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12/
87th Congress, 2d Session

House Report No. 1410

ANNUAL REPORT
OF THE

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ON THE

JANUARY 1962 ECONOMIC REPORT OF THE
PRESIDENT
WITH

MINORITY AND OTHER VIEWS

MARCH 7, 1962.-Committed to the Committee of the Whole House
on the State of the Union and ordered to be printed
U.S. GOVERNMENT PRINTING OFFICE
80736

WASHINGTON: 1962

For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington 25, D.C. -Price 50 cents
80736 0-62-I

JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 6(a) of Public Law 304, 79th Cong.)
WRIGHT PATMAN, Texas, Chairman
PAUL H. DOUGLAS, Illinois, Vice Chairman
HOUSE OF REPRESENTATIVES

SENATE

RICHARD BOLLING, Missouri
JOHN SPARKMAN, Alabama
HALE BOGOS, Louisiana
J. W. FULBRIGHT, Arkansas
HENRY S. REUSS, Wisconsin
WILLIAM PROXMIRE, Wisconsin
MARTHA W. GRIFFITHS, Michigan
CLAIBORNE PELL, Rhode Island
THOMAS B. CURTIS, Missouri
PRESCOTT BUSH, Connecticut
CLARENCE E. KILBURN, New York
JOHN MARSHALL BUTLER, Maryland
WILLIAM B. WIDNALL, New Jersey
JACOB K. JAVIT6, New York
Wm. SuMMERs JOHNsON, ErecutireDirector
JOHN W. LEHMAN, Deputy Executive Director
JoHN R. STARK, Clerk
II

CONTENTS
Pace
v
1
1
2
2
5
5
6
6
7
8
8
8
8
8

Letter of transmittal --IntroductionThe economic reportThe budgetScope of committee reportProgress toward recoveryFactors in the recoveryThe continuing unemployment problemThe outlook for 1962Private demandEffects of fiscal policiesInhibiting forces in further recoveryTight money policySpending plansTax "take" too steep?Monetary and debt management policies -13
Monetary policies in the recover -13
"Bills only" policy dropped -15
Efforts to reduce long-term rates -19
Trading in a thin market -20
Debt management -21
Advance refunding -23
Pressures on the long-term rate -24
Effects of increased interest rates -24
Effects on borrowers -25
Effects on underwriters -25
Effects on nonbank lenders Credit availability versus interest rates -26
Free reserves maldistributed -28
Effects of "vault cash"-29
Money policies for economic recovery -31
Conclusions -32
Budget balancing for economic stabilization -33
Stabilizing effects of the Federal budget -33
A business view -34
Significance of the three Federal budgets -34
Administrative budget -34
Cash budget -35
Income-and-product-account budget -35
Changes in the three budgets compared -35
Repressive effect of 1963 budget -37
The high-employment "surplus"-37
Changes in debt levels Total debt and GNP have risen together -38
Federal debt declining relative to GNP Recommended fiscal policy adjustments -39
Proposed temporary tax-cut authority -39
Alternative proposals -41
Alternative income brackets -41
Standby public works authority -42
Expansion of unemployment compensation -42
Tax stimulus to investment -43
Other budget proposals -44

III

CONTENTS
Page

Balance-of-payments and international trade policies -45
International payments and domestic policies -45
United States versus European budgets -46
Foreign currency versus gold reserves -47
Postwar trends -47
Dollar claims and the role of gold -48
Bankers role: Long-term assets, short-term liabilities -49
Trade balance favorable -51
Steps taken to improve payments position -51
Increased interest ratesOther unilateral steps -52
Cooperative measures -53
Further steps needed -54
International trade problems -54
The Cormmon Market -55
Need for prompt action -55
U.S. plants locating in Europe -56
Importance of foreign trade -56
Helps control inflation -57
New trade legislation -57
Wage and price policies -59
Suggested guidelines -59
Productivity measures -60
Education and voluntary restraint -61
Administered price inflation -62
Conclusions -64
Antitrust policies -65
Antitrust activities in 1961 -65
Identical bids -66
Consent decrees -Policies for increased growth potentials -69
Main sources of potential growth -69
Problem of "excess" capacity -70
Slow growth and slack demand -70
Price reductions -71
Monetary policy -71
Wage and salary increases -71
Consumer tax reductions -72
Investment in human resources -72
Aid to education -72
Manpower training and development -73
Youth employment and training -73
The older worker -73
Other aids to education -73
Health programs -73
Investment in research and technological development -74
Discovery versus dissemination -75
Concentrated use of Federal funds -75
Patent policies -76
Basic research small -77
Tax stimuli for business investment -77
Investment tax credit -78
Probable effects of tax credit -78
Rates of return on capital -79
Comparison of tax credit with accelerated depreciation -81
Partial offsets to tax credit -81
Depreciation changes -82
Proper guidelines -82
Goals for the future -85
The employment goal -85
The production goals -86
The stabilization objectives -86
The growth objective -87
The Council's growth goals -87
The path to full employment -89

CONTENTS

V
page

The committee's recommendations -91
Increasing the stabilizing effects of Federal programs -91
Unemployment compensation -91
Standby public works -92
Temporary tax-cut authority -92
Monetary and debt-management policies -93
Salaries and terms of Board of Governors -93
Monetary silver -94
Monetary policies -94
Debt management -97
Policies for investment in growth potentials -97
Investment tax credit -97
New depreciation guidelines -98
Investment in human resources -99
International trade and balance-of-payments policies -100
New trade legislation -100
Balance of payments -101
Supplemental IMF fund -102
Strengthening competition -102
Note by Senator J. W. Fulbright -103
Supplementary views of Henry S. Reuss -105
Individual views of Senator William Proxmire -113
Oppose majority criticism of budget as too restrictive -113
Majority report fails to consider Government policy impact on supply
of labor -114
Disagreement with presidential recommendations -115
Temporary income tax cut -115
Presidential public works discretion -115
Investment credit
Equity considerations -116
Cyclical effects-116
Economic effectiveness -117
Revenue loss-118
Minority views -119
Introduction -119
The so-called growth gap -122
Balance of payments -124
Unemployment problem -125
Proposed solutions -128
Other administration proposals -129
Conclusion -130
Appendix A-A static labor force -133
Individual views of Senator Jacob K. Javits -135
Additional views of Representative Thomas B. Curtis -141
Committee and subcommittee activities in 1961 and plans for the coming
year -Studies by the full committee -143
Report on the 1961 Economic Report of the President -143
Review of the annual report of the Federal Reserve System Review of the Report of the Commission on Money and Credit
Variability of private investment in plant and equipment -143
Inventory movements, accumulation, and liquidation -144
Subcommittee on Economic Statistics -144
Government price statistics -144
Study of unemployment -144
Productivity, prices, and incomes -144
The Federal budget as an economic document -144
Other subcommittee studies -144
Subcommittee on Foreign Economic Policy -145
Subcommittee on International Exchange and Payments -145
Subcommittee on Inter-American Economic Relationships -145
Subcommittee on Defense Procurement -146
Subcommittee on Economic Stabilization, Automation, and Energy
Resources --------------------------------------Publications of the Joint Economic Committee issued since April 1961Earlier publications, January 1947 to April 1962 -151

116

143
143
143

146
147

CONTENTTS

CHARTS
Chart 1. Unemployment rates in four recessions and recoveries (seasonably adjusted)
-Chart 2. Gross national product, actual and potential, and unemployment
rate
-12
Chart 3. Yields on U.S. Government securities -14
Chart 4. Rates charged by banks on short-term loans to business -14
Chart 5. Yields on taxable Treasury securities by years to maturity
Chart 6. Ratio of liquidity to GNP and interest rate-17
Chart 7. Ratio of money supply to GNP and interest rate -17
Chart 8 Ratio of GNP to money supply and long-term corporate bond
yields, 1909-61 -27
Chart 9. Net public and private debt as a percent of gross national product, 1946-61
-Chart 10. Steel and other wholesale price indexes
-63
Chart 11. Capacity utilization and corporate profits
-

PaRe
10

40
80

TABLES
Table 1. The economic assumptions underlying the Economic Report of
the President and the budget for fiscal 1963Table 2. Short-term, long-term, and "spread" of long-term over short-term
interest rates, by months, February 1961-February 1962
Table 3. Maturity distribution of U.S. Government securities held by
Federal Reserve banks -19
Table 4. Total marketable securities outstanding, sales of 18 open-market
dealers and net additions to the Federal Reserve's portfolio -21
Table 5. Treasury advance refundings, intermediate and long-term, 1961
Table 6. Maturity distribution of marketable interest-bearing public debt.
Table 7. Reserves and borrowing of member banks, by classes -29
Table 8. Bank reserves of member banks-all banks and country banks,
1956-61 -29
Table 9. Reserves, balances with Federal Reserve banks, and vault cash of
country banks-30
Table 10. Cash and reserves of member banks, by classes, four weeks
ending December 27, 1961-31
Table 11. Various Federal budget totals for the fiscal years 1962 and 1963Table 12. Ratio of total public and private debt to gross national productTable 13. Distribution of tax savings by income classes under alternative
tax reduction methods -41
Table 14. U.S. balance of international payments, 1959-61 -45
Table 15. Central government surpluses and/or deficits for recent years
for four countries -46
Table 16. Official gold and foreign exchange holdings and volume of
international trade-selected countries
Table 17. International investment and gold position of the United
States, 1949 and 1960 -50
Table 18. Short-term international dollar balances reported by banks in
the United States, excess of liabilities to foreigners over claims on
foreigners, by countries -51
Table 19. Annual rates of growth of output per man-hour, 1947-60 -60
Table 20. Trends in funds for industrial research, experimentation, and
technological development-by source of funds, 1953-60 -74
Table 21. Allocation of funds for research, experimentation, and technological development by the U.S. Department of Defense, by size class
of prime contractor, fiscal year 1961 -75
Table 22. Funds for basic research performed in industry, 1953-60 -77
Table 23. Comparative corporate income rates, 1950-53, 1954-57, and
1958-61
Table 24. Potential growth rates compared to percentage of potential
output actually produced
-Table 25. Growth in potential gross national product and related factors,
selected periods
--

7
15

22
24

36
39

81
87
88

LETTER OF TRANSMITTAL
MARCH 7,
Hon. JOHN W.

1962.

MCCORMACK,

Speaker of the House of Representatives,
Washington, D.C.
DEAR MR. SPEAKER: Pursuant to section 5(a) of Public Law 304
(79th Cong.), there is transmitted herewith the Annual Report of the
Joint Economic Committee on the January 1962 Economic Report
of the President, containing, in addition, minority and other vews.
I am,
Sincerely,
WRIGHT PATMAN,

Chairman, Joint Economic Com~mittee.
VII

Calendar No. 590
87TH CONGRESS 1 HO USE OF REPRESENTATIVES

ASe3Sion

REPORT

No. 1410

REPORT ON THE
JANUARY 1962 ECONOMIC REPORT OF THE PRESIDENT

MARCH 7, 1962.-Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed

Mr. PATMAN, from the Joint Economic Committee, submitted the
following

REPORT
[Pursuant to sec. 5(a) of Public Law 304 (79th Cong.)]

INTRODUCTION
The Employment Act of 1946 requires the President to transmit to
the Congress at least once a year an "Economic Report" reviewing
the state of the economy and current and foreseeable trends in the
levels of employment, production, and purchasing power; reviewing
the economic programs of the Federal Government; and setting out
a program to achieve the objectives of the act. The act also requires
the Joint Economic Committee to review the President's Economic
Report and make a report to the Congress setting out its findings
and recommendations with respect to each of the main recommendations made by the President. We have reviewed the Economic Report
for 1962, and held hearings at which expert witnesses from Government, universities, private business, and farm and labor organizations
gave their analyses and evaluations of the President's report and
recommendations. Accordingly, we submit our report herewith.
THE ECONOMIC REPORT

To begin, we wish to congratulate the President and the Council
of Economic Advisers on the high quality of the Economic Report.
The division of the document into a brief Presidential statement and
a fuller report by the Council enhances the impact of the President's
observations and recommendations and allows the Council greater
freedom in its own presentation. The report contains an extremely
informative account of the working of the American economy, and
especially of the complex role of the Federal Government in this
economy. The explanation of the several forms of the Federal budget
is handled %withrare claritv and will prove of permanent value to
1

1962 JOINT ECONOMIC REPORT

students and practitioners of economic policy. The concept of the
"full employment surplus" affords a useful framework for the appraisal
of the economic impact of budgetary proposals. The guidelines for
noninflationary wage and price behavior offer useful guides for the
decisions of private parties and provide reasonable standards for
appraising the effects of such decisions. The development of such
standards is essential to the protection of the public interest in price
stability against the inflationary potential of concentrations of private
economic power. The Council presents a lucid summary of the record
of recovery achieved during 1961 and sets forth clearly the unfinished
business before us-full recovery without inflation, reduced unemployment, strengthened defenses against future recessions, more rapid
economic growth, and balance-of-payments equilibrium. The data
and analysis presented provide the necessary background for the
understanding and appraisal of both the President's broad proposals
and the detailed pieces of legislation that will come before this Congress in the field of economic policy. The statistical appendix is, as
always, an invaluable handbook for legislators and others concerned
with the state and prospects of the economy.
THE BUDGET

In addition, we wish to congratulate the Director of the Budget
and his assistants for several innovations in the budget presentations
which are most useful in relating the Government's fiscal operations
to the general economy, and also for the new volume of condensed
budget tables made available, at a modest price, to the general public.
SCOPE OF COMMITTEE REPORT

These new materials and the new, more fully analytical treatment
of previously available materials have been most helpful to the committee in forming judgments on the overall influence of the Government monetary and fiscal policies.
In the report to follow we discuss and state our judgments on the
individual programs recommended in the Economic Report. We have
given most attention, however, to general monetary and fiscal policies
as these have the most pervasive influence on incomes, savings, anS
investment, and are thus most directly related to the objectives of
the Employment Act of 1946-including maintaining maximum
production, employment, and purchasing power.
In a money economy, as we know, the Nation s income in a given
period is equal to the value of the final output of goods and services
in the period, which in turn must be equal to the amount spent for
consumption and investment combined.
Thus, if individuals and institutions save, in money terms, more
than is invested, income falls. Indeed, since the income fall is the
same as the fall in total spending, it is more usual to say that the
Nation cannot save more than is invested.
On the other hand, incomes rise only with increases in spending.
But if the managers of the Nation's money system do not, in their
discretion, permit an appropriate increase in the money supply, then
incomes do not rise, the output of goods and services does not increase,
and unemployment of labor and capital results.

1962 JOINT ECONOMIC REPORT

The Government's fiscal operations, at the size of the present
budget, make heavy diversions of private incomes, savings, and
investments and must, therefore, be conducted with caution. The
effects of a restrictive monetary policy can be offset by an expansionary fiscal policy, and vice versa, to achieve or maintain a given
level of economic activity; or both monetary and fiscal policies may
simultaneously be either restrictive or expansionary. Two conclusions concerning Federal tax and expenditure operations now seem
clear: first, these operations may have either expansionary or repressive effects on the general economy even while the annual budget is
running a deficit. Second, defense and other national needs permitting, reductions in the Federal debt can be made without repressive
effects on the economy-provided only that the Federal budget does
not become repressive too suddenly by too large an amount. If
funds made available by debt retirement are simultaneously invested,
or otherwise spent for current production, by other public and private
sectors, the debt retirement will not cause incomes to fall. But
market adjustment to large changes in patterns of consumption,
saving, and investment may take time and a degree of "gradualism."
The advances which have been made in understanding the stabilizing
and destabilizing roles that monetary and fiscal policies can play
in the economy do not suggest that these policies can be a substitute
for the market mechanism in adjusting resource uses and maintaining
equilibrium at high levels of employment. On the contrary, it
becomes doubly clear that we must follow policies to strengthen
competition and make the market mechanism more responsive to
the play of market forces.

PROGRESS TOWARD RECOVERY
It is now evident, as was believed at the time of our last report,
that the 1960-61 recession was indeed beyond its low point early last
spring. Most economic indicators place the low point in February.
Since that time the economy has achieved a rapid recovery, a large increase in the output of goods and services of all kinds, higher corporate
profits and consumer incomes, a return to a more normal workweek,
and, to some extent, more jobs.
The Nation's output as measured by GNP, which was $501 billion
(annual rate basis) in the first quarter of 1961, rose to $542 billion in
the fourth quarter, an increase of about 10 percent per year. In
manv respects this is most encouraging, especiallv in view of the fact.
that the most. optimistic current dollar es!imates a year ago placed the
GNP in the fourth quarter at $530 billion. In other respects, notably
the continuing high unemployment, the recovery thus far is much less
encouraging.
The recoverv so far achieved has meant an earlv increase in personal
income of $24 billion (compared to the first quarter of 1961), and of
about $13 billion in business profits. Farm incomes for the year 1961
rose by $1 billion over 1960, an increase of 8.5 percent-12 percent
of net cash farm incomes. Commodity prices, which underwent no
significant decline during the 1960-61 business downturn, have remained stable or actually declined slightly. Consumer prices rose by
only about one-half of 1 percent between February and December,
while wholesale prices declined slightly in the same period.
FACTORS IN

THE RECOVERY

The factors that combined to give the economy a boost were much
the same as those identified in our previous report. Federal spending
advanced by $5 billion, mostly for defense; State and local expenditures increased by $3 billion; business shifted from a $4 billion rate of
inventory liquidation to a rate of inventory accumulation of almost
$554 billion; residential nonfarm construction increased by almost $4
billion as did business spending for producers' durable equipment.
Our international balance-of-payments position was-and continues
to be-a major preoccupation of Government policy, domestic as well
as foreign. Monetary policy was-and continues to be-largely immobilized in a posture more suited to restraining overemployment
than to stimulating recovery. Yields on Treasury bills, which were
below 1 percent in the initial stages of the 1958 recovery, were apparently pegged at a minimum of 2l' percent as early as mid-1960
and rose gently during 1961. Long-term interest rates remained
above those of the tight money periods of 1953, 1955, and 1957, and
rose during the year.
5

1962 JOINT ECONOMIC REPORT
THE CONTINUING UNEMPLOYMENT PROBLEM

Despite the rapid progress of the recovery to date, unemployment
remains disturbingly high. Indeed, the large gains in production
achieved during 1961 were accomplished almost entirely by a return
to a more normal workweek and a step-up in operations with resulting increases in output both per man-hour and per worker.
The unemployment rate continued close to the 7-percent level
through most of the year, finally dropping to 6.1 percent in November
and to 6 percent in December. Between February and December civilian employment increased by only 213,000 (seasonally adjusted). The
Armed Forces callup, on the other hand, took over one-quarter of a
million people out of civilian activities.
The failure of output and demand to expand sufficiently as yet to
provide adequate job opportunities continues to pose the Nation's
No. 1 economic problem. Unemployment was still 5.8 percent of
the labor force (seasonally adjusted) in January, and an additional
2.1 million workers seeking full-time work were employed on a parttime basis. Taking both the totally unemployed and the partially
unemployed together, the equivalent rate of unemployment was
almost 7 percent of the labor force.
Furthermore, the long period of inadequate job opportunities seems
to have led people to drop out or stay out of the labor force-as the
labor force is counted-although, under more prosperous conditions,
these same people would have been at work. The total labor force
(including members of the Armed Forces) would normally have increased by 1 million persons or more from January 1961 to January
1962. As reported, it increased by only 203,000 persons. Taking
into account the apparent deficiency in the growth of the labor force
(at least three-quarters of a million), almost 8 percent of available
civilian workers were still without jobs in January 1962.
THE OUTLOOK FOR 1962

There is general agreement that the recovery will continue during
1962, though at what pace is not entirely clear. Favorable prospects
are seen for further advances in private demand, together with a continued rise in Federal, State, and local government outlays.
The administration has based its budget and economic report on
the expectation of an advance sufficiently strong to raise GNP to an
average of $570 billion for the year (in current prices). This would be
$49 billion, or 9.4 percent above the 1961 average. This rate of
advance is more modest than that during 1961. It is about in line
with the rate of advance during the 1954-55 recovery, slightly more
rapid than in 1958-59, and slower than in 1949-50. The Council says:
This appraisal of the prospects for production and income
implies an unemployment rate of 5 percent or somewhat lower
at the end of 1962 but not as low as 4 percent (Economic
Report of the President, p. 66).
A gross national product of $570 billion for the year 1962 is assumed
to be consistent with a personal income of about $448 billion and
corporate profits of about $56.5 billion before taxes. (See table 1.)

1962 JOINT ECONOMIC REPORT

TABLE 1.-The economic assumptions underlying the Economic Report of the

President and the budget for fiscal 1963
[In billions of dollars]

Change from 1961 to 1962

Calendar years
Item

_ _ _ _ _ _ _ _ _ _ _ _ _

1981

1962

570.0
448.0

Gross national product-521
Personal income -417

56.5

Corporate profits before taxes -46

Amount

+49.0
+31.0
+10. 5

Percent

+9. 4
+7.4
+22.8

Sources: Economic Report of the President for January 1962, p. 62; and The Budget of the United States

Government, Fiscal Year Ending June 30, 1963, pp. 44-45.

On the other hand, the Council states its belief that a vigorous expansion, stimulated by sound Government and private policies, could
make possible the achievement of a 4-percent unemployment rate by
mid-1963 without "serious upward pressures on prices." If this belief of the Council is to be realized, expansion will have to continue at
a rapid pace through mid-1963.
Underlying the administration's expectation of a continued rise in
overall economic activity throughout 1962 are expansions in both
private and public demand. The Council divides the anticipated
1961-62 increase in GNP (in current prices) as follows:
The expected total increase is made up, very roughly, of the
following parts: One-half, consumer outlays; one-fifth each,
Government purchases and private fixed investment; and
one-tenth, additions to inventories (ibid., p. 63).

Private demand
Within the private sector, which is expected to account for roughly
four-fifths of the expansion in demand, the largest single anticipated
increase is in consumer outlays. Almost all of this is expected to
come from a rise in disposable personal income; the ratio of total
consumer expenditure to disposable personal income is assumed
to

* * rise slightly in 1962."

In the business sector, inventory

accumulation is expected to average very little, if any, higher than
the present rate of $574 billion per year, and in the Council's words
"* * * cannot be expected to be a significant expansionary factor in
the latter half of this year" (p. 64).
Residential nonfarm construction is expected to make further moderate gains, but most of the expected increase between 1961 and 1962
has already occurred. Rising output in the domestic economy may
be accompanied, as usual, by some further increase in imports of raw
materials and components. The net excess of exports over imports
seems likely to shrink modestly, as is usual in a period of recovery.
An anticipated major force behind the expansion in private demand
is a rise in business outlays for plant and equipment significantly
greater than occurred in the 1958-60 expansion. This expectation
assumes a rising flow of internal funds from retained earnings and depreciation allowances, substantial incentives for modernization and
replacement, and an appreciable stimulus from increased utilization
of capacity.

1962 JOIT ECONOMC REPORT

Effects of fiscal policies
In the public sector, purchases of goods and services by State
and local governments are expected to continue to rise by about $4
billion per year, or about $1 billion per quarter. Federal budget
policies imply continued expansion of Federal purchases of goods
and services to $64.2 billion for fiscal 1963, compared to an annual
rate of about $60 billion in the fourth quarter of calendar 1961. This
also implies an increase of about $1.7 billion per quarter between early
1961 and the first quarter of this year, and then a slower rate of
increase of approximately $1 billion per quarter through the remainder
of 1962. Almost all of the Federal expansion is in increased expenditures for national security and related programs.
INHIBITING FORCES IN FURTHER RECOVERY

In summary, the outlook is for continued improvement through
1962. It does appear, however, as most of the expert witnesses seem
to feel, that the extent of improvement expected by the Council of
Economic Advisers is optimistic. Inhibiting forces present in past
recoveries seem likely to reappear.

Tight money policy
First, Federal Reserve authorities have shown a stubborn propensity
to tighten credit and force up interest rates during each recovery
period, notwithstanding the fact that each recovery has begun from
a higher plateau of interest rates (and a money supply relatively
smaller) than the previous recovery. Interest rates have been
trending upward again throughout the 1961 recovery. Although the
upward movement so far has been at a comparatively gentle rate,
there are indications that the monetary authorities are already
impatient to have them resume their more accustomed pace.
As recovery continues, some increased pressures on our international payments position may develop. Such pressures, if they occur,
will no doubt strengthen the hand of the monetary authorities and
result, perhaps, in another monetary squeeze. A movement toward
tighter credit when Federal fiscal operations are moving from deficit
spending toward a surplus of revenues over expenditures could well
produce a slowdown if not an actual downturn similar to the one in
1960.

Spending plans
Second, the large push given the economy in 1961 by inventory
building and increased Federal spending must be expected to taper
off during 1962. Consumers' buying plans, as indicated by January
1962 surveys, do not portend any large expansion of consumer spending. This leaves spending for plant and equipment as the mainstay
of the Council's projected recovery. As yet, however, surveys of
business plans give little evidence that large increases in such expenditures are in the offing.

Tax "take" too steep?
Finally, there is some question whether the Federal budget will not
prove too restrictive despite the careful attention that the administration has given this matter. We refer here not to the administrative
budget as projected for fiscal 1963, but rather to the "income-andproduct-account budget" as it would look if the economy improved to

1962 JOINT ECONOMIC REPORT

the point where only 4 percent of the labor force remained unemployed.'
If the Council's estimates are correct, the income-and-productaccount budget, at 4-percent unemployment, would be running a high
surplus-about $10 billion a year-in the first half of calendar 1963.
As a witness for the Committee on Economic Development testified: 2
This is higher, even in relation to the size of the economy,
than in any previous period of high employment since the
unusual conditions of 1948. Moreover, this surplus would
be accompanied by higher interest rates than at any earlier
time in the postwar period.
A $10 billion surplus in the first half of 1963 would be adding to the
savings of individuals and public and private groups an amount equal
to 1.6 percent of the potential GNP at that time. Furthermore, the
Council may have underestimated the size of the high employment
surplus, which may be as high as 2 to 3 percent of the potential GNP.
This obviously does not mean that the Federal Government cannot,
under any circumstances, make net reductions in its debt at a rate
of 2 to 3 percent of the GNP. Indeed, in the fiscal years 1947 and
1948 the Federal Government surplus (on a national-income basis)
was about 5 percent of the GNP, a proportion again achieved in
fiscal 1951. These large surpluses helped restrain the inflationary
pressures of those years. It is our considered view, furthermore,
that in periods of high employment the Federal Government should
make net reductions in its debt. Indeed, we have recommended repeatedly that the Federal Government employ fiscal policies more
heavily to secure economic stabilization, while allowing the money
supply to grow at a rate sufficient to permit a greater expansion of
private economic activity.
However, a budget which would, under present noninflationary
circumstances, divert $10 billion or more from spending to potential
savings may well choke off recovery before a high level of employment
is reached.
The reports of both the President and the Council of Economic
Advisers repeatedly emphasize, we think correctly, that the problem
ahead is to provide for an expansion of consumer demand. The
immediate problem, as we see it, is for the Federal Government to
adopt fiscal and monetary policies which find that balance between
effective consumer incomes and investment incentives that tends to
produce stability at high levels of employment and rapid economic
growth.
During the postwar years the unemployment rate has tended to
drift persistently upward, with each recession (except the 1953-54
post-Korean downturn) beginning from a. higher level of unemploy.ment (see chart 1). Since the fall of 1957,- the rate has remained
above 5 percent. Two different explanations have been advanced for
this: one is the so-called structural thesis, which is that automation
and other developments have left relatively more workers unsuited
to available jobs-by reasons of skill, location, or other factorsthan was true at previous times. The second explanation is that
I See January 1962 Economic Report of the President (hereinafter referred to as "Economic Report"),
P. 84.
2 Hearings before the Joint Economic Committee on the January 1962 Economic Report of the President
(hereinafter referred to as "hearings"), p. 657.

80736 0-62-2

CHAlT I

UNEMPLOYMENT

RATES IN FOUR RECESSIONS AND RECOVERIES
SEASONALLY

ADJUSTED

OR FORCE

PERCENT OF LABOR FORCE
rRdP6sH8

Oct.'4
Apr

§L]y
'p'5

e--.-1

~~ ~~ ~ ~ ~~~~~~~~~~40
~
N-Sept 52
0

°''
.15.94.13-12

.1.0-90

-7 -9 -5

-4-3 -2

-1

|
2

*
3

T
(MdONTHfSFROM TROUGH)

*
5

*8*

,.
.0

It23

14 15 IS I?

9 is9 20 225 23 24 25 e527t

31 se

33 34 35

1962 JOINT ECONOMIC REPORT

*11

unemployment has been high because total demand has been too
low; hence output has tended to fall relative to the Nation's productive potential (see chart 2). According to the calculations of the
Council, output was about 2% percent above potential in early 1953,
about 2 percent below potential at the cyclical peak in 1957, and
almost 5 percent below potential at the 1960 peak.
At the low point of the 1960-61 recession-the first quarter of
1961-output was about 9 percent below potential, leaving a gap of
about $51 billion between actual and potential output. Recovery
quarter of 1961 to between $28 and $40
reduced the gap by the fourth
billion, or 5 to 7 percent. 3
During the past year, our Subcommittee on Economic Statistics
investigated the recent high unemployment and found little evidence to
support the structural-transformation explanation. The proportion
of unemployment due to structural and frictional causes seems not to
have increased significantly compared to earlier periods. Most, if not
all, of the recent excess over the administration's interim goal of 4
percent unemployed by mid-1963 is due to inadequate total demand.
The solution of the problem of high and continuing unemployment
requires in the main: first and foremost, the prompt creation of conditions favorable to an expansion of demand sufficient to achieve full
employment, and then sustain it; second, a substantial increase in
both public and private efforts to increase the education, skills, and
mobility of the labor force, including special programs, such as worker
retraining and area redevelopment, to reduce the structural and
frictional unemployment that will remain even when employment is
high.
The Administration's view of the economic prospects and its
policy recommendations reflect a balanced concern between achieving
high employment and avoiding inflation. Speaking of the feasibility of achieving the Administration's interim goal of 4 percent
unemployment by mid-1963, the Council describes its view of the
preferred rate of recovery, as well as both a slower and a faster rate
of recovery as follows:
A continued upward movement for more than two years with
an over-all gain of 20 percent in real GNP would represent a
very strong expansion. But a less ambitious rate of recovery
to full employment would prolong the waste of unused resources
without gaining appreciably greater assurance of stable prices.
*

On the other hand, private demand can rise too fast or too far.
Too rapid an expansion may strain the adjustment mechanisms
of the economy. . . . It takes time to re-employ the jobless
and to return efficiently to full utilization of capacity. Hence,
a very rapid expansion of demand might involve price increases,
bottlenecks, and inefficiencies that could be avoided in a more
gradual rise to the same levels. (Economic Report, pp. 66-67.)
3 The smaller estimate of the gap is based on the estimates of potential output made by the Council of
Economic Advisers. The larger estimate uses staff estimates based on the Committee's Study Paper No.
20, "Potential Economic Growth in the United States" (Study of Employment, Growth, and Price
Levels [1960]).

12.

1962 JOINT

ECONOMIC REPORT
CHART 2

Gross National Product, Actual and Potential,
and Unemployment Rate
BILLIONSOF DOLLARS*(R.N.i wdae)

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

PERCENT

1963
PERCENT

-5

1953
1954
1955
1956
1957
*SEASONALLY
ADJUSTED
ANNUALRATES.

1958

1959

1960

1961

1968

1963

jJ3h%TRENDLINE THROUGH
MIDDLEOF 1955.
gUNEMPLOYMENT ASPERCENT
OF CIVILIAN LABORFORCE;SEASONALLY
ADJUSTED.
NOTE: A. B,ANDC REPRESENT
GNPINMIDDLEOF 1963ASSUMING
UNEMPLOYMENT
RATEOF 4%,Ss,
AND6%,RESPECTIVELY.
SOURCES:
DEPARTMENT
OF COMMERCE.
DEPARTMENT
OF LABOR,ANDCOUNCILOFECONOMIC
ADVISERS.

MONETARY AND DEBT MANAGEMENT POLICIES
Monetary policies played a major role in the 1960-61 economic
recession. Indeed, monetary and fiscal policies together, simultaneously mismanaged in the months preceding the downswing,
appear to have been the principal causes of the recession. As in the
months preceding the 1957 downswing, when credit was being
tightened at the same time that defense contracts were being cut back
and the Government was postponing payment of its bills, Federal
fiscal operations preceding the 1960 downswing suddenly shifted to a
large surplus position, while at the same time the Federal Reserve
was engaging in extreme credit tightening. Within a period of approximately 1 year preceding the May 1960 downturn, the Federal budget
underwent one of the most drastic shifts in the Nation's history, while
the Federal Reserve was sharply contracting the money supply and
driving up interest rates to a postwar high. Dr. Arthur F. Burns,
first. Chairman of President Eisenhower's Council of Economic
Advisers, has stated his view of the two principal reasons for the
1960 downturn:
First of all, we had a violent shift in Federal finances.
Between the first quarter of 1959 and the third quarter of
1959 the Federal cash deficit, allowing for seasonal factors,
fell from an annual rate of $17 billion to $2 billion. Bv
the second quarter of 1960, we were already operating with
a surplus at an annual rate of $7 billion. Thus, in a period
of little more than a year we had a turnaround in Federal
finances of about $24 billion.
This was undoubtedly one of the very sharpest shifts of
Federal finance in our Nation's history.
Second, the fiscal restraint on general economic expansion
was accompanied-indeed preceded-by a tightening of
credit conditions.
By mid-1959 commercial banks were already in debt at
the Federal Reserve to the tune of $1 billion. The money
supply stopped growing. Demand deposits diminished by
nearly $4 billion between July 1959 and May 1960. Interest rates rose sharply, both on short-term and long-term
loans. Indeed, long-term rates advanced faster than during
a comparable stage of any business cycle during the past
hundred years. (Congressional Record, Apr. 27, 1961,
p. A2886.)
MONETARY POLICIES IN THE RECOVERY

In contrast to the very heavv role monetary policy plaved in precipitating the 1960 downturn, however, it played a quite limited part
in aiding the 1961 recovery. Monetary policy in this period is characterized in the Council's report, and elsewhere, as one of ready credit
"availability." By this it seems to be meant that with the recovery,
personal and corporate savings increased, and some $50 billion of funds
were raised in capital and credit markets-almost as much as in 1959.
13

1962 JOINT ECONOMIC REPORT
CHART 3
YIELDS ONU.S. GOVERNMENT SEWRITIES
I.. ..

I.....

_T __TI __

1952

1954

1956

1958

1960

1962

Source:. Based on data from Federal Reserve Bulletin.

CHART 4

RATES CHARGED BY BANKS ONSHORT-TERM LOANS TO BUSINESS
12 CITIES
I

1...

L,
"I
5

,--%

AVERA E RATE
A
ON A LL I.A.1 I ",--,

,
I

,j
.. 0I

PRIME It TE
I

-,
I

1952

1954

1956

Source: Based on data from Federal Reserve Bulletin.

1958

1960

1962

1962 JOINT ECONOMIC REPORT

On the other hand, interest rates were maintained at levels much like
those that have prevailed in periods of a credit squeeze.
Yields on long-term Government and corporate bonds remained
above the peaks reached in the credit squeeze of 19.57.
The discount rate was maintained at 3 percent, the same as
prevailed through most of 1957.
The prime loan bank rate remained at 42 percent throughout
the year-a level reached only temporarily during the 1957
credit squeeze.
The average bank loan rate in 19 Federal Reserve cities
remained at about 5 percent-a level considerably higher than
was reached in 1957.
The yield on 91-day Treasury bills, which had been pegged at
a minimum of 2)j percent in mid-1960, fluctuated between 254
and 2% percent-an exceptionally high level for a period of
recession.
"Bills only" policy dropped?
The principal preoccupation of monetary policies in 1961 was, and
continues to be, the balance-of-payments problem. Since the Federal
Reserve's announcement on February 20, 1961, that the "bills only"
policy was being dropped, public interest has been centered on the
question whether the Federal Reserve could or would bring down
long-term rates, while holding up short-term rates to discourage the
flow of short-term funds abroad.
TABLE 2.-Short-term, long-term, and "spread" of long-term over short-term interest

rates, by months, February 1961-February 1962
[Percent per annuml
Rate
3-month
bills'

1961-February ---------------------------------------March April
-ay
-2.29
June July-2.27
August -----------------------September-2.30
October -2.35
November -2.
December -------------------1962-January-2.75
4February

U.S. Government
long-term
bond yield 2

2.41
2.42
2.33
2.36
2.40

2.62
2.85

3.81
3.78
3.80
3.73
3.88
3.90
4.00
4.02
3.98
3.98
4.06
4.08
4.11

"Spread"
long- term
over shortterm
1.40
1.36
1.47
1.44
1.52
1.63
1.60
1.72
1.63
1.52
1.44
1.33
1.36

Rate on new issues.
210 years or more
2 Announcement concerning policy of purchasing securities of mixed maturity ranges made on Feb. 20,
191.
Week ending Feb. 23,1962.
Source: Federal Reserve Bulletin.
|

Short-term rates have been successfully maintained. Yields on new
issues of 91-day Treasury bills declined somewhat from 2.41 percent
in February 1961, to a low of 2.27 percent in July, from which point
they have trended upward to 2.85 percent in the third week of February
1962. But whatever efforts may have been made to reduce long-term
rates, these have not been notably successful. The average yield on
long-term Government bonds was 3.81 percent in February 1961.
This trended upward throughout the year, reaching an average of

1962 JOINT ECONOMIC REPORT

11
l~~~~~4

*
-. -

t
1

I~~1

;i
0
03

m
t

-0
0

1962 JOINT ECONOMIC REPORT

4.10 percent in February of 1962. Moreover, the spread between the
short-term and the long-term rates widened through most of 1961,
though a substantial jump ill the bill rate in January and February
of the present year has now reduced the spread somewhat.
While the GNP, measured in constant prices, increased by 754 percent between the first and the final quarter of 1961, the money supply
increased by only 3 percent, meaning that the effective money supply
was actually reduced. Indeed, both total corporate and personal
liquidity (time and savings deposits, savings and loan shares, and
savings bonds, plus currency and demand deposits), as well as the
money supply, continued downward during the year at about the same
pace as has been in evidence since 1951 and before (see chart 7).
CHART 6-7

MONEY DEMAND AND INTEREST RATE
Pat CENT

Per Cent

100

6
RATIOS-s'.I.

L0IVID ASSETS TO GNP

A'~tSl-;"

U.S. GOVERNMENT

LONG-TERM BONDS

MONEY SUPPLY

1952
1954
1956
Source: Based on data from Federal Reserve Bulletin.

TO GNP

1958

1960

196 2

1962 JOINT ECONOMYC REPORT

On the occasions of two separate hearings last year the committee
engaged the Chairman of the Federal Reserve Board in extensive
colloquies concerning possible actions by the Federal Reserve System
to make shifts in its portfolio of Government securities, to reduce its
holdings of short-term securities and simultaneously increase its holdings of long-term securities. Indeed, this has been understood to be
the only effective way open to the Federal Reserve for putting downward pressures on long-term rates while maintaining upward pressures
on short-term rates. In view of its very substantial holdings of Government securities ($26 to $28 billion), such shifting from shortterm to long-term maturities would seem to hold potentialities for
quite formidable pressures in both directions, particularly since most
of the portfolio is in short maturities-mostly less than 1 year. It
was thus hoped that the Federal Reserve could, by selling to the open
market substantial portions of its short maturities and simultaneously
buying longer maturities, drive the long-term rates down relative to
short-term rates.
Indeed, this has seemed the only way the Federal Reserve could
make appropriate expansions of bank reserves, to permit the needed
expansion of the money supply, without. causing an increase in market prices of short-term securities and thus lowering all short-term
rates.
Following Chairman Martin's appearance before the committee on
March 7, however, some confusion developed concerning the meaning of
the February 20 announcement-a confusion which Chairman Martin
cleared up in a later appearance before the committee on June 2 of
last year. Referring to the previous day's testimony of Mr. Robert
G. Rouse, manager of the Federal Reserve's open market accountthe official who executes the System's policy-the committee chairman asked Mr. Martin the following question:
Let me ask you this then: I understood from Mr. Rouse's
testimony yesterday that your February 20 announcement
was misunderstood, and that, in truth, the Open Market
Committee has not made anv decision to try to reduce
long-term interest rates; is that correct?
Mr. Martin replied:
We have made a bona fide effort to endeavor to bring about
a meaningful decline, although I pointed out how difficult it
is to bring about a meaningful decline in long-term interest
rates and, at the same time, to maintain the short rate in
view of the balance-of-payments difficulty that we had. I
pointed out at some length in the statement that I made on
March 7 what the difficulties and problems were. And we
have made a conscientious, sincere, earnest, and continuing
effort to carry out both the spirit and intention of that February 20 statement.'
'Hearings, review of annual report of the Federal Reserve System for the year 1960. p. 91.

1962 JOINT ECONOMIC REPORT

Efforts to reduce long-term rates

The subsequent record indicates that the effort to shift the portfolio to long-term maturities was quite unsuccessful. While 54.7
percent of the total portfolio was in securities of under 1-year maturity in January 1961, by January of 1962 somewhat more than 60
percent of the total portfolio was in these short maturities. Approximately $1.4 billion of securities were added to the portfolio
in longon a net basis between the two dates, but none were added
term securities-those of more than 10-year maturity. 2 On the
contrary, Federal Reserve holdings of long-term securities were actually reduced during the period-from $271 million to $266 million.
TABLE

3.-Maturity distribution of U.S. Government securities held by Federal
Re8erve banks
Jan. 24, 1962

Jan. 25,1961

Change

Under I year Over I year to 5 years Over 5 years to 10 years -1,179
Overl0years -271
Total -26,747

Millions of Percent of
dollars
total

Millions of
dollars

Percent of
total

14,624
10,673

54. 7
39. 9
4. 4
1.0

16,904
8,738
2,227
266

60.1
31.0
7.9
1.0

2,280
-1,935
1,048
-5

100.0

28,135

100.0

1,388

Source: Federal Reserve Bulletin.

In his appearance before the committee on January 30, 1962, Chairman Martin said of the efforts to reduce long-term rates relative to
short-term rates:
To this end, the Federal Reserve in early 1961 extended
the area of its open market operations to include purchases
of longer term securities as well as short-terms, in which
open market operations formerly had been confined as a
general rule. The purchase of long-term instead of shortterm securities, when circumstances warranted, served at
least to relieve the short-term market from the direct impact
of these purchases on yields, and transfer that direct impact
to the longer term area (hearings, p. 177).
' In its statistical series, the Federal Reserve System consistently notes that its data on "long-term"
bonds refer to "bonds maturing or callable in 10 years or more" (e.g., Federal Reserve Bulletin, February
1962, p. 190). The Treasury Department in its compilations refers to "long-term" bonds as those "neither
due nor callable before 15years" (e.g., Treasury Bulletin, December 1961, p. 62).

1962 JOINT ECONOMIC REPORT

Trading in a thin market
As to the question why the Federal Reserve had acquired so few
securities of over 1-year maturity, and none of the over 10-year
maturities, Chairman Martin's explanation was, in effect, that market trading in longer term securities had been so thin that the Federal
Reserve could not have bought larger quantities without influencing
market prices-which was of course the purpose of the proposal in
the first place. Counting both the securities that the Federal Reserve
had purchased and those that the Treasury had purchased for trust
accounts, he said:
* * * The proportion for issues maturing in 1 to 5 years
averaged 9 percent for the year, although in some months
official purchases exceeded 30 percent of dealer sales in this
area. In the 5- to 10-year area, the proportion amounted
to more than 20 percent for the year as a whole and in the
period from March through July was more than 33% percent
of the total. For securities maturing after 10 years, official
purchases comprised over 30 percent of all market purchases
for the year and nearly two-thirds of total purchases in the
second quarter, when the bulk of the official purchases were
made (ibid., p. 178).
Since there are no official data on private sales in the market for
Government securities, it is difficult to appraise the question of what
the Federal Reserve's full opportunity to purchase long-term Government securities might have been had there been a determined effort
to this end.
The Federal Reserve's report of sales by the 18 open market dealers
who trade with the Federal Reserve's open market account in New
York would suggest a very large market for Government securities,
indeed, and certainly there was a substantial volume of marketable
Government securities outstanding. Table 4 indicates the magnitudes
involved. Chairman Martin has explained, however, that in arriving
at his estimates of the very small trading in the "market," sales
from one open market dealer to another have been excluded.

1962 JOINT ECONOMIC REPORT
TABLE

4.-Total marketable securities outstanding, sales of 18 open market dealers
and net additions to the Federal Reserve's portfolio
[In billions]
Marketable
Net additions
Government
Sales of 18
to Federal
Reserve
open market
securities
outstanding dealers (1961)1
portfolio
(Dec. 31,1961)
(Jan. 25,1961,
Jan. 24,1962)

Within I year -I to Syears -----5 to 10years ---------------------------------------10 to 20 years 20 and over - - - - - - - - - - - - - - - - - - - - - - - - --

$8---$85.9
64.9
19.8
12.0
13.4
196.0

Total-

$150.5
33.0
7.5
37
*
(2)

(2)

$2.3
-1.9
1.0
1.4

' Estimated from published data on daily averages (including intramarket).
2 Less than Ao billion.
3 Not applicable.
Source: Federal Reserve Bulletin.

A determined effort to shift the portfolio to long-term securities
might have included the purchase of longer-term securities directly
from the Treasury. Under existing law, the Federal Reserve has authority to purchase and have in its portfolio at any one time up to $5
billion of securities purchased directly from the Treasury. This
/
authority was not used during the year 1961.
DEBT MANAGEMENT

The Treasury's debt management policies, of course, provide wide
opportunities in themselves for putting downward pressures on longterm rates and upward pressures on short-term rates. The committee's
annual report of last year gave an account of the market for longterm bonds in the weeks immediately after the Federal Reserve's
Februarv 20 announcement that it was entering this market.

In the week following the February announcement the Federal
Reserve did go into the market, an action which was interpreted to
mean that it. had initiated an effort to bring down long-term rates.
Yields on long-term bonds dropped sharply during the week-from a
vield of 3.81 percent on February 18 to 3.76 percent on February 25.
When the Federal Reserve's subsequent weekly report was published,
however, it turned out that it had bought only $13 million in bonds$7 million in the 1- to 5-year maturity range, $6 million in the 5- to
10-year maturity range, and none in the over 10-year maturity group.
The Federal Reserve was in the market for bonds also during the
next 2 weeks but was still purchasing inconsequential amounts. If by
March 15 the bond market was still expecting long-term rates to come

TAHL1

5.-Treasury advance refunding8, intermediate and long-term, 1961
[In millions of dollars]

Bonds eligible for exchange
Issue

Bonds issued in exchange
Amount
outstanding when

Remaining term to
maturity

Extension of maturity

Issue

announced

Mar. 16:
2Yjs,
2Ys,
2%s,
2Yks,

June
Dec.
Feb.
Aug.

15, 1959/621
15,1959/6215,196315, 1963 -2

Total -

I year, 3 months
I year, 9 months
I year, 11 months
years, 6 months

5,262
3,449
3,971
6,755

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

Sept. 7:
2As, Mar. 15, 1965/70 -8
234s, Mar. 15,1966/71 -

5 years,
4 years,
4 years,
3 years,

5 months11 months 9months3 months -

3----, Nov. 15, 1967 do-do
do -do
33s, Nov. 15, 1966-

Rsmaining term to
maturity

6 years, 8 months
-1,421
-877
5 years, 8 months.

Amount
issued

1,308

Added
annual
interest

C0
-

2,439

18.0
19.5
99o0
21 3

6,044

67.6

19 years, 2 months
28 years, 5months --38 years, 2 months

1,274
1,297
1,187

12.7
13.0
11.9

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

3,758

37.6

19,436 -

years, 6 months

4,688

9 years, 6 months

2,927

Total-7,616
Source: Data from Treasury Bulletins.

10 years, 8 months31s, Nov. 15, 198019 years, 1lmonths-3- Feb. 15, 199028 years, 8months-3s
-Nov. 15,1998|------------------------ I-

12i

1962 JOINT ECONOMIC REPORT

down, it learned then that the Treasury apparently did not share
this expectation. On that (lay the Treasury announced a large refunding of bonds that were approximately 2 years from maturity, with
new bonds having a 6-year maturity. The old bonds, on which the
Government was paying coupon rates ranging from 2%4 to 2% percent
were replaced with bonds paying coupon rates of 3% to 3% percent.
Furthermore, market yields at which the new bonds were issued
were, according to the Treasury's announcement, "at least equal to
those on outstanding issues of comparable maturity on the date of the
offering." This action must have suggested to some investors either
that the Treasury did not expect the longer rates to come down,
or that it was giving away the taxpayers' money.

Advance refunding
Two years ago the committee recommended that the Treasury
experiment with the possibilities for advance refunding, and we have
been particularly interested in its operations in this field during the
past year.
The March advance refunding already mentioned involved an
exchange of approximately $6 billion of securities. It added $67.6
million to the annual interest cost of the debt.
An even more spectacular advance refunding operation was carried
out in September. In this case the Treasury refunded nearly $4
billion of 254-percent bonds having 8%i and 9%i years to run to maturity.
Holders of these bonds received, in exchange, 3%;-percent bonds with
maturities ranging from 20 to 37 years. Increasing the coupon rate
by 1 percentage point on bonds still having a life of 8 years added
$37.5 million to the annual cost of carrying the debt. This and the
March refunding together would seem to hiave added $105 million a
year to the cost of carrying the Federal debt, which appears a rather
high price to pay for what is essentially a speculation on what the level
of interest rates will be several years hence.

1962 JOINT ECONOMIC REPORT

Pressures on the long-term rate
Net market purchases by the Treasury of long-term Governments
for trust accounts in 1961-purchases which Chairman Martin told
the committee "* * * exceeded in amount those by the Federal
Reserve"-turned out to be $278.2 million. This compares with
$354.8 million of long-term bonds purchased for the trust accounts
in the previous year. In any case, such a relatively insignificant
amount could hardly be expected to have an appreciable effect on
long-term rates.
TABLE

6.-Maturity distribution of marketable interest-bearing public debt
(In billions of dollars]
Dec. 31

Maturity classes

1960
Within 1 year ---------I to 5 years
S tol10 years10 to 20 years 20 years and over-

-70.8
.18.7

75.3
13.2
11.0

85.9
64.9
19.8
12.0
13.4

10.6
-5.9
I1
-1.2
2. 4

196.0

7.0

4 yrs. 7 mos.

Amount outstanding-189.0
Average length -.

Net change

1961

Source: Treasury Bulletin.

Within the calendar year 1961 the Treasury's outstanding debt
was increased by $7 billion. In the process, short-term maturities
were increased by $10.6 billion, while the longer maturities, principally
in the 1-to 5-year maturity range, were decreased. This-undoubtedly
helped to keep very short-term rates up and probably had a depressing
effect on rates in the 1- to 5-year range.
On the other hand, issues in the over 20-year maturity class were
increased, and the average maturity of the debt at the end of 1961
was exactly the same as at the beginning-4 years and 7 months.
EFFECTS OF INCREASED INTEREST RATES

Several members of the committee have expressed concern over the
effects that the upward trend in interest rates over the postwar years
may have had on the cost of carrying the Federal debt. Noting that
the budget for fiscal 1963 estimates interest costs for the year at $9.4
billion, the committee chairman asked the Director of the Budget if
he would estimate what this cost would be on the same amount of
debt, at interest rates prevailing during the two previous administrations. According to the estimates submitted, the interest cost for
fiscal 1963 would be $6.6 billion at the average rates prevailing in the
period 1946-53; and the cost would be $7.1 billion at average interest
rates prevailing in the years 1954-57.

1962 JOINT ECONOMIC REPORT

25v

Undoubtedly the effects that interest rates and interest rate changes

have on the general economy are vastlv inore important than their
direct effects on the Federal budget. Limiting our consideration to
long-term rates, we might turn to an official statement in 1953 by the
Board of Governors of the Federal Reserve System. 3
Effects on borrowers
Speaking of the effect on borrowers of a rise in interest rates, the
Board said in part:
In the fixed capital area these changes, together with
changes in the outlook for profits and risks due to the altered
credit and monetary situation, shift the balance of business
decisions toward holding or buying old assets, and adapting
old assets to new uses, rather than buying new ones.
To illustrate the point, an example was given of how a rise of 1
percentage point in the long-term rate will cause an investor to purchase an existing structure, rather than build a new one-an interesting point in view of current efforts being made to encourage business
firms to modernize their equipment.
Effects on underwriters
Underwriters and dealers may be expected to discourage security
flotations while interest rates are adjusting to higher levels:
Underwriters and security dealers are important in the
money and capital market, and their responses to credit
tightness in turn affect the availability of credit. They
are particularly sensitive to changes in interest rates because
they customarily carry a large inventory of securities in the
process of distribution. They risk large losses if they are
holding large amounts of securities in a period of rising
interest rates, since they may not be able to sell them except
below cost or may have to carry the securities for some time
on borrowed money. Thus, underwriters and dealers may
be expected to carry securities less readily and hence to
discourage security flotations while interest rates are adjusting to higher levels. 'When yields are stable or are expected
to fall, they will be more likely to encourage such flotations.
Effects on nonbank lenders
With tightening credit, according to the Board's statement, life
insurance companies, mutual savings banks, and savings and loan
associations will be less willing to make any but the best grade loans.
When credit is tightening, or an increase in interest rates is expected,
projects requiring long-term credit may be deferred:
A tightening in credit and the accompanying increase in
interest rates will significantly affect lenders and investors
3 "Influence of Credit and Monetary Measures on Economic Stability," Federal Reserve Bulletin (March
1953).

80736 0-62-3

1962 JOINT ECONOMIC REPORT

who operate primarily in the long-term credit market, including life insurance companies. mutual savings banks,
savings and loan associations, and pension funds. They will
become less willing to make any but the best grade loans and
investments. They will generally exercise greater caution
in accepting marginal applications for credit.
*

In recent decades the flow of savings to nonbank institutional lenders, particularly insurance companies, has been
increasing rapidly and the size of the investment problem of
these lenders has grown accordingly. In order to insure the
ready placement of funds regularlv becoming available for
investment from new savings and from repayment of old
loans, the major savings institutions have developed techniques for committing their funds in advance to corporate,
mortgage, and other borrowers. Such commitments make
it possible for potential borrowers to proceed with projects
which they might not undertake without assurance of
financing on satisfactory terms. But nonbank lenders will
hesitate to commit themselves bevond the funds they expect
to have coming in if they fear that interest rates may rise
in the near future and that they may therefore have to sell
securities at a loss to meet future commitments, As a result,
when credit is tightening, some proposed projects requiring
long-term credit may be deferred because a financing commitment cannot be arranged.
In our annual report last year we urged abandonment "without
reservation" of the "bills only" policy. We then expressed an
apprehension that the monetary authorities had dropped "bills only"
in name only (p. 39). A year later the evidence suggests that our
apprehension was more than justified. We can only repeat-with a
sense of disappointment and frustration-our recommendation of
last year:
* * * that the Federal Reserve take the steps normally
taken by central banks to bring down interest rates, for the
purpose of reducing interest rates to the lowest levels that
our international balance-of-payments position permits,
which means putting particular pressure on long-term interest
rates (report of the Joint Economic Committee on the
January 1961 Economic Report of the President, p. 38).
We think that the Board of Governors in 1953 gave a correct analysis of the effects of increasing long-term rates. If the administration's hopes for a modest, continuing rate of economic recovery and
an increased rate of plant modernization to improve our international
competitive position are to be realized, more affirmative assistance
from the monetary authorities must be forthcoming.
CREDIT AVAILABILITY VERSUS INTEREST RATES

Over the past decade, students of monetary matters have turned increasing attention to measures and techniques which help in assessing
the degree of credit ease or tightness prevailing at a particular time.
This is in recognition of the fact that changes in supply-demand re-

CHART

RATIO OF GNP TO MONEY SUPPLY
AND LONG-TERM CORPORATE BOND YIELDS, 1909-1961

1909

1914

1919

1924

1929

1934

1939

1944

1949

1954

1959 '61

!iPercentoge yield on corporate high-grade long-term bonds from 1909-36,from FR.Mocouley, Bond Yields, Interest Rates,
Stock Prices' ( NBER: 1938), for 1937 to dote annual averages of Moodys Aaa bond yields
1
VGross National Product in millions of dollars divided by demand deposits adjusted plus currency outside bonks.
Source: Based on data, given in Hearings, Employment Growth, and Price Levels, p. 3442.

1962 JOINT ECONOMIC REPORT

lationships for money may not, for brief periods at least, be reflected in
changes in interest rates. Thus, a bank may find that it has large
amounts of loanable funds one day and very little the next, but it is
hardly likely to boost its loan rate to customers on the second day,
merely because of this. Much the same is true of the whole banking
system. Indeed, the record shows many periods when the banks'
prime loan rate has remained unchanged for a year or more, although
supply-demand relationships have a tered substantially during the
period
This is true even more of long-term interest rates. A reference to
chart 8 will indicate the tendency for changes in long-term interest
rates to lag behind (and sometimes lead) changes in supply-demand
relationships for money. The chart compares annual averages of
market yields on Moody's triple-A bonds for the years 1909 through
1961 with "income velocity," that is, the ratio of gross national product
(in current prices) to the money supply (demand deposits in comminercial banks plus currency in circulation). The chart suggestssa close
correlation between long-term interest rates and the ratio of GNP to
money supply. Moreover, despite all the emphasis that has been
placed on changes in business and banking practices which are thought
to have economized the use of money, and thus increased the velocity
of money, the chart suggests that changes in velocity have been the
result largely of temporary changes in supply-demand relationships
for money rather than of changes in the Nation's basic, secular Iequirements for money. Even so, the chart reflects some long lead and lag
times between changes in these relationships and changes in bond
yields, suggesting that credit availability at a given moment can be
quite different from that suggested by long-term interest rates.
Free reserves maldistributed
It is against this background that much has been said about easy
credit availability during 1961-and more recently. Chairman
Martin and others have pointed especially to the fact that banks have
been in a net free reserve position to the extent of about one-half
billion dollars, throughout the recovery period. This tends to suggest
that the Federal Reserve has made credit available, notwithstanding
the fact that interest rates remained near their postwar peak during
the decline and have risen during the recovery. On the face of it,
net free reserves of one-half billion dollars would seem to mean that
the banks had relatively large unused lending power and that the
System had thus done its part toward providing for money expansion
and a reduction in interest rates.
Actually, these net free reserves provided for very little expansion
of credit. The reasons in brief are: First, the unused reservespractically all in the country banks-are scattered in manY isolated
pockets where they are unlikely to be used; second, changes in Federal
Reserve regulations over the past 18 months now permit the banks
to count their vault cash against their reserve requirements with the
Federal Reserve. This has distorted past reserve relationships and
changed whatever significance might have been attached, in the past,
to a given quantity of free reserves.
Throughout 1961 substantially all of the net free reserves were in
the country banks. The central Reserve city banks and the Reserve
city banks have had almost no excess reserves and have also done
almost no borrowing. With a 3-percent discount rate prevailing

1962 JOINT ECONOMIC

REPORT

throughout the year, it may be assumed that few of these banks would
try to borrow even when otherwise eligible, because of temporary
losses of reserves.
TABLE

7.-Reserves and borrowing of member banks, by classes
[Average daily figures in millions of dollars]

January ---------February -41
Marcb-19
&pril---------Afay-3
June-46
July-12
August -19
September
October -15
November-40
December -

Central Reserve
reserve
cities
cities
30
58

9
7

101
67
58
60
54
83
64
57
63
26
57
'64

Free reserves

Borrowings

Excess reserves
1961

Country

Central
reserve
cities

Reserve
cities

614
546
469
500
491
483
505
527
518
466
516
1503

4
44
9
2
20
1
5
11
5
27
39
79

14
57
23
21
36
17
8
13
13
18
44
39

Country

31
36
38
33
40
45
38
43
19
20
22
31

Central Reserve
reserve
cities
cities
26
-3
10
56
-17
45
7
8
4
-12
1
-72

87
10
35
39
18
66
56
44
50
8
13
25

Country

583
510
431
467
451
438
467
484
499
446
494
472

X Preliminary.

Source: Federal Reserve Bulletin.

Effects of "vault cash"
Putting the vault cash provisions into effect, as the Federal
Reserve has done in the past few years, has decidedly shifted total
bank reserves to the country banks. The first regulation on this
matter was effective December 1, 1959, and permitted certain percentages of the banks' vault cash to be counted against required
reserves. Other changes were made in August and September 1960
amending the amounts, and, finally, effective November 24, 1960, the
Federal Reserve issued new regulations permitting the banks to count
all of their vault cash against their reserve requirements. This has
meant that a disproportionate percentage of the new reserves were
made available to the country banks, because these banks hold a
disproportionately large percentage of the vault cash.
Whereas, at the end of 1956 the country banks had 30.3 percent
of all the bank reserves in the System, by the end of 1961 their
proportion had jumped to 34.3 percent.
TABLE

8.-Bank reserves of member banks-all banks and country banks-1956-61
[Dollars in billions]

Dec. 31

1956 -19.5
1957 -19.4
1958 -189
1939------------------------------1960 -19.3
1961 -20.1
Source: Federal Reserve Bulletin.

All member
banks

18.9

Country
banks

5.9
5.9
5.9
6.0
6. 6
6.9

Proportion
In country
banks
(percent)
30.3
30.4
31. 2
31.8
34.2
34.3

1962 JOINT ECONOMIC REPORT

Finally, there is still an additional reason not yet discussed why the
country banks have not fully utilized their excess reserves. These
banks tend to maintain a certain percentage of reserves for safety's
sake, whether or not required to do so. Furthermore, when these
banks are accustomed to thinking of a certain minimum as a safe
level, some of them tend to maintain such a minimum, even after
changes in regulations permit them to keep a lower minimum.
Thus, it may be noted that on June 23, 1958 (before the vault cash
regulations reduced reserve requirements), the country banks had effective reserves amounting to 11.7 percent of their deposits. This amount
included vault cash, which may be considered as an effective reserve
although at the time it was not permissible to count it against required
reserves. By June 14, 1961, all reserves held by the country banks,
including vault cash, amounted to only 9.6 percent of their total deposits. Thus, although the country banks have utilized their vault
cash to a rather surprising degree, we may assume that some of these
have tended to hold excess reserves in the interest of safety.
TABLE

9.-Reserves, balances with Federal Reserve banks, and vault cash of
country banks
[Millions of dollars]
June 23, 1958 June 14,1961

Deposits subject to reserve requirements:
Demand-35,370
Time ----------------------- - Total

- -

-59,

24,315

37, 743
30, 542

685

68, 285

Effective reserves:
Reserves with Federal Reserve banks -,623
Vault cash I -

5,045
11,395

Total effective reserves -7,018
Percent effective reserves to deposits 1Not eligible as reserve prior to actions Dec. 1, 1959-Nov. 24, 1960.
Source: Federal Reserve Bulletin.

1,496

6, 541
11.7

9.6

1962 JOINT ECONOMIC REPORT
TABLE

10.-Cash and reserves of member banks by classes, 4 weeks ending Dec. 27,
1961 1
All
member
banks

Central reserve city
banks

Reserve
cty

bans

Country
banks

Millions of dollars
Balances with Federal Reserve banks -17,
Currency and coinTotal reserve heldRequired reserves ---

193
2,829

4,520
284

7,456
870

5,217
1,675

20,022
19,460

4,804
4,778

8,326
8,267

6,892
6,415

26
88

59
78

477
51

-62

-19

426

5.9
5.9

10.5
10.5

24.3
26.1

94.1
94. 6

89.5
90.2

75.7
81.3

Excess reserves-562
Borrowed reserves -216
Net free reserves -346

Percentage
Percent currency and coin is of:
Total reserves -14.1
Required reserves -Percent balance with Federal Reserve banks is of:
Total reservesRequired reserves --X Average

1--------4.5
85.9
88.4

daily figures.

Source: Federal Reserve Bulletin.
MONEY POLICIES FOR ECONOMIC RECOVERY

The Council of Economic Advisers has not been so bold as to suggest that money policies should be eased, but they have ventured the
hope that they will not be tightened as the expected recovery proceeds.
On the other hand, the two officials who have more authority than
any other individuals in setting interest levels, seem to have abandoned
all hope of lower rates and resigned themselves to still higher levels.
Secretary Dillon told the committee: "I would assume that as business advances, should it advance as well as we expect it to, there
could be some very moderate increases in interest rates * * *" (hearings, p. 140). Chairman Martin, when asked to comment on a statement of the Council of Economic Advisers that the behavior of interest
rates during the past year may have signaled the ending of a 10-year
upward trend, replied that he would hesitate before accepting that
conclusion (ibid., p. 193). Naturally market expectations, which
have an influence themselves, have soared.
It is our view that present money policy is much too stringent,
and that the Federal Reserve should immediately begin working
toward an easier credit policy and toward a lower level of interest
rates. It is manifest that the one-half billion dollars of net free
reserves that have been so much emphasized have not, and will not,
permit any substantial increase in credit availability. It is obvious
that no substantial effort has been made either by the Federal Reserve to lengthen the maturity of its holdings of Government securities
or by the Treasury to shorten the maturity of the outstanding debt.
It is also manifest, we think, that the balance-of-payments problem
has been overplayed as a reason for pursuing a tight-money policy,
for which Federal Reserve authorities have shown a persistent preference, beginning long before there was a balance-of-payments problem.

1962 JOINT ECONOMIC REPORT

Other methods, which will be discussed in the next section, are
available for persuading foreign central banks to hold their excess
dollar reserves, to the extent that these banks may need persuading.
CONCLUSIONS

Monetary and debt management policies are capable of making,
and should make, substantial contributions to economic recovery.
The preceding discussion points out that they have not done so in the
recovery to date. It may be said that in the 1960 downswing the
switch from a policy of contraction to one of expansion was well
timed; but however well timed, the action was not sufficiently vigorous.
From the standpoint of long-run growth, monetary policy since
1951 has been a drag on the economy. Currently, Federal Reserve
authorities seek to justify what appears to be a continuing policy of
tight money by bringing in the balance-of-payments problem. Their
arguments first ran in terms of keeping short-term interest rates relatively high in order to mitigate the outflow of short-term funds; but
in practice long-term rates have been boosted as well. Our conclusions and recommendations are set out in detail in the final section of
this report.

BUDGET BALANCING FOR ECONOMIC STABILIZATION
The effect of economic fluctuations on Federal tax receipts has
loin been recognized, but the significant influence that Federal
buLdgetary policy has on the economy has been given serious attention
only in the past few decades. Before World War I and even in the
1920's and into the 1930's, when the costs of past wars and national
defense were slight, Federal activities were a small part of the total
economy, and their economic impact was not viewed as a matter of
great concern. In that environment, the budget was viewed largely
as a measure of the Government's performance in handling its own
affairs with prudence and efficiency. The primary test was the
ability of policymakers to perform the necessary public services and
tasks of the state without spending more than tax receipts. In the
case of a general decline in activity, this test required that expenditures
be trimmed to match falling receipts.
STABILIZING

EFFECTS OF THE FEDERAL BUDGET

With better economic knowledge and the large growth of Government activities necessitated by national security and public welfare
considerations, the perversity of such a policy became evident. Any
reduction in Federal outlays during recession diminishes the flow of
incomes to the private sector and intensifies the decline in activity.
Unless they are accompanied by tax cuts, reductions in expenditures
result in a loss of jobs and a shrinking of incomes and tax revenuesall combining to make an endless chain of vain efforts to keep the
budget in balance. Similarly, greater outlays, or lower tax rates, in
prosperous periods can add to inflationary pressures.
Such accentuation of cyclical fluctuations through the activities
of the Federal Government has become clearly recognized as imprudent and unsound policy. It is now generally recognized that the
automatic fluctuations in Government receipts in response to changing
levels of economic activity have beneficial stabilizing effects on the
general economy. Tax receipts are closely related to private income.
Therefore, tax receipts will tend to fall during periods of relatively
slack activity in the economy and will tend to rise in periods when
private incomes are high. In essence, proportionately lighter tax
burdens are imposed upon individuals and businesses in times when
private incomes are low. If tax burdens are reduced in these slack
periods, relatively more income is left with individuals and businesses.
Therefore, individuals and firms do not need to restrict their own
purchases of goods and services as much as would be necessary if
tax liabilities were maintained. Similarly, in inflationary periods
tax receipts will tend to rise as incomes rise and thereby drain off
purchasing power that might otherwise be used to accentuate
inflationary pressures.
33

1962 JOINT ECONOMIC REPORT

A business view
One of our witnesses, representing a business research organization
(the Committee for Economic Development), which has been at the
forefront in encouraging fiscal policies to promote high employment
and economic stability, stated his organization's agreement with these
principles:

(a) Looking at the budget surplus as it would be under
conditions of high employment, as a guide to budget policy;
(b) Setting expenditure programs and tax rates so they
would yield a moderate surplus at high employment;
(c) Accepting actual departures from this target surplus,
below in recession and above in boom, that result from automatic responses of tax yields and expenditures, as beneficial
stabilizing influences on the economy;
(d) Accompanying this budget policy with a strong,
flexible use of monetary policy;
(e) Being prepared, in some circumstances, to take further
discretionary action in the budget, notably temporary tax
reduction in recessions.

Also we have recommended, as the Economic Report does,
that the national income budget, rather than the cash or the
administrative budget, should be used in measuring overall
budget policy (hearings, p. 656).
SIGNIFICANCE

OF THE THREE FEDERAL BTUDGETS

One 'of the most useful innovations in the analysis of Government
budgets has been the development of procedures for estimating Government receipts and expenditures so that it is possible to set up a
budget to represent the receipts and expenditures as they would work
out if the economy were wvorking continuously throughout the budget
period at full. employment. For the first time, the concept of the
full employment receipts, expenditures, and surplus or deficit has
found its way into the President's economic messages to the Congress,
particularly into the Economic Report. These developments represent significant progress, for which the administration is to be
commended.
This newer method of estimating the impact of Government fiscal
operations on the general economy relates, moreover, not to the
usual "administrative" or "cash" budgets but to what is now called
the income-and-product-account budget. This latter is not constructed just to show how much funds need to be appropriated, or
the total cash which Federal fiscal operations will take in or pay out.
Rather, the income-and-product-account budget seeks to measure
the direct effect on the economy of all Federal fiscal operations, and
at the time when these effects occur, not just when bills are submitted
and paid.
Since it is important to make a clear distinction among these three
forms of budgets, a brief review may be in order.
Administrative budget
The administrative budget has been developed in the form most
useful to the appropriations committees of Congress. Expenditures
are included in this budget because they are made from funds which

1962 JOINT ECONOMIC REPORT

have been considered by the Congress to be Government owned.
Receipts are shown on a net basis, after refunds, to indicate only the
amounts that will be available to meet expenditures. Many items,
such as the receipts and expenditures of the Post Office Department and other public enterprises, are shown in the administrative
budget only as net expenditures. These enterprises generally have
the authority to spend against the receipts they collect, and Congress
provides Government-owned money solely to meet any net deficits.
Many other operations of the Government, such as trust funds and
Government-spoDsored enterprises, are largely ignored in the administrative budget because virtually no Government funds (technically
defined) are required in these operations.
Cash budget

The cash budget is designed primarily to show the cash flows
between the Federal Government and the private economy (including
State and local governments). It differs from the administrative
budget in two principal ways: (1) The cash budget excludes transactions between agencies of the Government; for example, interest
and other payments between the Treasury Department and the
social security and other trust funds; and (2) the cash budget includes various transactions between the Federal Government and the
private economy which involve the U.S. Treasury, though the amounts
do not technically qualify as "Government-owned funds" and therefore
are not reflected in the administrative budget. The principal amounts
included in the cash budget, but not in the administrative budget,
are the transactions between Federal trust funds and the public. For
example, the cash budget includes as receipts all employment taxes
which enter social security trust funds and includes as expenditures
all payments of social security benefits.
Income-and-product-accountbudget

The income-and-product-account budget is provided in the national income and product accounts developed by the Commerce
Department. Like the cash budget, it includes both the transactions
of trust funds and some Government enterprises as well as administrative budget receipts and expenditures. It excludes financial items
and. exchanges of existing assets-transactions which affect liquidity
in the private economy but have no direct effect on production or

national income. It also excludes loans and guarantee programs of
the Government, which do have an impact on the economy.
While both the cash budget and the administrative budget generally
reflect receipts and expenditures in the year when cash changes hands,
the income and product budget attempts to show receipts at the
time when tax liabilities accrue, and expenditures for purchases of
goods and services are shown as of the time the goods and services
are produced and delivered.
CHANGES IN THE THREE BUDGETS COMPARED

Table 11 compares anticipated receipts and expenditures for the
three different budgets for fiscal 1963, giving also the indicated changes
from fiscal 1962. In addition, the table also shows the Council's
estimates of what receipts and expenditures in the national income
budget would be at an average rate of unemployment of 4 percent

1962 JOINT ECONOMIC REPORT

during each of the 2 fiscal years, instead of the unemployment rates
actually prevailing and expected to prevail.
Thus it may be noted that the administrative budget for fiscal
1963 anticipates expenditures of $92.5 billion. This is an increase of
$3.4 billion over fiscal 1962, of which $2.6 billion is for defense and
space affairs, $0.4 billion for increased interest charges on the Federal
debt, and $0.4 billion for all of the other functions of the Government
combined.
Whereas the administrative budget for fiscal 1962 ran a deficit of
$7 billion, the administrative budget for fiscal 1963 is, as has been
widely reported, in balance. More precisely, it is expected to run a
small surplus of approximately $0.5 billion.
TABLE

11.-Various Federal budget totals for the fiscal years 1962 and 1963
[In billions of dollarsl
1962 estimate 1963 estimate Change from
1962 to 1963

Administrative budget:
Expenditures:
----------------------National defense International affairs and finance -2.9
Space research and technology -1.3
Subtotal --------Interest -- ---------------------------------------Other expenditures, net-24.7
Total budget expenditures -89.1
ReceiptsCash budget:
Expenditures --------Receipts ------------------------------------National income budget:
Expenditures -----------Receipts ----------.
National income budget at 4-percent unemployment levels:
Expenditures ---Receipts ---Gross national product -U---------------------

51.2

52.7
3.0
2.4

1.5
.1
1.1

55.4
9.0

58.1
9.4
25.1

2. 7
.4
.4

82.1

92. 5
93.0

111.1
102. 6

114.8
116.6

3. 4
10.9
3. 7
14.0

106.1
105.6

111.9
116 3

5.8
10.7

105.3
1113.1
547. 5

111.6
1120.3
592. 5

1 6.3
' 7.2
45.0

1 Estimates are shown computed to the nearest tenth of a billion to maintain internal consistency and the
proper proportional change from year to year. This does not imply, however, that the estimates are
believed to be accurate to go of a billion dollars.
Source: 'The Budget In Brief," fiscal year ending June 30, 1963 (pp. 6 and 8). Council estimates of high
employment budget, and gross national product estimates compiled by the committee staff.

The cash budget, on the other hand, anticipates receipts of $116.6
billion in fiscal 1963 and expenditures of $114.8 billion. The cash
budget was also in deficit in fiscal 1962. The -substantial surplus
position ($1.6 billion) expected in 1963 is due largely to (a) net increases in payments into the trust accounts because of increased
employment, and (b) higher unemployment compensation and social
security tax rates.
As previously discussed, however, for purposes of judging the influence of the budget on the general economy, we are most interested
in the national income budget. Here we may note that whereas
this budget was almost in balance in fiscal 1962 ($0.5 billion deficit),
for fiscal 1963 it is expected to run a sizable surplus ($4.4 billion).
Thus, if the estimates are correct, Federal budget operations in fiscal
1963 will have a somewhat repressive effect on the general economy,
even though the administrative budget is in balance.
Finally, coming to the national income budget as it would appear
at a 4-percent rate of unemployment, we may note that for fiscal 1962

1962 JOIT ECONOMIC REPORT

the surplus would have been $7.8 billion, whereas in fiscal 1963 it
would be $8.7 billion. In addition to the absolute size of this surplus,
it is also important to note that receipts will he increasing in fiscal
1963 a great deal more rapidly than expenditures. Elsewhere we
point out that other estimates suggest that the 4-percent unemployment surplus in the national income budget may be substantially
higher than the Council has estimated, because of even more rapid
increases in receipts than the Council estimates.
REPRESSIVE EFFECT OF 1963 BUDGET

It is now anticipated that GNP will reach an annual rate of about
$600 billion (in 1961 prices) by the end of fiscal 1963 and that at this
annual rate unemployment will fall to approximately 4 percent of the
work force by the end of that fiscal year. If GNP could be increased
more rapidly to levels that would reduce unemployment to 4 percent
of the work force throughout the entire fiscal year 1963, what amount
of "full employment" budget surplus would occur? Federal expenditures, on an income-and-product-account basis, would apparently
amount to about $111 billion, approximately 18.6 percent of the GNP
at the 4-percent unemployment level, according to the projections
made by the Council of Economic Advisers. The comparable figures
were about 18.3 percent in fiscal 1961 and about 17.3 percent in
fiscal 1957-the latter just prior to the contraction, from which the
economy has not yet fully recovered. Hence, as a result of various
national and social needs, expenditures have increased somewhat as
a percentage of the 4 percent unemployment GNP.
The high employment "surplus"
At the same time, however, if 4-percent unemployment existed
throughout fiscal 1963, the Council has estimated that Federal
revenues in the national income accounts would amount to approximately $120 billion, about 20 percent of the high employment GNP.
This is the same as in fiscal 1961 and compares with about 17.2 percent
in fiscal 1957.
Hence, if the Nation were at a 4-percent unemployment level
throughout fiscal 1963, the income-and-product budget would show a
surplus of about $9 billion, approximately 1.5 percent of the 4 percent
unemployment GNP. (As previously stated, the "surplus" in the
first half of calendar 1963 will be running at the rate of $10 billion a
year.) The comparable figures were 1.8 percent in fiscal 1961, and 1.4
percent in fiscal 1957. The actual projected surplus in the national
income and product account is only 0.7 percent of the anticipated
GNP. Other estimates suggest that the high employment surplus in
fiscal 1963 might be as large as 2.5 percent of the high employment
GNP.
A high employment surplus amounting to 1.5 to 2.5 percent of high
employment GNP would, under present noninflationary conditions,
raise significantly the proportion of the total flow of incomes through
the economy that is set aside for savings, without necessarily insuring a parallel rise in investment. In fact, it seems possible that the
additional flow of funds to the Federal Government would-either
by adding to the Treasury cash balance or by returning funds to private savers via debt retirement-choke off recovery short of 96-percent
employment by reason of holding the total of consumption and investment expenditures below 96-percent employment levels.

1962 JOINT ECONOMIC REPORT

Obviously this does not mean that the Federal Government cannot,
under any circumstances, run a high employment surplus as large as
154 percent or more of the GNP. Indeed, under the inflationary conditions of 1947-48 and 1950-51 the Federal Government surplus ran
to about 5 percent of the GNP, helping to reduce inflationary pressures. As we have repeatedly pointed out, the Government should
set its budget policies so as to produce an excess of revenues over
expenditures at high employment and make retirements of the public
debt under high employment conditions.
But even a good policy can be carried too far. As we pointed out a
year ago, we are seriously concerned lest our revenue system be
capable of generating too large a Federal surplus at high employment, in which case employment high enough to produce any surplus
will likely not be acheived.
CHANGES IN DEBT LEVELS

One of the concomitants of economic growth in this country has
been a continuous addition to financial investment-and hence, a
continuous addition to debt. The Nation has lent more-and hence
borrowed more-as the Nation has grown wealthier. At the same
time our economy has become more specialized, the needs to obtain
money and put it to active use have increased.
Total debt and GNP have riven together
Total debt in the society has tended to remain relatively constant as a percentage of GNP. In other words, total debt has
tended to rise, step by step, with increases in GNP. Table 12, which
groups years since 1922 in rough correspondence with the business
cycles that have occurred since that date, indicates that total debt
as a percentage of GNP has varied within about 5 percentage points,
plus or minus, from the 41-year average, with the notable exception
of the 1930 decade. This is not surprising, of course, in view of the
fact that as GNP has tended to rise, savings levels have also risen
and made more funds available for borrowing and for productive use
in the economy. In the period of the great depression, production
and incomes fell so drastically that, despite widespread bankruptcies,
the debt ratio increased to unusually high levels.

1962 JOINT ECONOMIC REPORT
TABLE

12.-Ratio of total public and private debt to gross national product
[Dollar amounts In billions]
Average
debt

1916-21-$117.8
1922-241925-27 -173.6
1928-3 -186.4
1934-38 -183.9
1939-46 -----------------------------------------------1947-49 -472.1
1950-541955-57 -77.50
Average ratio, 1916-57
Average ratio, 1916-57, excluding 1930-34

150.2
309.8
602.0
-

-190
-

Average
GNP
$73.3
81.3
94.2
80.6
79.8
162.9
248.9
336.5
413.3

Ratiopercent
162
185
184
231
231
190
190
179
183

-184

Source: Marshall A. Robinson, "Debt and Economic Growth," in Money and Economic Activity, Readings
in Money and Banking, Lawrence S. Ritter (ed.), Houghton, Mifflin Co. (1961), p. 41.

Federal debt declining relative to GNP
The composition of total debt over time has changed. While public
debt (Federal, State, and local) has risen in the postwar period, the
percentage increases have been less than the percentage increases
either in private debt or in GNP. Chart 9 indicates these relationships. In effect, the public sector has been financing its current and
capital outlays more out of current income than has the private
sector. Moreover, since the economy is growing more rapidly than
public net borrowing, the significance of the public debt relative to
total economic activity is actually declining. (See chart 9, p. 40.)
RECOMMENDED

FISCAL POLICY ADJUSTMENTS

The President has recommended legislation designed to supplement
the automatic stabilizing features in the budget with changes in
business conditions. These recommendations include (1) standby
authority to make reductions in personal income tax rates, (2) standby
authority to expand public works programs, and (3) adjustments in
the unemployment compensation program. The President has also
proposed an investment tax credit as a permanent stimulus to investment. Each of these proposals requires careful consideration.

Proposed temporary tax cut authority
Under the proposed authority to reduce personal income tax rates,
the President would be given the power to adjust all individual income
tax rates downward by as much as 5 percentage points, with similar
adjustments in withholding rates and payments of estimated taxes.
The steps called for are to (1) submit the proposal to Congress; (2)
have the proposal take effect 30 days after submission unless rejected
by a joint resolution; (3) have the proposal remain in effect for 6
months unless changed by the same process; (4) have the tax change
take effect automatically if Congress is not in session, but have the
change terminate 30 days after Congress reconvenes.
In terms of economic principles, this proposal constitutes an excellent means by which to make the present automatic changes in our
tax structure even more effective as a stabilizing influence in the
economy. Automatic tax adjustments, as we have indicated above,
are powerful forces in influencing the level of private demands for
goods and services. The automatic changes in tax burdens with

1962 JOINT ECONOMIC REPORT
CHART 9

NET PUBLIC AND PRIVATE DEBT AS A
PERCENT OF GROSS NATIONAL PRODUCT
1946-1961
Percent
110 r-

1946
ii For June 50.

1950

1955

1960 '613t

V Estimated by Council of Economic Advisors.

Source. 1/962 Economic Reportof th1 President

changes in income levels have proved to be generally beneficial to the
societv in both recessions and boom periods, and it seems highly
desirable to make these adjustments even more effective by discretionary changes. This committee has long endorsed the principle of
using flexible tax receipts to counteract cyclical fluctuations. We

1962 JOINT ECONOMIC REPORT

believe that the President's proposal represents a potentially significant
step forward, and we hope that the Congress will give serious and
immediate attention to the suggestion.
Alternative proposals
Witnesses before the committee have posed objections to the exact
form of the present proposal-though not related to the economic
substance of the proposal-and have suggested alternative approaches
that might be equally effective. The practical objection to the proposal is that it involves a transfer of legislative function to the Executive, and a transfer of the Executive (veto) function to the Legislature-an arrangement carrying doubtful consequences. Recognizing
the urgency of prompt action, however, these witnesses have suggested
that Congress enact legislation to set out the conditions and terms of
a temporary tax cut such as it will wish to make, when asked to act
quickly; with the ground rules thus established, Congress should
be able to act quickly onl a request for a temporary tax change and,
indeed, to initiate such an action if need be. We believe that such an
alternative procedure would be practicable. It is certainly conceivable that Congress would act on a tax reduction measure within a
shorter period than the proposed 30-day veto.
Among the questions Congress would consider in framing such
"ground rules" would inevitably be those pertaining to the duration
and size of the tax cut and how it is to be distributed among income
tax brackets.
Alternative income brackets
The President has recommended an across-the-board cut of 5 percentage points for all income tax brackets. The Commission on
Money and Credit, on the other hand, recommended a reduction in
the first-bracket rate. The rate in this bracket is, of course, paid
by all taxpayers on the first $2,000 of income ($4,000 for joint returns). But with the change recommended by the Commission on
Money and Credit a smaller proportion of the gains to taxpayers
would go to the higher income families, and the reduction would
thus be more of a stimulant to consumer purchases. The CMC
proposal would distribute about 19 percent of the gain to individuals
with incomes of $10,000 or more, while the across-the-board reduction
would give them twice as much, or almost 40 percent of the total.
Another alternative would be to split the first bracket and apply a
lower tax rate on the portion of incomes in the new first bracket. The
distribution under all three alternatives is given in the following table:
TABLE

13.-Distribution of tax savings by income classes under alternative tax
reduction methods
Percent of total tax reduction
Income group

Oto S5,000-

$5,000 to $10,000 -48.9
Above $10,000-

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

Total -

80736 0-62-4

Percent of
total returns Across-theboard
reduction

First-bracket Splt firstreduction
bracket
ductionre-

12.7

47.6
39. 7

18.1

23.1

12.0
100.0

100.0

39.1

63.0
18.9

61. 9
15.0

1962

JOINT ECONOMC REPORT

Standby public works authority
Under the standby authority to expand public works expenditures,
the President could commit up to $750 million for direct Federal
expenditures, another $750 million for grants-in-aid to State and local
governments, a further $250 million in loans to States and localities
that might not be able to meet their share of project costs, and a final
$250 mitlion which he could distribute on a discretionary basis. Direct
Federal expenditures would be limited to projects previously authorized by the Congress. The program could be initiated within 2 months
after the seasonally adjusted unemployment rate (1) had risen in at
least 3 out of 4 (or 4 out of 6) months, and (2) had risen to a level at
least 1 percentage point higher than its level 4 (or 6) months earlier.
The program would be terminated automatically within 12 months
unless extended by the Congress, although the President could terminate the program within a shorter period.
The problem of using public works programs to mitigate fluctuations
in economic activity has been extensively examined in the past. It
would appear, on the basis of past experience, that typically the lags
between decision-making and the economic impact of public works
programs are almost always such that the impact occurs at inappropriate times. Moreover, the initial stimulus may be largely in industries where wage and price structures are such that the effects are felt
through increases in prices rather than in employment.
The new proposal seeks to avoid these difficulties. In particular,
the proposal anticipates acceleration in projects which can be initiated
quickly. The economic impact will be concentrated in short periods.
In general, therefore, we endorse the proposal to make use of such
public works to mitigate economic declines. In fact, this committee
urged in its annual report of last year a proposal quite similar to the
one the President is now advancing. Public works projects can
bolster the economy at the time when stimulus is needed and at the
same time contribute to the provision of certain necessary State and
local functions, such as fire protection, medical services, sewage disposal, etc. The President already has some power to adjust the
timing of public works programs, and this additional legislation would
simply increase his effectiveness in using these powers.
Expansion of unemployment compensation
The period of unemployment compensation would be extended by
as much as 13 weeks for workers who have had at least 3 years in
covered employment. The period of benefits for all insured workers
would also be extended when unemployment is widespread. The suggestion has been made that this latter proposal would come into
effect when insured unemployment has reached 5 percent and the
number of benefit exhaustions in a 3-month period has reached 1
percent of insured employment.
The administration's program also calls for legislation to extend the
unemployment compensation program to an additional 3 million
workers not now eligible to participate in the program. It would
require States to meet higher standards with respect to the amount
of weekly benefits and provide that those with heavy insured unemployment could receive higher insurance grants. A State would not

19t62 JOINT ECONOSIC REPORT

be allowed to deny compensation to claimants undergoing approved
training.
We feel strongly that all of these changes are in the right direction.
Unemployment benefits have not risen commensurately with the
increases in average weekly earnings and have, therefore, put an
increasingly heavy penalty in real terms upon families hit by unemployment. It is well recognized that unemployment compensation
can provide a powerful countercyclical influence. It can support
consumption demands in downturns. It is correlated directly with
unemployment. It diminishes rapidly in prosperous times and
can have a stabilizing influence in inflationary periods. All of the
President's proposals are designed to make unemployment compensation more adequate in today's economy. These proposals would
make the unemployment compensation system a more potent countercyclical device and ease the suffering of those families most adversely
affected by cyclical declines.
Tax stimulus to investment
The administration has also recommended legislation to provide a
stimulus to investment. This proposal in its present form would
allow firms to take a credit against income tax for new investments and
for purchases of up to $50,000 of used property. The credit generally
would be equal to 8 percent of the purchase price of domestic investments.
The growth features of this proposal are discussed elsewhere in this
report. However, we are concerned about the cyclical features of the
proposal. It is well known that investment tends to be high in boom
periods and low in recessions. The effect of an investment credit
will be, therefore, to lower Government revenues in times when
revenues should be rising to curb inflationary pressures, and to make
Federal revenues relatively higher in recession periods, when Government receipts should be reduced. Moreover, the investment credit
will tend to accentuate the instability of investment by encouraging
overinvestment in boom periods. This, in turn, may actually retard
growth rates. For example, there was a very substantial increase in
the rate of investment immediately after the adoption in 1954 of the
accelerated methods of depreciation for tax purposes. However,
as the report of the Council of Economic Advisers points out, capital
stock for the entire period from 1954 to 1960 actually grew at a lower
rate than it did in the pre-1954 period.
This procyclical feature of the proposed investment tax credit should
have serious consideration by the committees of Congress that will
be acting on the proposal. A parallel can be drawn in this connection
between the public works proposals recommended by the President
and the investment credit. Both of these proposals can lead to increases in demands for capital goods, the one in the form of public
capital and the other in the form of private capital. This suggests
that the investment credit proposal might appropriately adopt the
principles and limitations of the proposed standby capital improvements authority. Both could be brought into operation at the same
time and only under the same conditions. In effect, the adoption of
this change would involve stimulating private investment in recession
periods and eliminating the stimulus at times when it is not necessary.

1962 JOINT ECONOMIC REPORT

Other budget proposals
There are still several areas in which some recent economic ideas
have not been converted to budgetary practice. The budget still
makes relatively little assessment of capital outlays by the Federal
Government. The significance of these expenditures is that they
provide services to the Nation for a period of years after the initial
expenditures are made. Examples would include the construction of
dams, highways, bridges, airports, etc., as well as investments in

education and other human resources. It would be quite useful
if the budget measured the services being derived from these types of
outlays. Such a practice would be completely in accord with usual
accounting procedures. A railroad company would certainly not
include the costs of purchasing engines and cars as current expenses.
These capital acquisitions increase productive capacity for a period
of years into the future. Similarly, public capital items are also
productive over a long time.
The fact that the Federal budget includes all capital expenditures
along with current expenses in the year when the outlays are made
tends to distort comparisons of our budget with those of foreign
countries.
Another improvement in budgetary procedures would be to give
greater consideration to the economic effects of Government loan and
guarantee programs. At present, little attention is given to these
programs in the budget except insofar as they represent cash withdrawals from the Treasury. The guarantee and insurance programs,
however, can have substantial economic effects without involving
cash drains from the Treasury. In essence, Federal loan guarantees
are similar to reductions in risk for private lenders and hence have
the same types of economic effects as do reductions in interest rates.
Analysis of the economic effects of these programs should be provided
in the budget.
Under present procedures, the receipts side of the budget is considered by the Congress largely independently of the expenditures
side. Moreover, the only congressional analysis of expenditures
seems to be on the basis of individual appropriations bills. There is
little opportunity for the Congress or the public to consider the overall
impact of the budget or the way in which budget amounts change over
time or during congressional deliberations each session. As one of
our witnesses stated:
These hearings are probably the last moment at which Congress
will consider the budget as a whole. Whether or not the budget
target proposed by the administration is the correct one, there is
no reliable machinery in the Congress that will make the overall
results conform either to the administration's target or to some
other target consciously chosen by the Congress. The various
taxing and appropriating committees of the Congress are already
going their separate ways, making the unrelated decisions that
will finally determine the budget. We won't even know the net
result of all this until a month after Congress goes home. To
carry out the purposeful budget policy on which there is growing
agreement, more effective machinery in the Congress is needed
(hearings, p. 657).

BALANCE-OF-PAYMENTS AND INTERNATIONAL TRADE
POLICIES
Recent events in the international field have caused the American
people, and the Federal Government, to turn attention to problems
of foreign economic policy, perhaps more than at any time in a century. These events have also brought about a new interdependence
between our economy and the economies of other nations of the free
world. One of these developments is the large and persistent deficit
in our balance of payments. Another is the historic strides made by
the nations of Western Europe toward integrating their economies,
dramatized by the rapid economic growth of the Common Market
countries, and most particularly by the challenge which this integration raises to our exports and international payments position.
INTERNATIONAL PAYMENTS AND DOMESVfC

POLICIES

Large deficits in our international payments position occurred in
1958, 1959, and 1960, but went largely unnoticed until, in October
1960, a sudden outburst of speculative activity in the European gold
markets caught the attention of the American press and the American
public. That flurry of activity led to a number of quick actions to
limit the flow of dollars abroad, including the tying of foreign aid expenditures to domestic procurement, restrictions on spending by
overseas military personnel, new limitations on the amount of dutyfree goods that American tourists may bring in from abroad, and, at
one time, an order calling home dependents of our military personnel
abroad. Despite these and other actions, a deficit in our payments
position continues and has become a preoccupation central to all our
governmental policies, foreign and domestic.
TABLE 14.-U.S. balance of international payments, 1959-61
[Billions of dollars]
1959 '
U.S. expenditures abroad, total U.S. imports -23.5
---------------------MerchandiseMilitary expenditures-3.1
Other servicesRemittances and pensionsGovernment grants and capital outflow-3.0
U S. private capital -2.4
U.S. receipts from abroad, total-25.5
U.S. exports -23.7
Merchandise -16.3
(Other than Government financed)-(3)
Service, investment income, military sales-7.
Repayment of U.S. Government loans -1.1
Foreign investments in the United StatesTransactions unaccounted for; net receipts (+), payments (-) -+0.5
Balance ------------------------------------------------------Consisting ofSales of gold -.
Changes in liquid liabilities toInternational Monetary Fund-6
Other international organizations-Foreign central banks and governments -9
Foreign private banks -1.1
Other foreigners-.3

29.7
15.3
5.1
.8

4
.7
-3.7
7
.I

1960

19611

31.4
23.3
14.7
3.0
5.6
.8
3. 4
3.9
28.1
27.3
19.4
(17.6)
7.9
.6
.2
-0.6
-3.9

32.0
23.1
14.5
3.0
5.6
.9
4.2
3.8
30. 2
28.3
19.9
(17.5)
8. 4
1.3
.6
-0.6
-2.4

1.7

.7
.3
1.2
.1
-0.1

-0.1
.3
.6
.6
.3

IPreliminary.

'Excludes U.S. subscription to International Monetary Fund.
3Not available.
In 1961 includes convertible currencies held by U.S. monetary authorities.
Source: U.S. Department of Commerce, Office of Business Economies.

1962 JOINT ECONOMIC REPORT

In harsh terms, it could be said that since the late 1960 "gold
rush" our monetary policies have been shaped, not solely by the
needs of the domestic economy but largely by the way European
bankers are expected to react to a given level of U.S. interest rates.
Similarly, large or continuing deficits in the Federal budget must be
avoided, it has been suggested, because such deficits alarm European
bankers and tend to undermine confidence in the dollar.
In terms of the report of the Council of Economic Advisers:
* * * domestic economic policy must be framed with an
eye to the balance of payments. Action to safeguard the
international position of the dollar is today an essential part
of our policy for full employment and growth.
Such considerations are a new experience for the American people
and warrant some review.
United States versus European budgets
We might observe in passing, however, that the nervousness with
which foreign bankers are said to view our budget deficits may
arise from the fact that the Federal budget follows the unusual practice
of counting investments in capital items as "expenses" to be met within
the year. Questions raised with the Director of the Budget developed
the point that if the same practice were followed in the European
government budgets generally reputed to be in balance, many of
these would appear to have a deficit. For example, the calendar
budget of England would have appeared in deficit in 9 out of the last
11 years, the French budget would have shown a deficit in each of the
last 10 years, and West Germany would have had a deficit in 4 of
the past 6 years. In contrast, the United States budget over the
last 11 calendar years has shown surpluses in 5 years and deficits in 6.
TABLE

15.-Central Government surpluses and/or deficits for recent years for 4

countries

Calendar year

1950
-611
1951
-1952
-1953
-1954
-1955-1956
-150
1957
-1958 -----------------------------1959
-1960-

United
Kingdom
(millions of
current
pounds)

France
(billions of
current new
francs)

175
-101
282

()
-2. 40
-6.27
-7.94
-7. 56
-8.32
-11.72
-12.21
-9.36
-5. 48

-453

-3.24

55
464
628
74
-42

Germany
(millions
of current
deutsche
mark)
()
(')
(')
(')
(')
2,221
1,331
-2,926
-1,755
-3,881
-200

United
States
(billions of
current
dollars)
0.5
1.2
-. 6
-7.2
_1 1
-. 7
5. 5
1.2
-7.3
-8.0
3.5

Figures not available at this time on the same basis.
Source: Preliminary findings of a study prepared by Andrew H. Cant II for Harvard University, financed
by the Brookings Institution project of studies in government finance. (See hearings, pp. 101-102)
x

The large and persistent deficit in our international balance of payments is, on the other hand, quite real. Foreign governments and
foreign bankers have reason indeed to be concerned with this matterand with any other matter threatening the soundness of the dollar.

1962 JOINT ECONOMIC REPORT

The events of World War II and since have placed the United States
in the role of "world banker," which means not only that U.S. institutions and nationals now finance a large share of the free world's
business, but that the dollar has become a major "reserve" currency.
Almost every foreign central bank in the free world now holds some
of its reserves in dollars so that it can earn an interest return and
because the dollar is a widely used international currency.
FOREIGN CURRENCY VERSUS GOLD RESERVES

Under the existing gold exchange standard, countries keep their
international reserves partly in gold and partly in one or more of the
so-called reserve currencies-usually sterling or dollars.. These
"reserve" currencies are generally acceptable as means of international
payments. So long as foreign central bankers are confident that
their dollar reserves will continue to be convertible to gold in the
future-at the existing price-they generally prefer to hold a portion
of their reserves in dollars or dollar claims.
Dollars can be held as demand deposits in commercial banks in
New York and other cities, or they can be invested in interest-carrying
assets, such as short-term U.S. securities. On the other hand, dollars
used to buy gold earn no interest. Indeed, they incur a storage charge.
It is not relevant to the issue to debate whether gold is worth $35 per
ounce only because the U.S. Government is pledged to buy at this
price all that other governments wish to sell. The pertinent point is
that we are pledged to sell gold at this price to other governments, or
to their central banks, to the extent that they wish to buy and have
U.S. dollars with which to buy.
Postwar trends
In the early postwar years, the U.S. Government and its nationals
lent, spent, and invested many billions of dollars abroad, with no
immediate challenge to the adequacy of our gold reserves. In postwar
Europe, as in the underdeveloped nations, the U.S. goods and services
which dollars would buy were so much in demand that foreign
countries could spare relatively few dollars to buy gold. Indeed, in
the early postwar years, U.S. policy encouraged the flow of some gold
abroad to help in stabilizing the currencies of the recovering nations
by permitting them to build up their foreign exchange reserves. With
economic recovery in Europe, however, several European countries
began to accumulate large amounts of gold and dollars. For the most
part, dollars lent or spent in underdeveloped countries can be used to
purchase European goods or services, in which case they may end up
in European central banks already having a surplus of dollars. Between the end of 1949 and the end of 1960, foreign government and
private holdings of dollars and short-term dollar claims increased from
$7.5 to $19.9 billion (not counting holdings of the IMF and other
international organizations). Meanwhile, dollars had been used to
purchase our monetary gold to such an extent that our gold reserves
were reduced from $24.6 to $17.8 billion. Even with this large loss,
however, the United States still holds roughly 42 percent of all the free
world's monetary gold.

48
TABLE

1962 JOINT ECONOMIC REPORT

16.-Official gold and foreign ezchange holdings and volume of international
trade-Selected countries
[Billions of U.S. dollars]
Official I

Inter~~~national

_________

Gold

United States
Canada -.

-$17.

Common Market countries 3_-------------Belgium 3 ___________________________

France --------------Germany-3.6
Italy-2.2
Netherlands -1.6
United Kingdom -2.2
Switzerland-2.5
Japan -.

Foreign
exchange

Total

trade,
total '

Reserves
as apercent
of international
trade

5
9

$9. 1
1.0

$17.6
1.9

$36. 2
11.9

48. 6
15.9

10.7
1. 2

5.1
.4

15. 8
1.6

63.1
7.9

25.1
20.3

2.1

.7
2.8
1.1
.1
1.4
.3
1.3

2.8
6.4
3.3
1.7
3.6
2.8
1.6

13. 6
23.3
9.1
9.2
23.2
4.6
9.5

20.6
27. 4
36.3
18.4
15.5
60.8
16.8

I As of end of 3d quarter 1961.
2 Estimated total imports and exports in the 12 months ended Sept. 30,1961.
3 Includes Luxembourg trade; Luxembourg gold and exchange holdings not available.

Source: International Financial Statistics, January 1962.
DOLLAR CLAIMS AND THE ROLE OF GOLD

Foreign governments or their central banks now hold reserves of $11
billion of short-term dollar obligations, which might be used, at least
theoretically, to purchase our gold reserves. Private holders of
short-term dollar claims abroad have an additional $8 billion, and these
dollars too could be used to buy U.S. gold. The United States does
not, of course, sell gold to private holders of dollars, but private
holders may exchange their dollars for local currencies. In this case
the dollars go to a foreign central bank, which is privileged to buy our
gold. This does not mean that all of these foreign dollar holdings
are likely to be used to purchase our gold. On the contrary, to a
large extent private dollar holdings represent balances held by foreign
firms and nationals in U.S. banks for settling up-coming bills for the
purchase of U.S. goods and services. And, as has been indicated,
dollars are held as reserves to settle future international balances.
All U.S. sales of gold to European central banks in recent years
can by no means be attributed to speculative activities or to lack of
confidence in the dollar. On the contrary, many central banks
follow a practice of maintaining a certain minimum percentage of
their reserves in gold, notwithstanding the fact that the gold earns
no interest. Accordingly, since the increasingly favorable balanceof-payments position in Europe resulted in greatly increased holdings
of reserves, it was only natural that the European countries would
restore the balance they desired between gold and dollar holdings, and
hence, much of the gold flow has been automatic.
On the other hand, foreign central bankers may suddenly decide to
buy U.S. gold, not because of any lack of confidence in the U.S.
Government's intention to live up to its pledge or because of any lack
of confidence in its domestic fiscal policies, but because of uncertainties as to what other foreign central banks may do. Should all foreign
central banks make a rush on our gold reserves in the belief that others
are about to do so, extreme embarrassment could result. There is
no international Federal Reserve System to mobilize reserves or otherwise scotch irrational runs on central banks. The International

1962 JOINT ECONOMIC REPORT

Monetary Fund was created to serve this function but only to the
extent of its existing resources. Unlike a central bank, it does not
have the power to create new liquidity. Furthermore, its powers
and resources are small in relation to the growth of money transfers
that have taken place in recent years as a result of both increased
volumes of trade and a general return to currency convertibility.
Accordingly, the cooperation and continuous consultations among
nations now taking place in the OECD should help not only to avoid
raids on the reserves of individual nations, but to pave the way for
improvements in international monetary mechanisms.
BATNKER'S ROLE: LONG-TERM ASSETS, SHORT-TERM LIABILITIES

Our balance-of-payments deficit also does not mean that the United
States is becoming insolvent. On the contrary, as a world banker,
this country is in much the same position as a private commercial
bank in that most of the claims against us are short-term or demand
claims, while our assets are mostlv long-term or illiquid assets.
In theory at least, all of a bank's depositors could simultaneously
ask to have all their demand deposits converted to cash. Normally
this does not occur because there is a constant turnover of bank
deposits resulting merely in the shifting back and forth of credits
from some depositors' accounts to others as incomes are received, bills
are paid, and so on. Should a U.S. bank be confronted with a situation where all of its depositors were demanding at once to have their
deposit claims in cash, the average U.S. bank could make prompt
payment of not more than about 17 cents on the depositor's dollar,
because this is the amount that the average bank has in cash and
cash reserves with the Federal Reserve System. Commercial banks
have most of their assets in the form of loans that have been eytended
for a fixed period of time and other claims that usually cannot be
converted to cash immediately, except at distressed prices substantially below their worth. Needless to say, however, commercial
banks are subject to some fairly large demands for cash and have
learned from experience that they must, to be safe, keep a certain
fraction of their assets in a liquid form in order to be able to meet
such extra large demands.
And so it is with a nation. To illustrate, when a U.S. firm spends
dollars to build a plant abroad, a valuable asset is acquired, but the
dollars spent become a short-term claim, adding to the potential
drain on our gold reserves. Indeed, private investments by U.S.
nationals in foreign countries over the past 10 years amount to approximately the same as our international payments deficit in those
years, but these investments have been largely in long-term assets,
whereas relatively few of the foreign-held dollar claims against us
have been invested in long-term assets in the United States.

1962 JOINT ECONOMIC REPORT

TABLE 17.-International investment and gold position of the United States, 1949

and 1960

[Billions of dollars, end of year]
Assets and liabilities
Assets-552
Gold, IMF subscription, and short-term -28
Monetary gold -International Monetary Fund subscription '-2.8
Short-termnprivate-------------------------Long-term -26.6
irect investment -----Other private investment----------------------U.S. Government claims-3
.
- -11.0
.
Liabilities -d--------------------------------------------16.9
Liuidh
---------------------------------------------------Liquid -------ermby
holders:
Foreign official '-------------------------International Monetary Fund-5-Other international organizations
Private '----------------------------Foreign and international holdings of U.S. Government bonds and
notes-----------------------------------Long-term--------------------------------Direct investment------------------------Other private investment ----------------------Excess of assets overliablities--38.3

1949

19601

6
24.6
1.3
10.7
4.9
982.
9.8
2.9
1.3
.4
4.6
6
7.1
2.9
4.2

89.2
26' 8
17.8
4.1
4.9
62.4
32. 7
12.6
17.0
44. 7
26.2
10.3
2.6
1.4
9.6
2. 3
18.4
6. 9
11.5
44.5

'Preliminary.
X Under current practices of IMF, the United States has a virtually automatic right to draw the amount
of Its subscription less the amount of U.S. liabilities to IMF as shown in the lower part of the table.
Includes U.S. Government claims in inconvertible currencies.
4 As reported by banks in the United States.
6Non-interest-bearing notes (and, in 1949, deposits).
6 Includes estimated foreign holding of U.S. currency and other liquid claims not accounted for elsewhere.
NOTE.-Detail will not necessarily add to totals because of rounding.
Source: Department of Commerce and Board of Governors of the Federal Reserve System.

Over the postwar years foreign assets owned by the U.S. Government and its nationals have been increasing faster than have foreign
claims against the United States. Furthermore, our foreign assets
are substantially in excess of our liabilities to foreigners. In 1949,
our foreign assets exceeded our liabilities to foreign governments and
nationals by $38.3 billion. By the end of 1960, our excess of assets
over liabilities had grown to $44.5 billion. At the same time, however, short-term claims against us amounted to $26.2 billion, whereas
our short-term assets available to meet these claims, not counting
monetary gold, totaled only $9 billion.

1962 JOINT ECONOMIC REPORT

18.-Short-term international dollar balances reported by banks in the
United States, excess of liabilities to foreigners over claims on foreigners, by
countries

TABLE

[In millions of dollars]

Increaseinnet

Dec. 31
1957

Germany, Federal Republic -1,417
United Kingdom France ------------------------Italy -1,023
Switzerland-933
Other Europe -1,699
Canada -1,469
Latin America -1,
Asia -1,560
Other -----International agencies 'Grand total-12,959

1,177
240

619
-

305
1,517

liabilities

1961

Jan. 1, 1958,
to Dec. 31,
1961

1959

1960

1,678
749
430
1,085
810
2,261
1,776
1 304
1,770
210
1,544

1,933
869
598
1,340
931
2,268
1 926
1,233
2,194
317
13 ,1 58

3,394
1,422
487
843
618
1,564
2,018
1,066
2,061
283
13,95

2,676
2,044
947
1,199
769
1,915
2,212
894
1,085
302
3,804

1,259
867
707
176
-164
216
743
-725
-475
-3
2,287

13,617

16,766

17, 712

17,847

4,888

1958

' Represents principally the International Bank for Reconstruction and Development, IMF, IFC, and
IDA.
' Includes $1,031 000,000 representing increase in U.S. dollars subscription to the IMF paid in June 1959.
'IncludesBank {or International Settlements.
NOTE.-Detail maynot add to totals because of rounding.
Source: Federal Reserve Bulletin.

Trade balancefavorable
As is frequently pointed out, the balance of trade in goods and
services of the United States has not been unfavorable in the postwar
period. Our exports have exceeded our imports by a substantial
margin-though a margin by no means sufficient to bring back all
of the dollars used abroad for purposes other than imports. Payments made for overseas military costs, as well as loans and investments abroad, foreign aid, and dollars spent by U.S. tourists abroad,
all enter into the total outgo of dollars. Similarly, payments made
by foreign governments and nationals for repayment of loans, interest on loans, investments in the United States, and so on, enter
into our total receipts from abroad, along with payments for imports
from the United States. The deficit in our international payments
ranged .between $3%2 and $4 billion in the years 1958 through 1960,
and is estimated at $2.4 billion for 1961.
STEPS TAKEN TO IMPROVE PAYMENTS POSITION

Among the measures adopted to help correct the deficit, the one
that has been pursued with the most vigor, perhaps, is that of raising
short-term interest rates (and all other interest rates) in an effort to
make U.S. bank and security rates relatively more attractive to shortterm funds. When short-term interest rates in Europe are substantially higher than in the United States, certain types of depositors
with international connections may transfer funds to Europe to take
advantage of the higher rates. Dollar claims going abroad for longterm investment, such as for building a plant or purchasing European
stocks and bonds, are no more or less an immediate claim on the
United States than are short-term bank deposits. Concentrating our
efforts on stemming the flow of short-term funds simply draws a distinction between the purposes for which funds go abroad, not the

1962 JOINT ECONOMIC REPORT

effect they have on our balance of payments. Funds going abroad
for long-term investment are considered desirable, whereas funds
going merely to take advantage of the differential in short-term interest
rates are considered undesirable. Furthermore, many European
governments and banks receiving such funds tend to draw the same
distinction.

Increased interest rates
Under the 19th-century system of banking, any funds moving
from one country to another were considered automatically to increase
the money supply of the receiving country. Under today's conditions, the central bank exercises control over its country's money
supply, so that when funds flow into a country with adequate reserves
to meet international needs, the central banking authorities make only
the same amount of money available to its nationals as it would without the inflow. On the other hand, dollars transferred to Europe
flow to a central bank, which then invests them in U.S. Treasury
bills or other short-term securities, or deposits them in time accounts
in a U.S. bank. Thus, if the rate of interest being paid to the depositor
of dollars abroad is higher than the rate that the central bank earns
on the dollars in New York, the economy of the country in question
is paying net interest to the United States. Naturally, astute central
bankers do not like to have their countries pay interest to another
country just for the dubious pleasure of holding some of that country's
currency. Indeed, in some instances, European banking systems
have imposed a charge or penalty on dollar deposits in their banks in
order to discourage short-term funds from coming in. Knowing of
our nervousness over the decline in our gold reserves, furthermore,
European central bankers can, by threatening to take our gold,
exercise some leverage on our monetary officials to encourage them
to raise U.S. interest rates.
Since mid-1960, the Federal Reserve has maintained a 2}'- to 234percent floor under yields on 91-day Treasury bills, and a general
level of interest rates much higher than would be appropriate for
the state of the domestic economy. Presumably, this has reduced
the transfer of dollars abroad by making U.S. interest rates relatively
more attractive, though to what extent international monetary flows
are affected by interest rate differentials has not been indicated in
any factual way.
As a further step to stem the flow of short-term funds, the Federal
Reserve has amended Regulation "Q," effective January 2, 1962,
raising from 3 to 4 percent the ceiling on interest rates that member
banks may pay on time and savings deposits of 1 year or more.
This action will also help raise the general level of U.S. interest rates
and make them more attractive relative to rates abroad, provided,
of course, that the other major nations do not reciprocate by raising
their interest rates.

Other unilateralsteps
Further, the Treasury has undertaken some modest experiments
with techniques that may offer alternatives to monetary actions
raising the general level of interest rates throughout the domestic
economy. One of these techniques, that of issuing special certificates
at a negotiated interest rate to foreign central banks and governments,

1962 JOINT ECONOMIC REPORT

has been initiated. The other is that of obtaining foreign currencies
in order to operate in the foreign exchange markets to alleviate
pressures on the dollar. In addition, during the course of the committee's hearings the announcement was made that the Federal
Reserve System is beginning a similar operation. We have doubts
whether the Federal Reserve should be entering into this field of
activity. Responsibility for international economic and financial
policies resides with the President and the Secretary of the Treasury.
On the face of the matter, moreover, it would seem undesirable to
have two competing and possibly conflicting agencies in this vital area.
The technique of issuing special certificates to foreign central
banks appears promising. Such a practice would seem to involve a
much smaller direct cost to the Treasury than the present policy of
keeping interest rates on all short-term Treasury securities at artificially high levels. Furthermore, the indirect cost of the monetary
tightness necessary to keep short-term rates at these artificially high
levels, in terms of its repressive effects on the U.S. economy, seems
overwhelming. Similarly, as an alternative to the recent step to
raise maximum rates that the commercial banks pay on time and
savings deposits-a step which will further influence all long-term
rates upward-Treasury and Federal Reserve officials should explore
the possibility of persuading foreign banking systems to do more
toward discouraging the inflow of short-term funds where such funds
are not wanted.
Cooperative measures

The administration has made efforts to achieve better cooperation
with our Western allies, and these seem also to have met with some
success. West Germany and Holland appreciated their currencies
by approximately 5 percent during the past year, as an aid to slowing
the accumulation of dollar surpluses in those countries, but the
immediate effect was a speculative transfer of short-term funds from
the United States, and from the United Kingdom as well, in anticipation of further revaluations. What the longer run net assistance
from the revaluation has been, if any, is not clear. West Germany
made a loan prepayment amounting to $587 million, and this materially reduced our payments deficit for the year. Finally, we may
presume that the meetings of Working Party 3 of the OECD, as
well as the monthly meetings of central bank officials representing
the major countries at the Bank for International Settlements, have
led to better understanding of the problems and to improved coordination of monetary and balance-of-payments policies. Some progress
has been made, furthermore, toward achieving better international
monetary arrangements in the International Monetary Fund. Delegates from the 10 nations meeting at Vienna last September have
agreed to recommend to their respective governments that the IMF
be provided with a $6 billion supplemental borrowing and lending
authority. While the supplementary authority is disappointing in
the amount of European continental currencies provided and in the
degree of automaticity in making credit available, we believe that the
recommendation should be promptly approved by the United States
and the other participating countries.

1962 JOINT ECONOMIC REPORT
FURTHER STEPS NEEDED

Protecting the dollar from unnecessary, irrational strains is a matter
in which the whole free world has a manifest interest. This will
require a much larger sharing of the free world's burden for aid to
underdeveloped countries, and for mutual military defenses, on the
part of those countries now in a position to assume a larger share.
These countries must be persuaded to increase their contributions
to the underdeveloped countries generally, not just to former colonies
and associated territories, and to make more aid available without
tying the use of the aid funds to purchases in their own markets.
Similarly, several of our NATO allies must be pressed to make a fairer
contribution to NATO support, including increased contributions to
military base operating expenses, whether for civilian personnel, construction, land, or supplies.
Finally, while we applaud the efforts that the Common Market
countries are making toward an integration of their economies, we
feel that steps must be taken to lessen the discriminations against nonmember countries inherent in their evolving tariff structures, which
are characterized by disappearing internal tariffs, coupled with a
common external tariff. Manifestly, the Common Market countries
owe the rest of the free world a substantial unilateral reduction in
their external tariffs.
In extending the Marshall plan and other direct aid to the countries
of Western Europe during the immediate postwar years, the United
States has not acted entirely out of charity. Neither was it entirely
charity that led to the policy of permitting Western Europe access to
U.S. markets free of quantitative restrictions on manufactured goods,
while European markets were largely restricted against U.S. exporters,
thus allowing the Europeans to accumulate large holdings of gold and
dollar reserves.
On the contrary, this was intelligent policy, as has been indicated by the results. We think it would be equally intelligent policy
for those countries of Western Europe that are now in a surplus
position to do what they can toward cooperating in relieving the
present strain on the dollar.
INTERNATIONAL TRADE PROBLEMS

Since passage of the Trade Agreements Act of 1934, the policy of
the United States has been to promote freer movement of goods,
services, and capital across national boundaries. This policy has been
based, not only on the belief that expanding trade encourages peaceful
relations. among nations, but also upon the belief, based on our experience with free trade among the States of the Union, that the
benefits of economic specialization and technological development are
achieved where there is a minimum of artificial barriers to trade.
Over the past 28 years this policy on an international scale has met
with considerable success in stimulating an orderly expansion of world
trade among ourselves and our allies. Indeed, we have adhered to
the-most-favored-nation principle in negotiating reciprocal reductions
in tariffs with other countries. This means that any reductions in
our tariffs that are made for one country are extended to all. Even
so, this policy has resulted in a moderately favorable balance of trade
for the United States.

1962 JOINT ECONOMIC REPORT

The Common Market
The problem of the United States now is to maintain a sufficient
surplus of exports over imports to finance our military commitments
abroad and our efforts to help the underdeveloped countries achieve
the benefits of modern methods of economic organization. A principal development in this connection is the emergence of the European
Common Market. Already six nations-France, Germany, Italy,
the Netherlands, Belgium, and Luxembourg-are on the way to
forming a full economic union. The United Kingdom last year
agreed to apply for admission on the basis of full adherence to the
Common Market Treaty, and other free nations in Western Europe
are certain to follow Britain's lead. The result is the prospect,
not many years hence, of a modern mass market of some 300 million
persons, developing along lines very similar to our own.
In fact, the existing Common Market has, over its 4 years of
operation, been growing about twice as fast in economic terms as has
the United States. Per capita income in these six nations has been
increasing at a rate of more than 5 percent a year. Free Europeans
are forging for themselves a new standard of living by creating a freetrade area quite similar to the free-trade area comprising our 50
States. Through our exports we have been sharing in the growth of
this new market; our exports to the present members of the Common
Market have increased about 50 percent in the past 4 years. Clearly,
if our producers have nondiscriminatory access to this market, with
a minimum of tariff barriers, Western Europe will offer in the future
the largest opportunity for sales that any market outside of our
own has ever offered.
Need for prompt action
But if the promise of this new opportunity is to be realized, there
is need for prompt action. The members of the Common Market
have been rapidly eliminating trade barriers among themselves. Once
these barriers have been removed, a common tariff wall will be erected
around all the member nations. This common external tariff is based
in general on the arithmetical average of the 1957 tariffs of the four
customs areas (Benelux, France, Italy, and Germany).
In the process of moving to free trade among themselves and
erecting a common external tariff around their market, like the common tariff we have around our 50 States, the Europeans are placing
all outsiders at a disadvantage.
The evolving discrimination against nonmember countries is illustrated by the competitive disadvantage at which U.S.-made automobiles and trucks now stand, as against German-made vehicles,
in the French market. Before the Common Market was formed, the
French tariff on German and U.S. vehicles was the same. Now,
however, the French tariff on U.S.-made vehicles is 26 percent,
whereas the French tariff on German-made vehicles is only 18 percent.
It seems safe to say that American automobile manufacturers have
already lost business in the French market to their German competitors. And on the other side of the coin, U.S. exporters have lost
business in Germany on a variety of goods in which French exporters
have an advantage. Ultimately there will be no tariff on motor
vehicles as between Germany and France, but the common tariff
against the United States and other outsiders will be 23 percent.

1962 JOINT ECONOMC REPORT

To take another example, American manufacturers of rubber tires
sold approximately $1 million worth of their product in France in
1960. West Germany, which also has a large and efficient tire industry, is at present confronted with a French tariff of 11 percent,
whereas the French tariff on U.S. tires is 18 percent. Within the
next 7 years the French duty against German tires will have been
completely wiped out, although the external tariff of all of the Common
Market countries against American and other producers will be
between 19 and 22 percent. In this case, the common external tariff
will be even higher than the present French tariff.
U.S. plants locating in Europe
Under such circumstances, even the most efficient American producers will find it difficult to compete in Europe. In many cases, it
will be much more profitable for U.S. companies to establish plants
behind the tariff wall. The anticipation of this external tariff has
already encouraged our investors to invest in Common Market countries. The Department of Commerce estimates that American capital outlays in Europe in 1962 will be 40 percent higher than the 1960
levels. Part of this expected increase is no doubt attributable to uncertainty that the projected trade barriers can be reduced.
The President's authority to enter into reciprocal tariff reductions
under the present law has been substantially exhausted. Furthermore, the new problem of negotiating with the Common Market requires more flexibility in bargaining, including authority to bargain
across-the-board agreements with reference to a whole variety of
products. It is patently clear, moreover, that if maximum benefits
are to be gained from negotiation with the Common Market countries, these negotiations must be undertaken earlier rather than later.
New large-scale plants have been and are being located within the
Common Market in anticipation of the advantages that the common external tariff will offer. Other economic alinements are taking
shape which will quickly establish formidable vested interests in a
high Common Market tariff. The United States must, therefore,
move to allow its exports to grow along with the Common Market
rather than hope to be able to undo at a later time what has already
been done.
Importance of foreign trade
In some respects foreign trade is less important to the economic
strength of the United States than it is for most other countries. Last
year our merchandise exports, excluding military aid, amounted to
only about 4.3 percent of our gross national product; our merchandise
imports amounted to only about 3 percent of GNP. In other countries these percentages are much larger. For example, foreign trade
accounts for 35 percent of the national production of the Netherlands;
16 percent for the European Economic Community (Common Market) as a whole; 15 percent for the United Kingdom. Yet, 6 million
U.S. workers are employed in the manufacturing plants which account for the bulk of our industrial exports, though of course these
workers are producing principally for the domestic market. Approximately 15 percent of the cash income of American farms is attributable
to exports. Our industrial exports are, typically, those from our highwage, growth industries which have demonstrated a clear trading
advantage all over the world. The wider the markets open to these

1962 JOINT ECONOMIC REPORT

industries, the more investment and employment opportunities are
opened here at home. Because these industries are, economically
speaking, our star producers, the faster they grow, the stronger our
whole economy is.
Our imports, on the other hand, are chiefly of the raw materials we
need. Of the $14.7 billion of U.S. imports in 1961, nearly half were
industrial raw materials-iron ore, nonferrous metals, oil, and the
like-on which our domestic industries increasingly depend as our own
natural resources become depleted. Another 25 percent of our imports represent tropical foods and fibers-coffee, tea, cocoa, bananas,
jute, sisal, etc.-which we do not produce at home at all. The fraction of our imports which do compete directly or indirectly with domestic production offer our consumers a wider range of products,
product styles, and prices, which very often stimulate American producers to take on new and different lines of production here at home.
Helps control inflation
Furthermore, a progressive opening of our markets to competition
should help to solve one of our chronic domestic problems-that of
inflation. This was cogently stated bv a witness at one of our subcommittee hearings on foreign economic policy problems last December. Mr. T. V. Hauser, retired chairman of the board of Sears,
Roebuck & Co., speaking for the Committee for Economic Development (CED) said:
The main present obstacle to high employment in the
United States is the tendency to inflation in the American
economy when unemployment is low. Increasing the exposure of the American economy to foreign competition will
restrain this tendency, soften the conflict between general
price stability and high employment, and permit the attainment of higher employment. That is, the expansion of
trade-both import and export-undertaken, as I have suggested, with proper safeguards, will assist in the achievement
and maintenance of high employment in the United States
(Hearings before the Subcommittee on Foreign Economic
Policy of the Joint Economic Committee, Dec. 4-14, 1961,
pp. 253-54).
NEW TRADE LEGISLATION

We are aware, however, that the overriding issues facing the free
world run much deeper than any question of short-term gains in
trade specialization. The industrialized countries of the free world
command the overwhelmingly greater share of the productivity,
resources, and technical know-how of the world. Working together,
and rowing together, these countries-including those of North
America and Western Europe, as well as Japan-can mobilize the
creative resources and energies of the free world in such a way as to
raise living standards to new heights and to achieve for democratic
self-government a new record of performance in the economic realm.
A liberal trade partnership among these nations should make it possible to accommodate a growing trade of the less-developed areas of
the free world and to enlarge the technical and industrial assistance
being offered these nations. On the other hand, the powerful new
trading bloc which the Common Market will create could result in a
division that the free world can ill afford.
80736 0-62-5

19 62 JOINT ECONOMIC REPORT

The President has asked for new trade legislation along the lines
that we support. Such legislation is necessary to permit the free
world to take advantage of what seems an unparalleled opportunity
to bring about a large expansion of world trade from which all concerned will benefit.
We feel, however, that if trade legislation is to achieve its high
objectives, it must contain provisions for assisting communities, as
well as firms and workers in making adjustments to the new trade
patterns that will emerge. We think that the legislation should provide
for loans and grants to comniunities and firms, as well as for programs
to retrain workers. No doubt more companies, communities, and
workers will benefit than will be injured by a movement toward more
liberal trade. Indeed, all consumers will benefit if prompt adjustments
can be made to transfer capital and labor to more efficient lines of production, or to more efficient methods of present production. We
would emphasize, furthermore, that the condition which will make
such adjustments easiest is one of high production and employment
at home. This situation gives capital, labor, and enterprise attractive
alternatives.
In addition, as we have mentioned, we feel that unilateral actions
on the part of the Common Market countries are in order, with
reference to tariff reductions, with reference to liberalization of
quantitative restrictions against our goods, and with reference to
increased support of our mutual obligations for defense and aid to the
underdeveloped countries.
Finally, as a safeguard against the possibility that negotiations may
not prove as successful as we anticipate, we also think the new trade
legislation should specifically authorize the President to raise tariffs,
as well as to lower tariffs.'
I Mr. Boggs dissents, saying: "The recommendation seems to suggest that tariffs ought to be rested at
times, not for the protection of domestic industries, but as a device for bargaining with our trading partners.
Such a suggestion would of course be contrary to both the principles of aliberal trade policy and the rules
of GATT."

WAGE AND PRICE POLICIES
Responsibility for the maintenance of a climate conducive to
orderly and vigorous economic growth is not the function exclusively
of government. In a truly free economy, equal, if not greater,
responsibility to see that the forces that determine the flow and
allocation of resources are not distorted or blocked must lie with
individuals and private economic organizations.
There are important sectors of our economy where free market
forces are seriously impeded. Large corporations and large labor
unions exercise considerable power over wage and price decisions.
Where such actions involve large numbers of employees or significant
portions of output, they directly affect the national interest.
Companies having the power to administer their prices not only
may restrict the level of production in their own and other industries,
but may in the long run hurt their own self-interest by preventing
their natural markets from flourishing. Resources may be drawn
off into industries that contribute little to growth. Other industries
may thereby be prevented from achieving the natural economies of
scale inherent in a growing market.
In the same manner, wage increases in excess of productivity gains
may create unemployment and result in overcapitalization in the
affected industries, thus giving rise to further dislocations by downward pressure on wages in other industries, or pushing workers into
lower productivity areas of the economy.
When, in a particular industry, price leadership combines with
union strength to pass on inflationary wage increases as higher prices,
the dislocative effects can be widespread. The unduly large share of
income channeled toward such an industry prevents other workers
and employers, indeed the whole economy, from producing as much
or as effectively as they could under a more efficient allocation of
resources.
Suggested guidelines
In view of the long controversy that has prevailed in this field, it is
gratifying that the Council has made a pioneering effort to set guideposts for judging whether a particular wage or price decision may be
inflationary:
The general guide for noninflationary wage behavior is
that the rate of increase in wage rates (including fringe benefits) in each industry be equal to the trend rate of overall
productivity increase. General acceptance of this guide
would maintain stability of labor cost per unit of output for
the economy as a whole-though not of course for individual
industries.
The general guide for noninflationary price behavior calls
for price reduction if the industry's rate of productivity increase exceeds the overall rate-for this would mean declining unit labor costs; it calls for an appropriate increase in
price if the opposite relationship prevails; and it calls for
59

1982

JOINT ECONOMIC REPORT

stable prices if the two rates of productivity increase are
equal.
These general rules are, however, subject to modifications:
(1) Wage rate increases would exceed the general guide
rate in an industry which would otherwise be unable to attract sufficient labor; or in which wage rates are exceptionally low compared with the range of wages earned elsewhere
by similar labor, because the bargaining position of workers
has been weak in particular local labor markets.
(2) Wage rate increases would fall short of the general
guide rate in an industry which could not provide jobs for its
entire labor force even in times of generally full employment; or in which wage rates are exceptionally high compared with the range of wages earned elsewhere by similar
labor, because the bargaining position of workers has been
especially strong.
(3) Prices would rise more rapidly, or fall more slowly,
than indicated by the general guide rate in an industry in
which the level of profits was insufficient to attract the capital required to finance a needed expansion in capacity; or in
which costs other than labor costs had risen.
(4) Prices would rise more slowly, or fall more rapidly,
than indicated by the general guide in an industry in which
the relation of productive capacity to full employment demand shows the desirability of an outflow of capital from
the industry; or in which costs other than labor costs have
fallen; or in which excessive market power has resulted in
rates of profit substantially higher than those earned elsewhere on investments of comparable risk (Economic Report,
p. 189).
Productivity measures
The Council recognizes a number of problems to be resolved. Inasmuch as there are several measures of productivity, there first has to
be agreement about the method to be used in measuring the trend
rate of productivity, both for individual industries and for the economy
as a whole. As is evident in table 19, productivity gains in the period
1954-60 vary from 1.9 to 3.1 percent, depending on the type of measure
used. Second, there is the question of the time intervals to be used in
measuring productivity trends. Short intervals give excessive weight
to cyclical movements. Very long intervals may obscure important
breaks in trends.
TABLE 19'-Annual rates of growth of output per man-hour, 1947-60
Industry series

Average annual percentage change '
1947-60

Total private economy-3.0
Nonagriculture -2.
Nonmanufacturing -2.2
Manufacturing-2.8
Manufacturing corrected for varying rates of capacity
utilization -2.8

1947-54

1954-60

3.5
2.7
2.6
2.9

2. 6
2. 2
1.9
2.9

2.8

3.1

I Computed from least squares trend of the logarithms of the output per man-hour indexes.
Sources: Department of Labor and Council of Economic Advisers.

1962 JOINT ECONOMIC REPORT

The Council prefaced its proposal with an invitation to public
consideration and discussion:
* * * since the question is of prime importance to the
strength and progress of the American economy, it deserves
widespread public discussion and clarification of the issues.
What follows is intended as a contribution to such a discussion (ibid., p. 185).
Education and voluntary restraint
The committee' invited testimony on wage and price policy from
several expert witnesses. Dr. Ben William Lewis criticized as unrealistic previous efforts to "economize by admonition," i.e., by relying
on appeals to conscience, responsibility, and economic statesmanship
to stem inflationary price increases. He welcomes the guideposts as
a step forward:
The Council confirms by explicit reference the authoritative belief implicit in the earlier issuance of admonitions that
there are important sectors of the economy where the state
of competition leaves considerable room for the exercise of
private power over prices; and demonstrates an active public concern over this condition. But it goes further: it calls
for responsible behavior and, speaking for the administration, spells out in economic terms relevant to decision making
the general overall limits and shape of responsibility (hearings, p. 378).
Dr. Otto Eckstein expressed concern that in the past the Government, "apart from general exhortation * * * has relied on the
behind-the-scenes approach":
I would feel more secure about the matter if the public
had a means of passing its own judgment in this situation.
Either a public factfinding panel or a publicly available
statistical analysis by the staff of the Council of Economic
Advisers would give the public a means for judgment. * * *
Let me add, that ex-post pronouncements of the soundness
of settlements by the principals in a behind-the-scenes
negotiation are not a sufficient protection of the public
interest (ibid., p. 384).
He considers the Council's guideposts an important step:
While couched in somewhat more general language than
I would have chosen, the implications of these guides in the
present context are clear. They say, "the general guide for
noninflationary wage behavior is that the rate of increase in
wage rates (including fringe benefits) in each industry be
equal to the trend rate of overall productivity increase * * *.
The general guide for noninflationary price behavior calls for
price reduction if the industry's rate of productivity increase
exceeds the overall rate * * * for an appropriate increase
in price if the opposite relationship prevails * * *" (ibid.,
p. 383).

1962 JOINT ECONOMIC REPORT

Dr. Yale Brozen introduced a negative note:
I should emphasize that the correct rule or guide * * * for
wage setting is not the overall change in the economy as a
whole in output per man-hour. The Council recognizes this,
although it says otherwise. The Council implies the correct
rule or guide where it proposes that "wage rate increases
would exceed the general guide rate in an industry which
would otherwise be unable to attract sufficient labor" and,
in another paragraph, proposes that "wage rate increases
would fall short of the general guide rate in an industry
which could not provide jobs for its entire labor force."
* * * What the Council has said is that supply and demand
in free markets should determine wage rates (ibid., pp. 387388).
Dr. Henry C. Wallich, a former member of President Eisenhower's
Council, called the guidelines acautious and appropriate further step toward the evolution
of a wage policy * * * a move which in one form or another
several European countries have already taken (ibid., p. 623).
Another former Council member, Dr. R. J. Saulnier, indicated that
the effort to limit the rate of increase in wage rates in each industry
to the trend rate of the overall productivity increase, was of suchoverriding importance that it is futile to discuss monetary
and fiscal policy without reference to it. * * * It would have
been a vast improvement over our actual experience, in
which wage advances typically outran economywide productivity gains by substantial margins (ibid., p. 473).
Administered price inflation
Dr. Gardiner C. Means blamed neither wages nor general price
increases for the inflation since 1952. In presenting the results of his
intensive study of inflation since 1953, he advanced the conclusion that
the post-1953 rise in the wholesale price index has been an administered-price inflation concentrated largely in steel and steel-using industries. As compared with an 8.2 percent rise in wholesale prices,
finished steel prices rose 35 percent and were largely responsible for the
rise in the index as a whole. He found a striking lack of relation
between price increases and the level of steel operation, noting that
steel prices rose in 1954, when steel was operating at 71 percent of
capacity; in 1955, when it was operating at 93 percent of capacity;
and in 1958, when it averaged only 61 percent of capacity. Dr.
Means concludes that three-quarters of the steel price increase since
1953 resulted directly or indirectly from a widening of profit margins,
and that only a quarter derived from increased labor costs.

CHART 10

STEEL AND OTHER WHOLESALE
PRICE INDEXES
INDEX (1953-100)
bwg

Finished steel

130

Metal and metal mfg.

120
Wholesale prices

110

100Q(
11953
9

Wholesale prices excluding metals and metal mfg.
I

1955

1957

4 1961 AVERAGE OF FIRST 9 MONTHS

Scqou: Heavinp, P.DM.

1959

1961*

19652 JOINT ECONOMIC REPORT

Condusions

The fact that eminent experts can vary markedly in the emphasis
placed on wage and price factors points up the need for further intensive study of wage and price determination and their relation to full
employment. Meanwhile, there are certain general points of agreement. Increases in administered prices, like wage increases, are
detrimental to our economic health if they are excessive. In those
industries in which one or a few firms have the power to exercise price
leadership for the entire industry, there is a temptation to set prices
high enough to insure profit margins even at the greatly reduced levels
of operation typical of recessions.
This favored situation is achieved at great expense to the economy
as a whole. Inflated prices force up prices in user industries and
initiate a chain of reactions that end in reduced consumption. Unquestionably, high prices have contributed to the imbalance in our
international payments. Also, because they are misinterpreted as
indicating a general inflation in demand, such prices have helped to
bring about the tight money policy that has been inflicted on the
economy in past years. By interposing serious barriers to high employment, inflationary prices help to pave the way to deficit financing
and other Government-initiated stimuli.
If guidelines can be developed to the point where they can be
used to identify and measure the inflationary component of wages
and prices, they will help considerably to foster stable and, in some
instances, lower prices. Substantial economic benefit would ensue.
Domestic sales of the affected commodities would increase; likewise,
export sales would rise and help substantially to correct the deficit in
our international balance of payments.
Moreover, by placing full employment within easier reach, it would
make possible increased and more stable longrun profits in the
economy as a whole and call forth the investment capital required for
further increasing production. The increased demand, stimulated by
the price declines in industries whose prices are above the competitive
level, would reverberate widely in the economy. The elimination of
artificial restrictions on the flow of economic activity would make it
easier both to sustain full employment and to avoid demand inflation.
The cooperation of labor and capital has been a primary factor in
developing the tremendously productive economy we have today.
The availability of objective standards governing wage and price
actions will facilitate mutual understanding and cooperation in removing inflationary barriers to economic growth.

ANTITRUST POLICIES
Open, competitive markets are the means whereby a free society
-channels its efforts into producing the goods and services it wishes to
have. Markets must be kept open so that the innovators and newcomers will not be excluded. Markets must be kept as competitive
as possible. in order to allow the price system to play its traditional
role of allocating resources to uses which most effectively satisfy
consumer demands.
When powerful companies have the ability to control prices, this
power may be used to extract inordinately high prices from the rest
of the community. As indicated in the previous chapter on wages
and prices, unduly high administered prices can divert too much of
the income stream to powerful groups and undernourish the other
sectors of the economy, thereby disturbing the balance between income
on the one hand and consumption and savings on the other. As a
sequel, too large a share of that income that would otherwise have
been available for saving is siphoned off by these powerful groups.
This can deprive the rest of the business community of the ready
access to funds needed for growth and expansion.
When this happens, it becomes necessary for government to undertake compensatory action through easier credit, deficit spending, and
other special stimuli. Such actions may overcome the effects of
imbalance in the economy, but the basic distortions remain, so that
inevitably performance falls short of a completely effective utilization
of resources.
Unfortunately, the relation between industrial power and prices is
a complicated one, and there is no blueprint for recommended action.
Certain industries are characterized by heavy investment in plant and
equipment and a system of distribution that makes available on a
nationwide basis the standardized parts and services that consumers
demand. The efficiencies in production and distribution derive from
the very scale of operation. We do not know, however, the precise
level beyond which efficiency begins to suffer and less wholesome
objectives, like market domination, become the primary motives for
increasing size.

Nor is it easy to ascertain the degree of excess in any administered
price structure. It would be unfair and naive to assert that all administered prices are too high; it would be equally naive to claim that no
administered prices are excessive. In varying degree, there are
administered prices in many industries. Their existence, per se, does
not necessarily connote collusion.
ANTITRUST ACTIVITIES IN

1961

Although there are industries in which a disturbingly small number
of well-entrenched firms exercise substantial power over price and
output but in which no overt conspiracy exists, the Justice Department did not bring suit against. any such companies under section
2 of the Sherman Act last year. Apart from suits against mergers
and price fixing in the commercial banking business, the Antitrust
65

162 JOINT ECONOMIC REPORT
196

Division continued to limit its attention almost exclusively to cases
involving either mergers in violation of the Celler-Kefauver Act, or
specific illegal offenses, e.g., price-fixing, bid-rigging, and division of
territories, violative of section 1 of the Sherman Act.
Quite obviously, there is a large, shadowy area lying between the
kind of monopolistic price fixing that is currently prosecuted under
the antitrust laws, on the one hand, and the amount of price leadership that realistically must be tolerated in our economy, on the other
hand. There are many things we do not know about this large area.
At what point does size cease to contribute to efficiency? We need
better standards for distinguishing and judging the harmful quota
of excess in administered prices. Conceivably, there needs to be a
better definition of the permissible limits of concentration. Study
of this subject warrants high priority, particularly since the issue
relates directly to the major objectives of maximum production, a
rapid rate of growth and price stability.
Within the more clearly defined boundaries of the antitrust laws,
the Justice Department in 1961 gave evidence of a more vigorous
enforcement policy.
Identical bids
First, on April 24, 1961, the President issued Executive Order No.
10936 requiring Federal agencies to report to the Attorney General
identical bids on Government contracts. This should be of great
assistance to the antitrust agencies in detecting and prosecuting
price-fixing conspiracies. Over the past 10 years, goods and services
purchased by the Federal, State, and local governments have represented roughly 20 percent by value of all the goods and services
produced in the Nation. Thus in 1960, when the value of all goods
and services produced (GNP) totaled $504.4 billion, government
purchases accounted for $100.1 billion, slightly more than half of
which was by the Federal Government.
The President's Executive order carried out the main objectives of
this committee's resolution of March 14, 1961. That resolution
recommended that the President issue an order to require Federal
agencies to report identical bids to the Attorney General, to invite
State and local governments to make similar reports, and to require
the Attorney General to make frequent public reports of such identical
bids, giving the names of the companies making the bids and other
pertinent details. The chairman has been informed by the Antitrust
Division that the first such report will probably be completed in April
of 1962.
A study on identical bidding reported to the Department of Justice
for past years, issued by this committee on August 30, 1961,1 showed
that careful analysis of identical bids can provide useful leads for
collecting evidence to be used in prosecuting price-fixing conspiracies,
thus saving taxpayers millions of dollars each year. The report
pointed out, however, that to achieve these objectives the heads of
the various Government agencies including those charged with antitrust enforcement, must take their responsibilities more seriously
than they have in the past. As the committee report showed, most
of the agencies paid little attention to identical bids during the period

Joint Economic committee Staff Report, "Ninety-Three Lots of Bids Involving Identclal Bids, Re.
ported by the Federal Procurement Agenies In the Years 1955-60 (August 1961).

1962 JOINT ECONOMIC REPORT

1951-60 and made no material effort to obtain supporting evidence
of collusive behavior. If the reporting of information on identical
bids is to be a strong instrument of antitrust enforcement, as it can
be, then such intelligence must be made publicly available on a
regular basis; only in this way can the Congress ascertain whether
the public interest is being adequately safeguarded. For this reason,
permanent legislation requiring the submission of information on
identical bids is badly needed. H.R. 8603 (originally H.R. 4570),
sponsored by the committee chairman, is designed to accomplish
this objective; it was passed by the House in August 1961, and we
hope it will receive favorable consideration in the Senate during this
session of Congress.
Consent decrees
Second, both the Antitrust Division and the Federal Trade Commission adopted new policies on the negotiation of consent decrees that
may have important implications. Consent decrees long have been a
device by which those accused of antitrust violation can reach a favorable settlement with the interested Government agency and simultaneously minimize the risk of subsequent private damage suits.
Particularly where these understandings are arrived at clandestinely,
they can work directly counter to the public interest.
For years the Congress has been urging the Justice Department to
make the details of proposed settlements known in advance of their
actual submission in court, so that they can be subjected to close and
critical scrutiny. This past year, it is encouraging to note, the
Attorney General announced that henceforth all such proposed decrees
will be open for public inspection for 30 days prior to their formal
presentation in court.
In a related move, the Federal Trade Commission announced new
rules of practice that give respondents only 30 days after a complaint is
filed to negotiate a settlement; once this period has passed, the controversy proceeds to its ultimate contested conclusion, without further
opportunity for seeking a consent settlement. This new procedure
should have the desired effect of inducing more parties to settle their
cases quickly, with a consequent increase in the Commission's operating efficiency.
Third, as noted above, during 1961 the Antitrust Division filed a
number of suits contesting the legality under the antitrust laws of
certain bank mergers that had previously been favorably passed upon
b regulatory agencies of the Government. The Justice Department
Yso intervened in proceedings before the Federal Communications
Commission, the Interstate Commerce Commission (in respect to the
large number of pending railroad consolidations), and the Federal
Power Commission.
For bringing these suits and making presentations before regulatory
bodies, the Division merits wholehearted approval and strong encouragement. If the regulated sector of the economy, which encompasses such vital industries as banking, transportation, communications, and energy resources, is to be made to conform as closely as
possible to the competitive ideal, the respective administrative agencies must consider and weigh more heavily than they do at present
the competitive factors involved. Principal reliance should be placed
on competition, protected from monopolistic encroachment by diligent
antitrust enforcement.

POLICIES FOR INCREASED GROWTH POTENTIALS
Economic growth is not merely a desirable condition. It is essential-in terms both of our commitments as a free people and of
our dedication to the goal of full employment. We need expanded
output to provide military security and to maintain our programs of
foreign aid. As exemplars of a free democratic society, we must push
ahead to improve living standards for our growing population and, in
particular, to dry up the pockets of ignorance, poverty, and ill health
that still persist.
The first and most urgent requirement for raising the rate of growth
in the Nation's potential output is an expansion of total demand
to take up existing slack and to keep pace with future increases in
output potentials. There is little hope for an accelerated rate of
growth as long as unemployment is excessive and business enterprises are faced with too much idle productive capacity. Demand
adequate to purchase the full potential output of the economy will
itself contribute to a higher rate of growth in potential output.
But beyond this first task of achieving full recovery and greater
economic stability, public and private policies must be directed toward
influencing the basic determinants of the growth in the Nation's
potential output from year to year. There is much, of course, that is
still unknown about the process of economic growth, but there are
some matters of which we can be sure.
MAIN SOURCES OF POTENTIAL GROWTH

First, the primary source of our potential output, and of its growth,
is the number of people available for employment, the number of
hours they wish, or are able, to work, and the qualifications they bring
to the marketplace. We can be confident, therefore, that policies
that improve the health, general education, incentives, mobility, and
specific occupational skills of present and future workers will contribute to maximizing both the current level of potential output and
its future rate of growth.
Second, we can be sure that an important ingredient in the Nation's
productive capacities is the current state and rate of progress of technology. This includes not merely the familiar factors of knowledge
in scientific, engineering, and mechanical fields, but also the whole
range of managerial an organizational competence, which affects the
efficiency with which economic processes are operated. Policies that
tend to raise more rapidly the level of our knowledge in these fields
and to disperse it more widely among our people will have important
consequences for the rate of economic growth. In the areas of education and research and development, we can proceed with confidence
in the prospective benefits.
Third, our policy must always take cognizance of the fact that the
productive potentials of our economy depend on the efficiency with
which resources, both domestic and foreign, are allocated to different
69

197612 JOINT ECONOMIC REPORT

economic purposes and by the extent to which monopolistic or other
barriers impede the free and rapid movement of labor and capital
into the most productive uses.
Finally, it is generally accepted that our productive capacity is,
to a significant degree a reflection of the magnitude of our stock of
new and old plant and equipment as well as its distribution by age,
type, and location.
PROBLEM OF "EXCESS"

CAPACITY

Large percentages of the Nation's capital equipment and labor
force are now idle only be ause the goods and services these resources
can produce are not in su cient demand-at present prices.
The Council's report sattes:
Faster economic growth in the United States requires,
above all, an expansion of demand, to take up existing slack
and to match future increases in capacity. Unless demand
is adequate to buy potential output, accelerating the growth
of potential is neither an urgent problem nor a promising
possibility. Full utilization will itself contribute to growth
of capacity (p. 108).
Slow growth and slack demand
Most of the expert witnesses who testified on the subject expressed
a view that the insufficiency of demand, and hence the slow rate of
capital accumulation over the past few years, reflect an insufficiency
of consumer demand. Thus a past Chairman of the Council of
Economic Advisers, Mr. Leon Keyserling, said of the rate of capital
accumulation over the past 9 years:
Careful observation of the economy in action demonstrates
clearly why the rate of business investment was too low in
absolute terms, for the 9-year period as a whole. It was not
because either the tax treatment of investors or other factors,
such as price-wage-cost relations, militated against a sufficiently high level of profits and investment in producers'
goods at any time when the ultimate demand for products
in the form of private consumer expenditures and public
outlays for goods and services at all levels of government
were high enough to make reasonably full utilization of
plant and equipment and technology in being. Entirely to
the contrary, whenever this ultimate demand was adequate
or indeed not glaringly deficient, expansion of plant and
equipment through the investment process raced so far
ahead of the expansion of ultimate demand that the economy
got badly out of balance. Recessions consequently followed
(hearings, p. 562).
Dr. Gerhard Colm, chief economist of the National Planning
Association, said:
* * * Nothing discourages an increase in investments and
future growth as much as idle capacity; nothing stimulates
investments as much as a high rate of operation and the
expectation of expanding markets. Needless to say that
aggregate demand includes not only consumer demand, but

1962 JOYT ECONObaC REPORT

also business demands for new producers' goods, and Government demand (ibid., p. 520).
Policies to stimulate investment in business capital, if they succeed,
will themselves help generate consumer demand-and a demand for
labor. On the other hand, business firms do not turn in old equipment
for new unless there are clear labor savings to be achieved; and the
business community does not continue expanding capacity when there
is no foreseeable ultimate demand for the end product of the new
capacity.
To stimulate consumer demand three possibilities are open to
public and private policies: (1) Widespread and substantial price
reductions to increase aggregate real demand for goods and services,
(2) monetary policies to encourage economic expansion, and (3) stimulation of a more rapid rise in consumer incomes through (a) wage and
salary increases and (b) lower taxes on consumer incomes.
Price reductions
Selective price reductions are highly desirable, particularly in those
industries that have long operated at low rates of capacity utilization.
Furthermore, it is not impossible that such price reductions mightbe
achieved through appeals to business firms for a reexamination of
pricing policies through the force of public opinion. To obtain 'a
large reduction in the general price level, however, would require, as
in the past, a general monetary deflation with its dismal cortege of
bankruptcy, unemployment, and tragic waste of men and resources.
Pressures on prices can be increased to some extent by.increased
exposure of domestic markets to foreign competition, and indeed, the
new trade program that the President has proposed should be very
helpful toward restraining general price increases. Yet, to be realistic
we cannot count on any substantial reductions from this source.
Monetary policy
Much easier monetary policies could conceivably be adopted to
permit an expansion of private economic activity. Indeed, we have
repeatedly recommended such a policy-and we do so now. But the
demonstrated preference of the monetary management for an increasingly restrictive policy, aided now by the balance-of-payments
specter, hardly gives basis for hope that an easing of monetary policy
to the degree needed is likely to be forthcoming.
Wage and salary increases
One technique for stimulating more effective consumer demand
would be to encourage-or permit-general wage and salary increases.
However, wages and salaries represent costs as well as sources of
income. These costs, in turn, are related to relative productivities
in the economy. A simple invitation to the labor sector of the
economy to push for wage and salary increases is no answer to the
general problem of stimulating economic growth. Wage increases
would be related to bargaining strengths and to relative monopolistic
positions of the sellers of labor and would bear little relationship to
more fundamental economic adjustments. The results of such an open
invitation would be to distort income patterns in the Nation without
necessarily promoting growth, as is set forth in the chapter on "Wages
and Prices."

.1962 JOINT ECONOMIC REPORT

Consumer tax reductions
Lowering the general levels of taxation serves to increase disposable
incomes, or to reduce prices to consumers in the case of reductions in
excises. In either case the result is an increase in total real demand
for consumption. Moreover, income tax decreases can be designed
to concentrate the impact on those income groups that most need the
benefits of increased disposable incomes, and that are most likely to
use the tax reductions to augment consumer purchases. Excise tax
cuts, of course, tend to concentrate the first impact on particular commodities or services. Hence, permanent tax reductions are potentially
the most equitable and pragmatic of the means available for stimulating aggregate consumption demand and would seem to warrant first
consideration.
Consumer tax reductions would, moreover, help to compensate for
the restrictive monetary policies pursued in the post-Korean period.
Both before and after the "speedup" depreciation provisions, the
dividend-credit-and-exclusion provisions, and other investment "incentives" of the 1954 Revenue Code became effective, monetary
strictures have been aimed at slowing down investment in plant and
equipment. This was done on the theory that when increases in
productive capacity seriously outrun increases in consumer demand,
the inevitable result is a more stubborn cyclical recession.
The President has recommended several important steps, either
through legislation or budget requests, to stimulate investment in
our human resources, in research and development, and in business
purchases of plant and equipment-which we discuss below.
INVESTMENT IN HUMAN

RESOURCES

The greatest share of economic growth derives from human resources as the result of better education, improved technical skills,
and better health. Because programs to improve our human resources have such a wide impact on the economy, it is both appropriate
and wise for government to provide, or at least to support, many of
them. The wisdom of investment in education is borne out impressively by statistics. Current studies show the return on investment in
college training for the Nation as a whole to be around 9 percent-far
above the return on public investment in other fields. And this is
apart from the incalculable element of personal fulfillment.
Aid to education
Investment in elementary and secondary education has the greatest
longrun potential. Our elementary and secondary school population
is increasing by nearly a million a year; an estimated 600,000 classrooms need to be built in the 1960's. A total of 36 million children
are involved.
Another fertile investment area, involving both longrun benefits
and a quick payout, is in federally financed scholarships. Many of
these scholarship holders, upon graduation, will immediately enter or
return to the labor force. The average direct cost of attending college
has risen sharply to about $1,700 a year per public college student and
about $2,300 a year per student in private colleges. Unless direct
help can be given to students of great academic promise who lack

19 6 2 JOINT ECONOMIC REPORT

personal or family resources, we stand to lose priceless potential.
The Council of Economic Advisers has pointed out that:
Of each 1,000 pupils who entered the fifth grade in 1952,
900 entered high school in 1956, 600 graduated from high
school in 1960, and 300 entered college in the fall of 1960.
Thus 40 percent of the original 1,000 students did not graduate from high school, and half of those graduating from high
school did not enter college. Many of these withdrawals
are by children of better than average intelligence (Economic
Report, p. 119).
By the mid-1960's an estimated million more students will be
attending colleges and universities. The burden of providing the
classrooms, laboratories, and other teaching facilities needed wM tax
the limited State and private revenue sources beyond their capacities.
Sound economic policy requires that the Federal Government help
meet this critical need.
Manpower trainingand development
The program proposed by the President would provide for on-thejob training, vocational education, and relocation allowances. The
work already under way under section 16 of the Area Redevelopment
Act should provide a basis of experience on which to build such a program. Several European countries, notably Sweden, have had similar
programs, which are outlined in a committee study, "Economic Programs for Labor Surplus Areas in Selected Countries of Western
Europe." I

Youth employment and training
The proposed expenditure of $75 million during the first year and
$100 million in each of the next two years under this program might
well be offset by reductions in supportive and rehabilitative costs. An
even greater return might be in the contribution such a trained labor
force could make to economic growth.
The older worker
The need for retraining is particulhrly critical for the older worker.
When there is no longer a market for his original skill, he finds himself
at a double disadvantage because of widespread reluctance to hire
older persons. Yet here is an important source of manpower that,
for economic as well as for social reasons, we cannot afford to overlook.
Other aids to education
Programs to "teach the teachers" and otherwise to improve the
quality of education will have a multiple effect. This is true also of
the proposed programs for medical and dental school aid and scholarships. If we are to build the health of our Nation, studies show that
there will be need for more doctors and dentists than present arrangements can provide.
Health programs
If it is possible to add effective hours to the working year, and
working years to a life, by improvements in health, the result will
be an increase in the effective labor force. By almost any measure
of health the people of the United States are better off than the people
'Joint Economic Committee (December 190O), prepared by the committee staff

80736 0-62-6

1962 JOINT ECONOMIC REPORT

of most of the rest of the world. Nonetheless, any child on an
inadequate diet or any adult handicapped by a disease that could
have been prevented represents an unnecessary loss of resources.
Added investment in health programs would prevent such losses and
at the same time raise our standard of living.
INVESTMENT IN

RESEARCH AND TECHNOLOGICAL DEVELOPMENT

The President has proposed an increase in expenditures in fiscal
1963 for various research and development programs to a total of
$12.4 billion from the fiscal 1962 spending of $10.2 billion and fiscal
1961 total of $9.3 billion. Thus in 2 years, spending on these programs will have risen by $3.1 billion, or about one-third.
The Federal Government now supports about two-thirds of the
research and development activities of the Nation. In the calendar
year 1960, the latest period for which relatively complete data are
available, expenditures in the United States for research and development 2 totaled $14 billion, exclusive of capital expenditures. This
figure represents all funds for research and development whether
spent in industry or otherwise (universities, research institutes, the
Government itself, or other nonprofit organizations). Most of the
data at hand concern research and development actually conducted
in industrial firms; data on outlays in the nonindustrial sector are less
adequate.
In 1960 total funds, both governmental and private, expended on
research performed in industry amounted to $10.5 billion. As table 20
shows, this reflected a 10-percent increase over 1959 and is nearly
three times the comparable figure for 1953. In calendar 1960, 58
percent of the total research and development expenditures in American industry (or $6.1 billion of the $10.5 billion total) was financed
by the Federal Government.
TABLE 20.-Trends in funds for industrialresearch, experimentation, and

technological development-by source of funds, 1953-60
[Dollar amounts In millions]
Federal Government

Year

1960 --------------------------------1969I958---------------19571956-----------------1955---------------1954---------------1953-3,630

Total funds

$10,497
9,553
8,218
7,664
6,538
4,640
4,070

Amount

Percent of
total

$6,125
5,610
4,636
4,336
3 328
((I
(2)

1,430

Company I

(I(3)
R((1

Amount

58
59
56
57
51

$4,372
3,943
3,582
3,328
3,210

2,200

Percent of
total
42
41
44
43
49
(5)

1 Includes all industrial funds for these purposes except those provided by the Federal Government,
Does not include company-financed research and development contracted to colleges and universities.
research institutes, or other nonprofit organizations.
3 Not available.
Source: National Science Foundation.
I The usual definition of "research and development" Is that used by the National Science Foundation:
"Basic and applied research In the sciences (including medicine) and in engineering, and design and development of prototypes and processes." The definition does not include "quality control, routine product
testing, market research, sales promotion, sales service, research in the social sciences or psychology, or
other nontechnological activities or technical services." Thus It applies to work in the natural sciences
and excludes that in the social sciences and psychology.

1962 JOINT ECONOMIC REPORT

Discovery versus dissemination

It is not enough merely to discover new knowledge. It must be
put to active use throughout the economy if growth is to be effectively promoted. In this respect, present practices raise questions.
Present research funds are concentrated in a few firms and industries, with the results largely "locked up" via patents or other
barriers to wide use. The contrast between the picture in industry
and that which has prevailed in agriculture is startling. For almost
a century, research in agriculture has been sponsored and largely
financed by the Federal Government through the Department of
Agriculture and the State experimental stations. The results of this
research have been widely disseminated by the Government both in
technical publications and in nontechnical instructions to operating
farmers. The results show, for example, in the rate of increase of
output per man-hour in agriculture, which has grown by about 6
percent a year over the past two decades, or about double the rate
in nonagricultural industries.
Referring to the tremendous increase in productivity in agriculture
relative to that in industry, Prof. Alvin H. Hansen said in his testimony before the committee:
The U.S. Government has for a period of I suppose now
about 100 years been putting a lot of money in agricultural
research. This I think is the basic reason for the increase in
productivity in agriculture. * * *

This is one way to stimulate growth. We are doing much
more in research now, technological research, than before,
but we could do still more.
But I think fundamentally we would have had greater
growth since 1955 if we had had two things, larger outlays in
real terms in private investment, and larger outlays in real
terms in Federal Government outlays on things that do promote growth, like education, investment in natural resources,

and in research. * * * (hearings, p. 640).
Concentrated use of Federalfunds

The Department of Defense spends the lion's share of Federal research funds, virtually all of which go to a very small number of prime
contractors. Table 21 reveals that in fiscal 1961 the largest 10 recipients took nearly 57 percent of the total Department of Defense research outlays, the largest 20 some 73 percent, and the top 25 approximately 77 percent.
21.-Allocation of funds for research, experimentation, and technological
development by the U.S. Department of Defense, by size class of prime contractor,
fiscal year 1961

TABLE

[Procurement actions of $10,000 or more]

Total awards
dmllions of

Size class of contractor

Largest 10 -----------Largest 20 ----------Largest 25 ----Largest 500 --------------------------------------------------------Total -6,025

Percent of
awards

dollars)

3,427
-4,416

4,667
5,951

57.0
73.0
77.0
100.0

1962 JOINT ECONOMIC REPORT

Moreover, in distributing its research and development funds, the
Federal Government concentrates on a very few industries. In 1960,
for example, more than three-fourths of the total $6.1 billion spent by
the Federal Government went to just two industries-aircraft and
parts and electrical equipment and communication, with the former
alone receiving $3 billion, or half of the total. When private funds
are also considered, these two industries, plus chemicals and allied
products, received approximately 80 percent of all research and development funds spent in industry in 1960.
The high degree of concentration of research and development
funds in a small number of firms raises the question whether sufficient
attention is paid to some of the longrun impacts of research and development policies on the future of competitive enterpise. Thus,
former Attorney General Herbert Brownell noted:
* * * this Government must be deeply concerned with the
future of competitive enterprise, and it is important that its
share of this activity be administered to promote competition within the limits possible under the urgency and complexity of the defense program. However, although there
is inadequate factual material upon which to judge the effect
of Government subsidization of research, what indications
are available warn that the Government expenditures may
not run counter to the industry trend toward concentration,
but in some degree may even reinforce it.3
He further stated:
The disproportionate share of total industrial research and
development in the largest firms may foreshadow a greater
concentration of economic power in the future. An adequate
supply of technical manpower is the first prerequisite to any
research and development program. Such programs themselves are basic factors in the development and expansion of
our business economy. Therefore, a present concentration
of such manpower and programs means that in the future an
increasing share of anticipated improved technologies and
new product lines will be introduced by the industrial

giants. 4
Patent policies

In view of the large role played by the Federal Government,
especially the Defense Department, in research and development, the
question of our policy concerning patents deserves consideration. At
the present time, the Defense Department allows the company
receiving its research and development grants to acquire and control
the patents on any patentable invention it may make through use of
the funds. This is in contrast to the policy followed by the Atomic
Energy Commission, which itself obtains the patent in the name of
the Government and licenses its use. As many critics have proposed,
it seems to make sense to change Department of Defense policy so as
to permit the general public to use inventions made at public expense.
3 Attorney Oeneral's report of November 9,1956, "Review of Voluntary Agreements Program Under the
Defense Production Act and Related Material" (Serate Banking and Currency Committee), p. 17.
4 Ibid., p. 18.

1962 JOINT ECONOMIC REPORT

Basic researchsmall
Furthermore, most of the research and development funds are expended on applied research in the sciences and in engineering, and
very little is spent on basic research. In 1960, for example, only
about 8 percent of the $10.5 billion spent on research and develop-

ment, or $382 million, was for basic research. Table 22, showing basic
research expenditures by years for the 1953-60 period, indicates that
while basic research outlays have been rising in recent years, they
are still at a disturbingly low level. Perhaps it is not sensible to
expect industry to carry a large share of the costs of basic research.
One might argue, by analogy to the case of agriculture, that the Government should be the prime provider of funds, with the actual research in these basic fields carried on by universities, foundations, and
Government laboratories.
TABLE 22.-Funds for basic research performed in industry, 1958-60 (in millions)
1953 1954-1955-1956 -

$151
166
189
253

1957--__------$271
1958 -_-------_-_
1959 -_----_--_-_-_-_345
1960 ------------

305
-

382

TAX STIMULI FOR BUSINESS INVESTMENT

This committee has frequently emphasized in the past the importance of tax reform in stimulating economic growth. We therefore
applaud the fact that the present administration has proposed a firststage set of tax recommendations and is preparing a second-stage
group to be sent up to the Congress later in this session. The firststage group contains a number of proposals that have considerable
merit on grounds of both tax equity and economic effects. The areas
covered include withholding on dividends and interest, entertainment
and travel expenses, mutual fire and casualty insurance companies
foreign income, sales of depreciable assets, and income of mutual
thrift organizations and cooperatives.' Without presuming to enter
the domain of the tax-writing committees, we can say that study in
each of these areas is long overdue and that we are pleased that
consideration is now being given to these matters.
These proposed tax changes, in their present form, involve an
increase in revenues of approximately $1.1 billion in the first year after
adoption. Therefore, serious consideration must also be given to the
type of tax reduction necessary to offset these increases.
' Mr. Patman comments: "Current proposals to change competitive relationships between commercial
banks and savings and loan associations should be considered together. As recommended by the Commission on Money and Credit, these are to: (I) remove all reserve requirements against time and savings deposits In commercial banks, (2) remove the ceilings on the interest rates that commercial banks may pay on
time and savings deposits, (3) remove or raise the limits on commercial bank investments in obligations
secured by real estate, and (4) subject savings and loan associations and other thrift organizations to Federalcorporate income taxation in the fashion of commercial banks. I believe that the savings and loan associations have done and are doing, a good Job In the real estate mortgage field and should not be pushed out of
this business. While I approve of fair and equal taxes on all segments of our society, I must point out that
commercial banks and savings and loan associations are in no sense natural equals. Savings and loan assoclatlons pay interest on all of the funds they have to lend, and their income is derived from the margin between the rate they pay and the rate at which they lend. Commercial banks, on the other hand, create the
money they lend and, having created It, pay no interest to their demand depositors. Furthermore reserves
required against demand deposits are not maintained separately from those against time and savings deposits; on the contrary, commercial banks compute their total required reserves as a weighted average of the
two types of deposits."

1962 JOINT ECONOMIC REPORT

Investment tax credit
The administration has suggested that the offsetting tax reduction
should take the form of an investment tax credit. This proposed
credit would involve an annual loss of revenue of at least $1.8 billion.
The credit in its proposed form would allow an offset against business
income taxes for purchases of new equipment and machinery with
economic lives over 4 years and for purchases of up to $50,000 per
year of used property. The proposed benefit generally is equal to
8 percent of the purchase price of domestic investments, and the 8 percent would be applied dollar for dollar against tax liabilities. The
credit would in no way affect present depreciation allowances, and it
would be available only for investments in tangible personal property
and other tangible property, apart from buildings, used in manufacturing, production, extraction, transportation, or communications.
The principal objective of the proposed credit is to stimulate physical investment and thereby stimulate economic growth. In considering this proposal, Congress should determine whether priority should
be given to a direct fiscal stimulus to fixed investment, and, if so,.
whether the administration proposal is an effective and equitable means
of stimulating capital expenditures.
The administration proposal emphasizes the contribution of investment in equipment and other physical assets to labor productivity
and thereby to potential output. Unquestionably more and better
tools increase the productive capacity of the individual worker and of
the Nation as a whole. In particular, investment in new equipment
is an important means by which scientific advances are incorporated
into the production process. These are strong arguments in favor of
the administration proposal. But it is possible, as some would argue,
that the best way to build up investment is to create a more solid
foundation of consumer demand, thus assuring fuller utilization of
capital facilities and greater profitability from expanded capacity.
The depressed rates of fixed investment and low ratios of capital outlays to GNP in recent years are symptoms largely of the weakness of'
ultimate consumer and Government demand. Hence, measures which
directly promote consumption-such as lower personal taxes-may
rate an equally high priority as a means of attacking the causes of the*
low growth rates experienced since 1953. Of course, the two approaches are not mutually inconsistent and may be pursued together.
Probableeffects of tax credit
Consumer incomes and expenditures would, of course, benefit from
any measure successful in adding to investment demand directly. An
increased demand for capital equipment means a need for more re-.
sources to produce the new equipment and would hence be generally
expansionary in its impact on the economy. Over the long run, of
course, modernization and expansion of physical capital can have
negative as well as positive effects on employment, because it may
result in the substitution of capital for labor. To the extent that substitution is encouraged, it may be more difficult to maintain full employment. But this problem is posed by any successful growth
policy. If, for example, better education adds to the rate of productivity gain, it too would require a more rapid growth of demand to
maintain employment. In adopting any policies to promote growth,
the Nation must be prepared to meet the challenge of expanding
aggregate demand to keep pace with the growth of potential output.

1962 JOInT ECONOMIC REPORT

The Council's report specifically refutes the notion that there is
already a tendency for capital facilities to be overbuilt in periods of
prosperity. It points out that, even in the investment boom of 195557, the capital stock grew at a modest annual rate of under 4 percent.
The emergence of excess capacity resulted from an insufficient growth
of other demands. While such a rate of growth in the capital stock
should be sustainable, as the Council argues, a high investment
economy might be susceptible to sharper recessions and would require
appropriate stabilization of consumer and Government demand.
The premium placed on investment by the administration is sharply
and laudably at variance with the monetary policy of the past decade.
Restrictive monetary policy has its primary effect on the economy by
retarding investment in physical assets. All of the reasoning advanced in support of the investment tax credit points equally toward
aggressive easing of monetary policy as far as balance-of-payments objectives permit. The administration should encourage such actions
by the Federal Reserve System and reinforce them by its own conduct
of lending and loan-guarantee programs.
A further advantage in accelerating productivity lies in its contribution to the competitive position of American exports. Modernization
and expansion of capital may lower the costs of producing goods that
are sold abroad and thereby improve our balance-of-payments position. But export sales will be stimulated only if the productivity
gains are reflected in lower prices, rather than higher money wage rates
and enlarged profit margins.
Because the investment tax credit would be confined to domestic
investment, it would help to right the balance between incentives to
invest in the United States and incentives to invest abroad. Currently, more favorable tax treatment of capital outlays in foreign
countries creates an artificial incentive for American firms to place
their plant and equipment abroad. Thus, the investment tax credit
would help to strengthen our balance of payments.
The probable effectiveness of the specific proposal for an investment
tax credit is difficult to appraise, since such a provision would be novel
in the American economy. It would encourage investment by (a) aiding the financing of capital outlays through increases in the cash flow of
business firms and (b) increasing the incentive to invest by raising the
prospective after-tax yield of new capital projects.
The investment credit can significantly increase the cash flows into
business firms, just as would certain alternative tax reductions-for
example, in corporate profits taxes. These augmented cash flows
may, in turn, accelerate investment. However, as one of our recent
witnesses pointed out, the cash flows from current business incomes
after taxes and depreciation already are roughly commensurate withor exceed-new investment outlays. Furthermore, firms can and do
raise funds through equity flotations or borrowing. Hence, the case
for the investment tax credit must rest more heavily on its incentive
effects than on its cash flow effects.
Rates of return on capital
It has been alleged that the low level of investment in recent years
has been due to a squeeze on corporate profits. In support of this,
it has been pointed out that corporate profits after taxes averaged
about 5.9 percent of GNP from 1950 to 1953, and only about 4.5

1962 JOINT ECONOMIC REPORT

percent of GNP from 1958 to 1961. These simple, but oft-made
comparisons of profits with GNP can be seriously misleading as
indications of the state of corporate profits margins and the availability
of after-tax cash flows for corporate investment purposes.
In its Economic Report, the Council provides a chart which illustrates one part of the fallacy, by showing that corporate profits are
quite sensitive to the rate at which capacity is being utilized. (See
chart 11.)
CHART 11

Capacity Utilization and Corporate Profits
PERCENT

PERCENT
OUTPUT ASPERCENT OF PRIVATE STOCK OF CAPITAL (O/K)
BUSINESS

a_
I

..........

.RATE
OF CAPACITY UTILIZATION, MANUFACTURING (CU)
GP/GNP

4 16.4

56.0
54.5
53.0
51.5
5QO
485
INVENTORY VALUATI
PROFITS, CORPORATE
CORPORATE
CAPITAL CONSUMPTION
ANDCORPORATE
ADJUSTMENT,
NATIONAL PRODUCT(GP/GNP)
AS PERCENT OF GROSS

47.0
-

AS
PROFITS ANDINVENTORYVALUATION ADJUSTMENT
NATIONAL PRODUCT(NP/GNP)
PERCENT OF GROSS

--CORPORATE

l 1 1l
1953

l l
1 1III
1954

ll l l l t l l l l
1955 1956 1957

l l l l l ll l l l l l
1958 1959 1960 1961

ADVISERS(BASEDONDATA OF DEPARTMENT OF COMMERCE
SOURCE:COUNCILOF ECONOMIC
OF THE FEDERAL RESERVESYSTEM).
ANDBOARDOF GOVERNORS

As the chart indicates, corporate profits are low when capacity is not
being fully utilized. Since the rate of utilization was higher in the
early part of this decade than in recent years, it is only reasonable
that the ratio of profits to GNP would be higher in the earlier period.
There is a further imprecise characteristic of this comparison of
profits to gross national product. The relevant comparison is between corporate profits and that part of the national income or gross
national product that originates in corporations. If the corporate
share of economic activity falls, then corporate profits will decline as
a percentage of the GNP, even when corporate profits are a stable
percentage of the income flow through'corporations.

1962 JOINT ECONOMIC REPORT

Table 23 gives for three periods of the last decade both the familiar
comparison of profits to GNP and the more precise comparison of
corporate profits plus capital consumption allowances to national
income originating in corporations plus the capital consumption
allowances originating in corporations. It is clear from the table
that on the latter basis the ratio in recent years is higher than at the
beginning of the decade-even though unemployment rose from 3.7
percent to 6.1 percent and the ratio of GNP to potential declined from
an average of 103.5 percent to 92.4 percent.
TABLE

23.-Comparative corporate income rates, 1950-63, 1954-57, and 1958-61
[Percent]
Item

Corporate profits after taxes:
Percent of gross national product -.
Percent of national income originating in corporations
Corporate profits after taxes plus capital consumption allowances
Percent of gross national product Percent of national income originating in corporations
plus capital consumption allowances-18.8
Gross national product as percent of potential gross national
product -103.5
Unemployment as percent of civilian labor force-3.7

1950-53

1954-57

1958-61

9
12.6

5.3
11.4

4.5
10.1

9.4

10.0

9.7

19. 5

19. 3

9a.9
4. 6

92 4
6.1

Sources: U.S. Departments of Commerce and Labor, except gross national product as percent of potential
ross national roduct, which are based on the Committee's Study Paper No. 20, "Potential Economic
rowth of the Untted States" (Study of Employment, Growth, and Price Levels [1900]).

Comparison of tax credit with accelerated depreciation
The investment tax credit would increase the after-tax profitability
of capital outlays by lowering the net cost of acquiring depreciable
assets. The credit approach has the advantage of applying only to
newly acquired assets; it does not dissipate revenues in raising the
profitability of existing capital. Other possible means of stimulating
investment, such as various forms of accelerated depreciation, have
grave deficiencies in their incentive effects, making them clearly
and decisively inferior to the investment tax credit. For equal
losses in revenue to the Treasury, accelerated depreciation accomplishes a far smaller gain in the prospective vield of new investment
than does the investment credit approach. Accelerated depreciation
also has the undesirable feature of raising accounting costs; it thereby
distorts measurement of business profits and may encourage price
increases to keep pace with the higher reckoning of costs. The investment credit approach is likely to achieve a maximum increase in
investment per dollar of tax reduction, even though it still inevitably
will produce substantial "windfall" payments to firms which would
be investing anyway. In this respect, there was particular merit in the
original administration proposal of 1961, which would have granted a
tax credit only for that portion of a firm's investment that is in excess
of a stated percentage of its depreciation allowances.
Partialoffsets to tax credit
The revenue losses of the investment credit are to be offset in part by
revenue gains through closing some loopholes so as to improve the
equity and efficiency of the tax system. These tax revisions fall most
heavily on business and property incomes. Nevertheless, the offsetting
tax reduction need not be directed to the relief of business taxation.

1962 JOINT ECONOMC REPORT

The investment tax credit should be discussed and formulated specifically as a stimulus to capital formation and not as a tax relief measure.
Its potential contribution to productivity, growth, the balance of
payments, and full recovery is attractive and deserves favorable consideration by the Congress. In its deliberations, the Congress should
use every opportunity to reduce the "windfall" possibilities of the
credit and to focus its effect on promoting capital outlays. For example, any extension of the credit to industries with regulated profits
and prices, like public utilities, would not be consistent with the objectives of the credit. The administration proposal was on sound
ground in omitting such industries from coverage.
Depreciationchanges
The administration has announced that the Treasury is making revisions in the depreciation guidelines in Bulletin F; and the Secretary
of the Treasury has estimated that the revenue loss from this action
will be approximately $1.8 billion, at present levels of business operations, or about the same as the gross revenue loss expected from the
proposed investment tax credit. Two different goals may be achieved
through a revision of the depreciation schedules: (a) achievement of
more accurate measures of the actual useful lives of depreciable assets,
and (b) stimulation of investment in physical assets. We believe both
of these goals are highly desirable, but they must be distinguished. If
the primary purpose of depreciation reform is to obtain more realistic
depreciation rates, the proposals will presumably not be the same as
they would be if growth were the primary objective.
Adjustments designed only to make rates more realistic will probably
not result in much net chan~ge. Depreciation studies by the previous
administration led to the conclusion that existing rates were quite
reasonable. Actual depreciation deductions on tax returns cannot
be used as the basis for justifying shorter useful lives since these
deductions are usually determined by bargaining between agents and
business firms, and the result of the bargaining frequently bears
little relationship to actual useful lives. If the proposed depreciation
changes are designed for more realistic rates, presumably some
depreciation lives will have to be lengthened rather than shortened.
Properguidelines
Wherever current depreciation guidelines are insufficient in light of
actual economic lives of assets as affected by technical change and
obsolescence, firms are in effect required to prepay their taxes. This
inequity should be eliminated by revision of the guidelines. If,
however, the depreciation changes now being contemplated by the
Treasury were to make artificially short the periods of time over
which depreciation deductions are taken, this change would represent
in effect, an interest-free loan from the Government to individual
firms. Firms would be able to take larger depreciation deductions
in the early years of the life of assets, hence pay lower amounts in
tax during those years, and presumably pay larger amounts in tax
only after the depreciation deductions have been exhausted. More*over, to the extent that a firm was growing, the interest-free loan
would become simply a gift by the Government to the firm. The
reason for this result is that, over time, the depreciation deductions
on increasing amounts of assets as a firm grows would more than

1962 JOYT ECONOMIC REPORT

offset the loss of depreciation deductions on older assets. Hence
the Government would never recoup in revenues the losses associated
with the artificially short depreciation lives.
The administration has, through its investment credit proposal,
indicated that accelerated depreciation is an inferior means of stimulating capital expenditures. We agree. To be consistent with this
position, the Treasury should revise Bulletin F in keeping with the
best available information on useful lives of assets. It is our understanding that this is in fact the benchmark that the Treasury has
adopted in its current studies.

GOALS FOR THE FUTURE
The Employment Act of 1946 sets forth the goals of national
economic policy as ideal aspirations of a free people working together
in voluntary cooperation through both public and private institutions
and organizations. The act also creates machinery to insure continuing review of the Nation's economic performance, and the evaluation
of policies, public and private, by means of the guidelines provided
mn the policy framework laid out m section 2 of the act.
There is a clear mandate for a regular, annual administrative
determination (and congressional review) of the levels and behavior
of employment, production, income, and prices, which will give definite
and timely measures of the ultimate goals expressed in section 2 of
the Employment Act.
hIn terms of today's conditions and system of statistics, what are
the 1962 specifications of the Employment Act objectives?
THE EMPLOYMENT

GOAL

The 1962 Economic Report sets as an interim goal the reduction of
the unemployment rate by mid-1963 to about 4 percent of the civilian
labor force-a rate not realized since 1957. This interim 4-percent
unemployment goal is advanced as one that will reduce involuntary
unemployment and one that can be achieved(a) by adequate demand without structural changes in labor
markets or elsewhere in the economy; and
(b) without significant inflationary pressures.
The report also concludes that this goal can be further reduced in
the future without inflationary consequences if policies are adopted
to improve the operation of labor markets, increase mobility of labor
and capital, retrain workers, aid the redevelopment of chronically
depressed areas, etc.
The committee agrees that the Nation's immediate goal should be
a reduction of unemployment to about 4 percent as soon as is practicable without inflation, and that its longer range goal should be
increased mobility and efficiency of resource use so that within the
present decade a lower unemployment rate, perhaps 3 percent, can
be achieved without inflation.
Moreover, emphasis should be placed on eliminating or minimizing
involuntary unemployment, including that arising from involuntary
part-time employment at fewer hours than individuals are able and
willing to work, rather than on achieving some particular unemployment rate. In the present world situation, it is not only wrong, it is
dangerous to be complacent about the performance of the economy
as long as involuntary unemployment exists or recurs.
In passing, it is noteworthy that the statements in the 1962 Economic Report on this and other goals agree with past studies of the
Joint Economic Committee, especially the committee's study in 1960
of employment, growth, and price levels, and the study during the
85

1962 JOINT ECONOMIC REPORT

past year of employment and unemployment, which was conducted
by the Subcommittee on Economic Statistics.
THE PRODUCTION GOALS

The 1962 Economic Report quantifies proposed production goals
for 1960, 1961, 1962, and 1963 in terms of the total output of goods and
services in constant 1961 prices (real gross national product) that
would be possible without an inflationary excess of demand and with
unemployment averaging 4 percent of the civilian labor force. This
it terms the Nation's "potential production."
The potential GNP for 1962 is estimated at $580 billion (in 1961
prices), compared to $560 billion in 1961 and $541.8 billion in 1960,
a growth rate of 3.5 percent per year. The target for 1963 is $600
billion (in 1961 prices).
The committee believes that these are conservative estimates of
this Nation's potential production. The labor force and the overall
stock of capital seem adequate to support levels at least as high as
these estimates by the Council of Economic Advisers. Data from
various sources indicate rates of utilization of industrial capacity
well below that preferred by management and achieved in the past in
prosperous years.
THE STABILIZATION OBJECTIVES

Instability in the rate of employment of labor and capital results
in: (a) hardship to those experiencing involuntary unemployment;
(b) lower average profits to business because recession losses offset
part of the profits of high-employment years; (c) a lower average rate
of growth, due to the waste during recessions of opportunities for
technological advance, and for increases in capital per worker.
Instability of the general price level results in distortion in the
valuation of incomes and assets, bringing haphazard gains and losses,
which spur speculation in existing assets at the expense of investment
in new growth-producing assets. By rewarding unproductive speculation and penalizing productive workers and businesses, inflation creates
social injustices, hardships, and inefficient or misdirected use of resources.
Built-in stabilizers such as unemployment insurance, financial
reforms, improved coordination of policies, and increased confidence
on the part of business and consumers that their Government will
act promptly and effectively to stem any serious threat to stabilityall these changes since the early 1930's have tended to reduce cyclical
fluctuations, preventing the kind of cumulative spiraling collapse
that occurred in earlier eras.
But we must not be complacent. Our sights should be raised. A
greater degree of stability in both the rate of employment and the
price level is possible. The gains from increased economic stability
are great. The United States must show the world-particularly the
underdeveloped and newly emerging nations-that under our system
it is possible to enjoy both the fruits of political, social, and economic
freedom, on the one hand, and the material gains from stability of employment and prices and from rapid economic growth, on the other.

962I JOIIP ]GONOMIC DEPOM
THE GROWTH OBJECTIVE

If the goals of maximum employment and, production and of stability of both'prices and the'rate of employment of labor and capital are
achieved reasonably well, then the American economy will grow
rapidly. A rising population makes possible a rising labor force.
Increased education, health, and experience of the labor force each
year make possible increased production per worker. This will be
augmented by an increase in capital per worker since at sustained high
rates of production, savings and incentives will be adequate to produce

a rate of investment greater than that needed merely to replace or
maintain. the existing stock of capital per worker. Finally, the growth
of' technological know-how will contribute further to the productivity
of the economy. In a word, achievement of maximum employment,
production, and purchasing power from year to year necessarily promotes achievement of rapid economic growth and is consistent with
reasoiably stable prices. The rate of growth will not necessarily be the
maximum that could be achieved since it also depends on the success
of public and private policies in improving the education and mobility
of labor, encouraging technological progress, and promoting a satisfactory rate of investment.
*The rate of growth in potential output in periods when the economy
operates closest.to the Employment Act goals is at least 13i times the
annual rate achieved when it falls far short of these goals. (See table
24.) Though there can be legitimate debate about the precise magnitudes of the rates of growth in potential output, there seems to be
little basis for debate on the essential point; the closer the performance of the economy to the ideal expressed in the Employment Act,
the more likely it is that the growth rate will be high. Failure to
achieve the -stabilization and full-employment objectives of the. act
is costly not only in terms of lost output and hardship for the unemployed, but also in terms of permanent loss of growth in the Nation's
production potentials.
TAnLE 24.-Potential growth rates compared to percentage of potential output

actualiy produced

[Percent]
Item
Rate of growth per year in

output-3.
Actual output as percent f potentialverage
for

1919-29

iod99.

-1999-39

1947-57

2otel4al
2.

80.6

100. 6

Source: The Committee's Study Paper No. 20, "Potential Economic Growth Inthe United States"
(Study of Employment, Growth, and Price Levels [19601).
THE COUNCIL' S GROWTH GOALS

In its report, the Council of Economic Advisers has suggested that
the Nation's potential output under conditions of reasonably full
employment is now growing at a rate of about 3.5 percent per year.
It believes that it is possible to achieve over the decade 1960-70 an
average rate of growth in potential output of about 4.3 percent per
year. This would mean a rate of growth of 4.9 percent per year in
actual GNP from the 1960 level, since in 1960 the economy was about

1962 JoMM

'ECONOMW REPORT

$40 billion (in 1961 prices), or 7.5 percent, below potential, according
to the CEA estimates.
The proposed goal is not especially high compared to growth rates
in past periods when the economy was having somewhat better-thanaverage success in achieving the goals of maximum employment and
stability. This can readily be seen by inspecting table 25, keeping
in mind that the past record includes years when the growth rate
was slowed by performance of the economy significantly below full
employment standards.
TABLE

25.-Growth in potential gross national product and relatedfactors, selected
periods
[Percent change per year]

Potential
GNP

Council of Economic Advisers' estimates:
1947-54 --------------- 1964-60 ------------------1947-607
1960-70 -----------------.
Staff. Joint Economic Committee: 1909W-8

4.4
3.5
40
4.3
2.9

Potential
man-hours

0.6
.9
.8
1.2
.9

Stock of capital
Potential

Per
worker

(')

3.6
1.9
2.7

Per
man-hour

1'42
12.3
'3.2
(3)

1.0

1.6

GNP per
man-hour

3.8
2.6
3.2
3.0
2.0

I Derived from data in table 10, p. 113, Economic Report of the President, January 1962.
2 Estimate not given in the Economic Report.
Sources: Council of Economic Advisers estimates are from thelEconomic Report of the President, January
1962, table 10, p. 113, table 12, and table 15 p 129 Estimates of staff taken from the Committee's Study
Paper No. 20 "Potential Economic Growth in the United States" (Study of Employment, Growth, and
Price Levels [1960]).

The proposed growth goal can be accomplished in part by the
prospective higher rate of increase in available man-hours of laborabout 50 percent above that for 1947-60 and one-third above the
1909-58 rate. In addition, it would require a growth in output per
man-hour somewhat below the 1947-60 rate but 50 percent above the
1909-58 rate. The Council seems to believe, on the basis of past
experience, that this would call for a growth in capital per worker of
about 2}; to 3 percent per year, hardly a very large figure if chronic
slack in the economy is avoided.
This possibility is reinforced by the fact that at a high rate of
economic growth, the percentage of GNP that must be devoted to
replacement of existing capital would tend to decline slightly from
year to year. Potential output has grown more rapidly than the stock
of capital over the past 40 years; that is, output per dollar of capital
stock has risen by from three-tenths to one-half of 1 percent per year.
There can be exceptions to this trend, but nothing in the Economic
Report indicates an expectation of such an event in the years ahead.
Furthermore, the ratio of replacement requirements to the capital
stock is likely to be relatively constant. Therefore, each year a little
more of the national output can be devoted to modernizing the capital
stock or expanding the amount of capital per worker without necessarily increasing the percentage of potential output devoted to gross
private domestic investment in fixed capital.
The Council, therefore, has not been unduly optimistic. In fact,
with appropriate policies to stimulate growth and to achieve a better
performance of the economy in adhering to the goals of maximum em-

1962 JOINT ECONOMIC REPORT

ployment and economic stability, the economy may well achieve a rate
of growth higher than the Council of Economic Advisers now expects.
The problem is one of private and public policies, not of the capability
of the American economy and the American people to do the job.
THE PATH TO FULL

EMPLOYMENT

If the interim goal of 4-percent unemployment is to be reached by
mid-1963, output will have to expand at an annual rate of 6.7 percent
per year from the fourth quarter of 1961 to the middle of 1963. The
2-year expansion in output from 1961 to 1963 would have to average
about 7.3 percent per year, compared to an average of 6 percent per
year during three preceding recoveries.' The question is whether or
not the present forces at work in the economy and the policies proposed in the President's Economic Report are sufficient to bring about
achievement of recovery with speed and strength sufficient to carry
through without stalling short of full employment, as the recovery did
in 1959-60.
I If 1949-51 (with an average expansion of 8.1 percent per year) Is omitted, the average of the other two
was only 4.9 percent per year._Jrhe 1949-61 recovery was strongly accentuated by Korean war demands.

80736 0-62-7

THE COMMITTEE'S RECOMMENDATIONS
We live in a challenging age-and a dangerous one. All over the
world, ideas and social institutions are in ferment; and, happily, all of
this is not pointless unrest and conflict. New nations, those only now
emerging from industrial prehistory, are busying themselves with
ways of acquiring industrial tools, higher levels of literacy, and forms
of economic organization by which they may attain the more abundant
life. The older industrial nations are no less preoccupied with pushing
forward the frontiers of science and technology, with gaining still
higher levels of education and technical know-how, and with better
organizing their economic efforts. Indeed, so universal are these
aspirations for better economic organization that the contest between
East and West has become, in one of its forms, a race to determine
which of the contestants is better organizing its economic efforts.
We think that the United States can do no less than make a maximum effort to provide a climate in which the great potential of our
free enterprise system can be achieved. We cannot afford a continuation of the large gap between our economic performance and our
economic potential, involving as it does tremendous losses in production, business profits, and workers' incomes.
We believe that public and private policies should be aimed at(1) completing the task of full recovery and restoring full
employment;
(2) increasing the effectiveness of our stabilization policies,
to help maintain the recovery achieved; and
(3) increasing efforts to improve our growth potential, including, principally a healthier and better educated population,
more research and technological development, an increased rate
of capital modernization, and a better diffusion of individual
opportunities.
INCREASING THE STABILIZING

EFFECTS OF FEDERAL PROGRAMS

The President has recommended several important steps to improve
Federal programs, particularly to strengthen their influences against
cyclical recessions and inflationary tendencies in the economy. His
principal recommendations and our comments follow.
Unemployment compensation
The President has recommended legislation to strengthen
the unemployment insurance system by providing for an
extended benefit period for experienced workers at all times,
and for all workers in times of high unemployment, by providing incentives to States to increase benefits, by extending
coverage to 3 million additional workers, and other measures.
We favor this proposal. When the unemployment compensation
legislation was enacted, Congress expected that compensation rates
would provide workers with at least half their normal weekly earnings.
91

1962 JOINT ECONOMIC REPORT

Instead, compensation rates have not kept pace with average weekly
earnings. We favor also extending the unemployment compensation
system, insofar as it is practicable, to workers not now privileged to
participate in the system. The President's proposal, if enacted, will
provide better protection for workers and their families against the
extreme hardships and stresses that can come with periods of joblessness. There can be no doubt that the unemployment compensation system has provided a powerful stabilizing influence on the whole
economy and has thus benefited the employed as well as the unemployed. This stabilizing influence would be strengthened by enactment of the proposed legislation.
Standby public works
The President has recommended legislation toProvide standby authority for the President to accelerate
and initiate up to $2 billion of capital improvementsFederal, State, and local-which authority may be used
within 2 months after the unemployment rate (seasonally
adjusted) has risen (1) in at least 3 out of 4 (or 4 out of 6)
previous months and (2) has risen to a level at least 1 percentage point higher than its level 4 (or 6) months earlier.
We have previously recommended such a limited standby authority
for projects which can be initiated and completed within a short time.
We favor such authority, not for indiscriminate use, but for use in
areas where heavy unemployment occurs. The proposal would add
an important supplement to the arsenal of weapons for fighting recessions. This does not mean that we favor reliance on massive or
long-term public works as an effective countercyclical program. On
the contrary, our studies have led us to share the general view that
such programs are likely to be too slow in starting and too late in
ending.
Temporary tax cut authority
The President has recommended legislation toProvide standby authority for the President to make temporary (6 months) reductions of up to a maximum of 5 percentage points in all individual income tax rates subject to
congressional veto:
At the conclusion of the committee's intensive Study of Employment, Growth, and Price Levels 2 years ago, we strongly endorsed
the principle of limited discretionary tax flexibility, and we are pleased
to find the proposal in a Presidential recommendation. The present
tax structure provides a very large degree of automatic flexibility,
tending to counteract both recessionary developments and those of
overemployment and inflation. We feel, furthermore, that the longterm goal should be to improve these automatic features. But since
experience has provided no clear guidelines to perfection of automaticity, we favor making prompt, limited changes in tax rates from time
to time as economic events warrant. We believe that had such actions been taken early in past recessions, large downswings and tremendous losses in production and incomes (and tax revenues) could
have been avoided.
Witnesses before the committee have posed objections to the exact
form of the present proposal-though not related to the economic

1962 JOINT ECONOMIC REPORT

substance of the proposal-and have suggested alternative approaches
that might be equally effective. The practical objection to the proposal is that it involves a transfer of legislative function to the Executive, and a transfer of the Executive (veto) function to the Legislaturean arrangement involving doubtful consequences. Recognizing the
urgency of prompt action, however, these witnesses have suggested
that Congress enact legislation setting out the terms of the kind of
temporary tax cut it will make, when asked to act quickly; with the
"ground rules" thus established, Congress should be able to act
quickly on a request for a temporary tax change and, indeed, to initiate
such an action if need be. We believe that such an alternative procedure would be practicable.
In considering what legislation it will be willing to enact quickly, the
Congress might consider alternatives to the President's proposal for an
across-the-board tax reduction of 5 percentage points. The Commission on Money and Credit, in its recommendation on the matter, proposed that the cut be in the first income tax bracket only. Another
recommendation frequently considered is that the first income tax
bracket ($2,000 for a single taxpayer) be split in half to create a new
bracket for incomes up to $1,000.
Under the President's proposal, 40 percent of the tax reduction
would go to individuals having incomes of $10,000 or more; under the
CMC proposal 19 percent of the tax cut would go to individuals with
incomes of $10,000 or more; the same amount of tax reduction, if applied to the first half of the first income tax bracket would distribute
only 15 percent of the total amount to individuals having more than
$10,000 income.
We also believe that the tax structure needs adjustment. As we
have emphasized before, since tax rates are progressive and average
incomes are continually rising, the budget tends to balance at everhigher rates of unemployment-or, to put it another way, the "full
employment" budget tends to generate larger and larger surpluses.
Thus, we recommended in our annual report last year that the
Treasuryreview the tax structure with a view to recommending a
downward revision of taxes-not a temporary "tax cut"and that it make further periodic reviews for the same purpose, say every 5 years.
Since the Treasury is now examining the revenue system, with an
announced view to making other tax proposals later in this session
of the Congress, we hope that it will seriously consider whether such
an adjustment in tax rates is not now appropriate.
MONETARY AND DEBT MANAGEMENT POLICIES

A number of steps to improve monetary and debt-management
operations are in order. We discuss those recommended by the President and add several of our own:

Salaries and terms of Board of Governors
The President has recommended legislation to(1) Revise the terms of the officers and members of the
Board of Governors of the Federal Reserve System, so that
the 4-year term of the Chairman will coincide with that of

1962 JOINT ECONOMIC REPORT

the President, so that the terms of members begin and end
in odd years instead of even years.
(2) Raise salaries of members of the Board of Governors
of the Federal Reserve System.
These recommendations are part of a larger proposal advanced by
the Commission on Money and Credit for administrative changes in
the Federal Reserve System, including a change which would place
the functions of the Federal Open Market Committee in the Board of
Governors. We favor changing the term of the Chairman of the
Board of Governors to coincide with the term of the President and also
raising the salaries of members of the Board, without awaiting decision
on the other features of the CMC's proposal.
Monetary silver
The President has made a number of recommendations concerning
silver, including:
(1) Repeal the acts relating to silver of June 19, 1934,
July 6, 1939, and July 31, 1946, thus freeing the Treasury
from any obligation to support the price of silver.
(2) Repeal the 50-percent tax on transfers of interest in
silver, thus fostering orderly price movements by encouraging
the establishment of a future market in silver.
(3) Authorize the Federal Reserve System to issue Federal
Reserve notes in denominations of $1, thus making possible
the gradual withdrawal of silver certificates in the demoninations of $1 and $2 and the use for coinage purposes of the silver thereby released.
These recommendations are intended to free silver from Government control, remove price ceilings and floors, and eventually demonetize silver except for its use in coins. The committee believes that
this is a desirable combination of steps to be taken in view of the large
and expanding industrial demand for silver.
Monetary policies
We must express particular dissatisfaction with Federal Reserve
monetary operations in the past year. For several years past, the
committee has repeatedly urged that the Federal Reserve amend
several policies which can have only restrictive effects on the economy.
Not the least of the recommendations we have made are that (1) the
Federal Reserve allow the money supply to increase at a rate appropriate to the growth of the gross national product, and (2) that it
"abandon its discredited 'bills only' policy, finally, and without
reservation." The evidence is that the Federal Reserve has not permitted a sufficient expansion in the money supply, and it has done
little more than abandon "bills only" in name only.
In view of the Federal Reserve's policy of pegging the minimum bill
rate, in response to the balance-of-payments problem, it has now become most necessary that it realistically abandon the "bills only"
policy and make substantial shifts in its holdings of Government securities, shifting from short-term to long-term securities. To the
extent that the monetary authoritiis insist on holding up short-term
rates, this objective can best be accomplished by releasing to the
market large quantities of their short-term securities, while buying
from the market an equal or larger quantity of long-term securities.

1962 JOINT ECONOMIC REPORT

In this way additions to the money supply can be made without putting downward pressure on the short-term rates. Furthermore, taking long-term securities off the market will put downward pressure on
these rates, thus offsetting the upward pressures these rates are receiving, indirectly, by virtue of the pressures being held under the
short-term rates. We do not believe that because the Federal Reserve has pegged the minimum bill rate it should return to the practice of pegging the maximum bond rate. We do believe, however,
that there should be a judicious shifting of the portfolio such as we
suggest to relieve the artificial pressures under the long-term rate.
Furthermore, we believe that the balance-of-payments problem has
been much overplayed as an excuse for pursuing a tight-money policy,
and for boosting interest rates across the board. Tighter money and
higher interest rates have been a perennial goal of the Federal Reserve
authorities, beginning long before there was any balance-of-payments
problem.
We believe that a proper monetary policy to follow is one that will
make for maximum employment and growth, without inflation, at
home. Such a policy will at the same time best serve our balance-ofpayments interest by increasing our growth and our productivity, and
thus keep our export-import position competitive.
We consider that the case for a policy of tighter money (and higher
interest rates) than is necessary to achieve this result has not been
proven. Higher interest rates abroad, and their magnetic effect on
short-term dollar capital, are sometimes mentioned in talk of
the "balance-of-payments constraint." Long .before the monetary
authorities are justified in following a tight-monev, high-interest
policy which inhibits maximum employment and economic growth
without inflation, they should take other steps to correct such adverse
effects as high interest rates abroad may have on our international
payments position. These steps include(a) a wholehearted abandonment of the "bills only"
policy;
(b) a wholehearted effort to persuade friendly countries
which appear to be drawing off short-term capital from the
United States by higher interest rates to moderate those
interest rates, and their magnetic effect on short-term capital,
by an increased emphasis on fiscal rather than monetary
methods of combating inflation;
(c) vigorous use of the 10-nation international payments
supplementary agreement, adoption of which is recommended
elsewhere. This can further neutralize the effects of interest
rate differentials.
In short, we see no justification whatever for slowing up domestic
growth and tolerating large-scale domestic unemployment, because of
some untested assumptions about the "magnetic effect" of interest
rate differentials.
We repeat our recommendations of last year as follows:
* * * the Federal Reserve should(1) Supply the member banks with adequate reserves to
permit a competitive reduction in interest rates; and
(2) Make exchanges of securities in the open market, so as
to shift the Federal Reserve's portfolio of some $27 billion of

1962 JOINT ECONOMIC REPORT

Government securities (now mostly short-term securities) to
include substantially more long-term securities.
These steps will(a) put downward pressure on interest rates, particularly long-term interest rates, and thus spur private
investment in business plant and equipment, stimulate
housing, and encourage expansion of State and local
government improvements;
(b) increase consumer demand by restoring purchasing power to the low- and middle-income groups;
(c) decrease the staggering carrying charges on the
Federal debt; and
(d) enable the Treasury to lengthen the average maturity of the debt-even during the period of economic
recovery.
(3) Take simultaneously, a third appropriate step, which
is to lower the Federal Reserve discount rate.' It is doubtful
that the discount rate has much, if any, direct influence on
other interest rates. Yet the discount rate is, as it is sometimes called, a "clear signal," discernible to the financial
community, indicating the direction which current monetary
policies intend interest rates to take. Accordingly, the discount rate should promptly give a "clear signal" that the
Federal Reserve authorities are returning to a less stringent
money and interest rate policy and hence reduce the upward
pressures arising from market expectations that further increases in interest rates may be in the offing.
In addition to the above recommendations for immediate
actions appropriate to a period of high unemployment, we
repeat our previous recommendations for appropriate continuing practices. The Federal Reserve authorities should(4) Bring about longrun increases in the money supply at
approximately the same rate at which the gross national
product increases. This will avoid pushing up interest rates,
over the long run, and similarly, avoid pushing up the rate
of deposit turnover.
. (5) Purchase Government securities and thus increase
bank reserves as a method of increasing the money supply,
rather than lowering reserve requirements. This will mean
that in the future the private banks will acquire less Government securities, on bank-created money, and that the Federal
Reserve will acquire correspondingly more, in which case the
interest payments will be returned to the Treasury instead
of going into bank profits.
(6) Abandon its discredited "bills only" policy finally, and
without reservation. A policy of conducting open market
operations freely in all maturity ranges of Government securities would restore to monetary policies needed flexibility and
hence an effectiveness which has not yet been achieved by
what seems only a token suspension of the "bills only" policy
made in face of the recent acute, but presumably temporary,
balance-of-payments problem.
' Senator Douglas: "I would prefer to say at this time, the discount rate should not be raised."

1962 JOINT ECONOMIC REPORT

Debt management
In the past we have endorsed certain types of advance refunding,
believing that the Treasury can accomplish desirable results by
refunding a portion of its securities in advance of the dates when
they are to mature. We have said, however, that "advance refunding
has to be done gradually and in moderation in order to prevent the
interest costs from being driven up". 2
We are considerably puzzled, however, by some of the advance
refunding operations that were carried out in the past year. Among
these, as we discuss elsewhere, was one refunding of $4 billion of
bonds costing the Treasury a rate of 22 percent and having between
8% and 9% years to go before maturity. These were replaced with
new bonds which cost the Treasury 3% percent per year. This and
other advance refunding operations carried out last vear appear to
have increased the annual cost of carrying the Federal debt by $105
million. While we can understand the desirability of refunding
bonds well in advance of their maturity, we do not understand
refunding bonds having 8 years and more to go to maturity.
We repeat recommendations which we made in 1960 and again in
1961 that the Treasury should(1) Establish as soon as practicable, a regular, predetermined schedule for refunding maturing securities; and
(2) Take vigorous steps to achieve a broader and more
competitive market for Federal securities and work toward
the adoption of the auction method of marketing all Federal
securities.
POLICIES FOR INVESTMENT IN GROWTH POTENTIALS

The President has recommended a number of steps to increase our
longrun growth potential-a more rapid rate of investment in plant
and equipment, programs to increase the Nation's level of education,
to retrain unemployed workers, and to increase the efficiency and
health of our human resources in other ways.

Investment tax credit
. The President's program calls for two steps to provide increased
incentives for investment in plant and equipment. The first, to be
taken by administrative action, will be to provide new guidelines for
the depreciation schedules in Bulletin F, such as have already been
provided for the textile industry. The second is legislation to:
Provide a tax credit equal to 8 percent of gross investment in eligible machinery and equipment, thus stimulating investment in capacity expansion and modernization
by reducing the net cost of acquiring new equipment.
We have no doubt that if our rate of growth is to be improved and
our competitive position in world markets strengthened, there must
be more rapid modernization of the Nation's productive plant. A high
rate of productivity makes possible a high level of wages and standard
of living.
The President's original proposal in this area was for a credit to
be concentrated primarily upon purchases of assets in excess of replace-

' The Committee's Study Paper No. 19, "Debt Management in the United States," Study of Employment, Growth, and Price Levels 11960], p. 36.

1962 JOINT ECONOMIC REPORT

ment amounts. This original proposal had the advantage that it
tended to concentrate more directly upon marginal investment decisions. In effect, the tax benefits were directed toward new investment
and expansion of equipment rather than total purchases of equipment.
To the extent that investment can be stimulated by tax benefits such
as would be produced by the proposed credit, greater benefits will
presumably derive from larger credits concentrated only on marginal
investment decisions.

The proposed credit in its present form retains some of the advantages of the President's original proposal. Specifically, it recognizes
that a tax credit provides greater potency for stimulating investment
than does a change in deductions for equipment. Hence, rates of
return on capital investments can be considerably augmented by this
type of change. At the same time, however, such a credit does
involve a variation away from the concept that deductions associated
with an asset should not exceed 100 percent of its cost. The credit
may, on the other hand, be viewed as a factor in the tax computation,
designed to aid in the achievement of an important national goal.
It may also be said that the gains to firms accruing from postponement
of tax payments, the expending of research and development funds
and, of course, depreciation deductions accelerated beyond realistic
depreciation, likewise involve factors in the determination of tax costs
which go beyond standard business accounting practices.
The proposed credit can be of particular benefit in overseas competition. A number of other countries provide special tax incentives
roughly comparable to the investment credit, and adoption of the
credit may place domestic firms on a more equal competitive basis.
The effect of the credit is to reduce the price of new equipment.
For a firm with a 52-percent tax liability, an 8-percent tax credit will
be equivalent, roughly, to a 16-percent reduction in the price of new
equipment. It must be recognized, of course, that the investment
credit will have a stimulative effect on our export-import position only
to the extent that the credit is reflected in lower prices of goods
produced with the equipment.
The primary purpose of the investment credit is to stimulate physical investment and thereby encourage growth." Modernization and
expansion of productive capacity can increase our standards of living.
On the other hand, to the extent that the tax cut stimulates investment, the investment may be stimulated in an erratic manner that
accentuates business fluctuations. The present proposal to give a
credit on any and all purchases of business equipment may be a tax
cut which may or may not be used to purchase new equipment. We
are not sure that a business tax cut should have first priority, in the
present state of the economy. Complementary measures, such as
reductions of taxes on consumption demands, may be necessary in
order to provide a balanced growth within the economy.
New depreciationguidelines
The President's recommendations with respect to depreciation reform are meritorious. A general reexamination of depreciation lives
for tax purposes is long overdue. It is essential for tax equity alone
that depreciation lives be realistic in terms of usable lives and rates of
obsolescence. To the extent that depreciation lives have been unduly
3

8enator Pell adds: "I believe that the present proposal for a tax credit could he a real stimulus to economic growth in Rhode Island and throughout our Nation; I strongly favor this proposal."

1962 JOINT ECONOMIC REPORT

long in the past, business firms have not received sufficient depreciation deductions during the early years and may have been discouraged
from investing in newer pieces of equipment. Hence, a reform of depreciation lives can also serve to stimulate economic growth.
Support of greater realism in depreciation policy cannot be equated
with indiscriminate tax subsidies through accelerated depreciation deductions. An examination such as the administration seems to be
making should not be a signal for Congress to enact arbitrary depreciation deductions. Substantial amounts of depreciation deductions
during the early part of the life of an asset constitute simply an
interest-free loan from the Government to private firms and such
loans are in effect converted into gifts to the extent that firms may be
growing. Therefore, while we endorse the administration's efforts to
obtain realism in depreciation guidelines, we are opposed to other
proposals which have been made to shorten depreciation schedules
arbitrarily and to such an extent that windfalls on already-existing
equipment would be provided.
Investment in human resources
The President's recommendations for investment in our human
resources call for legislation to1. Provide Federal aid for training and retraining of
unemployed workers (passage of proposed Manpower
Development and Training Act).
2. Establish pilot programs to expand employment opportunities for young people, including training, employment in
public service jobs, and employment in a newly established
Youth Conservation Corps (passage of proposed Youth
Employment Opportunities Act).
3. Increase appropriation for the U.S. Employment
Service, to enable that agency to better fulfill its function
of matching available jobs and workers.
4. Amend the Welfare and Pension Plans Disclosure Act
so as to (a) provide adequate penalties for embezzlement
and (b) to vest authority in a responsible Federal agency to
enforce the statute by issuing binding regulations, prescribing
uniform reporting forms, and investigating violations.
5. Provide Federal aid to education, including assistance
to States for provision of more adequate public school
facilities and higher teachers' salaries and-at the higher
education level-loans for construction of facilities and for
scholarships to able students who need help.
Congress has already acted favorably on the proposed Pension and
Welfare Plans Disclosure Act, and on the proposed Manpower Development and Training Act. We hope it will act promptly and favorably on the other three recommendations.' These recommendations
will make important contributions toward raising the Nation's education and training levels-a primary source of economic growthand toward reducing so-called frictional and structural unemployment.
The Nation has had altogether too much waste of its human resources
4 Mr. Patman dissents from the recommendation, as stated, concerning aid to education, adding: "I am
fully aware, however, that itis vital to our Nation's future to raise, and raisesubstantially, thelevelsofeducation and training of our young people. Soviet Russia is now training more than twice as many sclentists
and engineers as we are."

100

1962 JOINT ECONOMIC REPORT

because of workers' lack of the education, training, and background
suited to current job opportunities.
The Nation's loss from young people dropping out of school because
of a lack of financial resources, on the part of the pupils or the school
systems, involves a staggering waste of national assets which we can
ill afford. The exact form and extent of the aid proposed may involve
matters of law and constitutionality, as well as social and political
policy; but these are outside the purview of this committee. We
strongly support the proposition that some way must be found to
provide educational opportunities for all children, commensurate with
their abilities to profit from such opportunities.
INTERNATIONAL TRADE AND BALANCE-OF-PAYMENTS POLICIES

Over the past 28 years, the policy of the United States has been to
promote a greater flow of goods, services, and capital across national
boundaries. This policy has been based on the belief not only that
economic interchange promotes peaceful relations among nations,
but that it promotes economies from which all nations benefit.
New developments among the trading nations now confront us with
a necessity for new trade legislation, and for new arrangements, to
reduce the deficit in our balance of international payments. The
President's authority to negotiate reciprocal tariff reductions under
present legislation is now substantially exhausted. At the same time,
however, the new force of the Common Market in Europe makes it
necessary that the President have authority for negotiating large
reciprocal tariff reductions, and also have authority for negotiating
on a broader basis than present legislation permits.
New trade legislation
The President has recommended new trade legislation which encompasses most of the authority and safeguards that we believe necessary to maintain and expand our foreign trade, while providing
assistance to domestic firms and workers who may have to adjust
to new activities.
In general, we favor the President's proposed legislation, but we
do not believe that it goes far enough in respect to provisions for
adjustment assistance. We feel that the new legislation should make
provision for assistance to communities, as well as to firms and
workers. In addition, we recommend that the legislation provide
for grants for adjustment assistance, as well as for loans to firms and
retraining programs for workers.
As a general matter, we would also emphasize what has been learned
from the Common Market experience-that both workers and
business firms make the easiest and best adjustments to new activities
in an economy operating at high levels of production, an economy
that is growing and offering expanding opportunities.
In the interest of efficient division of labor, the greatest attention
should be paid to bargaining down Common Market tariffs against our
agricultural products. Conversely, as we move toward freer trade,
we must make certain that U.S. manufacturers are not discriminated
against when it comes to purchasing their agricultural raw materials,
such as cotton and wool.

1962 JOINT ECONOMIC REPORT

101

An important byproduct of a trade partnership between the United
States and the Common Market should be closer alinement of policies
regarding trade with the Communist bloc. The United States cannot
hope to counter the disruptive effects of Communist trade by going it
alone. What is needed is a common approach on the part of all the
major industrial powers in the free world, particularly in the matter of
trade in strategic materials. Such an approach will be much easier
if expanding trade opportunities within the free world are assured.
Finally, as a safeguard against the eventuality that negotiations do
not prove as successful as we anticipate, we also think the new trade
legislation should specifically authorize the President to raise tariffs,
as well as to lower tariffs.5
Balance of payments
The proposed new trade legislation will not solve our immediate
and pressing balance-of-payments problem. This will take vigorous
and immediate steps to obtain fair concessions from the countries of
Western Europe. These countries should meet a larger share of the
cost of our mutual defense, and those now enjoying a surplus of payments should assume a larger share of the burden of aiding the
underdeveloped countries. There must be a prompt reduction of
approximately $2 to $3 billion in our payments deficit. Furthermore,
the major industrial nations should work out improved international
monetary arrangements whereby they may better utilize their monetary reserves. We believe that:
1. The Common Market countries of Western Europe owe the
rest of the free world a substantial unilateral reduction in their
tariffs, to offset the growing discriminations against the rest of
the free world which are inherent in the emerging tariffs of the
Common Market countries.
2. Those countries of Western Europe which are now enjoying
a surplus payments position should increase their aid to underdeveloped countries generally-not just extend aid to colonies or
associated territories.
3. Those NATO countries now making disproportionately small
contributions to our mutual defense should increase their contributions; contributions should be available for base operating
expenses, whether for civilian personnel, construction, land or
supplies.
Specifically, what is needed is for the major industrial nations to
sit down in conference and agree on a set of recommendations for
balancing out the hard-core $2 to $3 billion in U.S. payments deficits
and their corresponding European payments surpluses. We would
hope that the recommendations for balancing would be achieved by
European action with respect to unilateral tariff reductions, greater
development aid, and larger defense contributions, rather than by
recommendations for U.S. import restrictions, curtailment of U.S.
tourist travel, restrictions on capital movements, and other undesirable
measures.
8 Mr. Boggs dissents, saying: "The recommendation seems to suggest that tariffs ought to be raised at
times, not for the protection of domestic industries but as a device for bargaining with our trading partners.
Such a suggestion would of course be contrary to both the principles of a liberal trade policy and the rules
of GATT."

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1962 JOINT ECONOMIC REPORT

Supplemernal IMF Fund
The President has recommended, as one step dealing with the
balance-of-payments problem, that CongressEnact enabling legislation for U.S. participation in the
recent agreement among 10 major industrial countries to
lend specified amounts of their currencies to the International
Monetary Fund when necessary to cope with or forestall
pressures which may impair the international monetary
system.
We believe that the Congress should approve this proposal, and
that the other participating nations should do likewise.
However, we also recommend that negotiations be continued for
a more adequate international credit arrangement. A more adequate
arrangement will permit automatic lending procedures, not just those
individually approved by the separate countries involved. Furthermore, there should be larger contributions from the nondollar and
nonsterling participants in the supplemental fund.
STRENGTHENING

COMPETITION

By eliminating monopolistic and collusive barriers to the
entry of new business and by maintaining the spur of competition to innovation and the utilization of technology,
antitrust enforcement tends to create conditions which
encourage economic growth (p. 127).
This statement by the Council of Economic Advisers puts succinctly
the considerations which lead this committee to make several recommendations on antitrust policies at this time. We believe that:
1. The Antitrust Division of the Department of Justice and the
Federal Trade Commission should devote increased efforts to the
elimination of existing monopoly power, reflected for the most part
in markets where a small number of producers, without engaging in
overt collusion, dominate sales and jointly frustrate public policy.
2. There should be a prompt intensive study of market domination
in industries characterized by relatively few large companies with a
tradition of price leadership, (a) to ascertain among other things, the
relationship between size and efficiency, prevalence of excessive
pricing, their relationship to inflation and recession and other effects
on the economy; (b) to examine and clarify the role of the antitrust
laws in relation to price leadership, to point up where they are in
need of strengthening and, conversely, where they are not appropriate
instruments of regulation; (c) to determine what other public measures
may be required to assure the competitive vigor of the economy.
3. The competitive factor must be assigned a more important role
in the work of the various Federal regulatory agencies, particularly in
respect to the approval of corporate mergers. The right of the Antitrust Division to intervene in proceedings before the agencies should
be carefully defined by law wherever necessary. Moreover, whenever
an agency approves a merger that may have the reasonable probability
of lessening competition it should be required by law to find that the
anticipated benefits of the merger cannot feasibly be realized in any
way other than by the contemplated merger.

1962 JOINT ECONOMIC REPORT

103

4. Monopolistic mergers are now often consummated before the
Department of Justice or the Federal Trade Commission know of
the plan for merger. After mergers are consummated, furthermore,
the Government finds it difficult to force dissolutions-and indeed
the time required to pursue such matters through the courts may
leave no real opportunity to undo the competitive damages. We are
in favor of legislation to require premerger notification by large
firms proposing mergers.
5. The requirement for public reporting of identical bids made to
Federal agencies should be made a permanent part of the law. H.R.
8603 (originally introduced as H.R. 4570), introduced by the committee chairman, would accomplish this, as well as serve additional
worthy purposes. It passed the House on August 22, 1961, and is
now before the Senate Committee on Government Operations. We
recommend its early enactment.
6. Expanded opportunities for small business are definitely in
order, as a vital adjunct to our traditional antitrust policy and to our
national ideal of opportunity open to all.
NorE.-Senator Fulbright, because of the extraordinary press of other congressional duties, was unable to participate in the hearings or committee meetings
on this report. For that reason, the findings and conclusions herein set forth are
neither approved nor disapproved by him.

SUPPLEMENTARY VIEWS OF HENRY S. REUSS
The President and the Council of Economic Advisers have submitted
a comprehensive and exceptionally thorough Economic Report.
Quite apart from the substance of the report, the concept of responsibilities under the Employment Act of 1946, as reflected in the report,
is far more in accord with the requirements of the act than has been
the case in recent years.
I have repeatedly pointed to five defects in the reports in the past,
as measured by the requirements clearly imposed by the Employment
Act. These deficiencies of performance which led to the introduction
of H.R. 12785 in 1958 and H.R. 6263 in 1959, are discussed in detail
in the published hearings on the bills by the House Government
Operations Committee. (Hearings before a Subcommittee of the
House Committee on Government Operations, 85th Cong., 2d sess., on
H.R. 12785, July 21 and 22, 1958; hearings before a Subcommittee
of the House Committee on Government Operations on H.R. 6263,
March 25, 26, and April 9, 1959.) The five particulars in which past
reports failed to fulfill duties under the Employment Act were:
(1) They cast doubt on whether reasonable price stability was a goal
of the Employment Act. Despite the fact that the public, the
Congress, and the first two Chairmen of the Council of Economic
Advisers had believed that the act's goal of "maximum purchasing
power" had included the concept of reasonable price stability, the
President in the Economic Report for 1959 said:
* * * the Congress is requested to amend the Employ-

ment Act of 1946 to make reasonable price stability an
explicit goal of Federal economic policy, coordinate with the
goals of maximum production, employment, and purchasing
power now specified in that act. Such an amendment would
strengthen Government's hand in restraining inflationary
forces and would help build a public opinion favorable to the
adoption and vigorous application of needed measures.
This amendment would make it clear that Government is as
determined to direct its policies toward maintenance of price
stability as it is to employ them in combating economic
contraction (Economic Report of the President, January
1959, pp. 52-53).
(2) They failed to state in quantitative terms, as required by
section 3 of the act "the levels of employment, production, and purchasing power * * * needed to carry out the policy declared in sec-

tion 2," or to state in quantitative terms "current and foreseeable
trends in the levels of employment, production, and purchasing
power." Chairman Saulnier of the Council of Economic Advisers
stated in a letter to the House Committee on Government Operations
on March 13, 1959:
* * * The Council considers it unnecessary, impractical,

and inadvisable to quantify the concepts of "maximum"
105

80736 0-62-8

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1962 JOINT ECONOMIC REPORT

employment, production and purchasing power
Current trends are described quantitatively * * *; foreseeable trends, on the other hand, are discussed in general
terms and we believe this is the only suitable way to discuss
them in such reports * * * (hearings before a subcommittee
of the House Government Operations Committee, 86th
Cong., 1st sess., Mar. 25, 26, and Apr. 9, 1959, pp. 202-203).
This construction of the act was so restrictive that in 1959, for
example, no estimates of expected employment or gross national
product for the year were published, even though these estimates had,
of course, been necessary in arriving at Federal revenue figures for
the budget.
(3) From 1953 through 1960, no advantage was taken of the provision in the act totransmit from time to time to the Congress reports supplementary to the Economic Report, each of which shall include
such supplementary or revised recommendations as he may
deem necessary or desirable * * *.
Prior to 1953, the President had issued midyear supplementary
reports, which were especially relevant and necessary when significant
shifts in economic trends had occurred or were foreseen. Because of
the mechanical policy of writing a report for January of each year
only, the Congress was not, for example, provided with the facts or
considerations which led to a drastic shift in economic policies in the.
summer of 1958 from one of fighting recession to one of fighting
inflation.
(4) During the period 1953-60, the reports failed to state what
monetary policy should be for the year ahead, on the ground that the
Federal Reserve is an independent agency of Government. The Employment Act was construed by the President to mean that the Government as a whole should not have a monetary policy at all, much
less one coordinated with expenditure, tax, and other governmental
policies, including the credit policies of the many Federal agencies
under the President's direct control. The delicate regard for the independence of the Federal Reserve System was not accompanied by
similar inhibitions in the case of other groups in the economy. The
President did not hesitate to address dozens of specific recommendations to Congress. to State and local governments, to private management, or to labor unions-all indubitably independent of the executive
branch of the Federal Government. But with respect to monetary
policy, Chairman Saulnier of the Council of Economic Advisers,
testified to the Joint Economic Committee in 1958:
In the Economic Report we have expressed no judgments as to
the adequacy or inadequacy of credit policy. We have done
the best we can do to describe that po icy and to describe the
movement of our economy, and have left evaluations of it
completely out of the story (Joint Economic Committee,
"Hearings on January 1958 Economic Report of the President," p. 20).
The 1959 Economic Report merely stated:
Responsibility for monetary and credit policies rests with
the Federal Reserve authorities who have independent

1962 JOINT ECONOMIC REPORT

107

status within Government * * * the pursuit of appropriate
monetary (and) credit * * * policies would help attain
rising production and employment at stable prices (Economic Report of the President, January 1959, p. 52).
(5) Vigorous objections were raised against the proposals that the
President directly, or indirectly through an agency like the Council
of Economic Advisers, should bring public opinion to bear on particular proposed wage or price increases, in large strategic industries,
which might have an overall inflationary impact on the economy.
The proposals would have necessitated the formulation of appropriate
criteria for both wage and price increases. It would then have been
necessary for the President or his representatives to discuss these
criteria with industry and labor before undesirable decisions had been
taken. In addition, the President could have made public all the
facts, and the applicable criteria, as well as any specific recommendations in a particular case where a threatened wage or price decision
would have an inflationary impact on the economy.
Chairman Saulnier of the Council of Economic Advisers reacted to
the proposal, in his letter to the House Government Operations Committee on July 1, 1958, by saying:
* * * to revise the language of the Employment Act along
the lines proposed in section 3 of H.R. 12785 would seem not
only to invite but to require Presidential intervention in decisions relating to specific wage and price increases. Such intervention would, in our judgment, be altogether undesirable
(hearings before a Subcommittee of the House Government
Operations Committee, 85th Cong., 2d sess., on H.R. 12785,
July 21 and 22, 1958, p. 103).
In line with this point of view, the President confined himself to
repeated but generalized admonitions addressed to the public, to
industry, and to labor. For example, in his state of the Union message of January 10, 1957, the President said:
And, if our economy is to remain healthy, increases in wages
and other labor benefits, negotiated by labor and management, must be reasonably related to improvements in productivity. Such increases are beneficial, for they provide
wage earners with greater purchasing power.
Except where necessary to correct obvious injustices, wage
increases that outrun productivity, however, are an inflationary factor. They make for higher prices for the public
generally and impose a particular hardship not only on the
active workmen, but on those whose welfare depends on the
purchasing power of retirement income and savings. Wage
negotiations should also take cognizance of the right of the
public generally to share in the benefits of improvements in
technology (hearings before a subcommittee of the House
Government Operations Committee, 85th Cong., 2d sess., on
H.R. 12785, July 21 and 22, 1958, p. 9).
At his press conference on June 26, 1957, the President said:
The only point I make is this: Government, no matter
what its policies, cannot of itself, make certain of the sound-

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ness of the dollar, that is, the stability of the purchasing
power of the dollar in this country. There must be statesmanlike action, both by business and by labor. Frankly, I
believe that boards of directors of business, of business
organizations, should take under the most serious consideration any thought of a price rise and should approve it only
when they can see that it is absolutely necessary in order to
continue to get the kind of money they need for the expansion
demanded in this country-and at the same time labor
should demand wages, wage increases that conform roughly
to the increase in productivity of the individual, and the only
exception I think they ought to make to that, when there are
demonstrable injustices existing in particular areas (ibid.,
P. 9).
In a speech on May 21, 1958, he said:
The American people are going to be looking over the
shoulders of those sitting at every bargaining table to see
whether the wage settlement and subsequent price decisions
are consistent with a stable dollar (ibid., p. 9).
In his January 1958 Economic Report, the President said:
Business managements must recognize that price increases
that are unwarranted by costs, or that attempt to recapture
investment outlays too quickly, not only lower the buying
power of the dollar, but also may be self-defeating by causing
a restriction of markets, lower output, and a narrowing of
the return on capital investment. The leadership of labor
must recognize that wage increases that go beyond overall
productivity gains are inconsistent with stable prices, and
that the resumption of economic growth can be slowed by
wage increases that involve either higher prices or a further
narrowing of the margin between prices and costs (Economic
Report of the President, January 1958, p. v).
The trouble with these generalized admonitions was that everyone
thought the President was referring to the other fellow. Labor was
convinced, in any given situation, that the President was admonishing
industry against price increases, while management thought he was
lecturing labor unions against unreasonable wage demands.
The failure to take appropriate action was -accompanied by, or
perhaps due to, failure to identify the nature of the inflation which
can occur even when unemployment and idle plant capacity exist.
That there is a difference between the cost-push type of inflation in
administered-price industries and demand-pull general inflation was
recognized very belatedly. Hence, the Washington Post considered
it headline news when Mr. Woodlief Thomas, economic adviser to
the Federal Reserve Board, acknowledged on March 12, 1959, that
Dr. Gardiner Means' studies of administered inflation contributedto a better understanding of the problems of inflation and
fluctuations in economic activity and employment * *.
This contribution is in pointing out that there are unstabilizing forces in pricing actions of the private economy-on
the part of both management and labor-that cannot be

1962 JOINT ECONOMIC

REPORT

109

effectively controlled or corrected by governmental actions
in the area of fiscal and monetary policies.
Recognition that the Government must not rely on mere generalized admonitions has taken even longer. Mr. Saulnier, now testifying as a private expert witness, before the Joint Economic Committee
during hearings on the 1962 Economic Report found fault with the
administration for not intervening in a recent local dispute involving
wage increases and hours of work of electricians in New York City.
He said:
Now frankly I do not know how the Government should
have intervened in this. What did happen, in fact, was that
the President, after it was all over, ste ted his regrets. I think
this was right. It is regrettable. But I would like to think
that it might have been possible to have stated this earlier.
to have brought to bear on this question a greater force of
public opinion and perhaps to have avoided this outcome
(hearings, p. 496).
Hearings on my bills for strengthening performance under the
Employment Act, H.R. 12785 and H.R. 6263, were held in July 1958,
and March-April 1959, respectively. H.R. 6263 was reported out by
the House Government Operations Committee on June 12, 1959, but
it died in the Rules Committee at the end of the 86th Congress. An
identical bill, S. 2382, which was introduced in the Senate on January
17, 1959, by Senator Joseph Clark of Pennsylvania, Senator Proxmire
of Wisconsin, and Senators Byrd and Randolph of West Virginia, had
hearings before the Subcommittee on Production and Stabilization
of the Senate Banking and Currency Committee in February 1960.
No further action was taken by that committee.
The failure of past reports to meet responsibilities in the five areas
listed above was, of course, not due to need for clarifications by
Congress of the language of the Employment Act. Adequate performance, in accordance with the objectives of the act, has been and
is possible. This has been amply demonstrated in the reports of the
present Council of Economic Advisers in March 1961, and again in
January 1962. It is gratifying to be able to point out the way in
which the present Council has used the framework provided in the
Employment Act for reporting and action in the five areas I have
discussed:
(1) Price stability.-In answer to a question by Senator Bush during
the hearings on the 1962 Economic Report, Chairman Heller of the
Council of Economic Advisers stated:
* * * that the price stability objective seems to us to be
clearly implicit in the 1946 Employment Act. If we are
going to maintain maximum production and employment
and purchasing power, I should think that price stability
is one of the prime requisites * * * (bearings, p. 13).
(2) Quantitative statement of goals and foreseeable trends in the levels
of employment, production, and purchasing power.-Although the
Council of Economic Advisers admits frankly that there are difficulties and risks in economic forecasting, it states thatneither Government nor private enterprise can conduct its
affairs, develop its policies, and make its decisions without

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1962 JOINT ECONOMIC REPORT

economic projections

* *

For example, it would be im-

possible to formulate either Federal or State budgets without
projections of future levels of income and business activity
and the tax revenues they will produce (Economic Report,
p. 62).
The President states in his 1962 Economic Report that the goals
for 1963 are a reduction of unemployment to 4 percent as a temporary target, a gross national product of $600 billion. The President
*.also states that we must seek full recovery from the recession and go
on to full employment without inflation. Further, during the decade
of the 1960's, the President states thatwe should not settle for less than the achievement of a longterm growth rate matching the early postwar record. Increasing our growth rate to 45; percent a year lies within the
range of our capabilities during the 1960's (Economic Report,
P. 9).

In the report of the Council of Economic Advisers, the foreseeable
level of employment by the end of 1962 is put at a rate of "5 percent
or somewhat lower" and gross national product is projected for the
year 1962 at $570 billion.
(3) Supplementary economic reports.-The present Council of Eco-.
nomic Advisers submitted a report in March 1961, despite the fact
that the previous Council had filed its report just 2 months before.
The present Council properly took the view that with a change of
administration, and a new administration which proposed to adopt
new policies, it was necessary to report to the Congress in accordance
with the provisions of the Employment Act.
(4) Recommendations on monetary policy.-Both in the March 1961,
and the January 1962, reports of the Council of Economic Advisers,
there are lengthy discussions of monetary policy appropriate to the
particular conditions foreseen in the immediate future.
The March 1961 report sets out monetary policy necessary during
a recession period within the limits of balance-of-payments considerations. The report states clearly that the objective of policy then
being followed by the Federal system wasTo lower long-term interest rates, in order to increase
business investment and residential construction, while
maintaining the discount rate and related short-term rates
at internationally competitive levels (hearings, Joint Economic Committee, 87th Cong., 1st sess., February, March,
April, 1961, p. 347).
Furtherthe economy needs the stimulus of low interest rates and
greater credit availability, not merely for recovery of the
ground lost in the recession, but for the more difficult and
important tasks of restoring full employment and promoting
growth (ibid., p. 349).
A major portion of the Council's section devoted to "Policies for
maximum employment and production" in its 1962 report is concerned
with monetary policy and its proper coordination with other major
economic policies to achieve domestic and international economic

1962 JOINT ECONOMIC REPORT

objectives. After explaining that monetary policy must be coordinated with fiscal policy in order to obtain a given stabilization objective, the Council states thatthe stabilization of demand at full employment levels by
a budget surplus compensated by an expansionary monetary
policy-is favorable to growth (Economic Report, p. 85).
It points out, however, thaton the other hand, monetary policy may in some circumstances be constrained by the balance of payments (ibid.,
p. 86).
The Council concludesinterest rates may appropriately be more stable
andthe appropriate expansion of liquidity will depend upon the
strength of private demands, on the tightness of fiscal policy,
and on the balance of payments position (ibid., p. 92).
(5) Bringing to bear the public interest in wage-price decisions which
may threaten general price stability as recovery continues.-In this
Economic Report, the President states thatwe do not foresee in 1962 a level of demand for goods and
services which will strain the economy's capacity to produce.
Neither is it likely that many industries will find themselves pressing against their capacity ceilings. Inflationary
pressures from these sources should not be a problem
(Economic Report, p. 16).
However, the President explicitly recognizes thatin those sectors where both companies and unions possess
substantial market power, the interplay of price and wage
decisions could set off a movement toward a higher price
level (ibid., p. 16).
He counsels labor leaders to accept the productivity benchmark as a
guide to wage objectives.
The Council of Economic Advisers devotes 23 pages of its report
to an explanation of price behavior in the economy and includes
general guideposts on wage and price decisions, particularly appropriate in the parts of the economy where firms are large or employees
well-organized, or both. After stating that noninflationary wage
decisions should in each industry be equal to the rate of overall
productivity increase and giving general rules relating productivity
increase to price policy, the Council sets forth four important modifications of the general rules where wage increases could exceed or fall
below the general guide rate and where prices would either rise more
rapidly (or fall more slowly) or rise more slowly (or fall more rapidly)
while preserving the stability of the general price level.
Even before these statements on wage-price goals the President
took personal action in September 1961 when it was reported that
the steel industry was considering price increases, by addressing
letters to the heads of the 12 largest steel companies, urging them
to forego any increases. Also, since the first of the year, the Presi-

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1962 JOINT ECONOMIC REPORT

dent and the Secretary of Labor have urged the United Steelworkers,
whose contract expires in June 1962, not only to seek new contract
terms which would be in accord with the applicable productivity rule
but also to start negotiations early so that there would be no repetition of the costly 1959 strike and no undue accumulation of steel
products inventories in anticipation of such a strike.
The Council of Economic Advisers has taken a hand in another
area of wage policy which is of nationwide significance. According
to a Washington Post report of February 13, 1962, Chairman Heller
of the Council discussed the administration's wage goals for this year
with the Communications Workers of America, at the specific invitation of the union. The union's officers agreed that this discussion
will condition the climate of its negotiations with telephone companies throughout the country. CWA President Joseph A. Beirne
contrasted favorably this readiness to discuss appropriate wage standards with former President Eisenhower's general exhortations, on tho
one hand, and the refusal of Mr. Saulnier, former Chairman of the
Council of Economic Advisers, to address the union's wage policy
group, on the other. The union president stated that Mr. Heller's
statements to the group were useful since both industry and labor
now know what range of wage increases is considered noninflationary
under present economic circumstances.
By utilizing the framework of the Employment Act, particularly
in the five areas I have discussed above, the President and the Council
of Economic Advisers have appropriately recognized the intent of
Congress in conferring broad responsibility for economic policy on all
executive agencies of the Federal Government. In doing so, the
President and the Council have restored to the Employment Act a
usefulness which has long been lacking.
HENRY S. REUSS.

INDIVIDUAL VIEWS OF SENATOR WILLIAM PROXMIRE TO
THE MAJORITY REPORT OF THE JOINT ECONOMIC
COMMITTEE
While I find much to applaud both in the President's Economic
Report and the report of the majority of the Joint Economic Committee to which these views are attached, I find it necessary to write
these individual views for three main reasons.
OPPOSE MAJORITY CRITICISM OF BUDGET AS

Too

RESTRICTIVE

First I must express vigorous disagreement with the shocking conclusion of the majority that the proposed budget may be too restrictive, that the relatively small surplus projected by the Treasury for
the coming fiscal year on highly optimistic assumptions may be too
large for the good of the economy.
The majority conclusion is an extreme reliance on what has become
the new economic orthodoxy, the now predominantly accepted economic theory that the Nation must run a deficit as long as there are
substantial unused economic resources.
Relying on this theory, the majority by implication counsels our
Government-in the coining fiscal year-to run a deficit in the
administrative budget, a deficit that would increase the national debt
even if the coming fiscal year turns out to be a record-smashing boom
year. If this advice had been followed in the past, this Nation would
have run deficits in virtually every peacetime year of this century.
Since deficits are all but certain in wartime-such a course would
have given this country a truly astronomical national debt by today.
Service costs on the national debt, already the second heaviest cost
of the Federal Government, would have rivaled the immense defense
costs as a burden on the taxpayer.
The position of the majority in objecting to the administration's
small surplus as "too restrictive" is also wrong because it overlooks
the fact that the principal economic impact of a budget is in the swing
from deficit to surplus. The swing in the coming fiscal year is moderate.
All this is not to say that there is not a solid and proper case for
compensatory fiscal policy. Certainly in the event of a serious depression or even a prolonged recession, a very strong case can be made
against a surplus, and for following an expansionary fiscal policy in
Government taxing and spending.
But the policy of deliberately planning a deficit in a predicted boom
year in our economy is unconscionable.
This.policy is not only wrong because of the immense national debt
burden it would assure. It is also wrong because it would destroy
whatever basis there now is for discipline and efficiency in Federal
spending. Under this doctrine proponents of additional Government
spending cannot only contend for the benefits of the service their
spending would provide, they can almost always argue that the spend113

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1962 JOINT ECONOMIC REPORT

ing should involve no taxing because the resulting deficit will be a
healthy thing for the economy and put idle resources to work.
The policy is also wrong because there is little evidence that it
will work. There is no empirical evidence that the heavy spending
and the immense and steady deficits-in relation to gross national
product-in the thirties were a significant factor in pulling the Nation
out of that depression.
The policy is wrong because its proponents assume that a relatively
moderate shift on the order of $2 or $3 billion in the balance between
Government spending and taxing can have a major effect on a $550
billion economy.
The policy is wrong because it overlooks other more promising

alternatives.

MAJORITY REPORT FAILs To CONSIDER GOVERNMENT POLICY IMPACT
ON SUPPLY OF LABOR

Alternatives to compensatory fiscal policy bring us to our second
reason for these individual views.
There is almost no recognition expressed in the majority report of
the possibility of approaching the unemployment problem from the
supply side of the equation. The number entering the labor force
and the number staying in the labor force are apparently regarded as
beyond the pale of governmental policy although perhaps the biggest
-contribution to the reduction of unemployment in this country and
in free enterprise economies abroad has been in raising the age at
which young people enter the labor force and especially reducing the
age at which old people retire from it. Just during the past year a
significant though generally overlooked contribution of a change in the
social security system to reduction of the labor supply was in the
reduction of the male retirement age to 62.
The contribution of the development of the social security system
alone to the reduction of both the labor force and unemployment
dwarfs the role that compensatory fiscal policy has played. What is
more, substantial improvement-as through social security-in the
opportunity for workers to retire earlier makes a longrun, secular
contribution to unemployment. Compensatory fiscal policy can at
best only iron out the valleys and peaks. Since present unemployment is viewed as a secular rather than cyclical problem, compensatory
fiscal policy is peculiarly unsuited while improvement and expansion
of social security is especially suited to meet the problem.
Complementing the social security a proach should be emphasis on
a systematic study of entrance to the labor market. For example, the
simple act of increasing the age at which children leave school to enter
the work force by 1 or 2 years, could at one stroke immensely reduce
the unemployment problem. Because of dropouts before high school
graduation and the poor preparation for employment of many high
school graduates, unemployment is extremely heavy among the young.
Of course, this is an action that could not and should not be taken by
Federal fiat. On the other hand, Congress and especially the President of the United States could have significant influence in persuading
State :and local authorities to increase the school-leaving age.
An extra year or two in school combined with heavy emphasis on
vocational education during that year for those who intended to enter

1962 JOINT ECONOMIC REPORT

115

the labor force immediately upon the conclusion of their high school
education could reduce unemployment in two ways. With more
young people in school there would perforce be fewer young people
seeking work. With young people out of high school better prepared
for available jobs, there would be a dimunution both in unfilled skilled
jobs and youthful unemployment.
DISAGREEMENT

WITH PRESIDENTIAL RECOMMENDATIONS

My third reason for these individual views is to express my disagreement with the report's support of several of the President's legislative
recommendations to this session of Congress.
TEMPORARY INCOME TAX CUT

The President has recommended that Congress delegate to hin the
authority to reduce the personal income tax temporarily. I emphatically oppose this request. While the majority report does not wholeheartedly support this Presidential request, it does not directly oppose
it. I do.
In the event of a serious economic setback, a tax cut might be desirable. Under such circumstances I am confident that the Congress
would promptly respond to a Presidential request to reduce taxes.
Indeed, no witness at the Joint Economic Committee's hearings was
able to adduce a single instance when a Presidentially requested tax
cut was not granted.
It might be good public policy for the Congress to agree with the
administration on the type of tax cut that would be most useful to
combat a serious economic setback. It might be desirable for Congress to agree to give congressional priority to any such request.
But for the Congress to surrender even part of this prime congressional power over taxes on such scanty justification would be very
unwise. The balance of power between the Legislature and the
Executive has shifted significantly and perhaps necessarily in recent
years to the advantage of the Executive. For Congress to surrender
its good right arm-its taxing power-would mark a very harmful
and unnecessary weakening of congressional power.
PRESIDENTIAL PUBLIC WORKS DISCRETION

For many similar reasons I am opposed to the President's request
to the Congress to grant him authority to initiate $2 billion of publics
works spending whenever unemployment has been rising for 3 out of
4 or 4 out of 6 months and has risen by more than 1 percent above its
level 4 or 6 months earlier.
Such a formula, of course, provides immense discretion for the
President to spend money without specific congressional approval.
It appears to be based on the theory that there is some spending that
ordinarily cannot be justified on its merits; but might be justified in
a period of economic adversity as a method of recovery. I disagree
that spending which cannot be justified on its merits is likely to be
justified in terms of good public policy except in times of very serious
economic adversity. While the argument for such spending might
have solid merit in the event of a depression, once again-n therecord-it is doubtful if any President would have difficulty under

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these circumstances persuading the Congress to support a constructive
program.
What is more this proposal has the serious demerit of authorizing
grants in aid-to State and local governments for projects which are
peculiarly local in their nature-police and fire stations are an example-and should-if any expenditure should-be left to local discretion and local responsibility.
INVESTMENT CREDIT

Finally, I am vigorously opposed to the investment credit proposal
of the administration.
The investment credit proposal is wrong for three reasons: (a) it is
inequitable; (b) it would aggravate the business cycle, increasing investment in the upswing of the cycle, reducing investment during the
downswing; (c) it would not significantly increase investment.
Equity considerations
* The proposed investment credit will, in effect, allow a business investor to obtain tax benefit equal to more than 100 percent of the
cost of purchase of an asset. For a corporation in the 52-percent
bracket, the investment credetwill mean roughly the same as obtaining depreciation equal to 116 percenit of the cost of newly acquired
assets. The only other case in the tax law where this type of treatment occurs is in the case of percentage depletion.
The credit will, therefore, constitute a new tax loophole. It is a
hidden subsidy designed to stimulate investment. However, it is
important to recognize that the credit, in its present form, will be
given to all taxpayers for almost all purchases of equipment. Therefore, a taxpayer may do only what he would do in any case in order
to maximize profits and still receive the benefits of the investment
credit. In other words, the investment credit is given even if the
taxpayer does nothing unusual in order to receive the benefit.
l
As a new loophole, the investment credit will be either precedent
setting or precedent confirming. Hence, it will make the job of closing other loopholes more difficult.
Cyclical effects
The proposed credit will tend to accentuate business fluctuations.
This will be true even if the credit has no effect on investment decisions.
The reason for the procyclical characteristics of the credit is that
investment tends to be higher in booms than in recession periods.
Since the credit is associated with amounts of investment, this means
that Federal revenues will be going down relatively exactly at the
times when Government revenues should be rising and Federal
revenues will be relatively higher in recession periods. Consequently,
the effectiveness of our automatic stabilizers would be watered down
by the investment credit.
Accentuation of cyclical fluctuations tends to reduce rates of growth
because of the losses of production during periods of under full employment. Therefore, the investment credit will definitely serve to slow
growth rates through its cyclical impact. A similar example of this
occurred after the adoption in 1954 of the accelerated depreciation

1962 JOINT ECONOMIC REPORT

117

methods. There was a boom in investment which led rapidly into a
recession period and the average rate of growth after 1954 has actually
been less than in the period prior to 1954.

The same types of economic effects hoped for from the credit could
be obtained simply through an easier money policy. Both the credit
and interest rates affect only the cost considerations in investment
decisions.

Economic effectiveness
It is hoped that the investment credit will encourage modernization and expansion of capital equipment and therefore stimulate
economic growth. However, it seems doubtful that the credit will,
in fact, stimulate much investment that would not otherwise occur.
The credit, of course, can only be justfied to the extent that it encourages new investment over and above that which would be made
without the credit.
There are several reasons for doubting that the credit will have much
influence on investment decisions.
First, there are the comments which are made by the business community itself. A recent Wall Street Journal survey of 68 substantial
firms showed that only one (Radio Corp. of America) planned to step
up investment significantly because of the credit. Most firms viewed
the credit as a welcome windfall in profits but of little or no signifi-

cance in determining investment policy.
Second, there is considerable excess capacity which exists in manufacturing concerns and it would seem unrealistic for businessmen to
expand capacity when they already have more than they can effectivelv use.
Third, it has been argued that the business community needs more
funds in order to invest more fully, but the evidence points the other
way. Corporate profits, as a proportion of that part of GNP arising
in the corporate sector, have actually been increasing. Furthermore,
retained earnings, plus depreciation allowances, now actually are
greater than new investment being undertaken by firms. Hence,
cash flows are adequate for additional investment, even ignoring the
possibilities for new borrowings and new capital flotations.
Fourth, in order for the economy to reap benefits from the new
investment, it will be necessary for price reductions to occur in order
to have expanded markets. The history of price reductions in the
last few years is not promising in this respect. It seems far more
likely that, as in the case of accelerated depreciation deductions,
firms will simply increase their target rates and thereby retain more
profits for dividend payments and other purposes rather than expanding investment.
There are many alternatives to the investment credit and more
consideration should probably be given to these alternatives before
accepting the credit. The investment credit will involve a revenue
loss of at least $1.8 billion in the first year and increasing amounts as
investment rises. A major alternative, if tax reduction is to be used,
is a reduction of personal income taxes. Such a reduction can stimulate aggregate demand for the goods which capital equipment can
produce and thereby lead to an expansion of investment, as well as
consumption. Considerable personal tax reduction could be obtained

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in lieu of the investment credit. Another major alternative is a reduction in the excessively high corporate income tax rate.

Revenue

088

Proponents have argued that it is necessary to accept the investment credit in order to obtain the loophole closing features of the
present bill. Some of these loophole closing features are being lost
from the bill. With their loss the Treasury loses the revenues necessary to balance the revenue loss involved in the investment credit.

MINORITY VIEWS
INTRODUCTION

We emphatically agree with the importance the majority attaches
to the U.S. balance-of-payments problem and just as emphatically
disagree with their analysis of the causes of and remedies for the
Nation's other most important economic problem-the persistence
of a high rate of unemployment.
It is always pleasant to accentuate the positive. Accordingly, we
first stress our endorsement of the committee's statement that the
President's proposed trade legislation alone will not solve the dangerous balance-of-payments problem, but that a solution will require
a fairer sharing of the free world's burdens by the countries of Western
Europe.
So important are the bipartisan conclusions reached by the committee on this problem that they bear repetition at this point:
The proposed new trade legislation will not solve our immediate and pressing balance-of-payments problem. This will
take vigorous and immediate steps to obtain fair concessions
from the countries of Western Europe. These countries
should meet a larger share of the cost of our mutual defense,
and those now enjoying a surplus of payments should assume
a larger share of the burden of aiding the underdeveloped
countries. There must be a prompt reduction of approximately $2 to $3 billion in our payments deficit. Furthermore,
the major industrial nations should work out improved
international monetary arrangements whereby they may
better utilize their monetary reserves. We believe that:
1. The Common Market countries of Western Europe owe
the rest of the free world a substantial unilateral reduction
in their tariffs, to offset the growing discriminations against
the rest of the free world which are inherent in the emerging
tariffs of the Common Market countries.
2. Those countries of Western Europe which are now enjoying a surplus-payments position should increase their aid
to underdeveloped countries generally-not just extend aid
to colonies or associated territories.
3.1 ThoseINATO countries now making disproportionately
small contributions to our mutual defense should increase
their contributions; contributions should be available for
base operating expenses, whether for civilian personnel, construction, land, or supplies.
Specifically, what is needed is for the major industrial
nations to sit down in conference and agee on a set of recommendations for balancing out the hard-core $2 to $3 billion
in U.S. payments deficits and their corresponding European
payments surpluses. We would hope that the recommendations for balancing would be achieved by European action
119

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REPORT

with respect to unilateral tariff reductions, greater developinent aid, and larger defense contributions, rather than by
recommendations for U.S. import restrictions, curtailment
of U.S. tourist travel, restrictions on capital movements, and
other undesirable measures.
We earnestly hope that the administration will take advantage of
this expression of bipartisan congressional opinion to call immediately
a conference of the Atlantic nations to consider not only a more
equitable sharing of the free world's burdens, but other problems
which create major barriers to the greater free world unity which
must be achieved to win victory in the cold war. These include
(1) policy toward trade with the Sino-Soviet bloc; and (2) the role
of Japan, Latin America, Africa, and other non-Atlantic nations in
the struggle against Communist imperialism.
Such a conference could be held under the auspices of the Organization for Economic Cooperation and Development (OECD), or by
the administration's invoking article 2 of the NATO Treaty, which
provides that members "will seek to eliminate conflict in their international economic policies and will encourage economic collaboration
between any and all of them."
The administration has failed to act with sufficient energy and vigor
to meet the balance-of-payments problem. Instead, it has sought to
persuade the public that the proposed trade program alone will solve
it by expanding U.S. exports more rapidly than imports.
In the long run, a mutual lowering of trade barriers by the United
States and the Common Market should have the effect of improving
our favorable balance of trade. However, such an improvement will
be slow in coming, and may not be fully felt until 5 years from now.
In the meantime, our balauce-of-payments deficit creates an urgent
problem which must be solved now-not 5 years hence. The way to
start, as the committee has unanimously concluded, is for the administration "to take vigorous and immediate steps to obtain fair concessions from the countries of Western Europe." I
Although we agree with the majority that the President should
have new authority for negotiating reciprocal reductions in trade
barriers, we cannot join in its general endorsement of the administration's trade bill. It calls for too great a concentration of power over
labor and industry to be entrusted to any one man, and, in our judgment, must be substantially amended before it can be made acceptable.2
The majority report ascribes great credit for the improvement in
the domestic situation to a series of governmental measures taken by
the new administration, which took office January 20,1961. The fact
is that any slowdown in the economy during 1960 had bottomed
out by February 1961, as the Council in its professional analysis
recognizes and the majority report of this committee points out in
its opening paragraph. It was thus impossible for any Federal action
taken by the new administration to have had any marked effect in
accelerating the operation of our naturally resilient and dynamicAmerican economy.
I Senator Javits feels that enactment of trade legislation to implement the broad objectives set forth by
the President (see his National Trade Policy Act of 1962,S. 2840). would contribute materially to our Nation's ability to obtain such unilateral concessions, and he rates higher than the minority report its
Importance in righting U.S. balance-of-payments problems.
XSee"Individual
Views of Senator Javits" for his position on the President's authority to make trade
agreements.

1962 JOINT ECONOMIC

REPORT

12:1

* In his rush to claim credit for recovery, the President forgets that
the economic dip in question was the mildest since World War II
and that his own advisers characterized the measures taken as a
"placebo program" given merely to satisfy the patient. Reportedly
writing in foreign newspapers, they said further thatwhen you come to add up in quantitative terms what the
whole package of programs can be expected to accomplish,
you realize how limited the total package really is.
The downgrading of the contribution of the free enterprise system
itself begins in the first sentence of the President's report: "the economy," he says, "is responding to the Federal Government's efforts."
It always seems difficult for those committed to large Federal spending and Federal manipulation to give credit to the institutions and
driving force of the free enterprise system itself.
We share the majority's concern because the administration has
failed to deal adequately with the serious unemployment problem
which plagues this country. The basic evil of unemployment is that
it is an affront to human dignity. There is no more tragic circumstance than that which confronts a man, able and willing to work,
who cannot find a job suited to his talents.
- In a period of sharply rising output, unemployment dropped but
slightly last year. Even more alarming, an examination of the lagging
growth in the labor force may mean that unemployment over the
past year has actually grown worse rather than better. About 700,000
fewer Americans joined the labor force last year than had been predicted. These 700,000 Americans who "got lost" will, however, enter
the labor force as originally expected when more job opportunities
open up with a rising level of economic activity. When that happens-and in this we are supported by the testimony of Walter
Reuther-unemployment will jump sharply. (For a more extensive
discussion of the labor force problem, see app. A, p. 133.)
We believe the administration, and the majority, are fundamentally
wrong in their search for a solution to the unemployment problem.
They look backward to the past, advocating expansion of demand
principally through larger expenditures by the Federal Government.
They forget that 7 years of Federal spending on make-work and pumppriming devices failed to solve the unemployment problem of the
1930's. Not until World War II began in Europe, did unemployment
drop below 9 million.
Instead of looking to the past, we believe the administration, and
the majority, should wake up to the facts of modern life. In most of
the countries of Western Europe, the problem today is not one of
unemployment, but of overemployment. There are more jobs than
workers to fill them.
Why did this come about? There are many reasons, but the
evidence suggests that the prosperity of Western Europe resulted
primarily from governments exercising fiscal responsibility, stabilizing
their currencies and, above all, encouraging free enterprise to expand
and to modernize plant and equipment.
Similarly, recent experience in this country illustrates the jobcreating potential of tax reductions which release funds to the private
economy and stimulate investment and confidence in the future by
consumers and the business community. Following the 1954 tax
reductions proposed by President Eisenhower, business investment in
80736 0-62-9

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1962 JOINT ECONOMIC REPORT

new plant and equipment rose sharply from $26.8 billion in 1954 to $35
billion in 1956. At the same time, unemployment dropped from 5.6
to 4.2 percent of the civilian labor force.
We believe the administration should move beyond the limited tax
incentives for plant modernization it has proposed, which because of
their limitations are unsound both economically and taxwise. The
administration should work boldly toward a major tax reform which
would remove impediments to investment so that the economy would
move forward, thus putting people back to work and creating new job
opportunities. Before any major tax reform can be undertaken,
however, we need a solid, substantial surplus rather than a budget now
admittedly in precarious balance.
Congress and the administration will have to discriminate between
urgent and essential expenditures and those which might be postponable.3
THE SO-CALLED

GROWTH GAP

In going along with the growth rate numbers game played by the
Council of Economic Advisers, the majority fails to recognize the
fallacy of using gross national product as a measure of the so-called
gap between what the economy can produce and what it actually
produces. GNP is one of our most valuable statistical tools. But it
is seriously limited in measuring meaningful economic growth or
capacity, particularly over the short run.
Like all statistical tools, it can be misunderstood or, regrettably,
misused by anyone trying to perpetuate the dangerous myth that our
dynamic American economy is sagging, lagging or dragging. Ours is
not a sluggish and tired economy! In the mistaken belief that it is,
the administration would, by misguided tinkering, turn our economic
successes into failures and, through neglect, make our failures worse.
The fact that we rely increasingly on statistics in political and economic decisionmaking imposes a heavy obligation to use them with
honesty and care.
The problems we face are problems of growth-not decline. What
we are suffering-particularly in the form of unemployment-are
growing pains. They are symptoms of the swift and far-reaching
basic growth that is changing the face of our economy. In fact,
change is upon us to such an extent that it has become a phenomenon
worthy of a new name-automation. We consider this the major
domestic challenge of our times. So does the President, according to
a statement made at his February 14 press conference. Yet the
President's Council of Economic Advisers and the majority of this
committee doggedly persist in clinging to conventional wisdom more
appropriate to the dark depression days of the New Deal.
Rather than continuing to obscure the real issues and problems of
our times through a misuse of GNP figures, we urge the majority to
recognize that GNP measures the ups and downs of economic activity, not true economic growth or capacity. Economic activity
may be going nowhere or even backward. It includes economic mistakes, such as poor planning, unused surpluses, faulty distribution
and production, as well as what in the long run may turn out to be
a See "Individual Views of Senator Javits" for a discussion of governmental expenditures to stimulate
productivity growth and his views on how to deal with the chronic unemployment problem. Also for
Senator Javits' views on the legitimacy of Federal Government expenditures and the essentials of budget
balance.

1962 JOINT ECONOMIC

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123

real economic growth. Who, for example, would claim that the tremendous rise in GNP during a war is based on real or sustainable
growth? On the other hand, expenditures for research, development
and education, and improvements in quality-the essential areas on
which meaningful economic growth is based-show up not at all or
as comparatively minor items in the overall GNP figures.
Discussing the nature of meaningful economic growth in its separate
views on the Economic Report of the President last year, the minority
said:
Meaningful economic growth is to be found in the new
and improved goods and services available on the market
for more and more of our people.
Meaningful economic growth is to be found in increased
economic flexibility, more and better transportation, communication, power and its availability, a more mobile labor
force which can shuck off skills that have become obsolete and
learn new and higher skills. Meaningful economic growth
is to be found in a shift of employment from the manufacturing sector to the distributive and service sectors, and a shift
within manufacturing itself from blue-collar workers to
white-collar workers.
Meaningful economic growth is to be found in increased
productivity which, in turn, is found in more availability
and cheaper power per person, more training, better health,
better housing, better recreation, more leisure time, in fact
all things that go not only to meet the needs of technological
progress, but to increase the standard of living of more people.
Increased productivity means utilization of disabled workers
and older workers, not merely shucking them off and removing them from the labor market by a policy promoting earlier
retirements.
Meaningful economic growth is to be found in increased
activity in the fields of research and development, particularly in the field of basic research. Meaningful economic
growth is to be found in freeing the individual so that he can
make more economic and other choices for himself. Increased leisure time widely diffused in a society is an indicator
of economic progress. It is especially so when it permits and
encourages scholarship since the search for truth, is the source
of all progress, economic or otherwise.
By all of these indicators our society has had enormous
economic growth in the past few decades. Today we stand
upon the threshold of a new era if we will only take fair stock
of ourselves. Finally, meaningful economic growth is to
be found in a change of attitude toward one's fellow manan attitude of appreciation that a coworker has for a fellow
coworker, in place of an attitude of distrust, contempt, or
envy.
Because GNP does not measure this meaningful economic growth,
we do not believe it should be relied upon so heavily for policy guidance. In view of its defects, acknowledged by the Council of Economic Advisers in its second appearance before the committee last
year, we cannot accept as valid a concept of economic potential

].24

1962 JOINT ECONOMIC REPORT

based on actual GNP and from which an alleged "growth gap" is
derived. The policies which the majority would adopt to close the
gap are more appropriate to an economy of scarcity than to our economy of plenty and the new and challenging problems which it presents.
BALANCE OF PAYMENTS

Restoration of reasonable balance in our international payments will
require the discipline of fiscal responsibility by the Federal Government and understanding and restraint by business and labor. Only
in this way can we create conditions at home which will lead to a
strengthening of our international payments position. Only in this
way can we assure the rest of the world of our intention and ability
to behave in a manner fitting to our leadership role. We agree with
the President's Council of Economic Advisers when in its 1961 report
it said, "domestic policy must be framed with an eye to the balance of
payments."
The majority appears aggrieved that domestic economic policyparticularly monetary policy-has been fixed with an eye to the
balance of payments. They acknowledge the balance-of-payments
problem and, indeed, as we have said, they offer some correctives with
which we fully agree. Among these are greater efforts to induce our
European allies to assume a larger share of the common defense and
development aid burden. But, while recognizing the problem, the
majority charges that it has been "overplayed as a reason for pursuing
a tight-money policy." They dismiss concern over the drain in
U.S. gold stocks as "nervousness" and speak disparagingly of "the
balance-of-payments specter."
This attitude is in contrast to the Economic Report of the President,
which says that "monetary and debt management policies must continue to protect the balance of international payments against outflows of short-term capital." During 1961, the President said,
"The Federal Reserve System maintained general monetary ease"
and, complemented by Treasury debt management policies, "served
to counter upward pressures on long-term interest_ rates" while
"countering downward pressure on short-term rates." Th§s view wvas
supported at committee hearings by a number of expert witnesses.
The annual report of the Council of Economic Advisers observes
that interest rates began declining in 1960 aided by a gradual reversal
of Federal Reserve policy, but that this policy was "constrained by a
serious balance-of-payments situation." The moderate increase in
long-term rates after May 1961 the Council ascribes to "response to
recovery."
As in the past, the majority is critical of sound monetary policies;
critical of the Federal Reserve and debt management policies; doctrinarily critical of the "bills preferably" policy; and obsessed with
interest as a cost rather than an inducement to save.
The majority's charge that the Federal Reserve has failed to allow
the money supply to grow at a rate appropriate to the growth of gross
national product is not fully supported by the Council of Economic
Advisers, which says that Federal Reserve and Treasury policies
"provided the basic liquidity necessary for economic expansion."
While the money supply increased by 3 percent, "liquid assets held
by the public

in GNP."

* * *

grew by 7 percent in 1961, paralleling the rise

1962 JOINT ECONOMIC REPORT

125

The majority puts the attainment of rapid economic growth above
all other objectives and, in doing so, recommends policies which we
consider potentially damaging to our already bad international payments position. As banker for a large part of the world, the United
States is compelled to follow policies which, while not deterring
growth, will provide jobs for all who want them, and which will at
the same time insure price stability and avoid wide fluctuations in
the level of business activity. In the words of the Council of Economic Advisers, the necessity for balance-of-payments equilibrium
"has given price stability new and compelling importance as a requiremnent of economic policy for growth and recovery." Any other
course would lead to a weakening of confidence in the dollar and a
further seepage in our gold stocks.
One step which might be considered to help stem the outflow of
gold would be for the United States to terminate its guarantee to buy
gold from foreigners at $35 per ounce or at any other predetermined
price. At the same time, we believe that the United States must
avoid devaluation by continuing to sell gold to foreigners at $35
an ounce.
The guarantee to buy gold at a fixed price encourages speculation in
gold against the dollar. The belief that the United States, facing
balance-of-payments difficulties, may devalue the dollar in terms of
gold, leads speculators to sell dollars for gold in the free gold markets
overseas. They hold the gold in the hope of selling it to the U.S.
Treasury after devaluation, thus reaping a large profit should devaluation occur. If the dollar is not devalued, their loss is negligible, since
almost all risk has been removed by the U.S. guarantee to buy the
gold at $35 an ounce. Eliminating this guarantee to buy gold at a
fixed price would dampen speculative fevers by introducing a new element of heavy risk in speculative operations.
There is considerable reason to feel that some of the U.S. gold loss
in recent years has been to replace gold that the Bank of England has
been paying out to speculators for the purposes outlined. We think
termination of the guarantee to buy at a fixed price would be likely
to sharply reduce such speculation and, at the same time, stimulate
a return of sizable amounts of gold to the United States.
Equilibrium in our balance of international payments is not only
important for the reasons already mentioned. We believe that stable
long-term growth in this country will be impossible to achieve without
our first having restored reasonable balance in our international payments. Without it, our freedom of action in adopting appropriate
domestic policies is narrowed. We lament this fact, as does the
majority, and believe that the answer lies in correcting the balance..
of-payments problem which causes it.
As we have tried to make clear, however, this does not mean that a
solution to the balance-of-payments problem precludes efforts to
improve employment and spur domestic economic growth.
UNEMPLOYMENT PROBLEM

The unemployment problem is particularly acute. Throughout
1961, unemployment averaged 6.9 percent, or 1.6 percent higher than
the 1960 average. Furthermore, recovery was not accompanied by
a significant reduction in the unemployment rate. Walter Reuther

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1962 JOINT ECONOMIC REPORT

pointed out in his testimony what he called a "shocker." Nine
months after the bottom of the current recession, he said, unemployed
had been reduced only 7.3 percent, contrasted to 30.6 percent after
the 1948-49 recession, 26.1 percent after the 1953-55 recession, and
20 percent after the 1957-58 recession.
The dimensions of the problem are further underscored by the fact
that while output was increasing about as fast as during previous
recoveries, the gain in nonfarm jobs 11 months after the cyclical
trough has been sharply reduced. Labor Department figures show
that the increase in nonfarm jobs during this period following the
recent recession to be 949,000 compared to 3.4 million in the 1948-50
recovery, 2.1 million in 1953-55, and 1.9 million in 1957-59. To
make matters worse, a noneconomic factor-the callup of nearly
300,000 persons into the Armed Forces-accounted for a large part
of the relatively modest decline in unemployment during 1961.
Furthermore, of the employment gain, 250,000 new jobs were accounted for by State and municipal employment and 80,000 by an
increase in Federal civilian employment. Thus, only one-third of
the overall increase was provided by the private sector. The rest
was accounted for by Government employment and by the fact that
people moved into jobs vacated by those called into service. And
as we have already mentioned, the situation may actually be even
worse than this because of the lag in labor force growth.
We believe that the rate of unemployment must be sharply cut.
But our attack on the problem can only bear results if we fully understand the nature of the problem facing us.
The majority takes the view that the high levels of unemployment
result from a lag in aggregate demand. The way to correct the
situation, they say, is to stimulate both public and private demand.
This position is stoutly maintained even though the majority acknowledges that the "rapid recovery" improved the employment picture
only "to some extent."
The majority dismisses the possibility that structural changes
caused by automation and technology is a major cause of high unemployment. The Subcommittee on Economic Statistics, they say,
"found little evidence to support the structural-transformation explanation." And yet, curiously, the majority goes on to suggest that
unemployment could be reduced by "a substantial increase in public
and private efforts * * * to reduce structural and frictional unemployment," a position with which we agree.
Taking the majority's own figures, we submit that with 7 percent of
the labor force totally or partially unemployed during a period of
brisk recovery, there is obviously a large hard core of unemployment
which is not readily affected by increasing demand.
Chairman Martin of the Federal Reserve Board recognized the
seriousness of the structural employment problem in his testimony
and said it was "not readily responsive to general fiscal and monetary
measures." Walter Reuther, too, told the committee that from 195361 the decline in the number of production workers offset by the gain
in white-collar and technical employees resulted in a net reduction of
6 percent in manufacturing workers. Yet during this same period,
4We wish to caution that the administration's use of nonfarm employment figures distracts our attention
from the overall employment situation. We are concerned with what is happening in the economy as a
whole. The addition of farm employment figures-where jobs are being lost-would make the employment
picture less favorable.

1962 JOINT ECONOMIC

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he pointed out that 24 percent more goods were being turned out.
Reuther warned that, "the technological revolution has just started."
It appears that, contrary to the belief of the majority, fuller utilization of industrial capacity no longer guarantees a rising number of
jobs. Fewer men can now produce more goods. If this is true, as
seems likely, "full employment" is reached at a higher level of unemployment. Government spending policies to expand demand, therefore, may not serve to increase employment but instead may cause
inflation. The inflationary impact of such policies not only hurts
the individual citizen but also has an adverse effect on this country's
balance of payments by cutting down exports which in turn reduces
employment opportunities. And yet it is the prescription which the
majority offers.
Certainly, some part of those unemployed at any one time, and
particularly during periods of high unemployment, could be restored
to work by a sharp increase in demand. But to carry this policy too
far will cause rising prices without getting most of the hard-core
unemployed back to work. Job opportunities do exist in many
lines of work and in many areas of the country. These jobs must be
identified and filled. The blunderbuss approach of increasing
aggregate demand will not do.
We recognize as one possible solution to the structural unemployment problem the vital role of worker retraining and education as
well as the importance of encouraging and assisting maximum worker
mobility. We strongly support the approach of the manpower
training and development bill, which was approved by Congress with
bipartisan support. We also support the proposed strengthening of
the U.S. Employment Service to help match jobs and workers.
In addition, we would like to see a greater effort made by management and labor, singly and through labor-management conferences,
to develop programs to attack structural unemployment. Thought
should be given to what further Federal encouragment and assistance
might be necessary and appropriate to accomplish this objective.
We think the Youth Employment Opportunities bill merits further
study. The public service and the on-the-job training provisions
might belp ease the problem of unemployment among young people,
particularly where the cause is economic and not motivational, as is
so often the case. In any event, it is clear that information is lacking
in this area and that before a program is initiated a thorough study
of the problem is called for. But we think that putting young people
on the Federal payroll and assigning them to make-work projects, as
Corps provision of the bill,
is envisioned by the Youth Conservation
would fail to meet their real needs. 5 Young people should be encouraged and assisted in developing the skills in demand by employers. The other provisions of the bill would help do this. We
must not fail to recognize, however, that in the long run this is a
State and local problem which requires adaptation of educational
programs to meet the needs of the school population. Furthermore,
every effort must be made to encourage young people to remain in
school.
While from 1950-60 public and private school construction expenditures increased 2% times, we favor more investment-both by public
5 Senator Javits reserves his views on the Youth Conservation Corps-which he has heretofore opposed
under present conditions-as the issue will be pending before the Committee on Lahor and Public Wclfarc of which he is a member.

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and private bodies-in the education of our young people. The
quality of our educational plant must be expanded and improved
through stepped-up school construction. Our teachers also should
get a better break through a general increase in teachers' salaries.
PROPOSED SOLUTIONS

All of these problems-balance of payments, unemployment,
domestic growth-would yield to a substantial increase in productivity
in our industrial plant, provided prices held firm. Even greater benefits would result if prices were reduced.
As Dr. Raymond J. Saulnier, Chairman of President Eisenhower's
Council of Economic Advisers, told the committee, what we need in
the present context "is not merely a stability of price levels * * *"

but "a significant reduction in prices." Chairman Martin told the
committee that "much of our postwar economic trouble has been
brought about by pricing consumers out of the market instead of into
it." The consumer has been the forgotten man. It is time the consumer got a better break.
Rising productivity can result in part from fuller utilization of
existing industrial capacity, technological development, managerial
efficiencies and from a number of other causes. However, rising productivity primarily depends upon a higher level of domestic investment in new plant and equipment. The effects of investment spread
throughout the economy and create new jobs.
The considerations that determine new investment are highly
complex. Generally, it is correct to say that it pays to invest in new
equipment when the annual return from investment is greater than
the annual cost. The administration has proposed an 8-percent tax
credit for new investment and a change in depreciation schedules as a
means of reducing the cost of investment and thus increasing the
incentive for new investment.
We oppose the tax credit proposal as an uneconomic and costly giveaway which would favor the large taxpayer and penalize the small. 6
The proposal, which would cost the Treasury about $1.8 billion in
revenue, would produce inequity among various classes of taxpayers.
As an example, those taxpayers who have expanded and modernized
without having to rely upon any tax inducement would be put at a
competitive disadvantage.

The proposal also gives special and unwarranted preference to
workers and investors in construction and equipment manufacturing
as opposed to those laboring in services, which make relatively less use
of depreciable plant.
We favor more liberal depreciation allowances as a fair and effective
way of removing impediments to modernization of industry and
creating new job opportunities. In fact, we think that the administration was neglectful in not liberalizing allowances early enough to
remove this impediment to recovery from the 1960-61 recession. In a
world in which technical change is very rapid, existing depreciation
schedules must be changed to permit investment costs to be written
off over the useful life of the equipment rather than over the period of
its physical life.
8Senator Javits, while favoring liberalized depreciation allowance schedules, reserves his view on the
8-percent tax credit as at least a partial incentive to modernization of machinery and equipment.

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129

Stepped-up investment resulting in increased productivity with
lower prices would have an especially healthy effect on our balance-ofpayments position. Lower prices would tend to increase exports
relative to imports by making our export goods more competitive in
world markets.
Lower prices do not mean that consumers would be the only ones to
benefit from greater productivity. Workers and management should
also share in the benefits in the form of higher wages and profits. A
problem arises, of course, in trying to spell out precisely how the rewards of increased productivity should be allocated among workers,
producers, and consumers. Some increase in wages would spur
demand; higher profit margins would encourage job-creating investment; and reduced prices would stimulate consumer expenditures.
We agree with Dr. Saulnier that wages-the major component of busi-

ness costs-must be kept well within the limits of productivity increases in order to leave room for significant price decreases.
We believe that an increase in domestic economic activity arising
from private investment decisions is preferable to direct efforts by the
Federal Government to expand demand through spending which
leads to budget deficits in a period of recovery. Such a policy may
weaken international confidence in the dollar. It may lead to inflation at home. Erratic and uncertain in its effects and often done on
the basis of noneconomic considerations, deficit spending designed to
increased aggregate demand does not guarantee a high and stable
level of domestic economic activity. Indeed, it may militate against
it. As Dr. Henry C. Wallich, a member of President Eisenhower's
Council of Economic Advisers, said in testimony before the committeeI am disenchanted with what we got by increasing Federal
expenditures by $11 billion in the administrative budget
over 2 years. That ought to have given us a lot of growth,
but it does not seem to have done a great deal for us.
OTHER ADMINISTRATION PROPOSALS

The administration has recommended three programs which it
claims would strengthen the hand of the Federal Government in
combating cyclical recessions and inflationary tendencies in the
economy.
In general, we favor the strengthening of the unemployment insurance system.
We cannot, however, support the proposals to give the President
standby hauthiority to reduce taxes and to spend up to $2 billion for
public works projects. Both plans give the President dangerously
unprecedented powers at the expense of the traditional powers of
Congress to lay taxes and to appropriate.
It is encouraging to note that the majority report, while endorsing
the principle of limited discretionary tax flexibility, expresses grave
reservations about giving this power to the President. The majority
prefers a method to enable Congress to act quickly in changing tax
rates in response to changing economic conditions. While we caution
against the desirability of speed at all costs in altering tax rates, we
think the idea merits further consideration by the House Ways and
Means Committee and the Senate Finance Committee. Because

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ECONOMIC REPORT

our experience with the use of tax reductions as an antirecession tool
is extremely limited, however, we should, as Dr. Saulnier suggested
in his testimony, guard against legislation which would invite situations in which taxes might be reduced "when it was not really timely
or beneficial to do so."
It should also be pointed out that the proposal raises grave constitutional issues. The Constitution specifically gives to Congress the
right to levy taxes, which we believe embraces the power to fix
rates. If the President is given the power to change tax rates, we
believe that the law would be in direct violation of the Constitution.7
The propensity of this administration to spend-often regardless of
the need-cautions us against the proposal to permit the President
to commit up to $2 billion on public works projects. Not only is the
proposal objectionable because it bypasses the appropriations process,
but the guidelines under which the President would operate are
altogether too loose. We think the authority asked for is not needed.
Under present arrangements there is already considerable leeway for
increasing construction expenditures. We also think the proposal
would prove ineffective in combating recessions because such expenditures generally do not become effective until recovery is well underway. As Dr. Wallich told the committee, "public works come too
late to help." We believe that a continuing program of capital
improvements, wisely selected for their economic merit rather than
for their political effect, is of greater benefit to our economy over the
long run rather than the off-again, on-again approach favored by the
administration.8
We also oppose the President's recommendation that the Federal
Reserve Act be amended to make the term of the Chairman of the
Board of Governors of the Federal Reserve System coincide with the
4-year term of the President. We agree with Dr. Saulnier's opinion
that our central banking system should be in the hands of men who
are both technically competent and free from political considerations.
It would be exceedingly difficult to maintain nonpolitical control of
our central banking system if the chairmanship of the Board were to
change with every change in the Presidency. The President is
pledged to give effect to a political program. He would be likely to
reflect this pledge in his choice of Chairman.
CONCLUSION

The majority and the administration basically misundertand the
nature of our dynamic and growing economy. They believe that
U.S. Government spending will lead to prosperity and full employment. This policy would take us down the well-worn path to inflation. It would neither solve our basic structural unemploymentwhich is the primary symptom of our dynamic and growing economynor would it solve our serious balance of payments problem. Indeed,
it would make them worse.
This administration has failed to attack our unemployment and
balance-of-payments problems with sufficient vigor or urgency. In
7Senator Javits reserves his view on the constitutionality of this proposal pending further study.
8See "Individual Views of Senator Javits" on this proposal.

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131

fact, instead of improving, recent signs suggest that these problems
may be deepending. Significant improvement cannot be expected
until the administration discards its obsolescent economic theories in
favor of the ideas more appropriate to today's technological revolution.
We welcome this technological revolution. In the long run it will
lead to a sharp expansion in job opportunities as well as to a significant
improvement in this country's international competitive position. In
the meantime, we must ease and facilitate the adjustments which
technological change causes by promoting worker retraining and
mobility, by improving the unemployment compensation system and
by making greater efforts to match unfilled jobs with the men and
women seeking work.'
Every equitable effort must be made to stimulate job-creating
investment. This can lead to greater productivity and, with restraint
by Government, labor and business, to lower prices which would
spur sales at home and better our competitive position in world
markets.
Those who have little faith in the inherent dynamism and resiliency
of our free enterprise economy have been proved wrong in the past.
We think they are wrong again and that history will bear us out.
HOUSE OF REPRESENTATIVES
THOMAS B. CURTIS.
CLARENCE E. KILBURN.
WILLIAM B. WIDNALL.

SENATE
PRESCOTT BUSH.
JOHN MARSHALL BUTLER.
JACOB K. JAVITS.

"Individual Views of Senator Javits" emphasizes his belief that foreign economic development is a
major additional factor.

APPENDIX A
A

STATIC LABOR FORCE

If the Economic Report had been wholly objective about economic
developments in 1961, more concern would certainly have been shown
over the trend of the labor force, that is the number of persons able and
seeking work or self employment. This has a tremendous impact
upon any conclusions about the degree of recovery. It is basic to the
validity of discussions about full production and projections of
productive potential showing an alleged gap, which is a cornerstone
to the Council's analysis in last year's report and again this year.
In its report the Council notes, and in this they would find substantial agreement among population experts, that:
"The population upsurge which began in the 1940's together with
the expected decline in death rates, will give us a rapid increase in the
population of working age. Adult women are expected to enter the
labor force in increasing proportions; but because a larger fraction of
our youth will remain in school and because the trend toward earlier
retirement among male workers is likely to continue, overall labor force
participation rates are expected to remain steady. The resultant of
these factors should be a labor force in 1970 of a little more than 87
million, an annual rate of increase of 1.8 percent in this decade, compared with the distinctly lower rate of 1.3 percent from 1947 to 1960"
(p. 116).
Quite in keeping with the Council's projection of upward of a million
new entrants each year of the decade, the Commissioner of Labor
Statistics in February 1961 estimated, before this committee, that on
the basis of population changes and past trends 1 million new persons
would enter the labor force of those willing and able to work. What
actually happened? The total labor force in December 1960 was
73,079,000; in December 1961 it was 73,372,000, an increase of 293,000.
The lagging trend continues this year. In January 1961 the total,
according to Economic Indicators, was 72,361,000; in January 1962
it was 72,564,000, an increase of only 203,000 or three-tenths of 1 percent instead of 1.8 percent.
It is not a very happy answer, but it is easy to account for the
numbers represented by these new entrants. Their number joined
the Armed Forces. By something more than a striking coincidence
the number of 293,000 who joined the total work force is close to the
283,000 who joined the military. The increase in military was, moreover, largely in October and November, precisely when the reported
rate of civilian unemployment cited with pride by the President
dropped from 6.8 to 6.1 percent.
With 300,000 of the expected 1 million new jobseekers accounted
for by the increase in the Armed Forces, what about the civilian work
force and the other 700,000? For all practical purposes none of these
expected new workers actually showed up at the employment offices
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of the country, in business for themselves, or on the farms. The
nominal increase of 10,000 added to the labor force (Economic
Report, p. 230, December 31, 1960, 70,549,000; December 31, 1961,
70,559,000) must, under the circumstances, be brushed aside as negligible, perhaps the result of statistical rounding or sampling. In any
case, it is a far cry from the near 1 million new civilian entrants of the
previous year and the projected full 1 million for 1961. In January
1962 the seasonally adjusted civilian work force was actually 120,000

less than the preceding January. Their withdrawal helped the unemployment rate to fall to 5.8 percent from 6.1 percent. Certainly such
a trend in the number working and seeking work needs explanation.
The Council of Economic Advisers notes (p. 50) that "Participation
in the labor force is encouraged by greater availability of job opportunities." A year ago, commenting that the actual additions in 1958-60
of some three quarters of a million each year had been below the expectations of population and census experts, the Council explained
that "This shortfall is attributable to the disappointing performance
of the economy; many people have stayed out of the labor market
although they would take employment if jobs were available" (hearing, p. 373).
Before the administration takes too much credit for its program in
bringing about the reported reduction in unemployment (accounted
for by a transfer to the Armed Forces) let it explain why 700,000 expected new workers who were not absorbed by the Armed Forces were
not employed or even counted as unemployed. If these working-age
persons, who the Council has suggested may have felt it useless to
apply for jobs, had been counted in the statistics as unemployed the
alleged gains of 1961 are wiped out and the rate of civlian unemployment today right back unchanged at the 6.8-6.9 percent level of a
year ago.
Enough for the success of the "placebo program." It is not necessary to do more than raise the question: What happens to the Council's analysis of potential national product and the narrowing last
year of the gap between potential and actual production when the
elements of the potential itself are not realized? The projected potential rests on the expected rapid increase in population of working
age and the Council's assumption that, with other factors more or less
offsetting each other-"overall labor force participation rates are expected to remain steady" (p. 116).

INDIVIDUAL VIEWS OF SENATOR JAVITS
While I join in the minority views because I believe that, in the
preponderance of the points made, they state the situation more
accurately and make the more pertinent recommendations, I find it
necessary to file mny own individual views because of the reseravtions
which I have as to both majority and minority views and because of
certain practical recommendations which I wish to put forward.
It is my feeling that the majority's report is directed toward the
major premise that increasing Government spending will get us
further toward full employment and prosperity. Therefore, I feel it
essential to publish these additional views because I believe the major
key to prosperity and solution of our problem of a chronic and unacceptable rate of unemployment to be in rapid growth of productivity,
increased automation, expanded international trade, and more
effective participation by the private economy in international economic development assistance. Such developments must be based
on a tax structure providing incentives for industrial modernization,
and on a solid underpinning of social security, minimum wage,
unemployment compensation, adjustment assistance-including retraining of workers-and just labor-management relations.
Before detailing my underlying reasoning and suggesting specific
approaches, I should like to express my agreement with certain
points in the majority report.
(1) With respect to the international balance of payments, the
need to press for(a) unilateral reductions of import restrictions by the European Economic Community in order to offset the discriminations
growing out of its common external tariff;
(b) increased Western European contributions to the economic
development of the newly developing free world areas;
(c) increased contributions by NATO members to meet the
costs of our common defense establishment; and
(d) approval by the Congress of U.S. participation in the 10nation agreement to supplement the capabilities of the International Monetary Fund in supporting international reserve
currencies, like the dollar and the pound sterling.
(2) The freeing of silver from Government controls and supports,
and its demonitization except for coins.
(3) Amendment of the Welfare and Pension Plans Disclosure Act
to strengthen its enforcement provisions.
(4) An effective adjustment assistance program in connection with
legislation for trade expansion-excluding, however, Federal purchase
of businesses or the extension of subsidies to private enterprise.
However, standby authority for the President to make tax cuts as
recommended by the majority is an open invitation to politically
motivated abuse of the revenue raising power. So, too, open-end
authority to spend $2 billion on recession-countering public works
creates the same climate. On the other hand, the idea of speeding
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congressional action on temporary tax revisions and on public works
expenditures to counter recessions by establishing certain criteria and
"ground rules" for such action so that they may be triggered quickly
by Congress merits thorough consideration.
There are factors in foreign trade policy which are not dealt with
in the majority's report but which are of importance to the discussion
of U.S. economic policy. Presidential responsibility over foreign
relations and congressional responsibility in economic policy and for
the general welfare must be exercised in full partnership. I propose a
means for achieving such a partnership, through provisions for
congressional veto and the laying down of specific congressional
policy guides to Presidential authority in the negotiation of trade
agreements, in the National Trade Policy Act of 1962 (S. 2840) which
I have introduced as an alternative to the administration's trade
program. Foreign trade is so vital to the Nation's economic welfare
and world peace leadership as to demand such a partnership.
Here, too, we must use our capabilities and fill our needs more carefully, more selectively than the President's program appears to do.
We cannot exclude or include nations and areas arbitrarily when the
Congress extends authority to the President to make trade agreements.
Why should Canada, Australia, and other nations which are not
members of the European Economic Community but have wage and
productivity rates equal to the EEC and often provide greater individual markets for our exports than even the EEC, be excluded from
negotiations for 100 percent across-the-board mutual reductions in
tariffs? Why must our ability to negotiate for such reductions depend
on the decision of the United Kingdom to enter the EEC? Why must
it be tied to past levels of commodity-by-commodity trade which are
certain to undergo sweeping changes in the future-changes based on
worldwide productivity factors?
The key issue insufficiently noted in the majority report is the need
for an acceleration of productivity growth in the United States. I
suggest that productivity is the key to competition with foreign wage
rates, to meeting the problems of foreign trade and to dealing with a
serious and an almost accepted, but a still unacceptable, rate of unemployment.
We cannot overcome persistent economic problems by measures
designed for temporary situations. When the well is leaking, pump
priming only wastes good water.
The problem of persistent unemployment which even now, during a
period of economic recovery, finds 4.7 million (unadjusted figure)
jobless-more than half a million for more than 6 months-and 2.1
million only partially employed must be solved on high priority. The
selective application of stimulants by the Federal Government is
indicated: An improved Federal standard of unemployment compensation benefits; tax incentives for plant and business modernization;
the concentration of the civilian sector of public expenditures on research, education, and capital investment in basic national resources;
greatly expanded foreign trade; and full participation in the economic
upsurge of the industrialized free world nations through accelerated
productivity growth.
The shotgun approach advocated by the majority is intended to
increase consumer demand. The question is: Demand for what?for higher priced, lower quality goods?-for items which have little

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if any relation to our growth as a nation and to our indispensible
economic and social ties with the rest of the free world?
Increased productivity to meet greater demand at declining real
price levels will respond to a healthy demand. The majority report
seems to forget the basic economic principle that price determines
cost. There is no way of getting around this principle in a system
which utilizes the profit motive as its driving force. Its consequences
are reinforced by the public and private restraints on absolutely free
market forces which exist in our economic system.
The majority contends that excess aggregate demand has not been
responsible for inflationary pressures since 1952. (The report quotes
the testimony of Dr. Gardiner Means to this effect, in a context
with which I do not take issue.) The question, however, is: Demand
at what price?
Obviously, there has been a limited demand for products at a high
price; otherwise goods would not have been sold at that price or
produced at a cost determined by that price. Price includes business
profits and labor and dividend costs, as well as other costs. Consciously or not, both management and labor have tended to cater
to demand at a high price-reflected in profit and wage costs-often
at the expense of larger output and increased employment.
The majority report advocates measures-tax cuts and deficit
spending-to increase demand at the high price level now prevailing.
The eventual result of such measures is to increase demand somewhat-but at a still higher price level. The consequences of still
higher prices (costs) to our international trade and payments position
must be adverse. I do not see how the majority can reconcile its
advocacy of trade expansion with its recommendations leading to
inflation.
It appears essential to me that we do not permit artificial and increasingly isolated domestic price levels to become the determinants
of our costs. Both the short- and the long-range solutions to our
persistent (and unacceptable) unemployment rate and balance-ofpayments problems reside to a large extent in a major increase of our
exports. Every dollar or increase in exports represents a dollar added
to the domestic consumer's income. Since, however, we can only
produce and export at the prices meeting world market demand,
this dollar earned by the American consumer will also buy more than
a dollar gratuitously given to the consumer through broad tax cuts or
deficit spending.
The problem of high prices must be met by a reorientation of U.S.
management and labor policies, now directed to the maximization of
profits and wages by meeting limited demand at high prices, to the
maximization of profits and wages by meeting increased demand at
lower prices. The key to such a solution resides in accelerated productivity growth. And the achievement of accelerated productivity
growth requires restoration of a balance in the economic system-a
balance which was lost during the decade following World War II,
when the United States stood isolated from the rest of the world in
absolute economic superiority.
To this end I advocate the following measures which are opposed,
underemphasized, or entirely ignored in the majority report:
(1) Tax incentives which will make it more profitable for business to modernize and thereby to be able to sell more at lower
prices, rather than to limit sales at a high price.
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(2) Additional tax incentives for businesses in the export field
where world price competition will do what I advocate in (1)
above: make it more profitable to meet increased demand at
lower prices than to meet limited demand at high prices
(3) Immediate enactment of permanent improved Federal
standards of unemployment compensation to support and help
those workers who, through lack of training and other factors,
are at present at a disadvantage in the current stage of our
economic development, and to strengthen their low level of demand until other selective measures give the needed impetus
to U.S. economic growth.
(4) Retraining programs to give the U.S. worker the opportunity to acquire the skills required for servicing the machinery
and transacting the business of a productivity-oriented economy.
(5) Elimination of discriminatory employment practices based
on outworn prejudices regarding race, faith, sex and age-practices which in the private and public sectors of our economy rob
us of urgently needed skills, and are contrary to the Constitution
and to our sense of justice and fair play.
(6) Establishment of a Peace Production Board to indicate
priorities required to accelerate national productivity and to
encourage the formation of plant, community, and industrywide
labor-management-public committees designed to work in mutual
self-interest for increased productivity. (Establishment of such
a Board would represent a recognition by the President and the
Congress of the common responsibility for our Nation's welfare
of both management and labor.)
(7) Greatly increased public and private investment in education at all levels through school construction and the improvement of teachers' salaries. (The majority recommends Federal
aid to education.)

(8) Increased public investment and greater stimulants for
private participation in research of all kinds, as well as in the
preservation and development of national resources-both
natural and man made.
(9) An end to agricultural policies which by bureaucratic
production controls or high fixed farm price supports make a
mockery of American productivity gains in agriculture, hamper
our ability to feed hungry multitudes throughout the world, and
continue to cost our Treasury funds otherwise urgently required
to meet national needs.
(10) Effective antitrust law administration to deal with the
special problems of small business, expanded exports and participation by the private economy in international economic
development assistance.
In conclusion, I should like to touch on two points directly related
to the problem of our international balance of payments.
The majority report appears to endorse the President's proposals
for the taxation of oversea investment in productive resources, which
would result in placing U.S. private foreign investment at a disadvantage in its competition with investors from other countries. Once
more, a shotgun approach is proposed to meet a situation requiring
specifically directed remedies-measures designed to close tax loopholes which are now diverting U.S. investment into uneconomic

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139

channels. Measures of this nature have been drafted by the House
Committee on Ways and Means and they require careful consideration
to determine whether they would accomplish what they are allegedly
designed to do. The President's original proposals, however, would
discourage economically sound investment-investment which is essential to the expansion of U.S. export markets and which assures us
of future net gains in dollar income and economic influence in the
world. It is contradictory to endorse policies for trade expansion
while at the same time advocating tax policies tending to the strangulation of the channels of trade and the sapping of our bases of foreign
economic power. Nor does the evidence before the committee bear
out any dire predictions that oversea operations of U.S. business
deprive U.S. workers of their jobs or our Government of revenue.
On the contrary, they appear to add to both jobs and Government
revenue at home by getting us income from exports from which we
would be excluded by foreign competition, if we did not produce
abroad, and also by the sale of machines, parts and shipment facilities
which are required by such operations.
I have indicated my support of certain of the majority's recommendations relating to the balance of payments, but I have some
fundamental doubts on the ability of the present system of international exchange based on the gold holdings of nations which supply
reserve currencies, to support the rapidly accelerating velocity and
mounting volume of international transactions. Proposals to meet
this problem, such as that of Professor Triffin of Yale for an international pooling of gold reserves, and those of Dr. Edward Bernstein,
Lord Stamp, and other international economists deserve our full
attention.
In summary, our economic way in the world is forward and outward. With 50 percent of the free world's industrial production in
our hands, and this world's demand for a well-being which modern
technology is capable of supplying with freedom and justice, there is
no other course which leads to peace than a full commitment by our
Nation to its undeniable leadership of the free world.

ADDITIONAL VIEWS OF REPRESENTATIVE
THOMAS B. CURTIS
The expression of these additional views in no way diminishes my
full support of the minority statement. I only wish to elaborate on a
point which I think merits further consideration.
Is the United States drifting toward a situation in which the Federal
Government in effect "sits in" as a third party at major wage bargaining tables and price-setting conferences? More than one witness at
the committee hearings said he believed that we were. At least one
distinguished economist urged that we were not moving in that direction fast enough. If we are, indeed, drifting in that direction, it is a
matter of prime importance, since it threatens a basic revolution in
the philosophy of our traditional economic system.
Our economic system is designed to economize our natural and
human resources and to channel and allocate them among alternative
uses through the impersonal operation of the market system. We
have placed chief reliance upon the forces of (1) free independent
initiative and choice, (2) profit motivation, and (3) competition between
independent sellers, seeking the favor and purchases of independent
buyers, trying to get the "most-of-the-mostest" for their money.
Through these forces our system is designed to maximize employment,
production, and purchasing power and achieve the optimum use of
resources at the level and in the directions we desire.
One evidence, if any is needed, of increasing Government intrusion
into the economizing process is the new language which has crept into
high economic discussion and the way in which the concepts that go
with the expression are accepted as "givens" no longer needing critical
examination. We are, for example, quite accustomed to discussions
and recommendations about what is, or would be, appropriate nmonetary policy, debt management policy, fiscal policy, trade policy. But,
note that these things-monetary, debt, and fiscal management, together with foreign relations, of which trade is a part-are inherent
and necessary functions of Government. The Employment Act of
1946 simply declares that in administering these inevitable and sovereign governmen'tal powers, consideration will be given expressly to
their coordination and utilization in a manner calculated to foster
stability and economic growth.
In the several economic reports of this year, we run into something
more-not entirely new, but apparently becoming more and more embedded-that goes a step beyond these inevitable governmental operations. In the majority report of this committee, we find, for example,
an entire chapter devoted to "policies" involving wage rates and prices,
as if having a wage policy (beyond that dealing with its own employees)
or a price policy was a normal and expected function of governnient.
The President, as have some of his predecessors, exhorts business and
labor to add something of a "public spirit" or "national interest" to
their expected social function of economizing, and directing the limited
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resources among the alternative uses in accordance with market
signals.
The Council of Economic Advisers, as its contribution to the drift,
undertakes to set up advisory "guideposts" so that businessmen and
labor negotiators and price setters need no longer depend on the
market directives and signals which are the cornerstone of the freeenterprise system.
These things may seem harmless and incidental but their implications are far more serious.. They are illustrative of how government
expands its role, and reliance on the impersonal market direction of
the economy pared and eroded away.
No one will deny the overriding and paramount national interest
when it is at stake, but serious thought needs to be given to the
question of how that national interest is best served. Is it best
served by admonishing leaders of industry and labor that they must
be "responsible"? Appeals to private responsibility and conscience
as a way of influencing or determining economic decisions, no matter
how desirable the ends may seem, amounts to an insidious step away
from the economizing objectives and virtues of the market enterprise
system and its associated free political system.
The Council of Economic Advisers proposes as a general guide for
noninflationary wage behavior that the rate of increase in wage rates
in each industry be equal to the trend rate of productivity increase
in the economy as a whole. An appropriately similar guide calls for
price reductions if the industry rate of productivity exceeds the overall
rate. Apart from the issue raised above about the propriety of a
Government agency setting up so-called guide lines, it is reassuring
to find the Council's own reliance on the market system in later
paragraphs. In explanation of the proposed guideposts it says that
an industry which would otherwise be unable to attract sufficient
labor would be justified in a relatively higher wage rate increase, and
that wage rate increases in an industry which cannot provide jobs for
its entire labor force should fall short of the general guide. In spite
of exhortation and guideposts, it is thus reassuring in the end to find
that the Council supports the principal that supply and demand in
the free markets should determine wage rates.
The risk is that we will drift or be led into a new pattern, downgrading collective bargaining and the free market system. The
proper role of Government under our political and economic system
should be to create and maintain the market machinery in good
working order-not undertake to substitute for it, -or confuse the
issues of its imperfections by admonitions that it do better.

COMMITTEE AND SUBCOMMITTEE ACTIVITIES IN 1961FAND
PLANS FOR THE COMING YEAR
The Joint Economic Committee is directed by the law creating it
(Public Law 304, 79th Cong.) to report to the Congress on the main
recommendations of the President's Economic Report and to make a
"continuing study" of the economy.
During 1961, studies were conducted by the full committee and by
six subcommittees. These 1961 studies and committee plans for 1962
are outlined below:
STUDIES BY THE FULL COMMITTEE

Report on the 1961 Economic Report of the President
During February, March, and April, the committee held hearings
on the 1961 Economic Report of the President and the economic
situation and outlook. A report was prepared and transmitted to the
Congress on May 2. Included in this report was a summary of the
committee and subcommittee activities for 1960 and a list of studies
to be undertaken by subcommittees and by the committee staff in
1961.
Review of annual report of the Federal Reserve System
The committee held hearings during June 1961 to review actions of
the Federal Reserve Board and the Open Market Committee, as set
out in the annual report of the Board of Governors for the calendar
year 1960. This review was concerned with policies and actions
affecting levels of employment, production, and purchasing power. A
report is being drafted and is expected to be ready for review during
March.
Review of report of the Commission on Money and Credit
Hearings were held by the full committee August 14-18 to consider
those portions of the report of the Commission on Money and Credit
that deal with the questions of coordination and utilization of the
Federal Government's plans, functions, and resources toward achievement of the objectives of the Employment Act. A report is in
preparation for submission later in 1962.
Variability of private investment in plant and equipment
This study, conducted as part of a series of studies dealing with
the volatile elements of the economy, was begun during 1961 with the
preparation and release of a series of papers by academic and business
experts. Papers completed and released are part I entitled "Investment and Its Financing, " and part II, which deals with "Some Elements
Shaping Investment Decisions."
Arrangements have been made for studies of other aspects of the
investment problem to be completed during 1962. It is also anticipated that with the completion of these study materials, hearings will
be held, to which business, labor, and academic experts will be invited.
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Inventory movements, accumulation, and liquidation
As a second part of the committee's series of studies of the volatile
elements in the economy, three volumes of staff papers were prepared
covering "Postwar Fluctuations in Business Inventories" (pt. I);
"Causative Factors in Movements of Business Inventories" (pt. II);
"Inventory Fluctuations and Economic Instability" (pt. III). Two
additional staff studies are in preparation for early submission and
release. It is also expected that hearings will be held at which the
authors of these studies will discuss their findings.
SUBCOMMITTEE ON ECONOMIC STATISTICS

Government price statistics
The subcommittee held a hearing May 1-5 to examine the report
on Government price statistics which was prepared for the Bureau
of the Budget by the National Bureau of Economic Research. A
report on these hearings and the committee's findings in regard to
the National Bureau Review Committee's recommendations was
transmitted to the full committee and released on July 21.

Study of unemployment
As part of this study, which examines the cyclical, secular, and
structural characteristics of unemployment, staff papers were prepared
on the subjects of "Higher Unemployment Rates, 1957-60: Structural
Transformation or Inadequate Demand" and "Unemployment:
Terminology, Measurement, and Analysis." These papers, which
were submitted in November, were reviewed in hearings December
18-20 and a report by the subcommittee prepared and released on
February 2, 1962.
The subcommittee expects to continue its study with additional
hearings after the President's Committee To Appraise Employment
and Unemployment Statistics submits its report later this year.

Productivity, prices, and incomes
The subcommittee expects to have made, during 1962,
of the Joint Economic Committee's 1957 study of this
is planned that this updating may include preparation
indexes, unit value added indexes, contributions to price
related materials.

an updating
subject. It
of unit cost
change, and

The Federal budget as an economic document
An extensive staff study on "The Federal Budget as an Economic
Document" was prepared for the subcommittee and released early in
Januarv 1962. The study provides information on the steps in
budgetary decisionmaking and criteria for constructing a budgetary
document for economic analysis and describes the character of present
budget data, with some recommendations for changes in the budget
document. It is expected that further review of the problem will be
carried out during 1962, based on the completed staff study.

Other subcommittee studies
It has been the practice of the committee to have the staff, every
other year, under the direction of the Subcommittee on Economic
Statistics, investigate suggestions for revisions in Economic Indicators, and to propose incorporation of such additions and revisions
as seem desirable. At the time these revisions are made, the staff

1962 JOINT ECONOMIC REPORT

145

also revises and brings up to date the "Supplement to Economic
Indicators, Historical and Descriptive Background," with the assistance of the Bureau of the Budget. The subcommittee is asked to
carry out these activities as part of its program for 1962.
Members of the Subcommittee on Economic Statistics are Senator
William Proxmire, chairman; Senators Paul H. Douglas and J. W.
Fulbright; and Representatives Richard Bolling, Thomas B. Curtis,
and William B. Widnall.
SUBCOMMITTEE

ON FOREIGN ECONOMIC POLICY

The Subcommittee on Foreign Economic Policy made an extensive
review of all major aspects of foreign economic policy problems; and
for this purpose had a number of study papers prepared by experts
in the field, including a joint paper by the Honorable Christian A.
Herter and the Honorable William L. Clayton. These papers were
released prior to hearings, and hearings were held December 4-14.
The subcommittee findings, based on the studies and hearings, were
released January 17 in a report entitled "Foreign Economic Policy
for the 1960's."
The subcommittee will continue to follow the activities in this field
during 1962.
Members of the Subcommittee on Foreign Economic Policy are
Representative Hale Boggs, chairman; Representatives Henry S.
Reuss and Thomas B. Curtis; and Senators John Sparkman, J. W.
Fulbright, Claiborne Pell, Prescott Bush, and Jacob K. Javits.
SUBCOMMITTEE

ON INTERNATIONAL EXCHANGE AND PAYMENTS

The subcommittee held hearings May 16 and June 19-21 on international payments imbalances and need for strengthening international financial arrangements. A subcommittee report with the
same title was issued on August 23.
The balance of international trade and payments presents a relatively
new and unfamiliar experience for policymakers, businessmen, labor
leaders, editors, and the man in the street. Accordingly, the subcommittee proposes to undertake a broadly based study of the conditions past, present, and prospective, which have raised the balanceof-payments problem to its present position of concern. Such a
study, which would deal with the feasibility and contributions of
alternative measures to be taken, would in no way minimize the
urgency of the general trade liberalization objectives, but would
explain the desirability, possibility, and needs presented by these
other, complementary, directions of attack.
Members of the subcommittee are Representative Henry S. Reuss,
chairman; and Representative Hale Boggs; and Senators Paul H.
Douglas, William Proxmire, Claiborne Pell, Prescott Bush, John
Marshall Butler, and Jacob K. Javits.
SUBCOMMITTEE ON INTER-AMERICAN

ECONOMIC RELATIONSHIPS

Chairman Sparkman and Representative Griffiths from the subcommittee and Representative Curtis from the full committee held
on-the-spot discussions in six South American countries with key

146

1962 JOINT ECONOMIC REPORT

government officials, labor and business leaders, and experts from
academic life in November 1961. Their findings were issued by the
subcommittee in January 1962 in a report on "Economic Policies and
Programs in South America."
The subcommittee has under consideration a similar study in other
Latin American countries for 1962.
Members of the subcommittee are Senator John Sparkman, chairman; Senator John Marshall Butler; and Representatives Richard
Boiling, Hale Boggs, Martha W. Griffiths, and Clarence E. Kilburn.
SUBCOMMITTEE ON DEFENSE PROCUREMENT

The subcommittee in carrying out the committee's continued
interest in this field held a hearing in June on the progress made by
the Department of Defense in reducing the impact of military procurement on the economy.
The subcommittee will continue to follow these developments during
1962.
Members of the subcommittee are Senator Paul H. Douglas, chairman; Senators John Sparkman, William Proxmire, and Jacob K.
Javits; and Representatives Wright Patman, Martha W. Griffiths,
Thomas B. Curtis, and William B. Widnall.
SUBCOMMITTEE ON ECONOMIC STABILIZATION, AUTOMATION, AND ENERGY
RESOURCES

Preliminary staff work was begun on a study of the effect of private
pension systems on employee mobility. The subcommittee staff also
explored with labor and management the possibilities for a study of
industries likely to adopt new technologies in the near future and to
determine the kinds, volumes, and locations of probable labor
displacement.
Members of the subcommittee are Representative Wright Patman,
chairman; Representatives Henry S. Reuss, Martha W. Griffiths,
Clarence E. Kilburn, and William B. Widnall; and Senators William
Proxmire, Claiborne Pell, and John Marshall Butler.

PUBLICATIONS OF THE JOINT ECONOMIC COMMITTEE
ISSUED SINCE APRIL 1961
Full committee:

Hearings, Review of Annual Report of the Federal Reserve System
for Year 1960, June 1 and 2, 1961 (sale price 45 cents): August
1961.

93 Lots of Bids Involving Identical Bids Reported to the Department
of Justice by the Federal Procurement Agencies in the Years
1965-60 (materials assembled by the Antitrust Division of the
Department of Justice and by the Bureau of the Census of the
Department of Commerce for the Joint Economic Committee),
committee print: September 1961.

Hearings, Review of Report of the Commission on Money and Credit,
August 14-18, 1961 (sale price $1.25): October 1961.

Inventory Fluctuations and Economic Stabilization, Part I, Postwar
Fluctuations in Business Inventories (Papers prepared for the
Joint Economic Committee by experts from government, universities, and research organizations), committee print (sale
price 50 cents): December 1961.

Inventory Fluctuationsand Economic Stabilization, PartII, Causative Factors in Movements of Business Inventories (Papers prepared for the Joint Economic Committee by experts from government, universities, and research organizations), committee
print (sale price 55 cents): December 1961.

tInventory Fluctuations and Economic Stabilization, Part III,

Inventory Fluctuations and Economic Stability (Papers prepared for the Joint Economic Committee by experts from
government, universities, and research organizations), committee print (sale price 55 cents): December 1961.

Variability of Private Investment in Plant and Equipment, Part I,

Investment and Its Financing (materials prepared for the Joint
Economic Committee by the Department of Commerce), committee print (sale price 25 cents): February 1962.

Variability of Private Investment in Plant and Equipment, Part II,
Some elements Shaping Investment Decisions (papers prepared
for the Joint Economic Committee by academic and business
experts), committee print (sale price 20 cents): February 1962.

Hearings, January 1962 Economic Report of the President, January 25, 26, 30, 31, February 1, 2, 5, 6, 7, and 8, 1962 (sale
price $2.25): March 1962.
Joint Economic Report, Report of the Joint Economic Committee
on the 1962 Economic Report of the President, House Report
1410 (sale price 50 cents): March 1962.
tEconomic Indicators (a monthly publication of the Congress
under Public Law 120, 81st Cong., 1st sess.) (sale price 20 cents
a copy, $2.00 a year): Issued monthly.
147

148

1962 JOINT ECONOMIC

REPORT

Subcommittee on Economic Statistics:
Hearings, Government Price Statistics, Subcommittee on Economic
Statistics, May 1-5, 1961 (sale price 65 cents): July 1961.
Government Price Statistics (Report of the Subcommittee on
Economic Statistics), committee print (sale price 10 cents):
Julv 1961.
Unemployment: Terminology, Measurement, and Analysis (Papers
prepared by the Bureau of Labor Statistics for the Subcommittee on Economic Statistics), committee print (sale price 35
cents): November 1961.
Higher Unemployment Rates, 1957-60: Structural Transformation
of Inadequate Demand (prepared for the Subcommittee on
Economic Statistics by the staff), committee print (sale price
25 cents): November 1961.
Hearings, Employment and Unemployment, December 18, 19, 20,
1961 (sale price $1.00): January 1962.
Employment and Unemployment (Report of the Subcommittee on
Economic Statistics with Minority Views), committee print
(sale price 15 cents): February 1962.
t The Federal Budget as an Economic Document (prepared for the
Subcommittee on Economic Statistics by the staff), committee
print (sale price 50 cents): January 1962.
Subcommittee on Foreign Economic Policy:
A New Look at Foreign Economic Policy: In Light of the Cold War
and the Extension of the Common Market in Europe, by Christian
A. Herter and William L. Clayton, committee print (sale price
15 cents): October 1961.
t The Task for 1962: A Free World Community by Henry S.
Reuss, committee print (sale price 10 cents): November 1961.
A New Look at Trade Policy Toward the Communist Bloc: The
Elements of a Common Strategy for the West, by Samuel Pisar,
committee print (sale price 30 cents): November 1961.
Economic Policies Toward Less Developed Countries, by Raymond
F. Mikesell and Robert Loring Allen, committee print (sale
price 30 cents): November 1961.
Japan in United States Foreign Economic Policy, by Warren S.
Hunsberger, committee print (sale price 25 cents): November
1961.
Trade Adjustment in Theory and Practice, by Otto R. Reischer,
committee print (sale price 30 cents): November 1961.
The European Economic Community and the United States, by
Robert R. Bowie and Theodore Geiger, committee print (sale
price 25 cents): November 1961.
Food and People, by Ralph McCabe and Louis H. Bean, committee print (sale price 25 cents): November 1961.
United States Commercial Policy: A Programfor the 1960's, by
Peter B. Kenen, committee print (sale price 25 cents): November 1961.
Trade Restraints in the Western Community: With Tariff Comparisons and Selected Statistical Tables Pertinentto Foreign Economic
Policy (prepared by the staff with the assistance of the Tariff
Commission and several other Federal Agencies), committee
print (sale price 20 cents): December 1961.

1962 JOINT ECONOMIC REPORT

149

The Political Stakes in East-West Trade: A Report on a Factfinding Trip to the U.S.S.R. and Eastern Europe, by Senator
Jacob K. Javits, committee print, February 1962.
Hearings, Foreign Economic Policy, December 4-14, 1961 (sale
price $1.50): January 1962.
Foreign Economic Policyfor the 1960's (Report of the Subcommittee on Foreign Economic Policy with Minority and other views),
committee print (sale price 20 cents): January 1962.
Subcommittee on International Exchange and Payments:
Hearings, International Payments Imbalances and Need for
Strengthening International Financial Arrangements, May 16,
June 19, 20, and 21, 1961, Subcommittee on International
Exchange and Payments (sale price $1.00): August 1961.
f International Payments Imbalances and Need for Strengthening
International FinancialArrangements (Report of the Subcommittee on International Exchange and Payments), committee
print (sale price 15 cents): August 1961.
Subcommittee on Inter-American Economic Relationships:
Economic Policies and Programs in South America (Report from
the Subcommittee on Inter-American Economic Relationships),
committee print (sale price 35 cents): January 1962.
Subcommittee on Defense Procurement:
Hearings, ProgressMade by the Department of Defense in Reducing
the Impact of Military Procurement on the Economy, June 12,
1961, Subcommittee on Defense Procurement: September 1961.

EARLIER PUBLICATIONS
January 1947 to April 1962
Single copies of the publications listed may be obtained from the Joint Economic
Committee except as otherwise noted. Additional copies of committee publications may be purchased from the Superintendent of Documents, Washington 25, D.C., at the price given. The prices shown are for single copies.
There is a discount for quantity orders. Out-of-print publications are denoted by an asterisk. Publications available only from Superintendent of
Documents are denoted by a dagger (t)

*Declaring a National Policy on Employment, Production, and Purchasing Power (Report of the Joint Committee on the Economic
Report), Senate Report No. 11: January 1947.
*Food Prices, Production, and Consumption (Report of the Joint Committee on the Economic Report), Senate Document 113: April 1957.
*Hearings on Current Price Developments and the Problem of Economic Stabilization (June 24, 25, 26, July 2, 8, 9, 10, 14, 15, 16,
and 17, 1947): July 1947.
*Interim Report on the President'sProgram To Deal With the Problems
of Inflation (Report of the Joint Committee on the Economic
Report), Senate Report 809: December 1947.
*Hearings on Anti-inflation Program as Recommended in the President's Message of November 17, 1947 (November 21, 24, 25, 26,
28, December 2, 3, 4, 5, and 10, 1947): December 1947.
*Allocation and Inventory Control of Grainfor the Production of Ethyl
Alcohol (Report of the Joint Committee on the Economic Report),
Senate Report 888: February 1948.
*Hearings on Allocation of Grain for Production of Ethyl Alcohol
(February 5 and 6, 1948): February 1948.
*High Prices of Consumer Goods (Report of the Joint Committee on
the Economic Report), Senate Report 1565: June 1948.
Hearings on Increases in Steel Prices (March 2, 1948).
*Joint Economic Report (Report of the Joint Committee on the
Economic Report on the January 1948 Economic Report of the
President), Senate Report 1358: May 1948.
*Hearings on Credit Policies (April 13 and 16, May 12, 13, 27, 1948):
July 1948.
*Statistical Gaps, Current Gaps in Our Statistical Knowledge (materials
assembled by the staff of the Joint Committee on the Economic
Report), committee print: July 1948.
Consumers' Price Indez (materials assembled by the staff of the Joint
Committee on the Economic Report), committee print: December
1948.
*Hearings on Profits (December 6, 7, 8, 9,10,15,16,17, 20, 21, 1948):
December 1948.
Profits (Report of a Subcommittee of the Joint Committee on the
Economic Report on Profits Hearings), committee print: February
1949.
151

152

1962 JOINT ECONOMIC REPORT

*Hearings, January 1949 Economic Report. of the President (February
8,9, 10, 11, 14, 15, 16, 17, 18, 1949): March 1949.

Joint Ecnnomic Report (Report of the Joint Committee on the Economic Report on the January 1949 Economic Report of the Presidlenlt), Senate Report 88: March 1949.

Joint Economic Report (minority views of the Joint Committee on the
Economic Report on the January 1949 Economic Report of the
President), part ITof Report 88: April 1949.
*Employment and Unemployment (initial report of the Subcommittee
on Unemployment), committee print: July 1949.

*Economy of the South (the impact of Federal policies on the economy
of the South), committee print: July 1949.
Factors Affecting the Volume and Stability of Private Investment (materials on the investment problem assembled by the staff of the Subcommittee on Investment), Senate Document 232: September 1950;
reprinted from committee print of October 1949.
*Hearings, Subcommittee on Monetary, Credit, and Fiscal Policies,
Federal Expenditure and Revenue Policies, September 23, 1949
(containing National Planning Association reports prepared by
Conference of University Economists): October 1949.
*Selected Government Programs Which Aid the Unemployed and LowIncome Families (materials assembled by the staffs of the Subcommittee on Unemployment and the Subcommittee on Low-Income
Families), committee print: November 1949.
Low-Income Families and Economic Stability (materials on the problem
of low-income families assembled by the staff of the Subcommittee
on Low-Income Families), Senate Document 231: September 1950;
reprinted from committee print of November 1949.
*Compendium of Materials on Monetary, Credit, and Fiscal Policies (a
collection of statements submitted to the Subcommittee on Monetary, Credit, and Fiscal Policies by Government officials, bankers,
economists, and others), Senate Document 132: January 1950;
reprinted from committee print of November 1949.
Hearings, Subcommittee on Investment, Volume and Stability of
Private Investment, Part 1 (September 27, 28, 29, 1949): November
1949.
Basic Data Relating to Steel Prices (materials assembled by the staff
of the Joint Committee on the Economic Report for use in steel

hearings), committee print: January 1950.
Highways and the Nation's Economy (materials assembled by the staff
of the Joint Committee on the Economic Report), Senate Document
145: January 1950.

*Hearings, Subcommittee on Monetary, Credit, and Fiscal Policies,
Monetary, Credit, and Fiscal Policies (September 23, November 16,
17, 18, 22, 23, and December 1, 2, 3, 5, 7, 1949): January 1950.
*Monetary, Credit, and FiscalPolicies (Report of the Subcommittee on
Monetary, Credit, and Fiscal Policies), Senate Document 129:
January 1950.
Employment and Unemployment (Report of the Subcommittee on
Unemployment), Senate Document 140: February 1950.

*Hearings, Subcommittee on Investment, Volume and Stability of
Private Investment, Part 2 (December 6, 7, 8, 9, 12, 13, 14, 15, 17,
1949): February 1950.

1962 JOINT ECONOMIC REPORT

153

Hearings, Subcommittee on Low-Income Families, Low-Income Families (December 12, 13, 14, 15, 16, 17, 19, 20, 21, 22): March 1950.
*Hearings, January 1950 Economic Report of the President (January
17, 18, 19, 20): February 1950.
*Hearings, December 1949 Steel Price Increases (January 24, 25, 26,
27): March 1950.
*Low-.IncmeFamilies and Economic Stability (final report of the Subcommittee on Low-Income Families), Senate Document 146:
March 1950.
Volume and Stability of Private Investment (final report of the Subcommittee on Investment), Senate Document 149: March 1950.
*December 1949 Steel Price Increases (Report of the Joint Committee
on the Economic Report), Senate Report 1373: March 1950.
*Handbook of Regional Statistics (material assembled by the staff of
the Joint Committee on the Economic Report), committee print:
April 1950.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the January 1950 Economic Report of the President), Senate Report 1843: June 1950.
*General Credit Control, Debt Management, and Economic Mobilization
(materials prepared by the staff of the Joint Committee on the
Economic Report), committee print: Januray 1951.
Underemployment of Rural Families (materials prepared by the staff
of the Joint Committee on the Economic Report), committee
print: February 1951.
*The Economic and Political Hazards of an Inflationary Defense Economy (materials prepared by the staff of the Joint Committee on
the Economic Report), committee print: February 1951.
*Hearings, January 1951 Economic Report of the President (January
22, 24, 25, 26, 29, 31, February 2): March 1951.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the January 1951 Economic Report of the President), Senate Report 210: April 2, 1951.
Making Ends Meet on Less than $2,000 a Year, Case Studies of 100
Low-Income Families (communication to the Joint Committee on
the Economic Report from the Conference Group of Nine National
Voluntary Organizations Convened by the National Social Welfare
Assembly), committee print: July 1951.
Prevalence of Price Cutting of Merchandise Marketed Under PriceMaintenance Agreements, May 28 through June 25, 1951 (study prepared for the Joint Committee on the Economic Report and the
Select Committee on Small Business), committee print: July 1951.
The Need for Industrial Dispersal (materials prepared for the Joint
Committee on the Economic Report by the committee staff), Senate
Document 55: August 1951.
*National Defense and the Economic Outlook (materials prepared for the
Joint Committee on the Economic Report by the committee staff),
committee print: August 1951.
Inflation Still a Danger (report of the Joint Committee on the Economic Report together with materials on national defense and the
economic outlook included in committee print mentioned above),
Senate Report 644: August 1951.
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1962 JOINT ECONOMIC

REPORT

*Questions on General Credit Control and Debt Management (prepared

by staff of the Subcommittee on General Credit Control and Debt
Management of the Joint Committee on the Economic Report),
committee print: October 1951.

Monetary Policy and the Management of the Public Debt. Their Role

in Achieving Price Stability and High-Level Employment (replies
to questions and other material for the use of the Subcommittee on
General Credit Control and Debt Management), Senate Document
123, Parts I and II: February 1952.

Hearings, January 1952 Economic Report of the President. (January
23, 24, 25, 26, 28, 30, 31, February 1): February 1952.

Constitutional Limitation on Federal Income, Estate, and Gift Tax Rates
(materials assembled for the Joint Committee on the Economic
Report and the Select Committee on Small Business of the House
of Representatives), committee print (sale price 15 cents): February
1952.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the January 1952 Economic Report of the President together with National Defense and the Economic Outlook for
the Fiscal Year 1953, material prepared for the Joint Committee
on the Economic Report by the committee staff), Senate Report
No. 1295: March 1952.

The Taxation of Corporate Surplus Accumulations, The Application

and Effect, Real and Feared, of Section 102 of the Internal Revenue
Code dealing with Unreasonable Accumulation of Corporate Profits
(study prepared for the Joint Committee on the Economic Report
by Dr. J. K. Hall), committee print: May 1952.
*Hearings, Subcommittee on General Credit Control and Debt Management, Monetary Policy and the Management of the Public
Debt (March 10, 11, 12, 13, 14, 17, 18, 19, 20, 21, 24, 25, 26, 27, 29,
and 31, 1952): May 1952.

Monetary Policy and the Management of the Public Debt (Report of the
Subcommittee on General Credit Control and Debt Management)
Senate Document No. 163: July 1952.

Federal Tax Changes and Estimated Revenue Losses under Present Law
(Materials prepared for the Joint Committee on the Economic
Report by the committee staff), committee print: November 1952.
Sustaining Economic Forces Ahead (Materials prepared for the Joint
Committee on the Economic Report by the committee staff), committee print: December 1952.
tPensions in the United States (A study prepared for the Joint Committee on the Economic Report by the National Planning Association), committee print (sale price 30 cents): December 1952.

*Index of Joint Economic Publications:January 1947 through December 1952. Committee print: January 1953.

*Historicaland Descriptive Supplement to Economic Indicators: December 1953.
*Hearings, January 1954 Economic Report of the President (February
1, 2, 3, 4, 5, 8, 9, 10, 11, 15, 16, 17, 18): March 1954.
*Joint Economic Report (Report of the Joint Committee on the
Economic Report on the 1954 Economic Report of the President),
House Report No. 1256 (sale price 30 cents): February 1954.

1962 JOINT ECONOMIC REPORT

155

Hearings, Subcommittee on Economic Statistics, Economic Statistics
(July 12 and 13, 1954): August 1954.
Economic Statistics (Progress Report prepared by the Subcommittee
on Economic Statistics). House Report No. 2628: August 1954.
CongressionalActton on Major Economic Recommendations of the President, 1954 (Materials prepared by the Joint Committee on the
Economic Report by the Committee Staff), committee print:
September 1954.
tPotential Economic Growth of the United States During the Next Decade
(Materials prepared for the Joint Committee on the Economic
Report by the Committee Staff), committee print (sale price 15
cents): October 1954.
*Hearings, Subcommittee on Economic Stabilization, United States
Monetary Policy: Recent Thinking and Experience (December 6
and 7, 1954): December 1954.
*Trends in Economic Growth, A Comparison of the Western Powers and
the Soviet Bloc (Materials prepared for the Joint Committee on the
Economic Report by the Legislative Reference Service of the Library
of Congress), committee print (sale price $1): January 1955.
*Hearings, January 1955 Economic Report of the President (January
24, 26, 27, 28, 31, February 1, 2, 3, 8, 9, 10, and 16, 1955) (sale price
$3.50): February 1955.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the 1955 Economic Report of the President),
Senate Report No. 60 (sale price 30 cents): March 1955.
*Historical and Descriptive Supplement to Economic Indicators: November 1955.
*Hearings, Subcommittee on Economic Stabilization, Automation
and Technological Change (October 14, 15, 17, 18, 24, 25, 26, 27,
and 28, 1955) (sale price $2.00): November 1955. (Reprinted September 1959.)
Automation and Technological Change (Report of the Subcommittee
on Economic Stabilization) committee print, November 1955 (sale
price 10 cents): became Senate Report No. 1308, January 1956.
Hearings, Subcommittee on Economic Statistics Reports of Federal
Reserve Consultant Committees on Economic Statistics (July 19
and 26, October 4 and 5, 1955) (sale price $2.25): November 1955.
Hearings, Subcommittee on Economic Statistics, Employment and
Unemployment Statistics (November 7 and 8, 1955) (sale price 45
cents): November 1955.
1965 Report on Economic Statistics (Report of the Subcommittee on
Economic Statistics) committee print, November 1955: became
Senate Report No. 1309, January 1956.
*Federal Tax Policy for Economic Growth and Stability (Papers submitted by panelists appearing before the Subcommittee on Tax
Policy), committee print (sale price $2.50): November 1955.
(Reprinted September 1959.)
tHearings, Subcommittee on Tax Policy, Federal Tax Policy for
Economic Growth and Stability (December 5, 6, 7, 8, 9, 12, 13, 14,
15, and 16, 1955) (sale price $2.00): January 1956.

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1962 JOINT ECONOMIC REPORT

Federal Tax Policy for Economic Growth and Stability (Report of the
Subcommittee on Tax Policy) committee print, December 1955
(sale price 10 cents): became Senate Report No. 1310, January
1956.
*The Federal Revenue System: Facts and Problems (Materials assembled for the Subcommittee on Tax Policy by the committee staff),
committee print (sale price 55 cents): January 1956. (Reprinted
May 1959.)
*Characteristicsof the Low-Income Population and Related Programs
(Materials prepared by the staff of the Subcommittee on LowIncome Families), committee print (sale price 60 cents); October
1955.
tHearings, Subcommittee on Low-Income Families, Low-Income Families (November 18, 19, 21, 22, and 23, 1955) (sale price $2.00):
December 1955.
A Programfor the Low-Income Population at Substandard Levels of
Living (Report of the Subcommittee on Low-Income Families),
committee print, December 1955 (sale price 10 cents): became
Senate Report No. 1311, January 1956.
Hearings, Subcommittee on Foreign Economic Policy, Foreign Economic Policy (November 9, 10, 14, 15, 16, 17, 1955) (sale price
$1.75): December 1955.
Foreign Economic Policy (Report of the Subcommittee on Foreign
Economic Policy), committee print, December 1955 (sale price
15 cents): became Senate Report No. 1312, January 1956.
Hearings, January 1956 Economic Report of the President (January
31, February 1, 2, 3, 6, 7, 8, 9,14,15, 17, and 28, 1956): March 1956.
*Joint Economic Report (Report of the Joint Committee on the Economic Report on the 1956 Economic Report of the President):
Senate Report No. 1606 (sale price 35 cents): March 1956.
Hearings, Subcommittee on Economic Stabilization, Conflicting
Official Views on Monetary Policy: April 1956 (June 12,A956)
(sale price 20 cents): June 1956.
tHearings, Subcommittee on Foreign Economic Policy, Defense
Essentiality and Foreign Economic Policy (June 4, 5, 6, and 7,
1956) (sale price $1.50): July 1956.
Defense Essentiality and Foreign Economic Policy, Case Study: Watch
Industry and Precision Skills (Report of the Subcommittee on
Foreign Economic Policy), Senate Report No. 2629, Parts I and II
(sale price 15 cents with Part II): July 1956.
Hearings, Subcommittee on Economic Stabilization, Monetary Policy:
1955-56 (December 10 and 11, 1956) (sale price 45 cents): January
1957.
Hearings, Subcommittee on Foreign Economic Policy, World Economic Growth and Competition (December 10, 12, and 13, 1956)
(sale price 45 cents): February 1957.
tHearings, Subcommittee on Economic Stabilization, Instrumentation
and Automation (December 12, 13, and 14, 1956) (sale price 75
cents): February 1957.
*Employment Act of 1946, as Amended, and Related Laws, and Rules
of the Joint Economic Committee (prepared by staff of the Joint
Economic Committee) committee print: January 1957.

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157

tHearings, January 1957 Economic Report of the President (January
28, 29, 30, 31, February 1, 4, 5, 6) (sales price $2.25): February
1957.
*Joint Economic Report (Report of the Joint Economic Committee
on the 1957 Economic Report of the President): House Report
No. 175: February 1957.

FiscalPolicy Implications of the Economic Outlook and Budget Developments (Report of the Subcommittee on Fiscal Policy), House Report
No. 647 (sale price 10 cents): June 1957.
Hearings, Subcommittee on Fiscal Policy, Fiscal Policy Implications
of the Economic Outlook (June 3, 4, 5, 6, 7, 13, and 14, 1957) (sale
price $1.00): June 1957.
tProductivity, Prices, and Incomes (Materials prepared for the Joint
Economic Committee by the committee staff), committee print
(sale price 70 cents): June 1957.

*Soviet Economic Growth: A Comparisonuwith the United States (A study

prepared for the Subcommittee on Foreign Economic Policy of the
Joint Economic Committee by the Legislative Reference Service of
the Library of Congress), committee print (sale price 40 cents):
September 1957.

*1957 Historical and Descriptive Supplement to Economic Indicators
(Prepared for the Joint Economic Committee by the Committee
Staff and the Office of Statistical Standards, Bureau of the Budget),
committee print (sale price 40 cents): September 1957.

tFederalExpenditure Policyfor Economic Growth and Stability (Papers

submitted by panelists appearing before the Subcommittee on Fiscal
Policy), committee print (sale price $3.25): November 1957.
tHearings, Subcommittee on Fiscal Policy, Federal Expenditure Policy
for Economic Growth and Stability (November 18-27, 1957) (sale
price $2.00): January 1958.

FederalExpenditure Policies for Economic Growth and Stability (Report

of the Subcommittee on Fiscal Policy), committee print (sale price
10 cents): January 1958.

tPolicy for Commercial Agriculture: Its Relation to Economic Growth
and Stability (Papers submitted by panelists appearing before the
Subcommittee on Agricultural Policy), committee print (sale price
$2.25): November 1957.
Hearings, Subcommittee on Agricultural Policy, Policy for Commercial Agriculture: Its Relation to Economic Growth and Stability
(December 16-20, 1957) (sale price $1.00): January 1958.

tPolicy for Commercial Agriculture: Its Relation to Economic Growth

and Stability (Report of the Subcommittee on Agricultural Policy),
committee print (sale price 15 cents): February 1958.
tHearings, Subcommittee on Economic Statistics, The National Economic Accounts of the United States (October 29 and 30, 1957)
(sale price 75 cents): December 1957.
Hearings, Subcommittee on Economic Stabilization, Automation and
Recent Trends (November 14 and 15, 1957) (sale price 30 cents):
December 1957.
Automation and Technological Change (Reprint of S. Rept. 1308 of the
Joint Committee on the Economic Report, January 1956) (sale price
10 cents): January 1958.

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1962 JOINT ECONOMIC REPORT

International Economic Statistics (A Memorandum prepared for the
Subcommittee on Economic Statistics of the Joint Economic Committee by the Office of Statistical Standards of the Bureau of the
Budget), committee print (sale price 25 cents): February 1958.
Hearings, January 1958 Economic Report of the President (January
27, 28, 29, 30, February 3, 4, 5, 6, 7, and 10) (sale price $1.50):
February 1958.
*Joint Economic Report (Report of the Joint Economic Committee on
the 1958 Report of the President): House Report No. 1409 (sale
price 20 cents): February 1958.
*The Relationship of Prices to Economic Stability and Growth (Papers
submitted by panelists appearing before the Joint Economic Committee), committee print (sale price $2.00): March 1958.
tHearings, Relationship of Prices to Economic Stability and Growth
(May 12, 13, 14, 15, 16, 19, 20, 21, and 22, 1958) (sale price $1.25):
July 1958.
The Relationship of Prices to Economic Stability and Growth (Commentaries submitted by economists from labor and industry appearing before the Joint Economic Committee), committee print (sale
price 65 cents): November 1958.
tHearings, Relationship of Prices to Economic Stability and Growth
(December 15-18, 1958) (sale price $1.25): February 1959.
tHearings, Subcommittee on Fiscal Policy, Fiscal Policy Implications
of the Current Economic Outlook (April 28, 29, 30, and May 1,
1958) (sale price 55 cents): July 1958.
Frequency of Change in Wholesale Prices: A Study of Price Flexibility
(A study prepared for the Joint Economic Committee by the U.S.
Department of Labor, Bureau of Labor Statistics), committee print
(sale price 30 cents): January 1959.
Economic Policy Questionnaire (Tabulation of replies submitted to the
Subcommittee on Economic Stabilization of the Joint Economic
Committee), committee print (sale price 15 cents): February 1959.
*Hearings, January 1959 Economic Report of the President (January
27, 28, 29, 30, February 2, 3, 4, 5, 6, 9,10, 1959): March 1959.
Joint Economic Report (Report of the Joint Economic Committee on
the 1959 Report of the President): Senate Report No. 98 (sale
price 25 cents): March 1959.
*The Federal Revenue System: Facts and Problems (Materials assembled for the Subcommittee on Tax Policy by the committee staff),
committee print (January 1956) Revised May 1959 (sale price 65
cents): May 1959.
Economic Policy in Western Europe (Report based on conferences on
economic policy matters held in seven countries of Western Europe
late in 1958 together with selected materials assembled by the
committee staff), committee print (sale price, $1.25): July 1959.
tHearings, Subcommittee on Economic Stabilization, Automation and
Technological Change (October 14, 15, 17, 18, 24, 25, 26, 27, and 28,
1955) (sale price $2): (November 1955) Reprinted September 1959.
*Federal Tax Policy for Economic Growth and Stability (Papers submitted by panelists appearing before the Subcommittee on Tax
Policy), committee print (sale price $2.50): (November 1955)
Reprinted September 1959.

1962 JOINT ECONOMIC REPORT

159

Comparison of the United States and Soviet Economies (Papers submitted by panelists appearing before the Subcommittee on Economic Statistics), committee prints.
tPart I (sale price, $1.00): October 1959.
tPart II (sale price, 45 cents): November 1959.
tPart III (sale price, 25 cents): November 1959.
*Hearings, Comparison of the United States and Soviet Economies,
hearings before Subcommittee on Economic Statistics, November
13, 16, 17, 18, 19, and 20 (sale price 70 cents): November 1959.
Comparisons of the United States and Soviet Economies (Supplemental
Statement and Costs and Benefits to the Soviet Union of its Bloc
and Pact System: Comparisons with the Western Alliance System
prepared by the Central Intelligence Agency in Cooperation with
the Department of State and Department of Defense for the Subcommittee on Economic Statistics for the Joint Economic Committee) committee print (sale price 20 cents): June 1960.
Hearings, Energy Resources and Technology, hearings before the
Subcommittee on Automation and Energy Resources, October 12,
13, 14, 15, 16 (sale price, $1.25): November 1959.
Employment Act of 1946, as Amended, and Related Laws, and Rules
of the Joint Economic Committee (prepared by staff of the Joint
Economic Committee), committee print: 1960.
Joint Economic Report (Report of the Joint Economic Committee on
the 1960 Report of the President): Senate Report 1152 (sale price
30 cents): February 1960.
*Hearings, January 1960, Economic Report of the President (February
1, 2, 3, 4, 5, and 16, 1960) (sale price $1.50): March 1960.
tBackground Material on Economic Aspects of Military Procurement
and Supply (Materials prepared for the Subcommittee on Defense
Procurement), committee print (sale price $1): February 1960.
tHearings, Impact of Defense Procurement, hearings before Subcommittee on Defense Procurement, January 28, 29, and 30 (sale
price $1.75): March 1960.
tEconomic Aspects of Military Procurement and Supply (Report of
the Subcommittee on Defense Procurement), committee print
(sale price 35 cents): October 1960.
REPORTS, HEARINGS, AND STUDY PAPERS FROM THE STUDY OF
EMPLOYMENT, GROWTH, AND PRICE LEVELS

*Staff Report on Employment, Growth, and Price Levels (committee
print) (sale price $1.50): December 1959.
tEmployment, Growth, and Price Levels (Report of the Joint Economic
Committee, pursuant to Senate Concurrent Resolution 13, 86th
Congress, 1st session): Senate Report No. 1043 (sale price 50 cents):
January 1960.
Hearings
Part 1. The American Economy: Problems and Prospects, March 20,
23, 24, 25, 1959 (sale price 60 cents): April 1959.
Part 2. Historical and Comparative Rates of Production, Productivity,
and Prices, April 7-10, 1959 (sale price $1.00): May 1959.

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1962 JOINT ECONOMIC REPORT

Part 3. Historical and Comparative Rates of Labor Force, Employment,
and Unemployment, April 25, 27, and 28, 1959 (sale price 35 cents):
June 1959.

Part 4. Influence on Prices of Changes in the Effective Supply of Money,
May 25, 26, 27, 28, 1959 (sale price 75 cents): July 1959.

Part 5. International Influences on the American Economy, June 29,
30, July 1, 2, 1959 (sale price 50 cents): September 1959.

Part 6A. Government's Management of its Monetary, Fiscal, and Debt
Operations, July 24, 27, 28, 29, 1959 (sale price $1.25): September
1959.

Part 6B. Government's Management of its Monetary, Fiscal, and Debt
Operations, August 5, 6, 7, 1959 (sale price 75 cents): November
1959.

Part 6C. Government's Management of its Monetary, Fiscal, and Debt
Operations, Replies to Questions on Monetary Policy, and other
materials (sale price 65 cents): November 1959.

Part 7. The Effect of Monopolistic and Quasi-Monopolistic Practices
Upon Prices, Profits, Production, and Employment, September 22,
23, 24, and 25 (sale price $1.25): November 1959.

Part 8. The Effect of Increases in Wages, Salaries, and the Prices of
Personal Services, Together With Union and Professional Practices
Upon Prices, Profits, Production, and Employment, September 28,
29, 30, October 1 and 2 (sale price 75 cents): November 1959.

Part 9A. Construction Suggestions for Reconciling and Simultaneously
Obtaining the Three Objectives of Maximum Employment, an Adequate
Rate of Growth, and Substantial Stability of the Price Level, October
26, 27, 28, 29, 30, November 2, 3, 4, 5, and 6 (sale price 70 cents):
December 1959.
Part 9B. Same title as 9A. (Materials submitted by 12 organizations at the invitation of the Joint Economic Committee) (sale price
45 cents): December 1959.

Part 10. Additional Materials Submitted for the Record (sale price 60
cents): January 1960.

Questions on Monetary Policy and Debt Management (sale price 10
cents): August 1959.

Study papers
tNo. 1. Recent Inflation in the United States, by Charles L. Schultze
(sale price 40 cents): September 1959.
tNos. 2 and 3 Steel and the Postwar Inflation by Otto Eckstein and

Gary Fromm; An Analysis of the Inflation in Machinery Prices by
Thomas A. Wilson (sale price 25 cents): November 1959.

Nos. 4 and 5 Analysis of the Rising Costs of Public Education by
Werner Z. Hirsch; Trends in the Supply and Demand of Medical
Care by Markley Roberts (sale price 30 cents): November 1959.

No. 6 The Extent and Nature of Frictional Unemployment by the Bureau
of Labor Statistics (sale price 25 cents): November 1959.

tNos. 7, 8, and 9 The Incidence of Inflation: Or Who Gets Hurts by
Seymour E. Harris; Protection Against Inflation by H. S. Houthak-

ker; The Share of Wages and Salaries in Manufacturing Incomes,
1947-56 by Alfred H. Conrad (sale price 45 cents): November 1959.

Nos. 10 and 11 Potential Public Policies to Deal With Inflation Caused
by Market Power by Emmette S. Redford; A Brief Interpretive Survey of Wage-Price Problems in Europe by Mark W. Leiserson (sale
price 25 cents): December 1959.

1962 JOINT ECONOMIC REPORT

161

Nos. 12 and 13 The Low Income Population and Economic Growth by
Robert J. Lampman; The Adequacy of Resources for Economl
Growth in the United States by Joseph L. Fisher and Edward Boorstein (sale price 25 cents): December 1959.
Nos. 14 and 15 Liquidity and Financial Institutions in the Postwar
Period by John Gurley; Profits. Profit Markups, and Productivity:
An Examination of Corporate Behavior Since 1.947, by Edwin Kuh
(sale price 35 cents): December 1959.
No. 16 International Effects of U.S. Economic Policy, by Edward M.
Bernstein (sale price 30 cents): January 1960.
No. 17 Prices and Costs in Manufacturing Industries, by Charles L.
Schultz and Joseph L. Tryon (sale price 20 cents): January 1960.
No. 18 National Security and the American Economy in the 1960's by
Henry Rowen (sale price 25 cents): January 1960.
tNo. 19 Debt Management in the United States by Warren L. Smith
(sale price 40 cents): January 1960.
No. 20 The Potential Economic Growth of the United States by James
W. Knowles (sale price 20 cents): January 1960.
No. 21 Postwar Movement of Prices and Wages in Manufacturing
Industries by Harold M. Levinson (sale price 40 cents): January
1960.
No. 22 An Evaluation of Anti-Trust Policy: Its Relation to Economic
Growth, Full Employment, and Prices by Theodore J. Kreps (sale
price 20 cents): January 1960.
No. 23 The Structure of Unemployment in Areas of Substantial Labor
Surplus by the Bureau of Labor Statistics (sale price 15 cents):
January 1960.

*New Views on Automation (papers submitted to the Subcommittee

on Automation and Energy Resources), committee print (sale price
$1.75): October 1960.
tEconomic Policiesfor Agriculture in the 1960's, Implications of Four
Selected Alternatives (materials prepared for the Joint Economic
Committee), committee print (sale price 25 cents): November 1960.
1960 Descriptive Supplement to Economic Indicators (Historical and
Descriptive Background) (Prepared for the Joint Economic Committee by the Committee Staff and the Office of Statistical Standards, Bureau of the Budget), committee print (sale price 60 cents):
December 1960.
Energy Resources and Government (materials submitted to the Subcommittee on Automation and Energy Resources by Federal and
State Regulatory and Developmental Agencies), committee print
(sale price $2.00): December 1960.
tSubsidy and Subsidy-like Programs of the U.S. Government (materials
prepared for the Joint Economic Committee), committee print (sale
price 25 cents): December 1960.
Economic Programsfor Labor Surplus Areas in Selected Countries of
Western Europe (materials prepared for the Joint Economic Committee), committee print (sale price 25 cents): December 1960.
Index to Hearingson Employment, Growth, and Price Levels (with Tables
of Contents of Study Papers and Reports) (prepared for the Joint
Economic Committee), committee print (sale price 30 cents):
December 1960.

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1962 JOINT ECONOMIC REPORT

A Study of the Dealer Market for Federal Government Securities (materials prepared for the Joint Economic Committee), committee
print (sale price 40 cents): January 1961.
tHearings, Current Economic Situation and Short-Run Outlook,
December 7 and 8, 1960 (sale price 70 cents): January 1961.
tHearings, Government Price Statistics, Subcommittee on Economic
Statistics, January 24, 1961 (sale price, $1.50): March 1961.
Hearings, January 1961 Economic Report of the President and the
Economic Situation and Outlook, February 9, 10, March 6, 7, and
April 10, 1961 (sale price $2.75): April 1961.
Joint Economic Report (Report of the Joint Economic Committee on
the 1961 Economic Report of the President), House Report 328
(sale price 35 cents): April 1961.
t The Federal Revenue System: Facts and Problems (materials assembled
by the committee staff for the Joint Economic Committee), updates 1957 and 1959 prints by the same title. Committee print
(sale price 70 cents): April 1961.
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