the Core Rate of Inflation -77
Research and Development -78
Wage-Price Guidelines -National Productivity Council and Labor-Management
Cooperation -84
Regulation and Paperwork -86
Regulatory Budget -92
Cost-Effective Regulation -98
Federal Paperwork -99
V. Employment, Small Business, and Housing -108
Overview of the Employment Situation in 1979 -109
The Problem of Structural Unemployment -114
The Nature of Structural Unemployment -114
The Economic and Social Costs of Structural Unemployment Long-Term Demographic Trends and Structural Unemployment -------------------Solving the Structural Unemployment Problem -133
A Policy Framework -133
A Program for Upgrading Education and Skills Among the
Structurally Unemployed -140
The Target Population ---What Should be Done? The Setting of Goals and Priorities
Expanding Small Business Opportunities -152
Stabilizing Homebuilding: The Impact on Structural Unemployment -------------------Structural Unemployment and the Goals of the Full Employment
and Balanced Growth Act of 1978 -162
(m)

Page
1
6

33

69

80

118
123

141
144
157

Iv
VI. Energy and International Trade -165
Energy Dependence -165
Enhanced Oil Recovery -172
A Near-Term Energy Security Program -174
Energy Indices -175
Energy Security Index -175
Energy Productivity Index -180
Near-Term Energy Production: Alcohol Fuels -185
Increased Diversity of Supply -187
North American Energy Policy -194
International Trade -196
International Competitiveness --------Export Incentives -200
Foreign Corrupt Practices Act -202
American Trading Companies -204
Federal Trade Bureaucracy -205
International Finance: Adjustment and Recycling -206
Appendix: The Current Services Budget
-213
Additional Views -_

Page

198

215

96TH CONRES

2d Se88wn

1

SENATE

I

i

REPORT
No.

REPORT ON THE JANUARY 1980 ECONOMIC REPORT
OF THE PRESIDENT

-______________1980.-Ordered to be printed

Mr. BENTSEN, from the Joint Economic Committee,

submitted the following

REPORT
together with
ADDITIONAL VIEWS
[Pursuant to see. 11 (b) (3) of Public Law 304 (79th Cong.) I

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.
All statistics appearing in this report were current as of February 18,
1980.
(v)

INTRODUCTION
BY
SENATOR LLOYD BENTSEN, CHAIRMAN
The Majority and Minority Members of the
risen above
Committee have
Joint Economic
year
election
this
in
political partisanship
report.
annual
unified
a
issue
to once again
We have done so because we believe that our
an innovative and
Committee has developed
help reverse our
to
strategy
effective
country's declining economic fortunes and
all
of living for
standard
the
raise
Americans during the 1980's and beyond.
The 1980 annual report signals the start
The past
of a new era of economic thinking.
focused
who
economists
by
has been dominated
of the
side
demand
the
on
almost exclusively
trapped
were
result,
a
as
who,
economy and
inevitable
an
is
there
that
into believing
trade-off between unemployment and inflation.
inflation
to fight
America does not have
up
pulling
periodically
by
1980's
the
during
doom
that
recessions
the drawbridge with
millions of Americans to unemployment.
says that
report
The Committee's 1980
by
created
growth,
economic
steady
a
by
accompanied
and
gains
productivity
reduction
gradual
a
and
stable fiscal policy
money supply over a
of the
in the growth
inflation
reduce
can
years,
period of
without
1980's
the
during
significantly
this
achieve
To
unemployment.
increasing
a
recommends
Committee
the
goal,
to
designed
comprehensive set of policies
enhance the productive side, the supply side
also
Commnittee
The
economy.
the
of
the
to
approach
targeted
a
recommends
deand
problems
Nation's structural economic
emphasis of macroeconomic fine tuning.
(1)

2

The Committee recommends :-hat fully onehalf of the next tax cut be directed to
enhancing
saving
and investment in the
economy. Traditionally, tax cuts have been
viewed
solely as countercvclical devices
designed to shore up the demand side of the
economy. The Joint Economic Committee is now
on record in support of the view that tax
policy can and should be directed toward
improving the productivity performance- of theeconomy over the long term and need not be
enacted only to counter a recession.
One of the major reasons why policymakers
have not viewed tax
reducions
as
an
important device to improve the structure of
the economy has been the absence of economic
models capable of adequately assessing the
effects of supply side tax policies.
The
Joint Economic Committee, working with Dr.
Otto Eckstein of Data Resources, Inc.,
has
taken a major step toward remedying that
deficiency.
The new model discussed in :he 1980 report
shows that tax policies, such as depreciation
schedule adjustment, can lower :he inflation
rate substantially over the decade.
The
model also demonstrates tha: the only way
demand management policies alone can lower
the
inflation
rate substantially is by
maintaining unemployment at near depression
levels throughout the decade. This new model
is an important tool
which
will
help
policymakers
implement
the
supply side
policies which are being advocated by the
JEC.
The Committee's 1980 repor: recognizes
that continuation of the his.or:c adversary
relationship among government, business, and
labor is a major impediment to implementation
of
supply
side
policies
to
improve

3

Committee
the
Therefore,
productivity.
recommends that the Administration use the
National Productivity Council as a vehicle to
enlist the active cooperation of business and
labor to work on new ideas to improve the
productivity performance of the economy. Our
not
if
country may find it difficult,
to solve its major economic
impossible,
problems and remain competitive in world
markets, as long. as- government.,. bus~iness., and
labor continue to work at cross purposes.
The Committee continues to believe that
the Federal Government must put its own
financial house in order. That requires a
steady reduction of the ratio of government
spending to the gross national product and a
full accounting of the command over resources
now exercised by the Federal Government. The
the
understates
budget
fiscal
current
proportion of the Nation's resources that are
The fiscal budget
used for public purposes.
does not include private, State, and local
Federal
by
government spending mandated
regulations.
The Committee recommends the establishment
of a process that would ultimately lead to a
Federal regulatory budget to be submitted
along with its fiscal budget. Development of
budget would be the most
regulatory
a
important new budgetary development since the
Federal Government began to submit a single
and
departments
budget for all Federal
agencies.
Despite the important employment gains
which have been made over the last two years,
too many blacks, Hispanics, young people, and
other disadvantaged minorities have been left
out of the mainstream of our economic life.
We do not, and we must not, accept the
inevitability of structural unemployment.

4

The Committee recommends that this society
undertake a renewed effort to keep youngsters
in school and to return to the basic elements
of a good education --

reading, writing,

quantitative

We also advocate a new

skills.

approach to job training programs --

and

one that

coordinates
job training and actions to
increase capital formation in order to avoid
a misma:ch of job opportunities and the newly
trai ned.
Energy remains a key economic and national
security problem. The 1980 report recommends
increased domestic production, particularly
through enhanced recovery techniques
and
greater
energy
conservation.
It
also
recommends

a

new

concept

--

an

energy

securitv index -- to help alert all Americans
to potential dangers to
this
country's
security from possible disruptions in our
energy supplies.
The Committee also advocates development
of an energy productivity index to assess the
effects
of
our
efforts
at
energy
conservation. We also support development of
alternative sources of energy and initiatives
to diversify oil and gas production through
increased exploration in the third world.
Taken together, these energy recommendations
provide a solid, workable agenda to protect
our national security and to reduce our
reliance on foreign sources of energy.
As\ oart of the effort to adapt U.S. trade
policies to the economic realities of the
1980's, a delegation of JEC Members journeyed
to East Asia in January at the request of the
U.S.
Chamber
of Commerce, the American
Pacific Council of American Chambers
of
Commerce, and the U.S. Department of State.
That delegation held 10 days of hearings
durinc
which it received testimony from

5

numerous businessmen and women who are on the
front lines of America's effort to remain
competitive in the world.
delegation will issue a detailed
The
report in April. But some of what it has
learned is discussed in the 1980 annual
report. For example, the Committee urges the
major
a
undertake
to
Administration
our
to. encourage
diplomatic. initiative
an
to
adhere
to
partners
trading
international code of conduct enforced by an
That would improve the
international agency.
business
international
of
conduct
transactions and ensure that no business firm
operating anywhere in the world can gain a
advantage through corruption.
competitive
The Committee also recommends a comprehensive
assessment of Federal tax and regulatory
policies which affect American business and
individuals living abroad to determine the
impact of those policies on our competitive
position in world markets.
More than a century ago, Oliver Wendell
Holmes suggested that the most important
thing in this world is not so much where we
stand, but in what direction we are moving.
"We must sail," he said, "sometimes with the
wind and sometimes against it --

but we

must

sail and not drift, nor lie at anchor." The
1980
unified
Joint Economic Committee's
points the Congress, the
report
annual
Administration, and the Nation in the right
It is a call to lift anchor and
direction.
in President Kennedy's words to "get this
country moving again."

INTRODUCTION
BY
REPRESENTATIVE CLARENCE J. BROWN,
RANKING MINORITY MEMBER
The Minority Members of the Joint Economic
to join the
Committee are again pleased
Majority Members of the Committee in this
To achieve another
consensus annual report.
in a national
this time
consensus report,
remarkable
a
is
year,
election
accomplishment, attesting to the soundness of
the policy recommendations contained herein.
The 1980 Joint Economic Committee Report
It
is not a vague compromise of mushy logic.
is a clarion call to get this country moving
clear set of
again. And it offers a new,
sustainable
real,
to
generate
policies
It is
inflation.
economic growth without
forthright, revolutionary, and important.
The United States
These are tense times.
and the free world are threatened militarily
struggle with
Americans
and economically.
each other for a bigger slice of a shrinking
pie.
It should not be this way.
It did not
have to be this way.
1978
our
In
trillion threshold.
trillion.

economy crossed the
It could have been

$2
$3

If Americans had saved and invested a bit
1 1/2
more, if the Nation had grown only
the
1950,
year
since
each
faster
percent
United States would now have more than a $3.5
trillion economy instead of the $2.4 trillion
(6)

7

Incomes would be 50
registered in 1979.
percent higher than they are now, and jobs
would be plentiful. Federal revenues would
have been $250 billion higher in 1980, and
there would have been enough to provide for
balanced budgets and creatly expanded health
and social spending with enough left over to
permit lowering income and payroll taxes
instead of raising them. The Nation would be
enjoying stable prices, millions more jobs
system.
security
social
and a solvent
America would have an ultramodern productive
industrial economy three times the size of
the

Soviet

Union's

instead of twice --

and

Russia
unquestioned military superiority.
United
the
with
up
simply could not have kept
States.
Faster growth, higher real incomes, and
the
what
exactly
are
jobs
plentiful
the
and
unemployed,
the
minorities,
been
have
country
this
of
underpriviledged
It is no accident that
seeking for years.
and
the greatest gains in income, jobs
dignity for such workers have come during
periods of rapid expansion.
Therefore, growth is critical; and saving,
investment, and productivity are critical to
They must be encouraged, as the
growth.
Minority has been saying for years. The hour
is very late. It is high time the Nation got
started.
We have not gotten started because the
outdated
Administration has cluna to an
fcrqed in other economic
economic doctrine,
The political
circumstances decades aCo.
leadership that has doinated our Nation for
more than a generation has not adopted modern
America's current
address
to
solutions
The emptiness of its
economic problems.
doctrine is proven by zhe Administration's

8

own estimates that one year from now the best
it feels our Nation can hope for under its
policies is 10.5 percent inflation and 7.5
Minority is
The
unemployment.
percent
convinced our Nation can do better and that
Americans demand that it do better.
This report provides the needed approach
that repudiates the myth perpetuated by the
Administration that to fight inflation we
is
That
unemployment.
increase
must
manipulative demand management economics of
the old-fashioned variety, and it is outdated
by today's circumstances.
Our Nation should have three major goals:
full
and
real growth,
price stability,
employment.
cannot hit these diverse economic
We
targets if all our policy options are aimed
to wring out
economy
the
slowing
at
as
The proper policy "mix,"
inflation.
outlined in this report, is:
1.

To fight inflation by a gradual
reduction in the
(but sustained)
growth of the money supply and a
gradual reduction of the ratio of
regulatory
and
direct
Federal
spending to GNP.

2.

To fight general unemployment by
growth
economic
increasing real
through tax reductions designed, not
to pump money into the economy, but
restructure the tax code to
to
increase the after-tax reward to
investment,
saving,
additional
production, and employment. The tax
structure must direct more of our
into
effort
economic
annual
for competitiveness
modernization

.9

and growth rather
consumption.
3.

than

immediate

To fight hard-core unemployment by
emphasizing
program
targeted
a
productive, private sector, on-thejob training to increase the skills
Structural
unemployed.
the
of
which
problem
a
not
unemployment is
pumping
by
solved
be
can or should
to
jobs
money into "make-work"
inflate the whole economy.

out in this
spelled
These policies -mutually
and
consistent
are
report --

The tax cuts to stimulate
reinforcing.
saving, investment, and competitiveness will
put more goods on the shelves and lower
prices, thus reinforcing the anti-inflation
monetary policy. The anti-inflation monetary
policy will reduce the biases against saving
and investment (now in the tax code) which
occur as inflation destroys the depreciation
allowances and savings returns and pushes
The
brackets.
tax
people into higher
the
reinforce
thus
will
lowering of inflation
production,
more
generating
tax changes in
operate
to
profits
and
growth,
real
Both
rates.
tax
lower
at
programs
government
raise labor productivity,
will
policies
increase the demand for labor, and reinforce
hire and train the
to
incentives
the
unemployed.

All these policies mean a healthier and
more efficient domestic economy better able
to compete in the world, to improve the U.S.
balance of payments and strengthen the dollar
The
U.S. freedoms.
sacrificing
without
of
cost
the
stronger dollar addresses
materials and other
raw
oil,
imported
products, thus helping to fight inflation.

10

The comprehensive Joint Economic Committee
approach to the many problems confronting the
economy herein addressed is a workable and
acceptable answer for a better future for
America and the world.
The
Minority
is
pleased
to
have
participated in pointing the way, refining
the
ideas
and
presenting
them
for
consideration.

II.

REVIEW AND OUTLOOK
Review of 1979

The economy continued its expansion in
1979 though at a much reduced pace from that
experienced during the earlier years of the
recovery from the 1973-75 recession, and
inflation accelerated.. This. was contra-r-y to.
economic
many
widespread predictions by
forecasters.
real gross
over year,
year
Measured
percent in
2.3
by
grew
(GNP)
national product
rate of
percent
4.4
the
from
down
1979,
percent
5.3
the
and
1978
in
posted
growth
The
rate of growth registered in 1977.
consumer price index (CPI) rose by 13.3
percent in 1979 compared to 11.8 percent in
1978.
A more accurate portrayal of the rate of
economic activity over the course of any
single year is obtained by measuring growth
Using
fourth quarter over fourth quarter.
of
pace
the
that
clear
is
it
this criterion,
in
dramatically
slowed
economic activity
the
to
1978
of
quarter
fourth
the
From
1979.
fourth quarter of 1979, real GNP advanced at
sluggish rate of 0.8 percent, down
the
1978 and 5.7
sharply from 4.8 percent in
percent in 1977.
forecasters did not predict the
Most
There were
accelerated pace of inflation.
evidenced
as
slack
signs of growing economic
Board
Reserve
by a reduction in the Federal
86.8
from
utilization
of capacity
index
84.4
of
value
a
to
percent in December 1978,
in
slowdown
a
and
1979,
percent in December
as
inflation,
order backlogs. Nevertheless,
measured by the CPI, zoomed up from a 9.0
(11)

58-205 0 - 80 - 2

12
percent rate of increase in 1978 to 13.3
percent in 1979. Food and energy prices in
the first half of the year, and energy prices
and
home-related financing costs in the
second half, accounted for much of the sharp
increase in the CPI during 1979. However,
the accelerating rate of inflation was not
due to these special factors alone. On the
contrary, during 1979 there was a marked
increase, in the, nderlying rate, of. inflation.
-- the rate determined by the long-run pace
of unit labor and unit capital costs -- of
2.5 percent or more, bringing it to a high of
about 9 percent. This rapid increase in the
underlying rate of inflation is what poses
the
most
serious
challenge
for
U.-S.
policymakers. Even if the special factors
were to disappear in future months, we would
still be stuck wi:h a very high rate of
inflation
that,
on
the basis of past
experience, exhibits considerable inertia.
Although the slowdown in real GNP growth
was substantial in 1979, the reduction in the
growth of real final sales was much less so,
advancing fourth m-arter to fourth quarter at
a rate of nearly 1.7 percent in 1979. The
sharp reduction in the rate of inventory
investment
in
,979
accounts
for
the
difference in these growth rates.
The slowed ra e of inventory investment
has two implications.
First, from the point
of view of
final sales, the economy was
stronger in 1979 than real GNP statistics
indicate.
Second,
because
business
inventories have already been substantially
adjusted in response to a reduced rate of
economic activity, inventory reduction will
be less severe if -here is a further decline
in real economic ac:ivity in 1980, an outcome
that will limit the magnitude of the decline
itself.

13
The real story in 1979, however, was not
the fact of the economic slowdown itself.
This was widely anticipated -- indeed, it was
the
of
consequence
a
as
planned --

restrictive demand management policies put
into place late in 1978 and early in 1979.
after imported oil prices rose by
Moreover,
the slow
46 percent from February to July,
was all but
1979
for
outcome
growth
guaranteed.. Most forecasters did not predict
the resilience of the American economy in the
second half of the year in the face of these
domestic and external policy actions. Coming
off an annualized 2.3 percent decline in real
GNP in the second quarter of 1979, real GNP
increased sharply in the third quarter by 3.1
percent at an annual rate and continued to
an
at
quarter
fourth
advance in the
of
increase
of
rate
annual
high
unexpectedly
to
refused
simply
economy
The
percent.
1.4
turn down at the point most forecasters had
led us to expect it would.
There were a number of other developments
in 1979 that were not predicted by most
Despite the slowdown in the
forecasters.
economy, the unemployment rate moved only
slightly, varying by almost imperceptible
amounts over the course of the year around an
average rate of 5.8 percent. True, labor
force growth slowed in 1979 to an average
annual rate of increase of 2.1 percent, down
from the 2.42 percent average annual rate of
increase experienced over the course of the
But the fact that our
past five years.
1 percent
economy, experiencing less than
real growth, was capable of translating a
labor force increase of 2.2 million into
employment gains of 2.1 million, thereby
the unemployment rate unchanged,
leaving
optimistic
most
the
even
astounded
forecasters.

14
Most forecasters also did not predict the
continued remarkable strength of consumer
spending during 1979. Although rapid price
personal
disposable
increases left real
income virtually unchanged, real consumption
fourth
the
from
expenditures, measured
quarter of 1978 to the fourth quarter of
As
1979, actually increased by 2.6 percent.
a consequence, personal savings as a percent
of personal. disposable. income fell. from- 4..7
percent in the fourth quarter of 1978 to 3.3
the
1979,
percent in the fourth quarter of
lowest level in more than three decades, a
This
development that we view with concern.
low savings rate helps to explain the recent
strength in the economy, but living off our
savings could be a bad sign for the future.
Several explanations have been offered for
these developments. Some have suggested that
the decline in saving is a natural reaction
to the inflation-induced drop in the aftertax reward to saving. Others have mentioned
inflationary
heightened
of
effect
the
expectations on the desire to buv before
prices rise further.
The investment picture in 1979 was mixed.
Measured year over year, real gross private
domestic investment increased by $0.5 billion
1
in 1979, an increase of two-tenths of
fixed
nonresidential
Real
percent.
rising
investment performed quite strongly,
By comparison,
by 5.8 percent in real terms.
residential fixed investment declined by 6
percent in real terms.
When the rate of investment spending is
calculated using fourth quarter to fourth
it is apparent that
quarter comparisons,
investment activity slowed sharply in 1979.
From the fourth quarter of 1978 to the fourth
quarter of 1979, real gross private domestic

15
investment declined by over 5 percent; real
nonresidential fixed investment increased by
only 1.7 percent compared with about a 5
percent average annual increase over the past
and residential fixed investment
decade;
The slowdown in
declined by 8.33 percent.
growth of real nonresidential fixed
the
fourth
investment in 1979, down from a
quarter to fourth quarter rate of increase of
of
is a source
10.48. percent in 1978,
considerable concern to the Committee.
Particularly noteworthy was the magnitude
of the improvement in our net export position
during 1979. Measured in billions of current
dollars, net exports improved by almost $7
billion in 1979, rising from an :.average
annual rate of $-10.3 billion in 1978 to an
average annual rate of $-3.5 billion in 1979,
an improvement that occurred despite a near
$18 billion increase in our oil import bill
in 1979. In billions of 1972 dollars, net
exports rose from $11.0 billion in 1978 to
$17.7 billion in 1979.
the
for
account
factors
Several
the
improvement in our net export position,
most notable being the more rapid growth of
nonagricultural exports, the slower growth of
nonoil imports, and the surge in growth of
The trade deficit
our services exports.
declined from a value of $33.7 billion in
1978 to $29.1 billion in 1979 due in large
part to the sharp turnaround in our trade
balance in manufactured goods from a deficit
of $5.8 billion in 1978 to an estimated
Our surplus
surplus of $4 billion in 1979.
services account swelled by an
the
on
estimated $8.3 billion, the result mainly of
strong gains in net.direct investment income
which rose from $21.7 billion in 1978 to
Both of these
in 1979.
billion
$30.6
developments were sufficient to bring our

16
current account into near balance in 1979.
This represents an improvement over the 1978
current account deficit of $13.4 billion.
Table II-1 shows a breakdown of the sources
of
economic
growth during the recovery
period.

17
TABLE II-1
SOURCES OF ECONOMIC GROWTH*
(Percent Change, Annual Rates)

1976

1977

1978.

Consumer

4.5

4.1

2.9

0.7

Business

1.4

1.5

1.1

-0.4

Foreign
Trade

-0.7

-0.6

0.5

0.5

Government

-0.3

0.7

0.3

0

4.9

5.7

4.8

0.8

Total

*Comparisons are
quarter
Source:

fourth

1979

quarter to fourth

U.S. DePartment of Commerce, Bureau
of Economic Analysis.

18
As
noted
earlier, the United States
reached near balance in its current account
despite
dramatic
deve~o=-ents
on
the
international oil price front. Twice during
the year, in response to turmoil in Iran and
resulting tight world oil
markets,
oil
exporters responded to surgcing spot market
prices with massive contract price increases.
The
Organization
of Pe-roleum Exporting
Co.un.tri.es. (.OPEC) crude. prices. a.veraged- about
$27 per barrel in January 1980, up from
$13.66 per barrel a year earlier. The price
increase occurred despite a worldwide surplus
of oil production over consumption which
approached one million barrels daily (mbd) by
the end of the year.
Evaluatino Economic Forecasts
Before
making
our assessment of the
outlook for 1980, it is wor-hwhile going back
a year or so to examine the outlook for 1979
formed on the basis of economic forecasts
that were then receiving a lot of attention.
How accurate were the model forecasts?
Did
the
performance of the economy in 1979
parallel
the
performance- projected
by
forecasters or were thev way off the mark?
Did the forecasters predc-- a
continued
expansion of the economy in 979 or did they
project a downturn?
Did they accurately
predict a near constant unemployment rate?
Did they accurately foresee the
sharply
accelerated rate of inflation?
These are not easy questions to answer.
The various forecasters were not always in
agreement with one another in terms of their
outlook for 1979. And their outlook varied
depending on when it was that they made their
forecasts.

19

The discrepancies in model forecasts for
1979 and the variations in those forecasts as
we approached 1979 are presented in Table II2. The table shows the 1979 forecasts made
(DRI), Wharton
Data
Resources, Inc.
by
Inc.
Associates,
Econometric Forecasting
(WEFA), and Chase Econometrics Associates,
Inc. (Chase), over the period from the third
quarter of 1977 to the fourth quarter of
1978.

20
TABLE II-2
QUARTERLY FORECASTS FOR YEAR

1977:3

1977:4

1979

Forecasts Made In:
1978:3
1978:2
1978:1

Real GNP (%Change)
4.0
3.0
DRI
3.9
3.9
Chase
3.9
4.1
WEFA

Actual*
1978:4

3.2
2.5
3.9

2.0
1.3
2.4

2.27
2.27
2.27

implicit Price Deflator for GNP (% Change)
6.2
5.8
5.7
5.5
DRI
6.5
5.8
5.5
5.2
Chase
7.0
6.5
5.7
6.1
WEFA

6.6
6.8
7.0

7.3
7.7
7.1

8.84
8.84
8.84

Unemployment Rate (Percent)
6.4
6.3
6.4
DRI
5.6
7.3
8.5
Chase
6.0
6.3
5.6
WEFA

6.0
6.0
5.5

6.3
6.5
5.7

6.6
6.8
6.2

5.8
5.8
5.8

95.6
96.4
97.1

96.0
96.0
97.7

96.0
95.5
96.4

Employment
DRI
Chase
WEFA

3.9
4.2
3.9

(Millions of Persons)
95.3
95.0
94.9
96.1
94.1
92.5
95.7
94.9
96.6

3.9
4.3
4.3

*preliminary
Source:

Statistics

compiled

by the Library of Congress

96.9
96.9
96.9

21

The 1979 real GNP forecasts made in 1977
and early 1978 were all in the neighborhood
of 4 oer-ent. During the last half of 1978
the GN? forecasts were lowered and by the end
of the year two of the three forecasts shown
were acceptably close in terms of the growth
actually observed.
Looking at the price
predictions,
most
forecasts
showed
an
increase of 5 to 6 percent in the early part
of the forecasting. period-..
By. the. end. o.f
1978, the forecasts had been raised to the 7
to 8 percent range, but they still fell short
of actual performance.
The unemployment rate
projections were consistently too high and
showed a mixed picture with no significant
improvement or deterioration as time passed.
The emnalcvment projections show a pattern
which oarall.els the growth forecast.
Althouch not shown in Table II-2, the
model forecasts for 1979, made in 1979, were
much closer to the mark in terms of real GNP
growth,
inflation,
unemployment,
and
employment.
However,
virtually
all
forecasters in the spring of
1979 -predicted
that the economy would be turning down by the
end of 1979, that the unemployment rate would
be
ris-ing, and that inflation would be
somewhat
less
rapid.
All
of
these
predictions turned out to be incorrect.
The record for the four-vear period, 1975
to 1978, shows a different but in some ways
more disturbing pattern in the forecasts. In
general, the inflation forecasts were poor,
the unemployment forecasts were mixed, and
the growth forecasts were good.
In this
period, the 1973-75 recession ended and was
followed by three years of steady growth, and
there were no unusual inflation shocks to the
economy. The consistent underestimates of
prices by all the forecasters were therefore
disappoin:ing. Two of the three forecasters

22
underestimated unemployment at the beginning
of the period and, in the last three years,
These
were increasingly too high.
they
the
of
value
the
reduced
inaccuracies
of
dangers
the
demonstrate
and
forecasts
excessive reliance on forecasts as guides to
policy.
is, of course, dangerous to make
It
very
sweeping, conclusions based on this
of
record
forecasting
limited analysis of the
one
Nevertheless,
builders.
the model
In assessing the
conclusion seems apparent.
model
the
year,
coming
the
outlook for
cautiously.
very
used
be
to
need
forecasts
The forecasters themselves would tell you
the same thing. Forecasting is not an exact
it is partly, and maybe largely, an
science;
art. And all forecasts are "conditional" -dependent on the assumptions employed by the
forecasters in making their projections.
There are three principal sources of error
in model forecasts. First, the models used
to generate the forecasts could be in error
to the extent that they fail to reflect
accurately the underlying structure of the
behavioral
assumed
including
economy,
forecast period.
the
during
responses,
Second, they could be inaccurate because of
the assumptions employed about the nature of
economic policy during the forecast period.
And third, they could be wrong because they
fail to reflect the influence of a whole host
of events that no one could reasonably have
anticipated at the time of the forecast.
source of error is that
second
The
adjust their policies
policymakers
frequently
in ways that differ from those assumed in
the
because
precisely
making forecasts
to
found
forecasts portend outcomes that are

23
be
inconsistent
with
stated
policy
objectives.
In other words, the private
forecasts with their assumed policy scenarios
are often used for the purpose of making
policy adjustments in an effort to achieve
outcomes that differ from those originally
forecast.
If the economic policies assumed by the
model builders constituted the only serious
source of forecast error, it would be highly
appropriate to use those model forecasts as
one important basis for the design of our
economic policies. However, it is becoming
clear that the other two sources of error are
more important, as a consequence of which it
might be injudicious to alter policies when
confronted with forecasts implying outcomes
that
are at variance with our economic
objectives.
The
inability
of the forecasters to
accurately predict employment, unemployment,
and inflation in the face of reasonably
accurate real GNP forecasts suggests that
there are problems with either the structures
of the models themselves or their assumptions
respecting
the
behavioral
responses of
consumers and businesses. The failure of the
model builders to foresee the huge jump in
OPEC prices in June, and the heightening of
world
tensions
and
their
economic
consequences at year end, should make us
doubly cautious in accepting current economic
forecasts
for,
if
anything,
political
uncertainty is much greater now than it has
been in the recent past.
None of this discussion is intended to
deny the usefulness of economic forecasting.
On the contrary, economic forecasting is a
very useful planning tool for both
the
government and the private sector.
Economic

24
forecasts can alert us to developments that
Without
future.
the
in
occur
might
forecasts, public and private policymakers
would be confined to walking into the future
while constantly looking at the immediate
pas:.
We have been strong advocates of economic
the
to
inputs
useful
as
forecasts
Indeed, we have pushed
pol cymaking proc.ess-.
both the Executive Branch and the Congress to
look further into the future in trying to
formulate our economic policies. We continue
to believe that this is important to the
Nevertheless, we
process of policy design.
caution,
extreme
exercise
to
need
some forecasters
Indeed,
particularly now.
who had initially predicted a recession for
1979, saying later that it would not come
until 1980, are saying now that we may not
have a recession at all. In a period with as
mucn uncertainty as this one, policymakers
any
approach
would be well advised to
caution.
forecast with a good deal of
The Outlook for 1980
To be blunt, we do not know for sure, nor
does anyone else, whether the economy will
enter a recession in 1980. We do not know
whether inflationary pressures will abate
sigsificantly or whether the unemployment
If the OPEC
rate will rise significantly.
prices once
oil
their
producers escalate
of oil to
shipments
their
again or curtail
result a
could
there
States,
United
the
serious recession and a sharply increased
There are a number of
rate of inflation.
reasons why the now widely expected recession
forecast may not materalize. For example, a
steep rise in military outlays coupled with
strong consumer spending could
continued

25
provide a short-run stimulus.
Barring a
wartime mobilization effort and assuming,
optimistically,
that
OPEC
petroleum
production remains at or above 30 mbd, and
that spot prices decline converging toward an
assumed average contract price of $30 per
barrel, it is possible to formulate a less
uncertain outlook for 1980.
For the most
part, these are the conditions assumed by
most model forecasters., in their "baseline"
predictions
for
1980.
The
present
uncertainties
add
to
the reasons that
policymakers should focus on the long term.
The
Council of Economic Advisers has
forecast that in 1980,
the economy will
experience
a mild recession.
They have
predicted that real GNP will decline
1
percent during 1980 then grow at a 2.8
percent annual rate during 1981. At the same
time,
they
foresee
inflation
slowing
moderately. Looking at changes in the CPI
from December to December, the Council sees
the rate of inflation declining from 13.2
percent in 1979 to 10.4 percent in 1980 and
8.6 percent in 1981.
The decline in real GNP
is expected to be accompanied by an increase
in the unemployment rate to about 7-1/2
percent in late 1980. With the resumption of
economic growth,
the unemployment rate is
expected to fall slightly to 7-1/4 percent by
the end of 1981.
In the Council's view, the
recession is likely to be brief, mild, and
largely over by midyear.
Private
forecasters
are
largely
in
agreement with the Council.
They are almost
unanimous in telling us that we should expect
economic contraction to occur in the first
half of 1980 and a resumption of moderate
growth in the latter part of the year.
Although there are differences in the exact
quarterly pattern, the depth of the decline,

26
and the length of the recession, there is
widespread agreement that the economy will
experience at least a mild recession in 1980
and move into 1981 on a positive growth
track.
The forecast of a mild recession seems
When we
reasonable, but it is not certain.
examine the potential sources of economic
grow-th.,. the consumer sector is-one: area where
caution needs to be exercised. Although it
is widely anticipated that consumers will
retrench and try to bring spending patterns
more closely in line with disposable income,
it is possible they will continue to borrow
The
or to dip further into their savings.
unused lines of credit available to consumers
remain substantial, and it is clear that
people's attitudes toward the use of debt
have changed dramatically in recent times.
If consumers continue to behave as they did
in 1979 and other parts of the economy do not
deteriorate, a recession could be avoided.
Although we do not consider this the most
likely prospect for 1980, there is a strong
possibility that it might occur.
Caution also needs to be exercised in
terms of the outlook for Federal Government
Defense and cold war factors could
outlays.
a
cause sharp increases in defense outlays,
growth
contribute to
will
that
factor
directly, in addition to the private sector
spending increases occasioned by increased
contracts and military purchases. How large
the military buildup will be and how rapidly
it will be translated into military contracts
and payments is unknown at present.
Looking at other potential sources of
growth, we believe that there are likely to
be some shifts between the government sector
and the foreign trade sector. The embargo on

27
grain sales to the Soviet Union means that
our exports will be reduced and government
purchases will be increased.
Since these
changes are largely offsetting,
they will
have little impact on next year's economic
growth. However, a general slowdown in the
world economy, in the wake of 1979 OPEC price
increases, would mean
that
the
growth
contributed by the foreign trade sector in
1979 would not be repeated in 1980.
There
is
good reason to expect the
business sector to be virtually flat in 1980
as it was in 1979. The slowdown in inventory
accumulation observed in the last half of
1979 indicates that inventory levels will
probably be kept tight next year. Surveys of
investment plans also show a flat year for
1980.
And
finally,
investment
has
traditionally lagged behind other sectors of
the economy in turning up after a slowdown.
This brings us back to th e consumer.
While it is possible
for
consumers
to
maintain their spending levels zv increasing
their debt burden, it seems more likely that
they will cut back. The weakness in housing
and automobiles- that showed up in the latter
part of 1979 is likely to spread to other
parts of the economy, and another year of
stagnant or falling real dispcsable income
will create mounting pressure on consumers'
budgets.
In view of these considerations, we think
the rate of real GNP growth for
1980 could
lie in the range of from +0.5 to -1.5 percent
measured fourth quarter to fourth quarter.
The range is a narrow one encompassing the
possibility of continued slugg s> growth with
no recession,
and a mild recession. The
consensus forecast estimates growth at from 0.5
percent
to -2.0 percent, and some

58-205 0 - 80 - 3

28
forecasters'-have suggested that the situation
could be much worse. However, the following
factors could contribute to a more cotimistic
(1) The behavior of businessmen in
outcome:
the
mases
inventories
maintaining lean
much
cycle
probability of a classic inventory
Much of the employment
(2)
less likely.
growth of the past few years has been in the
service industries. This part of ou: economy
is. less. sensitive- to cyclical fluctuations,
and therefore the prospect of large layoffs
during a slowdown are somewhat reduced. More
stable employment patterns will be :ranslated
into more stable consumer income. (3) Just
as the new financial instruments provided
more credit to the housing market than had
high
been available in past periods of
slowdown
the
interest rates, thereby delaying
in housing starts, those same sources of
funds can be expected to cushion the fall in
1980.
On the price front, we see little prospect
The
for relief from inflation in 1980.
recent petroleum price increases mean that
even with moderate wage increases and no
unfortunate surprises in other areas, we are
virtually locked into a rate of inf ation of
10 percent or more. The only way cur Nation
can absorb external price shocks is through
productivity growth. Unfortunately, policies
have not been put in place to strengthen
productivity and therefore the prospects are
protuctivity
improved
much
a
dim for
performance during 1980.
Of course, if consumers cut back on their
expenditures by more than we now an:icioate,
and if investment does not increase to pick
up the slack, and if net exoorts de:eriorate
by more than we now foresee, the economic
outlook could be worse.

29
The caution we express with respect to our
net export position in 1980 is well grounded.
As a result of the 1979 rise in world oil
prices, OPEC revenues are estimated to jump
to around $280 billion in 1980 compared to
$138 billion in 1977, $130 billion in 1978,
and an estimated $196 billion in 1979. Even
assuming no dramatic changes in OPEC policies
in 1980,
the magnitude of this increase in
revenues.virtually guaranteess-that the OPEC
nations will run a current account surplus of
$100 billion or more in 1980.
The consequences of the 1979 OPEC price
increases for the world economy in 1980 seem
clear.
There will be slower growth, higher
inflation, and enlarged balance-of-payments
deficits for the non-OPEC nations of the
world. And it is likely that the nonoil
developing nations will be hit the hardest,
all the more so because it is almost certain
that the OPEC surpluses will not be recycled
as quickly or as easily as
they
were
following
the 1973-74 OPEC price hikes.
Depending on the outcomes that result from
OPEC's 1979 price increases, the net export
position
of
the
United
States
could
deteriorate dramatically.
In our estimation, it is not now possible
to judge which of the many
prospective
outcomes is most likely for 1980. We do
expect 1980 to be a year characterized by
sluggish growth, at least.
But even this
prospect is not unconditional.
In view of this uncertainty, we do not
feel that it is appropriate to rush forward
with new macroeconomic policy initiatives
designed explicitly on the basis of current
economic forecasts. We will make a number of
macroeconomic policy recommendations later on
in this report, but the rationale for their

30

implementation is based on considerations
other than those implied by the now popular
economic forecasts.
Recommendation No. 1
Because the outlook for 1980 is so
uncertain, and because actual economic
developments may not unfold in themanner Predicted by many forecasters,
we urge Congress and the Administration
not to rush forward with new program
at
aimed
specifically
initiatives
short-run
proscective
countering
those
in
implied
developments
forecasts.
Long-Term Focus
In formulating our recommendations for
careful
given
have
we
report,
this
forecasts
short-term
the
consideration to
provided by the Council of Economic Advisers
and numerous private economists. However, we
continue to find that looking at both the
past and the future from a longer term
perspective yields insights which are more
valuable for policymaking.
As we turn to the longer term outlook for
the U.S. economy, we cannot be unmindful of
The history of the
current developments.
the
that
demonstrates
recession
1973-75
was
than
rapidly
more
deteriorate
can
economy
believed reasonable, and certainly if this
short-term
recur,
to
were
situation
countercyclical measures would be necessary.
such
with
deal
to
plans
Contingency
unanticipated situations must be a permanent
of our policy formulating process.
part
Nevertheless, it would be inappropriate to

31

implement such countercyclical measures as
long as we feel that the economy will recover
from
any
temporary
setbacks
within a
reasonably short period of time.
The fundamental elements which underlie
the economy's long-term growth were discussed
at length in the report we Published last
August. To briefly review the outlook for
these fundamentals, consider. es.t-ima.tes for
the growth of potential GNP. The easiest way
to arrive at such an estimate is to sum the
growth rates of
(a) the labor force,
(b)
productivity, and (c) hours worked.
Since the population supplyinz new workers

to the labor force durina the next
five to
ten years is largely fixed, the major factors
which influence the number who actually enter
the work force are changes in female and
teenage participation rates. This, in turn,
is influenced by such factors as the need for
additional family members to enter the work
force in order to maintain a cer:ain level of
real earnings in the face of rising prices,
the desire of women to parti:i-ate in the
work force, the number of wcmen who are
occupied by childbearing and zhildrearing,
the average length of time people remain in
school,
etc. Immicration also has an impact
on both the population and the labor force.
After reviewing all of these factors, we
conclude that the labor force is likely to
grow 2 to 2.3 percent per year over the next
five years.
The second major factor determining longer
term
economic
growth
is,
of
course,
productivity.
We discuss this at length
elsewhere, but briefly, we believe that the
U.S. productivity performance must and will
improve significantly during the next few
years. An older, more experienced work force

32
If combined with
encourage the growth of
which
=olicies
ca-ital relative to labor, 1.5 to 2 percent
average annual growth is quite reasonable.
reduce
could
which
factors
Necative
:rcductivity growth such as an erratic growth
Tav:ern which would reduce capital formation
or dramatic .changes in the relative price of
energy must be carefully managed.
wi l be a positive factor.

Combining the projections for productivity
average
and labor force growth with an
decline in hours worked of about 0.5 percent
per year yields an estimate of 3 to 3.5
,erzent per year for the growth of potential
GNP. Many economists will call this estimate
cr:mistic, and we have already stated that
coliCies designed to increase the capital to
Iabtor ratio will be necessary to achieve it.
moving
is
Nevertheless, if the economy
-orward in the range of its potential growth
rate by 1981, as many forecasters now expect,
we believe that by implementing now the
rolicies which are laid out in the remainder
Congress can lay the
report,
this
cf
ou-.dation for economic growth and prosperity
.or the remainder of the decade.

III.

THE DESIGN OF MACROECONOMIC POLICY
FOR 1980 AND BEYOND

The failure of the economy to register as
sharp a slowdown in 1979 as many forecasters
earlier
predicted
has
had
one
very
unfortunate side effect.
It has all but
stalled efforts to design new fiscal and
monetary policy initiatives to deal with both
our
current
and prospective growth and
inflation problems.
Many policymakers are
unwilling to commit themselves to any kind of
tax cut proposal
until
presented
with
incontrovertible evidence that the economy is
in the midst of a serious recession and that
there will be no adverse inflationary effect
from the tax cut.
The Administration,
for
example, has made it clear in its fiscal 1981
budget message that it will stand
firm
against
tax
reductions
until
events
deteriorate more than is now anticipated.
The Need for Consistent and Steady
Long-Term Economic Policies
In our estimation, there is need for a
shift in the focus of monetary and fiscal
policies
away
from
short-run
crisis
containment toward steady long-term economic
growth.
In the past two decades, there has
been too much emphasis placed on
"fine
tuning" the economy. In the future, monetary
and fiscal policy should be conducted in a
stable manner.
Long-term policies should
have a two-fold aim.
First,
they should
promote growth at rates that are in line with
the
economy's
actual
potential
for
noninflationary real growth.
Second, they
should be structured to encourage an increase
in these potential growth rates for the
future.
(33)

34
guide to the
our
as
use
can
We
establishment of our steady growth target the
of our Nation's productive
rate
growth
potential, technically, the growth rate of
Given current and
GNP.
real
potential
expected rates of productivity and labor
force growth, this guide implies, at present,
a long-term growth potential of approximately
If this is correct,
3 percent annually.
beshould
policries
fiscal
monetary and,
average
percent
3
accommodate
to
designed now
real growth per year; as well, consideration
needs to be given to the structure of these
policies in ways conducive to an increase in
our growth potential over the long term.
From the perspective of long-term economic
growth, monetary and fiscal policy should be
adjusted only in accordance with changes in
the long-run growth potential of the U.S.
Since the growth of potential real
economy.
GNP only changes very gradually over time, no
abrupt long-term policy changes would be
anticipated.
From a short-run point of view, we do not
feel that it is appropriate to try to "fine
tune" the economy by attempting to adjust
policy in response to all, or even most,
cyclical departures from our targeted longHowever, we do feel that it
run growth path.
is

appropriate

--

indeed,

mandatory --

to

adjust our macroeconomic policies if actual
real growth registers a sustained departure
from our long-run targeted growth path and if
a change in policy is judged necessary in
order to put us back on target toward the
realization of our long-term growth goal.
that real
of course,
This does not mean,
same rate
the
at
economic growth must proceed
macroeconomic
that
year in and year out, or
should be adjusted in ways to
policies
attempt to bring such a precise result about.

35
It does mean that macroeconomic policies
should be adjusted when, in the absence of
policy changes, a realistic lon-run average
rate
of
growth
would
be
otherwise
unattainable.
And finally, since any rea. szic program
must have a beginning and an end against
which our actual performance can be assessed,
we- need to avoid attaching undue s.ignificance
to the promised performance at the terminal
date the closer we cet to it.
would be
wrongheaded policy, for examo>e, to rush
forward with programs to either dramatically
pump up or slow down the economy in the
interests of attaining a goal as though that
were a desirable end
in itself. Too many
unexpected events can take place to render
the goal unreachable, not the least of which
is the fact that as we move forward in time
we may witness changes in the growth of our
real GNP potential as a resu.: of both
unanticipated developments and co. cy actions
initiated in the interim.
In short-, there is
no specific terminal goal other :han that of
attaining the highest possible lona-run rate
of real economic crowth consis ent with the
satisfaction of our myraid other coals.
Recommendation No. 2
U.S. monetary and fiscal oociies need
to be desianed -or the :urnose of
achieving an averaae annual real arowth
rate equal to thnat of our Long-run
ootential real GNP;
we need to hold
those colicies szeacv over -he long
term; and we need -o avolc adiustinq
those oolicies cvclicallv exceot in
those instances when actual real outout
growth registers a sustained ze.arture,
uD or down,
ma~inc One at:a:2ment of

36
growth
target
long-term
our
unattainable in the absence of policy
changes.
of
this
policy
implications
The
It implies the
recommendation are profound.
setting of monetary and fiscal policies and
sticking with them, changing them only under
the most extraordinary circumstances.
It
implies, abandonment. of. the. "fine tuning"
approach to policy, an approach that is
impractical because, among other reasons, the
state of the art of economic forecasting is
much too imprecise to permit us to make the
required policy adjustments when they are
needed.

It

implies

the

very

- close

coordination of monetary and fiscal policies.
it implies that conventional
And finally,
macroeconomic policies can no longer be used
as the primary means to reduce unemployment
below the 5.5 to 6.0 percent range, because
the labor markets for skilled workers are
tight in that range.
The latter point requires explanation. We
are not abandoning the 4 percent unemployment
target mandated by the Humphrey-Hawkins Full
Employment and Balanced Growth Act of 1978.
However, we have learned from past experience
that it is inappropriate to attempt to reach
that 4 percent target solely through demand
macroeconomic
stimulation.
Conventional
policies are constrained by the fact that,
once the overall unemployment rate reaches
the 5.5 to 6.0 range, further increases in
inflationary
demand add significantly to
pressures. The reason for this is now clear:
Although shortages of low-skilled workers are
rare when the overall unemployment rate is in
at
the neighborhood of 5.5 to 6.0 percent,
that overall rate, shortages begin to appear
Demand
in many high-skilled labor markets.
to further reduce the overall
expansion

37
wage
causes
little
rate
unemployment
low-skilled workers but
among
inflation
among
highly inflationary wage increases
In order to avoid
high-skilled workers.
exacerbating labor shortages in high-skilled
to
reduce
while
attempting
markets
unemployment among low-skilled workers, it is
targeted structural
adopt
to
necessary
microeconomric policies tailored to meet the
specific. needs of. the low skilled.. we also
need targeted structural policies to fight
inflation by generating investment in modern
the
shift
to
plant and equipment and
composition of our output toward industries
with high potential for productivity growth.
are discussed more fully
mat:ers
These
elsewhere in this report.
this
of
adoption
the
view
We
recommendation, in conjunction with the other
recommendations in this report, as essential
to the ultimate attainment of the inflation
goals mandated by the
unemDloyment
and
In our estimation, an
Humphrey-Hawkins Act.
environment characterized by the application
of steady, Consistently applied policies is
itself conducive to the establishment of an
rapid
steady,
by
economy characterized
growth.
have had enough of policy-induced
We
economic fr:s and starts, enough of roller
coaster pc:icies that have left us at the end
of each recovery and downturn with more
inflation, higher unemployment, and a smaller
one
earlier.
growth potential than the
real growth is essential to the
Steady
encouragement of major new investments in
factories and skills, to expand the supply
enhance
and
to
economy,
side of our
productivity growth and reduce inflation.
The uncertainties created in the wake of
economic - ts and starts serve to diminish

38
such investment incentives, the consequence
of which is a slower rate of growth of
potential real GNP. In other words, steady
real growth, by encouraging a higher rate of
is itself
capital formation than otherwise,
conducive to a higher rate of growth of our
Nation's productive potential. According to
one study by Data Resources, Inc., steady
growth could add 0.2 percent to the growth of
our Nation's- potertial real GNP each year.
structured
appropriately
Additionally,
policies aimed at
fiscal
and
monetary
enhancing productivity and capital growth
could result in an even faster rate of growth
of our real potential output.
In order to achieve these goals, however,
that
it is mandatory, as noted before,
and fiscal policies be closely
monetary
coordinated. They must not be permitted to
work at cross purposes in terms of our
And the Federal Reserve
national goals.
Board needs to send Congress more than broadbrush assurances that their monetary growth
targets are "reasonably consistent" with the
economic goals of the President, as was done
last year in the Board's first report to
We
Cong-ress under the :iumphrey-Hawkins Act.
are convinced that there exists an effective
anti-inflationary pro-growth mix of monetary
and fiscal policies. And we know that they
the
with
coordinated
can be carefully
of the Federal Reserve, the
cooperation
President, and Congress.

,I

39

The

Design

of

Fiscal

Policy

for 1980 and

Beyond

What is required in order to maintain
is
a
steady
course
fiscal policy on
reasonably straightforward.
Once Congress
and the Administration reach agreement on the
levels of government spending, they must set
tax policies in such a way as to accommodate
a. rate of growth of real.private-spending
consistent with the targeted long-run average
rate
of
growth
for
the economy, and
consistent with the monetary policy then in
place.
However,
because both real and
are
taxed
at
nominal income increases
progressively higher rates, real tax receipts
will rise more than in proportion to the
increase in real income. This extra rise, if
not offset, will lower the future growth of
real private spending, making the long-run
average real growth target for the economy
unattainable.
Insofar as private sector
growth
incentives are reduced, the real
potential of the economy is reduced as well.
In order for fiscal policy to continue to
have a steady, not contractionary, influence
on the economy, it would be necessary either
to
periodically
increase
real
Federal
Government spending or to lower tax rates, or
both,
to
offset
the
real growth and
inflation-induced increases in tax receipts.
Which method of offset should be used -an
whether it should take the form of
increase in real Federal Government spending
or a reduction in taxes --

goal
we
Government
product.

depends

upon

the

set for the share of Federal
outlays in the gross national

The question that now arises is: what
course should fiscal policy follow in 1980
and
1981?
The
answer
given
by the
Administration is that there should be no

40

bold new fiscal policy initiatives at this
time. The policy initiatives that have been
proposed relate mainly to defense and energy.
Proposals have not been put forward to deal
with the economic slowdown.
as taxes are concerned, the
far
As
Administration remains adamantly opposed to a
tax cut at this point. The economic outlook
is. highly uncertain. The' recession. fai1ed- to
and there is no
1979,
in
materialize
1980.
guarantee that it will emerge in
is no
there
Administration,
to
the
According
need for a tax cut because such fiscal
stimulus could worsen an already disturbing
rate of inflation.
We fail to see why the question of a tax
cut should be so intimately tied to whether
or not a recession actually materializes.
That there will be continued sluggish growth
and that the United States will fall farther
below its real GNP potential in 1980 are not
in dispute. The Administration is concerned
that a tax cut will contribute to inflation.
A properly designed tax cut can be targeted
so that it will not add to inflation and,
over the long term, help slow it down. The
conscious adoption of policies designed to
throw the economy into recession or the
failure to offset the drift of the economy
into recession caused by external forces such
as OPEC price increases, is not a responsible
way to conduct policy. The costs of such a
lengthened
of
terms
in
policy option
productive
idled
lines,
unemployment
capacity, and reduced real output are both
obvious and huge, serving neither the shortterm nor the long-term interests of the
The anti-inflation gains
American people.
from pursuing a sluggish growth strategy are
disappointingly small.

41

A severe economic slowdown will result in
a sharp and immediate reduction of investment
spending.
This is something our economy can
ill afford. Not only would such a reduction
of capital spending severely limit our future
growth pczential and our long-term rate of
productivity
growth,
it would virtually
guarantee yet another sharp increase
in
prices once the restrictive policy spigots
are reversed.. One of the first reauirements
for a healzhy rate of capital formation is a
healthy hich employment economy, an outcome
that we have a greater chance of fostering
through -he use of consistent and steady
monetary and fiscal policies.
It is not the worsened outlook itself that
forms the basis for our consideration of a
tax cut, but the fact that fiscal policy, far
from
remaining
steady,
has
become
contractionary in the course of the past
year, a -actor that has contributed to the
worsened economic outlook.
Last
March,
in our annual report to
Congress, we endorsed the Administration's
policy of overall demand restraint. we knew
then that such a policy would result
in a
slower rate of growth for the economy in both
1979 and 1980.
In the Committee's view, such
an outcome was deemed appropriate in order to
prevent demand (which at the end of 1978 was
pressing up against our productive Potential)
from con::ibuting to the then accelerating
rate of inflation. Importantly, when making
our recc-rmendations we did not call
for a
policy
severe demand restriction.
We
recommenec
only a
policy
of
moderate
restriction aimed at slowing the rate of
growth of aggregate demand to bring it into
closer a: cnment with the growth of potential
real GN?.
We believe that
the
policy
recommendations
we made last March with

42
respect to fiscal policy were correct, and on
the basis of the evidence we have at our
disposal concerning the current state of the
economy and the long-term growth of our
productive potential, we feel that fiscal
policy design should continue to be guided by
However,
the
principles.
these
same
additional fiscal drag exerted by a higher
than expected inflation rate means we are not
we
policy
same
fiscal
the
pursuing
Fiscal policy has
recommended last March.
tightened considerably since then and will
continue to tighten further throughout 1980
in the absence of tax or expenditure changes.
Therefore, it is necessary to put fiscal
policy back on its earlier recommended steady
course.
The move toward fiscal restraint is most
clearly evidenced in the sharp decline of the
high employment budget deficit between 1978
and 1979 and its expected further decline
Between the fourth quarter of
during 1980.
1978 and the fourth quarter of 1979, the high
employment budget shifted from an annualized
deficit of $6.6 billion to a surplus of $13.8
billion, a swing of over $20 billion in the
This
restraint.
of
fiscal
direction
additional margin of fiscal restraint was
largely the result of legislated increases in
social security taxes and the effects of
inflation on Federal Government tax receipts.
Moreover, given a near double digit rate of
fiscal policy
inflation projected for 1980,
will automatically tighten further this year
causing yet another $10 billion increase in
the high employment surplus.
In order to
policy,
this
fiscal
maintain a steady
additional fiscal restraint, occurring as it
does in automatic response to real income
increases and inflation, should be offset if
it can be accomplished without worsening
inflation.

43
We are convinced that we need to consider
a modest tax cut on the order of $25 billion
to take effect no later than the summer of
considerable
1981, even though there is
uncertainty surrounding the economic outlook.
The tax cut we propose here is not the
benefits
mostly
conventional kind which
half of
least
at
consumers. On the contrary,
to
targeted.
bethe tax reduction shouldand
savings
through
productivity
enhance
investment with the remainder going to help
pressure of
the
of
taxpayers
relieve
costs.
energy
higher
and
taxes
increased
important to recognize why a
is
It
conventional tax cut is not in order. we do
not need another boom in consumer spending.
Savings and investment must command a larger
percentage of our GNP or we will fail to
reverse our dismal productivity performance
with the result that we will make little
headway in our efforts to slow inflation and
it is
Moreover,
incomes.
real
raise
given
is
relief
tax
whatever
that
important
the
on
given
be
it
community
business
the
to
basis of its performance in expanding plant
and equipment expenditures. We leave it to
the tax-writing committees to work out the
precise details of the tax cut proposed here.
If there is a downturn in the economy over
the next 18 months and a sharp increase in
the unemployment rate, Congress is likely to
If there is no downturn and
enact a tax cut.
in the
remains
rate
unemployment
the
to the
according
percent,
6
of
neighborhood
surpluses
budget
substantial
Administration,
will begin to accrue in fiscal year 1981 and
Congress is also likely to enact a tax cut.
In either case, Congress must make sure that
the tax cut does not result in exacerbating
the rate of inflation.

58-205 0 - 80 - 4

44
Recommendation No. 3
Should either of these events occur,
the Joint Economic Committee recommends
a targeted tax cut of approximately $25
billion to take effect no later than
the summer of 1981, designed to improve
productivity and partially offset the
tax increase on individuals caused by
inflation. At least half of the tax
cut should be directed toward enhancing
savings and investment. 1/

1/
Mr.
Reuss states:
"To the extent that
the economy needs an infusion of resources to
reduce
fiscal drag, this should come in the
form of targeted spending on
structural
unemployment,
on
our
cities
and
transportation networks, and as carefully
targeted subsidies or incentives to business
investment."

45

There are a variety of approaches and
methods to achieve an enhancement of savings
and investment. :or example, adjustments to
increase
could
schedules
depreciation
It would
investment.
and
business savincs
in
rollback
a
consider
to
also be appropriate
of
forms
other
and
:axes
social security
personal and corporate tax reductions.
A caveat is in order here: If in response
to heightened worr_ tensions Congress and the
Administration dee- it appropriate to step up
Government
Federal
sharply the rate of
tax cut
the
outlays for defense purposes,
deferred
or
pared
be
to
need
will
spending
other
some
or
accordingly,
on
policy
fiscal
keep
to
order
restrained in
course.
a steady
The President's fiscal 1981 budget implies
some increase in :-e Federal Government share
of GNP over the course of the next year.
government
Projected future increases in
Federal
reduced
spending imply a somewhat
an
years,
future
in
Government share c: GNP
because,
approval
our
with
outcome that meets
with the improved economic outlook for future
years, our social program objectives need not
more rapid growth in- the
be encumbered.
is the appropriate means for
economy
private
achieving a reduced Federal share.
The Employmen: Act, as amended, requires
that the President's Economic Report include
interim numerical goals for reducing the
share of the Na-icn's gross national product
for b': Federal outlays to 21
accounted
percent or less by 1981 and to 20 percent or
less by 1983, or :he lowest level consistent
It was
with national needs and priorities.
requirement
this
when
Congress
the intent of
report
was enacted tha: the President's
outlays
Federal
reducing
If
goal
the
discuss

46
as a share of GNP and demonstrate
how
policies and programs can be designed to
achieve this goal without
impeding
the
achievement
of
the
goal
of
reducing
unemployment.
The
President's
Economic
Report does not contain the interim numerical
goals or the policy discussion called for,
with respect to the share of GNP accounted
for by Federal outlays.
This lapse
is
unfortunate and we- are hopeful it will be
corrected in next year's report.
Recommendation No. 4
The Committee suoDorts the basic trend
of Federal Government spending proposed
by the President, for fiscal year 1981
and projected into future years. toward
a gradually reduced share of Federal
outlays in the gross national product.
It
should
be
recognized
that
the
Government's command over national resources
is not accurately measured by the share of
Federal outlays in GNP alone.
Government
regulatory activity also represents command
over resources as it often requires State,
local
and
private
spending.
It
is
conceivable that the Federal share of GNP
measured by Federal spending could increase
while at the same time total
federally
mandated spending is reduced because of a
reduction in regulatory burdens.
The Design
Beyond

of

Monetary Policy for 1980 and

In the overall design of macroeconomic
policy,
it is equally, or perhaps more,
important
that
the monetary authorities
pursue a steady course.
Unfortunately,
the

47
gyrating rates of change of money growth over
the past several years provide. convincing
evidence that the Federal Reserve's charted
course has been anything but steady.
It is not difficult to discover why past
Federal Reserve efforts to control the money
supply proved largely unsuccessful. It was
mainly a by-product of the methods used by
the Federal Reserve to control money growth,
methods which in practice caused short-run
movements in the money supply, and perhaps
long-run movements as well, to be determined
largely by changes in the demand for money.
The problem of monetary control arose because
that by
believed
Reserve
Federal
the
controlling movements of short-term interest
rates

--

in

particular,

rate, the interest rate at
banks

lend

to

each

the Federal funds

which

other

--

commercial
it

could

effectively control movements in the demand
Using the policy instruments at
for money.
its disposal to bring about changes in the
funds rate, the Federal Reserve
Federal
believed that it could bring money demand
growth into alignment with its targeted rate
of money expansion.
As long as the demand for money is a
stable function of the interest rate, and as
long as the Federal funds rate targeted by
the Board is consistent with the Board's
targeted rate of money growth, such a policy
approach should work. Unfortunately, neither
condition was met.
The demand for money was not effectively
controlled by controlling interest rates.
When the demand for money rose for reasons
rates, the
other than movements in interest
Federal funds rate would rise above its
target, causing the Federal Reserve to inject
new reserves into the banking system raising

48
the supply of money.
Wher the demand for
money
declined, the reverse sequence of
events would occur and the money supply would
fall.
The
absence
o0
a
stable and
predictable relationship be:ween the demand
for money and the Federal funds rate meant
that volatile movements in the demand for
money would be mirrored in corresponding
volatile movements in -the money supply.
Additionally, if the Federal Reserve set
its interest rate target "too low" or "too
high," even assuming that
there existed a
stable relationship between the demand for
money and interest rates, :here would result
a rate of money growth abcve or below the
Federal Reserve's money growth targets. A
targeted Federal funds rate -hat was too low
would
cause
too rapid an injection of
reserves, and conversely.
In an earlier era there may well have
existed a more
stable
and
predictable
relationship between interest rates and the
demand for money. For a variety of reasons,
including recent financial reforms and rapid
inflation, that relationsh z today is much
less stable and predictable. Moreover, in a
period
of
inflation,
and
particularly
accelerating
inflation,
t is extremely
difficult to interpret the significance of
any

given

level

of

i.-erest

rates,

in

particular, what a given Level of interest
rates implies about the a:tual rate of money
growth.
It is possible that the Federal Reserve's
past monetary growth problems were compounded
by its practice of makinc only small and
relatively predictable p-: zv and interest
rate

adjustments.

particularly
accelerating

T.. s

can

prove

troublesome *:n a period
of
inflation be:ause it means only

49

marginal upwards adjustments in the targeted
Federal funds-rate when, in retrospect, much
been
more dramatic increases would have
called for. The consequence, in the minds of
many monetary experts, was a Federal funds
rate that was consistently too low; too low
in the sense of being inconsistent with the
Federal Reserve's own targeted rate of money
growth. The result was an inordinately rapid
increase in the secular growth of money.
In a dramatic departure from its previous
operational practices, the Federal Reserve
announced on October 6, 1979, new operating
procedures designed to enable it to gain more
effective control over the supply of money.
Instead of tying its policies to movements in
the Federal funds rates, the Federal Reserve
will henceforth peg its operations largely to
bank reserves. That is, the Federal Reserve
will supply reserves to banks at rates it
believes are consistent with its money growth
targets.
We applaud the Federal Reserve for having
the courage to change its operating methods
as it did on October 6. By exercising firm
control over the growth of reserves, the
Federal Reserve should now be able to gain
much more effective control over the money
supply growth process than was true in the
past, a laudatory goal for which there is
The control might
near universal agreement.
not be as precise as some would like, but it
should be effective enough to ensure money
growth at rates that fall within the ranges
of the prescribed growth targets.
We come now to the really thorny issue.
Just how fast should the money supply be
permitted to grow in the months and years
ahead? Unfortunately, there are no clear-cut
It depends on
answers to this question.

50

one's

definition

of

money

relationship between -it and
nominal spending.

-

the

and

rate

the

of

Settling on an appropriate definition of
money is not as easy as one micht imagine.
Some argue that money should be defined
narrowly as checking account (or checking
account type) balances plus currency and coin
only
the
only, since. these- constitute
universally acceptable "means of payment" for
True,
virtually all economic transactions.
but the relationship between -his narrowly
defined aggregate and the rate of nominal
particularly close or
not
is
spending
reliable.
The reason why this is so is clear. The
be
can
dollar amount of spending that
financed depends not only on the stock of the
"means of payment" but also on ::s velocity
the rate a- which it
of circulation -changes hands and is used to make Purchases.
If the velocity of circulation increases, the
be
can
dollar amount of purchase that
financed rises even if the stock of the
"means of payment" does not, and conversely.
The difficulty with focusing On the "means
of
velocity
its
that
of payment" is
circulation fluctuates sharply over time.
These fluctuations are the result of the
decisions people make with respect to their
If a
holdings of the "means of payment."
large enough number of people decide to
economize on their "means of payment" by
temporarily putting those funds into interest
their
for
needed
bearing assets until
purchases, they will thereby have put them
into the hands of those who will use them to
make purchases in the interim, the result of
which will be a noticeable increase in the
But :he fact that
velocity of circulation.

51

different people behave differently at times
in response to all sorts of developments,
regulations,
including changing laws and
the rate of
and
innovations
financial
it is not
inflation, among other reasons,
surprising that we should discover volatile
movements in the velocity of circulation of
the "means of payment."
Because the velocity of circulation of the
and
volatile
is so
"means of payment"
not
was
Reserve
unpredictable, the Federal
of
objective
its
accomplish
to
able
by
spending
nominal
in
controlling movements
of
"means
the
in
movements
controlling
Federal
the
caused
fact
This
payment."
Reserve years ago to search out some more
broadly d'efined aggregate to be used along
that
one
with the "means of payment,"
included one or more financial assets that
was more or less readily substitutable for
the "means of payment," an aggregate that was
more reliably and predictably related to
nominal spending. The results of that search
process led ultimately to the development of
not one, but several, alternative monetary
aggregate measures, no single one of which
was unambiguously better than any other in
all circumstances. Thus, the Federal Reserve
attempted to subject to its control the
monetary
many
these
growth of all of
aggregates.
As a result of continued changes in the
and
financial and regulatory environment
the behavioral responses of
in
changes
individuals and businesses to interest rates
and inflation, even these monetary aggregates
proved to be inadequate, a matter that we
discussed in detail in our annual report last
year. The problem, in short, is that none of
them behaved as reliably and as predictably
in terms of nominal spending as they once

52
did; the velocity of circulation associated
with each had increased in volatility over
time.
The Federal Reserve has recently
introduced new aggregate measures which it
hopes will prove more meaningful.
Under the circumstances, it is difficult
to recommend a precise growth target for the
new aggregates because their relationshios to
the. ultimate- target.s of. monetary control. at
present are unknown and ill defined. We are
forced, therefore, to discuss the issue of
monetary control
in terms of the general
principles that should govern the conduct of
monetary policy now and in the future.

53
We find ourselves in broad agreement with
Federal Reserve Board Chairman Paul Volcker
who, on January 2, 1980, made the following
statement before the National Press Club in
Washington:
a
in
taken
policy,
Our
perspective, rests on a simple
one documented
-that
experience --

longer
premise

by centuries of
the inflationary

related to
ultimately
is
process
credit.
and
money
in
excessive growth
the
that
suggest
to
mean
I do not
that
or
close,
so
is
relationship
economic reality is so simple, that we
can simply set a monetary dial and
Changes in spending and saving
relax.
habits, the shifting characteristics of
different financial instruments having
some of the characteristics of money,
and the inflationary process itself,
all affect the observed relationship
between money and economic activity.
The increased openness of our economy
of
growth
the
and
general,
in
in
markets
financial
international
ended
since
long
has
particular,
policy.
in
autonomy
illusions of
range
whole
a
policy,
tax
and
Spending
and
policies,
regulatory
government
of
the behavioral patterns of business and
labor all affect the performance of the
economy, and the relationship between
money, inflation and economic activity.
But, with all the complications, I do
believe that moderate, noninflationary
growth in money and credit, sustained
over a period of time, is an absolute
dealing with the
for
prerequisite
the dollar,
ravaged
has
that
inflation
and
performance
economic
our
undermined
prospects, and disturbed our society
We are learning that money
itself.

54
creation cannot substitute for
the
productivity, savings and resources we
need to support economic growth but
rather, in excess, will only impair
prospects for sustained growth.
The central question is, how can we attain
"noninflationary growth in money and credit"?
Should
it be accomplished
rapidly or only
gradually over a period of several years? In
our view, the rate of money and credit
expansion should be slowed gradually.
To do
otherwise,
risks pushing the economy into a
prolonged and deep recession. Since wage and
price inflation show considerable momentum,
at least on the downside, the burden of any
very abrupt slowing in the growth of money
and credit would fall on production and
employment, virtually guaranteeing a deep and
protracted recession. As we said earlier in
our discussion of fiscal policy, attempts to
wring inflation out of the
economy
by
adopting the recession route makes no sense.
The emphasis should be on the attainment of a
gradual reduction in money and credit growth
in order to permit the economy to make the
production,
investment,
and
other real
adjustments that can and do occur
only
gradually.
Recommendation No. 5
The Committee strongly recommends that
the Federal
Reserve
accomplish
a
gradual reduction in the rate of money
and credit expansion (relative to the
very high rates Posted in years past)
over a period of years toward money and
credit growth rates that are consistent
with the noninflationary real growth
rate of the economy.

55
that this recommendation,
believe
We
recommendations
other
our
coupled with
concerning productivity, energy, savings and
investment, is essential to solving inflation
while maintaining real economic growth and
full employment.
Turning briefly to the rates of money
expansion experienced since October 6, there
exists & possibility that the- Federal Reserve
has moved too abruptly, thaw i- is aiming for
a rate of reduction of money growth that is
too rapid from the. point of view of the
short-term and long-term interests of the
economy. If this.is so, it should ease up
somewhat over the next few months in order to
accomplish its ultimate long-run objectives
in a more gradual and more certain manner.
We say "more certain" because if the economy
is thrown into a serious recession, made all
the more serious by an overly restrictive
monetary policy, the Federal Reserve may feel
compelled to reverse itself sharply bringing
us back to yet another era of monetary
instability.
if the Federal Reserve
More explicitly,
were to maintain a rate of money expansion
that was too low for a oeriod of several
years,

there

is

little

Doubt

that

our

But unless
inflation rate would be reduced.
there has been an unusual increase in the
velocity of circulation, the economy would be
forced to suffer through a moderate to severe
We find it hard to believe that
recession.
the Federal Reserve would be willing to
maintain such a policy in the face of such
heavy costs.
But if the Federal Reserve, in the face of
itself
such an eventuality, did reverse
sharply, we would have to ask ourselves what
it was that we accomplished by such a tight

56
money policy.
Will the deflationary effect
of slower money growth and higher interest
rates do much to slow inflation this year and
next?
Probably not.
The burden of the
deflationary
adjustment will fall almost
exclusively on employment and output in the
short run.
And if the deflationary effects
of the policy will not make a significant
dent in inflation in the short run, a quick
policy reversal will return us to current or
higher rates of inflation, thus incurring the
costs of the recession without any permanent
gains against inflation.
In fairness to the Federal Reserve, there
is a possibility that
the
relationship
between
the
aggregates and GNP may be
somewhat more lexible than in the past.
If
velocity, for one reason or another, has
increased significantly, then
any
given
reduction in the growth of the supply of
dollars may have less of a
restraining
influence on GNP than formerly. This is not
entirely inconceivable since high inflation,
rapid
financial innovation, ever-changing
laws and regulations and changing behavioral
responses on the part of individuals and
businesses to interest rates could change the
relationship between the aggregates and GNP
dramatically.
We do not know,
for example, how much
significance zo attach to the sharp rise in
interest rates since high levels of interest
rates are,
in part, a by-product of the
inflationary process.
Thus, although nominal
interest rates are high, real interest rates
are much lower; and real interest rates after
taxes are lower still.
Interest earned is taxable. Interest paid
is tax deductible. For savers and borrowers
in the 50 percent bracket, a 2 percent real

57
interest rate at zero inflation implies a
real after-tax reward to savers and a real
At
after-tax cost to borrowers of 1 percent.
a 12 percent interest rate and 10 percent
both
for
inflation, the after-tax rate
lenders and borrowers will be 6 percent in
nominal terms, but a negative 4 percent in
real terms, even if the real pretax interest
rate remains at 2 percent. The reduction in
induces
rates
interest
after-tax
real
borrowers to demand larger quantities of
money and credit, an outcome that could
account for the continued strong demand for
credit at record nominal interest rates and
help- to explain the problems the Federal
had in controlling the monetary
Reserve
aggregates in earlier months.
Our final assessment on the matter of the
appropriate rate of money expansion will have
to await the announcement by the Federal
Reserve of its new money growth targets and
the meaning of those targets in the context
of the relationship between the old and the
monetary aggregates and between the
new
aggregates and GNP.
Conventional macroeconomic policies- are
incapable of working a quick fix on our
inflation problem. We can lick the inflation
problem only gradually -- through the use of
steady policies and through a very gradual
reduction in the growth of the money supply
from the high rates registered in years past.
be
should
Monetary policy, in general,
nor overly
expansionary
overly
neither
In
contractionary, nor should it be erratic.
the past, we pursued policies that were too
accelerating
expansionary at first; when
inflation reared its ugly head, we slammed on
the brakes hard; inflation didn't decline
much but output and employment did, so we
pumped up the economy again for yet another

58
repeat performance.
As noted before, this
roller coaster approach has caused a secular
upward ratcheting of our rate of inflation.
It is time we learned from our past mistakes.
One
final
problem area concerns the
conduct of monetary policy in the face of
downward pressures on the foreign exchange
value of the dollar.
We should not sacrifice our long-term
economic objectives for the
purpose
of
attempting to maintain the value of the
dollar in the short run.
Indeed,
it was
precisely to avoid the need to sacrifice
domestic economic objectives that made the
abandonment of fixed rates of exchange an
attractive option years ago.
Recommendation No. 6
The Committee sees no need to divert
monetary policy from domestic goals to
secure international objectives other
than
in
truly
exceptional
circumstances. We are firmly convinced
that the Committee's recommendations
for monetarv and fiscal policy will
work to raise oroductivity and lower
inflation
in
the
United
States.
outcomes that will ultimately result in
greater
stability
for
the dollar
internationally.

We fully recognize that the key currency
role of the dollar imposes on the United
States an obligation to ensure its stability.
But that obligation is not ours alone; it is
an obligation that must be shared by all the
major industrialized countries.
The
key
requirement that needs to be met to bring
about a more stable dollar is the effective

59

synchronization of macroeconomic policies and
Absent the required degree of
performances.
there can be little hope of
coordination,
greater long-run exchange rate stability.
We are often told that it is unrealistic
to expect the major industrialized countries
to coordinate their economic policies in the
rate
manner required to ensure exchange
highly
upon
insist
to
that
stability,
would
policies
economic
coordinated
necessitate that they each sacrifice the
an
realization of their domestic goals,
outcome they would all find unacceptable.
The alternative these critics suggest is a
return to some more stable system of exchange
rates, one that is more heavily managed than
In our
We disagree.
the current system.
estimation floating is required precisely
because the industrialized economies have
failed to ach-ieve the necessary degree of
Indeed, in the absence of
coordination.
and
policies
macroeconomic
synchronized
a fixed or near-fixed exchange
performances,
rate system would foster the development of
growing payments imbalances, the correction
of which would necessitate the use of trade
capital restrictions or the use of
and
restrictive macroeconomic policies, or both.
We do not view floating as a panacea for
the world's economic problems. But floating
because it can facilitate the
is important
process of balance-of-payments adjustment by
providing time for governments to correct
domestic imba ances without resort to trade
inappropriate
restrictions or
and caoital
macroeconomic policies.

58-205 0 - 80 - 5

60
Recommendation No. 7
The system of floatinc exchange rates,
with oeriodic interven ion to counter
disorderly markets, shouid be retained.
Under
present
world
conditions,
floating aoDears to be :he only viable
approach.
In order to achieve greater
exchange
stability,
we
urge
the
Administration to conz:n.ue. to. oress for
greater international coordination of
macroeconomic Dolicies.

Macroeconomic
Overview

Policy

lb-ectives:

An

The American people have every right to be
thoroughly dissatisfied wit-h the performance
of

our economy --

both Gas. and prospective.

We have not been successful in our efforts to
contain inflation.
On the contrary, our
inflation problem has worsened. We have not
solved our unemployment problem.
Indeed, for
huge segments of the American population -most notably blacks, Hiscanics, and teenagers
generally -- the American dream of
steady,
meaningful
employment
at high wages is
nothing more than a hopeless myth.
To be
sure, the employment gains registered in the
past
several
years
have
been
truly
impressive.
But these employment increases
have not been matched by a rising standard of
living for the average American worker. The
reason is the fall-off in the growth of labor
productivity.
In our view, the Amerizan people are not
unreasonable in demanding a reduction in the
unemployment rate to 4 percent or less, a
decline in the rate of inflation to something
on the order of
3 percent annually and an
increase in their livinc standards.

61

It would be irresponsible in the extreme
to seek solutions to our problems by forcing
the American people to suffer through yet
another period of
vicious
"stagflation"
characterized by continued rapid inflation,
lengthened unemployment lines, and reduced
levels of -real production.
Macroeconomic
policy must be directed more toward the
supply
side
of the economy, toward an
expansion
of
our
Nation's.
productivea
manner
that
raises
potential
in
dramatically the growth of American labor
To accomplish this we need to
productivity.
step up sharply our Nation's rate of capital
formation.
Specific policies targeted at
enhancing investment constitute only part of
the answer, and not necessarily the most
important part. Steady real growth and a
lower
rate
of
inflation are essential
components of this process.
The emphasis that we accord to the supply
side of the economy is important for yet
another reason.
The capacity of our economic
system to absorb the huge costs imposed on us
by the OPEC oil producers is severely limited
when our capacity for growth is limited.
It
is undoubtedly easier to absorb the required
adjustment costs when real production -and
real production per worker -- is advancing at

a rapid rate. Under those circumstances, the
economy could adjust without the need to
suffer actual declines in consumable output.
In
the
absence
of rapid real growth,
purchasing power must decline for some or all
citizens.
The strain this puts on our
economic, social, and political fabric is all
too clear.
The need for a growth buffer is
apparent.
Finally, as a further means of bolstering
the supply side of the economy, we need to go
policy
the
macroeconomic
beyond

62
recommendations set forth above,
so as to
deal with the real structural maladies that
plague our economy. We need better programs
that address specifically the problems of the
structurally unemployed, programs forged on
the basis of a close partnership between the
public and private sectors.
We need to
develop
an
effective
long-term
energy
strategy aimed at reducing our vulnerability
to the, price: and. production. polic-ies. of. OPEC...
We must do more to enhance the development
and
construction
of
high
productivity
technologies in America's businesses.
We
need to develop more efficient methods for
achieving the reallocation of our Nation's
resources
away
from
declining
lowproductivity
industries
to
those
high
technology
consumer
and
capital
goods
industries at the leading edge of the product
cycle.
We need to provide more adequate
transportation networks and public utilities
in order to mak'e our industrial centers more
efficient locations for industry.
And we
need to shift out of, not protect, those
industries that cannot successfully compete
with
foreign firms.
One alternative to
protectionism is to invite foreign companies
to open their high-productivity plants here.

IV.

INFLATION, PRODUCTIVITY, AND
REGULATORY REFORM

charged by the slowdown in
Inflation,
productivity growth and energy price shocks,
be the paramount economic
to
continues
worst
our
we posted
In 1979
problem.
and
years,
30
over
in
record
inflation
percent.
2
by
declined
actually
productivity
The Committee is more convinced than ever
and
inflation
the
to
solutions
that
productivity problems must be found on the
A new study
supply side of the economy.
Otto
for the Committee by Dr.
prepared
changes
Eckstein reinforces our belief that
if properly designed and
in tax policies,
implemented over a period of several years,
inflation and
significantly reduce
would
and
productivity
increase the growth rate of
GNP.
a combination of
that
study shows
The
and
credits
tax
investment
enlarged
allowances could
depreciation
liberalized
inflation
result in a 4 percent reduction in
as measured by the Consumer Price Index and a
3.3 percent increase in productivity by the
To achieve a
end of the present decade.
similar reduction of inflation through demand
management policies would require a prolonged
unemployment,
above 9 percent
period of
levels, and such policies
nearly depression
would further slow down productivity growth.
that any analysis
Although we recognize
based on econometric model simulations should
(63)

64
be approached cautiously, the Eckstein study
contains one of the first formal models of
the supply side of the economy, and we
very
application
initial
consider this
encouraging.
The remainder of this chapter discusses
the
from
productivity
and
inflation
analysis.
economic
side
perspective of supply
Compa-risons. are made of o.ur rec.ord. with. those
of other major industrial nations in order to
place the issue in an international context.
the slowdown in the growth of
Two factors,
capital formation and the proliferation of
government regulations and paperwork, are
The
singled out for detailed treatment.
and the need for
guidelines
wage-price
government,
between
cooperation
greater
business, and labor in order to improve
productivity are also discussed.
International Comparisons of
Inflation and Productivity
The U.S. productivity record contrasts
sharply with the records of the other major
Our growth in
countries.
industrialized
productivity since World.War II has lagged
behind the rates posted by every one of our
True, the United
major trading partners.
lead in terms of
the
maintains
States still
but if our
productivity,
of
level
the overall
growth
productivity
poor
relatively
performance persists, that gap will soon be
Indeed, evidence suggests that we
closed.
trading
have fallen behind some of our
partners in a few key industries.
One recent study by Dale W. Jorgenson of
Harvard University and Mieko Mishimizu of
University shows that by 1972
Princeton
the
eliminated
had
Japanese industries

65
U.S.
their
with
gap
technological
counterparts in 13 out of 28 industries
Japanese industry has been ahead
compared.
of the United States in primary iron and
steel and in primary nonferrous metals since
1967 and in chemicals since 1963 and has been
steadily increasing their advantages in those
which
industries. According to the study,
has
Japan
1972,
to
1955
period
the
covers
been catching. up with. the- United States in
other heavy manufacturing industries and is
ahead of the United States technologically in
a number of light manufacturing and service
industries including construction, paper and
allied products, printing and publishing, and
transportation and communication.
In Table IV-1 we compare the productivity
and inflation records of the United States,
Japan, France, West Germany, and the United
In
Kingdom for the period of 1974 to 1979.
view of our relatively poor productivity
performance, it is no mere coincidence that
our record on inflation has been one of the
worst among the countries compared in the
table.

TABLE IV-1
AND PRODUCTIVITY FOR VARIOUS COUNTRIES
1974 to 1979
Over Same Period of Previous Year)
Increase

INFLATION
(Rates

of

Jaa-n

U.S.

CP I

Prod,

CPI

Prod.

France

ciy

Frod.

U.K.

German

W.

To

IPd,

1974

11.0

-2.9

23.2

0.1

13.7

2.4

7.0

2.4

16.0

-1.7

1975

9.1

0.3

11.7

1.7

11.8

2.2

6.0

1.3

24.2

-1.0

1976

5.8

2.5

9.4

5.4

9.6

4.0

4.5

6.1

16.5

3.3

1977

6.5

1.8

8.1

3.8

9.4

2.4

3.9

2.9

15.8

1.1

2.9

2.6

3.1

8.3

3.1

1978

7.7

0.3

4.2

4.5

9.1

1979:1

9.8

---

3.0

---

10.1

--

3.0

---

9.6

---

1979:2

10.7

---

3.3

---

10.1

---

3.7

---

10.6

---

1979:3

11.7

---

3.5

---

10.7

---

4.9

---

16.0

---

1979:4

12.7

---

---

---

11.5

---

5.7

---

17.3

Source:

Productivity
Bureau of Labor Statistics.
Domestic Product per employed person.

measured

by Gross

67
Not all of the relative improvements for
Germany and Japan on the inflation front can
be attributed to their more rapid rates of
productivity growth, however. One needs to
the importance of the sharp
acknowledge
appreciation of their currencies relative to
the dollar over this time period, exchange
particularly
are
that
rate
movements
important to those two countries because of
the enormous size of their foreign sectors. in
levels of
their
domestic
to
relation
higher
Nevertheless,
production.
productivity growth rates brought them more
inflation relief than was possible in the
United States.
In Table IV-2 we present the productivity
growth rates for the United States and for
each of our six major trading partners over
Besides the fact
the period 1950 to 1978.
that the United States is on the bottom of
the list as far as productivity growth is
concerned, one other important fact also
seven
all
acknowledged:
be
needs to
in
declines
precipitous
registered
countries
their rates of productivity growth after
1973.

68
TABLE IV-2
PRODUCTIVITY

MEASURES

FOR VARIOUS COUNTRIES

Relative
Productivit*
i9/6

Averaqe Annual Percentaqe
Chance in Productivitv**
1950-65

1965-73

1973-78

1950-78

7.2

9.1

3.1

7.0

Japan

63.0

W. Germany

85.1

5.2

4.3

3.2

4.,

Italy

57.3

5.1

5.6

1.3

4.5

France

85.6

4.7

4.5

2.8

4.3

Canada

96.1

2.7

2.3

0.8

2.3

United
Kinqdom

58.4

2.2

3.3

0.9

2.3

100.0

2.4

1.6

0.4

1.8

United
States

*Measured by real cross domestic product per employed person. usinq international
price weiqhts, relative to the
United States.
'Measured
by qrowth in real domestic product per employed
person, usinq own country's price weiahts.
SOURCE:

Bureau

of Labor Statistics

69
Recession, Inflation, and Productivity
It is clear that recession is a very
inefficient and inhumane means of fighting
In order to have a significant
inflation.
influence on inflation, a recession would
have to affect labor markets to a sufficient
degree that the rate of growth in hourly
compensation falls by an appreciable amount.
The extent. has. to. be enough. to more than
the usually harmful effect of a
offset
recession on productivity so as to reduce the
rate of increase in unit labor cost.
Eckstein study referred to above
The
illustrates this problem. To lower the core
inflation rate 1 percent to 7.9 percent by
1985, demand management policies would have
to aim at 7.5 percent unemployment following
a

1980-81

recession.

To

achieve

a

2

reduction in the core
point
percentage
inflation rate, unemployment would have to be
held

above 9 percent from now to 1985.

This

would pull one family in 16 into severe
distress and make progress for disadvantaged
groups virtually impossible. Moreoever, the
effects on the utilization rate of industry
and thus on production under this approach
be damaging and limit the
to
continue
benefits of holding down aggregate demand.
Even if a recession were effective in
reducing inflation, it would not be worth the
resulting higher unemployment and economic
This is particularly true for
distress.
black and other minority workers. Because
the black unemployment rate is approximately
twice the white unemployment rate at all
staaes of the business cycle, in a recession
the percentage of black workers losing their
jobs is approximately twice the percentage of
white workers who are thrown out of work.

70

Capital Formation and the
Productivity Slowdown
Analysts are virtually united in their
call for more capital formation, despite
differences
of
opinion on the relative
importance
of
various
causes
of
the
productivity slowdown.
In a recent study,
productivity analysts at the Bureau of Labor
Statistics. stated "the. 1973-78 slowdown is
dominated by the effects of reduced capital
formation."
There are several methods of measuring the
adequacy of capital formation. One can look
at the ratio of real nonresidential fixed
investment (spending for plant and equipment)
to real GNP. This was 10.7 percent for 1973
to 1974, averaged 9.5 percent for 1975 to
1977, but recovered to 10.0 percent for 1978
and 10.4 percent for 1979.
However, these
data are somewhat misleading because a share
of this investment was for the installation
of
pollution
abatement equipment.
This
yields benefits of reduced pollution, but it
does not contribute directly to measured
output. In 1978 these expenditures amounted
to $6.9 billion, more than 4.5 cercent of
total investment in the surveyed industries,
with a projected increase to $7.3 billion for
1979. For certain industries the share
in
1978
was
higher:
primary metals (12.6
percent); electric utilities (10.1 percent);
petroleum (8.3 percent); and chemicals (7.8
percent). And these data omit the annual
operating costs of complying with pollution
abatement regulations.
A
better measure of the adequacy of
capital formation is the capital-labor ratio
because it accounts for the growth in the
labor force as well as the change in the
capital stock.
This ratio increased at an

71

average annual rate of 2.2 percent for the
But with continued labor
1955-75 period.
it
force growth and inadequate investment,
fell after 1975 and still has not regained
its 1975 peak. Due to our energy situation,
past rates of increase in the capital-labor
ratio may be inadequate to restore past rates
of labor productivity growth.
A, recession would have an adverse shortrun effect on productivity and inflation due to
the cyclical performance of productivity. In
the long run the effects are equally adverse.
In a recession the rate of utilization of
the
reducing
falls,
capacity
existing
plant and equipment
new
for
incentive
spending, thus hurting productivity growth.
Inflation, Productivity, and Tax Policy
In order to understand the role that tax
policy can play in addressing our severe
inflation and productivity problems, we need
to develop a conceptual framework of the
the forces that
and
process
inflation
influence the supply side of the economy.
The
actual rate of inflation can be
inflation
separate
three
into
divided
the demand rate of inflation, the
sources:
shock rate, and the core rate.
The Demand Rate of Inflation
The demand rate is determined by the state
our
of aggregate demand in relation to
High rates of resource
GNP.
potential
utilization, reflected in low overall rates
of unemployment and high operating rates of
physical capital, cause demand inflation to
An easing of demand pressures through
rise.

72
restrictive demand management policies can
alleviate this source of inflation. Severely
aggregate
restrictive policies that push
demand far below our Nation's productive
potential can bring about an actual reduction
in the overall rate of inflation. A number
our
of studies have suggested that, in
present economy, the demand rate of inflation
overall
the
is approximately zero when
unemployment. rate is.in the' neighborhood of.
capacity
overall
the
and
6.0 percent
utilization rate (as measured by the Federal
At lower
Reserve) is around 88 percent.
rates of
higher
and
unemployment
of
rates
capacity utilization, demand contributes to
At rates of unemployment
higher inflation.
above 6.0 percent and at capacity utilization
rates below 88 percent, demand helps control
inflation.
The Shock Rate of Inflation
The shock rate is determined by all those
in
changes
sudden
cause
that
forces
OPEC decisions affecting
particular costs:
energy prices; weather and crop conditions,
both here and abroad, affecting food prices;
and shocks by government actions in the form
of changes in payroll taxes, regulations,
affect
tariffs, and exchange rates that
production costs and output prices.
The Core Rate of Inflation
The demand and shock rates of inflation
price
short-term
determine
primarily
behavior. The core rate of inflation, on the
other hand, determines the long-run price
behavior of the economy.

73
The core rate of inflation is described by
Eck-stein in the following way:
The core rate of inflation can be
viewed as the rate that would occur on
the economy's long-term growth path,
provided the path were free of shocks
and
the
state
of
demand
were
neutral....
The core rate reflects
those price- inc-reases, made necessary by
increases in the trend costs of the
inputs
to
production.
The
cost
increases in turn
are
largely
a
function
of
underlying
price
expectations. These expectations are
the
result of previous experience,
which, :-in turn,
is created by the
history of demand, shock inflation, and
changes in the tax code.
What is notable about the core rate of
inflation is its
"great
propensity
to
persist." It chances only very gradually and
does not respond quickly to policies or other
particular events.
The inertia exhibited by the core rate is
extremely important as far as the design of
economic policies is concerned.
This can
easily be illustrated. There is little doubt
that shocks will continue to be an important
source of inflation in the future.
The
current round of OPEC price increases and the
impending increases in social security tax
rates will raise the shock rate of inflation
significantly, according to Dr. Eckstein.
Additionally, even if we assume that future
OPEC real price increases amount to only 4
percent a year, this in combination with
domestic oil price deregulation will add to
the shock rate of inflation. During the next
three years these factors will raise the
shock rate of inflation by about 2 percent,

74
and they will add at least 1 percent a year
over the course of the next decade. Of
course, these increases in the shock rate of
inflation will eventually drive up the core
rate as well.
use
conventional
we
were
to
If
macroeconomic policies to stabilize the core
rate at its present near-9-percent plateau,
the demand rate of inflation would have to
become sufficiently negative to offset the
increasing shock rate. As mentioned earlier,
this could be accomplished only by holding
the unemployment rate above 6.5 percent for
Moreover, if monetary and
several years.
fiscal policies were to be used for the
purpose of dramatically lowering the core
the
rate below 9 percent, according to
Eckstein study, it "would require a prolonged
bordering
on
period of deep recession,
depression, with the average unemployment
rate held above 9 percent."
The answer to our inflation problem, then,
does not lie in the exclusive use of demand
policies.
We must go beyond
management
demand management to deal with the supply
side of the economy --

to expand' our Nation's

productive potential through an increase in
the quantity and quality of our labor and
capital resources.
The productive potential of our Nation's
economy is determined by a vast array of
complex factors of which we have at present
only an imperfect understanding.
Labor,
capital,
energy, and the state of technology
How they
are all important determinants.
interact and how policy can be used to change
effectively both the quantity and quality of
those resources are not clearly understood.
training programs,
We know that education,
health policies, and the tax system all

73

affect the quantity an:

resources,

quality of our

labor

but the precise relationships are

and
We
know that
research
not known.
development
(R&D) expenditures can influence
all of the factors c-:ed above,
but there
exists
a
dearth c- information on the
such
importance of
relative and absolute
expenditures on the quantity and quality of

our resources.
The Eckstein study is a first step in the
direction of a supply-side model of the U.S.
economy.
The econometric tests performed by
Dr.
Eckstein
indizate
that
further
developments focusing zn the supply side will
ultimately yield us a fuse payoff in terms of
new policy approaches aimed at both raising
productivity and lower ng inflation.
The
results that emerge from Eckstein's
aggregate-demand/aggre-ate-supply model based
on two relatively sizole tax policy changes
are most significant:
the study assumes that
investzent
tax credit by 2.7
we raise the
percentage points beginning in 1980 and that
the average tax lifetime of
we also
reduce
producers durable equipment
by four years
beginning in 1980; finally, it assumes that
we hold monetary and fiscal policies
neutral
so that the demand ra:e of inflation is zero
on average over the decade of the 1980s.
By comparison with :he outcomes that would
emerge in the absence of
these tax policy
changes, real business fixed investment would
be up 5.7 percent by 1281 and 15.5 percent by
1990,
raising
the zapital
stock by
3.5
percent by 1985 and 7.2 percent by 1990.
The
raise
of capital would
increased
stock
by 1985
(0.2
potential GNP by 1.1 percent
percent annually
in the
first half of the
The improved capital to labor ratio
decade).
to
the level of
add 1.2 percent
would

58-205 0 - 80 - 6

76
productivity by 1985 (0.5 percent annually).
It would raise real wages by 0.9 percent by
1985 and would help to produce a 0.7 percent
It would
increase
in real consumption.
reduce the core inflation rate by 1.3 percent
by the end of the decade.
A 1.0 percent reduction in the core rate
might not seem like much, but in the absence
of these policy changes, the core rate would
tend to rise because of the assumed secular
increase in the shock rate of inflation.
It is also worth emphasizing one other
important finding from the Eckstein study. A
question
that
often
arises
in
the
to
stimulate
policies
consideration of
expanding
the
is
whether
investment
investment tax credit would be the most
whether we should
efficient
method
or
liberalize business depreciation schedules.
Opinions have been very mixed on this score,
but recent evidence leans toward liberalized
depreciation.
The Eckstein study concludes
that liberalizing depreciation produces a
long-run effect on supply which is modestly
greater than the investment tax credit.
In
addition, McGraw-Hill, at our request, asked
this question of the companies they include
in
their
capital spending survey.
The
survey
varied
across
response to this
industries, but on the whole businessmen
stated that in the intermediate and long run,
faster
depreciation would have a larger
effect on their capital spending than a
These and other
larger investment credit.
survey results will be presented in a report
which we expect to publish soon.

77

Recommendation No. 8
general
our
with
accordance
In
recommendations on fiscal policy and
the tax cut, the
of
timing
the
composition of our next tax reduction
should be as follows: one half of the
tax reduction should be designed to
provide greater incentives for capital
be
should,
This.
investment.
increasing
by
primarily
accomplished
allowances for business depreciation.

Other Measures to Reduce the
Core Rate of Inflation
To further reduce the core rate, other
be
could
approaches
supply-side policy
notes:
Eckstein
explored. As
They include a renewed effort to build
and
technical
of
stock
the
up
scientific knowledge through investment
in research and development, changes in
personal tax burden which may
the
augment the supply of labor at least to
encourage
and
degree
small
a
productivity, and measures to enlarge
the total supply of capital to the
personal
increased
economy through
saving. Measures that would reduce the
disadvantaged
of
unemployment rate
groups also would help in the struggle
against inflation both by adding to the
effective labor supply and by making it
acceptable to manage aggregate demand
in a more cautious manner.
In the remainder of this chapter we focus
our attention on three promising ways of
increasing investment efficiency --

increased

78
innovation;
and
development,
research,
Government-labor-management
increased
cooperation; and reduced regulatory costs.
Research and Develorjment
In 1978 total expenditures for research
and development in the United States. amounted
to $4-7.3. billion, or. 2.2 percent of GNP, down
from approximately 3 percent in the mid and
late 1960s. Some economists have questioned
the link between this decline and the falling
rate of productivity growth because much of
the drop was in military and space-related
R&D and because the specific payoffs to R&D
are uncertain and difficult to measure.
We believe that even though the precise
effects are difficult to trace, it would be
unwise to wait until definitive analyses are
the
improve
concluded before acting to
effectiveness of Federal R&D programs. Thus,
we favor increasing R&D relative to GNP.
This has happened abroad. Our overall R&D to
GNP ratio still exceeds that in Japan, but
theirs has been rising while ours has been
falling.
Civilian R&D relative to GNP is
greater in Japan than in the United States.
The aggregate West German ratio is about the
same as ours, but their civilian R&D ratio is
much higher.
Concentrating strictly on research and
when
development is too narrow a focus
analyzing the effects on productivity of
In our 1979 Midyear
policies in this field.
Review,
we
used the term "Advances of
innovation, and
Knowledge" to include R&D,
the rate of diffusion of new knowledge. The
latter two factors were as important as R&D
in explaining the productivity slowdown, and
studies have repeatedly shown that research

79

is a small fraction of the total cost of
innovation.
Our national policies toward
innovation should be viewed in this broader
framework.
Last
year
we urged consideration of
additional tax and other
incentives
to
promote industrial R&D.
We realize that
there may be some difficulty in defining R&D
sufficiently nar-o-w.Ly to distinguish.h it from.
other costs.
But we believe that
this
problem
is
nc
beyond
solution,
and
appropriate tax incentives might be designed.
In the past many Federal R&D programs have
not been aimed at the most promising areas.
In some cases this arises from the lack of
oversight. For example, under the Pentagon's
independent R&D Program, defense contractors
receive grants for civilian R&D which in
practice are used for a wide variety of
expenditures
Also,
under
Training Act
grants are
virtually no

certain

with tenuous
relation to R&D.
the ComDrehensive Emoloyment and
(CETA)
program many
research
made
to local governments with
review.
In other cases, such as

National

Science

Foundation

(NSF)

projects,
funds are allocated
by
rigid
percentage
formulae,
rather than by careful
overall Program review.
Of course,
it
is
often difficult -to predict in advance exactly
what activities will
lead
to the
greatest
economic
benefits.
But we believe that more

can be done in this area.
Recommendation Nc.

9

We believe t.at the Federal Government
should more
closely
tarcet
ts
R&D
proarams :cward areas
of orcsoective
arowth.

80
Wage-Price Guidelines
On October 24,
1978, President Carter
announced his anti-inflation voluntary wageThe original provisions
price guidelines.
were discussed in some de:ail in The 1979
Since that time there
Joint Economic Reoort.
have been several major developments in the
guidelines.
t.e guidelines and
of
legality
The
possible sanctions for vicazors were upheld
on July 2 when the Supre-:e Court refused to
review a lower court decision.
A
(six

Pay

Advisory

representing

Commi::ee
labor,

s:x

of 18 members
representing

members) was
management, and six "ptblic
of
Committee
Advisorv
A
Price
established.
six "public" members was a.so established.
The Pay Advisory Commit:ee recommended new
pay guidelines to the President on January
The new stand.ards would replace
22,
1980.
percent wage Guidelines with a
the former
7.5
percent
to 9.5 percent range, and
where
establish criteria for Determining
within this range a specific agreement might
The rate of inf ation assumed in
fall.
contracts
with
compliance
ox
judging
escalator clauses would ze raised from 6
percent to 7.5 percent. New price guidelines
were established in October. These involved
of
:he
profit margin
some
tightening
standard.
The Council on wage and Price Stability
was directed to take into consideration the
need to stimulate produc::vity in monitoring
wages and prices to deter une compliance with
the standards. The Council was also directed
to submit a report to Congress in July

81

policies with respect
its
reviewing
promoting greater productivity growth.

to

It is difficult to assess the effects of
The 13.3 percent
the guidelines program.
rate of increase in the Consumer Price Index
in 1979 might suggest that the standards have
been a "failure," but this conclusion does
not necessarily follow for several reasons.
(1) Ideally, the relevant comparison is
not between inflation before and after the
guidelines, but inflation since 1978 with and
without the guidelines.
(2) The wage guidelines might have been
more successful than the price guidelines,
is
necessary to look at the
it
thus
performance of wages as well as prices.
in the growth rates of
(3) Changes
productivity and nonlabor cost affect the
differences between growth in compensation,
unit labor cost, and prices.
(4) The Consumer Price Index has recently
overstated the "true" rate of inflation.
(5) Many
guidelines.

items

are

excluded

from

the

(6) A detailed review of the program would
require a comparison of price and wage data
for the thousands of companies and labor
contracts covered with the specific standards
applicable to each.
.The CPI rose 3.7 percentage points faster
the
but
in FY 1979 than in FY 1978,
accelerations in the personal consumption
and
index
price
(PCE)
expenditure
price
implicit
corporate
nonfinancial
deflators were 2.0 percent and 2.6 percent.

82
The worsening of inflation in FY 1979 in the
nonfinancial corporate sector was due neither
to
more
rapid
gains
in total hourly
compensation (which accelerated by only 0.6
percent to 8.9 percent, as compared with the
target of 7.5 percent), nor to higher unit
profits
(which showed a turnaround, from a
gain of 1.4 percent in FY 1978 to a loss of
3.9 percent in FY 1979). Rather, it arose
from the large jump in the rate of increase
in unit nonlabor cost (especially energy),
and the fall in productivity in FY 1979 after
a
modest
gain in FY 1978.
While not
conclusive, these data suggest that
the
guidelines
may
have been successful in
restraining both wage and profit growth;
the
worsening
of
inflation
arose from the
increase in nonlabor costs and the turnaround
in productivity.

83
Recommendation No.

10

Voluntary ware and Drice guidelines can
be an effective policy for windinc down
long-term inflation when
oersistent
they are car: of an overall antiinflation crocram that includes fiscal
and monetary restraint and other antiinflation cc icies.
We urge Concress
and the- Pres-dent to conduct economic
1980 in a manner that
oolicv duri:a
will contribt:e to the success of the
guidelines. _/

1/ Congressmen Clarence J. Brown and John H.
Rousselct, and Senators William V. Roth,
James A. McClre, and Roger W. Jepsen feel
that the "voluntary" wage-price guidelines
are improper (f- not illegal) because of the
compliance provisions making them involuntary
for certain seaments of the econcmy, and,
thus, highly ur.fair in their applicability.
emplc-yees
and members o: large
Federal
industrial unic-s have been hurt more than
others.
In acition, the Administration has
mocked its own voluntary" program in certain
politic
circumstances
by
pragmatically
endorsing settlements which are obviously in
excess of the guidelines. Thus, un airness
ccmpliance
is implicit i- the whimsical
required by these nonvoluntary guidelines -the same unfairness that history establishes
is rampant in mandatory uniform wage-price
controls. Free market adjustments may not
impacts, but they are much
result in equal
It
more effective, balanced, and desirable.
is time the Administration admits that the
guidelines are not working and move to an
anti-inflation

one described

policy

that will work

this report.

--

the

84
National Productivity Council and
Labor-Management Cooperation
It is unfortunate that the efforts of the
Federal Government to stimulate productivity
growth appear to have diminished at the very
time that the need for such efforts has
grown. Ironically, 30 years ago we knew what
was necessary when we required that countries
participating in the, Marshall Plan set up.
national productivity centers. These centers
have made major contributions in Europe and
Japan. But we have not followed our own
advice.
The National Center for Productivity and
staff
of
Quality of Worklife, with
a
approximately 50 employees, was created as
the catalyst and focal point for national
efforts in November 1975, but it terminated
The
1978.
operations as of September 30,
by the National
was
superseded
Center
by
(NPC),
created
Productivity Council
Executive Order on October 23, 1978. The
Director of the Office of Management and
Budget is the Chairman of the Council, and
the heads of a number of key agencies are
members.
To date the main function of the
NPC is the undertaking of several studies:
the improvement of productivity statistics;
in
role
determining the proper Federal
and
local
government
supporting
State
productivity improvement efforts;
imoroving
Federal employee productivity through the
Civil Service Reform Act; and
analyzing
to encourage laborFederal
initiatives
management cooperation.
Critics have charged that the NPC is
inadequate to meet our needs, with only two
professional staff persons (though some work
is carried out by staff from other agencies).
The Comptroller General has stated that the

85
size of the staff is "mighty inadequate."
Other
criticisms
have been that in an
interagency task force responsibility is too
diffuse and, as stated by the Comptroller
General,
"We must move from rhetoric to
action in improving national productivity."
A center serving as the focal point for
Federal productivity efforts need not be a
large. new.. bureaucracy,,
imposing. added
paperwork on businessmen.
Rather a small but
effective group could work with the private
sector.
As outlined by the
Comptroller
General in a letter to the Chairman of this
Committee, such a center should:
--Identify Federal Government targets of
opportunity to improve private sector
productivity.
--Work to have adequate funds allocated to
match these' targets of opportunities.
--Ensure the coordination of all Federal
efforts to improve productivity.
-- Represent
the
perspective
productivity improvement at the
policymaking level.

of
top

The direct Federal efforts to improve
national productivity should remain within
existing agencies.
The productivity focal
point should,
however, provide the needed
leadership
and
direction
to
Federal
departments and agencies.
One of the best examples of the type of
success such a center might achieve
is
provided by the cooperative efforts of the
Agriculture Department and American farmers.
These efforts have given us by far the most
productive agricultural sector in the world.

86
We strongly support Federal policies which
encourage
greater
cooperation
between
industry, labor, and government in order to
identify opportunities for productivity gains
and improvement of worker morale. It is part
of our general view that steps should be
taken to modify the often strong adversary
labor,
relations
between
nature
of
management, and government.
Recommendation No.

11

the
National
The
efforts
of
Productivity
Council
should
be
exDanded.
One specific area which
should be addressed is the need to
promote higher productivity through the
cooperative
efforts
of
labor,
management, and government. In general
the NPC should give more stress to
specific policy actions.
Regulation and Paperwork
It is difficult to quantify the effect of
Federal Government policies on inflation and
productivity.
There can be little doubt,
however, that government regulations
and
paperwork
requirements impose substantial
compliance costs on American
businesses,
We
contributes to rising prices.
which
believe that a comprehensive program
to
reduce inflation and improve the productivity
of the American economy
should
include
measures to reduce the unnecessary costs of
and
ineffective,
wasteful
redundant,
conflicting
regulations
and
paperwork
requirements. A number of measures have been
proposed for reforming Federal regulations.
The test of their effectiveness should be
whether or not they reduce regulatory costs

87
without reducing the ability of regulatory
agencies to carry out their congressional
mandates.
During the past -decade and a half, the
Federal Government has increasingly relied on
regulation of the private sector to channel
resources toward such public g6als as a
cleaner environment, safer workplaces, less
hazardous consumer
products,
and
equal
employment opportunities. More than 20 new
regulatory agencies were established during
the 1970s with regulatory responsibilities in
such areas as
environmental
protection,
highway safety, consumer product safety, and
energy production, to name only a
few.
Although
many pre-existing programs were
incorporated in those agencies this was the
largest number of regulatory agencies created
during any decade in the Nation's history.
These important programs usually require
that businesses incur significant compliance
costs which are then passed on to consumers
through higher prices. While many government
regulations,
particularly those affecting
health,
safety and the environment, have
contributed
significantly to the overall
well-being of the vast majority of American
consumers

and

workers

--

and we would not

roll back the clock because many regulatory
policies have produced substantial benefits
for the public
-the cost of regulatory
programs must be brought under control.
The
Federal
Recister, where all new
regulations are printed, provides evidence
that the burdens imposed by regulation are
growing substantiall.
In 1955, the Federal
-Reister contained only about 10,000 pages.
By 1970, 15 years la:er, the number of pages
had doubled to 20,000. In 1979, however, the
number of pages was over 77,000, almost four

88
times the 1970 level. Much of this growth
was the result of new regulatory programs.
regulatory growth has imposed a
This
substantial, and rising, cost on the American
Although the measurement of the
economy.
with
private sector costs of compliance
the
at
is still
regulations
government
have
studies
of
development stage, a number
which give an
performed
been
recently
According to
magnitude.
indication of their
Economic
Joint
the
for
a study prepared
Washington
of
Weidenbaum
Murray
Committee by
University, businesses and individuals are
currently spending perhaps as much as $100
billion annually, or even more, to comply
with government regulations. This represents
a 63 percent increase just since 1976. While
been
have
study
this
the results of
challenged, some believe they provide useful
costs.
estimate of regulatory compliance
Spending by State and local government is
Federal
by
influenced
heavily
also
been
have
there
In addition,
regulations.
individual
of
costs
numerous studies of the
regulations or regulatory programs, including
a study by the Business Roundtable which
found that 48 member firms incurred costs of
$2.6 billion during 1977 to comply with the
regulations of just six Federal agencies.
The growth of Federal regulation continued
during 1979. According to the second edition
of the Calendar of Federal Regulations, which
was published by the Regulatory Council in
the November 28, 1979, Federal Register,
of
Federal agencies are in the process
that
regulations
new
developing 129 major
will significantly affect the economy during
1980 and in the years to come. Among the
criteria used for listing a regulation in the
Calendar is that it have an economic effect
of $100 million or more or have some other

89

*

significant
impact on an industry or sector
of the economy. Of the 129 regulations in
the Calendar, 31 affect energy, 24 affect
State and local governments, 21 affect autos,
trucks, and buses, 21 affect agriculture, 18
affect the coal industry, and 13 affect the
chemical industry.
These regulations will
very likely increase costs and prices in
these industries and sectors of the economy.
As witn many new and rapidly growing
government programs, problems have developed
with regulations that have to be dealt .with
in order to improve their efficiency and
effectiveness.
One major problem involves
the measurement of benefits and costs.
Most
economists would agree that the costs of
regulatory programs
should
be
balanced
against the benefits.
But this is very
difficult in practice,
as
the
current
techniques for measuring benefits and costs
are still crude and need further development.
There are other significant problems which we
will discuss later. Partly as -a result, the
benefit goals of many regulations are set
with little regard to cost.
Some of the
fault for this lies with Congress, as some
laws allow regulations without requiring that
costs or benefits be weighed, while other
laws prohibit the consideration of costs.
In addition, the recent proliferation of
regulations and lack of coordination among
regulatory
agencies
often
results
in
regulations
which
are
duplicative,
conflictinc, and excessive.
Recently, the
Congressional Research Service prepared for
the Joint Economic Committee a background
study
of
conflicting
and
duplicative
regulations in eight major industries or
sectors of -he American economy,
including
iron
and
steel, automobiles, chemicals,
pharmaceuticals,
health
care,
farming,

90

The study will be
and energy.
housing
published by the Committee later this year.
The study, which relies on published sources
and industry spokespersons, concludes that:
The areas of Federal regulation cited
most frequently as being in conflict
one- another included energy,
with
environmental, and health and safety
In a number of instances,
regulations.
our inquiries found that conflict may
regulations
among
be
only
not
national
broader
with
but
themselves
economic objectives as well, such as
the goals of increasing productivity,
reducing
economic growth,
promoting
inflation, conserving and allocating
providing
and
resources,
scarce
affordable housing for low and moderate
income families....
duplicative
of
question
the
On
industry
requirements,
regulatory
spokesmen consulted in our informal
of
examples
cited
inquiries
redundancies or overlap in reporting
requirements, inspections, and Federal,
State and local regulations-....
Finally, though the focus of this study
was not on the cost of regulation or
regulatory delay,
of
problem
the
several examples of conflicting and/or
duplicative regulations were identified
by industry spokesmen as causing costly
and unnecessary delays in production
and as placing heavy cost burdens on
their businesses.
The growing cost of Federal regulations
and their contribution to inflation has led
to efforts within the Administration and
Congress to reform the way in which agencies

91

President
develop and issue regulations.
to
actions
certain
taken
Carter has recentlv
improve

the

regulatory process --

including

to
Council
formation of the Regulatory
coordinate agency regulations, creation of
to
the Regulatory Analysis Review Group
agency regulatory analyses, and
evaluate
promulgation of an Executive Order requiring
all executive acencies to prepare an economic
The.
regulations.
major
of
analysis
effectiveness cf these actions, however, is
addition, the President
7n
still uncertain.
Congress have
of
Memibers
various
and
introduced numerous bills during the 96th
Congress to improve the regulatory process or
Numerous
regulations.
cut the cost Of
efforts have also been made to cut the burden
of government paperwork.
These actions will reduce inflation and
improve the productivity of the American
economy only if :hey help cut the unnecessary
and wasteful coszs of Federal regulatory
programs without hampering the ability of
agencies to achieve their statutory goals.
measures now before
many
Unfortunately,
Congress are unabashedly antiregulation and
aim explicitlv a. hamstringing the ability of
regulatory agenc-es to protect consumers,
workers, and the environment.
There is no limitation on the costs that
regulatory agencies can impose on the private
sector in their attempts to achieve their
regulatory goals. The President cannot set
most of the regulatory
because
limits,
or
commissions
agencies are independent
does not set
Congress
administrations.
limits because we have not yet established a
systematic way of doing it. The result is
entirely predic:aze. The agencies have no
incentive to consider private sector costs
when they develop regulations, and so they

58-205 0 - 80 - 7

92
have no incentive to minimize those costs.
Regulations can turn out to *be ineffective,
unnecessary, wasteful, in conflict with other
regulations,
or
duplicative
of
other
regulations.
The Joint Economic Committee supcorts the
major goals of most of
our
regulatory
programs, but we are concerned at the way
thoset regulatory programs. are:
sometimes
administered. We have no intention, however,
of recommending measures that will reduce the
protection now afforded consumers, workers,
and the environment
while
we
try
to
discipline the regulatory agencies.
:nstead,
we believe measures adopted by Congress and
the
President
must
require
that
the
regulatory agencies behave in a responsible
manner and minimize the unnecessary costs
that regulations impose on the
American
economy.
There are a number of measures Congress
and the President could take to reduce the
costs
of
duplicative,
conflicting, and
unnecessary regulations and to cut the burden
of Federal paperwork on American businesses.
Regulatory Budget
During the past year, the Joint Economic
Committee held hearings to
examine
how
enactment
of
a regulatory budge- could
improve the regulatory process
and
cut
unnecessary regulatory costs. Administration
and private witnesses testified
On
the
potential uses of a regulatory budget and the
problems that will have to be solved before
such a budget could be implemented for the
Federal Government. Their findings indicate
that a regulatory budget could, in :he long
run, fill a number of important gaps that

93
have been omitted from other efforts to
without
process,
improve the regulatory
problems.
posing any insurmountable
The current regulatory process fails to
regulatory
of
recognize that the goals
programs must be balanced rationally with
The achievement
other national objectives.
of any objective, public or private, involves
resources.tha.t. could. be used for several.
more resources that are
The
purposes.
the less available
devoted to one purpose,
George Eads, member of the
for others.
Council of Economic Advisers, testified that
only the regulatory budget proposal would
of
"provide a control mechanism capable
sector
private
of
level
the
keeping
Federal
from
resulting
expenditures
with
line
in
requirements
regulatory
alternative uses of the same resources to
attain other national objectives."
The impact of this omission was discussed
by James C. Miller III, Codirector of the
Center for the Study of Government Regulation
at the American Enterprise Institute for
Public Policy Research:
can obtain resources in
Government
Taxing and using those
three ways:
proceeds to buy things in the private
sector; printing money and using the
money to pay for such resources; and
In
conscripting resources outright.
accomplish
to
regulation
essence,
social ends is not unlike conscription,
and I think we need to have a handle on
the size of that bundle of goods and
services that we're conscripting, to
know what size it is and to know to
being
are
resources
those
whom
allocated and from whom they're being
taken.

94
And it seems to me the regulatory
budget would accomplish that in great
measure.
The
fiscal budget no longer provides
Congress
and
the
President
with
the
information needed to make these decisions.
Prior to the rapid growth of regulatory
programs,
the present fiscal budget was
generally adequate to. show the-, impact of
government on the economy. Almost all the
activities of the Federal Government involved
direct spending, in the form of purchases or
transfers or direct taxation, and
these
showed up in the budget. There were very few
regulatory programs.
By showing the level of total spending and
the amounts to be spent by each agency,
the
Federal budget has been a powerful tool for
limiting the Government's command over public
resources and facilitating their allocation
among competing uses.
One could have a
fairly clear picture of the Government's
influence in the economy by reading the
budget. But with the rapid growth of the new
regulatory

agencies

--

the

Occupational

Safety
and
Health
Administration,
the
Environmental Protection Agency, the National
Highway Traffic Safety Administration, and
many others --

the Federal budget

conveys
a
complete
picture
Government's economic impact.

no

longer

of

the

The
annual
budget
understates
the
proportion of the Nation's resources that are
used
for
public
purposes.
Government
spending for national defense, welfare,
job
training,
revenue
sharing,
and
other
programs, as well as revenues lost through
tax incentives, do appear in the budget.
Spending in the Drivate sector for auto
safety, mine safety, pollution control, and

95
attendant
the
consumer protection, plus
government-required paperwork do not appear
in the budget. Nor do the possible higher
prices paid by consumers because of economic
regulation by such agencies as the Interstate
Commerce Commission, the Civil Aeronautics
Communications
Federal
the
and
Board,
of both
benefits
and
The costs
Commission.
social and

economic

regulations

should

be

more clearly available- to policymakers..
If these costs were minor, their omission
But
from the budget would not be a problem.
costs are
The
minor.
not
are
they
significant and growing. On the other side
of the ledger, benefits are also significant
but do not appear anywhere.
Enactment of a regulatory budget would
make it possible for Congress and the Federal
agencies to establish better priorities over
resources.
Nation's
the
of
use
the
a
establishes
budget
fiscal
the
Currently,
ceiling on the amount agencies can spend for
This
social goals out of tax receipts.
forces Congress and the agencies to determine
how we can obtain the greatest benefits for
the Nation from the resources available in
But the regulatory
year's budget.
each
no
under
operate
currently
agencies
private
the
force
they
constraints on how
sector to spend funds for social purpcses.
Brookings
the
of
Crandall
Robert
As
Institution testified:
In the absence of a regulatory budge:,
the
iregulators may proceed as
resources they command have no other
In virtually every
social value....
institution which controls a
major
the
share of our society's resources,
a
by
limited
use of these resources is
most
firms,
Households,
budget.

96
government
agencies,
and even the
military services are operated with a
budget
limitation.
Only regulatory
agencies -- such as EPA, OSHA, CPSC, or
FDA --

are not limited by such a device

in their discretion to command our
society's
resources to protect the
public. Regulatory standards or rules,
may
have
to
be
"reasonable' or
"feasible."r but. the-re- is

no, mechanism

which
forces the decisionmakers in
these
agencies
to
trade
off
expenditures on one goal for outlays on
another.
Enactment of a regulatory budget would
significantly improve the process b7 which
regulatory agencies channel private resources
toward important public uses.
Although some regulatory costs cannot be
to measured with current techniques, many
costs are measurable, including the zosts of
required investment, paperwork, and chances
in product quality.
While much progress
remains to be made in regulatory analysis,
witnesses
argued
that
sicnificant
improvements have occurred just in the last
year in the ability of agencies to measure
the costs of regulations.
As- Christooher
DeMuth, Director of the Faculty Project on
Regulation at Harvard University, testified:
I would like to note that the executive
branch regulatory agencies are already
preparing
fairly
exhaustive
cost
estimates of their major regulatory
proposals at present, under President
Carter's regulatory review program..
So the first step toward a regulatory
budget, presumably, would be for some
group at OMB or COWPS to collect these

97
cost analyses and consolidate them as
part of a special analysis of the
budget.
James Miller III was also optimistic about
the ability of agencies to develop the cost
figures needed to implement a regulatory
budget:
While the: performance of. many agencies
in measuring costs has been less than
over time agencies have
exemplary,
gained a great deal of experience --

at

estimating the costs of
in
least
individual regulatory initiatives. The
bottom line seems to be that while many
precise
the
over
disagree
would
good
fairly
cases
most
in
estimates,
the
if
developed
be
can
approximations
the task with
about
go
agencies
competent
employ
determination and
analysts.
Recommendation No. 12
The Committee urges Congress and the
Executive Branch to study and develop a
regulatory budget during the next three
years, with emphasis on developing the
a
make
to
necessary
methodology
Federal
the
regulatory budget for
Government a reality in the future. A
encourage
would
budget
regulatory
government agencies to reduce the costs
the
imorove
and
regulation
of
In
programs.
efficiency of regulatory
would
budget
addition, a regulatory
supplement the annual fiscal budget to
Dublic, Congress. and the
give the
more comprehensive view of
a
President
command over
Government's
Federal
the
ourooses.
oublic
for
resources

98
Cost-Effective Regulation
In our 1979 Joint Economic Report, the
Committee recommended that all government
regulations should be cost effective. When
there are alternative ways of achieving the
goals of a regulation, the least costly way
should be adopted unless there is
some
overriding national objective that requires
ther adoption. of. a. l.e~ss. cost-effective
alternative.
We
argued
that
a cost-effectiveness
requirement would be the simplest way of
assuring that regulatory goals are achieved
at the lowest possible cost and with the
least
waste of resources.
The American
public would still receive the benefits of
regulations designed to protect consumers,
workers, and the environment, but without the
inflationary impact of regulations which pay
little attention to the costs they impose on
the private sector.
We believe a costeffectiveness rule would be a more effective
way of controlling regulatory costs without
reducing benefits than would a cost-benefit
test, as some have proposed, because benefits
would not have to be measured and because
regulators would simply have to choose the
least costly of alternative ways of achieving
their regulatory objectives.
President Carter included this requirement
in his proposed Regulation Reform Act of 1979
which was introduced in March of last year.
Under the bill,
the regulatory
analysis
accompanying each major Federal regulation
would have to demonstrate that the method
chosen
to
accomplish
the goal of the
regulation is the least costly
of
the
possible alternatives or it would have to
explain why a more costly alternative was
chosen.

99

Recommendation No. 13
s;hould
reculations
government
All
accomplish the statutory obec--ive in
When
the most cost effective manner.
which
oalternatives exist, each
would achieve a Darticular
clearly
way
regulatory goal, the least cos:lv
overriding
an
unless
should be adopted
statutory goal rea.uir.es. the- adco.tion of
a less cost-effective alternat:ve.
Federal Paperwork
Among the most unproductive uses of the
Nation's resources are the time and energy
wasted by American businesses and individuals
repetitive,
excessive,
in responding to
State and
Federal,
duplicative or unnecessary
reporting
and
recordkeeping
local
covernment's
of
Much
requirements.
collection of information from -he private
is legitimate and is useful for
sector
our
advancing
administering programs or
But in
knowledge of the Nation's problems.
too many instances, Federal agencies demand
information that is already beinrg collected
by other agencies or that is in excess of
to satisfy their statutory
needs
their
to
The resources used
responsibilities.
much
be
could
requirements
comply with these
the
impair:ng
without
better employed,
-rograms
cut
carry
to
ability
Government's
effectively.
the Joint Economic Ccmmittee
Last year,
(GAO)
requested a General Accounting Office
of the burden imposed by Federal
study
In
businesses.
American
on
paperwork
agency
sureyed
response, the GAO thoroughly
business
paperwork requirements affecting

100

that had been approved by either the Office
of Management and Budget (OMB) or by the GAO.
According
to
the
General Accounting
Office, American businesses take about 69
million hours annually at an estimated cost
of over $1 billion to respond to the more
than
2,100
reporting
and recordkeeping
requirements that have been approved by OMB
or GAO.
The average approved requirement
involves ten separate forms, although one
requirement was discovered which created 90
forms.
In addition, many Federal reporting
requirements
are
repetitious
and occur
throughout the year, thus vastly increasing
the burden.
For example, one Department of
Commerce requirement generates 5.8 million
responses
yearly,
while
22
of
the
Government's paperwork
requirements
each
involve more than 1 million annual responses.
The General Accounting Office found in its
study that:
The
requirements analyzed represent
only the tip of the burden iceberg.
About
78
percent
of all Federal
reporting requirements are exempt from
either GAO or OMB clearance. Thus, the
most
pervasive,
burdensome,
and
probably most irritating requirements
were not addressed.
When

the

exempted forms --

primarily the

tax forms of the Internal Revenue Service -are added,
along with paperwork affecting
individuals,
farms, and State and
local
governments,
the Office of Management and
Budget has found that "the
Government's
paperwork
requirements translated at the
beginning of 1979 into 786 million hours of
the public's time spent filling out forms."
This is the equivalent of over 390,000 full-

101

time workers --

the number of people who work

for the fourth largest American

corporation.

particularly
is
paperwork
Federal
A study
businesses.
smaller
for
burdensome
for
Counsel
recently prepared by the Chief
Business
Small
U.S.
the
of
Advocacy
Administration found that small businesses
file over 305 million Federal forms a year,
and
pages
million
850
totaling, over
The
questions.
containing over 7.3 billion
annual
average
the
that
SBA's survey showed
cost per small business firm to comply with
government reporting requirements comes to
about $1,270, about 80 percent of which is
attributable to Federal requirements and the
balance to State and local requirements.
its report to the Joint Economic
In
Committee, the GAO found a number of serious
problems with the management of paperwork by
the Federal Government.
First, when an agency submits a request to
the Office of Management and Budget or the
General Accounting Office for approval of a
new reporting or recordkeeping requirement,
must be accompanied by an
request
the
estimate of the burden-hours to be imposed on
each respondent plus an estimate of the total
burden to be imposed on all respondents.
This burden estimate is designed to help
compare the cost of supplying the information
government with its benefit or
the
to
If the burden estimates are
usefulness.
provide little information
they
inaccurate,
The General
comparisons.
for making these
that:
found
Office
Accounting
burden estimates
of
accuracy
The
Federal
various
the
by
provided
Because these
agencies is unknown.
only
the
currently
estimates are

102
available measurement of the burden of
reporting requirements, they should be
as
accurate
as possible.
If the
estimates are poor, their usefulness is
limited. Before these estimates can be
relied upon, questions regarding their
accuracy need to be resolved.
It is hichly likely that the agencies
underestimate- the actual burden of their
reporting
and recordkeeping requirements.
Many agencies only compute the time needed to
fill
out reauired forms, but in fact there
are 17 different kinds of costs involved with
Federal paperwork as shown in Chart IV-1. -

103
CHART IV-1
EXAMPLES OF PAPERWORK

BURDENS

(Time and Money)

*

First-time costs to design, develo0, install
information systems needed to furnish information
requests by the government

*

Repetitive direct and indirect costs of data
collection, processing, and analysis

*

Costs of filling out forms

*

Costs to hire consultants, lawyers, accountants,
actuaries, computer services, or other professional
services to prepare report

*

Costs of time required to take part in the program,
including salaries and benefits

*

Costs of program delays resulting from paperwork and
red tape

*

Costs of keeming informed,
seminars on reoulations

*

Costs to

*

Costs of correcting reporting errors on complex forms

*

Costs of stationery, reproduction,
telephone

*

Personnel training costs

*

Costs of time to understand what the government's
requirements mean

*

Costs of travel to government offices to discuss
requi rements

*

Records/data

*

Computer costs

*

Overhead costs

*

Costs of on-site Government audits

Source:

including publications and

transmit or mail data

postage,

and

storaqe costs

for data submitted

Government
U.S. Small Business Administration.
Problems and
Paperwork and Small Business:
P. 24.
Solutions. December 1979.

104
The General Accounting Office 4s currently
evaluating the accuracy of burden estimates,
and the processes used by agencies to develop
these estimates,
in a series of in-depth
studies for the Joint Economic Commit-tee.
The first of these studies examines Federal
recordkeeping
and
reporting requirements
under the Packers and Stockyards Act of 1921,
as administered by the U.S. Department of
Agricultures. The following. is an. informal
summary of the findings.
1.
The Office of Management and Budget
has specified four ways in which agencies can
determine the burden imposed by their various
reporting and recordkeeping requirements -including
interviews
with
experts,
preliminary
tests,
etc.
The
General
Accounting Office found that the Department
of Agriculture ignored these guidelines and
relied almost entirely on staff judgment to
create burden estimates.
Of 82 clearances
examined, the burden estimate on 73 was
undocumented.
When
the
Department
of
Agriculture clearance officer sensed tha: the
estimate made by the agency was unreasonable,
the clearance officer and the procram officer
would negotiate a more reasonable estima e.
According to the General Accounting Office
report, the use of staff judgment for burden
estimates
means
that the Denartment of
Agriculture has been able to reduce its
paperwork
burden
figures
under
the
President's Burden Reduction Program wi:hout
making
any
substantive
chances in its
paperwork requirements, simply bv reducinc
the burden estimate on selected clearances
based on "better" staff judgments.
For
example, in 1977, the Food Safety and Quality
Service used a new staff estimate to cut the
burden
estimate
of its meat inspection
reporting requirement from 833,000
hours

105
annually to 407,500 hours, even though no
change had been made in the requirement.
Although the Office of Management and
2.
be
collected
Budget requires that data
useful, the General Accounting Office found
that the Department of Agriculture has no
formal criteria for determining utility. Of
agencies
Agriculture
of
six Department
found
Office
examined, the General Accounting
more
no
of
consisted
that the utility review
the
between
discussion
an informal
than
program
and
officer
paperwork clearance
Often the clearance officer simply
officer.
program officer's desire to
the
accepted
collect data.
and
reporting
major
four
The
3.
General
the
requirements
recordkeeping
Accounting Office decided to look at under
the meat inspection program are part of a
paperwork clearance package that actually
and
reporting
separate
24
includes
are
which
of
20
requirements,
recordkeeping
the
clearance,
this
at
looking
While
minor.
more
eight
found
Office
Accounting
General
requirements that had never been submitted to
the Office of Management and Budget for
approval, and which were thus being imposed
In
on packers and stockyards illegally.
found
Office
addition, the General Accounting
almost 1,100 "bootleg" forms being used by
State and local offices of Department of
that had not been
agencies
Agriculture
of Management and
Office
submitted to the
approval.
for
Budget
One of the most serious findings
4.
Each time
involves the labeling requirement.
a packer wants to change a label on one of
it must
its products, such as canned hams,
label to the Department of
the
submit
Agriculture for approval before it can be

106
used. The Department of Agriculture requires
a separate application for each size and each
packaging plant so that a firm producing five
sizes at different plants must submit 25
different applications even though the only
difference in labels may be
in
weight
designation.
The burden estimate for each
application is 15 minutes. At $15 per hour
for
labor costs,
the General Accounting
Office. found that this example would cost a.
packer $94.
If all the labels could be
submitted together, the cost could be cut to
$4. Even worse is the fact that packers have
been forced to hire private expediters to cut
through the Department of Agriculture red
tape to get their labels approved.
Approval
currently
takes
2-3
weeks.
Private
expediters will speed up the process and
usher applications through the bureaucracy
for $8-15 per application, at a cost of $200375 in the above example. A Food Safety and
Quality Service officer interviewed by the
General Accounting Office admitted that this
greatly speeds the process, at the cost of
delaying
applications
not
having
an
expediter.
The General Accounting Office also found
much duplication in the collection of data
from the business sector, even within the
same department or agency. For example,
the
indepth report on the Packers and Stockyards
Act discovered that the same financial data
was being collected from companies in the
meat industry by four different Department of
Agriculture agencies, as well as by the
Department of Commerce. Only the format and
coverage
of
the
data
differed.
This
duplication imposes an unnecessary and costly
burden
on
businesses,
but the General
Accounting Office believes
that
current
government
efforts
to
eliminate
such
duplication are inadequate.

107
Much of the blame falls on the Office of
Management and Budget. Rather than set and
enforce overall standards and procedures to
be followed by Federal agencies, CMB instead
reviews all agency requests for paperwork
clearances. Since OMB does not have the
personnel or experience needed to judge each
request for
information
adequately,
it
approves an overwhelming proportion of such
agency clearance, requests..
In
addition,.
pursuant to a congressional mandate clearance
requests from the independent
regulatory
agencies are processed through the General
Accounting Office, not the 0MB.
Recommendation No.

14

Congress
should
enact
lecislation
consolidating all oa-cerwork manacement
responsibilities under the Cf-c::e of
Management and Budoet, Provider there
is
sufficient
Oroteczion
of
the
sensitive functions of the independent
regulatory
agencies.
The zacerwork
management activities of the Federal
departments
and acencles snou~d be
upgraded and monitored by 0MB, wi-h the
goal of reducing the burden of Federal
paperwork on the American oubliz to the
level
necessary
for
the effective
management of government proQrams.

58-205 0 - 80 - 8

V.

EMPLOYMENT, SMALL BUSINESS, AND HOUSING

long-run goals for
and
mediumThe
in the
established
inflation
and
employment
Full Employment and Balanced Growth Act of
1978 (The Humphrey-Hawkins Act) can only be
achieved if our economic policies pursue the
twin goals of long-term economic growth and
improved productivity.
-.The best way to create new jobs is through
is
growth
Economic
growth.
economic
workers,
black
to
important
particularly
women, youths, and other groups of workers
who suffer from high rates of unemployment in
good times and bad. Many of the unemployed
in these groups are jobless for structural
reasons --

inadequate basic educations,

poor

or nonexistent job skills, job attachment to
central
declining industries or decaying
race,
on
based
cities, and discrimination
unrelated
sex, age or other characteristics
to their ability to work and produce. They
are the last hired and the first fired.
past decade and a half,
the
During
a number of programs to
created
has
Congress
provide the structurally unemployed with the
work
development,
skill
training,
job
them
of
experience and other support many
American
the
of
need to enter the mainstream
These are important programs
labor force.
but they are not a complete answer to the
because they don't create jobs.
problem
Only strong economic growth will create the
jobs needed over the long run to provide
(108)

109

employment opportunities for
willing and able to work.

all

Americans

The biggest obstacle to growth today is
is
problem
inflation
Our
inflation.
partially

the result

of

rising

oil

prices and

Traditional
our declining terms of trade.
policies of economic restraint will not help
check this source. of. inflation,, because
energy cost increases will still be passed
along to consumers through higher prices.
These increases could be absorbed, however,
through improvements in productivity, with
reduced labor and capital costs offsetting
rising energy costs, thus allowing for price
The policies we recommended in
moderation.
Chapter IV to stimulate productivity and
expand the supply side of our economy go hand
in hand with many of the recommendations in
Poor productivity and high
this chapter.
inflation rates and their harmful effects on
economic growth are the major obstacles to
the full employment policies that are the
best hope for millions of Americans who
desperately want to work and share in the
are currently
who
but
dream
American
unemployed for reasons beyond their control.
Overview of the Emcloyment
Situation in 1979
1979
was
during
growth
Employment
considerably below the job growth of the
previous years, marking the first
three
significant slowdown since the economy began
its recovery from the severe recession of
1974-75. Between December 1978 and December
1979, the economy created 2.1 million new
jobs. By comparison, 3.2 million jobs were
created during 1978, 4.1 million during 1977,
as Table V-1
and 3.0 million during 1976,

110

The proportion of the working age
shows.
population holding jobs rose last year to a
record level of 59.3 percent, but the year's
increase of 0.7 percentage points in the
fell
ratio
employment/population
registered
significantly below the gains
during the previous three years, as seen in
This downturn in job growth
Table V-2.
reflected.. the; ove.r.a.1.l slowing. of the economy
discussed in Chapter II.

111
TABLE V-1
EMPLOYMENT

December of
Year

C:;::an.
Employment
(Thc',zsoanf of Persons)
16 yearslof age and
over, seasonally adjusted)

Change
From
Previous
Year

Percent Change
From
Previous
Year

1975

a5,534

-

1976

88,486

2,952

3.45

1977

-

,2,589

4,103

4.64

1978

95,831

3,242

3.50

1979

97,912

2,081

2.17

Source:

Department

zf Labor, Bureau of Labor Statistics

TABLE V-2
UNEMPLOYMENT AND EMPLOYMENT -POPULATION RATIO

Change in Employment/
Population Ratio From
Previous Year,
Percentage
Points

Year

Unemployment
Rate
(Percent of
Civilian Labor
Force)

1975

8.5

55.3

-

1976

7.7

56.1

.8

1977

7.0

57.1

1978

6.0

58.6

1979

5.8

59.3

Source:

Department of Labor,

Employment/
Population
Ratio,
Percent

1.0
.

Bureau of Labor Statistics

1.5
.7

113
Last year was the first year since the
bottom of the recession in which unemployment
failed to show a noticeable decline (see
Table V-2). The unemployment rate fluctuated
between 5.7 and 5.9 percent throughout the
year, while the December 1979 jobless rate of
5.9
percent
was identical to the rate
registered during December
1978.
Total
unemployment during. 19-79 a.veraged 6-. 0. million
persons. This was only 1.9 million below the
record unemployment level set in 1975. While
the job gains made during 1979 were welcome,
the increase in employment barely kept pace
with the growth of the labor force and was
thus inadequate to make further progress in
reducing unemployment.
Of the 2.1 million jobs added to the
economy during 1979, over two-thirds were
filled by adult women. Virtually all of the
net
additions
came
in
white
collar
occupations, while blue collar employment
remained about constant.
Among
the
industries,
most
of the
employment gains came
in
the
serviceproducing industries, led by "services" and
"wholesale and retail trade."
Although the
goods-producing industries posted some modest
gains, most of this employment growth came in
the
construction
industry,
while
manufacturing
employment
remained
about
constant.
However,
toward the close of the
year, even these gains were beginning to
erode as the housing market tightened and
auto industry layoffs rose.

114
The Problem of Structural Unemoloyment
The Nature of Structural Unemployment
Unemployment is traditionally divided into
three categories --

cyclical, frictional

and

structural. The real source of concern today
is structural unemployment. The- expansionary
1975 have proven
pursued since
policies
high level of
the
with
dealing
in
successful
occurred
which
unemployment
cyclical
Frictional
following the 1974-75 recession.
unemployment is not a major source of concern
since it represents the natural movement of
readily employable workers who are in the
whose
and
jobs
changing
of
process
voluntary.
usually
unemployment is
The structurally unemployed are all those
than
workers who are jobless for other
be
would
who
and
reasons
frictional
standard
the
when
even
involuntarily unemployed
output
full
its
reached
has
economy
for
jobs
potential. Any attempt to provide
through
unemployed
structurally
the
conventional expansionary policies would open
but,
opportunities
employment
new
few
in
acceleration
an
in
instead, would result
rate.
inflation
the current
is difficult to identify specific
It
as
considered
individuals who could be
term
the
since
unemployed
structurally
encompasses a wide variety of job-related
the
however,
group,
a
As
problems.
common
one
structurally unemployed face
malady

--

their

characteristics as workers

generally fail to mesh with the needs of
private and public employers. Even when the
economy is operating at or close to full
capacity and job opportunities are numerous,

115
many workers still
employment --

have

difficulty

finding

because they have an inadequate

basic education, poor or nonexistent job
skills or obsolete job skills; because they
live in a depressed geographic location; or
because they face discrimination by employers
on account of race, age,
sex, or other
personal characteristics that are unrelated
to how. well they w-ould perform- on the- job..
These problems are concentrated in particular
population groups which suffer more heavily
than others from structural unemployment.
For example, new entrants or reentrants into
the labor force -- mostly women and teenagers
-- suffer from much higher unemployment rates

than do experienced workers because -hey have
few job skills. Blacks and other minority
workers also have high unemployment rates,
largely because of the continuing impact of
racial discrimination.
The
severity
of the problem can be
demonstrated by comparing the unemployment
rates fIr
varirous groups of workcr .
In December 1979, the unemployment rate
for adult men was 4.2 percent on a seasonally
adjusted
basis.
By
comparison,
the
unemployment rate was 5.7 percent for adult
women and 16.0 percent for teenagers. The
unemployment rate for blacks
and
other
minorities was 11.3 percent, more than double
the 5.1 percent unemployment rate for whites.
These figures are shown in Table V-3.

116
TABLE V-3
SELECTED UNEMPLOYMENT RATES
(Percent of Civilian Labor Force)
(Seasonally Adjusted)

1975

Category

December,

8.5

Total
Men, 20 years and over
Women, 20 years and over
Both sexes, 16-19

6.7
8.0
19.9

4.2
5.7
16.0

White, Total
Men, 20 years and over
Women, 20 years and over
Both sexes, 16-19

7.8
6.2
7.5
17.9

5.1
3.7
5.0
13.9

Black and Other, Total
Men, 20 years and over
Women, 20 years and over
Both sexes, 16-19

13.9
11.7
11.5
36.9

11.3
8.6
10.0
34.3

Married men, spouse present
5.1
Married women, spouse present
7.9
10.0
Women who head families

2.£
5.0
8.4
4.9*
11.3*
9.1*

Whites
Blacks
Hispanics

*Not seasonally adjusted

Source:

1979

Department of Labor, Bureau of Labor Statistics

117
Using an even more detailed breakdown of
the
unemployment
statistics,
the
discrepancies between different groups become
even more glaring. The December unemployment
rate
for white adult males
prime workers by most employers

---

considered
was
3.7

percent.
By comparison, the rate for white
adult women was 5.0 percent, while the rate
for white- teenagers. was 13.9 percent.. For
blacks and other minorities in all three
groups

it

was

much higher --

in fact, more

than double. Black adult males experienced
an unemployment rate of 8.6 percent, for
black adult women it was 10.0 percent, and
for black teenagers it was 34.3 percent.
For Hispanics, the December unemployment
rate (not seasonally adjusted)
was
9.1
percent, compared to an unadjusted rate of
4.9 percent for whites and 11.3 percent for
blacks.
For

male

une~mrlcnt

heads
raze was

of
a

households,
mere

2.8

the

percent,

while
female
heads of households
joblessness of 8.4 percent.

faced

To compound the problems faced by these
groups from structural unemployment,
they
also face much greater joblessness during an
economic downturn, as the figures from 1975
in
Table
V-3
show,
indicating that a
recession during 1980 would likely have its
greatest impact on those who suffer from high
unemployment even in the best of times.

118
The Economic and Social Costs
of Structural Unemployment
and
economic
the
to
addition
In
psychological costs suffered by those who are
unemployment imposes
structural
jobless,
immense economic and social costs on the
Nation as a whole. During October 1979, the
Joint Economic Commi.ttee held a series, of
hearings to examine the economic and social
costs of structural unemployment affecting
minority workers, women, and youths. The
witnesses testified that the economic costs
of unemployment are much greater than just
the
to
payments
transfer
the sum of
the
In
incomes.
lost
their
and
unemployed
long run, economic costs also include the
resulting misallocation of human resources
and the loss of their productive output.
When the incidence of structural unemployment
falls more heavily on one societal group than
on others, the Nation also suffers pervasive
and long-term maldistribution of income that
offends our sense of economic justice.
The costs to the Federal budget are one
aspect of the economic costs of unemployment.
Based on estimates made by the Congressional
Budget Office, each percentage point in the
Federal
the
costs
rate
unemployment
Government about $16-$20 billion in direct
and indirect transfer payments and lost tax
revenues. Although these figures could vary
widely depending upon the rate of GNP growth,
costs
budgetary
substantial
are
there
associated with increases in unemployment.
a
has
also
unemployment
Structural
potential
economy's
the
on
effect
significant
According to the
output and productivity.
of the Library
Service
Research
Congressional
billion in
$93.5
lost
we
1978
in
of Congress,

119

potential gross national product because or
the effects of racial discrimination in the
labor market.
This discrimination
takes
three

forms --

higher unemployment rates for

blacks, Hispanics, and other minorities; a
higher
concentration of blacks
in lessskilled occupations and higher educational
requirements for blacks; and lower pay for
blacks, than whites in the. same occupation.
If these differentials did not exist, our
1978 gross national product would have been
4.4
percent
higher,
according
to the
Congressional Research Service study.
Lost opportunities for employment, Lower
earnings, and depressed household incomes are
tangible evidence of gaps in the economic
health of minority groups.
For example,
between 1970 and 1977, black median family
income declined from 61.3 to 57.1 oercent or
the median family income of whizes. Black
families also lost ground in absolute terms
as their median
real income declined 2.4
percent. while that ^f white famil-es gained
by

4.8

percent.

in

1978,

HispaniQs had the

lowest median weekly earnings of any group,
$174, compared to $232 for white workers and
$181 for black workers.
The med an annual
income of Hispanics in 1977 was S11,400, as
compared
to
$16,700
for
the
general
population.
Twenty-one percent of Hispanic
families have incomes below the
poverty
level, compared to 9 percent of all U.S.
families.
Comparisons made by the Ecual Employment
Opportunity
Commission
orelative
advancement rates among occupations show that
minority workers are still no. receiving a
fair
share of higher wage occupations even
though a large number of cual'fied
and
qualifiable minority workers exist.
Althoug.h

123
for
decreasing
is
discrimination
wage
white
and
minority
between
equivalent work
still
is
workers, hiring discr:mination
in
exists
inequality
addition.
In
evident.
opportunities
prcmotional
and
job assignments
low-wage
in
Workers
minorities.
for
of
sources
fewer
have
usually
occupations
and
as interest
su:h
income
nonsalary
income.
in the
facranother
dividends,
white
and
between mnnority
differentials
households.
of unemployment for
rates
high
The
minority youths reflec: discrimination and
deficiencies in train nq, education and job
experience, as well as structural shifts in
In the next decade, minority
the economy.
to have difficulties in
continue
youth will
ALthough the relative
the labor market.
:he labor market will
in
youth
of
importance
decline in the 1980s, minorities will become
youth
the
of
an increasing proporz on
In
force.
labor
population and the youth
growth
expected
the
order to keep pace with
the labor market and to reduce the
in
differential in unemployment rates between
minority and other yo-:hs by 1983, many more
jobs have to be created for minority youths
to fill.
In addition to the economic costs of
also
are
there
structural unemployment,
important social costs.
One study performed for the Committee
predictable
indicates that a stable and
and
unemployment
between
relationship exists
and
problems
health
as
such social indicators
decades,
three
cast
-:ne
crime rates. During
health problems of workers and crime rates
have increased with the national unemployment
rate. When unemployment rose, so did crime,

121
suicides, heart attacks and commitments to
mental institu:ions. These relationships are
statistically
significant,
although
the
changes in a social indicator can lag the
change in the unemployment rate by as much as
three years. For example, heart attacks and
other
circulatory
problems
show
uO,
particularly among nonwhites, within two or
three
years
after
an increase in the
unemployment rate. These relationsh.ips were
found primari:.' among adults.
For
youths,
a different relationshic
holds.
Youths seem to be less influenced by
the overall unemployment rate than by their
relative unemz.loyment rate. Thus, an adverse
change in the ratio of youth unemployment to
the general unemployment rate
seems
to
trigger
increases in crime and aggressive
behavior.
If youths consider
themselves
relatively worse off in economic terms, this
perceived disparity plays a significant role
in the increase of youth suicides, automobile
Accident .m.orta'lLies and personal crimes,
includinr
assahult ,
1onicide
and
rape.
Nonwhite youths respond
to
unemployment
differentials at a rate almost three times as
great as white youths both in terms of crime
and other sources of pathology unrelated to
crime

--

in-ant

mortality,

cardiovascular

mortality, and mental hospitalization.

Another stady presented to the Committee
discovered tha: jobs alone do not encourage
individuals
to
commit
less
crime,
particularly property offenses.
Rather,
it
was discovered that only good jobs with hich
wages and more
job
satisfaction
(less
turnover)
are
a
significant factor in
reducing crime rates. Because many juvenile
offenders alternate between legitimate anc
illegitimate wzrk, the better the legal job,

122
the greater the probability that they will
stay away from crime.
a link between
be
also
may
There
for
childbearing
unemployment and early
with
coupled
teenage women. Low expectations
pocr educational preparation leads to lowwage jobs and intermittent employment. Many
choose
sit.uat.i~on
this
in
young women
continued
means
often
which
parenthood,
The
poverty and early welfare dependency.
social

costs of this vicious cycle are clear.

There are a number of reasons for the lack
of availability of better jobs. The cyclical
waves of economic activity have encouraged
firms to create secondary rather than primary
jobs in order to preserve their flexibility
in changing business conditions. The workers
in these secondary jobs, primarily youths,
minorities and women, are laid off easily.
the jobs are not career-oriented,
Since
workers feel little job attachment to them.
Youths have also experienced increased
comrpetition for entry-level type jobs from
the large influx of women entering the labor
force, and from the greater number of their
In addition, structural shifts,
own peers.
such as the exodus of workers from the
agricultural sector, have resulted in fewer
jobs requiring a lower level of skills.
As the size of the population aged 15 to
24 vears shrinks in the next decade, analysts
believe a decrease in crime and mortality
the
However,
occur.
will
statistics
total
to
relationship of youth unemployment
unemployment should continue to influence
crime and mortality rates.

123
As youths grow older, they typically commit
less crime. But if they become unemployed or
remain
Will
they
adults,
low-income
vulnerable to economic fluctuations. In the
longer term, these persons are picked up in
the statistics on mental hospitalization,
This
data.
and
mortality
morbidity
among
phenomenon holds true particularly
lower socioeconomic croups which have had
traditionally higher mortality rates than the
general population.
Lonq-Term Demograrhic Trends
and Structural Unemplovmentof
problem
the
1970s,
the
During
structural unemployment was magnified by the
unusually high rates of growth of those
segments of the labor force which suffer the
For
problems.
employment
serious
most
example, the number of females in the labor
force increased by 42 percent during the
of
-male incr4
decade. more thrn twice th
Blacks and other minorities
18.5 percent.
increased 37 percent, while whites increased
The teenage labor force (16 to
26 percent.
19 years old) increased 36 percent over the
decade, and the young adult labor force (20
to 24 years old) grew 55 percent, compared to
a growth rate of only 22 percent for workers
25 years old and over.
Population growth explains some of this
the
in
The number o: youths
pattern.
population rose rapidly as the baby boom
Blacks and
generation came of working age.
as a
increased
also
minorities
other
this
of
Much
percentage of the population.
significant
from
resulted
however,
pattern,
increases in labor force participation rates,
particularly for women and white teenagers.

58-205 0 - 80 - 9

124
More than half of all women work today,
compared to only 43 percent at the start of
the
groups,
these
Among
1970s.
the
characteristics of structural unemployment -formal
of
levels
lower
skills,
poor
reduced attachment to the labor
education,
force, and the effects of discrimination
because of race, sex or age -- occur more
frequently, and so their relative growth in
the labor force has helped make structural
unemploymen: a significant problem today for
economic policy.
In this section, we will examine the
demographic changes which occurred in the
labor force during the 1970s and look at the
implications of these changes for economic
policy during 1980 and beyond.
decade has been marked by
The
past
dramatic chances in the size and composition
of the labor force. During the 1970s, the
labor force expanded by over 25 percent with
the massive influx of youths and women.
extraordinary
Employment also experienced
growth, registering some of the sharpest
gains in the 38-year history of modern day
employment statistics. The result was a much
larger and substantially younger work force,
one in which women played an increasingly
primary role, and one which found most of its
new employment among the ranks of white
collar jobs in the expanding service and
trade industries.
About ten years ago teenagers and young
persons born during the postwar baby boom
became a sionificant force in the labor
market. In the early 1970s the rate of
women's participation in the labor force,
which had been rising slowly since the end of
accelerating
began
II,
War
World

125
started
adults
young
As
unexpectedly.
and fer:ility rates
marriage
postponing
dropped, more and more women becan to enter
the "primary" labor force. I. more recent
years, as the baby boom generation matured,
frequently
were
formed
households
the
families.
two-income
by
characterized
demographic and social
these
Reflecting
increased at an
changes, the labor force
annual rate of 2.5 percent during the 1970s.
This rate of growth was the largest since the
last great wave of immigration during the
1880s.
This massive labor supply increase was
accompanied by a large increase in the demand
for labor. During the 1970s, employment grew
This
year.
per
by about 2.2 percent
represents a very rapid absorption of the
supply surge of youth and women into gainful
employment, raising the ratio of employment
to working age population to an all time high
of nearly 60 percent. While tnis growth in
demand was large relative to earlier periods
uf growth, it was not sufficient to employ
As Table
the entire labor supply increase.
V-4 shows, unemployment in 1T78 fell much
more heavily on the shoulders c- women and
blacks than it did in 1970. The unemployment
burden on teenagers and young workers is
masked by the fact that the labor force
teenagers
black
for
participation rate
declined considerably over the decade, as
many simply gave up looking for work in the
face of a hopeless situation.

TABLE

V-4

UNEMPLOYMENT EXPERIENCE OF
SELECTED POPULATION GROUPS
(Thousands of Persons)

Number of Persons
Unemploved

Percent of
Number Unemoloved

1970

1978

1970

1978

Total
Male
Female

4,088
2,235
1,853

6,047
3,051
2,996

100. 0
54.7
45.3

100. 0
50.5
49.5

White
Black

3,337
752

4,620
1,427

81.6
18.4

76.4
23.6

1,969
1,105
864
2,119

2,984
1,559
1,426
3,063

48.2
27.0
21.1
51.8

49.3
25.8
23.6
50.7

Aged 1i5-24

5-19
2110-24
5 i Over

Source:

Bureau of Labor Statistics

p

0-'

127
On the whole, the changing structure of
industry and employment growth during this
period tended to coincide with the large
All
labor.
increase in the supply of
of
proportions
higher
employ
industries now
those
However,
workers.
young
and
women
industries that increased their share of
trade,
total employment, such as retail
insurance and real estate and professional
services, generally have had historically
proportions of women and younger
higher
workers.
Occupational changes largely paralleled
those in industries, with the shift 'being
away from manufacturing and blue collar jobs
toward service industries and white collar
Nearly two-thirds of the tenoccupations.
year employment growth came in white collar
jobs, while blue collar occuDations accounted
for only about one-fifth of the employment
Here, too, women and young adult
growth.
the
in
gains
workers made substantial
and
collar professional
white
expanding
technical positions, and women appear to have
broken many of the barriers to managerial and
administrative jobs.
Despite the upward trend in aggregate
the
rates,
participation
force
labor
participation of racial minorities dropped
The nonwhite
off during the past decade.
male participation rate declined much more
rapidly than that of white males. And while
nonwhite women increased their participation,
they did so at a much slower pace than white
force
labor
civilian
The
women.
nonwhites
and
whites
of
rates
participation
are summarized by age and sex in Table V-5.

TABLE V- 5
CIVILIAN LABOR FORCE PARTICIPATION RATES
Age

White

Nonwhite

16 to

Under

1Q

35

35 and
over

16 and
over

16 to
10

Under
35

35 and
over

63.3

50.5
56.9
61.8

62.8
68.1
74.1

57.6
55.9
55.4

63.0
60.0
61.7

42.7
40.9
41.6

64.3
62.7
66.1

62.0
57.5
57.3

Male:
1968:2 .80.8
1973:2 .79.7
197:2..

78.8

58.6
63.3
66.4

82.8
84.7
86.5

79.7
75.9
72.8

78.6
73.9
72.2

50.7
47.2
45.2

79.2
75.5
74.3

78.2
72.4
70.1

Female:
1968:2.
1973:23.
197::2.

40.7
44.4
49.2

42.8
50.3
57.2

45.0
52.2
62.0

38.1
38.5
40.3

49.9
48.4
53.0

35.2
35.0
38.1

51.8
51.8
59.8

48.4
45.4
47.0

16 and
over
Total:
1968:2 ..........
1973:2 .60.9
1978:2 .

Source:

59.5

t"gr3au of Labor Statistics

H

t'3

129
participation rates of white and
The
nonwhite men were fairly comparable az- -he
start of the decade, measuring 80.8 an- 78.6
percent respectively. But by 1978 the gap
between the two had widened considerably,
with white male participation at 78.8 percent
nonwhite male participation at 72.2
and
percent. Most of this gap was due to -rends
among white and nonwhite men. under 3.5 years
of age. White males in this group increased
their participation while the participation
This
of their nonwhite cohorts declined.
pronounced
divergence of trends was most
among teenagers; in 1978 the participation
for white male teenagers was 66.4
rate
for
percent
45.2
to
percent compared
This disparity in labor force
nonwhites.
of
the
indication
participation is an
minority
many
which
with
hopelessness
teenagers view their job prospects.
Participation rates among nonwhite women
have historically been higher than those of
white women, but the gap narrowed appreciably
in the past decade. Minority women increased
their participation rate by only about 3
1968-78
the
during
percentage points
period, while white women registered a sharp
points.
increase of nearly 9 percentage
These developments brought the labor -force
participation of white and nonwhite women
closer together.
Among women under 35 years of age, white
women increased their participation rate by
17 percentage points between 1968 and 1978,
while nonwhite women upped their rate by less
than half that amount. As a result of these
changes, for the first time, white women now
participate at higher rates than minority
women in the under 35 age group.

130
Thus, while employment among the working
age population rose to an all time high
during recent years, the employment situation
of racial minorities with respect to their
working age population deteriorated during
In contrast to the employment-tothe 1970s.
for whites,
ratio
working-age-population
which rose from 56 to over 60 percent, this
ratio for nonwhites declined. from 5.6 to. 53
percent. This means that racial minorities
have enjoyed less than their proportional
share of the employment and economic growth
of recent years.
The excessively high youth unemployment
the
rates among the baby boom generation,
the
and
of
women,
rates
participation
rising
continued lack of satisfactory employment
opportunities for blacks and other minorities
an
unemployment
structural
make
will
important policy issue for 1980 and beyond.
During the upcoming decade, however, certain
likely demographic changes will alter the
nature of some of the most pressing problems.
First, as the baby boom generation ages
the
and the number of teenagers declines,
probably
will
youths
among
unemployment rate
fall from the levels set during the 1970s.
Between 1980 and 1990, demographers expect
the number of teenagers 15 to 19 years old to
decline by almost 20 percent and the number
of youths 20 to 24 years old to fall almost
Although the impact of this
15 percent.
decline in supply on the teenage unemployment
rate will also depend on what happens to the
it is likely that
demand for their labor,
their unemployment problem will ease during
the decade.
The improvement, however, will probably be
with
concentrated among white teenagers,

131
black teenagers con:inuing to suffer from the
high unemployment rates they suffered during
the 1970s unless targeted programs are geared
to their specific needs.
According
to
demographers,
there will be a continued
growth in the number of black teenagers
during
the
1980s.
As a result, youth
unemployment
will
increasingly
become
concentrated amonc black teenagers and young
adults. This was one issue emphasized by Dr.
Bernard Anderson in testimony October 9,
1979, before the Joint Economic Committee:
From 1977 through 1990, for example,
there is expected to be very little
change in the numbers of blacks between
the ages of 16 and 24, while the number
of whites in that age category is
expected to decline. And so those who
look at demograp;-ic changes as the
potential source of solution to the
problem of minority youth employment, I
think, are barking up the wrong tree.
In
addition,
Anderson
argued, black
teenagers continue zo live predominantly in
areas that suffer from limited employment
opportunities
in
the
private
sector,
particularly in declining central cities and
poor rural areas.
The percentage of women in the labor force
will also continue -o crow during the 1980s,
although the trend- in female participation
rates has always been difficult to predict.
An article in the January 1980 issue of
American Demoqraphics states:

132
Bureau of Labor Statistics projections
consistently
1970s
the
in
underestimated the growth in the labor
force participation rate for women.
The bureau's projected participation
rates for women by 1990 vary from 53.8
percent to 60.4 percent. Since more
than 5C percent are already in the
force., the, figure should be
labcr
closer to the high projection than the
low by the end of the decade.
AccOrding to the American Demograrhics
article, demographic trends among blacks and
other Minorities indicate that jobs will
continue to be a major problem for these
groups:
By 1950 nearly one out of every five
Americans will be black or Hispanic.
In younger age brackets the proportion
Blacks will number
will be higher.
12.2 percent of
near:.y 30 million,
Census
according to the
Americans,
Bureau projections which assume a 2.1
fer:li'_y rate. While the population
a
whole increases by only 10
as
percent, the black population will grow
by about 14 percent because of the
are
black
women
fertility
hicher
expec:ed to have during the 1980s.
the fastest growing
are
Hispanzcs
minority group in the United States.
the Census Bureau does not
Althnouch
the
Hispanic
issce projections of
popuation, we predict based on current
growth rates that it will increase to
17 million by 1990. Hispanics,
abou:
who represented only about 4 percent of
will
population 10 years ago,
the
acccunt for 7 percent by 1990.

133
Several witnesses appearing before the
Joint Economic Committee
testified
that
blacks, Hispanics, and other minority groups
will continue to face many of the labor
market difficulties experienced during the
1970s.
Solving the Structural Unemployment Probl.em
A Policy Framework
In this section, we intend to consider two
important questions.
First, can targeted
programs
reduce
joblessness among those
segments of the labor force which
have
special difficulties in obtaining employment
even when the economy is operating at full
capacity?
Second, can targeted programs
achieve and sustain a decrease
in
the
national
unemployment
rate
without
exacerbating inflation?
Our answer is yes to both questions, but
with certain qualifications.
First,
the
programs
must be carefully designed and
targeted
to
reach
the
structurally
unemployed.
Second, measures must also be
taken to increase the rate
of
capital
formation.
These
measures
must
be
coordinated with the special unemployment
programs.
Third, we must pursue policies
designed to achieve strong economic growth
and expanded employment opportunities for the
economy as a whole.
There are several reasons why targeted
policies are needed to significantly reduce
structural unemployment without adding to
inflationary pressures.
In the first place,
unskilled
workers
constitute
a

134
disproportinate share of the pool of job
seekers when the economy is operating at or
near full capacity. Skilled workers, on the
other hand, tend to be in relatively short
supply. An overall expansion of the economy
through macroeconomic policies would raise
the demand for both skilled and unskilled
While the increased demand for
workers.
unskilled workers woul-d cause little* or no
increase in inflation, the increased demand
for skilled workers would impart an upward,
and perhaps substantial, inflationary impact
on the economy because it would tend to raise
their wages.
As former Deputy Assistant
Secretary of
Labor
Donald
A.
Nichols
testified
before
the
Joint
Economic
Committee:
ability to reduce the overall
The
economic
through
unemployment rate
growth is limited by inflation. When
the lowest unemployment rate consistent
with the inflation barrier is reached,
the unemployment rate for low-skilled
workers will still be high and will be
substantially higher than that of highskilled workers.
Shortages of lowskilled workers will be rare and a
reduction in the unemployment rate of
this croup by itself would not cause
The highto
increase.
inflation
skilled group, on the other hand, will
have shortages and an attempt to reduce
their unemployment rate further would
tend to lead to wage increases rather
than employment increases.
Therefore,
an attempt to reduce unemployment among
the low-skilled by increasing economic
activity is stymied by the fact that it
will lead to shortages in the highskilled
market
and
therefore
to
inflation.

135
There seems to be little question that
are
workers
skilled
labor markets for
generally tighter than for unskilled workers.
The unemployment figures for 1979 illustrate
The unemployment rates for several
this.
skilled occupations --

workers,

craft

operatives --

are

including white collar

workers

and

significantly

transport
lower

than

-occupations
less-ski lved
for
those
operatives, nonfarm laborers and many service
These figures are presented in
workers.
Table V-6. Since the unemployment rates in
Table V-6 only include workers who have
previously held jobs and do not include new
entrants into the labor force
and teenagers with low skills

---

mostly women
even these

figures understate the unemployment disparity
workers.
unskilled
and
between skilled
Furthermore, the unemployment rates for lessskilled occupations have recently turned up
in response to the economic slowdown, while
unemployment rates among skilled workers have
remained relatively low.

136
TABLE V-6
UNEMPLOYMENT

RATES BY OCCUPATION, 1979

OCCUPATION

UNEMPLOYMENT RATE
(Percent)

White-Collar Workers

3.3

Professional and Technical

2.4

Managers and Administrations (except farm)

2.1

Sales Workers

3.9

Clerical Workers

4.6

Blue-Collar Workers

6.9

Craft and Kindred Workers

4.5

Operatives (except transport)

8.4

Transport Equipment Operatives

5.4

Nonfarm Laborers

10.8

Service Workers

7.1

Farm Workers

3.8

Source:

U.S. Department of Labor, Bureau of Labor Statistics

a

137
targeted structural employment and
If
training programs are to be used to reduce
rate without
unemploymen:
national
the
exacerbating inflation, they need to be aimed
at low-skilled workers, where there is an
excess supply and where additional employment
gains could be achieved with little or no
Such programs
upward pressure on costs.
cotld als6 help to alleviate cost pressures
in high-skilled markets if they provide an
increased supply of trained workers to these
Supplying additional workers to
markets.
such "tight" labor markets can help alleviate
bottlenecks among skilled workers that push
up costs.
conventional
why
reason
second
The
ineffective
macroeconomic policies would be
in reducing unemployment has to do with the
fact t..at the tightness and looseness of
labor markets varies dramatically from one
Since it
recion of the country to another.
if not impossible, to target
is difficult,
aggregate monetary

and

fiscal

DO]iripe;

hv

any attempt to reduce unemployment
region,
through aggregate policies in areas where the
unemployment rate is excessive will generally
also end up adding to inflationary pressures
in recions where there is very little labor
market slack. In addition, much structural
unemployment occurs in older urban areas
scarce,
are
opportunities
job
where
other
and
teenagers
black
particularly for
have
areas
These
youths.
minoritv
times
good
in
decline
economic
an
experienced
and bad and are hard to help with aggregate
economic policies. Ending the deterioration
of business and employment opportunities in
our Nation's central cities of the North and
South should be a central goal of -our program
to reduce structural unemployment.

138
conventional
why
reason
third
The
be relied
not
should
policies
macroeconomic
when
ovment
unemp
structural
reduce
to
upon
the economy is at or near full capacity is
because further increases in overall supply
would be severely constrained by productive
capacity limits. Capacity utilization rates
are still quite high, even though :he economy
has slowed.. According to the Federal Reserve
Board's index, capacity utilization. was 84.4
percent in manufacturing in December 1979; in
materials, the capacity utilization rate was
Since an index value in the
85.7 percent.
percent is widely viewed as
90
to
range of 88
capacity, the margin of
full
constituting
currently szill quite
is
capacity
unused
small. Thus, independent of any inflationary
wage pressures that might arise as a result
of further increases in demand, additional
inflationary pressures would mount because of
the continuing unavailability of capital.
if
The point that needs emphasis is this:
of
rates
the availability of capital and
restraining
not
were
return on investment
factors today, further increases in demand
and further reductions in unemployment could
brought about without adding to our
be
is
The diff-iculty
inflationary pressures.
market conditions,
present
under
that,
further expansions of output and employment
would necessitate the use of older, less
efficient capital which in turn would lower
productivity, raise unit costs and accelerate
inflation. This means that the aznroach to
reducing unemployment should include targeted
structural employment and training programs
as well as measures aimed at raisinc the rate
of capital formation.
If the restraints on productive capacity
were eliminated, conventional macroeconomic
policies might not need to be as restrained

139
as they now are. In that event, it might be
demand
conventional
use
to
possible
management tools to reduce the margin of idle
without risking further
resources
labor
Even under such circumstances
inflation.
conventional policies alone probably could
not be relied upon to reach the 4 percent
unemployment rate goal.
Recommendation No. 15
and employment
training
Structural
by
accompanied
programs should be
measures to increase capital formation.
It would be necessary to coordinate
employment
and
training
targeted
increase
to
actions
programs and
avoid a
to
as
capital formation so
the
and
mismatch of job ooportunities
newly trained.

58-205 0 - 80 - 10

140
It should be emphasized, however, that
targeted structural employment and training
programs constitute only part of the solution
to the structural
unemployment
problem.
Another essential element is strong economic
growth.
Economic growth has been found to reduce
black unemployment even more rapidly than it
reduces white unemployment. According to a
study recently performed by the National
Commission
for Employment Policy, a one
percentage point reduction in the national
unemployment
rate will reduce the black
unemployment rate by 1.26 percentage points
compared to only .99 percentage points for
whites. For teenagers, the disparity is even
greater,
with
a
one
percentage point
reduction in the national unemployment rate
associated
with a 1.66 percentage point
reduction in white teenage unemployment and a
2.17 percentage point reduction in the black
teenage unemployment rate. The reverse,
of
course,

is also true --

an economic downturn

has a greater impact on black unemployment
than on white unemployment. This evidence
indicates that sustained economic growth can
do much to lessen the discrepancies between
the different racial groups in this country
in their employment opportunities.

A Program for Upgrading Education and Skills
Amonq the Structurally Unemployed
Structural unemployment is a long-term
rather than a short-term problem.
While a
strongly growing economy is needed to create
jobs for the structurally unemployed, growth
alone is not the answer, as we have pointed
out. In order to achieve the unemployment

141
goals set in the Full Employment and Balanced
Growth Act of 1978, we also need targeted
training and employment policies to alleviate
the education and skill deficiency and other
problems of the structurally unemployed.
The Target Population
Most of the recent work on structural
of
unemployment focuses on the problems
Unemployment
reasons.
several
for
youths
rates are much higher for youths, especially
minority youths. Furthermore, the situation
for minorities relative to white youths has
1950s.
the
since
deteriorating
been
youths,
out-of-school
for
Joblessness
leads to unstable
dropouts,
particularly
lower earnings as
and
employment patterns
costs, such as
economic
and
Social
adults.
behavior,
antisocial
and
early childbearing
as we
unemployment,
youth
accompany
often
basic
of
lack
finally,
And,
above.
discussed
1

--

,i

a'

of
_

t

pr

r

Those
structural deficiencies for youths.
basic skills can be taught more effectively
and at less cost at a younger age.
including
all youth unemployment,
Not
is
youths,
minority
for
unemployment
search
job
in
spent
time
The
undesirable.
often results in new information about the
labor market, a higher level of earnings and
In-school
more realistic job expectations.
youths who experience periods of unemployment
do not seem to suffer long-term employment
consequences as a result. Most youths will
voluntarily move from part-time work to fulltime school attendance to full-time summer
employment to part-time work during school
It is a time of experimentation
periods.

142
with the labor market and employees, and
youths themselves perceive it as such.

the

This
orderly movement
into the labor
market can break down for many youths.
This
occurs, for example, when a youth, without
adequate credentials for anything more than
menial work, drops out of high school and
then tries to enter the job market.
Another
problem
occurs
for
the
functionally
illiterate
high
school
graduate.
The
"devaluation" of the high school diploma has
become a
very
serious
problem.
Even
employers who are willing *to train their
young workers need someone who has good
literacy and number skills.
A third example
is the juvenile delinquent, often a dropout,
who
needs
much
more than conventional
education.
Beyond the achievement of basic skills,
youths
also
need
adequate
specialized
preparation
for
certain jobs.
Poor or
nonexistent counseling often
results
in
coursework choices which are irrelevant to
future jobs. The increasing number of jobs
with a high technology and energy related
content mean that adequate course preparation
will be more, not less, important in the next
decade.
Minority youths, particularly blacks and
Hispanics,
face additional
obstacles
to
entering the job market. The most serious is
discrimination by employers. Hispanic youths
also have staggeringly hich dropout rates
from school, and
so
their
educational
background can be very weak. Minorities have
far
fewer
informal
entrees
into
job
opportunities from relatives or friends and a
less developed "old boy" network to speed up
the
promotion
process
after a job is

143
attained. Minority aspirations tend to be
very unrealistic in terms of job content and
wage levels because of their Door access to
labor market information.
The previous discussion has involved the
structural unemployment problems of youths.
structurally
are
there
addition,
In
unemployed adults who have serious prc-bIe,.s.
For most structurally unemployed adults,
better
a
providing jobs appears to be
AI-hougn
skills.
upgrading
than
approach
there are adults who have educational and
basic skill deficiencies, the main problem is
usually a mismatch of particular skills with
adults have
Quite often,
available jobs.
For
considerable previous job experience.
emotional
an
involves
retraining
many,
commitment to an entirely new type of job.
This becomes a particular problem for those
from
years
ten
who are only five to
family
are
there
Usually
retirement.
a;

pCC,

at

4isles

f(m;

Ii

a

in

Y-%nr

+-

rrCrnnn

CZ

and a certain living standard from previous
an
for
difficult
it
jobs which make
individual to change employment patterns.
occur
may
difficulties
Relocational
especially if community and family ties are
well developed. Occasionally, job losses are
of
realignment
the
of
result
the
shoes,
i.e.,
-patterns
trade
international
over a long period of time.
textiles -problems must be met quite
structural
These
differently from the structural difficulties
experienced by youths.

144
What Should be Done? The
Setting of Goals and Priorities
Extensive research, training experience,
and numerous surveys of
employers
have
confirmed
that
high
schools have been
graduating youths who cannot read or write.
Without
basic
educational skills, other
employment and training efforts are usually
wasted.
Education and the development of
basic literacy skills for school-age youths
should be the first priority of policies to
help structurally unemployed youths.
Eli
Ginsberg, Chairman of the National Commission
for Employment
Policy,
summed
up
the
situation:
"The best kind of vocational
education in a service economy is acquisition
of the basic skills, meaning the three R's."
Recommentation No.

16

The
Nation's
youth employment and
training orograms should place greater
emphasis on basic education and basic
skills. A good job requires a good
education, but too many young people
droD out of school or fail to take
school work seriously because they do
not
understand
this
connection.
Programs for the young should make the
connection between basic educational
skills
and
future
employment
opportunities, and youths should be
given strong incentives to remain in
school.
The Administration's recently announced
youth initiative, drawing heavily on the
research
of the National Commission for
Employment
Policy,
stresses
educational
objectives in its proposed employment and

145
training programs. The proposals are based
on the fact that as youths mature from their
their
adulthood,
voung
early teens to
employment and training experiences change in
an orderly way. In the earlier years, most
time is spent accuiring basic education and
The latter years are
some work experience.
spent in job search or specialized skill
training.
The Administration's proposal attempts to
process.
natural
that
complement
Fundamentally, the proposal calls for better
policy coordination between education and
employment.
the
in
programs
Federal
Previous
educational area directed the bulk of funds
The current
into elementary institutions.
proposal channels more funds into secondary
institutions for the development of programs
in remedial classwork, additional tutoring
and incentives -or students to remain in
b5U!nU1.

Based on hearings before the Committee, we
believe there are several important elements
which should be included in any training and
employment policy.
their
target
should
programs
The
assistance on those who need help the most,
stressing the needs of minorities and youths
who
disadvantaged,
and the economically
invariably suffer the greatest employment
problems.
Targeting programs to the population of
low-income students can be carried out on the
basis of various important criteria. The
family income level is one such criterion.
of the National
Director
Sawhill,
Dr.

146
Commission for Employment Policy, testified
that eligibility standards for youth programs
location,
should also include geographic
since income level alone often includes many
not
are
white students and others who
prone to
or
disadvantaged
economically
This
problems.
unemployment
structural
dimension can be achieved by
geographic
targeting on cen-sus.trac-ts.. where a. certain
percentage of the households are poor, a
higher
much
criterion that picks up a
straight
a
does
than
minorities
percentage of
income criterion alone.
Recommendation No. 17
Youth training and employment programs
should target their assistance on those
who

need

helv

the most, particularly

minority
disadvantaged
economically
and others who suffer from
youths
The
severe structural unemployment.
should
eligibility
for
chosen
criteria
of
achieve the necessary targeting
assistance.
A number of witnesses before the Committee
classroom
conventional
that
stressed
techniques are ineffective for many of those
from
students who are likely to suffer
For example, most
structural unemployment.
attempts to induce high school dropouts back
to the classroom have failed. Many Hispanic
students do not respond well to the classroom
cultural disparities, severe
of
because
problems with the English language, the lowincome status of many Hispanic families, and
a low priority set on educational attainment.
formidable
provide
factors
These
disincentives for Hispanic students to remain
in school.

147
There are a number of alternative ways to
problems,
including
with
these
deal
individual tutoring and remedial work outside
of the formal school system, work experience
programs tied to classroom participation and
of
use
and
the
intensive counseling,
resources and expertise of community-based
the
learn
organizations to help youths
English language.
Recommendation No. 18
Alternatives

to conventional classroom

education should be explored for youths

who are inadequately prepared for the
job market through traditional methods.
Particular emphasis should be placed on
programs for potential school dropouts
and for those who have droDped out.
These
alternatives
should
help
students
acquire
noncollege-bound
enough basic skills for the job market
or for more specialized training.
Educators in the school system should
assess the special needs of target students
Students nearing the end
through counseling.
be
taught
should
schooling
of formal
efficient methods of job search, development
nonstereotyped
of proper work attitudes,
occupational opportunities, and realistic job
Information about
and salary expectations.
the course work needed for job preparation in
a variety of occupations should be given to
freshman and sophomore students. This would
first, youths would
serve two purposes:
even traditional jobs may
that
realize
once
they
require more background than
thought and second, youths would have enough
time to prepare themselves adequately for the
job market.

148
The information provided youths about the
labor market should stress the fact that
employment opportunities differ
potential
occupations,
Many
occupations.
among
particularly those requiring few skills, are
long-term
where
in declining industries
Guiding young people
prospects are poor.
into these areas does them and the Nation a
Instead, we should gear
great disservice.
our youth employment programs toward those
occupations and industries where there are
This
good prospects for long-term growth.
who
those
First,
purposes.
two
serve
will
well
be
will
programs
the
in
participate
served through increased lifetime employment
Second,
opportunities and better incomes.
the Nation will be well served as the pool of
skilled workers expands and labor market
bottlenecks become less severe. This will
help improve the long-range growth prospects
for the economy.
Recommendation No. 19
and
training
youth
Nation's
The
channel
should
employment programs
minority and economically disadvantaged
and
industries
into
young people
long-run
experiencing
occupations
the
This would coordinate
growth.
otherwise
training of youths who would
become structurally unemployed with the
skill needs of growth industries, thus
helping the economy grow faster than it
otherwise could.
For older youths and youths out of school,
the primary objective of youth labor market
programs should provide training and jobs,
with particular emphasis on private sector
Youths often are at the end of
employment.

21 9

to
employer
due
queue
hiring
the
discrimination, poor job search techniques,
and fundamental def:: encies in education.
the
Comprehensive
w_:-n
Our
experience
Employment and Training Act (CETA) shows that
public sector jobs a'one will not necessarily
lead to an increase in :he employability of
job recipients, par:-iularly for the target
populations of black_ and. Hispanics,

youths,

persons.
^ sadvantaged
economically
and
is
success
program's
Because the CETA
measured by the nuzber of persons placed in
unsubsidized jobs, persons with the greatest
transition have often
chance of making th:-been chosen. This vrocess leaves out many of
the hardest-to-employ. In addition, CETA was
designed to serve several objectives, and its
clients included man-; more persons unemployed
for cyclical reasc:s than for structural
reasons.
Improving the access of minority youths to
private sector jobs is a crucial part of a
1

nrtcr-d

ZO_ _1 '.

IC

On

StucurL

unemployment problems. While public sector
jobs such as summer employment programs will
the employment gap,
be necessary to fill
employment policy should be directed toward
employment
sector
priva:e
up
opening
This is also important for
opportunities.
adults who are strucm rally unemployed.

_

150
Recommendation No. 20
The Nation's employment and training
programs should recognize that most
jobs are in the private sector. Public
sector
efforts
should
be
fully
coordinated with the needs of and the
opportunities provided in the private
sector.
In addition., the incentives.
currently provided to
the
private
sector to employ and train those who
suffer
most
from
structural
unemployment
problems
should
be
strengthened and expanded, and
the
public
and
private sectors should
improve their links between training
programs and employment opportunities.
These links can be initiated through more
Private
Industry
the
intensive use of
Councils
(PICs)
and
community-based
organizations
(CBOs) which draw on local
community expertise and knowledge of local
has
been
There
requirements.
labor
successful experimentation with programs in
job
which a private employer guarantees
placement for a certain number of unemployed
youths after prior screening by a community
Work experience programs for
organization.
youths during the summer and after school can
familiarize an employer with the youths, and
this often results in permanent hiring of
youths after their graduation.
Experimentation with different types of
employer incentives to hire the structurally
unemployed
should
be
pursued.
Among
incentives that would reduce the cost of
hiring the structurally unemployed are a
delay of social security costs or limitations
of other fringe benefits. Unfortunately, it
is too early to judge whether the targeted

151
tax credit to employers enacted last year is
an effective incentive, since its impact was
delayed by slow dissemination of information
about the program.
In addition,
the news
about the program was sent primarily to larce
employers rather than small businesses wnere
its effect would be more pronounced. _arlv
reports
suggest
that
the
number
C_
participants is increasing monthly at a rapirate.
Subsidies to the private sector for work
by the structurally unemployed can be a
valuable
mechanism
for creating private
sector
employment
opportunities.
Wor k
experience programs in the public sector have
not fulfilled expectations for
long-term
benefits
accruing
to
the
unemployed.
Analysts conclude that temporary jobs with
little or no future only depress the work
aspirations of the unemployed.
A s-:.-;r=a
resulting from their participation in such
programs hindered some youths'
entry into
private sector jobs. Work in the public
sector is not a realistic substitute for
private sector employment.
Recommendation No. 21
Legislation
should
be
enacted to
provide
targeted incentives
to
private
sector
emDlovers
-particularly small business
-o
effectively
train
and
hire
tne
structurally
unemoloved.
Trainina
subsidies
or
other incentives for
trainina
should
be
provided
to
employers.
We emnhasize that this
supDort should be
oaid
on.v
fir
training and not waces.

152
Expandina Small Business Opportunities
The small business sector of our economy
can make an important contribution toward
achieving the full employment and inflation
goals of the Full Employment and Balanced
Growth Act of 1978. A growing small business
opportunity
for
sector offers a unique
long-term
structural
addressing
basic
lowering
problems by improving productivity,
inflation,
and creating more jobs. However,
many small business people believe that their
ability to help solve these problems is
sharply limited by government policies.
Small business has historically provided
growth
and
the backbone of
employment
inflation-fighting innovation and competition
Small business currently
in our economy.
accounts for almost half of the Nation's
total business output and 55 percent of all
According to a study
private employment.
performed by the Center for Neighborhood and
Massachusetts
at
the
Change
Regional
Institute of Technology, from 1969 to 1976,
or fewer employees
with
20
businesses
generated two-thirds of the private sector's
employment growth, while businesses with 500
or more employees created only 13 percent of
private sector employment growth.
and
innovation
area
of
In
the
productivity, the National Science Foundation
has found that one out of every four of the
and
product
most significant industrial
process innovations since World War II was
of
less
than
100
developed by firms
employees, while one-half were accounted for
by firms with less than 1,000 employees.
The rate of productivity growth depends in
part on how rapidly the ideas of inventors

153
how
rapidly
innovations.
and
become
the
throughout
innovations are diffused
are often more
industry.
Small
firms
adventuresome and have a greater propensity
for risk-taking. Accordingly, they are able
to move faster and use
resources
more
effectively than large companies. However,
much of the innovation and diffusion process
is dependent on whether the ent.remn:eneurial
risk-takers in the economy can raise enough
money
to
convert
new ideas into more
productive technology.

TABLE V-7
HOUSING STARTS, MEDIAN PRICES
AND MORTGAGE INTEREST RATES

Annualized
Starts
(millions)I

$

Mortgage
Interest
Rates*

55,700

9.58%

1.6
1.8
1.8
1.6

60,600
63,200
64,600
62,600

10.237.
10.527.
10.967
11.51%

1.4

71,900

11.77%

2.0

1978

Median Pricrs
New Homes

1979
Quarter
Quarter
Quarter
Quarter

1
2
3
4

1980 (Estimated)
DRI Forecast

* average interest rate on conventional mortgages by

Savings and. Loan Associations.

Source:

(1)
(2)
(3)

Bureau of the Census
Bureau of the Census
Federal Home Loan Bank Board

155

Greater
access
to capital for small
business in both credit and equity markets
would also boost employment growth. Given
the historical tendency of small business to
employ a relatively lower ratio of capital to
labor than large business, each additional
dollar invested in small business is likely
to generate more jobs than if it
were
invested in large business.
A policy of small business growth would
have its greatest effect in decaying central
cities where the structurally unemployed have
the most
difficulty
finding
good
job
opportunities.
Traditionally, young people
in this country use jobs in small businesses
to gain the work experience needed for entry
into jobs that
lead
to
highly skilled
careers.
Although the United States has not
had an explicit policy
of
discouraging
business growth in central cities, this has
been the effect of a wide
variety
of
government programs and activities.
As a
Lesu'LL,

d

l

ye

IIUiIuier

UI

teellayerb,

primarily black, who live in declining urban
areas do not have the opportunity to develop
the skills needed to obtain good jobs.
In
many urban areas, the unemployment rate among
black
teenagers can run as high as 50
percent.
Although
unemployment
falls
dramatically as youths mature, witnesses have
recently testified before the Committee that
prolonged teenage unemployment hurts for life
by retarding personal growth
and
skill
development in comparison with those who had
jobs as teenagers.

58-205 0 - 80 - 11

156
Recommendation No. 22
During 1980 and beyond, the attack
against structural unemplovment should
the development of small
emphasize
with particular
opportunities
business
small
minority-owned
to
attention
could
These businesses
businesses.
provide entry-level Job ooportunit.ies
for all teenagers, especially minority
teenagers, as well as skilled jobs for
older workers.
capital
improve
to
policies
Public
should
sector
formation in the small business
disparities
present
the
be targeted to remove
suffered by small business as a result of
the current structure of
and
inflation
Additional programs are
policy.
government
necessary to improve small business' access
of
to credit, particularly during times
excessively restrictive monetary policy.
Targeted tax measures are also needed to
improve small business' access to equity. In
the past, the tendency of Congress has been
to enact tax incentives which on the surface
but fail to
equally
firms
all
treat
are
businesses
small
most
acknowledge that
a
for
them
of
advantage
take
to
unable
variety of reasons specifically related to
the size of the business. Tax incentives
need to be developed that will enable smaller
firms to retain a greater proportion of their
capital
in
reinvestment
for
earnings
These
and plant expansion.
improvements
small
to
directly
programs should be targeted
businesses.

157
Recommendation No. 23
Conqress
enacts business tax
When
incentives, it should pay particular
their effect on the
attention
to
ability of small businesses to obtain
for growth and innovation.
capital
Special small business tax provisions,
such as an exemption for capital gains
that are reinvested in
new
small
businesses, or accelerated depreciation
provisions that are geared to the needs
be
small
businesses,
should
of
considered in order to increase the
availability of capital for investment
in small businesses.
if an investor sells an equity
Currently,
interest in a business, he is taxed on any
Consequently, he has an
capital
gain.
incentive to retain his investment, dispose
of
his
investment through a nontaxable
transaction such as a merger,
or conjure
offsetting

capital

losses

in

an attempt

to

defray the tax.
Allowing the investor to
retain the full equity and capital gain
provided he reinvest the full sum in a small
would
strengthen
new business
business
Targeted
accelerated
development.
depreciation would also generate more capital
for small business growth. These incentives
would be particularly useful if they were
aimed at the needs
of
minority
small
businesses in economically depressed areas.
Stabilizing Homebuilding: The Impact
on Structural Unemployment
construction
and
The
homebuilding
industries are sources of the kinds of jobs
make a significant impact on
that
can

158
structural unemployment. Most jobs in these
industries are relatively highly skilled and
well paid and offer career opportunities that
are not just dead-end jobs. The entry-level
jobs in these industries, however, do not
require a high skill level, and most skills
can be learned on the job.
are
unfortunately,
industries,
These
cyclical
significant
by
characterized
in activity and employment.
fluctuations
of
ability
the
This seriously hampers
these
in
jobs
good
obtain
to
workers
minority
industries, since those who are hired last
when the industry is undergoing a boom are
the first laid off during a downturn. Hiring
practices in these industries have yielded a
very high proportion of whites in positions
with seniority, so that downturns in housing
and construction have a much greater impact
minority unemployment in construction
on
jobs.
In addition, the deterioration of central
cities and the lack of new construction in
these areas, combined with the strong growth
most
that
means
areas,
suburban
of
construction jobs are located far from innercity black youths and others who suffer the
most from structural unemployment.
stabilize
which
policies
Therefore,
which
and
homebuilding and construction
will
areas
urban
declining
revitalize
employment
to
significantly
contribute
opportunities for minority youths and other
unemployed.
workers who are structurally
fluctuations in the Nation's
Historically,
in turn,
business cycles have affected and,
were themselves inversely affected by the
In inflationary
rate of housing starts.
periods, the housing industry is generally

159

*

affected sooner and often more sharply than
most
other sectors.
Typically, this is
reflected in declines in housing starts as
interest rates rise.
Likewise, increased
housing starts encouraged by low interest
rates have generally led the Nation out of
economic downturns.
In response to record high interest rates
and home prices, housing starts in 1979 fell
14 percent from 1978 to 1.75 million units.
While this may be a significant reduction, it
is not as steep as mighz have been expected
in light of the fact that the median price of
a new home for 1979 increased 13 percent over
last year to $62,900.
And mortgage interest
rates
reached a previously unprecedented
national average of 10.8 percent in 1979. In
December,
preliminary
estimates indicate
mortgage interest
rates
averaged
11.79
percent nationally.

160
cost of interest and home
high
The
purchases did not initially have the expected
dramatic dampening effect. But as the year
progressed and interest rates soared, housing
sales came to a virtual standstill in many
States where usury laws prevented interest
rates from rising to the market level. This
situation has been alleviated by P.L. 96-161
which invalidates all State usury ceilings
through March 31, 1980.
In November, new home sales declined to an
13.5 percent
annualized rate of 604,000,
This was the largest
below October sales.
percentage drop since February 1970, and the
lowest number of home sales since June 1976.
Rapid and severe swings in the housing
sector are both costly and inefficient during
Idle capacity is created when
downturns.
the
plant and equipment remain dormant,
capacity for manufacturing materials used in
housing construction is underutilized, and
not employed.
are
workers
construction
Further, the pent-up demand created during
the downswing may exert an upward pressure on
prices as the economy recovers. According to
Herman Smith, Vice President of the National
in testimony
Association of Home Builders,
of high
periods
during
Committee,
before the
construction activity returns on plant and
equipment must be higher to make up for
losses during idle periods. The demand for
resources used in housing increases sharply,
resulting in higher land prices, material
prices, interest costs and wage costs. It is
precipitous
a
that
important therefore
decline in housing starts be averted in 1980.
for 1980,
projections
start
Housing
starts
annual
average
however, anticipate
Joint
recent
a
At
level.
1979
the
below
well

161
Economic
Committee
hearing,
projections
varied between 1.1 and 1.5 million units.
Data Resources, Inc. and Chase Econometrics
are both predicting 1980 starts of about 1.4
million units. The Chase forecast projects a
drop in single family units from 1.2 million
this year to .88 million in 1980, the low
point reached during the housing trough of
1974. Both DRI and Chase predict the decline
in starts will reach its depth in the second
quarter of 1980 at approximately 1.3 million
units and recover to about 1.5 million units
by the fourth quarter.
The projected sharp decline in starts
could have serious implications for
our
national economy in 1980. The implications
for
employment
of
these
projections
opportunities are significant.
If housing
starts decline by 300,000 units in 1980, more
than 400,000 worker-years of labor could be
sacrificed.
~rA i e- n
nof
money
mqrkpt
certificates (MMCs) in June 1978 and other
institutional and regulatory changes in the
past year were responsible for preventing a
sharper decline in housing starts in 1979.
The MMCs and other instruments provided a
continuous source of
funds to the thrift
avert
helped
to
institutions
and
disintermediation in most instances.
The
extraordinarily high rate of interest paid on
the
MMCs
by
the
lenders,
however,
to
the
lower
particularly in relation
from existing,
received
interest
rates
outstanding mortgages, have placed financial
strains on many thrift institutions.
In
recent months, with the elimination of the
on
MMCs favoring
differential
interest
thrifts, disintermediation has increased for
the mutual savings banks, and the flow of
v9.e

in

r

162
funds to the savings and loan associations
has been down sharply from last year.
Structural Unemployment and the Goals
of the Full Emoloyment and Balanced Growth
Ac-: of 1978
Most. of. the labor market developmentsduring 1979 were directly related to longterm trends and shifts in the structure of
our economy that characterized the 1970s.
These trends and shifts and their anticipated
turns and developments in the coming decade
the
in
reflected
clearly
most
were
timetable
the
of
revisions
Administration's
for achieving the Humphrey-Hawkins goals.
While the necessity of revising these goals
it is equally
certainly unfortunate,
is
necessary to preserve the validity of the
making the
by
process
Humphrey-Hawkins
timetable more realistic, particularly in
light of long-term economic problems for
which there are no easy short-term solutions.
The 1980 Econcmic Report of the President
contains what the Committee believes are some
essential policy incentives for
the
of
Many
achieving the Humphrey-Hawkins goals.
of our present unemployment and inflation
demographic
problems stem from long-term
in the
shifts
structural
developments,
economy, and the disappointing trends in
In
business investment and productivity.
this regard, we are pleased to note the new
initiatives for addressing the problems of
youth unemployment, although we reserve final
are
details
full
the
until
judgment
not
speak
initiatives
new
The
presented.
only to the need to improve the educational
preparation of disadvantaged youths, but also
to the need to different"iate the job training

163
and job experience needs of youths that are
structural
of
stages
different
in
that
programs
jobs
unemployment. Targeted
public
both
for
incentives
on
are premised
and private involvement in job training are
the key to attacking the long-term structural
economy,
our
plague
that
problems
particularly if they are complemented by
appropriate incentives for increasing. jobcreating capital investments in the private
sector.
Small business can provide the important
job
training,
linkages between the job
this
of
aspects
creating
job
and
experience
policy strategy. With their relatively low
capital to labor ratio, small business can
create more jobs per added investment dollar
and at the same time reap relatively larger
benefits from such targeted job experience
programs as the targeted jobs tax credit
program. Furthermore, since small business
already tends to provide the lion's share of
our

present

employment

growth,

ciuder

cooperation of job-training officials with
help
the small business community would
ensure a closer match-up of job opportunities
for training program graduates.
strategy that combines job
policy
A
training and job experience programs with
programs for small business investment growth
It would not
would not be inflationary.
our economy,
of
side
overstimulate the demand
productive
the
improve
but rather it would
expand the
and
force
work
our
of
potential
productive capacity of the competitive, small
This supply
business sector of our economy.
side strategy will mean not only more jobs,
well.
as
prices
consumer
lower
but
incentive
proper
the
if
Additionally,
framework is built into these programs, the

164

price of this strategy will be only a small
fraction
of
the
social costs of high
unemployment and high inflation that
we
currently pay in high crime rates, high
prices, extreme uncertainty, and ever-growing
government spending and taxes.

VI. ENERGY AND INTERNATIONAL TRADE
Energy Dependence
The decade: of. the 1970s witnessed two very
important changes
in
the
international
economic
position of the United States:
sharply higher energy prices and growing
American dependence on the world economy.
America's growing economic ties with the rest
of the world have made us starkly vulnerable
to economic and political events overseas.
The American economy has become heavily
dependent on the political as well as the
fortunes
of our major trading
economic
partners. The revolution in Iran, and the
short-lived seizure of the Grand Mosque in
Saudi Aiabla point to the potential for
political instability in a region of the
world that supplies the United States with 33
percent of its oil imports and accounts for
60 percent of the noncommunist world's oil
supply.
A growing Soviet presence in the
area -first in South Yemen,
then
in
Ethiopia, and most recently in Afghanistan -adds to the likelihood of a politically
determined
interruption in the U.S. oil
(165)

166
supply and a serious
overall world economy.

disruption

of

the

American dependence on the rest of the
world involves more than imported oil.
The
old phrase "when America sneezed, Europe
caught cold" can now apply to our own health
as
well.
The United States depends on
imports for 50 percent or more of its supply
of a long list of raw materials. One acre in
three is now planted for the export market;
one in eight manufacturing 'jobs is linked to
exports.
Most
of
the
leading
U.S.
manufacturing firms, many large banks, and a
growing number of service companies are also
heavily involved in international commerce as
well. Consequently, merchandise exports now
account for 6.7 percent of GNP compared to
4.3 percent in 1970, while imports have more
than doubled in importance from 4.1 percent
of GNP in 1970 to 8.3 percent in 1978.
These growing economic ties with the rest
of the world have brought many benefits, but
they
have
also made the United States
increasingly vulnerable to
economic
and
political events overseas.
And nowhere is
this vulnerability more explicit than with
petroleum supplies.
The supply and prices of
critical liquid fuels in the United States
and the noncommunist world continued to be
subject to manipulation during 1979 by a
handful
of
petroleum-exporting
nations.

167
Members of the Organization of Petroleum
Exporting
Countries
(OPEC)
control the
decisive margin of tight world oil supplies.
Repeatedly since 1973, they have exploited
this position to
limit
production
and
increase
prices,
creating
a
major
international income redistribution
which
will approach $300 billion in 1980 alone.
OPEC contract oil prices have risen from
$1.80 per barrel in 1970 to an average of
$28-$30 per barrel at the end of
1979.
Largely in response, the U.S. terms of trade
deteriorated by more than 25 percent over
this period.
With Petroleum imports at 8.2 million
barrels per day (mbd)
in 1978, the United
States relies on foreign nations to meet 24
percent of its demand for all forms of
energy.
As depicted in Table VI-l, this
level of dependence is not unique among
noncommunist countries.
For example, Japan
relied on oil imports for 72 percent of its
tota

cncrg1

ccdLA
An ssdrn

t97.

M try

as

a

consequence of slowed economic growth and
rising prices than of government action or
increased domestic oil production,
these
levels
of oil dependency have generally
stabilized. The United States, for example,
has held petroleum imports in the last two
years below the 8.8 mbd recorded in 1977.
Yet
as the occasionally frantic bidding
revealed last year, the oil consuming nations

168
are far from united in efforts to reduce
their oil
dependence.
In
fact,
most
explicitly reject voluntary reductions in
adverse
imported oil levels, noting the
effects on domestic growth and employment
associated with such reductions.

I

169
TABLE VI-1
NET OIL IMPORTS AS PERCENTAGE OF TOTAL
PRIMARY ENERGY CONSUMPTION
1960 - 1978

United States
Japan
West Germany
United Kingdom
France
Italy
Austria
Norway
Turkey

1960

1973

1978

5
31
19
26
30
40
5
39
10

16
75
54
49
71
73
41
34
36

24
721
56
19
621
661
43
-282
57

-12
16
0

-14
18
-2

USSR
Eastern Europe
China
World Oil Price Per Barrel: $1.75
Sources:

$2.593/

$12.70

Resources for the Future. Energy: The Next Twentv Years.
British Petroleum Statistical Review or the World Ol
, f Fnorv.
e
TI S
1075.
.;,
T4..

Jaoan
'Including coal and liquefied natural gas enervy imoorts,
hile France
imported 88 percent of all energy consuned in 1978, -percent.
81
imported 76 percent and Italy
2

Negative numbers signify net energy exporters.

3

Benchmark light crude petroleum sold by Saudi Arabia. Variations of
up to $1 existed due to quality and locational differences. This
price was increased to $3.01 per barrel in October upon initiation
of the Arab oil embargo.

170
A number of destabilizing factors exist
which may send OPEC prices higher and 'force
import
reductions
upon the noncommunist
world. The Soviet seizure of Afghanistan and
the Soviet military presence in Ethiopia and
both North and South Yemen have alarmed
Continuing
Gulf
oil exporters.
Persian
in Saudi
turmoil in Iran, domestic unrest
the continuing Arab-Israeli
Arabia,
and
conflict jeopardize Middle East petroleum
And the looming emergence of the
production.
Soviet Bloc as a net oil importer of up to
threatens oil
also
by
1985
4.5
mbd
If the
availability and price stability.
Soviet Union enters the world oil markets it
and
would tax foreign exchange reserves
expose the Soviet economy to the threat of
foreign disruption. Soviet acquisition of a
client oil exporting state in the Persian
but
Gulf would minimize these problems,
create havoc in the free world.
is
developing a
States
The
United
and
multifaceted program of conservation
imports.
energy production to reduce oil
While some of these investments will promote
labor productivity and employment, others
The new programs will be costly.
will not.
For example, to liquefy or gasify significant
amounts of coal will require investments in
the tens of billions of dollars through the
year 2000. The programs will raise serious
environmental issues, as well, such as coal-

171
related acid-rain and atmospheric
carbon
dioxide accumulation. Other notable problems
-exist.
One
is
with
nuclear
energy
exemplified by the Three Mile Island nuclear
power plant accident, and the de
facto
moratorium
on nuclear plant construction
permits and operating licenses.
Another is
the continuing controversy over low-level
radiation standards.
Increased coal utilization, nuclear power,
and reversing the declining trend in oil
production all carry economic and social
costs. Yet the drain abroad of national
wealth and the threat of energy embargoes has
slowed economic and employment growth and
eroded
living
standards.
And
these
debilitating effects of America's
energy
dependence will probably persist throughout
the 1980s.
It is vitally important that the United
States
increase
domestic
energy,
and
particularly
oil production.
This is a
cornerstone of any American energy policy.
In addition to providing necessary incentives
for traditional domestic oil production, a
major
program to increase the yield of
existing oil fields must
be
initiated,
utilizing enhanced recovery techniques. 1/

Mr. Reuss states:
"A technique exists to
reduce our dependence on imported oil rapidly
and effectively. We could and should ration
gasoline now."
1/

58-205 0 - 80 - 12

172
Enhanced Oil Recovery
The United States is witnessing a decline
in its proved reserves of domestic petroleum.
Consumotion stands at close to 6 billion
barrels annually, with domestic production at
slightly over three billion barrels.
For the
first Wine in 25 years, Texas production fell
last year to less than one billion barrels.
S~ince the major addition of Prudhoe Bay in
1970, new proved reserve finds have fallen
well below production. From 1975 to 1979,
consequently, the United States consumed 4.5
barre's of oil for each new barrel of oil
discovered despite near-record exploratory
additions
New proved
drilling activity.
averaced less than 1.3 billion barrels a year
in that period.
To close the present oil import gap of
8.0-8.5 mbd would require the discovery of a
new Prudhoe Bay-sized field every two or two
and ore-half years during the 1980s. Even to
maintain present domestic production will be
a prodigious achievement,
requiring
the
discovery of two Prudhoe Bays, or a 150
percent rise in discovered proved reserves
over what period. Prospects, consequently,
are for a notable reduction in domestic oil
production over the next decade, a reversal
of most predictions made during the
1970s
when domestic production was projected to
rise yv 50 percent or more by 1990.

173
The decline in domestic oil production
cannot be reversed over the next several
years. Beyond that, however, one significant
option exists to rapidly rebuild domestic oil
even if oil discovery rates
production,
the
levels:
dismal
remain at present
enhanced recovery of oil from existing oil
fields.
Primary and secondary petroleum recovery
techniques extract only some 25-30 percent of
The remainder
petroleum from reservoirs.
(some 300 billion barrels, domestically),
remains too closely adhered to surrounding
or
pressures
field
strata for natural
30
to
up
However,
extract.
to
waterflooding
is
oil
remaining
this
of
barrels
billion
subject to extraction with a variety of
enhanced recovery techniques, about half with
gas and steam injections and the remainder
with more expensive chemical technologies.
Enhanced oil recovery is expensive'(from
$l0-$32/barrei). Many of the technologies
are immature and require years following
their application in specific wells to yield
Federal research into
substantial results.
enhanced recovery technologies, consequently,
should be accelerated now if this promising
supply option is to contribute notably to the
domestic energy stock during the 1980s.

174
Recommendation No. 24
The Administration should initiate a
major program to accelerate the use of
enhanced oil recovery technologies and
increase
to
designed
other steos
domestic petroleum production.
A Near-Term Enerqy Security Program
light of the pessimistic prospects for
oil prices and supply stability and the
extended period of time required before U.S.
oil
energy programs will sharply reduce
imports, an added dimension is needed for
U.S. energy policies. The United States must
short-term energy program
establish a new,
designed to prevent further loss in energy
independence during the 1980s. This program
should stress emergency energy preparedness,
conservation, and energy supply alternatives
That is,
which will yield results quickly.
we need to establish an emergency energy
security program that places emphasis on
energy conservation, enhanced recovery of oil
fuels
alcohol
wells,
existing
from
strategic
of
the
the
filling
production,
energy
increased
petroleum reserve, and
imports from more secure sources including
Canada and Mexico. Additionally, we need to
begin now to encourage the search for and
development of new fossil fuels in the third
In

175
world.
We need to
develor,
as
well,
statistical measures expressing the magnitude
of our vulnerability
to
energy
supply
interruptions -- an energy security index -and our energy requirements -an energy

productivity index.
Energy Indices
Each
month
the
Council of Economic
Advisers publishes Economic Indicators for
the Joint Economic Committee. This document
includes about 45 key econom c indicators
which measure what we think is important and
what should be a focus of public debate. The
Departments of Commerce, Energy, and other
Federal agencies maintain indices,
as well.
Yet,
there are two key aspects of energy
policy for which we have no valid indices -our
level
of
energy security and the
efficiency of U.S. energy use or energy
productivity.
Energy Security Index
One of the basic facts of enercy life in
the 1980s is the possibility th-t oil imports
will be interrupted. The economic importance
of these supply interruptions can be very
large.
For instance, it has ceen estimated
that the 1973-74 Arab oil embargo increased

176
inflation by 1.8 percent, lowered GNP by 3
percent, and increased unemployment by 1.7
percent.
A national energy security index could be
developed to measure our ability to withstand
a one mbd to three mbd cutoff of oil imports,
an amount roughly equivalent to a complete
shutdown of Saudi Arabia or a cutoff of all
other Arab OPEC exports. This index could be
a combined measure of how the following four
factors affect the U.S. ability to withstand
an import supply interruption.
If the United States
Spare Capacity:
1.
could temporarily increase its production
from Alaska, the Outer Continental Shelf, and
the National Naval Petroleum Reserves by
300,000-500,000 barrels per day, it would
threat
substantially reduce the economic
OPEC's ability to
posed by an embargo.
control world oil supplies really arose when
Texas and Canada ceased to be the marginal
the
Thus,
world oil suppliers in 1971.
measure
would
index
the
of
section
"capacity"
the amount of spare capacity the United
States has.that could quickly be brought into
production in the event of a cutoff.
2. Emergency Curtailment: If the Federal
Government developed a series of programs to
reduce energy consumption in an emergency and
had the legal authority to enforce such

I

177
curtailments,
our
abili:v
to withstand
cutoffs would be substan-ially increased.
For instance, a temporary combination of
reduced gasoline and fuel oil consumption,
the substitution of natral gas for oil,
electricity
wheeling,
and
building
temperature controls could save over one
million barrels per day with no serious
economic dislocations. Th-e index would show
the amount of reduced cons -. __ion that could.
be realized with such programs.
3.
Strategic
Petroleum
Reserve:
A
sizeable Strategic Petrole., Reserve of 500
million to one billion barrels would reduce
dramatically the security risks of import
cutoffs.
The present level is about 90
million barrels -11 days'
supply
of
imports.
Filling the S=D was halted last
year to relieve pressure c. world oil prices
but should be resumed cnce markets become
less tight.
A4.
~rki
St--a. 'L
:I UL L
Reduction
Program:
Finally,
we s:culd have as
a
national policy the lowering of imports from
nations that are the most likely to embargo
the United States.
The security of our
imports,
not their gross level,
is
the
fundamental national secur:-:y problem. An
undifferentiated policy of
.lowering imports"
may
be
ineffective,
or
even
counterproductive, if we re-uce imports from

178
stable suppliers
unstable sources.

while increasing them from

To illustrate how the energy security
index might be used, let us suppose that we
choose as our optimum short-run policy the
ability to withstand a three million barrel a
day cutoff for 100 days. Thus, if all of the
alternatives
conservation
and
supply
suggested. above, yielded a- 30.0 milLi.on barrel
offset to a prospective energy import supply
interruption, the index would have a value of
100.

The index would read 33 if the available
offset amounted to only 100 million barrels,
since a three million barrel per day cutoff
would exhaust such a reserve in only 33 days
--

one-third

of the optimum measured by the

index. The index would increase one point
for every additional three million barrels
stored in the Strategic Petroleum Reserve.
The index would also increase as our imports
were
nations
unstable
from politically
reduced --

a 500,000 barrel per day reduction

would add 17 points to the index, since it
would increase our security by 17 percent of
three million barrels. Similar increases in
the index would occur as spare production
capacity or emergency curtailment options
were put in place.

179
The development of an enercy security
its
index would help the Nation assess
ability to withstand oil cutoffs. As the
value of the index steadily improved, the
national sense of confidence would gradually
increase. Since the United States is the
world's largest user of oil and the world's
larcest oil
importer,
an
international
perception :nat it is steadily increasing its
ability to weather. oiL cutoffs would. tend t-o
weaken upward pressure on world oil prices.
ReccmmendatiDn No. 25
An enerzv security index and eiergencv
ozs-and-bv =rograms to allevia-:e
shortages
following
a
temporarv
disrunticn in Petroleum imoorts shoul;
We
develcoed.
Among the criteria
contained in an energy securiiv incex
in t-e
should He the amount of o04
ou.
strategic
petroleum
reserve.
oability :o curtail consumoti n.
aDility

:- increase

production

on

an

emergenc: basis, and the amour.: or o:±
obtainec :rom insecure suooliers.

180
Energy Productivity Index
The 1 percent reduction in American oil
use during 1979 was caused in part by renewed
uncertainty
over
oil availability; past
investment in energy efficient machinery,
autos, and equipment; sharply higher energy
the
prices; and a growing awareness by
American public that oil import dependence
of.
U.S;.. consumption
must. be. curtailed..
energy per GNP dollar continued to decline in
1979, dropping 4 percent below 1978.
Since
1975, our real GNP has risen almost 20
percent, while energy consumption has grown
by only 11 percent.
This energy efficiency or productivity
cain is the result of millions of individual
investment

and

consumption

decisions

--

ranging from the purchase of more efficient
automobiles to the caulking and insulation of
drafty homes --

which were aimed at

reducing

energy
use
without
penalizing economic
growth. The overall contribution of this
growing energy efficiency to our current
energy supply mix has been significant.
In 1973 before the oil embargo, America
consumed 74.6 quads of energy, a rate of 60.4
thousand Btu's of energy per constant dollar
of GNP (as depicted in Table VI-2). If that
rate
of energy use had been maintained
through 1979, the rise in real GNP since 1973

181
would have required the use of 86 quads of
energy during 1979. In fact, only 79 quads
were used due to a reduction in the rate of
energy use to 55 thousand Btu's per constant
This increased efficiency
dollar of GNP.
oil import requirements
U.S.
directly reduced
or the equivalent of
year,
per
by 7.2 quads
per day. In other
oil
of
barrels
million
3.5
a near constant level of
given
words,
domestic energy produc.tion over that period,
the
production,
Alaskan
new
including
increased efficiency enabled us to reduce our
energy imports by about 3.5 million barrels
per day below what they otherwise would have
been.

TABLE VI-?
ENERGY CONSUMPTION PER GNP DOLLAR

Annuasl Rate

Energy
Consumption
per Constant
Dollar of CNP
(Thousand BTU's)

Yearly
Rate of
Energy
Consumption
(Quadrillion Btus)
-

-

Gross
National Product
Current
1972
Dollars
Dollars
(Trillion Dollars)

1973 Average

60.4

74.605

1.307

1.235

1974 Average

59.9

72.756

1.413

1.214

1975 Average

59.3

70.706

1.516

1.192

1976 Average

58.6

74.513

1.700

1.271

1977 1st
2nd
3rd
4th

64.4
53.6
53.7
58.2

84.108
71.047
72.222
78.872

1.807
1.867
1.917
1.958

1.307
1.326
1.344
1.355

57.4

76.536

1.887

1.333

64.2
53.0
52.8
56.8

. 86.902
73.269
73.468
80.256

1.992
2.088
2.136
2.212

1.354
1.383
1.391
1.413

Average

56.6

78.443

2.107

1.385

1st
2nd
3rd
4th

62.3
51.3
50.0
54.6

89.620
72.952
71.711
82.013

2.265
2.330
2.395
2.456

1.416
1.422
1.434
1.438

54.5

79.074

2.362

1.427

Quarter
Quarter
Quarter
Quarter

Average
1978 1st
2nd
3rd
4th

1979

Quarter
Quarter
Quarter
Quarter

Quarter
Quarter
Quarter
Quarter

Average
Source:

0

U.S. Department of Energy

00

183
Further increases in enerc-- efficiency can
occur in ways that do not jec.ardize economic
The jump in energy prices during
growth.
1979 encouraged conservation out reduced the
ability of consumers and businesses to make
long-term energy efficiency investments. For
example, optimal weatherizat on of a typical
American house costs from $1,500 to $2,500.
Yet few families can make such a front-end
are-.
outlay easily,. and. investments_ that
important to recucing our oil
extremely
thereby
thwarted.
import dependence are
Focusing on this problem, Congress expanded
and
homeowners
for
incentives in 1979
commercial building owners :o increase the
energy efficiency of their structures. It is
apparent, however, that much more could be
Indeed, an analysis by the Energy
done.
at
the Harvard Business School
Project
suggests, for example, that an accelerated
energy conservation program could save the
equivalent of 5 million barre..s of oil beyond
the savings already projected from existing
ngovirnmnnt -ronrams-

The
long-term competitiveness of many
domestic industries depends on the rapidity
with which they adapt to higher energy prices
Despite
by improving energy efficiency.
significant improvement since 1973, however,
energy
many industries remain rela ively
The United S".ates uses 40
inefficient.
percent more energy to produce a ton of

184
steel, for example, and 50 percent more
energy to produce a ton of cement than does
Production of aluminum here requires
Japan.
If
30 percent more energy than in France.
the adaptation to energy efficiency is slow,
these and other industries in which energy is
a significant cost element will become less
and less competitive, jeopardizing employment
Energy efficiency,
and
economic growth.
on
domestic
then, has a direct impact
economic growth and employment.
To focus national attention on the wisdom
an energy
of improving energy efficiency,
productivity index (EPI) should be developed.
labor
the
Such an index, patterned on
productivity indices of the Labor Department,
would measure output per unit of energy
input. An EPI would facilitate establishment
of national energy conservation goals, and
would provide a mechanism with which to
measure progress here and with fellow members
of the Organization for Economic Cooperation
and Development (OECD).
Recommendation No. 26

An energy productivity index should be
developed to measure progress toward
improved national energy utilization.
Separate energy productivity indices
should be developed for each of the

185
each
for
U.S.
industries,
major
consuming sector, and for the economy
as a whole.
Near-Term Energy Production:
Alcohol Fuels
Every gasoline engine in the United States
can be fueled with a mixture of alcohol and
gasoline --

or gasohol --

which increases the

fuel's octane rating and eliminates engine
knocking without jeopardizing fuel efficiency
or mileage. Usually comprising either 10 or
alcohol can be
20 percent of the fuel,
produced from coal or a variety of biomass
including wood (methanol) or grains
sources,
The
traditional
(ethanol).
and sugars
beverage technology presently utilized for
alcohol production, reflecting the necessity
to meet strict human consumption standards,
Newer
equipment,
inefficient.
is fuel
however, holds the prospect for a favorable
tlt

L

by

lUdidI1C~t

.

TIi
X

U
L

ayt:
d yvt

L

.1-Ui o

Ioy

yields alcohol which, at $1.60 or more per
gallon, is substantially higher than the
This cost
price of gasoline.
tankwagon
will
diminish
as
newer
disadvantage
technology evolves and as markets develop for
the protein-rich alcohol by-product called
DWG is presently
Distillers Wet Grain (DWG).
selling for 35 cents to 45 cents per gallon
in limited quantities as livestock feed.
Existing and proposed Federal and State tax

186
incentives will reduce this cost disadvantage
further.
The development of DWG as a by-product may
resolve the fuel versus food trade-off which
surrounds
gasohol
debates.
If
so, a
significant diversion of feed grains
to
alcohol
production
could
occur without
jeopardizing livestock feed
supplies
or
price.
Presenz
alcohol. for
gasohol.
production is a miniscule 6,000
barrels
daily. Evolving Administration plans include
expansion of ethanol production to meet
10
percent of unleaded gasoline demand with
gasohol by late 1981 which would require
production
of
28,000
barrels daily of
alcohol.
Blending all gasoline with a 10 percent
alcohol mix would reduce oil imports by 5
percent
to
10
percent,
would require
production from some 45 million acres (10
percent of U.S. planting), and would require
an investment of approximately $10 billion to
$15
billion
in
new alcohol production
facilities.
Expansion of production even on the modest
scale envisaged by the Administration faces
several hurdles, however. Technology for the
small scale production of alcohol suitable
for blending with gasoline must be developed
if the rural economy, including farmers and

187
farm co-ops, are to participate directly in
gasohol
production.
Research
must
be
conducted on the use of vehicles, including
farm machinery, run largely or entirely on
alcohol
in
the Brazilian pattern.
And
further research is needed, as well, on the
technology of producing alcohol from coal and
from wood and urban waste.
Increased Diversity of Supply
In
1979, just three countries, Saudi
Arabia, Iran, and Iraq, produced over 25
percent of the total world oil supply.
(See
Table VI-3.) And as presented in Table VI-4,
five OPEC countries, Saudi Arabia, Nigeria,
Venezuela, Libya, and Algeria, accounted for
over half of all U.S. imports.
This extreme
dependence on the stability and production
policies of a handful of governments is a
constant threat to U.S. economic stability.

58-205 0 - 80 - 13

188
TABLE VI-3
CRUDE OIL PRODUCTION BY MAJOR PETROLEUM
EXPORTING COUNTRIES
September, 1979

Countrv
Algeria
Iraq
Kuwait
Libya
Qatar
Saudi Arabia
United Arab Emirates

±'roouct LOfl
Proauction
(Thousand b/d)
1,000
3,500
2.376
2,028
454
9,774
1,837
20,967

Arab OPEC

Subtotal:

220
199
1,578
3,500
2,1:6
2,365

Ecuador
Gabon
Indonesia
Iran
Nigeria
Venezuela

9.978

Non-Arab OPEC

Subtotal:

30,945

TOTAL OPEC
1,474
1 460
2, 157

Canada
Mexico
North Sea
TOTAL OPEC, Canada, Mexico, North Sea
TOTAL WORLD

Source:

.

U.S. Department of Energy

36,036

TABLE VI-4
U.S. PETROLEUM IMPORTS BY COUNTRY
I/
1979 Average-

Country
Algeria
Indonesia
Iran
Libya
Nigeria
Saudi Arabia
United Arab Emirates
Venezuela
Other OPEC

Subtotal:

614.9
387.0
230.4
667.5
1,068.8
1,351.5
288.5
657.8
202.8

OPFC

Canada
Mexico
2/
Caribbean 2
Other

Subtotal:

imports
(Thousand b/d)

5,469.2
513.5
409.4
1,013.9
691.3

Non-OPEC

TOTAL IMPORTS

2,628.0
8,097.2

1/ January th::ough September.

7/ Includes Bahamas, Netherland Antilles, Puerto Rico, Virgin

Islands, Trinidad and Tobago. Virtually all of these imports
are petroLeum products transhipped from OPEC nations.

Source:

U.S. Department of Energy

190

Developing new international sources of
key
is
a
supplies
imported petroleum
any strategy for reducing
of
component
overall U.S. dependence on foreign supplies.
Federal policy should recognize that there is
"safety in numbers" --

the greater the number

of oil producers worldwide, the less is the
from
the
disruption
economic
risk of
of
any single nation's
loss
temporary
Evexy.
productive capacity or. an. embargo..
barrel of new oil discovered potentially
places downward pressure on OPEC prices and
contributes to stabilizing world oil supply.
Such stabilization of world oil markets is at
least as important for developing countries
its
for
in the Third World as it is
contribution to the economic security of the
Third World nations face
United States.
severe hardship as a result of what they will
be required to pay in 1981 for OPEC oil.
substantial
means
drain
currency
This
and
programs
development
for
setbacks
portends additional years of hardship for
developing
of
oil-importing
citizens
countries.
The International Bank for Reconstruction
an
and Development recently embarked on
expanded five-year program to spend $1.2
billion annually on oil and gas projects in
non-OPEC, less-developed countries (LDCs).
Sixty percent of these funds will be for
production facilities to develop known but

191

previously unexploited reserves. This is an
important and necessary program. Yet only a
relatively small $500 million will be devoted
to
an
increase in exploratory drilling
designed to identify new commercial reserves.
account
for
LDCs
Although
non-OPEC
world's
approximately 50 percent of the
prospective area of oil reserves, less than 5
percent of the exploratory wells ever drilled
have been l.ocated in Afri.ca-,. Southeas.t.Asia,.
Latin America, and China, as summarized in
Table VI-5, from a study prepared for the
Joint Economic Committee.
Yet the results of
such
exploratory
drilling
have
been
favorable, as noted in Table VI-6.

192
TABLE VI-5
EXPLORATORY WELLS DRILLED

-

Developed Countries:
U.S.S.R
United States
Canada
Australia and New Zealand
Western Europe
Japan
Total:

100, 000

482, 000
20, 000
500
12,500
1, 000

616,000

95.4 percent

Developing Countries:
Africa and Madagascar
Latin America
South and Southeast Asia
Peoples Republic of China
Total:

6 500
14, 000
5 .000
27 000
27,500

WORLD TOTAL

4.3 percent

643,500

1/ Figures are approximate in some instances.
Source:

A St-ategy of Oil Proliferation.
Economic Couuittee, torthcoming.

Arnold E. Safer.

Joint

TABLE VI-6
BARRELS OF OIL PER FOOT OF TOTAL DRILLING,
U.S., WESTERN EUROPE, LATIN AMERICA, AFRICA
(1945 -1974)

Time
Interval

United
States

Western
Europe

Latin
America

1970-74
1965-69
1960-64
1955-59
1950-54
1945-49

15.0
30.3
13.9
13.7
16.1
25.5

1,134.0
322.6
35.7
26.9
84.8
49.9

208.6
158.4
117.5
160.6
167.5
191.2

Source:

Africa
1,062.4
1,189.4
813.6
996.2
77.8
109.8

Grossling, B., "A Critical Survey of World Petroleum
U.S. and World
Opportunities," Project Independence:
Research
Congressional
1990,
Energy Outlook Through
D.C..,
Washington,
Congress,
Service, Library of
November, 1977.

Hw
(.A

194
North American Energy Policy
As the world's largest energy importer,
the United States is fortunate to have two
neighbors
who are among the handful of
nations both capable and willing to export
energy.
Development of a North American
energy policy, designed to replace insecure
OPEC petroleum with energy from Mexico and
Canada will. reinforce efforts to. minimize:
U.S. energy dependence.
I
Mexico
envisages
expansion
of
oil
production by up to an additional one mbd
over the next five years. Domestic energy
firms should be encouraged to build on the
good
will established by the successful
conclusion of the American-Mexican natural
gas negotiations in December and seek to
negotiate long-term guaranteed contracts for
petroleum supplies.
Looming natural gas surpluses in Alberta,
could be made available to U.S. consumers
through prompt U.S./Canadian cooperation on
the Alaskan gas pipeline and on a proposed
West-to-East Canadian line.
Canadian petroleum exports to the United
States could be increased in future decades
by U.S.
participation in development of the
vast Canadian tar
sands
resources.
A
memorandum of understanding on tar sands

195
research and development was signed last
summer
with
Canada and :he new Energy
Security Corporation will have authority to
expand upon that agreement i- warranted. In
addition, Canada has expressed interest in
the development of joint strategic petroleum
reserves in her Eastern provinces, convenient
to
oil-dependent New England.
Prospects
exist, as well, to back out U.S. oil imports
used
far
electricity
generati.on
with
hydroelectric exports
from
Canada.
An
expansion of seasonal electric power wheeling
between the U.S. Midwest, Quebec, and Ontario
awaits regulatory approval in the United
States. And sizeable untapped hydroelectric
sites in Canada could possibly be utilized by
U.S. utilities under long-termr agreements.
Recommendation No. 27
The Administration should present to
Congress
a
comorehens:ve
olan,
including
the
estimated costs and
benefits, crocosed for the development
of:
(1) a Drogram to stimulate areaterenergy conservation and to :a se energy
productivity;
(2)

a major, accelerated A.cohol Fuels

Program,

stressing

large

and

small-

196
scale'production facilities and the use
of coal and biomass as feed stocks;
to
encourage oil
a
program
(3)
developing
non-OPEC
exploration in
countries;
(4) a program to increase the economic
security of the Western Hemisphere by
increasing and strengthening long-term
trade relationships of mutual benefit
including energy trade with Mexico and
Canada.
International Trade
difficulty with which America is
The
adapting to its growing interdependence with
the world economy emphasizes the urgency to
renew its industrial base and export markets.
American industrial policy has continued to
economic
assumptions
to
the
cling
of the post-World War II
characteristic
world. At the close of the war, America
stood virtually alone as the world's preeminent military, political, and economic
power. U.S. technology was the most advanced
while the industrial base had grown and
But
become more modern during the war years.
the world economy and America's place in it
have undergone considerable change.

197
The major development of the 1970s and the
major factor in growing U.S. dependence on
the world economy has been and remains oil.
In part, the expansion of American prosperity
in the 1950s and 1960s reflected a steady
improvement in

our

terms

of

--

trade

in

effect, year after year we had to sell fewer
of our own products for each barrel of
imported oil.
Over the entire period, our
terms of trade improved.by. almost 25 percent..
The oil shock of 1973 has reversed our
economic fortunes. The sudden increase in
the
price of energy not only added to
inflationary pressures but it also made a
portion *of America's plant and equipment
economically obsolete. At the time, domestic
production of oil and gas started to decline.
The jump in

our

roughly

billion

$3

oil

billion in 1979 --

import

in

1970

bill

--

to

over

is another way

of

from

$60

saying

that
our
terms
of trade have sharply
deteriorated.
Instead of
continuing
to
improve, over the last decade our terms of
trade have deteriorated by some 25 percent.
the shifting terms of
Among other factors,
trade have forced us to focus on augmenting
our
s ock of capital equipment and the
domestic supply of raw materials.
But

it

is

not

only

the

concerns American policymakers.

oil bill that

198
Nearly all other nations recognize the
link between international trade and domestic
The United States has been slow
prosperity.
to adjust to the competitive world of trade.
We have tended to view foreign trade as a
luxury rather than a necessity.
In the
meantime, the U.S. market has become the
target of integrated, well-financed,
and
highly successful efforts by our competitors.
International Competitiveness
after industry has lost its
Industry
competitive edge in international commerce.
Textiles, shoes, industrial fasteners, ball
bearings, specialty steel, and the automotive
industries have come under severe pressure
In
recent
from
overseas
competitors.
Economic
testimony
before
the
Joint
Committee, a spokesman for the semi-conductor
in our high
industry,
a
key
element
technology future, expressed concern about
the future ability of his industry to meet
current and expected challenges from abroad.
An
important
part of the answer to
restoring international competitiveness lies
in raising our rate of investment in plant
and equipment. As we emphasize elsewhere in
this report, higher rates of investment will
boost sagging American productivity and allow
us to move toward a lower, m6re stable price

199

level. But investment is not the entire
answer. During the next decade, we will have
our
of
many
to take a hard look at
institutions. The relative economic strength
and health of Germany and Japan suggest that
they might have some lessons for us in terms
Neither
institutions.
and
of policies
adversary
the
adopted
has
country
relationship that often exists between the
American Gove-rnment and. the private sector.
That relationship will surely have to change
if we are to continue to be the economic as
well as the political leader of the free
world. Both Germany and Japan give workers a
of
operation
the
in
voice
greater
corporations than we do in the United States.
And both Germany and Japan have some form of
that
strategy
industrial
national
a
determine,
not
does
it
if
influences,
sector
private
and
policy
government
investment plans. It is premature to suggest
that the United States should move in any of
these particular directions. What is clear
is that our national desire for industrial
and economic leadership will be severely
tested in the decade ahead. Sharply higher
or
energy prices have rendered obsolete
reduced the economic life of a substantial
portion of U.S. plant and equipment and have
of many commercial
value
the
affected
and
automobiles
private
structures,
appliances.

200
At
the same time that America faces
sharply higher energy prices, there has been
a
steady
increase in competition among
industrial and industrializing countries for
access to secure supplies of raw materials,
in world markets for manufactured goods, and
for the American market itself.
U.S. dependence is not just a question of
high energy imports. The periodic. ability of.
the OPEC cartel to sharply and suddenly raise
prices has forced a
much
more
severe
The
adjustment on the American economy.
sudden rise in prices created a loss in
national income and a deterioriation in the
American terms of trade with the OPEC cartel;
America will have to sell more machines or
more grain for each barrel of oil.
Export Incentives
High
energy
prices
and
economic
interdependence will force major adjustments
on the U.S. economy. First, there will have
to be an increase in capital investment.
By
devoting a greater share of national income
to investment in
plant
and
equipment,
American industry will be able to replace
obsolete
machines
with
equipment
that
incorporates recent innovations and energy
saving techniques. A more modern industrial
plant would boost U.S. productivity, a key to

201
bringing inflation under control, and help
maintain the international competitiveness of
U.S. goods. In addition, a reasonable rate
of economic growth and higher levels of
capital investment will facilitate the shift
of the U.S. economy toward a greater export
relatively
from
away
and
orientation
inefficient industries- that can no longer
compete for international markets.
Second, the rising import bill for energy
and other raw materials and the growing
competition for foreign and domestic markets
should force the United States to become a
more effective international competitor. The
recommendations in this report concerning the
conduct of macroeconomic policy and targeted
programs aimed at raising productivity if
the
increase
to
tend
will
adopted,
There are
competitiveness of U.S. exports.
also a wide range of specific policies that
the United States could adopt to improve its
For example, there are
export performance.
hundreds of thousands of U.S. firms that have
The
export market.
the
test
to
yet
export
for
budget
limited
relatively
promotion may be part of the problem. In
governmental
few
are
there
addition,
help firms penetrate new
to
incentives
foreign markets.
Although the new international code on the
use of subsidies has circumscribed the use of

202
direct subsidies to stimulate the export of
manufaz:ured goods, permissible techniques
could be used to aid the kind of structural
shift toward
exports
that
Is
already
indica:ed by long-term market forces.
Recommendation No. 28
he-1 D
improve
the U.S. exDort
performance, the
Government
should
act:ve.v
promote
the interest and
par-:io-ation of American business
in
foreian trade; evaluate and eliminate
the diisncentives and the stat:orv and
reck azory
reauirements
which
unnecessarily imtede U.S. exc rts and
investment;- and explore the need for
new :rncentives.
To

Foreic-. CorruDt Practices Act
We are also concerned about adherence to
princinies contained in the provisions of the
Foreign Corrupt Practices Act by foreign
producers.
The Act, passed i.. 1977,
is
designed =o discourage the use of-bribery and
other :legal business practices bv American
firms.
-t was hoped that this law would
provide a guideline,
and
a
behavioral
framewcrk
for U.S. trading partners and
compet:-ors, as well. This hope has not yet

203
draft
a
despite
realized
fully
been
Justice
The
issue.
this
of
convention
Department has developed a business review
procedure to help U.S. business firms who
have questions about the law. It is hoped
that this will assist in resolving such
questions.
Some American businessmen abroad argue
that their ab.ili.ty to gain new. markets, and,
maintain existing ones is jeopardized by the
disproportionate responsibility they have for
practices
business
ethical
maintaining
competitors
that
extent
the
to
overseas
In our view,
ignore the spirit of that law.
the answer to this problem is not to relax
the standards of conduct of U.S. businesses
in foreign trade, but to insist upon the
elimination of any corrupt practices on the
part of foreign nationals.
Recommendation No. 29
The President should initiate an effort
the
to
adherence
encourage
to
Foreign
principles contained in the
our
by
Act
Practices
Corruot
abroad,
customers
and
competitors
and
forums
utilizing international
multilateral
aporooriate
other
channels.

58-205 0 - 80 - 14

204
American Trading Companies
A number of America's trading partners, in
particular Japan and several of the newly
industrialized
countries,
have
had
considerable success in increasing exports
through large trading companies. Although
trading companies do exist in the United
States, most of their trading activity is on
the import side and there has been little
success in forming the large, export-oriented
trading companies through which
a
high
percentage of Japanese exports are traded.
There is no clear reason why the trading
company concept has failed to become a major
force in U.S. foreign trade. The rapid postWorld War II spread of the U.S.
based
multinational firm, the extensive American
use
of
antitrust
laws
and
limited
availability of adequate bank financing have
all been suggested as possible impediments to
the formation of U.S. trading companies.
Recommendation No.

30

The
Administration
should
provide
Congress with a study assessing the
existing barriers to the formation of
U.S.
trading
companies
and
the
feasibility of significantly increasing
exports through trading companies.

I

205
Federal Trade Bureaucracy
In the past, the United States Government
has not been sufficiently well organized to
deal
with overall trade policy.
Export
policy,
in particular,
has been given a
relatively low priority.
Alone among the
major
industrial
or
the
principal
industrializing countries, the United States
does not have. a full-fledged Department. of
International Trade.
The
President
has recently moved to
reorganize
the
international
trade
bureaucracy.
Under the President's plan
(Reorganization Plan #3) responsibility for
trade policy will be consolidated in the
White House-based Office of the Special Trade
Representative (now renamed the Office of the
U.S. Trade Representative) and the execution
of trade policy will be centralized in the
Department
of
Commerce.
Under
the
President's trade reorganization plan, both
export policy and export promotion will be
given considerably more emphasis.
The President's recent reorganization of
the international trade bureaucracy was a
definite step in the right direction. The
consolidation of policy and operations, the
establishment
of
a
foreign
commercial
service, and the new emphasis on export
policy are all welcome innovations. There is

206
concern, however, about the institutional
split between policy and operations and the
danger that the U.S. Department of Commerce
will find its dedication to trade matters
diluted by its multiple responsibilities.
Recommendation No. 31
Congress and the- President are urged.to
monitor the effectiveness of the new
At the same
trade
reorganization.
time, the Congress and the President
to
study
the
should
continue
feasibility of establishing a fullfledged Department of Trade.
International Finance:
Adjustment and Recycling
International economic developments during
1979 provide us with further evidence that
the international adjustment process does
work under floating exchange rates. We note
first the substantial improvement in the U.S.
current account position during 1979, from a
deficit, of $13.9 billion in 1978, to near
balance in 1979, and this improvement despite
an increase in our oil import bill of nearly
growth
of
More
rapid
$18
billion.
slower growth of
nonagricultural exports,
non-oil imports, and a surge in the growth of

6

207
our surplus on service transactions are the
most notable factors responsible for 'our
improved current account position. Both our
export and our import-competing industries
have made major gains in their market shares.
The lagged effects of gains
from
past
reductions in the foreign exchange value of
the dollar, in combination with slower growth
in the U.S. and more rapid growth abroad,
have- produced- a, substantial improvement, in
the current account position of the United
States
In addition to the U.S. improvement, we
also witnessed a change in the
current
account positions of the other industrialized
countries. The huge Japanese surplus has
been

sharply

reversed

--

$16.5 billion in 1978 to a

from a surplus of

deficit

of

$8.6

billion
in 1979; the German surplus -- which
amounted to $8.8 billion in 1978 -- fell to a

$4.9 billion deficit in 1979. Again, the
lagged effects of past exchange rate changes
and shifts in relative growth rates largely
explain the reversal of these current account
balances.
Of' course, we need to emphasize what we
have known for a long time:
changes in
exchange rates and growth rates exert their
influence on trade flows
only
with
a
considerable lag. Nevertheless, the results
of past exchange rate and growth rate changes

208
can be seen clearly in the current account
swings of the major industrialized countries
in 1979. A similar shift occurred after the
early
exchange rate realignments of the
1970s.
current account
the
of
shifts
The
industrialized
ma'jor
the
of
positions
largely
were
1979
during
countries
responsible far- ano-ther important development
--

a

more

stable

dollar

on

the

world's

currency exchanges. The dollar was subjected
to intermittent downward pressures over the
course of 1979, but it did not register a
Indeed, despite the
decline.
sustained
stands above the
now
pressures, the dollar
levels reached in Octcber 1978. On a tradeweighted basis, the dcllar on January 31,
stood about 4.9 percent above the rate
1980,
registered during October 1978.
account
current
balanced
However, .
positions are by themselves not sufficient to
ensure continued stability in the value of
the dollar. There needs to be confidence as
well in the adequacy of the economic policies
inflation
of the major countries to combat
If the policies
growth.
and' sluggish
recommended in this report are adopted, we
believe that the world economy will express
economic
much greater confidence in U.S.
policies.

U

209
The fact that the dollar continues to play
a role in world currency markets that is out
of line with the economic position of the
United States in the world economy is another
In our
source of instability.
possible
the
urged
we
year,
last
annual report
Administration to look with favor on the
in
establishment of a Substitution Account
Monetary Fund whereby
International
the
foreign central banks who wish to diversify
portfolios can do so by
reserve
their
exchanging some limited portion of their
disproportionately large holdings of dollars
for Special Drawing Rights (SDRs) or some
We continue to
other currency composite.
press for this reform.
Recommendation No. 32
In our view, the United States must
continue to express a willingness to
give serious consideration to proposals
designed to facilitate a changed role
in world currency
dollar
the
for
initiatives
markets. We endorse the
taken by the Administration to work
a
of
establishment
the
toward
the
within
Account
Substitution
International Monetary Fund in the near
We recognize that other steos
future.
may be necessary.

210
One final issue that needs to be addressed
concerns the question of whether recycling is
going to work this time around for the nonoil
developing countries. As a result of the
sharp increase in energy prices in 1979, the
oil import bill of the developing nations
will swell, absorbing, according to some
export
their
of
one-third
estimates,
This, of course, will reduce the
receipts.
funds. available to. them: for debzt.. service. or
for payment of other imports.
of the non-oil
debts
aggregate
The
tripled between
almost
nations
developing
As a proportion of GNP,
1973 and 1978.
average gross debt rose from 17 to 23 precent
between 1973 and 1978; gross debt net of
And
reserves rose from 11 to 17 percent.
debt service requirements relative to exports
rose from 14 to 17 percent.
The last few rounds of oil c-ice increases
raised nonoil developing country debt by an
estimated additional $25 billion in 1979;
even without another round of OPEC price
increases, their debt could rise by another
$25 billion in 1980.
Two

questions

are

raised in the wake of

these mounting debt problems.

The first, and

concerns the degree of
difficult,
most
adjustment the nonoil developing nations are
prepared to make in their own economies in

211

response to their growing payments problems.
Many adjustments need to be made. Several
and Korea
nations including Brazil, Chile,
have devalued their currencies in an effort
to boost their export earnings to help pay
for their enlarged oil import bills.
The second question concerns the extent to
which banks are willing and able to handle
the.- additional borrow-ing requirements- of the
developing nations. U.S. banks have slowed
sharply their rate of lending to developing
countries.
And recently, Japanese
banks
abruptly
curtailed
their
foreign
loan
activity. However, in view of the fact that
most large non-U.S. and non-Japanese banks
have a relatively low ratio of foreign assets
to total assets in their portfolios, it is
possible that the Eurocurrency markets may be
able
to
accommodate
a fairly sizeable
increase in loan demand on the part of the
developing nations.
Of course, in view of
the worsened debt position of many developing
nations, there are no guarantees that the
be
required financing
will
necessarily
accommodated,
and
those loans that are
granted are likely to be more expensive.
Under the circumstances,
it is becoming
increasingly clear that the International
Monetary Fund (IMF) will have to play a
larger role this time around in recycling
funds from the OPEC surplus countries to the

212
the
nonoil developing nations. Fortunately,
IMF is in a good position to assume this
role. The Fund now has about $30 billion for
lending to member countries, and given the 50
percent increase in quotas expected this
amount
will
be
augmented
year,
that
substantially.
Additionally,
since
Fund
assistance is now available in larger amounts
and for longer periods than was true in the
early 1.970s,
it. is.poss-ible- for. the nonoil
developing nations to make more orderly and
gradual adjustments to the now higher oil
prices.
At the moment we are mildly optimistic
that the banks and the IMF,
in combination,
can
effect
the
required
financing to
accommodate the borrowing needs of the nonoil
developing nations. However, we believe that
needs
to
be
monitored
the
situation
carefully.
If
existing
financial
be
to
institutional relationships prove
inadequate,
it will be necessary to search
for effective alternatives.

0

APPENDIX
The Current Services Budget
Section 605 of the Congressional Budget
Act of 1974 requires the Office of Management
and Budget
(OMB) to submit "the estimated
outlays and proposed budget authority which
would

be

included in the budget ...

ensuring fiscal

year

if

activities were carried
year at the same level ...

all

for the

programs

and

on during such ...
and without policy

changes." It further requires that the Joint
Economic
Committee
"shall
review
the
estimated
outlays
and
proposed
budget
authorities so submitted, and shall submit to
the Committee on the Budget of both Houses an
economic evaluation thereof."
We are pleased to report that this year,
for the first time, the Current Services
estimates
are
as
useful as they were
orginally
envisioned.
The
economic
assumptions underlying these estimates are
the same as those used in other parts of the
President's budget.
Further, in accordance
with a recommendation we made for several
years, the Administration has treated all
programs equally with respect to inflation.
Although
there
are
always
further
improvements to be made, we believe that the
Administration has taken a significant step
forward and we applaud them for it.
(213)

ADDITIONAL

(215)

VIEWS

REPRESENTATIVE HENRY S. REUSS
I congratulate
Chairman Bentsen and the
Committee for having once again produced a
unified
report.
The Committee has worked
very
hard
to
achieve
consensus
and,
remarkably,
it has fashioned a substantive
policy document.
As the Joint
Economic
Committee has in the past taken the lead in
pointing out new directions for economic
policy,
it is now doing so again. What
follows is therefore not a dissent,
but a
synopsis of the most important themes of the
Committee's analysis, and an attempt
to
impart a clear focus to the direction that
policy must take.
On macroeconomic policy, the Committee has
made two points of transcendent importance.
First,
the
Committee
states
that
macroeconomic policy should adopt a target
for long-run economic growth, and stick to
it.
This would mean
an
end
to
the
destructive cycles of stop and go that have
characterized policy in the last decade, and
which have, at each turn of the screw, made
our structural inflation and our structural
unemployment worse.
Second,
the
Committee
states
that
macroeconomic policy alone cannot do the job.
We
must
have
comprehensive
structural
policies, on energy, on
incomes,
and above
all
to
promote
our
efficiency
and
competitiveness that we now lack.
(217)

218
the
two positions,
these
taking
In
vanguard
the
Committee has placed itself in
The
the Administration.
of
ahead
far
this
testimony of Chairman Schultze before
Committee established, had there been any
doubt, that the Administration continues to
base policy on the macroeconomic will-of-theof
abdication
an
is
This
wisp.
that the Committee wisely
responsibility
rejects. 1/

Following is an
1/
Schultze's testimony:

excerpt from Chairman

Welcome, Chal-rman
Representative Reuss.
with the
problems
Schultze. I have a lot of
I
policy.
Administration's anti-inflation
believe
think most members of this Committee
that the Federal Reserve is doing its part,
and has the monetary aggregates at last under
But when you look at the other
control.
the
which
those
policies,
of
gamut
I really don't see
Administration controls,
an anti-inflation policy in place adequate to
deal with the 13 percent inflation that now
plagues us.
The budget is not in balance. There's
and,
still a deficit at this late stage;
the
that
hint
expenditures
military
indeed,
increased.
be
will
deficit
The wage-price incomes policy is weakened.
The description of that (in the President's
report) ends up on page 82 with the statement
that "As this Report went to press, the Pay
Committee has just recommended a basic pay
standard that would establish a range of
Those allowable
allowable pay increases."
pay increases are, of course, greater in many

219

Footnote 1/ continued
than

instances
weaker.

what

we

had.

So

that's

There is no attempt, by gasoline rationing
or by a sharp increase in the excise tax, to
limit the discretionary nonessential element
thus
and
transportation,
American
in
strengthen the dollar and fight inflation by
enabling us to cut down on the real cost of
our imports.
I find that the section on the
Finally,
of
the economy, on page 104 and
structure
105, "Improving the Structural Performance of
short
very
the Economy," has just two
I can
as
far
as
paragraphs in it. Nothing,
of
steel,
of
see, is said about the problems
automobiles, of semiconductors, of railroads,
of mass transit, and the half hundred other
in my judgment,
American industries which,
really need a sectoral approach such as the
Germans and Japanese have been giving their
problems.
I am disappointed with the antiSo
am
I
if
but
program;
inflationary
unnecessarily dour, I wish you would cheer me
up.

Let me start
I will try.
Schultze.
Mr.
the
"Improving
that
with a brief note,
Structural Performance of the Economy," which
to
as you note has two paragraphs, was meant
51-page
a
to
introduction
be a two-paragraph
exercise.

You may disagree with the subjects

we picked out that are important. We didn't
think we were smart enough to pick out
exactly which industries ought to be pushed
importantly,
about,
talk
did
we
but
agriculture,
markets,
labor
investment,

58-205 0 - 80 - 15

220
Footnote 1/ continued

of

the

If I may,
Representative Reuss.
Who
is smart enough?
stop there.
rL.tUU
r,,eboliuovernment
really ought wu u
who is putting his mind on avoiding
Rock Island-Milwaukee Roads, avoiding
avoiding
Fords,
and
Chryslers
disappearance of our steel industry.

let's
There

energy and
economy.

the

key

big

sectors

future
future
the

Schultze. I thought we had something
Mr.
That doesn't mean the
called the market.
intervene. My own
government should never
better off
probably
we
are
judgment is that
and
on an ad
intervening very occasionally
think
I
don't
Quite frankly,
hoc basis...
Government
Federal
this is a major area the
can do anything but harm when it mucks around
in ....

Representative Reuss. At least you, with
your characteristic honesty, have stated the
issue.

a

221
of the macroeconomic
heyday
the
In
of the Employment
passage
fixation, from the
part of the last
early
the
until
Act of 1946
was at
Committee
Economic
decade, the Joint
economic
in
innovation
forefront of
the
In recent years, with the passage of
policy.
the Humphrey-Hawkins and Budget Reform Acts,
an
found
has
policy
macroeconomic
institutional

home

in

parts

other

of the

fiscal
of
Legislative review
Congress.
Committees,
policy is lodged in the Budget
and that of monetary policy in the Banking
Now there is a new emphasis for
Committees.
the Joint Economic Committee

--

the

design

and implementation of structural policies and
their integration with fiscal and monetary
policy.
In Chapters IV, V, and VI the Committee
of
elements
the
of
has defined some
bipartisan
which
on
policy
structural
an
is
This
consensus already exists.
should
Committee
The
step.
first
admirable
now turn its concentrated energies to the
task of designing and winning agreement to
the full range of policies that are needed.
fall into two
these
speaking,
Broadly
to which we
policies
long-range
categories:
and
commitment,
permanent
a
make
must
manage
to
needed
are
that
temporary policies
the present crisis.
Our long-run goal must be to restore the
competitiveness of U.S. manufacturing and
other major economic sectors in domestic and
For the first time in our
world markets.
history, the stability and prosperity of the
American economy has become contingent on
events outside our borders and beyond our
control. This is partly a matter of our
dependence on foreign oil, which can and must
be reduced. But even more threatening is our
foreign
superior
to
addiction
growing

222
manufactured goods.
From 1965 through 1978,
our
imports of manufactures grew at an
average annual rate of 9.4 percent, compared
to a growth in our exports of manufactures of
only 6.1 percent per year. This trend poses
a threat to American employment, to American
prosperity, and to the quality of American
life
that even the greatest success in
reducing energy consumption and in promoting
agricultural exports cannot offset.
To rebuild American industry we must end
the adversary relationship that now exists
between government and business.
This point
was emphasized by the Committee, but in my
view,

we

need to go farther --

to adopt

the

cooperative approach that has been tried and
proven by several of our major allies and
rivals,
notably
Germany
and
Japan.
Conventional measures,
such as regulatory
reform and revision of tax and depreciation
schedules, are also necessary, but they are
not enough. We need a government role in the
planning and coordination of investment, in
coordination
of
industrial
location
decisions,
and
to
assure adequate and
efficient
support
services
(such
as
transportation, housing, and waste disposal)
to
major
new
enterprises.
This
is
particularly
necessary to facilitate
the
relocation
of
foreign
manufacturing
enterprise to our shores. Perhaps the best
single way to overcome foreign domination of
our
automotive,
television,
consumer
electronics and motorcycle markets, to name
only a few,
is to persuade Toyota, Honda,
Sony, Yamaha and dozens of others to build
their next factories
in
this country.
At
present, official efforts to do so are weak
and spasmodic.
Such
a
indicative,

government
role
not
coercive.

would
be
Ideally,

223
independent teams from government, business
and labor should be constituted to look into
the problems of each of our major sectors.
Such teams should come from outside the
sector to which they are attached, and should
be drawn from our best and brightest public
servants and public-spirited private men and
Their objective should be to devise
women.
plans,
policies and development
sectoral
new
restructuring,
corporate
covering
remedial
location,
its
and
investment
regulatory legislation, and public financial
assistance where required.
Such teams are needed in
Four high-priority examples:

many places.

we need massive new investment
In steel,
technology to overcome
casting
in continuous
recover ground lost
and
lag
our technological
producers.
foreign
to
in recent years
we need to persuade foreign
autos,
In
manufacturers to follow Volkswagen, Honda and
Renault in establishing manufacturing plants
if possible, to
in this country. We need,
Chrysler
of
transformation
the
assure
energy-efficient
Corporation into a viable
reverse the North American
producer and to
decline of Ford.
we need to
In transportation generally,
rationalize and rebuild our railroads before
crumble away. The
they (quite literally)
once-great mid-western roads are in imminent
So long as the
danger of complete collapse.
rights-of-way exist, there is hope for a
*

comprehensive

rescue

operation

--

but

if

government inaction allows the rights-of-way
to disappear, our transportation base will be
irreplaceably lost.

224
We also need a coordinated effort to
resurrect urban mass transit.
The Federal
Government should create a market for a massproduced, made-in-USA light rail transit car,
and should greatly step up development of
light-rail
transit
systems
around
the
country.
In many cities, existing freight
rail track is available and suitable for
light-rail, given only the will and the money
to fix it up and electrify it. We also need
a decent bus.
In energy,
we need a major commitment of
resources to the production of ethanol for
gasohol.
We need to promote the use of solar
power.
We need to end the bungling that has
surrounded
the construction of a natural gas
pipeline from Alaska.
We also need
to
promote the use of insulation, and energy
efficient construction techniques.
I will shortly propose legislation to
establish a new Cabinet department to pursue
the
development
of
long-run structural
policies for American industry.
To be called
the Department of Industry and Trade, this
department would
replace
the
amorphous
Department
of
Commerce, adopt the
illcoordinated export promotion functions now
scattered through the Departments of State
and Treasury,
and add such new
importsubstitution
and
reindustrialization
functions as are needed to get the job done.
Reconstruction of our cities and of our
rail networks can be done without adding a
new
bureaucratic
entity to
the Federal
Government.
The task at hand is
unavoidably
expensive.
But the cost of doing nothing is
immeasurably greater.
Under the best conditions, it would take a
year or more to get the development of

4

225
sectoral policies underway, and substantially
longer before there were visible results.
Immediate action is needed to bridge the gap.
I propose a four point program:
Ration gasoline, providing enough for
1)
essential business, agriculture, and get-tobut cutting back heavily on
use,
work
The Administration
discretionary driving.
saving in our
major
a
acknowledges that
at once
achieved
be
could
bill
imported oil
the
Unfortunately,
2/
measure.
by such a
in
only
oil
imported
of
thinks
Administration
are
there
which
of
shortages
of
terms
currently none --

real

danger:

and not

a

in

terms

deteriorating

U.S.

of

its

trade

Following is an excerpt from Secretary
2/
Duncan's testimony:
Secretary Duncan,
Representative Reuss.
if we did impose tomorrow a well-administered
gasoline rationing system which guaranteed to
all industrial and agricultural users what
they needed, and enough so that people could
all
but cut out
from work,
get to and
what
purposes,
pleasure
nonessential
percentage of our gasoline consumption would
be saved?
percent of
Forty
Duncan.
Secretary
gasoline consumption is considered to be
we're
Now,
consumption.
discretionary
consuming gasoline at a rate of approximately
--

in

1979

it was 7.05 million barrels per

that
So assuming
day, on the average.
of
day
per
barrels
million
2.8
about
number,
discretionary
of
form
the
in
was
gasoline
consumption.

226
balance,
a weakened international dollar,
higher
real costs of chrome, manganese and
what not, and worse inflations/

3/
Following
is
an excerpt from the
testimony of Drs. Walt Whitman Rostow, Alan
Greenspan, and Lester Thurow:
Representative Reuss.
Let me ask each
member of the panel a question, which I hope
can be answered yes or no.
The question:
Do
you find the
anti-inflationary
economic
program of the Administration adequate? Mr.
Rostow.
Mr. Rostow.

No.

Representative Reuss.
Mr. Greenspan.

No.

Representative Reuss.
Mr. Thurow.

No.

Mr. Greenspan.

Mr. Thurow.

227
Over the next years, gasoline supplies
could be stretched by up to at least 10
percent with the accelerated production of
for
which could be pump-blended
ethanol,
prices,
market
at
pleasure-driving motorists
high enough to compensate America's corn
is
oil-import situation
Our
producers.
before
action
critical, and we need immediate
it is too late.
Balance the budget. This can be done
2)
by such means as cutting back general revenue
sharing to the states, by selling a small
amount of our gold at current inflated prices
from the Fort Knox stockpile, and by using
A
budget.
military
moderation in the
balanced budget would be an important symbol
of our determination, and it would strengthen
the fiscal position of the government for the
tasks ahead.
Increase Federal job programs for the
3)
Committee's
The
structurally unemployed.
on how
suggestions
useful
many
makes
report
programs for the structurally unemployed can
be improved. The single greatest improvement
A whole
would be to provide more jobs.
generation

is going to waste

--

we must act.

In the
Strengthen incomes policies.
4)
reform
to
program
absence of a thorough-going
wage-price
mandatory
our economic structure,
In the presence of
controls are not useful.
such a program, controls can play a useful
In the long run, structural
bridging role.
reform can liquidate the need for controls
altogether, as high rates of productivity
increase permit the payment of high wages
without inflation.

228
Summary
This
report
of
the
Joint Economic
Committee has made a first
step toward
the
development
of
sectoral
and structural
policies to replace the sole reliance on
macroeconomic
measures that we have all come
to reject. Now, we must face the future
fearlessly,
and
work
to
persuade
the
Administration and the American public of
what is required.

SENATOR WILLIAM PROXMIRE
Inflation is still our number one problem.
While I favor a tax cut I believe it must be
A tax cut which merely added to the
earned.
deficit would itself be inflationary.
The tax cut must be earned by cutting
This is
spending and balancing the budget.
the single most important step we could take
to fight inflation. Spending should be cut
in virtually every program, military and
too
is too big,
civilian. The Government
intrusive, and an excessive part of our
lives. If cuts are made intelligently we can
have a leaner, more efficient, more humane
government than at the present.
if we cut spending sufficiently
Further,
When we
we can provide a budget surplus.
a tax
earned
have
will
we
surplus
achieve a
antian
be
should
cut
tax
any
cut. However,
down
hold
help
to
designed
cut,
inflation tax
and
savings
encourage
increases,
wage
productivity.
investment and enhance
I believe we should require the President
to propose a budget each year which would be
in surplus if the economy grew at 3 percent
Such a requirement would have
or more.
provided a balanced budget that would have
been in surplus in 12 of the last 17 years
It would
instead of 16 deficits in 17 years.
provide for a deficit in years when there is
slow growth and a balanced budget or a
(229)

230
surplus in those years when the economy grows
at the historical rate of 3 percent or more.
Essentially,
it would require a balanced
budget over the business cycle, with good
years off-setting bad years and providing
either stimulus or restraint as were needed.
The proposal also removes forecasting and
guesswork from the President's proposals. As
economists have been routinely wrong in their
forecasts, a proposal that would require the
budget to be in surplus if growth were 3
percent, removes guesswork and estimates from
the calculations of what fiscal policy should
be.
Until inflation is brought under control,
we must follow both a tight fiscal and a
tight monetary policy with any tax cut based
on returning to the public the funds saved
through budget restraints.
I
am
in general agreement with the
recommendations in the
report
and
the
accompanying
excellent
analysis
and
discussion. As I have indicated, I would go
several steps further than my colleagues in
several respects.

SENATOR EDWARD KENNEDY
I commend the Joint Economic Committee for
once again issuing a unified annual report,
and I am pleased to support it.
I also commend Chairman Bentsen for his
He has
leadership over the past two years.
maintained the Joint Economic Committee as a
cohesive unit whose penetrating inquiries and
sophisticated analyses have done much to
all
of
interests
advance the economic
Americans.
I am particularly supportive of the theme
of this year's report which debunks the myth
that our Nation can only reduce inflation by
wringing it out of the system through the
adoption of monetary and fiscal policies
the
is
That
which produce recession.
approach taken by the Carter Administration,
yet this report correctly points out that
these kinds of policies simply will not work
Moreover, they will
to reduce inflation.
result in unacceptable hardships for the
our
and
America
of
people
working
minorities.
disadvantaged
report also places proper emphasis on
country's
our
increase
to
need
the
and to
inflation
productivity to help fight
the
in
again
make America competitive once
have
I
theme
a
markets of the world. This is
stressed over the last several years.
The

(231)

232
Over the last several months,
I have
spelled out my economic views in
great
detail.
Although I agree with most of the
major
conclusions
of
the
report,
I
additionally believe that the only way to
stop the present inflationary spiral
is
through a temporary program of across-theboard controls on prices, wages, profits,
dividends, and rent.
I have also urged the
adoption of an equitable system of gasoline
rationing.
And finally,
I have proposed
additional Federal programs of public service
and other jobs, and of youth employment and
training, to combat a recession, with most of
the funding to be spent on a triggered basis
as unemployment
rises.
I have described
these views more fully in two policy papers.
I do believe,
however, that this report
makes an important contribution to developing
a strategy to deal with our complex economic
problems, and that is why I support it.

REPRESENTATIVE PARREN J. MITCHELL
I am in agreement with the Committee's
efforts to attack the long-run structural
problems of the economy with a comprehensive
targeted
a
and
economic growth policy
do
however,
I,
effort.
employment
structural
of
assessment
Committee's
the
with
not agree
ills
economic
the
to
solution
the short-run
that currently confront this Nation, nor do I
agree with the Committee's endorsement of
full
Administrative policies which delay
Act.
Humphrey-Hawkins
implementation of the
Consensus among economists, including the
Economic Report of the President, predicts a
downturn in the economy which will certainly
add to the problems of unemployment in the
black and Hispanic communities of America.
The Administration's budget, which initiates
mechanism,
countercylical
stand-by
no
essentially sanctions increased unemployment
in already depressed economic areas. The
Committee's reluctance to suggest a stand-by
countercyclical program, based on uncertainty
has
and variance in the economic forecasts,
the same effect. In either case there seems
cyclical
to be an insensitivity to the
victims of recessionary trends.
Black adult unemployment is currently over
13 percent, while Hispanic adult unemployment
has reached nearly 10 percent. Black youth
unemployment, which has not been recorded
below 30 percent in a decade, is currently 35
percent. Any downturn in the economy will
have a disproportionate impact on the already
existing depression in the Black and Hispanic
(233)

234
communities of America.
Any suggestion to
remain silent while the last-hired and firstfired
bear
the burden of recession is
unconscionable.
Sustained economic growth is clearly the
solution to the adverse impact that cyclical
variations impose on specific sectors of the
economy. Because of such external factors as
random oil price increases, our economic
growth has been significantly reduced.
As
acknowledged
by
the
Committee
report,
sustained economic growth addresses
both
structural
economic deficiencies and the
economic ills caused by recessionary trends.
In the absence of economic growth, however,
we must stand ready to assist victims of
downturn.
The
Council of Economic Advisors has
forecast that in 1980,
the economy will
experience a mild recession. They predict
that real GNP will decline by 1 percent
during 1980, then grow at a 2.8 percent
annual rate during 1981.
According to the
CEA,
accompanying this decline in inflation
will be an increase in the unemployment rate
to 7.5 percent in the beginning of FY '81.
The
CEA
further
predicts
that
the
unemployment
rate will experience only a
slight decline to 7.3
percent
by
the
beginning of FY '82.
The Joint Economic
Committee's Annual Report is slightly more
optimistic, referring to a continued consumer
spending
pattern
and
Federal
outlays,
associated with escalated military spending,
as potential sources of economic growth which
may prevent an economic downturn. A caveat
should be noted with respect to military
spending as a potential source of economic
growth. Any steep rise in military spending
for FY '81 will have the effect of locking us
into military production for
five to seven

235
years.
Long-term production contracts, for
military weapons, are large uncontrollable
budget outlays.
The growth of uncontrollable
outlays runs counter to the recommendations
of both the Council of Economic Advisors and
this Committee that Federal spending as a
share of gross national product be gradually
reduced. Uncontrollable outlays,
caused by
military spendino decisions today, reduce our
budget options in the out-years and are
certain to limit our ability to maximize the
impact of Federal outlays at some future
time.
I suggest we apply a great deal of
consideration to the
long-term
economic
impact of military spending.
I
simply cannot: endorse a policy of
spending limitations
in
the
midst
of
projections
of high unemployment,
little
economic growth,
international chaos
and
random
pricing
from
international
oil
cartels. A policy of spending limitations,
coupled with additional locked-in outlays for
military
spending,
will
render
the
discretionary human resource programs for
education, training and skill development
vulnerable
for
reduction.
Currently 77
percent
of
the
Federal
budget
is
uncontrollable by law or prior year contract.
Any additions to the uncontrollable portion
of
the
budget
complemented
with
the
imposition of a spending limitation will
impose constraints that will provide a budget
rationale for our reducing the discretionary
programs.
In hearings held before the Joint Economic
Committee, we had witnesses who discussed the
problems of the economy.
It was revealed
that the problem of unemployment must be
addressed with a Federal commitment to train
and
encourage
the
employment
of
the
structurally unemployed. This commitment is

58-205 0 - 80 - 16

236
met with Federal outlays targeted to the
regardless of a
unemployed
structurally
proviso that incorporates some relationship
outlays with gross national
Federal
of
product.
During periods of high sustained real
the uncontrollable portion of the
growth
compensation,
unemployment
as
budget
veterans' entitlements, social security, and
public assistance decrease as a proportion of
the gross national product. However, during
low growth and economic instability, we need
flexibility in Federal spending which will
afford options that may be employed to reduce
the
the impact and stimulate growth in
economy.
Chairman of the Domestic Monetary
As
Policy Subcommittee of the House Banking,
Currency and Housing Committee, I have long
promoted a policy of controlling the growth
of monetary aggregates thus limiting the
effect that an oscillating money supply has
a
Also,
investment in the economy.
on
is
targeted growth in the money supply
congruent with the Committee objective of a
This
inflation.
of
rate
reduced
recommendation is essential to the viability
of the American economy.
Despite considerable economic uncertainty,
the Committee is convinced that a $25 billion
I agree that we must
is in order.
tax cut
I, however, disagree
make immediate plans.
tax
billion
$25
additional
an
with
expenditure. Perhaps as a sound economic
alternative, the $25 billion deficit increase
could be allocated between a modest tax cut
countercyclical program
stand-by
a
and
The
targeted to areas of high unemployment.
Committee's efforts to enhance productivity
and bolster consumer disposable income are

237
admirable.
However, of equal importance is
the economic well-being of those marginal
workers who are victimized by unemployment as
well as inflation.
The Annual Report focuses on a point that
merits my underscore. Recessions are not an
economic vehicle used to control inflation.
As reported, "in order to lower the inflation
rate by one percentage point, using fiscal
and restrictive monetary policy alone,
we
have to throw a million people out of work
for two years." I emphasize this to be the
most important economic policy statement of
the report.
This section emphasizes that
Black unemployment is approximately twice the
White unemployment rate and hence
Black
workers are fired at twice the rate as White
workers during downturn.
In the traditional
Philips Curve argument, the trade-off depicts
Black workers as victims in an effort to
control inflation.
I support the Committee's
endorsement that this is an unbearable burden
for the Black communities of America.
Any tax expenditures designed to encourage
capital investment should be targeted to
small businesses,
the employment generating
sector of the economy.
In recent hearings
before the Joint Economic Committee, we heard
testimony that small businesses with less
than 20 employees created 66 percent of the
private sector new jobs,
and establishments
with 21 to 50 employees created 11 percent of
the private sector new jobs.
Thus,
77
percent of new employment generation from
1969
to 1976 was created in the
small
business sector. Medium and large businesses
(those with 500 employees or more)
generated
only 13 percent of the new private sector
jobs in the same period.
To stimulate growth
and development of the small business sector,
I recommend that the accelerated depreciation

238
tax expenditure be limited to the approved
definition of a small business.
I agree with efforts to target expenditure
thus insuring
for research and development,
to create
maximized
are
efforts
that
productivity
increase
advances,
technological
as the vanguard for product
serve
and
will upgrade the quality of
which
development
However, I also deem it necessary to
life.
reevaluate the tax provision which provides
for $1.7 billion loss in tax revenue because
large manufacturing corporations abuse the
provision which allows them to deduct costs
(expense costs) for research and development.
Evidence suggests that, of the total amount
claimed as research and experimental costs,
about 10 percent is basic research and 90
This tax
percent is product development.
potential impact of
the
reduces
abuse
research and development and provides no
productivity increase to the
appreciable
economy.
I commend the Committee's assessment of
I
the problems of structural unemployment.
commitment
for
need
the
over-emphasize
cannot
the
in
necessary to institute a shift
Federal
The
problem.
unemployment
structural
Government in cooperation with the private
sector must be willing to educate, train, and
the
hire the. lowest skilled workers in
Federal
committed
a
Without
economy.
training program and a willingness of the
hire the designated
to
sector
private
is
problem
the
structurally unemployed,
insurmountable
destined to escalate into an
task. The concentration of the structurally
unemployed, who are characteristically Black
and Hispanic, in urban areas heightens the
potential for tension if the problem is not
I commend Committee
adequately addressed.

239
emphasis of the problem and underscore as a
recommendation:
A Federal policy which encourages the
owned
and
minority
use of small
business
in urban areas where the
structurally
unemoloyed
are
concentrated.
The interaction of the small business
employment
generating
sector
with
the
unskilled labor force is a solution which
merits extensive economic investigation and
consideration as a solution to the problem of
structural unemployment.
This recommendation
is consistent with the goals of the HumphreyHawkins Full Employment and Balanced Growth
Act.
A growing small and minority owned
business sector offers a unique opportunity
for addressing basic long-term structural
problems by improving productivity,
lowering
inflation, and creating more jobs.
The Committee Report, in responding to the
has
provisions of the Humphrey-Hawkins Act,
the
statutory responsibility "to include
findings,
recommendations,
and
any
appropriate analyses with respect and
in
direct comparison to each of the short-term
and
medium-term goals set forth in the
Economic Report."
In recognition of the fact
that
the 4 percent unemployment goal by 1983
has been drastically deterred because of
Administration budget reductions in skill
development and training programs as well as
reductions in temporary employment programs
in the public sector,
it will be
more
difficult to meet the stated timetable.
The President's budget which reflects a
low figure of 450,000 job slots for CETA
II-D and VI is a major factor for the
Titles
delay
in meeting the stated unemployment

240
goals of the Humphrey-Hawkins Act. This lack
of commitment to the problem of unemployment
clearly violates the last-resort provisions
my
I must stand firm on
of the Act.
of
timetables
and
goals
commitment tht the
Act
Growth
the Full Employment and Balanced
I, therefore, cannot support
are attainable.
a policy that continues to procrastinate a
national commitment to reducing unemployment.
In meeting the goals of inflation as set
forth in the Humphrey-Hawkins Act, I suggest
that it is time to apply the mandatory
constraints of wage, price and profit control
on the economy. We must be prepared to take
action against the possibility of rampant
inflation destroying any gains we might make
our
of
recognition
In
year.
this
suppliers,
oil
international
to
vulnerability
it is obvious that the voluntary controls of
in
ineffective
are
Administration
the
in
profits
annual
reported
controlling the
percent,
131
Mobil's
percent,
Exxon at 111
They also are
and Texaco's 158 percent.
housing when
to
ineffective with respect
of a house
price
considering that the median
I commend
year.
last
increased 13 percent
statement
strong
its
the Committee report for
be an
not
should
that induced recession
However,
economic tool to counter inflation.
temper
to
commitment
adequate
without
controls,
mandatory
through
inflation
economic history will prevail and an induced
are
we
Before
recession will result.
and
overtaken by the experience of recession
double-digit inflation, let us move now to
impose a mandatory control of wages, profits,
prices and rents and make every effort to
meet the inflation goals as defined in the
Humphrey-Hawkins Act.
In conclusion, I must applaud the efforts
of the Chairman to address the long-term

241
problems of the structurally unemployed. I,
however, have reserved my right to endorse
this report because of its policy of spending
limitations,
inadequate response
to
the
problems of the cyclically unemployed, and
the lack of commitment to meeting the stated
goals of the Full Employment and Balanced
Growth Act.

SENATOR JACOB K. JAVITS
It is especially gratifying, in these
political
and
economic
times of grave
has
bipartisanship
that
instability,
prevailed and allowed a unified Committee in
this year's Joint Economic Committee Annual
Report to deliver what I believe to be the
prescription that will change the
right
economic direction of our country; diminish
our vulnerability to international economic
dislocations; buttress our national security;
advance
and
productivity;
improve
growth.
noninflationary
The dampening of inflation must be our
country's principal domestic concern, and so,
approve of the Report's comprehensive
I
that
havoc
analysis of the devastating
economy.
inflation has wreaked on our
share many of the concerns
I
While
especially
contained in the Report, and
support the Committee's effort to bring to
and
urgency
the
attention
national
decisiveness with which we must act to adopt
a long-run strategy of increased savings and
investment to increase productivity, some
additional comment is necessary, in my view,
productivity,
workers'
to
respect
with
Also,
energy, and the international economy.
I set forth here my reservations with respect
to the Annual Report's recommendation for a
tax cut in 1981.
We must avoid the policy pitfalls of the
1974-75 recession and be particularly wary of
tax reductions that increase consumer demand
(242)

243
but accomplish very little in terms
of
stimulating
investment for modernization of
machinery, equipment and
processes.
We
cannot ignore that the economy simply does
not now have the means to regain for the
American
people
recent losses in their
standard of living.
In my view, we can break the economic vise
in which we now find ourselves only if we
devote a much greater share of the gross
national product to investment. Hence,
only
a tax cut targeted toward generating largescale increases in savings and investment
will serve this objective.
I recognize,
however, the political realities are such
that to implement such a strategy, Congress
may be likely to seek to enact personal tax
cuts as well but these should be held to
readjusting tax brackets for inflation only.
The State of the Economy
It is a tragedy that recommendations of
past JEC Reports to address the
"triple
threat" of double-digit inflation,
rising
unemployment,
and
stagnant
productivity
continue to go unheeded.
Instead of bold action, the Administration
offers us an exceedingly
grim
economic
forecast for
the near term and for much of
the decade. A recession with unemployment
reaching 7 1/2 percent is expected -indeed,
counted upon -- to deal with the worst annual

inflation since 1944.
The
Administration's
stated
antiinflationary fight consists only of a promise
for a nearly balanced budget and a timorous
energy plan, while rejecting the notion that
a concerted effort to increase real economic

244
achieve the real standard of
growth will
living gains that have evaded us for the past
two years.
This is an unacceptable strategy. The
is
hard truth is that double-digit inflation
not abating, nor is-a meaningful reduction in
the
with
realistic
consumption
energy
place.
in
have
now
we
policies
We have neglected to maintain adequately
the traditional energizers of our economic
process

--

our

industrial

plant

and

development
and
our research
equipment,
facilities, our transportation system and our
business enterprises --

and,

therefore,

at

least part of our industrial base is lapsing
If we fail to galvanize
intoW obsolescence.
our energies and tailor our strategies now so
as to achieve the maximum efficiency from our
economy in the coming years, we risk an even
lower standard of living at home and an
increasingly vulnerable competitive stance
abroad.
In order to achieve these goals, the
to
have
American people may very well
in the
considerable sacrifices
undertake
I believe that they are prepared
short term.
if presented at the outset with a
to do so
detailed action program which has a real
of bringing
and for all,
once
chance,
and
proportions
inflation down to manageable
long-term
sustainable
for
the basis
setting
economic growth.
Productivity and Inflation
The major potential source for reductions
of
rate
the core
in
during the 1980s
inflation which has severely undermined our
built-in incentives to savings and investment

245
must
be improved productivity.
Only by
correcting our productivity problems will we
be able to develop solutions to the inflation
and unemployment that dominate the economic
outlook in the next few years. To achieve
this end, we must begin now to put in place
policies that will produce incentives for
saving, for working, and for investing.
I am
particularly pleased that efforts, such as
the exclusion on interest income for savings
and the accelerated depreciation proposal,
are now underway in the Congress.
As this
year's
Annual
Report will confirm,
the
downward readjustment of time limits
in
depreciation schedules is the most efficient
way we can address the core inflation rate.
while spurring new business investment.
Productivity will also be spurred by the
institution of additional incentives
for
youth employment, targeted training programs
(particularly those that encourage greater
linkages
between
the
school
and
the
workplace), and labor management committees,
which
will
improve
the climate at
the
industry level and reduce
tensions between
labor
and
management
in
noncollective
bargaining.
Energy
The United States cannot feel economically
or politically secure nor free in the conduct
of our
foreign policy until our increasing
dependence on foreign oil
is
significantly
lessened.
We
are
confronted
with an
immediate threat, not a gradual one.
Demand
for oil must be cut directly and by switching
to other more secure fuels where possible.
The free market mechanism is not sufficient
to achieve these reductions on a timely
basis.
Furthermore,
rationing solely by

246
price is unfair to the poor who would bear a
the economic
of
*share
disproportionate
impact. The answer is therefore conservation
through a manda-ory program.
Gasoline, made from premium oils, is the
the United
in
fuel used most wastefully
States and which offers the most opportunity
for such mandatory conservation.
reduction of our import levels
Also,
mandatory
should be achieved by strict,
demand reductions through conservation and
not by a quota as proposed by the President.
A quota system will create shortages which
will require a full-scale allocations and
entitlements svstem with all the predictable
red tape and inJustices which accompany such
regulation.
energy
mid-term
our
addition,
In
to
first,
be,
development priorities must
energy
more
make our economy significantly
coal
accelerate
to
second,
efficient;
investments
necessary
with the
utilization,
advance the
third,
to protect air cuality;
and,
solar and nuclear energy;
of
use
finally, to develop a series on a costbenefit basis of our other domestic energy
heavy
resources including all renewables,
oil, shale oil, tar sands and oil recoverable
by reworking of existing fields.
The International Economy
The crises in Iran and Afghanistan have
only added to the erosion of confidence we
leadership of the
are suffering in U.S.
The problems
system.
monetary
international
of a dollar subject to periodic sell-offs, a
continued large deficit in our trade balance,
performance, and
export
weak
still
a

247
overreliance on energy imports from the OPEC
countries must be resolved before confidence
can once again be restored adequately to the
world economy.
Once again, many of the oil consuming
developing
countries
are
facing
severe
balance-of-payments
deficits;
and
how the
OPEC surpluses, which were $40-50 billion in
1979
and in 1980 may be as high as $80
billion, will be recycled may very well be
the major dilemma facing the international
monetary system today.
It is estimated that, at the end of 1978,
medium and long-term indebtedness of nonoil
developing countries reached $270 billion, up
almost four-fold since 1973
($74 billion),
with U.S. commercial bank credit to these
countries totaling $52 billion in
1978.
Furthermore, the nonoil developing countries
will have to finance current account deficits
of around $20 billion in 1979 and about $40
billion in 1980; and even the deficit of the
Soviet bloc and Communist China may rise to
$12 billion.
Many of the commercial bankers who, as
late as early 1979, argued that the LDC debt
situation was manageable and that the banking
system would be able to provide the necessary
LDC credit, today are expressing alarm that
the
situation
may
be
deteriorating.
Innovative
approaches
to
meeting
the
recycling problem are thus needed to ensure
that
the
system will be able to deal
adequately with the most
recent OPEC oil
price shock.
We must insist that the IMF,
only contributed 3 percent of LDC
since 1974, play a greater role
the proper conditions for
this

which has
financing
in setting
recycling.

248
Given the increased perception of risk among
the commercial lenders, submission by the
deficit countries to IMF "conditionality"
before the banks will extend any further
commercial credit is a probable objective.
To ensure that these countries make use of
this IMF conditional financing at an early
stage of their payments difficulties, we must
lessen the amount of liquidity in world
financial markets.
and other major central banks
The U.S.
approaches,
creative
new,
must develop
possibly through the establishment of new
up
dry
to
off-market techniques, both
partially this excess liquidity and also to
meet the desire of both official and private
holders of dollars to diversify into other
currencies.
A Substitution
discussion in the
and other
(IMF),
"diversification"

Account, which is now under
International Monetary Fund
mechanisms for stemming the
tide, would also help.

Also, we must begin to consider seriously
relationship
some form of institutionalized
banks; for
commercial
the
and
IMF
between the
of
exchange
to
respect
example, with
these
to
lending
coordinated
information and
deficit-ridden LDC's.
In the final analysis, the fragility of
the monetary recycling system through the
Eurocurrency market will be reduced if and
when the OPEC surplus countries begin to
undertake a greater share of the risk in
recycling their funds directly to these oil
importing developing countries through direct
placements and investments.
To encourage and facilitate this move by
the OPEC surplus countries, commercial banks

249
could
provide
the
required
technical
assistance and, thus, take on a new role of
arrangers" rather than "underwriters" of
these loans. By assuming part of the actual
risk, the OPEC surplus countries would have a
greater incentive to a.ssure that their oil
pricing
policies
should
not wreck the
international monetary system than
if the
returns on their investments were in effect
guaranteed
because
they
are
made
by
commercial banks of deposit.
0