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PUBLIC DEBT AND THE BUDGET

HEARINGS
BEFORE THE

SUBCOMMITTEE ON TAXATION AND
DEBT MANAGEMENT GENEKALLY
OF

THE

COMMITTEE ON FINANCE
UNITED STATES SENATE
N I N E T Y - F I F T H

C O N G R E S S

SECOND SESSION

JANUARY 30 AND FEBRUARY 6, 1978

Printed for the use of the Committee on Finance

U.S. GOVERNMENT PRINTING OFFICE
23-544




WASHINGTON

: 1978

COMMITTEE

ON

FINANCE

RUSSELL B. LONG, Louisiana,
HERMAN E. TALMADGE, Georgia
ABRAHAM RIBICOFF, Connecticut
HARRY F. BYRD, JR., Virginia
GAYLORD NELSON, Wisconsin
MIKE GRAVEL, Alaska
LLOYD BENTSEN, Texas
WILLIAM D. HATHAWAY, Maine
FLOYD K. HASKELL, Colorado
SPARK M. MATSUNAGA, Hawaii
DANIEL PATRICK MOYNIHAN, New York

Chairman

CARL T. CURTIS, Nebraska
CLIFFORD P. HANSEN, Wyoming
ROBERT DOLE, Kansas
BOB PACKWOOD, Oregon
WILLIAM V. ROTH, JR., Delaware
PAUL LAXALT, Nevada
JOHN C. DANFORTH, Missouri

MICHAEL STERN, Staff
Director
GEORGE W . PRITTS, J r . , Minority
Counsel

S U B C O M M I T T E E ON T A X A T I O N A N D D E B T M A N A G E M E N T

GENERALLY

HARRY F. BYRD, JR., Virginia, Chairman
HERMAN E. TALMADGE, Georgia
MIKE GRAVEL, Alaska
FLOYD K. HASKELL, Colorado




BOB PACKWOOD, Oregon
CLIFFORD P. HANSEN, Wyoming
WILLIAM V. ROTH, JR., Delaware(II)

CONTENTS
ADMINISTRATION WITNESSES
Altman, Hon. Roger, Assistant Secretary of the Treasury for Domestic
Finance
Cutter, W. Bowman, Executive Associate Director for Budget, Office of
Management and Budget
Gardner, Hon. Stephen S., member, Board of Governors, Federal Reserve
System

^
108
127
138

PUBLIC WITNESSES
Data Resources Inc., Otto Eckstein, president
Eckstein, Otto, president, Data Resources Inc
American Enterprise Institute, Rudolph G. Penner, director of tax policy
studies
Penner, Rudolph G., director of tax policy studies, American Enterprise
Institute
Meiselman, David I., professor of economics, director, graduate economics
program in northern Virginia, Virginia Polytechnic Institute and State
university
Sindlinger, Albert E.} chairman of the board, Sindlinger & Co., Media, Pa__

2
2
7
7
12
18

COMMUNICATION
Schmidt, Wilson E

147
APPENDIX

Tables on estimated gross and net Government and private debt

149

ADDITIONAL INFORMATION
Committee on Finance press release announcing these hearings




(HI)

1




PUBLIC DEBT AND THE BUDGET

MONDAY, J A N U A R Y 30, 1978
U.S.

SENATE,

S U B C O M M I T T E E ON T A X A T I O N A N D D E B T M A N A G E M E N T
G E N E R A L L Y , C O M M I T T E E ON F I N A N C E ,

Washington, D.O.
The subcommittee met, pursuant to notice, at 10 a.m., in room 2221,
Dirksen Senate Office Building, Hon. Harry F. Byrd, Jr. [chairman
of the subcommittee] presiding.
Present: Senator Byrd.
[The committee press release announcing these hearings follows:]
[ P r e s s Release, Jan. 17, 1 9 7 8 ]
FINANCE SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT SETS HEARINGS
ON PUBLIC DEBT AND BUDGET

Senator Harry F. Byrd, Jr., Chairman of the Subcommittee on Taxation and
Debt Management of the Senate Committee on Finance announced today that
the Committee will hold hearings on January 30 and February 6, 1978 on the
public debt and the implications of President Carter's budget upon the debt.
Hearings on January 30 will begin at 10 a.m., and will consist of a panel of
economists including Dr. Otto Eckstein, Dr. Rudolph G. Penner, and Dr. David
I. Meiselman. The hearings on February 6 will begin at 10 a.m. and will have
as witnesses, W. Bowman Cutter, Executive Associate Director of the Office of
Management and Budget, and Roger Altman, Assistant Secretary of the Treasury
for Capital Markets and Debt Management.
The hearings will be held in room 2221, Dirksen Senate Office Building.
"President Carter plans to submit the fiscal year 1979 budget to the Congress
on January 23. Congress must look closely at the budget and its implications
for the national debt and the future performance of our economy."
Senator Byrd noted that the statutory debt ceiling is now $752 billion, and this
expires on March 31,1978.
"Often the Senate is confronted with last-minute legislation to extend the
debt ceiling," Senator Byrd said. "These hearings will give the Senate an advance opportunity to explore the public debt and its economic ramifications."
Other witnesses who desire to testify at the hearings should submit a written request to Michael Stern, Staff Director, Committee on Finance, room 2227,
Dirksen Senate Office Building, Washington, D.C. 20510 by no later than the
close of business on January 25,1978.
Legislative Reorganization
Act.—Senator Byrd stated that the Legislative
Reorganization Act of 1946, as amended, requires all witnesses appearing before
the Committees of Congress "to file in advance written statements of their proposed testimony, and to limit their oral presentations to brief summaries of
their argument."
Witnesses scheduled to testify should comply with the following rules:
1. A copy of the statement must be filed by noon the day before the day the
witness is scheduled to testify.
2. All witnesses must include with their written statement a summary of the
principal points included in the statement.
3. The written statements must be typed on letter-size paper (not legal size)
and at least 75 copies must be submitted by the close of business the day before
the witness is scheduled to testify.




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2
4. Witnesses are not to read their written statements to the Committee, but
are to confine their fifteen-minute oral presentations to a summary of the points
included in the statement.
5. Not more than 15 minutes will be allowed for oral presentation.
Written testimony.—Senator Byrd stated that the subcommittee would be
pleased to receive written testimony from those persons or organizations who
wish to submit statements for the record. Statements submitted for inclusion in
the record should be typewritten, not more than 25 double-spaced pages in length
and mailed with five (5) copies by February 15, 1978, to Michael Stern, Staff Director, Committee on Finance, room 2227, Dirksen Senate Office Building, Washington, D.C. 20510.

Senator BYRD. The committee will come to order.
The budget recently submitted to the Congress by the Carter administration estimated that the gross Federal debt at the end of
fiscal year 1979 will be $873 billion. This projected increase in the
Federal debt is the largest yearly increase in our Nation's history,
namely $88.1 billion. The increase in that debt means that the Carter
administration is not able yet to bring Federal spending under
control.
Many people dismiss Government borrowing with the proposition
that the Federal debt is not cause for concern because we owe it to
ourselves. I cannot ignore our debt so easily.
Federal spending is really a claim upon the resources of our Nation.
In borrowing to finance the Federal deficit and roll over past debts,
the Treasury will be competing with the private sector for funds;
public debt will be replacing private debt and private equity which
could be used to finance the capital investment necessary for the future
economic well-being of our Nation.
The statutory debt ceiling is now $752 billion. This ceiling is scheduled to expire on March 31.
Often the Senate is confronted with a last-minute request to continue to increase the debt ceiling. These hearings will provide the
Senate with an opportunity prior to the actual debt ceiling hearings
to explore in some detail the future course of the Federal debt, the
deficit and the implications of Federal spending upon our economy.
We are fortunate today to have a distinguished group of economics
analysts to testify before our committee. We have a panel of three
economists and, along with them, a noted pollster on economic issues.
The witnesses today will be Dr. Otto Eckstein, president, Data
Resources, Inc.; Dr. Rudolph G. Penner, director of tax policy studies, American Enterprise Institute; Dr. David I. Meiselman, professor, graduate economics program in northern Virginia, Virginia
Polytechnic Institute; and Albert E. Sindlinger, chairman of the
board, Sindlinger & Co., of Media in Pennsylvania.
Next Monday, Government witnesses will present testimony but I
think that it is important to get the viewpoint of non-Government
experts.
Suppose, Dr. Eckstein, that you lead off, and then we will go to
the other witnesses bef ore we go into the question period.
STATEMENT OP OTTO ECKSTEIN, PRESIDENT, DATA RESOURCES
INC.

Mr. E C K S T E I N . Thank you very much, Senator Byrd.
According to the Government's estimates, the gross Federal debt
will reach $873.7 billion by September 30,1979. In the ordinary course



3
of events, the debt will pass the $1 trillion mark in 1981 or, if we are
lucky, 1982.
Does it matter? Twenty years ago, most economists would have
answered that it matters rather little, because the interest payments
are a transfer within the American people. While there was a revival
of the classical view that there was an intergenerational burden, the
arguments were rather obscure and based on somewhat "iffy"
assumptions.
But circumstances have changed in a variety of ways in the last
20 years, and so it is appropriate to use the occasion of the annual
ritual of the statutory debt limit extension to reach a new assessment
on the importance of the debt burden and of the implications for
budget policy.
The debt is growing rapidly because the budget deficits have become so enormous. As chart 1 shows, the net interest burden as a
percentage of gross national product, which had changed rather little
from the end of World War I I until 1967, has risen substantially
since then. Short- and long-term interest rates are much higher in
response to the last decade of inflation, and the size of the debt has
also increased very sharply. The under-financed Vietnam war and
the 1967 slowdown produced the first of the recent frightening deficits.
The 1970 recession and the subsequent stimulative fiscal policy
added three more large deficits. The great recession of 1974-75 added
mightily to the debt, of course. The subsequent recovery, unlike other
postwar business cycle recoveries, is not bringing a rapid shrinkage
of the deficits. This condition is the first major issue that must be
studied.
The President's 1979 budget is a strategy of expansion. The full
employment budget, the best available measure of direct budget impact, shows a sizable increase in its deficit both in fiscal 1978 and
fiscal 1979. This is somewhat at odds with the media description of
the budget as moderate. How did the need for this budget plan
develop? What are the actual prospects for the 1979 project after
congressional action and administrative implementation? What are
the implications for the economy ?
According to the Government's estimates, the full employment
budget deficit on the unified budget basis increases from $10 billion
in fiscal 1977 to $32 billion in 1978 and $37 billion in 1979. DRI has
calculated the comparable estimates on the national income accounts
basis.
The rise in the deficit is not quite so extreme, reaching a $25 billion
deficit for 1979. The difference lies in net lending; the Federal housing
agencies are moving back to high lending volumes which are not
included in the national income accounts because they are offset by
asset acquisitions.
But even at the more moderate NIA estimates, a rising full employment budget deficit in years 4 and 5 of a business cycle expansion deserves close examination. The reasons for this budget strategy are
these:
The President has placed employment gains high on his priority
scale. The public and the Congress justifiably expect him to show
steady declines in the unemployment rate.
It is my own belief that that is the centerpiece of his election platform. Given that goal, you have to look at the economy.




4
The economy would slow down substantially if the budget did not
have an expansionary posture. Consumer spending will rise less than
income in 1978 because the debt burden is already excessive.
There is also considerable evidence in automobile and other retail
sales that consumers are taking steps to bring their debt burden back
in line.
The Government survey of business investment plans leaves little
doubt that investment will not be strong enough to carry the economy
forward alone. A year ago, the administration adopted a growth
strategy based on 10 percent growth in real investment, but that hope
must be abandoned in the light of the survey.
Housing starts are very likely to fall before 1978 is over because of
high interest rates and recent above-trend activity. Finally, the Federal Reserve, even under the chairmanship of Mr. Miller, is likely to
raise interest rates somewhat further as monetary growth is likely to
continue to be above the 6.5 percent target ceiling over the next 6
months.
There is really need for action. If you will look at chart 2, you will
see that the proposed action is really quite substantial. This shows the
history of the full employment budget back in 1956, the first year that
you can calculate it reasonably accurately.
You will see in 1956, and through 1965, the full employment budget
was in surplus—not the actual budget; these are "iffy" numbers; but
the budget would be if there were full employment.
I t corrects out the effect of the economy on the budget. We have
these very big deficits in the Vietnam war, break-even years in the
1970's, we have a deficit in 1973, a little surplus in 1974, which I believe
was a mistake. Then in 1975 the deficits begin once more and can be
seen to be growing from 1974 to 1978.
Senator BYTID. If I may, could I interrupt you for a point of
clarification ?
Are the full employment budget figures that you have submitted
here based on zero employment or 4 percent unemployment ?
Mr. E C K S T E I N . NO. We use the same method now used by the Government, which uses as a baseline a moving, rising, unemployment rate,
which at this time takes 4.9 percent as full employment, which is not
an unreasonable baseline. It uses 4 percent in the past and then moves
it up as the composition of the labor forces distorts young workers and
women.
This uses essentially the method used by the Government. The Government has not yet supplied us with full employment estimates for
the new budget on this basis.
All right. Will this strategy work ?
The Data Resources Forecast, that is how we make a living, is
somewhat below the projections in the President's economic report, but
the difference between the two projections is moderate, a total of 1.2
percent by 1980. The DRI answers are somewhat lower for three
reasons.
First, DRI believes that actual budget outlays will again fall short
of the President's proposals. The spending shortfalls of recent years
appear to have continued into the current fiscal year.
The President's budget proposals use the second congressional resolution as their baseline, but it is apparent that fiscal year 1978 spend-




5
ing will be considerably less, about $5 billion less according to the DRI
estimates.
While there are some areas in the 1979 budget, particularly the agricultural outlays, which could easily prove to be larger than the President's estimates, more general spending shortfalls are likely to outweigh them.
Second, the D R I forecast is somewhat lower because the large Federal deficit will produce some "crowding out." The D E I model is not
monetarist in the sense that every dollar of Federal deficit displaces a
dollar of private spending, but the model does reflect the impact of
Treasury financing on interest rates.
At current conditions, we estimate the crowding-out coefficient, the
loss in private spending for every dollar deficit, at about 30 cents. If
money were tight, or the economy were at full employment, it would
approach $1 as the monetarist position maintains. If the economy were
even more slack, it would even be a lower effect.
At this time, there is no effect.
The Federal Reserve is not likely to permit the rates of increase
in the money supply that would be required to fully accommodate
unified budget deficits of $61 billion, which convert into financing
needs that are substantially greater because of the deficits of off-budget
agencies.
In 1979, the Government's estimate of total borrowing from the
public is $73 billion, $7 billion more than projected for 1978. While
the Government's total financing needs will remain roughly constant
in 1979, a large fraction of 1978's deficit will be financed by drawing
down unusually large cash holdings.
Finally, DRI projects some final demands to grow a little less than
the administration. This is particularly the case in 1979, when DRI
sees a lull in the economy due to reduced housing activity.
The main question about this projection, which is a pretty good one,
and I think most people would find it quite satisfactory, our own projection—the main question is, will the outside world permit us to
follow this strategy ? Our own policies are expansionist, but they are
not in Japan and West Germany.
This year, the differences in growth rates between ours and the
other countries was disequilibriated by the exchange rate, particularly
the fall at the end of the year. We did have a large balance of trade
deficits.
If the disparity in economic performance continues through all of
1978, the recent policy change to stabilize the dollar will fail, and
since the United States is not free to let the dollar sink without limit
or to let exchange markets become disorderly, the international constraint would become effective on the U.S. economy. Higher interest
rates would be the most direct expression of this influence.
Fortunately, there are scattered signs that the European economies
are beginning to gain some momentum. West Germany's real GNP
growth rebounded to a 3.4-percent annual rate in the final quarter of
1977, following a 0.4-percent advance in the third quarter. Industrial
production and factory orders are also showing good gains in recent
months.
In France, industrial production jumped 4.1 percent in November,
though it still stood below year-earlier levels and unemployment
showed a good improvement in December.



6
In the United Kingdom, the period of decline and stagnation also
seemed to be coming to an end as production rose 0:6 percent in November and retail sales rose a big 3.2 percent in December.
Some of our other principal trading partners are showing less signs
of a turnaround. The Canadian economy reached its highest unemployment rate of the postwar period in December, though housing and
retail sales showed improvement near yearend. The Japanese economy,
the largest industrial economy after our own, did not show much renewal. While production advanced 2.8 percent in November, retail
sales remain weak, business fixed investment is flat to declining, and
housing starts are not strong despite various Government programs.
Public outlays are showing some increases as the more recent stimulus
packages are beginning to be felt. The Government has reasserted its
7-percent growth goal for fiscal 1978, though it is too early to assess
whether the Government really means to reach it.
In summary the President's short-term fiscal policy proposals are
correct, given the actual economic situation. The $25 billion tax reduction and the associated full-employment budget deficits are large and
one could argue responsibly for a few billion dollars less. On the other
hand, given the size of the full-employment budget deficit planned
for years 4 and 5 of the expansion, it would be a serious error to aim
at tax reductions beyond $25 billion, or to aim at budget deficits
beyond $60 billion.
In the longer term, the presence of a large national debt raises a
different set of issues. The burden of the debt is not measured by the
interest payments or the absolute size in relation to the GNP, because
inflation, including inflation created by the budget, steadily erodes
the real burden of the debt. The burden is found elsewhere.
If you want to view it brutally, the 6-percent inflation rate reduces
the real burden of a $750 billion debt by $42 billion a year. The real
burden is really found somewhere else.
First, an increasing share of the debt is now owed to foreigners.
As recently as 1970, the debt held abroad was small. The international
monetary crisis that began in 1971 led to the acquisition of $45 billion
of our debt by foreigners, principally central banks. The balance of
payments deficits created by the oil crisis and the recession led to
foreign purchases of another $33 billion in the years 1975-77 and the
prospects are that foreign acquisitions will continue near the $20 billion a year mark for some time.
Thus, it is no longer true that we "owe it to ourselves"—some of the
debt has become an external burden to the American people and we
pay interest like any other debtor.
Besides the interest burden, the new dependence on foreign financing is eroding our freedom of action both in domestic and public
policy. While there are some advantages in building economic and
political ties to the oil-producing countries who are buying our debt,
the United States will pay a price for these relationships. Indeed, the
sudden switch in U. S. foreign exchange rate policy this month is generally attributed to this factor.
The Federal debt is offset by very little real Government capital.
The big growth in Government spending has been in a variety of income benefit programs, and in grants-in-aid to States which preponderantly also go for current outlays. According to the always interest-




7
ing special analysis D of the Federal Budget, page 85, of a total 1977
budget outlay of $402 billion, only $24 billion went for civil physical
assets, $3 billion for net loans and financial investments, and $11 billion for civil research and development, a total of $38 billion or less
than 10 percent.
Another $20 billion went for education and training, which can be'
considered a form of investment in human resources. On the military
side, major equipment and public works represent only $21 billion of
$98 billion.
By any reasonable definition, the bulk of the debt is being created
for consumption purposes. The continued expansion of the scope of
Government, taking an ever larger share of the GNP, gives every sign
of curtailing the country's long-term growth.
The growth of the debt reflects a decisionmaking process in which
outlays are not validated by a willingness to pay. The weakness of
modern fiscal policy has always been that it removes the discipline of
the balanced budget. If the political process must levy the taxes to pay
for the expenditures, there is likely to be a more careful scrutiny than
if the expenditures can be clothed in the virtue of deficit-created stimulus packages.
In a year of recession, the loss of discipline is not important because
resource costs really are lower since labor and capital would otherwise
be idle. But we are now talking about large deficits in years 4 and 5 of
a recovery with no serious prospect of a return to a situation where
expenditures again have to be scrutinized in terms of their tax costs.
The dangers posed by this situation to the efficiency of resource use
in the public sector should not be ignored.
In dealing with the national debt, one must be realistic. The debt
will grow and the Congress will have to raise the debt limit. This committee is wise to focus public attention on the growth of the debt each
year. A rapidly expanding debt is a serious sign of weakness in the
way we manage our economic affairs. Fiscal policies designed to undo
the restraining of monetary policies, ineffectual expenditures with low
mufcipliers and little long-term value, inflationary public and private
policies which limit our prosperity, these and other flaws ultimately
become converted into a rising national debt.
Our children and grandchildren will judge us not so much by the
size of the debt burden in relation to the GNP, but in terms of our accomplishments in solving our economic problems and thereby gradually slowing the growth rate of a rapidly rising national debt.
Thank you, Senator.
Senator BYKD. Thank you very much, Doctor. That was indeed a
very interesting presentation.
The next witness will be Dr. Rudolph G. Penner, director of tax
policy studies, American Enterprise Institute.
STATEMENT OF RUDOLPH G. PENNER, DIRECTOR OP TAX POLICY
STUDIES, AMERICAN ENTERPRISE INSTITUTE

Mr. P E N N E R . There seems to be an aura of gloom hanging over
American and foreign financial markets. The stock market is valuing
the real value of the corporate capital stock very much lower than it




8
would cost to replace it. The dollar is weak, and generaly there is a
feeling that economic policymakers do not know what to do next.
In many ways, I find this pessimism puzzling, because we have done
extremely well economically since the horrors of the recession of 197475. We have raised employment by 8 million. We have reduced the unemployment rate from a high of 9 percent to 6.4 percent. Even the inflation rate has been, in the last 9 months, about half of what it was
during much of 1974.
So the recovery, I think, is proceeding in a satisfactory manner in
the sense that real growth is continually lowering the unemployment
rate.
The main problem that we face is inflation. While we have made
progress in the last 3 years, the consensus forecast is that that rate will
remain at about 6 percent over the next 2 years.
Now, I think that it is the worry about inflation that is the single
most important element causing uncertainty in domestic and foreign
financial markets.
So it is within this context that we be^in to debate the President's
economic program in 1979 and I would like to concentrate this testimony on first, the appropriateness of the deficit that has been recommended and then on the appropriateness of the income tax propoals.
The same inflation that makes financial markets so uneasy is inexorably pushing taxpayers into higher and higher tax brackets. If a person gets a cost-of-living raise, he finds that that raise is taxed at a
higher marginal rate than was a similar raise last year. If he gets a
merit increase on top of the cost-of-living raise, it is taxed at even
higher marginal tax rates.
The effect of this is well illustrated by a chart that I have attached, to
my testimony that appeared in the fact sheets that went along with
the President's tax message.
The chart uses the ratio of taxes paid to personal income to measure
the income tax burden. The chart reveals a sawtooth pattern. Whenever the burden starts to rise, the Congress has typically offset the rise
with a legislated tax cut. This occurred throughout the sixties and early
seventies and as a result, the tax burden in 1976 was about equal to the
burden that was extant in the early 1960's.
There is a slight reduction in the burden in 1977, but despite the
President's proposed tax reductions, the tax burden rises in 1978 and
1979. In other words, those proposals do not fully offset the effects of
inflation and real growth pushing people into higher tax brackets and,
if nothing happens after 1979, the tax burden soars. By 1981, it would
reach 12 percent—a level higher than at any time during the period
shown in the chart, and a level 20 percent higher than that existing in
1976.
I do not expect that either the administration or the Congress will
want to see the burden rise that rapidly and there will be intense pressures to have another tax cut even if the 1979 tax cut advocated by the
President is accepted. Those future tax cuts will make it difficult to
make progress against lowering the deficit.
The chart, of course, does not even show the social security burden
that would cause the total burden to rise even more rapidly.
Despite the fact that the President's tax cut for individuals is not
really a tax cut, he is not able to advocate a fall in the deficit of any sig-




9
nificance. As we look at the appropriateness of this policy, we have to
be careful to judge it by the economic conditions that are expected to
prevail in 1979 and 1980 when, with some timelags, this deficit will be
having its major economic impact. In the absence of bad luck or bad
policies, the unemployment rate should be at or under 6 percent for
most of those 2 years.
No economist knows for sure when demand pressures will begin
again, or, in other words, at what unemployment rate we shall begin to
see an acceleration of inflation again. But there are careful students of
labor markets who believe that we shall either be at the danger point or
perhaps already passed it once the unemployment rate goes below 6
percent.
Therefore, I conclude that, given that inflation is the one macroeconomic problem where we do not seem to be making much progress and
given that we shall be reaching fairly low levels of unemployment
when this deficit has its major impact, the deficit should be somewhat
lower. I would set a target of about $50 billion, recognizing that this
does not indicate much progress in lowering the deficit and that it really
represents a fairly trivial change in policy in the $2.3 trillion economy
expected for fiscal 1979.
However, I advocate that kind of change simply to show that we are
worried about the deficit in the long run and I would hope that this
would have a salutory psychological impact. I would also hope that it
would make Mr. Miller's difficult new job at the Federal Reserve System just slightly easier, and that it would give foreigners slightly more
confidence in the ultimate value of the dollar.
How do you get there? My goal is modest, because I recognize
the difficulties. The President has suggested that his proposed outlay
figure of $500 billion represents a "lean and tight" budget. The next
page of my testimony suggests that, while it is certainly lean, it is not
Draconian.
I suppose the one point on which I differ from Mr. Eckstein a little
bit is this question of the shortfall. I would not swear that we would
not have another shortfall in spending in 1979. However, the Office of
Management and Budget has gone to extreme lengths to improve their
estimates. Some of their assumptions are already out of date. For example, the interest rate on the public debt is higher than what they
assume in calculating the interest bill. So I do not think that we should
count on a shortfall. Again, I would not swear that one will not occur,
but I think that cost overruns are almost equally likely as we look
ahead to 1979.
In the prepared testimony, I talk about the difficulties of cutting
spending that we all know so well, and conclude that we shall have to
show extreme discipline to hold to the level of spending advocated by
the President, because there will be enormous pressures to exceed that
number.
The question is, then, how do I get to my $50 billion deficit ? I get
there by having a lesser tax cut. I reduce the President's tax cut in
two ways. First of all instead of making the tax cut effective October 1
1978 as the President suggests, I would delay the implementation
until January 1 of 1979. That, alone, would reduce the deficit by about
$5 billion, roughly speaking.




10
I would also lower the amount of the tax cut to about $15 billion
with it being shared between individuals and business in about the
same way as the President suggests.
How should such an individual tax cut be distributed? I would like
to spend a little bit of time on the proposed distribution of the President's tax cut because I do not think that the fact sheets that have
been issued by the Treasury are very revealing.
They look at the distribution of those tax cuts at a given level of
money income. As I already noted, inflation and real growth is constantly changing that income, so you have to look at comparable
people in 1979 and in 1977.
At the very back of the testimony, I have a rather complicated table
which adjusts only for inflation, and in the extreme lefthand column
of that table, I show dollar levels of income which provide the sarne
purchasing power in 1977 and 1979, given the inflation assumptions in
the budget. The budget assumes that the price level in 1979 will be at
about 12 percent higher than the price level in 1977. So each of the 1979
income levels in that table are 12 percent higher than the 1977 levels.
I then look at the tax burden implied under the 1977 law and under
the 1979 law proposed by the President.
The middle three columns show the average tax rates and what happens to them when you combine social security and personal income
tax rates. The last column shows what happens to the total tax burden—again in real purchasing power measured in 1977 dollars.
If, for example, you look at the first panel of that table, you see
that a person with $8,900 in 1977, gets the same before-tax purchasing
power with $10,000 in 1979. A family of four at this income level gets
a tax cut of $118 measured in terms of constant purchasing power, so
that this particular family would, indeed, be better off as a result of
the President's cut.
As we go down the table to higher and higher levels of income,
however, we see that the effect of a tax cut is lowered, and the breakeven point is roughly $17,000 in terms of 1977 income. Above that level,
the people find that they actually have a tax increase.
If we go all the way up to the $35,600 level in 1977, we find that
although the person gets a raise providing the same before-tax
purchasing power, or $40,000 in 1979, the family has lost some $557
in purchasing power because the tax burden has risen. In other words,
the President is recommending a highly redistributive pattern of cuts
when it is considered in conjunction with the social security increases.
This highly redistributive pattern comes on top of other tax changes
in the last 3 years that have all favored the lower part of the income
distribution. The earned income credit, created in 1975, favored the
working poor. The decision to have a $35 per exemption credit instead
of raising the basic exemption also favored the lower income groups.
The standard deduction increase in 1977 had its main impact at the
lower end of the income scale, while all through this period, inflation
and real growth have been pushing the upper half of the income scale
into higher and higher marginal brackets. Although the chart that I
showed you before indicated that, in the aggregate, the Congress has
offset the effects of real growth and inflation, they have not provided
a full offset for the top half of the distribution.




11
The choice of a proper distribution of the tax burden, clearly rests
on value judgments. Basically, we must ask how egalitarian should the
income distribution be ? And, to some degree the decision also rests on
economic judgments regarding how much incentive should be given
people to work their way up the income ladder. My own judgment is
that we have been moving very fast and very far in redistributing
income without a very good, explicit debate about what our eventual
goals are.
Are we really aiming for an egalitarian society, or do we want to
have a society in which the Government plays a lesser role in redistributing income ?
When I look at how my small tax cut should be redistributed for
1979,1 would like to keep it fairly neutral distributionally, given all
of the tax cuts that have favored the lower income groups recently and
I would reduce the burden somewhat on the upper half of the
distribution.
Roughly speaking, I would try to compensate for inflation. This
means designing a tax cut that has the highest proportionate cuts at
the bottom of the distribution, but the highest absolute cuts at the top.
In very general terms, it takes that kind of tax cut to correct for
inflation because inflation tends to increase the tax burden more
rapidly, proportionately, at the bottom of the income distribution. It
is those people that experience the most rapid increase in the average
tax rate as inflation pushes them further up the income scale.
The sort of tax cut that I would recommend would raise the basic
exemptions from $750 to something like $800 and leave some room for
cuts in marginal rates, as well.
If one were adjusting for inflation perfectly, you would widen the
brackets rather than cut rates, but I think there is some merit m
cutting rates on this occasion.
Unfortunately, the size of the tax cut that I am proposing—which
would be about 5 percent of tax liabilities or $11 billion—is not
sufficient to compensate for inflation and social security tax increases
between 1977 and 1979.
Therefore, I am really advocating a tax increase for everybody, and
it is unpleasant to do such a horrible thing. But I think that, unless we
show more discipline on the spending side, the requirement to bring
down the deficit really leaves us no other choice.
I would just like to take 1 minute to talk about two proposals in the
budget that might go unnoticed but which I think are very important
to this committee.
We have been talking about the role of Government debt in the
economy. There is one area of Government activity that never gets
much notice. That is the whole area of making direct loans and guaranteeing debt made by private lenders. An immense amount of activity goes on in these areas.
The gross value of Government loans and guarantees are expected to
be $99.7 billion in fiscal 1979, and the whole quantity of outstanding
loans and guarantees is expected to be $360.8 billion, a value about
one-half the value of the national debt.
These activities, while we hardly ever pay any attention to them,
have important resource allocation effects. When the Government




12
guarantees the debt of one person, whether it be a mortgage or a ship
loan or whatever, it makes it harder for everybody else who does not
have such Government guarantees to borrow money. And, because of
the guarantee, a private issue becomes very much like the Govrnment
debt, in that it does bear the full faith and credit of the U.S. Government if there is a default. As far as the lender is concerned, such issues
compete directly with the national debt and therefore raise the interest
bill that has to be paid by the Federal Government.
So guarantees are very important, and yet they have gone virtually
uncontrolled and unstudied. The President has proposed that his
budget process and the congressional budget process impose an annual
limit on guarantees and direct loans, and I would urge you to examine
that proposal very carefully, and, I hope, sympathetically,
The other rather unusual proposal which I think merits careful
study is the notion of taxing unemployment benefits where adjusted
gross income exceeds $25,000 on joint returns or $20,000 on single
returns. Where a family like that is receiving unemployment insurance, it is usually because the family contains more than one person in
the labor force and in that situation, the tax-free nature of the unemployment benefit means that if someone actually does go out and takes
a job, the gain in terms of net income is very, very small.
You can easily create a situation where 80 percent of the salary is
essentially lost, and therefore taxing the unemployment benefits would
reduce the incentive to stay unemployed longer and I would therefore
strongly support this administration initiative.
Thank you.
Senator B Y R D . Thank you very much, Dr. Penner.
Dr. David Meiselman, professor, graduate economics program, Virginia Polytechnic Institute. Would you proceed ?
STATEMENT OE DAVID I. MEISELMAN, PROFESSOR OP ECONOMICS,
DIRECTOR, GRADUATE ECONOMICS PROGRAM IN NORTHERN
VIRGINIA, VIRGINIA POLYTECHNIC INSTITUTE AND STATE
UNIVERSITY

Mr. M E I S E L M A N . Thank you, Senator.
As a first approximation, the cost of Government is measured by the
resources used in the public sector, not by the taxes we pay. When labor
and capital and raw materials are used in the public sector, they are
obviously not available for use in the private sector.
Private sector output and employment are thereby lower than they
would otherwise be. Doing without the private sector output covering
everything from food to houses is the cost of government and public
sector output, and the cost associated with the benefits of public sector
activities.
This cost exists independently of the means that are used to finance
Government expenditures, whether taxes are high enough—or low
enough—to balance the budget, or whether there is a budget deficit
financed either by selling bonds to the public or by having the bonds
purchased by the Federal Reserve with newly created—some would
say newly printed—money.
This is why any significant reduction in the costs of Government requires a corresponding reduction of Government expenditures. This is




13
also why tax reduction without expenditure reduction may give the
appearance of a reduction in the costs of Government to some taxpayers, but this is largely an illusion.
The deficit must be financed, and the interest on the public debt must
be paid out of future taxes. True, the tax may be deferred to a later
date, but the future tax bill will have to be higher because of the
interest on the public debt.
I may add that I see no important difference here between future
dollars used to pay obligations represented by outstanding Treasury
securities, now in the neighborhood of $750 billion and other legal
and "moral" unfunded obligations of the Federal Government to pay
future dollars for such items as social security, military, and civil
service pensions, and the like.
To be sure, these unfunded obligations are subject to modification
in the future, just as the real value of Treasury securities are subject
to modification by future inflation. In any event, it would appear that
current and unfunded obligations are many times greater than the
staggering but more precisely measured funded Federal debt.
For the moment, holding aside questions about the relative efficiency
of resources used in the private sector versus those used in the public
sector and the associated relative returns, each method of financing
Government expenditures has a bearing on overall efficiency, both in
terms of facilitating a shift of resources from private to public sector
use and also in terms of the efficient use of the remaining resources
available to the private sector.
Every method of financing Government alters relative prices and
changes the context in which private decisions are made. Against the
alternative of a hypothetical neutral tax, every tax and every deficit
makes the private sector less efficient. Although some kinds of taxes
do impose less distortions and inefficiencies than others, in the real
world there is no such thing as a completely neutral tax or a neutral
deficit. Every tax and every deficit adds its own costs, measured by the
loss of the efficiency of the private sector, to the other costs of resources
pushed out of the private sector into public sector use.
It is in this sense that no tax is a good tax and no deficit is a good
deficit. By the same token, the correct evaluation of the costs of government must also include the loss of output and employment and the
inefficiencies resulting from the unavoidable necessity to finance government expenditures.
There is, of course, no precise way to measure whether the benefits
of Government expenditures are sufficiently high to justify their costs,
especially since the people paying the costs may not be the same as the
people receiving the benefits. However, it is widely acknowledged
that our present tax and expenditure mechanism is heavily biased
toward excessive Government spending, especially since the costs of
Government tend to be diffuse whereas the benefits are highly specific.
Indeed, these are compelling reasons for tighter lids on total Government expenditures as well as for the closer links between expenditures and highly visible taxes to pay for those expenditures envisaged
by proponents of mandated balanced budgets.
For the present, it would seem that few people feel that they are
getting their taxes' worth from the vast array of Government programs. We are paying more and enjoying it less.
23-544—78



2

14
In light of this, any increase in the Federal budget would appear to
be excessive. Indeed, a substantial reduction in Government expenditures and in the scale and scope of Government would seem to be in
order.
Taxes generally force or induce us to do things differently and thereby reduce the inherent efficiency of a free market private property
system. When a tax increases the cost of labor, fewer workers are
employed or they are required to accept a correspondingly lower wage.
When a tax reduces the return from a work, we work less, and so forth.
Similarly, deficits also force or induce us to do things differently
because limited financial resources otherwise available to finance private sector capital formation are bid away by the financing needs of
the U.S. Treasury. These problems are not avoided when the Federal
.Reserve buys Treasury securities with newly-created Federal Reserve
credit; they are compounded by the subsequent inflation.
In any event, in part, taxes and deficits that force or induce us to
use less so that the Government can have more also have the unintended results of making the private sector less efficient. As I shall
discuss in a few minutes, the problem is especially critical with respect
to the impact of public policies on saving and investment because of
the differentially heavier burden the tax system now imposes on
income devoted to capital formation rather than consumption or
Government.
Some Government expenditures ai*e devoted to purchases of goods
and services and are thereby resource using in the sense that the
Government itself directly acquires the use of labor, capital, or raw
materials as would be the case when the Federal Government buys a
submarine for'national defense or hires more lawyers to promulgate
more regulations.
Increasingly, however, a larger and larger fraction of the Federal
budget is devoted to transfer payments. In the President's budget
document for fiscal 1979, less than 35 percent of total Federal expenditures are for the direct purchase of goods and services by the Federal
Government. The remainder of the half-trillion dollar budget is
largely devoted to transfer payments to individuals—about 40 percent—grants-in-aid to State and local governments—16 percent—and
interest on the national debt—8 percent.
But these expenditures do more than redistribute income by taxing
Peter to pay Paul because the taxes and the deficits that pay for the
transfer payments and the grants-in-aid make the economy as a whole
less efficient.
When transfer payments and the size of the budget are small, this
dead-weight loss is correspondingly small. However, the rapid growth
in transfer payments and grants-in-aid since the mid-1960's means
that financing the massive scale of these programs significantly
reduces the size of the pie being sliced up.
Holding aside the difficult ethical ahd political problems of largescale income redistribution, I believe that problems of slow growth,
inefficiency, impaired employment opportunities and inflation created
by the zeal for redistribution are some of the Nation's most vexing
and embarrassing problems, problems which cannot be solved without a significant moderation of the Federal Government's redistributionist policies.




15
I may add that the size distribution of income appears to have been
changed little by these policies and in no systematic way. All we
can definitively say is that, in aggregate, the Nation is poorer because of the redistributionist policies, in part because of the retarded
growth of plant and equipment resulting from the increases in taxes
on saving and investment. In turn, less capital means lower labor productivity and thereby both lower wages and impaired employment
^opportunities.
Moreover, there is now a large and growing number of informed
students of the problem w^ho contend that the net effect of recent public policies intended to make income distribution more heariy equal
lias been to impair opportunities for the poor, weaken the family, and
to make income distribution less equal.
It would seem that old ways of thinking about the problems of
poverty and unemployment are so deeply ingrained that even when
there is acknowledgment that public policies are counterproductive,
proposed new solutions repeat many of the same old errors and promise to make a bad situation even worse.
For a current example, consider the welfare system, a disaster
area of public policy, and new initiatives to change the system. It is
generally recognized that the present welfare system has caused more
unemployment and has perpetuated poverty.
The administration's welfare proposal contained in H.R. 9030 attempts to deal with the welfare mess.
At the request of the Law and Economics Center of the University
of Miami, I have just completed a detailed analysis of the administration's welfare proposal, including its provisions to create and fully
fund the largest public service employment program since the 1930's.
With your permission I would like to submit the study for the record.
My analysis concludes that, despite the administration's claims that
the program will shift the poor from welfare dependency to productive jobs, especially in the private sector, and at low additional cost to
the taxpayers, the results of the new program will be quite the
contrary.
Also, my study shows that, if enacted into law, H.R. 9030 would
cause a further expansion of the public sector that potentially will
attract a large segment of low- and middle-income workers out of the
private sector into low productivity, low priority, and largely deadend public sector employment. Costs will be substantially higher than
the administration forecasts. AT whole new welfare class is likely to
emerge, and family stability w ill be further impaired.
The ultimate costs will include both lower overall employment and
less economic growth. At the same time, the basic causes of the current
problems of unemployment and poverty, poor government policies
that have increased barriers to employment and to gaining work skills
while increasing incentives to unemployment and welfare, all are left
intact.
I turn now to several observations about some of the connections between our SIOAV economic growth—since 1960 perhaps the slowest of
all the Western industrial countries, and public policy. The major reason for our poor performance is that the American economy has been
•devoting too many resurces to consumption and to government, and
hot enough to the capital formation which makes growth possible.




16
Thus, there has been a slowing of the growth and capital per worker.
The sharp rise in the labor force in recent years has not been matched
by any corresponding speedup in the rate of capital formation.
To place the recent slowdown in capital formation per worker in
perspective, in the 1950-55 period, the growth of capital per worker
increased at the rate of 3.6 percent per year, and slowed in the decade
thereafter. From 1965 to 1970, capital per worker increased at the rate
of 2.6 percent per year.
In the 1970's there has been a sharp decline in the growth of capital
per worker. The Congressional Budget Office estimates that it grew
at the rate of about 1.6 percent per year between 1970 and 1975 and
only 1 percent per year since 1975.
In fact, during the current business cycle expansion since early 1975,
real gross nonresidential fixed capital formation has increased only
slightly and has actually declined as a fraction of gross national product. This is hardly the basis for the economic growth and the expansion of opportunity which the Nation can and should achieve.
This slowing growth in capital per workers is the result of a number
of public policy measures, which, by unduly penalizing saving and
investment, have diverted resources that individuals would prefer to
devote to capital formation and future consumption toward present
consumption by households and by government. And one of the worst
sets of policies, resulting in this wasteful distortion, is our Federal
tax system.
The fundamental bias against capital formation in our tax system
results from the multiple taxation of income which is saved and invested. Individuals must pay taxes on essentially all income they earn,
whether they spend it immediately or save it. The same holds true for
corporations and their profits.
This means that a dollar of current income is taxed only once when
spent on consumer goods.
However, the same dollar of current income devoted to saving is subject to multiple taxation because taxes must also be paid on the interest, dividends, capital gains, and the like that result from saving and
investing. The use of income for saving is thereby taxed at substantially
higher rates than the use of income for consumption. People naturally
respond by saving and investing less.
This distortion by multiple taxation is particularly great in the case
of dividends, for the return on equity is also subject to an initial corporate profits tax of 48 percent. To be sure, so-called capital gains are
taxed at lower rates than ordinary income, but this only moderates
the distortion; it does not eliminate it.
The damage wrought by our Federal tax system has been aggravated
by inflation which creates false business profits and false capital gains,
and thereby increases the tax bias against saving and investment.
The combination of our present tax system plus inflation itself the
result of poor public policy, mainly bad Federal Reserve monetary
policy, results in a set of capital levies on both business and individual
wealth and also puts individuals into higher income tax brackets when
their real pre-tax incomes remain the same. These capital levies and
higher tax rates are nowhere to be found in the tax code, and tacitly
raising tax rates and imposing capital levies by inflation rather than by




17
explicit debate and legislation are not among the Congress' more forth
right and honorable actions.
For yet another public policy that impairs saving and investment, I
would call your attention to a recent study by Prof. Martin Feldstein
of Harvard which indicates that the present social security system significantly reduces private saving. Professor Feldstein has reported
that social security benefits lead employees to reduce the funds they set
aside for their retirement almost dollar for dollar with any increase in
social security benefits, thereby reducing the pool of private saving
available to finance capital formation.
To sum up, the costs of Government continue to rise. It costs us more;
we are enjoying it less. Few of us believe that Ave are getting our taxes'
worth. By trying to level incomes, public policy has reduced the size of
the pie without significantly altering its distribution. The tax system,
heavily biased against saving and investment when there is no inflation,
is made even more biased by inflation, itself the result of poor public
policy.
The administration's budget promises more of the same, and the administration's welfare reform, if enacted into law, will result in fewer
jobs and still greater welfare dependency.
Central to the solution of these problems is the size of the budget
and the deficit. The staggering deficit of the Federal Government must
be eliminated, primarily through expenditure control, partly to avoid
having the deficit crowd out needed private capital formation.
We must also correct the longstanding bias in the Federal tax system
against saving and investment. For full tax equality between the consumption and saving uses of after-tax income, savings should be deductible from the income tax base so that only consumption is taxed.
Progressivity can be built into such a tax and I would favor a mild degree of progressivity with appropriate deduction for human capital
outlays such as health care and education.
I would also favor an indexing arrangement to keep "real" tax rates
intact. With the full deductibility of saving, taxes on corporate income
and on capital gains can be eliminated. In addition, taxes such as the
estate and gift taxes that yield little revenue and create much mischief
can be reduced or eliminated.
A roughly equivalent alternative would be a value added tax with
appropriate deductions for capital outlays.
For other desirable tax changes, I would urge the Congress to review
the record and follow the examples of the Kennedy administration
and of the Congress during the early 1960's, actions which set the stage
for a surge of economic growth as well as for the elimination of
inflation.
Then, the distortions of the tax system were moderated by effectively
reducing the tax biases against saving and investment by means of a
combination of policies that included more rapid depreciation and the
investment credit as well as the reduction in both corporate and personal tax rates. The Kennedy tax cuts have been more than offset by
inflation moving people and businesses into higher tax brackets. We
would need tax cuts to get us back to the Kennedy tax rates.
Finally, I would recommend the rejection of the administration's
welfare reform package.




18
Senator B Y R D . Thank you very much.
These have been three most interesting presentations from outstanding economists. The committee also has, today, Mr. Albert E..
Sindlinger.
You know, we in government frequently tend to be theoretical in
our outlook on legislative matters. That may also be the case among
economists. I find Mr. Sindlingers profession a most interesting one
because he comes in daily contact, and has been doing it for many
years, with several hundred or more consumers each day.
Whatever we may do in government, as I see it, can be easily confounded by how the people themselves react to our actions. I t is important that we know, as best we can, something of the thinking of
the consumers, especially housewives, who make the bulk of the purchases. What do they think about what is going on in Washington ?
What do they think about this new tax program of the President?
What do they think about the spending policies of the Federal
Government %
Mr. Sindlinger, you are in a unique situation to give us information
on this. We are delighted to have you, and you may proceed as you
wish.
STATEMENT OE ALBERT E. SINDLINGER, CHAIRMAN OE THE
BOARD, SINDLINGER & CO., MEDIA, PA.

Mr. SINDLINGER. Thank you for the opportunity of appearing here,
Senator.
As you just stated, I am going to talk from the standpoint of my
background of having conversations with people,
million households, who have been interviewed over the last 25 years. Anticipating
that we may not have a very big audience today, I had some special
tabulations made to explain why when you talk budget costs in Washington, you almost have the feeling that you are talking to yourself.
From September 29 through January 25, we made 20,964 interviews, and 189 of these interviews were completed in the suburbs of
the six counties of Greater Washington. Whenever my interviewers
from Media get their sample selections to call, and wThen they know
that the telefile that they are going to call is the suburbs of Washington, they always crack; now I am going to call in the land of milk,
honey, and money.
To illustrate, on page 2 of my testimony, I have a tabulation of"
20,964 interviews made in the last 16 weeks. To save time, you can
read this and you can see how the consumers related their response to
our four key questions on current income, expected household income,
expected job security, and expected business conditions.
And then I skip to page 3 where I break that tabulation down into
the 189' households interviewed in the six Washington suburbs, and
they are listed here as Prince Georges, Montgomery, Arlington, Fairfax Counties, and the places of Alexandria and Falls Church. In those
six counties, consumer confidence over the last 16 weeks averaged 78.3'
percent. That was because 81 percent of the people had an increase
in income, 69 percent expected increased income in the next 6 months,
62 percent expected more jobs, and 71 percent roughly expected better*
business conditions in the next 6 months.




19
Now, those six counties that I am referring to represent 0.9 percent
of the total households in the United States, which means that there
are 99.1 percent of the households not living in the land of milk,
honey, and money; and you see over in the righthand column that
their confidence is 54.1 percent during the last 16 months.
Twenty-nine percent had an income up, and almost the same number
had their income down. Only 30 percent expected gains in income,
only 31 percent nationally expect more jobs, and 30 percent expect
better business conditions.
So this makes the area in which we are talking—this excludes, by
the way, the District of Columbia, because the District of Columbia
is like the United States and very much unlike the suburbs.
This table, I think it is important, because everytime I come to
Washington, I have been coming here for many, many years, and in
recent years I always feel that when I enter the city I need a visa or
to show my passport going in and out of this city because it is so unlike
the world that I talk to every day.
In order to keep my remarks brief, I have provided some exhibits.
Quickly, the first exhibit is to set the mood. The second exhibit, B,
is to illustrate the cause of the error of the Federal Reserve Board in
making its third annual strikeout in interest rates during 1977; and
if we have time, I have exhibit C, to show where our money is and
was; and in D, I illustrate the velocity of our money measures and
also show the velocity of our money in the last 12 months. And F is
a concept of ours where we convert the money that is in the United
States to a per household basis.
In G, I point out how ridiculous our labor market figures are. And
when we talk about, as was just mentioned a minute ago, that the unemployment rate has been dropped from 9 percent to 6.4 percent, I
want to remind the committee that this is a seasonal adjustment decline, and it is very nice to be able to move people around, seasonably
adjusted: and when we talk about the 4 million people that the economy has absorbed as new employed people, I would like to remind the
committee and Congress that this is not because the economy is so
good. This is because people need extra jobs. The second and third
member of a household has to go to work to be able to pay all their
bills. This is the reason for the increase in the labor market, and it is
not because the econom}r is absorbing more jobs. I would like to get
that point cleared up.
If all of the U.S. households—and I think, if we had time, I could
document that—if the 70,800,000 U.S. households operated their fiscal
and monetary policy the way our Government operates its policy, we
would all be broke and bankrupt. And, if all U.S. households and corporations were to keep their books on a seasonably adjusted basis, as
the Government operates, and if all income tax returns were to be filed
on a seasonably adjusted basis—and why not—like the Federal Government fixes its monetary policy, if we filed seasonably adjusted income taxes, the IRS would have us all in jail. Then who would pay
the bills?
In the press release announcing this hearing, Senator Byrd, it is
noted that we are talking about a $752 billion national debt ceiling
now, and it is going to be more, with over 70 million households, to
save time, I would like to remind the committee that this national debt




20
represents $10,607.54 per household. That is how much the American
households owe, and according to a very extensive study that I now
have in the field, few people know that they have this national debt on
top of the other debts that they do know about, like taking their bank
savings and moving it into their checking accounts to pay for oil and
the Federal Reserve Board reading this as an explosion in the money
supply and raising interest rates because people are raiding their bank
savings to pay for oil.
I t is even worse for people who live with the credo that you cannot
spend more than you make, to have a debt of that magnitude that most
people do not even know that exists.
Senator, you have visited my operation and you have heard people
talk, and the key thing that comes through in all of our interviewing
in recent years is that people say you cannot spend more than you
make. So that, without consent and approval, the U.S. households of
this country are shouldering an extra $10,000 in debt that most people
do not even know they have.
This should not be kept a secret for much longer. I t should be ceaselessly publicized and dramatized, to show the people what the Government is really costing them.
We use a great deal of television time to promote the image of the
President of the United States. I would think that we ought to use a
little television time to promote how much the national debt is and
let people realize that they owe—each household over $10,000 at the
present time.
Speaking of publicizing, as I was writing this, I observed a television commercial that came to my mind and it was urging people to buy
Government savings bonds, as if savings bonds were war bonds, and
the commercial suggested that it is a patriotic duty to buy these savings bonds.
A horrible thought ran through my mind yesterday when I saw this,
because if some individual company were promoting the sale of savings bonds rather than the Government, would not the F T C come
down hard on these commercials as false advertising ? Think about it.
What will those patriotically bought savings bonds be worth when
they mature?
Mr. Chairman, you, better than any other member of this committee know what I am talking about when I refer to people. You and
I fully know well that Congress had better not underestimate the ability of the people to handle their own money and, I would like to add,
in view of this deficit, to handle their own votes.
Obviously, no one expects these households to come up with this
kind of cash to pay this debt, because they do not have it, but once the
issue is brought to people's minds, as in a special study that I am now
conducting, I can tell you that there will be a new atmosphere and
there will be more people attending a hearing like this, if it were not
held in Washington.
Once an issue confined to the backburner of public opinion, the
Federal deficit, now it has become the hottest topic in the country. We
are speaking of the Federal deficit. It has become a hot topic because of
what happened not so long ago with the President's recent state of
the Union message.




21
If you are interested, I have some tabulations on how many people
watched the program and what their opinions of the state of the
Union are. I have made some tabulations here of the question—on
page 7, I am referring to now—where we asked, and we have asked,
this question for the last 22 years—what would you say right now is
the No. 1 problem that faces this entire country, that you yourself
are most concerned about %
And in reference to this question and the tabulations shown on page
7 , 1 would like to add that when most people are asked this question,
they will give multiple responses. They will combine unemployment
or inflation or two or three other things, but for this particular question, whenever a respondent gives a multiple disclosure or multiple
choice, we ask him, would you please give me your considered No. 1
problem, so that the tabulations come out nearly to 100 percent.
Without taking time here, you can see that suddenly where 8 percent of the Nation last year, when President Ford gave his state of the
Union message, only 3 percent of the Nation were concerned about
the budget deficit. That figure has now shot up to almost 1 in 5.
During the 1960's until recently, most people cared very little about
the deficit because they thought—and, I would add, I think they were
educated to think—that somebody else was going to pay the bill and
that the deficit is good to make the economy grow. Now, deficit is a
dirty word among growing numbers of people from all walks of life
and all shades of opinion, all economic strata, who regard the deficit
as the primary cause of the Nation's economic dilemma.
In fact, in those tabulations that I showed you, people are now shifting to the deficit in preference to inflation, because they consider the
deficit as a major cause of inflation. This was not true 2, 3, and not even
thought of 4,5 or more years ago.
Instead of just expressing concern over the general issue of inflation
and unemployment and economic weakness, the people have shifted
their focus to hone in on a number of these problems, and until the
deficit is reduced or eliminated as people tell us, there can be no lasting
cure for inflation or economic stagnation, based upon this special study
I am referring to.
Government spending through the deficit is viewed as a keystone
of inflation. The need to borrow funds to finance deficit—and people
further acknowledge that this keeps interest rates high and a big
deficit is regarded as a barrier to the meaningful reduction of burdens
from taxes.
Perhaps the biggest monkey conceived by the consumers is the fact
that when the Government needs such massive amounts of money to
operate, it deprives the economic mainstream of needed funds from the
private sector.
I would also like to suggest—I have a booklet here that I have
brought along. I was not going to pass it out, but I would like you.
Senator, to include this in the record because this is an article written
by Dr. Richenbach in West Germany that explains why West Germany is not going to have capital formation and explains why we
are not going to have capital formation in this country.
^ On page 9,1 showed some of our confidence parameters. I will save
time, because I want some time for some questioning, and you will no-




22
tice in recent years, as you look at these charts, we have had a very,
very fast yo-yoing of confidence in recent years. Up and down, up and
down.
Going to page 12, and I want to talk about one of the problems
that we have in common, our money supply problem. We are talking
about the growth of the money supply. We are talking about how fast
the money supply is growing.
If you reduce the money supply to a per-household basis, you will
find that most of the money supply growth per household is just about
even with the rate of inflation.
The Federal Reserve Board read their figures in error and I would
like to refer to exhibit B here, which shows a chart. This chart shows
that the Federal Reserve Board, in misreading their seasonally adjusted figures found, in April M - l was growing at 21.2 percent, then
it fell back, then it jumped back again to 19.9 percent and then it
fell back and then it jumped up to 12.7 percent in October and fell
back, and these were the periods of time when the Federal Reserve
Board raised interest rates to cool off what they thought was an explosion in money.
If you look at the chart on the right, which is the Federal Reserve
Board's not adjusted figures showing the growth of M - l month by
month, year to year, there was no explosion of money, it was growing
under the target rate and here is an example, the seasonal adjustment
being misread and having the Federal Reserve Board, for the third
straight year, falsely raise interest rates to kill the recovery of 1977
as it was killed in 1976 and as it was killed in 1975, for the same
reason.
These false rises in the interest rate over the seasonal adjustment explosion of money, which is only seasonally adjusted, is incompetent.
The point is that these improper data and mistakes are leading to implementations of Government policies that hurt people. Before we can
make any move toward cleaning up our problems, the Government has
got to get its books in order. We have got to stop running our books on
a seasonally adjusted basis.
If a business or an individual were to presently seasonally adjust
their records to the Internal Revenue Service, and if we all filed
seasonally adjusted income taxes we would all be in jail. In fact, I
tried a little experiment with my wife, Nellie. I gave her a formula to
seasonally adjust our income taxes over the last 5 years, and I am
going to try this year to file my taxes in two forms: I am going to file
my real taxes and I am going to file a seasonally adjusted tax return
and we will see what the I R S does with which return that they want to
take, because the Government operates all of its data, all of its books,
on a seasonally adjusted basis. Why can I not seasonally adjust my
income taxes.
To save time, I came down here, Senator, because I am very worried.
I am not as optimistic as the people who live in Washington.
If you recall, Senator, we had a lot of conversations with a lot of
people in July of 1974 when we saw this recession coming. When I come
to Washington, and when I talk to people in Washington and I talk
-about the stock market, I am constantly told, as late as yesterday on
the telephone, that the stock market is wrong.




23
On a 4-week moving average, the stock market is the most accurate
forecaster of the Nation's economy that exists over the last past two
decades. It is an economic barometer that responds to the confidence
of people and that is why we have successfully forecast the stock market over the last 20 years.
As I say, I am shocked and dismayed by so many high officials in
and out of government who say to me that the stock market is wrong.
"Given its past record of accuracy, it is, to our way of thinking, incumbent upon them to look at the facts, and particularly, Congress had
better start paying some attention to the stock market.
The stock market is saying that the Nation's economy is heading
toward a recession and this cannot be arbitrarily dismissed. In a real
sense, the low levels and the downward directions of the stock market
are involving everything we have touched on today. It is being depressed by the low state of confidence, which, in turn, is resulting from
the monetary shortfall bothering the Nation's consumer.
With the limitations on time, to conclude, I place so much emphasis,
almost total emphasis, upon the stock market and I would like to discuss this Report No. 29, if we have some time. I use the Standard &
Poor 400 Index as a measure of the stock market.
The stock market, as measured by the S. < P. 400 index, is the only
&
accurate figure on the 4-week moving average that exists, that is real.
The stock market is not revised over and over, it is not seasonally adjusted and it cannot be fixed up by people, or 'manipulated, on a 4week moving average. It can be fixed up, manipulated, for maybe 1
day, 2 days, or maybe a week, but the stock market cannot be manipulated on a 4-week moving average.
Every other Government figure is constantly revised. They are seasonally adjusted, which is a fixup process to cover up the errors in the
raw data. That is why these seasonally adjusted figures are so popular,
because those who create them can use the seasonally adjusted to revise
and cover up their mistakes.
We think, and we make fiscal and monetary policy on the basis, that
we have an official inflation rate of 6 to 7 percent. We have discussed
this before, Senator. My data for the past 2 years say that the inflation rate for the things that people are buying is now, and has been,
over 11 percent for the last 2 years.
The reason that the official inflation rate is 6 to 7 percent is because
it is measured on the things that people stopped buying. If I recall,
Mr. Chairman, you were able to get a confirmation of this statement of mine that the inflation rate is 11 percent in some testimony
that you obtained last year. I think it was from one of the members
of the Council of Economic Advisers.
Next month, the BLS is supposed to issue a new CPI, Consumer
Price Index, which has already cost $48 million to create and it was
due to be released in April 1977 but was postponed because of so-called
computer problems. It seems to me in a year they could have solved
the computer problem and if NASA can get a man on the Moon, I
would think that somebody could come on over and fix up the computer
problem the BLS had.
Senator BYRD. If we could, let's get to some questions, because I
think you have brought out some most interesting points and I must




24
say I remember so well in 1974,1 guess it was the summer of 1974, when
you predicted with such accuracy what was going to happen to the
stock market in the next 6 to 8 months, as I recall. I t could have been
1973.
Mr. S I N D L I N G E R . We predicated a 20-percent decline. I was wrong;
it was 21.
Senator BYRD. I have always thought that Government finance is
such a dry subject; there is no political sex appeal to it, and I do not
see how it is today, but from what you say in your interviewing, if
I understood you correctly, that you find that nearly one person out of
five, somewhere between 18 and 20 percent, appear greatly concerned
about Government deficits. Is that right?
Mr. S I N D L I N G E R . That is what has all come about since the state of
the Union.
Senator BYRD. In other words, your polling shows that, 5 years ago,
or 2 or 3 years ago, there was not great concern about deficit financing
and the Government's financial position. However, today you have
found the people becoming increasingly concerned about this issue.
Mr. SINDLINGER. The President's problem is, in the last state of
the Union, he reviewed very clearly and put much emphasis on the
deficit. Also, the press, which has become a powerful force in recent
years, in the immediate 2 or 3 days after the state of the Union concentrated on the deficit, and concentrated on the fact that the President
had promised a reduction in expenses and now was raising the deficit.
This has shocked people and, I guarantee you, Senator, if this hearing were held anyplace other than Washington, this room would be
crowded.
Senator BYRD. May I ask other members of the panel what do you
see as the current inflation rate and what do envision the inflation will
be at the end of this calendar year?
Mr. E C K S T E I N . Senator, since I am a forecaster I will take on that
question.
The inflation rate for the year 1978, as measured by the Consumer
Price Index, is estimated by us to be 5.6 percent, Which is an improvement on the 1977 rate of 6.5 percent. There are some differences in the
computation of inflation. New house prices are rising very rapidly,
13 to 14 percent. Food prices have acted with exceptional moderation
recently.
At the end of this year, we are looking for an inflation rate of 5.4
percent. That is the rate that will be occurring during the final months
of 1978.
The reasons for that forecast are very simple. There is 1 percent
from energy inflation, as we move our domestic energy prices to world
prices. The unit labor cost factor will be advancing at a 5 to 6 percent
rate because wages will be going up 8 percent and only 2 percent of
that will be offset by productivity. We do not look for serious demand
inflation.
Utilization rates of industry are 83 percent, which are at least 4 to
8 points below the point where demand inflation can be said to exist.
Unemployment is still high and we do feel, as Dr. Penner also
emphasized in his statement, that in fact, there has been a rate of
improvement on inflation. We got new figures yesterday on the rate




25
of increase of the highly visible large wage negotiations and they also
showed a deceleration of a fraction of a point.
But we recognize that there is a range of error in these kinds of
forecasts. The average error, if you look back 8 to 10 years is about
1 percent.
Senator BYRD. The forecast usually has been on the low side, I
assume.
Mr. E C K S T E I N . Before 1974, on the low side. Since then, our errors
have been, very refreshingly, on the high side.
Mr. S I N D U N G E R . What do you think the new C P I inflation rate is
going to be when it is produced next month ?
Mr. E C K S T E I N . I would be astonished, given the importance of the
CPI and the wage contracts of some 8 to 10 million Americans, that
the rate of inflation of the new index would be very different from
the old index. If it would be different, it would not be acceptable.
Mr. SINDLINGER. Is that because they would fix it ?
Mr. E C K S T E I N . The Consumer Price Index is a very elaborate undertaking. They price out thousands of items in thousands of stores and
the next index will give a little bit different weight to the pieces that
they are pricing. Perhaps they will update a little bit what they are
pricing.
The inflation rate is really around 6 percent, outside of the housing
area where it is higher.
Senator BYRD. One very able American made this comment last
week. Inflation is still the biggest problem of the free world.
We have all found how easy it is to step on the accelerator, but we
have not learned that we must also apply the brakes. All nations of
the Western World have been moving their economies too fast. I know
you are very unpopular when you say that, but it is true. Inflation
is the enemy of growth, and you cannot have higher levels of employment unless you control inflation. This view is held by William McChesey Martin, former chairman of the Federal Reserve Board.
I am wondering whether the panel generally concurs that inflation
is the enemy of growth, and is the biggest problem in the free world?
Mr. P E N N E R . I would think, sir, I would certainly generally agree
with that remark. As I suggested in my testimony, the problem we
face, I think, is uncertainty in the future. I think that tends to make
businessmen and consumers demand, in the economist's jargon, much
more of a risk premium before they decide to invest in something then
if they could be confident that inflation would be more stable or
declining.
In other words, they demand a much higher rate of return and it
is partially responsible for the relatively low levels of investment we
have, given the state of our recovery.
Senator BYRD. I am wondering whether the majority of those 70
million households Mr. Sindlinger has been talking about, see the
picture a little more clearly than most of us in Washington see this
picture, particularly as it regards inflation.
Mr. SINDLINGER. If I may interrupt here, the figure of under 6 percent was just mentioned as an inflation rate. In the President's speech,
the state of the Union, he used a 6.9 percent inflation rate ancl the
people I interviewed say, what store does he go to? And the figure
was 6.9 percent.




26
Senator B Y R D . Whatever the inflation rate might be, it is very high.
Mr. S I N D L I N G E R . It is perceived to be much higher. Anytime anyone^
mentions an inflation rate figure of 6 percent, I understand what the
figure is, as well as everybody else does, what the public says, what
store do they go to ?
Senator B Y R D . My question is, how can the individual citizen protect himself or herself against inflation?
Mr. M E I S E L M A N . Unfortunately, there is no way. If we all tried to
go into debt, which is the popular way, it means in the process we give
up interest rates, and interest rates reflect what people anticipate the
future inflation rates are going to be.
There is no way that the people can protect themselves against inflation in any systematic and dependable way, if only because we all
have to have a certain amount of money and our money loses value
through inflation.
The gains and the losses out of this process are very capricious and
haphazard. They do not bear any relationship to what we think of as
fair. It has nothing to do with a set of incentives to be efficient or to
cooperate, and that is one of the reasons that inflation leads, not only
to inefficiency, but also leads to a breakdown of political and social
order.
We can chisel our way through for a couple of years, but the cumulative effects are immense and, at the same time, I do not really see that
there is enough will to stop it. The basic tool for stopping it is to slow
down in the rate of growth in the money supply.
At the present rates of monetary expansion, or even at the rates of the
last couple of years, we will have a current rate of inflation. There is
no way we can slow down inflation until the money growth is slowed
down, and on the basis of recent behavioral norms, it would mean forM - l that we would have to get the rate of growth for M-l down to
something like 1 percent per year, for M-2 something like 3 or 4 percent per year.
Mr. S I N D L I N G E R . May I ask a question ? How is the Federal Reserve
Board going to get M - l down I
Mr. M E I S E L M A N . They stop the printing press. That is easy.
Mr. S I N D L I N G E R . Fiscal policy dictates that the printing press be run.
Mr. M E I S E L M A N . The fiscal policy does not dictate that the Federal'
Reserve—the sense of the law is that monetary policy be divorced from
fiscal policy so the Treasury cannot sell obligations to the Federal
Reserve.
Mr. S I N D L I N G E R . When Congress spends money it does not have and
wTe have a deficit, somebody has to print the money.
Mr. M E I S E L M A N . Somebody has to lend the money to the Federal
Government.
Senator B Y R D . I think Dr. Eckstein got to the heart of the problem—
and it was also mentioned by Dr. Penner—when Dr. Eckstein said that
the weakness of modern fiscal policy has always been that it removes
the discipline of the balanced budget.
This is the great problem that we face today. We, in Congress, have
no discipline. There is no means of disciplining the 535 Members of
the Congress when it comes to fiscal policy. I t is so easy. It is a bonanza:
the way it is now.




27
The Congress says, do not worry about the deficit, do not worry about
the debt. The way to get along is just to go ahead and spend, add it to
the deficit, add it to the debt. There is no disciplinary process asking
them for a balanced budget that I can see.
Mr. S I N D L I N G E R . Senator, may I ask that we all look at this forecast
in this report No. 29, which shows what Congress, I think, can understand, and that is the stock market, and I just said it is the only accurate
figure we have.
The stock market has been declining in 1977, week by week, almost
precisely as we have been forecasting it should. Whenever the stock
market, the S. & P. 400 index, has been below 100 in the last two decades
we have had a recession right behind it.
The stock market for the first 3 weeks of 1978 has averaged, each
week, below 100.1 am trying to make this forecast wrong. This forecast
shows a collapse of the stock market all through 1978 with a crash of
1979 coming early in 1979.
Each week the turnaround for 1979 gets weaker. The reason the stock
market is falling is that the stock market fears inflation, and not the
rates we are talking about. The stock market sees what is happening to
the dollar versus the yen versus the mark, and this all goes back to
deficit spending.
The public, I am trying to tell you, is beginning to perceive that our
problem is deficit spending. This is our problem.
Senator B Y R D . If that is the case—and I hope that that is the case—
it is a very healthy development.
Mr. S I N D L I N G E R . I would like to add something that I observed only
yesterday. As I said, I am doing a very extensive study, and the greatest
error and the reason for the stock market decline and the reason for
the confidence decline of 1977 following April 14th is the administration's energy bill, wThich was immediately perceived when it was announced, as a tax bill. And I think that the record should note that the
National Association for the Advancement of Colored People, in a new
report just issued, is condemning the energy bill and the arguments are
in the study, that the NAACP calls for the deregulation of oil and gas
prices with more emphasis on the development of other sources of
energy.
^ I think it is significant that this liberal organization is almost identical to that of the conservative oil industry. If we are going to turn the
stock market around, that problem has to be solved.
Senator B Y R D . Let me ask the members of the panel at this point as
to whether they agree with Mr. Sindlinger's prediction in regard to
further substantial declines in the stock market ?
Mr. E C K S T E I N . Senator, I do not believe that there is any way on
Earth to predict the future path of the stock market so I have studiously avoided forecasting it in my long career as a forecaster.
I do believe, however, that the general tenor of the remarks of this
panel are coming out more negative than is justified by the reality.
If you look at other confidence indexes that are released by the
University of Michigan Conference Board, they do not show in the
collapse of confidence. The Michigan index has retreated from 87 to 83
percent, but in previous periods of a demoralized public, in 1974 and
1975, that index stood at 58 percent.




28
I think that the actual behavior of the public in the marketplace,
or even the behavior of business in the marketplace is far more positive
than the behavior of the stock market. Retail sales have been extremely
strong until a couple of week ago. I would even take exception that our
problem is due to the deficit. The deficit is a part of the problem, but
it is a far more complicated process.
The United States did develop some serious economic difficulties out
of the Vietnam war, out of the food crisis, and out of OPEC and out
of occasionally disastrous monetary policy which did create the great
recession of 1974 and 1975. If you look at the actual record of performance of American families in the marketplace and American business,
what you see is a remarkable recovery in confidence, in activity and
employment, and profits, output—any measure that you wish, a far
better recovery than any other advanced country has shown.
The Government deficit should be reduced, and, as I mentioned at
length in my testimony, I think to keep the deficit at $60 billion year
after year is probably more than is justified and indeed, it is partly
caused by a monetary policy that runs in the opposite direction.
Senator B Y R D . May I mention at this point, when you mention the
$60 billion deficit, and others have mentioned that figure also, that is
correct on a unified budget basis, but I have always felt that a more
significant figure is not the unified deficit budget figure but the Federal
funds deficit, which covers the general operations of Government.
If you take the Government operations, it will be $75 billion. The
only reason it gets to $60 billion is that we are running a surplus in
the trust funds, in the highway funds and so forth. This is the only
way the deficit gets down to $60 billion. For the general operations, it
is $74 billion. ^
Now, it is significant, too, I think, and it ties in with this Federal
fund figure, that the administration forecasts on an increase in the
national debt for this 1 year, fiscal 1979 compared to fiscal 1978, of $88
billion. An additional $14 billion comes from the off-budget items.
But, if you take, to get back to the national debt itself, in 1972, at the
end of that fiscal year, the national debt was $437 billion.
Now, the administration projects that at the end of 1979 it will be
$874 billion, precisely double, right down to the dollar, what it was
in 1972.
It seems to me that our problem is that the accelerated and accumulated deficits—I admit a great country like this could possibly
run deficits for a reasonable length of time and in some reasonable
amount—have gotten to a point now, which is totally out of line with
what could in any way be considered reasonable. The accumulation
of deficit must be what the people to whom Mr. Sindlinger talks—
the people in Detroit and Vermont and Florida and Texas and New
York—are perceiving as getting worse. I t is certainly not getting
better.
Mr. S I N D L I N G E R . A comment was made about the University of
Michigan and I will send you a report next week to show that the
University of Michigan is very accurate in measuring what the stock
market does. It has been a very accurate in following the stock market.
If this forecast comes true that I am forecasting—and I have been
doing this for many years and I have a lot of clients that pay me much




29
for this forecast because it has been very accurate—the University
of Michigan survey, by the end of 1978, will be at its all-time low.
We cannot continue, based on the things that I am measuring from
the people that we are talking to, we cannot continue this economy
until we get our house in order.
Senator BYRD. Dr. Meiselman, I believe, mentioned double taxation
of dividends.
Mr. M E I S E L M A N . Not just dividends. A multiple taxation of income
devoted to savings in capital formation relative to consumption.
Senator BYRD. Mr. Carter, as a candidate for President, took a very
strong position in opposition to the double taxation of dividends, but
I note that that, apparently, has been dropped by the wayside. It is
not a part of his present tax program.
Does the panel have a particular view, with regard to the double
taxation of dividends. Would it be a desirable so-called reform of
the tax laws, to eliminate the double taxation of dividends?
Mr. M E I S E L M A N . I think you have to put it in a larger context, not
that one element taken by itself, and I have tried to put it in a larger
context, which is in terms of eliminating or moderating the present
bias in the tax system against saving and investment, and there are
several devices for doing that, and I think that it would be better
to talk about the relationship between that one thing and other
measures than removing the taxation of dividends by themselves.
I am delighted that the administration dropped an item which
seemed to be high on its agenda during the summer which was essentially to remove the differential rate for the taxation of capital
gains. My idea of the tax system, capital gains would not be subject to
any tax at all.
Senator B Y R D . My guess is the reason that the administration
changed on that issue is because it found very little support in the
Congress for taxing capital gains as ordinary income. I was surprised
myself at the lack of support in the Congress for the elimination of
that special treatment on capital gains.
I had assumed that is the administration had recommended it, and
certainly it indicated it was going to recommend it, that it would pass.
But I have found that my Democratic colleagues who I thought would
have supported such a proposal were very much opposed to it because
they have been hearing from the public back home. The public sees the
difference that many around Washington do not seem to see, that there
is a difference between taxing income and taxing the sale of a capital
asset.
I personally think that the Congress was mistaken in increasing the
capital gains tax in 1969.
Mr. M E I S E L M A N . I would hope- that the Congress would be able to
move toward indexing the tax code; as I mentioned in my testimony,
and as Dr. Penner mentioned, the effect of the inflation has been to increase our tax rates substantially and that is one of the most serious
side effects of inflation.
Mr. E C K S T E I N . Senator, I thought we missed the opportunity of a
generation when we let the President's tax proposal of last September
disappear without a trace. The income from capital would have been
reduced very substantially by those proposals. The tax system would




30
have been a much better one thereafter, because we would rely on the
open capital market and rely less on the retention of earnings of large
corporations.
My own amateur political analysis of what happened is that the
financial community was so frightened of the one major element of tax
increase, which was the increase in capital gains taxation, that they
preferred what they have, which they understand, to a very dramatic
improvement in the tax system which they would have been the major
beneficiaries of.
Whether it is possible to go back to this matter at this time, I do not
know.
Senator B Y R D . Y O U are talking now of a tradeoff ?
Mr. E C K S T E I N . There was a tradeoff. There was a tightening of
capital gains, a loosening of taxation of dividends and also a 50 percent ceiling on all income, including income from dividends and
interest.
We analyzed that with our models in some detail and did some
studies on the impact on different groups and so on and it would indeed—the President's proposal would have been a substantial improvement of the taxation of income from property.
Senator B Y R D . Would you advocate changing the capital gains tax
without having some other corresponding reduction in the tax on
capital ?
Mr. E C K S T E I N . The President's new proposals do tighten up on capital gains once more, and my own belief is that one reason the stock
market has acted so badly over 15 years is that we have steadily deteriorated the taxation of income through the market, from capital obtained in the marketplace, and steadily reduced the burden of taxation
on income from capital that stays within the corporation.
We have bet on retained earnings and penalized more and more the
taxation of earnings of the private family that it can get from property it holds through the marketplace.
The new proposals do it once more through the provisions of the
minimum income tax and the application of the 25-percent ceiling on
capital gains, which to me is just back to the post-war tax policy that
began with President Eisenhower in 1954.
Senator B Y R D . Let me see if I understand it. You think that it would
be unwise to eliminate the 25-percent ceiling on capital gains?
Mr. E C K S T E I N . Yes; I believe it is going the wrong direction. We
should be more generous with capital that is allocated through the
marketplace and less generous with capital that just stays within the
business.
Mr. P E N N E R . I would like to make a narrow comment on the problem of the double taxation of dividends. I think that economists generally would agree that the corporate tax is a very bad tax and various
commissions and committees have made proposals for fully integrating it with the personal income tax.
I think, however, that the lawyers generally oppose economists on
that because they feel that complete integration would be very hard
to administer. As a concession to the lawyers, the kind of proposals
that the administration was talking about were very, very partial
eliminations of the double taxation of dividends. Such approaches
would affect different firms very differently and, I think, would also
generate a lot of uncertainty in capital markets.



31
So I would conclude that instead of adopting the particular proposals that were in the September package, we should try to solve the administrative problems related to a complete integration of the two
taxes. Then you could eliminate the double taxation of dividends and
the double taxation of reinvested profits as well.
Senator B Y R D . Personally, I would like to see the elimination of
double taxation of dividends. I think it would be a good thing for the
country.
I have found, in holding hearings on it some months ago, that the
business community itself cannot agree on just how that should be
done. Until the business community can reach some sort of agreement
or consensus it would be rather difficult, I suppose, to get it accomplished. However, I would like to see it tried.
In regard to the President's tax reduction, which I think all of you
have mentioned, the median income in my own State of Virginia is
about $14,500. As I understand the President's tax proposal, when
you get much above that median figure—I am speaking now of a family of four—those who are above it do not receive any significant tax
reduction, and as I understand the figures, and many get an increase.
Mr. P E N N E R . Senator, I do not know the Virginia data, but for the
country as a whole, it has to be remembered that the median income
for a family of four is considerably above the median for all families,
because by the time a family has two children they have worked their
wav up the income scale.
Mr. S I N D L I N G E R . And the wife is working.
Mr. P E N N E R . I think nationwide the median income for a family
of four will be close to the $20,000.
Mr. S I N D L I N G E R . It is about $19,000.
Mr. P E N N E R . Over $20,000 by 1 9 7 9 . That kind of a family would
certainly have a tax increase.
Senator B Y R D . Let me see if I interpret the figures right. That
would mean that 50 percent or more of the families would have a tax
increase ?
Mr. P E N N E R . I certainly think so, looking at levels of income with
the same purchasing power in 1977 and 1979.
Mr. S I N D L I N G E R . I think you will find, because the upper incomes
have fewer exemptions than the lower incomes, I think you will find
the way I have calculated it, that about 92 percent of the people above
the median would have a tax increase or 62 percent of all taxpayers.
Senator B Y R D . I am not sure that that is generally realized by the
taxpayers. The impression coming from television and political
speeches is that almost everyone, except a very small group at the top,
will have a tax reduction. I do not read the figures that way.
Mr. S I N D L I N G E R . What I am trying to say, my interviewing since
the State of the Union shows that almost everybody above $18,000
has already figured out that they will pay more taxes rather than less.
Mr. P E N N E R . Even my numbers do not tell the whole story. As I
said in the text—but did not mention in my summary—to the extent
that the people are in the higher income category or above $22,900
because they have more than one worker in the family, the situation
is even worse because the social security tax base increases will hit
them more heavily, than in my example where I assumed one worker
per family. My conclusion is that far more than half of the population will end up paying more taxes. Of course, it has to be pointed



32
out that, at most income levels, they would be even worse off were it
not for the President's income tax cut proposal.
Senator BYRD. Dr. Meiselman ?
Mr. M E I S E L M A N . My hunch is that there are large numbers of
people in the upper half of the income distribution who are very disturbed about the huge increases in social security taxes, especially
even though it is very difficult and sometimes impossible to find out
the relationship between the social security taxes you pay and the
so-called benefits you get down the road, it is becoming much clearer
to people, especially in the upper income groups or the upper half
that for every dollar they put in, they get a few pennies back.
That is being viewed—my hunch would be, I have not spoken to
very many people about this—that massive increases in social security
taxes is disturbing a large number of people. I know that it disturbs
me.
Senator BYRD. I assume that most of you would agree with the general figure given by Mr. Sindlinger. He said 62 percent of the taxpayers will have an actual increase under this proposal.
Mr. E C K S T E I N . The meaning of that phrase, if you include the social
security tax increases. The tax bill itself is a reduction for most
people, even in the upper income brackets. It is a decrease even for
those who do not avail themselves of tax shelter.
We all know social security had to be put on a foundation of an
$8 to $12 billion tax increase. It was absolutely necessary to assure the
American people that their pensions were secure.
The actual social security bill that was passed by this Congress,
wisely, last fall is one in which the benefits do improve very substantially in the upper-middle income brackets. The Congress rejected the
proposal of the President to split the employee-employer tax and did
raise both symmetrically, and that again, increases the entitlement to
the benefit.
The social security system, except for the double escalation which
had to be removed, will do a better job for the American people because of these tax increases. The question is, if you take the composite
tax package, the social security increases, some include the energy
increases and these cuts, what happens to the tax burden of the ordinary people?
I think the fact is that the bill that this administration presented
is one where the largest part of the benefit goes to the bottom half
of the American people.
In the context of the coming welfare reform and other things, I am
not sure to let the poor people of this country out of the tax system is
not such a bad idea.
We used to believe that we wanted, for the sake of tax consciousness, for everybody to pay income taxes. This really does represent a
change that was begun under President Nixon that we want to let the
poor out of the personal income tax.
That is really what this bill does. I t gets another several million out
of the tax system altogether.
Mr. P E N N E R . If I could comment on social security, I guess I am
not as optimistic about that as Dr. Eckstein. The actual rate of return
that people will earn because they pay the tax on an increased base
is very, very small. It is much smaller, given the indexing system




33
adopted by the Congress, than they could earn in a private pension
fund in the future.
I personally think that we missed a great opportunity to slow down
the rate of the growth of the burden of social security when the Congress chose to index future social security benefits to wage levels in
the economy rather than to follow the prescription of a panel of
experts that was appointed by the Congress, and which recommended
price indexing. Under this proposal, benefits grow more slowly than
wages, but only to the extent that the economy becomes richer in real
terms. With that kind of proposal in effect, we could have avoided a
very large part of the tax increase that the Congress felt it necessary
to adopt.
Senator B Y R D . The social security program is so important to so
many people that Congress had to take a positive step toward insuring its continuing solvency.
Mr. Sindlinger?
Mr. S I N D L I N G E R . I would like to add that one of the major reasons
that this new idea from the public about the deficit came up between
the first and the end of January, was that most people got their first
1978 check in the middle of January and saw what happened to their
check in social security taxes. This is what drove it home to them.
Senator B Y R D . When you mentioned your 62-percent figure awhile
ago
Mr. S I N D L I N G E R . Sixty-two percent of those who pay taxes would be
paying more taxes.
Mr. P E N N E R . I assume that does not take into account the effects of
inflation ?
Senator B Y R D . That does not take the effects of inflation ?
Mr. S I N D L I N G E R . The effects of inflation, no.
Senator B Y R D . Does it take into consideration the social security ?
Mr. S I N D L I N G E R . Yes; combined. This is what I am measuring, this
is what people are sensing.
Senator B Y R D . I think that this has been a very interesting and
stimulating discussion today and I want to, on behalf of the committee, thank each one of you for taking the time and making the
effort to join us, and I think it has been tremendously helpful and
I am grateful for each of you being here.
[The prepared statements and attachments of the preceding panel
follow:]
HEARINGS ON PUBLIC DEBT AND BUDGET—STATEMENT TO SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT, COMMITTEE ON FINANCE, U . S . SENATE, JANUARY

30, 19T8
My name is David Meiselman. I am a Professor of Economics at Virginia
Polytechnic Institute and State University where I am also Director of its
Northern Virginia Graduate Program in Economics.
A week ago the President sent his half-trillion dollar budget for Fiscal Year
1979 to the Congress, and it is most appropriate that the Subcommittee on
Taxation and Debt Management of the Senate Finance Committee is holding
hearings on Public Debt and the Budget at this time. I am honored and pleased
to participate in these hearings, and I wish to think the Subcommittee for this
opportunity to present my views.
Three Presidential documents, The State of the Union Message, The Budget
and The Economic Report of the President, addressed to the Congress and to
the nation in the last ten days of January, set the stage for public discussion and
Congressional action in some of the main areas of economic policy. Perhaps




34
at no time of the year is more attention paid to the broad problems and potentials of fiscal policy and the public debt. Accordingly, I shall attempt to present
several considerations which may help the Subcommittee evaluate the effects
of some of the main tools and aggregates of fiscal policy.
As a first approximation, the cost of government is measured by the resources
used in the public sector, not by the taxes we pay. When labor and capital and
raw materials are used in the public sector, they are obviously not available for
use in the private sector. Private sector output and employment are thereby
lower than they would otherwise be. Doing without the private sector output
covering everything from food to houses is the cost of government and public
sector output, and the cost associated with the benefits of public sector activities.
This cost exists independently of the means that are used to finance government
expenditures, whether taxes are high enough—or low enough, to balance the
budget, or whether there is a budget deficit financed either by selling bonds to
the public or by having the bonds purchased by the Federal Reserve with newly
created—some would say, newly printed, money.
This is why any significant reduction in the costs of government requires a
corresponding reduction of government expenditures. This is also why tax reduction without without expenditure reduction may give the appearance of a reduction in the costs of government to some taxpayers, but this is largely an illusion.
The deficit must be financed, and the -interest on the public debt must be paid
out of future taxes. True, the tax may be deferred to a later date, but the future
tax bill will have to be higher because of the interest on the public debt.
I may add that I see no important difference here between future dollars used
to pay obligations represented by outstanding Treasury securities, now in the
neighborhood of 750 billion dollars, and other legal and "moral" unfunded obligations of the Federal Government to pay future dollars for such items as
social security, military and civil service pensions, and the like. To be sure, these
unfunded obligations are subject to modification in the future, just as the real
value of Treasury securities are subject to modification by future inflation. In
any event, it would appear that current and unfunded obligations are many
times greater than the staggering but more precisely measured funded federal
debt.
For the moment, holding aside questions about the relative efficiency of resources used in the private sector versus those used in the public sector and
the associated relative returns, each method of financing government expenditures has a bearing on overall efficiency, both in terms of facilitating a shift of
resources from private to public sector use and also in terms of the efficient use
of the remaining resources available to the private sector.
Every method of financing government alters relative prices and changes the
context in which private decisions are made. Against the alternative of a hypothetical neutral tax, every tax and every deficit makes the private sector less
efficient. Although some kinds of taxes do impose less distortions and inefficiencies than others, in the real world there is no such thing as a completely neutral tax or a neutral deficit. Every tax and every deficit adds its own costs,
measured by the loss of the efficiency of the private sector, to the other costs of
resources pushed out of the private sector into public sector use. It is in this
sense that no tax is a good tax and no deficit is a good deficit. By the same token,
the correct evaluation of the costs of government must also include the loss of
output and employment and the inefficiencies resulting from the unavoidable
necessity to finance government expenditures.
There is, of course, no precise way to measure whether the benefits of government expenditures are sufficiently high to justify their costs, especially since
the people paying the costs may not be the same as the people receiving the
benefits. Hovyever, it is widely acknowledged that our present tax and expenditure mechanism is heavily biased towards excessive government spending, especially since the costs of government tend to be diffuse whereas the benefits are
highly specific. Indeed, these are compelling reasons for tighter lids on total government expenditures as well as for the closer links between expenditures and
highly visible taxes to pay for those expenditures envisaged by proponents of
mandated balanced budgets. For the present, it would seem that few people feel
that they are getting their taxes' worth from the vast array of government programs. We are paying more and enjoying it less. In light of this, any increase
in the federal budget would appear to be excessive. Indeed, a substantial reduction in government expenditures and in the scale and scope of government would
seem to be in order.




35
Taxes generally force or induce us to do things differently and thereby reduce
the inherent efficiency of a free market private property system. When a tax
increases the cost of labor, fewer workers are employed or they are required
to accept a correspondingly lower wage. When a tax reduces the return from
work, we work less, and so forth. Similarly, deficits also force or induce us to
do things differently because limited financial resources otherwise available to
finance private sector capital formation are bid away by the financing needs
of the U.S. Treasury. These problems are not avoided wThen the Federal Reserve
buys Treasury securities with newly-created Federal Reserve credit; they are
compounded by the subsequent inflation.
In any event, in part, taxes and deficits that force or induce us to use less
so that the government can have more also have the unintended results of making
the private sector less efficient. As I shall discuss in a few minutes, the problem
is especially critical with respect to the impact of public policies on saving and
investment because of the differentially heavier burden the tax system now imposes on income devoted to capital formation rather than consumption or government.
Some Government expenditures are devoted to purchases of goods and services
and are thereby resource using in the sense that the government itself directly
acquires the use of labor, capital or raw materials as would be the case when
the Federal Government buys a submarine for national defense or hires more
lawyers to promulgate more regulations. Increasingly, however, a larger and
larger fraction of the federal budget is devoted to transfer payments. In the
President's Budget document for fiscal 1979, less than 35 percent of total federal expenditures are for the direct purchase of goods and services by the Federal Government. The remainder of the half-trillion dollar budget is largely
devoted to transfer payments to individuals (about 40 percent), grants-in-aide
to state and local governments (16 percent) and interest on the national debt
(8 percent).
But these expenditures do more than redistribute income by taxing Peter to
pay Paul because the taxes and the deficits that pay for the transfer payments
and the grants-in-aide make the economy as a whole less efficient. When transfer
payments and the size of the budget are small, this dead-weight loss is correspondingly small. However, the rapid growth in transfer payments and grantsin-aide sincfe the mid-1960's means that financing the massive scale of these programs significantly reduces the size of the pie being sliced up. Holding aside the
difficult ethical and political problems of large-scale income redistribution, I
believe that problems of slow growth, inefficiency, impaired employment opportunities and inflation created by the zeal for redistribution are some of
the nation's most vexing and embarrassing problems, problems which cannot be
solved without a significant moderation of the Federal Government's redistributionist policies. I may add that the size distribution of income appears to have
been changed little by these policies and in no systematic way. All we can definitively say is that, in the aggregate, the nation is poorer because of the redistributionist policies, in part because of the retarded growth of plant and equipment resulting from the increases in taxes on saving and investment. In turn,
less capital mean lower labor productivity and thereby both lower wage and
impaired employment opportunities.
Moreover, there is now a large and growing number of informed students of
the problem who contend that the net effect of recent public policies intended to
make income distribution more nearly equal has been to impair opportunities
for the poor, weaken the family and to make income distribution less equal.
It would seem that old ways of thinking about the problems of poverty and
unemployment are so deeply ingrained that even when there is acknowledgment
that public policies are counter-productive, proposed new solutions repeat many of
the same old errors and promise to make a bad situation even worse.
For a current example, consider the welfare system, a disaster area of public
policy, and new initiatives to change the system. It is generally recognized that
the present welfare system has caused more unemployment and has perpetuated
poverty.
The Administration's welfare proposal contained in H.R. 9030 attempts to deal
with the welfare mess.
At the request of the Law and Economics Center of the University of Miami, I
have just completed a detailed analysis of the Administration's welfare proposal,
including its provisions to create and fully fund the largest public service em-




36
ployment program since the 1930's.1 With your permission I would like to submit the study for the record. My analysis concludes that, despite the Administration's claims that the program will shift the poor from welfare dependency to productive jobs, especially in the private sector, and at low additional cost to the taxpayers, the results of the new program will be quite the contrary.
Also, my study shows that, if enacted into law, H.R. 9030 would cause a further
expansion of the public sector that potentially will attract a large segment of lowand middle-income workers out of the private sector into low productivity, low
priority, and largely dead-end public sector employment. Costs will be substantially higher than the Administration forecasts. A whole new welfare class is
likely to emerge, and family stability will be further impaired. The ultimate costs
will include both lower overall employment and less economic growth. At the
same time, the basic causes of the current problems of unemployment and poverty,
poor government policies that have increased barriers to employment and to gaining work skills while increasing incentives to unemployment and welfare, all are
left intact.
I turn now to several observations about some of the connections between our
slow economic growth—since 1960 perhaps the slowest of all the Western industrial countries, and public policy. The major reason for our poor performance is
that the American economy has been devoting too many resources to consumption
and to government, and not enough to the capital formation which makes growth
possible. Thus, there has been a slowing of the growth of capital per worker. The
sharp rise in the labor force in recent years has not been matched by any corresponding speedup in the rate of capital formation.
To place the recent slowdown in capital formation per worker in perspective, in
the 1950-55 period the growth of capital per worker increased at the rate of 3.6
percent per year, and slowed in the decade thereafter. From 1965 to 1970, capital
per worker increased at the rate of 2.6 percent per year. In the 1970's there has
been a sharp decline in the growth of capital per worker. The Congressional
Budget Office estimates that it grew at the rate of about 1.6 percent per year between 1970 and 1975 and only 1 percent per year since 1975. In fact, during the
current business cycle expansion since early 1975, real gross non-residential fixed
capital formation has increased only slightly and has actually declined as a fraction of Gross National Product This is hardly the basis for the economic growth
and the expansion of opportunity which the nation can and should achieve.
This slowing growth in capital per worker is the result of a number of public
policy measures, which, by unduly penalizing saving and investment, have diverted resources that individuals would prefer to devote to capital formation and
future consumption towards present consumption by households and by Government. And one of the worst sets of policies, resulting in this wasteful distortion,
is our Federal tax system.
The fundamental bias against capital formation in our tax system results from
the multpile taxation of income which is saved and invested. Individuals must
pay taxes on essentially all income they earn, whether they spend it immediately
or save it. The same holds true for corporations and their profits. This means that
a dollar of current income is taxed only once when spent for consumer goods.
However, the same dollar of current income devoted to saving is subject to multiple taxation because taxes must also be paid on the interest, dividends, capital
gains and the like that result from saving and investing. The use of income for
saving is thereby taxed at substantially higher rates than the use of income for
consumption. People naturally respond by saving and investing less. This distortion by multiple taxation is particularly great in the case of dividends, for
the return on equity is also subect to an initial corporate profits tax of 48 percent.
To be sure, so-called capital gains are taxed at lower rates than ordinary income,
but this only moderates the distortion ; it does not eliminate it.
The damage wrought by our Federal tax system has been aggravated by inflation which creates false business profits and false capital gains, and thereby increases the tax bias against saving and investment. The combination of our present tax system plus inflation, itself the result of poor public policy, mainly bad
Federal Reserve monetary policy, results in a set of capital levies on both business and individual wealth and also puts individuals into higher income tax
brackets when their real pre-tax incomes remain the same. These capital levies
and higher tax rates are nowhere to be found in the tax code, and tacitly raising
tax rates and imposing capital levies by inflation rather than by explicit debate
1
David I. Meiselman, "Welfare Reform and the Carter Public Service Employment
Program: A Critique," a Law and Economics Center Occasional Paper, University of
Miami School of Law, 1978.




37
and legislation are not among the Congress more forthright and honorable
actions.
For yet another public policy that impairs saving and investment, I would
call your attention to a recent study by Prof. Martin Feldstein of Harvard
which indicates that the present social security system significantly reduces private saving. Professor Feldstein has reported that social security benefits lead
employees to reduce the funds they set aside for their retirement almost dollar
for dollar with any increase in social security benefits, thereby reducing the pool
of private saving available to finance capital formation.
To sum up, the costs of Government continue to rise. It costs us more; we are
enjoying it less. Few of us believe that we are getting our taxes' worth. By trying
to level incomes, public policy has reduced the size of the pie without significantly altering its distribution. The tax system, heavily biased against saving and
investment when there is no inflation, is made even more biased by inflation, itself
the result of poor public policy. The administration's budget promises more of the
same, and the administration's welfare reform, if enacted into law, will result
in fewer jobs and still greater welfare dependency.
Central to the solution of these problems is the size of the budget and the deficit.
The staggering deficit of the Federal Government must be eliminated, primarily
through expenditure control, partly to avoid having the deficit crowd out needed
private capital formation.
We must also correct the long-standing bias in the Federal tax system against
saving and investment. For full tax equality between the consumption and saving uses of after-tax income, savings should be deductible from the income tax
base so that only consumption is taxed. Progressivity can be built into such a tax
and I would favor a mild degree of progressivity with appropriate deduction for
human capital outlays such as health care and education. I would also favor
an indexing arrangement to keep "real" tax rates intact. With the full deductibility of saving, taxes on corporate income and on capital gains can be eliminated.
In addition, taxes such as the estate and gift taxes that yield little revenue
and create much mischief can be reduced or eliminated.
A roughly equivalent alternative would be a value added tax with appropriate
deductions for capital outlays.
For other desirable tax changes I would urge the Congress to review the record
and follow the examples of the Kennedy Administration and of the Congress
during the early 1960's, actions which set the stage for a surge of economic growth
as well as for the elimination of inflation. Then, the distortions of the tax system
were moderated by effectively reducing the tax biases against saving and investment by means of a combination of policies that included more rapid depreciation and the investment credit as well as the reduction in both corporate and personal tax rates. The Kennedy tax cuts have been more than offset by inflation
moving people and businesses into higher tax brackets. We would need tax
cuts to get us back to the Kennedy tax rates.
Finally, I would recommend the rejection of the administration's welfare
reform package.

2 3 - 5 4 4 O - 78 - 4




38

I&EC
Welfare
Reform
And the Carter Public Service
Employment Program:
A Critique

David I. Meiselman
Professor ofEconomics
Virginia Polytechnic Institute & State University




An LEC Occasional Paper

39
THE LAW AND ECONOMICS CENTER of the University of Miami School of
Law was established in August, 1974 to further the development of law and economics
as intellectually integrated disciplines. Its purpose is to bring market economics principles into public policy decisionmaking and in that regard to strengthen scholarship
in economics by relating economics meaningfully to the substance and procedures
of law. Its efforts are consciously focused on issues bearing on the maintenance of a
free society. Although part of the School of Law, contributing both to the School
and to the University, the Center is directed as a discrete entity and is independently
responsible for raising almost all of the funds required for its activities.
LEC's activities include:
Teaching institutes in market economics for law professors, Federal judges,
and government officials.
Teaching institutes in law for economics scholars.
The John M. Oiin Eellowship Program, a three-year course of legal studies for
trained economists leading to the Juris Doctor degree.
Interdisciplinary seminars in law and economics, centered around public
policy issues.
A continuing program of directed research on pivotal public policy questions.

FACULTY
Henry G. Manne, Director and
Distinguished Professor of Law
John H. Moore, Associate Director
and Research Professor of Economics
Peter H. Aranson, Special Research
Administrator and Research Professor

Kenneth W. Clarkson, Professor of
Economics
Louis De Alessi, Professor of Economics
Donald L. Martin, Professor of
Economics
Roger LeRoy Miller, Professor of
Economics
James S. Mofsky, Professor of Law

Copyright © 1978 Law and Economics Center
University of Miami School of Law
Coral Gables, FL 33124
Library of Congress Catalog Card Number 77-95219
ISBN 0-916770-05-2
Permission to quote from or to reproduce liberal portions of this publication is
granted when due acknowledgement is made.
Printed in the United States of America.




40

PREFACE
On August 6, 1977, in the sixth month of his Administration, President Jimmy
Carter announced his welfare reform proposal, the Program for Better Jobs and
Income. About five weeks later, the Carter plan was introduced in the Congress (HR
9030). Welfare reform had been a major issue in the Carter campaign, and the plan,
as expected, was comprehensive, calling for public service jobs, income support, tax
reduction, and the elimination of many present programs.
In response to the Carter welfare reform plan, Dr. David I. Meiselman has
authored a comprehensive and scholarly study; as readers must become aware, this
study is one that we shall ignore at our peril. Applying a careful analysis of labor
markets, unemployment, and public service employment to the Carter program, Dr.
Meiselman finds that the Administration's proposal would provide little or no
incentive to work for those now on welfare or unemployed. Indeed, the destabilizing
influence of present welfare programs on work incentives, good working habits, and
family stability are transferred unabated to—and are even aggravated by—the Carter
proposal.
Dr. Meiselman argues, furthermore, that the assumptions about labor markets that
are used to justify the Carter proposal simply do not hold water. Unemployment
statistics themselves are inflated by the government's own policies. And, real
unemployment is largely a product of present government welfare programs and
government intervention in the labor market.
Nor does our knowledge of past and present public service employment programs
offer hope for the Carter plan. These programs generate demands for workers and
resources now in the private sector. State and local governments substitute public
service employment funds for budgeted expenditures, thus producing no new jobs,
especially for the unemployed. Worse yet, the private sector must bear the cost of
public service employment either in higher taxes or in greater rates of inflation. This
added burden impairs the ability of the private sector to create jobs, and more unemployment and other economic distress results. The public sector, in effect, "crowds
out" the private sector.
While welfare recipients will refrain from working under the Carter plan, many
workers now employed in the private sector will take public service employment
jobs. Dr. Meiselman predicts that "a new welfare class" will emerge among middle
class America. Disregarding the indirect costs of the Administration's proposal, it is
argued that the immediate direct costs are three to four times the Administration's
estimates.
Americans are fast becoming inured to waking up each day to discover that some
well-intentioned and established government program has become a monster out of
control. The Social Security System is one example of these new and unpleasant
discoveries. Medicare is another. And, the Penn Central-Amtrak-Conrail route of
progressive governmental intervention in, and degradation of, rail service is a third.
In the instance of the Carter Program for Better Jobs and Income we are




41
adequately forewarned by Dr. Meiselman *s craftsmanlike analysis that we are courting yet another disaster. Were we so forewarned in earlier times, and had those
warnings been heeded, our leaders might have acted more wisely.
Peter H. Aranson
Research Professor and
Special Research Administrator
Coral Gables, Florida
January, 1978




42

CONTENTS
h INTRODUCTION

1

II. WILL PSE INCREASE TOTAL EMPLOYMENT?

4

Segmented Labor Market Models
Problems in Measuring Unemployment
Unemployment: Causes and Incentives
Unemployment Insurance and Welfare Benefits
Government Intervention in the Labor Market
Problems with Public Service Employment
Targeting, Government Employment Skill Levels,
and Resource Requirements
Fiscal Substitution
Competing with the Private Sector
The Potential Direct Cost
Crowding Out

III. THE PROGRAM FOR BETTER JOBS AND INCOME

16

The Specifics of the PBJI
Job Training and Employment
Income Support Program
Tax Reduction Provisions
Fiscal Relief for State and Local Government
Evaluating the PBJI as Welfare Policy
Work Incentives and the Potential Supply of Targeted PSE Workers
A New Welfare Class
Costs of the PBJI

BIBLIOGRAPHY




27

43

ABOUT THE AUTHOR
David I. Meiselman is Professor of Economics and Director of the Graduate
Economics Program in Northern Virginia, Virginia Polytechnic Institute and State
University. He is chairman of the editorial board of Policy Review and a member of
the advisory board of the Journal of Money, Credit, and Banking. Dr. Meiselman
is an Adjunct Scholar of the American Enterprise Institute for Public Policy Research and a Research Associate of the Center for the Study of Public Choice. Dr.
Meiselman has been chairman of a presidential task force on inflation and an advisor
and consultant to business and government. Dr. Meiselman's books include Varieties
of Monetary Experience and The Term Structure of Interest Rates. The author of
several articles, Dr. Meiselman served from 1966 to 1971 as Frederick R. Bigelow
Professor of Economics and Director of the Bureau of Economic Studies, Macalester College.




44

Welfare
Reform
And the Carter Public Service
Employment Program: A Critique
David I. Meiselman*

I. INTRODUCTION
The growing importance of public service employment and training programs as
a public policy issue parallels the secular rise in the nation's average unemployment
rate over the past two decades. High unemployment levels have become a persistent
economic problem. Even during periods of economic expansion, particular demographic groups such as teen-age blacks continue to experience high unemployment
rates. Reported unemployment rates for minority and low-skilled workers, moreover,
may fail to account for many persons who have voluntarily withdrawn or refrained
from entering the labor market.
Fiscal policies have aimed at reducing aggregate unemployment and increasing
aggregate output. The tools of fiscal policy have been increases in aggregate government expenditures and various tax reductions and incentives. These policies have
been highly expansionary according to measures used by the proponents of fiscal
policy, such as the size of the government deficit. Yet such expansionary fiscal policies seem not to have made much of a dent in the overall unemployment rate. Nor
have public service employment programs seemed to have made much of a dent in
the unemployment rate. There is some argument that public service employment
may actually have resulted in more total unemployment rather than less.
Statistics on increases in unemployment compensation, in Federal expenditures
for income-tested programs (that is, Aid to Families with Dependent Children
(AFDC), food stamps, and Supplemental Security Income), in the number of welfare
recipients, and in the annual average unemployment rate provide a perspective on
the magnitude of the current dilemma. Between 1960 and 1977, annual unemployment insurance payments increased from $3 billion to $16 billion. Federal transfers
alone through income-tested welfare programs and as grants-in-aid to the states to
support these programs at the local level in 1976 totaled almost $47 billion. Welfare
expenditures as a percentage of gross national product have more than doubled over
the past sixteen years, while the number of persons enrolled in these programs
*I wish to acknowledge the collaboration and assistance of Barbara Fields. Her rigorous and probing research and analysis is evident in every section of the paper.




l

45
climbed to over 30 million.1 Total enrollments today represent almost 15 percent of
the nation's population. The 1960-76 period saw the average unemployment rate rise
from 5.5 percent to 7.6 percent, peaking at 8.5 percent in 1975.
Congress has responded to these trends by passing ever more comprehensive and
costly manpower programs. The Area Redevelopment Act, passed in 1961, sought
to relieve the structural unemployment of the 1950s through training programs
designed to augment skill levels of particular groups of displaced workers. The scale
and goals of this first postwar Federally funded manpower program seem quite
modest today. Congressional funding in 1962 of the state-sponsored Community
Work and Training program was the first Federal attempt since the depression to
extend "relief" beyond training opportunities in the form of public service employment to able-bodied male welfare recipients. This program was expanded (financially
and to include females) by the Economic Opportunity Act of 1964.
During the early part of the 1970s, the congressional intent of manpower policy
shifted from providing training and rehabilitation services to direct job creation, or
public service employment (PSE). (Exceptions include the Job Corps, the Neighborhood Youth Corps, and the Youth Conservation Corps, all of which addressed youth
unemployment and crime rather than unemployment generally.) The Work Incentive
Program (WIN), enacted in 1971, focused on inducing welfare recipients to seek
gainful employment in the private and public sectors.
While those states with disproportionately high welfare costs, such as California,
have continued to focus on requiring welfare recipients to work off their grants,
Federal policy has vacillated between using PSE as a countercyclical policy for those
temporarily unemployed during cyclical recessions and as a welfare policy for those
more or less permanently unemployed or poor. Both the earlier Public Employment
Program (PEP) and the current public employment program, the Community Employment and Training Act (CETA), were intended to operate as countercyclical
measures. Approximately 300,000 PSE slots were funded under CETA in 1976.
Of the participants in these slots, however, only 25 percent were receiving public
assistance or unemployment compensation before public employment.
The Carter Administration's-recently unveiled welfare reform proposal, the Program for Better Jobs and Income (PBJI), incorporates as one of its three major
elements an ambitious manpower policy. Like much earlier legislation, the PBJI is
directed at the long-term unemployed and minority groups. It proposes to create and
fully fund the largest public service employment program since the 1930s. The program would replace CETA but use its extensive system of local governmental prime
contractors to implement its job creation objectives. Nearly $9 billion would be allocated to creating up to 1.4 million special public service jobs and training positions
in 1980, the initial year, if enacted, of the PBJFs life. Nearly all of these jobs would
be reserved for adults caring for dependent children and receiving public welfare.
The second major element of the Carter proposal is an income support program to

10

'This total includes all persons receiving AFDC, Supplemental Security Income, and Food
Stamps. There is an indeterminate amount of double counting of AFDC enrollees and those
purchasing food stamps.




46
replace the current welfare system. It is claimed that the PBJFs benefit structure
would induce welfare recipients to seek gainful employment by providing supplementary income guarantees to low income persons in either special public service
jobs or regular employment. Those families in which no one would be "expected"
to work will receive basic income support payments (welfare).
The third and final element of the reform package is tax reduction through an
expansion of the earned income tax credit and an increase in the minimum taxable
income (from the current $7,200 of adjusted gross income to $9,080). The existing
earned income tax credit for income levels below $8,000 would be increased, and
tax benefits of the credit would be extended to families with incomes up to $15,620
from regular employment. If enacted, this provision would lower the tax liability of
more than 50 percent of all families.
The Administration proposal is envisioned as a long-term anti-poverty program
to accomplish three goals. First, the program is expected to increase the productivity
of the structurally unemployed, particularly those persons now receiving public
assistance, by improving their skill level and work habits through experience and
training. Second, proponents believe the program will replace welfare dependency
with gainful employment through the revised benefit structure. Third, the Carter Administration expects the program to provide fiscal relief to state and local governments
while simultaneously reducing welfare costs and fulfilling "unmet social needs."
This study analyzes the efficacy and efficiency of using such direct government
job creation programs as welfare or anti-poverty measures. It focuses on the Administration's proposal because the immediacy, complexity, and permanence of that
proposal threaten to impose enormous financial and economic burdens on American
workers and taxpayers. (The PBJI is not the only legislation that imposes such a threat.
The Humphrey-Hawkins bill now pending before Congress is based on the same
anti-poverty objectives and to a large degree has the same potential consequences.)
At issue here is whether, as its proponents contend, the PBJI or any other longterm public employment program to reduce unemployment among the disadvantaged
can mitigate the inflation-unemployment tradeoff associated with more traditional
fiscal policies. This issue is especially acute because of other government programs,
such as high and rising minimum wages, which reduce private job opportunities and
increase unemployment. The argument of the PBJI's proponents depends critically
on several unrealistic assumptions about how these programs function and how labor
markets, in particular, function.
Proponents of PSE as welfare policy ignore the unpleasant reality that these programs must be financed either by higher taxes or by more government borrowing,
both of which reduce private sector output and employment. The myotic neglect of
the necessity to finance additional government expenditures and of the effects of the
financing itself, explain the inadequate public awareness of the aggregate impact of
these programs. This lack of awareness is worse yet because people fail to comprehend how public sector expenditures and employment crowd out private output and
employment.




10

47

II. WILL PSE INCREASE TOTAL EMPLOYMENT?
The objectives of Federally funded PSE programs have shifted from the shortterm countercyclical stabilization of state and local employment during recessionary
periods to the long-term improvement of the relative income and employment position of lower income persons.
Proponents of PSE as a welfare or anti-poverty measure argue that, if it is properly
"targeted" at the current poor, direct governmental job creation is a policy instrument
uniquely capable of increasing total employment and real output without triggering
inflationary pressures. In other words, they claim that PSE can lower the economy's
long-run "non-accelerating inflation rate of unemployment." A further argument is
that once those in the program have acquired skills and better work habits they can
move into private employment.
Segmented Labor Market Models
These arguments rest on the notion that the labor market in the United States is
essentially segmented into two (or more) separate and distinct markets: primary and
secondary labor markets. Workers in one market are believed not to be in competition
with workers in the other market because differences in the skill level of each group
supposedly preclude their substitution in the production process. Overall wage trends
are assumed to be dominated by the tightness of the primary market. Advocates
of this view of the labor market contend that the secondary market has a chronic
"excess" supply of labor. So, an increase in demandin the secondary market increases
employment without raising wage or labor costs. (Those who adopt the segmented
labor market notion never satisfactorily pose or answer the question of why there is
a persistent excess supply—why this market never clears.)
Labor market models based on the idea of segmentation and its related consequences explain the presumed "excess" supply of labor in the secondary market as
resulting either from worker characteristics or from the size and capital intensity of
industry.2 The former models, based on worker characteristics, explain differential
rates of unemployment between primary and secondary market workers as resulting
from the skill and educational level, reliability, commitment, and motivation for
learning of each group. The latter models, based on industry characteristics, argue
that primary market workers obtain the degree of security they enjoy because their
employers, assumed to be large organizations, require the continuity of employment
and skill level those workers offer. Secondary workers, in contrast, are assumed to be
employed by smaller firms. Such firms are believed to be more exposed to fluctuations in aggregate demand or to be offering services on a seasonal basis. No rigorous
attempt has been made to identify which segments of the labor force are in which

10

2
There are several variants of these models, including the dual, queue, and segmented market
models. For a more thorough exposition of the characteristics of each of these models see Martin
N. Bailey and James Tobin, "Direct Job Creation, Inflation, and Unemployment prepared for
the Brookings Institution Conference on Direct Job Creation (April 1977), 21-23.




48
10

idealized market setting, or to reconcile differences in the empirical presumptions
of the secondary market hypothesis advocates, such as whether small firms or large
firms specialize in employing secondary market workers.
Regardless of how each model postulates the market's segmentation, the models
differ only insignificantly in their policy implications. Segmented market models
hypothesize that, since the source of "wage inflation" is the primary rather than
secondary labor market and since the measured "excess" supply of secondary labor
is presumed to be chronic, direct government employment of the hard-core unemployed can increase total employment and output with only minimal pressure on
overall wages or the inflation rate. And, it is asserted, these benefits, with little
associated inflation, would accrue not only over the short run but in the long run
as well.
The general proposition that there are several distinct labor markets, or labor market segments, may appear realistic to some laymen. Widely publicized employment
statistics have shown an increasing disparity in the unemployment rates among various demographic groups generally believed to have different skill levels. Youths and
non-whites often register unemployment rates double *and sometimes several times
as high as the rate for mature male workers. The visibility of these statistics lends
credibility to the policy recommendations of segmented market theorists. Whatever
the source of the disparity in unemployment rates, however, the segmented market
approach cannot explain why the disparity has been widening, or why 30 years ago
essentially no disparity existed. Indeed, unemployment among black teen-agers was
lower than among white teen-agers years ago.3
One problem with segmented labor market models is that they are deeply rooted
in Keynesian economic theory, which is simply inappropriate, especially given
current economic conditions. Proponents of the use of fiscal policy for short-term
stabilization purposes appear to be retreating from the belief that today's unemployment can be "cured" by stimulating aggregate nominal demand. Instead, they are
proposing selective fiscal strategies conditioned by the same theoretical framework
but selectively pinpointed at the ailing sectors of the economy rather than at the
economy as a whole. In effect, instead of throwing money unselectively at the problem of aggregate unemployment, they propose throwing money at particular pockets
of unemployment but with little concern for where the money is raised.
Public service employment is a prime example of trying to place the effect of government expenditures (the fiscal stimulus) directly on the perceived problem, in this
case the hard-core unemployed. Those who believe in this approach appear to argue
that by increasing the demand for specific, underutilized labor inputs, rather than
for labor in general, aggregate output can be augmented at no additional resource or
inflation costs.4 Consistent with the Keynesian approach, this view of unemployment
is demand determined, even in secondary markets. There is no proper acknowledg3
Walter E. Williams, "Government Sanctioned Restraints That Reduce Economic Opportunities
for Minorities," Policy Review 2 (Fall 1977); 6-7.

"Bailey and Tobin, "Direct Job Creation, Inflation, and Unemployment."




49
10

ment of supply factors, and there is a corresponding failure to appreciate fundamental
changes in the structure of unemployment. Those who hold this view, therefore, fail
to explain why unemployment is so high either overall or among particular groups
in the labor force. Instead, in the face of high unemployment statistics, there is
almost a conditioned reflex to call for more and more government spending.

Problems in Measuring

Unemployment

Any public policy toward unemployment, despite its benign intentions, must have
a realistic view of how unemployment is measured-and how a change in policy can
affect the accuracy of that measurement. The overall unemployment rate is supposed
to measure the percentage of the civilian labor force that is seeking employment.
The Bureau of Labor Statistics also categorizes this total rate according to certain
demographic characteristics, such as race, sex, and age. The overall unemployment
rate and the subcategories of the unemployment rate are supposed to indicate first,
the extent of underutilization of available resources (that is, the number of those
offering labor services but unable to find work at the current wage level) and second,
the severity of unemployment.
Analysts have become increasingly aware that "measured" unemployment is an
imperfect, sometimes poor, indicator of labor market conditions. Part of the problem
with the measured unemployment rate is that it does not reflect changes in the labor
force participation rate—the proportion of the noninstitutional population 16 years
of age and over who are working or looking for a job. Increases in the number of
persons seeking work for the first time or reentering the labor market add to the
measured unemployment rate even if there has been no change in total employment.
Labor force participation varies in the short run with the level of business activity,
increasing during periods of expansion and rising wages and contracting during
recessions. Over the long run, basic demographic, economic, and cultural changes
influence the age and sex composition of the labor force, as well as its size. The
rising female participation rate over the past decade or so is a good example of how
economic and cultural changes can affect both the composition and size of the labor
force. Current high unemployment rates among youths, of course, reflect the baby
boom decade. Therefore, there are relatively more first time entrants in the labor
market, as well as relatively more people who plan to enter and leave the labor market more often. These phenomena alone would cause the measured unemployment
rate to rise.
Unemployment rates also do not reflect the duration of unemployment and the
degree of turnover in workers from one reporting period to the next. Geoffrey Moore
suggests constructing an index to measure both dimensions: duration of unemployment, which indicates the seriousness of the problem from the unemployed worker's
standpoint, and the average level of unemployment.5 Moore's "index of unemploys
Geoffrey H. Moore, How Full is Full Employment? and Other Essays on Interpreting the Unemployment Statistics. (Washington, D.C.: American Enterprise Institute, 1973).

2 3 - 5 4 4 O - 78 - 5




50
ment severity" demonstrates that recent unemployment experience has not been as
severe as is generally believed. While the 1971 unemployment rate of 5.9 percent
was equalled or exceeded only three times since 1948, the average duration of unemployment was exceeded in eleven years between 1948 and 1970.
These and other deficiencies inherent in the measured unemployment rate make it
a poor index of labor market activity. A superior, albeit somewhat rough, indicator
is the employment ratio, defined as the proportion of the noninstitutional population
over 16 years of age that is currently employed. The employment ratio is now near
its historical high, while measured unemployment remains about 7 percent. For
public purposes, the employment ratio presents a far more accurate picture of labor
market conditions.
Beyond these statistical and definitional problems, institutional changes affect
the unemployment rate. Among the most recent of these changes is the 1971 addition
of a work registration requirement for welfare eligibility. Clarkson and Meiners estimate that the current overall unemployment rate has been inflated by as much as
2.1 percentage points because people must register for work, and thus be declared
"unemployed," to be eligible for certain welfare benefits.6
Unemployment: Causes and Incentives
Unemployment Insurance and Welfare Benefits. The unemployment rate also fails to
differentiate between voluntary and involuntary unemployment. Hence, the rate is
not, as it is intended to be, a precise indicator of "hardship" or of market failure.
Significant disincentives to work, including both unemployment insurance and
several welfare benefits, have been built into government tax and transfer programs.
Following the old and enduring law of economics, as the cost of being unemployed
has fallen, there has been more unemployment. In a not so subtle way, these programs also subsidize erratic work habits and planned seasonal unemployment.7
They also impair the orderly acquisition of job skills on the job, where most skills
are obtained.
The "replacement rate" (non-tax able transfers of welfare benefits and unemployment compensation to the unemployed compared with after-tax income to those
gainfully employed) is now very high, especially for low income persons and families.
The level of the replacement rate influences the incentive to work. Men whose earnings approximate the current minimum wage, for example, receive unemployment
compensation equal to over 80 percent of after-tax net income. Married women,
because of the progressivity of the income tax, experience even higher replacement
rates and, depending on the number of children in the household, may even add more
6

Kenneth W. Clarkson and Roger E. Meiners, "Government Statistics as a Guide to Economic
Policy: Food Stamps and the Spurious Increase in the Unemployment Rates," Policy Review, 1
(Summer 1977), 27-51.
7

Martin S. Feldstein, "The Economics of the New Unemployment," The Public Interest, 33 (Fall
1973), 3-42.




10

51
10

to the family's net income by remaining unemployed than by working. For millions
of Americans, working is simply less remunerative than being unemployed. In addition, being unemployed means that one has time to do other things like taking care
of children, fishing, fixing up the house, working for unreported wages, and the like.
Unemployment insurance also reduces the cost of job search for those genuinely
looking for a job. But, this was an original intention of unemployment insurance
and is socially efficient up to some point. Some researchers believe that today the
job search has become excessively prolonged beyond what is justified by the potential increase in lifetime earnings.
Government Intervention in the Labor Market. Direct government intervention in
the labor market—in the form of minimum wage legislation and sanction of union
power—is a very significant cause of unemployment.8 For many of the unskilled and
the young whose productivity is low because of limited experience and education,
the legal minimum wage is a major deterrent to employment because it causes the
cost of hiring them to exceed their productivity.9 Lack of employment opportunities
is serious enough. The problem of limited job training is compounded by the minimum wage because nonemployment impairs the acquisition of job skills or systematic
on-the-job training. In most respects, the traditional apprenticeship system, which
trained the workers of the Western World for centuries, has been destroyed.
Feldstein and others suggest that the minimum wage actually has the ironic effect of
lowering the lifetime income potential of the disadvantaged by substantial amounts.10
Recent extensions of occupational coverage for Federal legal wage minima eliminate
still more private opportunities for training and increase more than proportionately
the adverse effect of these minima. Any attempt to index the wage minima, as has
been suggested, will maintain the real differential between the productivity of lowskill workers and the nominal wage required under law. If these wage minima were
left permanently at their existing level, then inflation would tend to ameliorate the
minimum wage effects. The recently legislated increase in minimum wages, however, will thus make the unemployment situation even worse.
Union practices have much the same effects on employment, on-the-job training,
and lifetime earnings except that these effects are concentrated in certain industries.
Unions have the power to set apprenticeship qualifications, often to the exclusion of
certain minority groups, and to establish minimum apprenticeship wages. It is always
to the advantage of journeymen members to have applicable minimum wages in
their own industry as high as possible. High minimum wages insure that hiring those
qualified for journeymen's wages will always be more cost effective than hiring less
skilled workers.11 It is not surprising that union leaders are usually the most vociferous
proponents of legislation to increase legal wage minima.
^United States Congress, Congressional Budget Office, "Public Employment and Training Assistance: Alternative Federal Approaches," Budget Issue Paper (Washington, D.C.: United States
Government Printing Office, 1977).
^Feldstein, "The Economics of the New Unemployment."
10

Feldstein, "The Economics of the New Unemployment."




52
10

Legal and government sanctioned minimum wages are probably the single most
important barrier to the employment of teen-agers and other low-skill workers.
Feldstein's recent study of unemployment among demographic groups tends to substantiate the importance of minimum wage effects on teen-age unemployment.'2
Feldstein estimated the responsiveness of the unemployment rate among different
age and sex demographic groups to changes in the rate for mature males (all those
over 24 years old). The rate for mature males is indicative of the general tightness
of the labor markets. Feldstein found that teen-age unemployment for all groups
(males, females, whites, and non-whites) would still exceed 10 percent even if the
rate for mature males fell to 1.5 percent. The rate for non-white teen-agers would
remain about 24 percent under these conditions. It should be noted that teen-age
unemployment accounts for a significant portion (possibly as much as 30 percent)
of the overall unemployment rate, which suggests that unemployment would remain
high even during economic prosperity. Among those over 20, only the rate for nonwhite females would exceed 6 percent when that for the control group approximated
1.5 percent.
Certain cultural forces undoubtedly do contribute to current high levels of unemployment among teen-agers and others. These forces include motivation, educational
opportunity, the general level of family wealth, and the replacement rate implicit in
income transfer programs. The minimum wage, nevertheless, must be responsible
to a large degree, for much of contemporary unemployment.
Persons with low skill levels may be expected to have low incomes. But low skill
alone does not explain unemployment as the segmented market models postulate.
Those models of the labor market use unemployment statistics to demonstrate that
the market is not working efficiently. This assertion of an inefficient labor market,
in turn, is the principal justification for government intervention through direct employment policies. Public service employment, in essence, would add yet another
layer of government simply to offset the adverse effects of existing Federal policies.
To summarize, the market is working, but it labors under the artificial constraints
imposed by government regulations and policies. That the minimum wage exceeds
the market clearing wage for many low-skilled persons alone explains a significant
amount of "measured" unemployment. Government tax and transfer programs
effectively lower the cost of prolonged job search and subsidize unstable employment
and periodic voluntary withdrawal from the labor market. Such voluntary unemployment accounts for an increasing fraction of overall unemployment, but it is hardly
indicative of market failure. Long-term trends in the age and sex composition of the
labor force and the responsiveness of the supply of labor to economic and other
influences also tend to be camouflaged by reported unemployment statistics.
Today's unemployment situation is characterized by temporary and voluntary withdrawal from employment, except for those persons denied employment opportunities
"Williams, "Government Sanctioned Restraints That Reduce Economic Opportunities for Minorities," 14-15.
l2

Feldstein, "The Economics of the New Unemployment," 7-8.




53
because of legal wage minima and other government policies. Less than 50 percent
of all unemployment arises from persons losing their jobs. In this labor market context, proposals for public service employment programs, especially massive and
permanent ones, are misguided and potentially serious threats to the economy:
Problems with Public Service Employment
Proponents of public service employment programs claim that they are virtually
a "free lunch*' They contend that the cost of "creating'1 public jobs will be offset
partially by savings in government transfer payments and partially by the "social
value" of the public services provided.13 Wage pressures will not surface, they argue,
because of the chronic "excess" supply of labor in the secondary labor market.
Indeed, some researchers go so far as to contend that public service employment
might actually contribute to a reduction in the rate of inflation. Nostalgia for the
1930s, however, wiH not change the reality that unemployment today is not the same
phenomenon as unemployment in the 1930s. The view of a labor market with workers
standing in line for jobs unavailable because the pace of economic activity is too
slow to absorb them is quite inappropriate with employment ratios at historically
high levels.
Direct government job creation intended to redistribute income to those currently
poor by the government's definition will be very costly in terms of a lower level of
total output and a higher rate of inflation in the long run. Costs will be even higher
the more expansive and permanent the program.
Targeting, Government Employment Skill Levels, and Resource Requirements.
PSE jobs, in the first place, cannot be "targeted" with any degree of certainty at the
hard-core unemployed, especially through local government initiative. Local governments simply have too great an incentive and opportunity to transform Federal
grant programs into general revenue sharing and to use the funds to hire an entirely
different group of workers who meet the relatively high skill requirements for state
and municipal employment. The nature of unemployment, moreover, suggests that
"targeting" jobs will be easier said than done even if the Federal Government implements the jobs program directly. Proponents of PSE either are ignorant of or choose
to ignore the realities of the current labor market situation. If targeting is less than
perfect, PSE workers will be drawn from private employment, resulting in a reduced
supply of labor in the private sector. This reduced supply of labor will lead to higher
labor costs and increased product prices. Evidence and analysis do indicate that
targeting is far from perfect.
Second, even if one could identify an easily segregated group of unemployed
persons whose skills were strictly noncompetitive with the needs of private employers,
nevertheless creating public sector jobs of any kind requires the use of other resources.
Supervisory personnel are not likely to be found among the unskilled "target" group.
"Bailey and Tobin, "Direct Job Creation, Inflation, and Unemployment:'" United States Department of Health, Education, and Welfare, "Welfare Reform," H.E.W. News (August 1977).

10




54
Material or capital inputs, whether they are brooms, typewriters, uniforms, hospital
equipment, or building materials, will be required to complement PSE workers.
These materials, of course, are in addition to the resources required to administer
the PSE program at the state and Federal level. Theorists supporting PSE wrongly
assume the existence of an infinitely elastic supply of unskilled labor and capital
inputs, and they wrongly assume that unskilled labor as well as capital are free goods
that would otherwise go unused. Government bidding for these resources, contrary
to these incorrect assumptions, will indeed divert capital, materials, and skilled and
at least some unskilled labor from other uses.
*
Fiscal Substitution. Experience with past and present public employment programs
leaves little room for doubt that fiscal substitution, or "displacement1' at the local
level will continue substantially to neutralize Federal policy objectives. "Displacement" occurs when state and local governments sgend Federal grant money earmarked for a particular purpose such as PSE on expenditures for goods and services
they had already budgeted. In other words, Federal funds are substituted for local
tax effort. The Congressional Budget Office has acknowledged that fiscal substitution may run as high as 100 percent within two years of a program's implementation.14
In a recent study, Johnson and Tomola used time series data to estimate the impact
of the PEP and PSE-CETA on total employment.15 They found that these programs
have a substantial effect on state and local employment for the first two quarters but
are subject to a high degree of fiscal substitution in subsequent quarters. Specifically,
they found that 100 PSE jobs resulted in 104, 91, 69, 42, 18, and finally only 3 incremental state and local government employment slots in the first through sixth quarters respectively. The high standard errors of the estimates indicate one difficulty
with PSE, to wit, how to differentiate these employees from those holding regular
public jobs. Wiseman, in a study of the PEP, found nearly identical results by the
third quarter, but his study showed no initial increment in regular public jobs beyond
the funded 100 PSE slots.16 The PEP, therefore, failed to induce any net increment in
local government spending.
More important than the amount of net employment are the characteristics of the
program participants. Evidence from diverse sources implies that CETA participants
are best classified as being from the middle of the skill range, not as unskilled.
Fewer than 46 percent of the persons hired under CETA were "economically disadvantaged" according to the government's definition (one who lives in a family
receiving cash welfare payments or earning income less than the poverty threshold).
Only 15 percent of all CETA participants in PSE or training programs had been
^United States Congress. Congressional Budget Office, "Public Employment and Training Assistance: Alternative Federal Approaches," 27.
1

'George E. Johnson and James D. Tomola, "The Fiscal Substitution Effect of Alternative Ap-

proaches to Public Service Employment Policy," The Journal of Human Resources,

12 (Winter

1977), 14.
1

^Michael Wiseman, "Public Employment as Fiscal Policy," Brookings

Activity,

Papers

on

Economic

1 (1976), 67-104.




10

55
receiving welfare before entering the program. And findings of a national survey
show that a substantial fraction, over 20 percent of PSE workers, are actually employed on the day before getting the subsidized job.17
Competing with the Private Sector. The problem with using state and local government as the vehicle for direct job creation is that this sector of the economy is
relatively skill intensive compared to the experienced civilian labor force. Hence,
the kinds of employees local government officials can use are simply not the targeted
unskilled, although they may be unemployed- Eli Ginzberg estimates that two-thirds
of the 9 million net new government jobs provided in the United States between 1950
and 1976 can be characterized as "good" jobs in terms of total compensation, job
security, and opportunity for advancement. All but 700,000 of these jobs were added
to state and local payrolls.18 The majority of these workers has skill levels higher than
the average level of the experienced civilian labor force. The stability and security
afforded by state and local employment has probably also drawn more unskilled
workers with a greater degree of job commitment than have been available to many
private employers.
The available evidence thus suggests that PSE programs compete directly for
workers with the private sector. This competition has two direct and perverse effects
on the economy. First, by subsidizing state and local government employees, Federal
employment programs effectively reduce the relative price of state and local services
to the taxpayers of the respective jurisdictions. Increased demand at the artificially
low price of labor has led to a more rapid increase in the amount and kinds of services
provided by these governmental units. Expansion under these conditions, however,
is extremely inefficient since it has not been market determined.
Second, with the Federal subsidy, state and local governments can compete more
successfully with the private sector for labor and capital inputs. Even at competitive
wage rates, state and local governments are advantaged in bidding for labor services
because they tend to offer greater security and stability of employment to workers
with any given level of skill than does the private sector. As we shall see, more
unemployment results as workers wait longer and search longer for these preferred
public sector jobs rather than take private sector jobs.
Proponents of PSE as a welfare measure view fiscal subsitution as a major obstacle.
They blame the failure of past programs even nominally to affect the rates of unemployment on the amount of displacement that has occurred at the local level. If this
potential for abuse were removed, they argue, PSE would realize gains in total
employment. Beyond tightening maintenance of effort requirements and rigidly
enforcing regulations, proponents of PSE anticipate that a more expansive Federal
program—and each year's legislation emphasizes more costly initiatives—would
greatly reduce the degree of substitution and increase the effectiveness of Federal
policy.
•'Wiseman, "Public Employment as Fiscal Policy," 101.
l8

Eli Ginzberg, "The Job Problem," Scientific American, 237 (November 1977), 43-51.

10




56
The Potential Direct Cost. Evidence from European countries, particularly the
Netherlands, which greatly extended its public employment programs over the past
few years, suggests that massive programs are subject to most of the problems associated with American programs to date. What proponents of PSE fail to appreciate
is that the potential demand for these jobs far exceeds the number of people currently
reported on welfare or as unemployed. For reasons I suggest earlier, public sector
employment is more attractive at any given wage rate than private sector employment.
This enhanced attractiveness holds especially during periods of economic instability.
Potential applicants include many people currently employed in private sector jobs,
the involuntarily unemployed, some of the voluntarily unemployed (depending on
the rate of replacement of income offered by transfer programs), many of those
receiving welfare, and an unknown number of persons who are not currently members of the labor force. It is ironic that the United States is contemplating massive
public employment at a time when most European countries are questioning the
efficiency of their public employment.
A massive public employment program presumably would create jobs for all who
"need" and apply for them. Assume for the moment that proponents of PSE could
actually prevent fiscal substitution as they contend. What would be required of such
a program?
Lowering the current unemployment rate 3 percent would require funding and
creating about 3 million PSE slots. The state and local government sector now employs approximately 12.5 million persons. The Bureau of Labor Statistics projects
this number to grow by approximately 3 percent per year or by just under 400,000
new employees annually through 1985. To provide an increase in employment sufficient to realize a 4 percent unemployment rate between now and 1985 would require
a doubling of that projected growth rate. But, these calculations assume no increase
in the labor force. If all of the "potential" labor force participants who indicated in a
recent Department of Labor survey that they "want a job now" were to surface and
be guaranteed a job, at least 8 million, not 3 million, PSE jobs would be required.19*
At $10,000 per year per job slot, the estimated cost per PSE-CETA job in 1976, this
effort could potentially add about $80 billion per year to Federal expenditures for
this part of the program alone. To be sure, there may be some reduction in other
Federal expenditures, but at most these are likely to be only a small fraction of the
staggering $80 billion.
Faced with such huge expenditures it is likely that the Federal response will be
further to limit access to the PSE program, so that the ambitious aims of the program
will have to be compromised. Indeed, the typical mistake in all Federal programs
is to underestimate the responsiveness of the public to important changes in costs,
benefits, and incentives. In our efforts to arrive at new solutions, the examples of
Medicare, Unemployment Compensation, and the existing welfare system should
help us to avoid a repetition and magnification of old mistakes.

19

Ginzberg, "The Job Problem."




10

57
Crowding Out
Whether the final increase in Federal expenditures for this program will be $80 billion a year or a smaller amount, the problem of how to finance the additional expenditures remains. Any complete analysis of the PSE program must include both a
recognition of the financing problems and an analysis of the impacts of financing
the additional required expenditures. The omission of these considerations has been,
and continues to be, one of the most fundamental and serious shortcomings in nearly
all analyses that underpin this and similar proposals. As we shall see, this omission
helps to explain why so many large and complex programs designed to solve a host
of problems have made little or no aggregate impact.
The evidence is clear that the aggregate expenditure level, nominal Gross National
Product, is linked to and determined by the quantity of money.20 The quantity of
money, in turn, is determined by the monetary policies of the Federal Reserve.
For a given money supply, which fixes the total of private and public expenditures,
an increase in any category of expenditures must be associated with a decrease in
other expenditures to keep the total of private and public expenditures the same.
Thus, for a given quantity of money, an increase in government expenditures is at
the expense of a decrease in private expenditures. The public sector, in other words,
"crowds out" the private sector.21
For a given stock of money, it follows that any increase in government spending
must be financed either by higher taxes or by borrowing. Higher taxes will depress
expenditures for private sector goods and services, thereby shrinking private sector
output and employment. Thus, an increase in the number of public sector jobs will
accompany a decrease in the number of private sector jobs. Labor is more efficient
in the private sector, and lost private sector output generally would have been more
useful and valuable than the additional public sector services. Most public sector
services are likely to be in activities that people would not voluntarily purchase at
current market prices, which more accurately reflect costs. Hence, an increase in
public sector employment will diminish private sector employment, and the efficiency of the economy as a whole will suffer. The real value of output will fall,
causing an increase in inflation. Average real wages and total employment, in turn,
also must fall.
-"David 1. Meiselman, "Statement to the Subcommittee on Domestic Monetary Policy of the
Committee on Banking. Currency, and Housing, United States House of Representatives, Hearings
on the Impact of the Federal Reserve's Money Policies on the Economy, 94th Congress, 2d Session,
June 9, 1976; David I. Meiselman, "The Impact of Countercyclical Monetary and Fiscal Policies
on Housing," in Department of Housing and Urban Development, Housing in the Seventies:
Volume II (Washington, D.C.: Government Printing'Office, 1976); David 1. Meiselman, "Worldwide Inflation: A Monetarist View," in David I. Meiselman and Arthur Laffer, eds..The Phenomenon of Worldwide Inflation (Washington, D.C.: American Enterprise Institute, 1975).
2,

For a comprehensive summary of the analysis of and evidence about crowding out, see Keith

M. Carlson and Roger W. Spencer, "Crowding Out and Its Critics," in Federal Reserve Bank of
St. Louis Review (December 1975). For a despairing view, see Bailey and Tobin, "Direct Job Creation, Inflation, and Unemployment." 7.

10




58
Borrowing to finance the increase in Federal expenditures has the same general
effect as taxing. When the Federal Government borrows more, the increased demand
for funds drives up interest rates as part of the process in which the Federal Government bids financial resources away from the private sector. Higher interest rates are
part of the mechanism for shifting financial resources to the Federal Government
and away from the private sector. Higher interest rates depress private spending,
especially for capital goods such as housing. Debt-financed government spending
crowds out housing and business expenditures for plant and equipment.
Impairing capital formation also has serious consequences for labor productivity
because that productivity depends on the amount of capital; more specifically, labor
productivity depends upon the ratio of capital to labor. With less capital, labor productivity is lower. Real wages, in turn, are also lower, and employment opportunities
are curtailed. Thus, by this mechanism alone, creating some PSE jobs in the short
run will be at the expense of lower wages and fewer jobs in the long run. Of course,
other mechanisms indicate no increase in total employment, even in the short run.
Besides taxing and borrowing there is only one other way to finance more government expenditures. The Federal Government can effectively get the funds to pay
its bills by having the Federal Reserve increase the money supply. The direct result
will be still more inflation. The indirect result of more inflation will be an increase,
rather than a decrease, in unemployment.22
Demand stimulus alone will not solve a supply problem. Specific pockets of
unemployment remain largely because of poor public policies. The government's
printing press cannot paper over the causes or consequences of those policies. The
ensuing inflation solves no problems; it adds more.
The problem of fiscal substitution by state and local governments, which 1 discuss
earlier, provides evidence about, and is linked to, the lower value people place on
public sector activities compared with those in the private sector. To the extent that
fiscal substitution takes place, such substitution reflects the perception of local taxpayers that the services and activities the Federal Government is trying to force them
to consume are of little or no value at all! Federal dollars are effectively used to
reduce local taxes or to finance increases in other local services, but not the services
the Federal Government "prefers" If it is worthwhile having Federal contributions
to local citizens in general, it would seem that a general tax cut at the Federal level
would be a more efficient and direct way to allocate such contributions. A Federal
tax cut also would save on the present substantial amount of administrative expense
and bureaucratic meddling. In addition, because PSE programs effectively subsidize
local government expenditures, these programs thereby induce a higher level of such
expenditures than local citizens would prefer if they paid for them out of their own
22

For analysis of and evidence about the proposition that more inflation leads to more unemployment,

see Milton Friedman, "Nobel lecture: Inflation and Unemployment," Journal of Political

Economy

85 (June 1977), 451-472; David I. Meiselman, "More Inflation: More Unemployment." Tax Review (January 1976); and David I. Meiselman, "Unemployment and the Variability of Inflation:
A Feasibility Study," unpublished manuscript prepared for the United States Department of Labor
(September 1977).




10

59
revenue resources. A Federal tax cut instead of PSE programs, therefore, would correspondingly help to avoid still more local government activities of low productivity
and low value. Given the slowdown in recent years of our economic growth, shifting
resources to create more make-work and busy-work projects hardly would seem to be
called for today.

IE. THE PROGRAM FOR BETTER JOBS AND INCOME23
The Carter Administration's "Program for Better Jobs and Income" is composed
of three major elements: a job training and employment program; a revised welfare
and supplementary income program with work incentives; and a revision of the
earned income tax credit and minimum taxable income components of the Federal
income tax provisions. The bill also provides for state and local fiscal relief. These
elements are interrelated because the financial incentives of each part depend on
those of the others. Here, I sketch briefly the intent and specification of each of these
components. Then, the entire program is evaluated in the context of the analysis
presented in Section II.
Specifics of The PBJI
Job Training and Employment. The stated goal of the job training and employment
component of the PBJI is to provide opportunities for work or training for principal
wage earners in families with children. State and local governments would be responsible for job search, training, and placement, and for creating subsidized jobs within
the existing CETA network of prime sponsors.
The PBJI would be funded by $8.8 billion in 1980 to create 1.4 million public service jobs and job-training slots to provide employment for up to 2.5 million persons
who cannot find private sector employment or regular public employment. Approximately 85 percent of these jobs would pay the minimum wage of $3.30 per hour
when initiated in 1981. Wages up to 25 percent more, or $4.15 per hour, would be
permitted for the remaining jobs to allow flexibility for rewarding work leaders and
good performance.
Those states currently paying welfare benefits greater than the Federal minimum
would be required to augment the minimum wage by an amount sufficient to maintain the Federal incentive structure between work and welfare compensation. Since
supplemental wages could not exceed 10 percent of the current minimum wage, this
provision will not adequately protect the work incentive benefit structure.
The job training and employment program would require no income or asset tests
for determining eligibility; however, applicants must be unemployed and show
"evidence" of a five-week job search. Each subsidized job is intended to serve as
23

This discussion and analysis is based on the Carter Administration's proposal as specified in
United States Department of Health, Education, and Welfare, "Welfare Reform." The final form
of the bill associated with the proposal may differ from this HEW release.

10




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transitional employment, and participants would be obliged to conduct an annual
job search and to accept private employment whenever it is offered. The proposal
never specifies just how the job search would be verified.
Two-parent families, single persons, childless couples, and single parents whose
children are fourteen or over, would be required to accept work if offered. Heads of
single-parent families with children between seven and fourteen would be expected
to work part time when available work does not interfere with child-care, and full time
if appropriate day care facilities are made available. Presumably, those exempted
from work—the aged, blind or disabled, and single parents whose children are under
seven—would not be excluded from consideration if there are sufficient PSE slots.
Under no condition would more than one PSE job be awarded per family "unit,"
although other family members would remain eligible to participate in other Federal
or state training or youth programs.
Since all low-income families with children would be eligible for PSE, participants would be drawn from a much larger pool than current welfare recipients. The
Department of Health, Education, and Welfare estimated that over 44 percent of this
pool would be persons not currently receiving AFDC, food stamps, or other relief.
If approximately 44 percent of PSE slots were indeed filled with people now on welfare, AFDC caseloads would drop by only 28 percent.24
Federal guidelines are supposed to assure the appropriateness of job opportunities
relative to skill levels of the "target" groups and to provide for training as part of job
activities. Provisions of the PBJI generously encourage flexible hours and provision
of part-time employment to accommodate participants.
The jobs program anticipates stimulating local projects not currently feasible on
a large scale in most communities. HEW identifies thirteen major categories of such'
jobs and estimates the number of participants likely to hold each job.25
200,000—aiding the elderly and infirmed;
200,000—constructing and maintaining local recreational facilities;
150,000—improving public safety;
150,000— paraprofessionals in local schools;
150,000—providing child care;
125,000— supervising recreation programs;
100,000—cleaning neighborhoods and controlling insects and rodents;
100,000—refurbishing school facilities;
75,000—supporting cultural activities;
50,000—monitoring environmental quality;
50,000—weatherizing homes;
25,000—providing facilities for the handicapped;
25,000—aiding in waste treatment and recycling.
Many of these jobs duplicate services performed by private sector small businesses and in some instances require labor skills competing directly with union
24

United States Department of Health, Education, and Welfare, "Welfare Reform."

"United States Department of Health, Education, and Welfare, "Welfare Reform."




10

61
members. Most of these jobs also appear to require skills beyond those normally attributed to the "targeted" poor, and one wonders whether some of the
job categories are fancy names for leaf-rakers and baby-sitters.
The legislation includes a "fail-safe" provision authorizing the Secretary of
Labor to arrange employment opportunities directly with public and private nonprofit agencies if the state and local governments do not provide the required
number of jobs.
Income Support Program. The cash assistance component of the PBJI consolidates
three of the largest income-tested transfer programs: Aid to Families with Dependent
Children, Supplemental Security Income, and Food Stamps. The principal objective
of this restructuring of the nation's welfare system is to discourage welfare dependency and to convert hundreds of state and county welfare programs having vastly
different eligibility rules, benefits, and regulations into a single, Federally funded
welfare system. The PBJI also anticipates applying computer technology to monthly
benefit calculations to reduce administrative costs and overpayments arising from
unreported income and to eliminate fraud.
The new system would be partially supplemented and administered by state and
local governments. The system provides a basic two-tier benefit structure, which
bases payments on family size and willingness to work. The upper tier provides.benefits equal to approximately 65 percent of the poverty threshold. The second, and
much lower, tier of benefits is intended to create work incentives by providing only
subsistence income. Virtually no one in the noninstitutionalized civilian population
would be categorically excluded from receiving some level of income assistance as
long as the living unit meets income and asset requirements. Married couples without
children, single persons, those living in "group quarters," students, aliens and other
residents here and in the territories of the United States would all be eligible for
some, albeit differential, welfare benefits.
This cash support system would afford benefits to existing welfare recipients who
are expected to work, to those persons currently working at a low income, and to
those persons exempted from employment for reasons of blindness, disability, age
of children, and the like. Cash benefit determination would involve extremely complex calculations, considering the large number of parameters influencing the total
value of such awards. These parameters cannot be summarized briefly. Enumeration
would be complicated and not especially systematic. Benefit penalties against earned
income differ, moreover, depending on whether or not a member of the family unit
is expected to work. Matching provisions would encourage states to augment Federal
benefit levels up to 100 percent of the poverty level. Future benefit levels in any one
state may or may not equal the national benefit or existing welfare payments.
Some examples may serve to illustrate the general emphasis and complexity of
the differential cash assistance provisions. Consider a single-parent family of four.
(Income is based on a 2000 hour work year.) If the head of the household is exempted
from work, the family would receive a Federal guarantee of $4,200, unless the state
chose to supplement the Federal payment.

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62
If the youngest child is between seven and fourteen years of age and the parent is
required to work part time, earnings from PSE plus the supplementary income bonus
would total $5,370. However, should the parent refuse to work, annual benefits
would fall to $2,300. Total earnings from a half-time private sector job at the minimum wage would be slightly higher, $5,635, because of the earned income tax credit.
If the youngest child is over fourteen years, full-time employment would be
required. In this case, earnings from a special public service job would amount to
$6,540 and those from private employment would total $7,005. (Cash benefits for a
family of four do not phase out completely until income reaches $8,400.) The differential, in this and other cases, between non-work public service employment,
and private work does not appear adequate to produce the intended effects.
Single persons, currently entitled only to $600 worth of food stamp benefits,
would receive an income guarantee of $1,100 under the proposal. They would be
expected to work, although they would not be eligible for special public jobs. Benefits decrease 50<z for each additional dollar earned. Note that this is a much higher
tax rate than these persons now face. Single persons do not qualify for the earned
income tax credit. When FICA is subtracted from wages, a far greater disincentive
to work is built into the proposal than exists under current law.
The PBJI encourages states and districts now having higher welfare benefits, such
as California, New York, and the District of Columbia, to maintain their differential
cash assistance up to the calculated poverty level by agreeing to offset a substantial
fraction of these costs in addition to the $4,200 Federal share. Apparently the
Administration believes that the national benefits floor would not represent an adequate income in certain parts of the country. Differences in the cost of living, however, do not parallel welfare differentials. These indices, moreover, do not reflect the
intrinsic values, such as climate, associated with particular geographic locations,
and, of course, cannot reflect individual preferences. When states supplement welfare
payments up to the poverty threshold, as the bill encourages them to do, they must
also increase the minimum wage payable to PSE employees. This is true regardless
of the condition of local labor markets.
Tax Reduction Provisions. Liability under the Federal income tax in 1977 begins
with adjusted gross incomes above $7,200. The Administration's proposal apparently
intends to recommend an increase in the minimum taxable income to $9,080, although
the precise method of establishing this threshold was not delineated.26
The PBJI would also modify and expand the earned income tax credit. This 1975
tax law provision currently provides $400 in benefits (in cash or reduced taxes) to
families with $4,000 of earnings, $200 for those earning $2,000 or $6,000, and no
benefits if earnings exceed $8,000. Since work disincentives would thus be created
for families earning between $4,000 and $8,000, many of whom would also be
eligible for cash assistance, the PBJI proposes to extend the credit to income levels
"Sheldon Danziger, Robert Haveman, and Eugene Smolensky, "The Program for Better Jobs and
Income: A Guide and a Critique," prepared for the Joint Economic Committee of the United States
Congress (October 1977), 7.




10

63
up to $15,620! The tax credit would be calculated monthly and would be reflected
in the withholding process. Nearly 50 percent of all families would benefit by this
expansion of the earned income tax credit. As an incentive for job holders to leave
subsidized employment, earnings from such employment would not be eligible for
the earned income tax credit.
Fiscal Relief for State arid Local Governments. Fiscal relief is a major stated objective of the reform proposal. States, on the average, will realize savings in their welfare
expenditures of 18.1 percent, which must be distributed to localities in proportion
to their total burden of state welfare costs. Those states and cities that have traditionally paid the highest benefits will realize the largest savings. California, New York
State, and the District of Columbia, for example, will receive relief (as a percent of
their current level of effort) of approximately 31, 36, and 56 percent, respectively.
No state would save less than 10 percent. The bill therefore rewards communities
that have previously been most guilty of encouraging (or underwriting) welfare
dependency.
Evaluating the PBJI as Welfare Policy
To assess the PBJI, as well as similar programs containing target unemployment
goals, against its stated objective (reducing the level of unemployment, particularly
among the hard-core unemployed, at minimal acceptable rates of inflation) one must
answer several critical questions. Will the work incentives provided current welfare
recipients induce a substantial portion of them to seek PSE? Beyond the "target"
unemployed, what is the potential total supply of applicants for PSE? How rapidly
will state and local governments respond to changes in "measured" unemployment,
and what kinds of jobs are they likely to "create" to meet the demand for PSE?
What will be the resource and inflation costs of the outcome or, more specifically,
what is the probable impact of the program on total employment, the distribution of
income, and total output?
Work Incentives and the Potential Supply of Targeted PSE Workers. Our evaluation
begins with the question of work incentives. The benefit structures of the income
maintenance program and the revised earned income tax credit were designed with
the intention of providing work incentives to welfare recipients without changing
the relative position of those low income persons currently employed. Those benefit
structures also were intended to encourage family stability.
There are an overwhelming number of alternative benefit schedules depending on
marital status and the ages and number of dependent children in each household.
To simplify the task of examining the incentive structure, a welfare family of four
with a female head of household will be singled out for reference. Households with
female heads represent a substantial fraction of total AFDC caseloads and expenditures. These households also tend to be the most welfare dependent and resistant
to public policy attempts to induce gainful employment. The accompanying table

20

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64
shows the components of income for an eligible four member household with a
female head.
COMPONENTS OF TOTAL INCOME: FEMALE-HEADED FAMILY OF FOUR,
ELIGIBLE FOR AFDC AND NOT EMPLOYED27
Case I:
Not Expected
to Work
Present
Proposed
System
System
Regular earned income
0
Special public job earnings . . . .
0
Supplementary income bonus 1 . .
0
Earned income tax credit 2
0
Payroll tax 3
0
Federal income tax
0
AFDC4
$720-$5,712
Food stamps 5
$1,992-696
Total income

$2,712-6,408

Case II:
Expected to
Work Part-Time
Present
Proposed
System
System

Case 111:
Expected to
Work Full Time
Present
Proposed
System
System

0
0
$4,200
0
0
0
0
0

0
0
0
0
0
0
$720-5,712
1,992-696

0
$2,650
2,875
0
-155
0
0
0

0
0
0
0
0
0
$720-5,712
1,992-696

0
$5,300
1,550
0
-310
0
0
0

4,200

2,712-6,408

5,370

2,712-6,408

6,540

^ h e amount by which States might supplement the work bonus would be added to t h i s total. If States choose to supplement, they must also supplement the wage of the special public job.The guarantee of $4,200 is reduced by 50 cents for
each $1 of earnings of those expected to work less t h a n f u l l time. For those expected to work full time, the guarantee is
only $2,300, but the first $3,800 of earnings are not taxed.
T h e earned income tax credit is available to families with children, but not for special public jobs.
Employee's share of the payroll t a x — 5 . 8 5 percent.
"The m i n i m u m benefit shown is for Mississippi; the maximum, for New York.
5 The bonus value of food stamps is computed by assuming a standard deduction of $50 per month for a couple and $100
per month for a family of 4.

The most obvious problem with the proposed benefit schedule is the implicit wage
per hour of PSE work. The PSE wage for mothers expected to work in full- or parttime jobs amounts to only $1.17, which hardly appears to be a sufficiently attractive
wage to induce actual employment. Studies of WIN found that work related expenses,
such as child care and travel, were significant determinants of welfare mothers' work
effort.28 The differential wage provided by PSE is simply not adequate to cover these
costs, even taking into account child care deduction. And, the wage differential is
certainly insufficient to reward work effort outside the home. These persons will be
best off under this system by registering for work but failing to get or to keep a job,
since the penalty for refusal is a 50 percent reduction in family benefits. Studies show
that work requirements carrying penalties this severe will induce welfare mothers
to work.29 The Administration's proposal, however, essentially negates any positive
27

This table is based on Tables 1 and 2 in Danziger, Haveman, and Smolensky, "The Program for
Better Jobs and Income: A Guide and a Critique," 15-16.

"Sar A. Levitan and David Marwick, "Work and Training for Relief Recipients," The Journal of
Human Resources, 8 (Supplement 1973), 5-18.
"See, for example, Irwin Garfinke! and Larry T. Orr, "Welfare Policy and the Employment Rate
of AFDC Mothers," National Tax Journal, 27 (June 1974), 275-284.




10

65
10

effect from this inducement because of the proposal's relatively small incremental
income provided for PSE employment.
The accompanying table also illustrates the substantial geographical differences
in the impact of the Administration's program. Welfare recipients in Mississippi
will automatically receive nearly 50 percent more income. The PBJI essentially imposes on state and local governments a required conformity with national standards,
which will impact on the number and location of welfare recipients. Substantial
increases in the income provided welfare families in certain parts of the country are
likely to affect adversely the attitudes and motivation of a substantial number of
low income, private sector workers, to the detriment of private employment, output,
and costs.
The benefit structure contains several other adverse incentive effects. First, it
does not, as intended, encourage family stability. Fathers not living with the family
are guaranteed the $1100 income provided for singles, but those fathers would add
only $600 if they remained with their families. Second, the program continues to
encourage welfare mothers to bear children, only with a somewhat different time
pattern. The program provides an incentive for mothers to space their children's
births so that they have a child under seven as long as possible. Moreover, benefits
increase beyond the $4,200 payment (for a family of four) with each child up to a
total of six children. Maximum national benefits peak at $6,000 for a mother with
six children; total family income with a father living separately would be $7,000,
with no taxes or work expenses deducted so long as employment is avoided.
The $4200 national benefit for a family of four, at the state's option, may be augmented with Federal matching grants up to the $6440 poverty threshold. This provision of the PBJI not only perpetuates existing geographical differentials in welfare
expenditures, but also rewards those states that have been most guilty of encouraging
welfare dependency. Since the minimum wage supplements are limited to increases
of 10 percent beyond the national level, there will be geographic differences in the
work incentives that the bill provides. Assuming that the highest paying states will
elect to supplement as provided, welfare recipients effectively will be rewarded more
handsomely for avoiding employment in the most heavily populated welfare states.
A recent study by Garfinkel and Orr of the effects of work incentives on the
employment rate of welfare mothers showed how limited these effects, as well as
others, might be on the employment rate. Garfinkel and Orr report, "Even if one
were to simultaneously decrease the guarantee by 40%, the tax rate by 35 percentage
points, and aggregate unemployment by 1.5 percentage points; increase the levels
of the set-aside and deductions by $50, and the percentage of the caseload receiving
rehabilitation services by 10%; and impose a work test in all states, our estimates
imply that 50 percent of the AFDC mothers in a typical state would still not work."30
These findings suggest that even though the PBJI imposes a strict work test as a condition of receipt of benefits, a significant increase in employment rates among welfare mothers is unlikely. However, the PBJI may create an artificially high measured
"Garfinkel and Orr, "Welfare Policy and the Employment Rate of AFDC Mothers," 283

2 3 - 5 4 4 O - 78 - 6




66
labor supply, or number of registrants for work programs. One problem with PSE as
a welfare policy is that there is no way to make people actually work, unless one is
satisfied with herding the "target" group into a room to keep them away from home
for X hours per day. Since one cannot fire anyone from PSE, and'since one cannot
make anyone do anything either, the most probable outcome is a large pool of welfare recipients registered to work and held indefinitely in the category "awaiting
assignment" Those so categorized receive the maximum net spendable income for
a minimum expenditure of time and effort.
For those who do respond positively to the rather small income differentials, and
who willingly participate in PSE and job training, the outlook is bleak for long-term
employment in either the public or private sector. Given the low skill level of the
average welfare recipient relative to the needs of state and local governments, and
given the true overall costs of creating public jobs (that is, additional costs of labor
and capital resources and administration), neither a state nor a local government has
an incentive to provide an adequate number of these jobs. The program's ultimate
goal of moving PSE employees into private sector employment after training and
"rehabilitation," moreover, must be seen as "pie-in-tfte-sky" in view of past experience with Federally funded training programs, especially since little training is
envisaged in the program. Indeed, it would seem that the likely poor work context
would corrupt rather than upgrade skills.
"Graduates" from WIN registered gains in hourly wages that were either modest or
nonexistent. Thirty percent of all males and three out of every five women enrollees
were still making only $2.00 per hour after leaving the training program. Attrition
rates were high from the outset because child-care allowances were inadequate and
training bonuses above welfare amounted in some cases to as little as $1.50 per day.
The attrition rates increased steadily as participants became disillusioned by feedback
on graduates.31 The Department of Labor claims only a 20 percent success rate in
moving participants permanently off welfare.
The Congressional Budget Office reports that even intensive training programs
fail to raise participants' lifetime income potential. The average manpower training
enrollee (either a youth or a minority group member) achieved a yearly post-training
income differential of only $400. Most of this differential, however, stemmed from
an increase in hours worked per week or in weeks worked per year, rather than from
higher hourly earnings.32
Most programs aimed at welfare recipients rather than at the poor in general, such
as WIN and the $50 million welfare demonstration under the Emergency Employment Act of 1971, have been implemented only with long lead times and an underutilization of appropriated funds. California, to take but one example, did not even
bother to submit an application for funds under the Emergency Employment Act.
Except for PSE-CETA, in which participation is not restricted to current welfare
3,

Levitan and Marwick, "Work and Training for Relief Recipient.

32

United States Congress, Congressional Budget Office, "Public Employment and Training Assistance: Alternative Federal Approaches " 28-29.




10

67
recipients, appropriations were very rapidly absorbed by most eligible localities.33
State and local governments may react in ways destructive of the PBJI goals
because welfare recipients cannot easily be assimilated into their work forces; or,
because these governmental units are unwilling to participate unless they can effectively substitute Federal money for local taxes; or, because administration costs are
differentially higher for programs like WIN, with no net reduction in total welfare
costs. Whatever the reason, state and local governments are not likely to follow the
intent of the PBJI.
A New Welfare Class. While the PBJI does not appear to be designed effectively to
put welfare recipients into PSE, it shows great promise for inducing a substantial
fraction of working class and lower middle class Americans out of private sector
employment and into public sector jobs. At best, the PBJI will have the regrettable
effect of transferring to the middle class the incentives to disrupt family status so
lamented in the current welfare system. This disruption arises from the earned-incometax credit and minimum tax provisions of the PBJI.
A substantial fraction (approximately 42 percent in 1974) of all individual tax
returns report adjusted gross income below $15,000. The expanded earned income
tax credit would provide tax relief to all of these household units with children. In
today's economy many families have two wage earners and, in these circumstances,
probably have total incomes exceeding $15,000 by large amounts. (In 1974, fully 73
percent of all returns showed adjusted gross incomes under $30,000.) The progressivity of the income tax tends to discourage marriage for many couples pursuing
joint careers, and this disincentive will be greatly reinforced by the proposed expansion of the earned income tax credit and increase in the minimum taxable income.
Many families with double incomes up to $30,000 will find that separate mailing
addresses, if not living quarters, could pay off handsomely. Alternatively there
would be cash and income incentives to outright divorce.
Suppose that a husband and wife each earns $12,000, and their adjusted gross
income is $20,000. Their 1976 tax liability would have ranged between $2400 and
$2800, assuming three to four dependents and deductions equal to 10 percent of
income. Under the Administration's program, this family could reduce its income
tax liability to $1430 and gain an approximate offset of $650 against the wife's FICA
tax by separating. The total tax reduction is about 73 percent! In some cases it may
be advantageous for each parent to claim some of the children as dependents, so that
each secures the benefits of the earned income tax credit, further reducing their joint
tax liability. It is possible in this income range to reduce Federal income tax liability
to zero and gain an earned income tax credit refund substantially offsetting social
security taxes. No one should be so naive as to believe that some middle class Americans will fail to take advantage of a new tax avoidance scheme if one is presented
to them.
Beyond the disincentives to family stability, it is not difficult to conceive of situa-

10

"Levitan and Marwick, "Work Training For Relief Recipients."




68
tions in which the household could not possibly help but be better off if one or both
wage earners withdrew from private employment in favor of PSE. Public employment offers far more security than is enjoyed by many low income workers. People
awaiting PSE jobs are guaranteed welfare benefits frequently higher than unemployment insurance provides.
The PBJI, moreover, explicitly states that welfare and supplemental income benefits
are to increase automatically to keep pace with inflation and that the Administration
intends periodically to raise benefits in real terms.34 Presumably, minimum wages,
already scheduled to rise to $3.30 per hour in 1981, will be similarly pegged so that
the so-called work incentives of the benefit structure will be maintained. Minimum
wages that rise faster than productivity will create more unemployment and increase
further the number of potential PSE workers. Studies have shown that so great is the
attraction of stable, secure public employment, many people prolong their job search
just to await these jobs, especially during periods of economic contraction. A recent
study has demonstrated how an increase in the public sector itself tends to increase
measured unemployment by this mechanism alone.35 If the PBJI guarantees employment to all takers, then the potential labor supply to the government under this program is likely to be of nightmarish proportions.
It should be noted that the tax provisions of the PBJI are critical to the proposal's
financial structure. If the earned income tax credit remained at current levels, then all
heads-of-households employed at wages approximating the 1981 minimum wage
would be far better off on welfare.
Those low and middle income and.skilled workers who would intentionally drop
out of the private sector under the PBJI are just the kind of workers state and local
governments can use at least up to some saturation level. In creating PSE slots to
absorb them, the government competes directly with the private sector and pushes up
the relative wage of public and private workers. There is a definite limit to the creation of local jobs in the short run unless local taxpayers radically change their attitudes.
The public sector, however, will grow, if slowly, while the private sector labors to
support the public sector and the overwhelming welfare burden. Total employment
probably will fall even in the short run, and the rate of growth in real output will
decline over time.
One of the potentially most adverse implications of the scenario is that the production potential of the economy declines over time. This decline can be expected not
only because of the effects of an increasingly large public sector, but also because of
the redistribution of income that results from rising relative wages of low- and moderate-skilled groups. As the relative wage of unskilled or semi-skilled workers rises,
future labor market participants alter their plans to attain higher, more specialized
academic and vocational educations. These education decisions are extremely responsive to changes in lifetime income prospects. Thus, the more successfully the PBJI
34

United States Department of Health, Education, and Welfare, "Welfare Reform," 15.

35

David A. Coulter, "A Two Sector Model of the Labor Market." unpublished paper prepared for
the Carnegie-Rochester Conference on Public Policy (November 18-19, 1977).




10

69
artificially redistributes income and opportunity to its target group or to other low
skill workers, the more deleterious will be the PBJI's long-run consequences.
Costs of PBJI. With typical myopia, the PBJI's authors have neglected completely to
account for the potential long-run resource and inflation costs its implementation
would impose on the economy. The same faulty and biased foresight results in initial
cost projections that not only are much too low, but also are extremely inaccurate and
misleading.
The Carter Administration estimates that the total Federal cost of funding the PBJI's
major provisions will be $30.7 billion for the first year the program is in full operation.
Included is $19.2 billion for public cash assistance payments, $8.8 billion for PSE and
training, $1.5 billion to cover the earned income tax credit for those receiving income
supplements, and $1.2 billion to cover the emergency block grants to the states and
child-care deductions. This total neglects the rather substantial earned income tax
credit benefits, expected to exceed $3.4 billion, for persons in the middle-income
range. The Administration argues that, although the earned income tax credit is a
critical part of its work incentive measures, these expenditures or tax forgivenesses
do not represent welfare expenditures.
Offset against these projected costs are $27.9 billion in current Federal expenditures that would be cancelled. A major offset is the $23.0 billion in current outlays
for AFDC, SSI, food stamps, and the stimulus portion of CETA and WIN. Several
other current expenditure categories, extended unemployment insurance compensation, housing subsidies and projected reductions in HEW's budget (from reduced
fraud and abuse) are used to offset $1.5 billion of estimated costs.
Including as offsets prospective reductions in housing subsidies and wellhead tax
revenue refunds, supposed to be made directly to individuals and included in an
energy bill as yet unpassed, represents what is sometimes euphemistically termed
"creative account!" More puzzling is the inclusion of lost tax revenues from the
existing earned income tax credit, since such future costs are excluded from the
other side of the accounts.
It is indefensible to include anticipated contributions to the social security and unemployment compensation trust funds from PSE workers. Social security contributions result in a Federal liability in future years of an as yet unknown amount. This
account is a separate trust fund, and revenues are not available for general government expenditures. Unemployment compensation is also an insurance scheme, funded
by a tax on labor income. If unemployment goes down, the tax rate on the currently
employed should go down and allow workers to enjoy a higher nominal after-tax
income. They and their employers will need that higher income to pay the taxes necessary to support the PBJI.
The Carter Administration estimates a $2.8 billion first year net cost for'the PBJI.
The true net cost should now realistically be considered to be three to four times that
high, even disregarding the likely private sector costs that have been neglected in the
Administration's analysis. Unfortunately, it is on the basis of this $2.8 billion net cost
estimate that the PBJI will be "sold" to the American people.

10




70
BIBLIOGRAPHY
Bailey, Martin N., and Tobin, James. ' Direct Job Creation, Inflation, and Unemployment." Paper prepared for the Brookings Conference on Direct Job Creation, April
1977.
Carlson, Keith M., and Spencer, Roger W. 'Crowding Out and Its Critics." Federal
Reserve Bank of St. Louis Review (December 1975).
Chiswick, Barry R., and O'Neill, June A., eds. Human Resources and Income Distribution. New York: Norton, 1977.
Clarkson, Kenneth W., and Meiners, Roger E. "Government Statistics as a Guide
to Economic Policy: Food Stamps and the Spurious Increase in the Unemployment
Rates." Policy Review 1 (Summer 1977): 27-51.
, Inflated Unemployment Statistics: The Effects of We If at e Work Registration
Requirements. Coral Gables, Fla.: Law and Economics Center, University of
Miami, 1977.
Coulter, David A. "A Two Sector Model of the Labor Market." Paper presented at
the Carnegie-Rochester Conference on Public Policy, 18 November 1977.
Danziger, Sheldon; Haveman, Robert; and Smolensky, Eugene. "The Program for
Better Jobs and Income: A Guide and Critique." Study prepared for the joint Economic Committee, U.S. Congress, October 1977.
Fechter, Alan. "Job-Creation Through Public Service Employment Programs." Unpublished paper. Prepared for the Joint Conference of the National Council on
Employment Policy and the School of Labor and Industrial Relations, Michigan
State University, East Lansing, Michigan, May 19-20, 1977. Revised June 8,1977.
, Public Employment Programs. Washington, D.C.: American Enterprise
Institute, 1975.
Feldstein, Martin S. "The Economics of the New Unemployment." The Public
Interest 33 (Fall 1973): 3-42.
Friedman, Barry L., and Hausman, Leonard J. "Work, Welfare, and the Program for
Better Jobs and Income." Study prepared for the Joint Economic Committee, U.S.
Congress, October 1977.
Friedman, Milton. "Nobel Lecture: Inflation and Unemployment y Journal of Political Economy 85 (June 1977): 451-472.
Garfinkel, Irwin, and Orr, Larry L. "Welfare Policy and the Employment Rate of
AFDC Mothers." National Tax Journal 27 (June 1974): 275-284.
Ginzberg, Eli. "The Job Problem." Scientific American 237 (November 1977): 43-51.
Gramlich, Edward M., and Galper, Harvey. "State and Local Fiscal Behavior and
Federal Grant Policy." Brookings Papers on Economic Activity 1 (1973): 15-58.
Hall, Robert E. "The Rigidity of Wages and the Persistence of Unemployment."
Brookings Papers on Economic Activity 2 (1975): 301-349.
Johnson, George E. "The Public Finance of Public Service Employment." Paper
presented at the Brookings Conference on Direct Job Creation, April 1977.
, andTomola, James D. "The Fiscal Substitution Effect of Alternative Approaches to Public Service Employment Policy." The Journal of Human Resources
12 (Winter 1977): 3-26.




10

71
Kemper, Peter, and Moss, Philip. "The Efficiency of Targeted Job Creation: Conjectures Based on Early Supported Work Experience." Paper presented at the Brookings Conference for Research on Poverty, March 1977.
Levitan, Sar A., and Marwick, David. "Work and Training for Relief Recipients."
The Journal of Human Resources 8 (Supplement 1973): 5-18.
,and Taggert, Robert. Emergency Employment Act: The PEP Generation,
Salt Lake City: Olympus, 1974.
Meiselman, David I. "The Impact of Countercyclical Monetary and Fiscal Policies
on Housing " Housing in the Seventies: Volume //, Department of Housing and
Urban Development, 1976.
"More Inflation: More Unemployment," Tax Review (January 1976).
Testimony before U.S. House of Representatives, Subcommittee on Domestic Monetary Policy. Hearings on the Impact of the Federal Reserves Money
Policies on the Economy; 94th Cong., 2d sess., 9 June 1976.
"Unemployment and the Variability of Inflation: A Feasibility Study." Unpublished. Paper prepared for United States Department of Labor, September 1977.
"Worldwide Inflation: A Monetarist View." In The Phenomenon of Worldwide Inflation, edited by David Meiselman and Arthur Laffer. Washington, D.C.:
American Enterprise Institute, 1975.
Moore, Geoffrey H. How Full Is Full Employment? and Other Essays on Interpreting the Unemployment Statistics. Washington, D.C.: American Enterprise Institute,
1973.
O'Neill, Dave M. The Federal Government and Manpower. Washington, D.C.:
American Enterprise Institute, 1973.
Rees, Albert. "An Overview of the Labor-Supply Results." The Journal of Human
Resources 9 (Spring 1974): 158-180.
Smith, Sharon P. "An Examination of Employment and Unemployment Rates."
Federal Reserve Bank of New York Quarterly Review (Autumn 1977): 14-18.
Tax Foundation, Inc. "The President's Welfare Reform Proposals: 1977—A Summary
with Initial Reactions and Comments." New York: Tax Foundation, Inc., 1977.
United States Congress, Congressional Budget Office, "Public Employment and
Training Assistance: Alternative Federal Approaches." Budget Issue Paper (Washington, D.C.: United States Government Printing Office, 1977).
United States Department of Health, Education, and Welfare, "Better Jobs and Income Act: H.R. 9030—A Summary and Sectional Explanation." 13 September
1977.
United States Department of Health, Education, and Welfare, "Welfare Reform."
H.E.W. News (August 1977).
Weicher, John. "Aid, Expenditures, and Local Government Structure." National
Tax Journal 25 (December 1972): 573-583.
Williams, Walter E. "Government Sanctioned Restraints that Reduce Economic
Opportunities for Minorities." Policy Review 2 (Fall 1977): 7-30.
Wiseman, Michael. "Public Employment as Fiscal Policy." Brookings Papers on
Economic Activity 1 (1976): 67-104.

10




72

M C

Occasional Paper

LEC 4-4/178

Welfare Reform and the Carter Public Service Employment Program:
A Critique by Professor David I. Meiselman acknowledges that there
is a real unemployment problem in the United States. Many Americans
are poor. It is generally recognized that the present welfare system has
caused more unemployment and has perpetuated poverty.
This essay examines closely the Carter Administration's welfare proposal, H.R. 9030, and especially its provisions for public service employment. Despite the Administration's claims that the program will
shift the poor from welfare dependency to productive jobs, especially
in the private sector, and at low additional costs to the taxpayers, this
study finds quite the contrary.
If enacted into law, H.R. 9030 would cause a further expansion of
the public sector that potentially will attract a large segment of low- and
middle-income workers out of the private sector into low productivity,
low priority, and largely dead-end public sector employment. Costs
will be substantially higher than the Administration forecasts. A whole
new welfare class is likely to emerge, and family stability will be further
impaired. The ultimate costs will include both lower overall employment and less economic growth. At the same time, the basic causes of
the current problems of unemployment and poverty, poor government
policies that have increased barriers to employment and to gaining work
skills while increasing incentives to unemployment and welfare, all are
left intact. The egalitarian zeal for equalizing distress, which is inherent
in the Carter proposal, is not an acceptable solution.
$2.50

ISBN 0-916770-05-2

LAW AND ECONOMICS CENTER
UNIVERSITY OF MIAMI SCHOOL OF LAW
Post Office Box 248000
Coral Gables, FL 33124
(305) 284-6174



73
STATEMENT OF OTTO E C K S T E I N , PRESIDENT, D A T A RESOURCES, INC., AND P A U L M .
WARBURG, PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY

According to the government's estimates, the gross federal debt will reach
$873.7 billion by September 30, 1979. In the ordinary course of events, the debt
will pass the $1 trillion mark in 1981.
Does it matter? Twenty years ago, most economists would have answered that
it matter rather little, because the interest payments are a transfer within the
American people. While there was a revival of the classical view that there
was an intergenerational burden, the arguments were rather obscure and based
on somewhat "iffy" assumptions.
But circumstances have changed in a variety of ways in the last 20 years, and
so it is appropriate to use the occasion of the annual ritual of the statutory debt
limit extension to reach a new assessment on the importance of the debt burden
and of the implications for budget policy.
THE

SHORT-TERM

ISSUES

The debt is growing rapidly because the budget deficits have become so
enormous. As Chart 1 shows, the net interest burden as a percentage of gross national product, which had changed rather little from the end of World War II until
1967, has risen substantially since then. Short and long-term interest rates are
much higher in response to the last decade of inflation, and the size of the debt
has also increased very sharply. The underfinanced Vietnam War and the 1967
slowdown produced the first of the recent frightening deficits. The 1970 recession
and the subsequent stimulative fiscal policy, added three more large deficits. The
great recession of 1974-75 added mightily to the debt, of course. The subsequent
recovery, unlike other postwar business cycle recoveries, is not bringing a rapid
shrinkage of the deficits. This condition is the first major issue that must be
studied.
t.e

i-H

1990




1

1835

1

1980

1

188S

1

1970

1—
1973

74
CHART

1.—Net interest as a percent of GNP.
T H E 1 9 7 9 BUDGET I N PERSPECTIVE

.

The President's 1979 budget is a strategy of expansion. The full employment
budget, the best available measure of direct budget impact, shows a sizeable
increase in its deficit both in fiscal 1978 and fiscal 1979. This is somewhat at
odds with the media description of the budget as moderate. How did the need
for this budget plan develop? What are the actual prospects for the 1979 project
after Congressional action and Administrative implementation? What are the
implications for the economy ?
According to the government's estimates, the full employment budget deficit
on the unified budget basis increases from $10 billion in fiscal 1977 to $32 billion
in 1978 and $37 billion in 1979. DRI has calculated the comparable estimates on
the national income accounts basis. The rise in the deficit is not quite so extreme
(Table 1), reaching a $25 billion deficit for 1979. The difference lies in net lending: the Federal housing agencies are moving back to high lending volumes
which are not included in the national income accounts because they are offset
by asset acquisitions.
TABLE

1 . — F u l l employment
1

budget surplus or deficit ( —)
billions of dollars—fiscal years

Unified budget basis :
1977
1978
1979
National income accounts basis: 2
1977
1978
1979
1
2

-10
—32
—37
—8
-19
-25

Source : Office of Management and Budget.
Source : DRI estimate, based on President's budget.

But even at the more moderate NIA estimates, a rising full employment budget
deficit in years four and five of a business cycle expansion deserves close examination (chart 2). The reasons for this budget strategy are these:
1. The President has placed employment gains high on his priority scale. The
public and the Congress justifiably expect him to show steady declines in the
unemployment rate.
2. The economy probably would slow down substantially if the budget did not
have an expansionary posture. Consumer spending will rise less than income in
1978 because the debt burden is already excessive. There is also considerable
evidence in automobile and other retail sales that consumers are taking steps
to bring their debt burden back in line. The government survey of business investment plans leaves little doubt that investment will not be strong enough to carry
the economy forward alone. A year ago, the Administration adopted a growth
strategy based on 10% growth in real investment, but that hope must be abandoned in the light of the survey. Housing starts are very likely to fall before
1978 is over because of high interest rates and recent above-trend activity.
Finally, the Federal Reserve, even under the chairmanship of Mr. Miller, is likely
to raise interest rates somewhat further as monetary growth is likely to continue
to be above the 6V2% target ceiling over the next 6 months.




75

L

IF

-356

58

60

62

64

66

68

70

72

?4

76

78

2.—Full employment budget surplus or deficit
as a percent of GXP (fiscal years, NIA basis)

CHART

Source: DRI estimates; fiscal years 1978 and 1979 based on President Carter's 1979
budget.
WILL T H E BUDGET STRATEGY WORK ?

The DRI forecast is somewhat below the projections in the President's economic report, but the difference between the two projections is moderate, a total
of 1.2 percent by 1980 (table 2). The DRI answers are somewhat lower for three
reasons. First, DRI believes that actual budget outlays will again fall short of
the President's proposals. The spending shortfalls of recent years appear to have
continued into the current fiscal year. The President's budget proposals use the
Second Congressional Resolution as their baseline, but it is apparent that fiscal
1978 spending will be considerably less, about $5 billion less according to the DRI
estimates. While there are some areas in the 1979 budget, particularly the agricultural outlays, which could easily prove to be larger than the President's
estimates, more general spending shortfalls are likely to outweight them.
TABLE

2.—Real GNP growth

(percent)

President's projections:
1978
4. 7
1979
4.8
1980
4.8
DRI forecast:
1978
4. 5
1979
3. 9
1980
4.7
Second, the DRI forecast is somewhat lower because the large Federal deficit
will produce some "crowding out." The DRI model is not monetarist in the
sense that every dollar of Federal deficit displaces a dollar of private spending,
but the model does reflect the impact of Treasury financing on interest rates.
The Federal Reserve is not likely to permit the rates of increase in the money
supply that would be required to fully accommodate unified budget deficits of
$61 billion, which convert into financing needs that are substantially greater
because of the deficits of off-budget agencies. In 1979 the government's estimate
of total borrowing from the public is $73 billion, $7 billion more than projected
for 1978. While the government's total financing needs will remain roughly constant in 1979, a large fraction of 1978's deficit will be financed by drawing down
unusually large cash holdings. Finally, DRI projects some final demands to grow
a little less than the Administration. This is particularly the case in 1979, when
DRI sees a lull in the economy due to reduced housing activity.




76
WILL T H E OUTSIDE WORLD PERMIT US TO FOLLOW T H I S STRATEGY ?

The President's expansionist fiscal policy is a very different approach from
that followed by Japan and West Germany. During 1977, the differences in
growth rates produced a large disequilibrium in international trade, and at yearend a sharp decline of the dollar. If the disparity in economic performance continues through all of 1978, the recent policy change to stabilize the dollar will
fail, and since the United States is not free to let the dollar sink without limit
or to let exchange markets become disorderly, the international constraint would
become effective on the U.S. economy. Higher interest rates would be the most
direct expression of this influence.
Fortunately, there are scattered signs that the European economies are beginning to gain some momentum. West Germany's real GXP growth rebounded to
a 3.4 percent annual rate in the final quarter of 1977, following a 0.4 percent
advance in the third quarter. Industrial production and factory orders are also
showing good gains in recent months. In France, industrial production jumped
4.1 percent in November, though it still stood below, year-earlier levels, and unemployment showed a good improvement in December. In the United Kingdom,
the period of decline and stagnation also seemed to be coming to an end as production rose 0.6 percent in November and retail sales rose a big 3.2 percent in
December.
Some of our other principal trading partners are showing less signs of a turnaround. The Canadian economy reached its highest unemployment rate of the
postwar period in December, though housing and retail sales showed improvement near year-end. The Japanese economy, the largest industrial economy after
our own, did not show much renewal. While production advanced 2.8 percent in
November, retail sales remain weak, business fixed investment is flat to declining, and housing starts are not strong despite various government programs.
Public outlays are showing some increases as the more recent stimulus packages
are beginning to be felt. The government has reasserted its 7 percent goal for
fiscal 1978, though it is too early to assess whether the government really means
to reach it.
In summary, the Preseident's short-term fiscal policy proposals are correct,
given the actual economic situation. The $25 billion tax reduction and the associated full-employment budget deficits are large and one could argue responsibly
for a few billion dollars less. On the other hand, given the size of the full-employment budget deficit planed for years four and five of the expansion, it would
be a serious error to aim at tax reductions beyond $25 billion, or to aim at budget
deficits beyond $60 billion.
THE

LONGER-TERM

CHANGES

In the longer term, the presence of a large national debt raises a different set
of issues. The burden of the debt is not measured by the interest payments or the
absolute size in relation to the GNP, because inflation, including inflation created
by the budget, steadily erodes the real burden of the debt. The burden is found
elsewhere.
1. An increasing share of the debt is now owed to foreigners. As recently as
1970, the debts held abroad was small. The international monetary crisis that
began in 1971 led to the acquisition of $45 billion of our debt by foreigners, principally central banks. The balance of payments deficits created by the oil crisis
and the recession led to foreign purchases of another $33 billion in the years
1975-77, and the prospects are that foreign acquisition will continue near the
$20 billion a year mark for some time. Thus, it is no longer true that we "owe it
to ourselves"—some of the debt has become an external burden to the American
people and we pay interest like any other debtor.
Besides the interest burden, the new dependence on foreign financing is eroding
our freedom of action both in domestic and foreign policy. While there are some
advantages in building economic and political ties to the oil producing countries
who are buying our debt, the United States will pay a price for these relationships. Indeed, the sudden switch in U.S. foreign exchange rate policy this month
is generally attribute to this factor.
2. The Federal debt is offset by very little real government capital. The big
growth in government sjjending has been in a variety of income benefit programs,
and in grants-in-aid to states which preponderantly also go for current outlays.
According to the always interesting Special Analysis D of the Federal Budget
(page 85), of a total 1977 budget outlay of $402 billion, only $24 billion went for




77
civil physical assets, $3 billion for net loans and financial investments, and $11
billion for civil research and development, a total of $38 billion, or less than
10%. Another $20 billion went for education and training, which can be considered a form of investment in human resources. On the military side, major equipment and public works represent only $21 of $98 billion. By any reasonable definition, the bulk of the debt is being created for consumption purposes. The continued expansion of the scope of government, taking an ever larger share of the
GNP, gives every sign of curtailing the country's long-term growth.
3. The growth of the debt reflects a decision-making process in which outlays
are not validated by a willingness to pay. The weakness of modern fiscal policy
has always been that it removes the discipline of the balanced budget. If the political process must levy the taxes to pay for the expenditures, there is likely to
be a more careful scrutiny than if the expenditures can be clothed in the virtue of
deficit-creating stimulus packages. In a year of recession, the loss of discipline is
not important because resource costs really are lower since labor and capital
would otherwise be idle. But we are now talking about large deficits in years four
and five of a recovery, with no serious prospect of a return to a situation where
expenditures again have to be scrutinized in terms of their tax costs. The dangers
posed by this situation to the efficiency of resource use in the public sector should
not be ignored.
CONCLUDING

COMMENTS

In dealing with the national debt, one must be realistic. The debt will grow and
the Congress will have to raise the debt limit. This committee is wise to focus
public attention on the growth of the debt each year. A rapidly expanding debt is
a serious sign of weakness in the way we manage our economic affairs. Fiscal
policies designed to undo the restraint of monetary policies, ineffectual expenditures with low multipliers and little long-term value, inflationary public and
private policies which limit our prosperty, these and other flaws ultimately become converted into a rising national debt. Our children and grandchildren will
judge us not so much by the size of the debt burden in relation to the GIVP, but
in terms of our accomplishments in solving our economic problems and thereby
gradually slowing the growth rate of a rapidly rising national debt.
STATEMENT OF R .

G . P E N N E R , AMERICAN

ENTERPRISE I N S T I T U T E

1

TAX CUTS, DEFICITS AND THE ECONOMY

There is an aura of gloom hanging over the U.S. economy. The stock market
values the real capital stock of* the average corporation far below what it would
cost to replace it. Foreigners have little confidence in the dollar, and there is a
general feeling that economic policymakers don't know what to do next.
Given our recent economic record the extreme pessimism is puzzling. Only
three years ago we were plunging into the worst recession since the 1930's, and
the unemployment rate was soaring. But since its peak of 9.0 percent in 1975, it
has fallen to 6.4 percent, while employment has gone up by 8 million workers.
Prices which rose over 12 percent from December 1973 to December 1974 have
been rising at about one-half that rate over the last 9 months. If we could halve
the rate aerain over the next 3 years, I am sure that everyone would be overjoyed.
But though the recovery is proceeding in a satisfactory manner—in the sense
that real growth is continuing to lower the unemployment rate—there is a strong
consensus that we have stopped making progress against inflation. It is said
that the rate is "stuck" at 6 percent or that we have entered the great stagnation swamp. This is peculiar terminology in that the inflation rate has been far
from "stock" and has been fluctuating quite a bit with food price changes and
the severe winter of last year. When people say that the rate is "stuck," they
are really referring to the forecasts for the next 2 years and not to the recent
past. I cannot quarrel with their forecasts except to say that any price forecast
is extremely uncertain. Nevertheless, it remains that the inflation rate is the
one macro economic problem where few expect much progress over the next two
years and this is the single, most important variable responsible for the malaise
in the foreign exchange and stock markets.
It is within this context that we begin to debate the President's economic
program for 1979. Time does not allow a thorough analysis of the entire budget
1
Views expressed in this testimony are those of the author and do not necessarily reflect
views of the staff, advisory panels, officers or trustees of AEI.




78
in all of its detail; so I would like to concentrate this testimony on the appropriateness of the recommended deficit and on some of the major individual
income tax proposals.
The same inflation that makes financial markets so uneasy is inexorably pushing taxpayers into higher and higher tax brackets. A person receiving a costof-living raise typically finds that a higher marginal tax rate is applied to that
raise than was applied to earlier wage increases and as a result, the taxpayer
finds that although the employer seemed to compensate for inflation, there has
actually been a loss in after-tax purchasing power. Any merit raise is also taxed
at higher marginal rates and as a result, the total tax burden, as measured by
the average tax rate, rises without Congress changing any tax laws.
The phenomenon is well illustrated by the attached chart which accompanied
the President's tax message. In 1976, the individual tax burden as measured by
the ratio of taxes to personal income was about the same level that had prevailed in the early sixties. In other words, legislated reductions in rates have,
in the aggregate, offset the effects of inflation and real growth that I described
above. The 1977 tax changes lowered the ratio slightly, but despite the so-called
tax cuts advocated by the President, the ratio rises in 1978 and 1979. In other
words, the President's proposals do not involve cuts in the aggregate individual
tax burden. They only prevent it from rising as fast as it would under constant
tax laws. If nothing further is done after 1979, the burden soars over the next
two years to a level almost 20 percent higher than that prevailing in 1976.
This chart does not include the scheduled increases in social security taxes
which will cause the total burden to rise even more steeply after 1977. Consequently, with regard to these two most important taxes paid by individuals and
families we are really debating how much taxes should rise—not how much
they should fall.
Despite the rise in the individual tax burden, the rise in recommended spending levels and business and other miscellaneous tax cuts lead to a recommended
1979 deficit level that is little changed from 1978's. I find that disturbing given
that we are in a reasonable recovery.
In examining this situation, it is important to judge it by the economic "conditions that are expected to prevail in calendar 1979 and 1980 when—with time
lags—this budget will be having its main economic impact. In the absence of
bad luck or bad policies, the unemployment rate will be at or below 6 percent
for almost all of those two years. No one knows for sure when demand inflation
will become a problem again, but there are careful students of labor markets
who think that we shall be near to or perhaps already passed the danger point
once unemployment goes below 6 percent.
I, therefore, conclude that caution is required and this budget should show
more progress in reducing the deficit. I would set a target of about $50 billion,
recognizing both that this does not indicate much progress and that it represents a trivial change in policy in the $2.8 trillion economy expected for fiscal
1979. However, it would at least be a move in the right direction and it would
have a salutary psychological impact. It would make Mr. Miller's difficult new
job at the Fed just a little easier, and it should give foreigners a little more
confidence in the ultimate value of the dollar.
How do you get there? My goal is modest because I recognize the difficulties.
The President has suggested that his proposed outlay figure of $500.2 billion
represents a "lean and tight" budget. Much is made of the reduction in spending
from 22.6 to 22.0 percent of GNP. Yet outlays are to exceed current service levels
by almost $8 billion.
The share of the Federal Government in GNP falls in part because outlays
on certain income maintenance programs rise less rapidly than GNP given the
projected fall in unemployment. For example, the GNP share of unemployment
compensation, AFDC, and food stamps falls 0.14 percentage points. There is a
0.2 percentage point fall in agriculture's share because of an assumption of
fewer disasters and good market conditions—due in part to acreage set asides.
(These are tenuous and highly uncertain assumptions to say the least.) In addition, defense continues to fall relative to GNP—by 0.09 percentage points. There
are other declines and offsetting increases, some of which are quite large, but
while this may be a lean budget it certainly is not stingy and there is an array
of small new programs.
In addition, OMB has undertaken intense efforts to eliminate the shortfall
problem and while some spending overestimates may still remain, I think that
overruns are now equally likely in 1979. For example, interest rates on the debt
are already above those assumed in the budget.




79
As usual, the pressure groups are lining up and asking for more and there
are cuts proposed by the President that are unlikely to be sustained. Like every
President since World War II, he cuts impact aid for education and like every
President before him, he is very likely to be rebuffed. Though relatively minor,
this program provides my favorite illustration of the difficulty of controlling
government spending.
Everyone has his or her own list of programs that should be cut, but those
programs exist because their proponents have more political clout than the
budget cutters. I reluctantly conclude that it will take extreme discipline to hold
to the $500 billion level. Yet, if we are to show any responsibility at all with
regard to the deficit, higher spending means a higher tax burden on the American people. Hopefully, that unpleasant fact will provide economizers with more
incentive as we confront the budget proposals.
If the President's spending target is accepted, my deficit goal requires a lesser
tax cut for fiscal 1979. One could move part way to the goal by delaying the
President's proposed cuts from October 1, 1978 to January 1, 1979. This has the
disadvantage that many believe that the tax system will be imposing a serious
drag by the last calendar quarter of 1978, but on the other hand I think that
there may be some technical problems in adopting only one-quarter of the tax
cut for calendar 1978. Treasury has probably worked out a plan for this transition, but it is not revealed in the budget or fact sheets accompanying the Tax
Message. Whatever the plan, I suspect it is hard to avoid either a complex
tax form in 1978, or some inequities as small groups of taxpayerrs find their
taxes increased inadvertently. My own conclusion is that the tax cut should be
postponed one quarter.
4 .
It is, however, important to make any changes in the investment tax credit
retroactive to January 1, 1978. Otherwise investment decisions will be badly
distorted as investors postpone their plans to take advantage of any future
moves to greater generosity. Significant instability could result.
The size of the tax cut from current law that can be afforded for 1979, given a
deficit goal of $50 billion, depends on one's view of the so-called feedback effect,
or in other words, the increases in Treasury revenues inspired by the greater
economic prosperity engendered by the cut. There are many different theories
regarding this feedback mechanism. As a result, there are many different estimates of its importance and the speed with which it reveals itself. My own view
is that the feedback is fairly modest in the short run.
I do not have the statistical facilities available to make very precise estimates,
but I believe that a tax cut of about $15 billion effective January 1, 1979 would
be roughly consistent with my deficit target of $50 billion for fiscal 1979. The cut
could be spread between business and individuals in roughly the same proportion
as advocated by President Carter.
Before discussing the appropriate distribution of individual cuts, it is useful
to examine the distribution proposed by President Carter. Although it is said that
he reduced his earlier emphasis on tax reform, I would say that the reform
which remains is itself highly radical. The substitution of a tax credit for the
basic exemption by itself greatly strengthens the degree to which the tax system
redistributes income from the upper half to the lower half of the income distribution. President Carter's proposed rate reductions offset part of this impact, but
the offset is far from complete.
When one looks at the distributional impact of his program, I do not believe
that the Treasury fact sheets are very revealing, because they look at the distributional impacts at a given level of money income. But money income is constantly changing because of inflation and real growth. In Table 1, I have adjusted
only for inflation. The table compares adjusted gross income with the same purchasing power in 1977 and 1979 given the inflation assumptions made in the budget.
It then calculates the burden imposed by the individual income tax and the employee's share of the social security tax under current law in 1977 and the
President's proposals in 1979. The burden is measured both by the average combined tax rate and by the change in the tax liability—also measured in terms of
1977 purchasing power.
The table shows net tax reductions for families of four below about $17,000 in
1977 dollars. Tax increases occur above that level. If these families got merit
increases on top of cost of living increases, the break-even point would occur lower
in the distribution. In addition, if families above the social security wage base of
$22,900 iif 1979 contain two earners with total wage income above the base, the
tax increase would be greater than shown. In short, the proposed income tax
changes combined with the legislated social security tax increases have a significant redistributive impact.




80
This would come on top of other tax changes in the last three years that all
favored the lower part of the income distribution. The earned income credit,
created in 1975, provided significant benefits to the working poor; the decision to
adopt a $35 per exemption credit in lieu of an increase in the $750 exemption
favored lower income groups; and 1977's increase in the standard deducuoi
tended to favor the lower half of the income distribution. All of this time, inflation and real growth has been pushing the upper half of the distribution into
higher and higher marginal tax brackets.
The choice of a proper distribution of the tax burden rests on value judgments
regarding the proper income distribution in society and on economic judgments
regarding the importance of providing incentives to people to work their way up
the income ladder. My own judgment on both grounds is that we have recently
been moving too far and too fast in redistributing income without a good explicit
debate regarding our ultimate goals.
My own recommended individual income tax cut for 1979 amounts to slightly
more than 5 percent of tax liabilities. I would spread the cut throughout the income distribution. If no other tax reforms were enacted, we could afford something like a $50 increase in the basic exemption (from $750 to $800) and some
minor cuts in some marginal tax rates. Any revenue raising reforms could facilitate further exemption increases and rate reductions.
At constant money incomes, such cuts should try to provide the greatest proportional tax reductions at the bottom of the income scale, but the highest absolute cuts at the top. In very general terms, this is the pattern of cuts necessary
to correct for inflation, although a perfect correction would widen tax brackets
rather than cutting rates and would increase all credits, standard deductions, etc.
Unfortunately, the cuts that I am proposing are not sufficient to compensate for
inflation and social security tax increases between 1977 and 1979, and except for
a few cases, everyone whose money income kept pace with inflation would see
their effective tax rate rise. It is unpleasant to advocate such a tax increase, but
I see no responsible alternative unless we show more disciplin on the spending
side.
MISCELLANEOUS PROPOSALS

There are two budget proposals which have great merit and one of particular
interest to this Subcommittee. The first, which is of direct interest, is the proposal to control credit guarantees, described in detail on page 27 of the main
Budget document. Gross loans and guarantees are expected to be $99.7 billion in
1979 and outstanding loans and guarantees are estimated to be $360.8 billion at
the end of 1979. These activities have important resource allocation effects in
the economy. The guarantees make it harder for those who do not receive them
to obtain credit and because guaranteed loans compete so directly with issues of
Federal debt, they directly raise the interest bill that must be paid by the Federal
Government. Despite their importance, they have gone virtually uncontrolled
and unstudied. I, therefore, urge you to examine the President's proposal carefully and I hope sympathetically.
Another proposal would tax a portion of unemployment benefits where adjusted
gross income exceeds $25,000 on joint returns and $20,000 on single returns. In
such situations, which usually occur because of two or more workers in a family,
the tax free nature of unemployment benefits often almost eliminates the whole
net gain from taking a job which provides taxable net income. This encourages
long searches for jusi the right job and therefore, imposes upward pressure on the
unemployment rate. I would, therefore, strongly support this Administration
initiative.




81
Individual I n c o m e T a x e s a s a P e r c e n t of
Personal Income, 1960-1982
(Arrows Identify Years of Major Effect of Significant Tax Legislation)
Percent
14

Projected Assuming
N o T a x Program

Revenue Act
of 1971
- Revenue Act
of 1964

12

10-

Projected
Assuming
Tax Program

Tax Reform
Act of 1969
Tax Reduction
Act of 1975
I I
1960

I

I

I I
'65

I

I

I I
'70
Year

I

I

I

I I I
75

'81

TABLE 1.—INDIVIDUAL INCOME AND SOCIAL SECURITY TAX BURDENS ON FAMILIES OF 4 WITH THE SAME REAL
ADJUSTED GROSS INCOME 1977 AND 1979

AGI
1977—$8,900...
1979—$10,000.
Change in tax burden..
1977—$13,350.
1979—$15,000.
Change in tax burden..
1977—$16,910.
1979—$19,000.
Change in tax burden..
1977—$17,800.
1979—$20,000.
Change in tax burden..
1977—$26,700.
1979—$30,000.
Change in tax burden..
1977—$35,600.
1979—$40,000.
Change in tax burden..

Average social Combined averAverage including tax rate security tax rate
age tax rate

Combined
burden in
1977 dollars

2.94
1.34

5.85
6.13

8.79
7.47

-1.60

+.28

-1.32

-118

8.06
7.15

5.85
6.13

13.91
13.28

1,857
1,773

-.91

+.28

-.63

-84

9. 73
9.21

5.71
6.13

15.43
15.34

2,610
2,594

783
665

-.52

+.42

-.09

-16

10.08
9.55

5.42
6.13

15.50
15.68

2, 760
2,791

-.53

+.71

+ . 18

+31

13.17
13.03

3.62
4.68

16.78
17.71

4,482
4,729

-.14

+1.06

+.93

+247

15.81
16.58

2.71
3.51

18.52
20.09

6,593
7,150

+.77

+.80

+1.57

+557

Note: The calculations assume that the entire AGI consists of wages or that at least the wage base is earned where
AGI exceeds that base. It is further assumed that there is only 1 earner per family and that the taxpayer takes either
the standard deduction or itemized deductions equal to 23 percent of AGI in 1977 and 20 percent in 1979.

2 3 - 5 4 4 O - 78 - 7




82
STATEMENT OF ALBERT E . SINDLINGER, CHAIRMAN OF THE BOARD, SINDLINGER & C o .
OF MEDIA I N PENNSYLVANIA

Thank you for the opportunity to appear before you once again and to comment
on a pressing national issue from the perspective of the American people.
My research background is based upon having interviewed 4,622,478 different
U.S. households over the last thirty years since 1948.
From September 29, 1977 through last Wednesday, January 25th, my company
has interviewed 20,964 different households at random by long distance telephoning within our 487 sample counties or places throughout the 48 contiguous
states from our central office enabling us to monitor and police each interview as
it is being conducted.
Six of these places grouped together, make up the suburbs of Washington, excluding the District of Columbia, where 189 interviews were completed.
As our interviewers who make these long distance calls each day obtaining their
random assignment county telephone cards telling them which households to interview that make up the national sample—
When they pick up a selected sample number to call to complete within the
suburbs of Washington—not the District, except for Georgetown—they crack—
Fm going to call in the land of milk, honey, and money.
To illustrate what they mean, I instructed our computer to run nationwide tabulations on our four key confidence questions for the past 16 weeks of nationwide
interviewing—the center column here is the ma^e responses—females on the
right—with the total on the left—projected to all U.S. households.
CONFIDENCE COMPONENTS—16 WEEKS FROM SEPT. 29, 1977, THROUGH JAN. 25, 1978
Male

Total

Sample
Universe of total sample projected to
all household
With household money supply

Percent

20,964
11,377

100.0
54.3

A. Current income status:
1. Income is up
2. Income is down
3. Income is same
4. Don't know/refused

6,278
5,893
8,756
37

Up/down balance

385

B. Household income forecast:
1. Expect up
2. Expect down
3. Expect same
4. Don't know/refused
Up/down balance
C. Employment forecast:
1. Will be more jobs
2. Will be fewer jobs
3. Same jobs as now
4. No opinion
More/fewer balance
D. Business forecast:
1. Will be better
2. Will be worse
3. Same as now
4. No opinion
Better/worse balance

A.
B.
C.
D.
E.

Current income index
Expected income index
Expected jobs index
Expected business index
Forecast confidence index




Projected
(thousands) Sample

70,893
38,473

10,346
5,572

29.9 21,230
28.1 19,928
41.8 29,610
.2
125

3,131
3,056
4,145
14

100.0
53.9

Percent

Projected
(thousands)

34,987
18,843

10,618
5,805

100.0
54.7

35,906
19,630

30.3 10,588
29.5 10,334
40.1 14,017
.1
47

3,147
2,837
4,611
23

29.6
26.7
43.4
.2

10,642
9,594
15,593
78

1,302

75

.7

254

310

2.9

1,048

6,803
4,308
9,179
674

32.5 23,005
20.5 14,568
43.8 31,040
3.2
2,280

3,404
1,973
4,666
303

32.9
19.1
45.1
2.9

11,511
6,672
15,779
1,025

3,399
2,335
4,513
371

32.0
22.0
42.5
3.5

11,494
7,896
15,261
1,255

2,495

11.9

8,437

1,431

13.8

4,839

1,064

10.0

3,598

6, 657
5,268
8,416
623

31.8 22, 511
25.1 17,815
40. 1 28,460
3.0
2,107

3, 352
2,572
4,158
264

32.4
24.9
40.2
2.6

11, 335
8,698
14,061
893

3, 305
2,696
4,258
359

31. 1
25.4
40.1
3.4

11,176
9,117
14,399
1,214

4,697

780

7.5

2,638

609

5.7

2,059

6, 453
4,311
9, 560
640

30. 8 21, 822
20.6 14,579
45.6 32, 329
3 . 1 2,164

3, 322
2,014
4, 726
284

32.1
19.5
45.7
2.7

11, 234
6,811
15,982
960

3,131
2,297
4, 834
356

29.5
21.6
45. 5
3.4

10, 588
7,768
16, 347
1,204

2,142

10.2

1,308

12.6

4,423

834

7.9

2,820

1,389

1.8

Percent

Female
Projected
(thousands) Sample

6.6

7,243

Percent
114.6
88.5
107.7
133.3
109.9

83
As the above illustrates, during the past four months only 54.3 percent of all
TT.S. households reported a positive Household Money Supply—HM$ as we identify it.
This is the second computer run ordered for today.
To illustrate what they mean, I instructed our computer to run this tabulation
on our four key confidence questions.
The left column below represents all of the nationwide interviews completed
during the past sixteen weeks, with the response projected to all U.S. households—
sampled during that period, which averaged 70,893,000.
The center column represents only those interviews completed within the six
places—which represents 0,9 percent of all nationwide interviewing.
The right column represents the rest of the nation—the other 99.1 percent of
all U.S. households who do not live in the land of mtllc, honey, and money.
CONFIDENCE C0MP0NENTS-16 WEEKS FROM SEPT. 29, 1977, THROUGH JAN. 25, 1978
The 6 Washington
suburbs1

Total

Sample
Universe of total sample projected to
all household
20,964
With household money supply
11,377

Projected
Per- (thoucent sands) Sample

The rest of the 99.1
percent of United States

Percent

Projected
(thousands) Sample

Percent

Projected
(thousands)

639 20,775
500 11,229

100.0
54.1

70,254
37,973

100.0 70,893
54.3 38,473

189
148

100.0
78.3

29.9 21,230
28.1 19,928
41.8 29,610
.2
125

153
10
25
1

81.0
5.3
13.2
.5

517
34
85
3

6,125
5,883
8,731
36

29.5
28.3
42.0
.2

20,713
19,894
29,525
122

1,301

143

75.7

483

242

1.2

818

A. Current income status:
1. Income is up
2. Income is down
3. Income is same
4. Don't know/refused

6,278
5,893
8,756
37

Up/down balance

385

B. Household income forecast:
1. Expect up
2. Expect down
3. Expect same
4. Don't know/refused

6,803
4,308
9,179
674

32.5 23,005
20.5 14,568
43.8 31,040
3.2 2,279

131
18
35
5

69.3
9.5
18.5
2.6

443
61
118
17

6,672
4,290
9,144
669

32.1
20.6
44.0
3.2

22,562
14,507
30,922
2,262

2,495

11.9

8,437

113

59.8

382

2,382

11.5

8,055

6,657
5,268
8,416
623

31.8 22,512
25.1 17,814
40.1 28,460
3.0 2,107

118
19
47
5

62.4
10.1
24.9
2.6

399
64
159
17

6,539
5,249
8,369
618

31.5
25.3
40.3
3.0

22,113
17,750
28,301
2,090

4,697

99

52.4

335

1,290

6.2

4,362

6, 453
4,311
9,560
640

30.8 21,822
20.6 14,579
45.6 32,329
3.1 2,165

134
28
23
4

70.9
14.8
12.2
2. 1

453
95
78
14

6,319
4,283
9,637
636

30.4
20.6
45.9
3.1

21,869
14,484
32,251
2,151

2,142

10.2

106

56.1

358

2,036

9.8

6,885

Up/down balance
0. Employment forecast:
1. Will be more jobs
2. Will be fewer jobs
3. Same jobs as now
4. No opinion...
More/fewer balance
D. Business forecast:
1. Will be better
2. Will be worse
3. Same as now
4. No opinion
Better/worse balance

1,389

1.8

6.6

7,243

* Includes the counties of Prince Georges, Montgomery, Arlington, Fairfax, and the places Alexandria and Falls Church.

How the response within the 639,000 households with the Washington suburbs
differ from the other 70,254,000 U.S. households (including the District of
Columbia) can be clearly viewed.
Why I present this table is to illustrate the difficulties I have encountered in explaining to people in government—the plight of the 99.1 percent which is the real
United States- -those American people who pay to support the 0.9 percent with job
security.
In order to keep my remarks brief—to provide background for further discu^
sion—I have prepared these exhibits.
A . . . is to set the current mood as reported by the press.
B . . . is to illustrate the cause of the error the Federal Reserve Board made
in falsely making interest rates rise for a third annual strike out during 1977.
C . . . is to show where our money is and was—in billions of dollars.




84
D . . . is to illustrate the velocity of our money measures—how many times
money turns over per annum.
B . . . is money velocity over the past twelve months.
F . . . is a Sindlinger concept of converting all money to a per-household
basis—i.e., to people.
G . . . is to raise the point of how ridiculous—our labor market figures have
become.
H . . . is the weekly Sindlinger Report #29 to illustrate what the stock market
is trying to tell Congress and the Administration.
If we have time, I think I can document and demonstrate how—IF our
70,893,000 U.S. households operated their fiscal and monetary policy the way our
government does—they would all be broke and in bankruptcy.
And if all U.S. households and if all corporations were to keep their books on
a seasonally adjusted basis—as the government operates—and, that if all income
tax returns were filed on a seasonally adjusted basis—like the Fed fixes monetary
policy—IRS would have everybody in jail—and then who would finance our
government?
In the press release announcing this hearing. Senator Bryd noted how this
committee will consider the possible extension of the $752 billion national debt
ceiling and explore the ''public debt and its economic ramifications". The aim
is laudable. The national debt is staggering and any attempt to raise the ceiling
deserves the most careful attention. But even more mind boggling than the sheer
size of the debt is the very large stake that each American household has in this
accumulation of long-running budget deficits.
During January, my organization, Sindlinger & Company of Media, in Pennsylvania, sampled 70,893,000 households across the United States during continuous and daily telephone surveys on the economic conditions and political
opinions of American consumers. For this year, through January 28th, we have
sampled 5,006 different households.
It has been my three-decade belief that the only way to look at every measure
of money is through people because it is people who use money. Therefore, I prefer
to present measures of money stock that are broken down on a per-U.S. household basis. (See Exhibit F).
Only in this way can we determine if there is truly enough money to serve the
people's needs.
In a reverse of this approach, we should also be expressing the debt and the
deficit on a per-household basis, for this will demonstrate the real burden of the
total bill on the American people.
If the $752 billion debt is divided by the 70,893,000 households, it becomes clear
to people that the national debt is roughly $10,607.54 per household. In other
words, each American household, above and beyond its own visible debt, owes
another $10,607.54—which according to an extensive study now in the field—very
few people know they have this national debt—on top of their other debts which
they know about—like paying for oil.
For American households, an unknown debt of over $10,000 would be alarming.
But, it's even worse for people who live by the credo of "You can't spend more
than you make" to have a debt of that magnitude that most don't even know
exists.
Without its consent or approval, each U.S. household in the country must
shoulder an additional $10,000 in debt amassed by the very people the household
members voted into office to protect their money.
This should not be kept a secret for much longer. It should be ceaselessly publicized and dramatized to show the people what the government is really costing
them.
Speaking of publicizing—as I write this, I have just observed a television commercial urging people to buy government savings bonds—as if savings bonds were
war bonds—and it is suggested that it is a patriotic duty to buy these bonds.
A horrible thought runs through my mind.
If some individual company were promoting the sale of savings bonds—rather
than the government—would not the FTO come down hard on these commercials
as false advertising? Think about it—what will those "patriotically bought" savings bonds be worth when they mature?
Mr. Chairman, you, better than any member of this committee, know what I
am talking about when referring to people. We have conversed frequently, and
you have paid a personal call on me to witness Sindlinger & Company's survey
operations first hand.




85
You and I know fully well that Congress had better not underestimate the
ability of the people to handle their own money.
Obviously, no one expects each households to come up with that kind of cash to
liquidate the national debt, for the money is not there. But at $10,000 per household, the debt is a definite financial monkey on the back of each one and an increasing number of Americans are coming to this realization even without
knowing the exact figures.
Once an issue confined to the back burner of public opinion—the federal budget
deficit has become the hottest topic in the country that we're measuring.
In the week following President Carter's State of the Union message, one of
five persons we interviewed listed the deficit and government spending as the
number one problem in the country. As late as last year, only about 3 percent,
mostly intensive fiscal conservatives, gave it priority status.
Here we insert a table for two comparative periods in time, based upon this
question:
What would you say—right now—is the number one problem that faces this
entire country—that you, yourself—are most concerned about ?
For this question, where a respondent gave multiple problems—as most people
do—our interviewers probed for the number one problem to eliminate the
multiple responses.
COMPARISON TABLE FOR NO. 1 PROBLEM FACING THIS NATION
Week
ending
March Jan. 25,
1975
1978
1. Crime/unsafe streets/gangs/robberies/violence
Drugs
Inflation/high prices
Unemployment
High taxes
High interest rates
Housing
Schools/education
Quality of city services
Corruption in government/dishonesty in government
11. Pollution/ecology..
12. Energy crisis/fuel
13. Shortages of foods..
..
14. The courts
15. International problems
16. Immorality/not practicing the golden
rule/lack of religious training
17. Aged/health care
18. Deteriorating neighborhoods/vacant
homes
19. National defense
20. Population explosion
21. Traffic
22. Racial discrimination/racial imbalance
23. Land/air/sea/tragedies/death
24. General low caliber people/lack of
morality
25. President and top officials unresponsive to citizens/government officials overspending
26. Too much foreign aid/trade
2.
3.
4.
5.
6.
7.
8.
9.
10.

2.1
.5
25.4
22.6
1.5
.3
.6
.2
0
3.3
.8
2.6
.6
0
.2
1.2
.1
0
.4
.7
.4
0

.4

1.3
4.0
.1

27. Stock market lows
28. Greed/selfishness among people/
industry and labor
29. Power of labor unions/demand for
high wages/strikes
30. Big business/high profits
31. Welfare rolls
32. Farm problems/low income for
farmers...
33. Recession/depression/bad economy..
34. Do-nothing Congress
3.8 35. President's lack of action
. 2 36. Mideast war
5.7 37. Corporate profits down/closing of
0
businesses
38. Play areas and facilities for children0
1.3 39. Communism
40. Allowing one minority to rule
1.0 41. Transportation poor
.4 42. Heavy traffic
43. More optimism/media's power
. 1 44. Parking
.2 45. Waste/nonproductivity
0
, . _
46. Don't know
47. Nothing
0
48. Decrease government spending/less
.2
government deficit
49. Republican Party
0
50. Wage and price controls needed
1.0 51. Wages not compatible with prices
52. Big business controlling legislation..
53. Devaluation of dollar
4.8 54. Fixed income of elderly
4.7 55. President Carter

2.2
2.4
13.2
1.1
4.3
.9
.3
.2
0

March
1975

Week
ending
Jan. 25,
1978

.1

4.7

.7

1.0

.9
.8
.5

1.5
.3
.5

.6
14.1
.9
1.1
1.5

1.7
1.3
.6
9.1
5.8

.5

.4
.6
.1
.1
.4
0
.3
.3
.6

1.3
0
.2
.2
.5
.1
0
0
.6
.3
.5

1.8
.5
.2
.7
.3
.8
.5
0

18.1
0
0
.4
0
1.9
.3
1.5

0

During the 1960s and until recently, most people cared little about the deficit
because they thought it kept the economy going.
Now deficit is a dirty word among growing numbers of people from all walks
of life, all shades of opinion, all economic strata who regard the deficit as the
primary cause of the nation's economic dilemma.
Instead of just expressing concern over the general issues of inflation, unemployment and economic weakness, the people have shifted their focus to hone in
on the nub of these problems.
Until the deficit is reduced or eliminated, people tell us, there can be no lasting
cure for inflation or economic stagnation—based upon a special study now being
conducted.
Government spending through the deficit is viewed as a key exacerbant to inflation. The need to borrow funds to finance the deficit, the people further




86
acknowledge, keeps interest rates high. Similarly, the big deficit is regarded as
a barrier to a meaningful reduction in burdensome taxes.
And the public today rightfully links inflation with unemployment and recession.
They know that when inflation runs high, consumers must curtail spending
and when consumer spending droops, jobs are threatened.
But perhaps the biggest monkey perceived by the consumer is the fact that
when the government needs such massive amounts of money to operate, it deprives the economic mainstream of needed funds to expand the private sector
and make jobs. Money spent by the government frequently disappears into some
non-productive never, never land. Big government literally shortchanges the
economy. It is now taking money away from people at the rate of over $10,000
per household. As inflation increases, so does this amount.
Mr. Chairman, you should hear people respond to the question on this $10,000
debt in a special study we are conducting, and how people have never considered
the fact that they owe this huge amount.
This monetary shortfall is not something imaginary. It plagues people all the
time in a very real way and is manifested by a continual "yo-yoing" of Consumer
Confidence.
If you recall, the most important information resulting from Sindlinger's
daily surveys concerns the levels and directions of Consumer Confidence across
the nation. As Sindlinger defines it, confidence is not an unmeasurable psychological consideration, but a quantitative measurement based on people, jobs and
money.
And, we know that before any sustained economic recovery can begin, it must
be preceded by a brisk, sustained rise in consumer confidence. Over the last few
years, confidence often has been anything but sustained. It has zigged up and
zagged down without a stop, a condition that we term "yo-yoing".
Most recently, we logged a rather healthy rise in confidence over the final
quarter of 197T to nearly the 70 percent level. By the first of the year, confidence
peaked and again is now headed downward at a fast rate.




Sindlinger 9

87
It has become increasingly clear that each of these turns responds to a
monetary situation.
The late 1977 consumer confidence rise started when it looked like President
Carter would reappoint Arthur Burns as Federal Reserve chairman. Most people
regarded Burns as the protector of their money. The decline came after Burns
was sidetracked.
Anything that will depress the value or the amount of people's money—i.e. high
interest rates, an increased deficit—inflation—similarly depresses confidence.
Anything that increases the value of people's money—builds strong confidence.




Sindlinger 10

88

11

Moreover, the Federal Reserve Board's own money supply figures, if read properly, shed additional light on the people's monetary shortfall and show the reasons
for the public's intensified concern over money. For this purpose, we must use
the Fed's non-adjusted money stock measures, prior to their seasonal adjustment
and we must break them down 011 a per-household basis. The figures we will
employ are for the month of December. (See exhibits C and F.)
A key factor to bear in mind in this respect is inflation.
If we factor inflation into the data, we find, that in many cases, on a perhousehold basis, there has actually been negative "real growth" in some measures.




89
Most notably, there is the checking account component of Ml which is the
key vehicle for consumer spending. On an aggregate basis, this component posted
a year-to-year growth rate of 6.5 percent, or barely above the "official" 1977 inflation rate of 6 percent. (See Exhibit C.)
But when spread among the 70.8 million households, the growth rate, because
households have grown at a faster rate than checking account balances, plunges to
3.8 percent. This is well below the "official" inflation rate and signals negative
growth. (See Exhibit F.)
Bank savings are another example of how the facts do not support the figures.
On an aggregate basis, bank savings grew in December at a still high 10.1 percent, but the rate is down to 7.3 percent on a per-household basis.
After inflation is subtracted, the growth rate per household is minuscule.
The figures show nothing like a monetary explosion nor even anything resembling an adequacy of money at the level where it's most needed—among the people.
Unfortunately, our government policy makers fail to see the true plight of the
people because they ignore the figures we have presented. They are hung up on
the seasonally adjusted or so-called "official" figures.
Seasonally adjusted figures are dead wrong.
They are distorted by the five past years of economic aberrations and consistently flash false signals to policy makers which lead to improper decisions. And
because they are at their worst in producing data on jobs and money—the two,
primary ingredients of confidence as we measure it—they literally blind government officials to the plight of the people—especially when those who reside in
the land of milk, honey, and money—have it so good.
The Fed's false rise in interest rates last May was purely based on seasonally
adjusted figures which purported to show a monetary explosion. The Fed's own
non-adjusted data not only showed that the explosion never took place, but that
the growth rate didn't even approach the Fed's target of 8.5 percent.
The temporary growth in the money supply during April resulted from just
one thing: PEOPLE moved money into their checking accounts out of savings
to pay their taxes, and the seasonal adjustment did not cope with this move.
But the Fed interpreted this entirely natural step as an explosive phenomenon,
and in applying the monetary brakes aborted a promising economic recovery for
the third straight year.
We have, as Senator Byrd knows, written extensively about the errors in the
seasonal adjustment of the unemployment figures—how the adjustment tends
to artificially depress unemployment in the first half of a year and then artificially inflate it in the second half. The errors reached a peak with the December
report showing a decline in seasonally adjusted unemployment to 6.4 percent.
By this time, we're not alone in questioning the data. It has been met with
skepticism from many observers, one of whom is also appearing before this
committee today.
The point is that these improper data and mistakes are leading to implementation of government policies which hurt people.
Before we can make any move toward cleaning up our problems, the government must get its books in order.
If a business or an individual were to present seasonally adjusted records to
the Internal Revenue Service, they would wind up in jail.
In fact, I tried a little experiment with my wife, Nellie, who handles all our
financial matters. We worked out a formula, involving our finances of the last
five years, that provided for paying taxes on a seasonally adjusted basis. We
actually found our taxes were reduced.
If everyone tried this approach, they probably also could save a lot of money,
although the Treasury would be the poorer.
It may seem ironic, but the American people may be getting a better break
from the stock market in describing their problems. We hope we have some time
to discuss this.
The stock market is trying to tell Congress and the Administration something—and, it's not good.
The stock market cannot be ignored.
On a four-week moving average basis, it's the most accurate forecaster of the
nation's economy. And it is an economic barometer that responds to the confidence of the people, which is why we have been able to successfully forecast it
over the last twenty years.
We are shocked and dismayed by so many high officials in and out of government and experts who say the market is wrong.




90
Given its past record of accuracy, it is, to our way of thinking, incumbent upon
them to at least look at the facts.
The stock market is saying we are headed toward a recession and this cannot
be arbitrarily dismissed.
In a real sense, the low levels and downward directions of the market are
embodying everything we've touched upon today. It is being depressed by the
low state of confidence which in turn is resulting from the monetary shortfall
bothering the nation's consumers.
With the limitation on time, to conclude—I place so much emphasis—almost
total emphasis—upon the stock market—and use the Standard & Poor's 400
Industrial Stock Index as the measure (see Exhibit H) because
This is the only accurate figure—on a four-week moving average that is in
existence—which is real.
The stock market is not revised and is not seasonally adjusted and it cannot
be fixed up by people, or manipulated, on a four-week moving average.
Every other government figure is constantly revised. They are seasonally adjusted, which is a fix up process to cover up errors in the raw data. That is why
these seasonally adjusted figures are so popular with those who create them.
They revise the seasonally adjusted figures to cover up mistakes.
We think and we make fiscal and monetary policy on the basis that we have
an "official" inflation rate of 6 to 7 percent. My data for the past two years say
the inflation rate for the things people buy has been over 11 percent.
If I recall, Mr. Chairman—you were able to get a confirmation on this at
hearings we attended together.
In February, BLS is supposed to issue the new CPI—which cost $50 million
to create, which was due in April 1977, but postponed because of so-called computer problems.
What kind of a new seasonally adjusted CPI the BLS will produce next month
will make fascinating reading—after their latest seasonal adjustment revision
that showed the creation of 1,359,000 new jobs from October to December 1977—
more than three times the number they supposedly counted. (See Exhibit G.)
To conclude, here are some points, incidents, events and ideas—which if we
had time, need discussing:
How the error of the seasonal adjustment of Ml in Jannuary 1973 started the
snowball rolling downhill.
Our Paul Revere Ride to Washington, D.C. in —uly 1974—warning of the
recession and what could have been done to stop it.
Our Thanksgiving 1976 warning to President Ford that he better get that
seasonal adjustment junked—or, he would be the first president to be seasonally
adjusted out of a job.
Over the decades, whenever the S & P 400 Index wTas under 100 for four weeks,
we had a recession. For the last three weeks of January 1978 it has been under
100—and the recession I see—may not be held to a recession.
While Congress and the Administration did nothing to stop the last recession—we don't have much time to stop the one we are about in now.
That stock market has got to be reversed and it still can be turned up.
Most economists and most politicians—consider that when an economy gets
into trouble—you buy your way out with a tax cut, add to deficit spending—let
inflation pay for i t
But in 1978—there is only one way we can restore and strengthen Consumer
Confidence to hold: to restore the value of the dollar; curb the growth of inflation ; turn the stock market around; and avoid the coming recession—
and that is—to start to reduce the Federal deficit and debt—not to continue
adding to it—as now planned.
Simply, wTe have to put the money back in the hands of the people, and out
of government.
A tax cut, let me add, is not the way this year. It would only enlarge tne
deficit and scare people even more. And, at present levels of falling confidence,
thpre is no guarantee that anv of the money going to the people through tax
cuts—which incidentally would be less than bountiful on a per-household basis—
wTould be spent to stimulate the economy.
Any business or individual that's up to its neck in debt like the government,
facing bankruptcy, would try to cure its problem by cutting spending. We think
it's about time that the government stopped trying to use the budget deficit to
stimulate the economy and let the private sector try its hand for a change.
We have never tried that yet—and on this I have some ideas, based upon my
daily conversations with the American people throughout the nation.




91

The Sindlinger Report

A Condensed Weekly Digest On Consumer Economics
Reporting On People, Jobs, And, Money

For T o u r Information — F T I

Outlook uncertain
for autos in '78 as
economists grope
The bulls and the bears are at
it again, and it is a struggle of
immense interest to the entire
auto industry.
Even as the bulls, led by Detroit and a handful of economists, were predicting good
things for 1978, the ranks.
tftg
bears be^an swelling as key indicators and Ave consecutive"
dismal l6-day sales" r e p o r t s
seemed to suggest a pattern.
Some of the indicators"
• Automobile credit extended
in October was off slightly after
seaspnal adjustment, with liquidations rising, although nonauto category credit extensions

Early this year, Mr. Ed Laphara'
of Automotive
ed your

News telephon-

Editor, as he did

others.
Since Mr. Lapham did a very
good job of reporting our remarks, we pass this FYI along
to all clients who may have
missed this reading.
We have underlined in color
those points we made in our
telephone conversation which
Mr. Lapham reported herewith.




remained strong, according to
Federal Reserve data.
• The Dow-Jones Industrial
Average dropped niore than 13
points in the opening* round of
1978 trading!
* The flow of money into federally insured savings and l9an
associations in November slown Novembei '
ed to its smallest g r o w t h in
nearly a year and a half, down
32 percent from October's net
inflow, said the Federal Home
Loan Bank Board
• The dollar c o n t i n u e d to
weaken against Swiss, German,
Japanese and even British curbtlieve the economy is headeJ
into a recession In
or thaT
auto sales will plummet to the
bottom of the cycle, as they did
in 1974-75, but t h e r e is little
doubt that the current trendline
JS not aimed at Detroit's loftier
forecasts.
• As of late last week, GM had
not budged from its 11 75 million car forecast Said one official, "We're staying with the
forecast, we'll just hate to do a
better job selling cars "
Richard A Stuckey. assistant
chief economist at E I Du Pont
de Nemours & Co said he believes that GM will be forced to
"take pause and reevaluate" its
forecast
Stuckey said he believes that
new-car sales for calendar 1978
will be about 10 8 million, a figure used by many others as well
last week
One indicator Stuckey watch
es is credit extensions

"Credit extensions as a per;
cent
prnhahly rexrh
lis Viictnrif.nl
ppfik sometime -in.. laJp. spring "
hp said "Whfn that has happpned in the past, auto sales have
started to decline in the cycle "
Although the auto industr\ is,
an importan t se g m e n t of the
economy, Stuckey believes that
a recession in 1978 is "most unlikely " "There still is strength
in other segments," he said
"Housing starts are not going
Continued on
«. Col 1

of dispflaahjf. inromr mil

Continued from P«se 1
to decline so rapidly, the government is still spending and
autos probably4 will d e c l i n e
slowly to about 10.0 million in
1979."

• Why, then, is there a growing
wave of pessimism?
The reason is uncertainty. An
old Wall Street adage says, "We
can deal with good news or bad
news, but we can't deal with
uncertainty." And the s t o c k
markets, which many people believe reflect the real health o f
the economy, have been doing
poorly lately because of uncertainty . Which only compounds
the uncertainty
A n a l y s t s aren't even sure
whether the market will go up
or down; published reports in
respected business journals last
week offered all manner of
opinions, including extreme opposites
Albert Sindingler, market researcher and publisher of the
Sindlinger Report, believes that
the stock market "will drag the
U^ S. into a recession" in 1978
And because he believes the

stock m r e is thetestmeasure
akt

of consumer attitudes about car
purchases, he sees massive layoffs hitting the industry in
ruary
"Peop aren't buying cars be'People
cause they don't like wbat's o f r
fered," he said. 'Tfie"y'"'don't like
the smaller cars and they don't"
believe there's an energy crisis.'
Sindlinger also said that the
people lack confidence in the
Carter Administration and his
I tax poik:i« >nJ that

the Priidrnt i suffering fo _
«
rm
pvf exposure
(continued OVER)

92
F Y l f o r T h e Si n d linger R e p o r t ( c o n t i n u e d )
46 / Automotive News, January 9, 1978

What will *78 really be like for autos?

Economic crystal ball is clouded
Other c n u e aentiment
o a mr

surveys have not found the same
lack of confidence, but some
economists do agree with at
least parts of Sindlinger's analysis.
NOTE:
In reference to the above, the
Michigan SRC reported confidence down on the date of
this article.
One of those areas of agreement is m a r k e t saturation.
Stuckey cited low scrappage
rates and household formations
as having pumped up sales. Sindlinger referred to "hedge buyers" who've "been out of the
market for three, four or five
years."
• Frank Popovich. automotive
services manager of Data Resources, Inc., said there is definitely market saturation.
"There is market saturation in
the minis, subcompacts and compacts, where the Japanese have
got a hold on the market," he
said. "There is also market saturation m the 'personal' trucks
which take 85 p e r c e n t of all
truck sales."
P o p o v i c h like Sindlinger,
blamed the selection of cars for
contributing to market apathy
And Mute fas estimate
i?'3
sales was very close to Stuckey's 10 8 million, he said there
was increased danger for domestics because
Japanese have
tfrq ability to "move right on up
frpm two-dQpr to foqr-door and
thqp Igngfoen fog wheelbase to
larger sizes" because they have
"mastered" the fuel e c o n o
y
and emissions prrtte"^While car dealers across the
U. S. have seen their floor traffic slow to a crawl, topics

Chrysler Corp entered 1978
having already announced "inventory adjustment" shutdowns
American Motors has pinned its
survival hopes on a slim share
of a growing market Both wiH
face real trouble if the market
doesn't grow
Sluggish s a l e s also mean a •
model mix dilemma; auto mak- '
ers must meet Corporate Aver- |
age Fuel Economy requirements j"*
and if the "right" cars aren't J
selling that means a whole new I
set of scheduling problems
J
One market analyst suggested
that GM could do much to improve the "looks" of the market
by "arm twisting" lease buyers
into taking 300,000 deliveries in
a given 10-day period "say m
February" by offering "$50 en
$100" discount per cai
Such an action would of
courae have antitrust implications and would do little to solve
the problem of empty showrooms.
Just as the auto makers have
been accused of making things
"look" better, they have also
been accused of using "bandwagon forecasts" and GM Chairman Thomas A. Murphy admitted in December t h a t he believes too much negative talk
can hinder economic growth.
George W. Cloos, vice-president of the Chicago Federal Reserve Bank and Fed auto analyst, does not consider them
bandwagon forecasts, he calls
them "sales goals."
He does not make predictions,
but rather monitors the predictions of others. Cloos did say,
"I'd be very surprised if sales in
1978 are as high as 1977."
But he was not as pessimistic
about the economy or autos as
some.
"I think there'll be more of
the rolling adjustments in production and if a strike or the
weather closes a plant they
won't try very hard to make up
output unless it's a hot model,"
he said.
Hot models lust might be the

m ny supply, inflation, siaL
oe
iaz iacrearei. _ light
rrprlit a d housing starts are
n

iLfix—Rintilingpr h i long said
as

nim r up
tr r n t

Hftftn-t
thorn "
that tht» ai.tn maltwt must supply n'hal m ripmanripri nnt whal
pnvprnmpnt rpculatps

Security

heing . Hisfiisgpri hy wnrnmists
anri riwmnn malrcrc whnsft Hiffonng npmmng tppminglv ranHolprminp thf -right" eco-




What is significant about Mr. Lapham'i wellwritten and fully researched article on new
car sales is his lead and importance placed
upon credit extended and the direction of
the stock market being related to new automobile sales.
This was the point your Editor had made in
. , our conversation with Mr. Lapham — and a
| point we have been making for the past two
| decades.

I

1 Observe left, how sluggish sales also mean a
model mix d "
And observe, the last paragraph.
Our reference to how government bureaucrats are now designing Detroit's new cars
has an ironic twist.
Recent new car buying plans show the
market is strong and good among government employes, especially in the suburbs of
Washington.
For government employes who plan to buy
a small car — most plans are for imports. For
plans for domestic cars — most plans are for
the larger new cars.
1978 new model car sales are following
Sindlinger's buying plans projection.
And as Ed Lapham >o well reported herewith — the stock market direction in
forecasting new car sales — applies to the
total economy -» for the stock market is the
only accurate figure — on a four-week
moving average — that exists, to forecast
the economy.

93
s|M|rpv|r|F|s
Date of Release
January 3 0 , 1 9 7 8

I t

I I I

NEWS RELEASE
Sindlinger & Company, Inc., 600 N. Jackson St., Media, Pa. (19063)
215-565-2800

The $ 7 5 2 b i l l i o n national d e b t is a " f i n a n c i a l m o n k e y o n the b a c k " o f every A m e r i c a n , leading consumer researcher A l b e r t E. Sindlinger t o d a y t o l d a congressional c o m m i t t e e .
T h e massive d e b t and t h e c o n t i n u i n g budget deficits w h i c h feed i t , M r . Sindlinger said, are regarded
b y a g r o w i n g n u m b e r o f people as the r o o t cause o f all of t h e nation's e c o n o m i c ills, including inflat i o n , stagnation and s t u b b o r n l y high u n e m p l o y m e n t .
" O n c e an issue c o n f i n e d t o t h e back burner of public o p i n i o n , t h e federal budget d e f i c i t has become
t h e hottest t o p i c in the c o u n t r y t h a t we're measuring," M r . Sindlinger t o l d the Senate Finance Subc o m m i t t e e on T a x a t i o n and D e b t Management headed b y Senator Harry F. B y r d , Jr. of Virginia.
M r . Sindlinger is Chairman o f Sindlinger & C o m p a n y , an e c o n o m i c / p o l i t i c a l o p i n i o n research f i r m
based in Media, Pa., w h i c h gathers data o n t h e e c o n o m i c c o n d i t i o n s and political o p i n i o n s of t h e
A m e r i c a n consumer t h r o u g h c o n t i n u o u s d a i l y telephone interviews of consumers in all parts o f the
4 8 contiguous states.
M r . Sindlinger t o l d t h e senators t h a t in t h e seven days f o l l o w i n g President Carter's January 1 9 t h
State o f the U n i o n message, t h e federal d e f i c i t and government spending became t h e nation's
n u m b e r one issue. Nearly one o f every five persons interviewed b y his organization cited the d e f i c i t
as t h e c o u n t r y ' s n u m b e r one p r o b l e m .
In order t o p u t t h e d e f i c i t i n t o better perspective, M r . Sindlinger said, t h e $ 7 5 2 b i l l i o n d e b t , when
d i v i d e d i n t o t h e nation's 7 0 , 8 9 3 , 0 0 0 households equals $ 1 0 , 6 0 7 . 5 3 per household. In other words,
each A m e r i c a n household, above and b e y o n d its visible d e b t , owes another $ 1 0 , 0 0 0 w h i c h most
people d o n ' t even k n o w a b o u t .
" B u t , at $ 1 0 , 0 0 0 per h o u s e h o l d , " M r . Sindlinger added, " t h e debt is a d e f i n i t e financial m o n k e y o n
t h e back o f each one and an increasing n u m b e r o f Americans are coming t o this realization w i t h o u t
even k n o w i n g t h e exact figures I have given y o u this m o r n i n g . "
A c c o r d i n g t o his findings, M r , Sindlinger said, people view t h e d e f i c i t as i n f l a t i o n a r y , as a p r o p f o r
high taxes, and as a cause o f high interest rates.
" B u t perhaps t h e biggest m o n k e y perceived b y the consumer is t h e fact t h a t w h e n the government
needs such massive amounts o f m o n e y t o - o p e r a t e , it deprives the e c o n o m i c mainstream o f needed
f u n d s t o expand t h e private sector and make j o b s , " he said. " M o n e y spent by the government freq u e n t l y disappears i n t o some n o n - p r o d u c t i v e never, never land. Big government literally shortchanges t h e e c o n o m y . I t has taken m o n e y away f r o m people and added t o t h e i r d e b t at t h e rate of
$ 1 0 , 0 0 0 per h o u s e h o l d . "

.

M r . Sindlinger said t h e big deficits have impaired t h e l i q u i d i t y o f A m e r i c a n consumers and depressed the confidence t h a t is needed t o b u l l t h e e c o n o m y . " U n t i l the d e f i c i t is reduced or eliminated, t h e y t e l l us there can be no lasting cure f o r i n f l a t i o n or e c o n o m i c stagnation," he said.




- more -

94
News Release ~ As Of January 30, 1978

Mr. Sindlinger noted that the situation is best illustrated by the declining stock market which is
being depressed by this low confidence and, according t o his projections, is headed lower througho u t 1978.
Describing himself as "shocked and dismayed" by the tendency of high officials t o say the stock
market is wrong despite its outstanding record of accurate economic forecasting, Mr. Sindlinger
said: " T h e market is saying we're headed toward a recession and this cannot be arbitrarily dismissed."
Mr. Sindlinger warned Congress and the Administration that they better soon hear what the stock
market is telling them.
He added that a tax cut w i l l not help the situation, because it w i l l "enlarge the deficit and scare
people even m o f e . "
" A n y business or individual that's up t o its neck in debt like the government would t r y to cure its
problem by cutting spending," he said. "We think it's time the government stopped trying to use
the budget deficit to stimulate the economy and let the private sector t r y its hand." To do this,
Mr. Sindlinger offered a few suggestions to the committee.




95
Mailed from Media in Pennsylvania on January 25 1978

Based Upon
January 18, 197S
Confidence Parameters

29

Vol. 3 - No.

StJLfl rlwl T| FI s

Tlie Sindlinger Report
A C o n d e n s e d Weekly Digest On C o n s u m e r Economics
Reporting On People, Jobs, And, Money

~i—i—I—I—i—r

SCP STOCK MARKET FORECAST EDITION FOR NEXT 88 WEEKS OUT

How Far Away Are We From Recession? Maybe We Are There Now !
Over the past 1,181 weeks (22.7 years) whenever the S & P 400

It was over the July 4th 1974 weekend when most economists

Stock Index has been under 100.0 for four consecutive weeks,

were still saying NO RECESSION, that the stock market was

this has been the signal for a recession.

due for a rally among the professional opinions. However, by
July 4, 1974

As of January 18th — the 400 Index on a four-week moving
average was 101.4 — only 1.4 points above 100.0.

B
fl

As of January 24th — at press time, the 400 Index on a four

people withdrawing money f r o m local banks
to put under their mattresses.

week average is down to the 99.9 level

alt confidence parameters were falling d o w n

B

For the past three weeks the 400 Index has been 98.8 for

sharply.

January 11th, 99.7 for January 18th and is now at 98.2 -for

a three-week average below the

Sindlinger was reporting

a collapse in new car sales for year-end.

100.0 recession level

Forecast Confidence Index (FCI) was on on

B

by 1.1 points at a 98.9 level.

a slide, even greater than the November '73
oil embargo month, as the impact of rising
prices for oil was just beginning to impact

One more week (i.e.. bv February 1st) for the 400 Index t o

the economy.

be below 100.0 is a new early warning fiunal t o Congress, the
White House ( and the Federal Reserve Board.

and

B

SCP was then forecasting the 4 0 0 Index to
fall over 20 percent t o below 75.0 by Decem-

PRIOR W A R N I N G SIGNALS

ber 1974. And this happened.
It was on July 12, 1974 that Sindlinger made his Paul Revere

It was April 1973 that Sindlinger's Confidence Parameters
(SCP) were forecasting our last coming recession.

may

be coming

SCP was then forecasting an

up

White House, the Cabinet, the Treasurey, and the Fed — to do
something (which could have been done) t o avert the then

It was on August 25, 1973 when the 400 Index was at 115.4
when Sindlinger warned its clients how . . . A good time to sell
fstock)

Rule to Washington spending a week in allerting Congress, The

coming recession. The only suggestion we made upon which
action was taken was to raise the FDIC to $40,000 because
members of Congress have bank accounts.

October '73 rally and then the 400 Index should slide to
about the 100 recession level by July 4th, 1974.

HERE

ARE AGAIN

As we write, we just had a telephone call f r o m Senator Harry
F. Byrd, Jr. (I.Va ) w h o has been reading our recent client

)t happened, as the 400 Index rallied to 124.1 on October 24,

reports

'73 to then t u r n down t o 99.3 by June 26th '74 and then

subsequent

down to 94.5 by July 5th '74, below the SCP forecast decline.

stock market is now telling Congress.

- and he recalls our Washington t r i p in July '74 and
conversations.

Senator

Byrd

knows

what

the

ILATESTI

I
I.
II

II
I
I
V
V
VI

Current Income Index
Expected Income Index

79.9 !
94.6 I
124 1 I
Household Money Supply •
|
(HMSI As A Percent
I
58 9%j
Forecast Confidence Index ^ ^

" Jb " ..
o
" B sns "
ui es

L
125.2
88.8
101 9
129 1

128 7 ^
102 4
106 2

125 4

106.3

1

1 3 2^
1
138 7

137 7

81.4

113.3
137 6

102.8
76.7
111 2
135.3

116.4
43.6%
139.2
45.3% 107.8
112.4
with atl confidence parameters up sharply by November 16th and continued u

November 10th, 1977 was the date the Cartei/IBums feud was cooled off
increase through December 28th when Burns wais fired and atl parameters are now declining




NOVEMBER

DECEMBER

59 9%
124 4

^

57.2%

1^5

Indicates recent high levels

Page 269

1,182nd Week Of Nationwide Interviewing As Of January 18,1977

The Sindlinger Report - Vol. 3 - No. 29

Page 268

HOW SINDLINGER'S {32) CONFIDENCE PARAMETERS {SCP) ARE FORECASTING WHAT MARKET SHOULD DO INTO 1979

ABOUT THE WEEKLY SCP STOCK FORECAST CHART & TABLE
k start* on Thurday, ending Wednesday to
Each Friday morning, Sindlinger's First Six of its 32 different confidence parameters for
each Wednesday week ending are available (see first page) along with the stock market close
and the Fed's 7 weekly money measures for the prior updates with other key data.

1250 II ill 11 ll u
*
•
Mm
| 1977 staHBd with 1 b S & P 400 Stock Index at 118.S
K
+ By November 2nd, it had fallen undoi 100.0 |u»i at
SCP had 'O'™" " SHOULD The Dow fall wu 200
120 0 t
pomu, or 20 percent.

Sindlinger's Confidence Parameters (SCP)
,
, c 1Q7Q Forecasts For S & P 400 Stock Index For 88 Weeks Out - Now Through September 26,1979 ,
, iie lead time for SCP forecasts of the S & P 400 Stock lode* vary from
week-to-week and in recent weeks the longest lead time has been 90 weeks

Each Monday. Sindlinger's Computer Program (SCPl adds the latest week's forecast to the
table below and plott the chart right to illustrate the trends created by the latest SCP stock
market forecast (black thin line) in comparison to the prior seven weekly SCP forecasts.
SCP does not forecast what the Mock market will do - for nobody can do that. Whs
forecasts ii what tlw stock market SHOULD DO ~ and the market on a four-week rr
average — does what it should do — 99% of the time.

Forecast Weak* Ahead
Band Upon Pa«i 8




li

i»

ii

ii

li is a

s

103.4
102.*
104.3

CRASH OF 1979 STILL FORECAST +
FOR JANUARY 3RD.

— r—
m? w
Color Lines Are The Past Seven Weeks By SCP Forecasts

Thin Black Line Is Latert SCP Forecast For
400 Stock Market Index As Of January 1B, 1978
j ,..._...

|jul '|au[|s«p joct' | n o v | p * c A i » [ ^ y j * [ f t u g ] ^ jprt

97.9

97.B

Observe How 1979 Rebound It Looting Strength
(continued from first page)

latest SCP forecasts for the S & P 400
Stock lnde>i - with a forecast lead
time of 88 weeks out.
Observe, abcive the color line left, how
O
the actual 41D Stock Index for the first
three weeks of 1978 came in below the
SCP rally forecast*. We could still get
one last rally , however.
For the yet,r 1978, prior SCP forecasts
iw
had the bek 100 level to start in midbut the actual it declining
February
several weekI ahead of the SCP forecasts.
any rallies forecast for the
SCP has m
400 index for 1978 — but with each
rally the *100 Stock Index SHOULD
lose ground.

Senator Byrd knows that the stock market is trying to tell
something to Congress — and has invited us to explain what it
it - « hearings scheduled for 10 a.m. Monday, January 30th.
Alio on this same day, Henry Ford II is the lead-off speaker at
a four-day session scheduled at the White House, and he has
gs to say — which will
On Wednesday, February 1st, Eliot Janeway'
Washington will wrap it all up - in our efforts
the stock market is saying - i.e., our

WHERE WE ARE NOW
For weeks, tee schsrt, SCP has been forecasting a rally that
can't take place, with the actual 400 Stock Index coming in
below the SCP market decline.
Latert SCP forecasts as Of January 18th still has (thin black
line) the crash of '79 to come the first week of 1979 with the
400 Stock Index falling to 83.3 low and then turning up.
But observe, how for the pan three forecast weeks the 88th
week out is looting the rebound levels.
, . . As of January 4, 197B - SCP had the 400
Stock Index to rebound from the B3.2 low
to 105.4 by September 12, *79.
...

Thus, the week of January 30th is another Sindlinger Paul
Revere Fide to the land of milk, honey, and money.
As subsequent Sindlinger Reports will document. President
Carter's State of the Union message to Congress solidified
the SCP accuracy of the 400 Stock Index being forecast

As of January 11, 1978 - SCP had the rebound from the 82.2 low to 104.0 by September 19, "79.

.. . Now, as of January 18th, 1878 - SCP hat
the low still at 82.3 for January 3rd, '79 ~
but the rebound by September 26, '79 (88
weeks out) is now down to 99.7,

CD

97
Page 270

The Sindlinger Report Vol. 3
SCP F O R E C A S T S F O R 1 9 7 9

- No. 29

For the past three SCP forecasts, the break in rising interest
rates is scheduled f o r the first week o f 1979,

^

F o l l o w i n g are t h e SCP forecasts for the S & P 4 0 0 Stock Index
f o r those lead t i m e weeks i n t o 1979

i.e., 88 weeks uu

from

the dates o f t h e last five weekly SCP forecasts, as i l i t w n

H o w deep the recession goes at this p o i n t depends u p o n h o w
high

interest

rates

actually

go,

and h o w

low

confidence

actually falls

88.8

89.9

28

4

11

89.3
90.2

09.7
92.9
92.3

J9.7

H9.3

21

1232
1233
1234
1235
1236
1237
1238
1239
1240
1241
1242
1243
1244
1245
1246
1247
1248
1249
1250
1251
1252
1253
1254
1255
1256
1257
1254
1259
1260
1261
1262
1263
1264
1265
1266
1267
1268
1269
1270

3,
10,
17,
24,
31,
7,
14,
21,
28,
7,
14,
21,
26,
4,
N
11,
18,
"
25,
"
Hay. 2,
9,
"
'
16,
"
23,
* -30,
J
6,
13,
*
20,
*
"
27,
Jul. 4,
»
11.
*
18,
' £5.
Aug.
"
15.
"
*
22.
"
29,
Sep. 5.
"
12,
"
19,
"
26,
Jan.
"
"
"
"
Feb.
"
"
"
Mar.
"
"
"
Apr.

90.9
91.5
92.7
93.0
93.4
93.8
93.5
93.2
93.7
94.1
94.3
94.5
94.6
94.5
94.5
94.6
95.5
96.7
96.3
96.5
97.0
97.4
97.7

93.6
93.8
94.2
94.5
94.6
96.7
94.6
94.6
94.8
95.3
95.7
95.8
96.0
96.2
96.1
96.1
96.2
97.0
98.3
97.8
98.1
98.6
98.9
99.3
99.9
100.8

101.Z

101.7
102.4
103.0
100.9
.0
.0

94.?
93.7
92,4
95.4
92.9
96.5
93,2
96.9
93.6
97.?
93.9
97.5
95.8
99.3
93.9
98.9
93.9
98.9
94.1
99.1
94.6
99.6
94.9
99.9
100.1
100.3
100.5
100.3
95.4
100.3
95.5
100.5
96.3
101.3
97.6
101.3
102.1
102.3
102.8
103.2
98.6
103.5
99.2
104.1
105.0
105.5
100.5
105.9
101.0
106.7
101.B
107.4 ^ 1 0 2 . 5
107.9-^103.0
105.4 ^ 1 0 3 . 1 ^
.0
104.

12

b u t t o go d o w n f u r t h e r

1979

t n hnlri t h P

- W U tlfi il difficult
Rt
l
i

recession t o o n l y a recession

For h o w this moving picture develops, f o l l o w our center page
87,5
91.3
92.4
90,3
90.2
91.3
91.7
90.1
90.5
93.7
94.4
94.7
93.7
93.6
94.0
94.6
95.5
95.9
96.4
97.2
97.9
98.5

plans accordingly.
If there is another t h i n g sure in l i f e
taxes)

- (other than death and

— we have come t o t h e conclusion t h a t the stock

market on a four-week moving average is the most accurate
forecaster of the e c o n o m y t h a t exists — and SCP can forecast
what t h e stock market S H O U L D d o — t h e y w a y we d o it.

ABOUT PSYCHOLOGICAL FACTORS
T o forecast w h a t the stock m a r k e t S H O U L D D O — t h e w a y
we do i t — SCP utilizes 32 confidence parameters — see f r o n t
page of last issue # 2 8 f o r the list.
Each of these 3 2 d i f f e r e n t confidence parameters are d e f i n i t i v e
measurements w h i c h i n t e r l o c k w i t h their push/pull t o create

a year away

- at t h e 82.2 t o 83.2 level.

^

the final correlation p r o j e c t i o n w h i c h n o w has a lead t i m e f o r
the

4 0 0 Stock Index of 8 8 weeks o u t . (See l e f t ) .

There is n o psychological f a c t o r w i t h i n SCP o t h e r t h a n that

B u t observe h o w o n January 4 t h , 1 9 7 8 SCP had a r e b o u n d f o r
the 4 0 0 Stock Index at 107.9 September 5, ' 7 9 . ^

measured
While

our

expected
factors

components

have no

have influence o n the confidence

100, the recession level.

of

numbers

numbers.

For

do

example:

One o f our key open-end questions asked daily is t o determine
what people perceive as the number one p r o b l e m t h a t concerns

WHY IS THIS?
As prior stated — w h a t controls the level o f t h e SCP forecasts
f o r the 4 0 0 S t o c k Index are our confidence parameters —

t h e m t h e most.
•

w h i c h have f a l l e n each week since December 28, '77.
^

What c o n t r o l s t u r n i n g points are the interest rate parameters.
SCP are

inflationary,

Since 1971 t h e list is shorter w i t h i n f l a t i o n way at
the t o p . U p t o 76% d u r i n g 1977.

balance in the Fed's m o n e y measure parameters.

within

Prior t o 1971, the list was long w i t h crime at the
top.

What c o n t r o l s the d i r e c t i o n o f the stock market is the im-

which

depresses our confidence parameters, and thus the stock market.

S I N D L I N G E R & COMPANY , INC.
600 N. Jackson Street, Media, Pennsylvania (19063)
215-565-2800

®

The governments's d e f i c i t as the number one problem was only 1.8% in 1375 »nri was o n l y 3.6% f o r
the t w o weeks f o l l o w i n g President Ford's State i f
the U n i o n Address o n January 19, 1977.

As we go t o press w i t h i n one week after Carter's 1978 State o f
the U n i o n Address — the d e f i c i t has shot up t o over 25% as
the number one p r o b l e m . The i m p l i c a t i o n s of this are horrendous, t o be discussed in f u t u r e Sindlinger Reports.

2 3 - 5 4 4 O - 78 - 8




confidence.
— they

A S W I T C H OF P R I O R I T Y O N ISSUES

1 9 t h , 1 9 7 9 , b u t the latest SCP forecast has no r e b o u n d above

rates

within

psychological

January 11, ' 7 8 had a lower rebound at 104.0 f o r September

interest

If This shm.lri hannen

chart each week, and clients should make their investment

casts has t h e l o w p o i n t f o r t h e 4 0 0 Stock Index f o r January 3,

Rising

- then SCP w o u l d have

the January 1 9 7 9 crash of the stock market n o t t o t u r n up,

As o f January 1 9 7 8 , each o f t h e last three w e e k l y SCP f o r e
1979 -

If by any chance, the Treasury has t o pay 8% t o finance the
current g r o w i n g government deficit

98
A
# \

E X H I B I T

Supplenut Fr
a

To Accompany Textimony Of Albert E. Sindlinger For January 30,1978 Hearings By The Sub-Committee
On Taxation And Debt Management Of The Senate Committee On Finance.

The Sindlinger

Report

In the New York Times of Sunday, January
22nd, Thomas E, Mullaney does a first rate
job of weaving President Carter's State of the
Union message into the general economic
tenor of the nation.
His object is to offer his readers some idea as
to how the policies enunciated in the address
are impacting the economy and the people.
Mullaney admittedly finds this hard to do because the atmosphere is uncertain, the facts
often contradictory and difficult to assess.
This is to his credit and the credit of numerous other columnists who in similar exercises
found the situation confusing and made no
bones about saying it.
As an example of the confusion, Mullaney
cites the seemingly divergent findings on Consumer Confidence by three separate and respected research units.
Not surprisingly, Sindlinger is not included
because we, unlike the others, do not send
out press releases to make our information
available to the media for free. Free information is always as good as what one pays for it.
But because our job is the day-in, day-out
measurement of Consumer Confidence across
the land, we know some things about those
surveys that are not in Mullaney's or anyone
else's published writings.
We happen to know that all three surveys are
right
And we happen to know why they are in such
apparent conflict and confusing to everyone.
To clear up the confusion for our clients, we
have prepared a complete explanation in our
upcoming The Sine/linger Report *30
This weekly report of course will customarily
include the latest data on the real levels of
genuine Consumer Confidence in the nation
as of the latest Wednesday.

ABOUT SURVEYS

Vll. 3 Nt. 30 - Part I
I
THE ECONOMIC SCENE

The State of the Union
of various sizes, the Conferencet h e
Board found its measg
economR

By THOMAS E. MULLANEY

The latest survey or businessmen's expectations
conducted among more than 1,400 leaders in manufacturing. wholesaling and retailing by Dun & Bradstreet
President Farter's State ofthe Union, economic and
Inc, was rather neutral, It showed them looking for lit)«x messages were all tinged with an overtone of contle change in the first quarter of 1978 from the precedservatism and conciliation, and they were devoid of
ing quarter with respect to sales, inventories and emlny major surprises or initiative!. The motivation
ployment. while their profit predictions took a decidgras obviously both political and psychological. The
Administration, suffering from waning support in the
,.._ .
I character of the
public surveys and needing so much backing (or Its
ouiwess surveys and 1ft* camiHUM uepnHMM Bime flf
•ffograms in Congress, could hardly be negative on the
the stock marketqhe latest news from the real worTd
Objectives or the results It foresees (or its energy, tax
«nd other legislative proposals
showed that the old year ended on a strong note, in
Before the President went to Congress to present his
contrast to the weakness that was evident 12 months
Is for the coming year, the latest Poll by The New
"Stork Times and CBS News showed that public confTin real terma (subtracting the influence of inflation)
s nuge unemthe gross national product of the United States adm a hJ K
vanced at a fairly healthy rate of 4,2 percent in the
final three months of last year, in contrast to the small
nly. politically, economically and in spirit,"
gain at an annual rate of 1.2 percent in the closing
be President said, the state of the union is sound "We
quarter of 1976. Whan the actual December figures are
are a great country, a strong country and a dynamic
available for inventories and the nation's foreign
Country, andsowewill remain."
trade, there will be revisions in the fourth-quarter
With that, the business and economic world would
G.N.P. statistics for last year—and they might well
heartily agree. They would also applaud the Presipush the gain upward.
dent's pledge to hold down Government spending, his
What was moat encouraging about tha economic
abatements about the damage of continuing inflation,
performance la the final quarter of last year—and in•Is Tenewed disavowal of mandatory wage and prica
deed throughmt 1077—was tha strength of real final
Ipntrols and his recognition of the need to limit the
sales. That Indicated a strong underlying demand for
(Die of the Government in economic af fairs.
the goods of th* nation's Industries, and should aid fur-"The Government." the President declared In his
ther production growth in the first half of this new
lursday night address to Congress, "can't he the
yew.
lager of everything and everybody."
There were otter areas of the American economy
Friday the President unveiled the details of
that ended 1077 O a high plana. The mom significant
O
nic program along the lines previously indiwere December's 8 percent surge In new housing ac125 billion tax-reduction package, an entivity to an annual rate of 2,289,000 units, which was
1 of the Administration's jobs program for tha highest in nearly five yuars, and the strong 11 perth and the disadvantaged and an anti-Inflation procent gain In personal Income, which provides a solid
relying on voluntary cooperation by business
base for further consumer spending In support at the
labor to hold their increases below the average of
I ait two years.
• While most aspects of the tax program are widely
endorsed In business and economic circles, there are
dements in them lhat are controversial and unwelcome in both business and political quarters, and the
package may therefore encounter difficulty before it
ii adopted by Congress
Since those were well known beforehand, as were his
. there was such a surge
the need for his energy program, there were
i employment and a sharp drop in unemployment
Ihe financial market would per"
last year, when real growth of the economy was lower
than in the earlier quarters of 1977. Courtney Slater,
chief economist of the Commerce Department, said
there was a decline in average hours worked last
month That suggested, she said, that much hiring
probably occurred In retailing and in other industries
that did not increase total output significantly and also
that many employers were probably taking on work-

i mt>t&i
J

about this year s general business prospects.
The most gloomy of the soundings from tl

Whether we like it or not, public opinion polls
or surveys have become important and significant in the nation's economic and political

IK

Like people, some public opinion polls are
good and some are bad
and some get by
The criteria of any public opinion survey is its
accuracy record
of what the survey fore-

Mrs Slater also said there were several factors that
should be helpful for extending economic growth in the
first half of this year. She dted the extra tax refunds
payroll over-withholding in the first half of last year,
the fact that some state and local taxes are being reduced and the further (act lhat job^reation programs
Like other Government official*, Mrs. Staler said
she believed the economy would be reaching a slowing
state in the second half of this year that will require
the KS billion tax reduction that President Carter has
"If we pursue appropriate policies and especially
those that support an expansion of real income," she
said,' 'our economy should continue to grow through- ;
1
out 1978. ••
Although there is opposition in various quarters to
in parts of the President's new program of ecoimulus, most private economists J rid bustalso agree that further stimulus luip thm

Sindlinger surveys are primarily geared to
forecasting what the stock market SHOULD
DO
for the stock market is the only accurate figure
on a four week moving average - of the U S economy
And over the two decades - on a four week moving average • the stock market DOES WHAT IT SHOULD
DO
as can be forecast by consumer confidence parameters - 99% of the time
For ease of reading, we have underlined in color Mr Mullaney's references to surveys.
Latest Sindlinger data are included in subsequent exhibits.




EXHIBIT

B

Below is how The Wall Street Journal on
January 23, 1978 reported FOMC's Decern
ber '78 monthly meeting and note the tar
get shifts

EXHIBITDToAccompany

Testimony Of Albert £. Sindlinger For January 30. 1978 Hearings By The Subcommittee On Taxation And Debt Management Of The Senate Committee On Finance

m,LJ. £3. f^t/SJXl /VCT//I

£3 J.* T">»-

Week ending: JmtPf IK. 197!

Observe this
paragraph and how interest
rates were raised further on January 6th

HOW FED READS M I ' S GROWTH
SEASONALLY ADJUSTED TO CREATE
ERROR IN INTEREST RATE RISE

THE ACTUAL M l GROWTH
BEFORE QUIRKED UP WITH
PHONEY SEASONAL ADJUSTMENT

Year To Year Growth
Not Adjusted As Reported

Annual Rate Seasonally Adiusted
21.2

Fed Panel Voted Rise
In Growth Goals of Ml,
M2 at Latest Meeting
WASHINGTON - The Federal Rfsfr.e
System s money supply panel voted at its
Dec 19 20 meeting for a slight increase in
money supply growth targets

during 197? nr.
A b«lo« chit rei.tlv.ly rapid «°u»t (fortli oecurnd U

The 12-member Open Market Committee
while choosing to leave the federal funds in
teresi rate unchanged raised to two month
target growth ranges for the two key mea
sures of the money supply
The growth targe! for Ml cash in circu
lation plus checking accounts, was raised to
2^'", to 8V7c from the 1'y to 7% approved
al the previous meeting Nov 15 The target
for Mi, which also includes most consumer
type savings accounts at commercial banks
was raised to 6% to 107^ from 5 7 to 9vt
<„
The panel voted to keep the interest rate
on federal funds at the level prevailing O
n
Dec 19 20 and within the same
lo S\<?t
range approved in October Federal funds
are the overnight reserves that banks lend
one another, and the interest rate on them
responds directly to the purchases and sales
of government securities that the Fed uses

December '77 Fed's M1 Target Is 8.5%

... .llllll
d by the Fed Watchers — the January 20,

e left how the astute FOMC in December — look note of the slowdown in the growth
^ T h e records of the December meeting 1
were made public, as is customary about a
LEFT OUT By The FOMC!
month alter the session They indicate that
the panel members "took note of the slow I FOMC rs
down in the growth of the monetary aggre j
>i, of cou
gates in recent weeks.1
As FOMC read the trends last April, they called for putting on the brakes and ruling interest r«t«
On Jan 6, according to the minutes, ti
in May 1977 for the third straight annual strike out • i.a , the third time in
committee authorized an increase to Jl 5 b
lion from ll billion in the open accou
mittee falsely raised interest rates and aborted a promising ec
maintained by the system open market a
What the Journal reader did not read in this story was the rationale for FOMC's action. The supcount in view of continume unsettled cow
posed monetary explosion of last April that prompted the interest rate force-up wis purely • fig•ions of the foreign exchange markets l
ment of the seasonal adjustments The documentation of the money explosion ii shown in the St.
that day the Fed also raised its discou
Louis Fed s communication (above) and the left chart above Both are demonstrating the growth
rate of seasonally adjusted monetary figures




M A I W J

J

A

S

O

N

D

M

A

M

J

J

A

As we now testify, the previously reported seasonally adjusted figures are being revised to conform with n*w seasonal factors for 197*
By 19B2, the 1977 figures will have been revised livE times and the nation then will learn there really was no eiCplosion in the Spring of
1977
But we don't have to wait that lon^ What's more, the facts were available to FOMC at the very time it made the wrong move

tt well shy of the Fed's t

EXHIBIT D

To Accompany Testimony Of Albert £. Sindlinger For January 30. 1978 Hearings By The Subcommittee On Taxation And Debt Management Of The Senate Committee On Finance

M o n e y ...

Actual Fed & GNP Reported
Prior

M l ' ] Actml Fi'
McKA Of Due I960

Dec
• Old

1960

1

2

% 5.86

29.
117.
147.

213.

E 'M

G - W-Cimnertul B«nk1n{
)..

.6
6.1

5.4

[-

6.3

220.0

<3.53
43.53

2.9

20.24
63. 77

10.0
5.1

306.

54.
360.

H - Government Security
s..
K - Total Liquid Assets..

364.

P - TotiUtaounted

159,

D+ 1

204.

All Other
Job Producing honey.

133.
497.

^

" Mgney.!!?!^!?.....,
ft - Current tcllir GUP..

• ou

322.3

63.73

.o
5.1

52.5
374.6

10.39

-3.1

74.16
.89

3.9
40.6

379.3

1 - HS-Mamy Hark Fora.,

0 - Coonertlal Paper....,

2.9

4.5

306.

JM
.

™ y In Clrculatlor J
239.7

22B.1 S
303.2 C

75.05

4.2

6^3
6.3
9,3

809.5

84^00

42."I 11.4
45,63

7.5

27.77 15.9

492.

69.78 13.1

.0

.00

64,2

3.62 -23.0

64.

208.00
-22.67

1302,1

73.40 10.6

13.9

185.33

15.6

1.3

1237.9

208.00

17.33

121.9
1299.6

1 - H5-Kroy Mort Force....
H - Government Securities..

Total Liquid Asset

53.
1491.

.5

0 * 1
Protection Hone,

6,67

6.6

51.67 15.1
575.

24.95
505.4

.2
-5.6

100.00

US

-7.7 -102.67
7.5

232.3

1773.

I 0HO S 01 Dollars 5
n IIH

HOW TO READ SINDLINGER'S A THROUGH R MONEY TABLES

#

ft - Current Dollar G P
N

F
I
T

23.56
40.96
3.83
44.79
40.96
28.38
69,35
3.83
73.18

w'.
9.8
7.3
10,1

3.85

S
15.6
23.6

11.37

42.8

20.62

8.9
)e,2

66.4
11.7

31.96
5.64

8.9
14.2

66,4
69.6
136.2

31.98
33.62
65.61

11.0
18.2

n.24
9.6

4.6?

10.9
20.6

157.5

3.22

10.9

>5.B7
5.25

80.55

83.77

11.3

166.4

61.12

1029.2

51,94

12.3

152.6

54,24

630.8

31.83

55.8

26.B6

39.2
207,6

1DC
OO
.

16.23
1981.5 100.00

13.9
11.7

S S r S ^ H i Billions oi Dollars

18.88

zrjxir

R The bottom line is GNP (Gross National Product) m current dollars extrapolated monthly from the quarterly figure
Q Money, therefore, is the difference between P money as counted by the Fed and GWP s money not counted by the Fed i.e.,
R — P = Q. Balance of payments are included in Q money

The A through P lines list Federal Reserve Board (Fed) monthly money aggregates as Identified

WHAT THE VERTICAL COLUMNS MEAN
is defined as current money weight, i.e., the amount of money for each month as reported bv the Fed foi each measure as
identified.
The Ur left column
is defined as • old money what was reported for the same month the prior year
Foae, i.e , the money New money weight second from right column is the year to year add i.e , the amount of annual growth Dr contraction in dollars.
• that
Column 3
is the percent year to-year growth of • new money
Column 2
represents the money share o> each measure where (R> or GNP is equal to 1 0 C i or SIO" 00 for total money
The far right column is the money share o< new money growth i.e , where the
new money added each year is going
Money

also, A through G are

H Money is a repeat of M2, where
H + I = J Money or M3
Adding all nan bank savings to all commercial hank money
J + K (arepeatof F) = L Money
As th. Fed s MS
which Smdhmjer defines as the Mann/ Work
directly make* or rlot-s not make |obs,'including savings artd loan money for housing.
L + M = N Money
Which Sindlinger defiiu-i as total liquid assets of the government within Fed measured money
N + O = P Money
As total accounted for muney (within GIMP) as measured monthly by the Fed
When (D| as bank savings are added M 111 as non bank saving Smdlrnger defines this as Pram von
. A l l other |ob producing money is D * I subtracted from P

IB.91 4.5

100.00

A + B - C Money or M l . . The so-called narrow money supply used for the purchase of goods and services.
C i D s E Money or M2 . As broader money, where bank savings are added to M1
E + F = G Money or WW . . . Which is all the money the Fed measures within the commercial banking system
measured and reported weekly M4 is large bank CD's added to M2

Job Producing Money...,
Q - Dtrter lAcowlteU

282.

110.2 « - Other U
r

1596.1
63.9

For"*™""?!??

15.2 202.67
196,00

1450.0
146.1

« - Total liquid Assets....
0 - Coirnerciil Piper

1438.

CawercUl Paper..

916.

40.56

562.4

1237.

15.6
-1.7

811.7

! - Kon-ftank Savings

42.(11 U.4

492.6

J;

611.J
n.9

I. - m

745.3

124.00

J

E-N2
F - Bank CD'S

745,
64.
809.

r Cbmng*

•

2

B - Checking Accounts
C-Hl

13.49

34.00

14.7

174.3
205.0

/

A- R

Y.I

93. D S 4.54
254.3 12,86
344.9
17.41

A- Currency In Ci«=ul.tlonJ

321.
424.
745.)

lyiiiiGRs 0! Dollars




1977

z l i

84.00

102.3

Sarins....,

Fa,
FKB J Ac

72.00

2.9

.DO

93.

1.33
10.67
12.00

M o n e y ...

Actual Fed & GNP Reported

A-R

"
.1
,8
.9

$

23.43
29.28
14.25

220.0

213.

...

Me
.3

43.53

148.0
D - 6«nk Savings..

213.

Actual Fed & GNP Reported Money

* fitw Mon<iy

J

S J W Crowth
S

A-R

Yfi • r-fo-Vw Chttnye

Column 1

o
o

EXHIBIT D

To Accompany Testimony Of Albert £. Sindlinger For January 30. 1978 Hearings By The Subcommittee On Taxation And Debt Management Of The Senate Committee On Finance
VELOCITY OF MONEY
To illustrate velocity of money
change, the table left selects our
1959-60 recession period to compare with the last three years,
where velocity » calculated for
each December, the last month of
each year

New Money

In Billions Of Dollars

New Money

New Money

Dec.1960

Dec. 1976

Dec., 1977

S Velocity

Left table illustrates velocity for
each money measure, based on the
total money reported for each De

The right table is a Sindlinger creation to observe the velocity of new
money ONLY, i,e, the new money

Key

to watch are starred.

Where the economy is going from
the consumer's point of view is seen
by the right
new money velocity
table and observe A B-C-D-F and I
Protection Honey..,

THE VELOCITY OF MONEY

ie consumer controls this by his/her level of Consumer Confidence - and where

The relationship between Gross National Product or GNP asthe bottom line (defined as H money, see Exhibit C ) over time with tf
change in the money supply (vis specific money measures! that brought GNP about, is called -- The Velocity Of Money

daily tell us how consumer* ar

To compute Velocity of Money, the GIMP figure is divided by the selected money measure o
and can also calcu

For example

WE ARE PAYING FOR OIL OUT OF BANK SAVINGS

, to calculate Ml for December 1977

As Exhibit C shows, D money, or bank savings, in December 1976 were growing at 15 8% and -

4

S57 9 billion of new money was added over 1975 - with the new money velocity (top rightl at 2 701

Thus, on the average, as of December 1977, each dollar of M1 money was heing spent a




:r 5 7 times in purchasing goods and

For December 1977 the growth rate of D money, or bank savings, had declined to 10 1%, As an add, bank savings as of January 18th
are down to 9 7% and SCP is forecasting a further decline into 1978
I billion

down by S15 1 billion from 1976 s new money add.

to 4.B50.
Stndlinger interviewing reveal

cline in bank savings during 1977 was transferred to checking accounts by con-

Velocity
Jan.
$

80,5

VELOCITY

Feb.
$

0 - Bank Saving

82.8

22.345

80. 8

22.411

81.6

22.433

7.90.

230.8

437.3

4.154
2.306
28,404

& - M-Cocsnei-tcal Banking...
.

63.1
814.3

.

751,2

4.141

443.8

4.125

447.7

2.423
29.540

756.2

2.421

770.0

2.403

61.3

60.9

30.057

60.1

30.785

747.2

2.m

756.2

2.421

770.0

2.403

717.2

by

Aggregates

4.1 33

By

Jun.

May.

$

5
B3.4

vELOc,ry
Z2.421

232.1

7.93,

751.2

8.056

450.7
766.2
61.1

4.149
2.440
30.604

774.5

766.2
524.1

2.440
3.566

1290.3
61.1
1351.4
131.1

84.2

«L0Cm
22.390
7.948

Jul.
$

W.7

VELOCITY
22.177

Months
Aug.
VELOCIT
5
flb.8 22.33.
2 39 . 4

Z'l I'Z

8 . 003
4.172

2,386
3.583

505.9

1.432

12S3.1

63.1

28.404

i - MS-Money U«rk Force
1314.5
M - foxnw.t SK.rltln,,, 133,8
.

1.363

1314.4

13.395

134.2

3.579
1.445

515.4
1269.8

3.564
1.442

520.2
1290.2

3.557
1.434

29.5*0

30.057
1.376

60.1

30.785

1.378

60.9
1330.7

13.4S3

133.2

13.742

13S0.3
135.1

1.370
13.696

for
Sep.
S ^out,

KLMtT,

86.9

22.125

88.4

3.934

246.4

460.7
738.9
65.5
854,4

4.194
2.449
29.501
2.262

463.9
796.4

4.201
2.447

464,

4.230

446 .8

4,245

799.9

2.457

8H.7

68.4

2S.490

71.6

27.446

2.141
26.107

864.B
796,4

2.253
2.147

2.255
2.457

554.2

3.516

871. S
799.9
557.5

75.9
887.6
811.7

1350.6
68.4

1.443
25,490

1357.4

3.526
1.448

562.4
1374.1

1.373
14.214

27.446
1.375

75.9

1419.0
137.1

71.6
1429.0
135.6

14.492

1450.0
146.1

13.563
31.009

459.2
764,4

2.443

64.5

29.704

774.5
531.2

2.434

784.0

2.424

734.4

2.443

788,9

2.449

3.549

538.1

3.532

542.2

3.534

1.449
30.604
1.384

1305.7

1.444
29.924

1322.1
62.8

1.438

1326.6

1.444

548.2
1337.1

3.525
1,445

65.5

29,501

1.377

141.2

1384.9
13B.C

1.37?

14,049

1402.6

1,378

141.1

13.695

22.230

Dec.
S VELOCITY

245.6

4.161
2.424

14.213

Nov.
$

7.,6,

30.264

134.8

VELOCITY

22.443

62,3

13.351

Oct.
5

86,1

456.8
784.0

63.0
1368.7

1977

242.1

4.161
2.434
29.924

63.0

2.201

. 500.2
, 1251.4

I'Z

9C.0

22.017

254.9

2.232
2,441
3.523
1,442
1.367

. MM. 3
S3.9

« - Total Liquid Assets
0 - (omercUl Paper
e - Total Accounted

VEtOLITY

229.1

431.5

* - Btnk C0-s

Apr.
J

22.265

.
F - ton* CD'S

Money

Mar.
5 V*
O»
.

7.4,3

A - Currency In Circulation.
B "

1 - Kan-Hani, SavlMi

of

33.252

54.4

33.28!

54.7

33,464

56.3

32.863

57.6

32.464

S9.4

31.737

58.8

32.323

59.4

32.254

60.0

32.205

63.9

30.496

63.9

30.753

1596.1
63.9

1502.2

...»

1503.0

1.205

1518.6

1.205

1541.7

1.200

1542.1

1,213

1569.3

1.201

1581.7

1,202

1585.3

1.209

1603.7

1.205

1620.0

1.203

1628,5

1.207

166^0

1.194

.

931.7

1.914

943.2

1,920

957.4

1.912

967.9

1.912

971.8

1.918

984.3

1.915

994.9

1,910

1001.4

1.91]

,008.9

1.915

1018.1

1.914

1022,1

1.923

1029.2

1.925

.

570.5

3,142

559. B

3.235

561.2

3.262

573.8

3.224

567.3

3.296

585.0

3.223

586.8

3.239

583.9

3.281

594.8

3.249

606,4

3,241

630.fi

. 290.1
. 1792,3

6.178

307.8

5,883

327.8

5.704

315.9

318.9

5.960

328.7

5.529

336.6

5.Ill

1.000

1869.9

1.000

1885.2

5.795
I.000

5.680

1850.2

330.6
1915.9

328.6

1.000

5.869
l.OOO

5.997

1810.8

311.9
1830.5

308.5

1.000

1932.3

1.000

1948.7

1.000

1965.1

321.5
1981.5

*

0 + t
Ml Other
Job Producing Money
Q - Ctr.tr Uncounted
Honey
N>
H - Current Dollar G J

1.218

V E L O C I T Y OF MONEY ILLUSTRATED HERE IS NOT SEASONALLY ADJUSTED
The table above tracks the velocity of each key money measure, A R, for each month of 1977. Under each month are two columns of
figures. The left one n the monthly count of the money measure in billions of dollars. The right one it the velocity for that measure in
each month expressed at an annual rate.
Velocity offers important information about the way people are using their money.

5.968

10
00
.

1900,6

10
00
.

The changes in velocity on checking accounts also impacted the M1 aggregate or C money
in May, Ml velocity moved past 5.9 - the highest rate of turnover for 1977 In August, the velocity was close to 5 9 and this was the
second highest rate of the year.
The heavier than average turnover in May and August played a factor in Federal Reserve Board decisions to tighten money and raise
interest rates in both those months The Fed interpreted the increased activity in Ml as a monetary explosion that required action. In
fact, the aggregate in both months merely responded to consumer shifts of money to pay taxes.
and out of savings

For A money, currency in circulation, the velocity rs rather constant throughout the year with a turnover of ZZ times at an annual rate
in each month. This is not unusual. Currency is the petty cash of the economy and is used by people in meeting minor commitments
which are by and large inelastic.

Another view of the consumer's situation comes from D money or bank savings. The velocity held in the 4 1 range for the first eight
months of the year, then moved close to 4 2 in September, and exceeded 4.Z for the final three months of 1977

Checking accounts, or B money, present a rather different picture that provides important clues about consumer spending

This resulted from rising oil bills. Consumers were tapping their savings accounts to get money to pay oil A slowdown in the growth
of savings was another manifestation of this trend

In May, the velocity rose to nWe than eight after being well below that level for the prior four months. Similarly, the velocity reached
past 8 in August
Both of the accelerations stemmed from tax considerations In May, consumers were replenishing their checking accounts after paying
out federal income taxes the prior month. In August, they were replacing funds that were being paid out in July and August to meet
local taxes




M money, or government securities, show a responsiveness to Fed policy The velocity rises above 14 in May - the month of the false
force-up in interest rates, and again in August when the policy was tightened a bit more The generally restrictive stance also was
underscored by the velocity of over 14 in October and November
Commercial paper has shown a declining velocity as the year proceeded. However, the slowdown did not became significant until the
last three months of 1977 when velocity was well below that of January 1977

6.163

10
00
.

To Accompany Testimony Of Albert £. Sindlinger For January 30. 1978 Hearings By The Subcommittee On Taxation And Debt Management Of The Senate Committee On Finance

EXHIBIT D

A c t u a l F e d & G N P R e p o r t e d M o n e y ...

A c t u a l F e d & G N P R e p o r t e d M o n e y ... A - R
S2?

AS OF
DECEMBER 1960 '

Vow

/

A c t u a l F e d & G N P R e p c>rted M o n e y . . . A - R

A-R
Yt-r

or Dec 1976

OF
DECEMBER 1976

2

Vow

3

fflS'j A
a<5np

DECEMBER 1977

1976

-1.0
-.7
-.(

14.25

1277.BJ
4100.31

$ 5.86
23.43
29.2B

6.4

-21.21 84.89

SlllB.46 A
3397.08 B
4515.53 C
5452.30 S
1242.07 f
11209.W G

n

t 4.62

E'E:::: Z
86
97

Bjnk CD's

931 50
33

t

7,.31

4.32

3.2
12.8
-3)0.57
535.43

3.62 -25.0
45.63
4.8

7147 31

27.77

73,40
7.69

7.7
9.1

17

84.09

-18.84
3?.47

12.9

NS-ttaM, w r F Dree.... 1889265
ok
ao»ern«nt Securities.. HeO 53

6329.49 1
6100,24

Nan-Bank Sn1w>S

18,n
23.90

6.4

7.9

63.77
-310.67 -18.84
1353.26 82,07
165.08 10.01
1513.33 92.0S

1242,07 *
215.52 1725.5*
-370.46
169.25 1355,06

1S354.84 *

13.7?
For Hon**..,
3062.28
3923.79

11781.74
P +te tl

I

28

51.67

8283.44
3880. D
B

Job Pacing Money....

8342 89

32.41

.7

is P Hoo
e ost
r e
i

TF

sr ru pr Huh
su- e osi
e
2573a 16 100,00

Iff

In general, money on a per household basis has been growing at a slower rate than the monetary aggiegates This is because households
are growing at a faster rate than total money
But in a very real sense, money on a per household basis has actually shown negative growth when inflation is factored in Examples
are in Column 3 of the December 1977 table which shows year to-year growth rates (or each aggregate on a per household basts
The "official' inflation rate for 1977 was pegged at 6 percent
B money, or checking accounts, the primary repository or the consumer s spendable funds, grew only 3 8 percent
inflation rate Growth for this key consumer aggregate in real' terms was theiefore negative

6,8

or far below/ ilie

I " — '

28.38
69.35
3.83
B
205D4.55 73. I
2065.01 7.37
BO.55

11.3
8.2
15,2
8.5
4.3
(.1

t 89
23
.
132.47
215,40
449,08
6S4.48
141.81

3.63
5.80
9.44
19.68
29,11
6.21
35,33
29.11
35,30

3,22

13.5
8.5

1832.01

80.27

SI.*

9.4

,254.71

54.97

3,83

6,

577.,

25,9

16.23
28020.53 100.00

11.0
8.9

7952.94

L - «-Kmey Wr force,...
ok
K - Co.erT,nci.t Securities..

0• I
Protection M ny
oe

soe.28
664.4B
805.63
1470.11
141.81
1611.SO
ss.«
1697.39
134.61

83.77

1 -ten-Bank5i»fngs

25738.16 R - Current Dollir GP
N

EHr

I Sft—^
Vim,ght ,
7.0
3.8
4.6
7.3
6.1
15.2
6.9
t.!

4095.99

24089.30 R - Current Dollar GI
N
>

3

A- Current, If. Circulation* 1272.70 $ 4.54
12.86
C-H1
4877.26 17.41
0- B n Savings
ak
6601.05 23.56
<0.96
3.81
S - Ht-Coranerlcal Banking,. 12551.61 44,79
40.96

B342.B9

4024.87 Q
-180.53 •U45.40
12.49 1 O O
DO
.

The proper way to view money is on a per household basis. This n because the nation's 70 million households are us basic mini
economic units and the people living in them are the primary users of money Thus, breaking the money aggregates down on a per
household basis shows how much money is actually available to people and whether money is growing adequately enough to accom
modate people




13299.28

12.9

3299.PI

2S67.25
9553.32

0 t I

s 1189.77
3472.09
4661.86
6151.9?
10813.8)
931,60
11745.33
10BI3.B3
7147.31
17961.14
431.50
1B892.6S
1980.53
20873.1J
7(9.00
21642.17

2
S

Ac,
Current, In Circulation J 560.25
Checking
fccounts
2240.9B

' Dec ',"77

/

14553.99

64.41
6.C1
70.62
3.75
74.37
5.90

100.00

PeP H
ousehD m 5 =

D money, or bank savings, showed a fairly heahhy growth rate even on a per household basis But when inflation is subtracted, the
"real"growth rate is minuscule
In fact, the only aggregate that permitted total commercial bank funds M4 ot G money to slightly exceed the rate of inflation in
growth was F money or bank CD's, which a year earlier had been growing negatively The switch came about because big money in
vestors sought a method for cashing in on high interest rates
CD's are not the province of the consumer but business and large investors. The same is true of commercial paper which showed a
17.5 percent growth rale principally because of moves by corporations to take advantage of high interest rates Commercial paper alio
had the highest velocity of any of the money measures
Outside the cammeicial bank area, there was an apparently strong growth in non bank savings, another key measure dominated by
consumers But inflation chopped that rats about in half and left this measure with a modest gain
When viewed on a per household basis, and when inflation is factored in the money that is needed and used by consumers is growing
very slightly, or not at all

To Accompany Testimony Of Albert £. Sindlinger For January 30. 1978 Hearings By The Subcommittee On Taxation And Debt Management Of The Senate Committee On Finance

EXHIBIT D

Erratic Swings in Employment and Labor Force
Total Civilian Labor Fore*

{Full sag part lima amplpywl

Adjusted Adjurtwi
ir. 1977 S2.J30.000 81,230.00
iber. 1977 92.473.000 98,180.000
*'**' - +243,000
D««mt>tM977 92j6?3flOO

+S 0
,0 W

NvSc " '
a*S.

SURGE IN WORK TRIMS
JOBLESS RATE TO 6.4%,
WE LOWEST SINCE }U
G / R ' f E R HAILS FIGURES

- +358.000

>850,000
92.589.00

•0,0
4» 0
0

Z X Z

Tolattnctasse in employment, Ocl-Cuc. 1977

+ we,000

-

+42.000

-*«•«»

' StizowUly

Dcnr Da So R
eat a h s
e t w ie
ol 490 Jboe—
000 ohlr
.
ds
41 Wn G i Yr
o an e
n a
i

wui

+403,000 -U.aw.ooo

Revision of Unamptoyment Rates
As published • • Aaravtaad

llllllllllkh
S O N

Leonard Silk

Reactions to Jobless Rate:
'Impla usible' and'Incredible'
The unexpected ana
Lhe Bureau of Labor
.....
"unemployment dropped sharply" last
month to 64 percent of the Chilian
labor force is being challenged as "inplausible" by tome of the country's
leading economists and
-r h t
manpower experts. The rs„ liability of the new era°
ployment and unemployScene ment figures has an important bearing on whether
and How much economic stimulus, including President Carter's proposed tax
c Jt. will be needed to keep the economy
moving toward full employment.
Those who beiieve the economy is
already expanding fast enough—or
some think, too fast, given their fears
of inflation—put their emphasis on the
employment father than unemployment

two-month pain of 1,359,000




.

Many economists find this number
"incredible." One such is Otto Eckstein.
, president of Data Resources Inc., the
, large economic research firm, who says
< that th* November-December employie is tl ! biggrn two-month
gain in the last three decades, with
the exception of April to May I960,
when employment Bounced back front
a 947,000 decline. But the jump in
Noaember-December of 1977 followed
i long string of monthly advances,
which brourlit ;he year's total rise In
employment to a reported 4.1 million
in December
: dill cult to find anything in the
nance of the United States
economy during the last month of 1977
that would account for so rapid a spurt
in jobs as the Bureau of Labor Statistics is reporting, according to Mr. Eckstein. Industrial production rose only
0.5 percent in November and was up
in the fourth quarter it an estimated
annual rate of only 3.7 percent. we4J
below the average of 6 percent during
the first three quarters of the year.

iries of articles on
r unemployment report
for purposes of discussion.
As the Chairman knows, Sindlinger
has been commenting for four years
on the errors of the seasonal adjustment in calculating job and jobless
figures, errors which we believe were
intensified with the December data
that showed such a targe decline.
We have proven our case time, and
time again.
Apparently, tha December report was
too much for some other observers
and we are no longer alone (See
Leonard Silk's column).
Note the
comments of fellow witness Otto
Eckstein on the December report.

Gross national product, corrected for
inflation, rose at an estimated annua!
rate of only 4 percent in the fourth
quarter, which was also well below the
average rate of gain of 6.3 percent during 1977'» first three quarters
There are seeming inconsistencies in
lhe bureau's data on employment The
so-called household employment dam,

Continued nit Pag* SI, C l m S
ou n

WHAT'S IN A NUMBER?
rate
Mas tin C.irt ci A Inl
t
look hiffierl^ sf,„iteiimg its >nlcrJ Almost suielv not S.u V
T.es irau, who is a Ceor^r- Washington
Universitv economist and head til a ra-»
National Commission on Employment
•ind Unemployment Statistics appointed
by President Carter to review statistical
procedures, argues bliuitk that the numbers are "very good us far as what thev
purport to measure " The .question, litsays, is "whether these statistics measure the proper things "
That question is more than academic
Unemployment figures, for example,
were used last year to allocate $16 billion
in annual aid to local communities Escalator clauses triggered by changes ill the
consumer price index arc written into
many major labor contracts and government benefit programs "When von start
putting <
: official.
ie jiets

ei latcd that tin
number nasi.nK '
I t rethbilitv '
jobless figures .
. In 1,000 Census Bureau
I tall IHI a national sampling oi
lonsehotds asking which famih
rs 16 vears old and up are em
looking lor vwirk,
winking and not

arlv 1 ntillio

base

given up hope ol finding

e seasonal adjustment, said Commisr Julius Shiskin of the Bureau of

unemployed, and parttime workers are considered emploved. even
though thev nui\ want a
lull-turn; j o t and can't get
one At the same time, it's arguuhl
whether high-school girls looking i<
part-tune baby-sitting <bores should b
' iffic-iallv unemployed—;;
ployed—as
thev , .
Once collected, the raw b numbers
are put through a sophistic; i "seasonal
adjustment." designed to event nornient from
mal fluctuations
the jobless
causingerratic m

a fairly steady decline, to
•

for instance, when workers hired for the
Christmas selling season are laid oiT
Using a formula based on the previous

STRAINED CREDIBILITY

pU

q^NOINQTOECTARTS
rait and the wWesate price index—fharpty changed itx>
government's proNe of the economy lasf month.

,

,

Shtsk/n New variables
s, the Bi

> Labor Statistics
f

and adjusts its reported jobless
Figure to discount it. Thus, thousands tan
lose their jobs in January « IJIUKH cbangnig the reported unemployment rate But
the adjustment formula changes slightly
each year, as a I'resh year's data enter the
four-sear cvcle. This year, the revision
dropped 1973— which was distorted by
the economic shocks of the OPEC nations' oil-price hike—and included the
smoother history of 1977 The result was

the nc

The government also switched gears
recently in the reporting of another key
indicator, wholesale prices. The BLS
sidetracked the old wholesale-price index. w hich counted price changes at every lev el of the pinduction cycle, in favor
of a "finished-goods index," which records prices of products just before thev
pour into the retail markets The old WPI
reflected volatile swings in raw materials
and food prices—changes that often are
the time the-alTeeted goods
ironed out
reach consumers
THE CHANGING CONSUMER
Nest month, the c»<usiinier-pnci>lnde\
will also be revised to reHcct changing
spending habits. The1 iiuusiiallv complex
revision lias taken e iylit vears and cost
$50 million But lhe i icw nuli'\ isalrcadv
other trili.v the
\FL-CiO li ars vvb.it it m.o do to es.-atatot vl.lilses-.llld tin
docs il measure the ri.jlit t i l i n g In thr
rod. ,. statistk is,, 1 l U Blililmavn.it
h II soil vsb.it von w.•lllt to know

105
Senator BYRD. The committee will stand in recess.
[Thereupon^ at 12 noon the subcommittee recessed to reconvene at
the call oil the Chair.]







PUBLIC DEBT AND THE BUDGET

MONDAY, FEBRUARY

6,

1978

U . S . SENATE,
S U B C O M M I T T E E ON T A X A T I O N AND D E B T M A N A G E M E N T
G E N E R A L L Y OF T H E C O M M I T T E E ON F I N A N C E ,

Washington,,

D,G.

The subcommittee met, pursuant to recess, at 10 a.m. in room 2221,
Dirksen Senate Office Building, Hon. Harry F. Byrd, Jr., presiding.
Present: Senator Byrd.
Senator B Y R D . The hour of 10 having arrived, the committee will
come to order.
Today begins the second day of hearings on the budget, the deficit,
and the debt. The Federal debt will increase from fiscal year 1978
to fiscal year 1979 by $88.1 billion. This is the largest yearly increase
in the Federal debt in our Nation's history.
The increase in our Federal debt and the deficit for fiscal year 1979
of $60 billion for the unified budget indicates that our Government
still does not have Federal spending under control. Indeed, it seems
to be going in the opposite direction.
President Carter's budget for fiscal year 1979 takes us further away
from the goal of achieving a balanced budget.
I do commend those who have the responsibility for submitting
financial documents to the Congress from this present administration
for being frank and forthright and, for the most part, clearly stating
the assumptions which were made concerning the future costs of our
economy and the implications of this data upon the budget projections.
We have, today, witnesses from the Treasury, the Office of Management and Budget, and also from the Federal Reserve Board. Now, I
will change the order slightly for presentation of witnesses. I understand that Hon. Roger Altman, Assistant Secretary of the Treasury
for Domestic Finance has a commitment to be out of the city later
this morning, so at this point, the committee will call on Roger Altman, Assistant Secretary of the Treasury for Domestic Finance. Mr.
Altman, welcome. May I say that you may handle your presentation
in any way that you wish. Your entire testimony will be put in the
record. If you wish to, you could summarize it, but, in any case, the
text will be put in the record.
I will state for the record also, which I assume that all of you are
aware, that this hearing today does not take the place of the formal
hearing which will be held later, in early March, I assume, on the
formal proposal by the administration to increase the statutory debt
limit.
Mr. Altman, you may proceed as you wish.




(107)

108
Mr. A L T M A N . Thank you, Mr. Chairman and, with your permission,
I will summarize my testimony, with the full text being inserted into
the record.
I would like to begin by thanking you for permitting me to go first.
It is really on account of the snowstorm that Secretary Blumental and
I have to take the train to New York rather than to fly, as we had
planned and therefore have to leave earlier, so you are kind to permit
me to start.
STATEMENT OF HON. ROGER ALTMAN, ASSISTANT SECRETARY
THE

TREASURY

FOR DOMESTIC

OP

FINANCE

Mr. A L T M A N . Let me say that I am pleased to be here today to discus with you the public debt limit. The present temporary limit of
$752 billion will expire on March 31, and then, of course, the debt limit
would revert to the permanent ceiling of $400 billion. And so, legislative action by March 31 will be necessary to permit the Treasury to
continue to borrow in order to refund securities maturing after that
date and to raise the necessary new cash.
. .
In addition, Mr. Chairman, to permit the Treasury to continue borrowing on a long-term basis, it also will be necessary to increase the
$27 billion limit on the amount of bonds which we may issue without
regard to the 4^4 percent interest rate ceiling on Treasury long bonds.
Finally, we are repeating our earlier request for authority to permit
the Secretary of the Treasury, with the approval of the President, to
change the interest rate on U.S. savings bonds, if that should become
advisable.
Beginning with the debt limit, our estimates of the amounts of debt
subject to limit at the end of each month through 1979 are attached to
my testimony. Those attachments indicate that the debt will increase
to $778 billion at the end of this fiscal year and to approximately $868
billion at the end of fiscal 1979.
Senator B Y R D . Let me interrupt you there. Is that not the largest
increase in the gross public debt which our Nation has had in any year
during its entire history ?
Mr. A L T M A N . No; 1 do not believe so, Mr. Chairman. I believe that
fiscal 1976, the increase then was larger.
Senator B Y R D . Well, what wTas the increase in fiscal 1 9 7 6 ?
Mr. A L T M A N . Well, the increase in our public borrowing alone—
public borrowing—was $83 billion and adding to that the trust fund
surpluses, which are additive to the public debt limit, and off-budget
financing, indicates that that figure in 1976? I believe, was larger than
the 1979 figure.
Certainly, I know that our borrowing from the public, the effect of
our borrowings on the market, will be notably smaller in 1979 than it
was
Senator B Y R D . Well, let me give you, if I may, the exact figures,
then, since you do not seem to have them at your fingertips. At the end
of the fiscal year 1975, the national debt was $544 billion. At the end of
the fiscal year 1976, it was $632 billion. That is an increase of $88
oillion.
Your figures show that you project an increase of $88.1




109
Mr. A L T M A N . Mr. Chairman, my understanding is different, but I
would be happy to review it, and
Senator BYRD. Well, state what your understanding is. I got these
figures from the Treasury.
Mr. A L T M A N . If you look at borrowing from the public
Senator BYRD. I am speaking now of the national debt. What do you
consider to have been the national debt at the end of fiscal 1975?
Mr. A L T M A N . Well, let me answer you this way, sir. The way that I
look at it is the following: In fiscal 1976, our public borrowing was
$83 billion; in fiscal 1979, our public borrowing will be $73 billion.
Now, there are differences, yes, between the total increase in the
debt, subject to limit, and the
Senator BYRD. That is what we are speaking of.
Mr. A L T M A N . Yes, but I am saying, Mr. Chairman, that I think it is
more relevant
Senator B Y R D . Well, you may think it is more relevant, but I would
Hke to get the facts. If my facts are wrong, I got them from
the Treasury, and I would be glad if you would correct them. But my
facts show that the public debt including off-budget borrowing, if
your recommendation is approved, will increase from a projected
$787 billion for fiscal 1978, to $874 billion ?
Mr. A L T M A N . Up to $868 by the end of fiscal 1979. An increase to
$868 is what we project, sir,
Senator B Y R D . Y O U project $868 billion?
Show me the budget document to which you refer? I want to get
these facts clear.
Mr. A L T M A N . Mr. Chairman, I believe that I am correct. The increase in fiscal 1979 will be smaller—only slightly, to be sure—than
that in fiscal 1976, and I am looking at the
Senator BYRD. It will be greater than fiscal 1977 ?
Mr. A L T M A N . Yes; it will be greater than fiscal 1977.
Senator B Y R D . I t will be greater than fiscal 1 9 7 8 ?
M r . ALTMAN. Y e s , sir.

Senator BYRD. Now, the Budget in Brief, on page 73, shows at the
end of the year, the outstanding gross Federal debt will be $874—
$873.7.1 rounded it off to $874- billion.
That is the Budget in Brief, part 5, budget tables, page 73.
Mr. A L T M A N . Well, the difference between my figure and your figure
is that your figure includes the debt of Federal agencies in addition to
the direct debt, or guaranteed debt, and it is just a different way of
looking at it. It is another measure of total Federal debt.
But still, using your basis, using your basis, the increase in fiscal
1979 will be somewhat smaller—nothing to be proud of, but somewhat
smaller—than the increase in fiscal 1976.
Senator BYRD. Thank you. Please proceed.
Mr. A L T M A N . The $ 9 0 billion increase in the debt subject to limit in
fiscal 1979 reflects, as you know, the administration's current budget
estimates of the 1979 unified budget deficit of $60.6 billion, a trust
fund surplus of $13.9 billion, and a net financing requirement for offbudget entities of $12.5 billion.
Let me turn now, Mr. Chairman, to our fiscal 1979 need for an
increase.
Senator BYRD. J u s t a moment, sir. I am still a little unclear on this.




110
On page 2 of your statement, you say the $90 billion increase in
the debt m fiscal year 1979 and so forth. So it is a $90 billion increase,
is that correct ?
Mr. A L T M A N . Yes, but, Mr. Chairman, as you know, among other
things, the trust fund surpluses are added to the debt subject to limit,
even though they are not directly reflective of budget deficits.
Senator BYRD. Well, the point I am trying to establish is that you
are asking, I take it, from page 2 of your statement for an increase
of $90 billion in the statutory debt limit. Is that correct ?
Mr. A L T M A N . That is correct.
Senator BYRD. Now, at any other time, has as much as $90 billion
been added to the statutory debt limit in the space of 1 year?
Mr. A L T M A N . My understanding, Mr. Chairman, is yes, the amount
of total increase in the total debt, subject to limit in fiscal 1976 was
slightly larger than that, and I would be happy to provide a detailed
answer on that for the record.
But my understanding is that the 1976 increase was slightly larger
than that, yes.
Senator BYRD. Well, I would like for you to establish whether the
figure that my office got from the Treasury is incorrect. The figure is
$632 billion at the end of fiscal 1976.
Mr. A L T M A N . I believe that what your office has done, Mr. Chairman, is to add, in the 1976 computation, the just under $11 billion
of agency borrowings, Federal agency borrowings, to the public debt
amounts. Those are not amounts which add to the debt subject to limit.
I think what your office has simply done—I cannot be sure—is to—it
appears to me—is to add roughly $11 billion in 1976 agency debt to
the public debt securities of that year, then compared that to the
public debt figure of 1979.1 think it is a bit of apples and oranges, but
again, I would be happy to get together with your staff and straighten
it out.
[The following was subsequently supplied for the record:]
FEDERAL FINANCES AND DEBT OUTSTANDING, FISCAL YEARS 1970-79
[In billions of dollars]
1970
Federal funds deficit
Less: Trust fund surplus
( - ) or deficit
Equals: Total unified budget
deficit
—
Plus: Deficit of off-budget
Federal entities 2
Equals: Total deficit
Less: Nonborrowing means
of financing 3
Equals: Total borrowing
from the public
Plus: Change in debt held
by Government agencies*.
gross
Equals: Change in — Federal debt
Less: Change in Federal
agencydebt




1971

1972

1973

1974

1975

1976

TQ

1977

19781 19791

13.1

29.9

29.3

25.6

18.7

52.5

68.9

11.0

54.5

72.1

74,5

-10.3

-6.8

-5.9

-10.7

-14.0

-7.4

-2.4

2.0

-9.5

-10.3

-13.9

2.8

23.0

23.4

14.8

4.7

45.1

66.4

13.0

45.0

61.8

60.6

.1

1.4

8.1

7.2

1.8

8.7

11.5

12.5

2.8

23.0

23.4

14.9

6.1

53.1

73.7

14.7

53.7

73.4

73.1

2.6

-3.6

-3.9

4.4

-3.1

-2.3

9.3

3.3

-.2

-7.4

-.1

5.4

19.4

19.4

19.3

3.0

50.9

82.9

18.0

53.5

66.0

73.0

10.1

7.4

8.4

11.8

14.8

7.0

4.3

-3.5

9.2

10.4

15.1

15.5
1.7

26.9
.3

27.9
1.3

31.1
-.2

17.8
-.9

57.9
1.1

87.3

14.5
-.2

62.8
1.4

76.4
1.5

88.1
1.5

Ill
FEDERAL FINANCES AND DEBT OUTSTANDING. FISCAL YEARS 1970-79—Continued
[in bilfions of dollars]
1970

1971

1972

1973

1974

1975

1976

29.1

30.9

16.9

59.0

87.2

1

.1

59.0

87.3

Equals: Change in gross
public debt
Plus: Change in other debt
subject to limit 5

17.2

27.2

-.7

-1.2

Equals: Change in debt subject to limit

16.5

26.0

Debt outstanding (end of
fiscal years):
Gross Federal debt«
Less: Federal agency
debts

30.5

382.6 409.5 437.3

468.4

10.9

11.1

Equals: Gross public debt. 370.1 397.3 426.4
Plus: Other debt subject
to limits
2.5
1.3
1.3

457.3

Equals: Debt subject to
limit

12.2

1977

1978» 1979 *

14.3

64.1

78.0

89.6

14.3

64.1

78.0

89.6

486.2 544.1 631.9 646.4 709.1

785.6

873.7

-.4
29.1

12.5

TQ

372.6 398.6 427.8

.9
458.3

16.9

12.0

10.3

8.8

7.3

474.2 533.2 620.4 634.7 698.8

776.8

866.4

1.1

1.1

1.1

475.2 534.2 621.6 635.8 700.0

777.9

867.5

.9

10.9
1.0

11.4
1.1

11.7
1.1

Estimate.
Consists largely of Federal Financing Bank borrowings to finance off-budget programs.
3 Consists largely of changes in Treasury cash balances.
* Consists largely of trust fund surplus or deficit.
s Net of certain public debt not subject to limit.
6 Fiscal year 1976 figure includes reclassification of $471,000,000 of Export-Import Bank certificates of beneficial interest
from asset sales of debt.
Source: Special Analysis E of the Fiscal Year 1979 Budget January 1978.
1
3

Senator BYRD. The fact is, you are asking for an increase of $90 billion for the upcoming fiscal year, is that correct ?
Mr. A L T M A N . That is correct.
Senator BYRD. Now, has any Secretary of the Treasury, or his representative, come before this committee any time in the last 10 years
and asked for a $90 billion increase in the national debt subject to
limit?
Mr. A L T M A N . I do not believe that a request, Mr. Chairman, was
actually made at any one moment for a single increase in that amount.
But I believe that
Senator BYRD. It would have to be increased by the Congress. The
facts are all there.
Mr. A L T M A N . That is true but, of course, as you know, the public
debt has not always been increased for full years. For example, this
past September we came and asked for an increase from September
to September—September 1977 to September 1978. Congress decided
to increase us only for 6 months.
Senator BYRD. It happened to be my amendment that did that, so
I am well familiar with it.
Mr. A L T M A N . That is right.
So, in the past—I would have to look back over the historical
record
Senator BYRD. Well, 1 would like to get a categorical answer from
the Treasury Department on whether any Secretary of the Treasury
has ever come before this committee in recent history, within the Dast
10 years ?
Mr. ALTMAST. I believe the answer is no.
Senator BYRD. All right. That satisfies me.




112
Mr. A L T M A N . I was discussing the question of our long bond authority, simply pointing out that to meet our 1979 requirements, our current $27 billion authority to issue bonds on a long-term basis, without
regard to the 41/4 ceiling would need to be increased by $10 billion—
that is, to $37 billion.
We have, to date, used almost $20 billion of the $27 billion authority,
including the $1.25 billion which we auctioned last week, and so we
have about $7 billion remaining. A $10 billion increase, therefore,
would permit the Treasury to continue our recent pattern of bond
issues throughout fiscal 1979.
The reason we have been using the long-term market, Mr. Chairman,
is to enable us to make further progress toward achieving a better
balance in the maturity structure of the debt and toward reestablishing the overall market for Treasury long term securities.
I think both of those are vital to efficient management of the public
debt.
Let me briefly turn to the savings bonds question, if I may. In recent
years, we frequently recommended that Congress repeal the 6-percent
ceiling on the rate of interest which Treasury may pay on U.S. savings
bonds. Before 1970, that ceiling had been increased many times, but
the current 6 percent statutory ceiling was enacted in 1970. Yet, as
market rates of interest rose, it became clear that an increase in the savings bond interest rate was necessary to provide investors in savings
bonds with a fair rate of return.
It is not our view, Mr. Chairman, that an increase in the interest
rates paid on savings bonds is necessary today. But we are concerned
that the present approach, whereby each increase must be legislated,
does not provide sufficient flexibility to adjust that rate in response to
changing market conditions.
The delays encountered in the legislative process simply may result
in inequities to savings bonds purchasers and holders as market rates
fluctuate.
Mr. Chairman, let me close by suggesting that your committee consider a more effective procedure for controlling the size of the public
debt. We do not think that the present statutory debt limit is an effective way for Congress to control the debt.
In fact, the debt limit may actually divert public attention from the
real issue, which is control over the Federal budget. The increase in
the debt each year, as you know, is simply a result of earlier decisions
by the Congress on the amounts of Federal spending and taxation.
Accordingly, the only way to control the debt is through firm control
over the Federal budget.
Now, to be sure, the Congressional Budget Act of 1974 has greatly
improved congressional budget procedures and provided a more effective means of controlling the debt. And that new budget process assures
that Congress faces up each year to the public debt consequences of its
decisions on taxes and spending.
Beyond that, the statutory limitation on the public debt occasionally
has interfered with the efficient financing of the Government and actually resulted in increased costs to the taxpayer.
For example, as you remember, when the temporary debt limit expired on September 30 last year, new legislation was not enacted until




113
October 4, and the Treasury was required, in the interim, to suspend
the sale of savings bonds and other public debt securities, which resulted in a good deal of public confusion, as well as additional costs to
the Government.
And so, Mr. Chairman, we think that the public debt would be more
effectively controlled and better managed by tying the debt limit to the
new congressional budget process. We are simply putting this proposal
on the table for you and the other members of the subcommittee to
consider, in the hope that we can work together to devise a more acceptable way of controlling the debt.
Thank you, and I will try to answer any of the questions that you
may have.
Senator B Y R D . Thank you, Mr. Secretary.
Now, as you point out in your testimony, the debt, subject to the debt
limitation, will need to be increased for not only the current fiscal year,
I take it, but also, of course, for the upcoming fiscal year.
M r . A L T M A Y e s , sir.
Senator B Y R D . Now, I

do not find—I have gone over it hurriedly, I
must say—the precise figure to which you would recommend the limit
be increased if the Congress saw fit to increase it next month to fiscal
year 1979. What figure would that be %
Mr. A L T M A N . Well, it would be an increase to $ 8 7 1 billion, Mr. Chairman, reflecting an $868 billion forecast of the total debt subject to
limit in September 30, 1979, and the usual $3 billion margin for contingencies. That, of course, compares to the $ 7 5 2 billion limit which is
the current one, extending through March 31.
So $ 7 5 2 to $ 8 7 1 billion.
Senator B Y R D . Yes. Now, the $ 7 5 2 billion, if I read your statement
accurately, would need to be increased, you feel—or Treasury feels—by
$29 billion to take care of the needs through fiscal year 1978.
Mr. A L T M A X . I believe that figure is right; yes.
Senator BYRD. And then the $ 9 0 billion that you are speaking of
would be for the fiscal year ending 1979 ?
Mr. ALTMAN - . That is correct.
Let me emphasize, as you know, that these increases in the public
debt are simply the result of the fiscal decisions which the Congress in
effect makes during the budget process. They are nothing more than
arithmetic derivation of the congressional budget
Senator BYRD. I was going to point out that the Treasury, as such,
has no direct responsibility in causing the debt increase. I think the
responsibility lies jointly with the Congress and the administration
and, in this case, the Office of Management and Budget and the President. We will get to this later.
But I recognize, and I want the record to show, that the Treasury is
presenting what it estimates will be the needs of the executive branch
if the President's budget is enacted into law as is. Is that not correct ?
Mr. A L T M A X . That is correct, although I must say that we are all
part of the same team.
Senator BYRD. You are part of the same team, and if you want to
assume part of the responsibility, that is all right with me, but I did
not realize that Treasury had the responsibility of making up the
budget.
23-544—78—9




114
Mr. A L T M A N . Well, we consider ourselves important partners in the
formulation of overall fiscal policy, a major element being budgetmaking, so yes, I think we share all of that responsibility.
Senator B Y R D . All right- That is all right with me. I was just trying to point out that I did not feel that you had that responsibility;
that it was elsewhere. But, we will let the record stand as you said it.
So your figures are based on what the President submitted to the
Congress.
Mr. A L T M A N . That is correct, sir.
Senator B Y R D . N O W , whatever the final debit figure will be at the
end of this fiscal year, or at the end of the upcoming fiscal year based
on the new budget, it is a very, very high figure, and I calculate
roughly that the total debt at the end of fiscal year 1979 will be
almost exactly double the total debt at the end of fiscal 1972, which
is not very long ago.
My question is this. Often the national debt is dismissed on the
basis that it is not important since we owe it to ourselves. Do you
agree with that viewpoint %
Mr. A L T M A N . N O ; I must say, Mr. Chairman, that I do not fully
agree with that. We have been asked that question many times in
testimony before the Congress; and while it is true that certain debt
held either by the trust funds or by the Federal Reserve is debt owed
to other Government entities, I take the view that a debt obligation
is a debt obligation, regardless of to whom it is owed; and in effect,
the Federal Government owes a total of almost $720 billion today, of
debt subject to limit.
Senator BYRD. N O W , of the debt, roughly $ 1 0 0 billion, as I understand it, is owed to non-U.S. citizens or foreign governments. Is this
correct ?
Mr. A L T M A N . That is right. About $109 billion is owed to foreigners.
Senator BYRD. So if the rationale were carried to its conclusion
that the national debt is not important because we owe it to ourselves,
in the first place, that $100 billion owed to foreign governments or
foreign individuals would have to be repudiated, if you were going
to repudiate the debt ?
Mr. A L T M A N . That is true, but I do not think that any of us were
in favor of repudiating our debt.
Senator BYRD. I woxild not think so either. That is why it seems to
me that the statement made by many from time to time that the
debt is not important because we owe it to ourselves is not a valid
assertion.
Let me ask you this. What would happen to the banks and insurance companies in this country if that view were taken and we decided
to just wipe out the debt because we owed it to ourselves.
Mr. A L T M A N . Well, I think the effects would be severe because,
among many other things, banks and insurance companies and other
major financial institutions hold very large amounts of our debt,
which, of course, they count as assets, and, in effect, a great portion
of their asset base would be eliminated and their financial solidity
severely affected as a result.
Senator BYRD. It would play havoc with the banks, I would think,
and with the insurance companies too. It would play havoc, would




115
it not, with the social security trust funds and other trust funds. Are
many of those funds not in Government bonds?
M r . AJLTMAN. Y e s .
Senator B Y R D . So

it would play havoc with the 3 3 million social
security recipients. I t would just be totally unthinkable to say that
the obligations of the U.S. Government will be repudiated.
Mr. A L T M A N . I agree.
Senator B Y R D . What will be the peak borrowing periods for the
Treasury during fiscal year 1978 and fiscal year 1979 ?
Mr. A L T M A N . Well, each year our peak borrowing quarters are the
first and the second and the fourth—fiscal quarters. This year, fiscal
1978, our largest quarter is the current one—second fiscal quarter.
And while we have not projected specific quarter-by-quarter borrowing amounts for fiscal 1979, the trend should not be particularly
different.
Senator B Y R D . Henry Kaufman, an economist for Soloman Bros,
and Albert Cox, from Merrill Lynch, have indicated that financing
of the large Federal deficit will have an adverse effect on private
borrowing, especially housing and business.
What is your view on that ?
Mr. A L T M A N . Well, that gets to the oft-asked question of crowding
out.
Senator B Y R D . Of what ?
Mr. A L T M A N . Of crowding out, as it is so often called. Will the
financing of the Federal Government crowd out private borrowers?
Our view, Mr. Chairman, is that it will not. Let me make two or
three points quickly on that.
Senator B Y R D . What percentage of the lendable funds will the
Government be in the money market for during the remainder of
this fiscal year, and for the next fiscal year, since you are talking
about the next fiscal year as well as this one ?
Mr. A L T M A N . Well, I do not have a specific percentage because,
among other things, there are very different estimates as to the total
amount of credit in our economy, which is the percentage that you
are really asking for.
But I would say this. Our demands on the financial markets will
be smaller in fiscal 1978 and in fiscal 1979 than they were in 1975 and
1976.
Senator BYRD. Well, we have long since left 1 9 7 5 and 1 9 7 6 . We are
in 1 9 7 8 , now.
Mr. A L T M A N . I understand but, for a couple of reasons, I do not
think we are going to have a major negative effect on the financing
of our private sector, particularly housing or business. And the reason
I do not think so is that we do not expect the type of convergence of
market, financial market forces and basic economic forces which occurred in 1974 and 1975 and gave rise, then, to all of the fears and
discussions about crowding out.
We have a lot of slack today, at least a fair amount, in both our
markets, ample credit supplies, and in our economy. We are only operating at roughly 83 percent of our industrial capacity.
For those reasons
Senator BYRD. Suppose we did not have that slack?




116
Mr. A L T M A N . If we did not have as much slack in both our financial
markets and in our economy, sure.
Senator B Y R D . Well, as I understand it, the objective of your administration and the objective of the Congress is to have less slack.
Mr. A L T M A N . That is correct.
Senator B Y R D . That is my understanding of the objectives of
current economic policy.
Mr. A I / T M A N . That is right.
But you are asking me whether or not I think that in 1978 and in
1979 the amount of Government financing and borrowing will have
n major, negative impact on the financing of our private sector. I am
saying no, I do not think so, because the amounts that we will raise
in proportion to the availability of credit wTill not be such that we will
be taking away a great deal.
Senator B Y R D . What do you think Government borrowing will be in
relation to overall borrowing—70 percent, 60 percent ?
Mr. A L T M A N . Our borrowing as a percentage of total credit?
Senator BYRD. Yes.
Mr. A L T M A N . Far smaller than that. Far smaller than that. I believe—well, a recent estimate that I looked at over the last week in terms
of total credit supplied to the economy in 1978, was $430 billion and
our borrowing from the public in 1978, actually our market borrowing—market borrowing now—would be less than $50 billion, or around
$50 billion.
So we are borrowing around $50 billion from the market, the total
of which is $430 billion.
Senator BYRD. What will be the impact of Government borrowing
upon interest rates ?
Mr. A L T M A N . Well, as you know, Mr. Chairman, we do not forecast
interest rates. Our budget for fiscal 1979 assumes the level of interest
rates which were prevailing at the time that the budget Avas forecast.
Senator BYRD. And what is that ? What did you assume ?
Mr. A L T M A N . I believe that the assumption in the short-term area,
which is where most of our borrowing occurs, simply because most of
our borrowing is for the purpose of rolling over existing debt, is 6.1
percent.
Senator BYRD. Well, now you are paying 8 percent, are you not?
Mr. A L T M A N . The average interest rate on the public debt is 6,6
percent, in terms of the entire debt. We are paying—we auctioned 7year securities last week which resulted in an interest cost to us of
almost 8 percent.
Senator BYRD. 8 . 2 3 percent, was it not ?
Mr. A L T M A N . N O ; that was the long-term security, Mr. Chairman,
not the intermediate. We sold a package of 3-year and 3-month, 7-year,
and then 27-year and 3-month securities.
Senator B Y R D . But the Government is now paying roughly 8 percent for money ?
Mr. A L T M A N . N O , sir, we are paying less than that. Most of our
borrowing occurs in the short-term area, and we are paying a good
deal less than 8 percent today. In fact, 3-month Treasury bills are
currently in the neighborhood, on a coupon-equivalent basis, of 6.8 percent and while our interest costs on longer term borrowing are higher




117
than that, the overall cost to us at the moment is substantially less than
8 percent.
Senator B Y R D . Well, your budget has a figure of $55 billion for
interest for fiscal year 1979.
Mr. A L T M A N . That is right.
Senator B Y R D . N O W , you had to have some assumptions in order to
get that figure.
M r . ALTMAN. Y e s .
Senator B Y R D . Now, what did you assume ?
Mr. A L T M A N . We assumed the interest rates prevailing.
Senator B Y R D . What figure did you assume ?
Mr. A L T M A N . Well, the one I have in front of me is 6.1

percent on
our short-term borrowing, which in turn represents most of our borrowing. The blended rate, or the effective rate, is probably somewhat
higher than that, because we do not do all of our borrowing on a shortterm basis, so it is probably in the area of 6.5 percent, Mr. Chairman.
I will supply that specifically for the record.
[The following was subsequently supplied for the record:]
Budget estimates for interest on the public debt are made by the Office of Management and Budget. The interest which must be paid during the budget year on
public debt securities which are outstanding at the time the estimate is made is?
calculated by multiplying the effective interest rate on each security by the
amount of that security outstanding. For outstanding securities that will mature
in the budget year, the OMB methodology assumes that these will be refunded
by the issuance of like securities, e.g., bills, notes, bonds, with like maturities.
Similarly, for borrowing to raise new cash, the methodology assumes that the
maturity of new issues will be comparable to the maturity distribution of the
outstanding debt. OMB does not predict changes in interest rates. Therefore, estimated interest rates, based on market yields on outstanding securities of comparable maturities prevailing at the time the estimates are made, are applied to the
estimated amounts of refunding and new cash borrowings.
The interest rates used in the January 19T8 Budget presentation are as follows:
Interest

Rates Used to Estimate

Interest OYI the Public Debt iti the tJanuaru
1978 Budget

Maturity:
13 weeks
26 weeks
52 weeks
1 to 3 years
3 to 6 years
Over 6 years
1

Interest
rate 1

(Percent)
^ j
q] 4
J
75,
7.0
IIIIIII 7.* 25
7] 5

Rates based on market yields prevailing in December 1977.

Senator B Y R D . The point I am making is $55 billion for interest payments is going to be a low figure. In other words, interest is B
going; to be
higher than $55 billion.
Mr. A L T M A N . Well, yes.
Senator BYRD. Would you not think so ?
Mr. A L T M A N . If interest rates are higher throughout 1979 than they
were at the time that the budget was assembled, yes the actual interest
on the public debt will be higher. But we are not even into 1979 yet, in
fact we have several months to go, and it is not at all clear that that will
be the case.




118
Senator B Y R D . Now, you projected last year that the debt cost would
be $46.6 billion for fiscal 1978. What is your more recent figure in that
regard %
Mr. A L T M A N . $48.6 billion.
Senator B Y R D . S O it is up $2 billion, or roughly 5 percent %
Do you see inflation remaining at 6 percent ?
Mr. A L T M A N . Essentially yes, Mr. Chairman. The official administration forecast is for an inflation rate in 1978 of approximately 6 percent, yes.
Senator BYRD. Do you feel that the large projected deficits for the
remainder of fiscal 1978 and for fiscal 1979, as set forth in the budget,
as leading to greater inflation ?
Mr. A L T M A N . N O ; I do not, sir. I do not. We have, after all, as I said
earlier, a relatively high degree of slack in our economy. That is one of
the reasons why we have a budget deficit, we are not operating at full
capacity or full employment, and we do not see ourselves bumping up
against types of bottlenecks, either in terms of industrial use or the
financial markets or otherwise, which would begin to feed inflationary
pressures. No.
Senator B Y R D . I understand that the administration is proposing to
establish controls over Federal loan guarantee programs. In what programs do loan guarantees appear, and how do you propose to develop
a system of control over those guarantees ?
I am not sure whether that should be directed to you or to Mr.
Cutter.
Mr. A L T M A N . Well, Mr. Cutter can probably answer it better than I
can. We have both worked on it, but
Senator BYRD. Well, if you have worked on it, go ahead.
Mr. A L T M A N . Well, I would like to turn it to him. I think he is the
best person to answer it.
Mr. C U T T E R . Sir, there are loan guarantee programs throughout the
Federal Government. Our concern with loan guarantee programs is
that typically they are perceived by advocates outside the Government,
within the Government—the executive branch and the Congress—as
free goods. Since they are not quite the same as direct loans and we do
not count them as outlays—that is, since we do not count them the same
as direct loans—they are often seen as a form of backdoor budgeting, as
a way of getting around the discipline of the budget.
Senator BYRD. If I understand it correctly, I think you have developed a good approach.
Mr. C U T T E R . Well, that is our concern, and the direction we would
like to go in is to have the President establish, on the executive branch,
a ceiling on guarantees and then to ask that a similar ceiling be imposed, both in the congressional budgeting process and in the appropriation process.
Senator BYRD. Well, now would you submit for the record the programs in which the loan guarantees appear? In other words, enumerate the programs, and then how do you propose to develop a system of
control over these guarantees.
Mr. C U T T E R . I would be happy to submit the first part for the record, and as for the second, I have outlined to you the general form
that our control over such guarantees would take, and we will be developing that this year for implementation in the 1980 budget. I am




119
not sure I completely understood your question. If you would like an
amplification of that for the record, I would be happy to submit it.
Senator BYRD. Thank you.
[The material referred to was subsequently supplied for the
record:]
A list of Federal loan guarantee programs is contained in the following
document: House Committee on Banking, Finance, and Urban Affairs, Subcommittee on Economic Stabilization, Catalog of Federal Loan Guarantee Programs
(September 1977), 329 pps.
We are aware of the following omissions from this catalog:
Department of Housing and Urban Development: Public housing; urban renewal ; college housing; and Government National Mortgage Association mortgage-backed securities.
Department of Health, Education, and Welfare: College facilities.
Department of the Treasury: New York City seasonal financing.
National Aeronautics and Space Administration: Lease guarantees.
Funds appropriated to the President: International Financial Institutions
capital contributions.
Small Business Administration: Agriculture business loans; and agriculture
disaster loans.
Federal Deposit Insurance Corporation: Franklin Bank loan.
National Credit Union Administration : Loan guarantees.
D.C. Stadium loan guarantee.
Postal Service: Lease guarantees.

Senator BYRD. Mr. Secretary, the money supply is a key factor, of
course, in making economic projections for the budgetary purposes.
What are the administration's assumptions about the growth of the
money supply ?
Mr. A L T M A N . Mr. Chairman, I do not know precisely what our assumptions are. I think, to a large extent, they are one element in our
forecasts on inflation, but I will be happy to check and supply you
with an answer for the record as to what assumptions on that overall
front we are using.
[The following was subsequently supplied for the record:]
The money supply has behaved in a volatile manner in recent years, malting
it difficult to predict its future course with precision. In formulating the projections underlying the Budget, it was assumed that financial market conditions
would be such as to accommodate the 4Vi to 5 percent growth rate projected with
no exceptional pressures on interests rates. The money supply growth associated
with such market conditions will depend on the rate of money turnover, i.e.,
velocity. Since velocity changes have been erratic recently, it would be foolhardy
to try to predict its future course.

Senator B Y R D . I understand that you and Secretary Blumenthal—•
as you mentioned earlier—plan to go to ISTew York City.
M r . ALTMAN. Y e s , sir.
Senator B Y R D . The ISTew York

City situation is of considerable concern to many Members of the Congress. Could you give us a brief out™
line of the situation as you see it today ?
Mr. A L T M A N . I would be happy to.
Esentiallv, Mr. Chairman, as I am sure you know, the President is
committed to preserving ISTew York City's solvency. His position is
that if an extension of Federal lending to New York is necessary to
preserve that solvency, then he will propose it.
Secretary Blumenthal will be testifying before the House Banking
Committee, Subcommittee on Economic Stabilization on February 23
for purposes of presenting the administration's recommendations,
specific recommendations to the Congress, on New York City.




120
But it is fair to say that we intend to propose some form of extended
Federal lending. Yet, any such proposal will be explicitly conditioned
on a series of commitments from the relevant city and State parties,
both public and private, commitments which will assure the New York
City's budget moves into true balance over the period of any extension
Federal lending.
Senator B Y R D . Well, what will the private sector have to do with the
New York City budget ?
Mr. A L T M A N . Well, the private sector has less to do with the budget
than they have with the financing of the budget, but another set of
commitments that we must have, and we will not proceed relative to
Congres unles we do have, is a set of lending commitments from the
financial community as well as certain others, such as the pension
fund, so that the Congress can be sure, and the administration can be
sure, that any Federal lending after June 1978 is secure because the
other needs of New York City, which will not be accommodated by the
Federal Government, will be financed and not, in effect, left hanging.
What I am trying to say is that the Federal Government today does
not finance all of New York City's borrowing needs, and in the postJune period, whatever the Congress might approve will not be financing at all—in fact, will not finance as much as half. So that, for New
York City's sake and for the sake of the Federal Government in protecting our loans, we must be sure that the amounts which we do not
finance are financed, because if they were not to be, then the city would
not be solvent and our loans would be in jeopardy.
So we need commitments from the city in terms of its budget and a
series of public and private entities in terms of the financing of the
city's needs over the next 4 years, and that is what we are in the
process of seeking, and the reason that Secretary Blumenthal and I
are going to New York—if we ever get there, on the noon Metroliner.
But our positions will be outlined to the Congress later this month.
Senator BYTRD. You have studied this matter carefully. Did New
York City have a balanced budget in fiscal 1 9 7 6 ?
Mr. A L T M A N . Not on any conventional basis, absolutely not.
Senator BYRD. Did New York City have a balanced budget in fiscal
1977?
Mr. A L T M A N . In addition to a $ 3 5 7 million operating deficit the
budget w7as balanced under a State law which counted as a revenue
$ 5 7 2 million in bond proceeds. Thus, the budget was not balanced in
a generally accepted accounting sense.
Senator BYRD. Does that same assertion hold true for the current
fiscal year ?
Mr. A L T M A N . Yes, but I should say, only in fairness, that there has
been a great reduction in the budget deficit there. In fiscal 1975, the
budget deficit on a conventional basis including capitalized expenses,
a generally accepted accounting principles basis, was $2 billion.
Senator BYRD. What was it in 1 9 7 6 ?
Mr. A L T M A N . In 1976 it was approximately $1.3 billion.
Senator BYRD. $ 2 billion and $ 1 . 3 billion.
What was it in 1977?
Mr. A L T M A N . Well, I think I probably gave you the wrong figure.
I think it was 900 million including capitalized expenses in 1977 and
perhaps $1.6 billion in 1976.




121
And this year, it is in the area of $1 billion including the capitalized
expenses. They have reduced it, in other words, by 50 percent. Now a
$1 billion budget deficit is still a very large one for a municipality,
even though New York City's budget is the largest of any by a municipality by far.
Senator B Y R D . Does not the New York State law require the municipalities to operate on a balanced budget ?
Mr. A L T M A N . Well, it does, Mr. Chairman, but a special State law
was passed in 1975 to give New York 10 years over which to phase out
a habit of using some of the city's capital budget for purposes of
financing its operating expenses. And they had approximately $800
million of operating expenses which were being financed from, essentially, the capital budget in fiscal 1975.
So the city got 10 years, by State lawT, to phase that out.
Now, when I say they have a $1 billion deficit, under State law,
they can exclude the capitalized expenses from that figure, thus they
have a much smaller deficit than that. They have just announced a
potential fiscal 1979 deficit of $457 million. So it is much smaller than
$1 billion.
But on any conventionally accepted accounting basis, you know,
your operating budget is your operating budget and all of your operating expenses are in it, and so adding those operating expenses in the
capital budget to the normal budget means that, despite State law,
they nevertheless have a deficit of approximately $1 billion according
to generally accepted accounting principals.
But the deficit has been cut in half since 1975, and it is our view
that, over the next 4 years, with appropriate local effort, which we
must be sure takes place, the budget can be brought finally into true
balance. And once it is—and I think this is a crucial point—once it is,
New York City ought to be able to be restored to the basic financing
independence, borrowing on its own, the same way that any other
municipality does. And it is our basic view that, since that can be done
over the next 4 years, it makes sense for the Federal Government to
give New York those 4 more years as compared to a bankruptcy which
we think would be cataclysmic.
Senator B Y R D . Y O U are not even going to require New York to
balance its budget for 4 years ?
Mr. A L T M A N . Well, Mr. Chairman, we would like for New York to
balance its budget this afternoon, and I am sure you would too, but
it is not possible for its budget to be balanced, or that $1 billion deficit
to be eliminated, except on a multiyear basis.
Let me give you an example. New York City's budget is approximately $13 billion today. But of that amount, only $8 billion is its
own funds. The balance is Federal and State aid.
Now, the city has a lesser ability, of course, to influence Federal
and State aid and to get more of it, for example, than it does to raise
its own revenues, through economic development or other matters. So
it has a budget which is different than most in the sense that it is
enormously dependent on third parties.
And that is also true for the expense side of its budget. So it is just
not conceivable, unfortunately, that that $1 billion deficit could be
eliminated, sir, in 1 year. It is going to have to be eliminated through
a combination of city actions—which they have pledged to do, I might




122
say—a series of very difficult actions—attrition in the work forcey
et cetera; a series of State actions, where New York State has to take
a greater responsibility for New York City
Senator B Y R D . All of those requirements were put on New York
City 3 years ago. Now you are coming in here and saying that wehave to have another 4 years.
Mr. A L T M A N . Well, Mr. Chairman, I was not there 3 years ago urging the Congress that 3 years would be it and the city would be back
onto its feet. Frankly, I think that was wishful thinking, to a great
extent, on the part of those who were urging that.
But I do think that if one looks at it retrospectively, or rather in
particular perspective, it is a problem which is solvable over a number
of years. It was not realistic to think that it could be solved in 3 years.
That was not realistic, Mr. Chairman.
Senator BYRD. The problem is that you do not want to force the
politicians to take an unpopular course of action in New York.
Mr. ALT-MAN. I would beg to disagree just a bit, in this sense.
You can be assured that the purpose of our negotiations with the
city and the State, now and during the last couple of months, and
during the next 3 and 4 months, will be to win commitment from them.
Commitments of major new effort on budget and on financing, without
which we, ourselves, Mr. Chairman, we ourselves in the administration would not recommend that the Congress go forward.
So what I am saying is that our recommendations to Congress will
be conditioned on a set of city and State actions which I think we
can persuade you are major commitments and difficult politically. And
it is only on that basis that we will recommend that Federal money of
any type be extended.
Without the commitments, I agree. It is not an appropriate course
of action for the Congress and the administration to take.
We think we will get them, and we think that we can persuade the
Congress that they are sufficiently major as to end this overall financing crisis in New York over a period of 4 more years or so.
But I share your concerns and I share your implicit urgings concerning difficult political actions at the city and State levels; yes.
Senator BYRD. I am sure that your intentions are excellent. I do not
question that at all, but it just seems to me that the longer we coninue
to bail out New York the more that says to politicians everywhere:
Do not worry about it. Make all the commitments you want to all of the pressure groups that you want in your community and, if you get in trouble, the Federal Government will take care of you.

I think that is a bad philosophy to have abroad in this country.
Mr. A L T M A N . I agree that that is a bad philosophy. My point is that
we are essentially faced with a choice of, on the one hand, a New York
City bankruptcy, which we think makes no sense at all
Senator B Y R D . Well, I think that you are just painting things too
black and too white. If they were willing to cut some expenses, if they
were willing to take some tough courses, I am convinced that the
budget could be balanced in a lot shorter time than 4 years. Otherwise
we will be dealing with this question for 7 years from the time that
this problem first was brought to the attention of the Congress.
_ But anyway, go on up there now and do the best you can. But do not
give away these Federal funds. They come out of the pockets of the taxpayers of the State of Virginia as well as the other 49 States. I do not



123
think that the Virginia taxpayer takes very kindly to having their tax
funds used to bail out politicians in New York City, or any other city,
for that matter. I would not want to vote for tax funds to bail out the
politicians in any city in Virginia.
I think that the discussion of 4 additional years is not reasonable. I think that you ought to require a balanced budget long before
any 4-year period, and I hope that you and Secretary Blumenthal will.
Thank you, sir.
Mr. A L T M A N . Let me make one comment—not on that, but I have
done some quick research on your very first question about whether
the $90 billion request is the largest that was ever asked for. And you
are correct. I t is the largest that has ever been asked for, and it is the
largest increase in the debt subject to limit.
My point, which I respectfully suggest is worthwhile, is that the
debt subject to limit is composed of three basic factors: The unified
budget deficit, the trust fund surplus, and the financing requirements
of off-budget entities.
It is only because the trust fund surplus for 1979 is much larger than
for 1976, which is not the same type of characteristic borrowing need
as a budget deficit, that the increase will be the largest.
You see, I tend to think, Mr. Chairman, and this is just as
Senator BYRD. Y O U mentioned the trust fund surplus for 1 9 7 9 . What
is the trust fund surplus, around $14 billion?
Mr. A L T M A N . Yes; $13.9 billion.
Senator BYRD. Yes. Say $ 1 4 billion in round figures. Now how does
that $14 billion break down ?
For example, the social security surplus is what?
The highway surplus would be something like $7 billion, I would
guess.
Mr. A L T M A N . While lie is checking those for you—I do not want
to belabor the point, but if you look at those three components of borrowing need, you see that the unified budget deficit and the financing
need flowing out of that, which I know you are most concerned about,
that part of our borrowing, that aspect of it is not as great in fiscal
1979 as in fiscal 1976.
The difference, and the reason why the fiscal 1979 request is the
largest as compared to 1976—I do not want to belabor this because
they are both too big; I think we all agree—is because of the trust
fund surplus which increases much more—well, which is a much bigger
component of the need in 1979 than it was in 1976. That is my only
point.
Senator B Y R D . Well, now, let me get one figure before you leave
from Mr. Cutter as to the social security trust surplus.
Mr. C U T T E R . Sir, we can give you the exact figures, but the social
security trust fund, or more generally, the Federal old age survivors
and disability insurance trust funds, which is putting several
together—and I do not have the information here that would allow7 me
to take the components of that apart, but that general trust fund is
slightly—well, it is $3 billion in deficit in 1979.
Senator BYRD. Well, where does the $ 1 4 billion surplus come from?
That is what I am trying to get.
Mr. C U T T E R . The Federal employees' retirement fund, which is also
a trust fund and which is included in that general calculation, is $7
billion in surplus in that same year. I t is a netting-out of approximately 12 trust funds. That is where the $14 billion comes from.



124
Senator BYRD. Well, the large surplus is in the civil service retirement, is it not ?
Mr.

CUTTER. Y e s ,

sir.

Senator B Y R D . And that money is put in by individual Federal
employee ?
M r . CUTTER. Y e s , s i r .
Senator BYRD. And that

is $ 7 billion of the $ 1 4 billion. What other
.major trust fund is in surplus—the highway trust fund is in surplus
is it not ? $6 billion or $7 billion ?
Mr, C U T T E R . The highway trust fund is moderately—is not in deficit.
.It has a surplus of aproximately half a billion.
Senator BYRD. Only a half-billion for fiscal 1 9 7 9 ?
M r . CUTTER. Y e s , s i r .

Senator B Y R D . S O the bulk of trust fund surpluses are in the civil
service retirement?
Mr. C U T T E R . I can give you slightly more detail. The big negative
is in social security, which is a deficit of $2.9 billion, and the positives,
which are netted out against that, are the Federal employees retirement, which is $7.2 surplus; unemployment insurance, which is $5.2
in surplus; medicare, which is $2.3 in surplus; and highways, which
is $600 million in surplus.
Senator BYRD. N O W , the unemployment—that is from employer
contributions, basically, is it not ?
Mr.

CUTTER. Y e s ,

sir.

Senator B Y R D . S O that is not Government money. That is not from
general taxation. That money was put into the trust fund as a payroll tax by the various companies.
M r . CUTTER. Y e s , s i r .
Senator BYRD. Thank

you, Mr. Altman.
[The prepared statement of Mr. Altman follows:]

STATEMENT OF H O N . ROGER C . ALTMAN, A S S I S T A N T SECRETARY OF T H E TREASURY

Mr. Chairman and Members of the Committee: I am pleased to be here today
to assist you in your consideration of the public debt limit. The present temporary debt limit of $752 billion will expire on March 31, 1978, and the debt limit
will then revert to the permanent ceiling of $400 billion. Legislative action by
March 31 will be necessary, therefore, to permit the Treasury to borrow to
refund securities maturing after March 31 and to raise new cash to finance the
estimated deficits in the budget, as submitted to Congress by the President last
month.
In addition, to permit the Treasury to continue borrowing in the long-term
n\arket, it will be necessary to increase the $27 billion limit on the amount of
bi nds which we may issue without regard to the 414 percent interest rate ceiling
on Treasury bond issues.
Finally, we are repeating our earlier request for authority to permit the Secretary of the Treasury, with the approval of the President, to change the interest
rate on U.S. Savings Bonds if that should become necessary to assure a fair rate
of return to savings bond investors.
DEBT LIMIT

Turning first to the debt limit, our estimates of the amounts of debt subject
to limit at the end of each month through the fiscal years 1978 and 1979 are
shown in the attached table. The table indicates that the debt subject to limit
will increase to $778 billion on September 30, 1978, and to $868 billion on September 30, 1979, assuming a $12 billion cash balance on those dates. These are
the debt estimates and cash balances assumptions included in the President's
January budget proposals. The usual $3 billion margin for contingencies would
raise these amounts to $781 billion on September 30, 1978, and $871 billion on




125
September 30, 1979. Thus the present debt limit of $752 billion would need to
be increased by $29 billion to meet our financing requirements through the remainder of fiscal 1978 and by an additional $90 billion to meet the requirements
in fiscal 1979.
Our $781 billion estimate of the debt subject to limit on September 30, 1978
(which includes the $3 billion margin for contingencies) is $6 billion higher
than the $775 billion approved in the second concurrent resolution on the Federal
budget for fiscal year 1978, which was adopted by Congress on September 15„
1977.
The $90 billion increase in FY 1979 reflects the Administration's current
estimates of a fiscal 1979 unified budget deficit of $60.6 billion, a trust fund1
surplus of $13.9 billion, and a net financing requirement for off-budget entities,
of $12.5 billion. The trust fund surplus must be reflected in the debt requirement
because the surplus is invested in Treasury securities which are subject to the*
debt limit.
The relevant debt of off-budget entities consists largely of obligations which
are issued, sold or guaranteed by Federal agencies and financed through the
Federal Financing Bank. Since the Federal Financing Bank borrows from the
Treasury, we are required to increase our borrowing in the market by a corresponding amount. This, of course, adds to the debt subject to limit.
BOND AUTHORITY

I would like to turn now to our fiscal 1979 need for an increase in the Treasury's authority to issue long-term securities in the market without regard to
the 4*4 percent statutory ceiling on the rate of interest which may be paid
on such issues. To meet our requirements next year, the Treasury's authority
to issue bonds (securities with maturities over 10 years) should be increased
by $10 billion from the current ceiling of $27 billion to $37 billion.
The 4% percent ceiling predates World War II but did not become a serious
obstacle to Treasury issues of new bonds until the mid-19f)0's. At that time,
market rates of interest rose above 4% percent, and the Treasury was precluded
from issuing new bonds.
In 1971, Congress authorized the Treasury to issue up to $10 billion of bonds
without regard to the 4% percent ceiling. This limit has since beenT increased a
number of times, and in the debt limit act of October 4, 1977, it w as increased
from $17 billion to the current level of $27 billion.
The Treasury to date has used almost $20 billion of the $27 billion authority, including the $11,4 billion bond auctioned last week, which leaves the amount of
unused authority at about $7 billion. While the timing and amounts of future
bond issues will depend on prevailing market conditions, a $10 billion increase
in the bond authority would permit the Treasury to continue its recent pattern
of bond issues throughout fiscal year 1979. Thus, the Treasury would be able
to make further progress toward achieving a better balance in the maturity
structure of the debt and re-establishing the market for long-term Treasury
securities. We believe that such flexibility is essential to efficient management
of the public debt.
SAVINGS BONDS

In recent years, Treasury has recommended frequently that Congress repeal
the 6 percent ceiling on the rate of interest that the Treasury may pay 011
U.S. Savings Bonds. Prior to 1970 the ceiling had been increased many times,
but the current 6 percent statutory ceiling was enacted by Congress in 3970.
As market rates of interest rose, it became clear that an increase in the savings bond interest rate was necessary to provide investors in savings bonds with
a fair rate of return.
Mr. Chairman, we do not feel that an increase in the interest rate on savings
bonds is necessary today. Yet, wTe are concerned that the present requirement for
legislation to cover each increase in the rate does not provide sufficient flexibility to adjust the rate in response to changing market conditions. The delays
encountered in the legislative process could result in inequities to savings bond
purchasers and holders as market interest rates rise on competing forms of
savings.
Furthermore, Treasury relies on the savings bond program as an important
and relatively stable source of long-term funds. On that basis, we are concerned
that participants in the payroll savings plans and other savings bond purchasers
might drop out of the program if the interest rate were not maintained 8t a
level reasonably competitive with comparable forms of savings.




126
Any increase in the savings bond interest rate by the Treasury would continue to be subject to the provision in existing law which requires approval of
the President. Also, the Treasury would, of course, give very careful consideration to the effect of any increase in the savings bond interest rate on the flow
of savings to banks and thrift institutions.
DEBT LIMIT PROCEDURE

Mr. Chairman, I would also like to take this opportunity to suggest that
your Committee consider a more effective procedure for controlling the size
of the public debt.
We do not think that the present statutory debt limit is an effective way
for Congress to control the debt. In fact, the debt limit may actually divert
public attention from the real issue—control over the Federal budget. The
increase in the debt each year is simply the result of earlier decisions by the
Congress on the amounts of Federal spending and taxation. Consequently,
the only way to control the debt is through firm control over the Federal
budget. In this regard, the Congressional Budget Act of 1974 greatly improved
Congressional budget procedures and provided a more effective means of controlling the debt. That Act requires Congressional concurrent resolutions on
the appropriate levels of budget outlays, receipts, and public debt. This new
budget process thus assures that Congress will face up each year to the
public debt consequences of its decisions on taxes and expenditures.
Moreover, the statutory limitation on the public debt occasionally has interfered with the efficient financing of the Federal Government and has actually
resulted in increased costs to the taxpayer. For example, when the temporary
debt limit expired on September 30, 1977, and new legislation was not enacted
on the new debt limit until October 4, Treasury was required, in the interim
to suspend the sale of savings bonds and other public debt securities. The
suspension of savings bonds sales, in particular, resulted in considerable public
confusion, and indignation, as well as additional cost to the Government. The
cot of printing and distributing notifications to about 40,000 savings bonds issuing agents was $16,775. A much greater, but incalculable, cost is the loss of
public confidence in the savings bond program and in the management of the
government's finances.
Accordingly, we believe that the public debt would be more effectively controlled and more efficiently managed by typing the debt limit to the new
Congressional budget process. We simply put this proposal on the table, Mr.
Chairman, for you and the other members of the subcommittee to consider
in the hope that we can work together to devise a more acceptable way to
control the debt.
PUBLIC DEBT, SUBJECT TO LIMITATION
FISCAL YEAR 1978
IBased on: Budget receipts of $400,000,000,000, budget outlays of $462,000,000,000, unified budget deficit of
$62,000,000,000, off-budget outlays of $12,000,000,000]
[In billions of dollars]

Operating
cash balance
Actual:
Sept. 30,1977.
Oct. 31, 1 9 7 7 . .
Nov. 30, 1977..
Dec. 31,1977
Jan. 31, 1 9 7 8 . .
Estimated:
Feb. 28,1978
Mar. 31, 1978__
Apr. 19,1978
: Apr. 30, 1978..
May 31, 1978..
June 21,1978..
June 30,1978..
July 31, 1978..
Aug. 31,1978..
Sept. 30,1978.




Public debt
subject to
limit

19.1
7.7
5.5
12.3
12.5

700.0
698.5
709.1
720.1
722.7

12.0
12.0
12.0
12.0
12.0
12.0
12.0
12.0
12.0
12.0

738.0
747.0
750.0
740.0
753.0
753.0
746.0
756.0
772.0
778.0

With
$3,000,000,000
margin for
contingencies

741
750
753
743
756
756
749
759
775
781

127
PUBLIC DEBT, SUBJECT TO LIMITATION
FISCAL YEAR 1979
[Based on: Budget receipts of $440,000,000,000, budget outlays of $500,000,000,000, unified budget deficit of
$61,000,000,000, off-budget outlays of $12,000,000,000]
[In billions of dollars]

Operating
cash balance

Public debt
subject to
limit

With
$3,000,000,000
margin for
contingencies

12
12
12
12
12
12
12
12
12
12
12
12
12
12
12

778
789
801
806
809
824
837
841
828
846
852
839
848
864
868

781
792
804
809
812
827
840
844
831
849
855
842
851
867
871

Estimated:
Sept. 30,1978
Oct. 31,1978
Nov. 30,1978
Dec. 31,1978
Jan. 31,1979
Feb. 28,1979
Mar. 31,1979
Apr. 18,1979
Apr. 30,1979
May 31,1979
June 20,1979
June 30,1979
July 31,1979
Aug. 31,1979
Sept. 30,1979

Senator
prefer?

BYRD.

STATEMENT
DIRECTOR

OF

Mr. Cutter, will you proceed in any way that you
W.

FOR

BOWMAN
BUDGET,

CUTTER,
OFFICE

EXECUTIVE
OF

ASSOCIATE

MANAGEMENT

AND

BUDGET

Mr. CUTTER. Sir, I will be very brief. I am here to support the Treasury's position with respect to its request for an increase in the debt
limit, its proposals for improving the management of the debt, and
its suggestion that the statutory debt be tied to the congressional
budget process.
Rather than read my statement, I will summarize the first part of it,
which has to do more directly with the budget, and brings forth some
detail that Mr. Altman's testimony did not bring forth, and I will
submit the rest for the record.
The debt figures which wTe have been discussing are derived from
budget totals shown on the first table in my testimony. For fiscal year
1978, we are now estimating a deficit of $61.8 billion, with outlays of
$462.2 billion and receipts of $400.4 billion.
For 1979, we are now estimating a deficit of $60.6 billion, and the
President is asking for outlays of $500.2 billion and receipts of $439.6
billion.
Our outlays, speaking now to 1978, have changed little since my
testimony in last August and September. Our estimate is $462.2 billion now; the estimate at the time was $462.9 billion.
The outlays for fiscal year 1979, we believe, reflect a prudent and a
tight budget that resulted from a thorough zero-based budget analysis
of agency programs.
Spending for 1979 has been held to an overall increase of 8 percent,
which is the smallest increase since 1973. The deficit for 1979, it is true,
is only $1 billion less than the deficit for 1978, but had no tax cut been




128
proposed, we would have shown a decrease in the deficit of $15 billion
to $20 billion, and it was our judgment then, and it is now, that it is
more important that we have a tax cut to help the economy continue
to grow and to encourage the increased capital investment that will
improve productivity and allow growth for the future.
The President's reductions also mean that Federal taxes will represent a smaller share of gross national product, and this, in turn,
will provide an added incentive for both the Congress and the President to restrain the growth of spending.
We believe that this budget keeps open the option for a balanced
budget in 1981; and in an effort to control the budget more effectively
so that w^e can remain on this path, the President has asked each agency
to prepare future budget requests within the context of a planning
period that extends for 3 years beyond the budget year.
The multiyear planning system that we are developing will help
to insure better control of Federal spending by identifying the longterm spending consequences of program proposals.
Turning to receipts, our estimate of 1978 receipts have declined by
$1 billion since the August and September hearings on the debt ceiling, from $401.4 to 400.4 billion.
For 1979, the receipts estimates are $24.3 billion below those that
would be produced under existing tax legislation and that decrease
of $24.3 billion reflects the effects of the administration energy tax
and tax reduction and reform proposals.
In the remainder of my brief written testimony, I discuss the budget
by fund group, most of which you have already discussed with Mr.
Altman, and, with your permission, I would simply submit that for
the record and conclude by saying again that we support the Treasury Department's testimony and that I would like to call attention,
briefly, to the point that Mr. Altman made as to the element of redundancy that exists between the process of setting statutory debt
ceilings on the one hand and the establishment of appropriate levels
for debt subject to statutory limitation that are contained in the
congressional budget resolution.
In view of this, OMB supports the Treasury suggestion that because the public debt is being effectively controlled through the congressional budget process that the debt limit in the future be tried to
the congressional budget process.
Thank you, sir.
Senator BYRD. Budget debt is being effectively controlled. Is that
what you said ?
Buclget debt is being effectively controlled ?
Mr. CTJTTER. I said the public debt, sir.
Senator BYRD. The public debt is being effectively controlled ?
M r . CUTTER. Y e s . s i r .
Senator BYRD. Yet it

has increased—it will have doubled, according to Treasury figures—at the end of fiscal year 1979 compared to
the debt as it stood at the end of fiscal 1972. Frankly, I do not call
that being controlled.
Mr. CUTTER. Sir, I think that there is a difference between whether
one likes or dislikes the numbers and the process one uses to control,
in a managerial sense, the numbers that we agree on, both the Executive and the Congress.




129
Senator BYRD. Well, I do not blame the executive branch for not
wanting to have statutory debt ceilings. It is much easier, of course,
and much more desirable to be able to operate as you think best without restraint. You do not have to have public hearings or anything
approaching congressional review.
So I do not blame you, but I do not necessarily agree with you. If
I were in your position perhaps I would want to have it that way?
too.
Let me ask you for a couple of figures
Mr. CUTTER. Let me say just one thing. We feel that the Executive's
proposals are quite thoroughly aired
Senator BYRD. Are quite what ?
Mr. CUTTER. Are quite thoroughly aired, and that the new congressional budget process has been a helpful and important means of introducing some measure of overall congressional perspective to the setting
of the Federal budget and consequently that
Senator BYRD. I think you phrased it right, "some measure*'—
slightly, some measure. I see very little discipline in it, and I think
that the figures show that.
But I agree with you that there has been some improvement, with
the emphasis on "some." But that is mainly because nothing could have
been worse than the old system, as I see it.
Let me get three figures from you, if I may.
I think the most significant figures are those dealing with Federal
funds, raJther than the budget on a unified basis, because that is what
it costs to operate the Government exclusive of the trust funds to
which revenue is paid for a specific purpose and cannot be used for
the general operation of Government.
Now, what will be the receipts in the general fund for fiscal 1979 ?
Mr. CUTTER. Federal funds receipts would be $ 2 8 9 . 1 billion.
Senator BYRD. And the outlays will be what ?
Mr. C U T T E R . $363.6 billion.
Senator BYRD. And then the deficit will be what?
Mr. C U T T E R . $74.5 billion.
Senator BYRD. And then, according to your estimated figures, the
deficit for 1978 will be $72.1.
M r . CUTTER. Y e s , s i r .

Senator B Y R D . N O W , in looking at these figures, the figure that impresses me is this deficit of $74.5, in looking at the table that I have
before me, which goes back to fiscal 1959, will be the largest deficit in
Federal funds in the history of our Nation, with the possible exception
of World War II. There is no doubt about that, is there ?
Mr. C U T T E R . I think that is right.
Senator BYISD. And that is for fiscal year 1 9 7 9 .
M r . CUTTER. Y e s , s i r .
Senator BYRD. N O W ,

the runner-up year is the current year, fiscal
1978. That figure is $72.1 billion.
So, in so far as getting toward a balanced budget, it certainly seems
clear to me, judging by the figures, that we are going in the opposite
direction.
Mr. CUTTER. Sir, we have another point of view, which is that by
introducing this budget and the Federal funds deficit, which you have
pointed out—although we believe that the unified budget is an impor23-544—78——10




130
tant total to keep track of, and we pay more attention to the unified
budget—but the President chose to introduce a tax reduction of $25
billion—$24.3 billion.
Had he not made that choice, this Federal funds deficit would have
been somewhere between $15 billion and $20 billion less.
Senator BYRD. Regardless of the reason, the fact is, according to your
own figures, this Government will have the largest Federal funds deficit
in fiscal year 1979 that it has ever had in its history, and the second
largest deficit in fiscal year 1978.
Mr. CUTTER. Sir, I have acknowledged that. What I am trying to
explain the reason because it is important. Whether or not it reaches a
balance in future years has a great deal to do with the way the economy
performs, and it is the President's judgment that it is a far better
course, and more in the public interest, to choose a tax reduction this
year and accept the consequences of the higher deficit in order to continue the improvement in the economy and to insure that improvement
in coming years so that we can have a stable balance in the future.
Senator BYRD. Of course, that has been the whole philosophy of
every recent administration, and the deficits have gotten larger every
time.
When President Johnson was President, the Secretaries of the
Treasury would come in here with precisely the same argument. When
President Nixon was President, Secretary Schultz had that argument.
When President Ford was President, it was the same way. President
Carter is President, and this administration says that the way to have
good times in this country is for the Government to run higher and
higher deficits.
But I want to point out that when President Carter was a candidate,
when he sought the Presidency, he took an entirely different view. He
took, in my judgment, the correct view: that it is very important to get
back to a balanced budget. I regret the fact that the administration
has changed its position in that regard and has eliminated the high
priority which was given a balanced budget during the campaign and
during the first 6 months of this administration.
Mr. CUTTER. If I could make a point, sir, I certainly have seen no
single sign—nor do I think that the President has publicly stated—
that his concern and commitment to a balanced budget has even diminished to the slightest degree.
I sat through—I cannot count the number of hours—dozens of hours
of budget preparation with the President, with the current Acting Director Mclntyre, and that was a concern that was constantly on the
President's mind, constantly stated. It is our judgment, as an administration, that choosing this tax reduction—and therefore accepting
the consequences of this debt—is the best way to reach that balance.
Senator BYRD. I think the American people have to judge by the
figures. The figures show just what you brought out, that our country
will have the largest Federal funds deficit in fiscal year 1979 that it
has ever had, and it will have the second largest deficit in this current
year.
Now, the Federal debt is estimated to be $786 billion at the end of
fiscal year 1978 and $871 billion by the end of fiscal year 1979. Now,
often this debt is dismissed on the basis that it is not important, since
we owe the debt to ourselves. What is your view on that ?




131
Mr. C U T T E R . Sir, I think that Assistant Secretary Altman well expressed both his view and mine in saying that he did not agree, and
I would add that I do not agree with that judgment.
Senator B Y R D . H O W do you see inflation in 1 9 7 9 ?
Mr. C U T T E R . If I can glance for a second at our economic projections,
in our budget document—we are projecting, in 1979, a rate of inflation
of approximately 6 percent, fourth quarter over fourth quarter.
Senator B Y R D . And that is the same figure, I think, as you project
for 1978?
M r , CUTTER. Y e s .
Senator B Y R D . You project it for both
Mr. C U T T E R . Yes, sir. Essentially.
Senator B Y R D . Yes.

1978 and 1979 ?

I am not totally clear on this matter. I am sure it is simple, if you
could point it out to me.
You project a deficit of $74 billion in the Federal funds, but—for
fiscal 1979—the administration is seeking an increase in that fiscal year
in the debt ceiling of $90 billion.
Now, why would you need an increase of $90 billion if the Federal
funds deficit will be $74 billion ?
Mr. C U T T E R . The principal difference between the $ 7 4 . 5 which we
estimate as the Federal funds deficit, and the $90 that Mr. Altman has
discussed, is in the deficit of off-budget Federal entities, and the principal off-budget entity within that general category is the Federal
Financing Bank.
Senator B Y R D . Is the Federal Financing Bank ?
M r . CUTTER. Y e s , s i r .
Senator B Y R D . N O W , would

you give the committee a dissertation on
what the Federal Financing Bank is and how it draws money from
the Treasury ?
Mr. C U T T E R . I might say that it is by no means a simple matter, and
my understanding of it is almost certainly no greater than yours. I
can give you a very brif comment on its purpose and perhaps we could
submit for the record anything beyond that, and any of your questions that I cannot answer.
The Federal Financing Bank was originally established, recently—
but I am not certain as to when—to meet the problem that a number
of Federal agencies have debt, go to the market
Senator B Y R D . N O W , who established the Bank ?
Mr. C U T T E R . My understanding is that it was established in approximately 1973. It was established by the Federal Financing Bank Act of
1973, so it was established, I would imagine, by the request of the
administration at that time, by act of Congress.
Senator B Y R D . G O ahead, if you will.
Mr. C U T T E R . One of its purposes was to assist Federal agencies in
going to the market so that debt could be—so that all of the Federal
Government's impacts on the market could be properly accounted for
and assesed, and so that one effort by the Federal Government to go
to the market would not be confused by another.
Our concern with it, as I think I mentioned earlier to you, is that
it has also beome a means in conjunction with the use of guaranteed
loans by which Federal guarantees of loans are converted, off budget,




132
into direct loans and as the result of the invention of a new form of
backdoor budgeting.
That is a little bit off the point. On point, it is the largest single
source of deficit among the off-budget Federal entities.
Now, precisely how its financial relationship with the Treasury is*
I do not know. We could submit that to you for the record, or perhaps
one of Mr. Altaian's colleagues could answer that question for you.
Senator B Y R D . Could one of Mr. Altaian's colleagues answer that?
Would you identify yourself, please?
Sir, CAVANAUGH. I am Francis Cavanaugh, the Director of the
Office of Government Financing and I work for Mr. Altman.
Senator B Y R D . Welcome, sir.
Sir. CAVANAUGH. I think the question had to do with the Federal
Financing Bank's relationship to the Treasury? The Federal Financing Bank, in order to make loans to Federal agencies, and the purchase of loans guaranteed by Federal agencies, obtains its funds by
borrowing from the Treasury, and the Treasury, in turn, borrows
that much more in the private market.
Senator B Y R D . Well, is this correct? The Federal Financing Bank
borrows the money to supply the needs of various agencies of
Government ?
M r . CAVANAUGH. Y e s , s i r .
Senator B Y R D . So while the

Federal funds deficit is listed in Sir..
Cutter's statement, and in the budget, and presumably in the new
budget document, at $74 billion, you really need to add to that another
$16 billion for the deficit of the Federal Financing Bank ? Is that the
way it works ?
Mr. C U T T E R . N O , sir. It is not $16 billion. I had said to you that the
largest single factor in bridging between $74.5 billion and $90 billion was the Federal Financing Bank. The total deficit of off-budget
Federal entities is $12.5 billion. I am not certain as to the fiscal year
1979 deficit of the Federal Financing Bank by itself. I do not think it
is as high as $16 billion.
I t is $12.5 billion. The others are small in net.
Senator B Y R D . The Bank accounts for $12.5 in the deficit ?
M r . CUTTER. Y e s , s i r .
Senator BYRD. S O would I

be correct, then, in assuming that the real
deficit of the Government is—leaving out the trust funds—the real
deficit of the Government is $74 billion plus $12.5 billion ?
Sir. C U T T E R . There are some other minor adjustments, but that is
basically the total increase needed in the debt subject to limit.
Senator B Y R D . S O those, of course, are expenditures of Government.
It is a part of the cost of operating the Government, that $12.5 deficit ?
Sir. C U T T E R . It is part of the cost. I t is also directly linked to our
concerns and our interest in controlling credit, the credit transactions
of the Government, and our interest, as I mentioned earlier, in developing a budgetary means of control over guaranteed loans. Because
guaranteed loans and the Federal Financing Bank's later purchase of
them, which, in effect, translates them into direct Federal loans, because they are seen as free goods, they tend, in our judgment—although one never has specific evidence of this—to be overly used.
I think we believe in the economist's dictum that there is no such
thing as a free lunch, and would like to see those controlled directly




133
and to see limitations be put on them. And, were that to be done, we
would be more confident about saying to you what the true "heeds" of
the Federal Government were in this area.
The number $12.5 billion is that which is estimated to be required
by the Federal Financing Bank in fiscal year 1979 under current
conditions.
Senator BYRD. Well, the reason it arose is that you are testifying
today on behalf of the Treasury's position that it will need an additional $90 billion for fiscal 1979 %
M r . CUTTER. Y e s , s i r .
Senator BYRD. That is,

an increase in the debt ceiling of $90 billion.
So that would indicate to me that the Federal funds deficit would
be roughly $90 billion, but the Federal funds deficit is $74.5 billion,
and I take it that the reason the $90 billion is claimed to be needed is
because you need to add to the $74.5 billion the $12.5 billion for the
Federal Financing Bank.
Is that about right ?
M r . CUTTER. Y e s , s i r .
Senator BYRD. So your

total deficit, then, would be $ 7 4 . 5 billion plus
&12.5 billion, or $87 billion, which nearly reaches the $90 billion figure
that you are seeking to increase the debt ceiling ?
Mr. C U T T E R . A S I said, that is the total that the Treasury Department is requesting to be financed, and we are supporting that total.
Senator BYRD. I have had the feeling—maybe you could help us on
this—that, in the past, the $12.5 billion figure did not figure into the
debt ceiling, did it ? Or else it was not a deficit at that point.
Mr. CAVAXAUGH. That is correct, Senator. The Federal Financing
Bank Act was enacted in 1973 and commenced in 1974. It did not have
an impact on the debt ceiling limit until after that date, and the
financing that is now in the Financing Bank, thus financed through
the Treasury and in the debt subject to limit before was not affecting
the debt subject to limit. It was financed by the agencies on the market
outside the debt limit.
Senator BYRD. S O the actual deficit for the general operations of
Government would be $87 billion for this new fiscal year.
Mr. CAVAXAUGII. Including the Financing Bank?
Senator BYRD. Including the Financing Bank because, as I understand it from you, that is to finance the general operations of various
agencies of Government.
Mr. CAVAXAUGII. That is correct, sir.
Mr. C U T T E R . If I could interject, I think that an important point
was just made for all of our understanding of this number, that it is,
in many respects, a much more complete number than may have been
examined in the past.
In this budget, and in these testimonies, you are being given, sir, the
Federal funds deficit and the deficit of the off-budget entities of the
Federal Financing Bank, and therefore, arriving at a total which is
the total that we feel is necessary for Government operations in fiscal
year 1979.
In previous years, prior to the Federal Financing Bank's operation,
those agencies would have gone to the market, by themselves, and
financed those same activities, but in a manner that was not subject
to limit. And therefore the existence of the Bank ancl of this, I believe




134
open presentation, gives us, yon and the public much better sense of
what is being financed and what activities are costing.
Senator BYRD. I think it does, and I want to commend you and your
associates for doing this. I think it does give the Congress and the
public a much clearer picture, and it is a more candid way to present
the facts.
Since the deficit of the offbudget entities has become a significant
amount of money, why not include these in the budget ? Why do we
omit these entities from the budget ?
Mr. C U T T E R . There are a range of views about that, from, on the
one hand, the argument that they should, of course, be included directly and, on the other, that they should not be counted.
I am, personally, somewhere in the middle, which is that what is
most important is the development of some means of controlling the
credit that gives rise to the financing necessities, that to count loan
guarantees dollar for dollar is not quite accurate and that, therefore,
we should develop, in a sense, a credit budget.
And, in my own judgment, this controls the program activities
which give rise to the activities of the Federal Financing Bank, which
then gives rise to this number more effectively than were we to simply
put it on budget.
I can amplify on those remarks for your record, if you wish.
Senator BYRD. Who runs the Federal Financing Bank?
Mr. C U T T E R . I do not know the gentleman who is in charge of it.
My understanding is that it is a relatively small institution within the
Treasury Department—small in the sense that it is not a large independent building or large, independent staff, but I am not certain.
Senator BYRD. Maybe Treasury could help us on that.
Mr. CAVANAUGH. Yes, sir. The Federal Financing Bank was established in the act as an agency under the direction and supervision of
the Secretary of the Treasury, and the Chairman of the Board of the
Bank is, in fact, the Secretary of the Treasury. The Bank is run by the
Treasury and by Treasury officials who are serving, in effect, ex officio
in addition to their other duties as officers and board members of the
bank.
Senator BYRD. What individual has the responsibility for the Federal Financing Bank ?
Mr. CAVANAUGH. The Secretary of the Treasury is Chairman of the
Board of Directors for the Federal Financing Bank.
Senator BYRD. And who are the Directors ?
Mr. CAVANAUGH. The Directors are other officials of the Treasury
Department serving under the Secretary.
Senator BYRD. Well then, the Treasury has more to do with the general operation of Government and the Federal funds deficit than I had
thought in the past, because if the Federal Financing Bank anticipates
a deficit of $12.5 billion, that is a very signfiicant deficit.
Mr. CAVANAUGH. I should stress, Senator, that the Federal Financing Bank itself is not a program agency. It is not making any decisions
with respect to the size of its activities, who gets which loans when. It
is basically a debt management technique, so that after the Congress
decides what the various Federal agencies are authorized to do, how
much they are authorized to borrow or to guarantee, then instead of
their going directly into the private market to raise this money, it goes




135
to the Federal Financing Bank which is a more efficient means of
financing.
Senator B Y R D . Yes; it seems to me it would be.
Federal guarantees have been previously mentioned. What is the
total of our Federal guarantees ?
Mr. C A V A N A U G H . The total of guaranteed obligations—well, the net
increase in the fiscal 1979 budget is $30.5 billion.
Senator B Y R D . That is the increase ?
Mr. C A V A N A U G H . That is the increase in fiscal 1 9 7 9 . In the budget,
under special analysis F, there is a total which shows the guaranteed
loans outstanding as of the end of fiscal 1979 at $223.6 billion.
Senator B Y R D . N O W , that is not a part of the $ 8 7 1 billion debt, is it?
Guarantees are separate from our public debt ?
Mr. C A V A N A U G H . That is separate.
Senator B Y R D . S O the total Federal guarantee is estimated to be, at
the end of 1979, $203.6 billion, or an increase of $34.5 billion over fiscal
1978.
M r . CAVANAUGH. Y e s , s i r .
Senator B Y R D . Can you produce

without too much difficulty the figure on the Federal guarantee total for previous fiscal years, say, going
back to 1975 or somewhere around there ?
Mr. C A V A N A U G H . Well, that $223.6 billion figure for the end of 1979,
we will provide that for the record, Senator.
Mr. C U T T E R . We can provide that. We do not have that here.
Senator B Y R D . Yes, if you would, thank you.
M r . CUTTER. Y e s , s i r .
Senator B Y R D . D O you have the figure for liquid liabilities
eigners as of December 3 1 , 1 9 7 7 .
M r . CUTTER. NO, s i r , I d o n o t .
Mr. C A V A N A U G H . Are you speaking of the Treasury debt?
Senator B Y R D . NO, total liquid liabilities to foreigners.

to for-

For example, I have some figures here, as of December 31, 1970,
total liquid liabilities to foreigners was $47 billion. Then if you get up
to 1973, December 31, it was $92.6 and the next year it goes to $119.
The next year, 1975, it goes to $126 and then for December 31, 1976,
it was $151.
Now, I wanted to update those figures to get the figure for December
31, 1977.
Mr. C A V A N A U G H . We could provide that for the record, sir, if we
do not have that.
Senator B Y R D . Yes; thank you.
[The material referred to was subsequently supplied for the
record:]
[Outstanding primary guaranteed loans (adjusted)]
Fiscal year:
1975
1976
Transition quarter
1977
1978 estimate
1979 estimate

$158. 7 B
169.8
169. 8
183. 9
200.4
223.6

Senator B Y R D . Thank you, gentlemen, very much. We appreciate
your being here this morning.
Mr. C U T T E R . Thank you, sir.
[The prepared statement of Mr. Cutter follows:]



136
STATEMENT OF W . B O W M A N CUTTEB, EXECUTIVE ASSOCIATE DIRECTOB FOB BUDGET
OF THE OFFICE OF MANAGEMENT AND BUDGET

Mr. Chairman and Members of the Committee: I am pleased to support the
Treasury's request for an increase in the statutory debt limit, its proposals for
improving the management of the debt, and the suggestion that the statutory
debt limit be tied to the congressional budget process, which now gives the Congress more effective control over Federal taxation and spending. My statement
will discuss the budget and its effect on the public debt subject to the statutory
limitation.
BUDGET TOTALS

As shown in the following table, the fiscal year 1978 deficit is estimated at
$61.8 billion, with outlays of $462.2 billion and receipts of $400.4 billion. The
deficit for 1979 is estimated at $60.6 billion. The President's budget calls for
total 1979 outlays of $500.2 billion, and receipts estimated at $439.6 billion.
BUDGET TOTALS
[Fiscal years; in billions of dollars}
1977 actual 1978 estimate
Budget receipts.
Budget outlays
Deficit ( - )

1979 estimate

356.9
401.9
-

400.4
462.2

439.6
500.2

-45.0

-61.8

-60.6

OUTLAYS

Estimated outlays for 1978 have changed little since we testified on the debt
ceiling last August and September: $462.2 billion now, versus $462.9 then. The
outlays proposed for 1979 reflect a prudent and tight budget. It is the product of
a careful zero-base review of agency programs.
Spending has been held to an overall increase of eight percent, the smallest
increase since 1973. True, the deficit for 1979 is only one billion less than the
deficit in 1978. Had no tax cut been proposed, we could have shown a decrease
of $15 to $20 billion. It is more important now, however, that we have a tax cut to
Iielp the economy continue to grow and to encourage the increased capital investment that will improve productivity. The President's proposed reductions also
mean that Federal taxes will represent a smaller share of our gross national
product. This, in turn, will provide an additional incentive for both the Congress
and the President to restrain the growth in spending.
This budget keeps open the option for a balanced budget in 1981. In an effort
to control the budget more effectively so that we can remain on this path, the
President has asked each agency to prepare future budget requests within the
context of a planning period that extends for three years beyond the budget year.
The multiyear budget planning system that we are developing will help to assure
better control of Federal spending by identifying the long term spending consequences of program proposals. The 1979 budget requests together with detailed
long-range estimates prepared in connection with this budget will form the
Initial elements of the new system.
RECEIPTS

Estimates of 1978 receipts have declined by $1 billion since the August and
September hearings on the debt ceiling, from $401.4 billion to $400.4 billion. For
1979, the receipts estimates are $24.3 billion below those that would be produced
under existing legislation, reflecting the effects of the Administration's energy
tax and tax reduction and reform proposals.
THE BUDGET BY FUND GBOUP

Table 1 shows our current estimates of the budget snplus or deficit for 1978
and 1979 by fund group. As the following table indicates, a decline in the
•estimated Federal fund deficit for 1978 since August has been offset by a decline
in the estimated trust fund surplus.




137
SURPLUS OR DEFICIT BY FUND GROUP
[In billions of dollars]
Fiscal year 1978
August
estimate

Current
estimate

-74.6
13.1

-72.1
10.3

Federal funds
Trust funds

Change
2.5

—1. &

Table 2 shows revised estimates of debt subject to statutory limitation, and
explains numerically the derivation of the change in debt subject to limit in 1977,
1978, and 1979.
TABLE l . - B U D G E T TOTALS BY FUND GROUP
[Fiscal years; in billions of dollars]
1977 actual 1978 estimate

1979 estimtfc

240.4
152.8
-36.3

267.9
168.5
-36.0

-37.5

356.9

400.4

439.6

294.9
143.3
-36.3

340.0
158.2
-36.0

363.6.
174.1
-37.5

401.9

462.2

500.2

-54.5
9.5

-72.1
10.3

-74.5
13. ft

-45.0

-61.8

-60.6

1977 actual

1978

1979

Unified budget deficit
Portion of budget deficit attributable to trust funds surplus or deficit ( — ) -

45.0
9.5

61.8
10.3

60.6
13.9

Federal funds deficit
Deficit of off-budget Federal entities

54.5
8.7

72.1
11.5

74.5
12.5

Total to be financed.
.
„
Means of financing other than borrowing, and other adjustments

63.2
.9

83.7
-5.7

87.0
2.6

Receipts:
Federal funds
Trust funds
Interfund transactions

..

_„

_

Total, budget receipts
Outlays:
Federal funds
Trust funds
Interfund transactions

_

Total, budget outlays
Surplus or deficit ( — ) :
Federal funds.
Trust funds
Total, surplus or deficit ( — )

289.1

188.0

TABLE 2.—DEBT SUBJECT TO LIMIT
[Fiscal years; in billions of dollars]
Estimate

64.1

Change in debt subject to limit
Debt subject to limit, beginning of year
__
Estimated debt subject to limit, end of year

_

78.0

89.6

635.8
700.0

700.0
777.9

777.9
867.5-

STATUTORY DEBT CEILINGS AND CONGRESSIONAL BUDGET RESOLUTIONS

Let me conclude by touching briefly on the element of redundancy that now
exists between the process for setting statutory debt ceilings, on the one hand,
and the establishment of "appropriate levels for debt subject to statutory limitation" that are contained in the congressional budget resolutions. OMB supports
the Treasury suggestion that because the public debt is being effectively controlled and efficiently managed through the congressional budget process, the
debt limit in the future simply be tied directly to the congressional budget
process.




138
Senator B Y R D . We are pleased to have, as the next witness, the Vice
Chairman of the Federal Reserve Board, Gov. Stephen S. Gardner.
We are very glad, indeed, to have you, Governor Gardner, before the
-committee today.
Mr. G A R D N E R . Thank you, Mr. Chairman.
Senator B Y R D . I might say that I have a very high regard for the
Federal Reserve Board and the vitally important work which the
Board does; and contrary to some of my colleagues, I think it is very
important that the Board remain independent of other branches of
Government. I cannot imagine anything worse than having the Congress getting involved and attempting to handle the complex and difficult problems, many of a highly technical nature, that the Federal
Reserve Board must handle.
Welcome, sir, and you may proceed, Governor, as you wish.
S T A T E M E N T O F H O N . S T E P H E N S. G A R D N E R , M E M B E R , B O A R D
GOVERNORS, FEDERAL

RESERVE

OF

SYSTEM

Mr. G A R D N E R . Under the congressional budget procedures adopted
in 1974, increases in the Federal debt ceiling have become essentially a
reflection of the Federal budget totals Congress sets with the help of
its new budget committees. Debt ceiling hearings, nevertheless, provide an opportunity for review and reassessment of the broader economic implications of a large and rapidly growing Federal debt. My
testimony today will, therefore, focus as requested on some of the
financial implications of an expanding public debt.
The Federal budget document recently sent to Congress provides
projections of expected increases in the Federal debt subject to ceiling, along with estimates of the likely dimensions of needed changes
in the debt ceiling itself. While the outstanding Federal debt is expected to remain below the present temporary ceiling of $752 billion
during the next 2 months, this temporary leeway expires on March 31.
Since the permanent debt ceiling is still set at $400 billion, a neAV
temporary ceiling will obviously be needed by that date.
The Budget document estimates that a new temporary ceiling of
$781 billion will be needed to accommodate prospective Federal borrowing requirements through the end of the current fiscal year. Of
this T billion increase, about $10 billion is needed to cover expected
$29
grow th in agency holdings of Government debt, chiefly to fund future civil service retirement liabilities and unemployment compensation. A further increase in the ceiling to $871 billion is estimated to
be needed to cover requirements through fiscal 1979, with abput $15
billion of the $90 billion increase allotted to agency fund growth.
The projected need for a higher debt ceiling also reflects the administration's estimate that the Treasury will have to borrow $66
billion from the public during the current fiscal year, and then another $73 billion during fiscal 1979. These estimates include borrowing to finance so-called off-budget needs as well as regular budget
requirements. Since off-budget needs add to Federal demands on financial markets, a borrowing figure that covers both types of operations
provides a more comprehensive measure of the financial pressures
being exerted by Federal requirements. It should be noted that the




139
$66 and $73 billion figures relate only to net cast borrowing from the
public. Gross borrowing to refinance public holdings of maturing
Federal debt will be several times the volume of net borrowing.
Successive fiscal-year cash borrowing totals of $66 and $73 billion
are obviously large. However, their likely impact on conditions in
financial markets will depend on the aggregate volume of savings
available in the economy and the accumulated demand for funds
from other types of borrowers. Moreover, the significance of given
absolute dollar totals of Federal deficit financing must be kept in
perspective, by also considering the growth in the overall level of
economic activity.
In fiscal year 1976, net Federal borrowing from the public totaled
over $83 billion, substantially more than the annual figures now being
projected for the current fiscal year and for fiscal 1979. However, with
the economy in fiscal 1976 still in the early stages of recovery from the
serious 1974-75 recession, demands for funds from other nonfinancial
sectors were relatively moderate. Businesses were making sizable net
repayments of short-term loans at commercial banks, and demands for
funds to finance multifamily housing and commercial properties remained slack. As a result, net borrowing by the Federal Government
and other nonfinancial sectors, combined, amounted to about 15 percent of GNP—a reasonable total under the circumstances of the recovery taking place that year. Moreover, with credit demands moderate, commercial banks and other institutions were still actively rebuilding liquidity in the aftermath of the 1973-74 financial strains.
Consequently, there was a strong demand for U.S. Government securities, and the unusually large net Federal borrowing need was readily
accommodated at declining interest rates.
In the fiscal year 1977—which ended last September—net funds
raised by sectors other than the Federal Government were more than
$100 billion above the fiscal 1976 level. Even though Federal cash
borrowing was about $30 billion lower, total borrowing by all sectors
still showed a large increase and rose as a percentage of GNP. In bond
and mortgage markets, financing outside the Federal sector rose by
roughly 60 percent: consumer credit expanded sharply; and bank lending to businesses showed a marked recovery from the earlier cyclical
slackness.
As their customers' demands for loans expanded, commercial banks
sharply curtailed their acquisitions of Treasury securities; then during
the final quarter of the fiscal year, they became sizable net sellers of
such issues. Nonfinancial corporations were also sellers of Treasury
debt on balance over the year as a whole.
Thus, changes on both the demand and supply sides of financial markets contributed to upward pressures on market interest rates during
the latter half of fiscal 1977 as the economy continued to expand. Shortterm interest rates rose the most, but some increases also developed in
note and bond markets, particularly those for intermediate-term Treasury debt which absorbed a sizable volume of new offerings. Open-market operations undertaken by the Federal Reserve to counter the excessively rapid monetary growth that developed in the April and July
quarters of 1977, contributed to the rise in short-term rates, although
reserves available to the banking system expanded significantly during
fiscal 1977 after remaining essentially unchanged in fiscal 1976.




140
Since the end of fiscal 1977, the current and prospective near-term
volume of Federal deficit financing has expanded considerably. Pressures on Federal financing costs stemming from this expanded borrowing might have been greater had it not been for two special types
of demands for Treasury debt that became particularly strong in this
period. Foreign investors—chiefly central banks and other official
institutions—invested a substantial part of their sharply increased
holdings of U.S. dollars in Treasury debt. Also, State and local governments continued to acquire a large volume of special Treasury
arbitrage bonds, and thus limited the volume of new debt the Treasury
had to sell to other investors.
The Treasury has projected net Federal cash needs in the current
quarter not too different from the large volume borrowed in the January quarter of fiscal 1976. During the May-June period, however, it
expects the weight of Federal borrowing on financial markets to
slacken—with some seasonal debt repayment. During the July-September quarter, although the Treasury is again likely to face a sizable
deficit, net borrowing will probably be less than in the current quarter
and possibly little different from the comparable period 1 year ago.
In general, the net impact of the Treasury's future borrowing
requirements on financial markets will depend in large measure on
the weight of other credit demands at the time. If rising Federal
deficits occur in combination with a general strengthening of other
demands, this might very well lead to further upward pressure on
interest rates, particularly if inflationary increases in the monetary
aggregates are to be avoided. In order to encourage the capital spending by businesses that is needed to maintain our Nation's economic
growth and international competitiveness, it is, therefore, important
to insure that the Federal Government does not unduly impinge on
the financial and real resources that need to be channeled into business
expansion.
Before concluding, Mr. Chairman, I would like to offer two comments of a strictly operational character. First, I think the early
timing of this hearing in relation to the expiration date of the debt
ceiling is all to the good, since it should help to avoid the unfortunate
disruption of efficient debt management that invariably develops when
the ceiling reverts back to its permanent level—even for a few days..
Second, the Federal Reserve hopes that your actions will continue to
provide the Treasury with the requisite statutory flexibility to place
new debt in whatever maturity sector of the market will best implement its policy goals.
Thank you, sir.
Senator BYRD. Thank you very much. Governor Gardner.
Let me ask you if you would respond to the same question that I
asked the other witnesses, concerning the Federal debt which is now
quite large. It will be well over $800 billion by the end of fiscal 1979.
Often this debt is dismissed on the basis that it is not important, since
we owe the debt to ourselves.
Would you give your view on that ?
Mr. GARDNER. My view may be somewhat specific, because I think
that the important thing for our Government and our country to remember is that, as the Treasury borrows in the financial markets it
competes with all private borrowers; therefore, the rate of increase




141
and the amount each year that lias to be increased to the Federal debt
seems to me to be one of the most significant facts.
If we reach a point where the Treasury is outbidding the private
sector in any one particular year, or a combination of years, we can
severely damage our economy.
Now, so far, as I have indicated in my testimony in 1976 and 1977,
we got through two very significant deficit years. If we are to increase
productivity, and provide for the capital investment that is necessary,
we must hope that the Treasury's force in the marketplace is not so
great that it cuts back the ability of the other borrowers' legitimate
demands.
Senator BYRD. Well, in regard to the debt itself, would you take the
view which is frequently expressed that it is really not important
because the American people owe it to ourselves ?
Mr. GARDNER. I cannot take that view. In the first place, the amount
of interest that is included in the appropriate budget outlays which
must be paid is a very large part of the deficit in any particular year.
Surely it contributes to the deficit, so it is a cost.
Second, we do not owe it all to ourselves. Foreign governments buy
our securities, and that literally, begins to negate the concept that wTe
owe the Federal debt to ourselves.
Senator BYRD. Even for this country, those who own a part of the
debt do not own it equally. For example, I do not own any Government bonds, so if the debt were repudiated because we all owe it to
ourselves, I would lose nothing by it, but I assume that a great many
people would lose a great deal by it. Certainly the banks hold a very
substantial part of the Government obligations. Also, insurance companies, I believe do, along with banks owTn a great portion of the debt,
do they not ?
Mr. GARDNER. Yes, and pension funds and other trust funds of one
kind or another that provide for retirements hold Government bonds
and are indirectly owned by the beneficiaries of those plans although
they have no voice in acquiring them.
I agree with you. As a matter of fact, when I came to the Treasury,
Mr. Chairman, I learned very quickly that there is a specific law that
the Secretary of the Treasury cannot own any Government bonds. As
a result, I had to get rid of all of mine because I was his deputy.
Senator BYRD. I really do not know what that should be. I guess there
was some reason for it at the time that the law was enacted.
Mr. GARDNER. I believe it came from a long ago concern about Andrew Mellon serving as Secretary of the Treasury.
Senator B Y R D . Y O U mentioned something in connection with the national debt that is almost never mentioned; namely, the interest
charges. And yet, in the new budget, there is a total of $55 billion. Now,
that figure is almost—not quite, but almost—as much as the total
amount that we are spending on national defense for fiscal 1979.
It is a gigantic figure that must be paid, of course, by the taxpayers.
I think the national debt is of great significance to the individual citizens of our country.
You mentioned a little earlier, I believe, that the total borrowing
need of the Government in fiscal 1979 would be $73 billion. Now, does
that include refinancing?
M r . GARDNER. N O , s i r .




142
The rolling over of our existing indebtedness is an additional
'amount. It means that the debt has to be retired and replaced.
Senator B Y R D . Do you happen to have the figure on what the refinancing would be ?
Mr. GARDNER. I think it will be two or two and a half times as much,
but that is an inexact answer and I would rather provide it for the
record.
Senator B Y R D . Would you provide it for the record ?
Mr. GARDNER. I would be glad to.
Senator B Y R D . That would be helpful.
[The following was subsequently supplied for the record:]
While I do not know how the Treasury plans to roll over maturing debt at the
start of fiscal 1978, public holdings of outstanding marketable debt date to
mature within the fiscal year totaled $161.3 billion—more thta twice the $66
billion of net cash borrowing that occurred during the year. Of course, a part
of this total consisted of 3-month and 6-month Treasury bills which had to be
rolled over more than once within the year. The $161.3 billion figure counts
these Treasury bill roll-overs only once.

Senator B Y R D . What percentage of the lendable funds do you think
the Government would need to borrow in fiscal 1979, including the
refinancing ?
Mr. GARDNER. I would have to calculate that, because I do not want
to leave a wrong number. I am sorry, sir. I do not have it in front
of me.
Senator BYRD. Maybe you would provide that for the record %
Mr. GARDNER. I will indeed.
[The following was subsequently supplied for the record:]
At this point any figure indicating the percentage of total lendable funds the
Federal Government is likely to borrow in the fiscal year 1979 would, of course,
be strictly a forecast. It would depend not only on the recently published Federal
budget estimates, but also on projections of overall economic activity and the
likely flows of funds available to the full range of lenders. For the most recent
fiscal year, ending in September 1977, the share of total lending to non-financial
borrowers absorbed by the Federal Government was apparently about 17 percent.
While our staff has not yet made detailed projections of financial flows for fiscal
1979, it has made such projections for the year ending in June 1979. Over that
period the share of total lending to non-financial borrowers absorbed by the
Federal Government is projected to be a little higher than in fiscal 1977—possibly
around 20 percent.

Senator BYRD. H O W do you size up the impact of this borrowingvolume, both the new borrowing and the refinancing, as to the effect it
might have on interest rates ?
Mr. GARDNER. A S I have said in my testimony, if we find a general
increase in private credit demand, for which we are hoping due to a
shortage of capital investment in this whole recovery thus far, the
size of our Federal financing in the markets will be a very important
factor.
I have strongly supported the theory that the Government can
crowd out the private sector. You might remember that was quite a
catch phrase a year or two ago, but, as I have indicated here, it did not
happen.
Senator BYRD. But if the economy had been in a better condition, if
businesses were investing more, which the Government wants business,




143
to do, then you might have had an entirely different situation, might
you not, insofar as the crowding out ?
Mr. GARDNER. Y O U could, which is why I commend the committee'S
attention to the debt ceiling and, as I have indicated, we must do our
best to prevent the disruption that can occur when this develops.
Senator BYRD. I S the large recent increase in the debt inflationary ?
In the short space between the end of fiscal 1972 and the end of fiscal
1979, the debt, the national debt, will have doubled.
Mr. GARDNER. Yes, sir. Underlying that debt doubling was a substantial amount of budget deficit at the Federal level, and that has to
cause all kinds of inflationary pressures on our economy.
Senator BYRD. Looking ahead to 1 9 7 9 , Mr. Cutter testified that the
assumptions on which the new budget was based is that there would
be a new 6-percent inflation rate. How does that inflation rate figure
in your calculations ? Do you feel that is an appropriate figure ?
Mr. GARDNER. Our staff studies indicate that that is the general, supportable contention or estimate, and we make such studies when we
are provided with the President's economic reports.
I do not want to dispute OMB's figures, because our own staff studies
come close to those.
Senator BYRD. But your staff studies indicate inflation somewhat ir\
the 6-percent range, I would assume ?
M r . GARDNER. Y e s , s i r .
Senator B Y R D . Yet the

Government, in the past week or so, has been
paying 8 percent for money. Does that not indicate an inflationary
condition ?
Mr. GARDNER. I certainly agree with you that it does. There is a basic
rate of interest necessary in an economy, and then there is an inflationary premium depending on how the Government's efforts are proceeding—inflationary pressures other than the Federal deficit. I am
sure that Treasury is only paying what it has to pay in order to get
money. So there is a real interest rate and inflationary premium over
the real interest rate.
Senator BYRD. We were mentioning the cost of servicing the national
debt. In arriving at a $55 billion figure for fiscal year 1979 for interest
payments, two previous witnesses testified that the assumption was,
that the general average in interest rates, so to speak, would be about
6.1 percent.
But, with interest rates more recently having jumped up to 8 percent for the Government—when the Government pays 8 percent—that
means that everybody else is paying a great deal more, I would assume. Would that not be a reasonable assumption ?
Mr. GARDNER. That would be, but I have to say that the prior witnesses were dealing with the shorter term interest rates rather than the
long-term rates.
Senator B Y R D . Yes; but 31/2 years, I think, was one of the issues last
week that cost the Government 8 percent. That is not too short a term,
The other was 7 years, as I recall, also at 8 percent.
Mr. GARDNER. Mr. Chairman, I really do not want to make an interest
rate forecast since we at the Board have important monetary policy
responsibilities.




144
Senator B Y R D . N O ; I did not have that in mind. I was just getting you
to help me in my thinking. If the Government has to pay more for
money—and it has been, as I say, paying up to 8 percent—that indicates
to be that interest rates are almost bound to go up.
Now, I do not believe that this would be inappropriate, though, to
ask you this.
Are higher interest rates inflationary ?
Mr. GARDNER. I am sorry, sir ?
Senator B Y R D . Are higher interest rates, in themselves, inflationary ?
Mr. GARDNER. Yes, sir. They add to the cost of so much that we need—
housing, capital investment, et cetera.
Senator BYRD. One of your predecessors for whom I , incidentally,
have a very high regard, William McChesney Martin, had an interview
in the New York Times recently in which he said that the biggest
problem facing our Nation and, he said, the free world, is inflation.
That has been my view also. Is it your view that inflation ultimately
produces higher unemployment ?
Mr. GARDNER. Yes, sir, it does. It slows business development and
consumer spending.
Senator B Y R D . It seems to me, also, that it hurts most those on fixed
income.
Mr. GARDNER. Surely.
Senator B Y R D . And those in the middle and lower economic groups.
Mr. GARDNER. I would agree. We often hear the statement that they
cannot protect themselves, and that is a very true statement. They do
not have the means to avoid the inflationary costs that are visited on
them as inflation is moving ahead.
Senator B Y R D . I also think that the huge government debt and the
continued, accumulated and accelerated Federal deficits are a major
cause of inflation.
Would you care to comment on that ?
Mr. GARDNER. I cannot disagree with that. The experience that the
country has gone through since World War I I probably illustrates that
as specifically as anything can. It was not only the oil price quadrupling or quintupling, but the massive Federal outlays when we had
Vietnam as a burden on the economy clearly aggravated the Federal
deficit and, put more dollars into the economy than were appropriate
at the time. Our taxes were not high enough to deal with Vietnam, and
as a result, we built a strong disposition to inflation into our economy.
Senator BYRD. I was interested to note in last week's Washington
Post, that Hobart Rowen on February 5, quoted statements Prof. Otto
Eckstein made before this subcommittee. I quote:
The tipoff that "there is a real problem*'—speaking now of the
deficits and national debt—"comes from critiques by liberals, such as
Prof. Otto Eckstein, a member of the Economic Council under Lyndon
Johnson. Eckstein pointed out to a Senate committee the other day
that the economic recovery since 1974r-75 recession has not brought
about the usual shrinkage of Federal deficits."
And most certainly it has not, because in this current fiscal year,
the deficit will be greater than in the past, and the same will be true
for the upcoming fiscal year.




145
And, to go back to this column:
Instead, they have ballooned to the point where the gross Federal debt will
reach $837.7 billion by September 1979 and will pass $1 trillion by 1981—

according to this column.
Twenty years ago, most economists would have said it matters little because
the interest payments are a transfer within the American people—

Eckstein said—
but today we can no longer say that we owe it to ourselves, because about $100
billion of national debt is now held by foreigners, and that figure increases by
about $20 billion annually.

Again, it indicates to me the great importance of the Congress
paying greater attention to the debt and the deficits, and the great
impact that these accumulated deficits and the tremendous increase in
the debt will have upon the American people.
Would that be in accord with how you understand the economics
of it?
Mr. GARDNER. It certainly would, Mr. Chairman.
There was a recommendation in the previous witness testimony
that we adjust the congressional budgetary process so that the debt
ceiling might follow from that process. I explored this with my colleagues at the Board and I did not get a consensus of approval. They
think that the process that we are going through here today probably
does have some value. Some of us raised the question whether to support the idea that there be an addition to the budget procedures so
that the debt ceiling flows automatically, and I found that more than
a majority of my colleagues did not share that view at all. We should
seize every opportunity to pay attention to the debt ceiling and deficits. And, as you know, these hearings in the past have focused attention on the size of the debt. Therefore, why take away a discipline
such as we are going through here ?
Senator BYRD. I am glad to get those observations, Governor Gardner. I have some hope that the American people are coming to be more
concerned about Government finance, about the deficits and the debt.
But it is a subject in which there is no political sex appeal. It is a hell
of a dry subject; there is no political sex appeal to it.
And yet, it affects every man, woman, and child in our country.
Mr. GARDNER. Well, you are absolutely right that there is no political sex appeal. However, so much of our Federal spending is mandated by prior legislation—transfer payments to individuals, and
such—that we should continue to focus attention on the subject.
Once these programs are enacted by Congress and continue indefinitely, a rising share of our GNP and personal income or taxes on
individuals are necessary to support programs which occasionally
should be carefully analyzed because they make very heavy demands
on the Federal budget. Now, that is a subject that has no sex appeal at all. In fact, opposition to programs of that kind generates
great heat and discussion.
Senator BYRD. Indeed it does. Incidentally, Albert Sindlinger who
is an economic pollster, you may know him, he operates from Media,
Pa., not far from where you were president and chairman of the
board of the Girard Bank, fie testified before this committee last week.
23-544—{18



11

146
I have been to his office and seen his operation. I t is rather fascinating. He has been doing this for 20 or 25 years; I forgot which.
He and his staff make phone calls every day—some 150 to 200 each
night throughout the United States to consumers to find out what
they are thinking about, what their interests are, what their level of
confidence in the economic picture is. He told the committee, and has
told me privately also, that he is finding more and more concern on
the part of the public for the huge deficits of our Government. From
his polling, he feels that the public generally is becoming more aware
of just how bad the U.S. Government is in its financial matters.
If he is right about that—and I have no reason to think he is not—
if he is right about that, I think that is the most hopeful sign that
I have found in a long time. The only way that this uncontrolled
spending by the Federal Government is going to be curbed is if the
people themselves will demand that the Federal Government operate
with some reasonable degree, some reasonable degree, of propriety
and wisdom in the handling of tax funds and cease these huge
deficits.
To me, it is just unbelievable—and I admit that I am in the minority. Most of my colleagues do not agree with me, and maybe they
are right, but I am convinced that they are not right. These huge
deficits and the debt it creates are in the long run, very detrimental to
the American people.
Governor, I appreciate your being here this morning.
Mr. G A R D N E R . I have just critiqued the previous testimony in only
one part, I urge that this committee consider two other recommendations : First, that the early timing of the hearing result in some action
so that the unfortunate disruption of debt management in the Government that will occur if we revert back to the permanent level be
carefully considered; and second, I think it is terribly important
that the Treasury's recommendations to increase their long term borrowing capacity be adopted. This will help them manage the deficit
and debt in the economy since we do not want to stop what is going
well, such as housing, residential housing.
Senator B Y R D . I want to second what you say, and what the other
two witnesses said, about the importance of the Congress' acting with
more promptness on handling the debt ceiling increase legislation.
Usually it is put off until the last day or so before the old debt ceiling
expires. I think that is unwise. Sometimes it has even gone beyond the
point of expiration, and that is certainly undesirable.
I just, this morning, I urged the committee to arrange for early
action, because, for one thing, the Congress will be in Easter recess
on March 31, so if this legislation is to be handled before the Easter
recess, it will have to be handled—and this hearing today will not
take the place of a hearing that will be held on the precise legislation—
that hearing should be held, I would think, the first part of the week
of March 13. And that would give the Congress, then, about 2 weeks
before it goes out for the Easter recess.
But I want to second your statement that Congress should act
promptly on this matter.
Mr. G A R D N E R . Thank you, sir.
Senator B Y R D . Thank you.




147
The subcommittee is recessed.
[Thereupon, at 12:20 p.m., the subcommittee recessed, to reconvene at the call of the Chair.]
[By direction of the chairman the following communication was
made a part of the record:]
WILSON E .

SCHMIDT,

Black sburg, Va., February
Senator H A R R Y F.
Russell Building,
Washington, D.C.

11,1978.

BYRD,

DEAR SENATOR BYRD : Having just read Professor Otto Eckstein's testimony of
January 30 before your subcommittee in which he refers to the problem of foreign
ownership of our national debt, I wish to raise an aspect of that issue which he
did not cover, one which is more immediate and compelling in my view.
Over half of the increase in 1977 in privately held public debt securities was
bought by foreigners. A substantial part of the foreign purchases were made by
foreign central banks. They bought dollars for the purpose of holding up the
value of the dollar and holding down the value of their own currencies in the
foreign exchange markets. After they bought the dollars, they employed them to
buy U.S. Government securities. (See attachment for the data.)
This presents a dilemma. On the one hand, foreign central bank purchases of
dollars and then their purchases of U.S. Government securities ease the drain on
the U.S. private capital market imposed by the need to finance the Federal
budget deficit. And it reduces the need for indirect recourse to the Federal Reserve
System to finance the deficit with its inflationary consequences.
On the other hand, foreign central bank purchases of dollars, by keeping up the
value of the dollar, stimulate U.S. imports because foreign goods cost less than
they otherwise would. At the same time they retard U.S. exports because American goods become more expensive to foreigners than otherwise. In short, they
worsen our trade balance.
If the purchases had been made by private foreigners in search of higher
returns and safety, I would not be particularly concerned. But that is not the case.
As a general rule, there is a strong presumption against the U.S. Government
seeking to control or affect specific prices paid or received by Americans. There is
an even stronger presumption against foreign governments doing so. Yet that is
exactly what they are doing when they purchase dollars to affect the price of the
dollar in terms of their own currencies.
I hope that you wTill agree that the issue deserves serious consideration by the
Congress and the Executive. Your subcommittee wTould appear to be a logical place
to start. As a former Deputy Assistant Secretary of the Treasury, I believe that
there are some technically feasible policies available to ease the problem.
Sincerely,
WILSON

SCHMIDT.

Attachment.
According to the Treasury Bulletin, January 1978, Table OFS-2, the amount
of privately held public debt owned by foreigners rose by $28.6 billion between
the end of December 1976 and the end of November 1977 compared with an increment in all privately held debt of the U.S. Government of $48.1 billion.
According to the Survey of Current Business (September, 1977), Table B of
the article on U.S. international transactions, industrial countries increased their
foreign official assets in the United States by $7.2 billion in the first half of 1977.
According to the Department of Commerce press release, BE A 77-95, December
21, 1977, in the third quarter of 1977 foreign official assets in the United States
increased by another $8.2 billion; it explains that "Large intervention purchases
of dollars in exchange markets by several major industrial countries accounted
for most of the increase . . ."
Data for the fourth quarter are not yet available from the Department of Commerce on the change in foreign official assets of the industrialized countries.
However, in the Treasury Bulletin mentioned above one can find, in Table IFS-3,
that foreign official assets in the U.S. increased by almost $31 billion through
November 1977 and that $22 billion of the increase was obtained by Western
Europe.







APPENDIX
TABLES O N ESTIMATED GROSS A N D NET GOVERNMENT A N D
PRIVATE DEBT
(1) E s t i m a t e d Gross G o v e r n m e n t a n d Private Debt, by M a j o r
Categories
( 2 ) Estimated Per Capita Gross G o v e r n m e n t a n d Private Debt
( 3 ) Estimated Gross G o v e r n m e n t and Private Debt related t o Gross
National P r o d u c t
( 4 ) E s t i m a t e d Net G o v e r n m e n t a n d Private Debt, by M a j o r Categories
(5) Estimated Per Capita Net G o v e r n m e n t a n d Private Debt
( 6 ) E s t i m a t e d Net G o v e r n m e n t and Private Debt related t o Gross
National P r o d u c t
(7) Estimated Federal Debt Related t o Population a n d Prices
( 8 ) Privately-Held Federal Debt Related t o Gross National P r o d u c t
( 9 ) Changes in Per Capita Real Gross National P r o d u c t




(149)

TABLE 1.—ESTIMATED GROSS GOVERNMENT AND PRIVATE DEBT, BY MAJOR CATEGORIES
[Dollar amounts in billions]
Private

Federal 2

1

Percent
Federal
of total

Agency

Total

$17.8
18.9
19.5
19.7
19.5

$16.3
16.0
17.8
20.8
23.8

$1.2
1.3
1.3
1.2
1.5

$17.5
17.3
19.1
22.0
25.3

$215.2
215.4
203.8
194.9
188.2

8.2
8.1
9.4
11.3
13.5

140.4
139.5
141.5
141.3
136.8

19.2
19.6
19.6
19.6
19.8

28.5
30.6
34.4
37.3
39.4

4.8
5.6
5.9
5.8
6.2

33.3
36.2
40.3
43.1
45.6

192.9
195.3
201.4
204.0
202.2

17.3
18.6
20.1
21.2
22.6

86.8
89.0
97.5
106.3
110.3

137.6
142.0
153.1
156.2
159.1

20.1
20.2
20.0
19.2
18.1

41.9
45.0
57.9
108.2
165.9

6.9
7.2
7.7
5.5
5.1

48.8
52.2
65.6
113.7
171.0

206.5
214.4
238.7
289.1
348.2

23.7
24.4
27.5
39.4
49.2

109.0
99.5
109.3
128.9
139.4

159.7
154.2
169.2
198.3
220.0

17.1
16.0
16.1
17.5
19.6

230.6
278.1
258.9
255.4
251.6

3.0
1.5
1.5
.7
1.0

233.6
279.6
260.4
256.1
252.6

410.4
449.8
445.7
471.9
492.2

57.0
62.2
58.5
54.3
51.4

Corporate

Total

1929
1930
1931
1932
1933

$72.9
71.8
64.9
57.1
51.0

$107.0
107.4
100.3
96.1
92.4

$179.9
179.2
165.2
153.2
143.4

1934
1935
1936
1937
1938

49.8
49.7
50.6
51.1
50.0

90.6
89.8
90.9
90.2
86.8

1939
1940
1941
1942
1943

50.8
53.0
55.6
49.9
48.8

1944
1945
1946
1947
1948

50.7
54.7
59.9
69.4
80.6




Total
gross debt

Public

Individual

Year

OId ic

and local

1 9 49
195 0
195 1
195 2
1 9 53

90.4
104.3
114.3
129.4
143.2

140.3
167.7
191.9
202.9
212.9

230.7
272.0
306.2
332.3
356.1

22.2
25.3
28.0
31.0
35.0

256.1
255.4
258.1
266.2
273.8

.8
1.1
.8
.8
.9

256.9
256.5
258.9
267.0
274.7

509.8
553.8
593.1
630.3
665.8

50.4
46.4
43.7
42.4
41.3

195 4
195 5
195 6
195 7
195 8

157.2
180.1
195.5
207.6
222.9

217.6
253.9
277.3
295.8
312.0

374.8
434.0
472.8
503.4
534.9

40.2
46.3
50.1
54.7
60.4

277.2
279.1
275.5
274.2
282.2

.8
1.5
1.7
3.2
2.3

278.0
280.6
277.2
277.4
284.5

693.0
760.9
800.1
835.5
879.8

40.2
36.9
34.7
33.3
32.4

195 9
196 0
196 1
1962
1 9 63

245.0
263.3
284.8
311.9
345.8

341.4
365.1
391.5
421.5
457.1

586.4
628.4
676.3
733.4
802.9

66.6
72.0
77.6
83.4
89.5

288.7
287.7
293.6 •
300.2
306.0

5.7
6.4
6.9
7.8
8.1

294.4
294.1
300.5
308.0
314.1

947.4
994.5
1,054.4
1,124.8
1,206.5

31.1
29.6
28.5
27.4
26.0

1964
196 5
196 6
196 7
1968

380.1
424.6
454.7
489.1
529.3

497.3
551.9
617.4
672.9
779.1

877.4
976.5
1,072.1
1,162.0
1,308.4

95.5
103.1
109.3
117.3
127.2

314.3
317.2
325.6
341.8
356.2

9.1
9.8
14.0
20.1
15.1

323.4
326.9
339.6
361.9
371.3

1,296.3
1,406.5
1,521.1
1,641.0
1,806.9

24.9
23.2
22.3
22.2
20.5

1969
197 0
197 1
197 2
197 3

566.2
600.0
667.5
763.9
854.4

912.7
997.9
1,087.8
1,214.3
1,390.5

1,478.9
1,597.9
1,755.3
1,978.2
2,244.9

137.9
149.2
167.0
181.2
196.1

367.4
388.3
423.4
448.4
469.1

13.8
12.5
11.0
11.8
11.6

381.2
400.8
434.4
460.2
480.7

1,997.9
2,147.8
2,356.6
2,620.7
2,921.7

19.1
18.7
18.4
17.6
16.5

See footnotes at end of table.




TABLE 1 — E S T I M A T E D G R O S S GOVERNMENT AND PRIVATE DEBT, BY MAJOR
[Dollar amounts

Private1
Year
1 9 74
197 5
197 6
1977

Individual

Corporate

$922.1 $1,546.4 $2,468.5
9 9 4 . 4 1,626.1 2,620.5
1,106.8 1,781.7 2,888.5

$214.7
229.6
246.4

1 Private corporate debt includes the debt of certain federally
sponsored agencies in which there is no longer any Federal proprietary interest. The debt of the following agencies are included beginning these years: FLB's in 1949; FHLB's in 1951; FNMA-secondary
market operations, FICB's and BCOOP's in 1968. The total debt for
these agencies amounted to $0.7 billion on Dec. 31, 1947, $3.5
billion on Dec. 31, I 9 6 0 , $38.8 billion on Dec. 31, 1970, $78.8
billion on Dec. 31, 1975, and $81.4 billion on Dec. 31, 1976.




in billions]

State
and local

Total

CATEGORIES-Continued

Federal1
Public
$492.7
576.7
653.5
718.9

Agency
$11.3
10.9
11.3
10.2

Total
Total gross debt
$504.0 $3,187.2
587.6
3,437.7
664.8 3,799.7
729.2

Percent
Federal
of total
15.8
17.1
17.5

2 Total Federal securities includes public debt securities and budget agency securities.
Source: Federal debt, Treasury Department; other data, Bureau of
Economic Analysis, Commerce Department.

Note: Detail may not add to totals because of rounding. Real GNP
is in constant 1972 dollars. Real per capita debt expressed in 1967
prices (i.e., Consumer Price Index for all items).

^

TABLE 2.—ESTIMATED PER CAPITA GROSS GOVERNMENT AND PRIVATE D E B T 1
[Amounts in dollars]
Private
Year

2

Agency

Total

Total
gross debt

$146
154
157
158
155

$134
130
144
167
190

$10
11
10
10
12

$144
141
154
176
201

$1,767
1,750
1,643
1,561
1,499

1,111
1,096
1,105
1,097
1,054

152
154
153
152
153

226
240
269
290
303

38
44
46
45
48

264
284
315
335
351

1,526
1,535
1,573
1,584
1,557

663
671
728
785
804

1,051
1,071
1,143
1,154
1,159

154
152
149
142
132

320
339
432
799
1,209

53
54
58
41
37

373
394
490
840
1,246

1,578
1,617
1,783
2,136
2,537

785
708
770
891
947

1,150
1,098
1,192
1,370
1,494

123
114
113
121
133

1,660
1,980
1,824
1,765
1,709

22
11
11
5
7

1,682
1,990
1,835
1,770
1,716

2,954
3,202
3,140
3,261
3,344

Corporate

Total

1929
1930
1931
1932
1933

$599
583
523
457
406

$879
873
809
770
736

$1,477
1,456
1,332
1,227
1,142

1934
1935
1936
1937
1938

394
391
395
397
385

717
706
710
700
669

1939
1940
1941
1942
1943

388
400
415
369
356

1944
1945
1946
1947
1948

365
389
422
480
548




Federal 3
Public

Individual

See footnotes at end of table.

State and
1 oca1 -

TABLE 2.—ESTIMATED PER CAPITA GROSS GOVERNMENT A N D PRIVATE D E B T ' - C o n t i n u e d
[Amounts in dollars]
Private1

Agency

Total

Total
gross debt

$148
166
181
197
218

$1,710
1,677
1,666
1,690
1,709

$5
7
5
5
6

$1,715
1,684
1,672
1,695
1,715

$3,404
3,637
3,829
4,001
4,156

2,299
2,616
2,799
2,927
3,059

247
279
297
318
345

1,700
1,682
1,631
1,594
1,614

5
9
10
19
13

1,705
1,691
1,641
1,613
1,627

4,251
4,586
4,737
4,858
5,031

1,920
2,021
2,131
2,260
2,415

3,298
3,478
3,682
3,932
4,243

375
399
422
447
473

1,623
1,592
1,598
1,609
1,617

32
35
38
42
43

1,656
1,628
1,636
1,651
1,660

5,328
5,504
5,740
6,030
6,375

2,592
2,840
3,141
3,386
3,882

4,572
5,026
5,454
5,848
6,519

498
531
557
590
634

1,638
1,633
1,656
1,720
1,775

47
50
71
101
75

1,685
1,682
1,728
1,821
1,850

6,755
7,239
7,739
8,258
9,003

Corporate

Total

1 9 49
1 9 50
195 1
1 9 52
1 9 53

$604
685
738
821
894

$937
1,101
1,239
1,288
1,329

$1,540
1,786
1,977
2,109
2,223

1 9 54
195 5
1 9 56
195 7
1 9 58

964
1,085
1,157
1,207
1,275

1,335
1,530
1,642
1,720
1,784

1 9 59
1 9 60
196 1
1 9 62
1 9 63

1,378
1,457
1,550
1,672
1,827

1 9 64
1 9 65
1 9 66
196 7
1 9 68

1,981
2,185
2,313
2,461
2,637




Federal *
Public

Individual

Year

State and
local -

1969
197 0
197 1
1972
197 3

2,794
2,929
3,224
3,658
4,061

4,503
4,871
5,254
5,814
6,609

7,297
7,799
8,478
9,472
10,669

680
728
807
868
932

1,813
1,895
2,045
2,147
2,229

68
61
53
56
55

1,881
1,956
2,098
2,203
2,285

9,858
10,483
11,382
12,548
13,£86

197 4
1975
197 6
1977

4,352
4,657
5,145

7,298
7,615
8,282

11,649
12,272
13,428

1,013
1,075
1,145

2,325
2,701
3,038
3,316

53
51
53
47

2,379
2,752
3,090
3,364

15,041
16,099
17,663

1 Per capita debt is calculated by dividing debt figures by population of conterminous United States. Beginning 1949, population
includes Armed Forces overseas, Hawaii and Alaska.
2 Private corporate debt includes the debt of certain federally
sponsored agencies in which there is no longer any Federal proprietary interest. The debt of the following agencies are included beginning these years: FLB's in 1949; FHLB's in 1951; FNMA-secondary
market operations, FICB's and BCOOP's in 1968. The total debt for
these agencies amounted to $0.7 billion on Dec. 31, 1947, $3.5
billion on Dec. 31, I 9 6 0 , $38.8 billion on Dec. 31, 1970, $78.8




billion on Dec. 31, 1975, and $81.4 billion on Dec. 31, 1976.
on Dec. 31, 1976.
3 Total Federal securities includes
public debt securities and
budget agency securities.
Source: Federal debt, Treasury Department; other data, Bureau of
Economic Analysis, Commerce Department.
Note: Detail may not add to totals because of rounding. Real GNP
is in constant 1972 dollars. Real per capita debt expressed in 1967
prices (i.e., Consumer Price Index for all items).

TABLE 3.—GROSS GOVERNMENT AND PRIVATE DEBT RELATED TO GROSS NATIONAL PRODUCT
Ratios of debt to gross national product

Gross
national
product
(billions)

Individual

1929
1 9 30
193 1
1 9 32
1 9 33

$103.4
90.7
76.1
58.3
55.8

70.5
79.2
85.4
98.0
91.4

1 9 34
193 5
193 6
193 7
1 9 38

65.3
72.5
82.7
96.7
85.0

1 9 39
1 9 40
194 1
1 9 42
1 9 43
1 9 44
1945.:
194 6
1947
1 9 48

Year




Private 1

Federal 2

Total

State and
local

Public

Agency

Total

Total
gross debt

103.5
118.5
131.9
164.9
165.6

174.0
197.6
217.2
262.9
257.0

17.3
20.9
25.7
33.9
35.0

15.8
17.7
23.4
35.7
42.7

1.2
1.5
1.8
2.1
2.7

17.0
19.1
25.2
37.8
45.4

208.1
237.5
268.0
334.5
337.2

76.3
68.6
61.2
52.9
58.9

138.8
123.9
109.9
93.3
102.2

215.1
192.5
171.1
146.1
161.1

29.5
27.1
23.7
20.3
23.4

43.7
42.3
41.6
38.6
46.4

7.4
7.8
7.2
6.0
7.3

51.1
50.0
48.8
44.6
53.7

295.5
269.5
243.5
210.9
238.0

90.8
100.0
124.9
158.3
192.0

56.0
53.1
44.6
31.6
25.5

95.6
89.1
78.1
67.2
57.5

151.6
142.1
122.6
98.7
82.9

22.2
20.3
16.1
12.2
9.5

46.2
45.1
46.4
68.4
86.5

7.6
7.3
6.2
3.5
2.7

53.8
52.3
52.6
71.9
89.1

227.5
214.5
191.2
182.7
181.4

210.5
212.3
209.6
232.8
259.1

24.1
25.8
28.6
29.9
31.2

51.8
46.9
52.2
55.4
53.9

75.9
72.7
80.8
85.2
85.0

8.2
7.6
7.7
7.6
7.6

109.6
131.0
123.6
109.8
97.2

1.5
.8
.8
.4
.4

111.0
131.7
124.3
110.1
97.5

195.0
211.9
212.7
202.8
190.0

Corporate

1 9 49
1 9 50
195 1
1 9 52
1 9 53

258.0
286.2
330.2
347.2
366.1

35.1
36.5
34.7
37.2
39.2

54.4
58.6
58.2
58.5
58.2

89.5
95.1
92.8
95.8
97.3

8.7
8.9
8.5
9.0
9.6

99.3
89.3
78.2
76.7
74.8

.4
.4
.3
.3
.3

99.6
89.7
78.5
77.0
75.1

197.6
193.6
179.7
181.6
181.9

1 9 54
1955
195 6
195 7
195 8

366.3
399.3
420.7
442.8
448.9

43.0
45.2
46.5
46.9
49.7

59.5
63.6
66.0
66.9
69.6

102.4
108.7
112.4
113.7
119.2

11.0
11.6
12.0
12.4
13.5

75.7
69.9
65.5
62.0
62.9

.3
.4
.5
.8
.6

75.9
70.3
65.9
62.7
63.4

189.2
190.6
190.2
188.7
196.0

1 9 59
1 9 60
196 1
1 9 62
1 9 63

486.5
506.0
523.3
563.8
594.7

50.4
52.1
54.5
55.4
58.2

70.2
72.2
74.9
74.8
76.9

120.6
124.2
129.3
130.1
135.1

13.7
14.3
14.9
14.8
15.1

59.4
56.9
56.2
53.3
51.5

1.2
1.3
1.4
1.4
1.4

60.6
58.2
57.5
54.7
52.9

194.8
196.6
201.5
199.6
202.9

1 9 64
196 5
1 9 66
196 7
1 9 68

635.7
688.1
753.0
796.3
868.5

59.8
61.7
60.4
61.4
60.9

78.3
80.2
82.0
84.5
89.7

138.1
142.0
142.4
145.9
150.7

15.1
15.0
14.5
14.7
14.6

49.5
46.1
43.2
42.9
41.0

1.5
1.5
1.9
2.5
1.7

50.9
47.5
45.1
45.4
42.8

204.0
204.4
202.0
206.1
208.0

1 9 69
197 0
197 1
1 9 72
1 9 73

935.5
982.4
1,063.4
1,171.1
1,306.3

60.5
61.1
62.8
65.3
65.4

97.6
101.6
102.3
103.7
106.4

158.1
162.7
165.1
168.9
171.9

14.7
15.2
15.7
15.5
15.0

39.3
39.5
39.8
38.3
35.9

1.5
1.3
1.0
1.0
.9

40.7
40.8
40.9
39.3
36.8

213.6
218.6
221.6
223.8
223.7

See footnotes at end of table.




TABLE 3.—GROSS GOVERNMENT AND PRIVATE DEBT RELATED TO GROSS NATIONAL P R O D U C T - C o n t i n u e d

Year

1 9 74
197 5
197 6
197 7

Gross
national
product
(billions)

1,528.8
1,706.5
1,890.4

Ratios of debt to gross national product
Private

Individual

65.3
65.0
64.9

1

—
Corporate

109.4
106.4
104.4

i Private corporate debt includes the debt of certain federally
sponsored agencies in which there is no longer any Federal proprietary interest. The debt of the following agencies are included beginning these years: FLB's in 1949; FHLB's in 1951; FNMA-secondary
market operations, FICB's and BCOOP's in 1968. The total debt for
these agencies amounted to $0.7 billion on Dec. 31, 1947, $3.5
billion on Dec. 31, I 9 6 0 , $38.8 billion on Dec. 31, 1970, $78.8
billion on Dec. 31, 1975, and $ 8 1 . 4 billion on Dec. 31, 1976.




Total

174.7
171.4
169.3

State and
local

15.2
15.0
16.9

Federal*
Public

34.9
37.7
38.3
38.0

Agency

.8
.7
.7
.5

Tot 1

35.7
38.4
39.0
38.6

Total
gross debt

225.5
224.9
222.7

2 Total Federal securities includes public debt securities and budget agency securities.
Source: Federal debt, Treasury Department; other data, Bureau of
Economic Analysis, Commerce Department.

Note: Detail may not add to totals because of rounding. Real GNP
is in constant 1972 dollars. Real per capita debt expressed in 1967
prices (i.e., Consumer Price Index for all items).

Oi

00

TABLE 4.—ESTIMATED NET GOVERNMENT AND PRIVATE DEBT, BY MAJOR CATEGORIES
[Dollar amounts in billions]
Private 1

State and
local

Federal

Total net
debt

Percent
Federal of
total

Individual

Corporate

Total

1916
1917
1918
1919
1920

$36.3
38.7
44.5
43.9
48.1

$40.2
43.7
47.0
53.3
57.7

$76.5
82.4
91.5
97.2
105.8

$4.5
4.8
5.1
5.5
6.2

$1.2
7.3
20.9
25.6
23.7

$82.2
94.5
117.5
128.3
135.7

1.5
7.8
17.8
20.0
17.5

1921
1922
1923
1924
1925

49.2
50.9
53.7
55.8
59.6

57.0
58.6
62.6
67.2
72.7

106.2
109.5
116.3
123.0
132.3

7.0
7.9
8.6
9.4
10.3

23.1
22.8
21.8
21.0
20.3

136.3
140.2
146.7
153.4
162.9

17.0
16.3
14.9
13.7
12.5

1926
1927
1928
1929
1930

62.7
66.4
70.0
72.9
71.8

76.2
81.2
86.1
88.9
89.3

138.9
147.6
156.1
161.8
161.1

11.1
12.1
12.7
13.6
14.7

19.2
18.2
17.5
16.5
16.5

169.2
177.9
186.3
191.9
192.3

11.4
10.3
9.4
8.6
8.6

Year

See footnotes at end of table.




2

TABLE 4.—ESTIMATED NET GOVERNMENT AND PRIVATE DEBT, BY MAJOR C A T E G O R I E S - C o n t i n u e d
[Dollar amounts

in billions]

Private 1

Federal*

Total net
debt

Percent
Federal of
total

$182.9
175.0
168.5
171.6
175.0

10.2
12.2
14.5
17.8
19.7

180.6
182.2
179.9
183.3
189.8

20.9
21.6
22.6
23.3
23.7

Individual

Corporate

Total

State and
local

193 1
1 9 32
1 9 33
1 9 34
193 5

$64.9
57.1
51.0
49.8
49.7

$83.5
80.0
76.9
75.5
74.8

$148.4
137.1
127.9
125.3
124.5

$16.0
16.6
16.3
15.9
16.1

$18.5
21.3
24.3
30.4
34.4

1 9 36
193 7
1 9 38
1939
1 9 40

50.6
51.1
50.0
50.8
53.0

76.1
75.8
73.3
73.5
75.6

126.7
126.9
123.3
124.3
128.6

16.2
16.1
16.1
16.4
16.4

37.7
39.2
40.5
42.6
44.8

194 1
1942
1 9 43
1 9 44
1 9 45

55.6
49.9
48.8
50.7
54.7

83.4
91.6
95.5
94.1
85.3

139.0
141.5
144.3
144.8
140.0

16.1
15.4
14.5
13.9
13.4

56.3
101.7
154.4
211.9
252.5

211.4
258.6
313.2
370.6
405.9

26.7
39.4
49.3
57.2
62.3

1 9 46
1 9 47
1 9 48
1 9 49
1 9 50

59.9
69.4
80.6
90.4
104.3

93.5
109.6
118.4
118.7
142.8

153.4
179.0
199.0
209.1
247.1

13.7
15.0
17.0
19.1
21.7

229.5
221.7
215.3
217.6
217.4

396.6
415.7
431.3
445.8
486.2

57.9
53.4
50.0
48.9
44.8

Year




^

195 1
1 9 52
1953
1954
195 5

114.3
129.4
143.2
157.2
180.1

163.8
172.3
180.9
184.1
215.0

278.1
301.7
324.1
341.3
395.1

24.2
27.0
30.7
35.5
41.1

216.9
221.5
226.8
229.1
229.6

519.2
550.2
581.6
605.9
665.8

41.8
40.3
39.0
37.9
34.5

1 9 56
1957
1958
1959
I960.

195.5
207.6
222.9
245.0
263.3

234.1
249.1
262.0
287.0
306.3

429.6
456.7
484.9
532.0
569.6

44.5
48.6
53.7
59.6
64.9

224.3
223.0
231.0
241.4
239.8

698.4
728.3
769.6
833.0
874.3

32.2
30.7
30.1
29.0
27.5

196 1
1962
1963
1964
1965.!!

284.8
311.9
345.8
380.1
424.6

328.3
353.5
383.6
417.1
463.2

613.1
665.4
729.4
797.2
887.8

70.5
77.0
83.9
90.4
98.3

246.7
253.6
257.5
264.0
266.4

930.3
996.0
1,070.8
1,151.6
1,252.5

26.6
25.5
24.1
23.0
21.3

1966
1967
1968
1969'.!..!
1970

454.7
489.1
529.3
566.2
600.0

517.8
562.6
653.0
764.7
836.1

972.5
1,051.7
1,182.3
1,330.9
1,436.1

104.7
112.8
122.7
133.3
144.8

271.8
286.4
291.9
289.3
301.1

1,349.1
1,450.8
1,596.8
1,753.4
1,881.9

20.1
19.7
18.3
16.5
16.0,

See footnotes at end of table.




TABLE 4 — E S T I M A T E D NET GOVERNMENT AND PRIVATE DEBT, BY MAJOR C A T E G O R I E S - C o n t i n u e d
[Dollar amounts in billions]

Private1

State and
local

Federal1

Total net
debt

Percent
Federal of
total

Individual

Corporate

Total

197 1
197 2
1 9 73
197 4
197 5

$667.5
763.9
854.4
922.1
994.4

$911.2
1,016.7
1,166.5
1,299.4
1,365.4

$1,578.7
1,780.6
2,020.9
2,221.5
2,359.8

$162.7
178.0
192.3
211.2
222.7

$325.9
341.2
349.1
360.8
446.3

$2,067.3
2,299.8
2,562.3
2,793.5
3,028.8

15.8
14.8
13.6
12.9
14.7

1976

1,106.8

1,496.1

2,602.9

236.3

515.8
572.5

3,354.9

15.4

Year

i Private corporate debt includes the debt of certain federally
sponsored a g e n d e s I n w h i c h there is no longer any Federal proprjetary interest. The debt of the following agencies are included beginning these years: FLB's in 1949; FHLB's in 1 9 5 1 ; FNMA-secondary

• Borrowing from the public equals gross
ties held in Government accounts (a unified budget concept),
Source: Federal debt, Treasury Department; other data, Bureau of
E c o n o m i c Analysis, Commerce Department.

billion on Dec 31, 1975, and $81.4 billion on Dec. 31, 1976.

prices (i.e., Consumer Price Index for all items).




TABLE 5.—ESTIMATED PER CAPITA NET GOVERNMENT AND PRIVATE D E B T 1
[Amounts in dollars]
Private 2
Individual

Corporate

Total

State and
local

Federal 3

Total
net debt

1916
1917
1918
1919
1920

$356
375
431
420
452

$394
423
455
510
542

$750
798
887
930
994

$44
46
49
53
58

$12
71
203
245
223

$806
915
1,139
1,228
1,275

1921
1922
1923
1924
1925

453
462
480
489
515

525
532
559
589
628

978
995
1,039
1,078
1,142

64
72
77
82
89

213
207
195
184
175

1,256
1,274
1,310
1,344
1,406

1926
1927
1928
1929
1930

534
558
581
599
583

649
682
715
730
726

1,183
1,240
1,295
1,329
1,309

95
102
105
112
119

164
153
145
136
134

1,441
1,494
1,546
1,576
1,562

Year

See footnotes at end of table.




TABLE 5.—ESTI MATED PER CAPITA NET GOVERNMENT AND PRIVATE DEBT ' - C o n t i n u e d
[Amonuts in dollars]
Private 2

Federal 3

Total
net debt

$129
133
130
126
127

$149
171
194
241
270

$1,475
1,402
1,342
1,358
1,375

989
985
950
950
970

127
125
124
125
124

294
304
312
325
338

1,410
1,414
1,386
1,401
1,431

623
677
696
677
607

1,038
1,045
1,051
1,042
997

120
114
106
100
95

420
751
1,125
1,525
1,798

1,579
1,910
2,282
2,668
2,890

659
757
804
793
938

1,081
1,237
1,352
1,396
1,623

97
104
115
128
143

1,617
1,532
1,463
1,453
1,428

2,794
2,873
2,930
2,977
3,193

Individual

Corporate

Total

1931
1932
1933
1934
1935

$523
457
406
394
391

$673
641
612
597
588

$1,196
1,098
1,018
992
978

1936
1937
1938
1939
1940

395
397
385
388
400

594
588
565
562
570

1941
1942
1943
1944
1945

415
369
356
365
389

1946
1947
1948
1949
1950

422
480
548
604
685

Year




State and
local

195 1
1952
1 9 53
1 9 54
1955

738
821
894
964
1,085

1,058
1,094
1,129
1,129
1,296

1,796
1,915
2,023
2,094
2,381

1956
195 7
1 9 58
1 9 59
1 9 60

1,157
1,207
1,275
1,378
1,457

1,386
1,448
1,498
1,614
1,695

196 1
1 9 62
1 9 63
1 9 64
196 5

1,550
1 672
1,827
1,981
2,185

1 9 66
1 9 67
196 8
1969
197 0

2,313
2461
2,637
2,794
2,929

See footnotes at end of table.




156
171
192
248

1,400
1,406
1,416
1,405
1,384

3,352
3,492
3,631
3,717
4,013

2,543
2,655
2,773
2,992
3.153

263
283
307
335
359

1,328
1,297
1,321
1,357
1,327

4,135
4,235
4,401
4,684
4,839

1,787
1,895
2,027
2,174
2,384

3,338
3,567
3,854
4.154
4,569

384
413
443
471
506

1,343
1.360
1.361
1,376
1,371

5,064
5,339
5,658
6,001
6,446

2,634
2,831
3,254
3,773
4,081

4,948
5,293
5,891
6,567
7,010

533
568

1,383
1,441
1,454
1,427
1,470

6,864
7,301
7,956
8,651
9,185

218

611
658
707

TABLE 5.—ESTIMATED PER CAPITA NET GOVERNMENT AND PRIVATE DEBT—Continued
[Amonuts in dollars]
Private 2
Individual

Corporate

Total

State and
local

Federal *

Total
net debt

197 1
1 9 72
1 9 73
1 9 74
197 5

$3,224
3,658
4,061
4,352
4,693

$4,401
4,868
5,544
6,132
6,444

$7,625
8,526
9,605
10,484
11,136

$786
852
914
997
1,051

$1,574
1,634
1,659
1,703
2,090

$9,984
11,012
12,178
13,183
14,293

197 6
197 7

5,145

6,955

12,100

1,098

2,398
2,641

15,596

Year

1 Per capita debt is calculated by dividing debt figures by population of conterminous United States. Beginning 1949, population
includes Armed Forces overseas, Hawaii, and Alaska.
2 Private corporate debt includes the debt of certain federally
sponsored agencies in which there is no longer any Federal proprietary interest. The debt of the following agencies are included beginning these years: FLB's in 1949; FHLB's in 1951; FNMA-secondary
market operations, FICB's and BCOOP's in 1968. The total debt for
these agencies amounted to $0.7 billion on Dec. 31, 1947, $3.5
billion on Dec. 31, 1960, $38.8 billion on Dec. 31, 1970, $78.8




billion on Dec. 31, 1975, and $81.4 billion on Dec. 31, 1976.
3 Borrowing from the public equals gross Federal debt less securities held in Government accounts (a unified budget concept).
Source: Federal debt, Treasury Department; other data, Bureau of
Economic Analysis, Commerce Department.
Note.—Detail may not add to totals because of rounding. Real GNP
is in constant 1972 dollars. Real per capita debt expressed in 1967
prices (i.e., Consumer Price Index for all items).

T A B L E 6 . — N E T G O V E R N M E N T A N D PRIVATE DEBT RELATED T O GROSS N A T I O N A L
Gross
national
product

PRODUCT

Ratios of debt to gross national product
Private 1
Individual

Corporate

Total

State and
local

Federal 2

Total
net debt

$103.4
90.7
76.1
58.3
55.8

$70.5
79.2
85.4
98.0
91.4

$86.0
98.5
109.8
137.3
137.8

$156.5
177.7
195.1
235.3
229:2

$13.2
16.3
21.1
28.5
29.3

$16.0
18.2
24.4
36.6
43.6

$185.6
212.1
240.5
300.3
301.9

1934.
1935
1936
1937
1938

65.3
72.5
82.7
96.7
85.0

76.3
68.6
61.2
52.9
58.9

115.7
103.2
92.0
78.4
86.3

192.0
171.8
153.2
131.2
145.2

24.4
22.3
19.6
16.7
19.0

46.6
47.5
45.6
40.6
47.7

262.9
241.4
218.3
188.4
211.8

1939
1940
1941
1942
1943

90.8
100.0
124.9
158.3
192.0

56.0
53.1
44.6
31.6
25.5

81.0
75.7
66.8
57.9
49.8

136.9
128.7
111.4
89.4
75.2

18.1
16.5
12.9
9.8
7.6

47.0
44.9
45.1
64.3
80.5

201.9
189.9
169.3
163.4
163.2

Year

1929
1930
1931
1932
1933

See footnotes at end of table.




(billion)

TABLE 6.—NET GOVERNMENT AND PRIVATE DEBT RELATED TO GROSS NATIONAL P R O D U C T - C o n t i n u e d

Year

Gross
national
product
(billion)

Ratios of debt to gross national product
Private1
Individual

Corporate

Total

State and
local

Federal 2

Total
net d e b t

1944
1945
1946
1947
1948

$210.5
212.3
209.6
232.8
259.1

24.1
25.8
28.6
29.9
31.2

44.8
40.2
44.7
47.1
45.7

68.8
66.0
73.2
76.9
76.9

6.7
6.4
6.6
6.5
6.6

100.7
119.0
109.5
95.3
83.1

176.1
191.2
189.3
178.6
166.5

1949
1950
1951
1952
1953

258.0
286.2
330.2
347.2
366.1

35.1
36.5
34.7
37.3
39.2

46.1
49.9
49.7
49.7
49.5

81.1
86.4
84.3
86.9
88.6

7.5
7.6
7.4
7.8
8.4

84.4
76.0
65.7
63.8
62.0

172.8
169.9
157.3
158.5
158.9

1954
1955
1956
1957
1958

366.3
399.3
420.7
442.8
448.9

43.0
45.2
46.5
46.9
49.7

50.3
53.9
55.7
56.3
58.4

93.2
99.0
102.2
103.2
108.1

9.7
10.3
10.6
11.0
12.0

62.6
57.6
53.4
50.4
51.5

165.5
166.8
166.1
164.5
171.5

1959
1960
1961
1962
1963

486.5
506.0 .
523.3
563.8
594.7

50.4
52.1
54.5
55.4
58.2

59.0
60.6
62.8
62.7
64.6

109.4
112.6
117.2
118.1
122.7

12.3
12.9
13.5
13.7
14.2

49.7
47.4
47.2
45.0
43.3

171.3
172.8
177.8
176.7
180.1




_
®
00

196
196
196
196
196

4
5
6
7
8

635.7
688.1
753.0
796.3
868.5

59.8
61.7
60.4
61.4
60.9

65.7
67.3
68.6
70.7
75.2

125.5
129.0
129.2
132.1
136.1

14.3
14.3
13.9
14.2
14.1

41.6
38.7
36.1
36.0
33.6

181.2
182.0
179.2
182.2
183.9

196
197
197
197
197

9
0
1
2
3

935.5
982.4
1,063.4
1,171.1
1,306.3

60.5
61.1
62.8
65.2
65.4

81.7
85.1
85.7
86.8
89.3

142.2
146.2
148.5
152.0
154.7

14.2
14.7
15.3
15.2
14.6

3
3
3
2
2

.9
.6
.6
.2
.7

187.4
191.6
194.4
196.4
196.1

1
1
1
1

4
5
6
7

1,412.9
1,528.8
1,706.5
1,890.4

65.3
65.0
64.9

92.0
89.3
87.7

157.2
154.4
152.5

14.9
14.6
13.8

25.5
29.2
30.2
30.3

197.7
198.1
196.6

97
97
97
97

1 P r i v a t e c o r p o r a t e d e b t i n c l u d e s t h e d e b t of c e r t a i n
federally
s p o n s o r e d a g e n c i e s in w h i c h t h e r e is no longer any Federal propriet a r y i n t e r e s t . T h e d e b t of t h e f o l l o w i n g a g e n c i e s are i n c l u d e d beginn i n g t h e s e y e a r s : FLB's in 1 9 4 9 ; F H L B ' s in 1 9 5 1 ; F N M A - s e c o n d a r y
m a r k e t o p e r a t i o n s , FICB's, a n d BCOOP's in 1 9 6 8 . The t o t a l d e b t for
t h e s e a g e n c i e s a m o u n t e d t o $ 0 . 7 b i l l i o n on Dec. 31 f 1947., $ 3 . 5
b i l l i o n o n Dec. 3 1 , I 9 6 0 , $ 3 8 . 8 b i l l i o n on Dec. 3 1 , 1 9 7 0 , $ 7 8 . 8
b i l l i o n o n Dec. 3 1 , 1 9 7 5 , a n d $ 8 1 . 4 b i l l i o n on Dec. 31, 1 9 7 6 .




0
0
0
9
6

2 B o r r o w i n g f r o m t h e p u b l i c e q u a l s g r o s s Federal d e b t less securit i e s h e l d in G o v e r n m e n t a c c o u n t s (a u n i f i e d b u d g e t concept).
S o u r c e : Federal d e b t , T r e a s u r y D e p a r t m e n t ; o t h e r data, B u r e a u of
Economic Analysis, Commerce Department.

N o t e : Detail m a y not a d d t o t o t a l s b e c a u s e of r o u n d i n g . Real G N P
is in c o n s t a n t 1 9 7 2 dollars. Real per c a p i t a d e b t e x p r e s s e d in 1 9 6 7
p r i c e s (i.e., C o n s u m e r Price I n d e x f o r all i t e m s .

TABLE 7 . - E S T I M A T E D FEDERAL DEBT RELATED TO POPULATION AND PRICES
[Amounts in dollars]
Outstanding Federal debt

$281
292
354
451
513

$265
279
342
437
492

$256
266
327
396
443

221
251
275
284
291

657
688
752
776
837

600
654
704
706
744

551
607
658
658
695

306
321
403
705
1,041

893
934
1,059
1,661
2,388

780
802
909
1,486
2,156

733
761
871
1,394
1,995

Net3

Privately
held n e t 4

$16.5
16.5
18.5
21.3
24.3

$16.0
15.8
17.7
19.4
21.9

$144
141
154
176
201

$136
134
149
171
194

$131
128
142
155
174

33.3
36.2
40.3
43.1
45.6

30.4
34.4
37.7
39.2
40.5

28.0
32.0
35.3
36.6
37.9

264
284
315
335
351

241
270
294
304
312

48.8
52.2
65.6
113.7
171.0

42.6
44.8
56.3
101.7
154.4

40.1
42.6
54.0
95.5
142.9

373
394
490
840
1,246

325
338
420
751
1,125

1929.
1930.
1931.
1932.
1933.

$17.5
17.3
19.1
22.0
25.3

1934.
1935.
1936.
1937.
1938.
1939.
1940.
1941.
1942.
1943.




Privately
held n e t 1

Gross 2

Net 3

Real per capita Federal debt
Net3

Pi ivately
held net 4

Gross 1

Year

Per capita Federal d e b t 1

Gross 1

3

1 9 44
1 9 45
1 9 46
1 9 47
1 9 48

233.6
279.6
260.4
256.1
252.6

211.9
252.5
229.5
221.7
215.3

193.1
228.2
206.1
199.1
192.0

1,682
1,990
1,835
1,770
1,716

1,525
1,798
1,617
1,532
1,463

1,390
1,624
1,452
1,375
1,304

3,156
3,653
2,841
2,522
2,384

2,863
3,299
2,504
2,183
2,032

2,608
2,981
2,248
1,960
1,811

1 9 49
1950
195 1
1 9 52
1 9 53

256.9
256.5
258.9
267.0
274.7

217.6
217.4
216.9
221.5
226.8

197.7
196.6
193.1
196.8
200.9

1,715
1,684
1,672
1,695
1,715

1,453
1,428
1,400
1,406
1,416

1,320
1,291
1,246
1,249
1,254

2,427
2,252
2,109
2,119
2,131

2,056
1,909
1,767
1.758
1.759

1,867
1,725
1,573
1,562
1,558

1 9 54
195 5
195 6
195 7
1 9 58

278.0
280.6
277.2
277.4
284.5

229.1
229.6
224.3
223.0
231.0

204.2
204.8
199.4
198.8
204.7

1,705
1,691
1,641
1,613
1.627

1,405
1,384
1,328
1,297
1,321

1,252
1,234
1,180
1,155
1,170

2,128
2,102
1,983
1,892
1,876

1,754
1,720
1,605
1,521
1,523

1,563
1,534
1,426
1,356
1,349

1 9 59
1 9 60
196 1
1 9 62
1 9 63

294.4
294.1
300.5
308.0
314.1

241.4
239.8
246.7
253.6
257.5

214.8
212.4
217.8
222.8
223.9

1,656
1.628
1,636
1,651
1,660

1,357
1,327
1,343
1,360
1,361

1,207
1,175
1,185
1,194
1,183

1,881
1,823
1,820
1,815
1,795

1,542
1,486
1.494
1.495
1,472

1,372
1,316
1,319
1,313
1,279

See footnotes at end of table.




TABLE 7 . - E S T I M A T E D FEDERAL DEBT RELATED TO POPULATION A N D

PRICES-Continued

[Amounts in dollars]
Per capita Federal d e b t 1

Outstanding Federal debt
Privately
Year
1964
196 5
1966
1967

Gross 2

Net3

held

$323.4
326.9
339.6
361.9

$264.0
266.4
271.8
286.4

$227.0
225.6
227.5
237.3

371.3

..

i96s:::::::::::::

Gross 2

net4

291.9

1969197 0

....

381.2
400.8

289.3
301.1

232.1
239.0

197 1

:::::.

434.4

325.9

255.1

197 2

460.2

341.2

269.9

1973:::::::::::::::....

480.7

349.1

268.6

1974
197 5

504.0
587.6

360.8
446.3

280.1
358.2

664.8
729.2

515.8
572.5

418.5
470.8

197 6
::
1977;;;:::;:.:.

....

1 Per capita debt is calculated by dividing debt figures by populat i o n of conterminous United States. Beginning 1949, population
includes A r m e d Forces overseas, Hawaii, and Alaska.
2 Total
Federal securities includes public debt securities and
b u d g e t agency securities.
3 Borrowing f r o m t h e p u b l i c equals gross Federal debt less securities held in Government accounts (a unified budget concept).




Privately
held n e t 4

Gross 2

$1,376
1,371
1,383
1,441
1,454

$1,183

$1,801

1,157
1,194
1,190

1,764
1,753
1,793
1,739

1,145

1,666

1,956
2,098
2,203
2,285

1,427
1,470
1,574
1,634
1,659

2,
2,
3,
3,

1,703
2,090
2,398
2,641

1,322
1,677
1,945
2,171

$1,685
1,682
1,728

238.9

Net3

Real per capita Federal debt

1,821
1,850

1,881

3
7
0
3
4

78
52
90
64

1,161

1,166
1,232
1,292
1,276

1,643
1,705
1,732
1,650
1,531
1,655
1,773

1,810

Net3

Private ly
held n e t 1

$1,470
1,438
1,403
1,419
1,367

$1,264
1,217
1,174
1,176
1,119

1,265
1,234
1,279
1,284
1,198

1.014
979

1,096
1,257
1,376
1,422

851
1,009

1,001
1.015
922

1,116
1,170

Borrowing f r o m the public less Federal Reserve holdings.

Source: Federal debt, Treasury D e p a r t m e n t ; other data. Bureau of
Economic Analysis, Commerce Department.
Note: Detail may not add to totals because of rounding. Real GNP
is in constant 1972 dollars. Real per capita d e b t expressed in 1967
prices (i.e., Consumer Price Index for all items).

173
TABLE 8.—PRIVATELY HELD FEDERAL DEBT RELATED TO GNP
[Dollar a m o u n t s in billions}

Year

Gross
national
product

Privately
held d e b t 1

Ratio of
d e b t to GNP

Year-to-year
price
changes2

1929
1930
1931
1932
1933

$103.4
90.7
76.1
58.3
55.8

$16.0
15.8
17.7
19.4
21.9

15.5
17.5
23.3
33.3
39.3

- 6 . 0
- 9 . 5
- 1 0 . 2
.6

1934
1935
1936
1937
1938

65.3
72.5
82.7
96.7
85.0

28.0
32.0
35.3
36.6
37.9

42.9
44.2
42.7
37.9
44.7

2.1
3.0
1.3
3.2
- 2 . 7

1939
1940
1941
1942
1943

90.8
100.0
124.9
158.3
192.0

40.1
42.6
54.0
95.5
142.9

44.2
42.7
43.3
60.4
74.5

- . 4
1.0
9.8
9.3
3.2

1944
1945
1946
1947
1948

210.5
212.3
209.6
232.8
259.1

193.1
228.2
206.1
199.1
192.0

91.8
107.5
98.4
85.6
74.2

2.2
2.3
18.6
8.7
2.6

1949
1950
1951
1952
1953

258.0
286.2
330.2
347.2
366.1

197.7
196.6
193.1
196.8
200.9

76.7
68.7
58.5
56.7
54.9

- 1 . 8
5.9
6.0
.9
.7

1954
1955
1956
1957
1958

366.3
399.3
420.7
442.8
448.9

204.2
204.8
199.4
198.8
204.7

55.8
51.3
47.4
44.9
45.7

- . 4
.4
2.9
3.1
1.8

1959
1960
1961
1962
1963

486.5
506.0
523.3
563.8
594.7

214.8
212.4
217.8
222.8
223.9

44.2
42.0
41.7
39.6
37.7

1.5
1.5
.7
1.3
1.7

See footnotes at end of table.




174
TABLE 8.—PRIVATELY. HELD FEDERAL
GNP—Continued

DEBT

RELATED

TO

[Dollar a m o u n t s in b i l l i o n s ]
Gross
national
product

Privately
held d e b t 1

1964
1965
1966
1967
1968

$635.7
688.1
753.0
796.3
868.5

$227.0
225.6
227.5
237.3
238.9

35.8
32.8
30.3
29.9
27.6

1.2
2.0
3.4
3.0
4.7

1969
1970
1971
1972
1973

935.5
982.4
1,063.4
1,171.1
1,306.3

232.1
239.0
255.6
271.1
270.4

24.9
24.4
24.0
23.1
20.7

6.1
5.5
3.4
3.4
8.8

1974
1975
1976
1977

1,412.9
1,528.8
1,706.5
1,890.4

280.1
358.2
418.5
470.8

19.8
23.4
24.5
24.9

12.2
7.0
4.8
6.8

Year

Ratio of
debt to GNP

Year-to-year
price
changes 2

B o r r o w i n g f r o m t h e p u b l i c less Federal Reserve h o l d i n g s .
M e a s u r e d by a l l i t e m C o n s u m e r Price I n d e x , D e c e m b e r t o D e c e m b e r basis.
S o u r c e : Federal d e b t , T r e a s u r y D e p a r t m e n t ; o t h e r d a t a , B u r e a u of E c o n o m i c
Analysis, Commerce Department.
N o t e : D e t a i l m a y not a d d t o t o t a l s b e c a u s e of r o u n d i n g . Real G N P is in c o n s t a n t
1 9 7 2 d o l l a r s . Real per c a p i t a d e b t e x p r e s s e d in 1 9 6 7 p r i c e s (i.e., C o n s u m e r Price
I n d e x f o r all i t e m s ) .
1
2




175
TABLE 9.—CHANGES IN PER CAPITA REAL GROSS NATIONAL
PRODUCT
GNP per capita, change
from year ago

GNPin
billions
of 1972
dollars

GNP per
capita
constant
1972
dollars 1

1929
1930
193 1
1932
1 9 33

314.7
385.1
263.3
227.1
222.1

2,584
3,129
2,123
1,819
1,769

544

21

-1,006

-32
-14

1934
193 5
1 9 36
193 7
1938

239.3
261.0
297.1
310.8
297.8

1,894
2,051
2,320
2,413
2,294

125
157
269
92
-118

1 9 39
194 0
194 1
1942
1 9 43

319.7
343.6
396.6
454.6
527.3

2,443
2,591
2,962
3,358
3,842

148
148
370
396
483

1 9 44
194 5
1946
1947
1 9 48

567.0
559.0
477.0
468.3
487.7

4,082
3,980
3,361
3,236
3,313

239
-101
-618
-124
76

1 9 49
195 0
195 1
1952
1 9 53

490.7
533.5
576.5
598.5
621.8

3,276
3,504
3,722
3,799
3,882

-36
227

1 9 54
195 5
195 6
195 7
195 8

613.7
654.8
668.8
680.9
679.5

195 9
196 0
1961.
1 9 62
196 3

720.4
736.8
755.3
799.1
830.7

Year

See footnotes at end of table.




Constant
1972
dollars

-303
-50

Percent

- 2

7

8
13
4
- 4

6
6
14
13
14

6
- 2

-15
- 3

2

- 1

218

6
6

76
83

2

2

3,764
3,946
3,960
3,959
3,885

-117
181
13

- 2
4

—73

- 1

4,051
4,078
4,112
4,284
4,390

165
27
33
172
105

4
4
2

176
TABLE

9.—CHANGES

IN PER

CAPITA

REAL GROSS

NATIONAL

PRODUCT—Continued

Year

GNP per
capita
constant
1972
dollars 1

GNP in
billions
of 1972
dollars

G N P per capita, change
f r o m y e a r ago
Constant
1972
dollars

Percent

1964
1965
1966
1967
1968

874.4
925.9
981.0
1,007.7
1,051.8

4,557
4,765
4,991
5,071
5,241

167
208
225
80
169

3
4
4
1
3

1969
1970
1971
1972
1973

1,078.8
1,075.3
1,107.5
1,171.1
1,235.0

5,323
5,249
5,349
5,607
5,869

82
- 7 4
100
258
262

1
- 1
1
4
4

1974
1975
1976
1977

1,217.8
1,202.1
1,274.7
1,337.6

5,747
5,629
5,926
6,169

- 1 2 2
- 1 1 8
297
243

- 2
- 2
5
4

1 Per c a p i t a d e b t is c a l c u l a t e d
by d i v i d i n g d e b t f i g u r e s by p o p u l a t i o n of c o n t e r m i n o u s U n i t e d States. B e g i n n i n g 1949, p o p u l a t i o n i n c l u d e s A r m e d Forces overseas, Hawaii, a n d Alaska.

S o u r c e : F e d e r a l d e b t , T r e a s u r y D e p a r t m e n t ; o t h e r d a t a , B u r e a u of E c o n o m i c
Analysis, Commerce Department.
N o t e : D e t a i l m a y n o t a d d t o t o t a l s b e c a u s e of r o u n d i n g . Real G N P is in c o n s t a n t
1 9 7 2 d o l l a r s . Real p e r c a p i t a d e b t e x p r e s s e d in 1 9 6 7 p r i c e s (i.e., C o n s u m e r P r i c e
I n d e x f o r all i t e m s ) .




o