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98th Co n g ress

let',Session

R eport

SENATE

N o . 9 8 -1 5

THE 1983
JOINT ECONOMIC REPORT

REPORT
OF TH E

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
O N TH E

FEBRUARY 1983 ECONOMIC REPORT
OF THE PRESIDENT
T O G E TH E R W IT H

ADDITIONAL VIEWS

March 3 (legislative day, F ebruary 23), 1983.— Ordered to be printed
Printed for the use of the Joint Economic Committee

U.S. GOVERNMENT PRINTING OFFICE
16-336 O

WASHINGTON : 1983

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




JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 5(a) o f Public Law 304, 79th Cong.)
SENATE
HOUSE OF REPRESENTATIVES
ROGER W. JEPSEN, Iowa, Chairman
LEE H. HAMILTON, Indiana, Vice Chairman
GILLIS W. LONG, Louisiana
WILLIAM V. ROTH, Jr., Delaware
PARREN J. MITCHELL, Maryland
JAMES ABDNOR, South Dakota
STEVEN D. SYMMS, Idaho
AUGUSTUS F. HAWKINS, California
MACK MATTINGLY, Georgia
DAVID R. OBEY, Wisconsin
JAMES H. SCHEUER, New York
ALPONSE M. D’AMATO, New York
LLOYD BENTSEN, Texas
CHALMERS P. WYLIE, Ohio
MARJORIE S. HOLT, Maryland
WILLIAM PROXMIRE, Wisconsin
EDWARD M. KENNEDY, Massachusetts
DAN LUNGREN, California
PAUL S. SARBANES, Maryland
OLYMPIA J. SNOWE, Maine
B ruce R. B artlett, Executive Director
J ames K. G albraith , Deputy Director




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CONTENTS
Page




COLOt—

Chairman’s Introduction.........
Vice Chairman’s Introduction
Republican View s........................
Democratic V iew s........................................................................................................................
Current Services Budget Estim ates......................................................................................

49
101




SENATE

98th C o n g r e ss

1st Session

R eport

No. 98-15

REPORT ON THE FEBRUARY 1983 ECONOMIC REPORT OF
THE PRESIDENT

M arch

3 (legislative day,

Mr.

Jepsen ,

F ebruary

23), 1983.— Ordered to be printed

from the Joint Economic Committee,
submitted the following

REPORT
together with
ADDITIONAL VIEWS
[Pursuant to sec. 11(b)(3) of Public Law 304 (79th Cong.), as amended]

This report is submitted in accordance with the requirem ent o f
the Employment Act o f 1946 that the Joint Econom ic Committee
file a report each year with the Senate and the House o f Repre­
sentatives containing its findings and recommendations with re­
spect to each o f the main recommendations made by the President
in the Economic Report. This report is to serve as a guide to the
several committees o f Congress dealing with legislation relating to
econom ic issues.




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C H A IR M A N 'S INTRODUCTION
R o g e r W . J e p s e n , USS

This Report o f the Joint Econom ic Committee is released in an
atmosphere o f growing optimism about the economy. For the past
two months, the econom ic statistics have pointed in one direction—
recovery. More im portantly, the broad and strong advance o f eco­
nom ic indicators provides evidence that the recovery will be strong­
er than anticipated.
In this Report, we look at Am erica's future and recommend poli­
cies that w ill provide a long and continuous recovery. Such a recov­
ery is the only way to perm anently attack our serious unemploy­
ment problem. Policies that are good for the short run but jeopard­
ize the recovery must be rejected. The “quick fix” is the w orst o f
all possible solutions. Concerning unemployment, Congress w ill
soon pass legislation providing assistance to the unemployed. How­
ever, no governm ent training and em ploym ent program w ill be suc­
cessful unless there is a recovery. Therefore, we must overcom e the
barriers to a durable recovery. We must remember that the most
powerful governm ent weapon is to reduce structural unem ploy­
ment, or unemployment caused by a lack o f labor skills. This
Report recommends that the hard-core unemployed be provided
em ploym ent and training in the private sector through governm ent
incentives to business.
First and forem ost, we must attact the large deficits that cloud
*our future. This Report is adamant that the deficit must be at­
tacked prim arily on the spending side and lastly on the tax side.
W e believe that entitlem ents programs and defense spending as
w ell as all other areas o f the budget must be scrutinized or reduc­
tions in the rate o f expenditure increase.
Tax increases must not be the scapegoat for deficit reduction.
The last Adm inistration tried to balance the budget by increasing
taxes—in fact, doubling taxes in only four years—and the result
was the beginning o f the three years o f no real econom ic growth.
Some tax increases may be necessary but only as a last resort; only
when we have gotten control o f spending.
Inronically, one o f the m ajor causes o f our current deficit has
been the welcome, rapid decline in inflation. As inflation has de­
clined to only about a third o f what it was when Ronald Reagan
took office, governm ent has been justly denied the revenues de­
rived from inflation pushing taxpayers into higher and higher tax
brackets. This is not to argue that we should use inflation to bal­
ance our budget, as I fear some are quietly advocating. If we return
again, have excessive m onetary growth, we w ill again have surging
inflation. And it must be noted that this higher rate of inflation
w ill not cause real econom ic growth to occur, but w ill in fact lead




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4

to another recession. Inflation in not our ally; it is our most debili­
tating enemy. _
The Federal Keserve in the past two years has, at crucial times,
severely restricted the growth o f the money supply. I believe that
this caused the recession in 1981, and prolonged it in 1982. I hope
that the Federal Reserve w ill be m ore accom m odative in the early
stages o f this recovery. But the Fed should be warned that efforts
to “ print” our way out o f our econom ic problem s w ill not be
tolerated.
The econom ic slump o f the United States has been matched by
econom ic slump around the world. It is unfortunate that many for­
eign governm ents have sought to protect their econom ies by creat­
ing barriers to imports which subsidizing their exports. The United
States should assure all foreign countries that w ill not allow their
barriers against ours and all other products to stand. The world
econom y in 1982 was also marked by an international debt crisis.
The Administration has moved forcefully to provide funds to the In­
ternational M onetary Fund to provide insurance that the crisis w ill
not lead to worldwide econom ic disruption. I support the Adm inis­
tration’s IMF proposal.
Finally, I represent a state that has a wide range o f agricultural
interests. It is not unusual, therefore, that I should attempt to
champion the cause of Am erica’s farm ers. But I suggest that
anyone—whether they be Republican or Dem ocrat, conservative or
liberal, rural or urban dweller—should be horrified at the eco­
nomic condition o f the Am erican farm er. The Am erican farm er,
the most productive worker in the world, has been victim ized by
his own success. His ability to cheaply produce mass quantities o f
food, and his willingness to share his technical expertise with the
less fortunate on this planet, have helped to drive down the prices
o f his products and reduce his profits to Depression levels.
The problems o f the Am erican farm er did not begin a year or
two or five years ago. And, just as im portantly, the econom ic
misery o f the Am erican farm er w ill not end with the beginning o f
this recovery. But if must not be viewed as a final step. We must
begin a wide-ranging debate on how to im prove the agricultural
sector o f our econom y. Failure to do so w ill lead to econom ic and
human suffering faster than any other failure. That debate must
start and it must start now.
These are the policy recom m endations that I believe w ill give us
a better econom y and stronger society. The econom ic condition o f
the econom y is growing stronger and the nation can once again
look at the future with confidence. Let us all hope that this recov­
ery w ill have the chance to provide a better life for all Am ericans.
I want to thank the Republican! Members o f this Committee for
their hard work in writing this Report. W e Republicans have con­
ducted our negotiations with vigor but have always maintained our
personal honor. I am proud to occupy the chair o f a com m ittee
with these honorable men and women as Republican Members.




VICE C H A IR M A N 'S INTRODUCTION
L e e H. H

a m il t o n ,

M .C.

The Democrats' report on the state o f the econom y is notable for
two reasons. It faces up to the m ajor issues before Congress, includ­
ing m onetary policy, jobs, taxes, defense, entitlem ents, and the In­
ternational M onetary Fund. Also, it is a unified report which,
given the diversity o f Democrats on the com m ittee, reflects a grow­
ing consensus on econom ic policy among Democrats in Congress.
W e must have strong and sustained econom ic growth. That is
our basic message and our basic goal.
For the shorter term, the Federal Reserve should set m onetary
policy to achieve low real interest rates this year. W e are not per­
suaded that the Federal Reserve cannot control interest rates be­
cause we have seen that the easing o f money since last summer
has brought about lower interest rates.
Other steps need to be taken to get the econom y growing this
year. Because the growth must be based on principles o f fairness,
Congress should enact a significant jobs program , provide addition­
al support to low-incom e people, extend the federal unem ploym ent
compensation program, give fiscal assistance to state and local gov­
ernments, and place a cap on this year's scheduled incom e tax cut.
For the longer term, we propose a vigorous deficit-reduction pro­
gram whose fundamental aim is to keep the econom y growing. Per­
sonal income tax indexing should be repealed. Inefficient and re­
gressive tax expenditures should be elim inated. There should be no
broad-based tax on consumption.
To keep econom ic growth from being choked o ff by excessive
spending, increases in the m ilitary budget should be slowed and en­
titlem ent programs must be reviewed for ways to reduce budget
deficits. Both these categories o f federal spending m erit scrutiny.
Economic growth can be sustained only if inflation is held in
check, if productivity increases, and if the productive capacities o f
people are used.
R elief from inflation last year was principally due to the reces­
sion. Placing such a heavy burden on one segment o f the popula­
tion was unnecessary and unfair. A better way to hold down the
wage-price spiral would be to forge a consensus anti-inflation policy
based on the cooperation o f business, labor, and government.
The federal governm ent should look to boost productivity and
open up opportunities for productive work by strengthening job
training programs, im proving education at all levels, providing
m ore support for civilian research and developm ent, and m oderniz­
ing public infrastructure.
Finally, the federal governm ent must fulfill its international re­
sponsibilities. This means ending the overvaluation o f the dollar
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16-336 0 - 8 3 - 2




6
and seeking proper enforcem ent o f trade laws while insisting on
th© elim ination o f bsrriors to our exports.
The requested increase in the lending authority o f the Interna­
tional M onetary Fund should be approved. That action should be
accom panied by a tightening o f oversight o f foreign lending.
W e must com e to understand that econom ic growth depends
more than ever before on events taking place beyond our shores.
In sum, the Dem ocrats on the com m ittee are united behind a
program that is sensible, com prehensive, and workable. It empha­
sizes econom ic growth. W hat it envisions is realistic and what it
asks is fair.




REPUBLICAN VIEWS ON THE FEBRUARY 1983 ECONOMIC
REPORT OF THE PRESIDENT




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CONTENTS
Page

I. Review and outlook....................................................... >.................................................
Recommendation: The present economic recovery will be stronger
than the Administration currently forecasts. Economic policy in
1983 should focus on prolonging the recovery.
II. Employment policy..........................................................................................................
Recommendation: For the long run, the Congress and the Adminis­
tration should direct their efforts to a job training program to
reduce structural unemployment. These programs should empha­
size the training of the hard-core unemployed by broad use of the
private sector.
III. Fiscal policy..........................................................................................................................
Recommendation: Persistent Federal deficits must be reduced. Strict
review of Federal expenditures is necessary. W e reject proposals to
reduce deficits by raising taxes that could cut short the recovery.
IV . Tax policy..............................................................................................................................
Recommendation: No major tax increases should be enacted. The
third year of the tax cut and indexation should be preserved.
V . Monetary policy.................................................................................................................
Recommendation: W e recommend that the Federal Reserve gradually
decrease money growth to a range that is consistent with normal
long-term GNP growth and low inflation. W e warn against keeping
money growth too fast, too long. That would produce another “ca­
lamity boom.” W ith a lag of about two years, inflation will surge
once more, making another recession inevitable.
VI. International.......................................................................................................................
Recommendation: The United States should step up efforts to in­
crease exports to foreign markets and encourage action to lim it
protectionism around the world.
V II. Agriculture .......................................................................................................................
Recommendation: The Administration and the Congress should im ­
mediately consider major changes in supply-control and demand­
enhancing farm policies and programs. Market discipline can be
improved, thereby reducing the budgetary cost of farm private
support programs, while at the same time improving the financial
picture of American farmers.
Additional views.........................................................................................................................




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11

14

18

23
28

31

35

39




I. R eview

and

O utlook

Recommendation

The present economic recovery will be stronger than the Adminis­
tration currently forecasts. Economic policy in 1983 should focus on
prolonging the recovery.
The econom ic recovery has begun. This is a welcome develop­
ment, but like all recoveries it is surrounded by many questions.
Foremost is: W ill this recovery be strong enough to lift the econo­
my out o f the doldrums it has been in since 1979? There are no
more telling statistics concerning our econom ic problems than that
the country has had no real econom ic growth since the fourth
quarter o f 1979 and that unem ploym ent has been rising for over
three years.
The greatest threat to this recovery would be to direct future
econom ic policy at the past recession. Efforts by the Federal Gov­
ernment to “ spend” our way to recovery or efforts by the Federal
Reserve to “ print” our way to econom ic health after this recovery
has already begun w ill only sow the seeds o f our next recession. W e
would be com m itting the same errors that have caused this decadelong decline in our econom ic fortunes. Instead o f looking back, eco­
nomic policy should focus on ways to sustain the present recovery.
The present expansion seems to be developing along traditional
lines, in that it is being led by recoveries o f the housing and the
auto industries. Housing starts in January, 1983 o f 1.7 m illion
units (annual rate) were almost double what they were in June
1982 and 36 percent above December. Housing perm its, which pro­
vide an indication o f future housing activity, increased to an
annual level o f 1.5 m illion units in January which is 16 percent
above December and almost double the annual rate o f last August.
The autom obile industry began a strong surge in late 1982. The
seasonally adjusted industrial production index for autos rose 25
percent from Novem ber 1982 to January 1983. Domestic auto sales
have also turned around. From December through the first ten
days o f February, they have averaged 6.1 m illion, seasonally adjust­
ed annual rate, com pared to 5.8 m illion for the year 1982 as a
whole. Most im portantly, rising auto sales have resulted in “ call
backs” o f laid-off workers at some auto plants.
The housing and auto expansions are a direct result of falling in­
terest rates. The prim e interest rate which peaked at 21.5 percent
in December 1980, and was as high as 16.5 percent last summer, is
presently at 10.5 percent. M ore im portantly, market interest rates
have fallen almost as dram atically. The 90-day Treasury bill rate
was 13.65 percent a year ago, it is now 8.01 percent. Long-term in­
terest rates have also fallen. The rate on 30-year Treasury bonds
has fallen from over 14 percent last February to under 11 percent
this month.




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12

Other recent econom ic signs that the recession is over are the 4.5
percent increase in durable orders in January; the 0.9 percent in­
crease in industrial production in January, the second rise in a row
follow ing declines in nine o f the ten previous months; and a 1.5
percent rise in the index o f leading indicators in December, the
eighth rise in the last nine months.
Perhaps the measures most often used by the public to determine
the econom ic health o f the country are inflation and unemploy­
ment. In fact, President Carter even popularized a term known as
the “ m isery index,” which consisted o f the inflation rate plus the
unemployment rate. In the case o f inflation, the increase in the
Consumer Price Index o f 3.9 percent for 1982 was the smallest in­
crease in the indicator since 1972. In fact, an actual reduction in
the price level itself occurred in a recent month. Other measures o f
inflation showed sim ilar rem arkable progress. The increase in the
prices for finished goods o f producers was 3.5 percent in 1982, onehalf their rise in 1981 and less than a third o f their rise in 1980.
The gross national product im plicit price deflator increased by 6
percent in 1982, compared with 9.4 .percent in 1981.
The disastrous unemployment problem in this country shows
some signs o f turning around. The civilian unem ploym ent rate in
January fell to 10.4 percent from 10.8 percent in December.
Though some o f this decline is the result o f an inaccurate seasonal
adjustment process, the January figures do show significant im ­
provement in the em ploym ent picture. Initial claim s for unem ploy­
ment insurance have declined by 200,000 from their peak in early
September. The defusion index, w hich measures the percentage o f
firms increasing employment, passed the critically significant 50
percent mark last month. The average workweek also increased,
signaling that production has started to increase. Employment in­
creased in the sensitive construction and retail trade sectors and
payroll employment increased by 340,000 in January, after season­
al adjustment.
Our econom ic problems cannot be ignored because a recovery has
begun. The absence o f econom ic growth over the past three years
has significantly worsened unemployment. W hile Congress should
enact short-term programs to help the unemployed, these programs
should be viewed as tem porary assistance and not as substitutes for
productive jobs. Only if this recovery is long and robust w ill a real
solution to unemployment be found.
For the present recovery, the Adm inistration forecasts real GNP
growth in 1983 o f 3.1 percent (4th quarter over 4th quarter). Com­
pared to most private forecasters, this is a very pessimistic outlook.
Blue Chip Indicators, which surveys 45 blue chip companies for
their economic forecasts, puts the growth rate for 1983 at approxi­
m ately 4.5 percent. A ll but two o f the 45 econom ic forecasts have
m ore optim istic estimates for growth in 1983 than the Adm inistra­
tion. More im portantly, as signs o f the recovery becom e increasing­
ly clear, most private forecasters have changed their estimates to
show even faster real econom ic growth in 1983.
The Adm inistration is not unmoved by such “ outside” advice.
Martin Feldstein, the Chairman o f the Council o f Economic Advis­
ers, testified before the Joint Econom ic Committee that he would
not be surprised if real econom ic growth in 1983 reached 5 percent.




13

The reason for the discrepancy between Dr. Feldstein’s “ official”
forecast and his “ unofficial” forecast was that the official forecast
was made early in January while his testim ony was given in Feb­
ruary. No one can be sure o f the precise date that recovery began.
In early January it was not as clear as it is now that the bottom o f
the business cycle was in December. The earlier the recovery
begins, the more econom ic growth when com paring 1983 to 1982.
Virtually all forecasters are projecting a recovery far stronger than
anticipated just a few months ago.
The Republican Members o f the Joint Econom ic Committee join
those who believe that the econom y will perform better in 1983 and
1984 than the Adm inistration currently forecasts. We hope to focus
attention on the need to make our econom ic perform ance better in
1985, 1986 and beyond. Consequently, we must not take any steps
that w ill jeopardize the future o f this recovery. We advise against
resorting to unnecessary tax increases in an effort to stim ulate eco­
nom ic growth. In this regard, we believe that the third year tax cut
and indexation should be preserved.
In setting forth our econom ic policy agenda, we should remember
that our econom ic difficulties did not begin, and w ill not end, with
the recent recession. We must set out sights on m aking the future
better, rather than trying to correct the past. To meet our chal­
lenges we offer the following recommendations and report.

16-336 O

83




3

II. E mploym ent P olicy
Recommendation

For the long run, the Congress and the Administration should
direct their efforts to designing a job training program to reduce
structural unemployment These programs should emphasize the
training o f the hard-core unemployed by broad use o f the private
sector.
Progress against inflation in recent years has had a harsh, and
probably unavoidable im pact on the N ation’s working population.
The unemployment rate rose persistently month by month over the
past several years as the N ation’s econom y receded. By December
o f 1982, the size o f the unemployed labor pool swelled to 12 m illion,
or 10.8 percent o f the N ation’s labor force.
The December unemployment rate was the highest level since
the Great Depression o f the 1930’s, but it also signalled a turning
point in the economy. The unemployment rate droped to 10.2 per­
cent by January 1983. The Republican Members believe that this
drop although small, provides a strong signal that the econom y has
turned the corner and is on the rebound. Though the unem ploy­
ment rate may move up slightly from the 10.2 percent in com ing
months. Most experts believe that it w ill not again reach its De­
cem ber high. The sharp rise in January factory hours and the
broad-based advance in the Bureau o f Labor Statistics diffusion
index o f employment change are other im portant labor m arket in­
dicators that signal an upturn in labor markets. The drop in unem­
ploym ent benefit claims for newly unem ployed workers in Febru­
ary provides additional collaborating evidence.
The impact o f unemployment varies unevenly among demo­
graphic groups. Blacks experienced a 19.0 percent unem ploym ent
rate in January 1983 in comparison with a 9.1 percent for their
white counterparts. The unemployment rate for women who main­
tain fam ilies was 13.2 percent. Age also makes a difference. Over
22 percent o f workers in the 16 to 19 age group were unemployed,
in com parison with an unemployment rate o f 9.6 percent for men
and 9.0 percent for women over age 20. The near doubling o f the
unem ploym ent rate for men over age 20 since 1977 reflects im por­
tant structural changes in the N ation’s econom y. Unem ploym ent
for the first tim e is reaching deeply into the ranks o f the blue
collar workers in the basic goods industries such as autom obiles,
steel and rubber.
Regional variations in labor market impacts are also prevalent.
States in the m anufacturing belt such as M ichigan, Ohio, Indiana,
Illinois, W isconsin, and Pennsylvania all had unemployment rates
w ell above the national average. Sunbelt and W estern states such
as South Carolina, Alabama, California, Mississippi, W ashington,
Nevada, and Oregon, also had unemployment rates w ell above the




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15

national average. On the positive side, 31 states had unemployment
rates below the national average in 1982. The states with the
lowest unemployment rates included Texas, Connecticut, Kansas,
Massachusetts, Verm ont, Oklahoma, South Dakota, and Hawaii.
We believe that the N ation's em ploym ent outlook is encouraging
and w ill be reflected in a sizable reduction in the N ation's unem­
ployment rate as the recovery gains additional momentum. The de­
cline in the unemployment rate typically follows an upturn in
GNP by two or three quarters (Table 1). Assuming the first quarter
o f 1983 marks the turning point in the recovery, which we believe
it does, it w ill be mid- to late 1983 before we see a significant de­
cline in the unemployment rate. Over the next few months, the un­
employment rate may edge up slightly as a result o f statistical
aberations, but the trend should be clearly downward.
TABLE ll.l.— THE LAG BETWEEN THE UPTURN IN THE BUSINESS CYCLE AND THE DECLINE IN
UNEMPLOYMENT OVER THE LAST FOUR BUSINESS CYCLES
Quarter of upturn in GNP

61-11...
70-111
75-11...
80—IV..

Quarter of downturn in unemployment

61—IV
72-1..
76-1..
81-111

Lag between GNP and
unemployment movement

2
7
3
3

1 Beginning with second quarter 1970, GNP turned upward for two quarters, downward in fourth quarter 1970 and then steadily upward until
first quarter 1974. If the cycle upturn is dated from first quarter 1971 the lag in the turn of the unemployment rate is four quarters, giving an
average for the four cycles of three quarters.

The rate o f decline in the unem ploym ent rate beyond 1983 w ill
depend upon the speed o f the recovery. The modest recovery fore­
seen by the Reagan Adm inistration w ill result in a projected unem­
ployment rate o f 8.9 percent in 1985 and 6.5 percent in 1988. The
more robust recovery that we foresee w ill create jobs at a much
faster pace. A drop in the unem ploym ent rate to approxim ately 8
percent by 1985 is clearly possible.
The Republican Members firm ly believe that econom ic recovery
and an expansion in the N ation's productive capacity is the best
jobs policy for the unemployed in the long run. As Richard Lesher,
President o f the United States Chamber o f Commerce, recently put
it, “ Last month alone, the econom ic recovery increased jobs by
339,000. How many billions of tax dollars would it take to legislate
jobs at that rate? And at what cost to the economy?
However, because o f the shifts in the structure o f the nation's
economy, many workers find that their labor skills are no longer
significantly demanded in the labor market. These structurally un­
employed workers w ill not find satisfactory employment in the
near future, even if the recovery is strong. To aid their retraining
and employment prospects, Congress and the Adm inistration
should establish programs that hasten their return as a productive
member o f the labor force.
To understand why Federal efforts should aim at retraining, the
causes o f unem ploym ent must be put into clear focus. Economists
have identified three sources o f unemployment: cyclical, frictional
and structural. Cyclical unemployment, which accounts for about
one-third o f the current unemployment, occurs when the econom y




16

is in a slump and vanishes when the econom y rebounds. The best
employment policy for workers affected by cyclical unemployment
is an econom ic recovery. Frictional unemployment occurs as a
result o f the approxim ately four m illion workers who change jobs
or enter and leave the labor m arket each month. These workers
are voluntarily unemployed in that they willingly forgo current
employment to search for better paying, and/or m ore challenging
jobs. Econom ic recovery cannot reduce frictional unemployment,
and may even increase it as more workers attempt to use the mo­
bility route to upgrade their em ploym ent status.
The third category, the structurally unemployed category, con­
sists o f individuals who are w illing to work at the prevailing wage
but they lack the necessary skills and experience to find a job.
Women, youth, and m inorities make up a disproportionately large
share o f the structurally unemployed, but it also includes many
blue collar workers who w ill not be reem ployed as the econom y re­
covers because their form er jobs have been perm anently elim inat­
ed. These displaced workers are entering the ranks o f the structur­
ally unemployed at a much higher rate than in the past. They are
a “ fallout* from shifts in the N ation's industrial structure to a
more service and high tech orientation. The best alternative for
workers in the structurally unemployed class is to acquire the nec­
essary skills to compete for jobs in new industries. Unfortunately,
these workers may not be able to acquire new skills easily on their
own. It is in this regard that governm ent efforts can have their
greatest employment impact. Some suggest that minimum wage
laws provide a barrier for the structurally unemployed youth who
would work at lower wages although the jobs are unavailable be­
cause employers w ill not hire youth at the minimum wage rate.
For other workers, including the displaced workers, job training
geared to the expanding service and high tech sectors provides a
promising alternative to upgrade econom ic status and find alterna­
tive employment.
Job creation efforts, both in the public and private sector, must
take into account the special em ploym ent o f women. The different
fam ily responsibilities and em ploym ent needs o f women should be
recognized, and provisions for the developm ent o f alternative work
schedules should be encouraged. Retraining programs should in­
clude an effort to prom ote em ploym ent o f women in non-traditional
occupations.
Strong efforts should be made to address wage and job discrim i­
nation toward women.
The econom ic recovery cannot be expected to restore full em ploy­
ment without creating excessive inflationary pressures unless the
Nation's productive capacity is expanded. The dynamics o f job cre­
ation explain why. During recovery, em ploym ent expands as idle
capacity is diminished, and furloughed workers are reemployed.
However, as stated, many form er employees in the basic goods in­
dustries and others w ill find their old jobs elim inated. New jobs
must be created for the displaced workers, the new entrants into
the labor m arket and those structurally unemployed workers who
lower their reservation wage or upgrade their skills. The new jobs
w ill occur in the private sector as the N ation's productive capacity
expands, but for productive capacity to expand, real investment in




17

existing businesses and in new business starts must increase. The
Republican Members maintain that higher rates o f real investment
and business form ation are critical to a public policy to restore full
employment in the labor market without rekindling inflationary
pressures.
Job training assistance to promote the upward m obility o f the
semi-skilled and unskilled workers, the structurally unemployed,
and the econom ically disadvantaged workers has much merit. The
em ergence o f the inform ation economy offers a bright future for
Am erica, but the transition is painful and filled with much uncer­
tainty and a sense o f hopelessness for m illions o f Am ericans. Indus­
tries like computers, research, semiconductors, telecom m unica­
tions, robotics, biotechnology, chemicals, and aerospace w ill create
m illions o f new jobs over the com ing decades. Many o f the new jobs
w ill be within the high tech-oriented sectors but a larger number
w ill be in the traditional sectors o f the economy. Many businesses
in the finance, insurance, m anufacturing, medical, services, whole­
sale and retail, and other industries are regaining a com petitive
edge in the world marketplace by adopting the new advanced proc­
ess technologies. The new wave o f technologies is creating tem po­
rary labor market distortions but at the same tim e it is a major
source o f new job growth for the economy.
The labor market im plications o f the computer-based inform a­
tion age that we are just entering are not fully understood, but it is
clear that the nature o f work and the workplace is changing. A
public policy to retrain displaced workers and facilitate the upward
m obility o f other workers caught in dead-end jobs can do much to
facilitate labor market adjustments and m itigate the adverse im­
pacts associated with econom ic change.




III. F iscal P olicy
Recommendation

Persistent Federal deficits must be reduced. Strict review o f Feder­
al expenditures is necessary. We reject proposals to reduce deficits by
raising taxes that could cut short the recovery.
Prospects o f $200 billion-plus Federal deficits, representing 5 to 6
percent o f GNP over the next few years, are taking the U.S. econo­
my into uncharted waters. Most financial analysts, the Congress,
and the Adm inistration are frightened by the risks such unprec­
edented deficits pose—crowding out in private credit markets, in­
flation, and high interest rates. We share the public concern over
huge deficits. We recognize the im portance o f deficit reduction, but
we caution against making deficit reduction the sole aim o f eco­
nom ic policy. The first goal o f policy must be sustaining non-inflationary econom ic growth. We believe that such growth w ill, in
large part, help deal with the deficit problem.
In the first place, budget projections are, at best, tenuous, and
m ajor policy decisions based on outyear projections must be made
cautiously. Deficits are among the most difficult o f all econom ic
measures to forecast. They are dependent on and are a com posite
of, numerous econom ic and political variables: inflation, unemploy­
ment, interest rates, GNP, governm ent spending patterns and pro­
cedures, acts, o f nature and a host o f other things which them­
selves are hard to predict. Thus, outyear budget estimates should
be recognized for their inherent weaknesses.
The follow ing table shows the projected budget deficit (or sur­
plus) in the Budget Messages o f the Presidents for the years indi­
cated, and the actual deficit (or surplus) for those years:
TABLE lll.l.— PROJECTING THE DEFICIT
[Administration budget messages for years indicated versus actual budget results; in billions of dollars]
Projected deficit ( - ) or surplus
(+ )

Year

1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
1969




-9 1 .5
-4 5 .0
- 1 5 .8
-2 9 .0
- 6 0 .6
-5 7 .7
- 4 3 .0
- 5 1 .9
-9 .4
- 1 2 .7
-3 8 .8

11.6

-

+ 1.3
+ 5 .8
-

(1 8 )

8.0

Actual deficit ( - ) or surplus
(+ )

— 1 207.7
-

110.6
- 5 7 .9
- 5 9 .6
- 2 7 .7
- 4 8 .8
- 4 4 .9
- 6 6 .4
-4 5 .2
-4 .7
- 1 4 .8
- 2 3 .4
- 2 3 .0
-

2.8

+ 3 .2

19

TABLE lll.l.— PROJECTING THE DEFICIT— Continued
[Administration budget messages for years indicated versus actual budget results; in billions of dollars]
Year

Projected deficit ( - ) or surplus

1968.......................................................................................................
1967.......................................................................................................
1966.......................................................................................................
1965.......................................................................................................
1964..................................................................................................................

(+)

-2 .1
-1 .8
- 5 .3
-4 .9
- 1 1 .9

Actual deficit ( - ) or surplus

(+)

-2 5 .2
- 8 .7
-3 .8
- 1 .6
- 5 .9 1

1 Estimate.
Source.- Congressional Quarterly and Office of Management and Budget.

Recent deficit estimates have been far o ff the mark on the low
side. We believe that current estimates o f future deficits may be as
far o ff on the high side.
Our basic message is that deficits should not drive econom ic
policy, but econom ic policy should drive out the deficits. Reasoned
econom ic policy aimed at solid long-run econom ic growth should be
the aim, with deficit reduction an im portant object o f that policy,
but not its only object.
We are very concerned about the prospect o f mammoth deficits.
We believe they should be reduced and ultim ately eliminated by
persistent expenditure control and by policies to prom ote econom ic
growth. We reject proposals for m ajor tax increases since, as in the
past, this would accelerate growth in governm ent and reduce pri­
vate econom ic growth.
The upward tilt in Federal deficits has been many years in the
making, growing out o f demand-oriented econom ic policy, in which
the government has been called on to solve one problem after an­
other by creating new programs or by providing new injections of
funds into existing programs. Elim ination o f such deficits w ill take
many years. To try to do it all at once could be a jolt to the eco­
nomic system. The im portant signal to the financial markets is
that we are pointed in the right direction and the policies are in
place or being adopted to reduce the deficits in 1984 and after­
wards. The actual direction is more im portant than the speed at
which deficits are reduced.
In approaching spending reductions we must discard the notion
o f “ uncontrollable'' budget items. As generally defined, “ uncontrollables” include open-ended programs such as Social Security and
railroad retirem ent, Federal employees retirem ent and insurance,
unemployment assistance, medical care, assistance to students, food
and nutrition assistance, and public assistance; net interest; gener­
al revenue sharing and farm price supports (CCC). These relatively
uncontrollable items in the budget presently account for nearly 60
percent o f the Federal budget. If outlays from prior-year contracts
and obligations are included, the ratio o f relatively uncontrollable
outlays rises to over 75 percent.
We believe the concept o f uncontrollable budget items should be
abolished, except in the case o f interest on the debt. Even interest
costs can be controlled to a modest degree by sound policies to
reduce interest rates. The entire budget deserves continual Con­
gressional examination.




20

Since it would require a 100 percent elim ination o f the relatively
controllable budget items (making up 25 percent o f the budget) to
elim inate the budget deficits (e.g. $204 billion in “ controllable” na­
tional defense and civilian expenditures out o f total budget expend­
itures o f $848 billion in Fiscal Year 1984), it is clear we w ill have to
turn to the big ticket items to accom plish the task—entitlements.
The Social Security program is a pay-as-you-go program, which
affects the overall Federal budget. To think o f Social Security as a
trust fund operation, separate and apart from the overall Federal
budget, really has no meaning. Every Social Security tax dollar is a
Federal budget revenue dollar, and every Social Security benefit
payment is a Federal budget outlay; it involves substantial sums o f
revenues and outlays and is getting bigger all the tim e. Even if we
still had a large Social Security Trust Fund surplus, which we do
not, the m oney com ing in is not as great as the m oney going out
and the im pact on the budget and on the econom y is very real and
very direct.
The rate o f rise in Social Security benefits should be reviewed.
We suggest the review o f long-term payments and do not propose
cuts in benefits. The National Commission on Social Security
Reform (NCSSR) has reported out a package o f proposal to cope
with the rising gap in Social Security outlays and revenues. The
entire package deserves fair consideration by the Congress. Several
of the Commission recommendations would have major impacts on
the trust funds, although impacts on the Federal budget deficits
would be considerably less than on the trust funds, because about
one-third o f the $168 billion package represents either transfers
from the general fund or amounts that would be offset by increases
in spending for other Federal programs or by reduced tax revenues.
The NCSSR proposed that OASDI benefits be reduced by enact­
ment o f a permanent six-month delay in the annual cost-of-living
adjustment. Thus the annual (COLA) payable in June (received in
July) would be paid in December instead (received in January). The
Congressional Budget O ffice estimates this would reduce OASDI
payments by $24.1 billion over fiscal years 1983-1988, although this
would be offset by $4.2 billion in payments to Supplemental Secu­
rity Income recipients (welfare recipients) who would be allowed to
retain $30 more in total benefits each month to offset the im pact o f
the Social Security COLA delay.
The National Commission also recommended that, beginning in
1988, COLA adjustments be based on the lower o f the CPI increase
or the increase in wages, if the fund ratio (fund balance as a per­
centage o f the fund outgo) is less than 20 percent. No estimates o f
the cost savings have been made, but suffice it to say the savings
would be substantial.
The shift to the low er o f wage indexing or the CPI indexing, ef­
fective in 1984, m ight be a good way to slow Social Security outlays
without serious hardship to recipients. The reason why Social Secu­
rity outlays have grown faster than revenues in the recent past is
that prices have risen faster than wages and salaries since 1979
and Social Security benefits are adjusted by the CPI, while payroll
tax revenues increase with the growth o f the wage base. If benefit
COLA’s were put on a wage base adjustment, recipients would still
receive increased benefits, although at a lesser rate, but the overall




21

impact on the trust funds and the Federal budget would be very
beneficial.
W ith regard to defense spending, we must remember that the
U.S. defense posture vis-a-vis the Soviet Union has deteriorated
over the past decade. No one seriously questions that. Also, nation­
al defense outlays as percent o f GNP declined from 8.1 percent o f
GNP in 1970 to 5.3 percent in 1980. Not that any particular ratio is
sacrosanct, but coupled with the continued Soviet build-up, these
declining ratios mean that the U.S. m ilitary spending must rise rel­
ative to the GNP and relative to the total budget. However, the
rise need not be as rapid as the Adm inistration originally proposed.
There is room for a scale-back or stretch-out in military spending
increases. From a total o f $215 billion in 1983, m ilitary spending
w ill rise to $386 billion in 1988, and the ratio to total budget out­
lays w ill rise from 26.7 percent in 1983 to 34.2 percent in 1988. We
make no specific recommendations regarding how or where to
reduce defense spending, but candidates for curtailm ent would in­
clude lim iting growth in operations and maintenance accounts,
lim iting growth in pay and benefits, imposing modest cuts in cur­
rent force structure or build-up plans, and scaling back real growth
in procurem ent accounts, by cancelling programs experiencing de­
velopm ent problems or by redirecting prelim inary developm ent ef­
forts to emphasize less expensive longer-term systems.
Lastly, we would like to reemphasize the point that econom ic
growth is a potent reducer of deficits. Thus fiscal policy should be
geared to private econom ic growth. This means tax incentives to
promote savings and no tax increases. The reason Japan can live
with deficit ratios o f 5 percent o f GNP is its very high savings
ratio—20 percent personal savings ratio compared to our 6 percent.
These high savings ratios enable Japan to finance private credit de­
mands and still fund its deficit without putting upward pressures
on inflation and interest rates.
The fram ework for the appropriate econom ic program to pro­
mote econom ic growth is in place. The Adm inistration is correct in
pursuing policies o f reduced tax burdens, reduced spending, and re­
duced regulatory burdens. W hile the recession and high interest
rates have been thorns impeding the short-run success o f that pro­
gram, its potential for long-run econom ic growth is sound.
To illustrate the power o f econom ic growth in deficit reduction,
the follow ing table illustrates the dollar im pact o f a 1 percentage
point increase in the rate o f growth o f real GNP on Federal rev­
enues, outlays, and the deficit for Fiscal Years 1983 to 1987.
TABLE 111.2.— EFFECT ON FEDERAL BUDGET PROJECTIONS OF CHANGES IN THE RATE OF GROWTH IN
REAL GNP
[By fiscal year; in billions of dollars]
Effect of 1 percentage point increase in real GNP (Beginning January 1983)

Change in revenues..................................................................................
Change in outlays....................................................................................
Change in deficit.......................................................................................
Note.— Totals may not add due to rounding.
Source: Congressional Budget Office.

16-336 0 - 8 3 - 4




1983

+9
-2
-1 0

1984

+ 23
-5
-2 8

1985

+ 35
-1 1
-4 6

1986

+45
-1 7
-6 2

1987

+ 60
-2 4
-8 3

22

If real GNP could grow 1 percentage point faster than projected
over the next five years, the 1987 deficit would be $83 billion less.
Though the relationships are not exactly linear, a 2 percentage
point increase in real GNP would result in roughly a $166 billion
reduction in the 1987 deficit.




IV. T a x Policy
Recommendation

No major tax increases should be enacted. The third year o f the
tax cut and indexation should be preserved.
By the beginning o f the 1980’s it becam e increasingly apparent
that many years o f legislated and unlegislated tax increases had
condemned the econom y to low growth, high unemployment, and
declining standards o f living. Incentives for work, investment, and
saving had been seriously eroded. Am erican industry, over-taxed
and starved o f capital, was stagnating and losing its ability to com­
pete in the world marketplace. Between 1976 and 1981, Federal
revenues leapt from $298 billion to $599 billion, an increase o f $300
billion or about 100 percent. As a percentage o f GNP, Federal tax
revenues increased from 18.2 percent to 20.9 percent, the highest
level since 1944. Marginal and average individual incom e tax rates
had risen substantially. The weighted average o f marginal rates o f
all tax returns jum ped from 27.8 percent in 1976 to 32.2 percent in
1981, mostly due to inflation-induced bracket creep. Fueled by the
enormous growth o f Federal taxes, Federal spending expanded at
an even faster rate.
Popular resentment against runaway taxing and spending forced
a major change in governm ent fiscal policy. The Reagan Adminis­
tration was given a mandate to reduce the heavy and growing tax
burden in the United States. W ith the enactm ent o f the Economic
Recovery Tax Act o f 1981 (ERTA), individual m arginal tax rates
were cut 23 percent across the board, a reduction m ostly preserved
by indexing o f the tax brackets starting in 1985. Corporate depreci­
ation schedules were liberalized to allow accelerated cost recovery
for tax purposes. Though the reduction o f individual taxes is
modest even when fully in place, due to bracket creep and higher
Social Security taxes, ERTA does stem the rising tide o f revenue
increases. Federal revenues as a percent o f GNP is projected to de­
cline to 18.3 percent by Fiscal Year 1988, still higher than they
were in 1976. Furthermore, the indexing provision makes the tax
reduction permanent and not m erely temporary.
This preservation o f the tax cuts is one o f the m ajor reasons in­
dexing is im portant to the future econom ic growth o f this country.
Consequently, current proposals to increase the tax burden o f the
Am erican people by repealing indexing could not be more illconsidered. The central purpose o f tax indexing is to lim it excessive
and disproportionate growth in tax receipts due to inflation. Be­
cause o f the progressive structure o f the tax code, a 10 percent rate
o f price inflation is estimated to increase tax revenues by about 17
percent. Government profits from inflation through bracket creep,
taxation o f phantom profits to inflation. Because o f the progressive
structure o f the tax code, a 10 percent rate o f price inflation is esti-




(2 3 )

24

mated to increase tax revenues by about 17 percent. Government
profits from inflation through bracket creep, taxation o f phantom
profits and capital, gains, and decline o f the real value o f its debt.
An unindexed tax code is undoubtedly one o f the most convenient
financing mechanisms available to the Federal Government. The
only problem is that it’s too convenient. Autom atic tax increases
provide plently o f funds for desired spending expansion without the
need for legislated tax increases. The Government can always find
ways to spend all the revenue it collects, and then some. By lim it­
ing unlegislated tax hikes, indexing promotes fiscal responsibility
and improves Congressional decision-making. M oreover, we believe,
since m ajor spending programs have been indexed to the inflation
rate for many years, it is an essential act o f fairness to treat those
who pay for governm ent spending as well as we treat those who
receive such spending.
Indexing adjusts individual tax brackets, zero bracket amounts,
and personal exem ption for infation starting in 1985. However,
little-known by the public is that the repeal o f indexing would
harm the poor and middle-income groups m ore than others. W ith­
out indexing, inflation would continue to push taxpayers into
higher and higher brackets. This well-known phenomenon, “ brack­
et creep,” increases both the m arginal and average tax rates o f
almost all taxpayers. But lower- and middle-income taxpayers are
especially victim ized by “ taxflation.” The fixed zero bracket
amount and personal exem ption come to a larger proportion o f
their gross incom e, and the tax brackets at the lower and middle
levels are much m ore closely spaced than those near the top. The
repeal o f indexing would amount to an enormous regressive tax in­
crease, falling heaviest on the working poor and middle class.
This effect o f inflation on tax liability can be shown by a few
simple comparisons. A fam ily o f four earning $15,000 in 1982 with
annual cost o f living adjustments would lose almost all o f the tax
benefits provided by the 1981 Economic Recovery Tax A ct (ERTA)
through bracket creep alone (using 1980 as a starting point). This
fam ily would receive $248 in tax relief from the rate reductions in
1983, but $214, or 86 percent would be wiped out by inflationinduced bracket creep. This leaves a meagre $34 in net tax reduc­
tion. In 1984, $271 o f $334 tax cut, or 81 percent, would be con­
sumed by bracket creep, allowing the taxpayer only $63 o f his tax
break under ERTA. Jum ping ahead to 1987, through bracket creep
this fam ily would lose $489, or 86 percent o f $567 from ERTA. In
the follow ing year, $566 (87 percent) o f his $647 tax cut would be
erased by inflation.
A repeal o f indexing would allow this process to continue un­
checked after 1985. This would amount to a sizable tax increase for
this taxpayer. W ithout indexing in place in 1985, this fam ily would
pay $295 m ore in Federal incom e taxes in 1988, an increase o f
about 22 percent in their taxes.
Another fam ily o f four, starting with $25,000 in 1982, does a
little better. In 1983 they lose $423, or 69 percent, out o f their $609
tax cut to bracket creep, leaving them with the sum o f $186. In
1984, $543 (67 percent) out o f $808 slips away, leaving them with
$265 o f their tax relief. By 1987, $944 o f their $1313, 76 percent,
would be taken by inflation, leaving a balance o f $369. In 1988




25

bracket creep robs them o f $1167, 78 percent, of $1501 in tax bene­
fits. If indexing were repealed, in 1988 this taxpayer would pay
about $624 more than he would under current law, a tax increase
o f about 20 percent.
A fam ily o f four earning $40,000 in 1982 is also pinched by brack­
et creep. In 1983, this taxpayer would lose $1008 (76 percent) o f his
$1318 tax cut, in 1984, $1288 (74 percent) o f $1739, in 1987, $2415
(81 percent) o f $2961, and in 1988, $2848 (83 percent) of $6927. If
indexing were repealed, in 1988 he would pay about $1560 more
than under current law, a tax increase o f about 22.5 percent.
Another way o f looking at indexing would take into account the
distribution o f taxable income and the relative impact o f indexing
on each incom e class. According to the Joint Committee on Tax­
ation, indexing would benefit the lower income taxpayers the most.
The percentage o f tax relief accruing to the various income classes
would be greatest at the lowest class, and decline steadily as
income rises. According to a Joint Committee on Taxation study,
1981 expanded revenue contributions under the current inflation
rate by the various income classes would, in percentage terms, be
16 times greater at the bottom than at the top.1 (See table IV. 1.)
TABLE IV .l— TAX INCREASES FROM INFLATION: LESS 1 AGGREGATE TOTAL AND PERCENT OF INCOME
TAX LIABILITY UNDER PRESENT LAW BY INCOME CLASS (1981 INCOME LEVEL)
Expanded income (thousands)

gregate total
(millions)

Percent of income tax
liability

Below $ 5 .....................................................................................................................................
$5 to $10....................................................................................................................................
$10 to $15.................................................................................................................................
$15 to $20.................................................................................................................................
$20 to $30 .................................................................................................................................
$40 to $50 ..............................................................................................................................
$50 to $100 ............................................................................................................................
$100 to $ 2 0 0 ..........................................................................................................................
$200 and over............................................................................................................................

$168
1,232
1,365
1,570
3,703
5,268
2,781
771
253

(2 )
19.3
8.4
6.8
6.3
6.1
5.4
3.2
1.2

Total..............................................................................................................................

$17,110

6.0

1 Revenue gain from not adjusting personal exemption, earned income credit, zero bracket amount, and rate brackets by 9.14 percent.
2 Individual income tax liability is negative for this group because earned income credits exceed tax.

In summary, an analysis o f the relative impact o f bracket creep
on different incom e classes shows clearly that lower- and middleincome taxpayers would be hit very hard by repeal o f indexing.
Bracket creep takes a larger bite out o f lower incomes than higher
incomes. Furthermore, the very wealthy do not benefit much from
indexing for the simple reason that additions to their incom e are
already taxed at the top rate which is now fixed at 50 percent.
These wealthy taxpayers are the only ones who do not gain greatly
from indexing. Indexation is a reform which is em inently progres­
sive in every sense o f the word. W hether they realize it or not, ad­
vocates o f indexing repeal are prom oting a huge tax increase on ev­
eryone except the rich.
1 Background and Issues Relating to Individual Income Tax Reductions, Joint Committee on
Taxation, April 1981, p. 12.




26

Support for the repeal o f indexing is largely m otivated by fears
about large projected deficits. Although this is o f serious concern,
in this respect the repeal o f indexing would be com pletely self-de­
feating. First o f all, average higher m arginal tax rates would
impose an additional drag on saving, investment, econom ic growth,
and employment. By shrinking the pool o f savings available, higher
marginal tax rates (from bracket creep), via repeal o f indexing,
would make financing the deficit m ore difficult, not less. In addi­
tion, m ore tax resources w ill stimulate an increased rate o f govern­
ment spending which, if past experience is any guide, might well
exceed projected revenue growth and increase the combined onbudget and off-budget deficit. This is what happened at the end o f
the last decade with the $300 billion revenue increase between 1976
and 1981.
Another political danger o f an unindexed tax code is the encourgement o f inflationary biases in governm ent. The tem ptation to in­
flate our way out o f fiscal problems w ill likely becom e very strong
in the years ahead. Tax indexation is a vital reform which lessens
inflationary political pressures on the m onetary authorities.
We fear that the prim ary objective o f repeal o f tax indexing is to
provide a way to finance accelerated Federal spending. By repeal­
ing indexing, Congress could avoid m aking the hard choices neces­
sary to restrain runaway Federal spending. This political reality is
why we oppose any tam pering with indexation, the third year o f
the tax cut, or enactment o f any other m ajor incom e tax increases.
Despite much discussion linking widening deficits with “ exces­
sive” revenue reductions, a quick look at the facts should dispel
this myth. In Fiscal Year 1983, projected baseline revenues are
$606 billion, and outlays $800 billion, leaving a deficit o f $194 bil­
lion. Revenues are projected to increase $47 billion between Fiscal
Year 1983 and Fiscal Year 1984, and then rise at least $50 billion
each fiscal year after that. Nonetheless, deficits are projected to
widen to $267 billion by 1988. W ith tax revenues rising over $50
billion annually after Fiscal Year 1984, it is impossible that they be
the source o f widening deficits—the answer must be that Federal
spending is outpacing the rise in revenues through 1988. Table IV.2
shows that spending is increasing about $70 billion annually
through Fiscal Year 1988. The cum ulative effect o f this rapid ex­
pansion o f outlays is creating the problem.
TABLE IV.2.— BASELINE PROJECTIONS BY FISCAL YEAR
pn bHfions of dollars]
Projections
1983 base
1984

Baseline revenues................................... ................................
Baseline outlays...................................... ................................
Baseline deficit........................................ ................................

606
800
194

653
850
197

1985

715
929
214

1986

768
999
231

1987

822
1,072
250

1988

878
1,145
267

In conclusion, we feel com pelled to restate the fact that we
cannot tax ourselves into prosperity. Im posing heavier tax burdens
on our people w ill not help them or our econom y. It’s tim e to hold




27

the line on major tax initiatives. The Congress should not repeal
the third year of the tax cut and indexation.




V. M onetary Policy
Recommendation

We recommend that the Federal Reserve gradually decrease
money growth to a range that is both consistant with normal long­
term real GNP growth and low inflation. We warn against keeping
money growth too fast, too long. That would produce another “ca­
lamity boom.99 With a lag o f about two years, inflation will surge
once more, making another recession inevitable.
From 1954 to 1964, measuring year over year, annual money
growth (M l) averaged 1.9 percent. In the same period, real GNP
growth averaged 3.6 percent a year, inflation (using the GNP defla­
tor) averaged 2.0 percent a year, unemployment averaged 5.4 per­
cent, and the Treasury bill rate averaged 2.8 percent and never ex­
ceeded 5.0 percent. In the next decade, increased Federal Govern­
ment spending to finance the Vietnam War and a proliferation o f
so-called anti-poverty programs here at home placed continuing
upward pressure on interest rates. The Federal Reserve, prompted
first by President Johnson and later by President Nixon, tried to
keep interest rates down by perm itting the growth o f M l to accel­
erate to 5.6 percent a year in the 1965 to 1974 period. As a result,
despite “jaw boning” by President Johnson and controls under
President Nixon, inflation increased and interest rates also rose.
Inflation averaged 4.8 percent a year and the Treasury bill rate av­
eraged 5.5 percent in the 1965 to 1974 period.
One o f the lessons o f the 1965 to 1974 period is that, if the Feder­
al Reserve promotes rapid money growth, neither tax increases nor
balancing the budget w ill keep inflation in check and interest rates
down. That lesson was brought into clear view by the results o f
President Johnson’s ill-conceived plan to “ tighten” fiscal policy and
“ loosen” monetary policy in 1968. Acting on his proposal, in June
1968, Congress imposed surtaxes on personal and corporate incom e
taxes, effective in January and April 1968, respectively, and the
Federal Reserve perm itted fast M l growth by targetting interest
rates, M l increased by 7.0 percent in 1968. Consequently, inflation
jumped, interest rates soared, our international trade balance dete­
riorated, and by the fall o f 1969 the econom y was in a recession.
Beginning in mid-1974 and continuing to the end o f 1976, M l
growth was greatly moderated. The initial effect o f slowing money
growth was to exacerbate the 1974 to 1975 recession. But, in time,
our econom ic perform ance greatly improved. Measured year over
year, inflation dropped to 5.2 percent in 1976, from 8.7 percent in
1974 and 9.2 percent in 1975. The Treasury bill rate fell to 4.4 per­
cent in December 1976 from the August 1974 high o f 8.7 percent.
Real GNP growth turned up strongly in the year over year, infla­
tion dropped to 5.2 percent in 1976, from 8.7 percent in 1974 and
9.2 percent in 1975. The Treasury bill rate fell to 4.4 percent in De-




(2 8 )

29

cember 1976 from the August 1974 high o f 8.7 percent. Real GNP
growth turned up strongly in the second half o f 1975. It was 5.4
percent in 1976 versus 1975 as a whole, and unemployment fell
from 8.9 percent in May 1975 to 7.4 percent in January 1977.
Unfortunately, beginning in 1977, the Federal Reserve again per­
mitted rapid M l growth. It averagd 7.5 percent a year in the 1977
to 1980 period. In association, inflation and interest rates rose
again. Inflation averaged 7.7 percent a year in the 1977 to 1980
period and reached 9.0 percent in 1980. The Treasury bill rate in­
creased from 4.4 percent in December 1976, to 6.1 percent in De­
cember 1977, to 9.2 percent in Decmber 1978, to 12.1 percent in De­
cember 1979, and to 15.7 percent in December 1980.
No real sector gains resulted from stepping up M l growth either
in the 1977 to 1980 period or in the 1965 to 1974 period. In the 1965
to 1974 period, year-over-year real GNP growth was 2.9 percent
versus 3.6 percent in the 1954 to 1964 period, and unemployment
averaged 7.0 percent, versus 5.4 percent in the 1954 to 1964 period.
In the 1977 to 1980 period, real GNP growth averaged 3.0 percent a
year and unemployment averaged 6.5 percent. Moreover, in 1980,
real growth actually declined 0.4 percent and unemployment aver­
aged 7.2 percent.
The lesson is clear. W e cannot inflate our way, that is paper or
print our way, to real prosperity and full employment. The record
warns against money growth which is too fast, too long.
President Reagan inherited a m onetary policy problem when he
came into office in January 1981. M l growth had soared to over 13
percent per year in the second half o f 1980, the Treasury bill rate
averaged 15.7 percent in December 1980. The unhappy choice that
had to be made was between gradual reduction o f M l growth or a
sharp deceleration. Slowing money growth slowly from the 13 per­
cent per year level meant reducing inflation only slowly but keep­
ing the economy from receding sharply. Decreasing M l growth rap­
idly meant courting a m ajor recession but breaking inflation quick-

ly-

The Adm inistration urged that the growth o f the monetary base
(and thereby M l growth) be reduced slowly, 0.6 to 1.0 percentage
point a year. For reasons that are not clear, the Federal Reserve
allowed M l growth to drop very sharply beginning in A pril 1981
and continuing through July 1982. In that period, annualized M l
growth was only 3.3 percent, significantly lower then the 7.5 per­
cent per year average o f the 1977 to 1980 period. The sharp decel­
eration o f M l growth helped send the econom y into a recession be­
ginning in the second h alf o f 1981. However, it also helped to slash
the inflation rate in half, and interest rates, albeit with a lag, have
been follow ing the inflation rate downward.
Since last August, M l growth has again been accelerating sharp­
ly. It increased at an annual rate o f 12.7 percent from August 1982
to January 1983. The rapid runup in money growth since last
August has increased the quantity o f the M l measure o f money to
a level slightly above where it now would have been if the Federal
Reserve had followed the Reagan Adm inistration’s original plan o f
decreasing M l growth steadily by 0.6 to 1.0 percentage point a
year. W ith a strong recovery underway, it is time to again rein-in
the growth o f M l, but this time it must be done gradually. If the

16-336 0 - 8 3 - 5




30

Adm inistration's original track for M l growth had been followed,
M l growth would have been 6 to 6.5 percent in 1982. Since the
level o f M l is now about where it would have been if that track
had been followed, the sensible policy to pursue now is to follow
the original track in 1983 and subsequent years. Accordingly, we
recommend that M l growth be constrained to 5.0 to 6.0 percent in
1983 and reduced by 0.6 to 1.0 percentage point a year in the 1984
to 1986 period. This policy w ill promote sustained recovery and a
gradual return to full employment without reigniting inflation and
sending interest rates to much higher levels once again.




VI. International

Recommendation

The United States should step up efforts to increase exports to for­
eign markets and strongly resist protectionist measures at home.
International econom ic forces have taken on increasing impor­
tance in the United States over the past decade. Four out o f five
new manufacturing jobs have been created by international com­
merce. One out o f every three acres is planted for export, and trade
in general accounts for an ever-increasing share o f our Gross Na­
tional Product. Given the role o f trade in providing jobs and domes­
tic and international sales opportunities, we should adopt those
policies that w ill ensure expanded export markets and should avoid
increased protectionism.
Since W orld War II, the liberalizing influence o f successive
rounds of m ultilateral trade negotiations under the 89-country
General Agreement on Tariffs and Trade (GATT) fostered substan­
tial growth in world trade, i.e., at a 7.1 percent annual rate from
the mid-1940’s to the early 1970’s. The oil price shocks and com peti­
tion from developing countries slowed this growth substantially,
however, and the value o f world trade actually declined one per­
cent in 1981; 1982’s trade volum e rem ained stagnant, with the
United States particularly hard hit by im port pressure.
In 1982, the United States suffered a $44 billion balance o f trade
deficit. This shortfall is estimated to rise to $75 or $80 billion in
1983, particularly as a result o f the overvalued dollar’s upward
price pressure on U.S. goods and services. This deficit is directly
subtracted from GNP and in large part accounts for 1982’s slow
growth and high unemployment.
In this difficult international econom ic clim ate, the members o f
GATT met in Geneva in November 1982 to renew their commit­
ment to expanded world trade. The Contracting Parties committed
to “ refrain from taking or m aintaining any measures inconsistent
with the GATT” and to “ resist protectionist pressures.” However,
the European Community, in particular, refused to discuss a nearterm extension o f GATT rules to deal effectively with agricultural
trade problems. Thus, EC export subsidies for products such as
wheat flour, poultry and pasta rem ain, despite U.S. complaints
that such subsidies deprive us o f an equitable share o f the world
market. Japanese im port quotas on citrus fruits and juices, beef
and other farm products remain outside o f GATT scrutiny, as well.
During the GATT M inisterial, the United States made some
progress in establishing a GATT study o f the im pact o f internation­
al trade in services, such as banking, insurance, communications,
and data processing, and o f the barriers to such trade. However, we
could not persuade other countries to undertake a sim ilar examina-




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32

tion o f trade in high technology products, such as computers, elec­
tronic components and aircraft.
Notwithstanding the impact o f the current trading environm ent
here at home and the unwillingness o f our foreign partners to open
markets immediately, we should resist the use o f protectionist
measures. Government intervention in one sector o f the econom y
can distort trade and investment flows in that sector and else­
where. Protection, in the form o f higher tariffs, im port quotas or
“ Buy Am erican” provisions, should therefore be provided only
under the most serious circumstances.
At the same tim e we reject protectionism at home, however, the
United States should increase its efforts to combat unfair practices
on the part o f our trading partners. Predatory trade measures, e.g.,
industry targeting, insidious domestic subsidies, export aids and
cartel arrangements, deny U.S. producers an equitable share o f the
world market and should be removed. The United States must,
however, develop careful and measured responses designed to re­
store our legitim ate com petitive opportunities rather than imple­
menting actions that w ill prom ote a beggar-thy-neighbor trade war.
Such a trade war could have a devastating impact on the debtridden developing countries who rely on exports to the industrial­
ized world for much o f their survival.
In addition to outright protectionism , this rising world debt prob­
lem also constitutes a threat to world trade. Over the last year, de­
veloping country debt has risen to an incredible $700 billion, with a
major share held by Latin Am erican nations. Since 1978, high in­
terest rates have boosted the cost o f servicing such debt, forcing
countries to reschedule nearly $11 billion in repayments in 1982.
W hile the sharp fall in U.S. rates beginning at the end o f last year
eased the debt cost for major borrowers, a severe crisis continues.
Mexico, for example, has had to agree to numerous austerity meas­
ures in order to obtain a three-year $4 billion loan agreement with
the International M onetary Fund. Brazil was forced to devalue its
currency by 30 percent and to conclude a $4 9 billion credit agree­
ment with the Fund in order to meet its financing needs for 1983.
This agreement is conditioned upon the willingness o f Brazil's com ­
mercial creditors to increase their lending, as well. Argentina's
agreement was for a $1.6 billion IMF loan based on a rescheduling
o f existing debt as well as the securing o f an additional $2 billion
in new com m ercial loans.
W hile, through a com bination o f Fund credit and increased com­
m ercial bank commitments, the developing countries should be
able to avoid default this year, the present debt crisis points to the
need to take a closer look at how we reached the present state o f
commercial bank overexposure and vulnerability. Congress should
undertake to determ ine the inter-relationship between governm ent
actions and com m ercial bank lending. Useful areas o f inquiry
would be, for example, the extent to which banks have lent on the
basis o f governm ental foreign policy goals rather than on sound fi­
nancial considerations. In addition, we should consider what role
the Federal Government should reasonably play in supporting U.S.
com m ercial banks when these institutions face major loan defaults.
High interest rates, which have exacerbated world debt prob­
lems, have also affected the United States by raising the value o f




33

the dollar. Over the course o f 1982, the dollar rose as much as 40
percent against many m ajor foreign currencies. As a result, U.S.
goods and services have becom e relatively m ore expensive than
com parable foreign products in the international m arketplace. The
largest single factor in the d ollars surge has been the high real in­
terest rates, which have increased the attractiveness o f the U.S.
market to foreign suppliers o f credit. In addition, currencies, such as
the Japanese yen, have been abnorm ally depressed, further widen­
ing the gap and placing Am erican traders at a com petitive disad­
vantage vis-a-vis their Japanese counterparts. Since late October,
the yen has risen by approxim ately 11 percent against the dollar
and 7 to 8 percent against the German mark. Despite a $7 to $8
billion infusion to bolster the yen in 1982, it has depreciated 15 per­
cent in real terms over the past two years.
Recognizing the adverse im pact the overvalued dollar has had on
the U.S. balance o f trade, the United States should nevertheless
avoid foreign exchange m arket interventions except under condi­
tions o f severe distortion. Over the long term , the elim ination o f in­
flationary expectations and a concom m itant reduction in interest
rates w ill have the most positive im pact on exchange rates and cur­
rency misalignment.
Another factor currently influencing the international econom y
is the dissolution o f OPEC. In sharp contrast to 1974 and 1978, the
world econom y is facing not a massive increase in the price o f oil
but a massive glut o f one o f our most valuable natural resources.
The com bination o f worldwide econom ic downturn, increased con­
servation efforts, and greater use o f alternative energy sources has
reduced the demand for oil and led to dwindling production by the
countries that com prise the OPEC cartel.
According to OPEC’s Research Group o f Petroleum Exporters’
Policies, OPEC lost 12 m illion barrels per day in production be­
tween 1979 and 1982. M oreover, as a result o f the glut, we have
seen as much as a 25 percent decline in the real price o f oil since
March 1981. At present, the OPEC benchm ark price is $34 per
barrel, with the average effective effective price closer to $32.
W hile we should welcom e these declining prices, since they
herald a freeing-up o f scarce capital for other consumption and in­
vestment opportunities, there may be problem s associated with a
sudden price drop in oil. Developing countries like Mexico, Venezu­
ela, and Nigeria, for example, would see their oil-related incom e
decline, further weakening already fragile economies. However,
this should be more than offset by im provem ents in the balance o f
trade for such oil im porting countries as Brazil.
Nevertheless, on balance, a reduction in oil prices should be
hailed as a positive development.
The Adm inistration has asked that we go along with the propos­
al by the Board o f Governors o f the International M onetary Fund
(IMF) to increase its quotas by $32 billion and expand the General
Agreem ent to Borrow (GAB) by $12 billion. The cost to the United
States would be $8.4 billion. The proposal is prompted by the cur­
rent international debt crisis. The new moneys w ill not be paid
into the IMF until late 1983 or even early 1984. New econom ic
trends, including lower loan rates and the U.S. recovery, together
with actions taken in conjunction with the IMF by Argentina,




34

Brazil, Mexico, and other debtor nations to im prove their trade and
current account balances, and by creditor-banks to roll-over matur­
ing loans and extend new credits, will help to solve the debt crisis.
A rather positive view along these lines was set forth by the W orld
Bank in issuing its annual “ W orld Debt Tables.” However, the pro­
posal o f the Adm inistration would be a type o f “ insurance” for
solving the long-term debt crisis.




VII. A griculture
Recommendation

The Administration and the Congress should immediately consid­
er major changes in supply-control and demand-enhancing farm
policies and programs. Market discipline can be improved, thereby
reducing the budgetary cost o f farm private support programs, while
at the same time improving the financial picture o f American farm­
ers.
Since the 1930's, U.S. farm policy has had the dual objective o f
encouraging the production o f adequate supplies o f food and fiber
so as to maintain reasonable prices for consumers, and, at the same
tim e, assuring farmers a fair return on their investment and ef­
forts. Four measures are com m only em ployed by the Federal Gov­
ernment to balance these conflicting consum er and form er inter­
ests: direct payments to farmers, nonrecourse loans, acreage reduc­
tion programs, and export prom otion activities. Most agricultural
price support and related activities are carried out by the Commod­
ity Credit Corporation (CCC) o f the United States Department o f
Agriculture. Including the projection o f the Congressional Budget
O ffice for Fiscal Year 1983, CCC realized losses on commodity price
and farm incom e support program s for the last four years w ill
exceed $35 billion.
From the consum er perspective, traditional farm policy has been
exceptionally effective. Food and fiber supplies are not only ade­
quate but border on the extravagant. Never has a society been pro­
vided with more abundant supplies and a wider variety o f nutri­
tious food. The consumer price index for food and beverages during
the last four years has advanced 21.8 percent compared to a 33.0
percent increase in the prices o f all consum er goods and services.
Am ericans now spend a sm aller proportion o f their income on food
than any other people on earth.
Farmers, however, have not fared as well. According to the
United States Department o f Agriculture, 1983 w ill likely mark the
fourth consecutive year o f declining and record low net farm
incom e. In 1982, real net farm incom e was one-fourth the level
achieved by farm ers 10 years ago and roughly equivalent to that
realized in 1933. A fter three consecutive years o f im plem enting in­
creasingly costly acreage reduction programs, surplus carryover
stocks for virtually all grains and cotton approach record levels.
Government-owned stocks o f dairy products, acquired under the
dairy program , are at record levels. In constant dollars, the net
incom e-to-equity ratio for U.S. agriculture has trended down from
10.0 percent in 1973 to 2.2 percent in 1982.




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36

TABLE V ll.l.— NET INCOME-TO-EQUITY RATIO FOR U.S. AGRICULTURE (1972 to 1982)
Year

1972..........................................................................................................................
1973....................................................................... ...................................................
1974....................................................................... ...................................................
1975....................................................................... ...................................................
1976....................................................................... ...................................................
1977....................................................................... ...................................................
1978....................................................................... ...................................................
1979....................................................................... ...................................................
1980....................................................................... ...................................................
1981....................................................................... ...................................................
1982....................................................................... ..................................................

Net income ■

15.1
25.1
17.6
15.6
11.0
10.2
13.6
14.9
8.2
9.2
6.7

Equity ■

233.5
247.9
274.4
260.6
285.2
310.6
312.5
336.9
342.3
333.2
305.8

rS T p S

6.5
10.0
6.4
7.9
3.9
3.3
4.4
4.4
2.4
2.8
2.2

1 Billions of 1967 dollars.

Farm com m odity programs, specifically their price support provi­
sions, have proven to be counterproductive in achieving fair re­
turns to investment in agriculture. An increasingly larger share of
U.S. argriculture's output is being “ sold” at the loan rate for long­
term storage in governm ent warehouses rather than being com peti­
tively priced and purchased in the marketplace and consumed. In
1982, the governm ent incurred a storage expense o f close to $500
m illion just for the grain reserve. U.S. loan rates are considered by
our foreign com petitors as price ceilings. The United States Gov­
ernment, not the international marketplace, therefore, must ac­
commodate U.S. farm er-produced supplies as long as world prices
remain below loan rates. Loan rates, in effect, protect w orld farm ­
ers and their governments from feeling the full clout o f the U.S.
farm ers' competitiveness. The United Sates is losing export sales as
a result, and the role o f nonrecourse loans in future farm policy
needs to be carefully considered in that light.
Target prices have gained the reputation as constituting the clos­
est the Am erican society gets to providing a sector o f its populace
with a guaranteed income. But U.S. farm policy has, in fact, had
the effect o f guaranteeing farm ers a loss. For exam ple, wheat farm ­
ers in 1983, who reduce their planted acreage 20 percent and satis­
fy all other program requirem ents, are entitled to a minimum
price o f $4.30 per bushel for the amount o f wheat they do produce.
Target prices are legislatively determ ined and are generally be­
lieved to be below the cost o f production and above m arket-clearing
price levels. Relative to the target price o f $4.30 per bushel, wheat
is presently selling for $3.90 per bushel in Kansas City and, accord­
ing to Chase Econometrics, the cost o f growing a bushel o f wheat in
Kansas is $5.22 per bushel. The U.S. farm er is apparently becom ­
ing more and more remote from his m arketplace and, as a result,
his production decisions are more a consequence and reflection o f
political activity in W ashington than o f supply and demand forces
in Kansas City. Im portantly, it is m arket forces w hich prom ote effi­
ciency, and greater econom ic efficiency is one means to both
increase farm incom e and reduce food and Treasury costs.
Yet, the public most definitely has a vested interest in the con­
tinuance o f food supplies in adequate quantities, quality and vari­
ety provided at reasonably stable prices. It is estim ated that 20 per­




37

cent o f the U.S. gross national product and as many as 20 m illion
jobs are directly or indiretly related to the production o f food and
fiber. In addition, agricultural export sales have become a major
means o f earning foreign exchange and helping maintain a strong
dollar, thereby lowering the cost o f imported goods and services.
The United States Government also extensively uses the products
o f Am erican farmers to achieve public welfare and foreign policy
objectives, through the food stamp and Food for Peace programs.
Therefore, there is ample justification for the public to assume
some degree o f the risk associated with farm ing through the provi­
sion o f a necessary level o f incom e maintenance support. However,
target prices should be made adm inistratively more flexible and set
closer to market-clearing levels so that farm ers w ill be given more
appropriate market signals. Effective production restraint by farm ­
ers w ill result in higher market-clearing prices and therefore
higher income support levels. Conversely, overproduction w ill drive
prices down and lower prices w ill help more quickly to elim inate
surpluses.
Public support o f the farm sector should emphasize the promo­
tion o f export sales—meeting international market challenges and
pursuing international market opportunities—as a means o f in­
creasing demand and, therefore, market clearing prices. The
United States Government should assume the obligation o f aggres­
sively representing in the international m arketplace the most effi­
cient food producers in the world when and where necessary. Agri­
culture is a U.S. international advantage well worth defending.
Substantial evidence exists to support the need to challenge the
current effectiveness and question the future appropriateness o f
traditional farm policy in satisfying its prim ary client, the farmer.
The debate will be intense and controversial; but the debate must
proceed.

16-336 0 - 8 3 - 6










ADDITIONAL VIEW S

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ADDITIONAL VIEWS OF REPRESENTATIVE MARJORIE S.
HOLT
The Republican Members o f the Joint Econom ic Committee are
correct in their assumption that a strong econom ic recovery is al­
ready underway and we must avoid reinflating the econom y with a
burst o f stimulus spending and/or excessive monetary growth.
The greatest danger confronting the econom y in the next few
years is deficit spending on so large a scale that it would crowd out
the private sector by raising interest rates and force inflationary
increases in money supply to accommodate governm ent borrowing.
A strong rate o f econom ic growth w ill reduce annual budget defi­
cits by increasing revenues and reducing outlays associated with
unemployment, but this alone will probably not reduce the deficits
to acceptable levels.
I agree with my Republican colleagues that some savings are pos­
sible in the defense budget, but a realistic appraisal o f defense
needs leads me to assume that the savings w ill not be as large as
my colleagues would hope for.
To those who suggest that we cut operations and maintenance
accounts in the defense budget, I ask whether they are w illing to
sacrifice readiness. To those who would freeze pay and benefits, I
ask how we will recruit and retain m ilitary personnel o f good qual­
ity. To those who would spread procurem ent costs over additional
years, I say this w ill surely increase unit prices and increase the
total cost o f those weapons systems and equipment in the final
analysis.
Defense claimed 40 percent o f the Federal budget in 1970, but
only 23 percent o f the budget in 1980. This year defense has almost
27 percent o f the budget and next year might go to 29 percent, or 7
percent o f GNP.
Critics are com plaining that we cannot afford to spend 29 per­
cent o f the Federal budget on the forem ost responsibility o f the na­
tional government. They are upset that defense w ill have 34 per­
cent o f the Federal budget in fiscal 1988 if President Reagan’s pro­
gram is fully implemented.
Savings are possible, but there is a consensus in Congress that
the defense budget must continue to show substantial real growth
in the 1980’s after the cuts that were imposed in the 1970’s. There
is a consensus that we must not allow Soviet advantages in m ili­
tary capability to grow to overwhelming advantages that would
place the freedom and life o f every citizen o f the Free W orld at
risk.
Obviously, we must pay for effective and credible m ilitary
strength, one way or another, and at the same tim e that we con­
front the imperative o f reducing budget deficits.
Faced with this dilemma, I would be w illing to consider the
repeal o f tax indexing scheduled to begin in fiscal 1985.




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42

Perhaps it is unpopular to say this, but I believe Congress made
a big mistake in 1981 by promising that the individual tax burden
would be adjusted for inflation on a permanent basis beginning in
1985. That was not part o f President Reagan's original tax reduc­
tion package, but was among the ornaments Congress hung on the
tree.
I have never taken an expansive view o f the responsibilities o f
government, but I recognize that we must have sufficient revenues
to fulfill the responsibilities it must perform.
On the one hand, we are required to continue our defense re­
building effort to deter the perceived threat to our national secu­
rity. On the other hand, the future health o f our econom y depends
on reducing annual budget deficits o f enormous size.
Under the circumstances, allowing tax indexing to take effect in
1985 and proceed through the ensuing years would probably be
unwise.




ADDITIONAL VIEWS OF REPRESENTATIVE OLYMPIA J.
SNOWE
I want to lend my strong support to the Republican Views o f the
Joint Economic Committee and to praise Chairman Jepsen for his
leadership and dedication in producing a useful document. Through
this report, it is my hope the Congress w ill benefit from the view­
points presented by the Joint Economic Committee and the recom­
mendations that are contained in the body o f this report.
Curing the ills o f our econom y w ill not be easy. The high federal
deficits the pervasive nature o f unemployment, the prospects o f re­
newed inflation, the growing foreign debt problem, and the many
pressing human needs are problems that cannot be solved in a
short period o f time. Our recommendations are intended to produce
a strong economy, but recongnize that short-term, quick-fix solu­
tions often produce long-term problems o f an ever greater magni­
tude.
W hatever created our current problems in not my prim ary con­
cern. Congress should not dwell on the mistakes that we and others
have made in the past, but rather we should carefully scrutinize
our actions to determine their effects in the future. Too often our
actions are reflective o f short-term pressures, and pay little atten­
tion to the future im plications. This leads to stop and start policies,
personal and business uncertainty, and an uneven economy. More
attention should be paid to the long-range effect o f the actions we
take, and our goal should be a healthy and stable economy.
I would agree with the recent econom ic report that our econom y
is beginning to recover. I remain guarded in my optimism regard­
ing the recovery, however, particularly in view of the many pitfalls
pointed out to the Committee by several prom inent economists. A
great deal o f doubt remains about the strength and length o f the
recovery. The actions we take in Congress, as well as those taken
by the Reagan Adm inistration and the Federal Reserve Board,
should recognize the fragility of the recovery, and the need for
policies that build on the progress that has been made at this time.
The Reagan Adm inistration has taken many positive steps
toward producing a better economy. The reduced rate o f inflation
and the lower interest rates are praiseworthy. W hile the Adminis­
tration has been much criticized for the areas and amounts o f their
budget reductions, I applaude them for the honesty with which
they have addressed the Federal budget crisis. I have many differ­
ences with the specific budget levels recommended by the Adm inis­
tration, but I feel they have accurately captured the public mood,
as well as the econom ic necessity, to reduce Federal spending.
Much debate will focus in the coming months on efforts to delay
or repeal indexing o f the incom e tax rates. W hile this might result
in a significant reduction in the future deficit, it would also be an
indirect method o f increasing taxes. Such a tax increase would fall




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44

most heavily on the lower incom e classes and as such I do not
think it would be the most preferable course o f action. The everincreasing budget deficits must be reduced, however, and all meth­
ods o f deficit reduction should be reviewed by Congress. Delay of
indexing would not be my first choice to reduce the deficit, but it
should not be eliminated from the options to consider.
The level o f defense spending should receive considerable review.
Our m ilitary capability should not be harmed by any adjustments
in defense expenditures, but I believe the military budget should
receive the same scrutiny for possible savings as the rest o f the
budget has already received. The health o f the overall economy
will improve if the budget deficits can be decreased. As the overall
economy improves, our defense expenditures can again play a posi­
tive role in our economy.
O f particular concern to me are proposed spending reductions in
programs designed to protect against, or relieve human suffering.
Extremely important to my region is adequate funding for lowincome energy assistance and home weatherization. Funding for
health care should be maintained at a level necessary to assure
that proper attention is given to those in need. Our government
cannot turn its back on those that are suffering, and Americans
living in poverty must be given as much assistance as possible to
help them improve their quality o f life. The basic social safety net
that consists o f Federal, State, and local programs must not be
weakened. The Federal responsibility to provide assistance to the
needy is clear, and additional burdens should not be transferred to
the States, to local governments, or to the private sector.
One area where much im provem ent needs to be made is unem­
ployment. The overall rate is far too high, and unemployment
among certain subgroups is at tragic levels. I recognize the human
suffering caused by unemployment and strongly endorse the recom ­
mendations o f the Joint Econom ic Committee report designed to
reduce unemployment. Special attention should be made to the
problems o f women in the work force, a subject I w ill deal with in
greater depth later in these views.
The strong employment record o f small business should be recog­
nized, and efforts should be made to prom ote the activities o f all
sectors o f our small business community. Employment programs
should address the role o f regional industries in the econom y o f our
country and steps should be taken to insure the health o f our many
regional industries. Above all, unemployment should not be dealt
with as a statistical problem, but we should be ever mindful o f the
personal effects o f unemployment, underemployment, or the fear o f
unemployment, on every member o f our society.
As a member o f the Foreign Affairs Committee, I am well aware
o f the special trade problems o f our country. We are dependent on
other nations to an ever greater degree, and the world econom y is
closely tied to the econom y o f the United States. Both our export
policy and our im port policy are im portant to me, and I am outlin­
ing my views in greater detail in a later section o f these views.




45
W omen

an d

E mployment

The tragically high rate o f unemployment in this country, as
well as the near certainty that Congress w ill proceed with legisla­
tive measures to provide some relief to those who are out o f work,
demands that we focus renewed attention on the problems o f
women in the work force, and how they can be best addressed by
em ploym ent initiatives in the 98th Congress. I include these addi­
tional comments because I do not believe the plight o f women in
the work force has been adequately addressed any where in recent
discussions o f this country's employment picture.
In January 1983, nearly 48 m illion women, 16 years and over,
were in the labor force. Forty-three percent o f the Am erican labor
force is comprised o f women. This number has doubled in the last
20 years, and by 1990, women are expected to comprise more than
half o f all our nation's workers.
W hile women’s participation in the labor force has increased,
their pay has actually decreased. In 1955, women earned only $.64
for every $1 earned by a man. Incredibly, this has decreased to $.59
to every $1 earned by men today. In 1981, women workers with
four or more years o f college education earned approxim ately the
same incom e as men who had only one to three years o f high
school, while women high school graduates earned less than men
who had not completed their elem entary school.
One of the primary reasons for this gross disparity in pay contin­
ues to be the concentration o f women in traditional, low-paying,
dead-end jobs. In 1981, women were 80 percent o f all clerical work­
ers, 63 percent o f all retail sales workers, and 89 percent o f all
health service workers. At the same time, they were only 4 percent
o f all engineers, 14 percent o f all doctors and laywers, 7 percent o f
workers in heavy construction, and 1 percent o f all truck drivers.
Women work for the same reason man do—econom ic necessity.
Two-thirds o f all working women are single, widowed, divorced, or
separated, or have husbands who earn less then $15,000 a year. Ad­
ditionally, a growing proportion o f Am erican fam ilies are headed
by women. Tragically, almost one in three female-headed fam ilies
lives in poverty today, as contrasted to one in 18 headed by a man.
Three-fourths o f the poor are women, a phenomenon that has re­
cently been described as “ the fem inization o f poverty.” The most
vulnerable women are elderly and single fem ale heads o f house­
hold. The costs o f unemployment to these women, their fam ilies,
and society are enormous.
In January 1983, 10.0 percent of women 16 and over were unem­
ployed, and certain groups o f women have been much harder hit.
Women who maintain fam ilies, for example, suffer from an unem­
ploym ent rate o f 13.2 percent, while the figure approaches 50 per­
cent for young, black women.
Women make a vital contribution to the labor force o f this coun­
try and share the same devastating results o f unemployment.
Public policy discussions must go beyond the traditional, but total­
ly inaccurate concept that unemployment is not really a wom an's
problem because women don't really need to work. This sim ply is
not true, and steps must be taken to insure that any legislative

16-336 0 - 8 3 - 7




46

program adopted by the Congress w ill provide relief to all o f this
nation’s unemployed—not just to one group.
I, therefore, recommend that any legislative program meet the
following specific objectives: (1) that women be assured o f this gov­
ernment’s commitment to elim inate discrim ination in employment,
(2) that employment stim ulation be balanced over a wide range o f
job types, (3) that the specific employment needs working mothers
face in m eeting the demands o f their dual career be addressed, and
(4) that women’s long-term employment and econom ic security be
strengthened through job retraining programs that specifically
seek to overcom e sex-stereotyping in employment. I would like to
elaborate briefly on each o f these objectives.
Women continue to suffer from pervasive discrim ination in
wages and hiring, despite the passage o f m ajor legislation designed
to address these programs. The Equal Pay A ct o f 1963, Title VII o f
the Civil Rights A ct o f 1964, and Executive Order 11246 can be ef­
fective tools, if rigorously enforced. But women have been forced to
confront a governm ent that has not measured up to its responsibil­
ity for eradicating employment discrim ination. Therefore, it is vi­
tally im portant that antidiscrim ination provisions consistent with
existing law be included in the language o f any jobs legislation,
and that they be rigorously enforced. A com m itm ent to pay equity
must be affirm ed as well.
I also believe that we must balance employment stim ulation over
a wide range o f job types from public works to public services. The
recent debate on the various jobs bills proposed in the 97th Con­
gress to repair highways, bridges, and mass transit, and the even­
tual passage o f a gas tax to fund these jobs, exem plified the deeply
held assumption that unemployment is not really a woman’s prob­
lem. In fact, 98.3 percent o f construction workers in this country
are male, and when efforts are made to fund jobs to repair high­
ways, bridges and mass transit, the assistance goes prim arily to
employ men. Any jobs legislation passed by Congress must insure
that the jobs created w ill offer realistic em ploym ent opportunities
to women. This country has great needs for the rebuilding o f its
infrastructure, and those have received an abundance o f attention
recently. However, two years o f greatly reduced domestic spending
have created a considerable need for increased services to the el­
derly, poor, and children. Jobs created in the public service area
w ill both help to meet those needs and provide jobs that are m ore
consistent with the skills and employment interests traditionally
held by women.
Any serious consideration o f women’s em ploym ent problems
would be grossly deficient without efforts to address the specific
employment needs working mothers face in m eeting the demands
o f their dual role as workers and caregivers. Funding for day care
has been greatly reduced over the past few years. Adequate fund­
ing for child care resources must be an essential part o f any em­
ployment initiative that seeks to address wom en’s employment
needs. Additionally, provisions encouraging the developm ent o f al­
ternative work schedules should be included to realistically en­
hance women em ploym ent opportunities.
Finally, and very im portantly, it is vitally im portant that efforts
be made to move beyond the placement o f women into traditional




47

low-paying jobs, and strong steps be taken to encourage the en­
trance o f greater numbers o f women into nontraditional fields. Pro­
visions for occupational development, upward mobility, develop­
ment o f new careers for women, and overcom ing sex sterotyping
should be included as we enact new job training and job creation
programs. In particular, the rapid movement o f our econom y
toward a com plex, highly technical job structure, presents a critical
opportunity for women to prepare to enter and advance in parity
with their male counterparts into this new field.
Tragically, women are in a state o f double jeopardy at present.
They suffer from persistent and totally intolerable wage and hiring
discrim ination on the one hand. On the other hand, they face the
same critical problems that confront all unemployed workers in the
country today. It is essential that the 98th Congress recognize this
serious problem and take strong steps to address the specific prob­
lems confronting women as they fight for econom ic security.
T rade

No one can doubt the im portance o f trade to the U.S. econom y.
We rely on other countries for certain goods, and our exports are
critical to the econom y o f our country. But there must also be the
realization that parts o f our econom y may be hurt by foreign trade.
The actions o f other countries must be carefully monitored and ac­
tions should be taken if harm is done to our domestic economy.
The United States may currently be a victim , not a beneficiary of
its open market policies. Our econom y is directly disturbed when
our foreign trade partners help themselves to larger and larger
portions o f our consumer markets while denying access to their do­
mestic markets. It is time to put our foreign competitors on notice
that the slogan “ free trade must be fair trade” is not just simple
rhetoric. I do not advocate passing protectionist legislation, but I
submit that it must be clearly understood that all bilateral trade
relations with the United States w ill be equitable out o f necessity.
A case in point from my home state o f Maine involves the shoe
industry. Maine is the leading footwear producing state in the
nation, em ploying 17,000 people. Yet, significantly as that figure
appears, it is less by 7,000 jobs since the late 1960’s. Those job de­
creases can be directly attributed to the flood o f foreign, low-cost
shoes that have been dumped on U.S. markets. Foreign m aterial
costs and wage differentials are certainty a major factor account­
able for the decline, but the problem goes beyond that. In many in­
stances, the shoe exporters have gone one step further and are
denying m arket access to U.S. shoe exporters. For all intents and
purpose, the foreign shoe m anufacturers are having their cake and
eating it too by monopolizing their domestic markets, m aintaining
full production and exporting, at the expense o f U.S. shoe m anufac­
turers m illions o f pairs o f shoes. I do not think that anyone would
characterize this trade situation as fair or equitable.
Restricting market access is only one method by which the U.S.
global trade position suffers. Another serious roadblock to free and
fair trade is heavy subsidization by com peting governments.
Canada is a prime example o f a governm ent which subsidizes cer­
tain industries, often with great harm to our domestic markets.




48
Canadian lum ber exports to the United States has reached
almost $2 billion annually. Certainly, that level o f exports does not
come about as a result o f lack o f supply in the U.S. side o f the
border. It is a documented fact that the Canadian governm ent is
heavily interventionist in their industries, and offers the lumber
business a vast quantity o f loans, grants, rail rate discounts, wage
assistance, and inventory financing, while selling public tim ber
well below m arket value. Consequently, the Canadians are able to
severely undercut the products o f the U.S. lum ber industry and
that proof is dram atically illustrated by the fact that the Canadian
share o f the U.S. lum ber m arket has grown steadily over the last
20 years from 13 percent to over 30 percent. One other effect has
been increased unemployment in the U.S. lum ber industry. In
some segments, idleness has reached a disastrous level o f 50 per­
cent o f the work force. A good portion can be attributed to the sub­
sidized exports o f the United States. Clearly, this is another exam­
ple o f an unfair trade practice which aids the exporter while in­
flicting damage on our domestic market.
Similar claims can be made about the Canadian fishing industry.
The Canadian Fishing Vessel Construction Program provides up to
$50,000 for the purchase o f new fishing gear or can be put to use
for refurbishing an older fishing vessel. Canada also provides tax
exemptions for boat fuel and fishing gear. Unemployment insur­
ance is provided for Canadian fisherm en even though they are selfemployed. It is no wonder that over 50 percent o f the fisheries
products used in the United States are imported. O f those imports,
Canada supplies nearly one-half a billion dollars worth, which is
equal to 90 percent o f all o f Canada’s fish landings. It would appear
that Canada is supplying these subsidies because o f a conscious de­
cision to support the M aritim e fisheries as a less costly alternative
to widespread w elfare and the social losses that would result from
the decline o f the fishing industry.
The United States must follow an even course on trade policy. I
agree that considerable attention should center on efforts to in­
crease our exports, but attention should also be paid to our import
policy. We should not look only to markets in other countries for
our goods, but we should make every effort to encourage a healthy
domestic market for our products.




DEMOCRATIC VIEW S ON THE FEBRUARY 1983 ECONOMIC
REPORT OF THE PRESIDENT




(4 9 )




CONTENTS
Page

I. To restore grow th.......................................................................................................

55

R ecom m endation N o. 1: Congress, the Administration, and the Federal

Reserve should act to achieve a high rate of economic growth in 1983 and
1984. The following mix of policies is required:
Monetary policy should accommodate sufficient economic growth to
reduce unemployment in 1983 and 1984.
Fiscal policy in 1983 should support economic recovery. Immediate
steps to provide relief to low-income people and to improve tax fairness
will promote this objective.
Fiscal policy decisions this year for Fiscal Years 1984-1986 and
beyond should sustain recovery. Much lower deficits, achieved through
a reduction in the proposed m ilitary budget and other spending and
through a more fair tax system, will promote this objective by encour­
aging lower long-term interest rates.
Humphrey-Hawkins and the President’s Economic Report........................
57
Monetary Policy in 1983— Recovery................................... ................................
57
R ecom m endation N o. 2: The Federal Reserve should ease money and
credit to achieve low real interest rates early in 1983, and should sustain
such rates through 1984.
R ecom m endation N o. 3: Better coordination of monetary and fiscal poli­
cies should be achieved through the budget process. The Federal Open
Market Committee’s official projections for growth, inflation, and employ­
ment should be made consistent with the economic assumptions of the
budget resolution.
Fiscal Policy in 1983— R elief and Reform..........................................................
60
R ecom m endation N o. 4 : Congress should authorize and fund a significant
jobs program.
R ecom m endation N o. 5: Congress should provide additional support this
year for food, fuel, housing, and health care to low-income people.
R ecom m endation N o. 6:

The Federal Supplemental Compensation program should be ex­
tended to provide 10 additional weeks of coverage to those who have
exhausted benefits, and to provide the current level of coverage for
workers who become newly eligible over the next nine months. Propos­
als to cut eligibility for FSC by increasing the number of weeks worked
in the base period should be rejected. Consideration should be given to
the use of a national unemployment rate trigger as steps to reduce the
Federal deficit take effect. Congress should suspend changes in the Ex­
tended Benefit program that restrict availability of the program in cer­
tain states, and extend the two-year grace period on repayment of Fed­
eral loans to state unemployment insurance programs.
R ecom m endation N o. 7: Congress should provide fiscal assistance to state
and local governments this year to avert sharp cuts in public services and
regressive tax increases. Such assistance should be phased out as the econo­
my recovers. No counterproductive cuts in programs benefitting state and
local governments should be made this year.
R ecom m endation N o. 8: The July 1, 1983, 10 percent personal income tax
reduction should be capped at a maximum benefit of $700 per taxpayer,
preserving the full benefit of the cut for all taxpayers earning less than
$46,500.
Fiscal Policy in 1984-1986— Reconstruction




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67

52
Recommendation No. 9: Congress should put in place in 1983 a fair and
effective deficit reduction program for Fiscal Years 1984-1986.
Recommendation No. 10:
Personal income tax indexing should be repealed.
The base o f both the personal income tax and of the corporate
income tax should be broadened, with special emphasis on the elimina­
tion of tax expenditures which are obsolete, inefficient, or particulary
regressive, and on reform o f depreciation schedules to improve the neu­
trality of the tax code with respect o f different classes of investment.
W e oppose proposals for broad-based, regressive consumption taxes.
Recommendation No. 11: M ilitary spending increases should be slowed for
the immediate future by more prudent decisions with respect to weapons
systems and to procurement, rather than through cuts which will affect the
recruitment and retention o f qualified m ilitary personnel or their combat
readiness.
Recommendation No. 12: Entitlem ents programs should not be exempt
from review as part o f the broader effort to reduce budget deficits in future
years.
International Economic Policy................................................................................

71

Recommendation No. 13: The overvaluation of the U.S. dollar must be
ended.
Recommendation No. H : The United States Government must seek to
assure the proper enforcement o f existing trade laws, and seek elimination
o f foreign trade barriers which lim it our exports.
Recommendation No. 15: Congress should support the requested increase
in the lending authority o f the IM F.
Recommendation No. 16: A ny increase in the IM F quota should be accom­
panied by actions to tighten oversight o f foreign lending.
II. To sustain growth........................................................................................................

76

Recommendation No. 17: Cooperative policies to fight inflation must be
developed as the economy recovers.
Training and Job Services........................................................................................

77

Recommendation No. 18: The newly enacted job training and dislocated
worker assistance program needs increased funding.
Recommendation No. 19: State unemployment insurance laws should be
modified to encourage training and education, while avoiding measures
which have a punitive effect on those unable to work.
Recommendation No. 20: The functions o f the Employment Service should
be enlarged, with greater efforts to expand use o f the Service by applicants
and employers. Additional resources and staff should also be provided to of­
fices administering unemployment insurance.
Recommendation No. 21: Equal employment opportunity laws should be
enforced vigorously, with adequate funding for enforcement activity.
Education and Science...............................................................................................

79

Recommendation No. 22: Education at all levels must be improved. Feder­
al funds should be provided to raise the technical level o f primary, second­
ary, and higher education, and to assure more equal educational opportuni­
ty across all regions, and for the disadvantaged.
Recommendation No. 23: Federal support for nondefense research and de­
velopment, especially in universities, should be increased.
Industry and Infrastructure....................................................................................

82

Recommendation No. 24: Programs to support industry should be de­
signed to take advantage o f new opportunities while retaining our old, pro­
ductive strengths. The key ingredients include:
An efficient, up-to-date, w ell maintained public infrastructure.
Necessary Federal support to workers for adjustment to new indus­
try.
A griculture....................................................................................................................
84
Recommendation No. 25: Congress and the U SD A must take steps to
ensure that efforts to reduce excess U .S. production, such as the PaymentIn-Kind program, are successful.




53
Recom m endation N o. 26 : Congress and the Administration must increase
efforts to expand farm exports.

E nergy............................................................................................................................

86

necommendahun No. 27: Incentives to conserve energy, to promote pro­
duction of cost-efficient fossil fuels in the United States, to further reduce
unreliable energy imports, and for research in renewable energy should
remain high national priorities.
Statistics for Economic A nalysis...........................................................................

87

Recom m endation N o. 28:

The budget for economic statistics should restore adequate funding
for crucial economic data.
A full review o f Fiscal Year 1984 funding for GNP source data should
be undertaken.
Cooperation and a Common Purpose....................................................................

88

Recom m endation N o. 29 : Greater cooperation should be fostered among

the institutions of government, business, and labor toward the common ob­
jective of higher productivity, international competitiveness, and a higher
domestic standard of living.
Additional V iew s........................................................................................................




91




I.

T o R e sto r e G r o w t h

Recommendation No. 1
Congress, the Administration, and the Federal Reserve should act
to achieve a high rate o f economic growth in 1983 and 1984. The
follow ing mix o f policies is required:
Monetary policy should accommodate sufficient economic
growth to reduce unemployment in 1983 and 1984.
Fiscal policy in 1983 should support economic recovery. Im m e­
diate steps to provide relief to low-income people and to improve
tax fairness will promote this objective.
fisca l policy decisions this year for Fiscal Years 1984-1986
and beyond should sustain recovery. M uch lower deficits,
achieved through a reduction in the proposed m ilitary budget
and other spending and through a more fa ir tax system, w ill
prom ote this objective by encouraging lower long-term interest
rates.1

The Administration has presented a frank view o f the most
likely course o f the economy for 1983 and subsequent years. How­
ever, this course is not acceptable. W e believe that the policies rec­
ommended in this Report w ill yield m ore rapid econom ic growth
and a faster reduction in unemployment them under the Adminis­
tration forecast, without leading to an acceleration o f inflation.
W hile inflation remains a danger, in the current phase o f the busi­
ness cycle, renewed inflation is not the m ajor risk. Indeed, stronger
recovery over the next couple o f year could in some ways further
reduce the inflation rate.
We favor a more rapid growth rate o f output because that means
a more rapid reduction in unemployment after the peak unemploy­
ment rate is reached. The unemployment rate w ill fall only if
output grows faster than the total o f the rates o f increase in pro­
ductivity and the labor force. I f productivity were to grow by 2.5
percent and the labor force by 1.5 percent, modest in comparison
with past recoveries, output would have to rise by at least 4 per­
cent simply to maintain the unem ploym ent rate at the current
level. For this reason, we regard growth more rapid than 4 percent
in the year ahead as essential.
The achievement o f 5.5 to 6 percent real annual growth in the
first full year o f recovery is a realistic goal. Following six previous
recessions since W orld W ar n , econom ic growth in the first year o f
recovery was at or above this range five out o f six times, as shown
1 Representative Hawkins states: “ While deficit reduction is important and necessary, too
much attention is being placed on reducing the deficit as the means for sustaining economic
growth. Deficit reduction is a desired end result. The most effective way to promote this objec­
tive is by increasing employment and production with proper attention to the priority needs of
the American people ana the economy. The achievement o f full employment with price stability
after an initial increase in properly targeted budget outlays w ill produce growth that will pro­
vide the addition of revenues needed to lower the deficit and eventually balance the budget.”




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56

in Table I. W ith the exception o f the excessively rapid recovery
during the Korean War, stronger upturns have not led to higher
inflation. In the most recent sustained upturn, follow ing the 19731975 recession, real GNP rose at a 5.7 percent annual rate over a
two and a half year period, leading to a reduction in the unemploy­
ment rate from 9 percent to less than 6.5 percent, without acceler­
ating inflation.
TABLE I.— REAL GNP GROWTH AND UNEMPLOYMENT RATE, POSTWAR RECOVERIES
[In percent]

Real GNP through quarter

1949:1V........................................................ ...........................................
1954:11..
...........................................
1958:1...
......... ...........................................
1960:1V.
...........................................
1970:1V......................................................... ...........................................
1975:1........................................................... ...........................................
Average2....................................................... ...........................................
1982:1V3 .......................................................

Real GNP growth over
follm,l" 8 4 quarters

8 quarters1

13.3
7.4
6.9
6.4
4.7
6.7
7.6

9.6
5.0
5.5
5.1
5.8
5.4
6.1

Unemployment rate
( . M u g through-

Througi

4 quarters

7.0
5.8
6.3
6.3
5.8
8.3
6.6
1 0 .7 .....

4.2
4.4
5.8
6.2
5.9
7.7
5.7

8 quarters

3.4
4.2
5.1
5.5
5.4
7.5
5.2

1 Average annual rate of growth.
2 Excludes the abbreviated 1980 recovery, when real GNP rose for only 3 quarters (1980:111-1981:1).
3 Real GNP growth and unemployment rate based on administration forecast.

Faster growth at this time, with so much slack in the economy,
would actually restrain inflation in the short run through higher
productivity growth, which lowers the rate o f increase in labor cost
per unit o f output, the major component of the cost o f production.
At the same time, lower interest rates would reduce costs directly,
and contribute to a more rapid recovery of investment, which
would mean more productivity as the recovery matures. Lower in­
flation resulting from productivity improvement would build on
itself—a sustained improvement o f 1 percent in our productivity
growth rates would, over time, reduce the inflation rate by more
than 1 percent.2
To achieve a higher growth rate this year and to sustain it
through 1984 w ill require prompt action to change the course o f
both monetary and fiscal policy, both o f which are pursuing a dan­
gerous policy o f “ going slow” in the recovery’s early phases.
M onetary policy should act to achieve low real interest rates
early in 1983. The Federal Reserve has now rightly abandoned the
monetary targets it tentatively had set for 1983, in the im plicit rec­
ognition that those targets were incompatible with econom ic recov­
ery. But the thrust o f monetary policy remains that o f inching in­
terest rates down, in the hope that adequate recovery w ill take
hold. M onetary policy should instead set about to create the condi­
tions for more rapid econom ic growth in 1983 and 1984.
Fiscal policy should provide short-term stimulus in two highly ef­
ficient ways: by meeting the needs o f low-income people and the
unemployed, and by supporting the provision o f a significant
number o f useful jobs as rapidly as possible. Over the longer term,
2 “ Productivity and Inflation,” a study prepared for the use of the Joint Economic Committee,
April 24, 1980.




57

fiscal policy should have two objectives: to cut the deficits and so
help restore the long-term capital markets, and to assume the rule
o f fairness which should be the hallm ark o f the Am erican system
o f taxation.
H U M P H R E Y - H A W K IN S A N D T H E P R E S ID E N T ’ S E C O N O M IC R E P O R T

The Full Employment and Balanded Growth A ct o f 1978 (Humphrey-Hawkins Act) established national goals o f full employment
and price stability, and set out guidelines for the development o f
econom ic policy in pursuit o f these goals. Under the Act, the Presi­
dent is directed to establish short-term goals each year, whose at­
tainment is consistent with progress toward full employment and
price stability. The goals should then serve as anchors for the
design o f short-term economic policy, and as beacons to warn when
econom ic policy is not m eeting its objectives and should be
changed.
Since the enactment o f Humphrey-Hawkins in 1978, two Adm in­
istrations have misconstrued the provisions relating to short-term
econom ic goals, in particular by specifying “ forecasts,” for the at­
tainment of which the Adm inistration does not assume responsi­
bility, instead o f the “goals” required by law. This procedure needs
to be changed, as the experience o f the present Adm inistration in
1982 demonstrates.
In last year’s Economic Report, the Adm inistration made the fol­
lowing forecast: “ The com bination o f growth-oriented fiscal policy
and anti-inflationary monetary policy should mean substantial
progress toward the econom ic goals embodied in the Full Employ­
ment and Balanced Growth A ct o f 1978.” Specifically, unemploy­
ment was forecast to fall from an average level o f 8.9 percent in
1982 to 7.9 percent in 1983.
Obviously, this has not happened. Unem ploym ent is now expect­
ed to average 10.7 percent in 1983, and other indicators o f econom ic
perform ance except for inflation, w ill also fall far short o f the
levels forecast for them a year ago. Such a divergence o f perform ­
ance from objectives should be followed by changes in policy ade­
quate to restore progress toward the original objective.
The Administration forecasts for econom ic growth in 1983 are far
below the economy’s noninflationary potential. Different policies
are clearly available which would bring about a higher rate o f
growth without renewed inflation. U nder these circumstances, the
Full Employment and Balanced Growth A ct o f 1978 requires that
policy be changed to bring about more rapid growth and a more
rapid reduction in unemployment.
M O N E T A R Y P O L IC Y I N

1983— RECO VERY

From October 1979 through July 1982, with a brief exception in
the summer and fall o f 1980, m onetary policy was conducted to
fight inflation. No other objective influenced the course o f mone­
tary policy during this period. Two recessions have resulted, one in
early 1980, and another which began in July o f 1981 and continues
to this day.
It was Federal Reserve policy through the first h a lf o f 1982 to
continue strong monetary restraint despite the recession. As late as




58

May 18, 1982, the Federal Open Market Committee “ renewed the
short-run objectives (from expansion o f M l) established in late
M arch,” which objectives had been intended at the tim e to “ permit
only modest growth o f M l.”
In July 1982, the Federal Reserve changed policy. The growth o f
M l resumed at a rapid rate, and interest rates, which had been de­
clining irregularly since the fall o f 1981, began a rapid decline be­
ginning in July o f 1982. By its meeting o f October 5, 1982, the
FOMC had abandoned efforts to target narrow money. The FOMC's
endorsement o f more rapid money and credit expansion was re­
peated in November and in December.
In February o f 1983, the Federal Reserve presented m onetary
targets for 1983 to Congress as required by the Humphrey-Hawkins
Act. These targets reaffirm the Federal Reserve's retreat from
monetarism in 1983.
The target for M l has been widened, and its upper lim it, 8 per­
cent, is 2.5 points higher than the tentative lim it for M l in 1983 o f
5.5 percent which was advanced last July. Moreover, the base from
which the new M l lim it has been calculated—the level o f M l in
the fourth quarter o f 1982—was far higher than foreseen last July.
Combining the higher range and the higher base, it is possible for
M l growth in 1983 to be considerably higher than would have been
possible under the tentative targets set six months ago.
The Federal Reserve has also eased its targets for the growth o f
M2. The base for M2 growth in 1983, to which the 1983 target
range o f 7-10 percent applies, has been shifted forward to the level
o f M2 which w ill be achieved in February and March o f this year.
The Federal Reserve has thus given itself leeway to accommodate
the full liquidity requirements o f the economy in the first quarter
o f 1983, including all o f the demand for Super NOW accounts cur­
rently flooding into M2. This flexibility means an effective target
for M2 in 1983 o f up to 15 percent growth above the fourth quarter
o f 1982, or more if M2 growth continues to be rapid in the next
month.
The Federal Reserve's abandonment o f monetarism is a welcome
recognition o f the error in the monetary policy prescription o f the
Reagan Adm inistration, set forth in the Economic Recovery Pro­
gram o f February 18, 1981, which called for steady deceleration in
money growth over a period o f years, irrespective o f econom ic con­
ditions. This Committee warned at the time, in our 1981 Report,
that a too rigid approach to monetary targeting would not work.
The Federal Reserve has now acknowledged, by its actions since
July o f 1982, that our position was correct.
Simply put, the Federal Reserve miscalculated the costs o f rigid
monetarism in 1981 and 1982. In its report to Congress under the
Humphrey-Hawkins Act in July 1981, this m iscalculation is spelled
out: the individual members o f the Federal Open Market Commit­
tee estimated that unemployment in 1982 would average 7% per­
cent, with the most pessimistic estimate being 8V2 percent. As late
as July 1982, the Federal Open Market Committee predicted that
“ an upturn in econom ic activity was highly likely in the second
half o f 1982.” No one on the FOMC foresaw that, in fact, a sharp
drop in real GNP would occur during that period.




59

In early 1982, a bipartisan coalition introduced language into the
First Budget Resolution, on this Committee’s recommendation,
which urged the Federal Reserve to reevaluate its monetary tar­
gets. In the Continuing Resolution enacted in December, Congress
directed that the Federal Reserve “ continue to take such actions as
are necessary to achieve and m aintain a level o f interest rates low
enough to generate significant econom ic growth and thereby
reduce the current intolerable level o f unemployment.” These
measures undoubtedly had a positive effect on the conduct o f mone­
tary policy in 1982 and 1983.
We support the decisions o f the Federal Reserve in July 1982 and
February o f 1983 to relax its m onetary targets and to support eco­
nom ic recovery.8 Monetary policy in 1983 should move to assure
that strong econom ic recovery does occur, and monetary policy in
1984 should sustain that recovery at a rapid rate o f growth.
Recommendation No. 2
The Federal Reserve should ease m oney and credit to achieve low
real interest rates early in 1983, and should sustain such rates
through 1984.

Interest rates have fallen sharply since the peak levels o f 1981.
The prime rate averaged over 20 percent in the summer and fall o f
1981, it now stands at 11.0 percent. This is a welcom e reduction,
and accounts for the revival o f housing and autom obile sales in
1982.
Real interest rates, however, have fallen less than nom inal inter­
est rates, and remain much too high. W hen the prim e rate stood at
20.5 percent, the inflation rate was approxim ately 10.5 percent, and
the real rate o f interest stood at the historic level o f 10 percent.
Now the prime rate has declined to 10.5 percent, and inflation to
about 4 percent from levels a year ago. This represents a decline in
real interest rates to about 7 percent. It m ay be that expectations
o f inflation have not fallen as much as inflation, and this is delay­
ing the downward adjustment o f nom inal rates. However, a sub­
stantial further reduction in interest rates is called for at the pres­
ent time.
Recommendation No. 34
Better coordination o f monetary and fiscal policies should be
achieved through the budget process. The Federal Open M arket
Com m ittee’s official projections for growth, inflation, and employ­
ment should be made consistent with the economic assumptions o f
the budget resolution.

A major weakness o f budget and econom ic policy planning in
recent years has been failure to integrate monetary policy into the
budget process. If the m onetary and fiscal authorities are operating
on the basis o f economic assumptions and goals which conflict with
those of Congress, then congressional forecasts o f the budget deficit
are likely to be in error and the budget process itself is impaired.3
3 Representative Hawkins states: “ While I support the shift away from rigid monetarism
which the Federal Reserve has maintained since 1979, and which greatly contributed to two re­
cessions, it is not entirely clear to me that they have indeed stated a change in position nor
have they wholeheartedly endorsed a different monetary policy conducive to real economic
growth.”




60

Coordination o f monetary and fiscal policies has been made diffi­
cult by the failure o f the Federal Reserve to provide Congress with
a forecast o f real econom ic growth, inflation, and employment
which it believes to be consistent with the monetary and credit tar­
gets established under the Full Employment and Balanced Growth
Act o f 1978. Instead, the Federal Reserve provided Congress with a
wide “ range o f view s" o f the individual members o f the Federal
Open Market Committee, which provided no basis for relating the
Federal Reserve’s monetary targets to the final econom ic objec­
tives.
As a result o f discussions with this Committee, the Federal Re­
serve has now changed its practice. The February 1983 Report to
Congress under the Humphrev-Hawkins Act provides, for the first
time, the “ central tendency’* of the Open Market Committee’s
members’ views on growth, inflation, and unemployment. This
“ central tendency’’ is tantamount to an official Federal Reserve
forecast o f the expected consequences o f monetary policy. A sum­
mary of the forecast is given in Table II.
TABLE II.— FEDERAL RESERVE OPEN MARKET COMMITTEE ECONOMIC FORECAST FOR 1983
[Midpoints of Ranges]
FOMC

Changes, 4th quarter to 4th quarter, percent:
Nominal GNP........................................................................................................................
Real GNP.............................................................................................................................
GNP deflator........................................................................................................................
Average level in the 4th quarter, percent: Unemployment ra te .......................................

Administration

8.5
4.0
4.5
10.15

8.8
3.1
5.6
10.4

CBO

8.9
4.0
4.7
f1)

1 Not available.
Source: Federal Reserve Board.

Now that the Federal Reserve has agreed to supply to Congress
the econom ic forecast on which monetary policy is based, it is pos­
sible to proceed to the next step: integration o f the econom ic as­
sumptions underlying monetary policy with those underlying the
Budget. The logical way to do this is through the First Concurrent
Budget Resolution, as Congress recognized in 1982 when it includ­
ed language on m onetary policy in that Resolution.
In preparing the First Concurrent Budget Resolution for 1983,
the Budget Committees should seek common ground on econom ic
forecasts with the Federal Reserve, in consultation with this Com­
mittee and with the Banking Committees of the House and Senate.
Once such common ground has been achieved, language can be in­
cluded in the Budget Resolution which makes achievement of the
econom ic goals assumed therein the policy o f the Federal Reserve.
FISCAL POLICY IN 1 9 8 3 — RELIEF AND REFORM

Recommendation No. 4
Congress should authorize and fund a significant jobs program.
O f the 11.4 m illion people who were unemployed in January o f
1983, 23.4 percent, or nearly 3 m illion people, had been out o f work
for over 27 weeks. That is a record proportion, and can be com-




61

pared with 10.7 percent o f a far sm aller number o f total unem­
ployed in the 1980 recession.
Many o f the long-term unemployed have lost jobs that w ill never
return. Many live in regions which have fallen into a long-standing
state o f depression. These workers can expect, at best, only slow re­
absorption into the private sector as the econom y recovers.
And the number o f long-term unemployed w ill rise as total un­
employment remains high. Under the Adm inistration’s forecast,
total unemployment w ill remain above 10 percent on an annual
average basis until 1985. W hile the policies we advocate in this
Report would bring unemployment down more rapidly, they would
still leave hunderds o f thousands o f the long-term unemployed
without job offers in the private econom y until late in business
cycle upturn.
Under these circumstances, governm ent should act to provide
jobs to the long-term unemployed.
The program should be targeted on areas o f high unemployment,
and it should provide useful work in m aintaining, repairing, and
rehabilitating public facilities and essential public services. H iring
should be nondiscriminatory, with priority to the long-term unem­
ployed, for a period of one year’s em ploym ent, and at an average
cost per job below $15,000. The program should be designed to re­
spond quickly to changing conditions in the labor market.
The design of a jobs program is necessarily a compromise be­
tween the need to hire people quickly, and the desire to em ploy
them in their most productive uses. However, in a deep recession,
there is no shortage o f useful work to be done, the priority should
be to design programs which provide a range o f jobs which require
relatively little capital equipment, and which provide opportunities
at relatively modest wages to workers with varying skills. Repair o f
public facilities and improved delivery o f public services should
both be permitted work categories under this progam.
Examples o f labor-entensive, relatively sm all-scale projects in­
clude rehabilitation o f public buildings; bridge painting and repair;
maintenance o f roads, mass transit, and traffic control systems;
maintenance o f water and sanitation systems; and improved drain­
age in flood-prone areas. Useful service em ploym ent can be created
in the areas o f public health, safety, education, and child care.
As studies o f programs operated during the 1970’s have shown,
jobholders in such programs do benefit from the work experience.
Especially for low-income participants, the programs resulted in
future gains in employment and earnings. Equally im portant, the
country benefits from the work that these men and women can do,
in a time when the private econom y would not be able to offer
them productive private-sector jobs.
In order that jobs may be created quickly, state and local govern­
ments should be responsible for identifying areas where w ork is
needed and programs can be organized prom ptly. Cost-sharing re­
quirements between Federal, state, and local governments should
be encouraged as needed and appropriate to keep the Federal
budget cost o f this program within desirable limits.




62

Recommendation No, 5
Congress should provide additional support this year for food ,
fuel, housing, and health care to low-income people.
The Federal Government has a responsibility to see that emer­
gency needs for food, shelter, fuel, and health care are met. Addi­
tional resources should be provided to states and local communi­
ties, and to expand the capacity o f private charitable organizations
to respond to the rising demand for their services.
There are four specific areas in which Federal assistance can be
directed prom ptly to those most in need.
Distribution o f surplus food.
The tem porary provision of surplus housing, for example on
m ilitary bases.
Authorization o f emergency home foreclosure relief, in the
form o f assistance to the long-term unemployed in imminent
danger o f mortgage foreclosure or, in the case o f renters, evic­
tion.
Measures to extend health insurance coverage to unem­
ployed persons who have lost their own coverage. This is par­
ticularly urgent with respect to maternity and infant care.
Prompt action on such measures does not remove the need to
strengthen the m ajor incom e security programs. Many Am ericans
now in need o f aid were never eligible for unemployment insur­
ance, public assistance, or other support programs that could nor­
m ally have helped them through hard times. Others would have
been eligible under the law in effect before 1981, but became ineli­
gible just at the time they became needy. Congress should assure
that eligibility for food stamps, AFDC, and Medicaid for low-incom e
working people and the unemployed are not unduly restrictive.
Many o f the cuts in means-tested programs in 1981 and 1982
have affected low-income working people who had previously relied
on public assistance programs to supplement their incomes, their
diets, and to provide health care which otherwise they could not
afford. For example, in 1981, all fam ilies with incomes above
$12,000 were excluded from the food stamp program, irrespective o f
fam ily size. AFDC benefit reduction rates have been altered, so as
to increase the benefit penalty associated with each dollar o f out­
side earnings. Changes in the “ income disregard” associated with
work-related expenses (clothes, travel, tools, equipment, child care,
etc.) have disqualified for AFDC needy families with heavy expend­
itures in these areas. In many o f these cases, disqualification for
AFDC has also meant a loss o f Medicaid benefits.
The standard o f living o f low-income people has been eroded by
these changes, as has the ability o f the system o f public assistance
to respond to the additional needs generated by the recession. In
1981, the proportion o f persons living in poverty increased by the
largest amount since 1967, from 13.2 to 14.0 percent. That repre­
sents an increase o f 2.2 m illion persons, for a total o f 31.8 m illion.4
No doubt in 1982 the rate o f poverty rose even further.
For many programs, expectations that lost Federal revenues
would be replaced by state, local, and/or nonprofit organizations'
Census Bureau, Current Population Reports, Series P-60 Number 134.




63

revenues have not materialized. Most state and local governments
have not replaced lost Federal aid, partly because the iisca l effects
o f the recession have impaired their ability to do so. .Because non­
profit organizations are so dependent on public support, reductions
in Federal aid are forcing them to curtail activities also.
Even if the recession ends in the next few months, its effects,
and the effects o f program cuts, on low-incom e people w ill continue
to be felt. There is thus a com pelling case for additional support o f
food, fuel, housing, and health care to low-incom e people in 1983.
Part should take the form o f funding for relief that can be dis­
pensed rapidly under existing law. But there is also no substitute
for a truly effective safety net. There is no case for further reduc­
tions in means-tested benefit programs at this time.
Recommendation No. 6
The Federal Supplemental Compensation program should be ex­
tended to provide 10 additional weeks o f coverage to those who have
exhausted benefits, and to provide the current level o f coverage for
workers who become newly eligible over the next nine months. Pro­
posals to cut eligibility for FSC by increasing the number o f weeks
worked in the base period should be rejected. Consideration should
be given to the use o f a national unemployment rate trigger as steps
to reduce the Federal deficit take effect.
Congress should suspend changes in the Extended Benefit pro­
gram that restrict availability o f the program in certain states and
extend the two-year grace period on repayment o f Federal loans to
state unemployment insurance programs.*

Six and one-half m illion persons—about h alf o f the unem­
ployed—are currently drawing unem ploym ent insurance benefits.
This compares to 70 percent o f the jobless at the height o f the
1974-1975 recession and to an average o f 60 percent for all seven
previous postwar recessions. Until passage o f the Federal Supple­
mental Compensation program in September 1982, only about 40
percent o f those unemployed during this recession qualified for any
jobless benefits.
Since 1981, most states have responded to cost pressures by re­
stricting eligibility for the regular 26-week program. Federal law
changes have also limited the ability o f states to qualify for the Ex­
tended Benefits program, which provides an additional 13 weeks o f
benefits. Moreover, the rapid sequence o f the 1980 and 1981 reces­
sions prevented many o f the jobless from working long enough to
establish or reestablish their eligibility for unemployment insur­
ance. And the numbers o f jobless persons exhausting their benefits
keeps growing as weak labor markets persist.
The Federal Supplemental Compensation program now provides
a third tier o f benefits, adding either 8, 10, 12, 14, or 16 weeks to
whatever regular and extended benefits are available. Since the
length o f supplemental benefits depends upon a state’s unemploy­
m ent rate, most states can offer a total o f 40 weeks o f benefits. In
several states with high unemployment, the com bination o f regu-5
5 Senator Bentsen agrees that Congress could consider the suspension of changes in the Ex­
tended Benefit program, and extending the two-year grace period on repayment o f Federal loans
to state unemployment insurance programs, as the budget deficit is brought under control.




64

lar, extended, and supplemental benefits permits 55 weeks o f cover­
age. Federal supplemental benefits should be extended. An addi­
tional 10 weeks o f benefits should be provided to those who have
exhausted their unemployment benefits, with current levels o f cov­
erage available to newly eligible workers. Consideration should be
given to eventual use o f a national unemployment rate trigger.
To reduce costs, the Adm inistration’s Fiscal 1984 budget would
make it harder to qualify for the FSC program by requiring recipi­
ents to have worked 30 rather than 20 weeks in the base period
used to determine eligibility. This change would deny benefits to
an estimated 300,000 long-term unemployed persons and should be
rejected.
Meanwhile, because o f restrictions enacted in 1981, the second
tier o f the system—the Extended Benefits program—is irrelevant
for many states. Currently, 24 states and Puerto Rico qualify for
extended benefits. Four states with double-digit unemployment
rates are not eligible. The principal reasons are higher state trigger
levels, which took effect in September 1982, and a change in the
method o f calculating these rates. Because persons receiving ex­
tended benefits are now excluded in the computation o f the trigger
rates, several states with severe unemployment—such as Michigan
and Maryland—lost eligibility for extended benefits at times last
year. If these changes were suspended, a total of 34 states would be
able to offer extended benefits. If the former national trigger for
the program still applied, extended benefits would be available in
all states.
Even with lower eligibility rates, the cost of unemployment in­
surance claims in this recession has risen. Double-digit unemploy­
ment brought expenditures on unemployment insurance close to
$22 billion in 1982, up from $18 billion in 1981 and $16.5 billion in
1980. The states’ share, which finances the regular 26-week pro­
gram and one-half o f the cost of Extended Benefits, rose from $13.5
billion in 1980 to $20.3 billion in 1982.
Many o f the hardest hit states, reluctant to raise payroll taxes on
employers or cut benefits to the jobless any further, have borrowed
heavily from the Federal Government to meet their program obli­
gations. As of January 31, 1983, 23 states plus District of Columbia,
Puerto Rico, and the Virgin Islands had accumulated debts o f more
than $11.7 billion. At least 35 states are expected to have outstand­
ing loans in 1983.
The 1981 budget reconcilation legislation changed the rules on
borrowing by states whose revenues for unemployment insurance
have run short. Interest charges—currently 10 percent—have been
applied to states taking out loans after April 1982. After a two-year
grace period, states with outstanding loans will see em ployer pay­
roll taxes go up unless their programs meet certain new standards
for solvency.
These requirements are ill timed in the context o f the current re­
cession. States with high levels of unemployment—those most
likely to incur the debts— are least able to afford the penalty of
higher payroll taxes. Nationwide, employers alreadv face an in­
crease in unemployment insurance payroll taxes o f $1.4 billion in
1983. Extending the two-year grace period would spare states with




65

high unemployment from the choice o f cutting program costs to
deter the tax penalty or risking new losses o f industry and jobs.
Recommendation No. 7
Congress should provide fiscal assistance to state and local gov­
ernments this year to avert sharp cuts in public services and regres­
sive tax increases. Such assistance should be phased out as the econ­
om y recovers. N o counterproductive cuts in programs benefiting state
and local governments should be made this year.

For the state and local sectors, 1981 and 1982 were years o f tran­
sition. New federalism took a major leap forward and the growth
in Federal aid was reversed. A t the same tim e, the national econo­
m y was mired in a recession and interest rates were high. Taken
together, these factors had far-reaching im plications for state and
local governments.
In October 1982, the Committee released its annual survey on
the fiscal condition o f cities. Our 1981 survey had shown that the
number o f cities running operating deficits was large. According to
our latest report, five more cities were added to the list, bringing
the proportion o f cities with operating deficits to 40 percent. Cities
were projecting virtually no growth in revenues in 1982. For cities
o f all sizes, revenues were expected to increase by 1.3 percent, a re­
duction o f approximately 6 percent in real terms. Expenditures
were projected to increase by an average o f 7.8 percent. As a result,
as many as 60 percent o f the respondents may have incurred a cur­
rent deficit in 1982 unless expenditures were reduced or revenues
raised. The survey also found that the buffer generally provided by
carryover balances has continued to decrease, thereby reducing the
margin for fiscal error. Finally, our respondents indicated that city
work forces have once again declined and were expected to decline
further in 1982.
According to a survey o f 41 states conducted by the National
Governors Association (NGA) and the National Association o f State
Budget Officers (NASBO), these states expected to end FY 1982
with a combine surplus o f $1.6 billon, and FY 1983 with a $2.0 bil­
lion deficit. This compares to a surplus o f $11.8 billion as recently
as 1980. Nine states—California, Colorado, New Hampshire, New
Jersey, New York, Pennsylvania, Verm ont, Virginia, and W iscon­
sin—are currently projecting budget deficits for the end o f the
fiscal year.
Only six months ago, FY 1983 revenues were expected to be $8
billion higher than current projections and expenditures were pro­
jected to exceed current estimates by $5 billion. NGA concludes,
“ the Report quantifies the devastating im pact the recession has
had on state revenues. As bleak as these totals are, the fiscal situa­
tion in the states is probably worse than portrayed here.” 6
Because all states except Verm ont are prohibited from running
deficits, discretionary actions to reduce expenditures and increase
revenues have been implemented. The results are tax rate hikes,
program reductions, and employment layoffs. State tax increases in
1982 were the largest in more than a decade. Four states raised
their incom e taxes; five increased their sales taxes; and nearly half
6National Governors Association News Release, January 7,1983.




66

of the states have increased other taxes or fees. In addition, budg­
etary pressures have forced 26 states to cut back their 1982 and
1983 budgets after those budgets had already been proposed or en­
acted; 32 states imposed either across-the-board or selective spend­
ing cuts—or both—for fiscal year 1982 or 1983; 33 imposed hiring
lim itations; 18 laid o ff employees; and eight initiated furloughs.
High interest rates and the severity o f the national recession
have exacerbated state and local fiscal problems. According to the
Bond Buyer Index, interest rates on municipal bonds in 1982 aver­
age 11.6 percent. Although recently interest rates have been declin­
ing, at 9.5 percent they still outpace the Bond Buyer Index for the
1970’s, which average only 6.95 percent. Thus, for $75 billion in
long-term borrowing in 1982, state and local governments are com­
mitted to paying over $3 billion more in interest costs over the
course o f the loans than they would have if the same level o f bor­
rowing occurred in the 1970’s.
What is more, unemployment has reduced state and local rev­
enues, while increasing the need for additional social services. In
particular, cyclically sensitive taxes, such as those on sales and
income which are buoyed during inflationary periods tend to de­
cline the most during recessions. Due to the seriousness o f the re­
cession, property tax revenues, which have grown rapidly in recent
years, are also tapering off.
The Community Development Block Grant program provides one
means that additional funds could be provided to state and local
governments to relieve distress and at the same tim e lessen fiscal
pressure. At least $1 billion in additional CDBG funds could be
made available and used effectively this year. The State and Local
Fiscal Assistance A ct (general revenue sharing could also be made
into a vehicle for a tem porary increase in general fiscal assistance
to local governments.

Recommendation No. 8
The July 1, 1983, 10 percent personal income tax reduction should
be capped at a maximum benefit o f $700 per taxpayer, preserving
the fu ll benefit o f the cut for all taxpayers earning less than
$46,500.
Steps are needed this year to establish that Congress is prepared
and determined to cut the budget deficit in future years. One step,
which would have no adverse effect on recovery this year, would be
to place a $700 cap on the benefit received from the July 1, 1983, 10
percent personal incom e tax reduction.
A cap on the July 1, 1983, tax reduction would raise $1 billion in
fiscal year 1983, $5 billion in fiscal year 1984, $7 billion in fiscal
year 1985, and progressively larger sums thereafter. Over a threeto five-year period, it would more than com pletely pay back the
cost o f a significant jobs program. Alternatively, such a cap would
more than offset the additional cost o f needed relief programs in
1983 and 1984. A cap would only affect those taxpayers currently
earning over $46,500 per year, who have received m ore benefit
from the tax reductions already put into effect in 1981 and 1982.
A ll other taxpayers would receive the full 10 percent reduction in
their taxes on July 1.




67

Such a cap, finally, would be good for the economy. In the cur­
rent state o f the economy, the urgent priority is for additional
spending power to set the recovery moving; a cap on the third year
o f Kemp-Roth would promote this objective, by helping to lower in­
terest rates, reverse expectations o f high future deficits, and pro­
vide resources that are needed to bring about an end to the reces­
sion this year.
F IS C A L P O L IC Y I N

1 9 8 4 - 8 6 — R E C O N S T R U C T IO N

Recommendation No. 9:
Congress should put in place in 1983 a fa ir and effective deficit
reduction program for Fiscal Years 1984-1986.

To sustain the recovery beyond this year, the budget deficits
from Fiscal 1984 through 1988 must be reduced well below the
levels currently projected. The growth in spending projected
through 1988 must be reduced as part o f this effort, but no ade­
quate cut can be made in projected deficits unless we also consider
revenues.
The current situation is unprecedented. D eficits projected for
1984 and beyond actually increase, even if the econom y recovers
from the recession. The Federal deficit would rise to almost $300
billion by Fiscal 1988, even under optim istic assumptions about the
performance o f the economy between now and then.
In the past, Federal deficits have fallen, not risen, during recov­
ery periods.
During a recovery, the deficit should decline, Tax receipts nor­
m ally rise as people go back to work, businesses become profitable,
and incomes grow, while safety net expenditures norm ally decline.
A gradual reduction in the deficit during recovery also serves to
keep the economy from expanding too quickly and thus reduces in­
flationary pressures.
Deficits o f the size projected for 1984 through 1988 would tend to
induce another cycle o f inflation and recession if the econom y re­
covers as projected. Greater long-term stimulus is likely to bring
about a more rapid return o f inflation. Should this actually be our
fiscal policy, the Federal Reserve could com e under pressure to
tighten money and create another recession before the econom y
has fully recovered from this one.
Recommendation No. 10:
Personal income tax indexing should be repealed. 7
The base o f both "
’
? tax and o f the corporate
special emphasis on the
income tax should
elimination o f tax expenditures which are obsolete, inefficient, or
particularly regressive, and on reform o f depreciation schedules to
improve the neutrality o f the tax code with respect to different
classes o f investment.
We oppose proposals for broad-based regressive consumption taxes.

Personal income tax indexing should be repealed. W ith inflation
for 1984 and 1985 projected at 4 to 5 percent, the purpose o f index­
7 Senator Bentsen feels that, in light of the large budget deficit, personal income tax indexing
should be deferred.




68

ing—to protect taxpayers from bracket creep—is no longer com pel­
ling. But the projected deficits for 1985 and beyond are a com pel­
ling argument in favor o f the repeal o f indexing. From 1985
through 1988, the Administration projects a cumulative deficit o f
$601 billion. Repeal o f indexing would reduce the deficit by $90 bil­
lion without imposing a new tax on anyone.
Indexing o f income taxes would be bad economic policy even
under a better current outlook for the deficit. In periods o f infla­
tion, indexing would inject economic stimulus by cutting tax rates,
at just the time when good economic policy would call for restraint.
Under such circum stances—accelerating inflation, rising deficits—
interest rates would be certain to rise. Thus, indexing would active­
ly promote the vicious sequence o f inflation and recession which
econom ic policy ought to be devoted to defeating.
Broadening the tax base by eliminating loopholes Wtft help
reduce the deficit while improving the fairness o f the tax code. The
base o f the personal incom e tax code has become riddled with ex­
emptions and deductions. W hile some serve a useful purpose, chan­
neling private spending into activities that would otherwise be un­
derfunded, all com plicate the tax statutes, serve to erode the tax
base, and in their aggregate contribute to a lack o f public confi­
dence in the tax system.
A recent study prepared for the Joint Economic Committee by
the Treasury Department found that the top 4.4 percent o f taxpay­
ers in 1981—those making $50,000 or more—received a more that
proportionate share o f the benefits o f 13 out o f 33 tax expenditures
examined.8 The study found some major tax expenditures to be
highly regressive, such as the exclusion o f interest on state and
local bonds, with 94.1 percent o f the benefits going to the most af­
fluent taxpayers, and the capital gains exclusion, 63.5 percent o f
which goes to the wealthiest taxpayers.
Selective loophole closing will improve the progressivity o f effec­
tive tax rates, and make possible further m odification o f the mar­
ginal rate structure. In its purest form, with no deductions o f ex­
emptions, a flat rate tax would entail a massive shift o f the tax
burden from upper-income to middle-income taxpayers. But a lower
marginal rate structure that incorporated some o f the more pro­
gressive deductions and exemptions can be designed to expand the
tax base, and still make the overall tax system more progressive
and more equitable.
At present, virtually all o f the measures under consideration to
reduce the deficits for 1984 and beyond would increase the tax
burden on individuals. Corporations should pay their fair share o f
new revenues.
Such measures should aim to improve the neutrality o f the tax
system with respect to types o f business investment. The Acceler­
ated Cost Recovery System, enacted in 1981 to reduce taxes on new
investment, has acted to subsidize short-lived assets, such as auto­
mobiles and m achinery, at the expense o f long-lived assets, such as
factories and structures. This non-neutrality o f the business tax
8 Letter and tables transmitted to Chairman Henry S. Reuse on September 28, 1982, by John
E. Chapoton, Assistant Secretary of the Treasury for Tax Policy.




69

system cuts efficiency and wastes resources. This provision o f the
corporate income fay needs to be revised as the econom y recovers.
Finally, we oppose proposafs for regressive tax increases on con­
sumption, such as a value-added tax or a national sales tax. Such a
tax would fall unfairly on moderate and lower incom e households
who devote a larger percentage o f their incom es to consumption, at
a time when such households are already suffering a considerable
increase in the proportion o f the total tax burden which they bear.
A VAT or national sales tax would also be inflationary, since it
would be added directly to the price o f goods sold at retail. And
such a tax would greatly increase the burden o f paperwork, espe­
cially on small businesses who would have to absorb the additional
costs out o f their already recession-diminished profits.
Recommendation No. 11:
M ilitary spending increases should be slow ed for the immediate
future by more prudent decisions with respect to weapons system s
and to procurement, rather than through cuts which w ill affect the
recruitment and retention o f qualified m ilitary personnel or their
combat readiness.

The defense budget is at the core o f governm ents commitment to
protect the Nation in a perilous world. However, there can be no
serious effort to hold down governm ent spending if the defense
budget is not addressed. The large increases planned for defense
are disturbing from an econom ic perspective because our experi­
ence has been that too rapid m ilitary buildups lead to waste and
inefficiency.
There are additional problems. Under present circumstances, the
rapid planned m ilitary buildup is contributing significantly to the
budget deficits. Further, the higher level o f defense spending w ill
probably result in some crowding out o f private investment.
The present m ilitary buildup is a consequence o f spending in­
creases proposed by the Adm inistrations o f form er President
Carter and President Reagan and is the largest buildup in our
peacetime history. The defense budget, not including the m ilitary
com ponent of the space program and other defense-related activi­
ties, is scheduled to grow in terms o f budget authority from $214
billion in fiscal year 1982 to $445 billion in fiscal year 1988.
M urray Weidenbaum, form er Chairman o f the Council o f Eco­
nom ic Advisers, testified before this Committee on December 15,
1982, that, toward the middle o f the decade, when significant eco­
nom ic growth may coincide with the peak o f the m ilitary buildup,
three results o f the buildup can be anticipated: the substantial
transfer o f resources in the durable goods sector to defense produc­
tion may increase relative prices for the Defense Department and
private purchasers; increased demand may produce delays in the
delivery o f military goods; and some crowding out o f private invest­
ment may occur.
Prim arily, the proposed defense increases are for procurem ent of
weapons and equipment. When calculated as a percentage o f the
overall manufacturing base o f the national economy, these in­
creases represent an upward surge. There is reason for concern
about the capacity o f the defense industries to make deliveries on
schedule and about the ability o f the Defense Department to




70

manage its procurem ent programs. If deliveries cannot be made on
time, bottleneck problems and cost increases will ensue, with possi­
ble inflationary effects on the general economy.
There is presently so much excess capacity in Am erican industry
that capacity problems are unlikely for the next year or two. How­
ever, the persistence o f cost problems in defense production has
been widely noted. The latest defense deflator statistics show a
slowdown o f inflation in the defense sector which is less than has
occurred in the rest o f the economy.
The findings o f recent studies o f the management o f defense pro­
curement are equally disturbing. A study issued by the Committee
last year noted that, unless the trend o f cost overruns is reversed,
the cycle o f higher unit costs leading to increased budgets and in­
creased budgets contributing to higher unit costs w ill be perpetuat­
ed.9 Two studies perform ed in the Defense Department, portions o f
which were made available to the press, conclude that cost esti­
mates o f m ajor weapons programs continue to be unrealistically op­
timistic: “ actual procurem ent costs usually exceed the planning es­
timates.” 101Studies by the Heritage Foundation and others demon­
strate the relative ineffectiveness so far o f efforts to control cost
growth in defense procurem ent.11
Defense spending could crowd our private investment whether or
not there are capacity problems if, as seems likely, monetary policy
does not accommodate the increased defense spending or the poten­
tially induced increase in nominal and real GNP. In his testim ony
before this Committee, Otto Eckstein stated that, under this condi­
tion, defense spending crowds out private spending even in a period
o f general slack unless taxes are increased. Dr. Eckstein said, “ In
the current circum stance, it must be recognized that we have
chosen the path o f a massive increase in defense spending without
asking the public to pay for it.” The defense buildup, he continued,
combined with the tax cuts constitute “ the origin o f the enormous
deficit problem and forces us to consider the question to what
extent the growth o f aggregate supply, i.e., the long-run growth o f
the econom ic potential o f the country, will be damaged by a de­
fense boom that is not paid for.” To avoid this consequence, m ajor
tax increases would be necessary to adequately finance the defense
buildup.
A slowdown in the rate o f defense increases can produce signifi­
cant budgetary savings. The defense spending increases proposed
by the Adm inistration w ill average about 7 percent real annual
growth over the next five years. If annual growth o f defense budget
authority is trimmed to, say, 5 percent, the five-year savings would
be approxim ately $129 billion, or about $26 billion per year. W ith a
3 percent growth rate, the savings in budgetary authority would be
about $228 billion for the five years, or $46 billion annually.

9 “ The Defense Buildup and the Economy,” p. 29, a staff study prepared for the Subcommittee
on Economic Goals and Intergovernmental Policy.
10 Quoted in the Wall Street Journal, Dec. 7, 1982.
11 “Agenda ’83,” edited by Richard Holwill (Heritage Foundation, 1983).




71
Recommendation No. 12:
Entitlements programs should not he exempt from review as part
o f the broader effort to reduce budget deficits in future years.

Entitlements are at the core o f governm ent’s commitment to the
well-being o f the elderly, the sick, and the handicapped and dis­
abled. There will always be a significant need for the services that
entitlement programs provide and for the rights that they convey:
the right to reasonable nutrition, health care, a retirem ent incom e,
and to basic income support for those who cannot support them­
selves.
In the present recession, entitlem ent programs are hard pressed.
The demand for their services has risen, and at the same time
many currently ineligible people are in need o f assistance. Now is a
time when basic entitlement programs should be protected, not de­
molished.
The first priority in reducing the budget deficit should be re­
duced growth in m ilitary spending and improved revenues. A t the
same time, no serious effort to reduce the budget deficit in future
years can ignore certain aspects o f the entitlem ent programs.
There remains room for streamlined operation o f these programs
which will not undermine the well-being o f those who are necessar­
ily dependent on them.
Entitlement programs have been plagued in the past by faulty
adjustments for rises in the cost o f living, which have either over­
stated or understated the actual effect o f inflation on the recipient
group. It is probably impossible to predict in advance just how any
particular indexing mechanism m ight distort cost-of-living adjust­
ments. Congress should therefore retain the flexibility to adjust
future cost-of-living payments to compensate for unintended under­
payments or overpayments on a case-by-case basis, if they occur.
Second, health care costs continue to rise at double-digit rates de­
spite the recession. It is quite apparent that only a m ajor reform in
the finance, delivery, and pricing o f health care is likely to bring
this aspect o f the entitlement sector under control. Congress should
be prepared to implement health care cost containm ent well before
the projected financial difficulties o f the M edicare trust fund are
upon us.
IN T E R N A T IO N A L E C O N O M IC P O L IC Y

The problems o f our domestic econom y—unemployment, stagna­
tion, high real interest rates—are now m ore closely linked to the
fate o f the world economy than ever before. Today, alm ost every
nation is trying to lim it its imports and boost its exports—while at
the same time continuing with domestic austerity to fight inflation
or, in the case o f LDC’s, to conserve scarce foreign exchange. This
is a form ula for worldwide depression.
Economic recovery abroad depends on an early and strong eco­
nom ic recovery in the United States. A t the same tim e, sustained
econom ic recovery in the United States w ill require a revival in
the rest o f the world. U.S. policy must therefore be designed to
foster both domestic and international recovery as close to each
other in tim e as possible.




72

Recommendation No. 13
The overvaluation o f the U.S. dollar must be ended.

The principal means for correcting the overvaluation o f the
dollar is through lower U.S. interest rates. The overvalued dollar
has cost the U.S. econom y over one m illion jobs. It has contributed
significantly to the rise in protectionist pressures in this country.
During all previous postwar recessions, the U.S. trade balance
improved, because demand for imports slackened along with
demand for dom estic goods. The reason for the deterioration this
time is the overvalued dollar, which has made U.S. goods less com ­
petitive. Estimates o f the relative loss o f com petitiveness in 1982
alone range from 20 to 30 percent.
The high dollar also has worsened the debt crisis and inflation
for the oil-dependent developing countries. Global oil prices are de­
nominated in dollars. The currencies o f developing countries have
depreciated against the dollar so much that the price o f im ported
oil is almost twice as high for them as it is for the United States.
Thus, their balance-of-payments positions, already strained by high
interest payments on their debt and slackened demand for their ex­
ports, have been further eroded.
When, in 1981, the dollar began appreciating strongly against
the other m ajor currencies, the principal reason was the sizable in­
terest rate differential between the United States and Germany
and Japan. Interest rates here began dropping during the late
spring, thus narrowing the interest rate differential. In November,
the dollar began to fall relative to the Japanese yen and the
German mark. The decline against the yen has been striking. This
trend is most welcome, and will, we hope, continue. Further prog­
ress in the realignm ent o f our currency depends on further prog­
ress in getting interest rates down.
Recommendation No. H
The United States Government must seek to assure the proper en­
forcement o f existing trade laws and seek elimination o f foreign
trade barriers which lim it our exports.

As the fourth year o f the world recession begins, trading part­
ners are eyeing each other with increased hostility. The GATT
M inisterial M eeting failed to alter the drift towards protection.
The present recession poses the severest test o f open trade since
the Great Depression. W ith exports comprising a substantial share
o f each nation’s production, more and more jobs depend upon
them, and the use o f direct or indirect government export subsidies
abroad has grown sharply. This Nation should take the lead in re­
building a m ultilateral trade system free o f such subsidies. As part
o f that process, we must be w illing to counter export subsidies on a
case-by-case basis, as we did in the recent sale o f one m illion m etric
tons o f wheat flour to Egypt. And, Congress should m eet the Ad­
m inistration’s request for $2.67 billion in standby funds to enforce
the 22-nation agreem ent signed last year lim iting such governm ent
export subsidies. Since the world has profited so much from open
trade, we should continually remind and demonstrate to our trad­
ing partners that any short-term gains for particular sectors




73

through protection may be offset by long-term disadvantages to
other sectors, and to their economies as a whole.
The traditional merits o f open trade—enhanced competition at
home, benefits for consumers in variety, price, and quality, and im­
provements in the general welfare from international specializa­
tion—are still theoretically valid. In today’s competitive arena, we
must be prepared to act firm ly against imports which are subsi­
dized or dumped, providing only that there has been injury to do­
mestic producers. We should use the “ escape clause” in the trade
law which provides for im port restraints—usually temporary and
phased out over a period o f years—where domestic industry has
been injured, even if the imports in question are neither subsidized
nor dumped. When other countries follow a similar policy, we
should insist on our right to compensation.
U.S. traders have recently sought protection under Section 301 o f
the 1974 Trade Act as amended by the Trade Agreements A ct o f
1979. This reflects a concern that the GATT dispute settlement
mechanisms are inadequate to protect U.S. rights. Section 301 pro­
vides the President with authority to impose restrictions against
individual countries in retaliation against “ unjustifiable” or “ un­
reasonable” foreign trade practices. We cannot tolerate the cre­
ation o f any disingenuous ways o f excluding Am erican exports.
Ours is still the largest market, and we should be prepared to close
down some o f it in response to unfair trade practices.
The enlargement and fairness o f trade remain our primary inter­
ests. We must avoid enacting laws which would force us to require
bilateral, sectoral, or product-by-product reciprocity, but we should
be prepared to pursue such policies when they serve the national
interest. The relief we do provide—for those industries which quali­
fy as most affected by import competition—should be structured to
build a viable multilateral trade system.
Recommendation No. 15
Congress should support the requested increase in the lending au­
thority o f the IM F.

Global economic interdependence is illustrated nowhere so well
as in the LDC foreign debt problem. As more countries find it diffi­
cult to repay their debts, the possibility o f one or more defaults,
the failure of several major banks, and an international financial
collapse must be considered. Short o f such an eventuality, it is
likely that some o f the debt may never be repaid. The problems ex­
perienced by the developing nations have already caused them to
reduce their purchases from the United States and the West. The
developing nations purchase 40 percent o f the goods and services
exported by the OECD countries and about the same percentage o f
U.S. exports. Any contraction o f credit from the West to the LDC’s
w ill cause a greater reduction o f Western exports and is bound to
aggravate unemployment.
The total foreign debt of the LDC’s reached about $640 billion in
1982, an increase o f 200 percent since 1978. The heavy burden o f
this debt is evidenced by the fact that the interest payments alone
represented between 30-45 percent o f LDC exports. Commercial
banks account for approximately $375 billion o f the total debt.




74

The debt problem is due largely to circumstances beyond the con­
trol o f the debtor countries. These circumstances are the rise in oil
prices, higher interest rates, and the global recession. Since the oil
shocks o f the 1970’s the costs of oil imports for the oil im porting
developing nations have risen from 6 percent o f total im port costs
in 1973 to 20 percent today. The rise in interest rates caused the
average interest rate on outstanding long-term debt to rise from 4.5
percent in 1973-1977 to 8.5 percent in 1981-1982. At the same time,
the global recession has depressed commodity prices and made
export markets in the West and elsewhere less profitable.
So far, the nations who borrowed the most are the ones having
problems. Not all foreign debtors face debt payment interruptions.
The largest o f those who have problems made serious econom ic
mistakes. Poland and Brazil followed a high-growth strategy which
required huge foreign loans and involved high risks. M exico was
unable to adjust to the decline o f demand for oil, on which it had
based its development strategy, and kept incurring large deficits.
Argentina and Chile allowed their currency exchange rates to be
overvalued and there, as elsewhere, debt got out o f hand. The
United States and other industrial nations undoubtedly made
policy mistakes that led to recession, or at least failed to make the
adjustments to such changes as the oil shocks that would have
avoided recession. The commercial banks and the governm ent regu­
latory authorities also made their share o f mistakes. The difficult
problem is allocating the costs o f solving the problems.
The international banks and most economists agree that the IMF
replenishment is intended only as a partial solution, to provide
much needed immediate credit and to encourage the com m ercial
banks, which provide most o f the loans to the LDC’s, to continue
flows o f new financing. Secretary Regan has warned the commer­
cial banks that enabled LDC borrowers to run up dept— “ some o f it
nonproductive and nonforeign exchange earning” —o f the dangers
should they attempt to reduce exposure during the adjustment
process that is underway.
Whether the IMF replenishment is viewed as a stop-gap effort or
part of an overall strategy, it will have no lasting effect unless
there is a sustained recovery from the global recession. To restore
business and consumer confidence worldwide, Secretary Regan has
said, there must be “ a set of economic policies in the m ajor indus­
trialized countries that will produce economic growth and a
counter to the risks of inward-looking protectionism .” The consen­
sus is that a recovery must be led by the United Stated. The Ad­
ministration should take the opportunity of the W illiam sburg
summit to assure our allies o f our commitment to pursue strong
economic growth in the United States, and to secure their coopera­
tion in a coordinated program o f global economic expansion.
An important question for Congress is whether the Adm inistra­
tion’s IMF request is made in the context of a broader econom ic
strategy likely to bring about a strong, sustained econom ic recov­
ery. If there is no recovery or only a weak one, replenishing the
IMF and other recent emergency actions could prove to be first-aid
measures that were too little, too late. It is possible for further debt
troubles to arise this year, even if recovery gets underway, and




75

some economists are predicting that an additional IMF replenish­
ment might be needed in the near future.
Recommendation No. 16
A n y increase in the IM F quota should he accompanied by actions
to tighten oversight o f foreign lending.

In recent years, an increasing share o f the debt has been under­
taken on market-related terms, from com m ercial banks, and at
short maturity. These trends cause special concern. For one thing,
short-term loans have been increasingly relied upon to finance
long-term development projects. This posed no problem while
hanks were willing to rollover previous loans. Since the onset o f
the debt troubles, banks have becom e reluctant to provide roll­
overs.
The U.S. bank regulatory agencies should increased their ability
to m onitor foreign lending by U.S. banks. Inform ation about short­
term loans is inadequate, causing borrowers and lenders to under­
estim ate potential problems. They are also difficult for govern­
ments and private organizations to monitor. The previously undis­
closed large amount o f com m ercial short-term loans caused many
governm ent officials and private specialists to be surprised by the
total indebtedness o f some o f the countries whose problems were
made public in 1982.
In an effort to develop better data, the Interagency Country Ex­
posure Review Committee o f the three U.S. bank regulatory agen­
cies has met three times a year since the spring o f 1979 to review
the findings o f its examiners. Countries that interrupted or were
about to interrupt debt servicing were designated “ classified,” and
others designated as “ weak,” “ m oderately strong,” and “ strong.”
The designations are, in effect, a system o f credit ratings. However,
there is no indication that he system has had any effect on foreign
lending so far.
It is possible to correct the deficiencies in the system without cre­
ating a new government agency. First, the authority o f the inter­
agency committee can be enlarged and its m onitoring o f foreign
lending practices increased. Second, the functions o f the inter­
agency committee can be enlarged to provide an im portant step to­
wards an international clearinghouse o f inform ation about foreign
lending. As a first stage, the interagency com m ittee can collect in­
form ation about foreign lending by U.S. banks and make it availa­
ble to government officials in the Executive Branch and Congress,
as w ell as to the financial community. A ll that would remain is for
other governments to provide sim ilar inform ation about the foreign
lending o f their banks and to exchange such inform ation with the
United States and other countries.




II. To Sustain G rowth

Recommendation No. 17
Cooperative policies to fight inflation must be developed as the
economy recovers.
Inflation is in remission. The Consumer Price Index rose by only
3.9 percent for the 12-month period ending in December 1982,
which is less than one-half o f the inflation rate in 1981, and less
than one-third o f the inflation rate in 1980. Food prices, housing,
and energy prices all rose much less than in previous years, and
interest costs fell. Only medical costs failed to moderate during
1982, rising 11.1 percent.
For the immediate future, the inflation outlook is good. Falling
oil prices in recent days w ill probably mean a substantial further
slowdown in the CPI in the months ahead. There continue to be
large agricultural stocks overhanging the market, assuring rela­
tively stable food prices. Wage settlements will continue to be very
moderate, given the depressed condition o f the labor market. Rapid
productivity growth in the early phases o f the recovery, a standard
cyclical phenomenon, w ill further ease pressure on prices o f manu­
factured goods. Only the prospect o f a falling dollar—otherwise de­
sirable—might im ply some increase in prices in the year ahead.
But the relief from inflation during 1982 was due almost entirely
to the recession. Inflation followed a pattern which is entirely char­
acteristic o f the postwar business cycle. During the 1974-1975 re­
cession, for example, as the unemployment rate rose from 5 to 9
percent, the inflation rate fell from 12.2 percent (in 1974) to 4.8 per­
cent (in 1976), which is roughly comparable to the experience o f the
past three years.
Unhappily, recovery periods have almost always brought re­
newed inflation after a few years. Indeed, the experience since the
early 1960’s has been o f progressively worse inflation in each suc­
ceeding business cycle. There is no guarantee that today’s low rate
o f inflation, an artifact o f recession, will persist once econom ic
growth is restored. The best historical evidence suggests the re­
verse: inflation will return a few years after growth returns, unless
strong and effective policies are implemented to stop it.
By far the best and most durable way to combat inflation is to
raise the rate o f productivity growth. Each additional point o f pro­
ductivity permits an equivalent increase in real incom es without
putting any pressure on prices. The recommendations which follow
in this section outline a broad program which would meet the chal­
lenge o f increasing productivity, and so sustaining growth while
keeping inflation at bay.
In addition, measures w ill be needed to prevent chronic sources
o f inflation in our econom y from getting out o f control. This can
only be done effectively on a permanent basis if the principal play­




(7 6)

77

ers—business, labor, and governm ent—are brought together at all
levels, with a common purpose, and with the tools necessary to
forge and implement a consensus policy against inflation. Compul­
sory, short-term policies implemented against the will o f major eco­
nomic sectors cannot, on past experience, be sustained. The Admin­
istration and Congress should take advantage o f the time available
while inflation remains in remission to consider and choose a strat­
egy to prevent inflation from returning. No one should be lulled
into the complacent assumption that inflation has disappeared in­
definitely from our national life.
TR A IN IN G A N D JOB SERVICES

Recommendation No. 18
The newly enacted job training and dislocated worker assistance
program needs increased funding.

Many workers need to equip themselves with new skills to com ­
pete for jobs when the economy does improve. Am ong other groups,
youth and other new entrants to the labor market, the econom ical­
ly disadvantaged, and workers displaced from long-term jobs in
contracting industries could benefit from the opportunity to im­
prove their training or educational background. Such investments
w ill also benefit the Nation through higher levels o f productivity,
employment, and output o f goods and services.
Beginning in Fiscal 1984, a new job training law w ill take effect,
replacing programs operated under the Comprehensive Employ­
ment and Training Act (CETA). State and local areas w ill receive
funding for such services as job counseling classroom training and
education, and on-the-job training. Ninety percent o f program par­
ticipants must be econom ically disadvantaged: 40 percent o f the
funds—excluding those reserved for summer programs—must be
used for youth.
The Administration requested $1.9 billion for job training under
the new Act in its FY 1984 budget. Even with the stricter focus on
low-income groups, state and local programs could effectively uti­
lize substantially higher amounts. The new law is structured to
strengthen the involvement o f private em ployers in the design and
operation of training programs. This effort deserves stronger fund­
ing.
Also, the Administration has recommended $240 m illion for a
new dislocated worker assistance program. This level should be ap­
proved to enable job search assistance, retraining, relocation assist­
ance and supportive services for workers whose plants closed, and
for other long-term unemployed. The experience with seven Feder­
al demonstration projects and other prom ising state initiatives
should serve to guide the design o f these programs.
Recommendation No. 19
State unemployment insurance laws should be m odified to encour­
age training and education, while avoiding measures which have a
punitive effect on those unable to work.

The unemployment insurance system is currently structured to
provide short-term income replacement. W ithout undercutting this
vital function, certain revisions in unemployment insurance pro­




78

grams would enable workers to develop their skills and move into
jobs more quickly. Such program should be designed so as to make
this option available to those for whom it would be useful, while
not punishing or denying unemployment insurance eligibility to
those for whom retraining is not a sensible option.
Three states have amended their unemployment insurance laws
to encourage sharing o f available work during a downturn. Under
such arrangements, workers who would otherwise be laid o ff but
remain on the payroll for shorter hours could receive a prorated
unemployment insurance benefit. Firms are induced to retain these
workers because they w ill save on rehiring and retraining costs
once business picks up. Sometimes, the worker's downtime is profit­
ably used for retraining. In California, which enacted the first
work sharing legislation four years ago, 4,485 employers and
174,000 employees have made use o f the provision.
Another approach might be to establish a separate training ac­
count, financed jointly by contributions from workers and employ­
ers. Resembling an individual retirement account (IRA) in concept,
these training accounts would accumulate contributions and inter­
est while the worker is on the job, until a sufficient threshold, per­
haps $6,000 per worker, is reached. A displaced worker could then
use the funds from this account like a voucher, to pay for educa­
tion, retraining, relocation, or related expenses. W hile self-financ­
ing, the account could be linked to the unemployment insurance
system, by requiring workers to draw on the funds after collecting
unemployment insurance for some period o f time.
The Committee urges through examination o f these ideas and
their econom ic im plications. W hile struck by the imaginativeness
of the training account proposal, the Committee notes that the
method o f financing is equivalent to a new payroll tax on workers
and employers. In view o f the weak economy and already high pay­
roll tax levels, such a tax is not advisable at this time.

Recommendation No. 20
The functions o f the Employment Service should be enlarged,
with greater efforts to expand use o f the Service by applicants and
employers. Additional resources and sta ff should also be provided to
offices administering unemployment insurance.
The U.S. Employment Service (ES) serves as a labor-exchange for
individuals seeking work and for employers with job openings. Its
activities include counseling, testing, vocational guidance, and job
referrals. By producing better matches between workers and jobs,
an efficient system o f job information and placement assistance
will result in higher productivity. It can save the Nation billions o f
dollars by helping to shorten spells o f unemployment and reduce
periods o f dependence on transfer payments from the government.
The new job training act includes the most significant revisions
o f the Employment Service Act since its passage 50 years ago. The
law relieves the Enployment Service o f functions like m igrant and
seasonal farm -workers' housing inspections, alien labor certifica­
tions, and unemployment insurance work test verifications, thereby
providing a greater proportion o f ES funding for its labor-exchange
function. Also, the funding formula is altered to concentrate great-




79

er resources upon the training and counseling needs o f hard-topiace applicants.
Computerized innovations have substantially improved the effec­
tiveness o f ES in making tim ely and accurate job matches. Howev­
er, advanced technology must be accompanied by capable personnel
service, including efforts to improve relations with employers.
Double-digit unemployment has naturally increased demand on
unemployment insurance offices and branches o f the Employment
Service. Unemployment insurance offices have endured sharp re­
ductions in permanent staff while the job service was recently
denied a much-needed increase in personnel. As the long lines o f
people demonstrate, service to the public has deteriorated. Proper
staffing for unemployment insurance and Employment Service of­
fices w ill help to ensure better inform ation to job seekers and speed
the process o f reemployment.
Recommendation No. 21
Equal employment opportunity laws should be enforced vig­
orously, with adequate funding for enforcement activity.

Blacks, Hispanics, and women continue to experience significant
labor market disadvantages by com parison with whites and males,
and it should continue to be a vigorous Federal policy to root out
discrim inatory sources o f those problems.
According to a November 1982 study by the U.S. Civil Rights
Commission,1 Blacks, Hispanics, and women are m ore heavily rep­
resented in all categories o f em ployment hardship than they are in
the general population. These measures include unemployment, in­
term ittent employment, involuntary part-time employment, mar­
ginal jobs, workers in poverty households, overqualification for the
job held, and low pay. These disparities are present in all phases o f
the business cycle, and across the spectrum o f industries and re­
gions.
Not all o f the disadvantaged position o f these and other m inority
groups is due to discrimination that can be reached effectively
under current statutes. But some is. M oreover, it is longstanding
Federal policy to reduce such discrim ination. The need for the Fed­
eral Government to run efficient, adequately staffed, and effective
anti-discrimination enforcem ent efforts is clear. The Justice De­
partment, Office o f Federal Contract Compliance, and Equal Em­
ploym ent Opportunity Commission should reaffirm a strong com­
mitment to Title VII o f the Civil Rights A ct o f 1964 and other job
anti-discrimination measures.
EDUCATION AN D SCIENCE

Recommendation No. 22
Education at all levels must be improved. Federal funds should
be provided to raise the technical level o f primary, secondary, and
higher education, and to assure more equal educational opportunity
across all regions, and for the disadvantaged.
1 “ Unemployment and Underemployment Among Blacks, Hispanics and Women," U.S. Civil
Rights Commission, November 1982.




80

The growth and competitiveness of the United States economy
over the long run w ill depend in large part on the quality and level
o f education o f the Am erican work force. The present system o f
education in the United States has not produced the necessary
numbers o f workers with high levels o f skills in math, science, and
analytical ability. But that problem can be solved only in conjunc­
tion with a general program o f improvement in our system o f edu­
cation.
The Federal Government has an important role to play in educa­
tion. It is Federal resources which make possible a narrowing in
what would otherwise be vast differentials in educational resources
per pupil across States, and in different communities within States.
It is Federal resources which provide opportunities for the educa­
tionally disadvantaged to participate more fully in econom ic life.
By providing for a more even distribution o f educational opportuni­
ty, the Federal Government has made possible the creation o f a
much more broadly based skilled labor force than would otherwise
be the case.
There is evidence, moreover, that Federal assistance to education
is effective. For example, the basic test scores o f students in large
urban school districts receiving substantial Federal assistance have
risen. So have the cognitive skills o f socially and econom ically dis­
advantaged children who participate in Title I programs. So, clear­
ly, have the handicapped and otherwise educationally disabled,
whose participation in a normal curriculum has been made possi­
ble by Federal funds.
Under the Reagan Adm inistration, funds to meet all o f the objec­
tives of national education policy, particularly with respect to the
disadvantaged, the handicapped, and to general educational re­
sources in lower incom e states and communities, have been cut.
The fiscal year 1983 budget for elementary and secondary educa­
tion, for example, was $4.4 billion, which was $2 billion less than
would have been required to maintain programs at their fiscal year
1982 levels. These sharp cuts reflect a reduced level o f investment
in the next generations o f Americans, which could mean eventual
productivity and competitiveness lower than can be achieved
through strong and effective education.
One area o f special concern is the declining quality o f technical
education in the United States today.
The Nation's potential for scientific and technological advance­
ment depends directly on the quality o f the scientific and technical
education received by its students and on the numbers o f students
who enter these fields. In the area o f mathematics, science, foreign
languages, and technology education, we are currently witnessing a
decline in student achievement, a drop in the number o f students
studying advanced science and mathematics subjects, a shortage o f
teachers in these areas, and deficiences in the number o f skilled
technicians and high-level scientific personnel. This situation, if
not addressed, threatens to compromise Am erica's stature in the
international marketplace, weaken our industrial base, and under­
mine our national defense.
There currently exists a shortage o f qualified science and math
teachers and o f individuals willing to enter teaching careers in
these subjects. Furthermore, a growing number o f qualified math




81

and science teachers are leaving their profession to pursue other
careers. The principal reasons the large salary differential which
exists between the teaching profession and others which demand
the same mathematical or scientific education and skills. For new
graduates in science and math, the average salary in teaching is
between $9,000 and $10,000, whereas scientific and technical jobs in
industry pay $18,000 to $30,000. In addition to salary differences,
some may consider teaching o f lower professional status than work
in reserch organizations or industry.
Various means o f educational assessment show that the Nation
has experienced a 20-year erosion o f math and science com petence
at the precollege level. To reverse the trend, rewards to teaching
technical fields must be increased. Special undergraduate scholar­
ship, graduate fellowship, and low-interest loan programs should be
available to prospective teachers in math, science, and other fields
with inadequate supplies o f teachers. Loans and other form s o f fi­
nancial assistance could be forgiven if students pursue a career in
teaching for a designated number o f years.
In the area o f foreign languages, the proportion o f secondary stu­
dents enrolling in courses dropped from one-fourth in the mid1960’s to 15 percent in the 1970’s. Our educational system has not
placed sufficient emphasis on the study o f foreign languages, as re­
flected by steadily diminishing educational requirements in this
field. We should encourage student exposure to the languages and
cultures o f other countries and expand opportunities for exchange
programs and study abroad.
These trends suggest that the current generation o f students w ill
be ill-prepared to meet the challenges o f an increasingly techno­
logically oriented and com petitive job market. The National Sci­
ence Foundation notes that there is a manpower shortage at nearly
every degree level and specialty in engineering and the com puter
sciences, as well as in certain physical and biological science fields.
Furthermore, the Bureau o f Labor Statistics estimates that be­
tween 1980 and 1990 the demand for com puter-related occupations
is expected to grow by as much as 75 percent—and increase o f
600,000 jobs. If the United States intends to succeed in the interna­
tional markets for high technology products, we must address these
deficiencies in our national educational system.
A student’s early exposure to, and fam iliarity with, computers
and other technical equipment can serve to spark his interest in
the fields o f science and technology. A t present, according to the
National Center for Education Statistics, slightly over one-third o f
the Nation’s public schools have at least one com puter available for
classroom use. But as part o f any effort to broaden the use o f com ­
puters in classrooms, schools must also have trained personnel to
explain its processes and sufficient software to operate the pro­
grams.
In addition to proficiency in these technical subjects, deficiences
in the basic skills o f the disadvantaged must be remedied. Educa­
tional institutions must equip students with adequte literacy and
num erical skills as well as some facility with computers, to assure
that opportunities for skilled jobs w ill be open to all.
W hile it is only a small part o f total spending on education, Fed­
eral funding is critical to the skill development o f m illions who w ill




82

otherwise be left behind. Funding for programs serving the disad­
vantaged, the handicapped, and other special educational needs
must be made cost effective and must be maintained.
Recommendation No. 23
Federal support for nondefense reserach and development, espe­
cially in universities, should be increased.

In constant dollars, nondefense research and develpment (R&D)
spending in fiscal year 1983 will be 6 percent lower than in fiscal
year 1982 and 20 percent lower than in fiscal year 1981. The larg­
est relative cuts in R&D outlays for fiscal year 1983 occurred in the
environm ental protection area, the National Bureau o f Standards,
the Commerce Department, and the Bureau o f Mines.
The President’s budget provides an increase in overall funding
for R&D. However, when m ilitary and civilian activities are sepa­
rated, the budget shows a substantial increase for m ilitary R&D
and a reduction for civilian R&D, in real terms. This is the same
pattern that has prevailed since 1981. Among the agencies whose
R&D funds have been reduced are the Department o f Energy
(except for m ilitary research), NASA, the Department o f Agricul­
ture, the Department o f the Interior, the Department o f Commerce,
and the Environmental Protection Agency.
The Federal Government’s role in the national R&D effort con­
tinues to diminish. Federal R&D in fiscal year 1983 w ill comprise
about 45 percent o f the total projected U.S. spending on R&D,
down from some 55 percent during the previous decade. This sm all­
er Federal commitment to nondefense R&D runs counter to trends
abroad. And, by holding back the rate o f industrial innovation, it
will hurt productivity growth.
The trend is disturbing because of the im plication for productiv­
ity and econom ic growth. W hile the linkages between R&D, produc­
tivity, and econom ic growth cannot be precisely described, few
doubt that they are interrelated. Many economists believe that the
Nation’s technological progress has been slowed and our industrial
competitiveness has suffered in part because o f the Federal Gov­
ernm ent’s inadequate support for industrial research.
Future productivity gains depend in part on the ability to devel­
op less costly ways o f producing goods and services. Small firm s
have been the most innovative—and the heaviest investors in R&D.
Accelerating the improvement of technology will require expansion
o f basic and applied research, as well as better dissemination o f the
results. Centers that bring university and industry researchers to­
gether for joint projects are a valuable means o f strengthening this
process.
IN D U STRY AND INFRASTRUCTURE

Recommendation No. 24
Programs to support industry should be designed to take advan­
tage o f new opportunities while retaining our old, productive
strengths. The key ingredients include:
A n efficient, up-to-date, well maintained public infrastruc­
ture.




83

Necessary Federal support to workers for adjustm ent to new
industry.

The United States is and w ill remain and industrial nation. The
challenge will be to create the conditions for a revival and sus­
tained growth o f American industry that is com petitive in world
markets, and so makes possible a continued high standard o f living
for Am erican workers.
Private sector industrial investment requires and adequate and
well-maintained infrastructure. The condition or our infrastruc­
ture— our roads, bridges, water systems, ports, utilities, rails, and
other physical support systems—is not adequate. And although the
need for maintenance, repair, and rebuilding o f these systems
grows every year, real capital expenditures by State and local gov­
ernments continue to decline.
W ith the passage o f the Surface Transportation Assistance A ct o f
1982, Congress is attempting to reverse the decline in expenditure
on one aspect o f the national infrastructure: our highways. In so
doing, Congress has acknowledged that such investment is a vital
ingredient o f future national productivity growth. Such recognition
should lead to careful planning for any other programs o f Federal
support for infrastructure that may be developed. This Committee
is contributing to this effort by coordinating studies conducted by
the various States o f their public investm ent requirem ents and fi­
nancing capacity. Such studies w ill be published as they becom e
available throughout 1983.
Adjustment assistance represents another im portant elem ent o f
econom ic development and the transition to m ore modern, produc­
tive, and technology-intensive processes. Both the workers who are
currently (or were recently) employed in contracting industries and
the communities which are home to those industries should be con­
sidered as national assets. They can either be reem ployed, or they
can be neglected. Clearly, national econom ic developm ent w ill be
greater and our standard o f living higher if the form er course is
chosen.
For workers, every effort should be made to provide a range o f
opportunities in an industrial transition. These should include
training and relocation assistance.
For communities affected by plant closings, Congress should con­
sider providing transitional assistance to m aintain public services
should a dramatic erosion o f the tax base occur. Such assistance
could make it possible for a community to rem ain an attractive site
for new investment, which derelict com m unities are not and so pre­
serve the underlying physical com m unity—streets, homes, schools,
utilities, services, and trades.
Finally, consideration should be given to the problem o f assuring
that adequate capital is available to the most im portant o f our
basic industries to make possible modernization, rationalization,
and redevelopment on an internationally com petitive basis. Any
program to facilitate acquistion o f capital for such purposes must
also assure that the basic public objectives—jobs and com petitive
industry—are met. The problems o f the rapidly growing em erging
industries should also be considered, recognizing that one o f the
strongest markets for robots, semiconductors, and the services o f




84

computer-aided design and manufacture are in traditional manu­
facturing enterprise.
AGRICULTURE

Recommendation No. 25
Congress and the USDA must take steps to ensure that efforts to
reduce excess U.S. production, such as the Paymen t-In-Kind pro­
gram, are successful.

In sharp contrast to the tremendous growth and accom plish­
ments o f U.S. agriculture during the 1970’s, net farm incom e for
the last three years has been at record low levels. In real dollar
terms, 1982 net farm incom e was Vi the level of 10 years ago, and
roughly equivalent o f that realized by farmers in 1933. Only the
livestock sector has escaped, as incomes were bolstered by low feed
prices. Nationwide the value o f farmland has plummeted. Agricul­
tural exports have dropped. Farm bankruptcies are up. And the
farm er’s problems have rippled over into their communities and re­
lated industries. Perhaps the only bright news for farm ers has been
the virtual halt o f farm production cost increases, which had risen
more than 60 percent between 1975 and 1981. Nonetheless, there is
strong evidence that the agricultural bubble, inflated during the
1970’s, has burst.
Perhaps the most worrisome problem plaguing the agriculture
sector today is the growing surplus o f U.S. crops—wheat, soybeans,
and especially corn. Currently, the United States has m ore than
150 MMT o f stocks exceeding projected demand—almost 2 xfa times
the ending stocks just two years ago, and enough to meet our do­
mestic needs for almost an entire year. It is our greatest surplus in
more than 20 years, and it has resulted from three straight years
o f bumper crops at a time when export sales have lagged. The mas­
sive surplus has led to the lowest grain prices in years, and a sharp
increase in governm ent support payments to farmers. The public
cost o f farm programs in 1982 will likely exceed $12 billion, com ­
pared to $5 billion 10 years ago. The immediate farm policy chal­
lenge is to rapidly reduce price-depressing surplus grain stocks.
The quickest way to accomplish this goal is to produce less and sell
more in 1983.
A sim ilar situation applies to the beleaguered dairy industry.
The USDA has indicated that under current policy declines in the
huge dairy surpluses in 1983 are likely to be very small at best.
Other methods to reduce these surpluses should be explored.
The general consensus is that the traditional supply-control
measures to reduce surpluses, such as the voluntary land set-aside
program, have not been totally successful. This fact, coupled with
record high governm ent farm program costs and a growing budget
deficit, prompted the Administration to implement the PaymentIn-Kind (PIK) program. Under this program, farmers can retire up
to an additional 30 percent o f their land (50 percent when com ­
bined with the initial land set-aside program) and, in lieu o f plant­
ing, receive commodities from government-owned or controlled
stocks. Farmers can also bid their entire land base out o f produc­
tion. By lim iting production and shrinking the supply o f reserves
overhanging markets, PIK may yield firmer prices in 1984 and




85

beyond. The PIK program could be m ore successful at reducing
1983 grain and cotton output than many believe, because the net
returns associated with the program could be very attractive to
farmers.
Congress and the USDA must do what is necessary to ensure
that efforts to trim excess U.S. production, such as through the
PIK program, are successful. We must also closely m onitor produc­
tion by other countries. Sharp reductions in U.S. production could
be seen by our competitors as an opportunity to boost their produc­
tion to gain a greater share o f the export market. Expanded pro­
duction by non-U.S. grain suppliers, it must be cautioned, could
easily offset U.S. production control efforts, contributing to yet fur­
ther declines in world agricultural prices.
Recommendation No. 26
Congress and the Adm inistration m ust increase efforts to expand
farm exports.

Agricultural exports, once readily siphoning o ff excess U.S. pro­
duction, have dropped due to the worldwide recession, the strength­
ened U.S. dollar, aggressive m arket expansion o f other countries,
and reduced U.S. purchases by the Soviet Union. A fter several
straight record years, the dollar value o f agricultural experts has
dropped for the first time since the last global recession o f 1975.
We must recognize the recent internationalization o f the U.S.
farm sector. Twenty years ago, we produced alm ost entirely for the
domestic market, isolated from external changes. Today one out o f
every three bushels o f U.S. grain is produced for export, and our
farm sector is highly sensitive to supply and demand fluctuations
in other countries, variations in currency exchange rates, and
changes in foreign trade and agricultural policies. W e must recog­
nize this reality and meet the present challenge head on by devel­
oping an aggressive farm program o f export prom otion: expanding
and im proving our export credit and m arket development, meeting
our com petitors’ export subsidies with price subsidies o f our own,
negotating reductions in protectionist barriers to our products, de­
veloping future markets through an expanded food aid program,
negotiating long-term supply-purchase agreements, revising aspects
of our farm programs that price our goods out o f the world market,
and guaranteeing that contracts to buy U.S. agricultural goods w ill
not be cancelled for political reasons.
Recent promising Adm inistration actions have been expanding
the USDA “blended” credit program and negotiating the recent
wheat-flour sale to Egypt. An additional $250 m illion in direct in­
terest-free export credit w ill be blended with at least $1 billion in
export credit guarantees to produce interest rates below commer­
cial levels. The earlier blended credit program resulted in $500 m il­
lion in additional U.S. export sales for an outlay o f governm ent
funds o f $100 million. The 1 MMT wheat-flour sale to Egypt negoti­
ated by the USDA was made in direct response to European Eco­
nom ic Community export trade subsidies.
Ending the financial crisis in agriculture w ill require aggressive
efforts to boost farm prices to profitable levels. Surplus stocks must
be reduced and export sales increased. W hile this process occurs,
farm credit programs must remain flexible enough to see farmers




86

through this period o f extrem ely low incomes and negative cash
flows. Farm lending agencies, such as the Farmers Home Adminis­
tration and the Farm Credit Administration, must be w illing to
defer loan payments on a case-by-case basis until farm incomes im­
prove.
Indications are that 1983 will be neither the best o f times nor the
worst of times for U.S. farmers. Nominal total farm net income will
likely be up only m arginally in 1983. Recent dramatic and historic
declines in farm operator equity, in combination with three, and
likely four, consecutive years o f poor income returns foretell m ajor
adjustments for the agricultural sector. In 1982, the asset base o f
U.S. agriculture was approximately $1 trillion. This investment
yielded but $20 billion o f net income, for a rate o f return o f only 2
percent. The modest econom ic recovery predicted by the Adm inis­
tration, followed perhaps years later by a modest world econom ic
recovery, while necessary, w ill not be sufficient to restore prosper­
ity to U.S. farmers. Clearly, the real economic challenge to U.S. ag­
riculture lies ahead.
ENERGY

Recommendation No. 27
Incentives to conserve energy, to promote production o f cost-effi­
cient fossil fuels in the United States, to further reduce unreliable
energy imports, and for research in renewable energy should remain
high national priorities.

Energy use in 1982 fell for the third year in a row. Domestic
energy consumption from all sources of energy, including petro­
leum, natural gas, coal, and electricity, declined at a prelim inary
rate of 3.4 percent compared to 1981. Energy use in 1982 was off
almost 10 percent from the peak of 78.9 quadrillion BTU’s (quads)
consumed in 1979. The decline occured most heavily in natural gas
with demand off 6 percent nationally, over double the rate o f de­
cline experienced for coal. This decline was concentrated heavily in
the industrial sector where gas usage declined a very sharp 35 per­
cent through September.
With only lim ited natural gas storage capacity, the decline in
consumption was matched by a 7.4 percent decline in production
through September. Modest increases in domestic petroleum pro­
duction and a 6.4 percent rise in coal output offset declining gas
output and yielded a slight 0.6 percent rise in overall domestic
energy production last year through September compared to 1981.
Two notable trends emerged in 1981. First, production o f hydro­
electric power reversed its three-year decline and rose by close to
17 percent in 1982, compared to the first nine months o f 1981. This
reflected the boom in small-scale hydro projects intended to serve a
broad cross-section o f manufacturing facilities. Second, imports
plunged in 1982 to 5 m illion barrels daily through September from
6 m illion barrels daily during 1981, and almost 7 m illion barrels
per day in 1980. Altogether, petroleum imports over the first nine
months o f 1982 fell 16.6 percent below 1981 and were o ff a sharp 43
percent from the peak attained in 1977.
The decline in oil imports coupled with world oil price stability
cut the U.S. foreign oil bill some 20 percent below the 1981 total o f




87

$81.3 billion. That price stability should continue throughout 1983
in light o f continued softness in world oil m arkets and present dif­
ficulties OPEC is having with its pricing policies. Barring further
armed conflicts in the Middle East or elsewhere, foreign petroleum
supplies will be abundant in 1983 with im porters able to bargain
effectively for stable or even lower prices.
But, while the oil glut may be with us for another year, it is not
likely to be a permanent phenomenon.
The recent weak market, particularly for oil and natural gas, has
sent exploration activities tumbling. This m ay expose the United
States to needless supply vulnerability in the future. The number
o f crews engaged in seismic exploration plunged more than 13 per­
cent in 1982, largely at on-shore sites. Because o f its longer lead
time, off-shore exploration activities did not begin to decline last
year until July. Exploration rigs were stacked all across the South­
west, West, and Mountain states in 1982 as the number o f rotary
rigs in operation fell by 30 percent com pared to 1981.
The Administration has reduced Federal outlays for energy con­
servation activities in the past two years. A focus on conservation
has been maintained, however, in Federal tax policy and through
incentives offered by a large number o f states for building insula­
tion, hydroelectric, and unconventional energy production. The
Nation continues to improve the efficiency with which it utilizes
energy. Efforts to improve conservation and alternate energy
sources should be resume even though the energy crisis remains in
remission.
S T A T IS T IC S F O R E C O N O M IC A N A L Y S IS

Recommendation No. 28
The budget for economic statistics should restore adequate fund­
ing for crucial economic data.
A fu ll review o f Fiscal Year 1984 funding for G N P source data
should be undertaken.

High quality Federal statistical programs are crucial to sound
econom ic analysis and decision-making. The United States, with its
strong reputation for expertise in statistical matters, had tradition­
ally made maintaining these inform ation sources a top priority. Re­
cently, however, budget cuts at statistical agencies, coupled with
the weakening o f the interagency program coordination mecha­
nism, have led to doubts about the governm ent’s continued capabil­
ity to produce economic data m eeting its traditional high standards
o f accuracy, timeliness, and completeness.
Budget cuts during the past few years have had a widespread
effect on statistical programs. A staff study released by the Joint
Econom ic Committee last year identified several high-priority sta­
tistical areas for which restoration o f funds was desirable.2
U nfortunately many areas o f the statistical program continue to
suffer from ill-advised budget cuts. The em ploym ent and wage data
programs at the Bureau of Labor Statistics, for example, have been
cut so m uch that valuable, long-standing data series have had to be
2 “ Statistics for Economic Analysis: 1983 Budget Requirements/’ a study prepared for the use
o f the Joint Economic Committee, July 19,1982.




88
elim inated and research abandoned. The revision o f the Consumer
Price Index has also fallen behind schedule.
W hile the im portance o f accurate GNP accounts is widely recog­
nized, general budget stringency and organizational disarray in the
statistical program have led to erosion in the com pleteness and
timeliness o f the source data for the GNP. Improving the quality o f
the GNP accounts demands priority attention. The Adm inistration
should provide Congress with an analysis of proposed budget
changes having consequences for the GNP accounts and also with a
multi-year plan for investing in the improvement o f these accounts.
This analysis should be made available to Congress in time to be
useful in final decision-making on the 1984 budget.
COOPERATION AN D A COM M ON PURPOSE

Recommendation No. 29
Greater cooperation should be fostered among the institutions o f
government, business, and labor toward the common objective o f
higher productivity, international competitiveness, and a higher do­
mestic standard o f living.

The achievement o f sustained noninflationary growth requires
institutional changes which foster consensus in decision-making,
cooperation on the job, and a sense o f shared purpose among gov­
ernment, business, and labor. The relationships among these
groups at present are unnecessarily adversarial. There is too much
focus on short-term objectives, and there is inadequate consultation
and coordination. Institutional rigidities, distrust, and the lack o f
cooperative spirit impede econom ic performance, both in current
production and in the design and development o f new products and
processes.
A general com mitment to greater cooperation and to the develop­
ment o f a common purpose has many aspects.
Labor-management relations must be improved. W hile there is
no single blueprint for these activities, models exist: prom ising
joint initiatives have occurred in plants, industries, and local com­
munities around the country.
At the plant level, labor and management have participated
in quality o f work life programs, quality circles, and other in­
novative approaches to problem-solving and workplace deci­
sion-making. Joint committees have tackled problem s like ab­
senteeism and turnover, bottlenecks in the production process,
and changes in technology and skill requirements. They have
brought about higher productivity, greater job satisfaction, and
better labor-management relations.
Cooperative labor-management efforts have helped the retail
food, railroad, and airline industries cope with regulatory prob­
lems and improve competitiveness. In the telecom m unications
industry, there are join t committees which focus on broadening
worker participation in decision-making and addressing prob­
lems that have tended to jlebramatlize work.
Local communities have Tormed committees o f m ajor employ­
ers and unions, often to reduce strike activity and prom ote eco­
nomic development. A leading example is Jamestown, New
York, which has had a successful communitywide com m ittee




89

for nearly 10 years. Plagued with massive unemployment and
a reputation for hostile labor-management relations, James­
town organized a network o f cooperative activities in local
plants, special skill development programs, and other efforts to
attract new firms and expand existing ones.
Since the mid-1970’s, a labor-management com m ittee in Ev­
ansville, Indiana, has sim ilarly worked to foster the growth o f
local industry. A relatively new com m ittee in Philadelphia is
focusing on the problems o f displaced workers. There are cur­
rently initiatives in about 30 communities, h alf a dozen indus­
tries, and hundreds o f individual plants—including small busi­
ness and giant corporations. W ith proper encouragement, there
could be many more.
In the Labor-Management Cooperation A ct o f 1978, Congress au­
thorized the Federal Mediation and Conciliation Service (FMCS) to
provide modest grants and technical assistance to labor-manage­
ment committees established voluntarily on a plant, community, or
industry-wide basis. Help from a neutral source like this agency
can be critical in the initial stages o f labor-management activity,
and many o f the existing efforts could never have started without
Federal support.
Funding for the program has never been close to the $10 m illion
authorized. The current level is $500,000 a year, enough for six
grants.
Government-business-labor relations need fundamental reform .
The government should encourage active consultation among all
three parties.
In recent years, we have gained valuable experience in forgoing
partnerships among business, labor, and government. This experi­
ence suggests that, through sustained effort and a broad commit­
ment to cooperative endeavor, problems can be solved. For exam­
ple, state and local governments, the United Autom obile W orkers,
the Federal Government, and leading financial institutions came
together with the leadership o f the Chysler Corporation and struck
a bargain which has permitted that corporation to survive despite
bleak conditions in the automobile market. Sim ilarly, the Steel Tri­
partite Advisory Committee, initiated by the AFL-CIO, the Carter
Adm inistration, and our leading steel companies, offered promise
until the effort was abandoned in 1981. The advisory panel would
provide a general-purpose institutional setting within which such
efforts can be renewed.
Government, finally, must im prove its own process of decision­
making and intragovemment consensus-building. One key example
is the current lack o f coordination between the development o f
fiscal policy in the Executive branch and decision-making on mone­
tary policy at the Federal Reserve. We find it difficult to have con­
fidence in the com patibility o f monetary and fiscal policies when
cooperation is lacking. The President and the Federal Reserve
Chairman should meet regularly and coordinate their activities
closely. Ultimately, as discussed earlier in this Report, Congress
must ensure that monetary and fiscal policies are coordinated and
working toward a common objective.










A D D ITIO N AL V IE W S

(9 1 )




ADDITIONAL VIEW S OF SENATOR ED W A R D M. K E N N E D Y

V ice Chairman Hamilton, our Committee colleagues, and the
staff deserve and have my admiration and appreciation for their
hard and important work in fashioning this Report which makes a
com pelling argument against the continuation o f our current eco­
nom ic path; and, even more important, charts a responsible and
achievable alternative. The econom ic agenda set forth in this docu­
ment is one rooted in the twin visions o f econom ic growth and eco­
nom ic equity. It underscores the fundam ental im portance o f full
employment and balanced growth, while recognizing that our longrun econom ic health depends upon a restoration o f fiscal responsi­
bility and stable prices. It does not shrink from the tough decisions
we must make about spending priorities, and it emphasizes that we
must act forthrightly to ensure that the victim s o f today’s devastat­
ing recession have our help now. I am proud to join with my col­
leagues in forwarding our recommendations to the House and
Senate.
Our Report correctly emphasizes that a restoration o f steady sig­
nificant growth is our most important priority. However, I believe
we must also acknowledge that growth alone w ill not be sufficient.
Our econom y also faces massive and fundam ental structural prob­
lems which must be squarely addressed.
The international economic environm ent has changed markedly
during the past decade. Rapid development and impressive produc­
tivity growth by our trading partners have created a new com peti­
tive environm ent which we cannot ignore.
The steady shift from m anufacturing to services has left m illions
o f workers and hundreds o f communities with crucial adjustment
problems which cannot be wished away.
Rapid, often dazzling, technological change poses difficult new
problems for both goods-producing and service industries.
And the confluence o f these changes has created an awareness o f
the central role that new forms o f cooperation among business,
labor, and government must play if we are to meet the challenges
which lie ahead.
I believe that these problems require that we look beyond the
macro policy tools which we must em ploy to restore growth, and
consider what additional steps must be taken to sustain it.
At a minimum, these new tools—often now referred to as indus­
trial policy—must include:
A capacity to ensure coordination among the numerous—
tax, trade, education and training, and infrastructure develop­
ment—policies now utilized by government at all levels.
A capacity to build and sustain cooperative relationships
among all of the participants in the econom ic equation.




(9 3 )

94

A capacity to target investment on those strategic—both
basic and developing—industries that are fundamental to our
future.
A capacity to develop long-range economic strategies which
ensure (1) continued international competitiveness, and (2) that
the fruits o f econom ic strength will redound to the benefit o f
all Americans.
During the com ing year, we must address these fundam ental
needs or run the very serious risk o f seeing the benefits o f the
growth policy we have suggested dissipated. I look forward to join ­
ing with V ice Chairman Hamilton and our colleagues in that
effort.




ADDITIONAL VIEWS OF REPRESENTATIVE AUGUSTUS F.
HAWKINS
The February 1983 Economic Report o f the President violates the
statutory mandates o f the Employment A ct o f 1946, as amended by
the Full Employment and Balanced Growth A ct o f 1978.
The President is required to set goals and recommend policies de­
signed to reduce unemployment to 4 percent and inflation to 3 per­
cent by the end o f 1987. The Full Employment and Balanced
Growth A ct specifically obligated the President to substitute mean­
ingful programs and policies to achieve these defined objectives, in
place o f “ forecasts,” i.e., saying what is likely to happen if current
policies continue.
The Report o f the President forecasts a 7.3 percent unemploy­
ment rate for 1987, a 4.5 percent inflation rate, and makes no alter­
native recommendations as to how to achieve the statutory require­
ment o f 4 percent unemployment and 3 percent inflation.
The President’s Report unlawfully supports the trade-off theory
o f keeping unemployment unnecessarily high so that inflation can
be reduced. This is in direct violation o f Section 104 o f the Full Em­
ploym ent and Balanced Growth A ct which states, “ . . . policies and
programs for reducing the rate o f inflation shall be designated so
as not to impede achievement o f the goals and tim etables . . . for
the reduction o f unemployment. ’ ’ In addition, it is in direct viola­
tion o f Section 105, which states, “ In choosing means to achieve the
goal for the reduction o f unemployment and choosing means to
achieve the goal o f reasonable price stability, those means which
are m utually reinforcing shall be used . . .”
Distinguishing the difference between current policies as de­
scribed in the President’s Report and those we should be follow ing
as alternatives is the first responsibility o f the Joint Economic
Committee in its Report on the President’s Economic Report. The
second responsibility is to offer a workable alternative to set us
back on the right track.
W hile I commend the Vice Chairman, and I am in general agree­
ment with the alternative program recommended in this Report, I
believe the Full Employment and Balanced Growth Act embodies a
more aggressive and comprehensive plan o f remedies and appropri­
ate alternatives which should be followed because it w ill more
quickly increase employment and production, and attain the goals
o f full employment and price stability within the statutory tim e­
table.
First, we should set econom ic goals on both an annual basis, as
well as on a five-year basis, and then specify the policies and pro­
grams we must implement in order to reach those goals. As we go
along, year by year, we w ill be able to measure our progress in
achieving the reduction o f unemployment, and if we are not suc­
ceeding in reducing joblessness fast enough to meet the mandatory




(9 5 )

96

goals, then we can make mid-course corrections so that the goals
can be reached.
The Full Employment and Balanced Growth A ct requires mone­
tary and fiscal policy form ulation to support full employment and
full production. Current econom ic policy decision-making, as evi­
denced by the grossly inadequate Report o f the President, is made
on an ad-hoc basis, and w ill again result in wasteful, duplicitous,
and mismanaged governm ent policy.
M onetary policy is overly restrictive, stunting econom ic growth
and creating excessive levels o f interest rates. Congress has the au­
thority to direct the Federal Reserve Board to com ply with the cur­
rent requirements o f law, and the President, through the Economic
Report, can also tell the Federal Reserve Board to coordinate its
policies, as other governm ental entities are required to do.
Additional alternatives to the Federal Reserve Board’s policies
can be achieved through a tightening o f its reporting provisions in
the Full Employment and Balanced Growth Act, congressional
action mandating lower interest rates to levels that are consistent
with a GNP rate that w ill effectively begin to reduce unemploy­
ment, and amending the Federal Reserve Act to make the board
more accountable to the President, the Congress, and thus the
Am erican people.
Fiscal policies are currently misdirected, suppressing ultim ate
demand and regressively redistributing income. As I stated in my
footnote to Recommendation No. 1, too much attention is being put
on reducing deficits as a means for sustaining econom ic growth, as
opposed to being an end result o f alternative programs and policies.
Alternatives to this policy lie in changing the structure o f our tax
system, and in selectively increasing and targeting Federal budget
outlays to achieve employment creation and a more balanced at­
tention to national priorities in order to achieve sustained econom­
ic growth.
Tax indexing should be abandoned. While the idea may sound
good on its face, the net effect o f it in practice would be very re­
gressive. Tax law should be revised to reduce or elim inate tax pref­
erences that serve as incentives for speculation or other unproduc­
tive investment. Tax credit programs should focus on providing in­
centives for employment and self-sufficiency. For the outyears,
loopholes should be closed.
Federal Budget spending programs should be viewed as tools for
achieving sustained growth and as investments which w ill end up
paying for themselves as economic recovery and overall growth
take hold. Increased Federal spending, targeted to the labor force
groups, sectors o f the economy, and regions experiencing econom ic
difficulties, is the most powerful tool we have in stim ulating the
econom y and balancing priorities. In addition, it can be the most
effective anti-inflation program we have. Stable, balanced growth is
a key to price stability. Full employment and production prevents
shortages, which result in higher prices.
The Full Employment and Balanced Growth A ct recognizes that
monetary and fiscal policies alone cannot achieve the quantitative
goals mandated by law. Structural programs must be used to sup­
plement m acroeconom ic policy. While policies to prom ote aggregate
demand for goods and services provide overall stimulus necessary




97

to reduce unemployment and increase production, it only goes so
far, and disparities and inequities rem ain among certain labor
force groups, industrial sectors, and geographic areas.
Structural programs are necessary to close the gap among these
groups and sectors, so that all those able, w illing, and seeking work
have the opportunity for employment at fair rates o f compensation.
Targeting structured programs w ill also enable achievem ent o f full
em ploym ent simultaneously with price stability.
Thus, the Full Employment and Balanced Growth A ct should be
properly implemented. The preem inent goal guiding econom ic
policy should be full employment: the full utilization o f our materi­
al and human resources. When balanced in its approach, a full em­
ploym ent and full production alternative would do more than any­
thing else to improve productivity and reduce inflationary pres­
sures. W hen joined with structural programs which provide jobs
skills, education and opportunities, and targeted investment and
job creation in the sectors o f the econom y and geographic areas
which are underutilized or where shortages exist, the attainm ent o f
full employment with price stability w ill be a reality.







CURRENT SERVICES BUDGET ESTIMATES




(99)




Current Services Budget E stim ates 1

The Congressional Budget Act o f 1974 (Section 605) requires that
the President submit a current services budget to Congress. This
budget notes the level o f outlays and budget authority “ for the en­
suing fiscal year if all programs and activities were carried on
during such ensuing fiscal year at the same level as the fiscal year
in progress and without policy changes in such programs and activ­
ities.” Such benchmark estimates and the corresponding current
services receipts estimates are to be accom panied by “ the econom ic
and programmatic assumptions underlying the estimated outlays
and proposed budget authority, such as the rate o f inflation, the
rate o f real economic growth, the unem ploym ent rate, program
case loads, and pay increases.” The current services budget plays a
vital role in expediting efforts o f congressional com m ittees and the
Adm inistration to develop and evaluate tim ely and credible policy
alternatives. Current services outlays by function and receipts by
source for 1984 are compared with the corresponding 1982, estimat­
ed 1983, and proposed 1984 amounts in Table III. The deficit, offbudget outlays, and total budget authority are also shown.
TABLE ill.— RECEIPTS BY SOURCE AND OUTLAYS BY FUNCTION, FISCAL YEAR 1982,
ADMINISTRATION'S CURRENT SERVICES BASIS FOR FISCAL YEARS 1982-83, AND PROPOSAL FOR
FISCAL YEAR 1984
[In billions of dollars]
1984

1982
actual

1983
current
services

Current
services

Administra­
tion
proposal

Difference
from
current
services

Individual income taxes.............................................. ..............
Corporation income taxes........................................... ..............
Social insurance taxes and contributions..................................
Excise taxes............................................................... ..............
Other.........................................................................................

$297.7
49.2
201.5
36.3
33.0

$285.2
35.3
210.3
37.3
29.4

$295.8
51.9
231.7
40.4
29.0

$295.6
51.8
242.9
40.4
29.1

-$ 0 .2
-0 .1
11.2
0.0
0.1

Total receipts......................................................... ...........

617.8

597.5

648.8

659.7

10.9

Outlays:
National defense1 ............................................. ....... ..............
International affairs.................................................... ..............
General science, space, and technology....................................
Energy........................................................................ ..............
Natural resources and environment............................. ..............
Agriculture................................................................. ..............
Commerce and housing credit.................................... ..............
Transportation............................................................ ..............
Community and regional development.......................................

187.4
10.0
7.1
4.7
12.9
14.9
3.9
20.6
7.2

214.6
11.7
7.8
4.6
12.0
21.7
2.0
21.9
7.4

253.7
12.8
8.1
4.1
11.2
15.3
2.1
26.1
7.2

245.3
13.2
8.2
3.3
9.8
12.1
0.4
25.1
7.0

- 8 .4
0.4
0.2
-0 .7
-1 .4
-3 .2
-1 .6
-0 .9
-0 .2

1 A ll years referred to are fiscal years.




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102

TABLE III.— RECEIPTS BY SOURCE AND OUTLAYS BY FUNCTION, FISCAL YEAR 1982,
ADMINISTRATION'S CURRENT SERVICES BASIS FOR FISCAL YEARS 1982-83, AND PROPOSAL FOR
FISCAL YEAR 1984— Continued
[In billions of dollars]
1984
1982
actual

26.3
74.0
248.3
24.0
4.7
4.7
6.4
84.7
0.0
- 13.2

Education, training, employment, and social services...........
Health.......................................................................................
Income security........................................................................ .....
Veterans benefits and services................................................
Administration of justice.........................................................
General Government.................................................................
General purpose fiscal assistance...........................................
Net interest...............................................................................
Allowances................................................................................
Undistributed offsetting receipts............................................. .....
Total outlays........................................................................ .....
Deficit ( - ) ...................................................................................... .....
Off-Budget Outlays.............................................................................
Deficit ( - ) Including Off-Budget Outlays..................................... .....
Budget Authority................................................................................ .....

1983
current
services

-

728.4
110.6
17.3
127.9
779.9

Current
services

27.1
92.9
289.7
26.1
5.5
5.9
7.2
105.2
1.9
- 21.6

26.8
82.3
282.8
24.5
5.3
5.9
6.4
89.0
0.0
- 20.4
-

806.1
208.5
16.9
225.4
828.4

Administra­
tion
proposal

-

880.3
231.5
17.1
248.5
954.8

Difference
from
current
services

25.3
90.6
282.4
25.7
5.5
6.0
7.0
103.2
0.9
- 22.8
-

848.5
188.8
14.0
202.8
900.1

-

-

1.8
2.3
7.3
0.4
0.0
0.1
0.2
2.0
1.0
1.1

31.8
42.7
- 3.0
45.7
- 54.7

-

1 See Table IV and discussion of estimated current services outlays for national defense in the text.
Sources: Office of Management and Budget, "Budget of the United States Government, Fiscal Year 1984,” p. 9 -4 , and "Special Analysis A
(Current Services Estimates),” pp. A-4, A-6, A-7, A—11.

Since the 1981 budget, the economic assumptions utilized in the
current services estimates and other components o f the President’s
budget have been identical. This practice was continued in prepara­
tion o f the 1984 budget documents as well. This uniform ity resulted
from repeated recommendations by this Committee that econom ic
assumptions for each program be consistent. In 1981 and 1982, the
Committee recommended modification of Section 605 o f the Con­
gressional Budget Act to require submission by the President o f a
current services budget by January 31 o f each year, with the Joint
Economic Committee evaluation to follow by M arch 1. This change
would make the law consistent with the present satisfactory prac­
tice. That Act now requires submission by the President o f current
services budget estimates on or before November 10 o f each year,
and the Committee’s evaluation of such budget estimates must be
submitted to both Budget Committees by December 31. Compliance
with these deadlines has typically not occurred because it would
reduce the usefulness o f the evaluation which would be based on
assumptions not necessarily adopted for the ensuing budget. Each
year, it has been necessary to extend the deadlines on a one-year
basis because the proposed modification in the Budget Act has not
been made, and the Committee again urges that this step be taken.
In previous years, this Committee has called for more detailed
current services estimates for a five-year period, to facilitate longer
run policy form ulation. Last year the Adm inistration provided pro­
jections o f outlays on a “ current services baseline with adequate
defense” basis for five fiscal years. This presentation combined two
very im portant but very different concepts—current services and
an “ adequate defense.” The basic rationale for current services




103

budget is that it is intended to provide objective estimates o f spend­
ing in the absence o f policy changes. By com bining it with the
much more subjective (though im portant) concept o f an “ adequate
defense,” the estimates lose their meaning and, in fact, they create
confusion. Also, last year no details were provided for the outyears
on budget categories other than defense.
A major improvement has been made in the current services
budget this year in that five-year budget estimates have been made
o f total budget authority, receipts, outlays, deficits, and off-budget
outlays. Also differences between current services and proposed
outlays by function have been presented for 1984-1988. These func­
tional estimates would be somewhat more useful if the level o f cur­
rent services outlays by function were shown as well as the differ­
ences between current services outlays and the Adm inistration’s
proposals. In this year’s budget, current services outlays by func­
tion must be calculated by adding these differences to the proposed
outlays.
The major shortcoming o f the 1984 current services budget is its
treatm ent o f budget authority and outlays for defense. In an ac­
knowledged “ major exception” to norm al practice, the Adm inistra­
tion indicates that the estimated m ilitary budget authority for 1984
and outlays for 1984-1987 are not intended to represent costs “ if all
programs and activities were carried on . . . at the same level as
the fiscal year in progress and without policy changes in such pro­
grams and activities,” the definition o f current services in the
Budget Act. Rather, the 1984-1987 estimates are “ those presented
by the Administration and used by Congress in last year’s budget
deliberations,” and the 1988 estimates “ were developed consistent
with this baseline.” This baseline is “ believed to be the most useful
one for measuring the effects o f policy changes in the defense
area.” 2 It is not specified in the Special Analysis whether the Ad­
ministration or the Congress finds this baseline “ the most useful
one,” nor, if the latter, how such a determ ination was made. And
there is no indication why sim ilar baselines m ight not be “ the most
useful” as in other areas as well.
The basis for current services defense estimates has major im pli­
cations. As shown in Table IV, over the 1983-1988 period, the Ad­
m inistration’s proposed outlays for defense ($1,808.3 billion) repre­
sent a $46.9 billion reduction from the Adm inistration’s current
services estimates, but increases ranging from $74.0 billion to
$353.3 billion in comparison with the other four baselines listed.3
These differences between proposed outlays and various current
services measures vary by more than $400 billion over this period.
Sim ilarly, as shown in Table V, over the 1983-1988 period, the Ad­
m inistration’s proposed budget authority for defense ($2,050.5 bil­
lion) represents a $54.4 billion reduction from the Adm inistration’s
current services estimates, but increases ranging from $84.9 billion
to $389.4 billion in comparison with the other four baselines listed.
2 Office of Management and Budget, “ Special Analyses, Budget o f the United States Govern­
ment, Fiscal Year 1984,” p. A-3.
3 These comparisons do not take into account any differences between the economic forecasts
o f the Administration and the Congressional Budget Office. Such differences appear to be rela­
tively small in com panion with the magnitudes involved.




104

TABLE IV— OUTLAYS FOR NATIONAL DEFENSE: ADMINISTRATION PROPOSALS AND VARIOUS
BASELINES FISCAL YEARS 1983-88
[In billions of dollars]
Baseline
Fiscal year

Aftminic
T rS

( 1)

(2 )

(3 )

(4 )

(5 )

214.8
222.4
236.0
248.1
260.4
273.3

213.5
234.0
251.0
267.0
285.0
303.0

213.5
236.8
259.6
280.5
300.0
320.7

213.5
242.1
277.7
310.0
333.0
358.0

214.6
253.7
293.4
332.2
364.7
396.6

214.8
245.3
285.3
323.0
354.3
385.6

Total.............. ...... 1,455.0

1,553.5

1,611.1

1,734.3

1,855.2

1,808.3

1983 ........................... ......
1984 ........................... ......
1985 ........................... ......
1986 ........................... ......
1987 ........................... ......
1988 ........................... ......

proposal

Difference between administration proposal and
baseline
(5 )

(2 )

(3 )

(4 )

22.9
49.3
74.9
93.9
112.3

1.3
11.3
34.3
56.0
69.3
82.6

1.3
8.5
25.7
42.5
54.3
64.9

1.3
3.2
7.6
13.0
21.3
27.6

0.2
8.4
- 8.1
- 9.2
- 10.4
- 11.0

353.3

254.8

197.2

74.0

-

( 1)

0.0

-

46.9

Sources:
(1) No real growth, as derived from OMB data contained in Congressional Budget Office "An Analysis of the President's Budgetary Proposals for
Fiscal Year 1984.” Feb. 1983, p. 54
(2) CBO's "no real growth" path, from CBO’s "Baseline Budget Projections for Fiscal Year 1984-88,” Feb. 3, 1983, p. 45.
(3) CBO’s "programmatic component of baseline," same source as (2 ), p. 100.
(4) CBO's baseline, same source as (2 ), p. 100.
(5) Administration's current services budget, from Office of Management and Budget, “Special Analyses, Budget of the United States
Government, Fiscal Year 1984," pp. A-7, A-16.
Administration Proposal: Office of Management and Budget, "Budget of the United States Government, Fiscal Year 1984," p. 9-5.
Note: Adjustments have not been made in ( 2 ) - ( 4 ) for any differences between the CBO and Administration economic forecasts, which do not
have major impacts on estimated defense outlays.

TABLE V.— BUDGET AUTHORITY FOR NATIONAL DEFENSE: ADMINISTRATION PROPOSALS AND
VARIOUS BASELINES, FISCAL YEARS 1983-88
[In billions of dollars]*5

1SS

Baseline

AHminic

Fiscal year
( 1)

(2 )

(3 )

(4 )

(5 )

245.5
254.5
269.3
283.0
297.0
311.8

243.9
258.0
273.0
288.0
304.0
322.0

243.9
267.5
286.7
304.1
322.0
352.7

243.9
278.3
322.4
350.0
373.0
398.0

244.5
291.8
339.4
375.4
408.7
445.1

Total.............. ...... 1,661.1

1,688.9

1,776.9

1,965.6

1983 ........................... ......
1984 ........................... ......
1985 ........................... ......
1986 ........................... ......
1987 ........................... ......
1988 ........................... ......

proposal

Difference between administration proposal and
baseline
^
( 1)

0.0

(2 )

(3 )

(4 )

(5 )

1.0

245.5
280.5
330.0
364.8
397.0
432.7

26.0
60.7
81.8
100.0
120.9

1.6
22.5
57.0
76.8
93.0
110.7

1.6
13.0
43.3
60.7
75.0
80.0

1.6
2.2
7.6
14.8
24.0
34.7

11.3
- 9.4
- 10.6
- 11.7
- 12.4

2 , 104.9 2 ,050.5

389.4

361.6

273.6

84.9

-

-

54.4

Sources:
( l ) - ( 4 ) As in Table IV.
(5) As for (1). p. 80,
Administration Proposal: As for (1).
Note: Adjustments have not been made in ( 2 ) - ( 4 ) for any differences between the CBO and Administration economic forecasts, which do not
have major impacts in estimated defense budget authority.

These difference between proposed budget authority and various
current services measures of budget authority vary by more than
$400 billion over this period. Percentage increases in defense out­
lays and budget authority using the various measures are com­
pared in Table VI for 1983-1988.




105

TABLE VI.— AVERAGE ANNUAL INCREASES IN VARIOUS MEASURES OF DEFENSE SPENDING, FISCAL
YEARS 1983-88
[In percent]
Average annual percentage
increase, fiscal years 1983Measure
Outlays

Estimates in current dollars:
Baseline ( ! ) ..................
Baseline (2 )..................
Baseline (3 )..................
Baseline (4 )..................
Baseline (5 )..................
Administration proposal...
Estimates in constant dollars:1
Baseline (1 )..................
Baseline (2 )..................
Baseline (3 )..................
Baseline (4 )...................
Baseline (5 )...................
Administration proposal....

4.9
7.3
8.5
10.9
13.1
12.4

Budget
authority

4.9
5.7
7.7
10.3
12.7
12.0

0.0

0.0

2.2

0.8

3.4
5.7
7.8
7.1

2.6
5.1
7.5
6.8

1 In comparison with baseline (1).
Sources: Calculated from data in Tables III and IV.

The Congressional Budget Office rejected its “ no real growth” es­
timates as its baseline. The CBO “ no real growth” path over the
1984-1988 period implies increases in defense outlays averaging 7.3
percent per year and increases in defense budget authority averag­
ing 5.7 percent per year, well above OMB's im plicit estimates, but
CBO felt that funding at such levels “ could require cancelation o f
some investment programs, rescheduling o f others, and some force
structure deactivation.” 45 CBO’s “ no real growth” path probably
does understate a realistic level o f current services defense spend­
ing. But it is also clear that the Administration's current services de­
fense budget significantly overstates the level o f expenditures con­
sistent with the definition o f current services contained in the
Budget Act. The most realistic benchmark appears to be baseline
(3), CBO’s “ programmatic component o f baseline.”
In discussing the differences between the estimated current serv­
ices and proposed budgets, the Adm inistration cites savings in the
defense area “ due to lower inflation, the 1984 pay freeze, and var­
ious program economies.” 5 The proposed pay freeze and program
economies represent legitimate savings from current services
spending. Lower inflation will help restrain defense outlays by an
estimated $35 billion over the 1984-1988 period according to Ad­
m inistration estimates, but by definition these savings do not rep­
resent savings from current services, properly defined. The current
services budget, as well as the proposed budget, should be reduced
to take account o f lower inflation, leaving the difference between
the two unchanged.
4 Congressional Budget Office, “ Baseline Budget Projections for Fiscal Years 1984-88,” p. 46.
5 Office of Management and Budget, “ Special Analyses, Budget of the United States Govern­
ment, Fiscal Year 1984,” p. A-12.




106

In summary, in m any areas, the current services budget has
been im proved by providing more detailed estim ates o f outlays by
function and receipts by source over a five-year period. A five-year
analysis o f current services budget authority by function w ould
also be useful. In the defense area, the Adm inistration has inexpli­
cably departed from the basic definitions o f current services in the
Budget Act. Current services defense estimates based on last year’s
budget proposals by the Adm inistration are confusing and m islead­
ing. In the future, the analysis o f the defense program should be
based on a legitim ate current services concept, not on the previous
year’s budget proposals.




O