The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FEDER AL RESERVE BAIIK
OF ST. LOU
e
v
Volume 50
i
e
v
Number 3
Consumer Saving Rises
t j C O N O M IC A C T IV IT Y has been accelerating
since the spring of last year, bu t increases in consum er
expenditures have been m oderate relative to the
growth of income. H ouseholds have been saving a
relatively large portion of their after-tax income.
Although such behavior is not uncommon for short
periods of time, the m aintenance of such a pattern
over a period of a year and a half has been unexpect
ed by som e analysts.
an im portant factor underlying the m oderation of eco
nomic activity early in 1967, and w as a desirable de
pressant later in the year when other forces becam e
ebullient. T he perform ance of the economy in 1968
depends in large p art on whether consum ers continue
to save a relatively large portion of their incom e or
increase their dem ands for goods and services.
The higher saving rate has caused much comment
in the financial press. Som e view it with great concern
as a potential w eakness in the economy; others view
it as a pool of potential excessive dem and. Various
explanations for a tem porary increase in the saving rate
have been offered. This note takes the view that recent
consum er behavior w as neither random nor serious,
but reflected rational consum er response to economic
developm ents.
T otal spending has increased at a 9 per cent annual
rate since the second quarter of 1967, with investm ent
dem and accelerating especially rapidly. Investm ent
spending, which had declined sharply in the first half
of the year, m ainly due to a drastic reduction in in
ventory investm ent, expanded significantly in the sec
ond half. M ost of the rebound in investm ent spending
w as due to inventory accum ulation, which rose from
an annual rate of $0.5 billion in the second quarter to
$9 billion in the fourth quarter. R esidential construc-
The shift to a higher rate of saving in late 1966 was
Spending and Prices
Industrial Production
Dem and and Production
R a tio S c a le
B illio n s o f D o lla r s
R a tio S c a le
o f D o lla r s
Q uorterly Totals at Annual Rates
1965
1966
1967
Ratio Scale
1968
UL G NP in current dollars.
Source: U.S. Department of Commerce
12 GNP in 1958 dollars.
Percentages are annual rates of change between periods indicated.They
comparing most recent developments with past "trends."
Latest d ata plotted: 4th quarter
Page 2
Ratio S c a le
1960
1961
1962
1963
1964
1965
1966
1967
1968
Percentages are annual rotes of change between periods indicated .They are presented to aid in
comparing most recentdevelopments with post "trends."
L atestd ata p lotted: Jan u a ry p relim inary
rate from last spring to January. From 1957 to 1967
income grew at a 6 per cent average rate.
Prices
R a tio S c a le
R a tio S c a le
1957-59=100
125
1957-59=100
125
Prices p aid by consum ers for com m odities other
than food have increased at a 4.5 per cent rate since
July, after rising at a 2.2 per cent rate from D ecem ber
1966 to July. W holesale prices of industrial com m od
ities increased at a 3.2 per cent rate from Ju ly to
D ecem ber and even m ore sharply in Jan uary and
February.
Governm ent Actions and Economic
Activity
Aug. 66 A p r.6 7
- i
1960
1961
1962
1963
1964
1965
1966
l
Governm ent actions w ere a stim ulative force in the
economy in 1967. R eserves of m em ber banks increased
10 per cent from Jan uary 1967 to last January, com
pared with a 4 per cent trend rate from 1960 to 1966.
Jon.i
l
1967
\
1968
S o u r c e : U .S . D e p a r tm e n t o f L a b o r
Percentages are annual rates of change between periods indicated.They are presented to aid in
comparing most recentdevelopments with p asf'tre n d s.”
Latest d ata plotted: J a n u a ry p re lim in a ry
tion rose throughout the year, after declining sharply
in 1966. Investm ent in plant and equipm ent contrib
uted little to the acceleration but shows prom ise of
im provem ent in 1968, according to governm ent surveys.
Em ploym ent and income have expanded since last
spring, reflecting increased production. From June to
Jan uary industrial output rose at a 6.3 per cent rate,
follow ing a period of decline over the previous ten
months. Em ploym ent rose at a 3.3 per cent rate from
last spring to January, com pared with an estim ated 2
per cent rate of expansion in the population of working-force age. Unem ploym ent stood at 3.5 per cent of
the labor force in January, the low est rate since 1953.
Personal income increased at an 8 per cent annual
Q u a rte rly To tals a t A n n u a l Rates
Ratio Scale
Billions of D o lla rs
Monthly A verages of Daily Figures
S easo n ally Adjusted
+3 4%
3 182.7
+7.7% / y
//
170
170
■0.2%
+4.0?
+2.7%
150
150
14^
•o
July 59
ho
June '60
June 64
♦
1960
1961
1962
1963
1964
Apr. '65
t
1965
Apr. '66 Jan .6 7
2
*
1966
1967
t
1968
130
Percentages are a n n u al rates of change between periods indicated. They a re presented to aid in
comparing most recent developm ents with p a sf'tre n d s."
Personal Income
Ratio S c a le
B illio n s of D o lla rs
M oney Stock
Ratio Sc a le
B illions of D o lla rs
Latest d ata plotted: February prelim inary
Ratio S cale
B illio n s of D o llars
800
800
The money stock, currency plus dem and deposits, in
creased 7.3 per cent in the year ending in January, a
sharp acceleration from the previous nine months
when the money stock changed little.
The expansionary force of fiscal actions m oderated
slightly late in 1967 but still rem ained much stronger
than in 1966. T he high-em ploym ent b u d g et deficit
w as $11 billion in the second h alf of 1967, about un
changed from the first half bu t up sharply from a $3.4
billion deficit in the second h alf of 1966. In the ab
sence of the proposed tax surcharge, the stim ulative
force of fiscal actions w ould continue into 1968.
1956
1958
1960
1962
1964
1966
1968
S o urce : U .S. Departm entofCom m erce
♦ Personal incom e ad ju ste d for ta x ch an ges and by the im p licitp rice d e fla to r for
perso n al consumption exp e n d itu re s.
S h ad ed a re a s represent perio d s of b usin ess recessio n a s defined by the N atio n al
Bu reau of Econom ic Research.
La test d ata plotted: 4th quarter
Consumer Saving Behavior
D espite acceleration of personal income, growth in
consum er spending w as m oderate in the second half
Page 3
of last year. Since m id-1967 consum er
spending has increased at a 5 p er cent
annual rate, com pared with a 7 per
cent rate of increase in the first half
of the year. On balance, dem and for
goods, both durable and nondurable,
has m oderated since mid-year. The
slowdown in consum er spending re
flects an increased dem and for finan
cial assets relative to real goods. This
w as not a random event bu t resulted
from the interaction of several condi
tions.
Personal S a vi n g
a s a Per Cent of D i s p o s a b l e Perso nal Income
Individuals buy real goods and fi
nancial assets for the services or satis
faction which can be derived from
their use. Since the am ount they can
L a te s t d a ta p lo tte d : 4 th q u a rte r 1967
S o u rce : U .S . D e p a rtm e n t of Com m erce
acquire is lim ited by income and the
ability to obtain credit, individuals
est rates over the period not only increased the cost of
are forced to m ake decisions; som e wants must be
consum er credit bu t also the return on financial assets.
sacrificed in order to achieve others. They seek to
While price increases and interest rates m oderated late
acquire that com bination of items which provides m ax
in early 1967, individuals did not significantly reduce
imum satisfaction. T hese decisions are m ade by com
the portion of total income allocated to financial
paring benefits and costs, and that com bination of real
assets. Instead, they m erely m oved a portion of their
goods and financial assets is chosen which provides
assets from interest-bearing instrum ents to currency
maximum possible satisfaction, given income and the
and dem and and time deposits in an attem pt to build
availability and cost of credit.
liquidity which had been lost earlier. Since m id-1967
T he recent allocation of an increased share of in
prices have accelerated, and interest rates have again
come to financial assets has reflected the increasing
m oved upw ard. Individuals have responded by m od
costs of real goods and the expansion of the benefits
erating the growth of consum er spending and divert
offered by financial assets. On balance, the prices of real
ing an increased share of after-tax income (from 6.7
goods have risen at an accelerated rate since early in
per cent in the second quarter of 1967 to 7.5 per cent
1966. In addition, the high and rising nature of interin the fourth quarter) to financial assets.
Interest Rates
Per Cent
Per C ent
Monthly A v era g e s or D o ily Figu
7 .0
In addition to high interest return, financial assets
are providing other services to individuals. T he rising
cost of such item s as education and m edical care has
resulted in increasing the am ount of funds which m ust
be set aside for future use. T he threat of a tax increase
has probably caused som e individuals to sacrifice p res
ent consum ption of real goods in order to m eet expect
ed higher tax liabilities. U ncertainty about future
developm ents in A sia has been another factor in in
ducing consum ers to save their purchasing pow er. A
partial offset m ight be expectations of continued in
flation, which w ould tend to induce consum ers to buy
real goods at present prices.
-Month Treasury Bills
Conclusion
qT~
1960
-t-
1961
-r~
1962
1963
1964
~ r'
1965
(
~ r~
1966
1967
1968
Sources: Board of G o vern o rs of the F ed e ral Reserve System and M oody's Investors Service.
Latest d ata plotted: F ebru ary
Page 4
T he increased share of income allocated to savings
reflects the response of individuals to the acceleration
of prices and rising interest rates. Pressure on prices
and interest rates has in large p art been due to stabili-
C o n s u m e r In s ta lm e n t C red it
R a tio S c a le
M il
90
R a tio S c a le
a rs
90
80
80
+ 605
7 6 .7
70
70
60
60
50
50
40
40
3
a
<
Dec '61
t
30
1961
1962
1963
1964
1965
1966
K
S3
-d
£
K
!0
-£•
-3
N
<
t t
1967
30
1968
P ercen tages a re a n n u al ra tes o f ch an g e betw een perio ds in d ica te d .T h e y a re prese nted to
a id in com p aring most recen td evelo pm ents w ith p a s t" tre n d s .”
and services and addin g to pressure on prices and in
terest rates.
Given the growth of Governm ent spending for w ar
and w elfare program s, and given the increase of bu si
ness spending resulting from stim ulative fiscal and
m onetary actions, there w as only a lim ited amount of
productive resources left to satisfy consum ers. C on
sum ers were, in effect, rationed goods and services
by a com bination of higher interest rates and higher
prices. T heir behavior w as entirely consistent with
the conditions existing, and there is no reason to b e
lieve that individuals have m ade a long-run fu n da
m ental shift to a higher saving rate. There is little
likelihood that consum ers will change their saving rate
without a significant change in underlying economic
conditions.
L a t e s td a t a p lo tte d : D e c e m b e r
zation policies pursued since 1966. Strong dem and for
goods and services by the governm ent sector contrib
uted to the rapid increases in prices, and the large
bu d get deficits p u t upw ard pressure on interest rates.
R apid m onetary expansion late in 1967 w as an expan
sionary force, stim ulating private dem and for goods
Consum er behavior has operated as an autom atic
stabilizer in the economy. Expansionary fiscal and
m onetary actions in 1967 resulted in rapidly rising
business and governm ent expenditures. Consum ers, in
turn, increased their spending on goods and services
at a slow er rate bu t acquired more financial assets
issued by the other sectors.
Page 5
The Federal Budget and
Stabilization Policy in 1968
-LH E F E D E R A L B U D G E T and the Econom ic R e
port of the President are presented to Congress and
the public early each year. T ogether they can be view
ed as a national “economic plan” in the spirit of the
Em ploym ent A ct of 1946.1 The purpose of this article
is to sum m arize and analyze the economic plan for
1968. E m ph asis is placed on fiscal actions required to
achieve the goals of high employm ent with relative
price stability and equilibrium in the balance of inter
national paym ents.
T he 1968 national economic plan calls for a gross
national product of $846 billion, a 7.7 per cent in
crease over 1967, consisting of 4.2 p er cent grow th in
real produ ct and 3.4 p er cent increase in prices. The
chief economic problem in 1968, as expressed by the
President’s Council of Econom ic A dvisers ( C E A ), is
to restrain the increase in dollar dem and for goods and
services to a lim it im posed by growth in the nation’s
potential to produce. T o deal with the problem of p o
tential excess dem and, the C E A recom m ends a 10 per
cent surcharge on corporate and individual income
taxes, effective Jan uary 1 for corporations and April 1
for individuals. T he C E A warns that in the absence
of fiscal restraint, the economy will be subject to ser
ious inflationary pressures an d /o r serious financial
stringency.
Errors in p ast national economic plans and the pros
pects of success for future plans depend crucially on
information regardin g three areas of economic knowl
edge. One concerns the quantitative effect of fiscal
and m onetary actions on total dem and; a second, the
tim ing of the effects of fiscal and m onetary actions on
total dem and; and a third, the trade-off between prices
and real output.
I. Stabilization P olicy and Econom ic
P erform an ce in 1 9 6 7
As background for the analysis of the national eco
nom ic plan for 1968, economic conditions and stabiliza
tion policies in 1967 are review ed. T he C E A ’s econom
ic plan of a year ago is com pared with the outcome.
Economic Performance: Plan and
Outcom e
On balance, economic activity advanced in 1967 but
at a m uch slower rate than in recent years. T he year’s
growth pattern consisted of a sluggish first half fol
low ed by a sharp acceleration in the second half. The
slowdown in the first half w as dom inated by a large
inventory adjustm ent which more than offset the in
crease in final dem and, w hereas the second h alf w as
influenced prim arily by a sharp turn-around in the
rate of inventory accum ulation, even though final d e
m and slowed.
Superficially, the C E A ’s plan for 1967 appears to
have com e very close to being realized, although the
pattern during the year w as more uneven than antici
pated. The advance of activity in the first h alf w as
m uch slower than planned, w hile that of the second
half w as apparently faster than planned. In retrospect,
the first-half slowdown w as clearly underestim ated by
the C E A , bu t the second half surge w as apparently
m isgauged because the m ajor restraining fiscal actions
planned were not im plem ented.
In retrospect, it appears that the C E A forecast the
com position of G N P very accurately (T a b le I ) . In
term s of absolute error the m ajor exception w as conT a b le
FO R EC A ST AN D ACTU A L G N P , C ALEN D AR
Page 6
19 67
(B illio n s o f D ollars)
C E A F o re cast
P erso n al con su m p tion
B u sin e ss fixed
B usin e ss
investm ent
in ve n to ries
R e s id e n tia l construction
1 The term, “economic plan” , follows from the idea that given
certain information about the structure of the economy and
assumptions about the course of monetary actions, total de
mand can be controlled at the margin by fiscal actions. Use of
the term, “economic plan,” does not mean to imply that al
location of the nation’s output to particular sectors is planned.
I
A ctu a l
Error
495.1
4 9 1 .6
82 .3
82 .5
5 .7
5.1
.6
2 4 .8
2 4 .5
.3
3 .5
-
.2
F e d e r a l p u rch a se s
8 9 .0
8 9 .9
-
S tate a n d lo ca l p u rch a se s
84 .2
8 6 .4
- 2 .2
5 .9
5 .0
.9
7 8 7 .0
785.1
1.9
N e t e xp o rts
GNP
.9
sumption, which w as low er than forecast. T he low
estim ate occurred even though the recom m ended tax
surcharge w as not im plem ented. A proper appraisal of
the C E A forecast should b e b ased on a com parison of
its forecast, without a tax surcharge, with the actual
outcome. T he surcharge, as originally proposed, w as
designed to produce about $3 billion in revenue; thus
it could probably be assum ed that the C E A w as fore
casting a G N P in the $790 to $793 billion range in the
absence of the surcharge. On this basis, the C E A ’s
G N P forecast w as in error by $5 to $8 billion.
A forecast of G N P is incom plete unless it is accom
pan ied b y an estim ate of how the increase translates
into real product and prices. T he C E A ’s plan for 1967
included a 4 per cent increase in real product and a
2.5 per cent advance in prices. The record for the year
indicates a 3.8 per cent growth in real product and a
3.2 per cent rise in prices.
T he com parison of plan with outcome regarding
output and prices is blurred by the fact that the
C E A ’s plan assum ed a tax increase. T he C E A under
estim ated the extent to which inflationary forces were
operating in 1967. A larger portion of the 1967 increase
in G N P w ent into prices than in any other year since
1958.
1967 Budget Program: Plan and
Realization
In Jan uary 1967 the C E A presented its bu d get pro
gram for the year. A key p art of that program w as
the proposed surcharge on incom e taxes to take effect
on Ju ly 1. T he bu d get plan called for a $4 billion d ef
icit in the national income accounts for calendar 1967.
The actual deficit is currently estim ated at $12.6 bil
lion. A com parison of planned and actual receipts and
expenditures is shown in T ab le II.
T a b le
II
PLANNED AN D A CTU A L N IA BUDGET, CA LEN D A R 19 67
(B illio n s of
D ollars)
B u d g e t Plan
R eceip ts
...............................................................
A ctu a l
Error
15 8 .5
1 5 1 .5
7 .0
.....................................................
16 2 .5
164.1
- 1 .6
S u rp lu s (-{“ )» or d eficit ( — ) ..............
- 4 .0
- 1 2 .6
Ex p en d itu re s
T he chief reason for error in the bu d get plan for last
year w as the failure to estim ate receipts accurately;
actual expenditures exceeded the forecast by only $1.6
billion. T he shortfall of receipts can be explained by
two factors: ( 1 ) the failure of Congress to take action
on the surcharge, and ( 2 ) the slower-than-expected
G e n e ra l Price In d e x *
Ratio S c a le
Ratio S c a le
1958=100
1958=100
130
1301
lstq tr.
4th qtr.
It
1960
lstq tr.
4 lhq lr. cn 4thqtr.
_ i i ____
1961
1962
1963
1964
1965
a
1966
t
1967
4thqtr.
t i______l
1968
Source: U.S. D eportm entof Commerce
used in N ational Income Accounts
Percentages are annual rates of change between periods indicated.They are presented to aid in
comparing m ostrecentdevelopments with p asf'tre n d s.'’
Latest d ata plottedi4th q uarter 1967; 1968 estim ated from Economic Report of the p residen t
rise in economic activity, especially in the first half.
The 1967 experience suggests the desirability of the
C E A presenting publicly, when relevant, several fore
casts b ased on alternative sets of assum ptions. F o r
exam ple, in 1967 it w ould h ave been inform ative if the
C E A h ad presented in detail two forecasts, one assum
ing the tax surcharge and the other not. In this w ay
Congress and the public w ould have been better able
to assess the consequences of Congressional action or
inaction.
Summary
The year 1967 w as a year of m oderate growth, d e
spite fiscal actions that w ere more expansionary than
planned. M onetary actions w ere very restrictive in late
1966 and p robably affected economic expansion in
early 1967, but during 1967 m onetary expansion w as
probably m ore rapid than anticipated. T he 1967 C E A
report im plied that m onetary restraint w ould be re
quired if fiscal restraint, through the surcharge, w as
not forthcoming. This policy alternative w as not
placed into operation. E ven though the surcharge w as
not enacted, causing fiscal actions to b e more expan
sionary than planned, m onetary actions rem ained stim
ulative through D ecem ber 1967.
D esp ite the continuing stim ulus from fiscal actions
during 1967, economic activity w as sluggish in the first
h alf and ebullient in the second. This experience dem
onstrates the operation of lags in the economic im
pact of m onetary and fiscal actions. The first-half slow
down of activity prob ab ly reflected the restrictive
m onetary actions of 1966, which more than offset the
fiscal stim ulus of that period. It w as not until the
Page 7
second h alf of 1967 that the economy reflected the
com bined stim ulus of fiscal and m onetary actions.
In retrospect, the sequence of economic events took
p lace under such a different set of circum stances than
the C E A anticipated in its forecast, that it is not very
useful to com pare their plan with the outcome. It
w ould seem to be in the public interest to have the
regim e of circum stances outlined m ore explicitly, en
ablin g a m ore enlightened decision-m aking process
with regard to stabilization policy.
II. B u d get P rogram for 1 9 6 8 -6 9
T he b u d get program for fiscal 1969 is presented
within a new form at. A new concept of the b u dget is
presented, which replaces the outm oded and m idlead
ing adm inistrative bu d get and rem oves some con
fusion arising from the use of several bu d get concepts.
The bu d get plan of the F ed eral Government for
fiscal 1969 ( year ending Ju n e 30, 1969) calls for a d ef
icit of $8 billion in the new unified bu dget.2 E xpen di
tures are scheduled to rise 6 per cent from fiscal 1968
and receipts by 14 per cent. The deficit for fiscal 1968
is estim ated at $20 billion.
Spending Authority
Spending authority (i.e., b u d get authority in the
official parlance of the b u dget report)
for fiscal 1969 is scheduled to rise by 8.2
per cent, com pared with a 2.2 p er cent
increase in the previous fiscal year. An
8 per cent increase in authority for de
fense, international and space is includ
ed, com pared with a 1 per cent increase
in the previous fiscal year. Authority for
dom estic program s increases about 9 per
cent, up sharply from the 4 per cent rise
in fiscal 1968.
ing of 4 per cent for defense, international and space,
and 8 per cent for dom estic program s. Increases in
spending for these program s are estim ated at 9 and 14
per cent, respectively, in fiscal 1968.
Estim ates of defense spending for fiscal 1969 imply
a leveling off in defense purchases. W hen adjusted
for changes in prices, the increase translates into little
change in real terms. Any expansion in U. S. m ilitary
commitments w ould require supplem ental appropria
tions not included in the budget.
T he increase in dom estic spending prim arily reflects
program s that have already been legislated. Increased
social security benefits are scheduled for M arch and a
p ay raise for Governm ent em ployees for July. E xpen
ditures for education, housing, etc., however, are
scheduled to be cut back b y 4 p er cent.
T he discrepancy betw een changes in b u d g et author
ity and expenditures indicates that the pool of author
ized and spendable funds is being drawn down su b
stantially in fiscal 1968, bu t is scheduled to be built
up in fiscal 1969.
Receipts
Fed eral receipts are estim ated to rise sharply in
fiscal 1969, reflecting a 10 p er cent surcharge on cor
Fe d era l G o vernm en t Expenditures
Expenditures
Although spending authority is sched
uled to rise more rapidly in fiscal 1969
than in fiscal 1968, expenditure plans in
dicate a m arked slowdown in the rate of
increase. T he fiscal 1969 b u d get plans a
6 per cent rise of total spending, consist
2Since the budget plan is always prepared on
a fiscal year basis, i.e., for the year ending on
June 30, the budget plan is summarized on
this basis. The following section on the eco
nomic impact of the budget focuses on calen
dar 1968. Budget plans for the calendar year
have to be pieced together from the budget
report and the CEA report.
Page 8
S o u r c e : U .S . D e p a rtm e n t o ( Com m erce
Percentag es a re a n n u a l rates of change between periods in d ica te d .T h e y a re p resented to a id in com paring most recent
develo p m ents with past "trends.”
La te st d a ta p lotte d : J a n u a ry 1967 p re lim in a r y ; 1968 e stim a ted from Eco n o m ic R ep o rt o f the P re sid e n t
porate and individual incom e taxes, effective January
1 for corporations and April 1 for individuals. The
surcharge w ould provide an estim ated $9.8 billion in
fiscal 1969.
Other features of the tax program include expansion
of the base for social security taxes in calendar 1968,
an increase in social security tax rates on Jan uary 1,
1969, and extension of excise tax rates on telephone
service and autom obiles. T he increase in the social
security taxes will ad d $3.3 billion to revenue. Exten
sion of excise rates, which under existing law s are
scheduled for reduction on April 1, will prevent the
loss of $2.7 billion.
Changes in tax law s are estim ated to ad d $10.8
billion in revenue in fiscal 1969. The rem aining $11.5
billion of the increase is expected from growth in the
economy.
per cent increase in prices. This increase, if realized,
w ould be the largest year-to-year change since 1957.
C om pared with the experience of other periods since
1965 (w hen the economy reached full em ploym ent),
the projected increase in prices appears to be roughly
consistent with the 7.7 per cent forecast increase in
total dem and (se e T ab le I I I ) . There is no indication
T a b le III
SPEN D IN G , OUTPUT, AN D PRICES
Annual
Proposed b u d get actions for the eighteen-month
period ending June 30, 1969, rest on the prem ise that
in the absence of actions to raise tax rates or restrain
m onetary growth, federal b u dget actions w ould be
overly stim ulative in relation to present and expected
strength of private dem and relative to productive ca
pacity. T he b u d g et program will probably have little
effect on the rate of economic expansion early in cal
endar 1968, since the effect of m ost tax actions w ould
not be felt by consum ers until spring. Instead, the
program apparently aims at achieving a more m od
erate expansion in the second half of 1968.
T he C E A ’s forecast for 1968 has built into it a 3.4
Fed eral Budget Influence*
To tal
sp e n d in g 1
P eriod
19 6 6 :
Real
output2
P rice s3
1 .............. . .
9 .9
7 .7
2.1
1 to 19 6 6 : I V .............. . .
6 .7
3 .3
3 .3
I I .............. . .
3 .4
1.1
2.3
8 .5
4 .5
3 .8
19 64: IV to 19 6 6 :
1 9 6 6 : IV to 19 6 7 :
1967:
III. F ed eral B u d get Actions and the
Econom ic O utlook for 1 9 6 8
R ale s O f C h a n g e
(Per C en t)
II to 19 6 7 : I V ..............
1 G .\P in current dollars
-GNP in 1958 dollars
:i GNP deflator
in the C E A report, however, as to whether this com
bination of output growth and price increase is the
m ost desirable of the attainable alternatives. It would
be of great help to the policym akers if the C E A had
provided their alternative estim ates of real product
growth and inflation rates for different target levels of
total dem and. In this w ay Congress and the public
w ould be in a better position to judge whether the
C E A ’s economic plan is the best attainable under the
circum stances. Little is known about the trade-off b e
tween output and prices, yet the public w ould be
benefited if it knew the C E A ’s assum ptions about this
trade-off.3
S tim u lu s o r R e s t r a in t
Economic Implications o f the Budget
Econom ic activity is rising rapidly, fueled by the
lagged effects of a large fiscal stim ulus and very rapid
m onetary expansion in 1967. T he deficit in the highem ploym ent b u d g et w as estim ated at $10 billion in
the fourth quarter, com pared with a $5 billion deficit
a year earlier. The nation’s m oney supply rose 7 per
cent from D ecem ber 1966 to D ecem ber 1967, the fast
est rate for a twelve-month period since W orld W ar II.
So urce: F ed e ral Reserve Bonk of St. Louis
*The High-Employment Budget, first published by the C o un cil of Economic Advisers.
Latest d ata plotted :4 th q u a rter 1967 p relim in ary .-first and lost half 1968 estim ated by this b ank
3It has been suggested that there is both a short-run and longrun trade-off between output and prices. For an attempt to
estimate these trade-offs for several countries, see Michael
Reran, “The Effect of Total Demand on Real Output,” Federal
Reserve Bank of St. Louis Review Quly 1966), pp. 7-12.
Page 9
These p ast policy actions are currently w orking to
overheat the economy. Since policy actions affect the
economy with a lag, there is perhaps little that can be
done to restrain inflationary forces effectively in the
first half of 1968. To avoid the cumulation of these
inflationary forces, however, restrictive actions should
b e taken prom ptly. T he fiscal program w as supposed
ly designed for this purpose.
T he question rem ains w hether the proposed actions
are sufficient to successfully com bat inflation. Relevant
in answ ering such a question is the expected course of
m onetary actions. W ith more restrictive fiscal actions
it w ould be easier to restrain m onetary growth, and,
although it remains silent on this point, it is likely that
the C E A expects slower m onetary growth. If monetary
actions continue to b e expansionary, any restrictive
effects flowing from the fiscal program m ay be n egat
ed. If m onetary growth is reduced, the com bined fiscal
and m onetary program can probably be m ade effective.
Econom etric studies have been conducted over the
years, however, which shed light on this trade-off
betw een fiscal and m onetary actions. T ab le IV pro
vides som e crude estim ates of the effects of the pro
posed tax surcharge, as obtained from one such m odel.4
It should be em phasized that other m odels w ould give
different results.
These estim ates are prepared on the assum ption that
G N P totals the sam e $846 billion as the C E A projects
in its report, and that the Governm ent’s spending plans
will b e realized. Given these assum ptions, two sets of
values are calculated—one show ing the results with
the surcharge, and the other the results without the
surcharge. T he difference betw een these two sets of
values is shown in T ab le IV.
T a b le
EFFECT O F PRO PO SED TAX SU RC H A RG E
Effect o f 1 0 % S u rc h a rg e
(C o m p a re d w ith no S u rc h a rg e )
E co nom ic M a g n itu d e
T he C E A does not spell out the requirem ents for
m onetary action in its economic plan, bu t the success
of the program depends crucially on m onetary growth.
In addition, the possible consequences of Congress
ional inaction on the surcharge deserve a thorough
examination.
Policy M ix: An Examination of the
Alternatives
Answers to such questions as posed above require
quantitative estim ates of the im pact of fiscal and mon
etary actions. Such estim ates require information
about the structure of the economy. There is little
general agreem ent am ong economists about this struc
ture, yet an im plied structure of the economy under
lies the C E A ’s economic plan. Since the C E A does not
m ake its economic m odel available to the public, the
results of other studies have to be used to examine in
greater detail the im plications of the bu dget plan for
economic activity in 1968.
The C E A em phasizes that failure to enact the sur
charge w ould leave the entire burden of stabilization
to the Fed eral Reserve. M ore properly, it m ight be said
that the burden of stabilization, assum ing the Federal
Reserve restricts bank credit to the rate consistent with
desired growth in total dem and, will be greatest on
those who rely m ost heavily on credit, especially long
term credit. T he consequences will be a severe strain
on financial m arkets with possible disruptive effects
on the housing sector. T he C E A ’s statem ents are q uali
tative; no quantitative estim ates of the effects of this
policy alternative are given.
Page 10
IV
H ig h -p o w e re d
m on ey
.................................
Long-term g o v ern m en t bond rate
, ,
G r e a te r b y $ 7 .8 b illio n
Low er b y 5 6 b a s is points
G r e a t e r b y $ 0 .7 b illio n
S m a lle r b y $ 7 .2 b illio n
F e d e ra l d e b t in h a n d s of p u b l i c ...........
Low er b y $ 1 5 .0 b illio n
If the surcharge is not passed , a larger deficit will
h ave to be financed than otherwise. Also, m onetary
actions will have to be m odified accordingly to achieve
the G N P target. It is estim ated that the proposed tax
surcharge is the equivalent of $7.8 billion in m onetary
action as m easured b y the change in high-pow ered
money, i.e., bank reserves and public holdings of
currency.5 Thus, without the surcharge, the rate of
m onetary growth w ould have to be cut substantially
to achieve the G N P target of $846 billion.
Interest rates would be 56 basis points higher with
out the surcharge than with it, and as a result invest
ment would be about $0.7 billion less. T he item most
affected by the tax situation is the public’s holding of
Government debt, which w ould be greater by $15
billion if no action is taken on the surcharge.
These estim ates are crude, and are m eant to be
illustrative rather than indicative of actual m agnitudes.
4Based on estimates from a model similar to that presented by
Professor Carl Christ before the December 1966 meetings of
the American Economic Association. A detailed derivation of
these estimates, along with estimates from alternative models,
is provided in a memorandum entitled, “Policy Mix and the
1968 Economic Report,” available on request from the Re
search Department of this Bank.
5 See Leonall C. Andersen, “Three Approaches to Money Stock
Determination,” Federal Reserve Bank of St. Louis Review
(October 1967), pp. 6-13, for a description of this measure.
N evertheless, they are offered to dem onstrate the in
terdependence of fiscal and m onetary actions. Although
existing estim ates are approxim ate, they w ould seem
to be more m eaningful than intuitive judgm ent. If the
consequences of inaction on the surcharge are not
spelled out clearly, policym akers are not bein g suffi
ciently equipped with information upon which to m ake
intelligent decisions.
IV. Conclusion
The C E A ’s report has reflected increasing economic
sophistication in recent years with regard to the for
m ulation of stabilization policy. M any areas of eco
nomic know ledge are still in a sorry state, and the
C E A continues to prepare its analysis on the basis of
fiscal policy, largely ignoring m onetary effects. Yet,
there is little question but that the form ulation of eco
nomic policy has im proved over the years. One of the
great problem s that remains is the form ation and im
plem entation of policy when the economy is operating
at high employment. A ccording to Professor W alter
Heller, form er chairm an of the C E A :
. . . the margin for error diminishes as the economy
reaches the treasured but treacherous area of full
employment. Big doses of expansionary medicine
were easy—and safe—to recommend in the face of a
$50 billion gap and a hesitant Congress. But at full
employment, targets have to be defined more sharply,
tolerances are smaller, the line between expansion
and inflation becomes thinner. So in a full employ
ment world the economic dosage has to be much more
carefully controlled, the premium on quantitative
scientific knowledge becomes far greater, and the
premium on speed in our fiscal machinery also rises.6
8Walter W. Heller, New Dimensions of Political Economy
(Cambridge: Harvard University Press, 1966), pp. 69-70.
K
e it h
M.
C
a r lso n
APPENDIX
Measures of the Budget
The new unified budget is introduced as a replacement
for other outmoded measures. To gain an understanding
of the new budget, the old budget concepts are summarized
along with the new.
trative budget, receipts and expenditures of the trust funds
and Government-sponsored agencies are included. Surplus
es or deficits in the cash budget indicate changes in cash
borrowing from the public and/or changes in the Treasury’s
cash balance.
Administrative Budget
Prior to the presentation of the fiscal 1969 budget, the
administrative budget was the basic planning document of
the Federal Government. This measure of the budget in
cluded receipts and expenditures of funds owned by the
Government, excluding funds held in trust.
Cash Budget
The cash budget measures the flow of transactions be
tween the Federal Government and the rest of the econ
omy. In addition to the activities included in the adminis
Unified Budget
The new budget is a unified comprehensive statement
of the Government’s financial plan, replacing the adminis
trative budget as the Government’s basic planning docu
ment. The unified budget, as first presented, resembles
most closely the cash budget, with the major difference
being the treatment of sales of participation certificates in
Government-owned financial assets. The cash budget in
cludes such sales as an offset to expenditures, whereas in
the unified budget such sales are treated as borrowing.
Page 11
After accounting procedures are revised, receipts and ex
penditures in the unified budget will be presented on an
accrual basis, rather than on a cash basis.
levels of economic activity on Government receipts and ex
penditures), the high-employment budget indicates the
economic im pact of changes in tax laws and legal provi
sions for expenditures.
National Incom e Accounts Budget
The national income accounts budget summarizes the
receipts and expenditures of the Federal Government sector
as an integrated part of the recorded activities (i.e., the
national income accounts) of all sectors of the economy.
Primary differences between the national income accounts
budget and the unified budget (and the cash budget) are
(1) on the expenditure side, spending is recorded when
delivery is m ade to the Government, and purchases and
sales of existing real and financial assets are excluded, and
(2) on the receipts side, taxes are in large m easure recorded
when the tax liability is incurred.
H igh-Em ploym ent Budget
The high-employment budget is an estimate of the
national income accounts budget which would prevail at a
specified constant rate of resource use. By eliminating the
major built-in stabilizer effects (i.e., the effect of changing
Page 12
VBSCRIPTIONS to this bank’s
Budget Authority
Budget authority is legislation by congress permitting a
Government agency or departm ent to commit or obligate
the Government to pay out money either in the form of
expenditures or loans. Congress does not vote on expend
itures; it determines budget authority. Before funds can
be spent or loaned, an agency m ust submit and have
approved by the Bureau of the Budget an apportionment
request. This determines the rate at which budget authority
can be used. An agency usually incurs obligations, i.e.,
commits itself to spend or loan money, after apportionment
by the Bureau of the Budget.
Incurring obligations does not necessarily mean immedi
ate disbursement of funds. Trends in budget authority,
however, are indicative of trends in expenditures, although
frequently budget authority and expenditures diverge
sharply on a year-to-year basis.
R e v ie w
are available to the public without
charge, including bulk mailings to banks, business organizations, educational
institutions, and others. For information write: Research Department, Federal
Reserve Bank of St. Louis, P. O. Box 442, St. Louis, Missouri 63166.
@FedFRASER