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S T A T E
O F
T H E
F O R
E C O N O M Y
F U L L
A N D
P O L IC IE S
E M P L O Y M E N T
H E A R IN G S
BEFORE T H E
JOINT ECONOMIC COMMITTEE
CONGRESS OE THE UNITED STATES
EIGHTY-SEVENTH CONGRESS
SECOND SESSION
FUB8UAKT TO
Sec. 5(a) of Public Law 304
(79TH CONGRESS)
AUGUST 7-10, 13-17, 20, 21, AND 22, 1962
Printed for the use of the Joint Econom ic Committee
F e d s r a l
R
e s e r v e
B
a n k
STATE OF THE ECONOMY AND POLICIES
FOR FULL EMPLOYMENT
H
E A R
I N
G
S
BEFORE THE
J O IN T
C O N G R E S S
E C O N O M IC
O F
T H E
C O M M IT T E E
U N IT E D
S T A T E S
EIGHTY-SEVENTH CONGRESS
SECOND SESSION
PURSU AN T
TO
Sec. 5(a) of Public Law 304
(79TH CONGRESS)
AUGUST 7-10, 13-17, 20, 21, AND 22, 1962
Printed for the use of the Joint Economic Committee
0 .8 . GOVERNMENT PRINTING OFFICE
SB*
WASHINGTON : 1962
*or aalt by tbe Snptrfntandeat of Documents, U.S. Government Printing Office
WaiSdngtoit 2ft, D.C. - Price $2.75
JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 5(a) of Public Law 304,79th Gong.)
W RIGHT PATM AN, Texas, Chairman
PAUL H. DOUGLAS, Illinois, Vice Chairman
HOUSE OF REPRESENTATIVES
RICHARD BOLLING, Missouri
HALE BOGGS, Louisiana
HEN RY S. REUSS, Wisconsin
M A R T H A W. GRIFFITHS, Michigan
THOMAS B. CURTIS, Missouri
CLARENCE E. KILBURN, New York
W ILLIAM B. W IDNALL, New Jersey
SENATE
JOHN SPARKMAN, Alabama
J. W. FULBRIGHT, Arkansas
W ILLIAM PROXM IRE, Wisconsin
CLAIBORNE PELL, Rhode Island
PRESCOTT BUSH, Connecticut
JOHN MARSHALL BUTLER, Maryland
JACOB K. JAVITS, New York
W m . Sum m ers J o h n s o n , Executive Director
J o h n W . L e h m a n , Deputy Executive Director
J o h n R . S t a b s , Clerk
n
C O N T E N T S
PANEL DISCUSSIONS AND INDIVIDUAL WITNESSES IN
ORDER OF APPEARANCE
State
of
the
E conom y
Tuesday morning, August 7:
Ira Ellis, economist, E. I. du Pont de Nemours <k Co_______________
Daniel B. Suits, professor of economics, University of Michigan_____
J. Frederick Weston, professor of economics, University of California,
Los Angeles---------- ----------- ----------------------------------------- ---------------James Wishart, research director, Amalgamated Meat Cutters and
Butcher Workmen of North America____________________________
Wednesday morning, August 8:
Douglas Greenwald, director of research, McGraw-Hill Publishing Co_
Mona E. Dingle, economist, Board of Governors, Federal Reserve
System-------------------------------------- ----------- -----------------------------------George Katona, professor of economics, University of Michigan_____
Wednesday afternoon, August 8:
Council of Economic Advisers:
Walter W. Heller, Chairman---------------------------------------------------Kermit Gordon, member______________________________________
Gardner Ackley, member____________ _________________________
Thursday morning, August 9:
F is c a l
and
21
16
53
59
68
104
104
104
P o l ic y
Otto Eckstein, professor of economics, Harvard University__________
Paul W. McCracken, professor of economics, University of' Michigan..
Joseph A. Pechman, director of economic studies, the Brookings
Institution------------- -------------------------------------------------------------------Thursday afternoon, August 9:
Leon H. Keyserling, economic consultant, Washington, D.C________
Raymond J. Saulnier, professor of economics, School of Business,
Columbia University.............. ....... ..........................................................
Friday morning, August 10:
George G. Hagedom, director, Research Department, National Asso
ciation of Manufacturers------- ------------------------------------------------John K. Langum, consulting economist, and president of Business
Economics, Inc., Chicago------- ----------------------------------------------------Joseph A. Livingston, financial editor, Philadelphia Bulletin; nation
ally syndicated columnist__________________________ ______ ______
Stanley H . Ruttenberg, director, Department of Research, AFL“ CIO_
F is c a l
7
23
M o n e t a r y P o l ic ie s W it h P a r t ic u l a r
t o t h e E u r o p e a n E x p e r ie n c e
197
203
215
245
292
325
331
339
343
R eference
Monday morning, August 13:
Ettore Lolli, central director, Banca Nazionale del Lavoro, Rome,
Italy................................................ ....... ....................................................
Jurg Niehans, professor of economics, University of Zurich, Switzer
land____________________________________________________________
Alan Day, professor of economics, London School of Economics,
England------------------------------------------------------------------------
m
381
384
374
CONTENTS
IV
M
onetary
P olicies
Tuesday morning, August 14:
Lawrence S. Ritter, professor of economics, N e w York University,
Graduate School of Business________________________________
Beryl W. Sprinkel, vice president, Harris Trust and Savings Bank,
Chicago, 111_______________________________________________
J. M. Culbertson, professor of economics and commerce, University of
Wisconsin________________________________________________
B alance
of
Payments
and
onetary
P olicies
and
M
in t h e
S ize
and
C omposition
of t h e
fob M aximum
a n d P urchasing
in
487
519
551
571
601
663
735
776
797
817
826
838
854
P ublic P r o c u r e m e n t
Wednesday morning, August 22:
Lee Loevinger, Assistant Attorney General in Charge of Antitrust
Division, Department of Justice___________________ _________
475
479
E m p l o y m e n t , Production
Power
M onday morning, August 20:
Lee Loevinger, Assistant Attorney General in Charge of Antitrust
Division, Department of Justice____________________________
Tuesday morning, August 21:
Edwin G. Nourse, former Chairman, Council of Economic Advisers,
1946-49.......... ................ ......... .............
Walter Adams, professor of economics, Michigan State University__
Alfred E. Kahn, professor of economics, Cornell University________
Robert F. Lanzillotti, professor of economics, Michigan State Univer
sity... ........... .................. ................. .
Richard J. Barber, professor of law, Southern Methodist University..
Id e n t i c a l B i d d i n g
458
Labor F orce
Friday afternoon, August 17:
E w a n Clague, Commissioner of the Bureau of Labor Statistics, Depart
ment of Labor. ____________________________________________
C o m p e t i t i o n P olicies
417
ethods
Wednesday morning, August 15:
— Marriner S. Eccles, former Chairman, Board of Governors, Federal
Reserve System, and chairman of the board, First Security Corp.,
Salt Lake City__________ _____ ____________________________
Malcolm Bryan, president, Federal Reserve Bank, Atlanta_________
Thursday morning, August 16:
-Alfred Hayes, president, Federal Reserve Bank, N e w York________
-William McChesney Martin, Jr., Chairman, Board of Governors,
Federal Reserve System____________________________________
Friday morning, August 17:
-C. Douglas Dillon, Secretary of the Treasury____________________
Changes
433
In t e r n a t i o n a l F u n d s F l o w
Tuesday afternoon, August 14:
Philip Bell, professor of economics, Haverford College_____________
D o n Humphrey, professor of economics, Fletcher School of L a w and
Diplomacy, Tufts University________________________________
Samuel Pizer, Assistant Chief, Balance of Payments Division, Depart
ment of Commerce________________________________________
Frederick H. Klopstock, manager, Research Department, Federal
Reserve Bank of N e w York_________________________________
M
Page
431
910
CONTENTS
V
WITNESSES AND EXHIBITS
Page
Adams, Walter, professor of economics, Michigan State University---------Barber, Richard J., professor of law, Southern Methodist University_____
Bell, Philip W., professor of economics, Haverford College..................
Bryan, Malcolm, president, Federal Reserve Bank of Atlanta___________
Comments on chart on Treasury bill rate and yield on long-term
Government bonds_______ ____________________________ — --------Consumer prices and per capita money supply (demand deposits and
currency)-------- -------------- ------------------------ ---------------------------------Equilibrium rate established by the decisions of borrowers and
investors______________________________________ ______ — ...........
Free reserve c o n c e p t________ __________________________ _____ ____
Reserve figure and correctness of trend........ ......... ......................... ........
Clague, Ewan, Commissioner of Labor Statistics, U.S. Department of
Labor: Accompanied by Miss Gertrude Bancroft, Assistant Chief, Man
power and Employment Statistics Division; and Robert L. Stein, Chief
of Branch of Employment and Unemployment Analysis--------- ------------Civilian labor force participation rates, first quarter, 1948-second
quarter 1962____________ _____ __________ _________ ____ ________
Civilian labor force participation rates for women in selected age
groups, first quarter 1948-second quarter 1962. .................................
Civilian labor force rates for men and women in selected age groups,
first quarter 1948-second quarter 1962................................................
Current seasonal adjustment factors for unemployment (used in 1961).
Employment in goods-producing industries, monthly 1953 to date___
Employment in service-producing industries, monthly 1953 to date..
Index of gross national product in constant 1954 dollars and of the
civilian labor force, first quarter 1948-second quarter 1962________
Letter to chairman_______________________ _____ _______ __________
Selected labor force participation rates for men and women in selected
age groups, first quarter 1948-second quarter 1962_______________
Culbertson, J. M., professor of economics and commerce, University of
Wisconsin......................... ........... ........... ........... ........................................... _
Day, Alan, professor of economics, London School of Economics________
Dillon, Hon. C. Douglas, Secretary of the Treasury__ ________ _________
Cash flow to corporations____________ _________________ _______ ____
Comparison of depreciation deductions, initial and investment allow
ances for industrial equipment in leading industrial countries, with
similar deductions and allowances in the United States___________
Countries permitting depreciation and related deductions of more
than the total cost of assets________________________ _____________
Depreciation practices in certain foreign countries__________________
Explanations of allowances shown in summary comparison of depreci
ation deductions and initial and incentive allowances on industrial
equipment in leading industrial countries and the United States__
GNP and public debt_____________________________________________
Percentages of family incomes saved in the different income classes__
Dingle, Mona, Chief, Consumer Credit and Finance Section, Division of
Research and Statistics, Board of Governors of the Federal Reserve
System................................ ................. ................... ...................................... Autos and houses, plans to buy........ ........... ................... ..................... ..
Buying plan level, July....................................................... ............... —
Buying plans for houses, automobiles, and household durable goods..
Household durable goods— plans to buy------- ---------------------------------Past and expected changes in income, selected periods, 1960-62_____
Plans to buy houses and durable goods, selected periods, 1960-62___
Plans to buy specified durable goods within 6 months, selected periods,
1960-62....................................... ....... ......................................................
Eceles, Marriner S., former Chairman of the Board of Governors, Federal
Reserve System, and chairman of the board, First Security Corp., Salt
Lake City, Utah................ .....................................................................
817
854
458
545
551
557
569
564
552
735
740
741
742
754
752
753
739
744
742
417
374
663
688
670
697
698
694
721
672
59
66
64
65
66
68
67
67
519
VI
CONTENTS
Page
Eckstein, Otto, professor of economics, Harvard University_____________
Ellis, Ira, economist, E. I. du Pont de Nemours Co---------- __-----------------F.R.B. index of industrial production, 1909-61-------------------------------Gross national product, 1909-61_____________________________ ___ _
Information re the more rapid growth rate of economic activity in
Western Europe than in the United States over the past decade__
Greenwald, Douglas, manager, department of economics, McGraw-Hill
Publishing Co., New York, N .Y______________ _________________ _____
Business plans for capital spending in 1962_________________________
Hagedorn, George G., director, research department, National Association
of Manufacturers____________________________________ _____ _________
Gross national product and related totals____________ _____ ________
Various economic magnitudes as a percent of gross national product-.
Hayes, Alfred, president, Federal Reserve Bank of New York: accom
panied by Charles A. Coombs, vice president and special manager, Fed
eral Open Market Committee; George Garvy, adviser, research depart
ment; and Peter Sternlight, manager, securities department, Federal
Reserve Bank of New York__________________________________________
Changes in total business financing including bank loans, JanuaryJune___ ____________ ___________________________________________
Moody's AAA-rated corporate bond yields_________________________
Moody’s AAA-rated State and local government bond yields________
Nonbank liquid assets as a percent of GNP______________________ 585,
Short-term liquid assets ratio, New York City______________________
Short-term liquid assets ratio, outside New York City______________
U.S. Government long-term bond yields____________________________
Heller, Walter W., Chairman, Council of Economic Advisers; accompanied
by Gardner Ackley and Kermit Gordon, members____________________
Data on consumption expenditures or saving by income bracket_____
Increase in Federal expenditures____________________________ ______
Summary of 1961-62 economic expansion and policies______________
Tax liabilities under alternative tax schedules (revised: July 23,
1962).__________ __________ _____ _______ _______ _______________
Humphrey, Don, professor of international economics, Fletcher School of
Law and Diplomacy, Tufts University______ _______ ______ __________
Katona, George, survey research center, Institute for Social Research,
University of Michigan______________________________________________
Business conditions expected in the next 12 months_________________
Consumer attitudes and inclinations to buy. May 1962_____________
Consumers’ expectations regarding their financial situation a year
hence___________________________________________________________
Index of consumer attitudes and inclinations to buy________________
Opinions about buying conditions for large household goods, cars, and
houses__________________________________________________________
Opinions on the advisability of a tax reduction, spring and fall, 1961. _
Percentage of families expressing intentions to buy a car____________
Quartile ranking of savings bond holders, early 1959___________ ____
Supplementary material regarding Mr. Patman’s inquiry about con
centration of holdings in U.S. Government savings bonds_________
Type and size of liquid asset holdings______________________________
Kahn, Alfred E., professor of economics, Cornell University_____________
Keyserling, Leon H., former Chairman, Council of Economic Advisers,
economic consultant and president, Conference on Economic Progress,
Washington, D.C_______________ ____________________________________
Charts:
1. Recessions, booms, stagnations, 1953-62: Rates of change in
GNP.............................................................................................
2. Chronic rise of unemployment, 1953-62____________________
3. The high volume of idle plant and machines, 1954-62______
4. Chronic rise of our unused productive powers (GNP),
1953-62___________________
______ ________
197
7
15
14
45
53
54
325
330
330
571
588
590
589
598
586
587
591
104
133
119
104
179
475
68
78
74
77
76
79
73
76
93
93
94
826
245
259
260
261
262
CONTENTS
VH
Keyserling, Leon H.— Continued
Charts— Continued
5. Deficient rate of growth in private consumer spending, 1953mid-1962______ _________ ______________________________
264
6. Low growth in private consumption reflects low growth in
incomes_______________________________________ _____ ___
265
7. Federal budget has shrunk relative to total output and needs,
________ _________________________
267
1954-62_______
8. The Federal budget reflects national economic deficiencies,..
268
9. A balanced Federal budget depends upon a maximum pros
perity economy____________ ____________________________
269
10. Gross private domestic investment was deficient during 1953mid-1962 as a whole________________________ _____ ______
272
11. Rising prices, profits, and investment before the 1957-58
273
recession____________ ___________________________________
12. Investment boom occurred again before the 1960-61 recession
despite reduced prices and profits__________ _____________
274
13. Price, profit, and investment trends during current economic
upturn_____ ___________________________________________
275
14. Before the 1957-58 recession, profits and investment outran
277
wages— basic to consumption_________________________ _
15. Before the 1960-61 recession investment again outrun
wages— basic to consumption____________ _______________
278
16. Profits and investment during current economic upturn outrun
wages— basic to consumption___________________ _____ ___
279
17. Deficient rate of growth in wages and salaries, 1953-Mid1 9 62........................... ............... ................................................
280
18. Rates of change in nonfarm output, and in nonfarm wages
and salaries, per employee-hour, 1947-62________________
281
19. Rates of change in manufacturing output, and in wages and
salaries, per man-hour, 1947-62__________ _____ _________
282
20. Trends in output per man-hour— or productivity— 1910-62..
283
21. Key profits alter taxes are high despite large unused capac
ities.......................................... ................................... ................
285
22. Profits-sales ratios indicate still higher profits will result when
capacities are more fully used___________________________
286
23. Total funds used by corporations have increased...................
287
24. Goals for 1963 and 1964, consistent with long-range goals
through 1966___________________________________________
288
25. Differences in results of high and low economic growth rates,
1963-66— _________________________ ___________________
289
26. Toward a Federal budget consistent with maximum employ
290
ment and the priorities of national public needs__________
27. A Federal budget geared to jobs for all and adequate public
services___________ _____________ __________________ _____
291
Klopstock, Frederick H., manager, research department, Federal Reserve
Bank of New York______________________________ ______ _____________
487
Short-term capital movements and the U.S. balance of payments___
494
The market for dollar deposits in Europe___________________________
509
Langum, John K., president, Business Economics, Inc., Chicago, 111_____
331
Corporate profits and cash flow, tables_____________________________
331
Lanzillotti, Robert F., professor and chairman, department of economics,
Michigan State University------------------------------ ---------------------------------838
Frequency of identical bids by companies as published by the Joint
Economic Committee of the U.S. Congress_______________________
852
848
Identity of bids on 73 chemical transactions, 1955-60______________
Livingston, Joseph A., financial editor of the Philadelphia Bulletin, and
nationally syndicated columnist______________________________________
339
Loevinger, Lee, Assistant Attorney General in charge of Antitrust Division,
Department of Justice____________________________________________ 776, 910
Acquisitions of General Motors Corp. since 1908____________________
781
Examples of identical bids------------------------- ------------------- ---------------923
VIII
CONTENTS
Page
Lolli, Ettore, executive vice president, Banca Nazionale del Lavoro of Italy.*
Martin, Hon. William McChesney, Jr., Chairman, Board of Governors of
the Federal Reserve System_________________________________________
A system of fluctuating exchange rates: Pro and con_______________
Correspondence with Chairman re flow of funds____________________
McCracken, Paul W., professor of economics, University of Michigan.__
Niehans, Jurg, professor of economics, University of Zurich, Switzerland.*
Nourse, Edwin G., former chairman, Council of Economic Advisers,
1946-49_______________ ______ —........... — ......... ....... ............................. Some questions emerging under the Employment Act---------------------Pechman, Joseph A., director of economic studies, the Brooking’s Institu
tion____ ____________________________________________________________
Comparison of original budget estimates with actual results, fiscal
years 1958-62__________________________________________________
Responses by Mr. Pechman to the questions raised by the Chairman, _
Pizer, Samuel, Assistant Chief, Balance of Payments Division, Office of
Business Economics, U.S. Department of Commerce_____________ ____
Ritter, Lawrence S., professor of finance, Graduate School of Business
Administration, New York University______________ _________________
Ruttenberg, Stanley H., director, department of research, AFL-CIO_____
Saulnier, Raymond J., professor of economics, Barnard College, Columbia
University, New York City__________________________________________
Sprinkel, Beryl W., vice president and economist, Harris Trust & Savings
Bank, Chicago______________________________________________________
Monetary growth, velocity, and business fluctuations_____ - - - - - ____
Suits, Dr. Daniel B., professor of economics, University of Michigan.____
Changes in economic factors, 1960, 1961, and 1962__________________
Economic forecasts, 1960, 1961, and 1962____________ _________ _____
Information re the more rapid growth rate of economic activity in
Western Europe than in the United States over the past decade__
Weston, Dr. J. Frederick, professor of economics, University of California
at Los Angeles_____ ___ ______ _____________ ________ _______ _________
Wishart, James, director, research department, Amalgamated Meat Cutters
and Butcher Workmen (AFL-CIO)______________________ - __________
Employment and unemployment 16 months after trough, seasonably
adjusted data __________________________________________________
Growth in West Europe__ _______ ___ _______ ________ ______ ____ _
Percentage gains in real gross national product (seasonally a d j u s t e d
Projections of total labor force compared with actual labor force____
Summary, employment and unemployment estimates-____________
381
601
648
609
203
384
797
808
215
217
226
479
431
343
292
433
437
23
24
24
47
21
16
20
45
) 16
20
21
ADDITIONAL INFORMATION
Acquisitions of General Motors Corp. since 1908_______________ _____ ___
Average tax savings per individual under various methods of making a $6
billion reduction in individual income taxes___________________________
Businessmen's expectations, fourth quarter, 1962, Dun & Bradstreet
survey. -------------- ----------------------------------------- ------------------- -------------Clark, John M., statement on Relation of Industrial Concentration to the
Purposes of the Employment Act__................................ ....................... ......
Corporate cash flow— actual and calculated, 1929-61____________________
Excerpts from testimony of William McChesney Martin, Jr., Chairman of
the Board of Governors of the Federal Reserve System, before the Com
mittee on Banking and Currency, House of Representatives, July 17,
1962..............................................................................................................
How to choke off a recovery, the Federal Reserve does it again, speech of
Hon. Henry S. Reuss on the floor of the House, April 9, 1962_________
Interest arbitrage for German commercial banks_________ ________ _____
Interest arbitrage, New York/London______________________ *__________
Interest arbitrage, United States/Canada__________ ______ _____ _____ ___
Letter and enclosures of Ewan Clague, Commissioner of Labor Statistics*
U.S. Department of Labor to chairman______________ ____ ____________
781
223
627
905
687
348
617
185
183
184
135
CONTENTS
Letter of Hon. Paul H. Douglas to chairman re hearings............................
Letter of the minority members of the committee addressed to the chairman
requesting hearings----------------- --------------------------------------------------------Letter of Hon. William Proxmire to chairman re hearings................ ...........
Reply..... ------ ------ ----- ------- ---------------------
Neild, ft. R., Deputy Director, the National Institute of Economic and
Social Research, London, England. Statement and transmittal letter._
Percentage increase in taxable incomes, after taxes, of the different income
classes under various methods of making a $6 billion reduction in indi
vidual income t a x e s .--------------------------------- -----------------------------------Reservation of powers of the Secretary of the Treasury__________________
Short-term interest rates_______________________________ ______ ________
Treasury bill rate and yield on long-term Government bonds— market
rates, short-term and long-term____________________________________550
Yields on U.S. Government securities__________ _____ __________________
APPENDIX
Correspondence between Chairman Wright Patman and William
McChesney Martin, Jr., Chairman, Board of Governors, Federal Reserve
System, re publication of condensation of 1960 minutes of Federal Open
Market Committee--------------------------------------------------------------------------Federal Reserve System exchanges in Treasury refundings______________
Interest rates and foreign dollar Dalances, by Robert F. Gemmell, Board of
Governors of the Federal Reserve System-----------------------------------------Letter and enclosure of Ettori Lolti, executive vice president Banca
Naxionale del Lavoro of Italy------------ --------- -------------------------------------Letter of Lee Loevinger, Assistant Attorney General, Antitrust Division,
Department of Justice, to chairman----------------------------- ------------ -------Memorandum from Wm. Summers Johnson, executive director, to chair
man....... ..................... ......... ........... ..................................................................
Alternative methods of reducing taxes--------------------------------------------Analysis of cash flow to corporations_______________________________
Monetary and international statistics---------------------- ----------------------Open market transactions of the Federal Reserve System during 1962____
Ratio of corporate profits after tax plus corporate capital consumption to
gross national product and to national income originating in corporations
plus their capital consumption. ........... ............... ..........................................
Ratio of corporate profits after tax to gross national product and to national
income originating in corporations_____________ _____________________
Ritter, Lawrence S., reprint from the Journal of Political Economy,
February 1962, entitled “ Official Central Banking Theory in the U.S.,
1939-61 ____________ __________ __________________ _________________
Total Federal Reserve credit and net free reserves by class of bank______
U.S. Government securities, dealer sales and purchases (combined) (to
gether with transmittal letter from Chairman Martin)-------------------------
STATE OF THE ECONOMY AND POLICIES FOR FULL
EMPLOYMENT
TUESDAY, AUGUST 7, 1962
C o n g r e ss o p t h e U n it e d S t a t e s,
J o i n t E c o n o m ic C o m m it t e e ,
Washington, D.C.
The committee met at 10 a.m., pursuant to call, in room AE-1, the
Capitol, Hon. Wright Patman (chairman) presiding.
Present: Representative Patman; Senators Douglas, Proxmire,
Bush, and Javits; Representatives Reuss and Widnall.
Also present: William Summers Johnson, executive director; John
R. Stark, clerk; Hamilton D. Gewehr, research assistant.
Chairman P a t m a n . The committee will please come to order.
This morning we begin hearings on the state of the economy and
on the question of how the policy of the Federal Government might
be appropriately amended to help achieve maximum employment,
production, and purchasing power.
The purpose of the panel this morning is to present the facts on
the state o f the economy, and for this purpose we nave a distinguished
panel of experts:
Mr. Ira Ellis^ economist for E. I. du Pont de Nemours & Co.
Mr. James Wishart, research director, the Amalgamated Meat Cut'
ters &Butchers of North America.
And we have two others^ who are evidently late, Dr. Daniel B.
Suits, professor of economics, University of Michigan, and Dr. J.
Frederick Weston, professor of economics, University of California
at Los Angeles.
Senator D o u g l a s . May I say these gentlemen are not necessarily
late. They may be lost in the effort to find this room. I have heard
of the difficulties whiterats have in a maze. I have been trying to
find this room for 15 minutes, and so I think these gentlemen should
be given our condolences.
Senator B ush. Mr. Chairman, I move that the usual fines be waived
for these late or tardy gentlemen.
Chairman P a t m a n . Senator Bush desires to make a statement, and
he will be recognized for that purpose.
Senator B ush. Mr. Chairman, I want to take this opportunity to
eommend you and thank you for the promptness and efficiency with
which you and the committee staff responded to the request of the
minority members for hearings on the current state of the economy.
Hie public has a vital interest in the subject of these hearings, and
can benefit greatly from an open, objective, and dispassionate dis
cussion of the issues and the policy alternatives available to us.
1
2
POLICIES FOR FULL EMPLOYMENT
Closed hearings, while benefiting those few fortunate enough to
hear the testimony, do not serve to inform either the public or the
Congress at large about the problems we face and what we must do
to solve them. The Joint Economic Committee has a continuing
responsibility in this area, and we are glad to see that it is discharging
that responsibility.
The minority believes that the most important objective of these
hearings should be the examination of our basic economic situation.
We should try to determine whether the Nation is undergoing deepseated and fundamental economic adjustments.
The near-term economic outlook and the question of whether or
not there should be an immediate reduction in taxes is important,
and will enter these hearings; but compared to the long-run and basic
economic problems before the country, these more immediate questions
are but ripples on the stream. We should not permit them to turn our
attention too long from the basic economic problems with which we
must grapple if the country is to get moving again.
I request that the July 27 letter of the minority members of the
committee, addressed to the chairman, asking for these hearings, be
made a part of the record at this point.
I thank the chairman and the committee for their courtesy.
Chairman P a t m a n . Without objection, the letter will be made a
part of the record at this point.
(Letter referred to follows:)
J o in t E c o n o m ic C o m m it t e e ,
Washington, D.C., July 27,1962.
Hon. W r i g h t P a t m a n ,
Chairman, Joint Economic Committee,
New Senate Office Building,
Washington, D.O.
D e a r M r . C h a i r m a n : Concern over the state of the economy has mounted in
recent months as the recovery from the 1960-61 recession has begun to level off.
Some economists believe that we face another recession late this year or early in
1963. In addition to fears of another recession following close on the heels of
the last one, there is some opinion that Our economy is not growing at a sufficiently
rapid rate and that we may be in a period of what has been called high-level
stagnation.
One prescription being offered as a cure for our economic iUs is an immediate
tax cut. The House Ways and Means Committee even now is holding private
hearings to study the state of our economy and the need, if any, for an immediate
tax cut.
While we recognize and respect the legislative jurisdiction of the Ways and
Means Committee over taxation, we believe nevertheless, that the basic issues
involved are broadly economic in nature since they involve the proi>er role of
fiscal and monetary policy in the present economic environment. The Joint Eco
nomic Committee, through open hearings, could make an important contribution
to the clarification and public understanding of these issues.
Therefore, we strongly urge that you schedule hearings by the full Joint
Economic Committee on the state of the economy as soon as possible. Such
hearings must be open. Not only does the public have the right to know about
the health of the economy, but, equally important, it has a need to know. Only
a full and frank open discussion of the issues will lead to that broad public
understanding and support on which sound economic policies depend.
Very truly yours,
T homas B. Ctntns*
ClaVENCC E. KILBURN.
W illiam & W idnall.
Prescott Bush .
John Marshall Btjtueb.
Jacob K. Javits.
POLICIES FOR FULL EMPLOYMENT
3
Chairman P a t m a n . Senator Proxmire desires to make a statement.
He is recognized for that purpose.
Senator P r o x m ir e . I appreciate that. I have a short statement.
Mr. Chairman, on July 9 I wrote you suggesting that this com
mittee hold hearings on the economy because I was deeply disturbed
by the increasingly restrictive actions of the Federal Reserve Board
at a time when our economy is standing still.
I challenge any witness to appear before this committee to justify
the high interest rate economy—slowdown policies of the Federal Re
serve Board.
For the Federal Reserve Board to force up interest rates and re
duce available bank reserves under present economic circumstances
is sure to create further unemployment, especially in the homebuilding and construction industries, which are highly responsive to changes
in interest rates. Unemployment in construction has been seriously
high for a long time.
Americans ranging from the U.S. Chamber of Commerce to the
AFL-CIO have become so alarmed by economic stagnation that they
have advocated a tax cut that would pile a huge deficit this year on
top of last year’s unbalanced budget
Virtually every economist ana business leader who has spoken out
on the economy has expressed dissatisfaction with our present rate of
growth, and concern that we may be about to drift into a recession.
Unemployment has continued at a seriously high level for more
than 2 years, and has failed to improve significantly during the past
7 months. For the Federal Reserve Board to deliberately force up
interest rates as it has been doing is to throw sand in the engine,
when what we need is more fuel.
In 1929, we cut taxes at the same time interest rates were rising to
high levels. This contributed to the worst economic crash in U.S.
history.
Two significant effects occurred last week which have very pro
found implications for the problem into which this committee is in
quiring. On Friday it was reported that the Federal Reserve System
had again tightened credit last week. This recent reduction in free
reserves to $300 million is significant in that it confirms the suspicion
of most analysts that the Fed is now committed to a tight money
policy.
The indications of such a policy seemed to be clear in June, when for
several weeks in a row the Fed reduced free reserves and maintained
them at levels lower than had been reached since the tight money
policy prior to the last recession. This indication was confused by
the temporary easing of credit that occurred in July. But now it is
clear that the policy, revealed by their actions in June, does in fact
reflect their basic outlook toward the need for credit restraint at this
time*
It is thus particularly timely that this committee exercise its re
sponsibility to provide the needed legislative oversight in this vital
area* Monetary policy is too important to be left to the bankers.
I f there ever was a time for Congress to insure that the monetary
policy is formulated and executed m the context of the public inter
est, itisnow.
The chronically high levels of unemployment prevailing in this
country and the chrdnic slowdown in our growth rates make it ovwr*
4
POLICIES FOR FULL EMPLOYMENT
whelmingly clear that no monetary constraints whatsoever should
be placed on economic activity.
Federal Keserve monetary policies could easily frustrate any at
tempt to stimulate the economy through a tax cut, in the same man
ner that proper monetary policies might possibly preclude the need
for significant fiscal action at this time.
The second event that occurred last week which gives special mean
ing and timeliness to these hearings was the failure of the Treasury’s
attempt to float a new issue of long-term bonds. The Treasury was
willing to sell up to $750 million worth of 30-year bonds which were
priced to yield 4.19 percent. It is significant that subscriptions
amounted to only $316 million. This fell far short not only of the
$750 million that the T re a su ry was willing to sell, but it fell far short
of the $500 million that the Treasury expected to sell.
This is a very strong indication that there is not the available
liquidity at the long end of the market that many have talked about.
I f investors are not willing or able to take advantage of such attrac
tive rates, they certain must lack significant loanable funds which are
seeking a place for profitable investment. The only other reason for
the dismal failure of this recent attempt of the Treasury to attract
long-term funds is that the investors feel that the rate of interest is
about to go higher.
Either of these two possible explanations is very distressing in its
implications. The deficiency of the availability of loanable long-term
funds suggests that the restrictive policies of the Fed have already
had an effect. In any case, it suggests that the Fed is in error if it
feels that it must soak up a significant amount of excess liquidity at
the long end of the market.
These recent events suggest why it is necessary for Congress to act
quickly to prevent the misguided policies of the Fed from continuing
to slow down the economy. It is my hope that these hearings, and
further report, will help to remedy this situation.
I thank you very much for indulging me in this statement. As you
know, I did write you on this matter, and I feel very, very strongly,
and I am sure that you share at least some of my sentiments.
Senator D o u g l a s . Mr. Chairman, I wonder if the Senator from
Wisconsin would obtain unanimous consent that the letter which he
addressed to the chairman on July 6 should be made a part of the
record; and if he does so, I will ask unanimous consent that the sub
sequent letter, which I wrote, addressed to the chairman, some days
after that, also be made a part of the record.
Senator P r o x m ir e . Yes, indeed, Mr. Chairman.
Chairman P a t m a n . I would like to add that the chairman’s reply
also be inserted.
Senator P r o x m ir e . I make that request, Mr. Chairman.
Chairman P a t m a x . Without objection, it is so ordered.
(Letters referred to follow:)
J uly 10,1962.
Hon.
W
r ig h t
Pa t m a n ,
Chairman, Joint Economic Committee, Washington, B .C .
D e a r W r i g h t : I think we should have a few days hearings of the full com
mittee about the state of the economy, and especially we should get Mr. Martin to
come before us to explain why he has been tightening credit for legitimate busi
ness loans and investments but loosening credit for stock market speculation.
POLICIES FOB FULL EMPLOYMENT
5
All this baa been done at a time where there is some doubt about the econ
omy, and I think we should properly go into it
With best wishes.
Faithfully yours,
Paul H. D
U.S.
ou g las.
S e n a te ,
Washington, D.C., July 6,1962.
Hon. Weight Patman,
Chairman, Joint Economic Committee,
Congress of the United States, Washington, D.C.
D e a r M r . C h a i r m a n : Present monetary policies are drastically reducing the
free reserves of our banking system and sharply increasing interest rates.
The restrictive effect on the economy is sure to diminish business opportuni
ties, increase unemployment, and slow economic growth. Monetary policies are
having these adverse effects at a time when unemployment remains steadily
high and the economy is operating well below capacity.
Thus the consequencies of present monetary policies directly contradict the
objectives of our Government as expressed by Congress in the Employment Act
of 1946.
For these reasons I am writing to suggest for your consideration that the
Joint Economic Committee hold hearings on monetary policies to hear Chair
man Martin of the Federal Reserve Board, Secretary of the Treasury Dillon,
Chairman Heller of the Council of Economic Advisers and others. In view of
the great significance of these hearings I hope that they can be set as soon as
possible, preferably within the next week or two.
During the month of June while unemployment continued at the same high
level of 5% percent (seasonally adjusted) that has prevailed since February,
the FED followed a restrictive policy of selling FED obligations that con
tributed directly to a reduction of free reserves in the banking system from
roughly $500 million down to about $300 million.
Meanwhile, interest rates on Federal, State, local, and private obligations of
all maturities rose sharply. Ninety-day Treasury bills rose to a 2-year high.
At the very time these restrictive monetary policies were being followed, the
U.S. Chamber of Commerce, the AFL-CIO, and the National Conference of Gov
ernors have all endorsed proposals for a substantial tax cut to get the economy
moving. At his press conference this week President Kennedy also indicated
the possibility that he might favor a big tax reduction.
It appears therefore that the Congress may be on the verge of a tax cut to
stimulate the economy. If a tax cut were enacted and monetary authorities
refused to change their present restrictive policies, this would perhaps be the first
time in the Nation’s history when the two great instruments of economic policy
in our Nation were deliberately and simultaneously set off in opposite directions.
The results might be an expansion of the economy if the tax cut proves a more
potent instrument than contracting credit policies, but any expansion would be
dragging an anchor of credit restraint Or it might very well be that the aggre
gate effect of these two Government policies might be to shove the economy
downhill if the credit restraint proved more potent than a tax cut
In any event the adoption of both a restrictive credit policy and an expansionary
fiscal policy at the same time would seem to be the height of absurdity with the
only sure consequences higher interest rates, a bigger national debt, and a greater
eventual burden on the taxpayer.
In the event taxes are not cut It is of course even more important that the
present restrictive monetary policies be reconsidered so that the economy can
move off dead center and start moving ahead.
Sincerely,
William Pboxmire, U.S. Senator.
Hon. William Proxmire,
J u ly
10, 1962.
Chairman, Subcommittee on Bconomie Statistics,
U.S. Senate, Washington, D .C .
Dear Senator Proxmire: Thank you for your letter of July 6 concerning
the current direction of monetary policy. I know of your deep concern over
this matter from having read your speeches in the Senate on the subject
6
POLICIES FOE FULL EMPLOYMENT
Needless to say, I agree with the observations you make concerning the
adverse effects of restrictive monetary policy on business activity and employ
ment. I, too, am deeply concerned, as I have been over the 15 years the
Federal Reserve has been progressively reducing the Nation’s supply of money
and credit relative to the volume of business transactions requiring money and
credit. There have been a few interruptions to the steady reduction in our
effective money supply during the past 15 years, but the general trend has been
unvarying. Similarly, the Federal Reserve has made numerous changes in
margin requirements for purchasing and carrying stocks on the organized stock
exchanges, but of course these changes in margin requirements are ib no way
related to the supply of money, or the supply of other liquid assets, available
for carrying on the business of the Nation.
While the United States, among all the principal industrial nations, has made
the largest reductions in its effective money supply in the postwar years, and
has enjoyed one of the slowest rates of economic growth, those Nations which
have maintained or increased their effective money supplies have made the
greatest economic gains. To illustrate, Japan’s GNP increased 129 percent be
tween 1952 and 1961, and its effective money supply was increased by 13 percent.
Germany’s GNP increased 104 percent, and its effective money supply increased
6 percent. France’s GNP increased 98 percent and its effective money supply
increased 17 percent The U.S. GNP increased by 45 percent, and its effective
money supply was reduced by 24 percent.
As to the suggestion that the full committee hold hearings on the recent fur
ther tightening of credit, however, it has long seemed to me that the constructive
hearings on this subject must necessarily have some relevance to the balance-ofpayments problem. This is, of course, the problem which justifies the tightmoney high-interest policy, at least in the minds of those responsible for the
policy, and our balance-of-payments subcommittee is digging deeply into this
problem. I am hopeful, furthermore, that the subcommittee will soon have some
constructive suggestions, either as to possible improvements in the money system,
or as to a reappraisal of the policies which are leading to a continuous net out
flow of dollars.
To me, it would seem to be preferable to find some improvement in the money
system which would permit the creation of money claims to wealth in a volume
more nearly related to our capacity for wealth production, rather than in a
volume limited by our supply of gold. Frankly, I have difficulty seeing the
relevance of the “discipline” imposed by a limited supply of gold. True, some
of our prices are undoubtedly noncompetitive in world markets, but the fact
that we are able to export $4 worth of goods and services for each $3 imported
seems to suggest that the gold “discipline” is misplaced.
Assuming that the subcommittee finds no improvements in the international
money system to be feasible, however, it would then seem to ine that a careful
evaluation of the sources of the dollar outflow would be most constructive. Re
strictions have, of course, been imposed on our military personnel stationed
abroad, and reductions have been made in the duty-free goods which American
tourists may bring in.
I know of no steps yet taken to discourage American banks and other financial
institutions from freely making loans abroad, to discourage U.S. investors from
purchasing foreign stocks and bonds, or to discourage American industrial firms
from purchasing foreign competitors and building plants in highly developed
nations needing no U.S. assistance. Thus, it would seem that the possibility
of some disincentive on these activities—perhaps a tax to equalize differences
in interest rates—should not be ruled out. A restrictive monetary policy to
equalize interest rates and check the flow of funds seems to me to impose a most
unequal sacrifice, namely, one falling on the more than 4 million wage earners
who are squeezed out of employment by this kind of policy.
With reference to your expressions of concern over the current proposals for
tax reductions, I, too, have serious doubts about these proposals. Indeed, I have
serious doubts about some of the assumptions concerning the flow of funds in
our economy which underlie the kind of proposals being made, and I have been
wondering if one of our subcommittees—perhaps the Subcommittee on Economic
Statistics—might wish to develop some proposal for an inquiry into the facta, of
these matters.
POLICIES FOB FULL EMPLOYMENT
7
The assumption that the volume of savings—corporate and personal—is
inadequate to support a high level of investment is, of course, of quite recent
origin, and an assumption which seems to me deserving of the most critical
examination. If it is still true, as many experts have believed in the past, that
our basic problem is one of excess savings relative to consumption expenditures,
then the administration’s suggestions for cutting corporate taxes and cutting
individual income taxes in ways to give disproportionately large tax relief to
the high-income families, who can be expected to save much of their added
income, then the proposed tax reductions may prove ill-advised. Indeed, a tax
cut which stimulates savings without also stimulating a very large expansion in
consumption could worsen unemployment and worsen the other conditions which
the tax cut is intended to remedy, once the period of a larger Federal deficit is
ended.
I also wonder about the assumption that corporate profit margins are inade
quate to draw a high volume of savings into investment On the face of the
data now available, the so-called profit squeeze appears to be a bookkeeping
fiction, reflecting the fact that the postwar trend has been to count relatively
more of corporate net income as ‘‘depreciation” and relatively less as “profits.”
These changes in bookkeeping practices have been made possible, first, by the
certificates of necessity granted in the earlier postwar years to permit “speed*
up” writeoffs of new plant and equipment, and, later, by changes in the Internal
Revenue Code of 1954 which tended to extend speedup writeoffs to all invest
ment in new plant and equipment. Considering also that the rate of return on
corporate investment is closely related to the rate at which capital equipment is
utilized, it appears that corporate margins have actually been widening over
the past decade rather than being squeezed.
Of course the foregoing does not suggest all of the important questions which
need answers. In yearB past our Subcommittee on Economic Statistics has
helped to initiate and bring about Improvements in the Federal Reserve’s flowof-funds data, but while these data are Intended to provide information that is
central to the working of our economy, some of the experts tell me that the
reporting system is only in the formative stage and needs much clarification and
improvement
If you feel that there is any merit to the above suggestions, I would appreciate
it if you would give consideration to the possibility of a thoroughgoing investi
gation and hearings on the flow-of-funds data by your subcommittee, and, if
such an investigation seems feasible, let me know what the staff and budget
requirements of such an investigation would be,
I am,
Sincerely,
Wright Patman.
Cc: Hon. Henry S. Reuss, Chairman, Subcommittee on International Ex*
change and Payments.
Chairman P atman . Are you ready to proceed?
Senator B ush . I might say there was a letter which we all signed,
in which we asked for open hearings.
Chairman P a t m a n . Y o u may proceed in your own wav, Mr. Ellis.
I notice you have a prepared statement. You may proceed.
STATEMENT OF IRA ELLIS, ECONOMIST, K I. DU POUT DE HEMOTJBS
A CO.
Mr. E u j s . Mr. Chairman and members of the Joint Economic
Committee, it is a pleasure to discuss with this group the current state
of the economy and the outlook.
I like the statements that have been presented so far, which set up
a very good basis for discussion. I have prepared a background state
ment of the current business situation, which I would like to read to
the committee and to use as the basis for my subsequent discussion.
8786^—62------ 2
8
POLICIES FOR FULL EMPLOYMENT
The economic activity rate in the United States is at an alltime
high level, but it is rising only slowly. The total value of goods and
services produced in the country in the second quarter of 1962 was at
an annual rate of $552 billion, compared with $519 billion for the
year 1961. In terms of constant prices, that is, the physical volume
of goods and services, the second-quarter level of output of the econ
omy was up 0.7 percent from the first quarter—and, gentlemen, that
is almost 3 percent per year—and up 5.1 percent from the 1961 aver
age. And, gentlemen, the 1961 average was the previous alltime
high.
The principal gains are occurring in the rate of consumer spending
for goods ana services, and in construction. Government purchases
of goods and services also rose in the latest quarter, and at a rate some
what higher than the rise in consumer spending. You gentlemen
know that Government purchases include State and local purchases
as well as those of the Federal Government.
The business inventory accumulation rate in the latest quarter was
down significantly from the first quarter rate, but it was at a reason
able level, after being relatively high in the last quarter last year and
the first quarter of 1962.
And I call your attention to the fact that that decline in the rate
of inventory accumulation had a significant effect on the total change
in the gross national product. In other words, final consumption
went up even more from the first to the second quarter than the gross
national product indicated, because the rate of accumulation of inven
tories went down.
While we all would like to see the operating rate of our economy at
a higher level, the fact still remains that the rate in the latest quarter
was at a record high level.
The rate of industrial production in the country in the second quar
ter of 1962 was also at a record high level, up 2 percent from the first
quarter, and up 7 percent from the 1961 average.
The 1961 average was the alltime record high annual average.
Principal gains in production over the past year have occurred in
durable goods, where the mild recession of 1961 was largely concen
trated. The principal output gains from the low point last year to
the latest quarter occurred m primary metals: that is, steel, aluminum,
and other metals; machinery; and transportation equipment. And of
course in transportation equipment, the big item is automobiles, having
an unusually good year. There were also significant output gains
over this period in several industries producing nondurable goods,
particularly textiles and apparel, paper and products, chemicals ana
products, and rubber and plastics products.
The production rate of the American economy in 1962 will approxi
mate closely the value indicated by the trend of its growth over the
past 11 years; that is, starting in 1951, as may be noted from the
attached charts.
Whether we look at the gross national product in terms of constant
prices, that is, the physical volume of goods and services, or at the
POLICIES FOB FULL EMPLOYMENT
9
Federal Reserve Board Index of Industrial Production, which also, of
course, is expressed in terms of physical volume, we find the above
statement to oe correct.
We are maintaining our growth rate of the past 11 years. I would
agree with anybody who would desire to see it higher, but I call your
attention to the fact that we are maintaining that growth rate.
Wholesale prices are showing very little movement. The index of
wholesales prices of commodities other than farm products and foods,
that is, largely industrial products, has shown venr little net change
since January 1959, although there have been significant increases and
decreases among the subgroups.
The Consumer Price Index, the prices of goods and services pur
chased by urban moderate income people, has risen about 1.25 percent
per year over this period, and prices of goods and services in the gross
national product have risen aoout 1.5 percent per year in the same
time. While the rise in prices in our economy has been slowing down
in recent years, it has not yet been stopped—importantly because costs
are still rising.
Employment in the country continues to rise, especially employ
ment m nonfarm activities. Total employment in July was recently
estimated by the U.S. Department of Labor at 69.6 million, a record
high for July, up 1.1 million from July 1961, in spite of a decline of
almost 400,000 in reported farm employment over this period.
Nonfarm employment in July 1962, therefore, was up 1.5 million,
or 2.4 percent, from a year ago—with the principal gains in durable
goods manufacturing, wholesale and retail trade, finance and service
industries, and government. The government increase was primarily
at the State andlocal level. Employment in construction and in min
ing declined over the past year.
Unemployment was down 1.1 million from a year ago, to about
4 million, the reported total in July 1962.
While the reported rate of unemployment is still relatively high, the
Labor Department figures show that much of this unemployment is
concentrated among boys and girls 14 to 19 years of age, many of
whom are single and living at home, or among those out of work for
less than 5 weeks.
The unemployment rate in June (July data in detail are not yet
available) among boys 14 to 19 years of age was 17.5 percent. That is,
among all the boys, 14 to 19 years of age, who said they were in the
labor force, 17% percent reported themselves as unemployed but looking for work.
That figure, of course, is relatively high, importantly because many
students were looking for summer work early in June. That 17%
percent for boys 14 to 19 years of age, compared with a rate of only
3.8 percent for men 25 to 34 years of age, 3.6 percent for men 35 to
44 years of age, and 3.4 percent for men 45 to 54 years of age.
In other words, if you are talking about unemployment among the
adult male labor force of the country, it is under 4 percent. It was
in June. Similar low rates of unemployment were reported for adult
women in the labor force.
10
POLICIES FOR FULL EMPLOYMENT
It seems to me that when we talk about unemployment, we ought to
talk about the adult labor force, not boys and girls 14 to 19 years of
age. Furthermore, 57 percent of the unemployed potential workers in
June 1962 had been out of work for less than 5 weeks. Again, when
we talk unemployment, let us talk about serious unemployment, and
not about workers who are changing jobs or who have just begun to
look for their first job.
Unemployment rates are relatively low among skilled workers, that
is, professionals, technical, and kindred workers, managers in farm
and nonfarm activities, et cetera.
Unemployment rates rise as the skill level declines. In fact, un
employment rates are relatively high principally among the very
young, the unskilled, and the nonwhite potential workers.
As a result of high economic activity, high employment, and high
wage and salary rates, the rate of receipt of personal income in the
country in June 1962 was also at a record high level—$440 billion
per year, up 1.2 percent from the March rate; that is, up 1.2 percent
in the second quarter and up 5.8 percent from June 1961.
The principal gains in personal income over the past year have
occurred in employee income, up 6.2 percent. There have also been
significant gains in income of nonfarm proprietors, in the rental in
come of persons, and in interest and dividends.
The rise in income has been widely distributed, and the rising level
of income is being spent freely for goods and services. The rate of
personal savings from income after taxes in the latest quarter showed
very little change from the level of a year ago.
Consumers have money, and they are spending it. They may not
spend it for just what each individual would desire. Some people are
not selling at the rate they would like to sell. But the total volume of
personal spending, personal consumption expeditures, is very much
in line with the current rate of personal income.
The level of corporate profits recovered rapidly with the rise in
busines activity after the recent low point in the first quarter of 1961
until the fourth quarter of last year. There was apparently little
change in the level of corporate profits over the past two quarters.
The first quarter has been estimated, but the secona quarter is not yet
available. We are estimating that it may show a slight decline from
the first quarter and from the fourth quarter of last year. But earn
ings in the first half of 1962 virtually assure that the amount of cor
porate profits this year will make a new high record.
While the amount of profit earned by manufacturing corporations—
and here I am concentrating just on the segment o f manufacturing
industry because that is where we happen to be—the amount of profit
earned by manufacturing corporations this year will be significantly
higher than it was last year. (It will be a new high annua! record, 1
believe. The rate of profit on stockholders’ equity among manufactur
ing corporations this year will be the lowest since 1945, with the ex
ception of the years 1958, a recession year, 1960, and 1961.)
Senator B u s h . H o w do you define that rate of profit! Is that re
turn on investment ? Or what does it mean?
POLICIES FOR FULL EMPLOYMENT
11
Mr. E llis. Yes; return on the stockholders’ investment, using the
stockholders’ total equity.
Senator D ouglas. Just a moment. You mean the market value of
stocks ?
Mr. E llis. N o. What the stockholders have put in. The common
stock, the preferred stock, and the surplus of a corporation.
Senator D ouglas. Excluding bonds?
Mr. E llis. It would make very little difference if you did include
bonds and took the rate on total investment. It is not readily avail
able.
Senator D ouglas. Y ou mean the amount realized from the sale of
stock ?
Mr. E llis. N o. I mean corporate profits after taxes, divided by
stockholders’ equity.
Senator D ouglas. That is what I am trying to get at, the definition
of the denominator.
Mr. E llis. The stockholders’ equity is the sum of the book value of
common stock, preferred stock, and surplus.
Senator D ouglas. Book value?
Mr. E llis. Book value. What the stockholders have put in and
what has been retained for them, of course, by the corporation in the
form of surplus.
Senator D ouglas. Does this include capital and surplus?
Mr. E llis. Yes; capital and surplus. Common stock, preferred
stock, and surplus. Tiiat figure divided into the reported corporate
profit after taxes.
Senator D ouglas. Do you think the denominator might be inflated ?
Mr. E llis. In what way ?
Senator D ouglas. Well, I just ask you whether you would accept
the denominator as a true mirror of investment.
Mr. E llis. Yes; I do. I do not think it would be inflated in the
sense that some of this money might have been put in 20, 30, or 40 years
ago. That certainly would not be inflated now. That is not changed
from the amount put in at that time. It is not the market value of
the common stock. It would not be inflated that way. It is the
original amount put in.
Senator B ush , This equity is also the depreciated value of these
investments, as reflected in the capital and surplus figures ?
Mr. E llis. No; depreciation does not affect this. This is the amount
put in. Jt does not change. Once it is put in, it is there, and it is not
affected by depreciation.
Senator B u s h . Does it not affect the surplus figure ?
Mr. E llis. No. Depreciation would not affect the surplus figure.
Depreciation would affect the net value of the physical assets, the
difference between the cost of a plant and its current depreciated
value; but that would not affect tne common stock and surplus.
Senator B ush . But if you charged depreciation in a given year,
that comes out of your earnings, and your earnings over what you
pay out would go into surplus ?
Mr. E llis. That is right.
12
POLICIES FOR FULL EMPLOYMENT
Senator B ush . So it would seem to me that the depreciated value is
reflected in the surplus.
Mr. E llis. Not in that sense, any more than any other cost. The
payroll cost in that sense would also be reflected.
Starting with the net profit of the corporation: now, whatever has
been taken out before you arrive at that, of course, would affect the
net profit; but depreciation would have no unusual effect or special
effect.
Senator D ouglas. Mr. Ellis, I do not want to interfere with vour
argument, but I just want to mention one qualification that I think
should be made.
Some of us have felt for a long time that with the management
control of corporations there was a tendency to reinvest a larger
proportion of the surplus in companies than was economically justi
fiable, and hence to diminish the cash distribution to stockholders.
Now, to the degree that this is done, this does give a high figure,
some of us believe an uneconomic figure, in the denominator, and
consequently decreases the ratio.
Mr. E llis. That is right.
Senator D ouglas. And the point that Senator Bush made I think is
also true, that to the degree that the allowances or depreciation have
been increased, and they certainly have been under the double de
clining balance method of 1954, this operates to reduce earnings as
stated in the numerator of your fraction, and consequently the two
together would naturally serve to have a redoubled effect in diminish
ing the ratio of earnings to equity.
Mr. E llis. That is right; aiminishing below what it otherwise
might be. But should you not also take into account whether the
depreciation amount is adequate ? I f the depreciation is insufficient, as
it obviously was before 1954, then to raise it, while it does raise the
cost, does not necessarily make the depreciation excessive.
You have a good point. It has changed and does affect the ratio.
Senator P roxmire. May I just ask one other question, Mr. Ellis?
Is it not also true to say that the profits this year are the highest
since 1957, with the exception of 1959 ?
Mr. E llis. Profits? Oh, I think the corporate profits will be at an
all-time high this year.
Senator P roxmire. I am talking about the profit on stockholders’
equity.
Mr. E llis. Oh, the rate, the rate of profit?
Senator P roxmire. Yes, the rate oi profit is the highest in the past
5 years, with the single exception of 1959, according to your own
figures, here.
Mr. E llis. That is true. ^
That is right, because this is a pretty good business year in total.
POLICIES FOR FULL EMPLOYMENT
13
Senator Javits. Mr. Chairman, could I make one suggestion—that
whatever may be in their written statements, each of the witnesses
might try, even in their presentations, to answer for us what seems
to me at least to be a very worrisome question in the country?
Why, if all of our indexes are up, are we very worried ? And why
is there, in my opinion, such a demonstrable lack of confidence in the
future of the economy ?
Representative R euss. Would the gentleman yield at that point?
I believe that the state of confidence reflects the facts of the eco
nomic situation. Let me refer the gentleman to the July 1962 issue
of Business Cycle Developments, published by the U.S. Department
of Commerce. It shows that many of the principal leading indicators
are now pointing downward.
Senator Javits. I was merely addressing myself to the witness’s
general point.
I run through these statements, and everybody says, “We have more
gross national product. We have more people actually employed.
We have more corporate profits,” as Senator Proxmire properly
brought out.
And yet there seems to be something gnawing at the vitals of the
American economy, certainly in terms of the minds of the people who
make up that economy, whether it is workers, management, investors,
or academicians.
Mr. Chairman, I thank you for allowing me to make that
observation.
Chairman P atm an . You may proceed.
Mr. E llis. I believe the current relatively low level of corporate
profit on investment is a significant factor in the failure of employ
ment to rise more rapidly than it has in recent years.
My reason for that statement, of course, is that managements, faced
with what they consider an unsatisfactory rate of profit, have been
aggressively reducing costs this year, and cost reduction usually means
employment reduction.
In summary, economic activity in the country is growing at about
the average rate of the past 11 years. Business inventories seem
reasonably adjusted to the current and immediately expected rate of
sale. Industrial prices are stable, on the average, but there are sig
nificant increases and decreases in some areas.
Employment of the adult labor force of the country is relatively
high, and personal income is still rising.
While the amount of corporate profits may reach a new high level
this year, the rate of profit on investment is still relatively low.
Chairman P atm an . Thank you, sir.
Without objection, the charts will be inserted in connection with
your testimony.
(Charts referred to follow:)
( IN
1 9 5 7 PR IC E S )
POLICIES
FOR
FULL
EMPLOYMENT
CROSS RATIONAL PRODUCT: 1909-1961
F.R.B. INDEXOFIM0STSIAL WOWfCTIO* ! 1909-1961
ISO
90
«0
60
55
30
25
20
15
EMPLOYMENT
40
FULL
90
49
FOR
TO
POLICIES
100
€1957 > 1 0 0 )
16
POLICIES FOR FULL EMPLOYMENT
Chairman P a t m a n . Our next witness will be Mr. James Wishart,
research director of the Amalgamated Meat Cutters and Butchers of
North America.
STATEMENT OP JAMES WISHART, DIRECTOR, RESEARCH DEPART
MENT, AMALGAMATED MEAT CUTTERS AND BUTCHER WORK
MEN (AFL-CIO)
Mr. Wi s h a r t . I hope that my statement itself may be addressed to
the question which the Senator from New York raised here, concern
ing the negative elements within the economy, which do give some cause
for concern.
Conflicting trends mark both the state of the economy generally
and of the industries in which the 370,000 members of the Amalga
mated Meat Cutters and Butcher Workmen are employed.
In both the National economy and in our own industries, output
recently has reached alltime high levels.
Seasonally adjusted gross national product running at a $552 billion
annual rate, industrial production now 17.8 percent above its 1957
base? and civilian employment peaking out in July at more than 69.5
million—all establish new high records of national achievement.
At the same time, cause for grave concern exists over the future.
Even the record breaking $552 billion of gross national product
reported for the second quarter of this year falls far short of the $570
billion level for 1962 and the $600 billion rate for the first months of
1963 predicted by the Council of Economic Advisers.
The basic facts show that in the first half of 1962, the pace of recovery
slowed, down to a tempo substantially below any desired normal rate of
national growth.
This is indicated by the table below showing quarterly gains in
seasonally adjusted gross national product expressed in constant
1961 dollars.
Percent
gain
1st quarter to 2d quarter, 1961_______________________________________ 2.1
2d to 3d quarter, 1961--------------------------------------------- 1.3
3d to 4th quarter, 1961_____________________________________________2. 9
4th quarter to 1st, 1962-------------------------------------------.9
1st to 2d quarter, 1962---------------------------------------------- .7
This suggests a growth rate for the full year 1962 which could be
even less than a 3-percent increase.
The pace of recovery from the trough of the recent recession com
pares with increases over similar time spans in two previous recessions
as follows :
Percentage gains in real gross national product (seasonally adjusted)
GNP increase
P e r io d :
(percent)
1961:1st to 1962 2d quarter_____________________________________
8.5
1958 :2d to 1959 3d quarter------------------------------------- 10.1
1954: 3d to 1955 4th quarter------------------------------------ 10.7
The wave of recovery seems to be cresting out and breaking even
sooner than in these previous periods of recession. The present phase
of recovery could be only an interlude between the recession o f 1961
and. the recession of 1963.
POLICIES FOR FULL EMPLOYMENT
17
T H E E M PL O Y M E N T SITU A TIO N
Recently released labor-force data, showing a seasonally adjusted
unemployment rate of 5.3 percent for July, have been greeted as a
reassuring high of continued recovery. The June figure had been
5.5 percent.
Officially counted unemployment in July totaled 4,018,000 as com
pared with 5,140,000 in July of 1961, and 4,968,000 in February 1961.
It is difficult to say how much these figures may be credited as straws
in the economic winds.
However, to certify them as indicative of any basic solution to the
national problem of unemployment goes beyond credence.
The character of that basic problem is suggested by the Bureau of
Labor Statistics’ labor force projections for 1962. On the basis of
such projections, an increase in the Nation’s labor force of 1,134,000
could have been predicted between 1961 and 1962.
In fact, by June of 1962, the total increase in the Nation’s workers
(including the Armed Forces) over June of 1961 amounted to 63,000.
The civilian labor force, calculated with and without seasonal adjust
ment, actually dropped by more than 285,000 in this 12-month period.
This means that, after counting those who went into the Armed Forces,
more than a million workers who had been expected to join 1962’s
labor force were not, by the middle of the year, seeking any employ
ment.
They are not, according to the official definitions, of course, included
among the unemployed. Of that million or more workers who dis
appeared from labor markets, some were undoubtedly students who
decided on more schooling, some were older workers who took advan
tage of social security retirement set at the age of 62, and some were
housewives who had worked only on a marginal basis. A sizable
fraction of this group were certainly involuntary withdrawals from
the labor force.
The key fact, however, is that the Nation had no work to offer a
million or more workers who, under normal economic conditions,
would have been seeking jobs.
The key fact is that no employment opportunity existed for them,
or seems likely to develop for the additional 1.3 million new workers
who are expected to come into the Nation’s labor force by 1963.
The cushions which operated in 1962 may not soon be available
again. Students who continued schooling will presumably seek jobs
some day. No expansion in Armed Forces manpower is now planned.
No further reduction in the retirement age levels appears to have any
serious congressional contempaltion. New workers, for whom there
are no jobs, may again be among the unemployed in statistics as well
as fact.
Assuming a continuation of the present trends—a 3-percent growth
rate and a 3-percent annual gain m labor productivity—in the year
1963, there will be no jobs for at least 2 million people who desire
work, but are not now numbered among the unemployed. This would
be, of course, in addition to those officially numbered, a total of roughly
4 million at the present time.
Representative R e u s s . If I may interrupt, what would that work
out in percentages of the work force unemployed?
18
POLICIES FOR FULL EMPLOYMENT
Mr. W i s h a r t . Just calculating very roughly, in the neighborhood
of 7 percent.
All of this, as has been indicated, assumes continued recordbreaking
progress in line with recent trends, and no economic downturn what
soever.
This is calculated on the most optimistic basis. I might say also
that the assumption of a 3-percent annual gain in productivity is a
very conservative assumption, too, on the basis of present experience.
Recession, to which some indicators now point, would bitterly aug
ment the totals of next year’s unemployment.
T H E K E Y PROBLEM
The economy seems headed at vastly higher levels, toward an im
passe of a type it has not faced in more than 20 years. Four million
workers are unemployed. At least an additional million would be
available for work, were work available for them at the present time.
At least 15 percent of productive capacity is now idle.
And, I might say, this represents a minimum estimate. In my opin
ion, idle capacity runs to a far greater level than is suggested here.
Growth rates everywhere have tended to sag. Recent declines in
common-stock prices suggest sharp doubt over the future and perhaps
too firm a faith in the prospects for deflation.
Gains in plant and equipment investment have been under expecta
tion. Private construction appears to be continuing at a vigorous
pace, though observation in major cities suggests a soon-to-come sur
plus in high-rise, high-priced apartment units and luxury office space.
I might say that in the city oi Chicago, one very eminent real estate
man 10 days ago, withdrew from a major construction venture in the
downtown Chicago area. He withdrew on the basis that this type of
luxury office space construction was already a drug on the market,
and there were some indications that the construction of high-rise,
high-rental apartments had gone beyond any realizable market
potential.
Certainly, recent declines in resale home values suggest a softening
in the basic markets for housing. In some areas, the proliferation of
supermarkets and discount centers has gone beyond the needs even of
an expanding population for some years to come.
A ll of this suggests one thing all too clearly—that the onetime
enormous pressures of postwar consumer demand have been sharply
deflated. The total of consumer buying power—representing some
where between 65 and 70 percent of the Nation’s market—is now sub
stantially less than the Nation’s immediate power to produce. Buy
ing power is even more dramatically dwarfed by the Nation’s poten
tial for giant expansion.
This is the root cause for the relative stagnation which has marked
the course of the economy in recent years* The sweep of pent-up post
war demand, the imperatives of the Korean war period, the expansion
of consumer credit, the impact of an enormous defense program—all
these things have served, in the past 15 years, to accelerate the econ
omy. None of these things can now promise any renewed impetus for
vital new expansion. The key problem of 1962 is the shortage of buy
POLICIES FOR FULL EMPLOYMENT
19
ing power in relation to the vast potential for production of goods and
services.
In view of this, tax concessions to corporations and more generous
depreciation allowances seem doubtful tonics for the economy.
Industry faces no shortage of cash for expanding its power to pro
duce, were it assured the markets to make such expansion profitable.
AFLr-CIO estimates that such cash flow for American corporations
(after tax profits plus depreciation allowances) will come this year
to a total of $51.5 billion. This compares with $30.1 billion in 1953,
and $48 billion in 1961, as reported by the U.S. Department of Com
merce. Cash flow was 8.2 percent of the GNP in 1953, and 9.3 per
cent in 1962.
Such a sum has been augmented by the Bureau of Internal Reve
nue’s recent changes in depreciation rates for industrial equipment.
Even before such sweetening, the rates were more than sufficient to
meet the full dollar costs of industry plant and equipment investment
at first quarter 1962 rates and provide for stockholders’ unimpaired
dividend levels. Industry has the cash flow, in other words, to main
tain its full dividend rate and its full rate of plant investment without
seeking a single new dollar of capial on stock or bond markets.
As of June 1961, Forbes magazine reported that—
Currently, General Motors treasury Is aU but overflowing with cash and Gov
ernment bonds to the tune of $1.6 bUUon. Of this, a probable $1 billion Is surplus
cash by any ordinary standards.
Clearly, if General Motors made no major expansion in 1961, it
was not for lack of available cash. Nor, considering its income ac
counts, was it for lack of profitability in its operations. The inhibitor
to General Motors investment initiative could have been nothing other
than the conviction that no expanding markets existed to justify,
profitably, expansion of basic capacity.
GOVERNM ENT IN IT IA T IV E
The conditions of 1962 indicate that without massive and prompt
Government initiative, economic stagnation may easily become our
way of life. The conditions of 1962 suggest that Government has,
in fact, been fighting a rapidly evaporating menace of inflation and
at the same time giving tacit welcome to the currently live and deadly
foe of deflation.
This is a major misallocation of strategic economic resources. The
current economic situation calls for a speedy revision before our cur
rent momentum drops fully away.
Current practice is to fight for price stabilization, and to hope some
how that the problem of national growth will care for itself.
Sound practice demands that the first and primary battle be for
national growth—and that all else be subordinated to this purpose.
Sound practice demands that the disaster of renewed recession, that
the specter of mounting unemployment, that the spectacle of a great
Nation unable to bend its full economic muscle into production be
avoided above alL
The problem is difficult, requiring clear and perhaps “ sophisticated”
thinking. But above everything else, it is the responsibility of Gov-
POLICIES FOR FULL EMPLOYMENT
20
emment now to use every device at its command to create the precon
ditions of renewed economic progress. In relation to this, the fetish
of a quickly balanced budget, the fraction of a percent of GNP repre
sented by unfavorable international balances, and the canons of eco
nomic orthodoxy cannot be allowed to exercise a veto.
I might include in that group also the bankers of middle Europe.
Chairman P atman . Thank you, sir.
Without objection, the tables acompanying your testimony will be
inserted in connection with your remarks.
(Tables referred to follow:)
Employment and unemployment 16 months after trough (seasonally adjusted
data)
[In thousands]
Employ*
ment
Nonfarm
employment
Unemploy
ment
60,922
62,847
4,968
3,917
February 1961.._.
June 19621_____
66,723
67,911
Change, number.
Change, percent.
+1,188
+1.8
April 1958.......... .
August 1959....... .
63,542
65,794
57,753
60,103
5,070
3,696
Change, number.
Change, percent.
+2,252
+3.5
+2,350
+4.1
-1,374
-27.1
August 1954....... .
December 1955...
64,516
54,242
57,539
3,858
2,824
Change, number.
Change, percent.
+3,927
+6.5
+3,297
+6.1
—1,034
-26.8
October 1949.......
February 1951....
58,057
60,494
50,844
53,402
4,825
2,166
Change, number.
Change, percent.
+2,437
+4.2
+2.558
+5.0
-2,659
-55.1
Unemploy
ment rate
6.9
5.5
-1,051
-21.2
7.4
5.3
6.0
4.2
7.7
3.5
i Adjusted to 1950 census population base.
Projections o f total labor force compared with actual labor force
[In thousands]
Total labor force (in
cluding Armed Forces)
Projected
1955..
1956195719581959I960*.
1960 V
1961..
1962..
69,692
70,681
71,538
72,505
73,381
73,687
74,889
76,023
Actual
68,896
70,387
70,746
71,284
71,946
72,820
73,126
74,176
74,532
Deviation
of actual
from
projected
labor force
+695
+65
-254
-559
-561
-561
-713
-1,491
Period
Year-to-year increase
in labor force
Projected
Actual
1955-56
1956-57
1957-58
1958-59
1959-60
+796
+989
+857
+967
+876
+1,491
+359
+538
+662
+874
1960-61
1961-62
+1,202
+1,050
+356
+1,134
i Includes Alaska and Hawaii.
Souroe: U.S. Department of Labor. Projections from 1960 forward differ from those published in
“ Population and Labor Force for the United States, 1960 to 1975" (Bull. 1242) to take account of (1) revised
population figure shown by 1960 census and (2) to include Alaska and Hawaii; 1962 actual figures an 2d
quarter civilian employment seasonally adjusted plus Armed Forces.
POLICIES FOR FULL EMPLOYMENT
21
Summary employment and unemployment estimates
[Thousands of persons 14 years of age and over]
Employment status
Total labor force, Including Armed Forces.................................
Civilian labor force......... ......... ............................
Employed....... ............................
Agriculture...................................................
Nonagricultural industries.....................................................
Unemployed...... .................. ...... .............................
Seasonally adjusted unemployment rate, percent.............................
Unemployed 15 weeks or longer...............................................
Unemployed 27 weeks or longer..... ......................
Nonfarm workers or part time for economic reasons, total.
Usually work full time....................................
Usually work part time...........................................................
July 1962
June 1962
76,437
73,582
76,857
74,001
76,153
73,629
69,564
69,539
68,499
6,064
63,500
6,290
63,249
6,453
62,046
4,018
July 1961
V463~
5,140
5.3
921
576
5.5
1,033
584
6.9
1,634
1,026
2,674
2,630
3,011
962
1,712
1,041
1,589
1,119
1,892
Chairman P a t m a n . Our next witness will be Dr. J. Frederick Wes
ton, professor of economics, University of California, Los Angeles.
STATEMENT OF DR. J. FREDERICK WESTON, PROFESSOR OF ECO
NOMICS, U N IV E R S ITY OF C A LIFO R N IA A T LOS ANGELES
Dr. W e s t o n . Economic data give strong indications that the busi
ness upswing which began in February of 1961 is now tapering off.
While the effects of tne steel settlement and the stock market gyra
tions make interpretation difficult, there is no question that the rate
of increase in business activity has slowed.
Since significant segments of spending are tied to the rate of in
crease in general business, rather than to its absolute level, volatile
segments of spending are subject to sharp declines. Thus we approach
the upper levels of a business recovery substantially short of the econ
omy’s lull employment potential.
Tlie repetition of an abortive business recovery calls for immediate
action to alter the impact of what I would call the fiscal choke on the
economy. The strong evidence that at full employment the Federal
Government would run a surplus of over $10 billion in its adminis
trative budget calls for counteraction.
I therefore recommend a cut in the normal corporate income tax
rate by 5 percentage points, and a decrease in personal income taxes
by splitting the first bracket taxable income and halving the rate.
This proposal is not made to counter an incipient recession. It is made
to change the fiscal structure to remove some of the barriers to full
employment growth.
While some may oppose tax reductions until unmistakable evidence
of a decline appears, I offer three arguments against the policy of
waiting: (1) Substantial professional judgment sees a basis for im
mediate action. (2) Waiting would reauire stronger action to coun
ter movements of greater momentum. (3) And on this point I place
the greatest weight: monetary policy is relatively tight because of in
ternational balance-of-payments considerations. Therefore relative
fiscal ease is required to offset relative stringency in monetary policy.
I f subsequent events indicated that too much fiscal ease had been pro
22
POLICIES FOR FULL EMPLOYMENT
vided, monetary policy could be tightened further. This further
tightening in monetary policy would oe consistent with international
balance-of-payments considerations.
This point I would like to emphasize very strongly, because you
do not have to answer all of the horribly difficult questions in order to
formulate policy. You simply have to develop the strategy that makes
sense; and the strategy that makes sense under current conditions,
if you have tight money policy, is certainly to move in the direction
of greater ease m fiscal policy.
The major opposition to tax reduction is based on the fear that the
prospective deficit would be increased; but this was the same argu
ment used against a tax cut in the fall of 1957, and as a consequence,
a deficit of $12.4 billion in fiscal 1958-59 occurred. This was the
largest peacetime deficit in U.S. history, and under an administration
that put budgetary balance as a No. 1 economic objective.
It is ironical that a major responsibility for the large deficit must
be charged to Senator Byrd. Because of his insistence on the rigid
debt ceiling in the fall of 1957, the Air Force did not pay its bills for
a period. These actions aggravated the weak economic conditions in
the summer of 1957, and precipitated the decline. The resulting fall
in Federal Government revenues produced the $12.4 billion deficit.
We have the paradox that apparent fiscal responsibility had the
effect of grievous fiscal irresponsibility. Let us not repeat the same
mistake under the same arguments. Recasting the fiscal structure in
favor of higher economic growth will diminish deficits, not increase
them.
The central reason why a tax cut is called for stems from an his
torical accident. During the Korean war both the corporate and per
sonal income tax rates were increased substantially to deal with the
tendencies toward inflation that developed during the Korean hostili
ties. Those tax rates have never been reduced. As a consequence,
since the inflationary pressures have subsided in the economy during
the last several years, the fiscal structure that was developed to deal
with the Korean inflation actually now inhibits the normal growth of
the economy.
The current upswing is beginning to taper off with the economy
significantly short of its full-employment potential. This is not a
recommendation that the Government use its policies to prevent the
economy from ever turning down. The factor that calls for action
now is the realization that for the last several upswings the fiscal struc
ture has been a brake on normal recoveries. As a consequence, reduc
tions in taxes are called for, not simply to prevent a downturn, but
to alter the fundamental fiscal structure.
A reduction in taxes is particularly called for because monetary
policy has been stringent for the past several years in part because
of balance-of-payments considerations. The Federal Reserve author
ities argue for high interest rates so that money does not flow abroad
in quest of higher earnings on deposits in foreign countries. Given
that monetary policy is relatively tight and given that the fiscal struc
ture hits been inhibiting growth because it has been geared to a strong
wartime inflationary economy, a reduction in taxes is essential.
We have the paradox that because our economy does not approach
its full employment potential our Federal Government has been run
POLICIES FOR FULL EMPLOYMENT
23
ning deficits. Deficits occur because revenues depend upon a highlevel economy, with corporate profits and personal incomes growing
at vigorous rates. Therefore, the experience of the 1957-58 recession
particularly emphasizes that a reduction in taxes, by taking the brake
off economic recovery will bring in more revenues. Tax cuts will
result in no deficits or smaller deficits than would be the case if tax
cuts were not made and the economy did not achieve its normal
recovery.
The central idea is that the economy suffers from a harsh fiscal
olicy growing out of the Korean war economy. The Federal Reserve
ystem, concerned with the international balance of payments, lias
been pursuing a relatively tight money policy course. In order to
offset this tight money policy as well as to release the harsh fiscal
choke, a cut in taxes is necessary.
There is another element of the strategy. Because of this situa
tion a rather substantial cut in taxes could be made, on the order of
magnitude of $10 to $15 billion, to help avoid the repressive effects
of fiscal policy on the economy. We have the additional strategic
advantage in this situation that if at any point it appeared that
fiscal policy were too easy (which is extremely unlikely), the Federal
Reserve authorities could tighten monetary policy even further.
Also, the realm where monetary policy is particularly effective is
in stopping a too vigorous rise in economic recovery. It is said that
monetary policy is like a string—you can pull with it but you cannot
push. Hence we are in the position where fiscal policy is so tight that
the only thing monetary policy could be expected to do would be
to push with the string, ana it cannot. Whereas what we need to do
is to change the fiscal relationship so that once again we are in a
osition to use monetary policy effectively in the way that it should
e used. But what we have had for several years is both a tight fiscal
policy and a restrictive monetary policy. Since the monetary au
thorities are likely to continue the tight money policy, fiscal policy
must be eased in the direction of substantial tax reductions.
Chairman P a t m a n . Thank you, sir.
Our next witness will be Dr. Daniel B. Suits, professor of economics,
University of Michigan.
Dr. Suits.
Do you have a prepared statement, sir ?
§
E
STATEMENT OP DR. DANIEL B. SUITS, PROFESSOR OF ECONOMICS,
UNIVERSITY OP MICHIGAN
Dr. S u it s . I have only a manuscript statement.
Chairman P a t m a n . That is a ll right, sir. You m a y proceed in your
own way.
Dr. Suits. My analysis and economic forecasts are based on the
t»se of an econometric model of the U.S. economy. Essentially, this
consists of a system of mathematical equations statistically derived
from the interplay of the important factors in our economic life.
This system of equations has been generally described in earlier tes
timony before this committee, and a complete discussion of it, to
gether with its past forecasting experience, will be found in an article
entitled “ Forecasting and Analysis Witn an Econometric Model,”
87869—82------ 8
24
POLICIES FOB FULL EMPLOYMENT
that I published in the March issue of the American Econometric
Keview. I have copies of these for the committee.
The forecast levels of economic activity for 1960, 1961, and 1962
are shown in table I.
(Tables I and II follow:)
Table I.—Economic forecasts 1960,1961,1962
[Figures, except as noted, are billions of 1954 dollars]
1960
1961
Forecast
Actual
Forecast
1962
Actual
Forecast
Gross national product.................................
432.0
439.2
450.1
447.9
474.3
Consumption expenditure.................................... -
287.1
296.8
304.3
304.3
318.6
Automobiles___ „___ _____ . . . . __________ _
Other durables................................................
Nondurables____ -___-_______ ____ . . ___ _
Services.....______ *_______ ___ -___ —__
16.7
25.2
138.9
106.3
15.6
25.2
141.9
113.7
14.6
25.1
144.7
119.9
15.5
26.1
143.3
119.4
18.8
26.7
148.0
125.1
Private gross capital expenditure............................
62.4
60.5
61.3
57.8
61.1
40.5
19.7
39.3
18.0
39.0
19.9
37.7
18.2
38.6
17.8
2.2
3.2
2.4
Government purchase of goods and services............
Net exports._____________________ ________
83.7
-1 .3
80.3
1.6
84.7
.2
84.0
1.8
92.3
2.3
Civilian employment (millions).................................
Unemployment (millions)...........................................
Percent of labor force...................................................
65.5
4.4
6.3
66.7
3.9
5.6
67.0
4.3
6.0
66.8
4.8
6.7
68.9
3.6
5.0
Plant and equipment......................................
Residential construction..................................
Inventory:
Durable goods...........................................
Nondurable goods..................................... }
2.0 J
\
2.6
2.1
Table II.— Changes in basic economic factors, I960,1961, and 1962
[Figures except as noted are billions of 1954 dollars]
1960
1. Government expenditures tor goods and services:
Federal._____ ___. . . . . . . . . . . . . ________. . . . . . . . . __. .. . ..
State and local...._____ -_____ . . . ___ -___-____ —____
2. Plant and equipment (producer durables plus other construction).
3. Nonfarm residential construction..............................................
4. Automobile dem and.....__________ — ___— __. . . ___ -___
5. Civilian labor force (millions)____ ___ . .. . . _. . . ___. . . _____
-$0.5
3.6
3.4
-1.2
.7
1.3
1961
$44
44
-1.2
.1
-1.6
1.0
1962
$7.5
3.9
+2.1
+3.0
.9
Senator B u s h . This forecast is your forecast?
Dr. S u its . This is my forecast; yes, sir.
Each of these forecasts covers the average for a calendar year and
was prepared and presented in the preceding November, before the
Conference on the Economic Outlook at the University of Michigan.
Moreover, many of these forecasts had additional publicity. For ex
ample, the forecast of 1960 was placed in the record of this committee
in the fall of 1959.
The general agreement between the forecast values and the sub
sequent economic events speaks for itself, but the important point
shown in the table is the fact that there is nothing unusual or extraor
dinary about the present state of our economy. It is the result of
the same underlying factors that generated the recession of 1960,
and the recovery of 1961.
POLICIES FOR FULL EMPLOYMENT
25
The most important of these factors are the level of government
expenditure for goods and services, the expenditure of business firms
for new plant and equipment, the volume of residential construction,
and the behavior of the market for consumer durables, particularly
automobiles, and finally, the growth in the labor force. The behavior
of these factors is shown in table II.
The recession of 1960 can largely be traced to the slackening of
Federal expenditure for goods and services. During calendar 1960,
the Federal Government expenditure for goods and services declined
by one-half billion dollars, and the State and local expenditures in
creased by a relatively small amount, $3.6 billion.
These were combined with a decline in residential construction of
about $1.2 billion, and were somewhat offset by a rise in plant and
equipment expenditure.
Despite the decline in activity in the fall, the average level of activ
ity in 1960 stood somewhat higher than 1959, and indeed was almost
adequate on the average to absorb the normal growth of the labor
force; we experienced only a slight growth in unemployment.
The rapid recoveir following the first quarter of 1961 was almost
entirely the result of the sudden acceleration of U.S. defense activity.
This is reflected in the enlarged rate of expenditure by the Federal
Government. In contrast to the decline of one-half billion dollars
in calendar 1960, the expenditure of the Federal Government for goods
and services during 1961 increased by very nearly $4.5 billion over
the 1960 average. State and local expenditures were also somewhat
higher.
Despite the rapid rate of recoveiy during this year, the average was
insufficient to absorb the growth in the labor force, and the rate o t
unemployment rose to the level of over 6.7 percent.
For 1962 Federal expenditures are projected to rise by $7.5 billion.
This, coupled with a very substantial rise in automobile sales, has
brought us to our current position.
The average level of GNP for 1962 in current dollars will be
somewhat short of $560 billion. But, combined with the low rate
of growth in the civilian labor force, this will bring unemployment
down to about 5 percent of the labor force.
The present state of the economy is the best it has been in many
years. We are experiencing a record level of output and sales, and
the proportion of unemployment this year will average less than in
any year since 1957. Yet we are uncertain, uncomfortable, and even
somewhat fearful. There is good reason for this.
The defense buildup is rapidly approaching its new steady level,
and under present programs we can expect little further expansion
from the Government sector beyond the continued growth of State
and local services required by our growing population. The modest
showing of profits, coupled with substantial existing unused capacity,
promises no marked expansion of new plant and equipment expendi
ture. The present level of rental vacancy rates casts a shadow over
the residential construction picture, and no one expects the automobile
market to hold its own in face of the present rapid buildup in the
number and quality of cars on the road
26
POLICIES FOR FULL EMPLOYMENT
In view of these considerations, the apparent sluggishness of the
recovery hardly comes as a surprise, ana there is every chance of a
downturn within the next 6 months.
But while the prospect of a downturn occupies the center of atten
tion at the present time, it seems to me to be a secondary matter.
The real problem is not so much the prospect of a downturn as the
obvious fact that at the peak of a year of great prosperity we did
not reduce unemployment below 5 percent of the labor force. This
fact is underscored by the current abnormally low growth in the
civilian labor force itself. Had the labor force grown by what I
would consider a more normal annual rate of 1.2 million, instead
of the projected 0.9 million, the rate of unemployment would be
another half percent higher. Even at its best, the growth of produc
tion and employment has barely kept pace with the growth in the
labor force. In the absence of action to the contrary, we may expect
the level of unemployment in the next four quarters to again rise to
over 7 percent of the labor force.
What accounts for this current sugglishness in the midst of pros
perity ? The answer is esentially this: The tremendous heritage of
inflationary pressure from World War II made it essential to operate
this economy with a tight tax brake, applied to control inflation. The
defense buildup of the Korean period required the continuation of
this tight tax brake. But the inflationary forces are now abating,
and the brake is bearing directly on the level of production and em
ployment. In my opinion, it is now time to release this brake and
cut taxes.
The amount of tax cut required may be substantial. My calcula
tions suggest that with the continuation of the existing level of Gov
ernment expenditure, a cut in the personal income tax of $10 billion
would be expected to raise the level of employment by about 1 million
jobs. Of course this means that in the traditional accounting defini
tion, the#Government will operate at a deficit, but the deficit will be
substantially less than the $10 billion of the tax cut. The expansion
ary effect of the cut itself will operate to recoup something in the
neighborhood of 40 percent of the tax cut, and the so-called deficit
amounts to only about $6 billion.
I do not propose that a cut of this magnitude be made at once. So
long as we are aware that larger tax reductions are probably necessaiy,
we can ease off the brake little by little and find that point which is
consistent with the maximum growth of the economy. In this way, we
can use the fiscal power of the tax brake, together with the Govern
ment expenditure accelerator, for their proper purpose, to balance the
growth of a prosperous American economy.
Chairman P a t m a n . Thank you, sir.
Senator Douglas, we will start with you, and we will observe the
customary 10-minute rule, if that is satisfactory with the committee.
Senator Douglas?
Senator D ouglas. I would like to start with a proximate issue, and
not with basic issues.
The issue I want to ask about is tbe high incidence of unemploy
ment among juveniles, to which Mr. Ellis referred, and which Mr.
Wishart touched upon.
POLICIES FOR FULL EMPLOYMENT
27
Mr. Ellis pointed out the percentage listed as unemployed among
the age group of 14 to 19 years of age. I suppose it is true if you
narrow the age grouping to from 16 to 19, this percentage would be
even higher, would it not, Mr. Ellis?
Mr. E llis. Yes. The lower levels would be higher. I do not have
them cut that fine, but the lowest levels are highest.
Senator D o u g l a s . Mr. Wishart made the point that there is a great
deal of suppressed unemployment, or unemployment not shown, of
people who would like to get work if work were available, but who,
because they do not have employment records, as I understand it, are
not included as part of the labor force.
Mr. W i s i i a r t . Because they are not actively seeking work. I am
sure there are hundreds of thousands of individuals who are out of
the labor market because their experience, their knowledge, has indi
cated to them that there is no wort for them in the labor market.
Senator Douglas. D o you not think that these are concentrated
among the juveniles who have dropped out of school, and have not
been able to find work, and are more or less drifting?
Mr. W i s h a r t . That could be one large element.
Of course, another and more favorable side of the picture would be
those juveniles who have continued in school, rather than going on
to the labor market. But a substantial factor of this could be repre
sented by the kids who are hanging around street corners. This is
the sociological economic basis for juvenile delinquency, of which we
have heard a great deal.
Senator Douglas. Last year, of course, Dr. Conant made his study
of slums and schools and, as I remember it, he estimated that there
were a million boys and girls of high school age who were dropped
out of school and were not at work. And I think every large city in the
country knows what is happening as a result of this. The warfare
which broke out on West 94th Street in New York City just a few
days ago is connected with this.
Mr. Wi s h a r t . I should say this is a symptom of the unemployment
picture.
Senator Douglas. I understand. And, therefore, while the unem
ployment is concentrated, as Mr. Ellis says, in the juveniles, its in
cidence is extremely high among them.
Now, I think Conant’s estimate of last year was on the whole a con
servative one. Now, if you take the changes since last year—I have
the economic indicators before me, and comparing June 1961 with
June 1962, the increase in the labor force was only something like
70,000.
Mr. W i s h a r t . That is correct.
Senator Douglas. And that was the figure you gave. I was some
what startled when Mr. Suits estimated the change in the labor force
had been 900,000.
Mr. W i s h a r t . This may have been on an annual basis.
Dr. Suits. This was on an annual basis, yes.
Mr. Ellis. Would you not still question that it will rise that much
this year! It has not risen that much in the first 7 months.
Senator Douglas. That is exactly right.
I think it is fairly clear that the economy has not absorbed these
youngsters, the new entrants, who normally would have been absorbed,
28
POLICIES FOR FULL EMPLOYMENT
during this last year, and therefore that the amount of nonstated un
employment is greater than when Conant made his estimate of last
Mr. W i s h a r t . I should say also that the fact that this unemploy
ment has hit more heavily the younger groups by no means mitigates
its social seriousness or its gravity.
Senator Douglas. Not at all. That is the next point I wanted to
pass to: thatj to my mind, this calls for a frontal attack on the prob
lem of juvenile employment. It calls for the necessity of a revival of
CCC, a beginning of job training on the job. It calls for the other
features of the youth employment opportunities bill on a much larger
scale than contained in that bill.
This, it seems to me, is the basic necessity. And I find it somewhat
difficult to see how people are thinking of certain forms of communi
cation at 3,000 miles distance with other portions of the earth, and
neglecting the need for giving employment to the kids here in the
United States of America.
Mr. W i s h a b t . I might add this, Senator, that our studies of automa
tion in the meatpacking industry have indicated that the primary im
pact of automation does not come on employed workers, except where
a plant may be closed down. The impact is felt by the young people
who are not hired in the first place, because their potential jobs have
been taken over by new technology and new machines. And in farm
communities this has been a very serious thing.
Senator Douglas. In other words, the avenues of entrance are be
ing closed?
Mr. Wi s h a r t . That is correct.
Senator Douglas. N o w , Mr. Ellis properly says that this incidence
falls with greatest weight upon the young, the unskilled, the minority
groups. Now, if you have all three of these combined in one set, a
youngster who is unskilled, and who is also a member of a minority
group—this means that it is intensified among them. I think this
accounts in large part for the wolf packs which are organizing in the
cities of the country, that it is really the most serious social problem
that we have in the country, and it is an economic problem.
That is all I want to say, Mr. Chairman. That is the point I wanted
to bring out.
Chairman P a t m a n . Senator Bush?
Senator B u s h . Mr. Wishart, in your statement, you say :
But above everything else it is the responsibility of Government now to use
every device at its command to create the preconditions of renewed economic
progress.
What devices do you have, there ?
Mr. W i s h a r t . My understanding had been that we were not to
present organizational programs, or specific listings of legislative pro
posals. However, I would include first of all a tax cut, lifting the
burden of taxes, particularly on the lower income brackets, where a
tax cut becomes immediate purchasing power, with volatility and
circulation, to multiply its economic impact.
Senator B u s h . Y ou would suggest that irrespective of any reduction
in Government expenditures. Is that so?
Mr. W is h a b t . I would suggest that without reduction in Govern
ment expenditures.
POLICIES FOR FULL EMPLOYMENT
29
Senator B u s h . Without any reduction in Government expendi
tures?
Mr. W i s h a r t . That is correct, sir. I would suggest it as a means of
shoring up essential purchasing power.
Senator B u s h . I did not quite understand this. Is there some
inhibition about witnesses recommending relief, here, in the situa
tion that we are talking about ? Was there any advice ?
Mr. W i s h a r t . There was no absolute prohibition. I should go on
to say that basic urban renewal, a more substantial investment in
education, a more substantial investment, if I may use the contro
versial term, in medical care, all of these are essential.
Senator B u s h . Would you increase Government expenditure and
at the same time reduce taxes, especially in the lower brackets?
Mr. W i s h a r t . Yes, especially on the short-term basis. The question
of the long-term balance of the budget I would say is perhaps another
issue. But in terms of the immediate impasse, it seems to me that the
Government responsibility here is to provide the lacking purchasing
power, which Mr. Suits and others have indicated, along with my own
testimony, is at the root of the present loss of acceleration in the
economy.
Senator B u s h . So in your judgment it calls for increased Govern
ment expenditures along the lines that you said, and at the same time
a reduction in taxes. What order of magnitude do you have in mind,
there?
Mr. W i s h a r t . This is a question which I have not studied. I am
not in a position to give an authoritative answer.
Senator B u s h . Mr. Ellis, toward the end of your statement, there,
you say:
I believe the current relatively low level of corporate profit rate on invest
ment is a significant factor in the failure of employment to rise more rapidly
than it has in recent years.
Would you care to expand on that a little bit, there ?
Mr. E l l i s . Yes, Senator. I would be glad to.
We have to keep in mind that in this country most of the employ
ment is private employment. It is not Government employment.
And private employment depends on the outlook for profit. I f the
outlook for profit is good, the employer will make additional invest
ment and hire additional people.
At the moment, and in recent years, in the last 5 years, as was men
tioned by the gentleman over here, there has been a definite profit
squeeze in this country^ in the sense that it is becoming more and more
difficult to get the profit rate up to a satisfactory figure or to find new
things which, with today’s costs and today’s taxes, can be produced at
a satisfactory profit.
Therefore, the effort to find additional employees has been some
what bluntea.
I f the profit level were higher, if the opportunity to earn a profit
were one of the objectives of the present administration, the stimula
tion of profit, I think you would find the level of employment rising.
We talk about the level of unemployment being 5.3 percent, but if
you look, as I mentioned, at the level of the adult labor force, it is
under 4 percent, and it would not take much of an increase in em
ployment to reduce that to perhaps 3 percent
30
POLICIES FOR FULL EMPLOYMENT
We are not talking about very large magnitudes.
Senator B u s h . Why is the rate of profit declining? Why is it so
disagreeably low, in your estimate? What are the principal factors
that bring about that condition, which is so serious in your mind ?
Mr. E l lis . Importantly because costs have risen and are still ris
ing, and foreign competitive prices are lower than prices in the United
States.
The steel industry is an outstanding example. It is difficult to sell
steel abroad at the prices that apparently are necessary in this coun
try to make a profit on the steel investment. It is difficult to sell
American automobiles abroad, with our costs.
Senator B u s h . What do you think we can do about that ?
Mr. E l l is . We must do what has been mentioned here at the table:
Increase the productivity per man, and per man-hour, so that we can
get our costs down and therefore our prices down to a competitive
level. That is the ideal.
At least we ought to hold costs in this country, so that if other
countries, as in Western Europe, for example, do inflate their prices,
it would be to our advantage.
Senator B u s h . Do you think American industry is doing a pretty
good job of holding costs in line now ?
Mr. E l l is . Steel wage rates recently went up. Other wage and
salary rates are rising. Social security taxes are going up the first
of the year. State ana local tax rates are rising. Transportation costs
are rising. Postal rates may be raised. A lot of costs are still rising.
In construction, for example, it may be that one of the difficulties
with construction is the very high level of cost of construction. I
think this committee has heard frequently about the difficulties caused
by rising residential construction costs.
Senator B u s h . Principally in high costs of labor. Is that right?
Mr. E l l is . Well, basically labor, because most costs are labor costs.
Senator B u s h . In construction?
Mr. E l l is . In everything. Most costs of production are labor costs.
By labor I do not mean wages only. It includes salaries. It includes
the research people. ^It includes the sales people, the clerical people,
everybody. Payroll is the primary cost item in anything.
Senator B u s h . What do you think is needed to sort of bring the
realization of this thing home to those in authority ? What do you
think can be done about it to help us stabilize this cost situation ?
Mr. E l l is . We need to recognize the function of profit in the Ameri
can economy. Profit is the stimulator in the American economy. I f
we had the acceptance of that fact, rather than the attitude that fre
quently prevails—that profit is a nasty word—the American economy
would grow faster. To put it bluntly, if the administration would
come out for a satisfactory rate of profit, I thing businessmen would
increase the purchases of capital equipment and their employment.
It could not be done overnight. It is not something sudden. But
I think that is the direction in which we have to go. We have to
recognize that the American economy is a profit-stimulated economy;
not a Government-stimulated economy.
Senator B u s h . You do not feel that the business authorities have
a sense of real security in the attitude o f their Government toward
this important point. Is that right?
POLICIES FOR FULL EMPLOYMENT
31
Mr. Ems. That generally is correct; yes. I do not get the impres
sion that the administration is in favor of seeing profits rise. They
seemto apologize for them, when profit rates go up.
Certainly there is no outstanding program that would stimulate a
profit rise. When businessmen come to Washington to talk about
profit, the reception is not very favorable.
Senator B u s h . I would like to ask the gentleman from Michigan
one question if I still have the time.
You spoke about the gradual release of the tax brake. Would you
amplify that a little bit ?
Dr. S u it s . By this I mean, sir, that I am not certainly sure myself
how large a tax reduction would be needed to stimulate the demand
that I think is needed for the growth that we ought to get from our
economy. I would recommend, therefore, that we proceed with rea
sonable caution, but with all due dispatch.
I would suggest, therefore, a tax reduction in the neighborhood of
$5 billion. I do not believe that this is adequate for the purpose but
I proposed reducing a little at a time. If this $6 billion proves to be
inadequate, we should follow with another $5 billion.
Senator B u s h . With the prospects of a tax reform bill, a general
sweeping reform of our whole tax structure, being fairly good, I
think, for next year, do you think we ought to release the tax brake,
as you say, right now, rather than wait until we can do a comprehen
sive overhaul job on our tax structure in the light of extensive studies
by the Treasury and by the House Ways and Means Committee?
Dr. S u i t s . This i s , of course, a problem of political procedure in
which I amby no means competent.
Surely, if we could, tomorrow, bring in a completely reformed tax
structure, with generally reduced tax rates, this would be something
that everyone would be in favor of. But we must probably wait a
year for a tax reform bill to get through hearings and through the
Congress. I would think it would beletter to proceed at once to
reduce taxes within the context of the existing tax structure and then
make the reform later within the newlevel of rates.
Senator B u s h . My time is up.
Chairman P a t m a n . Mr. Reuss?
Representative R e u s s . Mr. Chainnan, all the witnesses appear to
agree that this country’s rate of national growth has continued at the
unsatisfactory 3-percent rate which it achieved during the 8 years of
the Eisenhower administration. I commend our Republican col*
leagues for being alarmed about this, and I join with them in think
ing that this merits consideration by the Joint Economic Committee.
I would like to call the attention of the panel to the July 1962 issue
of the U.S. Department of Commerce publication, Business Cycle
Developments. I think you all have a copy in front of you.
The leading indicators shown on page 5*have turned downward in
the last month or two. The average workweek has gone down. The
rate x>f new hirings in manufacturing has gone down. In all indus
try, it has gone down. The layoff rate is higher. The average weekly
unemployment compensation claims have increased.
I notice that these changes also preceded the 1949,1953, 1957, and
1960 recessions I am disturbed at the similarity in the movements
32
POLICIES FOR FULL EMPLOYMENT
of the leading indicators to those which occurred before previous
cyclical downturns. I ’d like your opinions.
Mr. Ellis?
Mr. Ellis. Gentlemen, I think you have to accept the fact that our
economy fluctuates. Sometimes it is rising. Sometimes it is falling.
When it has risen to a peak, it is likely to go down rather than up.
I think there is entirely too much discussion of the fact that we have
business fluctuations in this country. Do you expect to eliminate
business fluctuations ? Is that the ideal ?
Dr. W e s t o n . I think the fact that causes concern, however, is that
as we approach this business cycle peak, we still have very high excess
capacity in the industry.
Now, one can argue about the unemployment rate, but there is no
question about the high excess capacity, high unused capacity. And
I think the thing that causes alarm is that we have reached our turn
ing point far short of using our national potential.
And this particular point suggests that probably an increase in
the rate of the economic growth would do more for corporate profits
than any single Government action. There is clear evidence that
corporate profits are a function primarily of rate of capacity utiliza
tion, and the greatest increases in productivity you obtain when you
are utilizing capacity to a high extent and spreading relatively Med
costs over a much larger rate of output.
Representative Reuss. I am sure you would not disagree with this
last point, Mr. Ellis.
Mr. Ellis. I would not disagree. But I would point out that busi
nessmen spend a great deal of money on developing new products, on
sales forces, and on advertising to do just what the gentleman men
tioned. I f someone has a plan to increase sales volume, I certainly
would like to hear about it.
Dr. W e s t o n . Well, I think the answer there is the difference be
tween a microeconomic approach and a macroeconomic approach.
When the general level of business activity is declining, all the efforts
on the part of individual businessmen are likely to come to naught.
Income elasticities of demand are going to be pretty substantial, and
particularly in a producer goods industry, such as Mr. Ellis’ industry.
Certainly the individual businessman would like to do everything
in his power to help contribute to economic recovery, and I think
he can make some contribution. I do not say this is a job entirely
for Government. But it seems to me that the central fact here is
that you have a fiscal system now that does put a brake on recoveries,
as Professor Suits described it. And in that total environment, par
ticular efforts come to naught. You have to get at the fundamental
cause.
Mr. W i s h a r t . The individual businessman by investing in adver
tising does not create any new purchasing power. He may succeed
in taking a share of the consumer dollar from another manufacturer.
But in terms of the total economic system, he creates nothing new in
terms of expanded capacity.
Mr. Ellis. I would question that statement. But let us look first
at this matter of capacity, which receives a great deal of attention.
The Du Pont Co. has some excess capacity. In the case, for examples
o f viscose rayon yarn, we built it 30 years ago. It was very good
POLICIES FOR FULL EMPLOYMENT
33
capacity at that time. The world has moved on. We have developed
some new synthetic fibers that do a better job than viscose rayon
did. But we still have maintained some of that viscose rayon capacity
in operating condition.
Now, gentlemen, where did we make a mistake? We have excess
capacity here, but only because the world is moving on. We have
developed something new, something better.
Dr. W eston. Would you say that the largest proportion of existing
excess capacity is represented by technological obsolescence, or even
a significant portion ?
Mr. E llis. Yes, a significant proportion is. But, gentlemen, do
not use the 100 percent of capacity as your ideal operating rate. Do
not assume that we always should be operating at 100 percent of
capacity. We are operating at about 85. Ninety would oe a good
figure. If we get much above 90, we start to build more capacity.
It takes 2 years to build a large plant. Suppose we decide this
year that demand for our products in 1964 will be enough to absorb
more than 90 percent of our present capacity. Then we had better
get started building more capacity.
Our excess capacity in this country is not very large in total. Even
in the steel industry, is not some of that excess in steel in a sense a
defense reserve? Suppose we got into a shooting war. Would we
not need that apparent excess capacity in steel ? Is not some of the
other excess capacity in a sense a defense reserve?
We ought to have a little leeway in capacity, even in normal com
mercial operations. We do not shift easily from one item to another.
We may overestimate the demand here. We may underestimate it in
another product.
Representative R euss. Would you carry this argument to the point
of saying that the 17 or 20 percent of our young people around 20
years of age who are now unemployed are a necessary soil bank ?
Mr. E llis. N o. But a lot of that 17 percent are boys and girls liv*
ing at home looking for summer jobs. They are not looking for full
time work. Should we reorganize the economy so that every boy who
wants a job cutting grass can find it or every boy who wants a
high-income job can find it before he goes back to college?
Representative R euss. Let me say that this committee takes seri
ously its mandate under the Employment Act of 1946, which says
that it is the goal of the United States to have maximum employment,
production, and purchasing power. And this means that, to the
maximum extent possible, we do try to iron out extremes in business
cycle movements. This view is shared by Republicans and Democrats
alike. That is why the Republicans asked for this hearing.
Mr. E llis. I would question that statement, gentlemen. I think
you are getting on very dangerous ground if you put as your idea a
smooth, steady growth with no fluctuations.
Representative R euss. I did not say “no fluctuations.”
Mr. E llis. That is the business cycle. Remember, gentlemen, the
business decline in the spring of 1961 was the mildest we have had in
this country since 1926. That was not a very serious fluctuation.
Now, if you mean to eliminate things like that by pouring in massive
Government spending which is financed by selling securities to the
34
POLICIES FOB FULL EMPLOYMENT
mmmftrp.ia.1 banking system, I think you are presenting a dangerous
ideal.
If you can sell securities to savers, that is something else. But I am
not in favor of massive Government spending to iron out that kind
of fluctuation.
Representative R euss. I believe we must remember that we are not
talking of fluctuations around a rapidly rising upward trend in the
economy but those which have occurred at a time of inadequate long
term growth.
Chairman Patman. Senator Javits?
Senator J avits. Gentlemen, I see a full debate shaping up right here,
and I would like to state it.
Mr. Wishart, who represents one point of view, says the key problem
of 1962 is the shortage of buying power in relation to the vast potential
for production of goods and services.
Mr. Ellis, at the other pole, says the rate of profit on investment is
still relatively low. Ana being in management, he naturally under
states, whereas Mr. Wishart says it right out. But I think we get the
point.
Now, what I would like to ask you gentlemen: Are these two ideas,
which do represent the debate tnis fall, perhaps even the political
debate between the parties—are they mutually exclusive ?
I f I may just finish my question: In other words, is the only thing
we can do, according to Mr. Wishart, to get more urban renewal,
pass aid to education, win for medical care, pass, as my distinguished
colleague Senator Douglas says, the Youth Opportunities Acts And
that will do it?
Or must we go with Mr. Ellis in a mutually exclusive way, and say,
“Let’s put a roof, not in law but in national climate, on wage increases
and pnce increases, and let’s give a real boost to automation, and let’s
go to town with giving business the expectation of more profit” ?
Are these mutually exclusive? <
Mr. W ishakt. Might I say this: The increase of purchasing power
which would expand industry’s markets is by no means inconsistent
with a certain profit return to industry. In fact, in my opinion the
profit squeeze, about which we have heard so much, reflects primarily
the underutilization of equipment. The cost of equipment, the cost
of research and development, the cost of the sales force, the cost of the
salaried personnel, does not decline with the drop in production. That
cost remains relatively fixed.
The wage cost does go down in relation to production cutbacks.
So that the way out of the cost squeeze does not lie along the avenue
of a wage freeze. The way out lies along the lines on which we have
been talking here, the increase in purchasing power, to make it possible
for industry to operate at something close to a desired level of capacity
utilization. I think industry generally is quoted as saying that 94
percent is roughly the preferred level of operation.
I might add also that in mv opinion the deterrent in business in
vestment policy—and here, obviously, I am not speaking from the
inside—the deterrent on investment policy is not profit as such, but the
estimate o f tie market, the estimate, in other words, o f the available
buying power.
POLICIES FOR FULL EMPLOYMENT
35
Obviously, Du Pont and General Motors are not going to build new
plants if, in their opinion, the products of those plants cannot be sold.
If the market demand for that output does not exist, the new plants
are not going to be built, no matter how profitable current operations
may be. And a move simply to jack up industry profits will have no
long-range multiplier effects in reviving the economy as such.
Senator Javits. I would like to have Mr. Ellis’s view on that. I
would like to add to my question for him, which is the same question
as for Mr. Wishart, that he owes us an explanation of why the force
ful administration action on the steel price increase is said to have
shaken business confidence more severely than even what he considers
an inadequate rate of profit.
Mr. Ellis. Let us take, first, this idea of purchasing power.
Gentlemen, it is a myth that there is any source of purchasing power
that can be poured into the economy. Where do you get the purchas
ing power? Does it not come from the sales dollar? I f you sell a
product, some of it goes to pay salaries, some goes to wages, some
oes to research. It all gets distributed. Is not income generated
y production ?
1 think it is very easy to imply that what we need are massive injec
tions of purchasing power, without saying where it is to come from.
Where is this purchasing power to come from ? I f Europe would give
us massive doses of foreign aid, of course we would be prosperous.
There is no hope for that.
Purchasing power must be generated by production. There is no
other place to get it. Temporarily, of course, you can supplement it
by bank loans, which presumably get repaid later, and the same pur
chasing power then is withdrawn. You cannot rely on bank credit
to provide large amounts of purchasing power, nor can you rely on
printing dollar bills.
Senator Javits. Or Government appropriations—is that not right?
You would add Government appropriations to that. It is still pro
duction that makes-----Mr. Ellis. I would consider the receipts side rather than the expen
ditures side. You cannot consider selling Federal securities to the
commercial banking system as providing purchasing power.
I agree with the gentleman on my right, who had a very specific
statement. It would be fine if the total growth rate of the country,
the total output of industry and finance, insurance, and real estate,
wholesale and retail trade, could be expanded. That is why I stress
this 3-percent growth rate in the physical volume of the gross national
roduct. We are expanding at that rate. I would like to see it faster,
ut I do not know of any small changes that would give us a faster
growth rate. I f you want a faster growth rate, significantly faster,
then you have to make some major changes in the economy, improve
the educational level of the labor force, particularly these young peopfej 14 to 19 years of age.
It takes a long; period of training to do that. You do not do it
suddenly. Also increase the productivity, reduce the cost, so that
we could sell a wider volume of goods.
But I would also call attention to the fact that while personal con
sumption expenditures do account for two-thirds of the gross national
product, there is another third. What about new construction? I f
f
E
36
POLICIES FOR FULL EMPLOYMENT
it is not profitable, it will not be built. What about producers dur
able equipment, that is, the machinery used in production% I f it is
not profitable, it will not be bought. What about changes in business
inventories ? I f it is not profitable to accumulate inventory, business
men will not do it.
Let us not confuse the purchasing power of the American economy
with the purchasing power of individuals. That is part of it. That
is the bulk of it. But that is not all of it. Businessmen also spend
large amounts of money in our economy.
That is why I like the Joint Economic Committee presentation of
the gross national product. It shows immediately the pattern of
spending, the relative importance.
In that pattern, of course, you have government spending—Fed
eral as well as State and local. State and local spending is rising,
has risen every year since 1941, will continue to rise, should continue
to rise. That is primarily spending for roads and schools and public
welfare, goods and services provided for people. There is no serious
problem there. There is not much obj ection to tax rates there.
I also call your attention to the suggestion, with which I strongly
disagree, that all we need to do is to make our personal income-tax
rates more progressive and you improve the outlook for the American
economy. I think the current very high progressivity is one difficulty,
as the gentleman on my immediate right has suggested. It is pro
viding a tax brake. At some levels, you take 91 percent of a portion
of income. Now gentlemen, reducing the first bracket tax is not go
ing to help that upper income recover very much; it is not going to
make him interested in contributing for college construction or in
vesting money in new ventures, for example.
I thmk our personal income tax structure is very restrictive, es
pecially because of the nearly confiscatory rates at the top. I f you
consider permanent tax reduction, I suggest that you do it across the
board, for the reason that we ought to loosen restraint on the sources
of saving in this country. It is not only purchasing power. We also
have very large amounts of spending financed by mvestment funds,
from savings for consumption spending that concerns us. There
should also be substantial reductions of corporate income tax rates,
and some reductions in Federal spending.
Senator J avits. Mr. Ellis, thank you very much.
My time is up, but I would like to make a statement before I yield
my turn. I may not be here later.
I think one thing you gentlemen have not dealt with is one of the
causes for our dissatisfaction with the 3-percent growth rate. It is
not enough to sustain our world obligations, and our world responsi
bilities, as shown by our balance of payments, which is, as it were, the
thermometer of our temperature. And that shows that we are fine if
we were not giving foreign aid, if we were not maintaining large mili
tary forces abroad, if we did not have the world responsibilities we do.
The second thing I would like to lay upon this record is this: You
have all agreed pretty much on a tax cut; yet a tax cut itself is nothing
but a shot of adrenalin. None of you have told us, in my view, except
possibly Mr. Wishart, with his thesis that we need Government pro
grams—none of you have told us how you essentially deal with the
American economic problem, which is a problem ox automation, a
POLICIES FOR FULL EMPLOYMENT
37
problem of foreign trade and investment, as well as a problem of
domestic improvement.
After all, the growth potentials in our country apparently are now
limited, and we have got to look to the world in order to give the
American economy the new plateau upon which to stand, in the world
and in science. And these are the things I would hope, as we go along
in these hearings, may be developed.
Thank you.
Chairman P a t m a n . Senator Proxmire?
Senator P r o x m i r e . Before I ask Mr. Weston about his very provoca
tive reply to my challenge on monetary policy, I would like to say I
am delighted to see so much of this discussion revolving around excess
capacity. Our Statistics Subcommittee of this committee held hear
ings, and we have just filed a report. I put the report in the Congres
sional Record only yesterday, the recommendations from the report.
I think this would be an extremely useful area for further explora
tion. The data on statistics on industrial capacity is veiy unsatis
factory, very incomplete. We have some fine people working on it, and
they are doing the best they can, but we have a long, long way to go.
And this is one of the reasons why I feel that we cannot make de
cisions as confidently or as surely or as effectively as we should because
we just do not have the statistics necessary for them.
And I would like to ask, Mr. Weston-----Dr. W e s t o n . I was just going to say that although there is quite a
bit more work to be done on measuring capacity utilization for pur
poses of comparison all you need for judgment in a situation like this
is to compare the measures of capacity utilization in this recovery
with previous recoveries.
And although as absolute measures the measures may be imperfect,
the measures themselves have not fundamentally changed in their con
cept and techniques. And when you compare the degree of capacity
utilization in this recovery with previous recoveries, it falls signifi
cantly short.
And it does not have to fall very much short to have a significant
negative impact on the profits, because with a higher degree of fixed
costs, now, as a percentage of total cost, a smaller decline from some
norm of full capacity utilization will produce a much more repressive
effect on profits.
I just wanted to make that point.
Senator P r o x m i r e . Yes. W e l l , I do not want to get sidetracked.
We have an excellent chart in the Economic Report on page 55,
showing the distinct, direct, constant relationship between capacity
utilization and corporate profits. There is just no question about it.
At the same time, I think that much of what Mr. Ellis says is true,
that 90 percent seems to be the optimum level.
There is about the same degree of excess capacity that there is of
unemployment.
But let me get into this right now, because I think this is so crucial
and so important.
You seem to share the view that we should not put on fiscal brakes,
but you seem to think that we should put on monetary brakes, slowly,
gradually, but we ought to put them on. You say that monetary
policy is relatively tight because of the international balance-of-pay
38
POLICIES FOR FULL EMPLOYMENT
ments considerations. You go on to say this further tightening in
monetary policy would be consistent with international balance-ofpayments considerations.
Now, the two people in the country who are perhaps most respon
sible for monetary policy, particularly in relation to balance of pay
ments, are Mr. Martin, oi the Federal Reserve Board, and perhaps Mr.
Roosa of the Treasury Department.
Mr. Martin earlier this year, in response to a question from this
committee, said this with relation to this very question:
Interest rates are necessarily a factor affecting the movement of funds—
short term and long term— between the money markets and capital markets of
developed countries. There is, however, no invariable relationship between
relative interest rates in such markets and capital movements. While interest
differentials can be an important factor in movements of capital, other factors
also exert a conditioning influence. These other factors include the availability
of credit, the supply of credit instruments of ready marketability, the demand
for credit for borrowers of good standing, and— of predominant importance at
some times— expeetational and confidence factors.
Capital movements are sometimes viewed in the narrow context of funds
seeking liquid investment in prime market paper of short maturity. The differ
ences that existed last year between money rates here and abroad on this kind
of paper do not appear to have been a primary determinant of international
movements of funds of this type.
Mr. Roosa has said almost the same thing. He also indicated that
interest was not a highly significant factor in balance-of-payments
considerations.
Mr. Gemmill, a very distinguished economist with the Federal Re
serve Board, in an article I just put in the Congressional Record re
cently from the Journal of Finance, said exactly the same thing, only
with more emphasis, saying that this was not very significant.
I notice that the statistics show that our interest rates are already
substantially higher than they are in Germany, higher than they are in
the Netherlands—and these are short term rates, which are most
important—higher than they are in Switzerland.
And on the basis of all this data, it seems to me that to rely on inter
national balance of payments as the only alibi for higher interest rates
when we know that this does exert a restraining influence on the econ
omy, is inexcusable.
And when the economy, as you testified so well, and everybody here
has, is not moving fast enough,#is not growing, and we have unem
ployment and excess capacity—it just does not make sense.
Now, how do you justify it f
Dr. W e s t o n . I think you misunderstood my statement. I was not
advocating higher interest rates.
What I was saying was this: that I am talking to the Joint Eco
nomic Committee of Congress. And Congress, under our traditions,
does not control monetary policy.
Senator Proxmire. Oh, bless you for saying that. And we should.
The Constitution gives that power, as you know, in article I, section 8.
And this is something we ought to stand up and insist on.
Dr. W eston. Why do you not do it, then ?
Senator Proxmire. I am glad you said that, too. The Federal Re
serve Board is our creature. They are accountable to us.
D r . W e s to n . B e in g a p ra ctica l person, I lo o k at th e facts o f life ,
a n d I say th a t o ve r recent years: y o u h ave n o t exercised th is preroga^
POLICIES FOR FULL EMPLOYMENT
39
tive of yours. And so I address myself to the realm of powers which
you do have, and which you have exercised, and this is in the realm
of fiscal policy.
Senator P roxmire. Do you feel we should exert this influence?
Dr. W eston. Let me take one point at a time. Let me clarify my
basic position, which is that the kind of monetary policy that we have
had has been relatively tight. When you refer to the circumstances
of last year and say that very little of capital movement was due to
differentials in interest rates, this would certainly be true for last year,
because our short-term interest rates were relatively high.
Senator P roxmire. They are higher, now.
Dr. W eston. All right. What I am saying is that given this exter
nal factor over which you have chosen up to this point not to exercise
control, given relative monetary stringency, then in the area in which
you have presumably the power and have historically acted in the area
of fiscal policy, certainly you should act here.
Senator P r o x m i r e . Let me say: Is it not true that historically,
speaking now of the Government as an entity, the Government has
acted consciously at least more with regard to monetary policy than
fiscal policy? Fiscal policy is a relatively new tool of stability. For
the last 40 years at least we have had a conscious attempt on tne part
of the Government to influence the economy through controlling the
supply o f money. But the fiscal policy, tax-cut notion is a very new
notion, and from the Gallup poll ana other indications the public
does not accept at all that we should use fiscal policy.
This is a radical new idea, that you should deliberately create a
deficit, and particularly in a time of relative prosperity—lower taxes
and increase spending or maintain spending. That is something it
seems to me that is quite radical; as compared with the far more
conservative notion that when conditions do not look so good you ease
up a little bit on credit.
And I am not asking for pegging bonds at par. I am simply asking
for a little easier credit; not having just $300 million worth of free
bank reserves, but $500 or $600 million.
Why is this not a more traditional and a more conservative ap
proach? And also from what you are saying—and tell me if this is
not true—if we did not have this tight money policy, you would not
need as big a tax cut? Is that not what you are telling me? That
because we have a tight money policy, you are going to need a bigger
tax cut than you would have to have without it ?
Dr. W esto n . That is correct.
Senator P r o x m ir e . Therefore a bigger deficit than you would have
without it?
Dr. W eston . I would disagree with the bigger deficit. I think it is
questionable whether you would have a larger deficit if you had a
tax cut.
Senator P r o x m i r e . No, no. I am not talking about that. You
indicated we have about a $6 billion bigger deficit with a $10 billion
tax out* But I am not talking about that.
Dr. W e s t o n . That was Professor Suits. I would feel that the
d y n a m ic con sequ en ces of a $10 billion tax cut would substantially
elim in a te th e d e ficit.
8786*—
------ *
40
POLICIES FOR FULL EMPLOYMENT
Senator P r o xm ir e . It was my fault. I should have emphasized: I
am saying you will need a bigger tax cut if you have higher interest
rates.
Dr. W eston . Yes. That is absolutely true.
Senator P r o x m ir e . In order to do the same job?
Dr. W esto n . Certainly.
Senator P r o xm ir e . And the higher interest rates do restrain em
ployment? They do restrain expansion ?
Heaven knows in the construction industry, it is just as clear as
the nose on my face that between 1955 and 1957, when we had an in
crease in income, an increase in population, a big increase in family
formations, in spite of all this housing starts just nosedived—because
the interest rates were climbing. And here is a tremendous area of
employment.
Dr. W e sto n . Yes. But given that we are near the top of an up
swing, the ability of monetary policy to stop a turn is questionable.
This is why I argue for moving in the realm where you do have
authority, in the realm of fiscal policy.
Yes, I would agree to ease up on the monetary side, also. But on this
you have exercised no control. Ease up on fiscal policy, because this
has the greater power to stop the downturn.
Senator P r o xm ir e . My time is up. I just want to say that I think
we have all the control in the world, far more as a matter of fact, over
monetary policy than we have over fiscal policy. All we need is the
resolution to exercise it.
Chairman P a t m a n . I want to interrogate the panel after Mr. Widnall, but first I would like to congratulate you, Dr. Weston, on repri
manding Congress for failing to assume its constitutional monetary
powers.
Mr. Widnall ?
Representative W id n a l l . Thank you, Mr. Chairman.
I will ask this question of the entire panel.
I f an immediate tax cut is enacted, should it be limited as to length
of time?
D r . W est o n . I would say no, because certainly m y basis fo r recom
m ending the tax cut is not fo r the cyclical problem , but fo r the fiscal
structure problem .
Structurally, the taxes just levy too large a burden on spending
power.
And incidentally, with regard to where you provide the tax cuts:
While it is true that we have very high rates on high incomes nom
inally, it is questionable as to the extent to which our personal income
tax program is de facto progressive. Look at the facts; taxable
incomes over $20,000 a year account for only 26 percent of the total
revenues, of the revenue system.
As Prof. Henry Simons so aptly put it, we dip deeply with a sieve
in our personal income tax rate, and it really does not make too much
difference. The Harvard Business School studies of effects of the
progressive personal income taxes on incentives have very clearly con
cluded they did not have negative effects on incentives.
And this is why I argue that if the structural problem is inade
quate spending, you do it at the low end of the scale. You cut taxes
there.
POLICIES FOR FULL EMPLOYMENT
41
Representative W i d n a l l . Am I right in stating that none of you
have advocated an increase in exemptions on the income tax ?
Mr. W i s h a r t . I would certainly argue for an increase in exemp
tions applying with major impact, of course, on the lower brackets.
I think it is interesting that if you apply the cost-of-living index
to the $600 exemption, you will find that in constant dollars, the $600
exemption is now about a $180 exemption; that even the 1948 exemp
tion, in other words, is no longer effective in terms of the real buying
power of the lower bracket family.
Representative W i d n a l l . I s it your thought that you should not
only nave an increase in exemptions, but also a decrease in the rates?
Mr. W i s h a r t . Yes.
Representative W i d n a l l . Particularly in the lower brackets?
Mr. Wi s h a r t . Yes.
Dr. Suits. I think I would differ with that. Our personal income
tax as it stands is an immensely complicated thing to administer, and
it is a terrible nuisance for a person to fill out. We very badly need
reform in the entire structure of the tax.
I should certainly not—and this comes back to Mr. Bush’s ques
tion—want, in connection with an immediate tax cut, to run counter
to the longrun need for tax reform. I think this would be a step
in the wrong direction.
Personally, I think it would be politically expedient and econom
ically efficient to think in terms of some kind ox an across-the-board
cut that would yield $5 billion reduction in tax revenue at our cur
rent level of employment and income.
Representative W i d n a l l . Y o u all agree, then, that there should
not be any specific length of time. It would be permanently effective?
Dr. Suits. That is correct.
Mr. Ellis. I would support that position. I think the current
business level is sufficiently high that we should not stimulate the
economy at this level. If at some other time it is not satisfactory,
you might do that. But I think there is extreme danger in the Fed
eral Government taking the position that they will determine the
level of income, they will reduce tax rates over short periods and then
they will put them back up again.
I think the Federal Government should reduce the magnitude of
its spending, rather than increase it. I would not be in favor of a
quickie or temporary tax cut. I would be in favor only of basic
reform in tax rates. And I think that would take at least until the
1st of January.
Secondly, I do not think the economy now needs a quickie tax cut.
I think there is danger of implying that we can set the level of growth
at anything we want by just changing tax rates a little bit in a mild
recession and putting them back at some other time. You gentle
men know how difficult it is to raise tax rates. It would never be
appropriate to put them back up.
Let us have basic tax rate reform, and not use tax changes as a
regulator of the economy.
After all, businessmen have to make plans for several years in
advance. We would like to know what the conditions are going to
be 5 or 10 years from now. What will the tax rate be then?
42
POLICIES FOB FULL EMPLOYMENT
Let us not use tax rate changes as a minor adjusting factor. There
are too many factors to consider now in business investment. Do not
add any*
Dr. W e s t o n . I think it should be pointed out in this connection
that not to take any action at all is a policy matter* The fact of life is
that the Federal revenue system now accounts for something like 20
percent of gross national product. This means that even if you do
not make any change, there is a significant impact, and it is a policy
decision in effect to say that what we have is the correct thing.
Now, among all of the multitudinous things that can affect business
decision making, technological change, ana so forth, changing the
structure of taxes on the side of easing up on the fiscal brake should
pose few problems for business planning. In the first place, it is a
favorable change for business. In the second place these changes are
so infrequent, so episodic, that compared to the many other uncer
tainties that business faces, you certainly cannot use this as an argu
ment against a tax reduction.
Mr. E l l is . I was using only the argument against a quickie tax
reduction which may be for a short time. I am very much m favor of
permanent reform.
Mr. W i s h a r t . I might add to that the concept of a quickie tax re
duction, even a temporary one, on a countercyclical basis, is one which
has great support.
For example, in a period of declining employment, or in a period
where recession may be threatening, a $100 deduction of Government
tax withholding would I think have a strongly stimulating effect. It
can be used as a short-term offset.
Dr. W e s t o n . I would add that a permanent tax reduction enacted
promptly is not a quickie.
Mr. E l lis . N o , I was thinking of a reduction which would be
rescinded at some time in the future. That is what I meant by a
quickie.
Dr. W e s t o n . We were certainly proposing a permanent reduction.
Mr. E l lis . Yes. One without a time limit, then.
Dr. W e s t o n . W i t h o u t a time l i m i t ? and done promptly.
In this connection, it should be pointed out that such a great need
for tax reduction exists that a tax cut now does not rule out the need
for another tax reduction at the time the tax reform proposals come
before Congress. The present proposals for tax cuts would so stimu
late the economy that tne revenue loss would be very small. Tax cut
measures with initial cuts totaling at least $10 billion could well ac
company the tax reform proposals.
Representative W id n a l l . We have heard much recently about
budget deficits promoting prosperity. Now, in fiscal 1961 and fiscal
1962, we have budget deficits, and we are going to have one in fiscal
1963. Why has the economy been so sluggish, then, that we have
been incurring deficits?
Dr. W eston . It is the difference between a deficit incurred passively,
and one incurred actively. When a deficit is incurred passively, be
cause, of lighter economic growth, this has no stimulating economic
effect. A deficit that is planned for turns out not to be deficit.
Representative W idnall. Government spending has incurred the
deficit, and you are going to increase the Government spending? I do
not see the difference between the two.
POLICIES FOR FULL EMPLOYMENT
43
Dr. W eston . The cause of the deficit is the lag in Government reve
nues as a consequence of the lag in the rate of economic activity.
Dr. S uits . May I answer that question this way: I think we have
entirely too much emphasis on the “deficit,” which is a number, an
accountants’ number, associated with particular accounts dealing with
selected activities of only one government in our Federal structure,
organized as we are.
It is elementary that any expenditure by anybody—a business, a
State government, a school board, the Federal Government—stimu
lates economic activity and employment. It is elementary that any
taxation by anybody, by a school board, by the Federal Government,
by the State government, retards and brakes economic activity.
The extent to which we get stimulation or braking in our economy
depends on the extent to which we manipulate these two controls. The
difference between the tax revenues that we take in, and the expendi
tures that we make on certain specified accounts we call our deficit.
But neither the magnitude nor the direction of this difference tells us
what effect the fiscal activity will have on the economy. With equal
deficits we can have either expansion or contraction.
In principle, by increasing taxes and by increasing expenditures by
more or less, we could have a runway inflation in a situation in which
we were accumulating budgetary surpluses at a record rate, or we
could have the world’s worst depression in a situation where we had the
largest budgetary deficits that we have ever had, as we did, indeed in
the 1930’s.
We ought not to think of the deficit itself as doing anything. It is
expenditure that promotes, and it is taxes that retard. The deficit
is merely an accounting difference.
The purchasing power that we have been talking about already
exists. The profits that we are talking about already exist. Corporate profits are at a record rate, I believe.
Mr. E llis . That is right.
Dr. S u its . If we want corporate profits after taxes to be higher, all
in the world we have to do is to cut a couple of points off the corporate
income tax.
I f we want consumer purchasing power to expand, it is not a ques
tion of asking where this purchasing power originates, it is already
there. All we have to do is take off the tax brake and let it free.
Now, there are two sides to this current problem that we are in.
And this is, it seems to me, the proper approach to the fiscal side.
On the other hand, there is an aspect of this problem whis is not a
fiscal matter. This refers to the points that were raised by Senator
Douglas a moment ago: The question of the proper preparation of
our young people to take their place in a world in which we have an
entirely new technology; the proper provision of steps to the employ
ment and training for these people. This is another matter. Nothing
we can do with the purely fiscal powers—tax, spend, deficit, or what
you will—will attack these underlying problems.
There is nothing about the lack of education or preparedness of a
16-year-old young man that we can fix by any kind of Government
actionexcept training and education, and related projects.
Chairman P a t m a n . Thank you, sir.
It is about 12 o’clock, but I want to ask one or two questions.
44
POLICIES FOR FULL EMPLOYMENT
The question of what kind of a tax cut we should have has been dis
cussed by the panelists. I believe you said, Dr. Suits, that your calcu
lations show that a reduction of $10 billion in taxes would result in
1 million new jobs. I assume that you meant an across-the-board
reduction.
Dr. S u it s . I meant across the board in the personal income tax.
Chairman P a t m a n . In the personal income tax?
Dr. S u it s . That is right.
Chairman P a t m a n . Suppose you were to increase the exemption
on the lower income groups.
Dr. Surra. I think that the difference in effect would not be very
much greater.
Chairman P a t m a n . It would not be very much?
Dr. S u it s . I do not think so.
Chairman P a t m a n . During the depression in the early 1930’s, many
of us recognized that it was primarily due to an absence of purchasing
power, and the main thing we wanted to do was to increase purchas
ing power.
We accused those who differed with us of being members of the
trickle-down group. They favored pouring in money at the top, so
that it might trickle down, but it never did get down to the masses,
where real purchasing power was most needed in our economy.
Do you not think that it is better for an economy to have what
you might call the percolate-up type? In other words, shouldn’t it
start at the bottom ? I f purchasing power is made available at the
bottom, it can always percolate up. Isn’t that better than pouring
it in at the top and expecting it to trickle down ?
Dr. S u it s . This is certainly correct. I want it clearly understood,
however, that my view here is with regard to the immediate situation.
I am a great and a long-term advocate of tax reform. And I think
we should keep these two problems completely separate.
I f we become involved in internecine discussion of whether it is Mr.
A or Mr. B who is most deserving, or is most conducive to economic
expansion, we can get locked in dead center and not have what I believe
to be essential; namely? immediate tax relief. So that I would propose; from the standpoint purely of fiscal policy, without regard to
justice, or without regard to the longer run problems of tax balance,
that we simply cut taxes across the board by enough to yield, let us say,
an initial $5 billion reduction.
Chairman P a t m a n . Thank you, sir.
I shall not take more time. I f any other member would like to ask
questions, of course, we will be glad to listen to you.
Tomorrow morning, Wednesday morning, in this room, we will
start with a panel—Douglas Greenwald, director of research, McGrawHill; Mona E. Dingle, economist, Board of Governors, Federal Beserve System, and George Katona, professor of economics, University
of Michigan.
I want to thank you gentlemen very much. You have made a great
contribution to the success of our hearings.
Eepresentative W id n a l l . Mr. Chairman, I wonder if the members
of the panel could submit some answers to us on what they feel have
been the primary determinant of the rapid rate of growth in Western
POLICIES FOR FULL EMPLOYMENT
45
Europe and Japan, and whether there are any lessons we can learn
from that, in fiscal policy and other matters.
Chairman P atman . That is a good question.
When you get your transcripts to correct, if you will extend your
remarks and provide an answer to Mr. WidnalPs question, it will be
appreciated.
(The following was later received for the record:)
Co m m e n t s S e n t in A n s w e r to R e p r e s e n t a t iv e
E l l i s , E c o n o m is t , E . I . d u P o n t
Widna l l ’ s
de
Q u e s t io n ,
N e m o u r s & Co.
by
Ira
T.
The more rapid growth rate of economic activity in Western Europe than in
the United States over the past decade was due to a variety of reasons:
1. It was a period of extensive rebuilding in Europe to repair the damage of
World War II. No similar rebuilding was necessary in the United States.
Now that the rebuilding phase in Europe is largely completed, stimulation from
this source has declined significantly.
2. The growth rate of the American economy since 1939, or 1936, compares
very favorably with the growth rate of any other large industrial country over
this period. We enjoyed a great stimulation of production during World War II
and the early postwar years, when Western Europe was suffering extensive
destruction of their productive capacity. Concentrating on growth rates since
1953, for example, ignores the very much larger growth in output in the U.S.
economy from 1939 to 1953 than occurred in Western Europe over this period.
3. The burden of defense expenditures in Western Europe was very much
less over the past decade than it was in the United States.
4. Western Europe resumed her usual place in the export business of the
world over the past decade, while U.S. exports were declining from their abnor
mally high levels immediately after World War II.
5. There was a concerted drive by national political administrations, manage
ment, and labor in Western Europe to hold down production costs and increase
output. In this country, on the other hand, much of the poUtical and union
effort was directed toward increasing the share of labor in the production pie
rather than reducing costs or increasing output.
6. Substantial reduction in U.S. Federal personal and corporate income tax
rates, with significant cuts in some low-priority Government spending programs,
would stimulate the U.S. economic growth rate—at a time when there is clear
evidence of some slowing in the economic growth rate of Western Europe. There
should also be a concerted drive in this country to reduce production costs, even
at the cost of some shifts in employment, to widen our domestic market, and to
improve our competitive position in world markets.
G row th
in
W
est
E
urope
Statement by James Wishart, director, research department, Amalgamated
Meat Cutters and Butcher Workmen (AFL-CIO)
What have been the determinants of growth rates in West Europe and Japan
which have, in recent years, substantially exceeded those of our own economy?
If a single generalization may be submitted in tentative answer to this ques
tion it would seem that the one unifying principle behind recent European ex
perience has been the acceptance of government responsibility for the creation
and growth of markets for industry. Table I compares various measures of
growth abroad with our own.
Although tax policy in West European countries has favored capital investment
through depreciation allowance and other stimulants, the government’s basic
economic role has been that of assuring present and future markets at home and
abroad.
1.
Government fiscal and monetary policy has not been fettered by orthodox
concepts of budget balancing. Table II indicates that all countries of the Euro
pean Economic Community have accepted budget deficits running far above the
American level. Such deficits have been recorded through accounting methods,
which, In comparison with those in effect here, understate actual deficits in
46
POLICIES FOR FULL EMPLOYMENT
curred. And such deficits were tolerated as matters of national policy, even in
years of high level economic activity and growth. Government expenditures
have been used as a tool for assuring desired economic growth rates.
If this country were to accept deficits equal to the Italian deficit as a pro
portion of gross national product, our budget would fall short of Government
income by $15 billion annually. At the French level, our deficit would run
substantially over $25 billion.
2. The basic stimulant of the Common Market has been the clear prospect it
holds out for expanding continental markets. This has been sufficient to float
a boom in capital expansion for the six EEC countries, which, in turn, has shored
up the economies and rates of capital investment for other countries of the
hemisphere, with the possible exception of Great Britain.
In addition, government itself has taken direct responsibility for projecting
various sectors of domestic markets. France, for example, using input-output
analysis has projected a 5-percent growth in gross national product for 1962.
Although this is less rigid than a fixed national plan, it is more substantial than
a mere forecast of trends. It becomes a key and goal for the patterns of initia
tive from both private and government sectors of the economy. Although the
decisionmaking power remains officially in private hands for the most part, such
private decisionmaking is influenced and guided by specific knowledge of
national, sector, and industry patterns, and by the more basic assurance that
markets to absorb output of newly created capacity will also be created.
Government policy in all EEC countries has called for various forms of
guidance to private investment.
3. Direct government support and stimulus has gone to the creation of
foreign markets, which account for a larger sector of each nation’s output.
Export subsidies in various forms, import limitations or levies, and other
forms of control, have been used substantially by all EEC countries. They are
continuing in use, though to a lesser degree in relation to other members of the
Common Market, for the purpose of maximizing imports and favorable balances
of trade.
To assume any rigid application of strict free-trade principles among EEC
countries is currently unrealistic.
4. Unemployment levels have been kept low (see table III), and, as a con
sequence of relative shortages of labor, wage levels have risen rapidly. As the
New York Times reported (Jan. 9,1962):
“For the workingman, despite occasional headlines about strikes, 1961 was
the best year ever, particularly in the private sector.
“Wages in Europe are not easy to measure, partly because of the large social
security element. But in some countries they went up by more than 10 percent
in 1961, and in almost all by more than 5 percent Tie major reason, no doubt
was the labor shortage and the classic operation of the law of supply and demand.
“This huge increase in mass incomes—to the extent it was not taken away
again by higher prices—laid the foundation for a big burst of consumer spend
ing. This was already being felt in such countries as Germany and France as
the year ended.
“This ‘push’ from the consumer side, was one main reason why forecasts for
1962 remained, on the whole, optimistic.**
No restraints from government so far have been placed on wage gains running
far above gains in productivity of European labor.
The Wall Street Journal of July 17,1962, reported some pressures developing
in this direction in West Germany: “Mr. Erhard (Economic Minister for the
Bonn government) has warned that soaring wages and prices threaten to price
German manufactures out of world markets.”
The Journal account of this declared that West German wages rose 11 percent
last year, as compared with a 4-percent productivity gain.
Secretary of Labor Goldberg reported, early this month, that wage settle
ments this year in the United States have averaged 3.2 percent This figure does
not, of course, include substantial areas of industry in which no wage changes
have been reported.
It is beyond question that recent gains made in wage levels and in purchasing
power by the mass of West European peoples have been proportionally much
greater than those achieved in this country. They have been gains from a lower
base than our own. But to fail to see a correlation between such gains and
gains in gross national product* also from a base far below our own, is to
ignore basic economic fact
POLICIES FOR FULL EMPLOYMENT
47
Table I.— Increases in gross national product,industrial production and
consumption, selected countries, 1953-60
Percent
increase,
real GNP
(per capita)
Percent
increase,
real GNP
Belgium............................................................
France.................. ...........................................
Germany (Federal Republic)............................
Italy...................................................................
Netherlands...................................... ..... ........
.............
Austria.................................
Sweden................................. ..............................
United Kingdom..............................................
Canada....................................................
United States......................................................
Percent
increase,
index of
Industrial
production
27
68
80
82
57
69
35
30
30
19
16
28
48
44
30
65
24
18
1
6
21
36
61
49
42
58
30
22
22
19
Percent
increase,
per capita,
private
consumption
17
24
46
29
26
49
17
21
11
12
Source: Organization for European Economic Cooperation, General Statistics, July 1961, No. 4.
Table II.— Government deficits and surpluses as a percent of gross national
productf selected countriest 1952-59
[Key to symbols: D, deficit; S, surplus]
Coon trie*
Germany........................ ..........
France.......................................
Italy.......... ......... ...........*.........
United Kingdom......................
Sweden......................................
Belgium____________________
Netherlands...............................
United States............................
19S2
1958
1954
1055
1956
1957
1958
Number
of
1959
deficits
s
S
S
D
D
D
D
S
S
D
D
D
D
D
D
D
D
D
D
S
s
s
D
D
D
D
S
S
D
D
D
S
D
D
D
D
D
D
D
D
D
D
D
S
S
D
D
D
D
S
D
D
D
D
D
D
3
s
D
D
D
D
S
D
8
8
7
6
3
4
Average
deficit,
relative
to gross
national
product1
(percent)
1.17
4.61
2.70
1.27
2.20
2.21
.71
.95
JThe deficit for each year in which a deficit was incurred was converted into a percentage of gross national
product. These percentages were then averaged over the total number of years in which deficits occurred.
Source: Derived from International Monetary Fund data.
Table III.— Average annual rates of unemployment in selected countriest
percent of labor force
Country
1953
1954
1955
1956
1957
1958
1959
1960
Source of data
United States....................................
Germany...........................................
Netherlands......................................
Sweden................................. ............
2.9
7.5
2.8
2.8
5.6
7.0
1.9
2.6
4.4
6.1
1.3
2.5
4.2
4.0
.9
1.5
4.3
3.4
1.3
1.9
6.8
3.6
2.4
2.5
6.6
.7
1.9
2.0
5.6
1.2
1.1
1.5
Survey.
Registration.
Do.
Do.1
1 Trade union returns prior to 1966: Registration only of insured workers.
Source: National statistics; International Labor Organization, international labor statistics.
(Reply to Mr. Widnall’s question, by Daniel B. Suits:)
This important question could well become the basis of a large, important study
by this committee. It is one that deserves careful research by experts in the
field of foreign economic development. Unfortunately, I am not one of these,
and any serious expression of opinion on such a matter would be presumptuous.
Senator P roxmire. I would like to ask a couple more questions. I
apologize to the panel and to the members, but I think this is such
a good panel, ana so well balanced, and the statements have been so
provocative that I just cannot resist.
48
POLICIES FOR FULL EMPLOYMENT
Mr. Ellis, you pointed out, and I think rightly so, that a substan
tive proportion of our unemployment problem is the young people.
I am persuaded, as Senator Douglas brought out so well, that this
is true. I am wondering if one constructive way of solving this situa
tion and contributing very greatly to the long-term reduction in un
employment is not to do all we can to persuade the States to increase
the age at which students leave school from 14 to 16 up to a higher
level as they in their best judgment can do it; combine this with a
much more vigorous vocational education program and a dovetailing
of this in cooperation with management, labor, and others, so that when
young people leave the school there is a job for them available.
Now, one of the things that President Conant, former president of
Harvard, brought out in his book was that in communities where this
is done—and there are many communities in America where they do
that—there is very little problem of youthful unemployment.
Now, if we could somehow use what influence we have, here, the
President and Members of Congress, to work on the States to do it,
it seems to me we would do two things. No. 1, we would reduce un
employment; No. 2, we would solve a veiy vital problem of training
more skilled people in a technological society. Is that not correct?
Mr. Ellis. I think you are going in exactly the right direction. It
takes time, of course, but we have made a start in that direction when
we began to put this greater stress on mathematics and science in the
schools, and pointed out the shortage of engineers and the high salaries
they receive when they finish the training. We are trying to pull them
through the school system. And it is all to the good.
It would of course also be desirable to increase the level of voca
tional training which would be importantly at the high school level
rather than the college level, because unemployment is a very definite
function of lack of skill.
I f you can provide more skill in the jobs where there are shortages
of people for the jobs, you can increase employment. And in that
connection, I would like to point out that the fact that we have 4
million unemployed does not mean there are no jobs available. Some
of those people prefer not to work at the jobs that are available.
I think that is another point that we must keep in mind: that there
are a lot of jobs available in this country, but for some reason people
prefer not to take them.
I think you are going in exactly the right direction. Let us in
crease the level of skill of our young people, particularly the ones that
now drop out of school.
I do not take the figure for June 1962 as typical of the labor mar
ket. Many of those boys and girls reported as unemployed in June
are merely looking for summer work. They are going back to school
in the fall.
Senator Proxmire. I know. I am seasonally adjusting all these
figures, and in October, November, and all during the school year there
will be millions of those teenagers who will be out of school and out of
work.
Mr. Ellis. Look at October, for example, when the schools are in
full session. I think you are going in the right direction. Let us in
crease the level of skill of these t>oys and girls.
POLICIES FOR FULL EMPLOYMENT
49
I do not know whether raising the school dropout age would do it.
That is at 14 primarily in the Southeast, and in most o f the rest of the
country it is now 16. I do not think you could make it 18.
Senator Proxmire. No, but it could be from 16 to 17 in some parts
of the country.
Mr. Ellis. I would prefer to see it done in pulling them through
and point out the opportunities. Point out how much better life they
will have later if they increase their education now.
Senator Proxmire. When I have spoken in most of the high schools
in my State and everywhere, they stress the commercial or monetary
value of staying in school. But I think if you could make it manda
tory—after all, we used to permit students to leave after grade school,
ana very few people had a high school education, many years ago,
and we have been making progress, but it has been slow.
Mr. Ellis. Right.
Senator Proxmire. Secretary Goldberg said just the other day that
now for the first time labor leaders are really serious about a 35-hour
week, and about this approach to the problem. I do not blame them
for being concerned.
I do not blame them for feeling this way. They see their people un
employed. They do not know whether or not these tax-reduction pro
posals are going to work. And frankly, I do not think a $10 billion
or even a $15 billion tax reduction is going to do the big job that many
people expect it to do. It may help some.
Therefore I feel we should pay some attention to the supply side
of this equation. One way would be to keep our young people in
school. That would help a lot.
Another way: Imagine the massive unemployment problem we
would have today if we did not have social security. The fact that we
have 14 million people receiving social security checks, and therefore
it is unnecessary for them to work, and they are able to retire—I can
see if we can continue what we did very constructively, I think, in the
first part of this session, and reduce the retirement age from 62 to 60,
but make it voluntary, and at the same time reduce the benefit that will
be received under these circumstances----What is the cost ? If a person chooses to retire at 60, and believe me,
on the basis of the petitions I have received, thousands and thousands
would do so—you open up jobs and industry for younger people, and
you do not have to have this very heavy cost of reducing hours from
40 hours to 35 and trying to maintain the same wages, which would
really aggravate our problems.
I cannot see what is wrong with trying to look at the supply side
of the equation, as well as the demand side. I think it has been over
looked badly.
Mr. Ellis. In the first place, Senator, I do not think there is any
strong push back of the 35-hour week. Labor does not want to work
less ana enjoy more leisure at the cost of a lower standard of living.
Senator Proxmire. They want more jobs. But I think while I
would concede there is no strong push now, believe me, if the cycle
does what it has almost always done, and we move into recession and
get 7 or 8 percent unemployment, there is going to be terrific pressure,
Mr. E l l i s . What I meant to say is that you cannot reduce the hours
of work and pay the same weekly wage.
50
POLICIES FOR FULL EMPLOYMENT
Senator Proxmire. Not without a punishing increase in costs. I
do not favor it now.
Mr. Ellis. I do not, either. I do not think labor wants a shorter
workweek with a lower standard of living. And it is impossible,
without increasing productivity correspondingly, to have a lower
workweek at the same weekly income rate.
Our standard of living is based upon what we produce.
Senator Proxmire. I will not argue with you on the facts. I would
say Mr. Meany has indicated that he is serious about this. And he
is the spokesman for 16 million workers.
Mr. Ellis. But would it not result in more moonlighting?
Senator Proxmire. Again, I am not arguing the merits. I think
perhaps moonlighting has been somewhat exaggerated. But whether
it would or would not, I think it is something we should be concerned
with. And I think there is a legitimate reason behind this, because
the working people are really concerned about seeing a situation in
which, even in periods of recovery and economic prosperity, there are
4 million people unemployed.
And while your figures are perfectly correct, I call your attention
to the charts on page 43, which show that about 2 percent of the unem
ployed have been unemployed for more than 15 weeks, and some 3.6
percent of the married men are out of work, and of the experienced
wage and salaried workers, a very, very high percentage, over 5 per
cent, are out of work.
Mr. Ellis. Senator, would you say that it is possible that the wage
rate is also affecting unemployment, that labor in some cases has
priced itself out of the market ?
Mr. W i s h a r t . At certain points administered prices in industry
have reduced possible demand to a level which has created unemploy
ment. In terms of wage costs, the fact is that the wage costs per unit
of output have been declining in absolute terms over the past 3 years.
And I refer you to an exhibit submitted by Mr. Reuther before this
committee last February.
Senator Proxmire. "fhis is certainly true in many industries. It
seems to be true in steel and in some other areas, even though they
have had very substantial wage increases.
Mr. W i s h a r t . These are overall figures, covering manufacturing
industry as a whole.
Senator Proxmire. There is an indication of this, too, in the fact
that we have had fairly stable prices over the last couple of years.
Mr. W i s h a r t . Might I say, too, that labor’s proposal for a shorter
workweek—and I am speaking on behalf of a labor organization,
here—is not one to be underestimated in any sense of the word. Obvi
ously, we would prefer full employment, with a 40-hour workweek,
but without full employment, without the prospect of full employ
ment, the proposal for a shortening of work hours is one which has
behind it genuine force, momentum, and support.
Senator B u s h . Do you really believe that union members would
want to reduce their workweek from 40 hours to 35 hours without sub
stantial increase in pay ?
Mr. Wishart. Not without substantial increases in pay; no.
POLICIES FOR FULL EMPLOYMENT
51
Senator B u s h . So it is not just a reduction in the workweek they
want. It is really to get an increase in pay through that device. It
that right ?
Mr. W is h a r t . An increase in hourly rates would be involved in
such a reduction.
Senator B u s h . So as to mean a stabilization in wage costs! It
would result in a net income increase to the members. Is that true?
Mr. W i s h a r t . I would not concede that a rate increase is necessarily
an increase in wage costs. Under the impact of automation-----Senator Proxmire. What the workers want to do is to preserve
their present annual income or weekly income. You speak for the
AFL-CIO, and they want a shorter workweek not because they are
lazy or do not want to work 40 hours, but because they know so many
people who are relatives and friends and so forth who cannot get
work, and they see in the auto industry and the steel industry people
who have worked for 10 and 15 years and are thrown out because the
automation has created a situation in which far fewer people can do
more work. Is that not correct ?
Mr. Wi s h a r t . Yes. And in some sectors of the auto industry there
has been the deliberate application of a 6-day workweek, creating
conditions under which the unemployed may lose their right to pen
sion, to hospital, surgical, and other coverages. This has been part of
the operation in the Detroit area.
Senator B u s h . This is why I raise the question, then, as to this
35-hour workweek, as to whether it would not result in considerable
more overtime payment, beginning at the 35-hour level, and whether
it would actually result in decreased employment for those who need
the work.
Mr. Wi s h a r t . This would certainly not be the purpose.
Senator B u s h . I beg pardon ?
Mr. Wi s h a r t . There has been a proposal for the increase of over
time premium to obviate this tendency on the part of employers to
work a limited work force an unreasonable number of hours per week,
in order to avoid certain fringe benefit costs.
Senator B u s h . The thing that puzzles me about the proposition
is this: If you have a reduction in the workweek to 35 hours, whether
employers would rather pay—they are going to work 40 hours any
way, maybe more—whether they would rather pay the overtime rate
to those employed, rather than train a bunch or new workers to take
up the one-eighth slack, or whatever it would be, and whether they
would not find the latter more expensive than paying the overtime.
What is your judgment on that ?
Mr. W i s h a r t . Sly judgment is that in most industries today the
choice would be for the 35-hour workweek. This might be a problem
which we will face down the road, assuming the achievement of the
35-hour workweek. All the problems flowing from that have not been
given total analysis at the present time.
Senator B u s h . D o you think the 35-hour workweek would actually
increase employment?
Mr, W i s h a r t . This is the reason that labor is solidly and substan
tially supporting the idea of reduced hours, without reductions in
weekly take-home pay.
52
POLICIES FOR FULL EMPLOYMENT
Very frankly, the preference would be for not only the maintenance
of weekly take-home pay, but for the increase in take-home pay, an
increase in annual earnings. Organized labor generally would be
willing on a short-term basis to sacrifice this goal of increased annual
earnings, were it possible, through this action, to provide jobs for those
currently unemployed*
Senator B u s h . They believe, then, that it would provide more jobs—
this 35-hour workweek proposal. Is that right ?
Mr. Wi s h a r t . This is the reason that proposal has been seriously
advanced. And in the New York City area, m a number of construc
tion industries, it has been applied at a level below the 35-hour level,
as I am sure you know, Senator.
Senator B u s h . Twenty-five; yes.
Eepresentative W i d n a l l . Normally, when you talk about a 35-hour
workweek, you are talking about mass employment in an industry.
Are there not thousands of jobs, union jobs, that have been lost re
cently because of pricing out of the market individual home repair
work, electrical work, plumbing work, building a gameroom, building
an extra room ? You have had this tremendous increase of do-it-your
self, because labor has priced itself out of the market with the indi
vidual homeowner.
Now, those are all jobs, but they are odd jobs, they are not the
type of iob people want, because there is not enough employment in
them. And it is increasingly difficult to fill such jobs.
Mr. W i s h a r t . I am not familiar enough with that, except from the
view of the putative and injured do it yourselfer, to be able to say any
thing authoritative on this.
I would like, if I may be pardoned, to refer back to one earlier
statement in regard to the educational approach on the problem of
unemployment.
The Armour Automation Committee did a good deal of work in this
eneral area in seeking jobs for displaced packinghouse workers. We
ound that there were m certain labor markets a number of unfilled
jobs, jobs as computer programers, jobs as missile designers, jobs as
electronic engineers. But we found also that a worker who had had
perhaps 4 or 5 years of primary education, and who spent 25 years
cutting hides off steers, somehow could not qualify for these openings.
In regard to vocational training, our conclusion was one of some
hesitation. Our feeling was that training in very specific skills in
this period of automation, with very rapid shifts in skill requirements,
was not necessarily the most desirable thing. Our feeling was that
the concentration should be on basic education, in reading and writing
and arithmetic, to provide workers who are then available for industry
to go through the usual procedures of on-the-job training in the spe
cific skills required in a given situation.
Senator B u s h . I would agree that is probably the case.
Senator D o u g l a s (presiding). Any further questions?
We want to thank you gentlemen very much.
(Whereupon, at 12:30 p.m., the committee was recessed, to recon
vene at 10 ajn., Wednesday, August 8,1962.)
f
STATE OF THE ECONOMY AND POLICIES FOR FULL
EMPLOYMENT
WEDNESDAY, AUGUST 8, 1962
C
ongress of t h e
Joint E
U
nited
conomic
States,
C ommittee,
Washington, D.C.
The committee met at 10 a.m. in room AE-1, the Capitol, Hon.
Wright Patman (chairman) presiding.
Present: Representatives Patman, Reuss, Thomas B. Curtis, and
Widnall; Senators Douglas, Proxmire, Pell, Bush, and Javits.
Also present: William Summers Johnson, executive director; John
R. Stark, clerk; Hamilton D. Gewehr, research assistant.
Chairman P a t m a n . The committee will please come to order.
This morning we have as our panel Mr. Douglas Greenwald, Mr.
George Katona, and Miss Mona Dingle of the Board of Governors of
the Federal Reserve System.
This morning we continue hearings on the state of the economy.
We have with us a panel of distinguished economists who are spe
cialists in surveys of business and consumer expectations.
Before we begin, I would like to say a special word of thanks to
Miss Dingle and her associates on the staff of the Board of Governors,
who worked over the weekend in order to speed up the tabulation of
their most recent survey of consumer plans for purchases.
We will proceed now with Mr. Greenwald first, and then the mem
bers of the committee may put questions to the panel. I f there is no
objection, the committee will ask questions under the 10-minute rule.
Mr. Greenwald, you may proceed in your own way, sir.
STATEMENT OF DOUGLAS GREENWALD, MANAGER, DEPARTMENT
OF ECONOMICS, McGRAW-HILL PUBLISHING CO., NEW YORK, N.Y.
Mr. G r e e n w a j l d . Thank you, sir.
My assignment is to discuss the current and short-run health of the
economy with particular reference to the key area of the economy—
private investment in new plants and equipment. My contribution,
for the most part, will be based on recent important factual informa
tion from McGraw-Hill’s surveys of business* anticipations. And re
sults of these surveys indicate that capital investment intentions by
business constitute an element of strength in the business outlook.
In my department of the McGraw-Hill Publishing Co. we have
made surveys of plans for business’ spending on new facilities for 15
years. We also maintain a monthly index of new orders for non
electrical machinery which reflects the new incoming business of pro
53
54
POLICIES FOR FULL EMPLOYMENT
ducers of capital equipment, and a quarterly forecast index of
machinery orders, which reflects the producers’ expectations for four
quarters ahead. The indexes cover a relatively small number of large
manufacturers of machinery.
We generally survey business on its plans for domestic investment
twice a year—in the spring and in the fall. The spring survey is very
comprehensive and is geared to longer range plans; the fall survey
covers fewer questions and is geared to short-range plans.
In October 1961 we carried out our fall survey of business’ plans for
1962 and 1963. Our comprehensive survey of business’ plans for 1962
to 1965 was made during March and early April of this year. At the
end of June we carried out a special checkup ox plans.
The McGraw-Hill checkup of spending plans showed that business,
in general, is planning to invest approximately the same amount in
new plants and equipment in 1962 that it reported to us in our com
prehensive survey taken earlier this year, and a considerably higher
amount than it anticipated last fall. The table below shows the
results of the three McGraw-Hill surveys and actual 1961 capital ex
penditures as reported by the U.S. Department of Commerce.
(The table follows:)
Business plans for capital spending in 1962
[Billion dollars]
1962 planned—
Industry
1961
actual1
A s of
October
1961
As of March
and early
April 1962
As of
end of
Jane
All rrmnnfty».t.nrir>g ________ ______________ ______
M ining..............................................................................
Railroads..........................................................................
Other transportation and communications.........
Electric and gas utilities............................................
Commercial-...................................................................
13 67
.98
.67
5.07
5.52
8.46
14.59
.99
.64
5.03
5.87
8.72
15 41
1.09
.85
5.50
5.74
9.39
15.30
LOS
.87
5.50
5.82
9 39
Total, all business............................................
34.37
35.84
37.98
37.96
i U .S. Department of Commerce.
Mr. G r e e n w a l d . Our fall 1961 survey indicated that business had
plans to invest $35.84 billion in 1962, an increase of about 4 percent
over 1961. Over the past several years our fall surveys of business’
plans have always provided the correct direction of change in invest
ment as well as fairly reliable indications of the degree of change.
The McGraw-Hill comprehensive survey of business’ plans for new
lants and equipment taken early this spring indicated that business
rms had raised their investment sights significantly from the fall.
Planned investment for 1962 was $37.98 billion, up 10.5 percent over
1961. During the years that we have been making these spring sur
veys, they have proved remarkably accurate in indicating the trend
of overall investment for the year ahead, except in 1950, when all plans
were altered by the Korean war. During the last decade, the average
error between the McGraw-Hill survey’s planned percentage change
and the Department of Commerce’s percentage change for actual data
is only 3.5 percent.
Senator B u s h . That doesn’t mean 3 % percent annually ?
S
POLICIES FOR FULL EMPLOYMENT
55
Mr. G r e e n w a l d . Yes, sir. The average annual error.
Senator D o u g l a s . Somewhere in the range of a billion dollars.
Mr. G r e e n w a l d . In the earlier yea re it would be smaller in dollar
terms, and in the current years it would be bigger.
Senator D o u g l a s . But the average range would be about a billion
dollars?
Mr. G r e e n w a l d . Yes, sir.
We do not conclude from this experience, however, that we have a
sure-fire forecasting device. We claim nothing for the results of our
surveys except that they report present plans. We heavily emphasize
the proposition that our surveys are not promises of wThat is actually
going to happen.
Our special checkup in late June showed that business planned to
spend $37.96 billion on new plants and equipment this year, up 10.4
percent over 1961.
This checkup was based on plans of a substantial cross section of
business, accounting for 35 percent of total capital investment. For
the most part the results reflect the plans of large companies. This re
check provided no indication of what small companies were doing
about their investment. To begin with, investment plans of small com
panies were not up as much for 1962 as those of larger companies.
The downward movement of the stock market in May and June may
have had some impact on their investment plans. However, small companics account for a relatively small percentage of total capital in
vestment.
Our checkup pointed up the fact that business in general had not
cut back or canceled plans for investment in new facilities in 1962 as a
result of the sharp drop in stock prices in May and June or the so-called
loss of business confidence.
Manufacturing industries overall planned to invest $15.3 billion
this year, down about $110 million from plans reported to us in the
spring. Steel, machinery, electrical machinery, stone, clay and glass
and miscellaneous manufacturing industries plan to invest less in
1962 than they did earlier. However, transportation equipment (air
craft, railroads and shipbuilding) fabricated metal products and in
struments, chemicals, rubber and food industries plan to increase their
capital expenditures this year more than planned originally.
Among manufacturing industries, railroads and utilities planned
slightly higher capital investment for 1962 than they did earlier, while
the mining industry cut its plans.
About 80 percent of the companies that answered in our recheck in
dicated they had made no change in their 1962 plans for new plants
and equipment. The remaining 20 percent indicated some changes in
their planning. But this group was split right down the middle,
with half increasing plans and half cutt ing them.
Among the companies indicating investment cutbacks, only a very
few cited economic conditions as the reason. In most cases where
investment plans were lower than they were earlier, the reasons given
had absolutely nothing to do with a lack of business confidence or the
drop in the stock market. Instead, technological delays and con
struction delays were the reasons given.
We should point out that in the past years of high and rising busi
ness activity a large number of companies increased investment plans
during the year. This has not been the case so far in 1962.
87889— 62------5
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POLICIES FOR FULL EMPLOYMENT
This recheck was taken before stock market prices began to recover,
before margin requirements were reduced from 70 percent to 50 per
cent and before revenue procedure 62-21, with its more realistic depre
ciation guidelines regarding lives of machinery and equipment, be
came effective. It is conceivable that these three factors, along with
the T percent tax credit for new machinery and equipment purchases,
which Congress may soon make a part of the Nation’s law, could re
sult in higher capital expenditures at the end of this year than are
now anticipated by companies and by business economists in general.
However, it is my opinion that their impact on capital spending may
be slow in coming. We have some factual evidence on this point.
In our spring survey, we asked the question:
If the administration’s program of tax incentives for investment were enacted,
how much would this increase your capital expenditures in 1962?
Business as a whole indicated that it would raise its 1962 plans
by only 1 percent, or about $300 million. Nine out of every ten com
panies replying indicated that thev would not use such a program at
all in 1962.
The fact that American business is going ahead with its investment
lans for 1962 was not a surprise to us. It confirmed our belief that
usiness plans for new plants and equipment, once made for the year
ahead, are generally carried out. In the past, wars, recessions and
booms have led to significant changes in investment plans. But in
my view, we are not likely to be in any of these three situations this
year.
Also, it makes good sense for businessmen to go right ahead with
their modernization programs in 1962. Business firms reported to us
in our recent checkup that this year’s capital investment programs are
stressing modernization, with the hope that these cost-cutting proj
ects will result in better profit margins.
In our earlier survey this year, manufacturers reported that they
planned to devote 70 percent of their 1962 investment dollar to mod
ernization. The reason for their concern is obvious. About 40 per
cent of U.S. plant and equipment dates back to before 1951, and
nearly 25 percent goes back to World War II or even before that.
These significant statistics were also revealed by our spring survey.
Only a very small percentage of investment is going for new capac
ity this year. Most of this is going for capacity for new products
which are an important part of the payoff of industry’s tremen
dous expenditures on research and development during the last de
cade. Little investment is going for additional capacity for existing
products.
Based on the McGraw-Hill measures of manufacturing operating
rate, we estimate that manufacturers, on the average, are currently
utilizing 84 percent of their capacity, whereas they prefer to operate
at about 90 percent. Therefore, it is true that industry has a modest
amount of excess capacity at present. And the gap between the
operating rate and the preferred rate may widen if manufacturing
output were not to continue to expand during the rest of the year.
A s this committee well knows, my department compiles the only
direct measure of manufacturing capacity. Only a few months ago
I testified on the McGraw -Hill measures of capacity before the Sub
E
POLICIES FOR FULL EMPLOYMENT
57
committee on Economic Statistics of the Joint Economic Committee.
In its report on measures of productive capacity, the committee recom
mended and I quote—
an exploration of the McGraw-Hill techniques would offer an excellent oppor
tunity for a joint public-private project in which McGraw-Hill, the pioneer of
this technique, might work in cooperation with a suitable Government agency.
We at McGraw-Hill are giving this project serious consideration.
Another piece of evidence that confirms our belief that investment
will continue to expand throughout the rest of this year is provided
by the quarterly McGraw-Hill nonelectrical machinery new orders
forecast index. For today's hearings, I have had computed, earlier
than usual, a preliminary estimate of our forecast index for the four
quarters ahead. Although this index does not provide a precise gage
of the future level of new orders, it provides an indication of relative
changes in the confidence of machinery manufacturers.
Capital goods manufacturers now expect to book a far bigger dollar
volume of new orders in the current quarter than they ever did before.
They anticipate that new orders will subsequently fall off and that
the decline will continue into the first quarter of 1963. They fore
cast that the second quarter of 1963 will see a slight pickup in their
new orders.
The group of machinery manufacturers reporting forecasts to us
in our current quarterly survey are slightly less optimistic about
prospects for new orders for the last two quarters of 1962 than they
were 3 months ago. One reason for decreasing optimism about the
immediate future among this particular group of companies is the
fact, that their actual incoming new orders in June dropped by about
10 percent.
But despite this sharp drop for one month, their anticipations for
the last half of 1962 are only off about 2 percent from what they were
back in April. And most of the returns for this calculation arrived
in my office before the new procedure for depreciating machinery be
came effective.
Corporations now have a high enough rate of cash flow to finance
a considerably higher level of investment than is now planned for
1962. Our comprehensive survey taken early this year showed that
businessmen anticipated increasing their volume oi cash flow, com
posed of retained earnings and depreciation, at a faster rate than their
investment in new plants and equipment. At that time they expected
to increase cash flow by 14 percent and investment by only 10.5 percent.
It is my belief that the McGraw-Hill data on plant and equipment
expenditures indicate that this key segment of the economy will con
tinue to expand this year. If plans hold up for the year as a whole,
then the quarterly rate of capital expenditures may be expected to
reach $39 billion in the fourth quarter compared with a rate of about
$37 billion in the second quarter.
I now turn briefly to other major areas of the economy: Inventories,
consumer spending, housing, the net export balance and Government
spending.
Inventories are currently being built up at a much more moderate
pace than earlier this year. In the first quarter, business was accumu
lating inventories at an annual rate of about $6.7 billion. In the
second quarter the rate dropped to about $3.5 billion. In the cur
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POLICIES FOR FULL EMPLOYMENT
rent quarter, it probably is still lower. The rate of addition to in
ventory will continue to slow down during the rest of the year.
However, considering the relatively low inventory-to-sales ratios,
it is unlikely that business will reverse its policy soon and let its in
ventories run off. However, a declining rate of inventory addition
means that the negative impact on our Nation’s total dollar volume of
business has already taken place.
Consumer expenditures, which are by far the largest sector of the
total business picture, are dependent on many psychological factors.
I will leave the discussion of this sector to George Katona, except to
note that as long as personal income rises, and at this time we cannot
see any reason to expect it to turn down before yearend, consumer
spending on goods and services may be expected to follow the same
general path.
Housing is booming. Private starts in the second quarter were ex
ceedingly high at an annual rate of nearly 1.5 million units, despite
a drop in June. And because of the lag betwen a start and put in
place construction, we can look for the dollar volume of new housing
construction to break through previous record highs.
The net export balance is just about holding its own. Exports have
been holding up very well, while imports have not increased signifi
cantly. We do not expect to see a significant change from the current
rate of sui'plus of exports over imports during the rest of the year.
Thus the net export situation will have a neutral effect on the economy
in the months ahead.
This year’s Federal budget guarantees a modest rise in Federal
spending right through the end of the fiscal year, June 30,1963. How
ever, the increase during the current fiscal year will be considerably
smaller than the big gam registered during fiscal 1962.
Meanwhile, State and local spending on highways, schools, and other
projects is due for a large increase over the coming months. States
and cities are taking advantage of relatively easier money markets to
issue a record volume of construction bonds.
In conclusion, the pluses and minuses of the various sectors of the
economy add up favorably for the rest of the year. There is nothing
now in sight which clearly indicates that in the next few months there
will be a marked change in the direction of the economy.
Chairman P a t m a n . Thank you, sir.
Senator D o u g l a s . There is just one question I would like to ask,
Mr. Chairman. This is a very able statement, but the witness stated
that States and cities are taking advantage of relatively easy money
markets. I wonder what your evidence is for the money markets being
easier.
Mr. G r e e n w a l d . We were looking at the rates on State and munic
ipal bonds, and we found that they were around 3.27 in early June.
Senator D o u g l a s . 3.29 as of July 14.
Mr. G r e e n w a l d . But this compares with 3.40, 3.50, and 3.60 in
earlier periods of this year.
Senator D o u g l a s In April it was 3.08 and in the last 3 months they
have gone up 21-hundredths of a percentage point, or relatively speakG k e e n w a i d . I think, Senator Douglas, you are looking at the
figures on the triple A State and local.
POLICIES FOR FULL EMPLOYMENT
59
Senator D ouglas. That is right.
Mr. Greenwald. If you look at the total for States and local bonds
which is in the Federal Reserve Bulletin, you get a slightly different
picture.
Senator Douglas. That is you don't think this index on page 29 of
the indicators is useful ?
Mr. Greenwald. I think it is useful, but I look at the total for State
and local bonds.
Senator Douglas. What is that?
Mr. Greenwald. Starting with January, it was 3.55, February
3.40, March 3.30, April and May 3.21, and the week to which I referred,
which was June 2, it was only 3.27.
Senator Douglas. An increase of 2 percent.
Mr. Greenwald. Yes sir. But relative to the earlier periods in the
year, it is still low.
Senator Douglas. Recently, as compared to April, there has been
an increase %
Mr. Greenwald. That is right, sir.
Senator Douglas. Thank you.
Chairman P a t m a n . Miss Dingle, economist from the Board of
Governors of the Federal Reserve System, we are glad to have you,
and you may proceed in your own way.
STATEMENT OF MONA DINGLE, CHIEF, CONSUMER CREDIT AND
FINANCES SECTION, DIVISION OF RESEARCH AND STATISTICS,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Miss D ingle. I understand you are interested in receiving from me
a report on the most recent quarterly survey of consumer buying
intentions. Unlike Mr. Greenwald and, I assume, also Mr. Katona,
I will not attempt to make any forecast of what is likely to happen
in the next 6 months but will merely report my best interpretation
of what the most recent Quarterly Survey of Consumer Buying Inten
tions shows.
We do appreciate your recognition for our weekend work, but
I would like to add that a great deal of appreciation is due to the
Bureau of Census staff, which was on an around-the-clock schedule
part of last week and which spent a great deal of weekend time itself
checking the data and seeing that tneir interpretations of the data
generally tallied with ours.
Before I refer to the data that were collected, let me say something
about the nature of the buying plans data themselves. Taken alone,
these data are by no means a direct forecast of subsequent sales.
They represent individual consumers7best estimates of the likelihood
of their subsequent purchases as reported in sample surveys, and thus
give a measure of consumers’ interest in a market as of the interview
date. Purchases that consumers subsequently make reflect not only
the strength of their interest as expressed in the plans data but also
supply conditions and developments affecting consumer spending such
as changes in employment and income.
In general, consumers who report plans to buy are substantially
more likely to purchase than those who do not, but many planners
do not purchase and many nonplanners do purchase. Survey experi
60
POLICIES FOR FULL EMPLOYMENT
ence shows that purchase rates of nonplanners are particularly affect
ed by changes in economic conditions, while purchase rates of plan
ners show somewhat more stability.
Senator D o u g l a s . Is this an argument for planning ?
Miss D i n g l e . We would certainly appreciate it if all consumers
did plan definitely far in advance. I hope that you as a consumer will
do so.
b
The interpretation of buying plans data is complicated by their
seasonality. Plans show seasonal movements that are not identical
with those of purchases, and unfortunately the Quarterly Survey of
Consumer Buying Intentions has not been in existence long enough
to enable us to develop seasonally adjusted series. This is the fourth
year of interviews, but all four of these years have shown different
types of economic developments.
The year 1959 was one of general economic expansion characterized
by strong consumer demand, but expansion was interrupted by a pro
longed steel strike in the second half of the year. The first half of
1900 was strong, and the decline in economic activity in the second
half was tempered by continued strength in the automobile market.
Most of 1961 was characterized by recovery, but consumer expendi
tures for durable goods lagged compared with other recent cyclical
recoveries.
This year has shown mixed developments, with consumer purchases
of durable goods declining in the first quarter and picking up in the
second and with the strong demand for automobiles accounting for a
substantial part of the second quarter rise. These differences among
years create problems of comparison by affecting quarter-to-quarter
movements in plans as well as the relationship between plans and
purchases.
There are special problems involved in relating plans to buy auto
mobiles at this time of year to developments over the coming months.
Important factors in realized purchases are the supply of old model
automobiles, and of new ones once they are introduced, and consumer
reception of new model automobiles. Shortages due in part to strikes
kept purchases down in 1959 and to a lesser extent in 1961, while in
1960 sales were encouraged by the large supply of old model auto
mobiles which were sold at discounts from list prices.
As is illustrated in the material that has been distributed, infor
mation is obtained in the Quarterly Survey of Consumer Buying
Intentions covering buying plans reported for varying time periods
and with varying degrees of certainty, and data are tabulated for
various groups of consumers. We have always considered it desirable
to make the data available in detail in order to enable analysts to
make their own interpretations.
I hope the other members of the panel and the committee will take
advantage of that. I tried to show as much detail as I could, given
the limitations of time.
Tables 1, 2, and 3 and the chart showing the movements of buying
plans are being released today with our quarterly press release on
buying plans data. Additional tabular material will be included in
an article which will appear in the Federal Reserve Bulletin for
August and which will be released earlier in preprint form.
POLICIES FOR FULL EMPLOYMENT
61
Table A and the bar chart have been especially prepared to facili
tate the comparison of current plans and recent movements with
those in the corresponding period of earlier years. I might say I
do not plan to refer directly to tables and charts but to summarize
what they show. Most of my statements can be followed in table A.
In comparing the level of plans this year with those in earlier years, it
should be kept in mind that the data given show percentages of all
families m the United States and that the total number of families has
been increasing at the rate of about 2 percent per annum.
Thus, in terms of numbers of families reporting plans, a figure
of 5 percent in 1962 is equivalent to 5.1 percent in 1961 and 5.3 percent
in 1959, and a figure of 20 percent in 1962 is equivalent to 20.4 percent
in 1961 and 21.2 percent in 1959. Movements are shown for the
period Apnl-July for all items except used cars, for which JanuaryJuly movements are shown. Movements of course reflect cyclical as
well as seasonal developments.
As would be expected, the July data do not all point in the same
direction, and they may lend themselves to varying interpretations
depending in part on one’s analysis of related developments. In
general, however, reported buying plans were at or close to highs for
the current cyclical upswing. Automobile buying plans may have
weakened slightly from the strong April level.
Plans to buy household durable goods, however, after lagging
throughout 1961 and picking up from January to April, strengthened
further from April to July. Buying plans for houses have shown
little change since earlier this year.
Reports of plans to buy new cars within 6 months were unchanged
from April to July this year, compared with increases in the corre
sponding period of the expansion years 1959 and 1961 and a small
decline in 1960. Plans to buy in 3 months and in 6 to 12 months
were down somewhat. Buying plans reported in July were about
equal to those in July 1961 and higher than in either 1959 or 1960.
Plans to buy used cars continued strong in July. Since this figure
was abnormally high in April of this year, I have shown changes
from January to July for used cars rather than from April to July.
For this period, 6-month plans increased, compared with reductions
in each of the 3 preceding years. Reported plans to buy used cars
in July were higher than in any of the 3 preceding years.
The Quarterly Survey, while concentrating on buying plans, also
asks several other questions pertaining to the automobile market.
In July, the proportion of families that expressed dissatisfaction with
the car currently owned, which had been running above year-earlier
levels, declined to a level below that in July 1961 but above 1959 and
1960 levels. The proportion of families that reported shopping for
a car in recent weeks also declined to a level about the same as in 1961
and below that of other recent Julys.
As in each of the 2 preceding years, reported plans to buy houses
within the next 12 months showed little change from April to July,
but short-term plans and definite plans apparently strengthened some
what. In July total plans to purchase within a year were slightly
higher than in 1961 but slightly lower than in 1960. The increase
from a year ago was concentrated in plans to buy new houses.
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POLICIES FOR FULL EMPLOYMENT
Plans to buy household durable goods, which had continued weak
throughout 1961, showed greater strength in July than in any other
recent survey. Plans to buy such goods declined less from April to
July than in either 1960 or 1961, as a less than seasonal reduction in
plans to buy air conditioners was offset by an increase in plans to buy
most other items covered.
As in the second half of last year and the first half of this year, but
in contrast to the 1959 to early 1960 expansion period, strength was
concentrated in plans to buy within 3 months and in definite plans, as
opposed to plans to buy in 3 to 6 months and in more tentative plans.
Three-month plans were at the highest July level since the survey
began, while total 6-month plans were only moderately higher than
in 1961 and below earlier July levels.
In general, planners expressing plans to buy within 3 months and
those saying that their plans are definite are more likely to purchase
than those expressing tentative plans to buy or plans to buy after a
longer period. On the other hand, such planners account for a rela
tively small share of total purchases in any period, and a high level
of aggregate purchases requires large purchases by tentative planners
and by consumers classified as “nonplanners.”
It is possible that the tendency for 3-month plans and definite plans
to rise while the more tentative plans remain low may mean that
people are willing to make those purchases to which they have given
considerable thought but that they are adopting a wait-and-see atti
tude with respect to making longer raxige plans.
It should be noted that the weakness of 6-month plans for house
hold durable goods compared with earlier years was concentrated
particularly in refrigerators and washing machines; plans to buy
television sets and growth items such as air conditioners and clothes
dryers are generally close to or above 1960 levels. The strength in 3month plans, however, was particularly great for refrigerators and
washing machines.
There has apparently been some shift recently in the income struc
ture of plans to buy new cars and household durable goods. While
total plans to buy these items were generally equal to or above yearago levels, plans on the part of families with incomes of $7,500 or
more—about 25 percent of all families—were at the lowest July level
in the 4-year history of the Survey. Plans to buy houses and used
cars on the part of this upper income group, however, were equal to
or above year-earlier levels.
Plans to purchase household appliances by high-income respondents
have remained weak during the entire period of economic expansion,
while plans of lower income groups have strengthened. Recently
there has been some pickup in plans on the part of high-income re
spondents to buy growth items—air conditioners, clothes dryers, dish
washers, and radio and phonographic equipment—but their plans to
buy the items labeled as major durables—washing machines, refrig
erators, and television sets—were at new July lows.
Senator B u s h . W hy do you call those growth items ?
Miss Dingle. They have been expanding more with respect to own
ership in recent years than washing machines, refrigerators, and
television sets. Like other items, at the time of introduction they
POLICIES FOR FULL EMPLOYMENT
63
were purchased primarily by the higher income groups and are now
expanding into the lower income groups.
benator B ush . Thank you.
Mr. G r e e n w a l d . It might also be that these are relatively new
items, if I might add a point here, and fast growth begins in the
period when you first market new items, air conditioners, and so on.
Miss D i n g l e . Washing machines, refrigerators, and television sets
are owned by an extremely high proportion of all families The de
mand is either the result of necessary replacements or obsolescence.
Practically all purchases of those items are made by families that
already own one. Most families don't have much need for more than
one washing machine or refrigerator, except perhaps for summer
camps. There is expansion in the numbers of owners of television
sets.
One might refer to color television as being a growth area, but
television sets are generally very, very widely owned.
This reduction m plans may reflect in part saturation in the own
ership of such appliances by high-income families and a tendency to
make expenditures in other directions, rather than any significant
change in their willingness to spend. Plans to buy new cars on the
part of the high-income group appear to have weakened from April
to July.
While I don’t feel that I am in a position to explain this decline,
it is possible that it may reflect in part the recent stock market de
velopments and perhaps some sense of economic uncertainty on the
part of this group.
A shift of buying plans from higher to lower income groups does
not necessarily presage a decline in purchases on the part of all
planners, since purchase rates for planners generally differ little
among income groups. Purchase rates of nonplanners are higher in
the upper income group, however, and any si<m of caution on the
part of this income group might be reflected in a reduction in overall
purchase rates.
In looking at data for families with incomes of $7,500 or more,
it should be recognized that these families constitute a relatively
small part of the total, and hence that the data are subject to more
sampling variability than data for all families or for families with
incomes oelow $7,500. Planning rates of this group over a period
of years may also be affected by general increases in consumer incomes
ana the movement of new families into the higher income group.
Unlike the surveys conducted by Professor Katona, the Quarterly
Survey of Consumer Buying Intentions has only a limited number
of questions directed toward general economic attitudes and financial
developments. I hope he will say a great deal more about this area
in the course of his discussion.
Concerning income prospects, slightly fewer consumers than in
other recent quarterly surveys expected their incomes to increase over
the coming year, and a correspondingly higher proportion expected
their incomes to be unchanged. There was no change, however, in the
number expecting lower incomes or uncertain about their income
prospects. Slightly fewer families than in other recent surveys also
reported an increase in income compared with a year earlier.
(The tables and charts referred to follow:)
POLICIES FOR FULL EMPLOYMENT
64
BUYING PLAN LEVEL - JULY
WITHIN 3, 6, AND 12 MONTHS
AUTOMOBILES
NEW
USED
Per cent
8
WITHIN 3 AND 6 MONTHS
HOUSEHOLD DURABLE GOODS
MAJOR ITEMS
5tame. NOrg. —
GROWTH ITEMS
Number per 100 families
THOSE INDICATING UKCERTAHTTT ABOUT TIKIHQ WITHIN TW 6-MDWH FBI100 AM tNCLUBD IV TfB
•a MttBS TO TABLE A FOR 1TKMS INCLUSD I* HDOStHOlD DURABLE QOODS (MOWS,
65
POLICIES FOR FULL EMPLOYMENT
T able
A.— Buying plans for houses, automobiles, and household durable goods
Level, July
Change, April-July 1
Item and time period
1962
1961
1959
1960
1962
1961
1960
1959
Percentage of all families or of families in specified income group
New cars:
Plan to buy in 12 months.............
Plan to buy in 6 months________
Income under (7,500 _______
Income $7,500 and over_____
Definitely plan to b u y ...........
Plan to buy in 3 months...............
Used cars:1
Plan to buy in 12 m o n th s............
Plan to buy in 6 m on th s.. . ........
Income under $7,500................
Income $7,500 and over..........
Definitely plan to bu y. . __
Plan to buy in 3 months________
Houses (new and eiisting):
Plan to buy in 24 months * ___
Plan to buy in 12 months_______
Income under $7,500................
Income $7,500 and over..........
Definitely plan to b u y ..
Plan to buy in 6 months...............
7.4
3.4
2.1
7. 7
1.4
1.1
7.6
3.4
2.2
8.3
1.4
1.1
6.9
3.1
2. 0
8.2
1.2
.9
7.0
3.2
2.2
8.7
1.2
.9
- 0 .3
8.1
4.5
4.5
5.1
1.7
1.7
7.9
4.2
4.1
5.0
1.5
1.6
7.2
3.8
3.8
4.8
1.4
1.4
7.8
4.2
4.4
4.7
1.4
1.5
-.1
+ .2
+•1
+ .7
+ .2
+ .4
10.1
5.2
4.4
8.4
2.3
2.3
10.0
5.0
4.4
7.8
2.0
1.9
11.2
5.4
4.8
&8
2.2
2.4
(*)
(*)
(*)
(>)
(*)
(*)
-. 1
-.1
- .2
+ 0 .8
+ .3
+. 1
+ 1 .2
+ .3
+ .2
- 0 .1
-.2
-.4
+ .7
- .3
- .3
-.4
-.3
- .4
+ .2
- 1 .2
-.8
- .8
- 1 .2
—. 2
+ -1
+ .3
+ .1
+ .1
+. 1
+ .2
- .4
+ 0 .4
+. 5
+ .4
+ 1 .2
+ .3
+ .2
-.7
-.5
- .6
- .1
+. 1
+ 3
-.1
(*)
(J)
(s)
(’ )
(*)
<*>
* 1 .8
- .6
-2 .9
-.3
-.9
-1 .8
-.7
-2 .6
-1 .2
-1 .5
(*)
(*)
(*)
<*)
(*)
+ .2
-.2
+ .4
+ .2
+ .8
—.3
+ .3
+ 5 ” "+ .Y
+ .1
+ .6
+ 1 .0
- .3
+ 1 .8
+ 1 .8
+ 2 .6
(*)
+ .4
-1 .8
- 1 .3
- 3 .7
- .9
-1 .6
(*)
<*)
(*)
(*)
<*>
+ .3
+ .3
+. 1
+ .2
- .2
1
-.4
Plans per 100 families
Household durable goods: *
Plan to buy in 6 months................
Income under $7,500................
Income $7,500 and over...........
Definitely plan to buy............
Plan to buy in S months................
Major household durable goods: *
Plan to buy in 6 months................
Income under $7,500................
Income $7,500 and over...........
Definitely plan to buy............
Plan to buy in 3 m o n th s.______
Growth items: *
Plan to buy in 6 months................
Income under $7,500................
Income $7,500 and over_____
Definitely plan to b u y ..........
Plan to buy in 3 months................
19.3
16.0
28.6
6.9
6.8
18.4
15.1
31.0
6.2
5.8
20.1
17.6
34.3
6.5
5.9
(*)
(*)
(*)
(»>
(*)
13.2
12.2
16.7
■4.7
4.5
12.8
11.4
19.0
4.1
3.9
14.0
13.1
20.1
4.4
3.8
14.2
13.6
19.8
<*)
3.8
6.1
3.8
12.9
2.2
2.3
5.6
3.7
12.0
2.1
1.9
6.1
4.4
14.3
2.1
2.0
(*)
<*}
(*)
(*)
(*)
-0 .8
-.7
- 1 .6
-.2
- .4
-1 .0
-1 .1
-1 .3
-.5
-.9
-1 .6
-.8
- 3 .7
- .3
-1 .1
» Change for used cars shown for January-July rather than April-July period.
* Not available.
* Sum of plans to buy washing machines, refrigerators, television sets, air conditioners, clothes dryers,
radio and phonographic equipment, and dishwashers.
* Sum or plans to buy first 3 items listed in note Z
t gum of plans to buy last 4 items listed in note 2.
N ote .— Plans to buy include plans of families for which income was not ascertained.
66
POLICIES FOR FULL EMPLOYMENT
AUTOS AND HOUSES - PLANS TO BUY
WITHlti 6 MONTHS
'
Per cent
JAN.
APR.
JULY
O CT.
JAN.
Note.-Plans toboynewautosandusedautosincludeproratasharesof
plannersundecidedbetweennewand.used. Theydifferfromproportionsin
Table1whichincludeonlyspecificplanstobuyeitherneworusedcars.
HOUSEHOLD DURABLE GOODS - PLANS TO BUY
WITHIN 6 MONTHS
No. per 100 fam ilies
24
16
JA N .
APR.
JU LY
NOTE;**P!ans to buy Items listed In Toble 2.
OCT.
JA N .
67
POLICIES FOR FULL EMPLOYMENT
T a b l e 1.—
Plans to buy houses and durable goods,selected periods,1960-G21
Buying plan
April
1960
July
1960
April
1961
July
1961
October Janu
ary
1961
1962
April
1962
July
1962
Percentage of all families
Planning to buy new or used auto
mobile: *
Within 12 months.................. .......
Within 6 months...........................
Within 3 months...........................
Planning to buy new automobile
Within 12 months.......................
Within 6 months...........................
Within 3 months_______________
Planning to buy used automobile
Within 12 months....................... .
Within 6 months...........................
Within 3 months................ .........
Planning to buy house (new or ex
isting):
Within 24 months................ ........
Within 12 months______ _______
Within 6 months...........................
17.1
8.8
3.1
16.8
8.1
2.7
16.6
8.4
2.9
17.4
8.4
3.0
18.5
9.1
3.0
18.1
9.1
2.6
18.9
10.2
3.6
17.4
8.8
3.1
7.0
3.3
1.2
6.9
3.1
.9
6.8
3.1
.9
7.6
3.4
1.1
8.1
3.7
1.4
7.8
3.7
1.1
7.7
3.4
1.3
7.4
3.4
1.1
7.2
3.9
1.4
7.2
3.8
1.4
7 7
4. 1
1.7
7.9
4.2
1.6
8.2
4.4
1.4
8.2
4.3
1.3
9.2
5.6
2.1
8.1
4.5
1.7
11.1
5.3
2.5
11.2
5.4
2.4
10.0
5.1
2.3
10.0
5.0
1.9
10.6
5.1
2.0
9.8
4.8
1.8
10.0
5.2
2.3
10.1
5.2
2.3
Plans per 100 families
Planning to bny household durable
goods: •
Within 6 months...........................
W ithin 3 months...........................
Planning to buy major household
durable goods: *
Within 6 months...........................
Within 3 months...........................
21.9
7.4
20.1
5.9
20.2
6.7
18.4
5.8
19.6
6.9
18.8
4.8
20.1
7.2
19.3
6.8
13.9
3.8
14.0
3.8
13.0
3.7
12.8
3.9
13.1
4.5
12.2
3.2
13.0
4.0
13.2
4.5
1 As reported in interviews in the 1st month of each calendar quarter. Interviews are taken in the week
that includes the 19th of the month. Planning period begins on date of interview.
1 Includes those undecided between new and used.
* Sum of plans to buy washing machines, refrigerators, television sets, air conditioners, clothes dryers,
radio and phonographic equipment, and dishwashers.
* Sum of plans to buy 1st 3 items in note 3 above.
T a b l e 2.— Plans to buy specified durable goods within 6 months, selected periods,
1960-42
[Percentage of all families]
Type of durable goods
Washing machine............................. .
Refrigerator...........................................
Television set........................................
Air conditioner......................................
Clothes dryer........................................
Radio and phonographic equipment1.
Dishwasher.,........................................
April
1960
6.0
3.8
4.1
3.4
1.8
1.9
.8
July
1960
5.9
4.0
4.0
1.4
2.0
1.9
.8
April
1961
5.3
3.6
4.1
2.6
1.8
2.1
.8
July
1961
5.1
3.4
4.2
1.1
1.7
2.1
.7
October January
1961
1962
5.4
3.3
4.5
1.2
1.9
2.5
.8
i Radios or phonographs (or their component parts) costing together $100 or more.
5.2
3.1
3.9
1.9
1.8
2.3
.6
April
1962
5.4
3.4
4.2
2.6
1.8
1.9
.8
July
1962
5.3
3.6
4.3
1.3
2.1
1.9
.8
68
POLICIES FOR FU LL
EM PLOYM ENT
T a b l e 3.—Past and expected changes in income, selected periodst 1960-62
[Percentage distribution o f families]
Direction of change
Current income compared with a
year earlier:
H ig h er......................................... S a m e __ - .......... *_______ - ____
................ ..................
Doesn’t know ___ _________ . . . . .
All fam ilies... . . . ....... .............
Expected income compared with
current:1
H igh er............. - ............... - ..........
Same
..................................- __
Lower ..
___
_____ ____
Doesn’ t know ............. ...............
All families......................... . ..
Ix)wer
April
1960
July
1960
April
1961
July
1961
April
October Janu
1961 ary 1962 1962
July
1962
22.2
61.3
15.5
1.0
100.0
21.5
61.9
15.7
.9
100.0
20.7
59.9
18.5
.8
100.0
20.6
61.0
17.6
.9
100.0
22.6
59.9
16.6
.9
100.0
22.2
60.2
16.5
1.0
100.0
23.1
61.6
14.6
.8
100.0
21.1
63.7
14.4
.8
100.0
24.2
60.2
5.6
10.0
100.0
24.6
59.6
5.9
9.8
100.0
23.9
59.4
5.4
11.4
100.0
24.7
58.5
5.8
11.0
100.0
23.7
59.3
5.7
11.3
100.0
24.0
60.0
5.0
11.1
100.0
24.2
60.3
5.1
10.4
100.0
23.2
61.2
5.1
10-6
100.0
* E xpected a year hence.
N o t e — D etails m ay n ot add to totals because o f rounding.
Chairman P a t m a n . Thank you, Miss Dingle.
Before calling on Mr. Katona, I would just like to invite Miss
Dingle’s attention to the fact that she referred to the idea that the
stock market might have something to do with consumer caution.
In this connection, Mr. Greenwald said in his statement—this is a
very significant statement—that business in general had not cut back
or canceled plans for investment in new facilities in 1962 as a result
of the sharp drop in stock prices in May and June or the so-called
loss of business confidence.
Miss D i n g l e . I wish we knew what the effect of the stock market
decline was. Certainly I would not like to be in the position of saying
exactly what it is. One of the questions frequently asked is what the
stock market decline has done to consumer confidence, and if it had
any effect directly, it would be more likely to be on the upper-income
groups. I would not want any sign of weakness on their part to be
overemphasized, and certainly it does not show up in their plans to
buy houses or used cars.
I thought this was a matter that might be of interest in view of
the questions that have been raised.
Chairman P a t m a n . Thank you very much.
Mr. Katona you may proceed in your own way.
I believe you have a prepared statement.
STATEMENT OF GEORGE KATONA, SURVEY RESEARCH CENTER,
INSTITUTE FOR SOCIAL RESEARCH, UNIVERSITY OF MICHIGAN
Mr. K a t o n a . Thank you.
I have been director of the economic behavior program of the Survey
Research Center since its establishment in 1946 and professor of eco
nomics and of psychology at the university of Michigan. Originally,
I have been a psychologist, but devoted the last 25 years to a study of
consumer behavior and expectations.
Our research program stems from the conviction that the role of
consumers in the American economy has undergone substantial
changes. Before World War II it was justifiable to consider business
POLICIES FOR FULL EMPLOYMENT
69
investment and Government deficits or surpluses as the sole autonom
ous factors influencing the business cycle and to assume that the con
sumer sector was an unimportant transmitter of income generated
elsewhere. But during the past 25-odd years the number of middleincome families has increased greatly, and today a very substantial
proportion of American families have discretionary income; many
families also have some reserve funds; credit is available and buying
011 credit is widely accepted by consumers; finally, a sizable share of
consumer spending is for postponable and discretionary expenditures.
Today we must recognize three forms of investment: business in
vestment, consumers' tangible investment expenditures for housing,
automobiles, and appliances, and investment in human capital—pri
marily for education and health.
Consumer investment expenditures are not a function of money
alone. Ability to buy is important, but changes in willingness to buy
may occur independently of changes in income and may influence dis
cretionary consumer demand. That optimism or pessimism, confi
dence or its absence matter has often been asserted in the past. What
is new is that we are in a position to measure changes in consumer at
titudes and expectations. The Survey Research Center began with
such measurements 15 years ago. Even after 15 years of experience,
shared over the last few years by other organizations, there remain
many unsolved problems. Yet several crucial turning points in con
sumer expenditures for durable goods have been signaled in advance
by Survey Research Center data on consumer expectations, and statis
tical analysis indicates that consumer expectations, as measured by the
Survey Research Center, have substantial predictive value.
It is not possible to determine changes in attitudes and expectations
through a few simple questions. The Survey Research Center con
ducts nour-long personal interviews at regular intervals, each time
with a different nationwide sample of consumers, drawn by rigorous
methods of probability sampling.
Senator D ouglas. May I ask how large your sample is ?
Mr. K atona. Our quarterly samples are about 1,350 families, and
the first quarter of the year it is about double.
Senator B ush . What is the geographical distribution ?
Mr. K atona. It is all over the Nation from Atlantic to Pacific.
Senator D ouglas. Is that about the same number of persons sam
pled in the Gallup poll ?
Mr. K atona. The Gallup poll unfortunately gives very little in
formation about the size of its sample and the sampling composition.
The number of cases is not the most important point. We assume
from published data and information that Gallup still does not use
rigorous probability methods.
Senator D ouglas. But on numbers, I have seen various statements
that the probable number covered by the Gallup poll is somewhere
around 1,500. Have you seen those ?
Mr. K atona. I have seen those, too. I don’t know the facts. The
number is not essential as is well known from the Literary Digest
debacle. There were thousands and thousands of interviews.
Senator D ouglas. I understand.
Chairman P atm an . There are 3,070 counties in the United States.
That is about one for every two counties ?
70
POLICIES FOR FULL EMPLOYMENT
Mr. K a t o n a . No.
Senator D o u g l a s . There are about 1,500 of these counties which are
insignificant in size. There are many counties—I will not mention
in which State—which consist primarily of sagebrush.
Charman P a t m a n . You mean one to the county, then, instead of
one to two counties ?
Senator D o u g l a s . It would be very interesting to get the sampling
figures. This figure of 3,100 counties is very deceptive, as anyone who
runs for office in a large State knows.
Mr. K a t o n a . May I say that the sampling variations are important
to assess the significance of certain small changes. But on the whole,
modern statistical mathematical research has proved that sampling is
substantially solved. If you have the money, you can draw reliable
small samples. The real questions are reporting errors people not
telling the truth, or not expressing themselves correctly; how to
formulate the questions, since the answers depend on how the ques
tions are formulated. Here are our great problems, and not in
sampling any more.
Senator D o u g l a s . Y o u have to have a minimum number, however.
Mr. K a t o n a . Of course.
Chairman P a t m a n . You may proceed.
Mr. K a t o n a . The fixed question—free answer method of interview
ing is used; respondents answer in their own words and are asked
to explain why they think as they do. We do not ask multiple-choice
questions which suggest the answers. We conduct such surveys now
four times a year, m February, May, August, and November.
Our August survey, devoted especially to a study of consumer re
actions to the stock market decline and the tax reduction proposals, is
now in the field; the findings will be available in September. There
fore I am basing my discussion on our May survey, the major findings
of which were given to survey sponsors early in June and released
to the press on July 3. I brought along a few copies of the survey
report for submission to the committee. With your permission, I
shall summarize the major findings and conclusions and omit detailed
documentation in my presentation.
The reason is I would like to concentrate my oral presentation
here on new data and its interpretation. Statistical documentation
of the data is available here in this supplementary material.
The Survey Research Center’s measures of consumer attitudes and
expectations advanced from the low point registered in February
1961 for about 12 months. Yet the improvement was not as extensive
as following the 1958 or the 1953-54 recessions and did not continue
in 1962. As table 1 of the survey report shows, there was even a small
decline in the center’s index of consumer attitudes from February
to May 1962. The decline was so small, when sampling variations
are taken into account, that it is appropriate to view the index as
having stayed at a plateau during the first half of 1962.
The recovery was not as long and not as large as following previous
recessions, and over the last few months, that is from February to May
1962, we had a sidewise movement.
W hile general consumer attitudes indicate the sluggishness o f the
recovery from the 1960-61 recession, in one important area our data
have justified optimism since the spring o f 1961. Attitudes toward
POLICIES FOR FULL EMPLOYMENT
71
the automobile market and intentions to buy new cars showed an
upsurge as early as May 1961 and remained on a high level during the
following 12 months.
The original report given to the press over a month ago shows a
table about intentions to buy cars. Let me summarize here three
major figures. They showed that according to our surveys, 13.8 per
cent of families intended to buy cars during the next 12 months in
February 1961; 16.4 percent in May 1961; and 17.4 percent in May
1962. The statistical data are presented in the report submitted to
the committee. I may add that the upsurge of automobile intentions
and, generally, of attitudes toward automobile buying was shown in
our surveys, whereas it was not reflected or at least not strongly in the
surveys conducted by the Bureau of the Census and reported by Miss
Dingle.
In each of its surveys the Survey Research Center asks more than
50 questions about consumer attitudes and expectations. There have
been times in the past when practically all these measures pointed
uniformly upward or downward. Not so in the recent past. In addi
tion to questions about automobiles, questions about personal financial
prospects and market conditions have indicated satisfaction and
optimism in 1962. In particular, the feeling that rising prices are
reducing real income has become less frequent during the past 12
months.
On the other hand, there was a change for the worse in people’s
opinions about economic prospects, especially among upper income
people. The consumer’s mood is sober because of three persistent
concerns: the recurrence of recessions, the relatively high level of
unemployment, and the cold war. The great majority of Americans
have drawn the conclusion from the experiences of 1958 and 1960-61
that Government and business are capable of forestalling a depression,
but can do nothing to stop the recurrence of short and nevertheless
painful recessions.
Our findings are, if you ask people whether a depression like in the
thirties will recur, the overwhelming majority says, “No, it is im
possible. Government and business know how to deal with it.” If
you ask how about recessions, how about some short peaks of unem
ployment, the overwhelming majority says, “ No, we can’t do anything.
They will recur. They are in the cards.’' Given this frame of mind,
people are sensitive to bad news.
We concluded, therefore, from an analysis of our data that up to
May 1962 there was a sidewise movement which, although it did not
signal a downturn, indicated that consumers would not contribute to
a faster economic growth—unless new stimuli alter the prospects seen
by them.
I turn now to an analysis of consumer reactions to two new develop
ments, the stock market decline and the tax cut proposal. The dra
matic break in the stock market occurred the end of May, wrhen inter
viewing for our May survey was almost completed. Yet the market
was already weak in the preceding w-eeks and even months. Neverthe
less, we have reason not to attribute the findings reported up to now
to stock market developments. It must be kept in mind that stock
holdings are highly concentrated: Our surveys show that only about
18 percent of the 55 million American family units own stock, and
87869— *62-------6
72
POLICIES FOR FULL EMPLOYMENT
only about 7 percent of family units own stock worth $5,000 or more.
Thus the proportion of people who have suffered losses, even paper
losses, is relatively small.
Yet the decline in the stock market has received wide publicity,
and I expect to find in our August data that a very substantial pro
portion of consumers have heard of it. On the other hand, on the
basis of past data, I expect to find that only a small proportion of
the American people accept the notion that the stock market decline
is a signal for an economic recession. Most Americans do not see a
close connection between what happens in the stock market and what
happens to the economy. This attitude is in line with the high de
mand for automobiles which continued in June and July. But there
exists a minority with different views and therefore, overall, taking
majority and minority together, the probability is that the August
data will indicate more consumer caution and uncertainty than the
May data.
Over the past few years the Survey Research Center has carried
out extensive studies about consumer attitudes toward taxes. Since
there has been some discussion about the results of a recent Gallup
poll—it was criticized by President Kennedy at his press conference
last week—permit me to submit some data.
In May and again in November 1961 we asked the following ques
tion of representative, nationwide samples:
There has heen discussion about reducing taxes at the present time; do you
think this would be a good idea or a bad idea?
The findings are reproduced in my table below. It appears that
in 1961 the American people were about equally divided between
those who thought tax reduction was a good idea and those who
thought it was a bad idea. Naturally, many people might not have
given any thought to the problem and might have made snap judg
ments. Of particular significance, therefore, is a question about the
reasons people have for their opinions.
After they say that would be a good idea or a bad idea, we asked
them, “Why do you think so?” In reply to this question, we found
that only 13 percent of all people favored a tax cut because they
thoiig;ht it would increase purchasing power and stimulate recovery.
So, if you wish to call it that, the sophisticated economic notion was
shared last year by about 13 percent of American consumers.
Slightly over 20 percent favored a tax cut because, as they put it,
“taxes are too high.” On the other hand, 35 percent held that tax
cuts would not be appropriate since the money was needed for national
defense and other Government services. Another 8 percent were
against tax cuts because they feared deficits or felt the budget should
be balanced.
W e shall have more data along these lines when our August survey
is completed. Then we shall also know more about how people would
use the money from a tax cut. Past data indicate that most low- and
middle-income people would spend the money.
Recently people may have heard much more about the problem
o f a tax reduction than a year ago. Nevertheless, probably, the con
nection between tax reduction and increase in purchasing power is
73
POLICIES FOR FULL EMPLOYMENT
not fully understood. During World War II when our group made
extensive studies of war bonds for the Federal Government, we found
that in the opinion of many people the Government could not buy
the tanks and planes if the people did not buy war bonds.
In 1946 a sutetantial proportion of the American people said, “We
buy war bonds to bring the boys back home,” as if it would be im
possible to ship the boys back home from the South Pacific if people
would not buy war bonds.
Similar erroneous notions still prevail about taxes and defense ex
penditures. There are many people who believe that if taxes are not
nigh enough, we can’t do our duty in defending the country and in
fighting the cold war. I conclude that should a tax cut be enacted,
the Government- would have an additional task of informing and edu
cating the public about the reasons for its action.
Also, I may add, the Government should sponsor surveys about
consumer attitudes toward a tax cut, both if the measure takes effect
and if it does not, so as to understand better what is happening in our
economy.
Should taxes be reduced now? As said before, people feel un
certain and cautious because thev are not aware of any factor that
might be capable of stimulating the economy and reducing unemploy
ment. In a tax reduction, I believe, many people would see such a
stimulus.
We are not in a recession today, even though the extent of the
recovery is far from satisfactory. According to available indications
there will be no recession in the consumer sector during the winter of
1962-63. Therefore the argument, let us wait with the tax reduction,
is not without merit. But the last few weeks have brought forth a
new consideration. Probably very many people have heard about
the tax reduction proposals. There is a risk that they would view
a decision by Congress not to reduce taxes now as a disappointment.
A negative decision about the tax cut might then represent a new
factor adding to pessimistic view’s and making the recurrence of a
recession more probable than it has been. What Congress does is
important; how" the people interpret what Congress does or doesn't do
is likewise important.
(The chart and report referred to are as follows:)
Opinions on the advisability of a taw reduction, spring and fall, 1961
[Percent)
Family income
Tax reduction
All
families 1
Under
13,000
13,000 to
$4,990
$5,000 to
$7,499
$7,500 to
$9,999
$10,000
and over
A good idea...................................
Pro-eon...........................................
A bad idea.....................................
Don't know, not ascertained-
42
6
43
9
53
4
20
14
43
7
44
6
39
6
47
8
32
6
57
5
33
4
55
8
Total....................................
Number of cases..........................
100
2,256
100
564
100
462
100
581
100
250
100
282
1 includes cases whose Income was not ascertained.
74
POLICIES FOR FULL EMPLOYMENT
Reasons given for opinions (all families)
Good idea because:
Percent
Demand needs to be increased; to stimulate recovery-------------13
Taxes are too high---------------------------------------- — 22
Bad idea because:
Government needs money; defense expenditures high------------3u
8
Tax cut would cause deficit; budget should be balanced-----------N o t e .— T he questions w e r e : “ There has been discussion about reducing ta x es a t the
present time.
D o you think this w ould be a good idea or a bad id e a ? ”
“ W h y do you
think s o ? ’
Source: Survey Research Center, the University of Michigan.
C o n s u m e r A t t it u d e s
and
I
n c l in a t io n s to
B
uy,
M
ay
1962
Survey Research Center, Institute for Social Research, University of Michigan,
Ann Arbor, Mich.
The Survey Research Center conducted the latest of its quarterly
Surveys of consumer attitudes and inclinations to buy between
April 23 and M a y 29, 1962. A nationwide cross section of about
1,300 adults, selected by probability methods, was interviewed.
Similar surveys have been conducted regularly since 1951.
This report summarizes the major findings of the M a y 1962 sur
vey. In addition to measuring consumer expectations and inten
tions to buy, these surveys are particularly concerned with investi
gating the reasons for changes in attitudes. The surveys are
directed by George Katona and Eva Mueller.
Consumer attitudes show stability over the past few months. The American
people remain soberly optimistic and appear disposed to continue the high level
of spending evident during the spring months of 1962. The outlook appears
particularly favorable for the automobile market. These are the indications
obtained from the latest Survey of Consumer Attitudes and Inclinations to Buy,
conducted by the Survey Research Center of The University of Michigan from
April 23 to M a y 29, 1962. The Center's Index of Consumer Attitudes is at the
same level as in November 1961, but slightly below January 1962. The recent
decline is so small (when sampling variations are taken into account) that it is
appropriate to view the index as having stayed at a plateau during the past half
year. As table 1 shows, this plateau is significantly below the peak levels
attained in 1955-56, but does not compare unfavorably with more recent highs
reached by the index.
The overall stability of the index is brought about by counterbalancing
changes in two major areas of consumer sentiment. Consumers’satisfaction with
their personal financial situation has improved since November. Favorable
changes in personal finances seem to be reinforced by price stability, or more
precisely, by absence of the feeling that rising prices are reducing real income.
Fewer people indicate that they have worries of an economic kind. The recent
accumulation of liquid assets by consumers has contributed to their feeling of
financial well-being. Yet, as in past years, many people are far from content
with their savings performance and strive to save more. The proportion of peo
ple who expect to be better off in another year has not been higher at any time
In the past 10 years (table 2). And even longrun personal financial expectations
which usually show great stability, have grown somewhat more optimistic in
recent months.
At the same time, people’s expectations regarding business conditions in the
coming year, which improved decidedly between November 196^ and early 1962,
POLICIES FOR FULL EMPLOYMENT
75
show some change for the worse since the beginning of the year. A very small
deterioration also occurred in attitudes toward longer term economic prospects.
Table 3 indicates that evaluations of the business outlook are considerably more
favorable now than at the bottom of the 1960-61 recession, but (as in November
1961) are well below peak levels.
The weakening of optimism about business prospects since January is particu
larly pronounced among people with incomes of $7,500 and over. Moreover, this
is the only group which views business conditions less confidently than last
November. It is likely that people in the upper income brackets are most
sensitive to stock market news, and that stock market developments account
in part for their change in attitudes. Yet, this group ma y also be most aware
of public discussions about the somewhat unsatisfactory strength of the recovery*
Although stock prices declined throughout the interviewing period, the most
dramatic break in the stock market occurred near the close of interviewing. This
may explain the fact that only 3 percent of all people spoke spontaneously of the
drop in stock prices when discussing economic news they heard recently. Direct
questions on what people know about stock market developments and how they
react to them were not included in the survey. Still, it is possible to compare
interviews taken early during the interviewing period with those taken in late
M a y when people might have been more concerned about the stock market
decline. These comparisons reveal only a slight deterioration in evaluations of
business conditions in late M a y as against late April and early May. Since late
M a y the stock market has dropped further and has been repeatedly in the news.
If the downward trend persists, it might well come to have a stronger impact
on consumer confidence and expectations. The Survey Research Center’s August
survey will (among other things) be concerned with this question.
Answers to questions about the news people heard in the past few months
show clearly that consumers are mindful of a number of unfavorable aspects of
the business situation other than the stock market. A mong the 51 percent of
people who could recall some recent economic news, 28 percent referred to un
favorable' news, and only 23 percent to favorable news. Even without the 3
percent who spoke about the stock market, references to adverse developments
exceeded references to favorable developments by a small margin, while the
reverse was true in November 1961. (At that time 21 percent referred to unfav
orable news and 26 percent to favorable developments.)
The current mood of consumers is sober, perhaps even cautious, because of three
persistent concerns: the recurrence of recessions, the relatively high level of
unemployment, and the cold war. Given this frame of mind people are sensitive
to bad news. Adverse developments in particular industries or localities, which
m ay be of minor importance in the overall picture, are discussed and remembered.
In M a y more people than last November said they had heard or read that business
is declining; occasionally mention was made of specific industries, particularly
steel. The steel price stabilization was rarely mentioned, and in these few
cases opinions regarding it were divided. People also spoke about intense
business competition, the impact of automation on employment opportunities,
and labor problems.
Attitudes toward market conditions for major consumer goods were very
favorable already last November. Evaluations of the automobile and housing
market have improved slightly since then, while buying conditions for house
hold goods are viewed In about the same way as in November (table 4). Satis
faction with recent price trends for durable goods and houses accounts to a large
extent for the judgment that this is “a good time to buy."
Viewed as a whole, expressed buying intentions for major consumer goods
exhibit no clear trend either tip or down. Buying plans for new automobiles have
been exceptionally frequent ever since May-June 1961. In January-February
they dipped temporarily, but in M a y they were back at the high 1961 level or even
slightly above.
76
POLICIES FOR FULL EMPLOYMENT
Percentage of families expressing intentions to buy a car 1
All cars
January to February 1961
__ _________________ - ___
M ay to June 1961_______________ _______ - _______ _______________
November 1961________ ________ ___________ _________ _____ ______
January to February 1962.___ ..._________ __________________
M ay 1962 . . . .
.................. .....................................
New cars1
13.8
16.4
18.3
17.1
17.4
Used cars*
6.3
8.0
9.5
8.5
9.7
7.5
7.5
8.8
8*6
7.7
i Families that reported they would or probably would buy, plus H of those who said they might buy
during the next 12 months,
i Uncertain whether new or used apportioned equally between these categories.
Plans to buy used cars are the same as a year ago, but are somewhat lower
than last fall and winter. Plans to buy a house for owner occupancy are less
frequent than a year ago and less frequent than in most recent spring surveys.
However, expressed buying intentions for the upper income group do not show
a decline over the past year. Intentions to make major home improvements
remain at peak levels. Plans to purchase home appliances are now slightly higher
than a year ago for almost all major appliances, but in most cases comparisons
with earlier years are not favorable.
Clearly there is an element of caution in consumer sentiment. Yet it should
be emphasized again that people evaluate their own financial situation favor
ably and are satisfied with buying conditions. Hence, the sidewise movement of
the index of consumer attitudes should not be viewed as a signal of an impending deterioration of consumer confidence. Unless the flow of unfavorable eco
nomic and political news increases, the state of consumer optimism in M a y points
to a sustained high level of spending, particularly if personal incomes continue to
rise gradually.
On the other hand, it is evident that the consumer is not in an exuberant
frame of mind. There are no indications in the survey that people are dis
posed to upgrade their standard of living more rapidly in the period ahead than
they did during the past few years. Thus, the impetus to faster economic
growth, sought by government and business, is not likely to come from the
consumer sector in the near future— unless new stimuli alter the prospects seen
by consumers.
T a b l e 1.—
Index of consumer attitude$ and inclinations to buy
[FaU1866=-100]
Date of study
June 1 9 6 5 ..................................
October 1955...............................
M ay 1956.....................................
August 1956................................
November to December 1956.
June 1957.....................................
November to December 1957.
January to February 1968. - .
M ay to June 1958................
October 1958...............................
Exclud
ing buy
ing in
tentions
(6 ques
tions)
Includ
ing buy
ing in
tentions
(8 ques
tions)
104.2
102.6
99.3
99.8
100.3
94.4
86.0
82.2
86.5
92.7
102.2
102.7
99.1
97.6
102.4
95.1
86.7
83.0
86.6
91.5
Date of study
M ay to June 1950..................
October to November 1959.
January to February 1060
M ay 1060.................................
October to November 1960,
January to February 1061..
M ay to June 196!..................
November 1961......................
January to February 1962
M ay 1062.................................
Exclud
ing buy
ing in
tentions
(6 ques
tions)
95.1
91.1
96.7
92.9
92.8
92.4
94.4
96.4
98.7
96.8
Includ
ing buy
ing intentions
(8 ques
tions)
100.2
00.2
99.3
91.7
93.1
91.7
95.0
96.2
99.1
96.3
Table 2.— Consumers* expectations regarding their financial situation a year hence
(In percent]
M ay to
June 1950
31
46
15
7
1
34
48
12
6
1
Total...................................................
100
100
B . Families with Incomes ot 97,000 and
over:
Better off...............................................
Same.......................................................
Uncertain..............................................
Worse off...............................................
N ot ascertained...................................
43
44
8
4
1
44
38
12
5
1
Total...................................................
100
100
<*>
M ay I960
October to January to
November
February
1960
1961
M ay to
June 1961
November
1961
31
47
17
5
37
42
13
7
I
38
45
10
6
1
33
48
13
5
1
37
47
10
5
1
M ay 1962
33
47
15
6
40
40
12
7
1
35
45
13
6
1
100
100
100
100
100
100
100
100
100
49
41
8
2
43
40
12
5
50
35
9
5
1
43
43
9
5
41
43
11
5
44
40
8
7
1
47
38
8
7
44
43
9
3
1
49
39
7
4
1
100
100
100
100
100
100
100
(<)
0)
(■>
100
0)
(0
(')
100
(■>
i Less than H of 1 percent.
N ote .—T he question was: “ Now looking ahead—do you think that a year from now you people will be better off financially, or worse off, or Just about the same as now?"
EMPLOYMENT
32
48
14
6
October to January to
November February
1959
1960
FULL
October
1058
FOR
A . All fiunJUea:
Better off...............................................
Bam*.......................................................
U ncertain.,..........................................
Worse off...............................................
N ot ascertained...................................
November
to Decem
ber 1066
POLICIES
Expected change tn financial situation
00
T able 3.— Business conditions expected during the next 12 months
tin percent]
October
1958
M ay
to
June
1959
January
to
February
1960
M ay
1960
October January
to
to
November February
1960
1961
M ay
to
June
1961
January
November
to
February
1961
1962
M ay
1962
74
5
15
5
1
45
8
22
23
2
60
6
22
11
1
66
6
16
10
2
75
5
11
7
2
64
7
17
10
2
52
9
27
10
2
54
9
18
17
2
61
8
14
16
1
63
6
20
10
1
72
6
13
8
1
65
Uncertain. . . _______________________ _____
Bad times________________________________
Not ascertained__*________________________
12
17
1
100
100
100
100
100
100
100
100
100
100
100
100
88
4
6
1
1
50
10
17
21
2
76
4
13
6
1
76
10
7
4
3
83
5
6
6
79
6
9
6
1
63
6
19
9
3
56
9
12
21
2
69
9
11
10
1
80
5
8
6
1
82
5
7
5
1
73
6
10
10
1
Total— . .........................................................
100
100
100
100
100
100
100
100
100
100
100
100
0)
i Less than H of 1 percent.
N ote .— T he question was: “ Now turning to business conditions in the country as a whole—do you think that during the next 12 months we'll have good times financially or bad
times, or w hat?"
EMPLOYMENT
Total......... .....................................................
Families with incomes of $7,500 and over:
Good thrifts._________________________ „______ _____
Good in some ways, bad In others_______________
Uncertain______ __________________________
Bad times________________________________
Not ascertained______ _____________________
FULL
B.
M ay
to
June
1958
FOR
A . A1! families:
Good times_______________________________________
Good in some ways, bad In others_______________
November
to
December
1956
POLICIES
Expected business conditions
T able 4.— Opinions about buying conditions for large household goods(cars,and houses
[In percent]
June 1955
November to
December
1957
June 1959
October to
November
1959
M ay 1960
October to
November
I960
M ay to June
1961
November
1961
M ay 1962
55
27
IS
39
34
27
48
37
15
43
36
21
44
38
18
42
39
19
45
38
17
48
38
14
49
39
12
100
100
100
100
100
100
100
100
50
27
23
26
39
35
33
42
25
82
34
34
41
40
19
40
40
20
44
42
14
42
44
14
47
38
15
Total........................................................................
100
100
100
100
100
100
100
100
100
26
28
46
42
33
25
38
31
31
37
33
30
35
31
34
42
28
30
41
35
24
45
32
23
100
100
100
100
100
100
100
100
Houses:
Good time to buy...................................................
Uncertain; d e p e n d s.--__________ ____________
Bad time to bu y____________ ________ ________
T otal_______________________________________
0)
> Not available.
N o t e . —-The questions were: “ Now about things people buy for their house— I mean
furniture, house furnishings, refrigerator, stove* T V , and things like that. Do you
think now is a good time or a bad time to buy such large household items? W hy do you
say so ?"
EMPLOYMENT
100
FULL
Total................... ............................................ .......
Cars:
Good time to buy....................................................
Uncertain; depends................................................
Bad time to bu y_____________________________
FOR
Large household goods;
Good time to bu y........................... .........................
Uncertain; depends____________ _____________
Bad time to buy________ ______ ______________
POLICIES
Opinion
“ Thinking of the automobile market— do you think the next 12 months or so will be a
good time or a bad time to buy a car? W hy do you say so?"
“ Generally speaking, do you think now is a good time or a bad time to buy a house?
W hy do you say so?”
CO
80
POLICIES FOR FULL EMPLOYMENT
Chairman Patman. Thank you, sir.
Senator Douglas?
,
Senator D ouglas. First, I want to compliment all three of the
panelists for these very informative and objective analyses.
Consumer expenditures take about 65 percent of the gross national
product, gross private domestic investments about 14 percent, Gov
ernment purchases somewhere around 21 or 22 percent. We lia\e
covered two of these fields today. I take it that all three of the wit
nesses agree that so far as objective measurements are concerned,
there is not likely to be any decrease in personal consumption expendi
tures or private domestic investment. There may, indeed, be an
increase.
^
.
Tn the concluding paragraphs of Mr. Katona’s paper, he threw m
a new argument which 1 never heard before; namely, since states
men, polticians, economists, and journalists have been advocating a
tax cut, the public is likely to be greatly aggrieved if it does not come.
What you are saying is that, though there is no sound economic reason
for these positions on the part of a statesman, politician, economist, or
journalist, nevertheless, they will so affect public opinion that you
have to conform with their faulty analyses.
This, indeed, is a strange argument which I find very difficult to
accept.
Mr. K atona. May I say, Senators I did not say there is no sound
economic argument. I think we all know one, that the 1962 recovery
lias been sluggish.
Senator Douglas. That is true.
Mr. K atoxa. Second, that the rate of growth of our economy since
1958 is nothing to be proud of. So I 'would say there are certain argu
ments. The third argument, that, the recession is here or is threat
ening during the next few weeks, does not exist in my opinion accord
ing to our data.
Even then one may argue that preventive medicine is perhaps bet
ter than to operate wThen the appendix is about to burst. I leave that
up to your judgment. As to the argument that people believe it, we
have lots of evidence over the past few years that people’s interpreta
tion of what is going on influence their action.
Senator Douglas. But if the interpretations are faulty, then must
you conform to the faulty interpretations or try to change the inter
pretations and to have statesmen, politicians, economists, and journal
ists less trigger-happy and more restrained in their prescriptions?
Mr. K atona. Again the word “ faulty” is a value judgment which is
hard to evaluate. It is not in line with objective indicators, but very
often objective indicators don’t prove good predictors because of
people’s notions and interpretations. So I think it is a real factor.
I am not radical regarding the analysis of psychological factors. I
think both aspects are of importance. Ability to buy, which will
probably continue to rise, is of tremendous importance. But the
psychological notions and reactions to the ongoing discussions which
emphasize recession and the need of tax cuts should not be forgotten.
Senator Douglas. It is interesting that the argument for tax cuts
now seems to be turning from the claim that it is necessary to prevent
a recession, to the argument that it is necessary to speed up the rate
POLICIES FOR FULL EMPLOYMENT
81
of economic growth. In other words, it is turning to a long-time
factor.
As I see the situation, the benefit of a tax cut would be to create a
deficit which would be met by increased borrowing and the creation
of additional monetary purchasing power to buoy up consumers' in
come to the level of the prices charged by industry. I would like to
ask if it would not be a tetter long-time remedy to try to bring prices
down to the level of consumers' income rather than expanding con
sumers' income to the level of prices I
Mr. K atona. I do not know of any way to bring prices down.
Senator Douglas. You don’t believe in the antitrust policy?
Mr. K atona. I do.
Chairman Patman. Are you seriously insisting that we could roll
back prices. Senator?
Senator Douglas. I am saying we should try.
Chairman Patman. We tried that during the war.
Senator Douglas. There you had a big expansion of the money
supply. If you try to reduce price while expanding the money sup
ply at a rate much faster than the growth in production, the effort
is likely to be ineffective.
Mr. K atona. We have made extensive studies on people’s reaction
to prices, and people thoroughly dislike inflation and are worried if
prices rise out of understandable reason. They also distrust price
reductions. What creates consumer confidence is price stability. Peo*
pie get accustomed to prices. After a while they think this is the right
price just because it has been in existence for a year or longer. Price
stability is perfectly satisfactory in the minas of most American
consumers.
Senator D ouglas. You see what we are getting into. If you say
that an increase in consumer purchasing power is necessary in order
to speed up the rate of economic growth—and I agree with this—and
then you say we cannot get it through a reduction in prices but only
through an expansion in money income to be effected By tax cuts and
governmental deficits, you are saying, in effect, that there must be a
continuous injection of additional monetary purchasing power into
the economy and continuing governmental deficits in order to main
tain substantially full employment.
I think we ought to examine that very carefully before we come to
that conclusion. This is reallv the difference between Keynes' 1936
book and his 1929 book on the theory of money. I have always thought
the theory of money was basically sound. But the 1936 book, I think,
disregarded the fact that the high unemployment in England, which
continued ever since 1920, was, in my judgment, primarily due not
only to a high interest rate policy of the Bank of England, which was
part of it^ but also due to the presence of an increasing degree of
monopoly, quasi-monopoly, restriction of output, cartels, and so forth,
which spread like a fever through British society and in which Keynes>
himself, was one of the chief promoters.
I f we abandon the effort to get a greater degree of competition in
an industry and consequently a greater degree of price reduction, I
think we are going to be driven to what you say. But we are going to
pay a very heavy price for it. Before we turn to it, I would suggest
most seriously that we try the other route.
82
POLICIES FOR FULL EMPLOYMENT
Mr. K atona. May I just say, Senator, on the question of con
tinuous injection, I did not advocate a continuous injection. The
people strongly believe that the Government can do something. People
look to the Government for a new stimulus, for new trust.
Senator D ouglas. Is it possible that the Federal Reserve could do
something?
Mr. K atona. May I just say, first, about taxes, I do believe and
there is every indication that millions and millions of Americans
would consider a tax reduction as something rosy on the horizon and
would get more optimistic and would spend more, not only spending
the money they save in taxes, but still more, so that there would be
an expansion in the next 12, even 24 months.
Whether later one needs further injections, that is beyond us. I
argue for giving now a stimulus to the people, new hope and new
thoughts that something is being done to improve the situation and to
reduce not only unemployment but the threat of unemployment.
Senator Douglas, I will just make two replies, because my time is
almost up. The first is that your study of last year indicated that
there were as many people opposed to a tax cut as were in favor of
it, and you have not yet made your August study this year. So this
is surmise on your part and not sound statistical material.
Second, the first lesson that any military commander must learn—
he has two lessons—the first is so that his men do not fire prematurely
on the enemy, to hold their fire, as Prescott said at Bunker Hill, until
you see the whites of their eyes. The second, which even first sergeants
have to learn, and lieutenants and generals have to learn, that you
should not commit your reserves too quickly. You should have a
reserve so that you don’t mistake a diversionary attack for a main
attack. I have been rereading Churchill’s “ Finest Hour.” When
the Nazis broke through the French line near Sedan and Churchill
made his first visit to France and talked with General Gamelin he
said, “Where is your strategic reserve?” Gamelin replied, “There is
none. Wien the Germans came through, they went all the way.”
So I have felt if you face the possibility of a recesion, a tax cut is not
the first thing you should do—a reduction in the interest rates is the
first step. That has always been classic doctrine until the last 2 or 3
months. I f that is not sufficient, and a recession is really on you, then
the tax cut.
Senator B ush. If you faced a recession or you were in a recession,
the reduction in interest would come with it, would it not ?
Senator D ouglas. Yes. I am speaking of a reduction of the in
terest rate as a preventive measure to stimulate housing. When you
stimulate housing, jou stimulate building materials, lumber, brick,
cement, steel, electrical equipment, and so on. I have taken up more
than my time, Mr. Chairman.
Chairman Patman. Thank you, Senator Douglas.
Senator Bush ?
Senator Bush. I am glad the Senator did take up more than his
time. I think he developed a veiy interesting line of thought here.
Senator Douglas. The Senator is always a gentleman.
Senator Bush. I agree with what the Senator said about the tax
cut, but I am very dubious about his feeling about interest rates.
POLICIES FOR FULL EMPLOYMENT
83
Senator Douglas. I have saicl you would be dubious about that.
Senator Bush. It seems to me that interest rates aie a reflection of
the business situation and not a cause of it, you might say, one way or
another. I f business is good, interest rates are apt to go up. I
think history would show that they do not inhibit the expansion of
business. Many of our greatest periods of expansion in this country
have come when high interest rates prevailed throughout the period.
I think particularly of the 1920\ when for that whole decade we had
relatively high interest rates. Certainly they did not inhibit a very
broad and deep expansion of our economy at that time.
I would like to ask our friends from McGraw-Hill particularly
this question: What effect do you think a tax cut at the present time,
of the nature that is being discussed, something of the orcier of $5 to $6
billion, would have on busines confidence generally? I am not talk
ing about the consumer now’ as Mr. Katona was, but I am talking
about the people that are responsible for the management of the great
reservoirs of savings of our people and of the great funds that are
at the disposal of the companies, large and small, upon which so much
depends, especially the direction we are going to go with the national
economy.
In other words, these people have the decisions to make, as you
pointed out in your testimony. What is your judgment regarding the
effect, Mr. Greemvald, of a tax cut now upon business confidence gen
erally ?
Mr. Greenwald. I think it would act as a stimulant.
Senator Bush. On confidence ?
Mr. Greenwald. Especially on confidence, sir. However, I would
like to point out that at this time I don't see any necessity for a tax
cut.
Senator Bush. I gathered that from your testimony. You think
while there is no necessity for it, still it would have an increasing
effect upon business confidence ?
Mr. Greenwald. I think it would.
Senator Bush. How do you reconcile those two points of view?
Mr. Greenwald. I say that. I don't think it is necessary at this
time, because I think we have a very high level economy. * I think
our rate of growth, and we can get into the numbers game on the
rate of growth in any direction, shape or form you would want to take
it. However, if we go back to the end of tlie war and start fiom
1947, the rate of growth of the United States has been roughly 3.(>5
percent per year at a compounded rate. I think this is a good rate
of growth. I don’t believe that we should have to worry about 4, 5,
or 6 percent rate of growth. I f you consider where we are today, it
seemsto methat is a high-level economy.
I think if we were to talk about our strengths rather than our weak
nesses* we would probably be better off. I think tax reform would help
the confidence of business because this would mean there would be
more incentive for them. Businessmen are looking for profits. Profits
are important. I think there has been a profit squeeze despite the
fact that profits are relatively high. I believe that if businessmen
were told that the profit squeeze is going to be eased, that, profits will
be better after taxes, then I think there is more incentive for the busi
nessman. This developsconfidence.
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POLICIES FOR FULL EMPLOYMENT
Senator Bush. As the Senator from Illinois pointed out, if you
have a tax cut of the order of $5 or $6 billion, this would be probably
in addition to what other deficits we may face in fiscal 1963. Those
estimates are now of the order of $4 billion or maybe more than that,
without any thought of a tax cut. So we are thinking in terms of a
possible deficit of $10 billion that might occur from a tax cut at a
time when, as you point out, things are very good. The economy is
high, gross national product is high, national income is high, and the
various elements of the economy are strong and looking strong.
Wouldn’t you be fearful, or would you be fearful that the financing
of this kind of a deficit which, as the Senator pointed out, would
largely have to be done by addition to the money supply through
financing through the banking system, that this would have an infla
tionary effect which might injure the very object or retard the very
object we are seeking to attain ?
Mr. Greenwald. I would say no in this respect. I think our econ
omy does have excess capacity, as I pointed out. We have to close the
excess capacity gap in unemployment and in facilities. The most,
important thins: it seems to me would be to close this gap. The way I
would think of tax changes would be along the type of tax reform
where business would get some advantage and the consumer would
get some advantage.
Senator Bush. Mr. Ellis, the Du Pont economist, pointed out yes
terday that we alwavs have excess capacity in some areas. It is not
unusual or undesirable that we have excess capacity. In some areas
of the economy we don’t have excess capacity. We are running close.
We don’t run to our full capacity for very long. I just wonder if this
talk about excess capacity is not exaggerated from time to time. What
is your comment about that ?
Mr. Greenwald. I would sav no, sir; I don’t think it is, especially
when we deal with the manufacturing area. In other areas I can’t
say because I don’t know enough about them. When I talk about
capacity, I am talking about what the companies are telling us about
capacity, not something that I estimated. This is a direct measure.
I f a company tells us it is working at 80 percent of capacity and it
would like to operate at 05 percent of capacity, I know that that par
ticular company has 15 points of what might be called excess capac
ity. This margin has to be reduced to the point where it can do its
best job and produce its best profitmaking operation.
On the average for aill manufacturing, we now arrive at an 84 per
cent operating rate and a 90 percent preferred rate. So you have a
srap of onlv 6 points. But there are 6 points to eliminate before you
would get the most efficient operating rate.
Senator Bush. On that point, aren’t we graduallv closing it?
Mr. Greenwald. We are. We have moved up from the low of the
recession. However, vou can say in a way that we have not moved
up as fast as many of us thought we would. I don’t know whether
that is significant or not. But, if the businessman makes a plan and
he thinks he is going to do so much in sales but doesn’t, then ydu might
thfit this has some impact on his confidence. HoweVer, I don*t
think it has had much impact up to this time.
Senator B u sh . I think your estimate of the plans of businessmen
is very reassuring, indeed. I certainly agree with y&ur 6wn ojtfntoti
POLICIES FOR FULL EMPLOYMENT
85
that your whole appraisal of the situation does not warrant considera
tion of a tax cut at this time.
I have no further comment.
Chairman P atman. Senator Proxmire?
Senator P roxmire. First, I would like to say that I am very happy
to see you again, Mr. Greenwald. You did a marvelous job before our
Subcommittee on Statistics. I am happy to see in your statement you
say you are considering seriously an exploration of the McGraw-Hill
techniques as a public-private project, because you are the pioneeer of
this technique and you have done excellent work in this area and your
firm is considering this seriously.
I would also like to tell you how very grateful I am to you for mak
ing the statement you have just made this morning. Just yesterday
one of the most distinguished Members of the Senate, Senator Javits,
attacked President Kennedy’s leadership and said there was a lack of
confidence in the country, in the President of the United States and
talked about the administration’s alleged agonizing uncertainty and
undecisiveness. Senator Javits was serious, and I challenged him
on the floor of the Senate yesterday to document it, and in my judg
ment it was not there. You documented exactly the opposite case,
and you have done it in spades here this morning.
You point out that the manufacturing industries overall plan to
invest $15.3 billion this year. It is down only $110 million, which is
not a significant drop. Then you point out that in most cases, when
investment plans were lower than earlier, the reasons had nothing to
do with the lack of business confidence or the drop in the stock mariset.
You show there are a number of industries which have increased their
investment plans.
Altogether I think this is solid documentation that there is no un
certainty that is provoking a lack of business confidence on the part
of our business managers.
I think coming from McGraw-Hill, which is an objective organiza
tion, an organization which publishes Business Week, as I understand
it, and is close to the business community, is an extremely significant
assertion on your part.
I would like to ask you: You responded to Senator Bush that we
needed a tax cut and that this would particularly be encouraging to
the business community.
Mr. G reenwaid. Excuse me.
Senator P roxmire. I beg your pardon. You said that a tax cut
would stimulate the economy. You did not say we needed one. You
said the exact opposite, that it was unnecessary.
You reassert once again that the investment credit proposal of
the administration would seem to have an insignificant effect on an
increase in investment. You say $300 million increase in investment
although it will cost the Government $1 billion to get it. That would
be about the most expensive stimulation the Government handed
out in a long time.
Then, you say that the comprehensive survey taken earlier this year
shows tlia»t businessmen anticipated increasing their volume of cash
flow composed of retained earnings and depreciation at a faster rate
than investment in new plants and equipment. At that time they
expected an increased cash flow of 14 percent and investment of only
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POLICIES FOR FULL EMPLOYMENT
10.5 percent. Why in the world do they need further tax cuts de
signed to increase cash flow? They certainly have plenty of cash
available. The depreciation improvement which they have received
only this year, only a few weeks ago, is going to add additional cash.
So they have all the money in the world ready and available for in
vestment. It certainly is not based on this apparently, is it?
Mr. Greenwald. No, it is not. It is based on incentives and con
fidence. The incentive to the businessman. I think that is the only
point that I would make about why we even should think about a
tax cut now.
Senator Proxmire. You say an incentive to the businessman. You
would agree that the profits were higher now than last year and the
year before ?
Mr. Greenwald. In dollars but not in percentages of sales or return
on equity.
Senator P roxmire. Yes, sir, Mr. Ellis showed that in percentage
of investment they were the highest of any year since 1957 with the
exception of 1959.
Mr. Greenwald. I f we look at ratios to sales, this is not the case.
We did an editorial at McGraw-Hill not too long ago in which we
talked about the squeeze on profits. I f you take into consideration
the long trend, I think we went back to 1946-50, the average profit on
sales was 5 percent in 1951-55, 3.6 percent in 1956-60, 3.2 percent
and in 1961 the profit percentage 3.1 percent. It came down substan
tially in those 5-year periods.
Senator P roxmire. Let us assume there is a relative squeeze on
profits and you make a strong case that profits should be higher.
Nevertheless, what would persuade business to invest when they have
ample cash reserves to make the investment is an increase in con
sumer demand under these circumstances, isn’t that correct? Even
if the after-tax profit picture could be improved why in the world
would a business invest if they don’t have a specific reason in terms
of satisfying a demand ?
Mr. Greenwald. I would agree with that, sir.
Senator P roxmire. So more important than a business tax cut
under these circumstances with ample cash flow, the action already
taken on the part of the administration with regard to depreciation,
the investment credit which is likely to be passed this year----Mr. Greenwald. I would agree with that because this is the way
to close the gap. This is the first step. I think you also have to make
the other step, in combination, because in modernization terms in
dustry is pretty far behind. I think we pointed that out in this testi
mony, too. A large percentage of our plant and equipment is obsolete.
I f we can improve that part of the economy, and this is what we are
aiming at, with Revenue Procedure 62-21 and the tax credit, then I
think we have a good chance of improving the situation. I would
say this is the kind of thing that the businessman is waiting for. He
wants to make a better profit margin. I think the level is not bad at
this time, but improved margins are what he is aiming for. It is the
profit margin that is being squeezed.
Senator P r o x m i r e . Your position is that a tax cut is not necessary
at the present time?
Mr. G r e e n w a l d . Absolutely.
POLICIES FOR FULL EMPLOYMENT
87
Senator Proxmire. If there is a tax cut it would be probably more
stimulating for business if it were for consumers and individuals
rather than corporations?
Mr. Greenwald. I would like to see both. I think you have to have
a combination.
Senator Proxmire. What you have said is not much of a case for
a further tax cut.
Mr. Greenwald. I agree. I see no case for a tax cut.
Senator Proxmire. I would like to ask Dr. Katona when vou break
down your statistics they are fascinating in what they tell about what
people mean when they say they want a tax cut. On your final page
you show that there is no group with incomes of over $3,000 who favor
a tax cut. The only group that favors a tax cut are those with incomes
under $3,000.
These are family incomes. I have computed the income taxes these
people would pay and if there are four people in the family with
a standard deduction they would pay about $60 a year maximum.
Therefore, I suggest these people are not talking about an income tax
cut. When you say should we have a tax cut they’re talking about a
property tax cut.
TTiese people pay about $200 in property taxes. They pay close
to $75 or $100 in sales taxes on the average. On the basis of my
experience of talking with the people in my State they are very con
cerned about high taxes, but they are concerned about the local prop
erty and State taxes. The way your question is worded you say a
tax cut, not an income tax cut. Therefore it is significant that those
who are most conscious of the Federal income tax say no. Those who
would be conscious of local taxes say, “ Yes, we want a tax cut.”
Mr. K atona. You know, Senator, these are 1961 data and there was
no income tax proposal at that time, so we formulated the question that
way* It is easily possible that today the opinions are different. Ac
cording to our knowledge, people mean both taxes. It is not correct to
assume that they say no if they think of income taxes. According to
the arguments made, mostly they think of income taxes. But any kind
of tax cut would be a stimulus. I don’t see any way to cut property
taxes.
Senator Proxmire. I understand. But the question does not specify.
Mr. K atona. That is right.
Senator P roxmire. It would seem a logical conclusion when you
say you think taxes should be cut, without specifying an income tax and
you get a response on the part of people whose taxes are concentrated
in the nonincome tax area, they say, yes, a tax cut. Whereas, the peo
ple who pay the Federal income tax predominantly, and that is their
principal tax, say no tax cut. Therefore, the action indicated for the
Congress if we rely on public opinion would be not to cut Federal in
come taxes.
Mr. Katona. I submitted this table primarily because of the lower
part* I think the reasons people had in 1961 are still of interest. As
to the division of opinion which says good idea or bad idea, the data
are a vear old and the data are of lesser value. In other words, I
strongly emphasize the one point, that overwhelmingly those people
who a year ago said a tax cut would be a bad idea had reasons which
are erroneous, namely, the reasons that then we can’t do what we
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POLICIES FOR FULL EMPLOYMENT
must do for national defense. That is why I said if a tax cut should
be enacted this year, next year or whenever, it is necessary to inform
and educate the people.
Senator P roxmire. I see. What you said at the very end I think is
so important. If you are going to have a tax cut we have to do a far
more extensive job of justifying that so that people understand the
reason for it and are willing to accept it.
Miss D i n g l e . May I add one purely technical point ? In the under$3,000 income group you would have a large number of families that
do not pay property taxes directly because you have a large proportion
of renters. There are also, of course, a number of retired persons who
own their own homes, but you do have a large portion of renters in
this income group.
Senator P roxmire. That is right. There are also a large number of
farmers, believe me, in this category-----Mr. K atona. There are indeed.
Senator Proxmire. Whose taxes are overwhelmingly property taxes
and many pay no income tax. In our State they are predominantly
owners. Their incomes are less than $2,000 per family. My time is up.
Chairman P atman. Congressman Curtis.
Eepresentative Curtis. I want to get to some specific questions be
cause all of this has been placed in the context of what I regard as
begging the question, that a tax cut actually will stimulate the economy
in a period of deficit financing. I recognize that the bulk of the eco
nomic profession seems to have advanced that theory. However, I
suggest that they have not established that as a correct theory. We
have never tried it in the United States.
I know of no nation that ever has tried it. I think it is very im
portant to drive that home right in the very beginning. We have
had this theory advanced in the Ways and Means Committee hear
ings and I have asked each one of the witnesses why they thought
that dealing, as we are, in economic aggregates, in a perioa of deficit
financing—we are talking of balance between the Government sector
and private sector—shifting $5 billion from the Government sector
in a tax cut to the private sector and then turning right around and
taking $5 billion from the private sector and transferring it back to
the governmental sector by selling bonds to the private sector—why
does that stimulate an economy? Although I do want to get into
the details of this I think it is very proper to ask that question here.
This is not a proven theory and I am very disturbed that without even
debating it and getting into the reasons, all the witnesses seem—even
you, Mr. Greenwald-----Mr. Greenwald. I did not say that.
Eepresentative Curtis. To the extent that Mr. Katona, people like
yourself, say it is a question of informing and educating the public
on this new theory. In my view, I would say propagandizing the
public.
Mr. Katona. M ay I recapitulate, Mr. Curtis. The points are as
follows: The strongest stimulus for the consumers to increase their
spending, to improve their standard of living, to satisfy the innumer
able wants the American people do have, the strongest stimulus is a
rosy outlook— a hope that they get ahead, that there will not be im^
employment. A tax out contributes to the thought o f more porchae^
ing power.
POLICIES FOR FULL EMPLOYMENT
89
Representative Curtis. But does it? That is the whole point.
That is the issue.
Mr. K a t o n a . By means of a few dollars to the low-income people.
Representative C urtis. It doesn't go to the poorest. The poorest
sectors of our economy are not taxpayers. We are talking about Fed
eral income tax. We are not talking about the lowest income group.
Mr. K a t o n a . Quite a few people who are poor pay income taxes.
Representative Cnms. There are a bulk or people who are not in
the taxpaying brackets. I mean the income-tax paying brackets. I
am happy that the American people have responded m this way and
have not bought this “ pig in a poke” that this automatically is going
to do it. Maybe it does but I think it is about time for our economic
professors and those in the profession to come forward and get into
details and away from these aggregates. You transfer $5 billion from
one place to another. There may be something about the mix. Some
of the economists were forthright in saying we won’t have the public
buy the bonds, not in the beginning, at any rate. We would have the
Federal Reserve System or our banking system buy them. That is
not tax cutting. We are simply talking about printing more money.
Maybe that kind of inflationary pressure would help, but that, too,
is an issue that needs to be discussed.
Mr. K a t o n a . In one respect you point to the most important fac
tor in my opinion; namely, we need more information about the fac
tors influencing consumer confidence. We do not know enough. Our
group has done extensive studies over many years. There are great
difficulties in a financing these studies. We have over the last few
years received practically no Federal money in contrast to previous
years, and I fully agree with you it is not established. We do not
know enough.
Representative Curtis. No, we have never tried it. When we are
talking about it we need to refer to it as a theory. I respect those who
advance the theory, although I honestly disagree with them, because
I don’t think they have done the homework necessary to back this
theory up. One of our witnesses, I won’t identify him, said we had
an example in 1954. I pointed out in 1954 we cut Federal expendi
tures. I can begin to see a shifting from the public sector to the
private sector. Incidentally, one thing that has not been brought out
m these hearings to date is the fact that we have a tax increase that
is going to hit all workers including the lower income groups who
were not Federal taxpayers beginning in January 1, 1963. This tax
increase is going to hit each one of them.
It is an average increase of $24. I am referring to the increase in
the social security taxes. It goes from $150—and this is the rate
paid by worker, matched by employer—to $174.
Incidentally, in 1954 when we did cut the individual taxes I had
thought we had done, incidentally, a politically astute thing and never
could quite understand why the Republicans controlling that Congress
got no political credit It was then that I looked into the fact that
at the same time we had increased social security taxes and just, by
coincidence, almost the same amount we cut the individual income tax.
A worker saw in his pay envelope the same take-home pay because
the cat he got was almost eaten up by the increase in the social security
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tax. So many people, as I campaigned in my area, didn’t even know
they had a tax cut because they were looking at take-home pay.
Mr. K atona. We also had other tax increases. We had an increase
in Federal income taxes over the last few years. I f I had a $10,000
income a few years ago and now have $13,000 because of inflation, my
real income was unchanged. Nevertheless, because nominally my
income rose, I had to pay higher taxes. It is time to reverse this con
stant drain on incomes.
Representative Curtis. I personally am very strongly in favor of
a tax reform which is actually in the nature of tax cutting. But I
do not relate it to any theory of increasing purchasing power. I
relate it to what our tax is doing now in the way of dampening incen
tive in our private sector.
Getting back to incentive and business decision and investment, I
think any tax cutting not unrelated to reform but following out this
untried theory and unrelated to Federal expenditures cut is going to
be discouraging to business. I may be in error, Mr. Greenwald,T>ut
that is what I would think the business reaction would be.
In answer to one of the questions by you, Mr. Katona, if Congress
didn’t do anything in light of all this talk about tax cutting, I think
our business people would actually be encouraged that Congress had
enough sense not to dabble around in untried theories.
Mr. Greenwald. I am not talking about a “ quickie” tax cut. 1
have only referred to tax reform.
Representative Curtis. I think tax reform is always appropriate
whatever the state of the economy is. I see my time is up.
Chairman Patman. Senator Pell.
Senator P ell. Thank you.
Dr. Katona, I notice m your testimony you refer to the fact that
18 percent of the 55 million American family units own stock. The
other day, as I recall, the President of the New York Stock Exchange
said that one out of six individual Americans owned a share of stock,
which is considerably more. I was wondering how you equated those
two figures.
Mr. K atona. The two statistics are pretty much in agreement. The
fact is that partly because of our tax laws in very many families
there is joint ownership of stock or both husband and wife own stock.
Therefore I believe, as we have argued for years, that the New York
Stock Exchange statistics, speaking of individual ownership, are some
what misleading. It is not a question to count separately husbands
and wives, and even many children of rich families have beneficial
ownership of stock which is counted separately by the New York
Stock Exchange. The question is to find out what proportion of
American families own stock. Whether every member of the family
or one owns stock is not important. The 18-percent figure is subject
to error. It may be as high as 20 but it cannot be higher according
to all data. That would be 1 out of 5.
Senator P ell. Are you including debentures in that or only
equities?
Mr. Katona. N o. The fact is that of all kinds of bonds only U.S.
Government savings bonds are widely distributed. A ll other deben
tures are owned by a very small proportion of people most of whom
also own stock. But we include in equities mutual funds.
POLICIES FOB FULL EMPLOYMENT
91
Senator P ell. Thank you. Mr. Greenwald, I noticed your point
and was struck by it? that the economy has not gone down of late.
I am struck too by an insertion in the Congressional Record by Senator
Sparkman in which he put in a series of articles pointing out that
never have profits been higher and the economy apparently more
booming though we hear to the contrary. You point out that invest
ment plans have not been particularly changed by the investment
credit. You feel they are reasonably satisfactory in the United States.
Nevertheless, in comparison with Europe apparently we invest about
a third as much of GNP in new facilities as do they. This is true
even now while Europe has recovered from the holocaust of the war
and they are spending two or three times more of their GNP than we.
How do you account for the difference ?
Mr. Greenwald. If you have a high ratio growth in investment
relative to GNP countries generally you grow faster. I think this is
fine in many areas of the world but I don't think this applies to the
United States any more. I think we have a great record of growth in
the past and we are the richest Nation in the world.
Senator P ell. My point may be stated better, why is it in Europe
they are willing to put more profits into growth than here ?
Mr* G reenwald. I am not sure they are putting profits into growth.
This raises another question, the comparability of statistics. Many
industries for example in England or France are nationalized directly
or indirectly. So these comparisons, often cover more than private
industry.
Senator P ell. In general would you agree with the thought that a
larger proportion of the product of a plant or business is spent on
new equipment abroad than here?
Mr. Greenwald. Yes? sir, that is true.
Senator Pell. What is the reason for that?
Mr. Greenwald. This is something I am not certain about. I think
you could argue that this is a question of the incentive that I raised
earlier. In the United States you need the businessmen to invest,
to feel that he has a reason for a larger amount of investment. I have
said earlier before the Joint Economic Committee, that we should be
investing somewhere around $42 billion by the end of this year. How
ever, we are only going to spend according to my estimate of plant
investment in the fourth quarter, based on our surveys something
like $39 billion. Investment of $42 billion would give us a larger
ratio, although it might not be as high as in Europe. These countries
are expanding from almost desolation, so it was necessary for them
to have a high volume of capital investment to make up for the losses
they had before. It probaoly also has to do with labor shortages
overseas.
Senator P ell. Doctor, as both an economist and psychologist, is
the reason for it psychological ?
Mr. Katona. I have just come back from a study trip of the Com
mon Market countries. It is very true that in the first 10 years
after World War II, which is roughly 1947 to 1957, because of the
previous destruction, they have spent very much more on business
investment than we have. Today the trend is downward. The new
impetus in the Common Market countries comes from consumers,
from an enormous increase in installment credit and automobiles, con
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POLICIES FOR FULL EMPLOYMENT
sumer housing and consumer equipment. On the whole, the Common
Market countries are Americanizing rapidly and that will show up
in lesser business investments, more resembling our rates, and more
consumer tangible investment expenditures as well. So if you look at
the trend which foreshadows the future rather than on past facts, the
differences will, I believe, diminsh.
Mr. G r e e n w a l d . May I add to that? At McGraw-Hill we have
done surveys of oversea investments of U.S. companies. We will have
a survey out some time in early September on plans for U.S. com
panies to invest overseas in 1962* 1963, 1964. My guess would be,
as of this moment, that the results may show some decline which would
confirm what you have just said. We do know from surveys of the
IFO in Germany that increases in investment in Western Germany
have gone downhill.
Senator B ush. On a percentage basis?
Mr. G r e e n w a l d . Yes, sir.
Senator B ush. But they began from such a low percentage.
Mr. G r e e n w a l d . One year it was plus 23, last year 14, this year it
is expected to be 10. They have been building capacity up so fast that
maybe they will not be increasing investment next year at all. Again
we have to remember that the European Common Market has had
a pretty good growth rate since the end of the war, relative to ours.
They have built up a lot of capacity. When they get into a situation,
and it may be that next year will be the year for them, where they have
to go through a recession, then they won’t need additional capacity.
Business will start cutting back investment. It may be that American
companies will be cutting back on their oversea investment next year.
So European countries’ ratio of investment to GNP in 1963, might be
lower than ours. I believe that the trend in this ratio is down m the
Common Market.
Senator P e l l . Thank you, that is all.
Chairman P atman. I would like to ask you about these savings,
Mr. Katona, and then I will yield to Mr. Beuss.
I believe you prepared a table for the Federal Reserve Bulletin a
couple of years ago, did you not, about savings bonds and ownership
o f savings bonds ? To the best of my recollection there was a figure
that 73 percent of the people or families didn’t own any savings bonds
at all. Is that correct ?
Mr. K atona. Approximately. I don’t remember the exact number.
Ownership has declined since World War II.
Chairman P atman. Then isn’t it a fact that according to those
figures 7 percent of the remainder owned about 85 percent of the
bonds ? I am doing this from memory.
Mr. K atona. I don’t know whether it is as much as vou say.
Chairman P atman. Does that sound unreasonable?
Mr. K atona. I f you ask me, according to my memory, I had the
figure in mind that 10 percent owned 60 percent of the value.
Chairman Patman. D o you remember, Miss Dingle ?
Miss D ingle. I do not know. They are concentrated. A number
of owners may own only one $25 or $50 bond. I think it is necessary
to remember that particularly in the distribution of aggregates among
groups in the economy there is a large sampling error involved. We
POLICIES FOR FULL EMPLOYMENT
93
also know in consumer surveys in the past in dealing with items like
savings bonds we have not picked up data that tie in directly with
aggregates from other sources. We have generally underestimated
ownership. I personally have felt that one has to interpret pretty
broadly any data on distributions among groups collected in past
surveys. I guess I would feel that given the problems with the data,
we may notDe able to distinguish whether it is 7 percent owning 70
percent or 7 percent owning 80 percent.
Chairman P atman. You do not remember the figures that I men
tioned : 7 percent and 85 percent?
Miss D ingle. I don’t remember. We may have some computations
which I would be delighted to look up.
Mr. K atona. The point is well taken. All assets are highly con
centrated.
Chairman P atman. Will you put that table in the record with your
remarks when you correct your transcript, please ?
Mr. K a t o n a . Yes, sir.
(The information follows:)
As shown in the accompanying table, only 27 percent of all spending units
reported owning any savings bonds in the 1959 Survey of Consumer Finances,
and the top 25 percent of the owners— about 7 percent of all spending units—
accounted for almost 85 percent of the value of the savings bonds reported.
Quartile ranking of savings bond holders, early 1959
Percentage distribution of—
Quartfles
Spending
units
Savings bond Savings bond
aggregate
holders
All spending units______________________*_______ _________
100.0
N o holdings.._______ ____________ ______ ________________________
Some holdings___ _________________________________ ____
73 3
26 7
100 0
100 0
Quartile ranking of holders*
Highest quartile_______________ _________- _________________
Second____________________ _____ - ...................... ..........................
Third___________________________________ . . . . _______________
L o w e s t...____ _____________________________________________
C.7
6 7
tt.7
6 7
25
25
25
25
83.5
12.3
3.3
.9
0
0
0
0
N ot* .— Qaartlles are obtained by ranking spending units according to site of holdings of savings bonds;
one-quarter of all holders make up each quartile. The highest quartile in early 1959 included holders of
savings bonds with face value of $1,500 or more.
Source: 1059 Survey of Consumer Finances, Board of Governors* Federal Reserve System.
S u p p l e m e n t a r y M aterial R eg a r d i n g M r . P a t m a n 's In q u i r t A b o u t C o n c e n CENTRATION OF HOLDINGS IN U.S. GOVERNMENT SAVINGS BONDS
Submitted by George Katona, Survey Research Center, University of Michigan
As stated during the hearings of August 8,1962, survey data that indicate the
proportion of aggregate amounts of savings bonds held by the largest holders
(see the table for early 1959 submitted by the Board of Governors, Federal
Reserve System, on August 14, 1962) are subject to substantial sampling and
reporting errors. More reliable are data that show the changes over time In
the proportion of families or spending units who hold no bonds, small amounts
of bonds, and large amounts of bonds, respectively. The following table shows
that a much smaUer proportion of American spending units hold savings bonds
at present than shortly after World War II. Yet the proportion of spending
units having liquid assets has not declined during the last 15 years.
94
POLICIES FOR FULL EMPLOYMENT
Type and size of liquid asset holdings
[Percentage distribution of spending units]
Type and size of holdings
1951
1946
1956
1962
1960
U .S . savings bonds:
Zero...................................................................
$1 to 1499.........................................................
$500 to $1,999............... ..................................
$2,000 and over...................................... —
37
37
20
6
59
24
11
6
69
18
8
5
70
16
8
6
73
15
8
4
T otal.............................................................
100
100
100
100
100
Savings accounts: *
Zero...................................................................
$1 to $499........................................................
$600 to $1.999.................................................
$2,000 and over..............................................
61
16
16
7
55
20
14
11
52
20
15
13
47
19
16
18
49
19
15
17
Total.............................................................
100
100
100
100
100
Checking accounts:
Zero...................................................................
$1 to $499..........................................................
$500 to $1,999..................................................
$2,000 and over..............................................
66
18
14
2
59
27
10
4
51
31
14
4
43
39
14
4
43
41
12
4
100
100
100
100
100
24
29
28
19
28
30
23
19
28
27
23
22
24
27
24
25
27
29
21
23
100
100
100
100
100
T o t a l...........................................................
All these liquid assets:
Zero...................................................................
$1 to $490 ........................................................
$500 to $1.999..................................................
$2,000 and over..............................................
Total.............................................................
M i
* Includes savings accounts in banks, savings and loan associations, and credit unions.
Source: Pp. 77 and 78 of 1960 Survey of Consumer Finances, published by Survey Research Center,
Ann Arbor, Mich , in 1961. The 1962 data are from the 1962 Survey of Consumer Finances conducted by
the Survey Research Center.
Chairman P atman. Congressman Eeuss.
Representative R euss. Would the members of the panel comment on
my impression that there is not in sight today in this country the
same kind of stimulant to consumer demand that was offered by the
automobile in the 1920’s or by homebuilding and consumer durables
in the late 1940’s and early 1950’s. Does anybody disagree with that
observation ?
Mr. K atona. I think I disagree with the conclusion you seem to
imply, sir. It has often been stated that we are a wealthy, fat, sat
urated economy, who have all we need, and there are no needs, no
wants.
Representative R euss. Let me hasten to add I was not implying
that. I know that 20 or 25 percent of our people with very low in
comes are not really in our market economy at all and that the great
mass of the rest of our people could, if given the financial means to
do so, consume at a higher level. My question was whether there
seemed to be specific commodities now on the horizon of the kind
which were at the center of the great buying booms in the two periods
previously mentioned.
Mr. K atona. There is no single commodity, you are right. None
o f us have all the things we may want. What kind of things would
you like to have ? I f you asked that shortly after World War II peo
ple mentioned a few things like homes, automobiles, washing machines,
Today people mention a long list o f things and matters such as vaca
tion trips or summer homes and innumerable other wants.
POLICIES FOR FULL EMPLOYMENT
95
Representative Reuss. Don’t you find that the list of wants that
you get nowadays, as opposed to the list of wants which you got in
some earlier period, stresses in a much greater degree, services and
intangibles—medical care, recreation, vacations, leisure time activi
ties, nongoods items.
Mr. K atona. And also education and cultural things.
Representative R euss. Exactly.
Mr. K atona. Y ou are right. These are also expensive things.
Representatives R euss. That is right. I am wondering what effects
increased expenditures on services nave on the economy which may
be different from those we would get from the same amount of spend
ing on goods.
Mr. K atona. Travel leads to an enormous investment by the private
sector, say for motels, and by the public sector for roads.
Representative R euss. I am not suggesting that a greater demand
for medical care is not accompanied by a certain additional demand
for hospitals and medical schools. My question is whether a dollar
spent on services is likely to produce just as much economic activity
as a dollar spent on goocls?
Mr. K atona. We don’t know the answer to this question. There is
structural change in connection with the correctly stated facts in our
economy.
Mr. Greenwald. We don’t really know what new products are
coming along. There may be some magic things on the drawing
boards of many companies in the United States. We do know that
research and development expenditures have gone up tremendously.
We know that new products are a key to all of these programs. We
know, for example, from our surveys that 14 percent of manufac
turers’ sales in 1965 are going to be in new products that are not now
in existence—14 percent of manufacturers’ sales. That is a very
significant number.
Representative Reuss. I welcome and recognize what you say. My
question, however, was whether there now are in being and ascertained
things which look today as exciting as the automobile looked in the
1920’s and as the consumer durable goods looked in the early 1950’s.
Mr. Gbeenwald. We may not have any one good but we may have
a combination of 5 or 10 which could give sizable stimulus to the
economy. In 1961 the economics department of McGraw-Hill did a
long-range forecast through 1975. The Russians criticized this report.
They called McGraw-Hill, and myself, since I was responsible for the
preparation of the report, the Knight of the Electric Blanket and of
the Helicopter. I want to point out that we have many new products
coming along because of R. & D. Some dajr we will have wall-sized
television screens and many of us will be driving around in our own
helicopters. This might be a significant market of the future.
Miss Dingle. May I make one comment I
I think there are really two aspects here. I think you have been
emphasizing the real investment that is involved in connection with
production of goods versus services, which is a complex issue. I think
there is another question here and that is the question of what you
do to consumer purchasing power and consumer saving versus dissaving, as represented by debt. I think some economists have been
96
POLICIES FOR FULL EMPLOYMENT
surprised in recent years how greatly there has been an increase in
debt in connection with services.
Representative CuRns. Percentagewise to the value of the con
sumer durables.
Miss Dingle. I f you look at the expansion in consumer debt over
recent years, you will find the so-called personal loans have accounted
for a larger proportion of the increase and durable goods credit for a
smaller proportion as compared with earlier periods. It is a com
plex question. Personal loans do include some loans that are incurred
for purchasing small durable goods, the purpose of which is not speci
fied by the consumer to the lender. But it does also include all of
these new areas. It includes the travel credit that many lenders
are actively promoting now. It includes educational loans and a
number of others. So I would sajr again it is very difficult to judge
how important this is, but the statistics on consumer credit certainly
show that we have some new or expanding credit areas in connection
with services.
Representative R euss. Now let me get on to a very interesting point
raised by Dr. Katona.
I am struck at the tremendous desire on the part of housewives in
the European countries for our whole range of consumer durable
goods—dishwashers, dryers, refrigerators, washers, and so on. I won
der if you don’t feel that there is a coming boom in Europe in con
sumer goods, Professor Katona.
Mr. K atona. You are 100 percent right. Not only a coming boom,
but the boom in the last 3 years is largely due to consumers. It has
the consequence that the consumers say that they need more income
because they want to have all these attractive things. Over the last
year wages rose enormously in the Common Market countries be
cause of consumer needs.
You see, traditionally economists have always thought that con
sumption is a function of income. There is truth in it. There is truth
also in the reverse. Income is a function of consumer wants and
needs. I f people desire many things they work for higher income
and wage increases.
Representative R euss. This brings me to a central question.
Couldn’t European employers grant most of the new wage demands
without inflationary consequences, if the United States furnished a
large volume of the desired consumer goods? This would require
that the Common Market and the other European countries reduce
their present very high tariffs. The export sales we could make as
a result would help us to combat unemployment, increase the level
of economic activity, and reduce our payments deficit. It would also
bring American and European wage patterns close together and so
contribute to long-term international payments equilibrium.
Did you follow this rather complex question ?
Mr. K a t o n a . I did, sir. It is a wonderful thought I don’t believe
it is very practicable from the European point of view.
Representative Reuss. Isn’t it only practicable, but quite necessary
from the free world point of view? Must we not look at the elements
of our problem-surplus European payments, a U.S. payments deficit,
overfull employment in Europe* underemployment here, an ebullient
growth rate m Europe, and a lagging growth rate here.
POLICIES FOR FULL EMPLOYMENT
97
Mr. K atona. I fully agree with you and all our efforts should be
directed toward greater cooperation and mutual tariff reductions be
tween Common Market countries and the United States.
Representative R euss. I am glad to have your answer. My time is
up.
Chairman Patman. We have another meeting here at 2 o’clock with
Dr. Heller and the other members of the Council of Economic Ad
visers. Shall we go further ?
Representative Curtis. I personally would like to.
Senator Proxmire. I have a couple of questions.
Chairman Patman. You may go ahead, Mr. Curtis.
Representative Curtis. Thank you very much, because I want to
get into some of the details and I spent my previous time on the gen
eral overall picture. Have any series of statistics been developed on
new products and services on the market? I have heard a figure
that something like 25 percent of the goods and services on the market
today were unknown 5 years ago.
Mr. Greenwald. It is an estimate that we may have made at McGraw-Hill.
Representative Curtis. I think there was an estimate.
Mr. Greknwald. What we do in our surveys is ask the question
about expectations for new products and what percentage of sales they
account for in a period of 4 years ahead.
Representative Curtis. That is a sort of ad hoc thing.
Mr. Greenwald. We check back every year.
Representative Cuims. Is 25 percent accurate?
Mr. G r e e n w a l d . That is close but not exact. The time period is
wrong. When we asked this question the very first time in 1956, the
result was that about 10 percent of manufacturers’ sales would be in
new products 4 years ahead. When we asked it the last two times we
got an answer of 14 percent. This would be for a 4-year period. So
if you add these two together you come fairly close to 25 percent but
for an 8-year period.
Representative Curtis. I think Monsanto Chemical made the obser
vation (though I may be quoting them wrong) 90 percent of their
dollar sales reflected items that were not even manufactured in 1950.
Mr. Greenwald. May I provide you with a few figures, sir?
Representative C urtis. Yes, please.
Mr. Greenwald. I will quote them to you from our survey of busi
ness plants for new plant and equipment, 1962-65. These data are
on an industry basis. These are the percents that new products will
account for of sales in 1965. For iron and steel, 5 percent; nonferrous
metals, 9 percent; machinery, 23 percent; electrical machinery, 22
percent; autos, trucks, and parts, 10 percent; transportation equip
ment, 34 percent; fabricated metals and instruments, 18 percent; the
chemical industry, 16 percent; paper and pulp, 10; rubber, 6; stone,
cldy, and glass, 13; petroleum and coal products, 6; food and bever
ages, 12; textiles, 13; miscellaneous manufacturing, 9; and all manu
facturing, 14 percent.
Representative Curtis. To me it is in this new product area but
we will find the answer whether we are going to have a growing and
dynamic economy. I was very pleased to listen to Congressman Reuss
develop &theme that I have been trying to develop for some time. It
98
POLICIES FOR FULL EMPLOYMENT
is my belief that our ecnomy is not tired and sluggish. Quite the
contrary, we have “growing pains.” What we are seeing, among other
things, is a shift from manufacturing to distribution and services and,
indeed, to new products. When we have this kind of obsolenscence it
does relate to capacity and it relates to unemployment because our
skills become obsolete. The lessening of and need for unskilled and
semiskilled labor as we move forward is very marked. These are the
areas I think we have to get into in order to determine whether we
have a growing economy rather than GNP. I don’t mean by that that
GNP is not a valuable indicator. It certainly is, and very important.
But it is not a very good one to measure whether our economy is
dynamic and growing.
Mr. Greenwaid. This is the point I was trying to make before. ^ As
a matter of fact, research and development are still expanding rapidly.
This is why we are going to get new products. There is quite a bit
of this going on. When’ I cite industry figures, I don’t know which
products the iron and steel industry has on its drawing board or which
product the transportation industry has in mind. Yet there are many
new products coming along which industry expects to be in existence
and for sale by 1965.
Representative C tjrtis . Let me go to another area that is collateral
and that very few economists have taken note of. I am reading from
the HEW indicators in July—on page 27 of the chart 25, “ School bond
sales.” We started in 1957 in the school bonds voted on, in one col
umn, and then the next column is the bond issues passed and the per
centage passed; $1.4 billion of total voted in 1957, $1.8 in 1958, $2.26
in 1959, $2.25 in 1960. And here is the figure, 1.2 in 1961. The drop
in percentage of passing was even more dramatic. In 1960, it was
$1.8 billion and in 1961, $0.8; a drop of $1 billion in school bonds that
were voted. I can well understand why we are seeing a tapering off in
school construction which doesn’t show up on the chart on page 27,
educational construction. But it is going to. That might be some
thing that Senator Javits could use to back up his point of what
indecisiveness does. I lay a good bit of that to all of this talk of
Federal aid to school construction and the indecisiveness of action.
This is a very important economic indicator in an area where our econ
omy needs to move forward even more so, in this area of training
and education. I have one question I would like to direct to all of
you, another indicator that worries me. I made some comments be
fore on it, but I see no one picks this up very much. I am talking now
about employment figures. This is from page 9 from our Economic
Indicators of July. We have continued to have an increased civilian
labor force on this chart since 1955 even during recessions. Civilian
labor force constitutes those employed, plus unemployed. This has
been growing now at a rate of around a million a year. This is
where the question comes to you samplers.
We know that our unemployment statistics are based on sampling
and on questioning people. The other is a pretty real figure, I guess,
the employment figure. What is there about the fact that the employ
ment continued to increase right on up through 1961, but then looking
at the monthly indicators, employment or rather civilian labor force
decreased from June 1962, 74 million and June of 1961, 74,286,000.
Is this an econom ic phenom enon f A n d i f so, it is a very serious one.
POLICIES FOR FULL EMPLOYMENT
99
Or could it be that in the sampling of who are unemployed there is a
different standard being set in the questions asked of a person: “ Are
you looking for work?” Would anyone comment on this? To me
this is a very, very serious situation.
Mr. G r e e n w a l d . There is one part of this I know something about.
There has l)een a change in the coverage in April of this year, due to
the 1960 Census of Population. The figures for the overlap period
are roughly 200,000 different. So if you were to assume that you
could now make June 1962 comparable with June 1961. I would as
sume that it would be 200,000 higher and thus roughly the same and
not down. I am only pointing this out.
Representative C urtis. I appreciate that. I think we need some
comment on this. I would issue here a challenge to the administration
to tell us whether there is a new economic phenomenon hidden in this
or has somebody changed the rules of the game in the Bureau of
Labor Statistics in the method of sampling as to who are the unem
ployed? Because either the unemployed should be a million more
than they are, or there is something nappening to us in not increasing
our civilian labor force.
Mr. G reenwald. If you also look at the employment figures rather
than the unemployment figures, these have been going up.
Representative Curtis. They have been going up. But in trying
to compute whether there is a recession, or about to be, or anything
like that, we relate it to unemployment and all of these people are
talking about this gap beween potential based upon the unemployed
and unused capacity. If somebody is trying to “ rig” these figures—
and I think that term deserves to be used until we get an explanation
of this thing—then it would show more of a gap and it certainly would
should a lesser use situation. The one area of great concern to me
has always been employment and unemployment—I know the Senator
from Illinois knows tlhis—under the last administration as well as
this. I kept my finger on this employment and unemployment thing
because I think there is one area where we need to do something. I
would say, incidentally, it is in the field of training and retraining
and dealing with obsolete skills more than anything else where atten
tion should be paid.
Mr. Greenwald. A s you know, I have talked about unemployment
at these hearings before. I worry about what this unemployment sta
tistic means. I personally do not believe there is any “ rigging” in
these figures. I also worked for the Bureau of Labor Statistics many
years.
Representative Curtis. I defended, I might say, this group in the
Bureau of Labor Statistics against the charges in the article in Read
er’s Digest. But when I see no one coming forward pointing out what
has happened to a traditional trend of increasing the civilian labor
force by around a million & year, and the one area that has not been
moving up is in the unemployment area, I think it requires some
examination. I said as far as rigging figures is concerned, it needs
to be explained what phenomenon has changed this thing other than
rigjringthe figures. I hope they are not rigged.
iS r. K a t d k a . May I say as an independent observer that the entire
statistical profession is convinced that Census Bureau and B L S do an
outstanding sampling and statistical job in their unemployment
100
POLICIES FOR FULL EMPLOYMENT
studies. There are questions of definition which have widely been dis
cussed in the literature about who are really unemployed, and so on.
But as to sampling and interviewing they do an outstanding job.
Senator P roxmire. I would like to suggest the Congressman has
been a very good friend of the Bureau of Statistics and has always sup
ported them and has been a champion of their integrity and honesty.
I do think that this is so serious and such an excellent point is made
that before this afternoon we ought to get an explanation from the
Department of any changes that are involved in these figures and a
justification to the extent they can make one of why we have this
stark and dramatic change. I think the Congressman has made a very
legitimate and proper point.
Representative Curtis. I want to thank the Senator. I am trying
to be helpful. I, too, would presume we could rely on the figures.
I f this is so, we have seen a dramatic change in the development of the
civilian labor force.
Senator D o u g l a s . I f the Congressman would yield, I also have al
ways had great respect for the BLS and the Census. They are not
perfect, of course, but I think they have been kept free from political
influence. I think this failure of tne civilian labor force to grow is one
of the most disconcerting developments. Yes, sir; we had some pos
sible explanations of it which happen to agree with my own ideas and
which I, therefore thought, were very fine; namely, that it translates
into particularly young people and particularly unskilled people and
minority groups who cannot get a job because industry or the economic
system does not grow. And who because they do not have a job sort
of drift around in a hopeless fashion. I live in a great city, as you do.
I see these groups in my own city. My daughter has an apartment just
off Central Park in New York on the West Side, just four blocks from
her a few days ago they had an outright war between the Puerto
Ricans and the Negroes. These young people are largely those who
dropped out of school, can’t get a job. They are neither at school or
at work. They are milling around the streets. They are young and
unskilled and members of minority groups. When all three of these
disadvantages hit them at once it creates a terrible situation. I think
it is much worse this year than last year. I felt for over a year that
this was the greatest internal problem in the United States.
Mr, Greenwald. What you are really saying is that they are not
in the labor force.
Senator Douglas. Yes. This is disconcerting. There may be some
change in the method of measurement of BLS. And I agree with both
my colleagues that it should be explored. I want to suggest it is not
merely changes in measurement.
Mr. Greenwald. I f they were in the labor force then they would
probably be all unemployed on this basis.
Senator P roxmire. Yes. We would have as heavy unemployment
now as a year ago which was 7 percent.
Mr. Greenwald. This is a function of the idea that we are a highly
technological economy. We have gone so far ahead technically that
we are not going to find jobs for these people unless they are well
trained in the future.
Senator D ouglas. Unless there is enough demand.
POLICIES FOR FULL EMPLOYMENT
101
Mr. Greenwald. Not. even then, because unskilled workers cannot
take a job in technical fields.
Senator P roxmike. I want to apologize for keeping you longer but
I would like to take a few more minutes.
Mr. Katona* in your response, and Miss Dingle suggested this, you
said that a lot of these people who have incomes of less than $3,000
are not taxpayers, property taxpayers, they are renters. I would like
to suggest 011 the business of the statistics I have just gotten over the
phone most of these people are not Federal income-tax payers at all.
As a matter of fact, of the returns filed for people with incomes of less
than $3,000, there are some 21-million-plus, and more than half of those
returns are not taxable. These are for individuals.
If we recognize the fact that there are families involved here, that
is more than one individual in each unit with total income of less than
$3,000 I would say that probably two out of three of the people in this
lowest category pay no Federal income taxes. These are the people
who bring out your total answer that there appears to be a fair balance
between tax cut as a good idea and a bad iaea. If we recognize this
factor, and mo«t people are subjective enough in talking about their
own taxes, you would have a very substantial advantage on the side of
those people who in 1961 felt a tax cut was a bad idea.
Mr. K atona. I am very grateful to you, Senator. I plead guilty.
I have not thought of breaking down our data by taxpayers and non
taxpayers. I learned better and I shall do so in future surveys. I
again would like to emphasize that this balance, whatever those data
on the top part show, whether there are 40 or 50 percent who say good
or bad idea, is not too important. We asked the question in 1961 when
it was more an academic question mainly to get some baselines for
the 1962 or 1963 inquiries and to ask the question about reasons.
In other words, to find out something, why do people think as they
do, or how do they think about deficits and about taxes, and so on.
I have submitted this table primarily for the sake of the second part
of the table and to counteract notions which appeared in the press that
72 percent of all people, including the low-income people, are against
the tax cut, which appeared in newspapers last week from a public poll.
Senator P roxmire. Their question was not as good as yours. Their
question was if this would increase the debt or the deficit. It was sug
gestive and it was loaded. I say this although the result supported my
own bias.
Mr. Katona. I would not put great stress on these figures and your
point is well taken.
Miss D ingle. I would say that this makes very clear, as I have
been convinced in the past, tliat it is desirable to put out data insofar
as possible with relevant breakdowns of which the income breakdown
is probably the most important. I think the age breakdown is also
important. I think it makes it possible for people like you and other
intelligent users to be able to pick out the groups which may be most
important for a given question.
Senator Proxmire. I think Dr, Katona’s breakdown was really the
crucial thing. Briefly, I would like to suggest that there is a price
the European countries are paying, too, in addition to all the factors
which you emphasized of tneir enormous unfilled needs and their
Americanisation attitudes because of the movies and other things from
102
POLICIES FOR FULL EMPLOYMENT
this country developing Americanized demand. They are adopting
our standard of desire. This is an explanation, a big explanation or
part of the explanation, for the growth of their economy. They have
suffered a much greater degree of inflation in those countries tnan in
this country without exception.
In some cases it is worse than others. Isn’t that correct!
Mr. K atona. Very true.
Senator P roxmire. Mr. Greenwald, would you agree that higher
interest rates now would tend to block some ox this rosy picture that
you painted in construction and municipal bonds ? I should say school
construction and hospital construction as well as home and business
construction?
Mr. Greenwald. I f you mean we are going to have additional
changes-----Senator Proxmire. Yes. I f the Federal Reserve Board adopts the
policy of continued increased interest rates.
Mr. Greenwald. Yes, sir. I did point out that housing is practi
cally at an alltime peak. Even if you lowered the interest rates I
don’t believe it would help too much.
Senator P roxmire. What do these alltime peaks mean? In terms
of family formation we ought to be at an alltime peak every year be
cause we have more people involved.
Mr. Greenwald. I am not arguing this. I would say in the area
of construction you are operating pretty close to capacity relative
to some other industries.
Senator P roxmire. We had such a long construction recession. We
have not yet achieved in a single year as large a number of housing
starts as we did in 1950.
Mr. Greenwald. This is another one of those statistical series for
which we have a break in comparability. So we have only the 1959
figure of private housing starts which just fell short of 1.5 million
units.
Mr. Katona. May I say one word about interest rates?
According to our studies of consumer decisionmaking, what they
take into account when they decide, there is no doubt that in housing,
interest rate matters. In other words, a sizable drop in interest rates
would stimulate many people to go ahead with housebuying and build
ing plans. In consumer durables, automobiles, et cetera, it does not
matter, as Senator Douglas knows best, because interest rates are so
high that even a one or two percentage point drop is not significant.
Senator D ouglas. In the case of automobile costs it does not matter
because they do not know what they are.
Mr. K atona. It would not matter. Regarding business investment
probably it would not matter because risk factors play a greater role.
So the impact of reduction in interest rates is restricted to housing,
I believe.
Senator Proxmire. Which is tremendously important in terms of
employment. The other point was that perhaps a new industry along
the line that Congressman Reuss is pursuing, Fortune magazine said
might have the kind of impact automobiles had in the 1900’s, is the
space industry. This year we will have a $2 billion increase in spend
ing for man-to-the-moon. They expect tob e spending at the rate of
$10 to $15 billion a year by 1970. Because so much of this is con
POLICIES FOR FULL EMPLOYMENT
103
centrated in research and development the byproducts of possible
industrial expansion could be perfectly enormous for our society.
Mr. Iy a t o x a . No doubt that is a necessary observation.
Senator P r o x m i r e . Thank you very much, Mr. Chairman.
Senator D o u g l a s . We will meet at 2 o'clock.
(Whereupon, at 12:30 p.m. the committee was recessed, to be recon
vened at 2 p.m. the same day.)
AFTER RECESS
(The committee reconvened at 2 p.m., Hon. Wright Patman, chair
man of the committee, presiding.)
Chairman P a t m a n . The committee will be in order, please.
This afternoon the committee continues hearings on the state of the
economy and the question of what changes might be made in Federal
policies to achieve maximum employment, production, and purchasing
power. We are privileged this afternoon to have the Council of
Economic Advisers. The program of the President is, of course, the
outcome of a decision process in which advice, recommendations, and
considerations of many kinds from many sources, inside and outside
the economy, play a part The professional economic advice of the
Council is one element. It is not and should not be the sole considera
tion in the formulation of Presidential economic policy or of con
gressional policy. In congressional testimony and in other public
statements the Council must protect its advisory relationship to the
President. We assume that the committee does not expect the Council
to indicate in what respect its advice has or has not been taken by the
President nor to what extent particular proposals or omissions of
proposals reflect the advice of the Council.
^ Dr. Heller, this morning we had a witness from McGraw-Hill Pub
lishing Co., Dr. Greenwald, and he testified on one point that would
interest you. He said that the survey that McGraw-Hill made in
late June indicated that business planned to spend $37.9 million on
new plant equipment this year, more than 10 percent over 1961. He
also said that McGraw-Hill’s checkup survey made in late June indi
cated, and I quote:
Our checkup pointed up the fact that business in general had not cut back
or canceled plans for investment in new facilities in 1962 as a result of the
sharp drop in stock prices in M a y and June, or the so-called loss of business
confidence.
A m o n g the companies indicating investment cutbacks only a few cited economic
conditions as the reason. In most cases where investment plans were lower
than they were earlier, the reasons given had absolutely nothing to do with
a lack of business confidence or the drop in the stock market. Instead techno
logical delays and construction delays were the reasons given.
Dr. Ackley, we want particularly to welcome you back to Wash
ington and to congratulate you and the Council on your membership.
We regret Dr, Tobin’s leaving, but we are delighted to have you and
are looking forward to a long and fruitful association. After hearing
from Dr. Heller and other members of the Council? if they have state
ments, members of the committee will ask questions under the 10minute rule.
Dr. Heller, I understand that you have a prepared statement, and
I understand that you would like to proceed with your prepared state
ment. That will certainly be all right. You may proceed as you
desire.
104
POLICIES FOR FULL EMPLOYMENT
STATEMENT OF WALTER W. HELLER, CHAIRMAN, COUNCIL OF
ECONOMIC ADVISERS; ACCOMPANIED BY GARDNER ACKLEY AND
KERMIT GORDON, MEMBERS
Dr. H eller. Thank you.
Chairman Patman. Y ou are recognized, Dr. Heller.
Dr. H eller. Thank you. We are pleased to appear once again
before the Joint Economic Committee. I might say that in accord
ance with your request we have prepared a statement on economic
outlook and policy today. In developing this statement we have tried
to be responsive to the questions put by the committee, and I think
we have in effect also prepared, at least on a small scale, the kind of
midyear economic review that some members of the committee have
at times thought desirable for presentation to the committee. As the
chairman has indicated, I should like to read this statement on the per
formance of the economy, the outlook and policy problems.
We are examining the economic outlook today because the current
expansion has not teen as vigorous as all of us hoped and most of us
expected. The expansion has slowed down in 1962 and we must be
alert to the danger that the current recovery, like its immediate pre
decessor, will not carry us to full employment.
Nevertheless, we should recognize the important economic gains
that have been scored during the past year and a half. From the
first quarter of 1961 to the second quarter of 1962—
Gross national product rose from $501 to $552 billion, a rise of
10.2 percent (or a rise of 8.5 percent after price correction).
Consumption in constant prices increased by more than $250 per
family (annual rate).
Corporate profits before taxes have increased by roughly onefourth.
Labor income increased by nearly 9 percent.
Unemployment (seasonally adjusted) declined by about 1 million
persons, with the rate falling from 6.8 to 5.5 percent (and to 5.3 per
cent in July).
In order to conserve time we have put many of the statistics into
a separate statement called “ Summary of 1961-62 Economic Expan
sion and Policies.”
Chairman P atman. Without objection, you may insert them as a
part of your remarks in the record.
(The statement referred to follows:)
E x e c u t i v e O ffice o f t h e P r e s i d e n t ,
C o u n c i l o f E c o x o u i o A dvisers ,
Washington, August 6,1962 .
Su m m a r y
of
1961-62 E c o n o m i c E x p a n s i o n
and
P olicies
A . T H E BECOfiD OF GAIN S
Since the beginning of the current expansion taken as of February or the
first quarter of 1961:
1. The U.S. gross national product rose from an annual rate of |500.8 billion
in the first quarter of 1961 to $552 billion (second quarter, 1962) or 10.2 percent
in five quarters. In constant prices, the gain was 8.5 percent.
2. Personal income increased from an annual rate of $4012 to $440.4 billion
(June 1962)— a rise of 9 percent
POLICIES FOR FULL EMPLOYMENT
105
3. Corporate profits before taxes increased by a fourth from $39.8 billion (an
nual rate) to $50.1 billion (first quarter 1962). The level for the first quarter
of 1962 was slightly below that of the fourth quarter of 1961.
4 Industrial production expanded by more than 15 percent (June).
5. Labor income increased from $282 billion (annual rate) to $309 billion
(June)— or almost 10 percent.
6. Payroll employment in nonagricultural establishments rose by 1.9 million
jobs (June).
7. The number of persons unemployed declined by 23 percent (seasonally
adjusted) from 5 to 3.8 million persons (July). The unemployment rate dropped
from 0.9 to 5.3 percent of the civilian labor force.
8. Prices remained virtually stable. The industrial, as well as total, wholesale
price index declined. The total index fell from 101 to 100.1 (June) on a base of
1957-59=100. Consumer prices rose by only 1.3 percent from 103.9 to 105.3
(June)— with most of the increase in the service sector.
B.
ELEMENTS IN T H E RECOVERY
1. Consumption:
(а) Personal consumption expenditures have risen $24 billion (annual
rate in five quarters— $10 billion in services, $8 billion in nondurable goods,
and $6 billion in durable goods.
(б) In constant (1961) prices, per capita consumption increased by nearly
$75 (or more than $250 per family) as Americans advanced their Living
standards.
(c) Durable goods purchases in the last two quarters were 5 percent
above 1959 and 1960 levels, while disposable personal income was about 10
percent higher.
((1) Auto sales have accounted for most of the gains in consumer durable
purchases since the first quarter of 1961. Although June sales were some
what lower than the preceding 3 months, July sales rebounded on a season
ally adjusted basis. The total number of cars sold in the first 7 months
of this year is 25 percent greater than in the same period of 196L
(e) The savings rate has stayed near 7 percent during the recovery. It
is not high as compared to most postwar years, but it has not shown the
decline that marked the first year of previous recoveries.
(/) The expansion in consumption occurred at the same time that the
consumer was strengthening his liquidity position. During 1961 holdings of
liquid assets (cash, bank deposits, savings, loan shares, and government
bonds) rose by over $20 billion and consumer debt by only $ 1 % billion.
2. Investment:
(a) Business fixed investment (total of producers' durable equipment and
nonresidential construction) rose by $5.4 billion or 12 percent in five quarters,
(b) Investment has lagged behind corporate cash flow (consisting of
after-tax profits and capital consumption allowances). Cash flow rose by
$ 7 % billion from an annual rate of $47 billion in the first quarter of 1961 to
nearly $54% billion in the first quarter of 1962 (preliminary estimates indi
cate it was about the same in the second quarter).
(c) Improved operating rates have stimulated investment, but excess
capacity remains a drag on capital spending. Operating rates have risen
about two-thirds of the wa y back to preferred operating rates, from the low
levels that existed in early 1961.
(d) Total manufacturing and trade inventories at the end of June 1962
were $4.4 billion, or 4.8 percent, above their level in February 1961. But
sales increased faster— by 10.3 percent over the same period. The inventory-sales ratio declined from 1.58 to 1.47 in April and May, but rose to 1.50
in June.
(e) Housing has increased sharply over last year. Residential construc
tion expenditures in July were $25.7 billion (annual rate) or 29 percent
higher than in February 1961. Housing starts in June were 1.4 million units
(annual rate) compared to 1.2 million units in February 1961.
3. Government:
(a)
Federal receipts (on a national income account basis) rose $13 billion
(annual rate) from the first quarter of 1961 to the first quarter of 1962, re
flecting higher profits and incomes. Federal receipts are expected to show
further rises in the second quarter.
106
POLICIES FOR FULL EMPLOYMENT
(5) Federal purchases of goods and services rose by $6.5 billion, of which
$5.3 billion was for national defense. (The rise in five quarters was $7.1
billion of which $5.6 billion was for national defense). Other Federal expen
ditures rose by $2.8 billion.
(c) The income-and-product deficit declined from an annual rate of $6.3
billion in the first quarter of 1961 to $2.4 billion in the first quarter of 1962.
id) State and local purchases increased $4.6 billion (annual rate) from the
first quarter of 1961 to the second quarter of 1962.
4. Money and credit:
(a) The money supply (excluding time deposits) rose by $4.1 billion or
2.9 percent from February 1961 to June 1962. Including time deposits* the
increase was $20 billion or nearly 9.4 percent.
(6) Bank loans increased $12.2 billion or 10.7 percent from February 1961
to June 1962.
(c) Long-term interest rates have been unusually stable for a period of
economic expansion. However, in the past month, the average yield on
Government bonds has risen somewhat, reaching a level of 4 02 in July com
pared to 3.81 in February 1961.
5. International:
(«) The overall balance-of-payments deficit, as measured by U.S. gold
sales and increases in foreign dollar holdings, showed improvement in 1961
and further gains in the first half of 1962. The payments deficit was $1.9
billion (annual rate) during the first quarter compared to $2.5 billion for
the entire year 1961 and $3.9 billion for 1960. Latest indications are that
the deficit has decreased further and is now running at an annual rate of
$1.0 to $1.5 billion.
O. STRONG AN D W E A K
SPOTS IN
TH E CURRENT OUTLOOK
1. The economy expanded vigorously during 1961; the pace of advance in
1962 has been considerably slower. There are a number of weak spots in the
economic data for M a y and June. Only a few preliminary figures are available
so far for July.
(а) Personal income advanced only $2.1 billion from April to June com
pared to $6.4 billion from February to ApriL
(б) Retail sales declined in both M a y and June. (Judging by depart
ment store sales, sales rose in July.)
(c) Unemployment as a percentage of the labor force rose slightly in
June over M a y levels and then declined to 5.3 percent in July; however,
this is still considerably higher than at our full employment goal.
(d) Inventory accumulation has tapered off markedly. Accumulation
of manufacturing and trade inventories in the second quarter of 1962 was
less than half the amount in the first quarter ($0.8 billion compared to $1.6
billion). D u e to the drop in sales, overall inventory sales ratios rose in
June.
2. The prices of common stock have fallen 18 percent from March 15 to
August 3, reducing the estimated price-earnings ratio from 19.7 to 16.6 (based on
estimated second quarter earnings). Stock prices on August 3 were 58.12
(Standard & Poor’s price index) compared to 55.11 on the day before the 1960
elections. The realization that inflation has been brought under control is an
important factor in the decline of the stock market. The decline in stock prices
is a source of concern in economic policy because of its possible adverse effects
on consumer and business expectations. Margin requirements were reduced
from 70 to 50 percent July 9.
3. Private long-term interest rates are still generally below those at the trough
of the economic cycle in February 1961 and borrowing ease continues.
4. The outlook for continued price stability is favorable.
5. Federal purchases are headed upward, though at a slower rate. State and
local spending is expected to continue its upward trend.
6. The Commerce-SEC surrey taken in April and May shows investment plans
for 1962 at a level 8 percent above 1961. This result was the same as the
February survey, and it points to continued moderate increases in plant and
equipment outlays for the rest of this year.
d. administration’s program fob strengthening
tbm
boonomt
1. An 8>percent tax credit, totaling $1% billion, on new investment in machin
ery and equipment has been proposed to the Oongresa The administration’s
POLICIES FOR FULL EMPLOYMENT
107
proposal would increase the rate of profit on a typical new 10-year asset to the
same extent as a 20-point reduction in the corporate income tax.
2. A comprehensive tax reform bill, involving a net reduction in individual
and corporate income taxes, will be outlined later this year for consideration
by the next Congress in 1963. The President has recommended that the reduc
tion in the tax rate be made effective as of January 1, 1963. H e has also said
that, if economic conditions warrant, he will request a tax cut in 1962.
3. Standby authority for temporary income tax reduction has been requested
of Congress. This tool could be used quickly and effectively to combat economic
recessions.
4. Depreciation guidelines for business have been revised, reducing tax bills
on 1962 profits by an estimated $1 5 billion and releasing these investable funds
for business use.
5. Taxes have been removed on surface transportation effective November 16,
1962, and have been reduced by 50 percent on air transportation.
& Extension of temporary unemployment compensation and improvement of
our welfare programs have also been requested.
7. The Manpower Development and Training Act was enacted in March 1962.
launching a $400 million program. In addition, a bill to aid in employment
of our youth is pending before Congress. Money invested in training or retrain
ing of our unemployed can benefit society by a multiple of that investment, quite
apart from the immeasurable return to the worker in regaining a sense of pur
pose and hope.
8. Area Redevelopment Administration was established in 1961 to aid areas
of chronic unemployment The act provides funds to aid commercial and in
dustrial development, technical assistance in community planning, and retraining
of unemployed workers. To date 700 communities have participated and over
10,000 people ade in training programs.
9. A bill has passed the Senate authorizing $750 million immediately for ad
ditional Federal, State, and local public works in areas of heavy unemployment
and $750 million of stand-by authority for the future. A bill now in the Rules
Committee of the House provides $900 million immediately for additional public
works but does not provide standby authority as requested by the administration.
10. Pending before Congress is a bill to provide $500 million in aid to urban
areas for the development of mass transportation.
11. The President’s trade expansion program (passed the House) will stimu
late the foreign market for American production and improve the competitive
position of the United States in relation to the European C o m m o n Market The
bill allows the President to reduce tariffs 50 percent generally and to abolish
them on certain goods. Government aid is to be provided for U.S. workers
and industries affected by the change in tariff regulations.
12. A Consumers’ Advisory Council has been established to advise the Govern
ment on issues of broad economic policy, governmental programs protecting
consumer needs, and the flow of consumer research.
13. M a n y other measures such as aid to education now pending before Con
gress would provide additional stimulus to the economy.
Nora— A U figures are seasonally adjusted or based on seasonally adjusted
data except prices and interest rates.
Dr. H eller. I f advances could be maintained at this pace, on the
average, we would achieve full employment—full utilization of our
resources consistent with our interim goal of 4 percent unemploymentr—sometime late in 1963. But obviously we are still all concerned
by evidence that the next 5 quarters are not likely to yield equally
strong advances. Gross national product (in constant prices), after
rising at a rate of 9 percent per year from the first to fourth quarter
of 1961, has been rising at a rate of only about 3*4 percent per year
in the first half of 1962. Personal income increases averaged $2.6
billion (annual rate) per month during the 10 months of recovery
in 1961, but have been averaging only $1.6 billion since December.
After rapid gains during 1961, corporate profits seem to have changed
little in the past 2 quarters. On the other hand, the first hall of
1962 has witnessed a more rapid improvement in employment and a
108
POLICIES FOR FULL EMPLOYMENT
more rapid decline in unemployment than we experienced last year.
In early 1961 we were in the position of having to recover not from
one but from two recessions—for the recession of 1960 came on top of
the incomplete recovery from the recession of 1957-58. There can
be no doubt that impressive gains in employment and output have
been made in the past year and a half. But the economy has not yet
regained the reasonably full utilization of its labor and capital which
it last experienced in early 1957. It is in this context that we must
reexamine the means for achieving the goals of the Employment Act
of 1946: “maximum employment, production, and purchasing power.”
The postwar era taken as a whole has, to be sure, witnessed re
markable progress in the achievement of these goals. The worst
rates of unemployment in the postwar era were about 7y2 percent
of the labor force, much better than the best performance of the econ
omy in the 1931-40 decade, when the unemployment rate remained
consistently above 14 percent, about twice as much as the highest post
war figure. But the record of the past 5 years—while a great improve
ment over the prewar era—has not matched that of the first postwar
decade. From 1946 until mid-1957, full utilization of resources was
the normal state of the American economy. Unemployment signifi
cantly exceeded 4 percent of the civilian labor force only about onethird of the time, principally during and immediately after the two
brief recessions of 1948-49 and 1953-54. Since late 1957, unemploy
ment has fallen below 5 percent of the labor force only briefly. It
reached a peak of 7 percent in the recession of 1960-61, and has
averaged 6 percent for the 5-year period. Nor has the plant and
equipment capacity of American industry been fully utilized. Ac
cording to one widely used measure—and 1 might say we are aware of
the limitations of measures of capacity, particularly after reading
the excellent report of this committee on the subject—manufacturing
operating rates in the past 5 years have averaged 6 percentage points
lower in relation to capacity than in the previous decade and have
consistently remained well oelow the peak efficiency rates preferred
by businessmen. After dropping to 77 percent at the beginning of
1961, the average operating rate rose to an estimated 87 percent in
the second quarter of 1962, still several points short of preferred
levels.
Our capacity to produce has continued to expand since mid-1955
by roughly Sy2 percent per year, reflecting (1) a growing labor force,
and (2) higher productivity stemming from improved and expanded
equipment and plant, greater skill of workers and management, and
technological innovations. But our actual production has grown less
rapidly; at an annual rate of 2.7 percent from mid-1955 to date.
Actual gross national product has not kept pace with the economy’s
potential: beginning with 1958, unused potential output has amounted
annually to an estimated $25 to $50 billion (1961 prices). The gap
between potential and actual output has narrowed from over $50 bil
lion early Jn 1961 to roughly $30 billion today. But idle resources
have continued to be the Nation’s outstanding extravagance and
inefficiency.
It is important to improve this record of recant years. Our leader
ship of the free world, the opportunities for our youth, thfc security
of 6itt aged, the mobility of our surplus farm population; the prbe-
109
POLICIES FOR FULL EMPLOYMENT
pects for meeting growing public needs, the rejuvenation of our
chronically depressed regions, the capacity of our economy to adapt
smoothly to the expansion of our international trade, all of these are
linked to the goal of maximum employment. As President Kennedy
said in his Economic Report for 1962:
A full employment economy provides opportunities for useful and satisfying
work. It rewards enterprise with profit. It generates saving for the future
and transforms it into productive investment. It opens doors for the unskilled
and underprivileged and closes them against want and frustration. The con
quest of unemployment is not the sole end of economic policy, but it is surely
an Indispensable beginning.
DEVELOPM ENTS
IN
THE
F IR S T
HALF
OF
1962
At the end of 1961, the rise of GNP in three quarters of recovery
had exceeded the upsw ing from the low point of GNP in the compa
rable periods of the preceding two recoveries. While certain factors
were weaker than in 1951-55 and 1958-59, others were stronger, lead
ing to an expectation that the economy would continue upward at a
relatively strong pace in 1962.
Nevertheless, on the basis of past experience, the growth during
1962 was projected to be more modest than in the recovery quarters of
1961. What I am saying is that the $570 billion estimate of GNP
that was used as the underpinning to the budget projections actually
represented a slower rate of recovery in 1962 than in 1961. The shift
from inventory liquidation to restocking that follows a recession nor
mally yields large gains in the early stages of recovery. Some slow
down m the rate of advance must oe expected as the expansion con
tinues. But the change of pace was sharper than anticipated—in the
three quarters of recovery in 1961 GNP advanced at an annual rate
of nearly $13 billion per quarter; its increases in 1962 were only $6.4
billion in the first quarter and $7.0 billion in the second. Apart from
statistical adjustments resulting from the revision of 1961 date, actual
GNP in the second quarter, at $552 billion, ran at least $10 billion
below projections.
This disappointing outcome is virtually all traceable to investment
in plant ana equipment and inventories. In relation to income, con
sumer buying has held up relatively well; housing is now close to its
predicted"flight path after an erratic dip in the first quarter; exports
are slightly above expectations; and Government purchases have be
haved about as expected.
Although business fixed investment began to rise more promptly in
this expansion than in earlier recoveries, its performance since the
turn or the year has been disappointing. As against an expected in
crease of roughly 14 percent in 1962 over 1961, it now appears that
the gain for the year will be closer to 3 percent. That figure of 8
percent is roughly consonant with the 10-percent figure you mentioned,
Mr. Chairman.
I am sony that we do not have a revised estimate at the present
time.
This weakness of investment has sometimes been attributed to a
“profits squeeze." In fact, corporate profits have increased, as al
ready noted, by one-fourth over the period since the first quarter of
1961, although in the aggregate farther profit gains do not appear to
110
POLICIES FOR FULL EMPLOYMENT
have occurred so far in 1962. In the logic of our private enterprise
system an adequate level of profits is essential to economic progress.
Profits should be higher than they are today, and they will be higher
when our productive capacity is more fully utilized. It can be esti
mated that if the economy were operating at a 4-percent unemploy
ment level, corporate profits after taxes would be a healthy $30 bil
lion—compared to a $25.6 billion annual rate in the first quarter of
i962.
Corporate profits after taxes reached a peak of $22.8 billion in the
inflationary year of 1950, a peak which they did not surpass until
1955? and which even today they surpass by only a modest margin
despite the considerable growth in corporate sales and in the total
investment in corporate assets since 1950.
Still, we cannot look at corporate profits in isolation. Since 1950,
corporate depreciation and other capital consumption allowances have
risen from $9.4 billion in 1950 to $28.7 billion (annual rate) in the
first quarter of 1962. Together, corporate profits after taxes plus
corporate capital consumption allowances—often called “ corporate
cash flow”—have risen from $32.2 billion in 1950 to $54.3 billion in
the first quarter of 1962.
A comparison of business fixed investment with corporate cash flow
can only Tbe approximate since noncorporate investment is included in
the investment figures, but it gives some indication of business atti
tudes toward investment in relation to the flow of depreciation and
after-tax profits. Most of the time from 1951 to 1957, business fixed
investment exceeded corporate cash flow; since mid-1958, the reverse
has been true continuously, and the distance has widened in the
current expansion; cash flow has grown about $7 billion (an
nual rate) above the $47 billion level of the first quarter of 1961;
business fixed investment has meanwhile advanced $5.4 billion from
its $44.7 billion rate in the trough quarter. Although investment for
modernization and cost-cutting is rising moderately—and surveys sug
gest that about 70 percent of plant and equipment investment is for
these purposes—the gains in profits during 1961 did not generate en
thusiasm for a major expansion of plant and equipment. The overall
willingness of business firms to invest has not kept pace with their
overall ability to invest out of internal funds.
Inventory investment in the second quarter is estimated at the
relatively low annual rate of $3.4 billion. The working down of steel
inventories was a factor in recent months, but even apart from steel,
the general pattern of inventories reflects a cautious policy by busi
ness firms. Inventories were growing less rapidly than sales through
most of 1961 and into the spring of 1962. Inventory-sales ratios which
were declining from levels already relatively low by past standards
would typically have heralded a speedup in inventory accumulation,
but this has not occurred in 1962.
Business conservatism toward capital goods and inventories ap
pears to be grounded in the experience of the past 5 years. The
American economy since 1957 has had continuously slack labor mar
kets, buyers’ markets for materials, and persistent excess capacity* It
has proved difficult for businessmen to work up much enthusiasm for
buying or building ahead o f minimal needs with that histoiy still
fresh m their memories. The Nation’s businessmen have had their
POLICIES FOR FULL EMPLOYMENT
111
share of disappointments in the past 5 years. They saw markets
contract in 1957 just as they were adding new plant capacity and new
labor to meet expected growth in demand. Much of the expanded
capacity had to remain on the sidelines when the 1958-60 expansion
fell short of full use of the Nation’s great productive strength. To
be caught long on capital and labor and short on markets tends to
breed caution the next time around.
We do not have the stimulus of large backlogs of demand that
marked the early postwar years. We do not have—and do not want—
the stimulus to buying that inflationaiy expectations can provide.
Against this background, it is difficult for private demand to carry
the economy to full employment under existing tax rates.
During a period of recovery, an appreciable share of the growth in
business and personal incomes is drained off into Federal taxes. I
might say that this was a concern which we, as you may recall, ex
pressed in our initial testimony before this committee in March of
1961. The fact is that the automatic stabilizers do cushion a down
ward movement, but at the same time exert a very considerable drag
on a recovery. This tends to hamper the growth in both consumer
and producer demand upon whicn continued expansion depends.
During the five quarters of the current expansion, Federal taxes (net
of transfers) have taken $12 billion of the $51 billion increase in total
incomes, but Federal purchases have taken only $7 billion of the $51
billion increase in total output. The difference between the $12 bil
lion of added taxes (net of transfers) and the $7 billion of added
purchases is a measure of the drag on the recovery exercised by the
Federal budget. If tax receipts had grown less rapidly, or expendi
tures more rapidly, total demand would have grown faster, and the
expansion of output and income would have been greater. The auto
matic stabilizing effects to the Federal budget, which help to cushion
a recession, also tend to retard a recovei^.
I f the economy were at full employment today, we estimate that
total income and total output would be about $30 billion higher than
at present. But Federal tax receipts would be about $9 billion above
present levels, and private saving would be $5 or $6 billion higher than
today. Thus, taxes and savings would be drawing $14 or $15 billion
from the economy, which would have to be offset by additional in
vestment and Government expenditures for full employment to be
maintained. This means that, at present levels of Government ex
penditure, our present tax system bars the way to full employment
unless we are able to raise private investment about $14 or $15 billion
above present levels. I will come back to this point later.
PROSPECTS FOR TH E M ONTHS AHEAD
The most recent evidence on economic activity, though mixed, offers
cause for concern. After a slow start in January-February, and then
a brisk pickup in March and April, the 1962 economic expansion
slackened in May and June. Those measures of overall activity which
rimarily reflect the results of the execution of past decisions to hire,
uy, and produce—for example, the overall measures of income, em
ployment, production, and construction—kept setting new records
E
almost every month*
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POLICIES FOR FULL EMPLOYMENT
However, as previously indicated, the pace of advance was not satis
factory. And any appraisal of the outlook must also recognize the
recent softness of many indicators which record current decisions and
which point toward future economic decisions. For example, the
movements of orders and contracts are likely to foreshadow changes in
production and shipments. New orders for durable goods have been
moving downward since January and in June were 7 percent below
their January peak. Machinery and equipment orders are lower than
in January, although they recovered some lost ground in May and held
almost even in June. Housing starts and building permits have shown
considerable strength in recent months, even though the latest figures
are considerably below the high points of the present expansion. Com
mercial and industrial construction contracts are another area of recent
strength on which the latest returns point downward. The factory
workweek frequently indicates the needs of manufacturing firms for
additional labor. It has declined during both May and June. The
stock market is one of the many factors which help mold and reflect
economic expectations and attitudes toward spending, but the full im
plications of the slide in the market from March to June will not be
clear for many months.
As we look ahead, we see mixed evidence on the various components
of expenditure.
CONSUMPTION
Consumers have raised their spending in pace with gains in their
incomes during the current expansion, and there is little evidence to
suggest a marked departure from that pattern in the months ahead.
A rather sharp and widespread decline in retail sales during June
was worrisome, but preliminary data for July indicate a strengthen
ing in department store sales, new auto sales, and total retail sales,
after allowing for seasonal changes. Past experience and current
surveys indicate only a limited possibility that consumers will spark
a renewed advance in the economy. (I telieve you reviewed some of
those current surveys this morning.) Such a spark would probably
have to arise from the volatile area of durable goods purchases. In
the current expansion, autos have supplied most of the strength in
that sector, and it would be surprising if demand for 1963 autos
were to top the brisk activity in 1962 models.
housing
With the aid of rising incomes, readily available mortgage credit,
and lower interest rates, homebuilding has done very well. The sharp
rise in starts this spring carried housing activity to high levels. But,
following a sharp decline in starts for June, total housing outlays
fell in July. Permits come first in the chronological sequence of permit-start-construction activity. The recent data on permits point nei
ther to a continued slide in starts below the June level nor to a re
surgence to the high levels of April and May.
P L A N T A N D E Q U IP M E N T
Surveys of business intentions point to continued modest increases
in fixed investment during the remainder of 196SL liter recent MSo*
POLICIES FOR FULL EMPLOYMENT
113
Graw-Hill survey found no evidence of cutbacks in late June after
the stock market decline. Recent softness in orders for equipment
raises some doubts about the outlook for plant and equipment invest
ment but the evidence is not conclusive. At the same time, the recent
ly announced reform of depreciation guidelines and the pending tax
credit for investment serve as sources of future buoyancy in this sec
tor.
IN \ES TORIES
In the postwar period, every recession has been dominated by in
ventory cutbacks. But today, given the conservative inventory-sales
ratios already prevailing, it would be surprising if large-scale inven
tory liquidation were initiated. Reduction in stocks of steel has been
an important factor holding down inventory investment in recent
months. With that adjustment apparently nearing completion, in
ventory investment might revive this fall or winter. On the other
hand, new orders and unfilled orders are important determinants of
inventory policy, and strong incentives to build stocks probably would
arise only in response to a reversal in recent trends in such orders.
GOVERNMENT
Purchase of goods and services by the Federal Government are
expected to increase at a moderate rate in the next few quarters, giv
ing some support to the private economy. The upward trend of State
and local outlays will surely continue.
These prospects for various components are difficult to add up,
They do not sum up to a crisis in the economy, nor do they offer any
assurance of spontaneous resumption of brisk advances in the private
economy. A continued period of modest upward movements or
leveling off is one reasonable possibility. We experienced this in
1956-57, with gains in outjmt just large enough to prevent a significant
rise in unemployment. But we cannot rule out the alternative pos
sibility that the recent slowdown in the expansion represents advance
warning of an economic decline. A more explicit verdict would not
do justice to the perplexing and inconclusive crosscurrents in the evi
dence before us—nor to the obvious limitations of the science of
economic forecasting.
But even in the face of much greater uncertainty than usual about
the pace of further advance and the possibility and timing of an
economic downturn, this much is clear: The U.S. economy is still oper
ating considerably short of its potential and action on the important
economic measures recommended by the President is needed to
strengthen its performance.
POLICY ACTIONS
Pending proposals: The slowdown in the rate of expansion in 1962,
combined with the current uncertainties in the economic outlook,
underscore again the importance of action on the President’s recom
mendations in the Economic Report last January for—
a defense-in-depth against future recessions • * * a three-part program for
sustained prosperity which will (1) provide standby power, subject to congres
sional veto, for temporary income tax reductions, (2) set up a standby program
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POLICIES FOR FULL EMPLOYMENT
of public capital improvements, and (3) strengthen the unemployment insurance
system.
These three measures, or reasonable alternatives—providing up to
$10 billion of temporary income tax reduction (at annual rates), $2
billion of public works acceleration, and stronger unemployment com
pensation—would, as the President said in January—
enable Federal fiscal policy to respond firmly, flexibly, and swiftly to oncoming
recessions.
By enacting the foregoing proposals or the related measures that
now lie before it, the Congress could provide a significant economic
stimulus at the present time. ^
As the President noted in his statement on June 7:
*
* * I have asked the Congress to provide standby tax reduction authority
to make certain, as recommended by the eminent Commission on Money and
Credit, that this tool could be used instantly and effectively should a new reces
sion threaten to engulf us. The House Way s and Means Committee has been
busy with other important measures, but there is surely more cause now than
ever before for making such authority available.
The public works acceleration legislation which has passed the
Senate and is pending in the House will provide for additional Fed
eral, State, and local public works in areas of heavy unemployment.
(The Senate bill also includes provision for additional standby au
thority permitting the extension of the program should conditions
warrant.)
The temporary extension of the period of unemployment compen
sation benefits earlier authorized by the Congress has now lapsed,
and its renewal has been requested. Such a program alleviates in
some measure the hardship of those most directly and immediately
affected by continued excessive unemployment. Moreover, the result
ing addition to consumer purchasing power strengthens consumer
buying.
Other measures now pending before the Congress can also provide
immediate as well as sustained support for further economic
expansion:
The investment tax credit, part of the 1962 revenue bill, promises
further significant incentive to business investment, in addition to
the encouragement already provided by the new depreciation guidelines.
The proposed Trade Expansion Act of 1962 will contribute to the
administration’s program to expand our exports—a potential source
of increased demand for the output of our farms and factories, im
portant for this reason as well as for its contribution to improving
our balance-of-payments situation.
The proposed Youth Employment Opportunities Act, aimed es
pecially at the severe unemployment and underemployment of our
young people out of school, would make inroads on a particularly
unfortunate byproduct of slack in our economy.
TAX REDUCTION
Beyond these important and timely measures now pending before
the Congress, a program to improve the rate o f utilization o f out
resources and the rate of growth of pur economy must include tfafc
POLICIES FOR FULL EMPLOYMENT
115
even more fundamental measures of tax reduction and tax reform.
On June 7, President Kennedy stated:
•
* * our tax structure, as presently weighted, exerts too heavy a drain on
a prospering economy * * *. A comprehensive tax reform bill * * * will be
offered for action by the next Congress, making effective as of January 1 of
next year an across-the-board reduction in personal and corporate income tax
rates which will not be wholly offset by other reforms. In other words, it is
a net tax reduction.
The President has also indicated the possibility of asking for
earlier action on tax reduction if economic developments should
require it.
Apart from the announced intention to recommend both individual
and corporate income tax reduction effective January 1, 1963, unless
adverse economic developments require earlier action, no decision has
been made on the size, composition, and timing of a recommended tax
reduction. But the basic case for easing the net tax drain on the
economy, as well as the broad principles which should guide tax re
duction, are reasonably clear in the light of our unsatisfactory eco
nomic experience of the past 5 years.
A reduction in net tax liabilities of both consumers and business
spurs the economy's advance toward full resource utilization in three
important ways:
First, it increases the disposable income of consumers. The statis
tical record indicates that consumers consistently spend from 92 to 94
percent of their total disposable income. And past experience also
confirms that increases in such incomes are very largely and very
quickly translated into higher consumer spending. As the private
income released by tax reduction is spent, markets strengthen, produc
tion rises, new jobs are created, ana incomes and profits rise accord
ingly. This generates added cycles of private spending and leads to
further increases in output and employment. This process alone—
the so-called “multiplier effect”— translates the original personal tax
reduction into an increase in gross national product considerably
larger than the reduction itself.
Second, by bolstering sales and pushing production closer to ca
pacity, tax reduction stimulates investment m inventories and in plant
and equipment, the so-called accelerator effect. This further expands
gross national product, raises profits, and reduces the deterrent effect
of excess capacity that since 1957 has plagued the economy and curbed
expansionary investment*
Third, by reducing the Government’s share of business earnings,
tax reduction improves profit margins and increases the supply of
internal funds available for investment. This strengthens both the
incentives and the financial ability of businessmen to undertake the
risks involved in new investment.
Decisions on size, composition, and timing of tax cuts will need
to give appropriate weight to the following economic considerations:
1.
The longer-term need for reducing the excess of Federal reve
nues over Federal expenditures that would be realized at full employ
ment. a need that depends on:
(а) The current size of the full employment surplus, estimated
at $7 to $8 billion on a national-income-accounts basis;
(б) Its prospective size in light of projected growth in Federal
expenditures and Federal revenues as the economy expands;
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POLICIES FOR FULL EMPLOYMENT
(<?) The amount of surplus at full employment that is needed to
curb inflationary pressures while maintaining a high level of invest
ment.
2. Any short-term need that may exist for overcoming temporary
deficiencies in consumer and investment demand.
3. The necessity of combining individual and corporate income tax
reduction in the manner best suited to stimulating both consumption
and investment, to support both markets and incentives.
4. The appropriate relationship to the projected reform of the tax
structure, a reform designed to improve equity and remove the arti
ficial tax barriers or concessions that divert resources from their most
efficient uses and thus impair our rate of economic growth.
5. The invigorating effect of tax reduction on the economy and the
resulting “ feedback” of revenues to the Federal Treasury which limits
the net budgetary cost of the reduction and, over time, may even wipe
out its initial addition to a budget deficit.
6. The monetary policy being pursued— for example, if monetary
Policy becomes more restrictive for balance-of-payments reasons, a
larger tax reduction would be needed to yield a given economic
stimulus.
MONETARY POLICY
As the last, point indicates, fiscal policy and monetary policy are
tightly interwoven, indeed are in part substitutes for one another. A
gfven'stimuhis to the economy can be achieved by a relatively easier
fiscal policy coupled with a relatively tighter monetary policy, or vice
versa, but the effects on the balance of payments ana on the investment-consumption balance in the economy may be rather different
in the two cases.
During this economic recovery, the task of monetary policy has
been especially difficult. There has been a compelling need for gen
eral monetary ease, as part of expansionary economic policy for full
employment and adequate utilization of our resources. It has been
especially vital to maintain reasonably low long-term interest rates
and a plentiful supply of investment funds in order to stimulate
private investment and quicken the tempo of growth in potential out
put. Yet, concurrent with these objectives, it has been necessary to dis
courage large flows of capital out of this country that could complicate
the task of restoring a healthy balance of payments and confidence in
the dollar.
The problem of capital outflow is tied primarily to our level of
short-term interest rates relative to those of other countries, and it
has therefore teen necessary to prevent short-term rates from falling
too low. At the same time, the monetary and debt authorities have
tried to shield long-term rates, so critical to economic expansion^ from
the restrictive impact at the short end of the maturity spectrum.
Since February 20, 1961, the Federal Reserve nas conducted its
open-market operations in all maturity sectors of the U.S. Govern
ment securities market. On balance, the Federal Reserve has actually
sold short-term U.S. Government securities m the open market since
that date, but it has bought longer* terrii securities, primarily 1 to 5
years, in amounts much larger than the sale of short-term securities.
Most of the purchases o f long-teita securities took place in 1961,
POLICIES FOR FULL EMPLOYMENT
117
Since then, such purchases have been more limited. The Treasury
Department has also adapted debt management policies in part to
these same objectives, primarily through concentrating new cash
offerings of securities in the short-term area, but also by buying long
term securities for the Treasury investment accounts to the extent
that such purchases were consistent with the objectives of these funds.
The action that the Federal Reserve took, effective January 1 this
year, in raising the maximum interest rate payable on commercial
bank time deposits to as high as 4 percent, has increased the total flow
of funds through financial institutions. This has put pressure upon
these institutions to find investment outlets and has helped to reduce
yields on both mortgages and muncipal bonds. Actually at this point
of time, 17 months after the beginning of economic recovery, long
term private interest rates are generally below their levels at the
cyclical trough in February 1961. This does not say they are low
enough.
What it says is that as far as the statistical record is concerned, they
are below the trough levels in February 1961. They are also below
the levels at the corresponding stage of the 1958-59 recovery, despite
the postwar peak in interest rates that intervened. The reduction in
long-term rates has had to overcome two psychological barriers, rather
stubborn ones— first, some persistence of inflationary psychology in
the financial community despite the lack of tangible inflation; and,
second, vivid memories of the experience of 1958-59, when economic
recovery was accompanied by sharp increases in long-term rates (as I
recall, the sharpest in a hundred years in comparable phases of the
business cycle).
The total of demand and time deposits and currency has been in
creasing since February 1961, by more than 7 percent per year, and
the availability of bank reserves has been generally favorable to the
expansion of bank credit. Banks have been going more heavily into
municipal bonds and mortgages. Very little or the expansion of
bank loans and investments over the past year has been in U.S. Gov
ernment securities. In relation to economic activity, liquidity in the
economy is not much changed from its postwar low.
A special word is in order on the relation of monetary policy to
the balance-of-payments situation. W e have, from the beginning,
taken a number of determined and effective measures to improve our
balance of payments and maintain confidence in the dollar. In deal
ing with the balance of payments, however, it would be self-defeating
to adopt policies that would undermine the vigor of the economy;
for example, through restrictive monetary-fiscal policies. Confidence
in the dollar is dependent upon a strong, growing American economy.
Further, a revival of vigorous growth here will make the United
States a more attractive outlet for long-term investment funds, both
domestic and foreign. As a result, monetary and debt-management
policy must continue to aim at providing ample credit and liquidity
to support needed recovery and growth, consistent with the require
ments of balance-of-payments policy.
Finally, as monetary and fiscal policies are brought into coordinated
focus, these points stand out:
1.
A t a time when the Federal budget was becoming progressively
less expansionary in its net impact on the economy during the 1961-62
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POLICIES FOR FULL EMPLOYMENT
recovery, monetary policy remained easy, partly through conscious
effort of the monetary authorities, partly because expansionary forces
have not been as strong as expected, ana partly because 1961-62 may
mark the end of a rising trend— related to inflationary expectations—
in interest rates.
2. Balance of payments and gold outflow considerations currently
demand a more restrictive monetary policy than would be desirable
from the standpoint of the domestic economy. To this extent, fiscal
policy must be more expansionary than would otherwise be necessary
m order to promote domestic economic expansion and narrow the ex
cessive gap between our economic performance and our economic po
tential. Lideed, closing this gap can play an important role in build
ing longrun confidence in the dollar. As the steps currently being
taken to eliminate the balance-of-payments deficit and strengthen
our international monetary position achieve their objective, the curbs
on our freedom to use monetary policy to meet the needs of the do
mestic economy will be progressively reduced.
3. Any move toward sizable tax reductions must, of course, be ac
companied by a willingness to move toward higher interest rates if
this should prove to be necessary (a) to discourage any adverse capital
flows that might develop, or (b) to offset any inflationary pressures
that might ensue if the rebound toward full employment should prove
to be unexpectedly rapid. With a gap of approximately $30 billion
between actual and potential output, the prospect of inflation from
excess demand is surely remote.
4. I f budget deficits are incurred, the method of financing them
must be carefully adapted to the prevailing economic circumstances.
A careful balance must be struck between bank and nonbank financing,
a balance which will not thwart or nullify the expansionary effect of
budget measures in an economy with excessive unemployment and ex
cess capacity, but will prudently shift Federal debts into nonbank
hands as the economy comes close to or reaches full employment.
Summing up, let me say that relative monetary ease has facilitated
economic expansion in the recovery of 1961-62; that even greater ease
would have been possible in the absence of international payments
pressures; that those pressures throw an additional burden on fiscal
measures as part of a coordinated economic policy for full employ
ment and faster growth; and that care must be exercised not to over
compensate for such international monetary pressures by premature or
excessive tightening of credit and interest rate.
CONCLUSION
W e would be dangerously complacent if we focused only on such im
pressive advances in our economic well-being in recent years as:
The rise of over $50 billion in gross national product since the first
quarter of 1961, and the accompanying rise in employment, personal
income, and profits.
The shrinkage of our balance-of-payments deficit from $3.9 billion
in 1960 to $2.5 billion in 1961, and the prospect of further shrinkage
to $1.5 billion or less this year.
The 4 years of stability in our wholesale price level since 1958.
POLICIES FOR FULL EMPLOYMENT
119
The continued growth in our economic potential at rates exceeding
prewar averages.
But when we look ahead, instead of backward, it is the size of the
job yet to be done that demands attention and commands action: the
continued hardship, inequity, and waste of unemployment; the ex
cessive amounts of unused industrial capacity; the unsatisfactory pace
of economic expansion in 1962; and the remaining gap in our balance
of payments. My statement today has put its emphasis on this un
finished business of economic policy. The uncertainties of current
economic developments and prospects underscore the urgency of that
unfinished business. They also intensify the need for action oh those
economic measures that the President has already put before Congress,
and the need for forethought on the tax adjustments which are needed
to remove barriers to the expansion and full utilization of the great
potential of the American economy.
Chairman P a t m a n . Thank you very much, Dr. Heller. I assume
you are speaking for the Council ?
Dr. H eller. I am, Mr. Chairman.
Chairman P a t m a n . Dr. Heller, when you were before the com
mittee in January presenting the President’s economic report for
1962,1 believe you then projected a GNP for the year of $570 billion.
You mentioned that in your statement, I know. Is that correct?
Dr. H eller. That is correct.
Chairman P a t m a n . What amount of investment in plant and equip
ment did you project for 1962 at that time, do you recall, Dr. Heller?
Dr. H eller. We projected a 14-percent increase in the investment
in plant and equipment over 1961; that is, a total of about $39 billion
for 1962.
Chairman P atm an . D o you recall your projection of Federal ex
penditures?
Dr. H eller. May I put those in terms of the rise that we expected
from 1 year to the next ?
Chairman P a t m a n . Yes, sir. Also construction expenditures and
consumer durables. Rather than delaying the hearing, Dr. Heller,
I will ask you if you have the question to put the answer in the
record if you will, please.
Dr. H eller. Thank you, Mr. Chairman.
(The figures referred to follow:)
An increase of $8 billion from 1961 to 1962 was expected in Federal expendi
tures on an incotne-and-product basis with about $5% billion of tbe increase
occurring in purchases of goods and services. Data in the first half of 1962 are
consistent with those projections.
It was anticipated that residential construction in 1962 would ran $3 billion
above the 1061 average— or $1 billion above the fourth quarter o f 1961. Despite
the weak first quarter results, the average for 1962 is likely to be within $1
billion of the projected level.
No explicit projections of public construction or nonresidential building were
made.
A $5 billion rise in 1962 over 1961 was expected In consumer durable expendi
tures—slightly more than half in autos and the rest in other durables. The
second quarter of 1962 showed a level of
billion above 1961, with nearly
all of the gains coming from autos.
Chairman P atm an . What figure did you project for money supply
on the average for the year 1962 ?
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Dr. H eller. I do not believe we made an explicit projection for
the money supply.
Chairman JPa t m a n . What is the money supply now for the latest
date for which you have any data ?
Dr. H eller . The total money supply is $145 billion, consisting of
$30 billion of currency outside of banks, $115 of private demand
deposits.
Chairman P a t m a n . Is the GNP figure of $552 billion correct for
the second quarter of 1962 ?
Dr. H eller . That is the preliminary estimate of the Department
of Commerce; yes, sir.
Chairman P a t m a n . May I point out that between the fourth quar
ter of the last year and the second quarter of this year GNP increased
by 2 ^ percent, but your money supply grew in the same period on
a seasonally adjusted basis by only 0.9 percent. Is that correct the
way you understand it ?
Dr. H eller. From the trough of the recession until the middle
of this year GNP rose to the second quarter by about 8y 2 percent on
a price corrected basis and the money supply grew about 9 percent.
Senator P roxm ire . I think Chairman Patman is talking about time
deposits.
Dr. H eller. Thank you, Senator. I am including time deposits
in this 9-percent figure.
Chairman P a t m a n . I might point out also in the second quarter of
1961 the money supply amounted to 27.8 percent of GNP. In the
second quarter of this year it equals only 26.4 percent of GNP. This
volume of money relative to the size of the economy requiring money
is now the lowest since 1929. In trying to find out why the predic
tions you gave us last January were wrong, have you considered
whether or not your projections were sabotaged by the monetary au
thorities?
Dr. H eller . We try to look at all of the factors in the situation.
Chairman P a t m a n . That is one of them, I believe you will admit.
Dr. H eller. I think it is fair to say that the level of interest rates
is one of the important factors influencing construction activity and
lant and equipment investment. I f the level of interest rates could
ave been lower and the money supply greater, the conditions for
investment would have been more favorable.
Chairman P a t m a n . Dr. Heller, I might also point out from the
fourth quarter of 1960, just before President Kennedy took office, to
the second quarter of the present year the gross national product in
creased 9.6 percent. Within the same period the money supply in
creased at only about one-third of that rate or a total of 3.3 percent.
This brings up a question. When I first came to Congress, Dr. Heller,
about 34 years ago, I was one of the group advocating the payment of
the adjusted compensation certificates to three and a half million vet
erans of World War I, commonly known as the bonus. We finally
secured its passage under Mr. Hoover and overrode his veto to get
half of it paid by loans with interest, but that was not satisfactory to
us. Then we commenced a campaign to pay it off in cash, and we
succeeded after passing it several times in the House and Senate, and
almost over the President’s veto in 1936, only lacking eight votes, but
in 1936 we passed it over the President’s veto, with provision for pay
S
POLICIES FOR FULL EMPLOYMENT
1 21
ment to veterans of over $2 billion. We expected that to add a lot of
purchasing power and help the country because it would go into every
nook and corner of America, as you know. Each veteran had an
average certificate of $1,015. And yet, when payment was made it
did not seem to have much of an effect and we were puzzled about it.
But I soon discovered that when the money was paid, the monetary
authorities for the first time in history doubled the reserve require
ments of banks, which absolutely nullified the payment of that money
and retarded the country.
The reason I bring that up now is that it occurs to me that we have
a comparable situation. We have a situation where we want to do
something to increase purchasing power among our people and the
monetary authorities are, in effect: threatening to veto it through
monetary policy; and they can do it. I can certify to that because
I was a witness to it in 1936. They did it then. And they have the
power to do it now. Have you thought about that prospective trouble ?
Dr. H eller. Mr. Chairman, as I tried to indicate in my statement,
I think you are 100 percent correct in saying that the interrelation
ship of fiscal policy and monetary policy has to be kept in the fore
front of our policy thinking. It is perfectly true that it is possible
to nullify expansionary monetary policy by restrictive fiscal policy
or vice versa.
It is a source of concern to us that in response to balance-of-pay
ments pressures monetary policy has not been as easy— particularly
in the last few months—as would be required by the domestic economic
situation alone. I think that we must be extremely vigilant to make
sure that any tightening on the monetary front is really a necessary
response to the balance of payments and the gold outflow situation.
Chairman P a t m a n . I think you will have to assess carefully what
the monetary policy may do. You cannot guard against it because
you do not have the power to guard against it. In effect, the Federal
Reserve Board members have 14-year terms. I do not think President
Kennedy has selected even one.
Dr. H eller. One.
Chairman P a t m a n . He has selected one. One out of six. Of
course, the Open Market Committee is the most powerful group on
earth. By law, it is composed of 12 members. Seven members of the
Federal Reserve Board and five presidents of Federal Reserve banks.
But in effect and in practice the 12 presidents of Federal Reserve banks
come into this Open Market Committee, and they advise with them.
Their views are sought and obtained at the meetings of the Open Mar
ket Committee and for all practical purposes they are full participants.
So these 12 presidents of Federal Reserve banks are selected b y repre
sentatives of the banks and the banks want higher and higher interest
rates all the time.
I feel that we are in a little danger trying to bring this country back
to full employment with a situation like that, where the monetary
authorities have the power to veto what you do. I hope Congress
gives some consideration to this question in the interest of full recov
ery and employment.
Senatpr Bush ?
Senator B u sh . Mr. Chairman, during the previous 8 years I heard
a great deal about the tight-money policy of the previous adminis
122
POLICIES FOR FULL EMPLOYMENT
tration. I always contended in discussing that it was not a tightmoney policy, but rather a sound-money policy. I am rather sympa*
thetic with the attitude of this administration in respect to monetary
policy so far. You would not define it as a tight-money policy, would
you, Dr. Heller?
Dr. H eller . I would not. But a sound-money policy sometimes is
a tight-money policy and at other times is an easy-money policy.
Senator B u s h . I f you look at the statistics that are being piled up
here in this hearing, it seems as though housing was going ahead apace
this year, and that is influenced by the rates of money, I suppose, to
some degree. B ut certainly the interest rates have not seemed to in
hibit the increase in housing construction which is going ahead at a
very good rate. A million and a half starts this year, I believe. Also
consumers’ credit has been expanding considerably. That does not
seem to have been inhibited by interest rates. Is that not so ?
Dr. H eller . These things are relative in the sense that if interest
rates were still lower I presume that housing starts would be still
higher. But a rate of 1.4-or 1.5 million starts, which it looks like at
the present time, is a very substantial advance over the trough of
1961, and indeed a very respectable showing in terms of the history
of the 1950’s. That does not say we would not want more.
Senator B u s h . I would like to say that I congratulate the adminis
tration for its attitude on this question of monetary policy. I think
it has been very satisfactory so far, and I hope it would not be dis
lodged by any of the loud requests for lower interest rates artificially
produced by the Government. Have we ever had a temporary tax
cut of the type that is being discussed now for the purposes that are
being discussed now ?
Dr.
H eller . N o , we have not.
Senator B u s h . I have not been able to recall that has ever been
tried before.
Dr. H eller . N o .
Senator B u s h . So this would be an experiment, then? We are not
able to forecast in the light of what may have happened before, but
it would be a new adventure if we were to embark upon a temporary
tax cut for the purpose of spurring the economy, especially in the
face of expected deficits, is that true ?
Dr. H eller . That is correct, Senator. There have been extensive
discussions of this possibility in the whole postwar period, but it has
never been undertaken, even though we seemed at one time in 1958 to
be close to it. But there was a certain Easter recess after which
people in Congress seemed to back away from it.
Senator B u s h . Thought better.
Dr. H eller . Anyway they reconsidered it.
Senator B u s h . D r . Heller, a few years ago I read a book by Pro
fessor Galbraith which is a very interesting book on the economy,
“The Affluent Society.” In that book he advocated a different ap
proach to the tax situation. He said he thought if we were going to
go ahead and expand that we were going to have to very greatly
broaden our base of taxation. He advocated an addition to the tax,
that we should not be entirely dependent upon the income tax to the
extent that we are, which is probably heavier than any other country
today, I understand.
POLICIES FOR FULL EMPLOYMENT
123
He talked about some sort of a tax? I think he called it a production
tax. It was a tax upon the production of goods, generally speaking.
Is that correct ? Do you recall ?
Dr. H eller . Essentially the Galbraith position was to change some
what the balance between private and public goods and make public
foods less expensive and private goods more expensive. But I beieve that he was directing this particular comment on consumption
taxes primarily to the State and local level. He was suggesting that
State and local governments should not be quite as bashful about
using taxes that would be a direct burden on private consumption.
Senator B u s h . You did not gather he was directing that toward
the Federal Government tax system ?
Dr. H eller . That was not my impression though I stand subject to
correction.
Senator B u s h . It was my impression, but I have not read that book
for about 3 years, so I would not want to argue that point with you.
Dr. H eller . I have not read it for 19 months.
f
Senator B u s h . Y
ou
have not had much tim e in that period.
Mr. Chairman, I have no further comments.
Chairman
P atm an.
Senator Douglas?
Senator D ouglas . Dr. Heller, you know I have a very high opinion
of you.
Dr. H eller . That is an ominous opening statement.
Senator D ouglas . It is very sincere, I assure you. When you esti
mated last January when you appeared before us that the gross na
tional product would be $570 billion for calendar 1962, I asked you
if you were not a little optimistic and you replied no, you thought this
estimate was well taken. Then I asked you this question which ap
pears at the top of page 11 of the hearings:
Suppose you do not reach these goals—one must always have plans ready in
case the program of attack does not succeed.
D r. H
eller.
T h a t is rig h t.
Senator D o u g l a s . D o you have any plans that you want to reveal or do you
think it is wise not to discuss them?
Dr. H e l l e r . I do not want to suggest, Senator, that we have some hidden
weapons or secret weapons that are in reserve for this purpose. Weapons are
available that I think are familiar to this committee and to all of as. For ex
ample, monetary ease. If the recovery is not as vigorous throughout 1962 and
1963, as anticipated, one of the weapons would be monetary ease.
Senator D ouglas . The first part of this question is this: Is it not
apparent that we are going to fall very far short of $570 billion as
GNP for calendar 1962 ? The average for the first half is a little less
than 549. To reach 570 you would have to have an average of 590
for the second half. An average of 590, which would mean you would
have to go well over 600 in the final quarter. Are not we going to fall
very far short of 570 and should not we frankly admit that now!
Dr. H eller . W e are certainly going to fall substantially short of
$570 billion for the year. When I said earlier in response to your
question that we have not formulated a new estimate, it is not to deny
that we are going to fall substantially short of the $570 billion projec
tion.
Senator D ouglas . You said if we do fa ll short the weapon should be
monetaiy ease. Have we in practice had this monetary ease?
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POLICIES FOR FULL EMPLOYMENT
D r . H eller . S en a tor, w e h ave in p a rt, a lth ou g h , as I n oted in m y
statem ent, w e h ave been in h ib ited w ith respect to sh ort-term interest
rates b y b a la n ce -o f-p a y m e n ts con sid eration s. M ost o f o u r present
lo n g -te rm interest rates, h ow ever, are b e lo w th ose at the tim e o f the
tro u g h in 1961, and in case a fte r case;-------
Senator D o u g l a s . You expect them to be that just through the nor
mal cyclical process, interest rates fall in a period of recession and rise
during a period of advance.
Dr. H eller . I f I may interrupt, that is what makes the comparison
with 1959-60 relevant. Every one of the major interest rates today
is below its level at the corresponding point in the recovery of 195960. The reason for that in part is that the recovery this time has not
been as strong as expected and the monetary ease that has been contin
ued is, therefore, greater than it would have been if the recovery had
been more vigorous. In a sense we have used continued monetary ease.
Senator D ou glas . I want to concentrate our attention upon the de
velopments in May, June, and July of this year when, as you saideconomic conditions began to turn down, ana when according to all
the classical principles, monetary ease should have been observed. On
page 29 of your very excellent Economic Indicators, the first column
gives the rate on 3-month Treasury bills on what is known as the
short-time rate. In May that was 2.694. A t the end of June it was
2.719. On July 21, it was 2.983.
I have a release just issued by the Federal Reserve Board a few
hours ago. It shows a slight fall, but it is still 2.874 as of August 4.
This is an increase since the average in May of 28 points, or over 10
percent. So the short-term rate has gone up 10 percent. It is no
torious that this has been done by the Federal Reserve selling shorttime Government bonds in the market which has depressed the price
and raised the yield and consequently raised the short-time rate upon
which the Reserve in the past has always placed such great emphasis.
My figures are correct^ are they not ?
Dr. H eller . Yes, indeed, they are. I was ju st going to add the
very latest figure which is 2.802.
Senator D ouglas . When was that?
Dr. H el le r . That is the figure for the week of August 11.
Senator D ou glas . Have we reached August 11 yet ?
Dr. H eller . No.
Senator D ou g las . I s not this forecasting on a large scale?
Dr. H eller . These figures are reported as of the beginning of the
week of the new issue, but they are reported as of the date at the end
of the week, so we have it already.
Senator D ou glas . Even so that is an increase of 21 points, or around
8 percent!
Dr. H eller . No, I believe that is an increase of 11 points, or 4 per
cent.
Senator D oug las . Has not the policy of the Federal Reserve in the
last 3 months been to violate the historic principle that when reces
sion threatens—and I agree with you that it is not here, and the testi
mony this morning was pretty clear that there was no cleur evidence
that it was coming— Has not the action of the Federal Reserve in rais
ing interest rates flown in the face of the doctrine that the first
POLICIES FOR FULL EMPLOYMENT
125
thing you should do when storm signals begin to go up is to reduce
interest rates?
Dr. H eller , Let me make a few comments on that. In January
the 3-month Treasury bills was 2.746; now it is 2.802.
Senator D ouglas . That is when you were prophesying we would
have a GNP of $570 billion. Everything was fine at that time.
Dr. H eller . There had been a fall in the interim period and then a
rise. Of much greater concern than the short-term rate—which is the
essential one for stemming outflows of funds to foreign countries,
funds that further aggravate our balance-of-payments and gold situa
tion—-of much greater concern for economic expansion is the long-term
rate. There I would certainly share your concern about the rise.
Senator D ouglas . Let us get that into the record. In May that was
3.09, was it not ? No, pardon me. It was 3.88, was it not?
Dr. H eller . Yes, that is the figure.
Senator D ou glas . July 14, it was 4.03, which is an increase of 15
points and approximately under 4 percent.
Dr. H eller . Yes, and the latest figure was 4.04 for the week of
August 4.
Senator D ouglas . S o that is slightly higher. You have had an
increase both in the short-time rate and long-time rate. You yourself
argued, and I thought very cogently, that the first thing you should
do if it actually fell short of the prediction was to get a decrease in
the interest rate.
I know you do not have control over the interest rate, but we are
trying to find out whether the monetary policy has really been correct.
Dr. H eller . A s I indicated a moment ago, we have been concerned
by the fact that the short-term rate increase has been matched by a
rise of a similar number of basis points in the long-term rate, because
it is the long-term rate that is most important for economic expansion.
Senator D ouglas . I have always held with that in the past. The
excuse is the one that you gave, namely, it is necessary in order to pre
vent the outward flow of gold. I want to read the comparative shorttime rates for the European countries.
Switzerland is supposed to be the rater and I think it is. The Swiss
short-time rate is 2 percent. The Dutch, who are very thrifty have a
short-time rate as of June of 2.32, or 2% percent. Germany, which
has been held up to us as an example, has a short-time rate of 2.38.
The only countries with higher short-time rates are France, which I do
not think is a great deal of an international investor; Canada, which
has just gotten into difficulties, and, therefore, is raising its rate to
protect itself; and Great Britain which is the other gold exchange
country. I want to suggest that these comparative rates indicate that
the Federal Reservehas taken fright too quickly and is using an ex
cuse which is really not tenable.
My time is up and with that I will stop.
Chairman Patbcan. Congressman Curtis?
Representative Curtis. Thank you, Mr. Chairman.
Following your statement, Dr. Heller, you are basing the basic
theory on what has been referred to as the gap theory that you ad
vanced, I think it was a year ago.
Dr. H j b l l s r . March 6,1961.
126
POLICIES FOR FULL EMPLOYMENT
Representative C urtis . Let me ask this in reference to that. Inci^
dentally, I might state that this is a theory with which many disagree
and it is important to know there is this disagreement. Accepting the
“gap theory” just for the sake of discussion here, it strikes me that
really things are much worse off than you indicate because one of
the two bases of the gap theory is unemployment figures, is that right?
Dr. H eller . Yes.
Representative C urtis . The unused labor force ?
Dr. H eller . Unused labor force and unused industrial capacity.
Representative C urtis . I want to direct attention to the unused
labor force because it really should not be the unemployment figure as
much as it should be the percentage of the population from 14 to 65 or
14 up, which goes to make up the potential civilian labor force, am I
not correct ?
Dr. H eller . Yes.
Representative C urtis . The thing that disturbs me is that in our
indicators— the ones I have here are from July, 1962—beginning in
1955, that our civilian labor force has continued to rise since World
War II and it has risen during recessions along with the upturns,
averaging almost around a million a year.
We see that the civilian employment has been rising, but in June—
and this is the last month that I have a comparison— in June of 1962,
the civilian labor force was less than June 1961. Sixty-four million
in June 1962, 74.286 million in June 1961, which is not only not an
increase but is a decline. I f you threw that into your gap theory, I
suspect your gap is widening because you would really be adding a
million more people on to the unemployed rolls.
Dr. H eller. May I comment on that comparison, Congressman
Curtis?
Representative C urtis . Yes.
Dr. H eller, There is so much month-to-month variability in the
size of the labor force that it is safest to use quarterly averages when
making comparisons. During the second quarter of this year, the
civilian labor force was 60,000 higher than a year earlier. Over
this same period, the Armed Forces were increased by some 350,000
ersons. In order to take account of this, our comparisons should be
ased on the total labor force, which includes the Armed Forces. The
over-the-year increase is thus 410,000. Next, since April of this year,
labor force estimates have been constructed using information from
the 1960 Census of Population. Previously, estimating weights from
the 1950 census were utilized. This change has reduced estimates of
the labor force by about 210,000. Correcting for this, we find an
over-the-year increase of 620,000.
This is a sizable increase, but it is still smaller than was expected
on the basis of population growth and trends in labor force participa
tion. I think there are two reasons for this shortfall. First, the
retirement rate has increased, partly in response to liberalized social
security benefits. Second, and more important, has been the*continued
slackness in the labor market. Total employment has increased by
over iy ± million in the past year, but about half of this increase has
been due to recovery in manufacturing and to the rehiring of pre
viously laid-off workers. The expansion in new job opportunities has
been rather modest. In particular, employment gains in services and
E
POLICIES FOR FULL EMPLOYMENT
127
trade, while substantial, have been much smaller than in earlier expan
sion periods. This has a particular relevance for labor force growth,
since these industries absorb a high proportion of the women who
enter the labor market. We would expect that at full employment,
when more new job opportunities were being created, workers would
enter the labor force to nil these jobs.
Representative C u rtis. We have had that in previous recessions,
and we do not have a similar decline. In fact, reading the figures
from 1955, which I have in front of me, each year there has been a
net increase. I was trying to see which is the smallest. Probably
about from 1956 to 1957 where the increase was a little less than
400,000. It seems to me that is the figure, if you are going to use the
gap theory.
Just to restate it, I think you have misconstrued what is going on
here in our economy through dealing in economic aggregates. When
we identify who the unemployed are, they are centered in the un
skilled, semiskilled, who through the rapid technological growth and
through meaningful growth in our society cannot find jobs unless they
get trained for the skills that are in demand. This is something th&k
is inherent in a growing economy and should not be looked upon as
a gap. It should be looked upon rather as something that must be
met.
The same thing, I would say, applies to industrial capacity. Again,
when we grow rapidly we create more obsolescence; of what was
capacity in 1960, though physically still in existence, it is not economic
capacity in 1962.
At any rate, I wanted to go on to another thing because this one base
of your syllogism is the gap theory. The other is the theory of deficit
financing. I am talking about your recommendations that in a period
of already deficit financing we have a tax cut to stimulate the econ
omy which would create further deficits, and also at the same time
increase rather than decrease Federal expenditures. Your second
suggestion was a $900 million public works superimposed on the
present expenditures in the budget. Am I not correct m describing
that as a theory of deficit financing?
Dr. H e l l e r . I want to make one small correction. The President’s
proposal in the public works area was a $600 million proposal.
Representative C urtis. I thought it was $900 million.
Dr. H e l l e r . That was the figure that came out of the House Public
Works Committee.
Representative C u r t is . At least it is the theory of deficit financing.
Throughout your paper and your discussion here of the status of our
economy, you are one of the few witnesses that has not referred to
the important factor of business confidence. You recommend two
new and untried theories, the gap theory and the theory of deficit
financing, which certainly are not held to be sound by the business
leaders in the private sector.
Certainly a recommendation and pursuit of theories such as these,
even if they were true, is not going to help business confidence, is it ?
Dr. H e l l e r . Mr. Curtis, we thought that in testifying as to the
importance of profits and investment stimulants and stronger markets
that we were in effect testifying on the factors which above all others
create business confidence.
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POLICIES FOR FULL EMPLOYMENT
Representative C u r t is . D o not you feel that Government policy is
a very important factor in business confidence?
Dr. H e l l e r . Indeed it is.
Representative C u r t i s . And that is what we are talking about here,
Government policy. These are your policy recommendations. In
fact, you worded them as such in your prepared statement.
Dr. H e l l e r . The policies for increasing markets, for stimulating
investment through depreciation guideline revision and investment
credits.
Representative C u r t i s . Those are the collaterals. But you ad
vanced three basic recommendations, two of which are the ones I have
mentioned. One was tax cutting, the second was increased public
works, and the third was what?
Dr. H e l l e r . The unemployment compensation provisions.
Representative C u rtis. Yes.
Incidentally, all three of those, or at least two of the three, are al
most academic in August of 1962 in the tail end of this session of this
Congress.
Dr. H e l l e r . I think we should distinguish between the short-run
stimulants for inadequate cyclical recovery, on the one hand, and the
longer run bolstering of markets, and profits, and investment incen
tives, on the other. Perhaps in our testimony we did not make clear
enough the distinction between these two in our thinking. The Presi
dent’s three-ply program for sustained prosperity was designed to
meet the problem of dips in economic activity, temporary inadequacies
m the level of economic activity. Blit coupled with that there has
to be a longer term program for removing the tax overburden, for
stimulating consumer spending, and for stimulating business in
centives.
Representative C u r t i s . Under this when would you ever balance
the budget, or better still, when, looking backward in our history,
would you have ever balanced the budget since World War II ? Fol
lowing vour gap theory ?
Dr. H e l l e r . The budget has been balanced. There was essentially
no gap except in very short periods from 1946 to about 1955.
Representative C u r t i s . We had the Korean war in there.
Dr. H e l l e r . During that period we had a substantial number of
budget surpluses both on the conventional administrative budget and
even a larger number on the cash budget.
Representative C u r t i s . In retrospect, you would approve of those
balanced budgets?
Dr. H e l l e r . Those surpluses were extremely important and neces
sary and a desirable factor in moderating inflation and in stimulating
investment.
Representative C u r t i s . Then the key question is this: 1962. which
is predicated to beat all records in gross national product, which is the
way you have been measuring your gap, in spite of the fact that it is
that way, and 1961 broke all records in giross national product, you
do not feel that is a year when you need to have a balanced budget ?
Dr. I I e l l e r . Because of the fact that the economy is still operating
very substanitally below its tremendous potential,* fact which would*
la m sure, be repojjnized by a very great majority of private, business,
and labor economists, as well as the great m&jority of Government
economists.
POLICIES FOR FULL EMPLOYMENT
129
Representative C u rtis. I have been listening to them and interro
gating them to find why they felt that way. They do not all look
at it that way, fortunately. Those who hold your view, I honestly
think, are not looking at the indicators that really measure economic
growth.
Chairman P atm an. Congressman Reuss?
Representative Reuss. Mr. Chairman, Chairman Heller and mem
bers of the Council, I want to commend you for responding once again
to the mandate of the 1946 Employment Act, directing the Council
to send up not only an annual report out supplementary reports at such
times as they may be advisable. You did so last year, and I thought
your decision most appropriate. I thoroughly agree that a new re
port is advisable at tnis time, and I am delighted you have given us
this very comprehensive document.
I want to discuss with you the monetary policy which appears to be
in effect today. In the last 8 weeks, at a time when there has been
justifiable concern about the economy, the Federal Reserve Board has
markedly decreased the free reserves in the banking system, and this
has resulted in an increase in both short-term and long-term interest
rates, has it not ?
Dr. H e lle r . Yes, it has.
Representative R euss. The Treasury has also within the last few
days issued a long-term bond with a maximum legal permissible cou
pon of i y 4 percent. That is also a fact, is it not?
Dr. H e l l e r . Yes.
Representative R e u s s . If it were not for so-called balance of pay
ments considerations, it would be indefensible, would it not, to tighten
the supply and increase the cost of money at this time?
Dr. H e l l e r . In the light
nomic prospects, yes.
of
economic conditions today and eco
Representative R e u s s . S o let us look at the validity of the balance
of payments argument for doing this. You would agree, would you
not, that one, speculation, and two, the needs of trade, are a very im
portant cause of the movement between countries of short-term capital
funds?
Dr. H eller . Yes.
Representative R e u s s . Would you say that these causes are more
important than, or at least equally important as, differentials in in
terest rates?
Dr. H e l l e r . The answer to that question varies from period to
period. At one time, as in late 1960, when there was a speculative run,
no feasible amount of change in interest rates could have stemmed the
flow. At other times, however, a very substantial part of the shortrun flow is responsive to interest rates.
Representative R e u s s . In the last 8 weeks were interest rate differ
entials between the major trading nations such as to have justified an
apparent attempt to raise U.S. interest rates ?
Dr. H e l l e r . As Senator Douglas pointed out, in s o m e countries,
yes, and in some countries, no.
Representative R e u ss . Weren't Canada and the United Kingdom
the-only major countries with interest rates higher than ours?
Dr. Heller. Canada raised its short-term rate to about 5 percent,
and the U.K. had come down to just under 4 percent. Neverthe
130
POLICIES FOR FULL EMPLOYMENT
less there was still an incentive even with the differential for funds
to move out in response to these interest rates.
Representative R e u s s . Were the interest rate differentials, after
adjusting for exchange risks and forward cover, such in the last 8
weeks as to require a different policy on the part of this country ?
Dr. H e l l e r . I lack an intimate detailed knowledge of these move
ments, but I am under the impression that there were some pressures
on the dollar to which this was at least in part a response. While I
am not qualified to give you a very detailed answer on the movements
of forward cover and interest rates, I do know that there was an in
centive to move funds overseas, particularly to the United Kingdom
Representative R e u s s . Does the Council of Economic Advisers1
make an independent judgment as to whether a given interest rate
differential is a major risk for our balance of payments, or do you
accept the judgment of the Federal Reserve System ? I f your answer
is that you make an independent judgment, have you made one in
the last 8 weeks, and does it accord with that of the Federal Reserve?
And if it does not, have you let them know ?
Dr. H e l l e r . I would put our situation this way: We make a judg
ment based on information that is supplied by the Treasury and by
the Federal Reserve. But as far as the policy implications are con
cerned, we, of course, form our own counsel, and discuss these matters
with the Treasury, with the Federal Reserve Board, and with the
President in periodic meetings.
Representative R e u s s . Of course, if frail man should err in this,
the consequences could be most serious, could they not? I f we raised
our interest rate structure when it was not necessary for balance-ofpayments reasons, we would have injured our domestic growth pros
pects, needlessly.
And if domestic stagnation results in a large involuntary deficit,
perhaps made even larger by a tax designed to undo the effects of
tight money, we might in fact increase our balance-of-payments prob
lems. Foreign central banks could become more alarmed with such
a large budget deficit than from seeing modest quantities of short-term
capital move around.
Dr. H e l l e r . I think that any tightening that goes beyond what
is required for progress and stabilization on the b:ilance-oi-payments
and gold front is a heavy price to pay, and an unnecessary price to
pay, particularly when it hits long-term rates. We are concerned,
and have been concerned, with the recent tightening to which both
you and Senator Douglas have referred, with the question whether
it meets felt and actual needs, with the question of whether it might
not be nullified by rising interest rates in some of the other countries,
and with the question of whether it would not be possible to differ
entiate a little bit more between the rise in short-term rates and that
in long-term rates. These concerns of ours have been expressed in our
discussions within the administration and with the Federal Reserve
Board.
Representative R e u s s . Putting to one side the question of whether
we have in fact gone astray in the last 8 weeks in raising interest rates,
would you agree that interest rates higher than those we have today
are likely to harm our domestic situation and are of doubtful value
for our balance-of-payments situation ?
POLICIES FOR FULL EMPLOYMENT
131
Dr. H e l l e r . I feel that, given the present economic outlook, this is
a time to be very careful that interest rates not be raised one basis
point more, or credit tightened one dollar more, than is absolutely
required by the international payment situation. I think that this
requires continued vigilance in the current economic situation.
Representative R e u s s . Thank you.
C h a i r m a n P a tm a n . S e n a t o r J a v i t s ?
Senator J a v it s . Mr. Chairman, would you turn to your statement.
I call your attention to the sentence which reads:
The most recent evidence on economic activity, though mixed, offers cause for
concern.
I ask you, concern about what ?
Dr. H e l l e r . Concern about the full utilization of resources in the
economy and about the pace of further expansion.
Senator J a v it s . Does it offer concern that we may b e heading into
another recession ?
Dr. H e l l e r . When we tried to sum up our view on the outlook we
said that we cannot rule out the alternative possibility that the recent
slowdown in the expansion represents advanced warning of an eco
nomic decline. That is one alternative that has to be taken into
account in the formulation of policy and in the watching of the
indicators.
Senator J a v it s . When you use the word “ decline,” is that the same
meaning as my word “ recession” or is it a different meaning?
Dr. H e l l e r . In a sense, “recession” means a receding from the pre
vious levels achieved in the economy; and I suppose in this case “de
cline” is a euphemism for “ recession.”
Senator J a v it s . It is a fact, is it not, that you have omitted one
factor which is a sign of danger, and that is the diminution of inven
tory accumulation in the second quarter of 1962. Is not that correct?
Dr. H e l l e r . We specifically covered the $3.4 million rate of in
ventory accumulation in our statement.
Senator J a v it s . Except it is not at that particular point, is that
correct ? That is an additional factor.
Dr. H e l l e r . That is an additional factor and we pointed to it.
Senator J a v it s . N o w , may I ask you this question? Is there a con
nection between your statement that a program to improve the rate
of utilization of our resources and the rate of growth of our economy
must include the even more fundamental measures of tax reduction
and tax reform—is there a connection between that statement and the
statement that we have just been discussing that there is cause for con
cern ? In other words, is tax reduction a measure which is designed
to relieve us, if we can be relieved, of this case for concern ?
Dr. H e l l e r . I f further developments in the economy, Senator, con
firm the rather more pessimistic possibilities, the two are very much
related. But our statement to which you refer has both a short* and
long-run orientation. I think we are confronting, as the 5 years of
unsatisfactory economic performance indicate, a longer term problem
of inadequate expansion and continued underutilization of our re
sources which calls for tax reduction and tax reform, in any event. As
we noted in the list of considerations concerning the size, timing,
and composition of tax reduction there is also a shorter term ques
132
POLICIES FOR FULL EMPLOYMENT
tion of the need that may exist for overcoming temporary deficiencies
in consumer demand.
Senator J a v it s . A s a matter of fact, you say no decision has been
made on the size, composition, and timing of a recommended tax re
duction. I call that an agonizing indecisiveness on the part of the
President. One of my colleagues took a special exception to that—
Senator Proxmire of Wisconsin. What do you call it?
Dr. H e l l e r . Senator, I am not as good a phrasemaker; but I would
like to point out that the President has, after all, taken a decision
which I believe represents a decisiveness with respect to tax reduc
tion that has not been seen for many many years. He has said that
he will propose a tax reduction effective January 1, 1963. In other
words, there is a decision not only to cut taxes, but explicitly to cut
corporate and individual income taxes by an across-the-board reduc
tion—and, indeed, a net reduction in the sense that the reduction in
rates would not be offset by restoring the base.
Senator J a v it s . Then, are not you giving us the very narrow choice
as to whether we shall give the President the power to reduce or
whether we shall reduce ourselves. Is not that the choice you are
giving us? What you want is the power for the President to reduce.
I say we should reduce ourselves. So the choice is do we give the
President the power to reduce or do we reduce ourselves?
Dr. H e l l e r . I think that observation directs itself to a somewhat
different problem; namely, the standby tax-cutting authority. The
President’s request was for authority to cut up to 5 points from the
individual income tax rates for a period of 6 months. There, I think,
your comment is more directly applicable than to the other point of a
more permanent tax cut to take effect on January 1, 1963, which the
President is going to propose.
Senator J a v it s . It is fair to say, is it not, that the decision to cut
taxes has already been made in the sense that either we will cut
them now, or the President is going to recommend some other scheme
for cutting them as of January 1.
Dr. H e l l e r . In that sense, yes, it is.
Senator J a v i t s . The decision is made in that regard, is it not, really ?
Dr. H e l l e r . Yes, it is.
Senator J a v it s . Mr. Chairman, may I reserve the balance of my
time so I can vote?
Chairman P a t m a n . Dr. Heller, I would like to know about the
basic premise on which you are proceeding. Is our problem that the
rate of savings is too low or the rate of consumption too low?
Dr. H e l l e r . I think we have to look at two aspects of that. One
is the aspect of the question that relates to an underemployed econ
omy where there is a fair amount of slack, in which the primary prob
lem is that the level of total demand is too low.
Chairman P a t m a n * H o w is that related to the present situation?
Dr. H e l l e r . The level both of consumer demand and investment
demand are too low to make full use of the labor, machinery, plant,
and equipment that are available in the economy. Our problem at
the present time is not an inadequate level of savings.
POLICIES FOR FULL EMPLOYMENT
133
Chairman P i t m a n . But isn’t the fundamental problem the fact
that consumption is too low ?
Dr. H e l l e r . Consumption and investment demand are too low.
Chairman P a t m a n . The personal income tax cut which the Presi
dent has mentioned has been described as “ across the board." Does
that mean you reduce each tax rate by the same number of per
centage points?
Dr. H e l l e r . In saying that he would recommend an across-theboard reduction in rates, Mr. Chairman, it leaves the question open
whether it simply means a reduction in every bracket or a percentage
point bracket in every bracket or a percentage reduction in liabilities.
I would say that statement of the President does not rule out any
of several alternative ways of accomplishing the objective. I believe
what he is saying, in effect, is that he wants to see reductions from
top to bottom.
Chairman P a t m a n . If we increase the exemption, say, from $600
to about $900, or $1,000, income tax payers in each category would
get the benefit of it, would they not ?
Dr. H e l l e r . That would apply a tax reduction to all taxpayers.
Chairman P a t m a n . Even the 91-percent bracket would be bene
fited to the same extent.
Dr. H e l l e r . Taxpayers in the 91-percent bracket would get 91
percent of $300, if the exemption were raised to $900.
Chairman P a t m a n . So that would have an across-the-board effect,
too, wouldn’t it ?
Dr. H e l l e r . I believe the President spoke of across-the-board re
ductions in rates.
Chairman P a t m a n . I believe he did. I f we had an across-theboard tax cut, that would increase disposable income of families in
the high income brackets a great deal more than those at the low level
of the scale; if you felt that our basic problem is one of an inadequate
rate of savings, I could understand that kind of proposal. But it you
think that the problem is underconsumption, as you have stated, then I
should think you would want to make the largest cuts in the low-income
group to keep things even. In other words, an across-the-board cut
would tilt the income distribution in favor of the high income families.
Do you have any estimates of the different income classes as to how
much of the family income goes into consumption and how much goes
into savings, Dr. Heller t
Dr. H eller. I do not believe we have those at hand. Those are dif
ficult to come by. We will try to find what there is available and pre
sent it for the record.
Chairman P a t m a n . Will you please insert the information in con
nection with the revision of your remarks when you get your
transcript?
Dr. H eller. I would be happy to.
(The information is as follows:)
Data on consumption expenditure or saving by income bracket are not available for any year subsequent to 1965. The following data for 1950 are based
upon a BL&»Wharton School study and show current saving as a percentage of
after-tax money income. The unit is the urban family.
134
POLICIES FOR FULL EMPLOYMENT
Annual after-tax money income
Under $1,000,
$1,000 to $1,999........................................
$2,000 to $2,999............
$3,000 to $3,999...
$4,000 to $4,999-.......................................
Savins as
percent of
after-tax
income
—81.7
—6.2
—1.7
2.4
4.5
Annual after-tax money income
Saving as
percent of
after-tax
income
6.5
10.0
16.3
30. 7
$5,000 to $5,999.............................. ..........
$6,000 to $7,499.........................................
$7,600 to $9,999............... .........................
$1C,000 and over_____________________
Source: Friend and Schor, “ W ho Saves," Review of Economics and Statistics, M ay 1959, p. 232.
Data on consumption expenditure by income bracket for 1955 are available
from a study by Life magazine, but the income concept is before taxes, and con
sumption expenditure does not include gifts and contributions, educational ex
penditures, or expenditures away from home on vacation. Since average income
by bracket is not known, percentages could not be calculated. The unit in this
case is the household, not the family.
Annual household income before taxes
Under $2,000......................................... .
*2,000 to $2,999............. .......... ........ ........
$3,000 to $3,999............... ..........................
$4,000 to $4,999.........................................
Average
consump
tion of
goods and
services
$1,933
2,924
3,839
4,363
Annual household income before taxes
$5,000 to $6,999............................. ............
$7,000 to $9,999..........................................
$10,000 or more
-
Average
consump
tion of
goods and
services
$5,016
6,063
7,946
Source: Life Study of Consumer Expenditures, conducted for Life b y Alfred Polite Research, Inc., New
York, 1957, vol. 1, p. 17.
Chairman P a t m a n . Have you had any estimates made to show a
given amount of stimulus, how much reduction of taxes would be in
volved and how it would be distributed under each of the alternative
methods: raising the exemption, making the cut in the first income tax
bracket, and making the cut across the board ?
Dr. H eller . We have made some comparisons to see what kinds of
reductions would be involved for any given loss of revenue. For that
purpose we have prepared a table of five different tax proposals all of
which would reduce total tax liability by approximately $6 billion.
It is not intended as anything more than an example. It does not sugest that $6 billion is the figure we are talking about. This table could
e used to construct comparison for any other level of tax reduction.
[This table is inserted into the record below.]
Chairman P a t m a n . If we had an across-the-board cut in taxes,
which would change the income distribution in favor of the top bracket
income receivers, wouldn’t we have a worse fiscal structure after the
period of deficit is over? In other words, wouldn’t you, in the long
run, increase the troubles which the tax cut is intended to cure ?
Dr. H eller . It is extremely hard to answer a question like that, Mr.
Chairman, without having a more or less explicit proposal concerning
the relationship of proposed rates in the high brackets and the low
brackets.
Chairman P a t m a n . I will ask you about one other issue that was
raised in your testimony. You stated that during this economic re
covery, there has been a compelling need for general monetary ease.
I repeat that. You say there has been a compelling need for general
monetary ease as part of an expansionary economic program for full
employment and adequate utilization of our resources.
f
What can the President and the present administration do about
monetary
ease at this time under present laws and practices?
135
POLICIES FOR FULL EMPLOYMENT
Dr. H e l l e r . A s sev era l m e m b e rs o f th e c o m m itte e h a v e p o in te d
o u t, th e a d m in is t r a tio n 's p o s s ib ilit ie s f o r c r e a tin g ease are lim ite d
since th e primary instrument of monetary management and policy is
th e Federal Reserve Board.
Chairman P a t m a n . Over which you have no control.
Dr. H eller . Over which there is no legal control, as such. There is
an informal administrative coordination and cooperation in which the
administration tries to develop, in concert with the chairman of the
Federal Reserve Board, an approach to our economic policy problems.
This is a matter of persuasion and cooperation rather than a mat
ter of dictation.
Senator P r o x m ir e . I would like at this time to read a letter which
Chairman Patman has just received from Ewan Clague on the busi
ness of the interrogation by Congressman Curtis and myself this
morning, and our concern over the statistic “ Open Employment” on
page 9 of the Economic Indicators, showing that the total labor force,
including Armed Forces, between June 1961 and June 1962 remained
almost stationary. You have already been questioned on this, I be
lieve, Dr. Heller.
Dr. H e l l e r . Yes, sir.
Senator P r o x m ir e . And responded to it. But the fact that this
was the first time in many years, and some concern was expressed that
there may be a statistical error or some statistical mistake, I would like
to read this letter.
(The letter referred to follows:)
U.S.
D e p a r t m e n t o r L abor,
B u r e a u of L abor S t a t is t ic s ,
Washington, D.C., August 8, 1962.
The Honorable
W
r ig h t
P atm an,
Chairman, Joint Economic Committee,
U.S. Congress, Washington, D.C.
D e a r C h a i r m a n P a t m a n : Since mid-1961, the over-the-year growth in the labor
force has appeared to be slowing down. Evidence of this is provided by the
monthly survey of the labor force, conducted by the Bureau of the Census for
the Bureau of Labor Statistics. On the average during the first half of 1962,
the proportion of the population in the labor force in almost every age group
was slightly below that for the comparable period o f the year 1961. The only
significant exceptions were men and women 18 to 19 years of age and women 45
to 64 years of age. Somewhat the same picture is seen in comparing the second
half of 1961 with the same period in 1960.
There is no reason to believe that these declines are due to the operation of
the survey. There was no change in the sample areas included in the monthly
survey, in the methods of interviewing, or in the quality-control methods used by
the supervisory staff. No revisions in the concepts and definitions of the labor
force, employment, and unemployment have been made.
The only new element in the statistics is the introduction of data from the
1960 Census of Population into the estimation procedure to replace those from
the 19f>0 census. This change was made in April 1962 when the census material
became available. The effect was to reduce employment and the civilian labor
force by about 200,000; no changes occurred in the percent distributions within
age groups or in labor force or unemployment rates by age. The revision and
its effects were fully described in the monthly report on the labor force for
April 1962. In each subsequent month, our statements about year-over-year
labor force growth always make allowance for this revision.
I am enclosing a copy of the monthly report on the labor force for April 1962
which contains a statement on the revision in the estimation procedure due to
the 1960 census figures.
Sincerely yours,
___
&78eo o—« ---- io
E
wan
C lague,
Commissioner of Labor Statistics.
POLICIES FOR FULL EMPLOYMENT
136
u s d l - 5210
FOR RELEASE: 12 Noon, Tuesday
May 15, 1962
U .S. DEPARTMENT OF LABOR
BES, T el. 961 - 2916
BLS, T el. 961 - 2634
THE EMPLOYMENT SITUATION: APR IL 1962
NOTE: Beginning with the figu res fo r A p ril 1962
inform ation from the I960 Census of Population
replaces that from the 1950 Census in the estim a
tion procedures for the labor fo rce survey. The
monthly and annual change a in the labor fo r c e
data quoted in this release are based on the old
A p ril figu res, which are com parable with p r e
viously published data. The d ifferen ces between
the old and new data are sm all (see page S -l in
attached Monthly Report on the Labor F o r c e ).
F actory employm ent and hours of w ork showed continued strong im p rov e
ment in A p ril, Secretary o f Labor Arthur J, G oldberg announced today.
With m ost manufacturing industries reporting b etter-th an -sea son al
developm ents during the month, jo b s in this se cto r rose by 80,000 instead o f
showing the sm all decline usual at this tim e o£ year*
C onstruction em ploym ent
expanded sharply during the month after the usual spring pickup had been delayed
by bad weather in M arch.
Trade em ploym ent continued to show better-th an -
seasonal im provem ent fo r the fourth consecutive month.
A ltogeth er, nonfarm
p ayroll em ploym ent at 54. 7 m illion was up 675, 000 from M arch to A p ril, or a
quarter of a m illion m ore than seasonally.
With the gains of the past few months, manufacturing em ploym ent has
returned to within 200,000 of the lev el in May I960, the p r e r e c e s s io n peak in.
general business activity, while trade is now significantly above that le v e l.
137
POLICIES FOR FULL EMPLOYMENT
THE EMPLOYMENT SITUATION
May 15, 1962
Page 2
The factory workweek continued to im prove in A pril, and at 40. 4 hours
was at a level which has not been exceeded for this month since 1953.
Overtime hours m manufacturing edged up to 2* 7 hours, the highest level for
A pril since data becam e available in 1956.
As announced on May 9, unemployment declined seasonally by 400, 000 in
A pril, and at 3. 9 m illion was L 0 m illion low er than a year e a rlie r.
The
seasonally adjusted rate of unemployment of 5. 5 percent was virtually unchanged
from the preceding 2 months but was w ell below the 6.9 percent o f a year
e a rlie r.
m illion.
State insured unemployment declined by 400,000 m m id -A p ril to 1.9
Total em ploym ent m oved seasonally higher by 700,000 to 66. b m illion
in A pril.
N onagncultural employm ent
(including the self-em p loyed , unpaid
fam ily w ork ers, and d om estics) rose by 450,000 to a re co rd for A pril of 61.9
m illion, an in crea se over the year of 1. 2 m illion .
A gricultural employm ent in creased by 250 , 000 from M arch and was
virtually the same as a year e a rlie r in A pril at 5. 0 m illion.
The number of w orkers on part time for econ om ic reasons declined by
100, 000, somewhat m ore than seasonal, to 2. 2 m illion in A p ril, som e 800, 000
le s s than at the same time in 1961.
The total labor fo r c e , including the A rm ed F o r c e s , rose about seasonally
again in A pril to 73. 7 m illion, and was 650,000 higher than a year e a rlie r.
C h aracteristics of the Unemployed
Age and Sex.
Nearly all of the A p ril decline in unemployment was among
adult m en, reflecting the spring pickup in outdoor activity.
While the unem
ployment rate fo r this group has shown mainly seasonal im provem ent since
January, both their number and rate of unem ploym entweresubstantially under
April 1961 levels*
J ob lessn ess among women and teenagers was unchanged over
the month.
»
138
POLICIES FOR FULL EMPLOYMENT
THE EMPLOYMENT SITUATION
May 15, 1962
Page 3
Duration of Unemployment.
The reduction in unemployment in A p ril was
prim arily among those who had been out of work from 1 to 3 months (5 to 14 w eeks)
about in line with seasonal expectations, as was the lack of change in the number
of lon g-term unemployed (of 15 or m ore weeks duration).
W orkers who had
been seeking work fo r 2? weeks or m ore numbered 700, 000 in A pril, unchanged
from M arch, but 300,000 le s s than the recession high in July 1961.
H owever,
the number in this group was still 300, 000 higher than before the recession .
New W orkers. Among the unemployed m A pril w ere 450, 000 persons
seeking their fir s t jo b s , som e 80 percent of whom w ere teenagers.
Inexperienced
w orkers have found it increasingly difficult to find job s in recent y ea rs.
A pril, they accounted fo r 12 percen t of total unemployment com pared
with 7 percent at the trough of the 1958 recession .
This
139
POLICIES FOR FULL EMPLOYMENT
EMPLOYMENT A N D UNEMPLOYMENT SUMMARY
(!■ dMMMfe)
Apr. 1962
Lafco#(*rct itatlltlct1
20yttti andovar, fcMtlti......................
Ua*«ptojr«4 •total.......... ...............................
20yaara aid ot«(, aialaa........................
Noaairicaltutal workara m part-«iaia fee
•coaoaijc rcaaoas - total....................... .........
Payroll a«ptoyaioN» itoflujca2
Eaploytci on oooagricvltural poyrolla *total...............
Maaufacturiog............................................. , ,
Mlaiaf............... ................................
Cootract coaatnictloa. .............................
Traoapoftatloo andjmbUc utJlitJaa .........................
Finaaca, iaaoraaca, aadreal .................. .............
Govamaiaat............................ ............ .
Aveng* weakly hoin of ptodactioa vodtcra.
UaonployMoat laa«ni<«idUiHti
Ultial clataa, weektadlagt
•V ***- H
April 21
April 28
Hfcrch
March
March
April
17
24
31
7
April 15
April 22
April 29
5
my 6
Insured^eaployaent, ««*k aadlagt
April H
April 21
April 28
March 17
Maxoh 24
March 31
April 15
April 22
April 29
Mar. 1962
A pr..1961
73,216
70,696
65,734
73,654
70,769
66,824
4,961
61,863
4,089
37,716
20,058
3,946
748
2,115
1,084
5.5
1,483
719
73,582
70,697
66,316
4,782
61,533
4,062
37,455
20,016
4,382
718
2,458
1,205
5.5
1,485
734
2, 2a
1,050
1,171
2,336
2,978
1,110
1,226
1,466
54,025
16,518
9,333
7,185
53,171
15,904
8,836
54,699
16,598
9,396
7,202
644
2,563
3,909
11,406
2,773
17,670
9,136
40.4
2.7
5,000
60,734
3,871
37,235
19,627
4,962
778
2,773
1,411
6,9 *
2,128
923
1,512
7,068
640
657
2,619
3,870
2,323
3,881
11,214
2,755
7,572
9,122
11,162
2,724
7,448
8,787
40.3
2.6
------- -
39.3
|1
2 .1
ProfroaU)
261
.................
............
253
244
................
252
270
255
244
308
364
328
312
330
iagular TEC* Regular TBC* Regularise?
•••*•....... 1,872 234 2,271 310 2,838 415
.................... 1,803 210
2,149 306 2,724 608
1,727 178
2,035 300 2,610 653
1/
Culondar vook ending noaroat 15th o f month,
2/
Tuiujyjriry Ji: tended Unoraploy-ont Componaation J'rotfreuno, beginning April 1961*
P a y r o ll p o r io d ondi:>c n o a rc a t 1 5th o f month.
141
POLICIES FOR FULL EMPLOYMENT
April 1962
m o n tlilv
r e p o r t
o n
TH E LABO R FORCE
e m p l o y m e n t • u n e m p lo y m e n t • h o u r s a n d e a r n in g s
U N IT E D
S T A T ES D E P A R T M E N T O F LA BO R
A r t h u r J . ^ o ld h f r p * Secntary
Issued
May 1962
142
POLICIES FOR FULL EMPLOYMENT
U.S. DEPARTMENT OF LABOR
Arthur J. Goldberg, Secretary
B ureau o f L ab o r S t a t i s t i c s
Evan C lag u e, C om m issioner
w ith th e c o o p e r a tio n o f th e
B ureau o f Employment S e c u r it y
R o b e rt C. Goodwin, A d m in is tr a to r
T h is r e p o r t com bines The M onthly R e p o rt on th e L abor F o rc e p r e v io u s ly
is s u e d by th e B ureau o f th e C ensus and th e Employment, H ours, and E b rn in g s
r e l e a s e p r e v io u s ly is s u e d by th e B ureau o f L abor S t a t i s t i c s .
In a d d i ti o n ,
s t a t i s t i c s and a n a l y s i s r e l a t i n g t o in s u r e d unemployment have been p ro v id e d
by t h e B ureau o f Bq>loym ent S e c u r i ty .
The B u reau o f t h e C ensus c o l l e c t s and t a b u l a t e s f o r th e B ureau o f
L abor S t a t i s t i c s th e la b o r f o r c e d a t a b a se d on h o u se h o ld in te r v ie w s , shown
in t h i s re p o rt.
A d e s c r i p t i o n o f th e m anner i n w hich t h e v a r io u s s t a t i s
t i c s a r e c o l l e c t e d and w hat th e y r e p r e s e n t i s p r o v id e d i n t h e E x p la n a to ry
N o tes.
The Monthly Report on the Labor Force la prepared in the Bureau o f Labor S t a t i s t i c s ,
D i v is io n o f Manpower and Eaployaen t S t a t i s t i c s , H a ro ld G o ld s te in , C h ie f.
POLICIES FOR FULL EMPLOYMENT
143
THE MONTHLY REPORT ON THE LABOR FORCE; APRIL 1962
Note: Beginning with the figures for A pril 1962, information
from the I960 Census of Population replaces that from the
1950 Census in the estim ation procedures for the labor force
survey. The monthly and annual changes in the labor force
data quoted in this release are based on the old A pril figures,
which are com parable with previously published data. The
differences between the old and new data are small (see page S- l).
Factory employment and hours of work showed continued strong im prove
ment in A pril.
With most manufacturing industries reporting better-than-seasonal
developments during the month, job s in this sector rose by 80,000 instead of
showing the small decline usual at this time of year. Construction employment
expanded sharply during the month after the usual spring pickup had been delayed
by bad weather in M arch. Trade employment continued to show better-thanseasonal improvement for the fourth consecutive month. Altogether, nonfarm
payroll employment at 54. 7 m illion was up 675, 000 from M arch to A pril, or a
quarter of a m illion more than seasonally.
With the gains of the past few months, manufacturing employment has
returned to within 200, 000 of the level in May I960, the p rerecession peak in
general business activity, while trade is now significantly above that level.
The factory workweek continued to im prove in A pril, and at 40. 4 hours
was at a level which has not been exceeded for this month since 1953. Overtime
hours in manufacturing edged up to 2. 7 hours, the highest level for April since
data becam e available in 1956.
As announced on May 9, unemployment declined seasonally by 400, 000 in
April, and at 3. 9 m illion was 1. 0 m illion low er than a year e a rlie r. The
seasonally adjusted rate of unemployment of 5. 5 percent was virtually unchanged
from the preceding 2 months but was well below the 6*9 percent of a year e a rlie r.
State insured unemployment declined by 400,000 in m id-A pril to 1*9 m illion.
Total employment moved seasonally higher by 700, 000 to 66. 8 m illion
in A pril. Nonagricultural employment (including the self-em ployed* unpaid
fam ily w ork ers, and dom estics) rose by 450, 000 to a record for April of 61.9
m illion, an increase over the year of I. 2 million.
Agricultural employment increased by 250, 000 from March and was
virtually the same as a year ea rlier in April at 5. 0 m illion.
The number of workers on part time for econom ic reasons declined by
100,000, somewhat m oie than seasonal, to 2.2 m illion in A p ril, some 800,000
less than at the same time in 1961.
The total labor fo rce , including the Arm ed F o r ce s, rose about seasonally
again in April to 73.7 mUUon. and was 650,000 higher than a year ea rlier.
144
POLICIES FOE FULL EMPLOYMENT
TRENDS IN EMPLOYMENT AND UNEMPLOYMENT
July 1948 to dale
(trlu al anil M'Udontllv •Wjiidlril)
MIHIONS
OF PERSONS
Mil I IONS
OF PERSONS
i i r
Unemploymenl
1
1
l A C l T A L '* |
j~ ~
MiiiHilmimiin
1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 I95A 1959 1960 1961 1962
POLICIES FOR FULL EMPLOYMENT
145
Nonfarm Payroll Employment
Nonfarm payroll employment rose sharply by 675,000 to an April record
of 54. 7 m illion. The total was I. 5 m illion higher than the depressed level of a
year ago and 530,000 higher (seasonally adjusted) than before the beginning of the
business downturn in May I960. Better>than.-seasonal gains were widespread in
manufacturing industries, while construction employment regained its previous
month's lo ss. Sm aller in crease* which were also better than seasonal, occu rred
in trade* transportation and public utilities, and State and local government.
Employment in manufacturing rose by 80,000 to 16. 6 m illion; it usually
declines in April. The gains were spread among virtually every manufacturing
industry, in both consum er and producer goods. Employment in transportation
equipment* which usually shows a seasonal decline in April* held its employment
level as automobile sales reached their highest point since September 1955. The
fabricated m etals, ele ctrica l equipment, and machinery industries increased
significantly on a seasonally adjusted basis* as did prim ary metals and the stone,
cla yt and glaas industries. In the soft-goods manufacturing industries* the
greatest strength was shown in apparel where job s in A pril were cut substantially
less than in the same month in previous years.
The largest part of the A pril jo b increase was seasonal and occu rred in
other than manufacturing industries. The increase of 240,000 in construction
brought seasonally adjusted employment up to the level of February 1962 and
Decem ber 1961 after weather affected declines in January and March 1962. The
job pickup in transportation and public utilities is the third consecutive monthly
increase whereas there had been virtually no im provem ent during the last half
of 1961 and a decline at the turn of the year. Trade has picked up 100,000
w orkers (seasonally adjusted) since January, and has now risen significantly
beyond its May 1960 level for the first time.
Half of the 1. 6 m illion job s gained during the recov ery period from
February 1961 have been in manufacturing, concentrated in the five durable
goods industries which accounted for the m ajor part of the recession lo s s . These
industries (prim ary m etals, fabricated m etals, e lectrica l equipment* transportation
equipment, and m achinery) have increased an average of 10 percent over their
recession lows* although machinery has shown much less of a gain than the others.
In nondurable goods employment, the in creases averaged only 2- 1/2 percent
during the upswing, but these industries suffered far less loss during the
recession . E lectrical equipment alone among the m ajor manufacturing industries
has risen substantially beyond p rerecession levels after allowance for seasonal
change. (See Table A .)
The other half of the I. 6 m illion Job increase since February 1961 was
in trade, se rv ice , governm ent, and finance. Among these, only trade shows any
decline during the rece ssion , and this decline was sm all. On the other hand,
employment in service and government continued steadily upward without
interruption during the recession , as it had in these industries throughout the
postwar period.
In other nonmanufacturing industries, mining and construction are the
only onee showing lo seee (totaling 75*000) since the latest recession low.
146
POLICIES FOB FULL EMPLOYMENT
EMPLOYMENT CHANGES IN SELECTED INDUSTRIES
May I9 6 0 to February I 9 6 lt and February 1961 to April 1962
(Seasonally Adjusted]
Thousands
300
600
500
i
700
r
State and Local Government
vzzzzm gain
LOSS
Receuion Period
Finance and Service
I vzzzzzzzzzzzzzzzzzzzzz
1 May I 960- February 1961
Recovery Period
A February
April
1961
1962
Metal and Metal-Using Durable Goods Manufacturing*
I
All OMier Durable Goods Manufacturing
II
■IE m m *
Nondurable Goods Manufacturing
II
.. V / / / / / / / / / / / / / / / / / / A
Wholesale and Retoil Trade
ii
7777777////////y///A
Transportation and Public Utilities
:l
*Pri«ary
fabricated metoli, Machinery,
electrical equipment, and treniportqtioii
t ^ w ip a iH i,,
M*(*s £ lio * «e » to April 1962 u l t n l v M
tr«M preliminary data.
POLICIES FOR FULL EMPLOYMENT
T a h le A .
^ p lo y m e n t C h an g es i n M o nfarn I n d u s t r i e s I n P o s t - t f o r ld War I I
C y c le s ( S e a s o n a lly a d ju s t e d , l a th o u sa n d s)
1 9 60-62
D u r a b le g o o d s . . . . . . . . . . . . . . . . .
M a n u fa c t u r in g w orkw eek ( h o u r s ) . . .
C o n s t r u c t io n , t r a n s p o r t a t io n ,
M i n i n g * , * * .............................
T r a d e ....................................................................
1 9 5 7 -5 9
M a n u fa c t u r in g w orkw eek ( h o u r s ) . .
C o n s t r u c t io n , t r a n s p o r t a t io n ,
an d l i n i n g . . . . ................ .........................
T r a d e ..........................................................
195V55
M a n u f a c t u r in g w orkw eek ( h o u r s ) , ,
C o n s t r u c t io n , t r a n s p o r t a t io n ,
an d m in in g ................................ • • • • • • • •
O o v a r i M i t .......................................................
1 9 A B -5 0 2 /
r e c e s s io n
le r e l
C han ge t o
Ifay I 9 6 0
F e b . 1961
M a n u f a c t u r in g w o rkw eek ( h o u r s ) • •
C o n s t r u c t io n , t r a n s p o r t a t io n ,
T r a d e ....................................................................
B u s in e s s
Chan ge t r m . t r o u g h
A f t e r 1 4 m on th s
A p r i l 1062 1/
5 4 ,5 8 4
1 6 ,9 6 5
9 ,6 0 8
7 ,3 7 7
4 0 .1
- 1 ,0 9 9
- 1 ,0 2 3
-8 1 1
-2 1 2
- 0 .8
+ 1 ,6 2 7
+ 852
+669
+183
+ 1 .5
7 ,6 8 6
1 1 ,4 4 2
9 ,9 9 6
8 ,4 7 5
-3 3 2
-1 4 6
*55
+186
+245
+ 399
M y la g
+195
42 0 7
i g a i r a
J t m i 10 5 0
5 3 ,0 7 7
1 7 ,2 4 0
9 ,9 0 2
7 ,3 3 8
3 9 .9
- 2 ,1 7 6
- 1 ,4 7 8
- 1 ,1 9 7
-2 8 1
-1 .3
+ 2 ,8 7 8
8 ,0 0 8
1 0 ,9 2 2
9 ,2 5 5
7 ,6 5 2
-5 5 5
-3 1 8
+17
+158
+330
+548
+425
+341
J u l y 1953
A n » . 1051,
+ 1 ,2 3 4
+962
4 2 72
+ 1 .9
O c t * 19 55
5 0 ,4 4 9
1 7 ,7 8 2
1 0 ,2 7 5
7 ,5 0 7
4 0 .7
- 1 ,7 1 1
- 1 ,7 6 4
- 1 ,3 9 1
-3 7 3
- 1 .0
+ 2 ,6 1 7
+ 1 ,0 9 8
48 32
+ 266
+ 1 .2
7 ,7 6 4
1 0 ,2 6 5
8 ,0 3 7
6 ,6 0 1
-3 3 2
-5 3
+ 344
+ 194
+371
1948
4 5 ,1 3 8
1/
2/
147
1 5 ,5 3 4
8 ,3 1 1
7 ,2 2 3
3 9 .8
7 ,4 0 8
9 ,3 3 9
7 ,0 8 8
5 ,7 6 9
1212
+454
+ 487
+ 207
P t f i* 1 9 5 0
- 1 ,3 7 4
-2 1 3
- 0 .3
+ 3 ,9 6 1
+ 2 ,1 5 7
+ 1 ,8 5 0
+307
+ 1 .4
-7 7 8
-1 0 4
+81
+99
4937
42 9 9
+244
+324
-2 ,2 8 9
- 1 ,5 8 7
P r e lim in a r y
B o th J o b l o s s e s an d g a i n s d u r in g t h e 1 9 4 8 - 5 0 c y c l e w e r e e x a g g e r a t e d tjy
M it lo m r ld e s t r i k e s I n c o a l an d s t e e l an d t h e su b s e q u e n t r e t u r n o f t h e
w o r k e r s on s t r i f e * .
POLICIES FOR FULL EMPLOYMENT
148
CHANGES IN NONFARM PAYROLL EMPLOYMENT
IN 3 POSTWAR BUSINESS CYCLES
(S c o to n a lly ad ju ste d }
Employment Chang* from
Prorocouton Poak
(In tlittiiMid*)
Employment Chang* from
Prerecostion
0" iIk
2,000 fftrictiiion
1,500
1,000
2,000
P*ok
r*ay 1960)
|July 1957)
duly 1953)
500
0
-500
■1,000
t \K I I| |.....U > * "
.1,500
-2,000
-2,500
N — — ^ \ l9 5 7 -5 9
I 11I I I
* i » I l 1 I t 1 l t 1 1 1 1 1 1 I _L
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 2728 29
Month* From fr«r»c«»ion Poak
01
UNEMPLOYMENT RATE
July 1948 to dale
Nrmi tl
9.0
CM Hw U W r H f i«
(S r in V N illt «4ljit»l«'<l)
1948 1949 1950 !95l 1952 1953 1954 1955 1956 19V 1958 1959 1960 1961 W62
POLICIES FOR FULL EMPLOYMENT
149
Increases in the number of nonproduction w orkers have contributed to
the gains in manufacturing employment in recent months. The employment of
these w ork ers, who perform the c le ric a l, adm inistrative, sales, and professional
work in manufacturing, tended to remain fairly steady at 4 .2 m illion during
the period of recession (when hundreds of thousands of production w orkers were
being laid o£f) and during the early period of recovery. Since the fall of 1961,
however, there has been a resumption of growth in their employment; since
September nonproduction w orkers have contributed about one-sixth of the gain
in manufacturing employment on a seasonally adjusted basis.
Hours and Earnings
The factory workweek, at 40.4 hours,
has not been exceeded in any April since
1953. B etter-than-seasonal workweek
developments were registered by every
m ajor industry except lum ber, which
reported no change after reaching a very high
level in M arch. Notable gains in the durables
sector were registered in fabricated m etals,
electrica l equipment, transportation equipment, and furniture. In the soft-goods
sector, apparel and textiles Shows the most
significant im provem ent.
Overtime hours averaged 2. 7 in April
com pared to 2. 6 in M arch, and 2. 5 in
February. A year ago, factory em ployees
worked 2.1 hours overtim e.
At $96. 56, weekly earnings o f manu
facturing production w orkers increased 65
cents from March to A p ril, regaining the
all-tim e high level o f D ecem ber 196).
Compared to a year ago, weekly earnings are
$5. 78 or 6-1 /2 percent higher. Hourly earnings at $2. 39 are 1 cent higher than last
month and 8 cents higher than A pril 1961.
mo
mi
I9*>
Total Employment
Total employment continued its regular spring expansion with a seasonal
increase o f 700,000 to an April record of 66. 8 m illion. Total nonagricultural
employment (including the self-em ployed , unpaid fam ily w orkers and dom estics)
rose seasonally by 450,000 between M arch and A p r il, and at 61.9 m illion, was
also at a re co rd high for A pril.
Agricultural employment rose by 250,000 over the month to 5 .0 m illion.
This increase was le s s than usual for A pril. Agricultural employment was i t the
same level as a year ago, but the number o f farm w orkers in A pril 1961 was held
down by adverse weather.
150
POLICIES FOR FULL EMPLOYMENT
SELECTED MEASURES OF UNEMPLOYMENT
AND PART-TIME EMPLOYMENT
1955 10 date
(Seasonally adjusted)
19 5 5
1956
1957
1958
1959
1960
1961
1962
1963
Explanatory notea to chart 1
Labor force time lost represent® the man-hours loat by the unemployed and those on
part time for economic reasons» as a percent of total man-hours potentially available to the
civilian labor force.
Man-hours lost are computed by asswing the unemployed lost 37.5 hours a week, and
that those on part tine for economic reasons lost the difference between 37*5 and the time
they actually worked*
Man-hours potentially available (the base for the rate) are obtained by adding!
(1)
(2)
Man-hours
Man-hours
job but
(3) Mao-houra
actually worked
that ooula hare been worked by employed persons with a.
not at work, assuming a 37*5 hour workweek
lost*
ttMgplogiagt rate, experienced wage and salary workers, is based on unemployment and
labor foroe figures that exclude tuosa *no never woriced, self-employed and tmpaid fasdly
workers* All wage and salary workers are represented, inoluding those in agrioulture,
dowestio service, government, and a ll other nonfan industries*
Cheaployaent rate* a ll oirilian workers* is the standard seasonally adjusted rate
of unemployment*
Ifaesrployaeiit rate, married wen, represents the number of vnemployed serried Men as a
percent or a ii n m e a nen in tue civilian labor foroe (employed plus unemployed}* These
figures exclude married men living apart from their wires* The rates for 19S aid 1956
are based on pre-1957 definitions of unemployment and employment*
NOTB* Tor a more detailed discussion of
the time-lost measure» see Technical Note
on "Some Alternative Zhdexes of Hiemploymeat* in the Monthly Labor Review,
February 196c, pp*lo> rr.
POLICIES FOR FULL EMPLOYMENT
151
Full- and P art-tim e Employment. The number o f nonfarm w orkers on
full-tim e •cEe3uIeVToikr^ea^onalIy-in~KprIi by 550,000 to 50.8 m illion, with
virtually all o f tike increase occurring among men* The 35* 2 m illion men with
full-tim e jobs this A pril also accounted for nearly a ll the 1,3 m illion increase in
full-tim e work since A pril a year ago; however* relatively few women had been
cut back from full- to part-tim e work daring the recession .
The number of nonfarm w orkers on part time for econom ic reasons
dropped by 100,000 after increasing in both February and M arch. At 2 .2 m illion
in A pril, the number o f such part-tim e w orkers was at about its January level
and about 800,000 below its year ago level. The o v e r-th e -y e a r decline was alm ost
evenly divided between persons who had been cut back from full-tim e to part-tim e
work and persons usually working part time because full-tim e w ork was not
available.
(See Table B . )
C h aracteristics o f the Unemployed
Seat. Mainly because of tike spring pickup in outdoor activities,
the number o f unemployed adult men fell seasonally in A pril by 350,000, accounting
for four-fifths of tike decline in total unemployment. A fter seasonal adjustment,
however, their unemployment rate remained virtually unchanged over the month
at 4 .6 percent. Following a substantial decline between August 1961 and January
1962, the unemployment rate for adult men has shown no further improvement*
N evertheless, at 2.1 m illion this A p ril, the number o f unemployed adult men
was 650,000 le s s than in A pril 1961 and their unemployment rate was w ell below
the 6.0 percent o f a year ago.
No significant changes have occu rred recently in unemployment among
women and teenagers* However* in both number and rate* unemployment among
adult women was considerably below the high levels o f a year ago. At 750,000*
the number o f unemployed 14 to 19 y ea r-old s accounted for le s s than on e-fifth o f
total unemployment, but their rate o f unemployment was two and on e-h alf tim es
greater than the overa ll rate* There was no change in the number o f unemployed
teenagers over the year.
Duration o f Unemployment. V irtually all o f the reduction In unemployment
was among persons wko ta d been job le s s for le s s than 15 w eeks. Their number
fell seasonally In A pril by 400* 000 to 2. 5 m illion with p erson s out o f w ork fo r m ore
than 4 weeks accounting for m ost o f the decline* The number o f p erson s unemployed
for m ore than 15 weeks was unchanged at 1. 5 million* but no seasonal change was
expected.
Among those looking fo r work for 15 weeks o r longer were 700*000 person s
who had been looking fo r work for over 26 weeks* about the same number as in
M arch. The number o f v e ry lon g-term unemployed was 200,000 below its y ea r-a go
level. While there has been virtually no change in the number o f v e ry lon g-term
unemployed since the beginning o f the year* this group was increasing steadily
throughout the firs t half o f 1961* reaching a re ce s s io n high o f about 1 m illion in
July* several months after the trough in econ om ic activity. A fter 14 months o f
re co v e ry the number o f v ery lon g-term jo b le s s is 300*000 higher than its p r e
re ce ssio n le v e ls.
Although this pattern o f lagging re cov e ry a lso follow ed the
1958 trough in business activity, v ery lon g-term unemployment is currently
some 450* 000 higher than in the months p r io r to the 1957-58 re ce s s io n .
152
POLICIES FOR FULL EMPLOYMENT
Induitry o f L u t Job. Unemployment rates in durable and nondurable
good* manufacturing, mining, and construction were below their year-ago level
this A p ril, and in durable goods manufacturing they w ere also below the level in
A pril 1960 before the re cession began. In transportation, trade, and finance and
se rv ice , unemployment rates while down over the year, were above those of
A pril 1960. In every m ajor industry group, unemployment rates were still well
above those registered under the high employment conditions o f A pril 1957.
New W orkers. Among the unemployed in A pril were 450,000 persons
looking fo r their firs t jo b s , about the same number as a year ago. Virtually
all o f these inexperienced unemployed w ere under 25 years of age and four-fifths
o f them w ere between 14 and 19 years of age. Over the past 4 years, the total
number o f 14-24 ye a r-o ld s in the population has increased by 17 percent* Partly
because o f tike tendency for young people to remain in school longer, the number
o f 14*24 y e a r-o ld s in the labor force has increased by only 12 percent. In con
trast, the number of unemployed young people seeking their firs t job has
in creased by 30 percent, two and one-half tim es greater than the rate of their
labor fo rce in crea se. A ll o f this increase in the inexperienced unemployed has
been among teenagers; there has even been a slight decline in the number of
unemployed new w orkers 20 years o f age and over.
In A pril 1958, the trough of the 1958 recession , new w orkers accounted
fo r 7 percent o f the total unemployed. This A p ril, they accounted for 12 percent.
The increase in the number o f unemployed new w orkers has been greatest at the
two extrem es in term s o f duration of unemployment. Both the very short-term
unemployed (l to 4 weeks) and the v ery lon g-term unemployed (27 weeks or m ore)
have increased by 50 percent over the past 4 years. In April 1962, nearly half of
the inexperienced unemployed had been looking for work for le s s than a month,
but 1 out o f e ve ry 6 had been searching for his first job for over half a year.
Insured Unemployment
The number o f insured job less under State program s dropped by nearly
one-fifth (400,000) to 1.9 m illion between March and A p ril. P relim in ary data
indicate that the number o f persons exhausting their regular State benefits edged
down from 170,000 in M arch to an estim ated 165,000 in A p ril.
In addition to the insured unemployed under the regular State program s,
som e 234,000 person s who had exhausted their State benefit rights w ere insured
under the Tem porary Extended Unemployment Compensation program (TEC) in
A pril. In M arch the total was 310,000. The sharp over-the-m onth decline was
due to the "phase-out 11 provision of the TEC A ct. Under this provision, eligibility
fo r TEC benefits after March 31 is lim ited to qualified claim ants who had been in
com pensable status under the TEC program on or before that date.
A ll but three States reported a decline in insured unemployment under
the regular State program s over the m on th .' The reductions amounted to 25,000
o r m ore in five States— California (51,000), New York (43,000), Pennsylvania
(34,000), Michigan (26,000), and Illinois (25,000). A large part of these declines
reflected continuing seasonal expansions in outdoor w ork, and a pre*E aster pickup
in trade. C alifornia a lso noted reca lls in food processin g and in fabricated m etals
plants, while Michigan reported increased activity in the auto industry.
POLICIES FOR FULL EMPLOYMENT
153
The national rate o f insured unemployment (not seasonally adjusted) was
4. 6 percent in A pril com pared with 5. 6 percent in M arch and 7. 0 percent a year
ago. Five S ta tes--A la sk a , Arkansas, M aine, North Dakota, and West V irg in ia -had rates in e x ce s s o f 7. 0 percent this A pril. H ow ever, the rates in all o f these
States except Maine w ere below those for M arch. In Maine, the start of a new
benefit year on A pril 1 caused the rate to r is e . Among the la rg er industrial
States, the rates were between 5.0 and 6 .0 percent in C alifornia, M assachusetts,
M ichigan, New J ersey, and Pennsylvania, and below 4. 0 percent in Illinois,
Indiana, T exas, and W isconsin.
Labor F orce
The labor
month by 300,000 to
em ploym ent. About
A pril 1961 and over
Table B.
fo rce (including the A rm ed F orces) rose seasonally over the
73.7 m illion, despite the small increase in agricultural
650,000 w orkers have been added to the labor force since
I. 5 m illion w orkers since A pril I960.
Moofara Workers on F u ll-tin e and Part-tiiie Schedules
(Thousands o f persons)
Work s c h e d u le s
U lth a j o b b u t n o t a t w o r k . , . .
At v o r k t
On f u l l - t l a e s c h e d u le s j / . . .
On p a r t —t l a s s o h e d u le s aa» «* »
E o o o o s ie r e a s o n s * •••••••••
U s u a lly f u l l t l x s * ••••••
U s u a lly p a rt t lB S ###a« #»
O th er r e a s o n s ............................
3/
I n o lu d e s
d u r in g t h e s u r v s jr
w o rke d 1 - 3 4 h o u r s
(b a d w e a t h e r , i l l n
March
1962
A p r il
1961
6 1 ,8 6 3
1 ,8 2 5
6 1,5 33
1 ,9 ^
6 0 ,7 3 4
1 ,8 1 1
5 0 ,8 0 7
9 ,2 3 4
2 ,2 2 1
1 ,0 5 0
1 ,1 7 1
7 ,0 1 3
5 0 ,2 5 0
9 ,3 5 6
2 ,3 3 6
1 ,1 1 0
1 ,2 2 6
7 ,0 2 0
4 9 ,5 5 3
9 ,3 7 0
2 ,9 7 8
1 ,4 6 6
1 ,5 1 2
6 ,3 9 2
ip r n .
1962
'■
t h o s e who ( a ) a c t u a l l y w orked 35 h o u r s o r ■ ore
w e e k , an d t h o s e who (b ) u s u a l l y w o rk f u l l t l » e b u t
d u r in g t h e s u r r e y w eek b e c a u s e o f D o n e e a o o a lc r e a s o n s
e s s , h o lid a y s , e t c . ) .
154
POLICIES FOR FULL EMPLOYMENT
Revision in Estimation Procedure
Beginning with the figures for April 1962, information from the 1960
Census of Population replaces that from the 1950 Census in the estimation p ro
cedures for the labor force sample survey. The effects of the change are shown in
the tables on the following pages presenting data on population and employment status
on both the old and the new basis for A pril. Most of the differences between the old
and the new labor force estim ates are small and well within the normal range of
sampling e rro r.
Population information from the decennial census is used in two stages
of the estimation procedure for the sample survey in order to improve, the
reliability of the results. Since labor force activity is highly correlated with
such ch aracteristics as age, co lo r, urban-rural residence, and sex, the sampling
variability of the estim ates can be reduced if the sample population is brought into
line with the known distributions of the total population by these ch a racteristics.
(See U. S. Bureau of the Census, Current Population Reports, "Concepts and
Methods Used in the Current Employment and Unemployment Statistics Prepared
by the Bureau of the C en su s," Series P. 23, No. 5,,for detailed explanation.)
The first stage in the estimation process takes into account differences
between the color and urban-rural residence distribution of the population in the
sample counties and that of the total population in each of the four m ajor regions
of the country at the time of the census. These adjustment ratios remain constant
until another census is taken or until changes are made in the counties in the
sample.
The second stage adjustment takes account of current differences between
the distribution of the sample population by age, c o lo r, and sex and that of the
Nation as a whole. Each month, the Census Bureau prepares current independent
estim ates of the noninstitutional population by age, c o lo r, and sex by carrying
forward the most recent census data to take account of the subsequent aging of the
population, m ortality, and migration between the United States and other countries.
These are used as controls for the sample results for the month. In effect, the
sample returns determine the percentage of the population within each a g e -co lo r•ex group which is employed, unemployed, etc. The absolute numbers are
derived by applying these percentages to the independent population figures.
The timing of the change-over to the I960 Census m aterial was
determined by the date of com pletion o f the tabulations of the n ecessary Census
information for all counties. These results became available in time for the
processin g of the A pril 1962 survey. In order to measure the effect of the change
to 1960 Census data, the survey results were also tabulated using 1950 data.
Since the new population figures show a somewhat different age distribution than
the old, the age distribution of the labor force and the employed will differ
slightly. H owever, there is no effect on percent distributions within age groups,
o r on labor force or unemployment rates by age. The effect on com parability
with data p rior to A pril 1962 is so m inor that no revisions of e a rlier statistics
w ill be made. U sers who wish to make allowances can do so on the basis o f the
data shown in die following tables.
POLICIES FOR FULL EMPLOYMENT
155
C i v i l i a n N o n in s t it u t io n a l P o p u la tio n and Labor F o r c e , b y Age and S e x , A p r i l
On Hew and Old B a s is
(The usands o f p e rs o n s 14 r e a r s o f a^e and o v e r )
C i v i l i a n Non i n s t i t u t i o n a l P o p u la tio n
C iv il^
Net
New1
New1
Old2
d iffe r e n c e
Age and Sex
T o t a l ..........................
1962
Net
Old2
1 2 6 ,7 0 2
1 2 6 ,7 5 6
-5 4
7 0 ,7 6 9
7 0 ,9 7 9
6 0 ,1 9 3
6 0 ,1 2 1
72
4 6 ,7 1 7
4 6 ,7 9 0
-7 3
6 ,2 6 0
3 ,5 5 2
2 ,7 0 8
7 ,2 0 1
2 ,3 7 6
4 ,8 2 5
1 0 ,1 7 0
4 ,8 6 6
5 ,3 0 4
1 1 ,3 8 8
5,7 7 5
5 ,6 1 3
1 0 ,1 1 8
5 ,3 1 3
4 ,8 0 5
7 ,5 8 7
4 ,1 5 8
3 ,4 2 9
7 ,4 6 8
2 ,8 3 8
4 ,6 3 0
6 ,4 1 2
3 ,6 6 1
2 ,7 5 1
7 ,3 2 9
2 ,4 2 3
4 ,9 0 6
1 0 ,2 8 0
4 ,9 1 6
5 ,3 6 4
1 1 ,2 8 0
5 ,7 1 9
5 ,5 6 1
1 0 ,1 7 5
5 ,3 0 6
4 ,8 6 9
7 ,5 6 5
4 ,1 2 1
3 ,4 4 4
7 ,0 8 0
2 ,7 4 4
4 ,3 3 6
-1 5 2
-1 0 9
-4 3
108
56
52
-5 7
7
-6 4
22
37
-1 5
388
94
294
1 ,6 1 4
591
1 ,0 2 3
5 ,5 6 6
1 ,5 0 0
4 ,0 6 6
9 ,8 6 7
4 ,7 1 5
5 ,1 5 2
1 1 ,1 1 8
5 ,6 4 7
5 ,4 7 1
9 ,6 4 9
5 ,1 1 0
4 ,5 3 9
6 ,5 5 8
3 ,7 9 8
2 ,7 6 0
2 ,3 4 5
1 ,2 5 5
1 ,0 9 0
1 ,6 5 1
608
1 ,0 4 3
5 ,6 6 5
1 ,5 3 1
4 ,1 3 4
9 ,9 7 2
4 ,7 6 4
5 ,2 0 8
1 1 ,0 1 3
5 ,5 9 1
5 ,4 2 2
9 ,7 0 5
5 ,1 0 4
4 ,6 0 1
6 ,5 3 9
3 ,7 6 5
2 ,7 7 4
2 ,2 4 4
1 ,2 1 6
1 ,0 2 8
-3 7
-1 7
-2 0
-9 9
-3 1
-6 8
-1 0 5
-4 9
-5 6
105
56
49
-5 6
6
-6 2
19
33
-1 4
101
39
62
6 6 ,5 1 0
6 6,6 35
-1 2 5
2 4 ,0 5 2
2 4 ,1 8 9
-1 3 7
6 ,1 3 8
3 ,4 4 8
2 ,6 9 0
8 ,6 1 7
2 ,7 5 3
5 ,8 6 4
1 1 ,3 0 0
5 ,4 5 8
5 ,8 4 2
1 2 ,3 9 9
t o 39 y e a r s . . .
6 ,3 1 7
to
y e a r s ...
6 ,0 8 2
1 0 ,6 4 8
5 ,6 1 1
t o 49 y e a r s . . .
5 ,0 3 7
t o 54 y e a r s . . .
8 ,2 0 1
4 ,4 0 8
t o 59 y e a r s . . .
to
y e a r s .. ,
3 ,7 9 3
and o v e r ............
9 ,2 0 7
t o if) y e a r s . . .
3 ,3 1 5
70 r e a r s and oven .... 1x822.
6 ,2 2 1
3 ,5 1 2
2 ,7 0 9
8 ,6 6 2
2 ,7 8 0
5 ,8 8 2
1 1 ,3 U
5 ,4 6 9
5 ,8 4 5
1 2 ,3 5 5
6 ,3 0 0
6 ,0 5 5
1 0 ,9 0 3
5 ,7 0 4
5 ,1 9 9
8 ,3 1 2
4 ,4 5 1
3 ,8 6 1
8 ,8 6 8
3 ,2 2 1
-8 3
-6 4
-1 9
-4 5
-2 7
-1 8
-1 4
-1 1
-3
44
17
27
-2 5 5
-9 3
-1 6 2
-1 1 1
-4 3
-6 8
339
94
957
360
597
3 ,9 7 4
1 ,3 0 1
2 ,6 7 3
4 ,0 5 1
1 ,8 8 5
2 ,1 6 6
5 ,5 7 9
2 ,6 5 6
2 ,9 2 3
5 ,3 2 7
2 ,8 0 9
2 ,5 1 8
3 ,2 2 2
1 ,9 8 7
1 ,2 3 5
942
964
364
600
3 ,9 9 9
1 ,3 1 2
2 ,6 8 7
4 ,0 5 4
1 ,8 9 2
2 ,1 6 2
5 ,5 5 1
2 ,6 4 6
2 ,9 0 5
5,4 5 5
2 ,8 5 5
2 ,6 0 0
3 ,2 6 0
2 ,0 0 4
1 ,2 5 6
907
547
-7
-4
-3
-2 5
-1 1
-1 4
-3
-7
4
28
10
18
-1 2 8
-4 6
-8 2
-3 8
-1 7
-2 1
35
19
M ale................................... .
14 t o 17
14
16
18 t o 24
18
20
.
25 t o
25
30
35 t o 4 4
35
40
45 t o 54
45
50
55 t o
55
60
65
65
70
34
64
y e a r s ..................
and 15 y e a r s .,
and 17 y e a r s .,
y e a r s .............. . ,
and 19 y e a r s .,
t o 24 y e a r s . . ,
y e a r s ..................
t o 29 y e a r s . . ,
t o 34 y e a r s . . .
y e a r s ..................
t o 39 y e a r s . . ,
t o 44 y e a r s . . ,
y e a r s ..................
t o 49 y e a r s . . ,
t o 54 y e a r s . . ,
y e a r s . ................
t o 59 y e a r s . . ,
to
y e a r s ..,
64
t o 69 y e a r s . . ,
y e a r s and ovei
F em ale.....................
14 t o 17
14
16
18 t o
.
18
20
25 t o 34
25
30
35
35
40
45
45
50
55
55
60
65 y e a r s
24
y e a r s ..................
and 15 y e a r s .,
and 17 y e a r s ..
y e a r s ...................
and 19 y e a r s ..
t o 24 y e a r s . . .
y e a r s ...................
t o 29 y e a r s . . .
t o 34 y e a r s .
44
64
65
-128
-4 7
—81
-1 1 0
-5 0
-60
I9 6 0 P o p u la tio n Cerjsus d a ta used i n e s tim a tio n p r o c e d u r e .
TL950 P o p u la tio n Census d a ta used i n e s tim a tio n p r o c e d u r e .
b a s is shown f o r Com parative p u rp oses o n ly .
566
.
.J &
A p r i l 1962 on o ld
-2 1 0
156
POLICIES FOR FULL EMPLOYMENT
Employment and Unemployment, by Age and Sax, April 1962
On New and Old Basis
n«nt
Unemployment
Old2
Age and Sex
Hale...............................
14 to 19 years;,........
New1
Old*
Old*
New1
4,961
5,048
61,863
61,979
3,946
3,952
4,258
4,329
39,925
39,925
2,534
2,535
486
2,251
3,445
8,929
9,796
420
427
371
443
462
427
295
New1
307
583
748
842
756
538
504
318
2,209
3,397
755
865
765
520
9,899
8,330
5,505
1,690
5,478
1,614
363
440
471
427
297
117
703
719
21,938
22,054
1,411
1,416
51
25
52
25
1,880
1,893
2,467
3,668
5,110
5,058
3,024
834
328
331
195
273
278
232
74
33
25 to 34 years............
35 to 44 years........ ...
110
161
55 to 64 years............
65 years and over.......
159
158
39
600
112
164
166
161
39
8,844
2,454
3,667
5,134
4,943
2,990
867
8,412
^1960 Population Census data used in estimation procedure*
21950 Population Census data used in estimation procedure*
on old basis shown for comparative purposes only*
194
273
282
225
74
36
110
April 1962
POLICIES FOR FULL EMPLOYMENT
157
Table 1. Employment atatua of lb* nonlnstltutlonal population, bya**
(Thousand* of gertopa 14years of><« andov»r)
Total
M
ale
HhU
Apr. Apr*. M
M
r.
a
r
.
M
A
p
r
.
A
p
r.
.
A
p
r
1962i 1962 1961 19621 1962 1961 19621 1
19p6r1.
96r.2 A
Total nonlnstltutlonal population. 129,587 129,*71 127,337 63,Okk 62,8* 61,905 66,5** 66,576 65,*U
Total labor force Including
,65k 73,582 73,216 *►
9,568 *9,*36 *k6
k,066 *,1*6 23,90.6
Civil1%
t
>1abor force.•»«*»*»«»•• 73
,696 *6,7
,89l9
2 2
7 760
*6,585 9,2
2*,052 2k,112 23,88k
17
Employed.................... 7
60
6,6
,39
16
60
6,7
,8629
k 7
5
,7
3
k
2
*1 2,619 22,192
k
k
,i8
3
k
3
,5
k
2
*
3
,6
9
7
Agriculture............... k,96l *,782 5,000 k,258 k,lkk *,298 2,6
638
703 2
1
Nonagricultural Industrie*.. 61,863 61,533 60,73k 39,925 39,553 39
,
2
k
k
1,980 21,*7900
2
1
,9
3
3,9*6 k,362 k,962 2,53* 2,888 1 910 l,kll8 23
1,*9J 1,692
55,933 55,889 5k,121 13,k75 13,*59 12,606 k2,k57 *2,*30 *1,515
Total
Natli
M
ai*
Apr. M
ur. Apr. Apr. M
ur. Apr. Apr. 1far. Apr.
1962 1962 1961 1962 1962 1961 1962 196« 1961
Unemployment rate*
Actual............ .................. .6 6.2
,2 7a
T
5.0
.9 6
1•O
U 5.* 6.2 7.0
6.1 7.*
Seaaonally idjusted*«t•*t••••••• 5
6
6.9 5.3 5.1 6.8
5.5 5.5
^P**H1962figures are not strlotly ooaparablswithtboee for previous periods beeeueeof the lntrodmctloe
of 19*0Censusdatainto the estlnationprocedure. Thechangeprlaarllyaffected the labor fereeendt 1iij
n
a
n
t
totals,
haictio
hn
wasreeerepdau
byabout 200,000. Theun—
ploy—nt totals wereTirtmUyeaehe^ed. for aore
dstalle
d inforw
m
gceed
S-l.
2Peroent of oiTillanlabor force unemployed.
Table 2. Employment atatuaof th* nonlnatltutlonal poo\)latlon, byage anda**, April. 196**
Total labor force
Civilian labor force •
Unemployed
Sm
ploym
d
ForceP
sercent
Hot la
Percent labor
W
o
n
a
g
r
i
of
Age andeex
onlnatl- Total A*rl- cultural Jhaaber of fore*
Hum
ber ntu
culture indus
tlonal
labor
force
tries
popula
tion
73.6f* 56.6 70,769 *.961 61.863 3,9*6 5.6 55-933
Male........................... *9.568 78.6 *6.717 *.258 39.925 2.53* 5.* 11.*75
*20 13-5
,11*
k86 2,209
3,590 379.0
.* *3,0
20to 24yeara............. .
66
5,08* 8
307 l:&
*3*603 £9
97.2 9,867
*.5 5'2i71
1
0
,6
0
9
38to 44yeara............... 11,558 97.7 11,118
*71 *.2
3
9
,8
9
9
8k2 8,300
4
S
to
0
4
y
e
a
r
a
...............
*.*
*68
*
2
7
9
,6
*
9
9
,7
3
9
9
5
.*
SSto 04years............ .
*.5
29
756 1,6
6,563 86.* 6,558
69years andover*
90
1
17
7 5.0
538 5'£5
2,3*5 31.* 2,3*5
Female......................... 2k,086 36.2 2*,052
T03 21,938 1,*U 59 *2,*57
80
2,258
328 1**5 6*632
51 1,8
14to 10years............. .
2,265 25.5 2
,673
3,2
,15
90
1
20
5 2,*5*i
19* 7.2 7
20to 24years................. 2,685 *5.7
1
1
3
,6
6
7
6.7
*,0
51
23to 34years................ *,059 *355.0
.9
3i 5.1 6,an
161 5,13*
5,58* 90.0 5,579
*.2 5,321
22
*3
1
5,327
5,329
75
* 2
15
59
8 *2,9
,99
0
3 *8,9
3,222 30
9.2
.3 3,222
3*.8
,27ft9
867
00years andover............ __ 2t£ 1
9*2
. 3k..
x»ot coa^lately coaqparablawithdatafor previoue periods. (9se footnote 1, table 1.)
lOICt Total mmlmtltutional populationmj be obtalnsdbyemslng total labor foseeandnot Inlabor feroe|
civilian nodnstitutianal populationbyearningclrillanlabor faro* andnot inlabor fcroe.
POLICIES FOR FULL EMPLOYMENT
158
Tabla 3.
Caplojraas on pajrolla of nonagricultural astabllshnants,
Actual and seasonally adjusted, by Industry
(In thousands)
8«asona ll/
Actual
Industry
Apr.
1962
54.699
Mining.......................................
Luabar and wood products............
Stone, clay, and glass products...
Fabricated Metal products...........
Machinery.................................
Electrical aqulpment..................
Transportation equipment............
Inatrunanta and ralatad products..
Food and klndrsd products...........
Tobacco Manufactures.... .............
Apparel and ralatad products.......
Cbaalcals and alllad products......
P ttro lra and ralatad products....
Rubbar and plastic products........
Laathar and laathar products.......
Transportation and public u tilitie s.
Service and nlsoallaxMOUa..............
NOTE:
54.0e5
53.823
644
640
2,323
16,596
16,518
9,396
9,333
210.1
587.4
376.9
565.5
1 223.0
,
1,110.5
1,455.1
1,504.7
,
1 626.2
353.8
642
674
4
-13
240
-56
652
16,676
16,572
9,2
9,38C
9,312
17
1,240.4
593.9
930.1
842.5
197.1
381.7
363.5
1,227.5
590.2
18.9
-4.4
3.0
-9.9
2* l
11,214
54,773
16,452
1,673.4
66.4
3,861
54.871
653
7,165
881.6
T9b.
1962
1962
2,694
1,672.4
81.3
3,909
55.112
M r.
654
7,185
197.9
383.1
357.2
Apr.
1962
adjusted
2,&3
2,282
1,691.3
76.9
864.6
1,230.5
596.2
932.7
851.8
1961
1.528
2,706
80 694 16,814
560 9,466
b(
63
14.1
210
207.0 13.8
209.6
.5
573.6
607
576.7
6.3
1.4
374.1
17.4
382
375.5
547.4
543.4
18.1 9.9
571
1,220.2 1,213.4 2.8 123.9 1,225
65.8 1,124
1,101.0 1,096.1 9.5 47.8
1,442
8.5
1,446.6
1,434.1
103.6 1,528
1,500.2
1,494.6
4.5
1,628.1 1, 625.2 -1.9
143.8
1,631
13.6
355.3
351.9
-1.5
355
375.6
13.6 391
370.7
6.7
860.0
926.6
838.4
197.6
381.3
363.5
3,863
11,188
134
7,348
210
611
207
612
379
563
375
563
1,610
355
386
1,430
1 ,5 S
1,421
1,495
1,595
352
384
‘7,296
7,260
1,777
90
1,776
89
864
1,216 1,211
1,106 1,097
9*3.
.8
JL.4
-6.3
1,780
1.8
68
891
52.0 1,257
600
!5 .l
11.4
936
20.9 644
- 6.1
199
31.5
387
366
3.7
26
39
3,941
3,926
3,914
192
244
11,482
11,451
11,447
5
71
173
8,422
3,046
t«i03
3,036
s;4 S
2.6
-5.9
13.3
866
1,227
599
931
841
199
384
362
1,206
595
929
841
200
381
359
3,026
8,360
8,193
3,021
8,167
2,773
2,755
2,749
IB
49
2,781
2,777
2,774
7,670
7,572
7,545
96
222
7,655
7,600
7,675
9,136
9,1*2
9,102
14
349
9,061
9,062
2,296
6,836
2,294
2,289
4
65
264
2,317
6,7&
2,322
6,740
2,oei
6,826
Data for tha 8 Boat recast Months are prallalnarr.
1962
7,202
11,406
Wholesale trada..........................
Batall trada.............................
Feb.
2,563
382.3
Nondurable goods................
1962
Mur.
Apr. 1962
changa from '
Mar.
Apr.
1962
6,613
187
10
3,060
9,044
2,312
6,732
POLICIES FOR FULL EMPLOYMENT
159
Table 4. Production worker* on aaaafactorlag payrolls,
actual aad seasonally adjusted, by sajor industry group
( In thou* aads >
Actusl
Major industry group
Mar.
Apr.
1962
furniture aad fixtures..................
Stone, clay, aad glass products......
Electrical equipment........... .........
Iastruaeats aad related products....
1962
12,315
12,2*1
6,918
6,857
1,01*.3
1,019.*
1,120.9
225.1
306.2
Paper aad allied products..............
Petroleum and related producta.......
Rubber and plastic products...........
VOTt: Data for the
2
12,187
311.0
* 36.6
990.9
8*2.2
1,007-3
1,016.5
1,119.5
226.5
299.9
65.3
796.6
1,09*.7
*73.*
597.2
525-7
96.*
512.9
309-7
*32.*
983.5
836.7
997-*
1,012.7
,
*.
29
•9
13-2
1-5
17-9
1-9
9-3
7.0
2.9
l. *
- .*
6.3
128.0
5,367
1,088.3
75-1
792.9
1,093-1
*
593-2
512.5
127.*
29*.9
1 10*.7
70.8
7*
61
1 118.6
22 9
*.6
1,087.1
69.9
79*.2
,
*
595.6
517.*
127-2
295-0
321.9
Seasonally adjusted
Ajr. 19W
chaage fro*.
m r.
1962
6,820
5,38*
1, 103.6
297-1
315.6
1962
96.*
510.1
97-3
523-3
312.5
*5*-5
992.8
851.5
5,397
food aad kindred products..............
feb.
67.8
322.0
Apr.
Mur.
1962
1962
Mb.
19&
603 12,518 12,388 12,300
*92 6,967 6,90* 6, 8*6
6.*
97
96
96
9.8
15-9
10.3
120.2
5*7
31*
*52
989
5*3
318
*60
997
*65
l, ul
,
5*7
311
*51
983
839
96*
8*8
0
88.8 1 0*0 1,0991
28 1,013
115-0 1,126 1,102 1,009
1
8.*
226 227 225
13.0 31*
310 308
111
5,* 8
*
13
5,531
5,*5*
16.5 -10.5 1,186 1,183 1,181
-*.6 -2.7
78
75
77
2.* 11.7
803
798
- 10.0
91 1,072
1,120 1,0799
*8.9
2.6 11.3
*76
*77
*73
1.6
5-0
596
597
599
8.3 17-0
517
51*
515
.8 -3.0
129
129
129
300 297
2.1 29.3
*.*
320 295
- 6.3
318
325
61.9
*2.5
aost recent aoatha arc preliminary.
Table S.
Employed persons, by boora worked or reasoa for act working
April I960
1
(Thoaaaada of psrsoas 14 years of age and w i r l
H o u rs w o rk e d
Total employed.
A t w o r k .................................
1 - 8 4 h o a r s ...................,
1 - 1 4 b o a r s ............. .
I S - 5 4 b o a r s ...........
3 0 - 4 0 b o a r * ................
41 b o a rs sad tf r e r ..
A r s r a g e h o u r s .............
Total
66, 82*
6*,830
Agri
culture
*,961
12,597
*,269
*,789
1,591
*75
30,058
21.375
* .*
605
2,511
*5-2
6>&
0
1,116
Nonagri
cultural
iadustr lss
61,863
60,0*1
111 000
1,95*
10t
11,007
3,79*
7,213
30,172
18.863
*
ko
kse
9*9
*7*
0.0
Oma
B o a a g r i
c u ltu ra l
With a job bat not at
^jRot eaqplatalj oaqparabla vlth data f«r pswvlow period**
HOBi Exolndaa p a rraa on layoff of la w
30 day*
•alary jots* within
day* (
,
).
30
Agri
culture
Reason for aot working
172
58
16
66
39
(So* footnota 1, tabl* 1.)
achadnlad to atari i
(93,000), and p in o n i
52
ko
k
13
88
3
*35
POLICIES FOR FULL EMPLOYMENT
160
T a b le
ob
0.
O ro s s h o a r* u d e a rn in g s o f p r o d u c t i o n w o rk e rs
a a n a f a c t u r ln g p a y r o l l s , by a a j o r i n d u s t r y gro up
Average weekly earnings
Apr.
M a r.
Apr.
1962
1962
1961
Major Industry group
Manufacturing..... .
Durable goods................. *
* 6.S6
10*.96
Ordnance and accessories......... .
117.03
76.05
78.36
Stone, clay, and glass products.. 97.75
Primary aetal industries........... 123-*1
IO
Machinery............................... 113.67
Electrical equipment................
Transportation equipment........... 119.39
iMtrUMBts and related products. 90.90
Miscellaneous aasufacturing.......
91.76
7^.69
68.5*
Apparel and related products.....
6l. 1*6
Paper and allied producta......... IOO
Printing and publishing............ 107.52
Cbealcals and allied products.... 109.10
Petroleum and related products... 125.1*
96.90
Leather and leather producta.....
6*.53
.67
H O Tf:
D a ta f o r the 2 i o i t
0
1.0
#95.91
$90.78
* .*
*0.3
♦104.33
♦98.31
*
*
*1.5
39.0
*0.6
*
*1.0
*1.3
*2.1
*
*1.6
*
39.9
*1.5
39.1
*0.6
*0.2
*1.0
*0.9
*2.0
*0.5
*1.*
*0.*
*0.1
117.03 112.06
75.07 7*.88
78
.78
6 73-1*
9
5.6
93-03
111.25
99-*5
106.1*9
93.13
110.95
95*51
75-27
*.90 123.*1
103.*8
112.98
96.63 96.39
118.*0
78.60 98.17
79-00
85.75
Average weekly hours
Apr.
>t o r .
1961
1962
Apr.
1962
81.27
85.5*
90.68
72.20
68.5*
6l.*9
100.91
107.80
108.05
123.62
98.25
65.53
87.30
71.05
63.18
56.51
97.90
10*.01
10*.21*
12*.*2
93.69
59.95
0.9
0.6
0.7
0.9
J39.3
♦2.39
♦2.38
♦2.31
39.8
♦2.56
♦2.55
♦2.*7
1.95
1.93
2.39
3.01
2.5*
2.82
1.92
1.9*
2.36
3.01
2.53
2.76
1-93
1.89
2.32
2.86
2.*8
2.30
2.87
2.*3
1.97
2.36
2.86
2.*3
1.97
2.3*
2.76
2.37
1.93
*0.6
38.8
38.7
*0.1
38.9
*0.1
*0.8
39.8
*0.2
*
39.0
0.3
39.6
38.7
*
3B.3
*
*0.3
37.8
*0.8
*0.0
30.*
*1.8
*1.3
*0.7
37.3
*2.*
38.5
*1.*
*0.8
*0.6
3B.1
39.7
0.6
0.8
36.8
* 2.3
36.6
Average hourly earnln£
Apr.
)tor.
Apr.
1962
1962
1961
38.2
39.0
35.1
*2.2
3B.1
*1.2
*1.2
39.7
35.9
2.82
2.70
2.16
2.26
1.95
1.68
1.67
2.30
2.80
2.61
3.03
2.*3
1.73
2.69
2.61
2.16
2.10
2.25
1.91
1.68
1.68
2.36
1.62
1.61
2.18
1.86
2.32
2.73
2.53
3.02
2.36
1.67
2.80
2.61
3.03
2.*2
1.72
r « c » n t a o n th s are p r e l i a l n a r y .
T a b le 7.
A v e ra ge w e e k ly h o u rs , s e a s o n a lly
a d ju s t e d , o f p r o d u c t io n w o rk e rs on
a a n u f a c t u r ln g p a y r o l l s
T a b le
A p r.
lto r.
Tab.
A p r.
1962
1968
1962
1961
Manufacturing....... tt.fi
*0.«5
*0.3
39.7
Duriblt foods..... ••«•••«• *1.2
lo&duftblt foods.......... *0.3
*1.1
*0.0
*0.9
39.5
*0.0
Subdivision
• O Tt:
a s ry.
39.3
Da ta f o r tb s 2 a o s t r e c e n t a o n th s a ra p r e l l a l -
A vera ge w e e c ly o v e r t l a e h o u rs
o f p r o d u c t io n w o rk e rs on
m a n u f a c tu rin g p a y r o l l s
M a n u f a c t u rin g .............
D u ra b le goo d s...............................
N o n d u ra b le g oo d s........................
H O Tf:
n a ry .
A p r.
1962
lto r.
1962
2.7
2.6
2.7
2.7
2.6
2.6
D a ta f o r th e 2 a o s t r e c e n t a o n tb s
r*b .
Employed 1 -3 4 hours........
Usually work fu ll time
Usually work part tlae
A p r.
1962 .1961
2.5 2.1
2.5 2.0
2.5 2.2
ara p r e l l a l -
in
(Thousands of persons 14 yaars of age and overi
Usual status and reason
tfc r.
A p r.
? X
working part time
1961
Worked part time for:
Economic reasons....
T a b le 8 .
S u b d iv is io n
S.
Pa rso ns e m ployed p a r t t l a e
n o n a g r i c u l t u r a l i n d u s t r i e s , by
re a s o n f o r p a r t - t l a e work
Worked part tlae for:
Economic reasons....
Other reasons........
1 62
11,007
2,821
1,050
11,219
1962
11,272
2,973
3,369
1,110
1,863
1,*66
1,903
8,18*
8,2*6
7,90*
1,171
7,013
1,226
7,020
1,512
6,392
1,772
1Hot c o ^ > le te ly conparable w ith d ata
p e rio d *. (See fo otnote 1
, ta b le 1
.)
f o r p re rio a e
POLICIES FOR FULL EMPLOYMENT
161
Table 10. teployed ptrtoai, by type «f industry, o l u i of work**, tad sex
1
April 1968
(Thousands of p ir K M 14 yeare of ago and » w )
Clasa of worker
Wage and aalary workers....
8elf-employed workere......
Total
Male
Female
731
297
*3*
l !Not c o m p le te ly comparable w it h d a ta f o r p r e v io u s p e r io d s.
Table 11.
(Se e fo o tn o te
1, t a b le 1.)
Male
resale
39,925
3*,879
29*
5,1*1
29,***
21,938
i92,&
,29n
2
3,*88
l*,09l
**
Total
Claaa of worker
66,82* **,1B3 22,6*1 Nonagricultural industries....
Wage and salary workere......
*,258 703
*,961
12*
l,*67
1,3*3
2,619 1** 8elf-employed workere........
2,763
61,863
52*,7
50
,586
8.629
*3
6,5
,*365*
. . flfc.
Selected iui«aplo|atnt 4*tt
(Persons 14 y tt n of ags and over)
April 196c1
Number
(thou
sands )
P e rce n t
d la t r lb u t lo n
hr.
3,9*6
1,527
936
76*
719
16.9
100.0 *,9*2
Total unemployed^,..............
38.7 1,600 Experienced wage and ^ lir f
................. .
23.7 1,23* workers...............
Agriculture...........................
Percent
d is t r i
bution
1,205
923
..Hag.
R a te *
AGE AND SEX
Total unemployed.,
M a la .,
14 to 84 rears.....
28 years and over..
N a t le ....................
14 to 24 years.....
28 years and over.,
5.6
5.*
10.9
*.*
5.9
10.6
*.7
100.0
19.8
**.*
35.8
13.2
22.5
7.0
7.0
1*.5
5.6
7.1
12.3
5.7
MARITAL STATUS ARC SEX
Kale........................... .
8lngle......................
Married, wife present..
Other marital status...
Female.......... ....................
Single..................... .......
Married, husband present...
Other marital sta tu s.......
15
1.*
.1 21.6
3.9
10.3
5.9
7.5
5.1
6.1
7.0
1*.2
35.9
6.7
5.1
10.9
35.8
n
10.2
17.7
7.9
6.5
7.5
COLOR AND SEX
W ilts....,
Male---resale.
■onwhlte.
Male---female.
*5196a 1 -12SL.
Percent
d istri
bution
IROQSTRY
DURATIOR
Total unemployed.......
Laas than 6 weeks..........
6 to 14 weeks.................
IS to 26 waaka...............
87 weeks and o n r . . . . . . . . .
Average duration (week*)
April
-A#L-
Mu*bar
(thou
sands )
*.8 76.3
*5.0
•7 *9.9
26.3
12.1
12.1
12.0
23.7
1*.3
9.5
6.3
6
.3*
6J
13*0
13.5
12.1
KonagrLcultural Industries......
Mining, forestry, fisheries...
Construction.......................
Manufacturing......................
Durable gooda..................
nondurable goods....... .
Transportation and public
u t ilit ie s ........... . .............
Wholesale and retail trade....
Pittance, Insurance, and real
estats....... ..................... .
8ervlce industries..............
Public administration........,
5.6
5.6
9.1
5.5
8.8
l*.l
5.5
5.*
5.6
100.0
1*.2
13.6
25.0 li:f
13.7
7
11.3 &
*•7
6.*
5.3
17.6
3.0
2.1
li*.l
*.0
2.6
7.0
85.2
7.3
3.7 10.5
81.5 7.2
1.5
5.*
7.*
2.3
*.2
*.7
2.3
3*2
1.7
OCCUPATION
5.6
Total Unemployed...............
Profeaaional, technical, and
kindred workers.............. .
Parsers and farm managers..........
Managers, o ffic ia ls, and propri
etors, except farm........ .
Clerical and kindred workers.....
8alea workers............... ..........
Craftsmen, foremen* and kindred
workers.............. .................
Operatives and kindred workers...
Private household workers..........
8ervlce workers, except private
household............ .............
Farm laborers and foremen.........
Laborers, except farm and mine...
So previous work experience......
1.5
.*
1.5
3*8
3.*
5.6
7.*
5.3
6.7
5.*
13.8
.3
A.
2.2
10.1 *.6
2.9
3.9
13.0
23.8
3.3
11.*
2.7
13.7
11.8
*.3
7.7
10.3
6.3
7.3
6.9
17.*
*j*ot co«*>late ly coperable with data for previous periods. ( See footnote 1, table 1.)
*]Percent of c iv ilia n labor force In each category who i»re unemployed.
^Includes self-employed, unpaid fasdly w r t i r i , and persona without previous work ejperleinee, not shone asperate ly .
1
POLICIES FOR FULL EMPLOYMENT
162
Table 12. Tba iN fM ia aaeaptoyed, by selected characteristic*
Unemployed
A p ril
13 weeks
19621
Uaeaployed 27 waeka or aote
or aote
A p ril
1961
A p ril
ACEANDSEX
Total........................................
Male..................................................
14 to 19 years..............................
20 to 24 years.............................
2) to 44 « u i .............................
43 grtwi aad o r e r .....................
7
F e a a le .............................................
14 to 19 years.............................
20 to 24 yeara.............................
23 to 44 ear*.............................
43 years aad o r e r .....................
7
100.0
69.9
7.*
9.*
25.5
27.5
ployed
ia sack
gsoap
37.6
*
0.9
26.2
38.6
VI. 5
*8.5
30.1
5.1
3.*
12.3
9.2
k0.6
100.0
37.6
31.7
2
3.2
26.3
33.0
Perceot
distri*
batioa
ployed
ia each
graap
diatribatioa
Noawhite................................
36.0
73.1 *2.6
26.9
26.2
2.9
*.*
10.3
8.7
52.8
33.0
21.7
29.7
35.8
38.3
100.0
78.*
21.6
k6.k
100.0
2.0
*2.9
30.*
1*2.9
»*2.0
100.0
2.*
.2
2.5
8.t
3.2
15.0
2^.5
2.6
11.1
2.5
18.0
9.5
37.6
27.6
(2)
32.2
31.5
31.6
*3.2
38.6
30.2
36.6
3*.3
30.2
-
2.k
6.3
3.9
17.1
29.5
1.9
8.3
2.7
18.1
7.8
100.0
88.1
3.6
2.1
16.9
25.5
13-9
11.6
5.6
18.0
13.*
3-0
2.*
9.5
37.6
38.9
37.0
(2)
*6.5
38.*
38.1
38.7
39-7
38.*
3L.1
(2)
30.2
5>.2
*j«ot completely comparable with date for preTioae period*.
•percent. not ahown vhere base le leee than 100,000.
100.0
89.8
3.2
2.8
17.1
33*7
23.8
9.9
5.1
13.8
12.1
2.0
2.5
7.8
19.9
15.9
16.8
18.1*
2*.9
16.1
1*.5
9.1
20.0
10.6
2D.k
100.0
77.*
22.6
18.6
18.0
21.1
100.0
2.4
18.6
15.9
12.7
9.3
100.0
71.6
26.*
100.0
1.8
.1
8.2
16.*
18.2
17.1
21.8
18.2
10.2
(2)
21.7
.*
21.1
1*.0
3.5 18
35.5
38.*
56.*
33.9
12.1
3.5
17.*
11.1
*2.9
**.2
*0.1
(2)
53.2
*8.*
53.*
» .5
*3.9
36.9
33.2
100.0
86.2
*.2
2.1
9.9
27.3
17.5
9.7
6.*
33.9
18.6
20.*
*.2
2.2
10.2
*•5
10.0
n
9.9
23.*
Perceat
of i t a ployed
ia each
•r* P
28.6
29.6
2.7
5.2
11.1
.0
22.2
3.5 18
12.*
INDUSTRY
T o t a l ...................................................................
Ezperieaced wage aad (alary workera......................
Agricalrare..............................................................
Miaiag, fore *try, fiaberie*.....................................
Caaatractiea...........................................................
Maawfactatiag...........................................................
Dwrahle gooda. ...................................................
Noe datable gooda..............................................
Traasportatiea aad pablic a tilitio s ......................
VboUsale aad retail tn d * ......................................
Serrice aad fiaaace, k t w u c e , aad real estate.
Pablic adaiaistratioo..............................................
Self-eaployed aad aapaid taaily worker*................
No ptweioas wark eaperieace................... ..............
100.0
TO.k
8.6
1961
25.*
30.5
2fi.*
*2.1
51.7
*7.9
26.8
April
Perceot
diatribasioa
29*8
OCCUPATION
Total......................................................................
Profeesiooal, eeckaical, aW kiadnJ votkara . . . .
F iia t ti aad fata aaaagera........................................
Maaagera, officiala, aad proprietors, except hua. .
Clerical aad kiadred worker*......................................
Sale a w orkers..............................................................
Craftaaea, ( m a n , aad tiadit< worker*................
Operative a aad kiadred worker*................................
Private hoaaebold workers........................................
Service vockera, except private hoaaebold.............
Pirn laborera aad f o r e a e * ........................................
Laborera, eacept fata aad a ia e ................................
No pteviou work ezperiaace................................
ployed
ia each
gyoap
100.0 k2.9 100.0 18.2
kS.O 71.6 20.3
73.8
16.0
9.2
3*.0
7.9
31
.6 *5-5
19.3
29-7
2.8 18
.0
27-9
50.7
26.3
<
Perceot
COLOR
Total..............................
Whit*..............................
1
1962
Perceat
Parc eat
dietribwtioa
18.5
15.5
2.*
2.6
11.1
(S m footnote 1, table 1.)
19.*
23.1
23.1
17.1
18.2
18.*
20.5
(2)
13.2
20.0
23*3
15.8
22.0
19.2
17.*
M
17.1
-
8.9
15.2
16.6
3.6
7.3
3.3
20.1
l* .l
15.2
28.9
2.1
7.9
2.2
20.3
12.V
1**7
13.2
2*.3
20.7
13.6
18.0
11.0
100.0
85.8
2.5
■ 2.9
10.1
37.2
26.0
11.2
*•7
12.*
1*.0
2.1
3.3
11.0
17.8
18.6
18.3
13.*
(2)
13.7
23.1
25*3
19.3
17.5
1*.3
16.6
(2)
19.7
20.7
POLICIES FOR FULL EMPLOYMENT
M
U
13.
163
«d «r lU it >ro|r*M
I m w «4
(Week ending M w i t the lflth of the ■oath)
Regular programs
Rate (psrooat of arersge
covered employment)
Vumber (la thousands)
8tate
April
1962
T o ta l..... 1 8 7 1 5
March
1962
& 27H
April
1961
April
change
March
1962
1962
froa •
April
1961
2 - 8 3 7 5 - 3 9 9 4 - 9 6 6 j0
44
- 2 JO - 1 8 4
-3
• A
-3 .T
-2 3
-7 .7
-4
- 5 1 3 -6 2 4 |
-3 .7
-3 2
- 6 3 - 1 8 j0
-8 -4
-3 5
51
174
39
7.7
54
25
3.7
3.4
- 7A
-2 1 5
-1 1 4
-7 5
-1 3 3
-2 5 3
-9 8 5
2.7
65
5.4
81
45
5 jO
51
4O
12
5.7
65
6O
61
65
45
114
73
115
65
64
103
-1 1 4
-9 3
-1 8 5
-4 .7
-1 A
-1 .7
-4 5
60
54
4A
6.4
31
44
43
6.7
6.4
55
9.7
54
62
42
74
90
62
104
34
65
72
34
2 jO
4.7
4
.7
.4
53
44
4.7
43
85
41
5 jO
63
55
55
50
11 2
51
53
71
6.7
64
6.7
85
IB
12
141
.7
235
53
3
124
21
165
5
314
7.7
5
172
84
55
6 jO
55
51
32
34
55
24
7.7
71
55
65
34
65
64
31
82
93
62
74
53
35
8.7
35
2.7
1 54
21
15
2.4
2
55
8 jO
35
1 93
25
8 jO
33
3
84
104
3A
63
85
55
71
3 jO
61
51
.7 5
3.7
74
83
4 j0
80
4.7
85
42
8 jO
1 I jO
54
64
4
3
84
74
85
31
4
64
4 54
4 61
53
65
1405
66 5
1 84
-1 4
-3 4
-1 4
-1 1
- 2 .7
-2 5 .4
-1 1 .7
-6 3
-1 3
-1 5 2
-1 8 3
2 jO
- 14
. 4 8 j0
-3 8 5
•4 A
95
3 0.4
8 92
1 53
3 0.7
751
8 7.1
13 9
31 B
31J0
1 31
405
9 1 .7
1 1 3 j6
165
523
4 0.4
824
4 41
1 0 0/4
1 854
- 44
•1 A
-1 4
22
- 9 .7
-1 6 5
-2 6 5
482
15 2
4 1.4
63
12
34
64
4 7.4
171
521
105
132
51
65
5 4 j0
245
5 95
1 1.7
84
55
111
-5 4
- 2 j0
-1 0 .7
- 34
- 60
- 13
2
Ohio......................
821
IS
83 35
3 9 j0
60
96B
9 7.7
8.7
2162
451
7 j6
1805
1 94
1105
104
3414
604
61
1 8 94
8 6.7
-1 5 5 - 2 8 4
-3 2
- 11
- 4 8.7 - 1 0 8 2
-6 1 -2 1 2
- 1
- 14
- 2 3.7 -9 2 5
- 80
-1 1
Puerto Rico............
Shod* Island...........
235
1735
139
1 2 .0
3 64
505
304
80 74
1 8.7
152
154
5 jO
4 4 j6
5 4 j0
385
8771
134
1 84
283
24
573
6 93
- 9.4
-7 1
- 3 4 2 -1 0 3 4
3
14
-6 4
-3 2
-8 .7
-1 4
3
- 8 jO
-8 4 -8 0 5
-3 5 -1 84
62
45
1 74
3 3 X)
883
864
4A
9.4
54
854
443
863
361
5.4
Maryland................
Michigan................
■ew Mexico..............
lew Tork................
l a.i
134
3 j0
tftah......................
Vermont......................
Virginia....................
Vssblnjtott.................
Vest Virginia..........
Visa oaain..................
Wyoming..................
8.4
64
895
4 8 ,4
365
4 91
4.4
-3 1
-5
3105
24
50
61
. 31
55
53
61
41
71
33 4
290
8.4
IB
1 1 83
4 5.7
80 2
Illin o is ................
10 23 4 3
2.7
3.7
35
44
64
44
43
45
55
30 O
2 74
73
51
924
3 4 .0
135
Hawaii...................
March
1962
April
1962
81
33
34
42
43
34
32
31
3 9.0
62
1 32
290
2 812
1 43
4 55
District of Columbls.
54
April
1961
64
8 83
61
114
814
2 761
134
342
81
6 j6
March
1962
1A
185
5.7
1 0.7
75
41
6 jO
53
263
5.7
95*
813
8 84 4
10 4
87 5
42
Alaska...................
April
1962
Temporary
program*
■umber
(In thousands)
-8 2
- 8 jO
- BA - 1 2 1
- 1 1 3 -1 5 -4
- 4 JO - 1 4 2
- 9 4 -8 2 4
-3
-1 3
5/4
1 82
45
8 JO
72
35
45
34
5
5
14
271
.7
35
4
.7
51
45
I jO
4
133
5.0
16
IJO
41
45
4
35
85
132
4
51
.7
14
3 jO
343
11
6 j0
4
5
64
6 j0
15
.7
165
82
23
15
54
53
3.7
5 jO
101
161
4.7
8.7
6.7
12
I jO
4
12
5
.4
3 jO
84
34
34
5
1 Te m p o r a ry E x te nd e d C o m p e n sa tion p ro g ra m , e f f e c t i v e A p r i l 8 , 1901, c o v e r in g c la im a n t * e x h a u s tin g b e n e f it s a n d e r
r e g u la r S ta t e p ro g ra m s o n l y .
A p r i J d a ta e x c lu d e s 1 4 ,9 0 1 in s u r e d unem ployed u n d e r e x te n d e d d u r a t i o n p r o v i s io n s o f
r e g u l a r S ta t e law s (C D ) as f o l l o w s :
C a l i f o r n i a ( 6 , 9 8 5 ) , Id a h o ( 1 , 4 9 4 ) , I l l i n o i s 0 , 8 6 3 ) , and V e rm ont ( 0 2 9 ) .
POLICIES FOR FULL EMPLOYMENT
164
Table
14.
1
In s u r e d u n e a p lo y a e n t in
147Major
labor Market areas*
(Is thousands, for track ending nearest the 18th of the Month)
i
*
Regular prograas Teaporary prograa
Regular prograas Temporary program
and
area
Alabaaa
Birainghaa.. . .
Mobile.............
April
March
April
March
1962
1962
1962
1962
59
63
33
2A
9
3
Arlsona
51
Arkansas
Little Rock...
1A
15
California
Los Angeles...
8acraaento.. . .
San Bernard inc
8an Diego........
San Francisco.
8an Joss.. . . . .
8tookton.. . . . .
6.7
5
1
7 .4
9 4 .0
63
9£
89
1 0 6 -5
13
1 5 .7 .
95
105
175
3 7.4
9.7
5.0
1 95
4 5j0
1 3.4
7.5
9
13
2A
6.4
55
7 .0
.4
44
5£
5 .4
A
2 3.
A
and
area
Indiana
Kvansville..«
6£
IS
l£
13
2£
21
3A
1 .7
33
Delaware
Wilaington.. . .
3A
7 .4
Dlat. o f Col.
Washington.. . .
8 jO
1 OS
Florida
Jacksonville.
Ml Mil...............
Taapa...............
B£
8£
5A
»
g s o rll.
Augusta............
.
.....
Maoon.............
Savannah.
S s a ii
Illin ois
Chicago.. . . . . .
Peoria.............
Rockford..........
See
*
55
11
1 .6
1J0
1 .7
.7
3
.4
1£
.7
1 .7
2 .6
9
1
2
1
3
Kansas
Wichita..........
21
2 .7
3
A
Kentucky
L ouisville...
63
8 .0
12
1 .6
Louisiana
Baton Rouge..
Mew Orleans..
Shreveport...
19
81
21
1 9
8.7
23
1 5
3
1£
Maine
Portland........
1 .7
1 .7
1
A
11
11
.4
Maryland
Baltlaore.. . .
B0 £
2 55
2 .4
33
Massachusetts
Boston...........
Brockton........
Fall R iver...
Lawrence........
311
2 .7
4A
4£
37 A
3£
3A
.
.
...
3£
3£
61
4 J0
41
4 jO
45
3
3
.4
3
.4
8 .0
4A
51
B
£
Iowa
Cedar Rapids.
Des Moines.. .
13
163
11
15
2A
63
Z£
1 .0
.6
£
.7
£
A
1 .4
ZA
8A
65
.4
1.4
1 .0
.5
1 .7
13
65
11
15
£
19 62
.4
3
11
1.4
.5
3
Oarjr-Haaaond.
Indianapolis.
South Bend.. .
Terrs Haute..
.4
£
£
March
19 62
3
Ft. Wayne.. . .
£
3
£
April
1 9 62
2
A
9
3
2
5
1 JO
11
13
13
1 .6
March
19 62
1 .6
61
6.7
2 .7
1 .6
1£
Colorado
Connecticut
Bridgeport.. . .
Hartford..........
Britain.. .
Mew Haven.. . . .
Stmford..........
April
£
3
3
3
Mew Bedford.
Springfield.
Worcester.
Michigan
Battle Creek.
D etroit.
F lint..
Qrand Rapids.
Kalaaaaoo.
Lansing.
Musksgon
Saginaw.
.....
.
...
...
....
21
11
4A
4A
2 .0
1 .4
451
1 9
29
It
15
15
M
l
6 .7
9
13
561
699
12 O
2 .7
4.4
2 .6
3
5
1 0 .7
3
19
35
2.0
fo o t n o t e s a t end o f t a b l e .
.4
A
3
9£
3 .0
58A
2 .4
45
Z£
85
81
13
£
3
3
£
3
3
A
£
72
3
A
2
3
A
2
3
8£
A
£
2
3
5
3
3
3
163
15
Mississippi
Jackson.........
1£
1£
2
Missouri
Kansas City..
8t. Louis___
2 3 .7
113
Z8£
3
12
£
143
8j0
A
£
1 jO
Minneapolis..
29
SA
22
1 JO
32
A
1 5
£
1£
4 jO
POLICIES FOR FULL EMPLOYMENT
Tabic
14.
Insured unemployment1In
165
147 major labor market areaa*-contlnued
(M.thouaanda, for week ending a* are at the lOtn of the month)
•
•
Regular programa Temporary program
Regular programa Temporary program
and
area
Mebraaka
A p ril
M arch
A p ril
M arch
1962
i9 6 2
1962
1962
3.4
4 .6
.6 Johnstowa.....
Philadelphia..
3 Plttaburgh....
Reading........
1 .7
1 .4
4
Atlantic City.
Jersey C ity...
3.7
9.4
23 3
5.4
1 0.0
2 7.7
8.7
1 6.7
4 .4
A
■aw Mexico
Albuquerque...
63
14 3
33
74
25
Binghamton....
2 1.6
Buffalo.........
Mew Tork....... 1 4 8 2
Rocbtlitr
35
34
Maw Tork
ea
utica..............
93
3£
2 4.6
1 7 3.4
7D
6.0
6 .6
5£
79
61
15
4.7
12
21
.7
3
3
3
3.0
145
A
9
5
A p ril
M arch
A pril
1962
1962
1962
Dorhim..........
Oreensboro....
Winston-Salem.
Ohio
CiBtOtt
Cincinnati....
Cleveland......
Columbus... .. .
1.6
2 j0
1A
3 jS
23
5 JO
53
5.4
113
253
c
O di
4 j6
9£
20 9
4.4
55
72
3.4
25
1.7
73
8A
Hamilton.......
Steubenville..
Toledo..........
Toungatown....
Oklahoma
Oklahoma City.
Oregon
1.4
1.7
1 .4
23
2£
•
Portland. ••••
Pennsylvania
Allentown.. ...
• ••
2 .0
1.4
63
5A
6A
3 j6
33
3£
3.7
103
122
6A
19
44
4A
75
23
43
6 j0
1962
1
1 Wilkea-Barre..
52
1.4
2 j8 Rhode laland
A Providence....
8outh Carolina
3 Charleaton....
Qreenvllle....
12
.4
3.7
1 9.8
1 j0
1.0
.7
Tannaaaaa
Chattanooga...
Knoxville......
Memphia.........
7 j0
1A
57 2
4 2.4
23
6.0
85
3.4
73
2.4
6 9.4
503
3.4
63
93
4A
125
1 6.0
1£
24
1 JO
1A
11
1.4
2
3
3
3
45
5.4
4£
55
3.6
1 JO
j0
3
5
12
1.0
13
4
.4
3
3
.4
5
14
5
1
5
3
13
5
j6
1.4
.7
42
4.6
23
Taxaa
Morth Carolina
Asheville......
M arch
Fa.— Con.
.4
New Haapahlre
Manchester....
Mew Brunawick.
and
area
£
33
1.7
5.6
2.6
3.7
6.0
£
31
.6
45
.7
3
7.7
5£
5
£
2
62
2
£
3
2
A
4
A
3
3
£
3
.4
.4 Corpua Chrlatl
.4
3
.4 Ft. Worth......
.6
San Antonio...
32
1 6
6£
25
3.7
65
3.4
j8
1 4 Otah
A
2 j0 Sa lt Lake City
4 2 V irgin ia
23
33
£
3
1 j0
2.0
13
1£
2A
1.7
4
3
£
-4
.5
1.4
3.4
.5
.7
3
2
3
.7
7
1 jo
ItlptOfl
5
3 Richmond. . . . . .
13
1 JO Waahlngton
Seattle.........
.4
.4
5
5 Meat Virgin ia
15
1 3 Wheeling.......
.4
£
3
3
A
£
Charleaton....
Huntington....
ifgamI■
£ Kenosha... . . . .
£ Madison.. . . . . .
.4 Milwaukee.....
.4
U
£
£
4
4
3
4j0
1 43
5A
3 j8
23
A
3£
3
3.7
33
33
3 j0
35
3
3
3
A
£
£
1
1
9
4
4
14
4
10
2A
5
i j0
92
11
3£
1
124
1.6
£
3
A
5
* Xnaured Jobleaa under State, Federal taployee, and Ex-Servicemen1v unemployment insurance programs.
'F o r fUil name of labor market area, see Area Labor Market Trends
tilshed by the Bureau of
Employment Security.
. * Temporary Extended Compensation program, effective April S, lOOi covering claimants exhausting
hanaflta under the regular 8tate and Federal programa.
•Revised.
166
POLICIES FOR FULL EMPLOYMENT
EXPLANATO RY NO TES
C u rre n t sta tistic s on em ploym ent and unem ploym ent are com piled from household in te rvie w s,
p a y ro ll repo rts fro m e m plo yers, and adm in istrative sta tistic s of unem ploym ent in su ran ce sy ste m s.
D ata fro m these different so u rce s give valuable in sig h ts into v a rio u s aspects of the lab or m arket.
The household survey g iv e s an unduplicated count of in d ivid uals who are em ployed or unem ployed
and detailed info rm ation on their person al c h a ra c te ristic s such a s age, sex, co lor, and m a r it a l
status.
The p a yro ll re p o rts g i v e detailed estim ates of n on a gricu ltu ra l em ploym ent, h ou rs and
e arn ings, by industry and geographic locality. Data from the unem ploym ent in su ran ce sy ste m s
yield geograp hic d etail on' the total number of w o rk e rs draW ing unem ploym ent com pensation under
State unem ploym ent in suran ce p ro g ra m s.
These three se r ie s requ ire different definitions, con
cepts, and m ethods of m easurem ent. Because of th is and because of sa m p lin g v a ria b ility , response
o r reporting e r r o r s , and adm in istrative factors, m onth-to-m onth changes shown b y t h e se r ie s
m ay differ.
Follo w in g i s a b rie f d escription of each se rie s. F o r m ore detail, see E m p loy m en t and E a r n in g s
of the Bureau of L ab o r S ta tistic s and publications of the B u re au of E m ploym en t Security.
The sam ple su rve y of households, collected and tabulated by the Bu re au of the Ce n su s, U .S .
Departm ent of C o m m erce, fo r the Bu reau of L a b o r Sta tistics, p ro v id e s a com preh ensive m easu re
of the labor force, i. e.., the total number of p e rso n s 14 y e a r s of age and over who are em ployed
o r unemployed. The info rm ation is obtained fro m a sc ie n tifica lly selected sam ple of about 35,000
interview ed households in 333 a re as throughout the country and i s based on the activity or status
reported by surveyed p e rso n s fo r the calendar week ending n earest the 15th day of the month.
The sam ple survey of em p lo yers p rovid es e stim ate s of the num ber of em ployees on the p a y ro lls
in n on a gricu ltu ra l e stablish m en ts, by industry. Sta tistic s on em ploym ent of production or nonsuperv is o r y w ork ers, average weekly hou rs and average hourly and w eekly e a rn in gs are a lso available
fo r a la rge number of in d u strie s.
The fig u re s a re based on re po rts from a sam ple of esta b lish m en ts em ploying approxim ately 25
m illio n w ork ers. The em ployee fig u re s include a ll person s who received pay from n on a gricu ltu ra l
establish m ents during the p a y ro ll period ending n earest the 15th of the month.
A d m in istra tiv e sta tistic s of unem ploym ent in su ran ce sy ste m s fu rn is h a com plete count of in su red
unem ploym ent am ong the tw o -th ird s of the N a tio n 's la b or force co vered by unem ploym ent in su ran ce
p ro g ra m s.
W eekly rep o rts, by State, are issu e d on the num ber of in itia l c la im s, the volum e and rate of
in su red unem ploym ent under State unem ploym ent in su ran ce p r o g r a m s, and the v olu m e s under the
p ro g ra m s of unem ploym ent com pensation for F e d e r a l em ployees, fo r veteran s, and fo r e x -s e r v ic e
m en. These sta tistic s are published by the B u re a u of E m p loy m en t Security, U. S. D epartm ent of
L a b o r in*Unem ploym ent In su ra n ce C la im s ."
Concepts and D e fin ition s
E m ploy m en t D ata
The em ployed total fro m the household su rv e y includes a ll w age and s a la r y w o rk e rs and se lfem ployed p e rso n s who worked at a ll du rin g the su rv e y week or who had jo b s or b u sin e sse s fro m
which they were te m p o ra rily absent because o f illn e s s , vacation, in d u str ia l dispute, o r v a rio u s
other re a so n s, r e g a rd le ss of whether pay w as received. It a ls o in clu d e s unpaid w o rk e rs in fa m ily operated e n te rp rise s who w orked 15 o r m ore h o u rs d u rin g the su rv e y week. E m p loy ed pe rso n s
include those w orking in a gricu ltu re , o r in n o n a gricu ltu ra l in d u strie s; those hold in g m ore than one
jo b a re counted only once and are c la s sifie d a cco rd in g to the job at which they w orked the g re a t
e s t num ber of hou rs d u rin g the su rv e y week.
P a y r o ll em ploym ent fro m the em ployer su rve y in clud e s non farm wage and s a la r y w o rk e rs who
received pay fo r any p art of the pay period. P e r so n s on paid sic k leave, paid holid ay, or paid
vacation are included, but those on leave without pay for the entire p a y ro ll period are excluded.
POLICIES FOR FULL EMPLOYMENT
167
P e r s o n s on the p a y r o ll of m o re than one e sta b lish m e n t d u rin g the pe riod are counted each tim e
reported.
S e lf-e m p lo y e d p e rso n s, unpaid fa m ily w o rk e rs, and d o m e stic s are excluded.
B e c a u se these p a y ro ll data are based upon r e c o r d s of a re la tiv e ly la rg e sam ple of e s ta b lish
m en ts, they provide in d u stry in fo rm a tio n in co n sid e rab le d etail which cannot be obtained w ith equal
a c c u ra c y fro m a su rv e y of households. The household su rve y, on the other hand, fu rn ish e s de
t a il on p e r s o n a l c h a r a c t e r is t ic s of the la b o r force.
U ne m ploym en t D a ta
The unem ployed tota l fr o m the household su rve y in clu d e s a ll jo b le s s p e rso n s who w ere lookin g
fo r w ork, r e g a r d le s s of whether or not they w ere e lig ib le fo r unem ploym ent in su ra n ce . A ls o counted
a s unem ployed are p e rso n s w a itin g to be ca lle d back to jo b s fr o m w hich they had been la id off; those
scheduled to sta rt new w age o r sa la r y jobs w ithin 30 d ay s (except stu d en ts); and those who w ould
have been lo o k in g fo r w ork except that they were t e m p o r a r ily i l l or b elieved no w o rk w a s a v a il
able in th e ir line of w ork or in the com m unity.
In su re d un em ploym ent re p re se n ts the num ber of p e rso n s re p o rtin g a week of unem ploym ent under
an un em ploym ent in su ra n ce p r o g r a m . It in clu d e s som e p e rso n s who are w o rk in g part tim e who
would be counted a s em plo yed in the p a y r o ll and household su rv e y s. E xc lu d e d are p e rso n s who
h a v e exhausted th eir benefit righ ts; new w o r k e r s who h a v e not earned r ig h t s to unem ploym ent
in su ra n ce ; and p e r s o n s lo sin g jo b s not co vered by unem ploym ent in su ra n ce sy ste m s (a gricu ltu re ,
State and lo c a l gove rn m en t, d o m e stic se rv ic e , se lf-e m p lo ym e n t, unpaid fa m ily w o r k , nonprofit
o rg a n iz a tio n s, and f ir m s below a m in im u m s iz e ). The rate of in su re d unem ploym ent is the num
be r of in su re d unem ployed e x p re sse d a s a percentage of av e rag e co vered em ploym ent in a 12-m onth
p e rio d ending 6 to 8 m on th s p r io r to the week of reference. In itia l c la im s are notices file d by
those lo s in g jo b s co ve re d by an unem ploym ent in su ra n ce p r o g r a m that they are sta rtin g period s
of unem ploym ent. A cla im a n t who continues to be unem ployed a fu ll week is then counted in the
in su re d un em ploym en t fig u re .
H o u rs of W o rk
A v e ra g e w eekly h o u rs of w o rk fro m the em p lo ye r su rv e y are a v a ila b le fo r detailed in d u str ie s
in m an u fac tu rin g and fo r se lected n onm anufacturing in d u str ie s. The d ata relate to production or
n o n su p e rv iso ry w o rk e rs and m e a su re the tota l num ber of h o u rs fo r w hich pay w as received.
The h o u rs of w o rk fro m the household su rv e y include a ll h o u rs w orked (paid or unpaid) in fa r m
and n o n farm em plo ym en t a s re po rted by in d iv id u a ls. The total nu m b e r of h o u rs w orked by p e rso n s
h o ld in g m o r e than one job i s cre dited to the a ctiv ity at w hich they w orked the m o st h ou rs.
S ta tistic a l R e lia b ilit y
Household Su rv e y
Since the data fro m the household su rv e y are based on a sa m p le , they m a y d iffe r f r o m t h e
f ig u r e s that w ould have been obtained if it w ere p o ssib le to take a com plete ce n su s u sin g the sam e
sch ed u le s, e n u m e ra to rs, and pro c e d u re s.
The sta n d a rd e r r o r i s p r im a r ily a m e asu re of
m ig h t oc cu r by chance because only a sa m p le of
about two out of three that an estim ate fr o m the
le s s than the sta n d a rd e r r o r .
The chan ce s are
le s s than tw ice the sta n d a rd e r r o r .
sa m p lin g v a r ia b ilit y , that is , the v a r ia t io n s that
the population i s surve ye d.
The chan ce s a r e
sa m p le w ould d iffe r fr o m a com plete c e n su s by
about 19 out of 20 that the d ifference would b e
The fo llo w in g table show s the ave rage sta n d a rd e r r o r fo r the m a jo r em ploym ent statu s cate
g o r ie s , com puted fr o m data fo r 12 recent m on th s. E s t im a t e s of change d e riv e d fr o m the su rv e y
are a ls o subject to sa m p lin g v a r ia b ilit y . The stan dard e r r o r of change fo r consecutive m onths is
a ls o shown. The sta n da rd e r r o r s of le v e l are acceptable a p p ro x im a tio n s of the sta n da rd e r r o r s
POLICIES FOR FULL EMPLOYMENT
168
of y e a r-to -y e a r change. F o r m ore details on sta tistica l relia b ility, see E m ploym en t and E a r n in g s
of the Bureau of L ab o r Statistics.
A v e ra g e standard e r r o r of m ajo r em ploym ent status ca te go rie s
( In thousands)
A verage standard e r r o r o f --
E m ploym en t status
L ab o r force and total em ploym ent ......................................
A gric u ltu re ..........................................................................
N o n agric u ltu ral em ploym ent ................... ............................
Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
M onthly level
250
200
300
100
M on th -to
rn o nth change
(consecutive
rftonths only)
180
120
180
100
E m p lo y e r Su rvey
Th is su rve y is designed p r im a r ily to m easure m onth-to-m onth changes in employment, as in d i
cated by a sam ple of em plo yers who report in su c ce ssive p a irs of months. The estim ated e m p lo y
m ent le vels are adjusted p e rio d ic a lly to bench m arks obtained fro m a v a rie ty of so u rce s, the m o st
im portant of which are re c o rd s of em ploym ent in establish m ents covered by State unemployment
insurance laws. These data are com piled by State agencies under the direction of the Bu re au of
Em ploym ent Security. The extent of adjustments needed to m ake the m onthly se rie s conform with the
benchm arks p rovides a check on the accu racy of the estim ates.
Significant causes of difference between the benchm arks and estim ates include changes in in d u s
t r ia l c la ssific a tio n of individual establish m ents, as well as sam p lin g and response e r r o r s . The fo llo w
ing table presents a co m p arison of n o n agricu ltu ral p a yro ll em ploym ent estim ate s fo r industry d iv i
sion s fo r M a rc h 1959. Th is c o m p ariso n relates to the se rie s published p rio r to co nversion to the
1957 Standard In d u stria l C la s sific a tio n , and refle cts only those differences which would result fro m
a n o rm al benchm ark adjustment. However, apart fro m sa m p lin g and related p roblem s, the M a r c h
1959 benchm ark le v e ls actually used for the se rie s on the 1957 S IC were affected by 1) additions to
employment amounting to |670, 000 (an increase of 1.3 percent in the total estim ate) for ce rtain c a te
go rie s not adequately represented before, and 2) sh ifts between industry d iv isio n s in accordance with
the new S IC , as described in the article in the N o vem ber 1961 is«ue of E m ploym ent and E a r n in g s .
C o m p a riso n of non agricu ltu ral p a y ro ll employm ent estim ates with M a r c h 1959 benchm arks,
by industry d ivisio n
Em ploym ent estim ate
In dustry d ivisio n
In thousands
A s percentage
of benchmark
A
T O T A L. .................................................................................
51,093
QQ
77» *
M i n i n g .................................................................................j
C o ntract co n stru c tio n ............................................................
689
2,435
15,995
3,883
11.134
2,393
6,409
8, 155
96.1
95.1
99.1
100.3
100.8
98.8
98.6
100.0
T ran sp o rtatio n and public u t ilit ie s ...................................... j
W holesale and re tail t r a d e ...................................................
Finance, insuran ce, and re a l e s ta te .................................. ..
Se rvic e and m is c e lla n e o u s .................................................. ^
G overnm ent ............ .............................................................
POLICIES FOR FULL EMPLOYMENT
169
Representative Cnms. Would the gentleman yield at that point?
Senator Proxmire. I would be happy to yield.
Representative C u r t i s . I got the figures for January 1961, Febru
ary and March, before this revision census data, and we show a similar
decline before that element entered in. I don’t know the significance,
but it does show a 100,000 decline. I think your point on armed serv
ices is well taken from the standpoint that they had increased about
300,000, but we still get back to the basic thing of a decline of the labor
force in relation to our total population, which I think bears on this
economic gap theory.
Senator P r o x m ir e . I would like to s a y this is a neglected area of
our whole economic approach. There has been laudatory emphasis
on the demand aspects of the situation, but I think too little emphasis
on the supply part of the employment enuation.
As I analyze your statement, and I tnink it is a very, very fine one,
there is an indication that you feel that the main problem is unem
ployment. There are other problems of growth and so forth, but
unemployment is certainly a nagging ana real and vital problem.
It is possible that we can solve this problem entirely in the area
of increasing effective demand. I wonder if we can really do so. I
can see nothing wrong at all with working constructively on reducing
the size of the labor force because I think we can do so without re
ducing our standard of living and providing greater values for our
people.
I am thinking particularly in two areas. One you mentioned, the
earlier retirement age and social security from 65 to 62 made a real
contribution. Why isn’t this good? If people want to retire, can re
tire earlier, open up jobs for other people, 1 think this is fine.
Another possibility which has not been developed is to keep our
young: people in scKool longer. In the first panel discussion we had
here it was emphasized that the most serious problem of unemploy
ment is the people who are young and just entering the labor force.
If they can he kept in school, and their remaining in school can be
dovetailed with an effective and aggressive vocational program, then
you solve the problem of diminishing unemployment ana have them at
constructive work so when they do enter the labor force they can make
a substantial contribution, and a job will be more readily available.
I might conclude this statement with one point, and that is that if
it were not for the social securiy system we have today, and did not
have in the thirties, we would today have not 5¥2 percent of our work
force out of work, but probably 14 or 15 percent of our work force out
of work, because the 13 or 14 million people on social security, most
of them, would have to work so that they would have the income to
stay alive. Therefore, it would seem to me that a constructive and
limited extension of social security may be another constructive way
to cope with this economic problem rather than try to do it entirely
with fiscal measures which can take us into a deeper and deeper na
tional debt and aggravate our problems in that direction.
Dr. H eller . We have been very much concerned about the supply
side, particularly the employment problem. We have stressed in
earlier testimony and in tne annual report of the Council that, side
by side with attention to expanding demand and expanding rates of
investment and modernization which release labor, it is extremely
170
POLICIES FOR FULL EMPLOYMENT
important to improve the mobility and the skill structure of the labor
force.
t
.
You are suggesting with respect to education and vocational train
ing, that these work at two ends of the problem. First, such training
takes people off the labor market for the time being, and second, it
upgrades the skills and education and knowledge of these individuals.
I couldn’t agree more with your suggestion.
It is true, of course, that increased training costs money. An exansion in the Federal budget and in State and local budgets would
& necessary to provide this higher level and longer period of training.
The same is true of social security as well. If we were to make limited
and modest advances in the provision of social security for the aged,
that, too, would require revisions that cost money.
I am not saying that the increased budgetary costs makes your pro
posals undesirable. We have to balance the costs against the benefits.
But it does run into some problems on the budgetary side that have
to be considered.
Senator P r o x m ir e . In this connection I understand the reduction
in retirement from 65 to 62 did not cost a significant amount because it
was accompanied by a reduction in the pension to be received. Sim
ilarly, a reduction from 62-to 60 might be accompanied by a reduction
in the benefits to be received and it would be completely voluntary
whether the people wanted to remain in the labor force and continue to
work or whether they would prefer to retire and take a lower pension.
At any rate, the dollar cost could be adjusted, I would think, so it
would not be significant.
Dr. H e l l e r . Yes. This whole question of how much of our advance
in economic potential we take out in the form of increased leisure
and how mucn we take out in the form of increased production is a
very difficult one and depends a great deal on some of the basic philo
sophical goals of the society in which we live.
To the extent that we put emphasis on growth for domestic fulfill
ment and international leadership, we are a little more reluctant to
cut down on the size of the labor force and its growth than if we felt
that we were at a stage where we were truly affluent and could afford
the cost.
I think this administration has placed somewhat more emphasis
on the maintenance of high rates of labor force participation and im
proved opportunities for education and training as a means to faster
economic growth.
Senator P r o x m ir e . I think we can do both vigorously at the same
time. The Senator from New York has 3 minutes remaining.
Senator Javttb. Thank you very much, Senator.
Mr. Chairman, I have one other line of questioning which I shall
make expeditious.
I notice in the various things you laid out under the heading of
policy actions you list entirely matters which are already before us.
You don’t list any measures other than those already before us.
I just wondered whether you would, yourself, consider these actions
as being everything that is needed, or what would be your attitude, for
example, on the widespread view that we need some better mechanism
in law for dealing with national strikes. We have just had a bill in
troduced by one of our colleagues which I didn’t join in because I
E
POLICIES FOR FULL EMPLOYMENT
171
didn’t like the way it was developed, but nonetheless it does seem to
be a general feeling that strikes which affect the total national interest
are beyond the reach of effective law.
Would it come within the compass of your activities to include in
your prescription as to what we ought to do with any such ideas?
Dr. H e l l e r . As you know, Senator, we are primarily charged under
the Employment Act of 1946 with problems and policy relating to
economic stability, economic growth and price stability. We do not
get as directly into problems of the kind jrou are raising.
We certainly do not have a policy position on the matter you refer
to that I could very usefully comment on at the present time.
Senator J a v it s . Would the same be true as to how business ought to
finance the worker in respect of the transition to automation ?
Dr. H e l l e r . This gets into the basic question of how best to stimu
late investment and modernization and to improve technology in the
economy, and it is something on which the Council might naturally
be consulted and concerned, although I would not say we have a
specific program to lay before you.
Senator J avits. Y ou did not hesitate to prescribe what you thought
should be guidelines for labor-management wage negotiations.
Dr. H e l l e r . This is an area so directly related to wage and price
levels in the economy, and to the whole question of the possible re
sumption of the wage-price spiral, that it is directly related to our
responsibilities concerning maximum purchasing power which, as you
know, we interpret to include concern with the maintenance of reason
able price stability.
Senator J avits. Would it be fair to say, therefore, and this is my
last question because my time is up, that the policy actions which are
specified are by no means an exclusive list as .you see the needs of the
economy to move it forward and avoid a recession!
Dr. H e l l e r . That is correct.
Senator J a v it s . Thank you. I thank my colleague.
Senator P r o x m ir e . I will ask a few questions and then defer to
Congressman Reuss.
I would like to go back to something we Democrats have been
neglecting today, the monetary policy, ana ask you a further question
on it
Most of our fire has been directed at the Federal Reserve Board. I
think Senator Douglas and Congressman Reuss did a marvelous job
of laying the groundwork for the question I want to ask. Senator
Douglas pointed out that traditionally, monetary policy has been to
ease the situation when the expansion slowed down. All the evi
dence is that we have not done so this time.
Congressman Reuss certainly documented it well. I am referring
to a New York Times article on last Sunday which is headlined K e n
nedy Revises His Fiscal Goals,” and frankly, this is one of the most
alarming articles I have read as a Democrat and one who is deeply
interested in economic policy. It reads in part:
The interest of the Kennedy administration in a steady or even higher interest
structure both short- and long-term was attested last week by the outcome of an
$8,800 million financing operation, most of which was intended to refund matur
ing debt and the test to raise about a billion dollars in new money. AU of the
money coold have been raised readily at short term at a cost of 3% peneut
Still, the Treasury saw fit to borrow $1,605 million of the total on bonds due In
172
POLICIES FOR FULL EMPLOYMENT
6% years at a cost of 4 percent, and $310 million on bonds due in 30 years at a
cost of nearly 4^4 percent.
I might say in this connection that the administration expected to
be able to sell $500 million worth of bonds, 4*4, 30 years. They stood
ready to gell $750 million of bonds and they could only sell $316 mil
lion, indicating the serious plight of our money market.
The fact that interest rates have gone so high and risen so sharply,
expectation of higher interest rates, is so apparent in the money market
that they refused to buy the Treasury bonds at this very enticing
rate.
It goes on to say that the reason for the long-term borrowings at
rates closely approaching the highest incurred by the Treasury in the
postwar period is perhaps best summed up in the declaration by the
Federal Reserve Bank of New York in January:
As an objective of monetary poUcy, the defense of the international value
of the dollar has come to occupy a position alongside of the goal of stable
economic growth.
You used some very strong words about the importance of monetary
ease for the domestic economy.
Now I want to read briefly from what Chairman Martin said to us
in February.
There is no invariable relationship between relative interest rates in various
capital markets. While interest differentials can be an important factor in
movements of capital, there are others.
He goes on to say what they are.
Capital movements are sometimes viewed in the narrow concept of short
maturity. The differences that existed last year between money rates here and
abroad on this kind of paper do not appear to have been a primary determinate
of international movements of funds of this type.
Under Secretary of the Treasury Roosa has written the same kind of
thing. Mr. Gemmill, a top monetary economist with the Federal
Reserve Board, has written similarly.
As I understand, there has been no change in the forward cover
premium. Chairman Martin indicated this to us 3 weeks ago
when I asked him rbout this, so I just can’t see what all the concern
about the international balance of payments situation is that would
warrant a deliberate policy of raising long-term interest rates, and the
evidence is overwhelming, as well as short-term interest rates.
Dr. H eller . A s I believe I suggested in my response to earlier
questions, the rise of about 20 basis points in the long-term rate is a
matter of very serious concern to us, on the same general grounds as
it is to you. It has made the cost of long-term money more expensive
and might have touched off expectations of further rises. As you
suggest, such expectations might have had some impact on the rather
modest amount—I think you said $316 million—that the Treasury
was able to borrow on long term.
Senator P ro x m ir e . This is the Treasury Department policy determi
nation. This is not the Federal Reserve Board.
D r. H eller . T h is is a source o f con cern to us as w ell as to you . I
th in k in o u r con sid era tion o f th e interest rate an d m on eta ry sp ec
tru m w e sh ou ld n ot leave o u t o f a ccou n t that, co n tra ry to the d e v e lo p
m en t y o u ju s t p o in te d ou t, in som e areas— such as m o rtg a g e rates—
POLICIES FOR FULL EMPLOYMENT
173
there has been no increase. Indeed, there has been a decline since
the beginning of the year in mortgage rates.
Senator Proxm ire. The figures I nave been given show the conven
tional rates for mortgages in the last several months have been very
high. July, 5.90; October, 5.95; April, 5.95; July, 5.95. The all-time
high was January 1960,6.24, but that is very high.
I hate to ask a question and run, but I will miss my rollcall unless I
do go.
Dr. H e lle r . I was hoping Mr. Gordon could comment on this.
Senator P roxmire. Would he defer that?
minutes.
I will be back in 5
Chairman P atm an. Congressman Curtis?
Representative C u r tis . I just wanted to pick up on that one little
point on the labor force. I am reading now from table D, labor force
participation rates by age and sex. I want to be sure what I am
reading from now. This is the monthly report of the labor force.
Labor force growth appears to be slowing down for reasons which fire not
entirely dear. Second quarter 1962 increased 600,000 over the year, ws* about
400,000 short of what might have been expected on the basis o f past trends.
Most of the difference was among women 25 to 54 years of age who have
accounted for such a large part of our expanding work force since World War
Young penole. on the oth**r hand, joined the work force in about the expected
numbers over the year. Shortage o f job opportunities could not be the full
explanation of the slowdown in growth. Over the year, the labor force partici
pation of women 55 to 64 years of age has risen sharply as it has in all recent
years. There Is no evidence that jobs are available for them, but not for younger
women.
I just wanted to add that into this discussion because it does seem to
me this becomes a very critical area of examination. In the gap theory
that the Council is advancing, certainly this should be interjected. I
say that again as one who doesn't agree with the gap theory as an ac
curate way of viewing our economy.
Dr. H e lle r . We recognize that many people remain outside the
labor force when they are discouraged by the inadequate availability
of job opportunities. Our estimate of potential output is, therefore,
based on the expected normal size of the labor force at full employ
ment. On the other hand, actual output is affected only by persons
actually employed, and not b y persons either unemployed or outside
of the labor force. The gap is obtained by subtracting actual from
potential output, and our calculations of the size of the gap, there
fore, make an allowance for the response of the labor force to job
opportunities.
So on the question of what the economy is capable of at full employ
ment—which is really all we are talking about and what you identify
as the “ gap theory’ —we do take both the present labor force and
the prospective labor force into our calculations.
Representative C u r tis . If I am wrong, I want to be corrected. In
your estimates, the gap has diminished in a year and a half. I would
say that if the labor force were increasing at the same rate that it
had been, roughly about a million a year, I suggest probably vou
have not closed at all. I don’t know whether it would be that big.
but it is a million more people in the unemployed sector, which would
make a sizable difference.
174
POLICIES FOR FULL EMPLOYMENT
Dr. H eller. Mr. Congressman, the increase in the gross national
product has been about $50 billion. We assume that approximately
$30 billion of that has been keeping up with the growth in the
economy’s potential and about $20 billion has been a narrowing of the
gap. That calculated gap of $30 billion does not rest on the differ
ence between the present 5.3- or 5.4-percent unemployment rate and
the so-called full employment rate of 4 percent; rather it does take
into account the labor force that would be drawn into the economy
at full employment, of course, not with perfect accuracy.
Representative C u rtis. How can it if you use unemployment figures,
because unemployment figures do not reveal these people who are not
in the work force.
Dr. H eller. On the basis of previous experience of what happens
to the growth of the labor force, as the economy approaches 4 percent
unemployment, one can calculate approximately the additions to the
labor force that high levels of economic activity will generate.
Eepresentative C urtis. You don’t have to use hypothetical figures.
We can simply use the figures as of any month, su^h as the cv*T?nt
month of 1962, or take the year 1962 and compute if there had been
the usual increase in the civilian labor force. It would be only in
the one area. It would be in the unemployment area which would
be roughly another million people there.
That is not, in my judgment, taken into your computations on your
gap theory of where .you are in 1962.
Dr. H eller. This is, I guess, a difficult point on which to establish
clear understanding. I want to state just once more, first, that the
differential in the labor force projection and the actual is not really
a million when we take account of the 350,000 increase in the Armed
Forces and the 210,000 adjustment in the labor force figures in response
to the 1960 census.
Eepresentative C u rtis. I think it is. I agree on the armed serv
ices. But again the arm^d services are hardly a basis of referring to
the private sector.
Dr. H eller. That takes potential labor force out of the private
sector. I want to say secondly that we would not get as big an in
crease as $30 billion in our total output if we were to use only the
people now in the labor force. In measuring the gap, we are calcu
lating an increment to that labor force from the sources you suggest.
Representative C u rtis. Our employment actually has increased.
That part is clear. Employment has increased each year.
Dr. H eller. That is correct.
Representative C u rtis. It has increased from 1961 to 1962. But
the area where there has not been an increase has been the civilian
labor force. That consists of the employed people and the unemployed
people. I was at first afraid that it might be a statistical error in our
computation of the unemployed because this is something that has
never happened in our recent history. This is new that our civilian
labor force has not been increasing. Even in the three post-World
War II recessions the civilian labor force increased. You are con
fronted with a new phenomena of decline in the civilian labor force
which to me is highly significant and must be fitted in somewhere
in the gap theory because it is perhaps even more ominous than those
who are listed as “ unemployed.” Let me go on to one other area. It
POLICIES FOR FULL EMPLOYMENT
175
is basic. But in your whole presentation of this deficit financing theory
there is only one paragraph devoted to what I think is one of the great
problems in deficit financing—debt management. I have asked other
witnesses who have suggested this quickie tax cut to stimulate the
economy— and I am using just the figure of $5 billion for convenience—
we could use 10— that you cut taxes by $5 billion and thereby release
that money to the private sector, but wtf have to sell $5 billion worth of
bonds to the private sector and thereby we withdraw $5 billion from
the private sector. Unless you want to use the banks of the Federal
Reserve System to buy these bonds.
In your paper you say, and this is the only reference I found to debt
management, that—
If budget deficit* are incurred, the method of financing1them must be carefully
adapted to the prevailing economic circumstances. A careful balance must be
struck between bank and nonbank financing, a balance which wiU not thwart
or nullify the expansionary effect of budget measures in an economy with exces
sive unemployment and excess capacity, but will prudently shift Federal debts
into nonbank bands as the economy comes close to or reaches full employment.
As one who. sits on the Ways and Means Committee, that has to
figure how we are going to market these bonds, all you are really saying
is that we have a problem. I think any one who advocates deficit
financing, particularly right now, should be ready to discuss the eco*
nomic impact of having to market these bonds.
May I relate it to one thing before I turn it over.
In monetary policy we find that the discipline that has entered the
picture is balance of payments. So we can’t follow the monetary
policy that otherwise we would. So I suggest with the Federal dew
the size it is, and the problems that we already have in marketing that
debt, I think just the rollover is around $90 billion next year, what is
the economic impact of superimposing another $5 billion on top of this
tremendous amount we have in debt management.
Dr. H eller. I think you are putting your finger on a very important
part of expansionary policy, and, indeed, on one of the key areas
where monetary policy has to b3 coordinated with fiscal policy. Es
sentially, in response to the very type of concern and question that
you have raised, what this paragraph says is that when the economy
is in a slack condition, when there are underemployed resources and
manpower, a budgetary deficit can lead to an expansion of employ
ment, production, incomes, and profits, without an increase in prices,
and can do so even if it is bank financed.
Representative Cuirns. That is the thesis.
Dr. H e ife r . This has been shown to be the case in past recessions
when we have had deficits that were financed in large part by selling
Government securities at the short end of the spectrum which were
in large part placed in by the banking system.
Representative C u r t is . That is the area for debate. I don’t know
that it has been shown. I am not willing to presume that is so. I want
the debate to center around the question, Is the theory of deficit
financing sound? Your presentation and the presentation of others
who advanced this theory begs the question throughout that the
economy will be stimulated. I think we need to examine into whether
it will or not. I doubt if it has in the past. People point to the fact
that in tV thirties this theory didn’t work out. That is countered
176
POLICIES FOR FULL EMPLOYMENT
by those who Say, “Well, the deficits were not large enough, we did
not spend enough.” After all, when the expenditures of World War
II came the economy did come back. However, I relate World War II
result to the fact that we took 10 million young men and women and
put them in uniform. That is where you got rid of your unemploy
ment situation. You had the war psychology and you had the forced
savings in those periods with wage and price controls and a lot of
other disciplines which people put up with because our conntrv was
at war. This was dictatorship and I am certain our people will not
put up with this kind of government domination in peacetime. I
certainly don’t 'believe that this deficit financing theory is one that
can be accepted without its proponents coming forward with their
working papers to prove it. I have sat through almost 2 weeks of
Ways and Means Committee hearings and listened to all of this re
statement of this novel theory without anyone advancing it coming
forward to establish it with their working papers. It is always pre
sented more or less as you do, that we all affree. Maybe the bulk of
the economists in the universities agree but there are some of us who
do not agree and do not understand it.
^Dr. H e l l e r . I think you are suggesting that a look at the statis
tical record over the years would be a useful exercise.
Representative C u r t is . Partly that, and also whether or not the
statistics really give us enough information of what really has been
going on.
Dr. H e l l e r . In our thinking about this problem we should also take
into account the fact that in a period of economic expansion when
there is still a considerable dejrree of unemployment and excess
capacity, there is always substantial deficit financing by the private
economy. Some of that deficit is covered by bank financing some
comes out of other sources. In terms of the principles involved this is
really no different from the question of the impact of bank financing
of Government deficits.
Representative C u r t i s . I must make one comment that we can come
back to. This business of relating private financing to Government
financing in my judgment is an unsound reference. Private financing:
puts up collateral either in the way of buildings or equities but Fed
eral financing doesn’t.
Dr. H e l l e r . May I make one comment on the statistics that Mr.
Gordon has called to my attention ?
In financing the $12.9 billion deficit of fiscal year 1959, the banks
absorbed about $10 billion of additional short-term securities. This
was done without any increase, as you know, in the wholesale price
level. We had a stable price level straight through.
Representative C ttrtis. I was critical at the time of what we did
in 1959 and it was my own administration; we are still paying for it.
Chairman P a t m a n . Senator Pell.
Senator P e l l . Thank you, Mr. Chairman.
Dr. Heller, just for the record, when you talk about the five quar
ters in which this growth has occurred, what exact period do we
mean from the viewpoint of the calendar?
Dr. H eller . Fran the first quarter of 1961 to the second quarter
of 1 9 6 2 , 1 believe.
^Senator P e l l . Y ou say since the bwnnninfir of the current expan
sion in 1961. Does that mean from February 1 until April 80?
POLICIES FOR FULL EMPLOYMENT
177
Dr. H e l l e r . When we are dealing with quarterly figures, we use,
in effect, the average for the first 3 months of 1961 compared with fig
ures for the second 3-month period of 1962. That is for quarterly
figures. The monthly comparisons are based on February 1961, and
run up the latest month for which data are available, usually June of
1962.
Senator P e l l . I found it a little confusing trying to discover the
exact calendar period you were referring to in which this improve
ment occurred.
Dr. H e l l e r . I am sorry. Some data are only available quarterly,
some monthly. O f the latter, the latest available data are in some
cases for May, some for June, and some for July.
Senator P e l l . In other words, our G N P has gone from 500.8 to 552
billion in the period from February 1 to April 30.
Dr. H e l l e r . N o . From the first quarter of 1961 to the second
quarter of 1962.
Senator P e l l . What would be the calendar dates ?
Dr. H e l l e r . The calendar dates are the average for January, Feb
ruary, and March 1961 and the average for April, May, ana June
Senator Pell. Thank you very much.
Dr. H e l l e r . We don’t have G rtfP on a monthly basis, only quarterly.
Senator P e l l . In line with Senator Bush’s question as to whether
we have tried a reduction in tax before to ward off a recession or
depression, I wonder if this same process has been tried in any foreign
countries of which you are aware.
Dr. H e l l e r . There is a flexible tax authority that is now available
to the British Government. They have the authority to vary certain
excise tax rates and employment taxes in response to the requirements
of economic policy. So far they have usea only one of those two,
their consumption taxes, and they moved those up last summer in
order to cut down the level of demand.
Secondly, the Swedish authorities have an investment credit which
is moved up and down. A s I recall the operation of that, businesses
are given a tax incentive to put a portion of their profits in escrow,
so to speak, during boom times. Then, in slack times, they are allowea
to use them for investment projects.
So there have been some experiments here and there, but there
is no precise parallel to what we are talking about. I might say,
however, that the 1954 experience offers some parallel, to be sure,
not in the sense of a conscious, antirecessionary tax policy, but the
effects are the same. Congress, as I recall, enacted a very quick cut
of about $4 billion in the Korean war taxes. Then, in the longrun
“tax overhaul,” as it was called, there was added another billion and
a half of income tax reduction. In other words, that gives us an
experience that is quite relevant, although not in the sense of de
liberate congressional action to cut taxes for business cycle reasons.
Senator P e l l . I f it is decided that a tax cut is a good idea— and
I personally agree with Senator Douglas that it would not be right
at this moment, although I am most certainly for an income tax cut—
what kind of tax cut would you be inclined to consider as the most
favorable or advisable! Would you incline to a cut in the lower
bracket, or employing the withholding mechanism in which the with
holding tax would be suspended for 2% to 3 months, would you
178
POLICIES FOR FULL EMPLOYMENT
divide the cut pretty equally between corporations and individuals,
or perhaps a straight matter of points across the board ?
Dr. H e l l e r . A s I indicated earlier, no decisions have been made.
I do think as a general principle, however, if you were attempting to
compensate for a short-run deficiency of demand, a good part of your
increase would have to go into personal income tax reductions. We
have, however, side by side with this a longer run problem of invest
ment stimulus. We have corporate rates----Senator P e l l . Forgive me for interrupting, but isn’t the whole
purpose of this current discussion to consider the short-run problem?
D r . H e l l e r . In talking about tax reduction any time from now
on, it is necessary to take into account both the short-run cyclical
considerations and the longer run reduction of the drag of taxes on
the economy.
Senator P e l l . But when thought is given to making a tax reduction
in this session of Congress, I was under the impression it should be
considered primarily from the short-term viewpoint because the
longer term problem will be taken care of in the next Congress in a
general bill.
Dr. H e l l e r . What I am saying is this: Given the background of
the projected recommended tax cut for next year side by side with
tax reform, it is impossible to discuss any 1962 tax reduction without
relating it to what might happen in 1963. I should note, however,
that apropos of your general comment on antirecessionary tax cuts,
the President’s request for standby authority proposed only reduc
tions in individual income tax rates of up to 5 points on an acrossthe-board basis.
Senator P e l l . I f an immediate tax cut is approved, what would be
your reaction to the idea of the withholding tax device for the reasons:
No. 1, that since the lower income groups would get the principal bene
fit, the money would be more quickly pumped into the national econ
omy by virtue of the fact that this group is more likely to use it to
immediately purchase consumer goods. Aiift secondly, by using the
withholding device the general public would not be really aware of
having received the reduction. They would just have thicker pay
envelopes. And when the time' comes for the temporary cut to be
ended, there would not be such an outcry.
A s Congressman Curtis pointed out, that might be balanced by the
increase in the social security tax. A t the same time when it came
time for a permanent reduction you would have a little sugar with
which to coat the general tax bill with which we will be presented
at that time.
Dr. H e l l e r . The exact form in which you carry a short-run tax
cut into effect is not preordained either by any administration or
congressional decisions that have been made. I think this is some
thing where we still have a great deal to learn. I don’t think we can
necessarily say that any one method is necessarily best in every respect,
and I believe the President has made that very clear in inviting Con
gress to suggest alternative approaches to temporary tax-cutting au
thority that might be substituted for his request.
Senator P ell. Do you think the idea o f suspending withholding
for several months would be an effective device*
Dr. Heller. I think it is one o f the devices that deserves conadffl*ation. I don’t think I can go beyond that comment..
179
POLICIES FOR FULL EMPLOYMENT
Senator P e l l . Thank y o u .
Chairman P a t m a x . I believe you stated, Dr. Heller, that you had
a table that would show what the different methods would produce
in a tax reduction bill. W ill you insert that table in connection with
y o u r remarks, please?
Dr. H e l l e r . Yes, Mr. Chairman.
(The table referred to follows:)
Table I.—Tam liabilities under alternative tax schedules1 (revised July JW,
1962)—Married persons, 2 children
Schedule
Schedule
Schedule
Schedule
Schedule
Schedule
A:
B:
C:
D:
K:
F:
KEY
Present Iaw
3 percentage point reduction In tax rates
Chamber of commerce proposal
$200 Increase in the per capita exemption
5 percentage point reduction in first bracket only
12% percent reduction in tax liabilities
Table 1-1.—Tam liabilities under alternative taw schedules—Married persons,
I children
Income
$1,000............
$i,000............
$3,000...........
$4,000............
$5,000...........
*»#»
..............
$
8,000.........
.
$10,000.........
$15,000.........
$30,000...........
$36,000...........
$60,000...........
$100,000........
$000,000..........
$1,000,000........
Taxable1
0
0
$300
1,300
2,100
3,000
4,800
6,000
11,100
15,600
30,100
42,600
87,600
447,600
897,600
Amount of taxindollars
A
0
0
$60
340
490
600
076
1,373
2,486
3,800
5.318
15,076
44,794
356,066
766,406
B
0
0
$51
304
357
510
832
1,174
2,153
3,332
4,715
14,608
42,056
343,538
730,538
C
0
0
$45
180
320
500
868
1,346
2,384
3,473
4,813
13,922
37,360
262,360
554,860
D
0
0
0
$80
360
440
800
1,106
2,278
3,560
5,042
15,528
44,172
356,228
765,728
B
0
0
$45
180
315
450
776
1,173
2,286
3,600
5,118
15,778
44.534
356,756
766,256
F
0
0
$52
210
368
436
854
1,300
2,175
3,328
4,653
13,979
30,134
313,336
670,640
1Amimlng deductions equal to 10 percent of Income
Table 1-2.—Tam liabilities under alternative taw schedules—Married persons,
2 children
Amount oftaxaspercent ofincome
Income
B
A
$1,000..........................
$2,000.......................
Kooo
$4*000..............
$5.000________ ...........
$6,000..........................
to000
WO,000.........................
fiiooo.....
Bo,000................... .....
$26,000.........................
fao.ooo.........................
£106,000........................
$500.000........................
$Tooo,ooo......................
0
0
2.0
6.0
8.4
10.0
1X2
13.7
16.6
10.0
21.3
32.0
417
71.4
m6
0
0
1.7
&1
7.1
8.5
ia4
11.7
14.4
16.7
18.9
29.4
48.1
68.7
740
C
0
0
1.5
45
&4
8-3
ias
12.5
15.3
17.4
10.3
37.8
37.4
52.5
55.5
D
0
0
0
2.0
5.2
7.3
10.0
12.0
15.2
17.8
30.2
31.1
44.2
71.2
76.6
E
0
0
1.5
4.5
6^3
7.5
9l7
11.7
15.2
18.0
20.5
31.6
44.5
71.4
76.6
i AU5 t*x pro»o«*lmwoM redact total llrttUtr by approximately $t Mllioa.
F
0
0
L7
5.3
7.4
&8
107
110
14.5
16.6
18.6
28.0
30.1
62.5
67.1
180
POLICIES FOR FULL EMPLOYMENT
Table 1-3.— Taw liabilities under alternative taw schedules— Married persons,
2 children
Amount of tax reduction from present law
Income
B
D
0
0
00
100
100
0
0
11,000.....
$2,000.....
13,000.......
$4,000.......
$5,000.......
$9
30
03
$15
106
$16,000......
$30,000......
$25,000___
$50,000.-.
144
108
333
468
603
1,278
2,068
13,428
20,928
90
$6,000.....
$8,000.....
$10,000....
$100,000_
$500.000....
$1,000,000..
125
202
328
505
2,054
7,364
94,506
211,506
0
0
$60
160
100
160
170
170
208
240
270
448
552
728
728
F
0
0
$15
00
105
150
200
200
200
200
200
200
200
200
200
0
0
$8
30
52
75
122
172
311
475
005
1,997
5,590
44,020
95,807
Tabus 1-4.— Tam liabilities under alternative taw schedules— Married persons,
2 children
Tax reduction as percent of income
Income
0
0
.3
.9
1.3
1.5
1.8
2.0
2.2
2.3
2.4
2.6
2.7
2.7
2.7
$1,000.— .
$2,000—..
$3,000--$4,000--$5,000--$6,000-.-.
$8,000 ....
$10,000....
$15,000 ...
$20,000....
$25,000....
$60,000—
$100,000...
$600,000
$1,000,000.
0
0
.5
1.5
2.0
1.7
1.4
1.3
1.3
1.6
2.0
4.1
7.4
18.9
21.2
0
0
2.0
4.0
3.2
2.7
2.2
1.8
1.4
1.2
1.1
.9
.6
.1
.1
0
0
0
0
.3
.8
1.0
1.2
1.5
1.7
2.1
2.4
2.7
4.0
5.6
8.9
9.6
.5
1.5
2.1
2.5
2.5
2.0
1.3
1.0
.8
.4
.2
0
0
Table 1-5.— Taw liabilities under alternative taw schedules— Married persons,
2 children
Tax redaction as percent of disposable inoome
Inoome
B
$1,000..................... .................
$2,000.......................... ........... .
$3,000..................... .................
$4,000.....................................
$5,000.......................................
$6,000.......................................
$8,000......................................
$10,000......................................
$15,000.... .............. ..................
go,000......................................
$25,000....................... ..............
$50,000............................ .........
$100,000.....................................
$500,000....................................
$1,000,000
0
0
.3
1.0
1.4
1.7
2.1
2.3
17
2.9
3.1
8.8
4.8
9.4
1L5
C
0
0
.5
1.6
2.2
1.9
1.5
1.5
1.6
10
2.6
6.1
13.3
66.1
90.6
D
E
0
0
2.0
4.3
3.5
3.0
2.5
2.0
1.7
1.5
1.4
1.3
1.0
.5
.3
F
0
0
.5
1.6
2.3
2.8
2.8
2.3
1.6
1.2
1.0
.6
.4
.1
.1
0
0
.3
.8
1.1
1.4
1.7
2.0
2.5
19
3.4
5.9
10.1
31.2
41.0
Dr. Heller. If the committee members would like to have copies,
I believe we have a supply.
POLICIES FOR FULL EMPLOYMENT
181
Chairman P a t m a n . Thank you.
Senator Douglas?
Senator D o u g l a s . I want to pursue this question of whether it is
necessary to increase interest rates in order to protect our gold supply.
I think we brought out in previous questioning that the U.S. 3-month
bill rate is about nine-tenths of 1 percent higher than the Swiss rate.
The Swiss rate has remained steady for a long time. So difference in
the interest rate in itself has thus not led to any major movement of
funds from the United States to Switzerland. That is true, is it not?
Dr. H e l l e r . That is right.
Senator D o u g l a s . So far as the Dutch are concerned, the Dutch rate
has fallen slightly in the last 2 months—the figure was 2.32 percent
for June as compared to an American figure for June of 2.72 roughly.
So they were four-tenths of 1 percent underneath the American rate.
The West German rate for July was 2.38. The American rate for
July was about 2.92. So you have an American rate which was almost
six-tenths of 1 percent higher than the German rate. As far as interest
rates are concerned, the American rate was thus already higher tl an
in Netherlands and Germany. It was not necessary therefore to raise
the American rate still more. The three remaining countries in the
Federal Reserve table are France, Canada, and the United Kingdom.
I don’t have figures for France more recent than April—then it
was 3.91.
Let us grant for the moment that the French rate is above the
American rate. It is doubtful if there is important movement here
as France does not have huge amounts on deposit in this country. So
we come down to Canada and the United Kingdom.
Mr. Johnson has prepared some charts that I think are noteworthy.
The upper chart (p. 183) shows the comparison of Treasury bill rates.
You will notice that the British rate came down very markedly in the
past year. The New York rate was rising at the very time that the
London rate was falling. There would thus not be any increased
strain in this case upon our currency, since the differential between
those two actually fell substantially during this time. But to get at
the real costs of converting dollars into pounds one must consider also
the arbitrage trend. If you add the arbitrage, with forward ex
change cover, to the New York rate you will see that, while the differ
ences in favor of London and in favor of New York are small and vary
from time to time, at other times recently the London rate is only
one-sixth of the 1 percent or less in preference of London over the
New York dollar. I think it has been testified that where the differ
ence in net rates is less than one-auarter of 1 percent interest rate con
siderations do not enter. So if you allow for rates with forward
arbitrage cover, there is really no material difference between London
and New York.
Then we come to Canada. Here there is a difference in Canada be*
cause Canada has been facing a financial crisis. Their short-time rate
has shot up very sharply. They are recently up to 5y% percent or
more.
Chairman Patman. Would you like to add those charts to the
record?
Senator Douglas. Yes, I would.
Chairman Patman. Without objection, it is so ordered.
(The data referred to follow:)
10
POLICIES
FOR
FULL
EMPLOYMENT
00
V M M M « . ( . M K M M K I T M C V H T IE S
POLICIES FOR FULL EMPLOYMENT
8786®—62------13
183
184
POLICIES FOE FULL EMPLOYMENT
INTIRIST A I B I T ft A O l,
UNHID
JTA TIl/CA N AD A
Tlmndty
THtll-M ONTH
T R K A S U B Y BI LL B A T I S
its*
ifit
Par t*nf par
i9*i
mi
185
POLICIES FOR FULL EMPLOYMENT
INTEREST Al
Friday figur**
T~
~T‘ ■ r
'ii ■
RATE DIFFERENTIAL AND FOR* f ARD DE UTSCHE MARK
1
1
1
-
1 .
n
. . . . 1 ..............
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i
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tlft .
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i
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r' ---- 1’ " ....
1
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1
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i
n
RATE 1HFFEREIr4TIAI"W!iITHFORWARD EXCHANOECOVE!\
__UT!■CtfflVt:
« fAVOl or1fl&NKVVt
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II
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mtuiit.
_1_1_ i i _t_1_ _1—1—1—1_1—1i i i _1_1—_i_i_ ■ i . i_i_
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ffM
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Special forward rot* available to G«rw«n c o m »* rc io l baftkt.
186
POLICIES FOR FULL EMPLOYMENT
SHORT-TKRM INTIftlST KATIS *
Par ( t n
POLICIES FOR FULL EMPLOYMENT
187
Senator D o u g l a s . The point I want to make is that only in the case
of the United Kingdom and Canada do you have any real difference
in rates. The difference between United Kingdom and United States
is accounted for by the arbitrage cost. This does not account for the
full difference in the case of Canada. But I can’t believe that Can
ada, with a population of 20 million, subjects the American dollar to
such great strain, particularly in view of the highly uncertain finan
cial situation of Canada. Both political parties concealed it during
the election but it has come out after the election. I should think
with the devaluation of the Canadian dollar down to 92 cents, whereas
some time ago it was $1.05, that people would not be getting Canadian
dollars in preference to American dollars. So, very frankly, I am
puzzled by the claim that it is necessary to increase the domestic
interest rate, both short term and long term, to meet the balance-ofpayments problem.
In view of these facts, we know the adverse effect which a higher
interest rate has in dampening off business recovery. I hope this will
not be regarded as libelous, but I heard a wag say the other day that a
good new Chairman of the Federal Reserve Board would be worth a
$10 billion tax cut.
Dr. H e l l e r . I have heard it said that the Chairman of the Council
is worth 50 points on the Dow-Jones.
Senator D o u g la s . N o ; I think you are doing a fine job. I have a
sneaky feeling that now you have become a Government official you
feel an obligation to defend all policies of all branches of the Gov
ernment.
Dr. H e l l e r . May I respond to two or three of the points you made ?
First, while the points you make are very well taken, and while it is
extremely difficult to judge whether the exact degree of tightening
that has occurred is really necessary to meet balance-of-payments and
gold pressures, it is necessary to take into account that the so-called
Euro-dollar market is offering rates of over 3y2 percent in Europe and
without any exchange risk, is perhaps attracting dollars on that
ground.
In other words, these are the dollars that are circulating, so to
speak, and used from bank to bank and country to country in Europe,
financed in effect with U.S. funds.
Second, the U.S. dollar is at a forward discount against the Dutch
guilder, against the Swiss franc, and against the German mark. This
may not be a huge factor, but it does mean that U.S. rates have to be
slightly higher than vou have suggested to prevent a flow of funds.
Senator D o u g l a s . Are Euro-dollars convertible into gold?
Dr. H e l l e r . Euro-dollars which find their way into the hands of
foreign central banks are convertible to gjold. They are not convert
ible to gold in the hands of private individuals at the U.S. Treasuiy,
but they also may cause some problem by being converted to gold m
the London gold market This is only an indirect gold-conversion
problem. But we must include it if we are talking about the total
withdrawal of funds or the total attraction of funds overseas.
Senator D o u g la s . S o far as the Netherlands, Germany, Switzer
land are concerned—countries that are held up to us as the great
examples—our interest rates are higher. I f they are economical men
they would not call their short-term deposits with us and put them on
188
POLICIES FOR FULL EMPLOYMENT
deposit in Zurich because our interest rates are above those in Switzer
land.
Dr. H eller. We have to consider not only discount rates and bill
rates, but also a number of other short-term rates. For example, the
local authorities in the United Kingdom surprisingly enough offer 4%
percent on 7-day money. There is a whole range of short-term rates
that we have to take account of. I think that is a factor that has to
be weighed in making this assessment.
I am not suggesting, Senator Douglas, that the interest rate move
ments that have occurred are a kind of a categorical imperative in the
light of international balance-of-payments considerations. That is a
matter of judgment on which we are not prepared to reach any final
conclusion here. However, I am prepared to suggest that, particularly
at the long end, the increase in rates does not seem to make much of a
contribution to the balance-of-payments problem.
Senator D ou glas. D o you think there is any relationship between
the fact that in May and June, as interest rates started to move up
under the policy of the Federal Reserve, business activity started to
move down. The Commerce Department publishes its series of busi
ness cycle indexes. Congressman Reuss introduced this into the record
yesterday. It shows on page 5 that the index turned down in May
and June and this is what in the past advocates of the tax cut brought
forward. I raise the question whether there is any connection be
tween the fact that durable goods, hours per week, accession rate, and
so forth turned down at the time interest rates turned up. Is it pos
sible that the second factor was the cause of the first ?
Dr. H e lle r . We certainly cannot always know the precise causeand-effect relationships. But it does seem that some of these things
that have happened in recent months have occurred too fast or too
soon to be directly related to the monetary tightening that has taken
place veiy recently. The disappointing Commerce-SEC survey of
plant and equipment investment plans came in March, well before
this recent tightening.
Inventory-sales ratios have been low for some time and cannot be
directly related to that. Of course, it is possible that there might be
some other results that are directly related to the recent tigthening, al
though I cannot think of any obvious ones.
Chairman P atman. Congressman Reuss, you may proceed, sir.
Representative R euss. Dr. Heller, you have been defending the
Federal Reserve for some time now. I am going to ask you to defend
the State Department for a while. In your statement you pointed
out that the proposed Trade Expansion Act could, by expanding our
exports, not only help us from the standpoint of our balance of pay
ments but increase the demand for the output of our farms and fac
tories. I agree that it has that potential, and I am one of those who
think that it is a very important potential.
I want to ask, however, a question about it. Because mv question
necessarily is somewhat long, I wrote up the main points of the ques
tion and handed you a copy of it earlier. It reads as follows:
Bearing in mind the following:
1. There is not in sight today any stimulant to demand comparable
to automobiles in the 1920’s or homes and appliances in the early
1950’s.
J
POLICIES FOR FULL EMPLOYMENT
189
2.
estern Europe, on the other hand, has a large pent-up demand
for all sorts of household appliances—washers, driers, dishwashers—
a potential $0 billion annual market, of which the United States could
well aim at a $2 billion share.
3. Western Europe, with its over-full employment, is unlikely to be
able to satisfy its domestic demand for consumer durable goods by its
own production in the years immediately ahead. The United States
has ample existing plant capacity.
4. A massive U.S. entry into the European market as soon as pos
sible would help diminish U.S. unemployment, and accelerate our
growth rate. Reciprocal tariff reductions which would make this
]>ossible would also reduce or eliminate our payments deficits, since the
probability for the short-term is that our trade surplus with Western
Europe would increase.
5. From the European standpoint, accepting larger U.S. exports
would enable European employers to grunt wage increases without
severe inflationary consequences, thus helping to bring United States
and European wages more closely into line as well as improving the
European standard of living.
6. The biggest single obstacle to our entering this vast export mar
ket is the high tariff wall—20 percent or more—of the Common Mar
ket and of other European countries on these household appliances.
7. The special bargaining authority of the Trade Expansion Act
to permit the tariffs to be reduced to zero on commodities for which
the United States and the Common Market account for 80 percent of
world trade is now largely meaningless since aircraft is the only major
category affected, until and unless the United Kingdom and other
EFT A countries join the Common Market. A current guess is that
the United Kingdom is unlikely to become a member of Uie Common
Market until at least 1964.
8. I f the Trade Expansion Act were amended so that we had the
power to bargain European tariffs down to zero, independently of
the United Kingdom’s joining the Common Market, we could start
vigorous bargaining immediately, with active negotiations to start in
6 months. This would provide no incentive for the United Kingdom
to refrain from joining the Common Market, since its own independ
ent tariffs would have to be reduced.
Why does not the administration recognize the realities of the situa
tion amend the Trade Expansion Act, and move vigorously for lower
tariffs to help us and the free world ?
Dr. H e l l e r . Mr. Reuss, may I make just one general comment and
then turn this question over to Mr. Gordon, who has been working
with the State Department, the White House staff, and the Commerce
Department in the general area of the Trade Expansion Act?
I hope your question does not imply that the American consumer
is not a pretty ingenious fellow. We have certainly found over the
years that when additional income is put into the hand of consumers,
they are quite capable of finding ways and means of putting it to good
use to the tune of 92 to 94 percent of their incomes, year m and year
out.
I believe what you are stressing, however, is that there is apparent
on the horizon no big, new, durable goods to take the lead in expan
sion; and you are suggesting that we ao everything possible to exploit
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POLICIES FOR FULL EMPLOYMENT
the expanding European market in this area. I want to say that we
surely agree with that objective and then ask Mr. Gordon to com
ment on the specific proposal.
Representative R eu ss. And to comment on your comment before
we hear Mr. Gordon, I agree with you about the propensity to spend
of the American consumer. However, in order to have that 92 percent
propensity to spend applied to a higher income total, you have to give
a tax cut or otherwise increase income, which in the immediate period
ahead would increase the deficit.
I am looking, as you are, for additional and auxiliary or substitute
methods which would stimulate the economy without increasing the
deficit.
Dr. H e l l e r . I think that clarifies any possible misunderstanding on
that point.
Mr. G o r d o x . Mr. Reuss, this is my first exposure to this proposal
I think it is a very bold and stimulating idea which I presume has
been discussed with the State Department. I didn’t know that.
Representative R eu ss. The State Department’s position is that the
United Kingdom’s entry into the Common Market is so desperately
important we should do anything, including cutting our own economic
throat, to help force the issue. I don’t see their logic. I wonder what
you think of their economics.
Dr. H e l l e r . That was not a direct quotation from the State Depart
ment?
Representative R eu ss. No, it was an embroidery, but I defy you to
produce from them any justification much different from what I have
just said.
Mr. Gordon*. On the economics of the matter, I must say I would
agree virtually completely with your premises. I think there un
questionably is a very substantia] potential market for consumer dur
able goods In Western Europe. I think that the effect of this kind of
action might well be attractive to European countries as a means of
reducing inflationary pressures which some of them are now having
considerable difficulty with. It would obviously have very beneficial
effects for our balance of payments. So in the quite narrow economic
analysis of the proposal, I must say it strikes me as very attractive.
But it is clearly a proposal which has dimensions that go beyond
the narrow economics. I think it is on this score that I would want to
be somewhat reticent. As all of us know, the United Kingdom and
the Common Market are presently engaged in negotiations. These
negotiations apparently have reached a very delicate state. I would
think that it might be argued, although I haven’t had an opportunity
to think it through, that a proposal of this kind at this stage would
constitute a very disturbing element in the present delicate state of
these negotiations.
But if I can separate the appraisal of the economic effects from the
political-diplomatic effects, I would certainly say that on economic
grounds it is most attractive.
Representative R eu ss. Thank you for your answer. I will ask just
one more question on it. Don’t you think that looking at the opportu
nities available to us to achieve our economic goals of maximum em
ployment, maximum growth and expansion of our exports so as to
improve our balance of payments, this is one of the more promising
opportunities that presents itself?
POLICIES FOR FULL EMPLOYMENT
191
Mr. G o rd o n . I think it is very promising, with one qualification
with which I am sure you would agree. I think it would be a mistake
to think that measures of this kind would have a very significant
effect on the U.S. economy in the short run. Negotiations of the sort
you propose—multilateral negotiations, quite complex international
negotiations—invariably take a considerable period of time to com
plete. So I think we ought to be realistic to expect that such nego
tiations, if we decide to enter them, would not have visible economic
effects in the near future.
Representative R eu ss. It is equally true, is it not, that the sooner
you equip yourself to start negotiations, the sooner you complete
them?
Mr. G o rd o n . Yes.
Chairman P a tm a n . Senator Proxmire ?
Senator P r o x m ir e . The main thing I want to do, Dr. Heller, now
that we have indicated that we are not wildly enthusiastic about the
higher interest rates, I would like to relate that to the possibility of a
tax cut.
You indicate in your statement that taxes and savings would be
drawing $14 or $15 billion too much, from the economy which would
have to be offset by additional investment and Government expendi
tures for full employment to be attained.
I presume this $14 to $15 billion indicates that a substantial tax cut
would be necessary in order to correct this situation, but I presume it
would be somewhat less than $14 to $15 billion, is that correct?
Dr. H e l l e r . Yes, it is, Senator. We would have to take into ac
count not only the initial impact of the tax cut itself, but the multiplied
effects, and the impact on inventory investment, and on investment in
plant and equipment and in housing. So these numbers were not meant
to suggest in any way, shape, or manner the size of anj tax cut.
Senator P ro x m ire . Let me ask you about that multiplier. I won’t
say you have been quoted, but people have said that the economists on
the Council of Economic Advisers indicate one specific multiplier;
others say others. I understand from some competent economists that
a tax cut of $10 billion would mean an increase in the GNP of $20
billion. Others say $25 billion. Would yon have a rough estimate?
Dr. H e l l e r . It is extremely difficult to tie oneself down to a specific
estimate in the absence of test-tube evidence. As was pointed out
earlier, a tax cut would show up primarily as an increase in disposable
income, quite undifferentiated from any other source of increase in
income. In other words, it would not appear to most people as a spe
cial hind of income, labeled “Cut in Tax Liabilities.” For the most
part, it would simply show up as an increase in take-home pay. That
touches off spending and re-spending.
Senator P ro x m ire . I understand the multiplier and I certainly
agree.
Dr. H e l l e r . I am trying to get to a rough approximation of the
magnitude, without suggesting that we are tied to any specific multi
plier figure. Very conservatively estimated, the multiplier effect as
such might be one and a half to two times the initial tax cut when it
works through the spending stream and on into an increase in GNP.
. Depeiiding in part on the level of economic activity relative to capac
ity, there would be further magnification of the original figure,
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POLICIES FOR FULL EMPLOYMENT
through the impact which the higher levels of consumption may have
on investment m inventories ana plant and equipment. Depending
on the conditions in the economy and a number of variables that are
terribly hard to tie down, that would increase the total impact from
1% or 2 to 2% or 3 times the size of the initial tax cut—and under very
favorable circumstances, even more. It depends in large part on con
ditions that exist at the particular moment the tax cut is made, and
in what direction you are moving—that is, whether the economy is
expanding, leveling off, or declining.
Senator P r o x m i r e . It would vary on the kind of tax cut. For ex
ample, if you had an increase in exemptions or if you had further
modification of depreciation or investment credit, would these have
varying impacts in your judgment on the multiplier? I f so, what
kincl of tax cut would have the greatest multiplier and which the least?
Dr. H e l l e r . It makes some difference, certainly. But we must not
exaggerate its amount. We know that, on the average, persons in
low-income brackets spend their entire incomes, while in the highest
brackets they save as much of their incomes as they spend. But some
studies suggest that the amount spent of an additional dollar of income
is not nearly so different across the range of incomes, or at least across
the brackets that really account for the bulk of taxable incomes.
Senator P r o x m i r e . But I think almost all of the proposals we have
here, with maybe a couple of exceptions, there would Be a much big
ger dollar tax cut with a bigger income.
I was going to say if you have a person with a $5,000 income and
you have a
billion tax cut for individuals, as I calculate it, he
would get about a $2 week increase in income or something in that
area; whereas a person with a $50,000 income would have a somewhat
larger dollar benefit.
Under these circumstances, while the dollar differences might be
somewhat the same, if you had the same dollar tax cut, you wouldn’t
have it. Therefore, the difference in spending would be quite marked.
You see, I am trying to get at two things, frankly, and my time is
limited, so I am going to have to cut short.
The first thing I am getting at is that I am wondering even if a big
tax cut of $6 or $7 or even $10 billion is going to give consumers the
kind of money in their pocket that is going to result in their buying
a house or car or buying anything of that Kind. That is No. 1.
No. 2, which is somewhat unrelated but which is the whole point of
what the chairman and Senator Douglas and Congressman Reuss and I
have been arguing, if you do have a tax cut coupled with higher in
terest rates, is it not true you will have to have a much bigger tax cut to
accomplish the same stimulation of the economy? Isn’t it true that,
whereas you might be able to achieve what you say you need to achieve
on page 10 with a $7 billion or $8 billion tax cut, and the multiplier
you have described, that if you have an increase in interest rates of
the kind we have been reading about overwhelmingly in the news
papers, and it seems to be in the cards on the basis of the Federal
Reserve and Treasury policy, that you will need a 50-percent higher
tax cut or maybe a 100-percent higher tax cut to achieve the same
degree of stimulation ?
Dr. H e l l e r . Let me answer the second question first, because I think
we can dispose o f that very quickly. It is perfectly true that ix fau
POLICIES FOR FULL EMPLOYMENT
193
had a tax cut and then proceeded to shrink private spending by the
same amount by monetary policy, you would simply nullify the tax
cut.
Senator P r o x m i r e . That is very important. If you have a tax cut
and if you sell bonds to the public to absorb all of the increase in
monetary supply or the increase in funds that results from a tax
cut, you say you would eliminate much of the effect of the tax cut.
Dr. H e l l e r . I think it is somewhat more complicated than that. If
you sell bonds to the public, you will be in part activating idle funds,
so that this would not go all the way to offset the effects of the tax cut.
The proposition I was stating was one in which the method of financ
ing would increase interest rates so much as to cut back the amount of
private spending by the full amount of the tax cut. Then you would
nullify the tax cut. But this would be extremely hard to do and would
require a highly restrictive monetary policy—one that actually reduced
the money supply severely. Of course, it is true that for any given
stimulus to the national product, the size of a tax cut would have to
be greater the tighter the monetary policy. That is just arithmetic,
anal am only too happy to underscore that arithmetical fact.
Going back to the first question, concerning the impact of a tax
cut. I f we look at this hypothetical set of figures that we put to
gether for a $6 billion cut in individual tax liabilities-----Senator P ro x m ire . May I just interrupt to put something in the
record ? I want to put in the record here, Chairman Martin’s reply to
Chairman Patman on this very question when Chairman Patman asked
him what we ought to do to stimulate the economy with a large deficit.
Martin said:
I will return to the simple statement I made earlier. In tlie event a decision
is made which widens or further deepens the deficit we are already running, I
want to put the Federal Reserve specificaUy on record this morning, if I have
not already* that I tHpfc we must not finance the deficit by bank created funds.
It should be financed by bona fide savings and not by writing up the funds on one
or the other side of the bank’s ledger. It would mean that the expansionary
effect of the tax cut would be enormously reduced.
Is my observation roughly correct ?
Dr. H e l l e r . As against other methods of financing that would ac
tivate bank funds and increase the money supply, there is not any
question that this approach would be more restrictive, and would
require a larger tax cut for any given result in employment and pro
duction.
I believe, as Congressman Curtis mentioned earlier, that this is an
area that requires a great deal of additional attention, partly because
we don’t know all the facts and partly because there is much misunder
standing and misuse of such terms as “ real” saving, bank and non
bank funds, activating idle funds, and so forth.
I would hope that our Council and this committee and others would
continue to discuss this problem, because it is one of the critical areas
of economic policy.
Chairman P a tm a n . Will you yield for a brief observation ?
Senator P r o x m ir e . Yes.
Chairman P a t m a n . Y o u a re emphasizing bringing out of hiding
some idle funds. Don’t you think th a t the amount of such funds would
be so ymftH and so insignificant that they would not be a significant
factor in our analysis or the monetary problem ?
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POLICIES FOR FULL EMPLOYMENT
Dr. H e l l e r . I am not in a very good position to judge that. I would
hate to make a quantitative answer to something for which I don’t
have the underlying evidences before me.
Eepresentative C u r t i s . Y o u said liquidity was low. That would
indicate not so much idle funds?would it not ?
Dr. H e l l e r . The extent of liquidity in the economy cannot be meas
ured entirely in terms of the money supply, as conventionally defined.
Senator P r o x m i r e . At any rate it would drive up interest rates, and
in doing so, tend to reduce the accelerator principle?
Dr. H e l l e r . It would drive up interest rates. It would reduce the
attractiveness of holding inventories and making plant and equip
ment investment.
Senator P r o x m i r e . And the attractiveness of buying a house?
Dr. H e l l e r , Yes, sir; in the long term, there is no question about it.
I would like now to come back for a moment to that earlier question
about the stimulating effects of a tax cut, leaving aside monetary
policy. The amounts that are involved in table 1-3, if you have it in
front of you, are really not inconsequential. Take, for example,
plan B, which is a 3 percentage point reduction in tax rates.
Senator P r o x m i r e . This is on an annual basis ?
Dr. H e l l e r . These are on an annual basis. Either plan B or plan C
which is the chamber of commerce proposal, or plan D, which is the
$200 increase in the per capita exemption—all involve some very ap
preciable tax savings. The fact that they might be distributed in
small amounts from week to week doesn’t mean they will not have a
stimulative effect. They don’t have to go into houses, TV sets, and so
forth, to have an expansionary effect on the economy.
Finally, apropos of the distributional point, it is interesting that a
one point across-the-board cut, as indicated in schedule B costs about
$2 billion of revenue.
Senator P r o x m i r e . For $5,000 income that would be a $21-a-year
tax cut and $63 for a 3-point cut.
Dr. H e l l e r . That is right. For $1.3 billion of each $2 billion of
the across-the-board cut would go to the first bracket. Most of the
rest would go to the next few brackets. So that even if you had an
across-the-board cut, the great bulk of the tax reduction would go to
the first bracket—$1.3 out of each $2 billion—and the bulk of the re
mainder to the next few brackets above the first bracket. I think this
is an important factor.
Senator P r o x m i r e . Mr. Gallup has conducted some studies and
there have been some other studies conducted. The Wall Street Jour
nal had a survey, indicating that the people would not be inclined to
spend the increased income received from the tax cut. While the
propensity to spend is 92 to 94 percent of income, I wonder if there
were not a psychologically adverse effect particularly if there was as
much opposition as there is now to the tax cut. People might say this
is a forerunner of trouble.
Dr. H e l l e r . This gets one again into the psychological realm as
you suggest.
Past history does not support the results of Mr. Gallup’s survey.
I think Mr. Katona would have told you this morning that what
people say they are going to do with an increase in income, particularly
when they are full of good intentions about saving, is not veiy closely
POLICIES FOR FULL EMPLOYMENT
195
related to what they actually do with their increase in income when
they get it. They are much more likely to spend it than they intended.
Senator P r o x m i r e . He indicated that, but certainly the record of
past tax cuts is not very reassuring. The tax cut we had in 1926 was
followed by a recession. In 1929 we know what happened after the
tax cut. That was a major tax cut. We had the worst depression in
history. The tax cut in 1948 was followed by a recession. It is true
in 1954 and some other tax cuts were followed by an improvement in
business conditions. There certainly is not anything automatic in the
tax cut itself which can assure us that we will have an expansion in
business as a result of the tax cut.
I would say that on the basis of having had 9 years out of the past
40 in which we have had tax cuts and in 3 of those years we had a drop
in business conditions and in some of those other years the effects were
at best mixed, that is, business was improving anyway, I can’t see
that we have very good empirical evidence that a tax cut is going to
be our solution.
Dr. H e l l e r . I think we have very good empirical evidence that ad
ditions to income result in higher spending and higher investment.
Senator P r o x m i r e . Those tax cuts were additions to income.
Dr. H e l l e r . It doesn’t matter whether it comes from a tax reduc
tion or other sources.
Senator P r o x m i r e . D o we have any study that indicates what hap
pens when you cut taxes and increase interest rates which seems to be
the plan ? I know it is not your plan.
Dr. H e l l e r . If that is the plan, I am not privy U>it.
I don’t think we have any direct evidence on this point, although it
would be interesting to check the 1954 experience when there was a
very good economic expansion and a very quick restoration of Fed
eral revenues after a $7% billion tax cut. This occurred in a period
when monetary ease ruled for quite some time, before tightening oc
curred in the later phases of expansion.
Senator P r o x m i r e . Certainly in 1954, wouldn’t you agree, that the
impact of the Korean war, although as in all our wars, with a great
increase in Government expenditure, with the increase in the size of
the Armed Forces, all that kind of thing, pent-up wartime demand of
various kinds had a more serious impact perhaps than the tax reduc
tions did ?
Furthermore, there was a particular business investment gimmick
there, a change in depreciation policies, that resulted in a great deal
of the expansion being concentrated in investment by business plant
and equipment.
Dr. H e l l e r . In the early part of that recovery investment was not
so much the initiating force. The investment surge developed later,
particularly in the 1955-57 period. There was about $3 billion of
individual income tax reduction at the beginning of 1954 and another
$1 billion reduction of excise taxes, and then the $1.4 billion reductions
from the overhaul of the income tax. The efforts of the latter were
concentrated mainly on business, and perhaps primarily affected
business investment. But overall the larger part of it, or at least half
of it, was devoted to a reduction of income and excise taxes on
consumers.
,
.
.
Senator P r o x m i r e . My time is up, Mr. Chairman.
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POLICIES FOR FULL EMPLOYMENT
Chairman P a tm a n . We have had you gentlemen here about 3 %
hours. That is quite a long time. I wonder if you would not be
willing to answer any questions we might submit to you, Dr. Heller,
if we get them to you in writing before you correct your transcript?
Would you be willing to answer them in connection with the exam
ination and correction of your transcript ?
Dr. H e l l e r . We would be happy to do our best on that score, Mr.
Chairman.
Chairman P a tm a n . You may submit anything that you think is
germane or material.
Chairman P a tm a n . Before closing, I think Congressman Curtis
has a question.
Eepresentative C u r t is . I have one question. I will have some
others. On the questioning of Senator Proxmire on the 1954 cut, I
think we are leaving out some factors. There was a $10 billion and
more cut in Federal expenditures.
Dr. H e l l e r . Which preceded the tax reduction.
Eepresentative C u r t is . Yes, but it occurred right at the time. That
w^as the basis on which we felt we could cut bade in Federal revenue
because it was not deficit financing that we were engaged in at the
time. I was on the committee in writing it. We had the dividend
credit there which took a great deal of the release of money and that
was certainly in the investment area.
In the consumer area, as far as the income tax cutting was concerned,
which was increasing the exemption from $500 to $600, we at the
same time increased the social security tax, as I was pointing out this
mr^ ‘
i i . i
i .
on out of the economy.
A
uost equalized in the consumer area.
I think if we examined into it, the only way that would have affected
the consumer would have been below the billion dollar figure.
Chairman P a tm a n . Thank you, gentlemen, very much. We will
submit the questions to you.
Thursday morning we have Mr. Otto Eckstein, professor of eco
nomics, Harvard University; Mr. McCracken of the University of
Michigan; Mr. Pechman of the Brookings Institution.
Without objection, the committee will stand in recess until 10
o’clock here in this room, tomorrow morning.
(Whereupon, at 5 :35 p.m., the committee recessed, to reconvene at
10 a.m., Thursday, August 9,1962.)
STATE OF THE ECONOMY AND POLICIES FOR FULL
EMPLOYMENT
THUBSDAY, AUGUST 9, 1062
C
ongress of t h e
Joint E
U
nited
conomic
S tates,
C ommittee,
Washington, D.C.
The committee met at 10 a.m., pursuant to recess, in room AE-1,
the Capitol, Hon. Wright Patman (chairman) presiding.
Present: Representatives Patman, Reuss, and Thomas B. Curtis;
Senators Douglas, Proxmire, Bush, and Javits.
Also present: William Summers Johnson, executive director; John
R. Stark, clerk; Hamilton D. Gewehr, research assistant.
Chairman P a t m a n . The committee will come to order.
The committee continues hearings on the state of the economy and
on improvements in policies to help achieve maximum employment,
production and purchasing power.
This morning we will consider fiscal policies in general and tax
policies in particular.
We have a very distinguished panel of experts on this subject, all
of whom are old friends of the committee. Prof. Otto Eckstein, Har
vard University; Prof. Paul W. McCracken, University of Michigan;
Dr. Joseph Pechman, director of economic studies, of the Brookings
Institution. It is delightful to have you, gentlemen.
Each of the panelists may make an opening statement if he has one,
and then members of the committee will put questions to the panel
under the 10-minute rule.
Dr. Otto Eckstein, you may proceed in your own way. You have
a prepared statement, I believe.
STATEMENT OF OTTO ECKSTEIN, PROFESSOR OF ECONOMICS,
HARVARD UNIVERSITY
Mr. E c k s t e in . Thank you, Mr. Chairman. It is a pleasure to be
back with the committee.
I f the reports of usually well-informed reporters are correct, the
prospect of a tax cut this year is fading. As has occurred repeatedly
through the postwar period, the President and the Congress seem to
lean to the view that a tax cut is either not necessary, or that the de
cision can wait a few more months, until short-term economic indi
cators cease to be mixed.
The decision has now waited for over 4 years. In the meantime,
we have progressively lowered our sights about the performance of
our economy, satisfying ourselves with higher rates of unemployment,
talking bravely about growth, but, in fact, accepting a rate of expan
197
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POLICIES FOR FULL EMPLOYMENT
sion which is clearly below the normal rate which the ordinary in
crease in the labor force and in the stock of capital would produce.
I believe I can best serve this committee and the formation of eco
nomic policy by talking about three things today. First, I shall re
port on some statistical analyses conducted in collaboration with
Professor Duesenberry of my department and Professor Lintner of
the Harvard Graudate School of Business Administration, about the
general economic outlook and the effects of tax cuts.
Second, I shall analyze some of the reasons for our hesitancy to
act, and finally I shall give a few preliminary ideas which may be
of relevance early in 1963 when we shall face the tax-cut proolem
again.
P R O J E C T IO N S
Two projections were prepared, not as forecasts but to provide a
realistic setting for the evaluation of a tax cut. We projected move
ments of the gross national product to the middle of 1963 on two
assumptions. One, an optimistic set, under which business spends as
much for investment in plant and equipment as it said it would spend
before the stock market declined; residential construction continues to
rise substantially to a rate of $25 billion a year and then remains at that
level; net exports remain high; the increase in the outlays of State
and local governments continues at the upper end of the rates of
increase of recent years; and the Federal Government spends as much
on goods and services as it announced in the recent budget.
If all of these optimistic assumptions come true, an unlikely com
bination of events, gross national product might reach a level of $580
billion by the second quarter of 1963.
We also prepared a set of projections making restrained pessimistic
assumptions. In this set we assume that fixed investment by busi
ness would begin to decline slightly after the middle of this year, and
continue to decline at a moderate rate to the middle of 1963; resi
dential construction maintains current levels; net exports fall slightly;
State and local governments increase outlays at a high rate but not
quite as high as under the optimistic set, and the Federal Govern
ment again sticks pretty closely to its announced plans.
This set of projections gives a gross national product of about
$547 billion by the middle of 1963, which is slightly below the cur
rent level.
To gain some perspective on these figures, it is useful to estimate
that rates of unemployment that are likely to be associated with them.
Even the optimistic projection produces no significant improvement
in the unemployment rate below its current lugh level. Under the
projection or restrained pessimism, unemployment rises above 7 per
cent by the middle of 1963.
To see what difference a tax cut would make, we assumed that per
sonal taxes would be cut $4 billion and business taxes on the order
of $2 billion or so, enough to raise business investment by $1 billion.
By comparing the resultant GNP figures with the above projections,
the net impact of a tax cut was estimated.
We find that this $6 billion tax cut leads to an increase in GNP by
the middle of 1963 of about $12 billion. I f the tax cut is added to the
optimistic projections, GNP might reach $592 billion. When added
POLICIES FOR FULL EMPLOYMENT
199
to the pessimistic projects, it results in a GNP of about $560 bil
lion. Ihus, what we call the multiplier of the tax cut is about 2.
It may also be of interest that of the $6 billion initial tax cut, some
thing like a third to a half would be recovered through the higher
tax yields of improved economic activity. Let me add that we did
not suggest that a $6 billion tax cut was the right amount. Larger
tax cuts would have larger effects, of course, but we see no immediate
reason to expect the resultant impact on the economy to be greater in
a more than a proportionate manner. Thus, a $10 billion tax cut
improve GNP by about $20 billion, a $4 billion tax cut by $8
What do tax cuts do to unemployment? The $6 billion tax cut
would lower the rate of unemployment by about 0.6 percent, or 400,000
persons. The improvement in employment would be greater as the
labor force returns closer to its normal rate of expansion.
The single most interesting fact about these figures is this: even if
the optimistic assumptions come true, that is, if the present supposedly
“mixed bag of signals” resolves itself on the side of optimism, a tax
cut would still be appropriate, since there is virtually no prospect of
a real improvement in the unemployment situation.
If the tax cut were enacted, even under these circumstances, the
resultant rate of unemployment would still be above 4.5 percent, and
therefore short of full employment. Thus, a tax cut would not be a
mistake even if the optimists were correct and things turned out just
as well as one could reasonably hope for. The risks of policy, there
fore, are not being run with regard to inflation, but recession and de
pression. For if things really go sour after this lengthy period of
under-utilization of capacity and high unemployment and after the
large decline in the stock market, no one can foresee just how the de
cline will occur and when and where it will stop. The prudent action,
therefore, is a tax cut.
REA SO N S
FOR
IN A C T IO N
The diagnosis I have just presented is now held very widely both by
economists and by business and labor leaders. It would take someone
with a lot more understanding of the political process than I possess
to explain the present dim outlook for action in the face of this agree
ment. Let me discuss a few of the more economic points, however.
First, we are much too preoccupied with the ups and downs of reces
sions and expansions, and have lost sight of the longer-term trend of
the economy in the process. It is indeed a fascinating sport to col
lect the straws in the wind every week about the immediate direction
of movement of the economy.
In fact, however, the business cycle per se has become extremely
mild. Inventory movements, as the recent studies prepared for this
committee showed, are a large part of the quick ups and downs of
recession. As the economy has become more slack and supplies abun
dant, business has gotten more and more cautious in its inventory
policies. The inventory movement of the 1960-61 recession was sub
stantially smaller than m the 1958 recession. Inventory buying durmg the present expansion was even more hand-to-mouth. Policies
for fixed investment have also become more cautious and based on low
assumptions of economic growth. These factors make recessions mild,
87869—62------ 14
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POLICIES FOR FULL EMPLOYMENT
though one must mention on the other side that the stock market crash
is a new factor which may worsen the process of decline when it next
occurs.
■
This mildness of recession militates against the use of fiscal policy.
Decisions to pursue an expansionary fiscal policy have only come long
after the signs of recession were clear, that is, when the inventory
decumulation was fully underway and most statistics were declining
sharply. A mild recession, even starting from a low point, does not
produce unambiguous short-run indicators. Only a snarp recession
does that.
What is important about the present situation is not the direction
of movement in any particular week, but the long-term output in
relation to the capacity of the economy. Our concern about the direc
tion of movement has distracted us from the longer term deterioration
of continued high unemployment and slow growth of the labor force,
of low utilization of capital and squeezed profit margins, and of
diminishing job opportunities in the face of a rapidly increasing
number of young people entering the working age brackets.
If we devoted as much attention to the measurement of the actual
trends of the economy as compared to the potential trends as we do
to the identification of business-cycle turning points, our fiscal policy
might be different.
Let me add I just received in the mail this committee’s study of
measurement of productive capacity, and I hope this marks a turning
point in our focus of attention.
BUDGET B A LA N C IN G
Fear of deficits and the desire for an annually balanced budget is
another major factor. This is not the place to rehearse all the pros
and cons of the balanced budget, but let me point out two salient facts:
first, if we really attempted to achieve an annually balanced budget
in a deteriorating economic situation, it would plunge the country
into depression.. Attempts to balance the budget oy raising tax rates
and cutting expenditures in the thirties were important contributory
causes to the magnitude of that disaster.
Second, the only valid reason for favoring an annually balanced
budget is the pressure which this principle puts on the President and
the Congress to resist the many pressure groups that always want the
Government to spend more money. That argument is clearly irrele
vant in the present context.
I f there is objection to a high volume of spending, a tax cut is much
more likely to place a check on expenditures growth than stumbling
into recession. A reduction in tax rates will force the Government to
scrutinize expenditures more closely in the coming budget, while a
recession, if recent history is any guide, will lead to a series of hasty
new expenditure programs.
L IN K IN G T H E T A X C U T TO A N IM M E D IA TE E XPEN D ITU RE C U T
Recently, the idea has been advanced that a tax cut should not be
enacted unless expenditures are cut at the same time* A s a point of
political strategy, of using this opportunity to insist on expenditure
reduction, it is not a point for me to judge. But when the same
POLICIES FOR FULL EMPLOYMENT
201
point is offered by economists as policy advice, it must be judged on
economic grounds. I do not doubt for a moment that the United
States would be better off if certain lines of Government expenditures
were substantially cut. I am also certain that my list would not be
somebody else’s list. We all have our own preferences about Govern
ment expenditures. But I fail to see any logical connection between
the desirability of a tax cut which would permit business and consumer
demand in the economy to grow in line with potential supply, and
the necessity of reduction of Government expenditure programs as
a precondition.
I cannot see why a sound tax policy has to await reform of the
agriculture program, of veterans’ benefits, of urban renewal, of wel
fare programs, of subsidiaries of business, of defense, or space, or
foreign aid, or whatever programs are in the minds of the economists
advocating this view. As a matter of general economic policy, the
argument is clearly upside down. I f expenditures were really cut—
even foolish expenditures—this would be a reduction in purchasing
power which would have to be offset by further tax cuts. The deficit
that would be associated with a policy of joint expenditure and tax
reduction would have to be larger than a deficit from a tax cut alone
to achieve any given degree o f improvement in output and employ
ment
relation to m o n e t a r y policy
Concern has also been expressed that the additional deficit which
would result from a tax cut would force up interest rates, which
might defeat the purpose of the tax cut. No doubt, a few more
bilFions of deficit that have to be financed by borrowing will add to
the demand for funds, and other things being equal, would have some
impact on interest rates.
However, I do not believe that this increase in the deficit would
in fact be decisive about the trends of interest rates in the coming
months. I would not judge the situation heavily on the experience
of 1958 and 1959 when a record cash deficit was financed wnile the
money supply shrank, and when interest rates did, of course, reach
record levels.
This time, the deficit presumably would be smaller and the money
supply would be allowed to increase at some modest rate. Of course,
the authorities will have to pass a judgment on the appropriate
monetary policy in the coming year and on the methods of financing
the deficit. But it is my belief that these decisions will be less influ
enced by the increment in the deficit that can be attributed to the
tax cut than by our international monetary position weighed against
the volume of unemployment.
T A X POLICY IN 1963
Let us begin to look ahead to the next moment of decision early
in 1963, when, presumably, some tax cut will be made in connection
with tax reform. It is now much too early to reach definitive con
clusions about proper policy at that date; however, a few simple
ideas might prove useful. First, the tax changes at that time must
deal both wita long-run and with short-run problems.
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POLICIES FOR FULL EMPLOYMENT
On the one hand, if economic growth really is a serious objective
of policy, the tax system should be further changed in a manner de
signed to raise the fraction of our gross national product which is
invested. On the other hand, consumer purchasing power must also
be stimulated. In practical terms, this means that the tax cut must
somehow be divided between reduction of upper bracket rates of
personal and of business taxes and reduction m the lower bracket
personal taxes.
We have already had a liberalization of depreciation allowances
which will save business about $2 billion a year. The investment
credit which may be enacted in this session would add at least an
other billion-plus to business tax relief.
Thus, these two measures alone would reduce corporation income
tax payments by $3 to $4 billion, thereby increasing the supply of
investible funds. If further substantial relief is given in business
taxation, while at the same time lack of growth of consumer pur
chasing power keeps the demand for final products relatively low,
there is little chance that the additional savings being made available
will in fact be invested.
Thus, a tax cut which only adds to savings may very well do more
harm than good in dealing with the central economic problem of our
day, which is the short fall of demand below potential supply. On
the other side, increased international competition and the need for
high long-term growth to meet our obligations requires us to take
some additional steps toward raising the fraction of GNP which is
invested.
The Congress would be well advised to take with a large grain of
salt any advice which would confine the emphasis of a tax cut either
to business investment alone or just to consumption. Obviously some
balance is the right answer, and what that balance is will depend on
the circumstances at that time. The higher the rate of unemploy
ment, the more weight will have to be given to the short-run stim
ulation of demand, which is best accomplished by stimulating
consumption.
Let me add at this point, that in the event that an extensive tax
reform bill is going to be tied to a tax cut, it might be wise for the
Treasury to get an immediate effect out of such a policy by reducing
the withholding tax schedule effective J anuary 1.
As I understand it, they have some administrative discretion about
the amount of withholding which they insist on from the first of the
year. If, in fact, it is going to be a tax bill which is debated well
into the fall, if it is to have any economic impact as far as the shortrun problem is concerned, it would be too late. I believe they have
discretion to reduce withholding earlier, presumably on the assump
tion that the final tax bill would contain a tax rate cut.
In conclusion, the history of tax policy reveals one lesson very
clearly: most of the time there are reasons for not engaging in a
positive tax policy, or for at least deferring the decision over and
over again. Our tax system is choking off the growth of the economy.
The longer we delay its regearing, the more it costs us in terms of
lost output, lost wages and profits, a permanently shrunk workweek,
a resistance to technological change, permanently lost capital forma
tion and just plain human suffering.
POLICIES FOR FULL EMPLOYMENT
203
Chairman P a t m a n . Thank you very much, sir.
Our next witness will be Professor McCracken, of the University
of Michigan. Professor, we are glad to have you.
STATEMENT OF PAUL W. McCKACKEN, PK0FESS0B OF ECONOMICS,
UNIVERSITY OF MICHIGAN
Mr. M cCracken. Thank you, Mr. Chairman.
First I want to say I very greatly appreciate this opportunity to
appear before the committee as it considers the implications of cur
rent business conditions for fiscal policy.
I d o h a v e a p r e p a r e d statem en t, b u t I a m g o i n g to r e a d e x c e r p ts
o n ly sin c e th e f u ll sta tem en t is so m e w h a t lo n g .
Chairman P a t m a n . Y o u may proceed as you desire.
Representative R e u s s , Mr. Chairman, I wonder if Dr. McCracken
would be good enough from time to time to tell us about what page
of his prepared statement he is reading from.
M r . M c C r a c k e n . Yes, I shall
Clearly the first question to pose is this: Does the evidence indicate
that the economic situation presently needs to be strengthened in a
fundamental way? Obviously there are reassuring aspects in the
evidence that we have at hand. And certainly we would all agree
that we need to avoid being “nervous Nellies,” irrationally rushing
into major policy changes each time we get a little bad news or have a
little bad luck.
On the other hand, three considerations suggest to me that the
economy does need strengthening in a very fundamental way.
First, there is the fact that the economy has for some years been
operating somewhat below par. This has been widely recognized and
discussed and needs no further elaboration here. The work of this
committee has done a great deal, I think, to provide the statistical
underpinning for documenting this problem.
Second, the current cyclical expansion, beginning after February
1961, has turned out to be the weakest since the iirst World War.
The facts can be usefully summarized something like this.
The data in table I of my prepared statement show the gains in
eight measures of business activity during the first 16 months of each
cyclical expansion since World War I. I f data were fully available
for the entire period, it would be possible to make 64 comparisons of
the current cyclical expansion with these others. For each of eight
measures of business activity, post-1961 gains could be compared
with that during the eight other cyclical expansions. Since, for the
earlier period, some data are not available, only 55 such comparisons
can actually be made.
It is interesting to note that in 48 of the 55 the comparison is un
favorable to the economic performance since early last year; in 6
there is a favorable comparison; and in one case it turns out to be a
tie. There can hardly be any question, therefore, that this is a candi
date for the weakest recovery since World War I.
Third, we are beginning to wonder if the present expansion will
turn out to be not only the weakest but also one of the shortest in the
postwar period. We must, of course, beware of attaching excessive
importance to very current data. On the other hand, some facts
are undeniably disturbing.
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POLICIES FOR FULL EMPLOYMENT
The gain in business activity during June, the last month at the
moment for which a full statistical picture is available, was roughly
one-third the average monthly gain since the present expansion got
underway. There is also some evidence in the data on table II of a
slowing down in the rate of the expansion throughout the second
quarter. (P. 5 of my statement.)
Finally, leading indicators generally have not been looking strong
for some time. New orders for durable goods have been declining
since the first of the year, and the June fall was particularly sharp.
The length of the workweek moved downward in May and June. In
fact, the most recent data available for the 30 leading indicators in
Business Cycle Developments show 18 declining and 12 rising. Lead
ing indicators can be affected by capricious developments, and in any
case the length of the leads is often quite variable. It would be
difficult, however, to give the present pattern a very optimistic inter
pretation.
I f this review of the current economic situation is realistic, we
clearly face more than the problem of an off 1 or 2 months in the
inevitably irregular pattern of cyclical expansion. It is more accurate
to say that we confront an uncertain short-run business outlook fol
lowing upon a particularly weak cyclical expansion, all of this super
imposed upon an economic performance that has been subpar for some
years.
What is our problem? There are, broadly speaking, two possi
bilities. People are either disinclined to spend their purchasing
power, or there is a shortage of purchasing power. In one respect
there may be a lessened inclination to spend. Consumer attitudes
have never regained the levels of buoyancy reached in 1955, and there
has been some deterioration since the events of April and May. And
the evidence is clear that changes in consumer attitudes do influence
the level of spending.
There is also some concern about the possibility that wants have
been saturated. There are persuasive reasons for believing that this
problem of saturation of wants is not the core of the present situa
tion, and on page 7 of my testimony I have a couple of paragraphs
summarizing the rather substantial body of evidence on this that comes
from the work of the Survey Research Center at the University of
Michigan.
Continuing at the top of page 8—the evidence suggests to me that
the problem is a shortage of purchasing power. Since the low quarter
of 1961, private incomes after taxes (disposable income plus corporate
profits after taxes), have increased $32.7 billion, but private demand
tor output has increased $35.9 billion. Thus private demand has
increased $1.21 for each dollar. This is less than the $1.32 in the
corresponding period after 1958 or the $1.54 after 1954. But it is
stiU true, in the five quarters following the low point last year, that
private demand for goods and services increased more rapidly than
income after taxes.
It is, I think, increasingly clear that the economic policies of Gov
ernment have been making a substantial contribution to the economy’s
shortage of purchasing power in recent years. At times the monetary
authorities clearly have stepped too hard on the brake pedal—for
example, in 1957 and again in 1959. It is equally clear to me that
POLICIES FOR FULL EMPLOYMENT
205
monetary policy has not impeded economic expansion for roughly
2% years. The reserve position of banks has been easy—and this
continues to be true in spite of the slightly recent tightening. Com
mercial banks are eager to expand their loans, in contrast to the
loaned-up banking sentiment in 1957 and 1959. Bank credit has in*
creased Sy2 percent during the last year. Reflecting this, interest
rates, contrary to the expectation of many experienced market ob
servers earlier this year, have remained relatively low. Bond yields
are only slightly above those of the low point of the recession early
last year. Whatever quarrels we may have with the Federal Reserve
about the details, the evidence does not seem to me to support the
view that monetary policy has had very much to do with the current
sluggishness of the economy. Nor does the recent slightly less easy
credit policy yet constitute much threat to further expansion.
The principal drag has come from the tax side of Government
fiscal operations. For years we have pointed with gratification to the
stabilizing effect of our tax structure as a major defense against a
recession. (Top of p. 10.)
Chairman Patman. I assume you will put your whole statement in
the record ?
Mr. McCracken. I would like to.
Chairman Patman. That will be done.
Senator Proxmire. I hesitate to interrupt, but I would appreciate
it if Dr. McCracken would define “money supply” for us.
Mr. McCracken. Yes, sir, that is a good point, Senator. My defini
tion of the money supply here would include time deposits. I suspect
that is the point of your question.
I continue at the top of page 10. That total cash receipts of gov
ernment (Federal, State ana local) have absorbed a large and growing
proportion of the national income is well enough known, though
the quantitative magnitudes are not always fully appreciated. The
ratio of Government cash receipts (on a national income basis) to
national income rose from 26.6 percent in 1948 to 33.9 percent in 1960,
and it is probably about 34y2 percent right now. Now let us look
more closely at the last year and one-half to see how this works out
cyclically.
Chairman Patman. I would like to have one clarification here.
You say “ ratio of Government cash receipts.” You mean all govern
ments, Federal, State and local political subdivisions ?
Mr. McCracken. That is correct. And on a national income basis.
Let us now look more closely at the last year and one-half to see
how this works out cyclically. From the low first quarter of 1961
to the second quarter of 1962 private incomes before taxes (personal
income plus corporate profits) increased $45 billion. Government
receipts, however, absorbed almost 44 percent.
Now the sluggishness of the present recovery and the one in 1958
to 1960 begins to look a little less mysterious. The tax structure, by
absorbing 40 to 46 percent of the rise in private incomes, left a gain
in incomes after taxes so moderate that, with no special elements
of strength present, we could not get an expansion in private demand
vigorous enough to carry the economy back to reasonably full employ
ment.
Now if the neutral position of the budget, where revenues and out
lays are equal, is at full employment, we should theoretically find it
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POLICIES FOR FULL EMPLOYMENT
possible to avoid persistent unemployment, though a tax structure
absorbing such large and growing proportions of income increases
would still have adverse implications for economic growth. If, how
ever, this neutral budgetary position is at a level of business activity
considerably below what would constitute reasonably full employ
ment, we have also a short-run problem.
The fiscal drag would make full employment difficult to attain,
which would cause a short fall in revenue, which would make the
budget look bad, which might make us disinclined to take needed
tax action, and so forth. This, I think, is not an unfair characteriza
tion of the present situation.
In the January report the Council of Economic Advisers estimated
that at reasonably full employment, the present tax structure would
produce a Federal surplus of perhaps $8 billion this year (on a na
tional income basis), with this full employment surplus approaching
something like $10 billion by the first half of calendar 196B. In
short, the budget now moves from a neutral to a restrictive position
substantially before the economy reaches reasonably full employment,
and with Government receipts siphoning off 40 percent of the addition
to income, it has been very difficult to get the needed thrust of in
creased private demand.
I f this diagnosis is correct, what does it suggest for fiscal policy ?
It means three things. First, the tax structure should be lowered
so that the budget does not begin to exert a brake on the economy
quite so far below reasonably fully employment.
Second, the tax structure now absorbs too large a proportion of
increases in the national income.
Third, we must slow down the tendency for Federal Government re
ceipts to absorb a growing proportion of the national income.
Most of my time has been consumed in an endeavor to establish
the case that the fiscal operations of Government are an important
source of our present economic problem, and vigorous fiscal action
must play a major role in this problem. This leaves little time to
spell out the specifics. This is not, I think, particularly fatal, be
cause it seems to me there is a rather surprising consensus on what
the tax actions ought to be if they can be undertaken.
First of all, budgetary procedures should be modified so that we
ive more explicit attention to this question: How rapidly should
'ederal expenditures grow in the years ahead? The excellent work
on expenditures at both ends of Pennsylvania Avenue does an effec
tive, and I think unappreciated, job of sifting out waste and unessen
tiality in the technical sense. It is less well designed to tell us
whether these individually well-considered programs add up to more
than ought to be spent in the aggregate.
The ratio of Federal budget cash outlays to GNP in fiscal year
1962 was 2.1 percentage points above that of fiscal 1960. Thus, if the
rate of increase of Federal cash outlays had been limited to the rate
of increase of GNP, Federal outlays last year would have been $12
billion less. This growth has reduced the scope of otherwise desirable
incentive-promoting tax reductions.
It is not unreasonable to expect from the administration an explicit
declaration of its longer range policy with respect to total outlays*
And the Congress should reexamine its own procedures to see if more
f
POLICIES FOR FULL EMPLOYMENT
207
explicit attention can be given to the total on the expenditure side of
each year’s budget.
Second, the economic situation would benefit from tax actions now
that would reduce the level of the structure and move it in the direction
of a better system. As I mentioned, fortunately, there is a rather
surprisingly narrow range of disagreement on what the elements of
such a package might be—some reduction in the corporate income tax
and some reduction in the personal income tax. The total package
should be such that the resulting tax structure would still produce
enough revenues comfortably to cover expenditures at reasonably full
employment. On this basis, something like $7 billion would probably
be the outside limit of any tax reduction at this time. The action
should not be quickie or temporary in character. We should capi
talize on the substantial current consensus in order to move toward
a better basic pattern of Federal taxes.
Third, I would, myself, support the proposal that the President be
given limited power to alter certain tax rates. This could be hedged
with adequate safeguards, limited as to amount and perhaps requiring
that the President transmit to the Congress a full report setting forth
reasons for his actions. Without this authority, each recession pro
duces inexorable pressures to do something on the expenditure side
which, history suggests, will be moving expenditures to a substantially
higher level.
This proposal, in other words, would be a step toward fiscal con
servatism. In the long run it would make for a less rapid increase for
expenditures and more elbow room on the tax side for further needed
reform.
One further question. Would tax reduction and reform now be
apt to worsen further the already somewhat nervous position of the
dollar internationally? This is possible. I f the resulting expansion
sets in motion an accelerated rise in our cost-price level, and if we
insist that the monetary authorities adhere to unrealistically low
interest rates, and if needed improvements in profits were seemingly
interpreted as evidence of malevolence, the dollar could quickly be
in real trouble. And it must be stated flatly that such trouble would
then be deserved. If, however, we manage our affairs carefully, there
is good reason to think that the international position of the dollar
would not be worsened bv tax reform and reduction now, and it might
well be strengthened. The resulting higher level of national income
would, of course, tend to increase imports and that would enlarge the
deficit in our international balance of payments.
There are, however, forces that would work the other way. The
more active demand for funds would produce higher interest rates
in the U.S. money and capital markets. The invigorated pace of
economic activity would enlarge the opportunities for more profitable
investment of capital in the domestic economy, reducing the incentives
to seek investment outlets abroad. The innovational activity that
accompanies a more lively pace of economic expansion should, in time,
have some favorable effects on U.S. exports. Since in the U.S. economy
imports are relatively small and the international capital outflow is
relatively large, there is at least an even chance that policies proposed
here woud help to narrow the deficit in our balance of payments.
Now, there does, of course, remain the potentially adverse effect on
psychology and confidence in the dollar both here and abroad. My
own view would be that if the tangible, concrete, objective factors
can be expected to be at least neutral and possibly helpful, then we
ought to be able to manage that.
In conclusion, the becalmed state of the economy at present com
ing on the heels of a particularly weak cyclical expansion superim
posed on a protracted period oi less than reasonably full employ
ment—strongly suggests to me that the economy needs strengthening
in a fundamental way, and it also suggests that within reasonable
limits this can be done without courting the risk of a disorderly
expansion.
The basic problem is the shortage of income and purchasing power,
but this deficiency must be remedied in ways that do not increase costs
per unit of output and do not produce monetary conditions which
would further weaken the dollar. This calls for tax adjustments that
lower and otherwise improve the structure. The magnitude of the
reduction should still leave us with a tax structure whose revenues
would cover expenditures when productive resources are being utilized
reasonably fully. Such actions need not weaken the dollar interna
tionally, and there is an even chance they might strengthen it.
In fact, we are fortunate that what is needed to step up the pace of
job creation and economic expansion at home could also add strength
to the dollar internationally; namely, a more innovative and prosper
ous and profitable economy.
Chairman P a t m a n . Thank y o u .
(The full statement is as follows:)
T e s t im o n y
op
op
P a u l W . M cC r a c k e n , P r o f e s so r o f B u s in e s s C o n d it io n s , S c h o o l
B u s in e s s A d m in is t r a t io n , U n iv e r s it y of M ic h ig a n
i
Mr. Chairman, I greatly appreciate the opportunity to appear before this
committee to consider the implications of current business conditions for eco
nomic poUcy. Clearly the first question to pose is this: Does the evidence indi
cate that the economic situation needs to be strengthened in a fundamental way?
The situation is not, of course, without its hopeful aspects. Even if this cyclical
expansion were to be a bit on the short side, business cycle history suggests that
economic conditions should continue to improve for several months y et By
the end of this year the present expansion would still be of only 22 months’ dura
tion. Only one upswing since World War I (November 1927, to August 1929)
was shorter than this. Moreover, we know that the course of any upswing is
irregular, with flat months and air pockets occasionally developing. The fact
is that in recent months the economy has been bombarded with an unusual run
of bad luck—such as the steel price donnybrook, the stock market break, and
recurring nervousness about the international position of the dollar. Good
economic policy clearly requires that we not be “nervous Nellies,*’ rashly pro
posing major changes each time a cluster of bad news or bad luck comes along.
Three considerations suggest that the economy does need strengthening in a
fundamental way. First, there is the fact that the economy has for some years
been operating somewhat below par. This has been widely recognized and dis
cussed. In his study for this committee (published in 1960) Mr. Knowles esti
mated for each year from 1909 to date the output that would have represented
reasonably fuU utilisation of the Nation’s productive resources. In 9 of the
15 years from 1947 to 1961, output was below par (including all years since 1957).
By contrast in the 17 years from 1909 to 1929 (excluding the years 1917-20) the
POLICIES FOR FULL EMPLOYMENT
209
record was notably better. ‘‘Full employment” years in those two decades out
numbered those when output was subpar by about 2 to 1.
Interpretations of this experience will differ, but one conclusion is clear. The
economy for several years has had an evident lack of bounce and steam. Our
current problem is more than just one o f those normal momentary air pockets in
a cyclical expansion.
Second, the current cyclical expansion (beginning after February 1961) has
turned out to be the weakest since the First World War. During the 16 months
from February 1961 to June 1962, nonagricultural employment gained 3.6 percent.
The average employment gain in the first 16 months of the eight other eyclical ex
pansions since World War I was 11.3 percent, and even following the hardly dis
cernible recession of 1927 employment increased 7.6 percent The improvement
in industrial production this time has been less than in any of the other cyclical
expansions since the First World War. The same is true for gross national
product. The gain in retail sales has been slightly greater than that following
July 1921, and November 1927, but it falls considerably short o f those after
the other six recessions. The facts can usefully be summarized something like
this. The data in table I show the gains in eight measures of business activity
during the first 16 months of each cyclical expansion since World War I. If
data were fully available it would be possible to make 64 comparisons of the
current cyclical expansion with others—for each of eight measures of business
activity comparing the post-1961 gain with that during the eight other cyclical
expansions. Since for earlier periods some data are not available, only 55 such
comparisons can be made. In 48 of these 55 the comparison is unfavorable to
the performance since early last year, in 6 there is a favorable comparison,
and in one case it is a tie.
That the current cyclical expansion has been a particularly weak and sluggish
one is quite evident from these facts. It is the Nation's poorest performance
in four decades, and probably one of the poorest in our history. It is, of course,
true that expansions after very mild recessions (such as the one in 1960-61) tend
to be on the mild side, but the current expansion is weak even relative to that
following the 1927 recession.
Third, we are beginning to wonder if the present expansion will turn out to
be not only the weakest but also one of the shortest in the postwar period. We
must beware of attaching excessive Importance to very current data. On the
other hand, certain facts are undeniably disturbing. The gain in business
activity during June (the last month at the moment for which data are fully
available) was about one-third the average monthly gain since the present
expansion got underway. There is also some evidence in the data in table II
of a slowing down in the expansion throughout the second quarter. Moreover,
it is clear that business sentiment has been adversely affected by events in
recent months. The stock market break has had a substantial effect on the
thinking of both business people and consumers.
Many businessmen were alarmed by the inferences they drew from the ad
ministration's handling of the steel price dispute, even though they did not
support the actions of the steel industry. It would be reasonable to expect
that an already anemic expansion would at least not be helped by the adverse
cumulative effect of these more or less fortuitous developments.
Finally, leading indicators generally have not been looking strong for some
time. New orders for durable goods have been declining since January, and
the June fall was fairly sharp. The length of the workweek moved downward
in May and again in June. In fact, the most recent data available for the
30 leading indicators in Business Cycle Developments show 18 of them de
clining and 12 rising. Leading indicators are, of course, difficult to interpret
They can be affected by capricious developments, and in any case the length
o f the leads is quite variable. It would be difficult, however, to give their present
pattern a very optimistic interpretation.
I f this review of the current economic situation is realistic, we clearly face
more than the problem of an off 1 or 2 months in the inevitably somewhat ir
regular path of a cyclical expansion. It is more accurate to say that we con
front an uncertain short-run business outlook following upon a particularly weak
cyclical expansion—all of this superimposed upon an economic performance that
has been subpar for some years.
T a b le
I.—Percentage increase in 8 measures of business activity during the
1st 16 months of cyclical expansions since World War I
After recession ending—
Indicator
July
July
1921
1924
March
N o
vember 1933
April
October August
June
1949
1938
1954
1958
1961
1927
Number of employees in
nonagricultural establish
ments___________ _____
Unemployment rate, total
(inverted)_______________
Index of industrial produc
tion ___________ _______
Gross national product in
current dollars (Q)*...........
Gross national product in
1954 dollars (Q)*.................
Bank debits outside New
York City, 343 centers.......
Personal income___________
Sales of retail stores...............
Feb
ruary
+ 21.6
+ 11.4
+ 7 .6
+ 18.2
+ 9 .4
+ 1 1 .0
+ 6 .1
+ 4 .8
+ 3 .6
(!)
(»)
0)
+ 35.0
+ 29.2
+123.7
+ 4 3 .0
+38.7
+ 2 6 .6
+ 50.0
+ 27.5
+18.4
+34.5
+ 4 7 .7
+ 3 0 .7
+ 1 7 .2
+18.9
+15.4
0)
+16.2
+11.8
+23.5
+ 1 2 .0
+23.7
+13.0
+ 1 0 .4
+10.2
(0
(0
(0
(0
C1)
+13.2
+ 9 .8
+ 9 .8
+ 7 .7
+11.3
+19.3
+12.6
+ 6.9
+13.0
+10.2
+ 5.4
+22.5
+26.5
+13.7
+10.8
+18.9
+ 2 9 .7
+16.2
+11.5
+11.3
+16.0
+ 8.5
+10.6
+16.0
+ 9 .0
+ 6 .5
+ 21.0
+ 4.5
+ 20.0
+21.1
+22.1
* Not available.
* 5 quarters.
* 4 quarters.
Source: Business Cycle Developments.
T a b le
July 1962, p. 57.
II.— Monthly changes in selected measures of business activity
(seasonally adjusted)
1962
Nonagricul
tural em
ployment
Industrial
production
Personal
income
Retail sales
(1)
(2)
(3)
(4)
(5)
-5 8
+339
+128
+359
+11
+43
+121
January________________ - ....................................
F ebruary.................................................................
M a rch ........................................ .............................
AprU.............. ..........................................................
M ay...... ....................................................................
February 1961-June 1962 average...................... .
- 1 .3
+ 1 .3
+ .9
+ 1.1
-$ 1 .7
+ 3 .2
+ 2 .6
+ 2 .4
+ 1 .4
+ .3
+ 1 .0
+ 2 .3
+.7
+• 7
+$9
+129
+302
+338
-117
-431
+80
Source: Col. 2, BLS estimates of nonagricultural workers on payrolls (In thousands); col. 3, percentage
Dints for the F R B index of industrial production; col. 4, Department of Commerce (in billions); col. 5,
department of Commerce (in millions).
n
What is our problem? There are, broadly speaking, two possibilities. People
are either disinclined to spend their purchasing power, or there is a shortage
of purchasing power. In one respect there may be a lessened inclination to
spend. Consumer attitudes have never regained the levels of buoyancy that
were reached in 1955, and there has been some deterioration since events of April
and May. And the evidence is clear from work at the University of Michigan’s
Survey Research Center that changes in consumer attitudes do influence the
level of spending. There is also some concern about the possibility that wants
have simply been saturated. This argument has taken many forms—ranging
from that of the affluent society to the fear that consumers are so fully in debt
that the further expansion of credit necessary to sustain vigorous prosperity can
not take place.
There are persuasive reasons, however, for believing that the problem is not
primarily saturation of wants. Research evidence is fairly clear on this point.
The simple fact is that as levels of living rise, levels of aspiration rise also. The
achievement o f one scale of living sets the stage for the desire to stage an assault
on the next Periodically during the last decade the University o f Michigan's
Survey Research Center has probed people about their needs and whether they
would like to make special expenditures in the coming year. In their 1962 mono
graph the center summarizes the evidence as follow s:
POLICIES FOR FULL EMPLOYMENT
211
"1. Today, as they did 10 years ago, the great majority of American people
express wishes and desires for consumer goods. This is true in all income
groups. Those who do not express such wishes are most commonly old * * * or
poor * •
The proportion having no wishes and desires has not increased in
the last 10 years. Being well stocked with goods, or having made large expendi
tures recently, does not make for ‘needlessness.’
“2. The kinds of things desired have changed substantially in the postwar
period. Desires for summer houses, boats, travel, and various hobby expendi
tures have increased in frequency. At the same time, desires for automobiles
have not diminished in frequency (partly as the result of an increase in desires for
second cars). Because people have a great many wants and desires, they feel they
must economize and shop carefully. (There was, therefore, a change in the kind
of automobile desired.) '*1
The evidence suggests to me that the problem is a shortage o f purchasing
power. Since the low quarter of 1901 private incomes after taxes (disposable
personal income plus corporate profits after taxes) have increased $32.7 billion
but private demand for output has increased $39.5 billion. Thus private demand
has increased $1.21 for each dollar increase in private incomes after taxes. This
is less than the $1.32 in the corresponding period after 19.18, or the $1.54 after
1954, but it is still true that in the five quarters following the low point last year
private demand for goods and services has increased more rapidly than incomes
after taxes.
To some a shortage o f purchasing power is synonymous with the need to ac
celerate the rise in wage rates. This approach would, of course, be self-defeating
because it would also raise costs of production and, therefore, prices. And if the
price line were held, the resulting deterioration in profits would give us a more
acute case o f the economic anemia we were trying to cure. On this our ex
perience of the last several years fs quite clear. The fact that costs per unit
of output rose more rapidly than prices after the mid-1950’s, with the consequent
sharp decline In profits per unit of output, unquestionably played a major role in
the sluggish performance of the economy in that period.
Table III.— Indexes of corporate income and output in manufacturing
[1955-1001
Per unit of output
Year
(1)
1955...................................................
1956................................................
1 9 5 7 .. ... .......................................
1958...................................................
1959...................................................
1960...................................................
1961..................................................
Output
(2)
100.0
102.9
103.3
96 5
109 0
112.0
112.5
E m ploym ent
costs
(3)
100.0
107.9
112 9
108.9
119.0
123.5
124.0
Profits
(4)
100.0
94.0
91.6
73.2
101.5
96.0
94.0
E m ploym ent
costs
Profits
(5)
(6)
m o
105.0
109 0
112.8
109.1
110.1
110.1
100.0
91.5
88.7
75.9
93.2
85.6
83.6
Source: Column (2), Federal Reserve Index; c o lu m n s (3) and (4), baste data from Department o f Com*
meroe; column (5), column 3 divided by column 2; column (6), column 4 divided by column 2.
It is, I think, increasingly clear that the economic policies of Government
have been making a substantial contribution to the economy’s shortage o f pur
chasing power in recent years. At times the monetary authorities clearly have
stepped too hard on the brake pedal, e.g., in 1957 and again in 1959. It is equally
clear, however, that monetary policy has not impeded economic expansion for
roughly 2% years. The reserve position o f the banks has been easy. Com
mercial banks are eager to expand their loans, in contrast to the “ loaned-up”
banking sentiment in the tight-reserve eras o f 1957 and 1959. Bank credit has
increased 8% percent in the last year. Reflecting this, interest rates (contrary
to the expectation o f many experienced market observers early this year) have
remained relatively low. Bond yields are only slightly above those at the
low point o f the recession early last year. Whatever quarrels we may have with
Q«oifi Katona, Charlej A. Limnger, James N.Morgan, and Bra Moellw^ttll Surrey
ftmgnitttr
(Univonlty of Michigan, Survey Reoearch Center, 1M2)« p.
the Federal Reserve about details, the evidence does not support the view that
monetary policy has had much to do with the current sluggishness of the
economy.
The principal drag has come from the tax side of Government fiscal operations.
For years we have pointed with gratification to the stabilizing effect of our tax
structure as a major defense in a recession. The large volume of tax collections
relative to national Income and the tax structure’s progressive nature have meant
that much of the decline in incomes has been at the expense of the tax collector.
Incomes after taxes tended to stay put—to be stabilized. We are all familiar with
this story. For some curious reason we have not seemed to perceive fully the
implications o f this for expansion, even though we usually recited the right
words.
The fact is, however, that a tax structure which stabilizes incomes after taxes
during a recession also “ stabilizes” them in an expansion, i.e., it retards their
expansion. That total cash receipts of government (Federal, State, and local)
have absorbed a large and growing proportion of the national income is well
enough known, though the quantitative magnitudes are not always appreciated.
The ratio of Government cash receipts (on a national income basis) to national
income rose from 26.6 percent in 1948 to 33.9 percent in I960, and it is probably
about 34^5 percent now.
Table IV.—Government
receipts and gross national product at postwar cyclical
peaks
[Dollaramountsinbillions]
Government receipts
Year
National income
Amount
1948.................................................................................
1953.................................................................................
1957................................................................... ......... .
I960 ..................................................................... ........
1962—2d quarter*__ _____ _________ _____________
$223.5
305.6
366.9
415.5
1457.0
Percent National
income
$59.2
94.9
116.3
141.0
H58.0
26.6
31.1
31.8
33.9
134.6
i Estimated.
Sows; BasicdatafromtheDepartment of Commerce.
Tabije V.—Change
in private incomes before tames and Government receipts 5
quarters after recession lows
[DoUir>moimts*in>UUanB]
1958-59
Private Incomes_____ _____ ____ __________________________*______________
Total Government receipts.................................. .................... _........ .....................
As percent change, private income.............................................................
Federal Government receipts.._________________ ___ ___________ _____
As percent change, private Income................ - .................................................
$49.6
$20.5
41.4
$16.5
33.3
1961-62
$45.0
$19.6
43.5
$15.7
315
Soaroet: BastedatafromDepartment of Oommeroe.
Let us now look more closely at the last year and one-half to see how this
works out cyclically. From the low first quarter of 1961 to the second quarter
of 1962 private incomes before taxes (personal Income plus corporate profits
and the inventory valuation adjustment) increased $45 billion. Government
receipts, however, absorbed 44 percent of this increase. Now the sluggishness
o f the present recovery, and the one in 1958-60, begins to look less mysterious.
The tax structure, by absorbing 40-45 percent of the rise in private incomes,
left a gain in incomes after taxes so moderate that (with no special elements
o f strength present) we could not get an expansion in private demand vigorous
enough to carry the economy back to reasonably full employment
I f the neutral position of the budget (where revenues and outlays are eQual)
id At full employment, we should theoretically find it possible to avoid persistent
unen^ormeat—ttough & tax structure absorbing such a large proportion o f
213
POLICIES FOR FULL EMPLOYMENT
increments to national income would still have important adverse implications for
economic growth. If, however, this neutral budgetary position is at a level of
business activity considerably below what would constitute reasonably full
employment, we have also a short-run problem. The fiscal drag would make
full employment difficult to attain, which would cause a short fall in revenue,
which would make the budget look bad, which might make us disinclined to take
needed tax action, etc.
This is not an unfair characterization of the present situation. In their
January report the Council of Economic Advisers estimated that at reasonably
full employment the present tax structure would produce a surplus (on a na
tional income accounts basis) of perhaps $8 billion this year, with this full
employment surplus approaching $10 billion by the first half of calendar 1903.
In short, the budget now moves from a neutral to a restrictive position substan
tially before the economy reaches reasonably full employment, and with govern
ment receipts siphoning off over 40 percent of additions to income, it has been
very difficult to get the needed thrust of increased private demand.
in
If this diagnosis is correct, what does it suggest for fiscal policy? It means,
I think, three things. First, the tax structure should be lowered so that the
budget does not begin to exert a brake on the economy quite so far below reason
ably full employment Second, the tax structure now absorbs too large a pro
portion o f increases in the national income. Third, we must slow down the
tendency for the Federal Government’s receipts to absorb a growing proportion
of the national income secularly.
Most of my time has been consumed in an endeavor to establish the case that
the fiscal operations of Government are an important source of our present
economic problem, and that vigorous fiscal action must play a major role in any
program to deal with the problem. This leaves little time to spell out specifics.
Even so, it may be useful to indicate briefly the nature of a fiscal program that
might contribute to a stronger economy.
First, budgetary procedures should be modified so that we give more explicit
attention to this question: How rapidly should Federal expenditures grow in
the years ahead? The excellent work on expenditures at both ends of Pennsyl
vania Avenue does an effective and, I think, underappreciated job of sifting out
waste and unessentiality in the technical sense. It is less well designed to tell
us whether these individually well-considered programs add up to more than
ought to be spent in the aggregate. The ratio of Federal budget cash outlays
to GNP in fiscal 1062 was 2.1 percentage points above that of fiscal 19o6. Thus,
if the rate of increase of Federal outlays had been limited to the rate of increase
of GNP, Federal cash outlays last year would have been $12 billion less. This
inevitably has reduced the scope for otherwise desirable incentive-promoting
tax reductions. It is not unreasonable to expect from the administration an ex
plicit declaration of its longer range policy with respect to total outlays; and
the Congress should reexamine its own procedures to see if more explicit
attention can be given to the total on the expenditure side of each year's budget.
Table VI.— Ratio of Federal cash budget outlays to gross national product
pbpflreem)
Fiscal year Flanl w
1060
1096
National defense ___ „________ ______ *____
Otben....
..........................................
Total...................................... .............
10.0
7.8
17.8
9.3
0.8
1*1
Fiscal yew
1063
0.5
10.4
10.9
Second, the economic situation would benefit from tax actions now that would
reduce the level o f the structure and move it in the direction of a better system.
Fortunately, there is considerable agreement about what would constitute such a
rirfrn fr hi reduction off three to flr i points In the corporate income ta x ; a cut
off o f the personal Income tax at around a 65-percent top rate, with reductions
of
two
points back down through tlie normal ta x ; and a
rattooattsation o f oar motley array o f eocise taxes (which could be done wtt*
214
POLICIES FOR FULL EMPLOYMENT
no loss of revenue). The total package should be such that the resulting tax
structure would produce enough revenues comfortably to cover expenditures
at reasonably full employment. On this basis something like $7 billion should
probably be the outside limit of any tax reductions at this time. The action
should not be “quickie” or temporary in character . We should capitalize on
the substantial current concensus about what ought to be done to move toward
a better basic pattern of Federal taxes.
Third, I would myself support the proposal that the President be given limited
power to alter certain tax rates. This could be hedged with adequate safe
guards—limited as to amount, and perhaps requiring that the President transmit
to the Congress a full report setting forth reasons for his actions. Without this
each recession produces inexorable pressures to “ do something’* on the expendi
ture side which, history suggests, will be moving expenditures to a substan
tially higher level. This proposal would, in short, be a step toward fiscal con
servatism. In the long run it would make for a less rapid increase in expendi
tures and more “elbow room” on the tax side for further needed reforms.
IV
One further question: Would tax reduction and reform now be apt to worsen
further the already somewhat nervous position of the dollar internationally?
This is possible. If the resulting expansion sets in motion an accelerated rise
in our cost-price level, and if we insist that the monetary authorities adhere to
unrealistically low interest rates, and if neded improvement in profits were seem
ingly interpreted as evidence of entrepreneurial malevolence, the dollar could
quickly be in real trouble. And, it must be stated flatly, such trouble would then
be thoroughly deserved.
If, however, we manage our affairs carefully, there is good reason to think
that the international position of the dollar would not be worsened by tax
reform and reduction now, and it might well be strengthened. The resulting
higher level of national income would, of course, tend to increase imports and
that would enlarge the deficit in our international balance of payments. There
are, however, forces that would work the other way. The more active demand
for funds would produce higher interest rates in the U.S. capital markets. The
invigorated pace of economic activity would enlarge the opportunities for more
profitable investment of capital in the domestic economy, reducing incentives
to seek investment outlets abroad. And the innovational activity that accom
panies a more lively pace of economic expansion should in time have some favor
able effect on U.S. exports. Since in the U*S. economy imports are relatively
small and the international capital outflow is relatively large, there is at least
an even chance that policies proposed here would help to narrow the balance-ofpayments deficit.
There does remain the potentially adverse effect on confidence in the dollar,
internationally and domestically, of tax action now. If, however, the tangible,
concrete, objective forces can reasonably be expected to beat least neutral and
probably favorable, and if we give evidence of capacity to manage sensibly such
things as monetary and wage-cost-price policies, we can probably deal with the
psychological aspects of the problem.
CONCLUSION
The becalmed state o f the economy at present, coming on the heels o f a par
ticularly weak cyclical expansion superimposed on a protracted period of less
than reasonably full employment, strongly suggests that the economy needs
strengthening in a fundamental w ay; and it also suggests that within reasonable
limits this can be done without courting the risk of a disorderly economic ex
pansion. The basic problem is a shortage of income and purchasing power,
but this deficiency must be remedied in ways that do not increase costs per unit
of output and that do not produce monetary conditions which would further
weaken the dollar. This calls for tax adjustments that lower and otherwise
improve the structure. The magnitude o f the reduction should still leave us with
a tax structure whose revenues would cover expenditures when productive re
sources are being utilized reasonably fully.
Such action need not weaken the dollar internationally, and there is an even
chance that it might strengthen i t In fact, we are fortunate that what is
needed to step up the pace o f Job creation and economic expansion at home could
also add strength to the dollar internationally—a more innovative, more pros
perous, and more profitable economy.
P0LICIE8 FOB FULL EM PLOYMENT
215
Chairman Patxan. Oar next witness will be Dr. Joseph A. PechmaiL director of economic studies at the Brookings Institution.
We are glad to hare you, sir. You may proceea in your own way.
STATEMENT OF JOSEPH A. PECHMAN, DIRECTOR OF ECONOMIC
STUDIES, THE BROOKINGS INSTITUTION
Dr. P b c i i m a v . Thank you, Mr. Chairman. I am happy to have
this opportunity to appear before the Joint Economic Committee to
discuss the economic situation and its fiscal policy implications. In
this statement, I propose to review the economic outlook, try to ex
plain why the expansion seems to be petering out, and suggest policies
that m ignt be adopted to restore our economic momentum. The views
I shall express are my own and do not necessarily reflect those of the
trustees, officers, or other staff members of the Brookings Institution.
Since I agree with practically all of what my two friends said before
me, you might call my statement “Variations on the Eckstein-McCractten Theme by Pechman.”
THE ECONOMIC OUTLOOK
There is no question that the economic expansion which began early
last year has Men disappointing. Perhaps the most telling figure—
certainly the one which should concern us most— is the rate of unem
ployment. In July, the unemployed were 5.3 percent of the labor
force, after adjustment for seasonal variation. This is a much poorer
performance than those of the first two postwar recoveries, and
roughly similar to the unsatisfactory 1958-60 performance.
A t the same stage in the cycle, unemployment was 3.4 percent in
the 194D-53 expansion and 4 percent in tne 1954-57; it was 5.6 percent
in the same stage of the 1958-60 expansion, but this figure was unusu
ally high at the time because of the prolonged steel strike. The dis
tressing fact about the unemployment situation is that it will get
worse if the economy rises by anything less than about $7 billion per
quarter at an annual rate.
It is not difficult to demonstrate that the expansion is not only
disappointing, but also that it has lost most of its momentum. In
the first place, the difference between actual G N P and potential G N P
at an unemployment rate of 4 percent has remained at about $30 bil
lion during the past 9 months.
Second, G N P in real terms rose at an annual rate of 8.6 percent
in the first three quarters of the expansion; in the last two quarters,
the rise has been at the rate of 3.2 percent.
Third, gains in employment, personal income, and industrial pro
duction have slowed down almost to a creep. In June, employment
rose only one-tenth of 1 percent; personal income, two-tenths of 1 per
cent ; and industrial production, three-tenths of 1 percent
Fourth, retail sales fell in May and June. Tne drop was particu
larly steep in June, perhaps reflecting the impact of tne sharp break
in the stock market Although sales appear to have increased again
in July, they will probably tarn out to be lower than the peak
reached in April.
Thus, none of the broad indicators of business activity suggests
that the eoooofliy » going anywhere very fast But the gloomy *fi
216
POLICIES FOR FULL EMPLOYMENT
dence on the business outlook comes from the leading indicators.
Manufacturers’ sales have exceeded new orders since March. This
means that order backlogs are going down and, unless the trend is
reversed very soon, production is Bound to fall.
Inventory investment declined sharply in the second quarter of
the year, suggesting that businessmen are already anticipating a slow
down in demand. The decline in inventory investment is not all due
to the unusual steel situation; other industries are also exhibiting the
same tendency. Fortunately, fixed investment—particularly construc
tion—has continued to rise, but new orders of firms manufacturing
machinery and equipment have been sliding off since January. This
implies a weakening of investment demand and is perhaps the most
disturbing sign of all.
I am not trying to suggest that a downturn in business activity in
the near future is a certainty. We have had slowdowns before with
out experiencing a recession. The two most recent cases were 1951
and 1956—but, m both cases, there were good reasons for the pickup.
In 1951, defense expenditures continued to rise rapidly as the
Korean war continued. In 1956, private investment remained strong
and defense orders rose sharply while industry generally was operat
ing close to capacity. Today, Federal expenditures are still rising,
but at a declining rate; excess capacity at current rates of output is
widespread; and there are no signs of a strong upward movement anywhere in the private economy.
We have had a good year in autos and housing, but these industries
are hardly likely to go much higher with personal incomes leveling
off. Inventory investment will continue to decline unless retail sales
pick up, and the latter is not likely to happen unless incomes go up
faster.
Profits are already falling, even though some specific companies have
reported record earnings for the first half of the year. With the large
amount of excess capacity throughout industry, it is hard to believe
that we are about to see a significant increase in investment demand.
(The more liberal depreciation allowances will certainly be helpful
and so would the investment credit if it were enacted, but their effect
probably will not be immediate.)
In brief, the situation looks more like mid-1957 than 1951 or 1956.
Then, as now, inventory accumulation was low, manufacturers’ new
orders were declining, and order backlogs were going down. With
out implying a forecast for this year, I simply record the historical
fact that the peak of that cycle was reached in July 1957.
W H A T W E N T W RONG ?
Since proper diagnosis is an essential prerequisite to prescription,
it is important to explain the premature slowdown in the rate of ex
pansion. Until the turn of the year, the recovery was going along on
schedule. There were differences of opinion over the outlook, but
practically all informed observers expected the rise to continue vigor
ously at least until midyear.
In this situation, the administration submitted a budget for fiscal
year 1968 that would be roughly in balance if the 1962 GNP turned
out to be $570 billion. It is to be noted that the balanced budget was
217
POLICIES FOR FULL EMPLOYMENT
expected to materialize only if, given the projected Government
spending and taxing programs, demand in the private economy would
oe large enough to produce a total G N P of $570 billion.
Developments in 1962 clearly indicate that Government fiscal policy
is too restrictive to permit the economy to achieve the projected levels
of output. The degree of restriction can perhaps be fully appreciated
if the figures used in the budget are translated to a full employment
basis (which is ordinarily denned as employment of 96 percent of the
labor force. J At full employment ana projected levels of Govern
ment spending, the administrative budget surplus would probably
amount to about $4 billion in fiscal year 1963. Wlien translated into
the more economically meaningful national income budget, this is
equivalent to a surplus of about $8 billion. Full employment will not
be reached this year because private demand is not strong enough to
permit the Government to drain off that amount from the private
economy.
In fact, as events have turned out, private demand is not even
strong enough to permit the Government to plan on a budget which
would be barely balanced at a 1962 G N P $15 to $20 billion short of full
employment.
It is noteworthy that the original budget estimates for every one
of the past 5 yeare projected some surplus, yet deficits were actually
realized in 4 out of these 5 years- A s the following table shows, the
original estimates for the 5 years aggregate to a cumulative surplus of
$8.1 billion, but the period ended with a cumulative net deficit of $24.2
billion. This sad record was due primarily to the reduced receipts
from levels of business activity that turned out to be substantially
lower than those estimated.
(The table referred to follows:)
Comparison of original budget estimates %cith actual results, fisoal years
1958-42
[Billions of dollars]
Ftoealyear
Administrative budget
surplus (+) ordeficit (—)
Original
estimate*
IMS.............................................................................
1060......................... ....................................................
1900........................................... .................................
1001.............. ............ ................................................
1000............................................................. -...............
TtttiL...................................................................
+1.8
+.5
-K2
+L«
+011
Actual
-2.8
-12.4
+1.2
-10
HI8
-24.2
The so-called “ squeeze” on corporate profits is principally a re
flection o f this lackluster performance or the economy. Recent re
search by econometricians has indicated that the brunt of a short fall
in the gross national product below full employment potential is felt
by corporate profits. The short fall o f profits felow the level it would
reach at full employment will amount to at least $8 billion in 1962
alone. Even larger amounts were lost in several recent years. We
cannot allow thin to continue much longer. A prolonged period o f
prwifnHnp profits inevitably reduces investment incentrvea and
Nteras tl»«a E o n ’h eoonomic growth.
218
POLICIES FOR FULL EMPLOYMENT
The United States cannot hope to approach the growth rates exerienced in Europe and Japan during the last decade without a
igher rate of investment* and we will not achieve a higher rate of
investment unless businessmen expect growing markets for their
products.
The lesson to be learned from the economic record of recent years
in this country is that planning for a surplus, without regard to the
strength of private demand, may very well produce unsatisfactory
rates of employment and output and create deficits besides. When
demand is strong and appears to be pressing hard on available re
sources, a surplus may be essential to insure balanced growth and sta
bility in the general level of prices.
But when demand is recovering from a recession and when unem
ployment is still large and capacity still greatly underutilized, too
vigorous a movement toward a surplus may repress the recovery and
prevent the growth in output and income upon which the expansion
of Government revenues was predicated.
In short, efforts to reduce the deficit too quickly are likely to be selfdefeating.
Does tnis mean that the United States is doomed to have deficits for
an indefinite period? The answer to this question cannot be given
with any degree of certainty by responsible economists, simply because
we do not know the strength of private demand out of the incomes
that would be generated at full employment.
It is my own view that, at full employment, demand would be
strong enough to require a surplus in order to prevent prices from
rising, and that a full employment level of activity is likely to gener
ate that surplus at the expenditure levels now contemplated, even
with somewhat lower tax rates than those now in effect.
But to reach full employment, we must first remove the restraints
under which the economy has been operating in recent years. Except
for an easy money policy which is ruled out because of our balanceof-payments problem, no other policy is available to restore our
economic momentum than fiscal policy.
E
POLICIES TO RESTORE ECON OM IC M O M EN TU M
Private demand can be stimulated through fiscal policy either by
increasing expenditures or by reducing taxes. Congress is now com
pleting action on the President’s expenditure requests for this year.
These requests contemplate a rise in Federal expenditures (as meas
ured by the national income accounts) amounting to $5.8 billion in
fiscal year 1963. Further expenditure increases of any substantial
magnitude would require considerable advance planning as well as
congressional action and would therefore not be effective soon enough.
Expenditure policy should, in any case, be geared largely to the longrun needs of the economy and to the demand for public services.
Under the circumstances, tax reduction would be the best and most
effective method of providing a strong and immediate stimulus to
the economy. In the past, consumers have consistently spent about
92 or 98 percent of their disposable incomes. There is no reason to
suppose that they would respond very differently to the added takehome pay from a tax cut than they would from a straight increase in
their wages. (In fact, as a resuU of withholding, the additional take
POLICIES FOB FULL E M PL OY ME NT
219
home pay from a tax cut is indistinguishable for the vast majority of
wage earners fr o m the additional tale-home pay due to an increase in
wages.)
This addition to consumer spending would increase employment
Mid incomes, leading to further rounds o f spending. Moreover, the
improvement in sales expectations would have effects of its own on
business expenditures. It would, in the first place, probably reverse
the decline in inventory investment; second, it would also promote
additional fixed investment. Together, the effects on consumer and
business spending could well provide the stimulus needed for a rapid
advance to full employment provided the tax cut is large enough.
I do not not agree with the view that a tax cut should be delayed until
after a recession has begun. The weakness o f investment in the last
few years is a reflection of the slow growth of demand and the con
tinuation of excess capacity. There is substantial danger that busi
nessmen will come to regard a slack economy as a normal state of
affairs.
Under these circumstances, oar economic recoveries will become even
more disappointing than they have been in the last two cycles and our
rate of growth will become chronically depressed. A prompt tax cut
would very quickly be translated into higher business sales and break
these bearish expectations.
Since the economy is already $30 billion below potential and the
prospects are that it will lose ground in the months ahead, strong
medicine is needed to overcome the effect of the disappointing perform
ance in recent years. Even if it is assumed that the tax reduction
will have a substantial direct effect on business spending, a cut o f at
least $10 billion would be required to close the gap between actual and
potential output In arriving at this judgment, I assume that the
effect o f the tax cut would not be offset in whole or in part by expendi
ture reduction. I f expenditures were reduced, the size of the tax
cut needed to reach full employment would increase by more than
the cut in expenditure.
I believe that what the economy needs is a permanent reduction in
tax rates, because it is now dear that the present rates choke off ex
pansions long before high employment is reached. However, con
sideration o f a permanent change in tax rates would trigger off a na
tional debate «***■ could not possibly be completed in this congres
sional session.
Moreover, any permanent revision in the rate structure should be
carefully adapted to the tax reform program scheduled for congres
sional consideration next year. For this reason, I would suggest the
enactment o f an equal percentage-point cut in individual and cor
porate income tax rates effective October 1 for a year or 16 months,
with the understanding that these rates would be superseded by a new
rate structure which would be included in next year’s tax reform
bill.
A redaction o f one point in all individual income tax rates would
cost $2 billion a year; the same reduction in the corporate rate would
cost $0.5 billion. Accordingly, a 4-point reduction in the individual
and corporate rates would amount to a total redaction o f $10 billion
st an annual rate; o f
$8 billion would go to individuals and the
twwlning$ 81^ 1knloo«riMtatioiia.
220
POLICIES FOR FULL EMPLOYMENT
This package would meet the requirements of simplicity and size,
and would have the added advantage of maintaining the present dif
ferential between top and bottom bracket individual income tax rates
and between individual income tax rates generally and the corporate
rates. It would also give the administration and the Congress the
necessary flexibility to coordinate the proposed tax reform with per
manent rate reduction.
The effect of this tax reduction on the budget for fiscal year 1963
would be much smaller than the full-year effect. I estimate that the
deficit would be increased by approximately $6 billion before taking
into account any recoupment from the effect of the tax cut on business
activity. It should be emphasized, however, that this increased deficit
in fiscal year 1963 would lead to a smaller deficit, or perhaps even a
surplus, in fiscal year 1964.
Although the case for an immediate tax cut is strong, I realize
that the odds against the enactment of such legislation during this
congressional session are very heavy indeed. If Congress does not
cut taxes this year, an alternative program should be devised to give
the administration sufficient power to cope with the problems that
may arise before Congress is organized and ready for action next year.
In my opinion, a minimum program would include the following:
First, the President should be given the authority he requested early
this year to make a temporary reduction in individual income tax
rates of up to 5 percentage points. The cut would take effect 30 days
after submission, unless rejected by the Congress. If the Congress
is not in session when the cut is proposed, it would take effect im
mediately but terminate 30 days after Congress convened.
I f the Congress is reluctant to yield this authority to the President
on a permanent basis, it might extend the authority until the end of
February 1963, when it will be organized to act quickly if necessary.
Second, provision should be made for the use of Federal funds to
extend unemployment compensation benefits for a limited period to
workers who exhaust their benefit rights under the regular State un
employment compensation laws. Similar legislation has been enacted
during the past two recessions, and has proved to be an effective
countercyclical measure. Since it is too late to process a permanent
law, the temporary law which expired in April of this year should be
reenacted for another year, for humanitarian reasons alone, if not for
reasons of purchasing power.
Third, the capital improvements program for distressed areas which
has already passed the Senate and is now being considered in the
House should be enacted before Congress adjourns. The legislation
is designed to provide funds especially for relatively small local proj
ects on which work can be started quickly. The amount of money
involved is modest enough to insure that the funds would be spent on
useful projects.
Finally, the administration should plan now to submit a budget for
the coming year that would yield a much smaller surplus at full em
ployment levels of income than the surplus implicit in the budget for
fiscal year 1963. Although it has been reduced somewhat since 1960,
the full employment surplus for the first half of calendar year 1963
which is implicit in the current budget is of the order of $10 billion
(on a national income basis).
POLICIES FOR FULL EMPLOYMENT
221
The Economic Report stated that uif demand falls short on cur
rent expectations, more expansionary policies will be pursued.” It
is clear that the signs were set too hign early this year and it is to
be hoped that budget planning will be more* realistic the next time
around.
In closing, I should like to recall to the committee that, when I last
appeared before you in December 1960, the economy was in a con
traction that was already 6 months old. Nevertheless, many people
denied that there was sufficient evidence to justify immediate action
to stimulate demand.
It was also said that caution was necessary to avoid unbalancing a
budget that was already becoming unbalanced because of the reduc
tion in employment and incomes. And there was a great concern
about the inflationary consequences of a vigorous fiscal policy at a
time when there were large reserves of idle men and machines waiting
to be productively employed.
Although the economy is not in a recession now, our rate of growth
continues to be inadequate by any standard and there is very little, if
any, steam left in the current expansion. But we are still told not to
prejudge the situation; more concern is expressed about the condi
tion of the budget than about the condition of the economy; and
we are still warned of the dangers of inflation even though unem
ployment is high and inflation has long since subsided.
As an economist, I cannot explain the defensive attitude which
has gripped the Nation in recent years. I can only express the hope
that this committee, which has done such excellent educational work
in economic affairs since it was established more than 15 years ago,
will help alert the country to the needs of the times.
Chairman P atman. Thank you, sir.
I would like to know about the basic premise on which you reach
conclusions as to the kind of tax cut whicn you think we should have.
Of course, I know we want to raise the level of savings, the level of
investment, the level of income, and the level of consumption, raise
all levels, but my question specifically is this: Relative to consumption
expenditures as defined in the national income account, are savings
too low or too high! How would you, Dr. Eckstein, answer that?
Would you say they are too low or to high!
Mr. Eckstein. Sir, in the present short-run context they are ob
viously too high. Not in the long run.
Chairman Patman. What do you say, Dr. McCracken ?
Mr. McCracken. The proportion of income bein^ saved does not
seem to me to be greatly out o f line with our historical trends.
Chairman Patman. Do you consider it too low or too high ? Which
would you say, if you can answer it categorically.
Mr. McCra cken. They are, I suppose, too low in the sense that ob
viously we need a step-up in the demand for output, though I do not
think this gets very close to the heart of the present problem.
Chairman P atman. How would you answer ?
Mr. P echman. I agree with Professors Eckstein and McCracken.
Chairman Patman. I would like to call your attention to two charts
prepared by Dr. Roy Moor of the committee stafL They show how the
income which would be made available to individuals under the tax
cat would be distributed among the various income brackets under
222
POLICIES FOR FULL EMPLOYMENT
the different methods of reducing individual income taxes. The chart
on the left is self-explanatory. It shows the average tax reductions.
Can you read those figures from where you are ? Looking at the addi
tional money that would be made available to individuals having
adjusted gross incomes of between nothing and $5,000, the relatively
low income class, we see that the different methods make quite a dif
ference in the amount of money which would go to these individuals.
The figures show the distribution, by class of a $6 billion overall re
duction in taxes. I f we split the first income tax bracket, setting up
a bracket of between zero and $1,000, and applied all the cut in that
new first bracket, individuals with less than $5,000 of income would
on the average have a net gain of $75. I f we increase the personal
income exemption from the present $600 to $800, individuals in this
roup would gain $76. I f we applied all of the tax cut in the present
rst bracket, individuals in this group would benefit by $60. I f we
had an across-the-board cut such as has been frequently suggested, in
dividuals in the lowest income group would benefit by only $42.
Looking at the families with incomes of over $50,000 you may notice
that the different methods also give different results. I f we increase
the personal income exemption these individuals would receive an
extra $300 of disposable income, but if we had an across-the-board
these individuals would receive an extra $1,680 of disposable income.
# But the chart on the right is probably more significant for our con
siderations of how a tax cut would affect the economic activity. This
shows the percentage increase in the aggregate income of each income
class which would be brought about by the different methods.
For example, if we increase the exemption the lowest income receiv
ers would have their disposable incomes increased by 2.8 percent, while
the aggregate income going to families with over $50,000 of income
would be increased by six-tenths of 1 percent. To take the other ex
treme, however, an across-the-board cut, we find that the aggregate in
comes in the lowest income group would be increased by only 1%
percent, while aggregate incomes of the group of over $50,000 would
be increased by 3.3 percent—more than twice the rate of the lowest
income families.
Would the members of the panel care to comment on whether these
different methods of reducing taxes would have important differences
in their effect on savings, investment, consumption and overall eco
nomic activity ? Would you start, Dr. Eckstein ?
Mr. E c k s t e i n . Of th e points to be made in this connection* I think
one very obvious point in this: That a $6 billion tax cut will not ac
complish miracles in any event because the increase in income accru
ing to anybody is only 3 percent, which is not exactly a revolution of
the economy.
Second, in general; it is my belief that this kind of an issue—that is,
the proper distribution of the tax burden—is largely a noneconomic
issue and elected officials are the people properly to pass judgment
of this sort. On the effect on saving, what studies have been done on
this problem tend to suggest that people in the lower income brackets
have somewhat higher spending propensities than the upper brackets,
but the total impact of any change in the tax burden can at best make
a small contribution to total expansionary policy.
f
POLICIES FOR FULL EMPLOYMENT
223
Average Tax Savings per Individual
Under Various Methods of Making a $6 Billion Reduction
in Individual Income Taxes*
ADJUSTEO GROSS
INCOME CLASSES
Reduce Rote in Holf First Brocket 7.5 Percentage Points
♦0 -5 .0 0 0
5.000 - 10,000
10.000 -20.000
20,000 -50.000
over 50,000
Increase Personal Exemption $200
$0 - 5,000
5.000 - 10.000
10.000 - 20,000
20.000-50.000
over 50,000
Reduce First Brocket Rote 4.6 Percentage Points
♦ 0-5.00 0
5.000 -10.000
10.000 - 20.000
20.000-50.000
over 50,000
Reduce Each Individual Rote 3 Percentage Points “Acrossme Bocni Cm*
*0 - 5.000 ^ *42
5.000 - 10.000
*114
10.000 - 20.000
*288________
20.000 * 50.000 I—
—
*762____________________
over 50j000 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ *1680
*£s#mofo4 for 1962 o* botit of t9C0 doto of btonol ftovm o Sonne*
224
POLICIES FOR FULL EMPLOYMENT
Percentage Increase in Taxable Incomes, After Taxes,
of the Different Income Classes Under Various Methods
of Making a $6 Billion Reduction in Individual Income Taxes*
INCOME^LASSES
Reduce Rate in Half First Bracket 7.5 Percentage Points
$ 0 - 5 ,0 0 0
5 ,0 0 0 - 10 .0 0 0
10,000-20,000
2 0 .0 0 0 -5 0 ,0 0 0
over 5 0 ,0 0 0
Increase Personal Exemption $ 2 0 0
$ 0 -5 ,0 0 0
5,0 0 0 - 10,000
1 0 ,0 0 0 -2 0 ,0 0 0
20 ,0 0 0 -5 0 ,0 0 0
over 5 0 ,0 0 0
Reduce First Bracket Rate 4.6 Percentage Points
$ 0 -5 ,0 0 0
5.0 0 0 -1 0 ,0 0 0
10.000 -2 0 ,0 0 0
2 0 ,0 0 0 -5 0 ,0 0 0
over 5 0 ,0 0 0
Reduce Each Individual Rate 3 Percentage Points "Across the Board Cut’
$ 0 -5 ,0 0 0
5 ,0 00 - 10,000
10,000-20,000
2 0 ,0 0 0 - 5 0 ,0 0 0
over 5 0 ,0 0 0
*Estimated for m 2 on basis of i960 data of Internal Revenue Sorm .
POLICIES FOR FULL EMPLOYMENT
225
Chairman P a tm a n . Thank you, sir.
I will not insist on answers to these at this time. I will put the
questions in the record. I wish each one of you would comment on
them when you review your transcript and extend your remarks, if
you please, or insert anything else that you feel is germane. An
across-the-board tax cut would increase disposable incomes of families
in the high-income brackets a great deal more than it would for those
at the lower end of the scale. If you felt that our basic problem is
one of inadequate rate of savings, I could understand this kind of
proposal. But if you think that the problem is underconsumption,
then I should think you would want to give the largest cuts to the
low-income groups, or at least keep things even. In other words, an
across-the-board cut would tilt the income distribution in favor of the
high-income families. Do you have any distribution by income classes
of the percentage of family income going into consumption and the
percentage going into savings? I wm ask you to submit an answer
when you review your transcript.
Next, have you experts made any estimates which would show how
much reduction in taxes would be required to produce a given amount
of stimuli under each of the alternative methods: raising the exemp
tions, making the cut in the first income tax bracket and making the
cut across the board ? This is a question that concerns me. If we had
an across-the-board cut in taxes; that is, a cut which would change
the income distribution in favor of the top bracket income receivers,
would we not have a worse fiscal structure after the period of the
deficit is over? In other words, would it not, in the long run, in
crease the troubles which the tax cut is intended to cure?
With reference to the economy of Western Europe, I think I can
see that there are peculiarities in the situation which would enable
these economies to operate at full employment even where a large
share of income is going into savings and investment. A dynamic
rebuilding or reconstructing of the whole European economy is going
on. They are building modem plants to replace handicraft plants in
anticipation of future consumer demand for the output of those
plants. But I wonder, in a situation like ours, if we can have full
employment with anything like the percentage of income going to
capital in Europe; that is, the high profits and high interest rates of
Western Europe.
Could you comment on that ? I will ask you to do that when you
look at your remarks. But I think those charts make out a convincing
case for the tax savings going to the low-income groups. Certainly
if our problem is underconsumption, the answer is obvious.
(Information submitted by Otto Eckstein, Harvard University,
follows:)
The major studies of the effects o f income distribution are the following:
Harold Lubell, “ Effects o f Income Redistribution on Consumers’ Expendi
tures,” American Economic Review, X X X V II (March llHT), 157-70, X X X V II
(December 1947), 930.
M. Bronfenbrenner, Taro Yamane, and C. H. Lee, “A Study in Redistribution
and Consumption,” the Review of Economics and Statistics, X X X V II (May 1955)
149__59t
Alfred H. Conrad, “The Multiplier Effects o f Redistributive Public Budgets,”
the Review of Economics and Statistics* X X X V II (May 1955), 100-73.
Lubell and Bronfenbrenner do not attribute much expansionary effect to
changing the income distribution; Oonrad comes to a more optimistic conclusion.
226
POLICIES FOR FULL EMPLOYMENT
As a first approximation, I would assume that all of a tax cut accruing to
individuals with incomes below $5,000 would be spent, and between one-half
and three-fourths of a tax cut on incomes over $15,000. Applying a multiplier
of 2, every $1 of low-income tax cut would raise GNP $2; the figure for highincome tax cuts would be $1 to $1.50.
(Responses
man :)
by
Mr. Pechman to the questions raised
by
the chair
1. I would rank the four illustrative tax cuts in the following order as re
gards their effect on personal consumption expenditures: (a) an increase in the
personal exemptions; ( b) a reduction in the rate in the first half of the first
bracket; (c) a reduction in the rate applying to all of the first bracket; and
(d) an across-the-board cut of equal percentage points. However, the difference
would not be very large. Although average consumption is a higher proportion
of income in the lower income brackets than in the high-income brackets, dif
ferences in consumption out of increments to income are probably much smaller.
2. There are no current estimates of the consumption-saving patterns of fam
ilies in different income classes. But earlier studies have all indicated that con
sumption declines relative to income as income rises. There are no data on the
proportions of additions to income that might be consumed at various levels of
income.
3. I do not agree that the fiscal structure would be distorted in any way as
a result of an equal percentage-point tax cut. As I indicated in my statement,
such a cut preserves the rate of progression and might therefore be more accept
able as an interim measure than a reduction in taxes applying mainly to one
part of the income distribution. Since the consumption effect would be sub
stantial in any case, I would support an across-the-board cut under present cir
cumstances*
Chairman P a tm a n * I have probably taken up m y time, and I will
yield to Mr. Curtis for questioning.
Representative C u r t is . Thank you, Mr. Chairman.
I fiad myself in a difficult position to ask questions because all three
presentations start on a premise with which I disagree, a very funda
mental premise, that our economy is stagnant. The very symptoms
that I think you all use to substantiate your view that the economy is
stagnant are what I would interpret as growing pains. We have had
this argument before, Dr* Eckstein and I. I think it comes to two
things. One is a question of whether or not we feel that an economy
does move forward through business cycles, as we call them. Do we
agree it does, that that is normal, to go forward in periods of expan
sion and then contractions like the peristaltic action, if I can be a
little earthy ? Is that a natural thing ? I f it is a natural thing what
are we trying to do—interfere with a natural process ? Rather should
not we be understanding it and working with it? Could I ask that
question?
Is it a natural process, or is it something that you want to eliminate?
Do we want an economy moving like that and so we feel it moves up
and down?
Mr. E c k s t e i n . Congressman, I doubt a little bit whether this is in
my statement. Actually, the business cycle itself has been becoming
milder of its own accord. The 1960-61 recession was a very mild oney
more so than 1958. Even that was very small by prewar standards.
I think our concern is that the little ups and downs have so pre
occupied us, especially with the immense amount of statistics and
figures which come out every single day, that we have tended to lose
sight of the longer run trend.
Representative Curhs. Do we agree, is it a natural thing? Is this
the way an economy moves forward, through contraction and ex
POLICIES FOR FULL EMPLOYMENT
227
pansion? Again, to use the earthy illustration, of the peristaltic
action, in actual life so many things move forward in that way. Do
you think that is a natural state? I f it is, we should not be trying to
destroy it, should we?
Mr. E c k s t e i n . Our economy has always grown w it h cycles.
Representative C u r t is . It has, but is it natural and is it the w a y
it should be, that is the question? I think some of you economic
theorists are treating something that is natural as if it were a disease.
Mr. P e c h m a n . I will try. What I do not like is your use of the
term “natural.” You use it in a way which suggests that, once you
have said it, that is all there is to be said about the cycle.
Representative C u r t is . N o.
Mr. P e c h m a n . Y o u said that 2 years ago, Mr. Curtis, when you
were talking about growing pains, about business cycles. We never
got back to high employment then. The real question is not-—
Representative C u r t i s . I will get to that because I happen to think,
and this was the next question—maybe I better interject this—you see
in your concept of this gap theory that Dr. Eckstein and Dr. Heller
and apparently most economists, and your paper seems to buy, is on
the assumption that there is failure to have full utilization of our
productive resources which includes the labor force, which includes
plant capacity. What I suggest that you are failing to realize is part
of this natural thing, particularly in a dynamic economy which is
innovation—and that to me is the real reason----M r . P e c h m a n . A r e y o u sa tisfied w it h th e e c o n o m y as it is t o d a y ?
Representative C u r t is . On innovation?
Mr. P e c h m a n . Yes.
Representative C u r t i s . I am never completely satisfied but let me
say this, that the innovation as near as we can figure reveals that 25
ercent of the goods and services now on the market were not even
nown 5 years ago. There is a test of innovation. How much money
is going into research and development? How much is going into
retraining ? Here is what I wanted to say. Part of the natural proc
ess, as I see it, is retooling, actually junking obsolete equipment. That
applies to human beings, to taking skills that have become obsolete
ana retraining for new skills in demand. So a lot of what you
people, I am afraid, call unemployment and unused capacity is part
of a natural process of dealing with obsolescence.
Mr. P e c h m a n . I must confess I have heard you say this a number
of times, Mr. Curtis, and I would like to understand your position.
Particularly the position that everything is going along all right.
Representative C u r t i s . I did not sa y that. Because I am critical.
I f I had time, and I do not here, but I will come around in the second
round, to point out where I am critical.
Incidentally, we all agree on one thing, the need for tax reform,
and the fact that our budgetary process and fiscal policy is interfering
with this natural, I say, process. You all for other reasons advocate
the same approach. No. I am not satisfied with our economy. I
never am. I do feel it is a basically sound situation and what we
have got to do, in my judgment, is understand it a little better.
Mr. P e c h m a n . There is no question about that. The problem, it
seems to me, is that in recent years we have not utilized the tremendous
resources or this country to the fullest advantage. For the last 5
E
228
POLICIES FOR FULL EMPLOYMENT
years our rate of growth has been falling farther and farther behind
the rate of growth in other industrialized economies. We are now
taking a back seat to some of the smaller and less advanced countries.
I f this continues over a period of years, I do not think we will be
able to survive the competition that we will be subjected to.
Representative C u r t i s . Your statement in my judgment begs the
question that is at issue. You are measuring growth in terms of gross
national product which I have tried to point out is not an accurate
measure of growth. You have to dig into the component parts, such
as innovation and new goods and services to test whether there is
real growth. As I have tried to point out, the shift we have seen in
our economy from the manufacturing sector to distribution and serv
ices, the amount of increased leisure time, the percentage of time
spent by an individual human being in education; those are measures
of real growth, not gross national product, which is simply a measure
of economic activity in a given year.
Mr. P e c h m a n . D o any of the measures that you suggest indicate
that we are doing better now than we did in 1960 ?
Representative C u r t i s . Certainly so.
Mr. P e c h m a n . Would you suggest some?
Representative C u r t i s . Yes, one is measurement of school con
struction. Incidentally, one of the most glaring inadequacies of this
administration is the fact that the school bonds in 1961—new school
bonds voted—went down from $2.2 billion to less than $1 billion.
It went down to $850 million. But take the cycle from 1950 to the pres
ent, President Kennedy said we had to double the amount we are
spending on education m the next 10 years. My comment was, “Why
slow down?” It has been more than two and a half times from 1950
to 1960. That is what I regard as significant growth.
Mr. P e c h m a n . I a g r e e w e n e e d m o r e sc h o o ls .
Representative C u r t i s . I am talking o f a sample o f measurement.
Mr. P e c h m a n . We could afford to build more schools if we had
higher GNP, the measure you do not like.
Representative C u r t i s . I disagree with you. We are building them
and the local districts are doing this because one of the essential sound
things in our economy has been the real estate tax, the property tax.
Mr. P e c h m a n . Every time they build a school it goes into the GNP.
Representative C u r t i s . My time is up.
Chairman P a t m a n . Y o u mentioned the bonds not being offered for
sale for school purposes. Do you not think that the people concerned
have refused to vote them because the interest rates were too high ?
Representative C u r t i s . No, as a matter of fact, let us get our indi
cators here and let us know what we are talking about. These are
the Health, Education, and Welfare indicators of July 1962. The
charts here are very interesting, and I think need to be followed. The
first chart on page 25 is public educational construction, bond elections,
bond sales and contract awards, and shows first bonds voted upon in
public school election bonds, and then the number passed.
Chairman P a t m a n . What percent?
Representative C u r t i s . The percent passed ranges, beginning in
1957,74 percent, 78 in 1958, 62 in 1959, 83 percent m 1960, and then
dropped to 69 in 1961, and it is ranging around there. But here is
the point. The amounts of bond issues voted start out 1.3 billion, go
up to 2.2 in 1960, and then drop down to 851 in 1961.
POLICIES FOR FULL EMPLOYMENT
229
Chairman P a tm a n . I urge you to look that over more carefully and
evaluate it more carefully with this in view: that the people turned
down these bond issues because the interest rates were too high. More
of the local people pay taxes on what they owe than what they own
because of the ad valorem system. They are very careful about levy
ing these extra costs on themselves.
Representative C u r tis . I might say to the gentleman that an exami
nation reveals that is not so. I think I can tell you why this drop.
It is because they are waiting for a Federal program.
Chairman P a t ji a n . What year was that? That was during the
preceding administration.
Representative C u r t is . 1961. The other figure on this thing, i f we
go on to the next page, you get your public education construction,
interest, cost of bonds, and educational construction put in place.
Chairman P a tm a n . Senator Douglas, we are intruding on your
time.
Senator D o u g la s . Not at all. We have the interest rate on long
term bonds, Federals; the movement of the State and municipals is
very similar; in 195*3 the rate was around 2!/2 percent, and it has been
rising to 4 percent more or less as of the present time, or a relative
increase of 60 percent during this period. Dr. McCracken, in your
statement you state that the reserve position of the banks has been
easing. You mention this as an indication that monetary policy has
not impeded economic expansion. I wonder what evidence you have
for the statement that the reserve position of the banks has t>een easy.
M r. M c C r a c k e n . I would make two or three points here. First of
all, there is the simple fact that the net free reserve position has
continued at a very substantial level. Even with recent changes free
reserves are still in excess of $300 million.
Senator D o u g la s . May I stop you right there. Dr. William Moor
of the committee staff has charted the free reserves for a number of
years. The chart shows, in brief, that in 1961 the average free re
serves for the year were above $500 million; probably a closer figure
for the year as a whole would be $550 million. The average free re
serves for the year thus far have been around $375 million.
Mr. M c C r a c k e n . That is right.
Senator D o u g la s . Or a decrease of some $150-$175 million. A fur
ther analysis indicates that almost the entire amount of these free re
serves is in the country banks where only a small proportion of the
demand for lending actually takes place. For instance, in the figures
for the end of June, the free reserves in the country banks amounted
to $371 million. In the Reserve city banks, there was a minus $5 mil
lion. In Chicago, a reserve of minus $3 million. In New York, a
minus $12 million. The actual “ free reserves” were thus entirely in the
country banks, where, as I have said, a very small fraction of the total
loans originate.
We should also remember that a few years ago we made vault cash
a part of the reserves. You have to have cash for cashing checks and
so forth and so on. So it would seem to me that in practice free re
serves are virtually nonexistent. It puzzles me, therefore, when I read
these statements—and yours is not tne only one—that the reserve posi
tion of the banks has been easy because free reserves are plentiful,
when they have declined absolutely and as a matter of fact are con-
230
POLICIES FOR FULL EMPLOYMENT
centrated almost exclusively in the country banks and consist almost
exclusively of vault cash.
Mr. M c C r a c k e n . Nonetheless, the evidence supports the conclu
sion which I stated in my testimony.
Senator D o u g l a s . Are my figures erroneous ?
Mr. M c C r a c k e n . This is what I want to comment on. In the first
place excess reserves historically tend to be concentrated in the country
banks. This is not new. Larger banks keep even temporarily sur
plus funds quite fully employed in such things as bills or the sale of
Federal funds.
In the second place, while the net free reserve figure, like any other
simple figure, is subject to limitations, it is a useful quick way of
getting some indication or some impression of the pressure on the
banking system. It indicates at present a condition of relative ease,
an impression confirmed by collateral evidence. I happen to be a
director of a bank and spend some time in banking circles. There is a
vast amount of difference in the sentiment of the bankers so far as their
lending policies are concerned, or particularly so far as their interest
in building up their loans, relative to that in 1957 or 1959. There is
not the loaned up sentiment that there was in those years. Moreover,
there has been an 8% percent increase in bank credit during the past
year. That is double the normal needed gain to support vigorous
economic growth. So, as I look at the evidence, I do not see it support
ing the position that the major problem that we face at the present
time is in the area of monetary policy.
Senator D o u g l a s . I wish you would take another look at these
figures, because it may indicate that free reserves are virtually non
existent. The second question I want to ask perhaps applies to all
three of you, although I came in late and did not hear Dr. Eckstein’s
statement. Dr. McCracken and Mr. Pechman seem to believe that the
balance-of-payments problem requires relatively high interest rates.
Yesterday, we brought forward facts indicating that so far as the
short-time rate is concerned that the American rate is above the Swiss
rate, which is only 2 percent. It is above the French rate which is
about 2% percent. It is above the Dutch rate, which is just about
2 percent. It is below the French, British, and Canadian rates.
But, if you take the arbitrage costs into account, it is approximately
equal to the French rate, and the British rate, and I think there are
charts here to demonstrate that. It is below the Canadian rate, but
I can hardly believe that people would transfer American dollars to
Canada in view of the shaky situation in Canada which has caused
them to devalue their dollar.
^Now, then, just what is it that you are afraid of as far as the situa
tion is concerned? Is it the fact that our balance of payments is
against us ? Is that the point ?
Mr. P echm an . I would be concerned about substantially lowering
the interest rate, particularly the short-term interest rate.
Senator D ouglas. H ow about the long-term rate ?
Mr. P echm an . I would like to keep the long-term rate at the pres
ent level, or even lower it a bit. The short-term rate controls short
term capital flows, which are particularly sensitive to interest rates.
I think we have to keep short-term rates at a higher level than we
kept them during the early postwar period.
POLICIES FOR FULL EMPLOYMENT
231
Senator Douglas. Is there a drain from Switzerland ?
Mr. P echman . No, but I am afraid that, if we pushed the rates
substantially lower than they are today, it might stimulate a large
flow of liquid funds abroad.
Senator D ouglas. Don’t we have a real margin of safety on this and
need we be concerned with speculative outflows of gold in search of
higher interest rates abroad ? That is what I am trying to say. What
are you afraid of: that the balance of payments is against us and
Europe may not be content with leaving their balance on deposit in
dollars?
Mr. Pechm an . Both factors are involved. I do not want you to
misunderstand me, Senator. I do not want a higher level of interest
rates.
Senator D ouglas. I understand. But you do not want a lower rate.
Mr. P echm an . That is right. In other words, I am saying that
we have done fairly well in monetary policy up until recently. I am
a little concerned about the noises oeing made on monetary policy,
though I cannot say that the action has been as bad as the noises. I f
these noises are followed up by action, I would be terribly concerned,
as you would.
Senator D ouglas. Here is the point. Recently the Federal Reserve
sold Government securities and depressed the price and consequently
raised the yields. The result has been a rise in the short-term rates and
a lesser rise, but some rise, in long-term rates.
On the question of the unfavorable balance of payments, must we
accept eternally those inadvisable items which turn a favorable balance
of trade into an unfavorable balance of payments, which turn $3
billion surplus in commodities to a 1% to 3 or 4 billion unfavorable
balance because of the so-called inadvisable items. Are we committed
indefinitely to continue maintaining military divisions in Europe?
Are we committed indefinitely to the attendant costs of expenditures
of dependents? Are we committed indefinitely to the existing level
of foreign aid if the other countries do not contribute? Are we com
mitted indefinitely to the present flow of capital abroad when virtually
every other country imposes some controls upon the export of capital.
I mention all these things. Can we take the existing unfavorable
balance as something we cannot do anything about?
Mr. P echman . I agree with the implications of what you said. A
great many of these things have already been done and a lot more
perhaps should be done. Certainly we should not have a domestic
policy that would prevent us from getting back to high employment
merely because of the balance of payments. I think that is the
important lesson of your remarks.
Senator Douglas. That is the point I was making. M y time is up,
but if any of you wish, you may volunteer a reply.
Mr. M cC racken. May I make just one comment, Senator Douglas.
The point of that part of my testimony where I commented on the
balance of payments problem was simply this. We hear a great deal
of discussion that the nature of our rather precarious balance of pay
ments problem makes it impossible for us to consider expansionist
fiscal policy action. Precisely the point that I was trying to develop
here was that if we manage an expansionist economic policy correctly,
there is reason to think that this kind of action at least would be
232
POLICIES FOR FULL EMPLOYMENT
neutral in its effect, and I think personally there is at least an even
chance that it might improve our balance of payments.
Senator Douglas. Y ou say “ correctly,” what do you mean?
Mr. McCracken. If the expansion of business activity that we got
sets off a very substantial rise in the price level, or if we gave the
economy a surfeit of liquidity, then this would probably work out to
have adverse effects. But in the technical sense, the adverse effect on
our balance of payments of a higher level of business activity because
of the higher imports, would, I suspect, be largely offset by favorable
effects on the large capital outflow—and ultimately even a strengthen
ing of U.S. exports.
Senator D o u g l a s . I was not speaking of commodities.
M r . M c C r a c k e n . I u n d e r sta n d .
Senator D o u g l a s . I was speaking of the military and dependents’
expenditures, foreign aid, capital investment abroad.
Mr. M c C r a c k e n . All of that would help. Some reduction in these
is an essential part of the solution.
Chairman P a t m a n . Senator Javits?
Senator J a v i t s . Gentlemen, I notice an interesting consensus among
all three with respect to a tax cut which is very interesting in view of
the fact that the press and public and Mr. Heller all assume the mat
ter is decided and that there will be none. Therefore, I notice, also,
an interesting consensus among you—certainly two of you explicitly,
and perhaps I missed it in the third, suggest that we give the Presi
dent the authority to make a tax cut. Suppose I should tell you, just
for the sake of this argument, that is equally impossible. Just as the
President can decide that he would not ask the Congress for a tax cut,
the Congress can decide that it would not give him authority to make
one. I have little doubt, and I state this unilaterally, that is just as
sure by now as the fact that he is not going to ask for one.
Representative C u r t i s . Surely.
Senator J a v i t s . I think the Congressman is right. Where does
that leave us in view of the fact that your recommendations, Dr. Pech
man, are directed essentially toward governmental action ? I notice at
pages 7 and 8 where you say that what we should do, if we cannot get
a tax cut, is to give the President authority. I tell you unilat
erally, and I think it is sound, that is just as unlikely and impossible
as the other.
Then really you boil down to recommendations to extend unemploy
ment compensation benefits, and to deal with the capital improvements
program already passed by the Senate. I do not think you put that
very high on your list, or that the administration submit a new
budget. Again it is not too decisive a form of action. So really we
get down to extending unemployment compensation benefits for a
year. I could not agree with you more. I thoroughly agree with you.
Now I would like to ask you all this question: Are there not many
other things which could be very helpful—assuming now that not
withstanding your view and mine, as you know widely advertised,
that there should be a tax cut, that it should be now and it can be now
and it makes a lot of sense, and the fact that we are not going to give
the President this authority, which I asked you to postdate, and the
fact that perhaps we would not even do this unemployment thing
much as I agree with you. Are there any things which the Presi
£OLiCtt:S Foft FULL EMPLOYMENT
^33
dent could do other than that which would help our situation, not
necessarily only in the governmental line ? For example, do you think
that some effort should be made to deal with the business problems
in making the transition to automation and in financing that transi
tion—something which the President might very well generate through
his Labor-Management Advisory Committee? Do you think that
some action on the part of the Congress concerning the rash of big
strikes that seem to be imminent on the railroads, to deal more effec
tively than we do under the Taft-Hartley law, with the problem of
national interest strikes might be something to which we ought to
direct our attention? Do you think that some declaration by the
Department of Justice as to its policy in respect of the antitrust laws
might be an important factor?
Somebody here suggested that the President ought to make a deci
sive statement of the view of the country on business profits, and their
desirability and importance. In short, do you have any suggestions
which go to the only clue to this proposition I find in your statements,
that of Professor McCracken’s paper which at page 5 says that busi
nessmen were alarmed by the inferences they drew from the adminis
tration’s handling of the steel price dispute? Then he says on page 6,
consumer attitudes have never regained the levels of buoyancy they
reached in 1955, and there has been some deterioration since events
of April and May, which I would imagine refers to the same events.
What do you say about that, gentlemen ?
My time is up and I have asked you a long question, because I am a
lawyer.
Mr. E c k s t e i n . I think this country has many problems and accom
plishments and there are lots of things the Government might do and
lots of things the Government might stop doing. One thing the Gov
ernment might well do is to create a more certain business environ
ment with regard to areas of regulation, antitrust and so on. Even
if policy is tough, business is better off knowing it is going to be tough
than not knowing at all and having to deal with a rather erratic kind
of situation. Other than that, I do not think a little bit of action on
these longrun structural problems, such as depressed areas and auto
mation, is any kind of a substitute for the kind of massive fiscal action
which is called for. I wil even go so far as to say that in some way
it distracts us from the main problem.
These structural programs, which I agree are very much needed
to ease the introduction of technological progress into the economy,
will be much more successful if the overall situation is healthier.
Senator J a v i t s . Thank y o u very much.
Mr. M c C r a c k e n . May I make one comment ?
Senator J a v i t s . I would like to have you all comment, i f you would.
Mr. M c C r a c k e n . I do not think any reasonable estimate of the
magnitude of the economic effect of action in these other areas would
be equal to the kind of stimulus we could get from tax reform and
reduction. Now, if these are ruled out, however, then the question be
comes: Do we just sit on our hands, or are there other things to do?
There is no question in my mind but that something constructive could
be done along the lines you have indicated in your question. It would
be very helpful to try. It certainly would not hurt to try.
Senator J avtts. Thank you.
*234
fcOLtClE'S FOB TOiJh BMPLOfMBNT
Mr. P e c h m a n . I agree that the longrun problems that you sug*
gested ought to be tackled and it would be helpful from the standpoint
of business and consumer confidence to know that they are being
thought about constructively. But I also think that the point made
by Professors Eckstein and McCracken is quite right. I know of noth
ing that would equal the potency of a very substantial tax cut. But I
have worried about your question and that is why I have a program
at the end of my paper.
_
Since you foreclose the possibility of Congress giving even tem
porary authority to the President to cut tax rates, I am pure that
when you have your hearings next February on the Economic Report
you will find that unemployment is no lower than it is today. It may
even be higher. And you will be lamenting the fact that we wasted
another 6 months, and that the rate of growth of the economy will have
been further reduced; in other words that we will still be where we
were 2 or 4 years ago. I think the quicker we start solving these longrun problems, the better.
Senator Javitz. Gentlemen, you have given me encouragement and
fortitude to continue my campaign for an incentive tax cut. Thank
you.
Chairman Patman. Mr. Reuss ?
Representative Reuss. A question first of my colleague, Mr. Curtis.
D id I hear you right— you attribute the fact that a smaller total
of local school bond issues was voted in 1961 than in the period, 195860, to President Kennedy’s advocacy of Federal aid for education)
Representative Curtis. It was the unsettled condition, yes. The
school districts thought they might get it free or get it from the Fed
eral Government.
Representative Reuss. Then I did hear you right.
Representative Curtis. That is correct.
Representative Reuss. How do you account for the fact that school
districts voted larger amounts for local school bonds m the period
1958-60, when President Eisenhower was advocating aid for school
construction? W as that because they did not believe him?
Representative Cubtib. I guess so.
Representative Reuss. A question for the panel-----Representative C u k t is . I f the gentleman would yield. You made a
wisecrack.
Representative Reuss. How long do you want me to yield!
Representative Cuktis. Just to comment. I would say it could be
that. I do not know. It certainly deserves explanation or contem
plation. I merely suggested that this could be the reason. I think
it probably is.
Representative R euss. A question for the panel: Leaving aside,
for the moment, the politics of tax cuts, monetary policy, and other
methods for dealing with our economic lag, what is the difference in
economic effect of a tax cut of, say, $6 billion and increased Federal
expenditure of $6 billion ? The increases in Federal spending in my
example would be for schools, hospitals, urban rapid transit, urban
redevelopment, antipollution work, and other necessary public works.
Is there, in your opinion, anything different economically between one
method and tile other? They would both increase the deficit by $6
billion in the period immediately ahead. Would one method give
more impetus to the economy than the other ?
POLICIES FOR FULL EMPLOYMENT
235
Let us also leave to one side, the point that the construction work re
quired by a public works program takes a bit longer to translate into
actual expenditure.
Would you each give me your opinion?
M r . M c C r a c k e n . Certainly I would not take any Procrustean view
with regard to Federal expenditures or taxes that one is all evil and
one is all virtue. It would seem to me that on the “first round” the
rise, in Federal expenditures might very well have a slightly more
expansive immediate effect than a decline in taxes. With a tax re
duction some part of the resulting increase in income would presum
ably be saved On the other hand it is not easy to effect an imme
diate, large upward displacement in the trend of Federal spending.
Representative R e u s s . I assume you are comparing the average
saving by consumers of 7 to 8 percent of their disposable income with
the fact that a million dollars spent in building a school is by defini
tion spent.
M r . M c C r a c k e n . I n th e first r o u n d , y es. O n th e o th e r h a n d at
th is sta g e o f th e g a m e th e e v id e n ce is q u ite c le a r , t o m e, th a t th e tim e
h a s c o m e w h en w e d o n eed som e a c tio n on th e ta x s id e in o r d e r t o sta rt
m o v in g t o w a r d a le v e l a n d stru c tu re o f ta x e s th a t w o u ld be s o m e
w h a t less o f a d r a g o n e c o n o m ic e x p a n s io n a n d g r o w t h se c u la r ly , q u ite
a p a r t fr o m th e v e r y im m e d ia te p e r io d .
Mr. E c k s t e i n . Congressman, the total Federal purchases of goods
and services outside of defense in 1960 were $8.6 billion. Of that, a
verv substantial fraction is agriculture. The rest was defense.
Representative C u r t i s . Federal?
Mr. E c k s t e i n . Federal goods and services. Only $8.6 is nonmilitary. And that includes space. To effect a substantial increase in
that would be very difficult. The Federal Government simply does
not buy that many civilian goods and services to make it an instrument
of the same magnitude as a tax change.
Representative R e u s s . I suggested some areas of public expendi
ture where the needs today are very great. However, I am putting
to one side the question of whether increased expenditures are po
litically feasible, socially just, or economically desirable in terms of
resource allocation. What I want to know is, would you get the same
economic impetus by spending $6 billion more as you would by taxing
$6 billion less?
Mr. P e c h m a n . I want to agree with the point you a re making.
The ratio of taxes to expenditures that is too nigh. You can reduce
this ratio either by reducing taxes or increasing expenditures. I f w e
got businessmen and consumers to spend as much as is necessary to get
us to high employment, today’s tax structure would not greatly im
pede the rate of growth.
I think there are things that can be done to improve our rate of
growth, but the rate of growth that we can achieve at high employ
ment is awfully tough to budge. We would have to make many
changes to increase the growth rate. One of them would be to re
form the tax structure to the extent that it impedes incentives.
Representative R e u s s . Then, what you three gentlemen contend is
not that we need a tax cut as such but that we need a budget Imbalance
at the present time for various reasons. In economic terms, am I not
right that it is not the level o f taxes alone, but the level o f taxes in
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POLICIES FOR FULL EMPLOYMENT
relationship to Federal spending which chokes off the economy before
full employment is reached? If the budget tends to balance before
full employment is reached, the ailment could be cured by either of
two methods.
Dr. McCracken says, “ Cut taxes.” Galbraith might say that public
expenditures should be increased.
Mr. P e ch m a n . I agree.
Representative R eu ss. I have used your names rather freely. I
hope I have not misinterpreted your positions.
M r. M c C r a c k e n . N o. Clearly the two sides of the budget must
be taken into account. I would agree with this. A tax cut would
temporarily mean an enlarged deficit. If, however, tax reforms will
really strengthen the economy (as I think they can) we can be ahead
of the game in the long run on renewals of the deficit.
Representative R eu ss. There has been much talk recently about a
tax cut as though it were the only way out. Actually, budgetary
balance seems to me to be the real problem. I am not suggesting what
fiscal policy mix we should have, except to say that the best mix is
one which combines relatively easy money and low interest rates,
a tax cut and spending for the Nation's needs. An aggressive trade
policy would also help.
Representative R eu ss. Dr. Eckstein, in your statement on page 8,
you refer to the argument which says,
Why cut taxes now, since this will cause interest rates to rise and to cancel
the benefit of the tax cut? The growth rate will not increase, but we will have
a larger deficit.
Your reply is that, although the monetary authorities actually shrank
the money supply and increased interest rates in the 1958-59 re
cession, they will now allow the money supply to increase at some
modest rate. Why do you think this will be the case, particularly in
view of Mr. Martin’s recent testimony that he would not permit any
of the deficit resulting from a tax increase to be financed by the
banks.
Mr. E c k s t e in . It would certainly be far beyond my capabilities to
analyze why our central bank does what it does when it does. How
ever, what I am really trying to say is this: The tightness of money
and the level of interest rates in 1968 will be largely determined by
the policy choices made by the Federal Reserve and the Treasury. I
do not know whether they will do the right thing or the wrong thing,
but the extra few billion of deficit which will have to be financed, I
doubt will be the decisive considerations. It would obviously raise in
terest rates somewhat. But I do not believe that additional financing
alone would reverse the basic tone of the capital markets.
Could I also take another moment while I have the floor? When
I read my statement I also made a quick comment on the possibility
of lowering withholding schedules effective January 1. I stand cor
rected on that. It would take congressional action to lower the with
holding rates.
. Representative R e u ss. I am glad you made that point because I
was about to ask you. More administrative flexibility in the with
holding provision might be desirable, but it does not now exist.
Senator P r o x m ir e . I would like to ask Mr. Eckstein, Senator Javits
indicated there is not much prospect of a tax cut. Yet Senator Javits
POLICIES FOR FULL EMPLOYMENT
237
advocated a tax cut the other day which he said would be a $7 billion
tax cut. He included in that the $1y2 billion reduction in tax burden
the administration has already achieved because of the adjustment of
the depreciation. Now, as he pointed out, it appears that the Finance
Committee with that monster they are about to report out, is going to
further reduce taxes, and as far as the investment credit would seem to
provide an additional $1 billion tax cut.
FOR BUSINESS SPECIFICALLY IN CASH FLOW
So is it not true that during this year of 1962 if Congress takes no
further action, there is likely to be, in effect, a tax cut for business of
about $2V£ billion ?
Mr. E c k s t e i n . That is correct.
Senator Proxmire. Since you advocated a $6 billion tax cut, this
is 40 percent of the way.
Mr. E c k s t e i n . N o / Our analyses took those for granted.
Senator P r o x m i r e . Y o u are really advocating $81/£ billion tax cut
if we want to include everything ?
Mr. E c k s t e i n . I f you want to include all the previous relief, yes.
The Treasury is supposed to get a little bit of the investment credit
back in revenues from loophole closing. They are not to get all of it.
Senator P r o x m ir e . Very little the first year— A net c u t of a
billion dollars in taxes.
„^ >
Mr. P e c h m a n . May I just interpose that I am distressed to see so
much pessimism about some of the things that were not included in
the Finance Committee bill. I should hope for example that an effort
would be made to restore withholding on the floor.
Senator P r o x m ir e . It w ill be made but it does not have much
chance.
Mr. E c k s t e i n . To answer your question more to the point, the addi1ional savings that will be made available by these measures will cer
tainly have to be considered in making up the next tax package. It
is a fact that the cash flow of corporations will have been augmented
by between $2y2 and $4 billion. I do not think anybody knows where
in that range. And for any tax bill in the future, it would not make
any sense to keep pouring more and more money into that area alone.
Senator P r o x m ir e . That is right. From what you say I take it.
this is one area where we are probably less in need of a tax cut.
This relates to a vote that we may be about to take on the floor of the
Senate in the next few weeks, whether or not we should have an invest
ment credit. I am inclined to feel that the cash flow increased before
the improvement in the depreciation policy of the administration.
Now the cash flow is going to be abundant, and perhaps superabundant.
There is an additional loophole in this investment credit to permit
for the first time a depreciation exceeding a hundred percent which
would seem to have some equity disadvantage. I am wondering
whether in your judgment, Dr. Eckstein, if this is a sensible proposal
now under tne present circumstances.
Mr. Eckstein. I am still an optimist that even if not now within
the reasonable future we will get the short-run problem straightened
out. Maybe that is foolish, but I believe we can, and there is a reason
able prospect we will. I f you really look at it as a long-term question,
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POLICIES FOR FULL
em ploym ent
I do believe that we have something to learn from the experience of
Western Europe and Japan, and that tax devices will raise the total
rate of investment.
Senator P r o x m ir e . Yes; but is this the right kind of tax device ? In
the first place, business has not indicated any enthusiasm. McGrawHill said this will have the result of increasing investment by $300
million although the Federal Government will lose a billion dollars.
A survey by the Wall Street Journal, with 68 big firms queried, only 1
said they would change their investment policy. It is a nice windfall,
but one they do not expect to influence policy and do not want it.
Mr. E c k s t e i n . This will not be very effective as long as the aggre
gate rate of activity does not lead to anything like optimal utilization
of capacity. I would not attach too much significance to the im
mediate answers of businessmen. I think most of them did not under
stand what the credit was about. I have explained it to a few small
businessmen and in some cases they very clearly told me, that it cer
tainly would help them quite a bit.
Senator P r o x m ir e . Tnese were the biggest firms in the country and
people who had very distinct ability, ana understanding in this area.
They have sufficient specialists so they should be competent on some
thing of this kind. Let me ask Dr. McCracken, you assumed the
same thing Dr. Heller did yesterday: That the supply of money should
include time deposits. We did not have a chance to pursue it on this,
but I want to take the few minutes I have left to pursue it with you.
Dr. Heller seemed to ignore his own indicators which show on page
26, money supply, total, and under total it does not include time de
posits. It does include currency and demand deposits which have been
the traditional definition of money supply. Then it shows related
deposits or time deposits separately. On this basis, and I think you
can make a good argument that time deposits are not money, it is clear
that money supply nas been dropping very rapidly in relationship to
the gross national product, whereas in 1953, it was 35 percent; 1958,
31 percent; a year ago, 27 percent; now it is down to 26 percent. This
does seem to represent a real squeeze which is being directly reflected
in rising interest rates, as Senator Douglas demonstrated so well, and
by the drop in free reserves.
Mr. McCracken. I would define the money supply differently from
the Federal Reserve or the concept as included in the Economic In
dicators. There is no one definition which is uniquely and clearly and
unambiguously vastly superior to another. The assets that people
hold are really a continuum, ranging all the way from currency, the
most liquid asset, to demand deposits and time deposits and for cor
poration short-term securities, which serve for them a function vir
tually the same as cash. One important function of money is to serve
as a reserve of purchasing power for unforeseen contingencies. Cer
tainly time deposits serve this function well, and practically are im
mediately convertible into demand deposits. In any event one can say
this. In the last year total bank credit has increased over 8 percent,
half of which has occurred since the turn of the year. Perhaps that is
a better measure ofthe monetary influence on economic activity. As a
matter of fact, in my opening statement I used the figures on bank
credit, rather than the money supply, because it was not until after my
POLICIES FOR FULL EMPLOYMENT
239
prepared statement had been mimeographed that I got the July
Feaeral Bulletin with the new seasonally adjusted data*
Senator P ro x m ire . T o follow up on this, would you not all agree
that if the Federal Eeserve Board and the Treasuiy continued to fol
low a tight money policy, if they continue to push up interest rates,
if they continue to shrink reserves, and the Chairman of the Federal
Reserve has indicated he might very likely adopt such a policy, and
action on the part of the Treasury has indicated they are moving in
the same kind of direction, then we are going to need a bigger tax
cut to get the same stimulation in the economy ? Furthermore would
you agree that it is conceivable that if we have a relatively modest and
small tax cut with a substantial increase in interest rates, that the
economy might not move at all. It might stand still or even retro
gress.
Mr. Pechman. I would agree that, to the extent interest rates are
raised, a larger tax cut would be necessary. However, I would hope
that, if we had a substantial tax cut, it would not be accompanied by
higher interest rates.
I certainly do not think that we ought to permit long-term interest
rates to rise and to reduce investment at the same time that we are
trying to promote investment. That would be ill-advised policy under
present circumstances.
Senator Proxmire. I would like to ask Drs. Eckstein and McCracken
one more question:
In reply to what Mr. Reuss said about cutting taxes and increasing
expenditures, you indicated that the expenditure side of the budget,
Dr. Eckstein, was pretty difficult to expand. In Dr. McCracken’s
presentation ne said on page 14, this proposal for a tax cut would be,
in short, a step toward fiscal conservation. In the long run it would
make for a less rapid increase in expenditures and more spacing
on the tax side for further needed reforms. I know that Dr. Eck
stein said that a reduction in tax rates will force the Government to
scrutinize expenditures more closely in the coming budget.
I believe m economy in Government. I wish I could subscribe to
your view that taxcutting will lead to expenditure reduction. But I
feel when economists are talking about deficits and asserting that we
need bigger deficits, this destroys the discipline Government has. You
can make a strong argument if you accept your basic assumptions
for almost unlimited spending. Services are needed and wanted.
There is a lot of pressure for them. What is a poor Senator or Con
gressman going to do when he gets that kind of pressure and when
the economists say it will be greater for economy if you cut taxes
and increase spending? It is wonderful for the politician if he ac
cepts that viewpoint. When you do that you get in the position where
you could have a very bad misallocation of resources, and where you
have no real discipline to exercise prudence in Govemnment spending.
This directly contradicts what both of you gentlemen said in your
statement. t)oes not this concern you at aD ?
Mr. Eckstein. I think you would agree with us, would you not,
sir, that in general a t cut would lead to less spending than no tax cut.
Senator Froxmike. In old days, yes. But now when a tax cut is
justified not because spending has^ teen reduced or spending can be
reduced, but although spending is increasing and has been increasing,
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POLICIES FOB FULL EMPLOYMENT
the argument is made we need a deficit to move employment up. I
say under these circumstances the tax cut will not restrain expenditures.
Mr. Eckstein. Historically, in recent years has it not been like
this? The Budget Bureau and the President have been very tough
when there was no recession. When there was a recession the lid was
off, so to speak, and new programs began. Everybody got a little bit
more money in all fields.
Senator P r o x m ir e . N o w there is no recession and believe me nobody
is very tough and Congress is spending money with record rapidity.
Mr. E c k s t e in . There are a lot of structural issues both in taxation
and expenditures. Obviously, there are some tax cuts that would be
worse than some expenditure increases and vice versa. A lot of peo
ple, including, I think, the three up here this morning presently favor
a tax cut, because they really feel it is impossible to prepare a high
quality expenditure program of the requisite magnitude within the
time schedule in which events are occurring.
Mr. M c C r a c k e n . The importance of maintaining the concept of
fiscal discipline, to which you have alluded, seems to me to be exceed
ingly important. While clearly the advocacy of a tax cut is suggesting
a program that would make the deficit larger, I prefer to put this in
terms of getting toward the kind of tax structure which would seem
to me to be more consistent with increasing the vitality of the econ
omy.
Now, how does one reconcile these two? I would reconcile them
on a basis that has received substantial attention recently. The im
portant thing is always to compare the relationship between our ex
penditures and the volume of taxes which the present tax structure
would produce at reasonably full employment. I would be very
reluctant, under any circumstances short of a real emergency, to sug
gest a tax cut which would leave the tax structure not comfortably
covering expenditures at full employment. If this is our approach
to the budget problem we do not surrender concern about fiscal dis
cipline. So our tax action should leave us with a tax structure that
will always comfortably cover expenditures, assuming that we have
reasonably full employment of our productive resources.
Senator P r o x m ir e . My time is up, but I would like to say that is
an awfully theoretical goal as compared to balancing the budget,
which is precise and with all its weaknesses you can still arrive at
some arithmetic precision. To talk about a full employment balance—
you can argue on vague generalities a long time.
Mr. M c C r a c k e n . There is no question about this. I suppose to
some extent the function of a professor is to be theoretical and ex
plore things that may not have immediate applicability. But it does
seem to me that there is validity to this way of looking at the budget
problem, and I suspect that we snail hear more about it.
Mr. P e c h m a n . I just want to agree with what Professors Eckstein
and McCracken said, although I did not make this point explicitly in
my statement. In reply to your question, I believe that expenditures
would be lower if we had a tax system that next year produced $90
billion rather than $95 or $98 billion. In other words, I do think that
the prospective level of the tax receipts exercises a restraint on spend
ing. The existence of a large deficit, which is your alternative hy
pothesis may relax restraints.
POLICIES FOB FULL EMPLOYMENT
241
As a mat ter of fact people do not understand that a deficit indicates
one of two things: either the economy is not operating up to full
capacity or expenditures are wasteful and too high. We have had
deficits during the past 5 years because we have not reached full
employment.
Representative Curtis. I want to get into another question, but
first I want to lead into this. The tiling I have not understood and
I have asked all the witnesses before the Ways and Means Committee,
and this committee, is this: How does this theory of a tax cut in a
period of a deficit already relate to the economic problems it creates
in the debt*management area ?
As a member of the Ways and Means Committee I have always
had to be concerned about how we market our bonds. I f you take $5
billion, let us say, and give it or transfer it from the governmental
sector to the private sector in the nature of a tax cut ana then market
$5 billion of bonds in the private sector, why do people suppose that
stimulates the economy ? Maybe there are some reasons. Occasionally
I have gotten answers to the effect that the transfers involve different
people. I say let us go into that. But we have not had very much
discussion on that subject.
Dr. Heller yesterday had only one little paragraph on the problems
of debt management in his prepared statement—simply to say they
are great and very difficult, and we have to be very careful about
wheflier we market the bonds to the consumer or whether we use the
Federal Reserve System. I said if you are going to use the Federal
Reserve System and simply create more money, in effect you are not
talking so much of the tax cut effect as you are talking about the fact
that inflationary forces of this nature would stimulate the economy.
Would any of you care to comment on that ?
Mr. E c k s t e in . It is certainly an extremely difficult question on
which economists have pondered and reach no definitive conclusions.
There are some things you can say. First, if economic activity ex
pands as a result of the tax cut, some normal increase in the money
supply should go along with it.
Representative C u r t is . Let me stop you there, i f I may, Doctor.
You say, “ If it does.” To me that begs the question. What we are
talking about—does it ? Will it ?
Mr. E ckstein . Let us take that question first. I take that for
granted. Would that tax cut be spent ? That is the first question.
Representative C u r t is . That is correct, but nothing should be taken
for granted.
Mr. Eckstein. The evidence on that, and there is some disagree
ment among the experts, I would say it would be fair to summarize
it this way. As far as consumers are concerned you would find—and
there is an immense amount of statistical work done—people would
say somewhere between 60 and 80 cents of every dollar would be spent
within a year.
Representative Curits. We have never done this. This has always
been theory, as I understand. There is no place we can look where
we have cut taxes for the purpose of this kind of economic stimulation.
I am just taking your aggregate. You take $5 billion here in tax cuts
and then youtake it backin bonds. Dealing in aggregates I do not see
what you have done, unless there is something about the mix in here.
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POLICIES FOR FULL EMPLOYMENT
Suppose you sold it in E-bonds. The purchasers then are the con
sumers. Then they would not have $5 billion to spend. You have
taken it right back from them. Suppose some goes to investors, as
some would, then they do not have tnat to invest. The Government
has taken it.
Mr. E c k s t e in . Sticking to the tax side, a tax cut on business, !
think most people who have tried to make studies of it tend to say in
the long run the larger part of additional cash flow would be spent.
Then you get to the other side of the question—to what extent is
spending reduced by the bond financing ? Mortgage money and other
long-run money is presently not terribly scarce. It is not rationed
even though interest rates have moved up. It seems to me that it is
up to policy whether long-term investible funds other than internally
generated funds are going to be made very scarce or not. That is a
question of Federal Reserve policy.
So we have that side of the com under somebody’s control to some
extent also. Of course, the Federal Reserve could run a policy which
is so tough that they could completely undo the effect of the tax cut.
Representative C u r t is . Particularly with the balance-of-payment
problem. To me these are the issues we should have been discussing
m the Ways and Means Committee. Yet the witnesses who appeared
before us were unprepared to discuss it. It was improvising, instead
of the prepared papers beingon that point. I thought that everyone
was begging the question. The question is, Will a tax cut which in
creases deficit financing and puts an added burden on debt manage
ment in the condition we are now in, balance of payments and so forth,
stimulate the economy, even if it would work at other times under
different circumstances? This is an untested theory at best. At any
rate I wanted to pose that.
The one thing I particularly wanted to ask a question on here is this:
I have just recently got my ducks in a row on it. I know you are all
interested in new economic phenomena. I think we have a beauty
here. To me it is an amazing thing and one that requires real study
and explanation. That is the fact that the civilian labor force, and
I have the figures back to 1929, has continually increased each year ex
cept for war years. With the total labor force which includes the
Armed Forces it continued to increase. But for the first time since
1929, in the year 1962, the civilian labor force actually has not in
creased and yet our population figures would indicate that there would
be an increase of around 1 million.
I average out the figures from 1929 to 1959; we increased on an
average about 700,000 a year. In the figures that we have here from
1955 to 1961, we increased almost a million a year. We were able to
ask questions on this. Dr. Ewen Clague sent in a letter to the commit
tee saying his statistics were right. 1 had raised the question whether
the phenomena could be explained as statistical errors. Secretary of
Labor Goldberg yesterday said that this is a phenonemon to which they
just do not know the answer. I have been trying to fit it into my
theory of what I think is the test of real economic growth and my be
lief that we are not stagnant and it does make sense to me that we are
having people withdraw from the labor market because they do not
want that extra income or balancing in their minds whether they would
rather hate the leisure tntte or the income. People did go into the
POLICIES FOR FULL EMPLOYMENT
243
labor force apparently, women, so that their fam ily could get another
car or downpayment on homes, and so on. Maybe that is it. I do not
know.
Certainly this gap theory, if you apply this million group, you must
put it into the unemployed area, and so the gap has widened. X do
not adhere to the gap theory, but to those of you who do, I would
think this would be very worrisome because then your gap is
increasing.
Mr. E c k st ein . I have tried to make a little bit of inquiry on this
problem.
gather that the lack of growth of labor force is not con
centrated in any one group. I think originally the thought was it
might be earlier retirements because of the improved social security
benefits.
Kepresenative Cuims. The figures showed it to be in all age groups
and not by men or women, either.
Mr. Eckstein. There are a lot of different phenomena and so far
nobody is in a position to put them together. Certainly one thing
that does happen in a depressed area, you do slowly over the years
evolve a new way of life m which people drift out of the labor force
and draw relief and make a living without working. It takes several
years o f not much prospect for employment where you are located be
fore you get this kind of effect of people just sort of drifting out o f
the labor force and finding some other way of getting along.
Representative C u bits . Even in the depression years of the thirties,
the civilian labor force increased each year. I did want to point
that up. The final thing, and I just want to get this more or less on
the record; to me the places that we have to get into in reforming our
tax structure are not just rates. Tes, I am very much interested in
rate reform. I want to point up some of the specific things in our tax
laws I frhinlr are impeding economic growth. They seem small, but
I do not think they are in economic effect, only in revenue. One is
a tax law which works against labor mobility. The law as it presently
is says that a man’s residence is where his job is. This may have
been true in the 1920’s and even 1930’s. A s a matter of fact, our
laboring group now, 80 percent of them own their own homes. So
their residence is where their home is. This archiac law has an
effect on the tax of those individuals if they have to follow a job.
I f they are tnnhniftiims, like from McDonnell Aircraft, men going
down with their missiles, from St. Louis to New Mexico, and they
are in New Mexico over a period of some^months, what is a per diem
allowance becoiP"" taxable income according to the Federal tax laws.
Likewise, when you shift a plant, like Chrysler did from Evansville
to St. Louis, the workers cannot immediately sell their homes. They
follow their jobs and they are commuting back and forth. They can
not deduct the cost of maintaining two residences from their taxable
income. This is a reform badly needed. In my estimation, one of
the greatest problems in our dynamic economy is m atchingskills with
jobs and encouraging labor mobility, to bring this about This tax law
encourages labor immobility.
The second point, our tax laws work against training and retrain
ing. Another great problem in a dynamic economy going places, as
ours is, is in upgrading skills, training, and retraining. The tax
law says if you study to hold your job you can deduct the cost from
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POLICIES FOR FULL
em ploym ent
your taxable income. But if you go to improve yourself by training
for a better job, you cannot. Yet the process today is such, if my
interpretation of this dynamic economy is right, that if you have a
skill, it can become obsolete in 5 years. Formerly, in father’s time,
you could have a skill that would last you a lifetime. Really, to
maintain yourself you have to be in a position of upgrading your
skill, retraining constantly, and yet our tax laws work against this
process. Third, our tax laws on research and development are out
of date and working against economic growth.
You have to tie the actual research and development into a marketed
product to get a tax deduction. Yet today pure research which is
not tied to a product must be conducted if we are to move forward, and
our tax laws work against that. Our tax laws work against equity
financing, giving an undue preference to retained earnings and debt
financing. We started to reform that in 1954, one step out of three
was taken. But even this modest reform was so hit on the head, I
would say, in a demagogic fashion, by people who refused to look
at the problem, saying we were giving tax cuts to rich people, that
we have been hard put to hold the little progress we made, let alone
take the next two desirable steps. The purpose of the stock dividend
tax credit was to try to relieve the double tax burden on new equity
financing of growth on the theory that new equity financing was a
more effective way to promote economic growth, than retained earn
ing and debt financing. This reform actually works against the rich
investor in favor of the smaller investor and encourages the nonin
vestor to become an investor.
And then finally I must mention the burdensome taxation we im
pose on profits which has had a lot of discussion here. This is an
out-and-out tax on incentive, the well spring of human progress,
economic or otherwise. I simply want to put those matters on the
record. So much talk has been spent on economic aggregates that
we tend to forget the components where we will find the source of
our problems. You call them structural when I refer to them in
this way. X think if we would get to work on these structural things
which mean little as far as the revenue is concerned, we would move
forward. It would mean a great deal to economic growth because we
would be removing some or these impediments to economic growth.
We would help to match up the unused labor force with the jobs
that are going begging. I am convinced there are more jobs going
begging today, than there are unemployed, which is traditional, not
unusual, in America. In other words, we have a labor shortage. We
have not matched the human beings with the jobs that are going
begging.
Thank you.
Senator Douglas. There very well may be a tax cut, if not in 1962,
in 1963. In connection with that, the chairman asked me to read cer
tain sentences from the report of the commission on money and credit
set up by the CED, which certainly is not charged with being
a radical commission. These are from pages 134 and 135:
As In the proposal for formula flexibility—
said the Commission—
th* most appropriate choice for shortrun discretionary changes in taxes is the
first-bracket rate of the personal income tax. They are least likely to open
POLICIES FOR FULL EMPLOYMENT
245
up controversial questions of income tax structure. The legislative and admin
istrative problems in making such changes would be relatively simple. No un
certainty would be encountered in complying with such changes.
That is the end of the first quotation.
Then the second quotation was the italicized summary on page 135:
The commission, therefore, concludes that when discretionary tax adjust
ments are used to promote shortrun economic stabilization, they should consist
of variations in the tirst-bracket rate of the personal income tax.
Thank you very much, gentlemen.
The committee will reconvene at 2 o'clock.
(Whereupon, at 12:30 p.m., the hearing in the above-entitled mat
ter was recessed, to reconvene at 2 p.m. the same day.)
AFTERNOON SESSION
Chairman P a t m a n . The committee will please come to order.
We have as our first witness this afternoon Mr. Leon II. Keyserling,
economic consultant, Washington, D.C. Mr. Keyserling is well known,
lie has been around Washington a long time. lie has been a witness
many, many times before this committee, before the Banking and Cur
rency Committees of the House and Senate, and others.
Mr. Keyserling, we are glad to have you, sir, and I notice you have
a prepared statement. You may proceed in your own way. After
you finish we will have Mr. Saulnier and then after he finishes we
would like to have the panel interrogate both of you.
We will interrogate you together instead of separately, if that is
all right. You may proceed.
STATEMENT OP LEON H. KEYSERLING, FORMER CHAIRMAN, COUN
CIL OF ECONOMIC ADVISERS, ECONOMIC CONSULTANT, AND
PRESIDENT, CONFERENCE ON ECONOMIC PROGRESS, WASHING
TON, D.C.
Mr.
K e y s e r lin g .
Mr. Chairman and members of the committee,
1 think the most expeditious method would be for me first to read some
brief highlights of my conclusions, which will take only a relatively
few minutes, and then I have some supporting materials in the form
of charts which I would talk from orally.
Chairman P a tm a n . All right.
Mr. K e y s e r l i n g . Beginning with my prepared statement, I have
been asked to speak about fiscal policy. But naturally, fiscal policy
derives from the condition of the economy, and ties in with other
economic policies. So, while I shall concentrate on fiscal policy, I
shall try to relate it to the matters which determine what it is ana
what it ought to be.
I think the members of the committee are familiar with the niethon
I use, which is to prepare over the years a rather complete description
of the economy in action, and also what I call my model of an economy
operating consistent with maximum employment, production, and
purchasing power under the Employment Act of 1946.
Then, I constantly test the actual condition of the economy against
the model, and try to discern where relationships went wrong and
where the diffieuhies appeared. This lias given me a rather full view,
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POLICIES FOR FULL EMPLOYMENT
and I think has helped me to arrive at some forecasts which have
turned out to be moderately accurate.
I want to call attention to just a few of these before this committee,
only for the reason that this has a bearing upon what I shall say
about the future now.
In 1954, before this committee and elsewhere, I forecast an average
annual economic growth rate of 2 ^ percent from 1953 through 1960,
which turned out to be accurate, and also forecast the growing levels
of unemployed plant and manpower which would result. This, also,
turned out to be reasonably accurate and, therefore, more or less vin
dicated my assumed needed growth rates, because if my assumed
needed growth rates had been too high, the actual unemployment of
plant and manpower would have been lower than my forecasts.
Second, in 1957, before this committee and elsewhere, when people
were generally concerned about inflation, I was very concerned about
the oncoming recession, which very shortly thereafter appeared, and
similarly in early 1960. In early 1961, before this committee and else
where, and in a publication in May 1961, and in a meeting with about
150 Members o f the Congress, I said that I thought that, with the
policies then in being, the economic growth rate under the new ad
ministration would be no better than under the old one, for the simple
reason that in my nonpolitical view you could not change an economy
much without changing policies much. I said that I thought that the
economic growth rate m 1961 and in 1962 would be only about half
as high as what we would need to get back to reasonably full employ
ment and production; that it would probably be the shortest recovery
of all; and that it would probably convert into stagnation and reces
sion more quickly than the others because of the cumulative effect of
the uncured imbalances. Unfortunately, this has come to pass to
date, though the recession still lies ahead.
Senator Bush. You are speaking of the current recovery?
Mr. Keyserling. I am saying that the current recovery is the
weakest since World War II.
Senator Bush. You are not indicating that you think it is finished,
are you?
Mr. Keyserling. I will deal with that specifically in my statement,
Senator.
Senator Bush. All right.
Mr. Keyserling. In support of my feeling that we need immediate
and extensive changes in national economic policies—this is my first
point—U.S. economic performance has been highly unsatisfactory
since early 1953. Since then to date, our average annual growth rate
has been only about 60 percent of the needed rate; we have at no time
had maximum employment and production; and, through a recur
rent pattern of inadequate upturns, recessions, and stagnations, we
have moved inexorably in the long run toward rising levels of idle
manpower and plant.
In second quarter 1962, the true level of unemployment averaged
about 6.5 million, or almost 9 percent of the civilian labor force, taking
into account full-time unemployment, the full-time equivalent of
part-time unemployment, and the concealed unemployment repre
senting inadequate growth in the labor force due to scarcity o f job op
portunity. I will demonstrate that in detail with my charts.
POLICIES FOR FULL EMPLOYMENT
247
Similarly in second quarter 1962, total national production was
about $73 billion or almost 12 percent below maximum production.
Let me say, parenthetically, that Chairman Heller in his statement
yesterday said that national production was about $30 billion below
the true level. He obtains this figure by projecting a 3 ^-percent
growth rate from 1957 or 1955 as being consistent with maximum em
ployment and production. I have shown before this committee, on
other occasions, and will show again, that this is a very much lower
growth rate than can possibly absorb the new technology and the
growing labor force.
As a matter of fact, the reason why the recovery in the first three
quarters of 1961 came so far short of getting us back to full employ
ment, and why the economy has done so much worse since then than
was anticipated by many of the forecasters, including the Council of
Economic Advisers, is that they have persisted in understating the
growth rate needed to regain and maintain maximum employment
and production.
In other words, the underestimate of the size of the problem is the
first step toward taking inadequate remedies.
Since late 1961, we have been in still another period of economic
stagnation, with an annual growth rate of only 3.5 percent from fourth
quarter 1961 to first quarter 1962, and only 2.8 percent from first
quarter 1962 to second quarter 1962. Of course, those figures cannot
be related to the 5-percent growth rate that I think is needed in the
long run, because you need a much higher growth rate than 5 percent
when you are in a recovery period. That rate would merely hold you
where you are with respect to unemployed plant and manpower.
And many indexes of activity tend to reveal an overall growth rate
even lower if not negligible or negative in June and July. All signs
now are that this latest stagnation will end up in the fourth recession
since 1953, and trying to guess—let me underscore this—trying to guess
whether this will happen later this year or in 1963 is a sad and fruit
less misdirection of energy.
In view of the dismally consistent long-term record since early 1953,
we are closing our eyes to reality and playing with fire when we ask
for another few weeks, and then still another few weeks, to see where
we are going, or when we look at every little ripple from week to week
in order to squeeze consolation out of the inconsequential. We have
done very badly for long enough; the time to start reversing the course
is now,
I do not share CEA Chairman Heller’s apparent view, expressed
in his testimony yesterday, that the fast rate of upturn during the first
three quarters of 1961, or how much better we have done in recent
years than in the 1930’s, may have some bearing upon where we are
now and what we should do.
With reference to my analysis of the causes of our chronic economic
difficulty, which is my second point, the central cause of this difficulty
is that ultimate demand, composed both of private consumer outlays
and public outlays for goods and services, has failed consistently to
keep up with our increasing power to produce, as generated by business
investment, improvements in technology and automation, ana enlarged
worker ana managerial skills. In second quarter 1962, measured as
an annual rate, a deficiency of about $66 billion in private consumer
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POLICIES FOR FULL EMPLOYMENT
outlays, and some deficiency in public outlays, were the dominant
factors in the deficiency of about <3 billion in total national produc
tion at an annual rate.
.
.
.
While there was also a deficiency in gross private domestic invest
ment, and in investment in plant and equipment, during second quarter
1962 and during the period 1953 to mid-1962 as a whole, this defi
ciency was caused by the deficiencies in ultimate demand which led
to vast idle plant capacities and therefore dissuaded private invest
ment.
.
.
During the upturn or boom periods which have occurred since
1953, investment in plant and equipment has tended to race forward
at a nonsustainable rate when measured against ultimate demand
and unused plant capacities. Throughout the whole period, prices
and profits and other funds available for investment have been ample
or excessive, in that they have always been adequate to spark a level
of investment as high or higher than justified by ultimate demand.
This is true even today, despite the exaggerated talk about the “ profit
squeeze” ; most profits now are very rewarding, and where they are
inadequate it is only because of deficient ultimate demand and the
extraordinarily high level of unused plant capacities. Profit-sales
ratios indicate clearly that what business really needs is more sales.
CEA Chairman Heller’s testimony of yesterday, in its citation of
facts and indeed in its general analysis, powerfully reinforces what
I have just said; that is, that profits are good and in many instances
advancmg; that funds available for investment are ample or even re
dundant, especially when cash flow is taken into account; and that
only unused capacities and deficient ultimate demand stand in the
way of more ebullient investment.
Under these circumstances, I might fairly construe Dr. Heller’s
continued support of still more tax concessions for investors as evi
dence of his proper responsibility to keep in step with existing ad
ministration policies. Meanwhile, I cannot understand fully why the
administration is still debating what kind of tax cuts we need, or
even leaning toward a composition of tax cuts which would exacerbate
the imbalances between investment in the means of production and
ultimate demand by favoring corporations and high-income indi
viduals unduly, at the expense of those middle- and low-income con
sumers who spend for consumption a larger part of their aftertax
incomes.
My third point is with respect to tax policy—and let me say that
my discussion follows the very penetrating questions in the statement
which the chairman of this committee put out in announcing the
hearings—dawdling or delaying with respect to tax reduction has no
justification, in the face of a chronic economic ailment which is now
being confirmed rather than alleviated. And in view of the central
reasons for the chronic economic ailment, the proper nature of the
immediately needed reductions in taxes is clear as day. Tax policy
since 1953 has aggravated the imbalances in the relationship between
investment in the means of production and ultimate demand; recent
Treasury revisions in tax regulations move in the same direction; and
passage of the 7-percent tax credit would move still further in the
same direction.
POLICIES FOR FULL EMPLOYMENT
249
To restore a better balance throughout the economy, large and im
mediate tax reduction should concentrate upon increasing the after
tax incomes of low- and middle-income consumers, who have a pro
pensity to spend a much larger proportion of their disposable incomes
than higher income families.
Senator Bush. May I just ask parenthetically how do you define
the middle-income group?
Mr. Keyserling. There is no one definitive definition. In my
recent studies, it is indicated that the middle-income group are those,
let us say, with family incomes from $4,000 to about $8,000 a year.
Senator, I would be very glad to provide you with a study which
shows the exact compositions of the number of families falling within
the different sectors.
Senator Bush. I just wanted to get what you meant. You spoke
of the low-income group and then the middle-income group. I am
not quite sure what you meant by middle.
Mr. Keyserling. For a multiple-person family, I would say below
$4,000, at least in urban areas, is low and from $4,000 to $8,000 or
thereabouts is middle.
Senator Bush. I see.
Mr. Keyserling. These tax cuts should have an annual value of
about $7 billion in fiscal 1963. Let me emphasize what I am saying
now. These kinds of tax cuts would be good, not only for the short
run, but also for the long run; they would be sound long-term reforms,
in addition to their immediately stimulative effects; and thus the
claim that we should wait until next year in order to develop syste
matic “ reforms” in the tax structure is in my view specious.
In other words, once you accept my basic proposition, which I think
to be sound, that we have a chronic economic problem of 9y2 years
duration, then it follows that the situation really hasn’t changed
fundamentally, and looking at all the little or short ups and downs
and saying that each one is a change in the situation is, as I have said
before, looking at a man whose head is bobbing up and down in the
water, and every time his head comes up, saying he is up again. The
economic trouble is chronic.
We should be particularly on guard against adopting, in the name
of “reform,” revisions in the tax structure which would aggravate
rather than remedy the fundamental imbalances in the economy which
have existed since 1953 and still exist. Such tax reforms as closing
loopholes, while ultimately desirable, should be deferred, because ef
forts to enact them now would forestall the top priority tax action
which is needed now.
I have noticed the veiy interesting article in the New Republic this
week by Senator Douglas. I wish that he were here. There is no
man in Congress for whom I have a higher regard, and I have not
yet recovered from a debate which I had with him in 1952. None
theless, I do differ with him in this particular instance.
I agree that we should wait for tax reduction until we “see the
whites o f their eyes,” but I have been seeing the whites of the eyes of
the chronic economic trouble for many years. It depends on what you
define as the whites of their eyes. I f you are concerned only in an
antirecessionary policy after the event of recession, then yon should
wait for tAT reduction until you have a recession. But if you are
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POLICIES FOR FULL EMPLOYMENT
concerned with the fundamental, long-range problem of an inade
quate growth performance, of chronic economic stagnation, of our
competition with the rest of the world, of all the matters about which
the President so eloquently has spoken on so many occasions, then the
whites of their eyes are right up at the crest of the hill now.
With respect to Federal spending policies, I have this point to
make. The proposition that any immediate cuts in tax rates should
be counterbalanced by comparable cuts in Federal spending is so ob
viously wrong in the context of our whole economic problem that it
should require no analysis. We are so far short of maximum employ
ment and production and have such a long and difficult road to travel
to get there and then to stay there, that we need both tax cuts and
increased spending now. We also need increased spending, because of
the grave neglect of many priorities of national need.
The current and prospective economic situation, in my view, calls
for Federal spending in fiscal 1963 about $3 billion higher than the
administration proposes. Thus, my proposed tax cuts and spending
increases would have a combined annual value in fiscal 1963 of about
$10 billion. This would provide total stimulation to the economy,
including indirect effects, of about $25 to $30 billion. Of course, var
ious economists will suggest a different product mix between the tax
cuts and the spending increases. I would like to call your attention
to the number of economists whose overall figure converges pretty
close to the $10 billion that I suggest.
Some of them suggest it all in tax cuts. I personally can’t see how,
as a great nation, we can concern ourselves only-—
Senator Bush. You say it would provide a stimulus to the economy,
including indirect effects of about $25 to $30 billion. In what would
that be reflected? The gross national product, or the gross national
income?
Mr. Keyserling. This is the gross national product, Senator. This
is merely the so-called multiplier effect of the changes in fiscal policy.
Senator Bush. Thank you.
Mr. Keyserling. On the subject of balancing of the Federal budget,
I make this point, which is my fifth.
Let me say clearly here that it is a complete misconception to think
that I am in favor of an unbalanced budget. I am in favor of a
balanced budget in a balanced economy.
We now have, and since 1953 have had, a spending and tax policy
which is grossly erroneous and self-defeating, because it attempts to
balance the Federal budget at levels of economic activity woefully
short of maximum employment and production. In consequence, de
spite constant declarations of intent to balance the Federal budget,
we have run an aggregate Federal deficit of $30.7 billion from the
beginning of 1953 through the middle of 1962. In vivid contrast, and
I will demonstrate more clearly with my charts, if the expenditure side
of the Federal budget during this period had been enough higher to
fulfill its appropriate share of the task of maintaining maximum em
ployment and production, the application of actually existing tax
rates to an economy functioning at maximum levels of activity would
have yielded an aggregate budget surplus estimated at $143 billion
from the beginning of 1953 through the middle of 1962/ In other
words, the net difference between the deficit o f $30.7 billion andthp
POLICIES FOR FULL EMPLOYMENT
251
$14.3 billion surplus which I estimate would be about $45 billion.
This implies that we should have had lower tax rates, as well as higher
spending, during this period as a whole, and indeed both would in
fact have been necessary for maximum prosperity.
Under the Federal budget for fiscal year 1963 as now officially pro
posed, I estimate that our total national production during fiscal ^ear
1963 will be at the very deficient level of not more than $565 billion,
and might well be only $555 billion or still lower. At this particular
point?most of the other estimates are about the same.
This would mean a Federal deficit of $4 to $7 billion, or even
higher. The changes in tax and expenditure policy which I recom
mend would result, according to my estimates, in total national pro
duction close to $600 billion tor fiscal year 1963 and a Federal deficit
of $6.5 to $7 billion. Thus, the true alternative is between choosing
a planned deficit that will be highly beneficial to employment and pro
duction, and stumbling once again into a deficit through neglect of
the needs of the economy, just as we stumbled into a $12 billion deficit
in one year recently, and I think about $6.3 billion during the fiscal
year just ended. Some people seem to think if you stumble into a
$6.3 billion deficit it has the same accelerating effect upon the economy
as if you plan a $6.3 billion deficit. This, of course, is not correct.
In one event you are starting out at the beginning of the year with
a fiscal policy that is stimulatory to the economy. In the other event
you are starting out at the beginning of the year with a fiscal policy
that is repressive of the economy ana you stumble into the deficit be
cause the economy suffers. It is not the same thing at all.
Moreover, the program which I recommend would offer a realistic
prospect of reasonably full production and employment bv 1964.
This condition, along with the closing of some tax loopholes when the
time is more propitious than now, and this is what some people call a
practical consideration or a political consideration, would yield enough
revenues to balance the budget even with the reduced tax rates and
increased spending which I propose.
As a matter of fact, on this matter of tax reform, I have said above
that I think that the kind of tax reduction which I propose is really
the most basic, and long-range, and fundamental kind of tax reform,
and that, so far as the tax reform of closing loopholes, such as depreci
ation allowances and so forth, I would like to do some of that but it
is entirely secondary now. It isn’t going to stimulate the economy
if you do it. It may give some people a sense of moral fervor. I
would like to see it done ultimately. It may be important, when we
are wedded to the concept of getting as close as we can to a budget
balance, but such kinds of tax reforms in my mind are entirely sec
ondary, and I think that they should be put aside so that with less
acrimony and more dispatch we can get down to the job of the kind
of tax reform that we really need now in the interest of the whole
economy.
Mr. Kiruss. Mr. Keyserling, when you say 1964, do you mean fiscal
year 1964!
Mr. K e y b e b l e n g . I would say calendar year 1964. I don’t believe
that, where we are now, we can get to full employment by fiscal year
1964, except by changing my $10 billion compound to $15 billion* and
for what I oill practical reasons I have held it a bit below that.
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POLICIES FOR FULL EMPLOYMENT
Senator Javits. Mr. Chairman.
Chairman P a tm a n . Senator Javits?
Senator Javits. I f the chairman would allow me—I may not be
able to stay but a few minutes as I have a bill on the floor and I have
to go back—I didn’t quite get, Mr. Keyserling, your point about taxes
when you talked. Would you mind making your point again ?
Mr. Keyserling. My point about taxes is that I think we need an
immediate tax reduction, and I want to commend the Senator on what
he said about that, although we don’t agree on the exact composition.
I think, also, that his statement about the lack of vigor in pressing
for this now is correct. I say that we need an immediate reduction
in taxes because we have been suffering from a chronic economic ail
ment for 9Vi years and that, therefore, waiting another 2 weeks, or
4 weeks, or 6 weeks for another little inconsequential ripple has little
to do with the case.
Such delay bespeaks a continual attention only to very short-range
developments, which negates the very concept of the chronic ailment.
Senator B u s h . Tell him also about your schedule of reduction.
Mr. Keyserling. Then I say, and here the Senator and I do not
have exactly the same program, that the program should concentrate
very heavily, if not entirely, upon the reduction of consumer taxes
in the middle and lower income brackets, on the ground that this
would provide the most immediate stimulus to consumption, and in
other parts of my testimony I analyze why the other forms of tax
reduction are not needed now.
Senator Javits. I thank my colleague and I am veiy grateful to
the chairman.
Mr. Keyserling. On the subject of rates of saving and family in
comes, which is one of the other questions raised by the committee
chairman, I say this: Federal tax and expenditure policy since 1953
to date, along with other developments in the economy, have resulted
generally in. too high a rate of personal saving, and too low a rate of
consumer expenditures, measured against total personal incomes after
taxes.
May I say here that I do not measure the appropriate rate of per
sonal saving, and here I differ from some economists, primarily by
historic records in the past. I measure it primarily by looking at the
economy and seeing whether as a matter of pragmatic observation in
vestment and consumption have been kept in balance or whether one
has outrun the other, and since the function of savings is to spark
investment or to feed investment and the function of consumer spend
ing is to add to ultimate demand, I derive the conclusion that the
rate of savings has been too high from the fact that, generally speak
ing, investment has outrun ultimate demand and resulted in vast
unused capacities.
I might call this the functional approach, or the real wealth ap
proach, or the ultimate performance of the economy approach. This
condition is the natural counterpart of the imbalance between invest
ment in the means of production and that portion of ultimate demand
which is represented by consumer spending.
The appropriate remedy is to reverse the regressive trends in in
come distribution which have been j>ersistent in recent years. M ay I
point out that, since I put out my income study a few months ago,
POLICIES FOR FULL EMPLOYMENT
253
there have been two very good books on the subject, one by Robert
Lampman and one by Professor Kelso, which support what I have
been saying all along: under conditions of low economic growth and
high unemployment, we have had a regressive redistribution of na
tional income m recent years.
The appropriate remedy is to reverse the regressive trends in in
come distribution which have been persistent in recent years, and
which cause too much saving relative to consumer spending because
higher income families save more while lower income families spend
more relative to the size of their incomes.
I am not talking here about a share-the-wealth program or equalitarian program, but I think it is always the function of national pol
icy to improve the equity of income distribution. This has been part
of our long-range progress, and whether this is the purpose or not,
every tax policy, every monetary policy, and every other basic eco
nomic policy, does affect income distribution, so we might as well look
at what we are doing. The kind of tax cuts which I propose would be
part of this appropriate remedy. Increased Federal spending would
also be part of the remedy, because many of the public programs which
need enlargement, such as in the fields of education, health, housing,
and social security, improve the absolute and relative incomes of lowincome and middle-income families. They also provide a great new
mass market for business.
A vigorous trend in this direction would also be highly desirable
on social grounds, which I have never regarded as outside the scope
of national economic policy, in view of the fact that about two-fifths
of all Americans now live in poverty or in some lesser degree of de
privation.
On the subject of monetary and credit policies, I would say this: I
agree entirely, I may say here, with the very eloquent statement made
by Senator Douglas in the New Republic this week, excoriating, if I
judge him correctly, the recent and current monetary policy. It has
been very much too tight. It has been wrong, all along.
I do not believe, however, that monetary policy is a substitute for
fiscal policy. Also, monetary policy can be used much more easily to
repress the economy rather than to expand it, because it is easier to
pull a string than to push it. If you don’t have the fundamental
levels of demand about which I have talked, the mere amplitude of
credit and money doesn’t expand investment much and does not ex
pand the economy much. I get to that in my analysis of the profit
question.
Monetary and credit policies, since 1953 to date, have been too strin
gent to float an adequate rate of economic growth and, therefore, have
contributed substantially to the chronic rise of idle manpower and
plant. As an avowed brake upon inflation, when inflation was actu
ally in process, the stringent monetary and credit policies have been
a failure, because the structure and t>ehavior pattern of the modem
U.S. economy is such that tightening up on money and credit trans
lates into repressed or reduced levels of employment and production
long before it impacts upon the price structure.
For example, during the period of reasonably adequate economic
growth, 1952-55, the average annual growth in total national produc
tion was 3.5 percent, the average annual growth in the nonfederally
254
POLICIES FOR FULL EMPLOYMENT
held money supply was 3.6 percent, consumer and wholesale prices
were virtually stable, and the average annual increase in industrial
prices was only 1.1 percent. But during the period of economic stag
nation, 1955-57, the average annual increase in total national produc
tion was only 1.7 percent, induced substantially by an average annual
increase in the nonfederally held money supply of only 2.5 percent,
while there was an average annual increase of 2.5 percent in consumer
prices, 3.1 percent in wholesale prices, and 3.6 percent in industrial
prices. This whole analysis, which defies some of the conventional
economic analysis, is based upon the simple proposition that you may
have inefficiency resulting from too high a rate of economic growth or
from too low a rate of economic growth. You may have inefficiencies
resulting from an economy that is excessively taxed—I don’t mean
taxed in the technical sense—I mean has excessive pressures on it, or
from an economy that is insufficiently pressured, just like a car going
too fast or too slow burns too much gas per mile.
Most economists have only lately come to realize increasingly this
point that I have been making, that an economy that is constantly
moving up and down, that has a high level of unemployment and a
high level of unused plant, tends thereby to be more inflationary than
under fuller utilization, aside from the fact that you lose scores of
billions of dollars of national product.
Moreover, the tight money policy and rising interest rates con
tribute mightily to the regressive redistribution of national income,
repress desirable lines of activity far more than they affect the rela
tively excessive periodic booms in investment relative to ultimate
demand, reduce the funds available to governments at all levels for
essential public purposes by increasing the interest charges and by
making it impossible for States and localities to borrow, and therefore
contribute to all of the chronic imbalances in the economy.
The open declaration in recent weeks by spokesmen for the Federal
Reserve System that they will tighten up on monetary and credit
policies, especially if immediate tax cuts are undertaken to stimulate
the economy, is an open declaration of war upon the programs which
the Nation needs, and represents an almost unbelievalbly gross incon
sistency in national economic thinking. This declaration of war, by
the Federal Reserve System, while it does not say so openly? is tanta
mount to continued adherence to the indefensible proposition that
large volumes of idle plant and manpower are indicia of economic
health and are necessary to fight inflation.
I find it difficult in this connection to follow the logic of CEA Chair
man Heller’s discussion of monetary policy in his testimony yesterday.
I understand he improved it some in response to questioning. He
says this:
Fiscal poHcy and monetary policy are tightly interwoven, indeed are in part
substitutes for one another. A given stimulus to the economy can be achieved
by a relatively easier fiscal poUcy coupled with a relatively tighter monetary
policy, or vice versa.
Let me try to translate that into simple language. It is like saying
that, if you take four steps forward and two steps backward,you are
still taking two steps forward. But it is nonethelesstrue that the
two stepp backward cancel out two of the steps forward, and if you
reduce taxes by $20 billion and tighten up on the monetary policy,
POLICIES FOR FULL EMPLOYMENT
255
you may still have a net forward of $10 billion, but why should you
cancel out the effect of one with the effect of the other, and if you
have a relatively smaller reduction in taxes, the tight money policy
can cancel it out entirely.
Representative Reuss. D id you underline the “vice versa” because
you want to emphasize it ?
Mr. Keyserling. I underlined the “vice versa” because it is un
derlined in Dr. Heller’s direct testimony. In other words, I would
have to ask him.
Representative Reuss. Is the policy combination implied in the “vice
versa’’ more offensive to you than the alternative?
Mr. Keyserling. They are both offensive.
I believe it far more pertinent to point out that fiscal and monetary
policies should in general reinforce each other; they should in general
be complements, not substitutes. When general inflation threatens,
both should be relatively tight or tightened; when there is very large
economic slack, both shouldTbe loose or loosened. I have great respect
for Dr. Heller, but in this instance I think that, instead of attempting
to rationalize the perverse and damaging policies of the Federal Re
serve System, he might well have called upon that System to bring
its policies into line with the real economic situation as he understands
it so well ind with the policy implications thereof which he compre
hends so fully.
Here I want to commend many members of this committee, includ
ing Senator Douglas, as I have said before, for their full realization of
this point. The Federal Reserve System does not need a pat on the
back; it needs a good jolting.
Fundamental conflict between fiscal and monetary policy, recurrent
in recent years^is an anachronism. Indeed, at another point in his
testimony. Dr. Heller admits that “monetary * * * policy must con
tinue [sic] to aim at providing ample credit and liquidity to support
needed recovery and growth.” But Dr. Heller then delimits the force
of this valid observation by saying that all this must be “consistent
with the requirements of balance-of-payments policy.” This brings
me to the subject of the balance of payments and gold problem.
Senator Pboxmire. I am sorry that you didn’t hear all of the things
that I said about the pernicious uses of a tight money policy to cancel
out the effects of tax reductions.
On the balance of payments and gold problem, which is the final
question raised in the chairman’s announcement: I am sorry I can’t
analyze this one in more detail, because I don’t know anything on
which there is more national confusion. Our balance of payments
and gold problem, while a real one, has been exaggerated and misused
and subject to the wrong remedies, very analogous to the way in
which the inflationary problem was exaggerated and misused and sub
jected to the wrong remedies in earlier years since 1958. The central
reason for owe unfavorable balance of payments and gold problem is
not to be found in the record of our international exchange of goods.
In this category, we hare been averaging a very favorable excess of
exports over imports, and our record in this category might be even
better if we aeiueved the zeal improvements in productivity and costs
which ar* fraefastod by large economic slack ana encouraged by fuller
of production resources.
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POLICIES FOR FULL EMPLOYMENT
A main reason for our balance of payments and gold problem has
been the perhaps excessive movement of American capital to Western
Europe (although I think this too is exaggerated) I am not quite
sure that I am absolutely clear as to why we should move toward a
philosophy of free exchange of goods based upon marginal efficiency
but not allow capital to flow where the manager of the capital, so
long as we believe in a free system, thinks it will be most efficient.
I think we are a little mixed up on this score, but I haven’t got time
to get into this in detail.
A main reason for our balance of payments and gold problem has
been the perhaps excessive movement of American capital to Western
Europe, and the excessive withdrawal of foreign funds from the
United States. Both of these trends are to be explained mainly by
the higher rate of economic growth, the lower levels of unemployment,
the freedom from economic recessions, and consequently the more
favorable opportunities for sustained investment and profits, in some
countries of Western Europe contrasted with the United States.
It follows inescapably that those of our national economic policies
are absolutely upside down which attempt to cure our balance of pay
ments and gold problem by repressing economic growth? employment,
and production in the United States. Variations in interest rates,
comparing here with overseas, are a relatively inconsequential factor.
And in any event, it shows a fantastic lack of perspective to saddle the
whole $550 billion American economy with the incubus of rising in
terest rates in order thereby to effectuate some slight changes in our
balance of payments and gold position.
In addition to the main remedy of restoring and maintaining maximum prosperity in the United States, we need to improve the devel
opment of international mechanisms which would serve as a clearing
house and set off short-range against long-range claims. In longrange terms, our balance-of-payments position nas in general been
satisfactory. _
Now, Chairman Heller, in his testimony, and others have brought
up the point that maybe we should try to hold down the long-term
interest rates because of our domestic needs, and let or help the short
term interest rates go up in order to take care of the capital flow prob
lem. I have been trying to convince committees of Congress for a long
time, and I think unfolding developments have helped me a little
bit, that it is absolutely impossible as a basic proposition to do these
two things at the same time because interest rates interrelate. Most
interest rates are fixed by other interest rates, and that is why I went
before the Senate Finance Committee in 1957, when they were talking
about raising the interest rates on savings bonds because other interest
rates were going up. I said, “ You have created a mess. You start
raising some and you have to raise others, and you are on an escalator
that will never come to an end.”
It is absolutely impossible to do these two things at the same time.
One of the reasons why the recent effort of the Treasury to float long
term bonds, at even what I consider a rather high coupon interest rate
of 414 percent, didn’t work out very well is because we are getting into
a situation where you are going to have to pay 5 or 6 percent interest
to borrow anything, even on the supreme credit of the Government of
the United States.
POLICIES FOR FULL EMPLOYMENT
257
Anyway, why should we be freeing such high interest rates into
long-term borrowings ?
Coming to the needed changes in the national policy, which is my
last point, during the 9 ^ -year period from the beginning of 1953
to the middle of 1962, we forfeited about $387 billion in total national
roduction—measured in 1961 dollars—compared with what we would
ave achieved at the maximum rates of economic growth called for
by the Employment Act of 1946. I don’t say we could have done that
well. But for goodness sakes, we should have done at least half that
well. Over the same span of years, the true level of unemployment
aggregated about 24 million man-years higher; in other words, well
over 2% million higher annually on the average, than it would have
been under conditions of sustained maximum employment.
The record during the past year and a half indicates no fundamental
change in the chronic ailment, although fortuitously we have been in
upward movement during most of this short period. In fact, I think
it is getting worse because of the uniquely weak character of this
recovery ana the fact that we are already m stagnation.
We are now in another stagnation, and confronted with the ominous
threat of another recession later this year or next year. I f our aver
age annual growth rate 1963-66 averages no better than during the
ast 9% years, and I do not think that it will average appreciably
stter without drastic changes in national economic policies, and I
think it could even average worse because these imbalances feed on
themselves, we could forfeit another $290 billion of total national pro
duction, and suffer another 17 million man-years of excessive unem
ployment, while we talk about the great worldwide contest in which we
are engaged and about the needs of our own people and about the
need for economic growth.
Neither domestic nor worldwide conditions permit us to countenance
even the possibility of such development. We must act, and act at
once.
In one sense, Mr. Chairman, and members of the committee, there
is never an "immediate” need for anything, except carrying somebody
to the hospital who has been hit by an automobile. You may quibble
about whether we should act now or wait until next winter, but once
you analyze this problem correctly, we are 5 or 6 years late now, and
it is getting later every minute.
We won’t know any more a few months from now, unless we have a
catastrophe. I don’t expect a catastrophe within the next few months.
I don’t see any obstacle in the way of action now that will disappear a
few months from now, and this whole business of looking at a few
weeks at a time, or a few months at a time, or at the little upturns
and downturns, is the greatest manifestation, in my view, of the im
mature nature of our economic policy and our national purposes in
times when we should be thinking over the long-range.
This completes my summary answers to the policy questions that
the chairman has raised. I would appreciate a little chance to docu
ment this with some of my pictures, which I think I can do rather
quickly now that I have laid the contours of the argument before you.
E
E
Chairman Patman. You may go ahead and present the charts that
you have. I suggest that you confme it to prcfoably 10 or 15 minutes if
you can.
258
POLICIES FOR FULL
em ploym ent
Mr. Keyserling. Yes, I certainly believe that we can, because the
questions will come later. I think I can do it very quickly. My first
chart simply shows the long-term record from 1953 through 1962 esti
mated, the recurrent series of booms, recessions, and upturns. The
first sector shows the record by years.
The second sector of the chart shows the short-term record quarter
by quarter, 1961 and 1962, showing a high rate of upturn during the
first three quarters of 1961, and the progressive deterioration since.
The third sector of the chart measures this on an annual basis from
first quarter 1961, to first quarter, 1962, and so forth, and finally from
fourth quarter 1961 to fourth quarter 1962, estimated.
In other words, we are experiencing a progressive shrinking in the
rate of the upturn, more ominously than during previous upturns
since World War II.
Senator Bush. What are those figures in the bottom chart?
Mr. Keyserling. The figures on the bottom sector of the chart are
yearly rates of change from first quarter 1961 to first quarter 1962,
actual.
Senator B u s h . In gross national product?
Mr. Keyserling. In gross national product; second quarter 1961
to second quarter 1962, actual, third quarter 1961 to third quarter 1962
estimated, and fourth quarter 1961 to the fourth quarter 1962 esti
mated.
My second chart shows the three types of unemployment. The bot
tom part of each bar shows full-time unemployment. The middle part
shows the full-time equivalent of part-time unemployment. The top
part factors in what I call the concealed unemployment resulting from
the phenomenally low growth of the labor force in recent years. In
other words, people aren’t looking for jobs because the jobs are not
there, and I was very interested that Senator Douglas stressed this in
his recent article.
The top sector of this chart shows the rising level of true unem
ployment. The second sector shows this unemployment as a percent
age of the civilian labor force. Just by glancing at the chart, you can
see how much more massive the bars are in thelater years than in the
earlier years. In first half 1962, which is a stagnation period, and not
a recession period, the true level of unemployment was almost 9 per
cent of the civilian labor force, compared with only 5 percent in 1953,
although you had a recession occurring in the middle of 1953, and this
shows the prolonged and pronounced upward trend.
My third chart shows the high volume of idle plant and machines.
The lower half of the chart shows that, in first quarter 1962, which
are the latest figures I have, 18 percent of steel capacity was idle, and
about 17 percent of manufacturing capacity was idle. The top part
of the chart shows, as of the end or 1961, the tremendously high vol
ume of idle capacity in a wide range of major industries.
Senator Bush. Where do you get those figures?
M r. K eyserling. The sources are cited below, M cGraw -Hill, and
Steel Institute. A ll the sources are at the bottom of the charts.
Chairman P atm an , W ithout objection the charts w ill be put in the
P O L IC IE S
FOR
FULL
259
EM PLOYM ENT
RECESSIONS, BOOMS, STAGNATIONS, l9 5 3 - ' 6 2 :
RATES OF CHANGE IN G. N. R
In 1961 Dollar,
SHORT-TERM RECORD. 1st QUARTER I96l - 2nd QUARTER 1962
(Seasonally Adjusted Annual Rates)
116%
9 .2 %
6.1%
3 .5 %
28%
m
2 n d Q T R 19 61 -
4 th Q TR 1961-
1st Q T R 1 9 6 2 -
3 rd Q T R 1961
Is t Q T R 1 9 6 2
2nd QTR 1962
BOOM AGAIN MOVES TOWARD STAGNATION 1961-1962
(Seasonally Adjusted Annual Rotes- 12 Month Trends)
7 .8 %
1st Q T R 1 9 6 1 W Q TR 1962
2n d Q TR 19 61 2n d Q TR 1962
3rd Q TR 1 9 61 3 rd Q TR 1962 (E S U
4 t h Q T R 19 61 4 th Q TR 1962 (E S I]
260
P O L IC IE S
FOR
FULL
EM PLOYM ENT
CHRONIC RISE OF UNEMPLOYMENT. 1 9 5 3 -1 9 6 2
TRUE LEVEL OF UNEMPLOYMENT
(Millions of Workers)
Total True Level, 1953-Mid 1962' 51.3 Million Man-Years'Boom
"Recession
Recession" Stagnation"
Yeor
"B o o *"
Yeor
"Slognotion" "Slognotion "Recession
Year
Receiuon"
Boom"
Yeor
Yew
Yeor
"Boom
'S ta jn a to ^
Slognotion" Recession"
Yeor
"Recession
Boom"
"Stagnation" "Stagnation"
Period
Period
Year
True Unem ploym ent
Concealed
U n e m p lo ym e n t*'
_ «
Full-T im e E quivalent o f
P a rt-T im e U nem ploym ent
/^6
4.7
8
3.9
H B
3.2
(S«o*oroliyAdjusted)
UNEMPLOYMENT AS PERCENT OF CIVILIAN LABOR F0RCE;
w The man-year figure .for first holf 1962 is one holf the figures shown for the half yeor. About 27 million
man-years of unemployment (true level) would hove been consistent with maximum employment.
2/ Estimated os the difference between the officially reported civilian lobor force and its likely size under
conditions of maximum employment.
7
•
1/ In deriving these percentages, the civilian lobor force Is estimated as the officially reported civilian
labor force plus concealed unemployment.
P O L IC IE S
FOR
FULL
261
EM PLOYM ENT
THE HIGH VOLUME OF IDLE PLANT
AND MACHINES - 1 95 4 - 1962
PERCENT OF PLANT CAPACITY IDLE v
NONELECTRICAL
MACHINERY
ELECTRICAL
MACHINERY
AUTOS, TRUCKS
ond PARTS
14%
Annual Average 1961
OTHER TRANSPORTATION
EQUIPMENT
27%
CHEMICALS
14%
1954-1961
DEC.
Annua! Average 1961
PAPER ond PULP
RUBBER
29%
15%
■
Annual Average 1961
1954-1961
DEC.
Annuol Average 1961
PETROLEUM
REFINING
STONE. CLAYondGLASS
! 1954-1961
DECT
! Annual Average 1961
i FOOD and BEVERAGES
m m-
S&4-I96!
Annual Average
DEC.
1961
TEXTILES
18%
Annual Average 1961
si
Annuol Average
dec:
1961
■
:i96i
DEC
Annual Average 1961
EH
PERCENT OF CAPACITY IDLE IN BASIC SECTORS, 1st QUARTER. 1962
M A N U F A C T U R IN G
C A P A C IT Y -17
Source of Basic Data-^McGraw Hi# Annual Surveys^Est based on
Am. Iron and Steel Inst. data.
STEEL
C A P A C IT Y 2'
DEC.
Annual Average 1961
262
P O L IC IE S
FOR
FULL
EM PLOYM ENT
CHRONIC RISE OF OUR UNUSED
PRODUCTIVE POWERS (G.N.R), 1 9 5 3 -1 9 6 2
ANNUAL DEFICIENCIES
In Billions of 1961 Dollars
Total Deficiency. 1953- Mid1962: 423 Billion Dollars ^
'B o o n
"Recession
Recession' Stagnation’
Yeor
Yeor
“Boom"
Yeor
' Stognofton' "Stognatan ‘ Recession
Yeor
Recession1
Boom"
Year
Yeor
Deficiency
in Production
5n
"Boom
‘ Stagnation 'Recession
Slognotion' Recession'
Boom"
Ye<»
Yeor
Y «u
Moiimum
„
pr0duc„0„?/
J
'Stagnation' ‘ SMgnotiooPenod
Period
596.6 JILL
6182
j 4g j
S 32H M M M M m m m m
Actual
Production
1959
I960
1st Qtr
1962
2n d Otr
(Mt-
ANNUAL DEFICIENCIES AS PERCENT OF MAXIMUM PRODUCTION
The deficiency for first half 1962 is one half the figures shown for the half year.
Based upon sufficient annual rate of growth In 6.N.P. to provide full use of growth in labor force,
plant and productivity under conditions of maximum employment and production.
1962
(S*a*onolly A<j,u«t#d
AnnuoJRatal
POLICIES FOR FULL EMPLOYMENT
263
Mr. K e t s e r l i x g . My chart five, taking into account unused plant
and unused manpower, estimates the size of the deficits in total na
tional production. The chart shows a deficit, as I have said, of about
$73 billion, annual rate, by the second quarter of 1962, coming to
almost 12 percent of maximum production capacity. These are really
underestimates, because I have no way of estimating the underutiliza
tion of manpower in the plants when they are running at 50 or 60
percent of capacity.
I have no way of estimating the accelerated technology and pro
ductivity which would result from full use, so these are very conserv
ative estimates.
Now I come to an analysis of the basic reasons for the trouble, and
this gets very closely into the matter of tax policy. My view is that
the deficiencies in total national production have occurred mostly
because of deficient pivate consumer demand. The three parts of the
economy which make up total national production are consumer de
mand, public outlays, and investment.
Taking consumer outlays first, my fifth chart shows in the bar on
the far left in the job sector, the needed rate of growth in consumer
outlays, and in the following bars the actual rati which, as you see,
has been very much lower. In the bottom sector, I attempt to show
the portion of the total deficient in national production which is
made up of the deficiency in consumer outlays. For example, in the'
second quarter of 1962, the deficiency of about $73 billion in total
national production includes a deficiency of about $56 billion in con
sumer outlays. I f necessary, I will develop these figures more on
questioning.
Moving over to my sixth chart, some people think that consumers
aren’t spending because they don’t want to. Indeed, the rate of sav
ing is too high. But nonetheless, the basic reason is income deficiency.
The top sector of this chart compares the actual levels of consumer
spending and income. The bottom sector makes an estimate that,
for the 9% year period as a whole, the deficiency of over $250 billion
in consumer outlays correlated roughly with the deficiency of about
$337 billion in consumer incomes before taxes, allowing for taxes and
allowing for savings.
M y seventh chart diows that there has also been some deficiency in
public oati&ys, mo|Uy at the Federal level The top sector of the
chart show£ the declining size of the Federal budget, relative to the
size of the national economy. The second sector of the chart shows
in uniform dollars the declining level of per capita outlays.
The first is a measure of the economic problem. The second is a
measure of the national need*
Coming to my eighth chart, the Federal budget reflects national
economic deficiencies, and I brought this out earlier in my testimony.
The top sector of the chart shows the annual deficiencies in national
production over the years. The middle sector of the chart shows
the actual condition of the Federal budget, and, as you see, it was
generally in surplus very early in the period and generally in deficit
later in the period.
.
The-thira sector of the chart compares the size of the deficits m
national production with the condition of the Federal budget, and
shows obviously that as the national production deficit has increased,
tbe Federal budgetary deficits have become larger.
264
POLICIES FOR FULL EMPLOYMENT
DEFICIENT RATE OF GROWTH IN
PRIVATE CONSUMER SPENDING, 1 9 5 3 - MID '6 2
Rates of Change in 1961 Dollars
Needed Rote of Growth 8888 Actual Rate of Growth
-M id 1 9 6 2
uoi Average
l 9 5 3 - ' 5 4 I 9 5 4 J 5 5 l 9 5 5 - * 5 6 l 9 5 6 - '5 7 l 9 5 7 - '5 8
I 9 5 8 J 5 9 l 9 5 9 - ‘6 0 I 9 6 0 - * 6 I 4 t h . 0 t r . '6 l- ls t.Q tr.‘6 2 l s t . Q t r ' 6 2 2 n d Q f r .'6 2
( Seasonally Adjusted
Annual Rotes)
THE PRIVATE CONSUMPTION DEFICITS
DOMINATE THE DEFICITS
IN THE TOTAL ECONOMY
Billions of 1961 Dollars
1st. Q tr.‘6 2
2 n d . Q tr.'6 2
(Seasonalty Adjusted
Annuoi Rotes)
265
POLICIES FOB FULL EMPLOYMENT
LOW GROWTH IN PRIVATE CONSUMPTION
REFLECTS LOW GROWTH IN INCOMES
Rates of Change in 1961 Dollars
Total Private Consumer Spending USB Total Personal Income After Taxes
1 9 5 3 -M id 19 62
Annuai A*efoge
1 9 5 8 -1 9 5 9
1 9 5 9 -1 9 6 0
1 9 6 0 -1 9 6 1
4 t h . O fr 19 6 1 1st. Q t r 1 9 6 2 1st. Q tr. 1 9 6 2
2 n d Q tr. 19 6 2
(Seasonally Adjusted Aonuol Rates)
THE PRIVATE CONSUMPTION DEFICIENCY
OF $ 2 5 4 BILLION. 1 9 5 3 - MID 1 96 2 , REFLECTED
A $ 3 3 7 BILLION INCOME DEFICIENCY
Billions of 1961 Dollars
D e fic ie n c y in
P r iv a te Consum ption
+
D e ficienc y in
C o n s u m e r S av ings
*
D eficien c ies in
C o n su m e r Incom e
A fte r T o ie s
+
S h o rt F o il in
T a » e s P aid by
Consum ers
-
D e ficienc y in
C on sum er Incom e
B e fo re To»es
337
266
POLICIES FOR FULL EMPLOYMENT
The last period is 1958—mid-1962, with an annual average deficit
of $64.5 billion in national production, and an annual average deficit
of $4.3 billion in the Federal budget, both cash and conventional.
My ninth chart illustrates what I said earlier in my testimony.
The first sector of the chart is the actual Federal budget over the
years, showing the predominance of the deficits. In the second sector
of the chart, to show that my notion is not taken out of thin air, I
have plotted the level of Federal expenditures appearing in my model
maximum prosperity budget, somewhat higher each year than the
actual, because I think they were too low. Then I have calculated
carefully what actually existing tax rates would have yielded at max
imum production and it shows, of course, a surplus during most of
the period, with a deficit in 1953-54, due mostly to the high level
of expenditures during the Korean war.
Now, coming over to my 10th chart, this brings me to the matter of
private investment. This has a great deal to do with tax policy. I
am for private investment. I am for private profit. I wish they
were higher. They would be higher if our economy were performing
better, and I have no objections to tax reductions for private investors
and for corporations when there is room for them.
I do object to throwing billions of dollars out of the window for this
purpose, when our narrow margin of capacity for tax reductions could
be used to much better purposes and when we are wedded for one
reason or another to trying to keep the budget somewhere near
balanced.
In my 10 th chart, I show in the top sector that, during the 9%-year
period as a whole, there was a deficit in gross private investment and
there was a deficit in plant and equipment investment. In fact, the
deficit averaged $10.3 billion a year m the case of gross private in
vestment and about $7 billion a year in the case of plant and equipment
investment. But how did this occur? It did not occur in anything
like a straight line. It occurred in a succession of very rapid upturns
when private investment far outran ultimate demand and led to large
unused plant capacity, and then, because of the large unused plant
capacity, the investment was cut way back so there was a low average
for the period as a whole. But if one who wants to understand the
equilibrium problem, to understand how this happens, one must look
at these separate periods.
From the first three quarters of 1955 to the first three quarters of
1957, before the 1957-58 recession, investment in plant and equipment
went up 9 percent and ultimate demand, in the form of both private
consumption and Government outlays, went up less than 3 percent.
Then there was a very sharp investment cutback in the recessionary
period. Naturally, being more volatile, investment went way down.
Then, from the first half of 1959 to the first half of 1960, before the
1960 downturn, investment went up 11.6 percent and ultimate demand
only 2.6 percent. Then there was another recession and another big
cutback. I haven’t chosen these periods arbitrarily. I have chosen
these periods carefully on the basis of when the changes in the trends
actually started to occur. From the first quarter 1961 to the first
uarter 1962, there was a slowdown in the rate of investment increase
uring the upturn period, due to the cumulative effects of all the un
used plant capacity. This means that, most recently, we have been
a
POLICIES FOR FULL EMPLOYMENT
FEDERAL BUDGET HAS SHRUNK RELATIVE
TO TOTAL OUTPUT AND NEEDS, 1 9 5 4 - 1 9 6 2
Fiscal Years
BUDGET OUTLAYS AS PERCENT OF TOTAL NATIONAL PRODUCTION
Percent
2 5 ---------------------------------------------------------------------------------------------------------------------------
20 -
BUDGET OUTLAYS PER CAPITA
In 1961 Dollars
267
268
POLICIES FOR FULL EMPLOYMENT
THE FEDERAL BUDGET REFLECTS
NATIONAL ECONOMIC DEFICIENCIES
B illio n s of
1961 D o lla r s
B illio n s of
1961 D o lla rs
FEDERAL DEFICITS GROW WITH NATIONAL ECONOMIC DEFICIENCIES
(Annual Averages, Calendar Years)
NATIONAL PRODUCTION
DEFICIENCY
CONVENTIONAL BUDGET
( B i l l i o n s o f C u r r e n t D o l la r s )
( B i l l i o n s o f 19 6 1 D o lla r s )
19581 9 4 7 -5 0
1 9 5 4 -5 7
M ID '6 2
1958+ 0 .9
l 9 5 4 - ‘5 7
M ID '6 2
269
POLICIES FOB FULL EMPLOYMENT
A BALANCED FEDERAL BUDGET DEPENDS
UPON A MAXIMUM PROSPERITY ECONOMY
Billkmof
Dollars
ACTUAL FEDERAL BUDGET
Conventional Budget, Calendar Yeors
Receipts
Aggregate Deficit, 1953-Mid 1962: $30.7Billion
1953
1954
1955
1956
1957
1958
1959
I960
1961
1962^
MODEL FEDERAL BUDGET CONSISTENT WITH MAXIMUM PROSPERITY
Conventional Budget, Calendar Yeors
1953
1954
1955
1956
1957
1956
1959
I960
1961
J / First half year 1962 shown at annual rote, seasonally adjusted
2 j Expenditures ore shown os actual expenditures plus estimated deficiencies in expenditures
during the period. Receipts are estimated by applying octuol to* rotes to maximum
prosperity levels of economic activity.
1962^
270
POLICIES FOR FULL EMPLOYMENT
getting a lower rate of investment expansion, even in the upturn period,
and Dr. Heller pointed this out, because finally business says: “My
goodness, how much more are we going to increase excess plant ca
pacity?” This slowdown in the rate of investment increase is very
serious, and it is one of the reasons why this most recent upturn is
shorter and less satisfactory than earlier ones, because due to the
cumulative effect of excess plant capacity and inadequate demand
there is less propulsion in the investment upturn. But to deduce
from this that the factor militating against investment is the tax
policy or the profit rate doesn’t comport with analysis of actual
developments.
My 1 1 th chart shows these actual developments. It shows the trends
before the 1957-58 recession, as to prices, profit, and investment. We
see prices rising, profit rising substantially, and investment in plant
and equipment rising enormously more in various key industries.
Coming to my chart 1 2 , before the 1960-61 recession, although
prices were generally down slightly and although profits were gen
erally down, nonetheless there was a tremendous investment splurge
because of the appraisal of business that the potential markets were
there to justify this level of investment. This indicates that the down
turn in prices, the downturn in profits, was on the basis of a more than
adequate profit margin to stimulate investment when the other en
vironing conditions were there, and probably indicated that the prices
and the profits had been much too high in the previous period. But
be that as it may, the investment boom again occurred, and, as I
showed on my 10 th chart, it very far outran ultimate demand.
Coming to my 13th chart, here is the situation from first quarter
1961 to first quarter 1962. Here you have a somewhat downward
trend in prices generally. In the case of the iron and steel industry
you also had a downward trend in investment, because of the enormous
unused capacity. Generally speaking, though, and in steel also, there
was a rather pronounced upturn in profits. And generally, there were
upturns in investment, though not as large as in the previous upturn
periods for the reasons I have given.
This leads me to the conclusion that the conditioning factor, with
respect to investment, is neither the tax structure nor the profit posi
tion, but rather the condition of ultimate demand and the amount of
unused plant capacity. Let me say, Chairman Heller in his testimony
yesterday supported this absolutely and completely. He talked about
the fact that profits in the first quarter of 1962 were higher than in
the first quarter 1961. He talked about the effect of cash flow. He
said the only thing that they need in order to have a still more re
warding level of profits, is more markets, and until they get that they
are not going to invest sufficiently.
In fact, he said they are overcashed and undermarketed. That is a
paraphrase of exactly what he said.
O f course, I don’t understand why, after saying this, he shifts over
to the proposition that, having given one and a half billion dollars in
the form of tax credits through Treasury regulations, and moving
toward giving another billion in the form of the 7 percent credit,
there is need to move on to give another large portion of any future
tax reduction to the same investors. I don’t understand the apparent
POLICIES FOR FULL EMPLOYMENT
271
dichotomy between the analysis of the facts and the policy con
clusions.
Representative Reuss. Before you leave this chart, I thought I
heard you say in this period steel profits went down. It was steel
investment that went down, not profits, was it not?
Mr. Keyserling. Yes. As the chart shows, steel investment went
down.
Representative Reuss. Profits went up.
Mr. Keyserling. Yes. In the first quarter of 1962 they went up.
Representative Reuss. I thought I heard you say they went down.
Mr. Keyserling. I may have misspoken.
The next series of charts relate to the wage question. As wages
are a basic factor in consumption, and investment is a basic factor
in enlarging our productive capacities, I want to show for these
periods the relative trends of wages and investment.
As vou will see on my chart, oefore the 1957-58 recession, wage
rate changes lagged generally far behind profits and phenomenally
behind investment What this means very simply is that, as cor
roboration of my earlier charts, the power to consume was not in
creasing anything like as fast as the power to produce, and I think
that this is very important to stress, because o f the widespread misimpressions about wage trends in recent vears.
My 15th chart shows how the rate of increase in plant and equip
ment outran tike rate of increase in wage rates during the period from
the first half of 1959 to the first half of 1960, before the 1960-61
recession. And my 16th chart shows how again, from the first quar
ter of 1961 to the first quarter of 1962, the rate of increases in profits
and in investment in plant and equipment generally outran the rate
of increases in wage rates.
I also have another few charts, which analyze wage trends in the
perspective of the whole economy. My 17th chart snows in the top
sector the deficient rate of growth in wages and salaries for the
9i/2-year period as a whole. The lower sector of this chart shows that
the deficiencies in wages and salaries have constituted the dominant
>rtion of the deficiencies in total consumer income before taxes.
y 18th and 19th charts show that, for the period 1947 to mid-1962
as a whole, with respect both to the entire nonfarm economy and
manufacturing, wage rate increases and productivity increases were
about in balance, and that during the most recent 5 years, wage rate
increases in both cases have lagged very seriously behind produc
tivity increases. These data lendno support to the popular impres
sion, and the impression of many economists, that wage rate increases
have outrun productivity increases and therefore forced up prices.
The truth of the matter is that profit margins per unit have been too
high, after allowing for all business costs including wage costs, which
means that prices have been too high. The inadequacy of profits at
times, as I have already demonstrated, relates entirely to the low level
of operations and the high amount or unused plant capacities, which
in turn are attributable to the deficiency in ultimate demand caused in
large measure by the deficiencies in total wages and even in wage rate
increases.
S
272
P O L IC IE S
FOR
FULL
EM PLOYM ENT
GROSS PRIVATE DOMESTIC INVESTMENT WAS
DEFICIENT DURING 1953 -MID 1962 AS A WHOLE
Gross Private Domestic Investment
Investment in Plant and Equipment
AVERAGE ANNUAL
DEFICIENCY
AVERAGE ANNUAL GROWTH RATE
1953-Mid 1962
In 1961 Dollars
3 0%
1953 - Mid 1962
In 1961 Dollars
2 6%
0 .3 %
NEEDED
ACTUAL
103%
BUT INVESTMENT IN MEANS OF PRODUCTION
AT TIMES OUTRAN ULTIMATE DEMAND;
HENCE INVESTMENT CUTS AND RECESSIONS
^
Gross Private Domestic Investment SB Investment in Plant and Equipment
^
Ultimate Demand: Total Private Consumption Expenditures
Plus Total Public Outlays ( Federal, Stote and Local) for Goods and Services
I St. Holf '59I st Half '60
1st Half '60Ist Half '61
UP
18%
Doan
64%
Dam
167%
Average Annual Rates of Change. 1961 Dollars
1st Otr‘61Ist Qtr'62
273
POLICIES FOR FULL EMPLOYMENT
RISING PRICES, PROFITS, AND INVESTMENT
BEFORE THE 1 9 5 7 - 1958 RECESSION
The Investment Boom Before the 1 9 5 7 -1 9 5 8 R ecession
First Three Quorters 1955 - F irst Three Quorters 1957
I Prices,^7
WfflMProfits offer Toxes;Zj
Investment in Plant ond Equipment ^
UP
110 0%
up
UP
18.2%
UP
26%
UP
59%
19M
7X
'M
'/’A
UP
153%
up
14 4%
z\.7\
262%
B88888
Processed Foods and
Kindred Products
Iron and Steel
Petroleum and
Cool Products
Chemicals and
Allied Products
E lectrical
Machinery
Non-Electrical
Mochinery
B uraou o f Lob
or
S t a t is tic * , J U S 0 * p t o f Lofcor), C a n m o d it, w m m I i P n c o In d o i w
S o c u r itio t ond E ic K o n g t Com m iM M Xi, P ro fit E t t i m o l* *
S o o r < t iM a x ! E i c M n g t C o m m iM io n n t m o l n a t K i m x h l u n t fo r p la n t an d « * iip « > * n t
274
P O L IC IE S
FOR
FULL
EM PLOYM ENT
INVESTMENT BOOM OCCURRED AGAIN
BEFORE THE 1 9 6 0 -1 9 6 1 RECESSION
DESPITE REDUCED PRICES AND PROFITS
F irs t H a lf 1 9 5 9 - F i r s t H a lf I 9 6 0
DOWN
3.0%
PROCESSED FOODS AND
KINDRED PRODUCTS
IRON AND STEEL
PETROLEUM AND
COAL PRODUCTS
UP
30.4%
DOWN
3.2%
CHEMICALS AND
ALLIED PRODUCTS
ELECTRICAL
MACHINERY
J/
U.S. Dopt of Labor, B uroau of Labor S tatis tics , com m odity w holosolt pries indexos
2/
Socurttios ond Exchongo Commission, p r o fit ostim atos.
1/
S ocurttios ond Exchongs Commission, ts iim a te s of oxpondituros for plant and equipment.
MOTOR VEHICLES
AND EQUIPMENT
P O L IC IE S
FOR
FULL
EM PLOYM ENT
PRICE, PROFIT AND INVESTMENT TRENDS
DURING CURRENT ECONOMIC UPTURN
1st Quarter 1961-1st Quarter 1962
Prices-' 1888888 Profits5' 0
1/Doto; US
Investment1'
Dept of Labor, wholesale commodity price indexee
^ Data: Securities and Exchange Commission.
* Data: us. Dept, of Commerce and Securities and Exchange Commission
275
276
POLICIES FOR FULL EMPLOYMENT
On top of all this, the material which I have thus far presented
measures actual wage rate increases against actual increases in pro
ductivity. But the actual increases in productivity have been repressed
by the large economic slack and consequent inefficient use of plant and
manpower. Wage rate increases, to fulfill their proper consumption
function, should be related to the technological changes in produc
tivity, which means the changes in productivity which would occur
under conditions of reasonably full utilization. My chart 20 demon
strates this proposition by comparing rates of actual productivity
growth under varying degrees of economic utilization, and therefore
substantiates my conclusion that the lag of wage rate increases behind
technological change has been severe indeed, and thus has been one of
the main factors in the poor character of our overall economic
performance.
Chairman Patman. They will all be in the record.
Mr. Keyserling. The main point is that there is nothing wrong
with our productivity, whenever there is adequate ultimate demand.
One day we hear that our productivity is increasing so fast that we
are never going to be able to expand ultimate demand enough to use
all the labor force because technology and automation are advancing
so fast. The next day we hear from the same people that productivity
and technology are increasing so slowly that we are at a competitive
disadvantage all around the world. Both statements can’t be gen
erally true.
The fact of the matter is that productivity and technology are in
creasing faster than we dare to realize, both in the factory and on
the farm, and the great problem is to expand distribution apace.
There is nothing wrong with American productivity, or American in
ventiveness, or American managerial skills. This is an economic prob
lem and not a technological problem.
This brings me back to the question about profits that Congressman
Reuss asked. My 21st chart shows profits in some key industries,
showing in the final bar of each box the first quarter o f 1962. This
does show iron and steel profits, up again in the first quarter of 1962,
although not above the alltime peaks of some of the earlier years.
In the case of motor vehicles, as we have all read in the papers re
cently, the profits are enormously above any previous time, and in the
case of other key industries they are either at or above or very near
alltime peaks.
^Let us remember that there is at the same time a very low utiliza
tion of capacity, as I showed.
My 22 d chart bears upon this. When you look at profit sales ra
tios, yon see that they have held up very well, and that most of them
have increased, which simply means that, if there were a higher level
of operations, if there were a higher level of ultimate demand, profits
would soar, and quite properly would soar, far above their recent
levels, which in themselves have been veiy rewarding and quite high.
P O L IC IE S
FOR
FULL
277
EM PLOYM ENT
BEFORE THE 1 9 5 7 -1 9 5 8 RECESSION,
PROFITS AND INVESTMENT
OUTRAN WAGES-BASIC TO CONSUMPTION
First Three Quarters 1955-First Three Quarters 1957
& Profits1'
SC Investment-5'
□ Wage Rotes1'
UP
110.0%
UP
UP
up
5.9%
BjJjjjBj
H H
21.7%
UP
up
II.o*
PROCESSED FOODS
and KINDRED PRODUCTS
CHEMICALS
end ALLIED PRODUCTS
1 1 .9 %
EL
IRON and STEEL
PETROLEUM
and COAL PRODUCTS
NON-ELECTRICAL
MACHINERY
•!/ Dota: Securities ond Exchange Commission
& Investment in plant and equipment. Dota: U.S. Dept of Commerce ond Securities and Exchange Commission
* Average hourly eornings of production workers Data: U.S. Dept, of Labor
278
P O L IC IE S
FOR
FULL
EM PLOYM ENT
BEFORE THE 1 9 6 0 -1 9 6 1 RECESSION
INVESTMENT AGAIN
OUTRUN WAGES-BASIC TO CONSUMPTION
First Half 1959-First Holf I960
W
Investment^
f FI Wage Rates5'
UP
70%
PROCESSED FOODS
and KINDRED PRODUCTS
CHEMICALS
and ALLIED PRODUCTS
IRON and STEEL
PETROLEUM
and COAL PRODUCTS
MOTOR VEHICLES
and EQUIPMENT
Investment in ptont and equipment Data: U. S Dept of Commerce and Securities and Exchange Commmion.
Average hourly earnings of production workers. Dala: U. S Dept of Labor.
P O L IC IE S
FOR
FULL
EM PLOYM ENT
PROFITS AND INVESTMENT
DURING CURRENT ECONOMIC UPTURN
OUTRUN WAGES-BASIC TO CONSUMPTION
1st Quarter 1961-1st Quarter 1962
IB
P r o f i t s T O Investment-^ S B Wage Rotes^
PETROLEUM
andCOALPRODUCTS
IRONandSTEEL
CHEMICALS
andALLIEDPRODUCTS
UP
35.5%
I
UP
e.i%
M
C=J'
ELECTRICAL
MACHINERY
'
NON-ELECTRICAL
MACHINERY
M
OTORVEHICLES
andEQUIPMENT
Data: Searttie* and Eichange Commission
Investment r pknt and equipmwrt. Data: U.S. Dept of Commerce and Seortties and Eichange Commission
* Average hourty earnings of production workers. Data: U.S. Dept of Lobar.
87808-—82------ 18
279
280
POLICIES FOR FULL EMPLOYMENT
DEFICIENT RATE OF GROWTH IN
WAGES AND SALARIES, 1 9 5 3 -MID 1962
DEFICIENCIES IN WAGES AND SALARIES
ARE LARGE SHARE OF DEFICIENCIES IN
TOTAL CONSUMER INCOMES BEFORE TAXES
Billions of 1961 Dollars
1953-Mid ’62
Annual Averoge
1956
35.5
1st Qtr
1962
2nd Qtr
1962
(Seasonally Adjusted Annuol Rates)
281
POLICIES FOR FULL EMPLOYMENT
RATES OF CHANGE IN NONFARM OUTPUT,
AND IN NONFARM WAGES AND SALARIES,
PER EMPLOYEE-HOUR, 1947 - 1 9 6 2 -^
Annual Average Rates of Change, Measured in Uniform Dollars
1947-1962
1947-1950
(P re -K o re a n War)
3.8%
2.9%
:
■
IIM
»
Output
»
Wages & Salaries
Output
Wages & Salaries
f t r E m ployee-hour
Per Emplqiee-hour
1950-1953
1953-1962
(Post-Korean War)
(K orea n W ar)
2.9%
2.8%
2.9%
Wages & Salaries
Output
Wages & Salaries
1.7%
I
Output
f t r E m ployee-how
Per Employee-hour
1957-1962
1947-1962
( E a t . Korean W ar Y ea rs 1 9 5 0 - 1 9 5 3 )
3.0*
2.9%
1
(M o s t Recent 5 Yeor P eriod)
3.1%
2.7%
1
Output
Pa
Wages & Salaries
E m p to n e e -to f
1/ 1962 estimated
Output
Wages & Salaries
ftr Emploiee-taf
282
P O L IC IE S
FOR
FULL
EM PLOYM ENT
RATES OF CHANGE IN MANUFACTURING OUTPUT,
AND IN WAGES AND SALARIES,
PER MAN-HOUR, 1 9 4 7 - 1 9 6 2 y
Average Annual Rates of Change. Measured in Uniform Dollars
1947-1950
1947-1962
(P r e - K orea n W ar)
3.9%
2.9%
2.9%
Output
Wages & Salaries
Output
Wages & Salaries
P er M a n -h o u r
P er M o n-hour
1953-1962
1950-1953
(P o s t-K o r e a n W ar)
(K o rea n W ar)
3.3%
2.7%
2.6 %
Output
Wages & Salaries
Output
Per M an -h o u r
Wages & Salaries
P er M a n -h o u r
1947-1962
(E id
2.7%
1957-1962
Korean W ar Y ears 1 9 5 0 - 1 9 5 3 )
( M o tt Recent 5 Y ea r P e rio d )
3.4%
30%
I
2.8%
I
Output
Wages & Salaries
P e r M a n -h o u r
J' 1962 Mtraftd
Output
Wages & Salaries
P e r M a a -h o u r
283
POLICIES FOR FULL EMPLOYMENT
T R E N D S IN OUTPUT PER M AN-HOUR
-O R
PR O D U CTIV ITY - 1 9 1 0 - 1 9 6 2
Average Annual Rate o f Productivity Growth
for the Entire Private Economy
THE RECORD /9/0-/962
INDICATING AN ACCELERATING PRODUCTIVITY
6R0WTH RATE UNTIL 1 9 5 5 -/9 6 /
19101920
19201930
19301940
19401950
19501955
19551961
1961-1962
(*., \
THE RECORD SINCE WORLD WAR R AND RECONVERSION
INDICATING A STILL HIGHER PRODUCTIVITY
GROWTH RATE UNTIL IT WAS ADVERSELY AFFECTED
BY RISING ECONOUIC SLACK
1953-1960
Period of
Relatively Large
Economic
Slack
Notr. Bawdon U.S.Ooportmont of Labor Mfimatvt, rotating to man-hour* workod
Period Affected
By Economic
Upturn
284
POLICIES FOR FULL EMPLOYMENT
Let’s now look at my 23d chart. This shows that, in addition to the
rofit factor, there is the cash flow factor. In other words, even the
igh profit figures under conditions of low capacity utilization do not
represent the real availability of funds for corporations. Here I an
alyze the organization of financing from internal sources, which is
done through various types of internal sources, including depreciation,
amortization, retained profits, and depletion allowances, so that what
is actually happening is that even in some of the cases where there
seems to be a profit squeeze, the Federal tax policy has been so liberal
that really, for all practical purposes, there have been more invest
ment funds available than at some earlier times when the figures were
showing a better profit picture.
I have had an opportunity to analyze this difficulty for the railroad
industry, and the difference between the figures when you just look
at the profit trends for the railroads and the figures when you look
at their true financial position, is fantastic in the case of some of
these very large rail companies which are seeking merger on the
ground that they are on the way to bankruptcy.
My final series of charts indicate the magnitude of the economic
task confronting us. My 24th chart shows the needed increases in
total national production, in various components of national produc
tion and income, and in employment. The goals for 1964 bring home
how far current programs, and programs under active discussion, are
short of the minimum requirements for restoring maximum employ
ment and production even by 1964. My 25th chart shows the differ
ence, 1953-56, between the high and the low growth rates. My 26th
and 27th charts portray the nature of a Federal budget which would
exert its appropriate role in an effective nationwide effort to restore
and maintain maximum employment and production, and in helping
to meet the great priorities of our public needs.
Now, what do all these charts show in substance, as I see them,
as they bear upon fiscal policy ? As they bear upon fiscal policy, they
show first, that the problem in the American economy since 1953
has been the age-old problem of not being able to distribute what
we can produce. It is an anomally that almost everybody agreed to
this a few years ago, and almost everybody has forgotten it now.
Businessmen, conservatives, liberals, economists, were all saying the
American economy has a genius for production, but doesn’t know how
to distribute what it could produce. Ultimately and basically, this
is what unused plant and manpower mean, that we don’t distribute
what we can produce, and it certainly isn’t because we are an affluent
society. It certainly isn’t because we don’t have poverty in our midst.
Even since the great depression, we haven’t learned to distribute
what we currently can produce, and yet our economic policies during
the last 9y2 years, if I may say so, under Republican and Democratic
administrations almost alike, have been wedded to a monetary policy,
a tax policy, an interest-rate policy, and other policies which have
aggravated rather than remedied these basic imbalances in our
economy.
E
285
POLICIES FOR FULL EMPLOYMENT
KEY PROFITS AFTER TAXES ARE HIGH
DESPITE LARGE UNUSED CAPACITIES
I953-IOO
MOTOR VEHICLES AND EQUIPMENT
IRONAND STEEL
250
200
150
100
50
01 1953 ‘54 '55 '56 '57 '58 '59 '60 '61 01
'62
'62
ELECTRICAL MACHINERY
PETROLEUMREFINING
0
25 0
200
150
100
50
0
1953 '54 '55 '56 '57 '58 '59 ‘60 *61 01
'62
25 0
CHEMICALS AND ALLIED PRODUCTS
H
TOTAL MANUFACTURING
250
200
150
100
50
0
01
'62
Note: First quarter 1962 figures shown at annual rate, not seasonally adjusted
Data: Federal Trade Commission-Securities ond Exchonge Commission
286
POLICIES FOR FULL EMPLOYMENT
PROFITS-SALES RATIOS INDICATE
STILL HIGHER PROFITS WILL RESULT
WHEN CAPACITIES ARE MORE FULLY USED
Manufacturing Corporations' Profits after Taxes, as Percent of Net Sales
MOTOR VEHICLES AND EQUIPMENT
IRONAND STEEL
7 .1 %
5 .3 %
4 .6 %
5 .5 %
4 .9 %
3 .9 %
'
M i
li t Otr
1962
n r to a i n tij n rn iim r
ELECTRICAL MACHINERY
4 .1 %
3 .5 %
3 .5 %
!-,W
— ...............
1953
CHEMICALS AND ALLIED PRODUCTS
73%
TOTAL MANUFACTURING
7 .2 %
43%
Data Fsdsrai Trod* Commission, Sscuritiw ond Enhangs Commission.
1961
4 .3 %
4 .3 %
POLICIES FOR FULL EMPLOYMENT
TOTAL FUNDS USED BY CORPORATIONS
HAVE INCREASED
B illio n s of C urrent D o llo rs
36.9
28.7
19 4 7 -1 9 5 3
Annual Average
1 9 5 3 -1 9 6 1
Annual Average
PORTION OF THESE FUNDS USED FOR
PLANT AND EQUIPMENT HAS GROWN
71.3%
76.7%
ViViWiVWiV
1 9 4 7 -1 9 5 3
Annual Average
19 53-1 961
Annual Average
PORTION OF CORPORATE FUNDS DRAWN
FROM INTERNAL SOURCES HAS RISEN
Depreciation and Amortization
Retained Profits and Depletion Allowances
70.1%
1 9 4 7 -1 9 5 3
A nn ual A v e ra g e
Datu DepartmentofCommerce.
19 53-1 961
A nn ual A v era g e
287
288
P O L IC IE S
FOR
FULL
EM PLOYM ENT
GOALS FOR 1 9 6 3 AND 1 9 6 4 . CONSISTENT
WITH LONG-RANGE GOALS THROUGH 1 96 6
1963 and 1964 Goals Compared with Estimated 1962
Dollar Figures in 1961 Dollars
EMPLOYMENT
(In m illions of m o n -y e o rs )
UNEMPLOYMENT
TOTAL PRODUCTION
UP $96 Billion
( in m illio n s of m o n-y«ars)
UP 5.7
CONSUMER
SPENDING
DOWN
l.l
DOWN
1.7
1963
FAMILY INCOME
WAGES and SALARIES
1964
NET FARM INCOME
(A v e ro g t)
TRANSFER
PAYMENTS
UP
$ 5 Billion
1963
1964
1963
UP
$10 Billion
1964
BUSINESS and
PROFESSIONAL
GROSS PRIVATE
DOMESTIC
RESIDENTIAL
NONFARM
INCOME
INVESTMENT
CONSTRUCTION
PUBLIC OUTLAYS FOR
GOODS and SERVICES
(C olodar Y aorl)
VFEDERAL
UP
$5BM on
UP
$ 9 Billion
1963
UP
UP
UP
$10 Billion
UP
$ 2 0 Billion
S TA TE an d L O C A L
up
$ 3 Billion
$ 3 Billion
1963
1964
1964
1963
UP
$ 5 Billion
289
POLICIES FOB FULL EMPLOYMENT
DIFFERENCES IN RESULTS OF HIGH AND
LOW ECONOMIC GROWTH RATES, 1 9 6 3 -1 9 6 6
Bold foco- Diffsrsnc* in 1966; Italics - Difftrwnc* for four f a r period at a whoh
Dollar figure* In 1961 dollars
EM
PLOYM
ENT J
( In millions of mon-ysors)
TOTAL
PRODUCTION
CONSUM
ER
SPENDING
PERSONAL
INCOM
E
UNEM
PLOYM
ENT,J
(In millions of mon-ysort}
3.7
/OS
$104 Billfe*
$65 Billto*
$82 Billion
$291Billiof,
$190 Billion
$229 Billion
FAM
ILY
INCOM
E
WAGESttd
SALARES
NETFARM
INCOM
E
TRANSFER
PAYMENTS
$1,200
*1600
$145Bilik*
$43 Billion
$31Billion
BUSINESSnod
PROFESSIONAL
INCOM
E
GROSSPRIVATE
DOMESTIC
INVESTMENT
RESIDENTIAL
NONFARM
CONSTRUCTION
FEDERAL,STATE. AND
LOCALGOV'TOUTLAYS
FORGOODSAND
SERVICES
$5 Billion
$15Billion
$50 Billion
$16 Billion
$11 BilliOO
$27 BUtiOft
$103 Blllioa
$12Billion
$ 76BHUoo
$ ffBillion
$35BHIbo
■(m m IMS
m
iBfcor «orfe*
mm km fnwih *
P O L IC IE S
FOR
FULL
EM PLOYM ENT
TOWARD A FE D E RA L BUDGET C O N SIST E N T
WITH MAXIMUM EMPLOYMENT AND TH E
PRIORITIES OF NATIONAL PUBLIC NEEDS
Billions of Dollars
114.0
•Interest
'..--General Government
Commerce
'/'Natural Resources
s 'Agriculture
N ''Labor and Welfare^
'Veterans
\ 'International Affairs
\ and Finance
'Housing
— Major National Security
1966
'
Fiscal Years
(Current Dollars)
.
Goal
Calendar
Year
(1961 Dollars)
B U R D E N O F F E D E R A L O U T L A Y S IN A
F U L L Y G R O W IN G E C O N O M Y W O U LD BE
LOW ER TH AN
IN R E C E N T Y E A R S
TOTAL federal outlays as percent of
TOTAL NATIONAL PRODUCTION(GNP)
(1 9 63 , Fiscal; All Other Years,
Calendar Years}
NATIONAL DEBTAS PERCENT OF
TOTAL NATIONAL PRODUCTION [GNP)
64.0%
(1 9 63 , Fiscal; All O ther Years,
Calendar Years)
(CONVENTIONAL BUDGET)
42.0%
16 7%
16.3% 16.4% 159%
1953-1961
1961
1963
1966
Av. Annual
Actual
Actual
Goal
Goal
I/BoMd upon Budget
M tim o tti a t of
July
2 /Inducing Mucafton and public htalth.
2 0 ,1 9 6 2 .
1953-1961
1961
Av. Annual
Actual
Actual
291
POLICIES FOR FULL EMPLOYMENT
A FEDERAL BUDGET GEARED TO
JOBS FOR ALL
AND ADEQUATE PUBLIC SERVICES
1962and 1963, Fiscal Yeara; 1966, Calendar Year
Par Capita Outlay in 1961 Dollars
TOTALFEDERAL
OUTLAYS
tor
NATIONAL DEFENSE,
SPACETECHNOLOGY
AND ALL
INTERNATIONAL
% of Total Pm
Ovtprt Capita VMr
%.ofToM Far
Outpvt Capita
EDUCATION
Mar
%af IbM Pm
Outpvt GopHa
HEALTH
SERVICES
AND RESEARCH
%aflMO 9m
1962^ 16.25 471.67 196gi/ 10.20296.14 I962J/ 020 5.79 1962^ 0.21 6.00
1963600146.41 50137 I9636ooll02l 312.47 1963Goal 0.31 946 1963Goal 0.31 9.46
1966 Goal 1536 569.43 1966Gool 9j85 351.65 1966Goof 0.67 2197 1966Gool 0.48 16.98
PUBUC
ASSISTANCE
LABORAND
MANPOWER. AND
OTHER WELFARE
SERVICES
HOUSINGAND
COMMUNITY
DEVELOPMENT
ALL DOMESTIC
PROGRAMSAND
SERVICES
tot* . iflitrca;
Mamt;€M«al
% a f* U
Pm
% « fM
Pm
%«TW Nr
Pm
1962^ 0.45 13110 1962-1/ 0.16 4.71 1962-1/ 006 1.80 1962^/ 605 175.53
1963Goal 0.52 »*7S 196360010.15 4.73 1963Gool 0.19 5l78 1963Gool 6t20 18990
I966LM 0^2 I&48 1966Gool 0.14 500 19666001 034 11.99 1966Goal 6.11 217.78
292
POLICIES FOR FULL EMPLOYMENT
The reason I have analyzed so carefully—I hope carefully—this
whole profit picture and investment picture during these recurrent
boom periods that collapsed so quickly, is because I have been asked
why they collapsed. They didn’t collapse because they were not
making enough profits. They did not collapse because the tax policy
was too severe. They collapsed because, even with a giveaway tax
policy, practically, and extremely high profits, they still won’t con
tinue to go ahead when they saw more and more that they couldn’t
sell what they could produce, and this is true in the last year as well
as in the period preceding the last recessions.
The reason we are now moving into stagnation and recession again,
is precisely the same reason as in these previous periods, namely, there
were plenty of cash flows, plenty of profits, a very favorable tax
situation, but they still would not go ahead with adequate investment,
and in fact are willing to go ahead now even less than previously, be
cause now more than ever before they are confronted with unused plant
capacity. Business Week, on the 28th of April—and this is my final
point, Mr. Chairman—these business magazines amuse me. They
have an editorial page in favor of more tax concessions for business.
Then they have a fact page or an analysis page which recognizes the
opposite.
There was a long article, based upon the McGraw-Hill survey in
Business Week, which said they had plenty of cash flow, plenty of
profits; that the reason they are slowing down their investment is that
the investment of tomorrow is based upon the customer of today; and
if only they could get the customers, they would have the markets
and would make the investments.
I think this is a guide to tax policy, I think it is a guide to monetary
policy, and I think it is a guide to general economic policy.
Thank you very much for your attention.
Chairman Patman. Thank you, sir. You may keep your seat there
if you desire, and we have our next witness, Mr. Saulnier.
Willy ou come forward, please ?
I believe, Doctor, you have a prepared statement. You may proceed
in your own way.
STATEMENT OF RAYMOND J. SAULNIER, PROFESSOR OF ECONOMICS,
BARNARD COLLEGE, COLUMBIA UNIVERSITY, NEW YORK CITY
Mr. Saulnier. Mr. Chairman, I have a prepared statement, copies
of which I believe have been distributed to the committee.
Chairman Patman. Yes; they have been distributed to the members.
Mr. Saulnier. This statement was prepared rather hurriedly and I
have already detected some points I would like to correct. I hope
you will give me an opportunity to correct them before the statement
is, as I expect it will be, printed.
Chairman Patman. You may correct them as you go along, or if you
desire you can wait until you examine your transcript of testimony.
Mr. Saulnier. Thank you, Mr. Chairman.
Chairman Patman. You certainly will be given permission to
correct it.
M r. S a u ln ier . I w ill read the statement, if I may.
POLICIES FOB PULL EMPLOYMENT
293
I want, first, to commend the committee on its decision to hold
open hearings at this time on economic policy and to thank you for
inviting me to participate in them.
Certainly, the hearings are timely. Although the economy is far
from being in distress, things have not gone very well and certainly
not as well as was expected. The 1961-62 recovery and expansion
was not up to par, much less than having been an improvement over
earlier recoveries. And there was those who think that after only 17
months of recovery and expansion a downturn is imminent. It also
adds to the timeliness of these hearings that they come at a point
when the Federal budget is being shaped up for the fiscal year 1964,
and I would assume mat work on the legislative program for 1963
will soon be under way in the executive branch.
In short, the time couldn’t be more appropriate for an open dis
cussion of economy policy. I think it would be agreed, also, that such
a discussion is needed.
As I understand it, you have already received testimony setting
forth the salient facts on the economic situation. I will try not to
duplicate any of this, but before I comment on policy matters I must
give you my own conclusions regarding the present position of the
economy and the near-term outlook, for these are critical to my policy
recommendations.
It is widely acknowledged that for some time now the indicators
to which we look for clues as to the economic outlook have been far
from encouraging. Warnings of a slowdown in the rate of economic
advance began to be visible early this year. Month by month these
warnings were confirmed; but the evidence for the month of May
went beyond this and suggested a strong possibility of a downturn
occurring before the end of the year. I f anything, June darkened
the outlook a bit.
July was another matter. Not very much data are available yet,
but what there is suggests that the economy steadied itself and lmroved a bit. Indeed, for a month that is often hard to interpret,
would say that the evidence of improvement in July is pretty clear.
Certainly, if we look at the month’s developments from the point
of view of their policy implications there is no doubt but that they
destroyed any case there may have been for an emergency tax cut.
And perhaps I can best express my estimate of the near-term out
look by saying that I doubt that developments in the next few months
will warrant emergency tax cutting.
But it would be a mistake to think that the danger of a downturn
has been altogether averted. I don’t think one can say at this time
that it has been any more than deferred. The economy has shown
resistance and strength in the last few weeks but the record for the
recovery as a whole obviously suggests a lack of the kind of liveliness
one would like to see.
The way I read the record, it is saying that there is no need for
emergency antirecessionary tax cutting, but that there is an urgent
need to strengthen the underlying forces that make for growth in
our economy and to remove obstacles to growth. And I would say
that the record is telling us, also, that we don’t have an unlimited
amount of time to shape and adopt the needed measures.
?
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The performance of the economy in the last few years, and in par
ticular the disappointing record of the present recovery, provide im
portant guidance as to the kinds of measures that are needed. Four
points in this record are especially noteworthy.
First, it should be clear from recent experience that we cant pro
duce the economic growth we want merely by the increase in Federal
spending. The fact is that in the fiscal year just completed net budget
expenditures of the Federal Government rose by more than $6 billion.
This followed an increase of $5 billion in the fiscal year 1961, of
which nearly 80 percent was incurred in the last 6 months of that
period. And I would judge that more increases are in prospect. The
budget presented to the Congress in January 1962 projected a rate of
expenditures for fiscal 1963 which would be about $6 billion higher
than the fiscal 1962 rate.
Thus, we have had a $10 billion increase in Federal expenditure
rates in the last year and a half; and if things turn out as projected
in January, we shall have had a $16 billion increase in 2 ^ years end
ing June 30, 1963. There has been a sharp increase, also, in spending
by State and local governments. The economy has lagged, but no
one can say it has lagged because it got no boost from Federal spending.
Second, not only have we had a sharp rise in Federal spending but
it has been deficit spending, which is widely regarded as being a very
strong tonic for the economy. But if a deficit in the Federal budget
with expenditures rising will stimulate the economy, then we should
be enjoying a good deal more stimulation than we are feeling right
now. There was a deficit in the conventional budget of nearly $4
billion in the fiscal year 1961, and a deficit of $6.3 billion was registered
in the fiscal year just completed. And still the economy lags.
There are all kinds of reasons why our country, with its heavy re
sponsibilities in the free world, should keep its financial housekeeping
in strict order, but if we were to put all of these powerful arguments
aside and simply look at the record aspragmatists I don’t seeTiow we
can escape the conclusion that the Federal budgetary deficits just
don’t work the magic they are reputed to perform.
Third, it is not easy, either^ to see a ground for complaint that con
sumer buying power nas not mcreased rapidly enough. Between the
first quarter of 1961, which was the trough quarter of the 1960-^1
recession, and the second quarter of this year, disposable personal in
come rose more than did personal consumption expenditures. Reflect
ing this fact, the annual rate of personal savings went up by about $3
billion, and the savings ratio rose from 6.7 to 7 percent.
Fourth, the record snows very clearly that the one major element in
our economy that has been really lagging is the volume of expendi
tures by private business concerns on plant and equipment wTiil©
other major categories of national product have been increasing
very well, and some, such as governmental spending, have been rising
sharply, producers’ expenditures on durable goods have hardly in
creased at all.
They rose in the recovery period, but not nearly enough; and, look
ing at their behavior over a longer period, they were barely larger in
the second quarter of 1962 than they were in the second quarter of
I960*
POLICIES FOB FULL EMPLOYMENT
295
Furthermore, if the amounts spent were expressed in constant
rather than in current prices I expect it would be found that the phys
ical amounts of goods involved was actually less in mid-1962 than it
was 2 years ago.
When one goes over the whole record, it is pretty clear that the lag
in our economy is in private investment activity, and that our major
need is to create an environment that will favor a more rapid increase
in this category of expenditures. What we need is a program of ac
tion that will bring this about.
In a moment I will outline a plan of policy which, in my judgment,
would fit the present situation, but, before I do that, let me say that a
plan of economic policy, like any broad strategical plan, must respect
the constraints that are inherent in the situation in wnich it is intended
to operate. There is no point in talking about what it would be help
ful to do if only the situation were not what it is.
In the present case, it is futile, and, worse than that, to talk about
policy without regard to the fact that we have a substantial and con
tinuing deficit in our balance of payments. When I appeared before
this committee last January, I said that I thought this was our No. 1
problem.
I think that is still a correct appraisal of the situation. We should
shape our policy plans in the understanding that we do have a precari
ous international financial position; and, to the fullest extent possible,
our plans should be designed to help improve that position.
Further, it is not very nelpful to talk about policy plans, fiscal or
otherwise, as if there were no deficit in the Federal budget. I have
heard suggestions that the Federal Government is not collecting
enough money to pay its expenses, even in an advanced stage of busi
ness expansion. If the advocates of this kind of tax cutting have
either overlooked the existing deficit, which hardly seems possible, or
they have been persuaded that tax cuts which create deficits will give
such a strong stimulus to growth that they will pay for themselves
with very little delay.
As I have shown, there is nothing in our recent experience to suggest
that deficits, as such, will do this.
In any case, the policy program I am going to propose does respect
the facts of our international financial position and our Federal
finances.
Let me outline the major elements of a program.
First, it would be helpful, if this committee, and the administration,
would reaffirm the budgetary policy which has been previously stated;
namely, that our object in budgetary planning is to achieve a balance
over the cycle, with surpluses in periods of cycncal expansion offsetting
deficits during cyclical recessions. Any doubts on tins should be put
to rest*
Second, it is essential, in my judgment, to initiate at the earliest
possible opportunity a program of tax reforms designed to stimulate
a higher rate of business capital expenditures. The steps recently
takenby the Treasury to liberalize depreciation allowances were a good
start. Ihe investment credit would oe helpful, too, though my pref
erence would befor a still more liberal depreciation allowance.
Beyond these steps, we ought to get the corporate income tax rate
down. The 42-percent limit proposal in the Baker-Herlong bill would
8786fr—*2-------30
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POLICIES FOR FULL EMPLOYMENT
be very helpful, of course, but we might set 47 percent as an interim
goal. Also, we should eliminate the near-confiscatory rates imposed
on the upper brackets of individual income.
Again, I would like to see these reduced over a period as contem
plated in the Baker-Herlong bill, but 50 percent would be a reasonable
interim goal.
Quite apart from other effects, these tax changes would be tremen
dously helpful to our 4 million small- and medium-sized business con
cerns. The task we face of providing jobs in this decade for a rapidly
increasing number of young people is going especially to require a
vigorous body of small- and medium-sized companies. Many will find
employment in large nationwide organizations, but we should leave
no stone unturned to help the small- and medium-sized companies in
which large numbers of young people will find their most interesting
and rewarding employment opportunities.
Third, although I want to see us do every bit of constructive, growthpromoting tax reducing that we can do, I believe we should limit what
we do to what can be counterbalanced, in its immediate revenue-reduc
ing effects, by expenditure reductions and possibly by some sales of
Treasury-held financial assets.
I f rate reductions of the type I have proposed promote growth to
the extent that I think they will, they will eventually pay for them
selves, but in the interim we should plan to pay for them in some quite
tangible way.
I suggest that we go about the task of financing constructive, growthpromoting tax cuts as follows:
( 1 ) As guidance for the fiscal 1964 budgetmaking process the Presi
dent should set a ceiling on Federal spending. This ceiling should
not be higher than the projected spending level of fiscal 1963 and if
possible should be lower.
( 2 ) With that ceiling as a preliminary guide, an effort should be
launched at once to reduce spending on low-priority programs. The
economies achieved from this budget review need not go exclusively
to financing tax reductions. On the contrary, they might be divided
about 50-50 between this purpose and increasing expenditures on truly
high-priority programs. By high-priority programs I mean those
that give clear promise of enhancing our capability for achieving a
vigorous rate of economic growth.
(3) Although I would depend mainly on the reduction of lowpriority spending to offset the immediate revenue cost of tax reforms
it should be possible to offset some part of this budgetary impact from
the proceeds of the sale of portions of the huge amount of financial
assets which the Federal Government has accumulated over the years
under its various direct loan programs.
^imated
the January 1962 budget message (special
analysis E) that outstanding direct loans of major Federal credit pro
grams at the close of the fiscal year 1962 would come to nearly $27
?■1 j *1 * Obviously, one should not press a program of this kind too
hard lest it raise borrowing costs in the long-term capital markets.
But it should be possible to distribute significant amounts of these
assets on terms that would be fully protective of the public interest and
without any material effect on long-term borrowing costs.
POLICIES FOR FULL EMPLOYMENT
297
Something between $2.5 and $3 billion would be a reasonable be
ginning goal for tax reductions of the sort I have proposed; and I
believe that this immediate impact on revenues could be offset by some
combination of the means I have indicated. If more can be done, so
much the better.
It is my considered judgment that a statement to the effect that this
is the direction of policy to be followed in tax and expenditure matters
would have a very stimulative effect on our economy. But I would
emphasize that it is very important to get the program underway
soon. Accordingly, the tax aspects should be presented, in my judg
ment, in a form mat will minimize the time required for consideration
prior to enactment. From this point of view, the simpler the bill, the
better.
(4)
This brings me to the question of monetary policy, which is
especially important at this time because of our international pay
ments postition and because of the lag in our economy.
No one wants a money policy that will retard the correction of our
balance-of-payments position, much less a policy which would actively
worsen that position. On the contrary, money policy should con
tribute to the needed correction. But if monetary policy is asked to
carry too much of the burden of correcting, or even of protecting, an
international payments position which, like ours, is traceable in good
part to governmental programs it could very well be so restrictive
as to offset all the stimulating effect which we could hope to produce
through fiscal measures.
The risk of our getting into such a policy dilemma is reduced, of
course, to the extent that we succeed in efforts such as those being
pressed by the administration in connection with procurement under
our military and economic aid programs. Vigorous application of
these efforts to conserve dollars is an absolute requirement of policy
at this time.
This requirement is underlined by the fact that free reserves seem
to have been trending down recently, that the money supply currently
seems to be shrinking, and money rates and bond yields nave recently
taken a rather sharp turn upward. Considering all elements in the
situation, as the reserve authorities are in a position to do, these
developments may be both necessary and beneficial.
All the same, I would hope that considering the position of the
economy at this time and the extent of the more direct measures being
taken to help correct our balance of payments, it will not be necessary
to tighten credit conditions over their present position. Actually,
some easing would be helpful to the economy, especially in the long
term section of the market.
At an earlier point in this statement I suggested the sale of some
part of the financial assets currently held by the Treasury as a tech
nique for meeting part of the cost of a growth-promoting tax-reduction program. I realize that this could have a tendency to raise long
term borrowing coste, though I should think the program could be
managed so as to limit this effect to a very small amount and hopefully
to avoid it altogether.
But if long-term borrowing costs have to be lifted, and in the last
few weeksthey have been lifted in the corporate bond market, I
should think it would be better to do this as part of a program to
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POLICIES FOR FULL EMPLOYMENT
finance growth-promoting tax reductions than as part of a normal
Federal Keserve open market operation.
(5) Finally, let me say a few words on the relation of costs and
rices to economic growth. Mr. Bolling of this committee will peraps remember a letter I wrote him a few years back responding to
certain questions he put to me and in which I stressed the importance
of cost increases, and particularly of labor-cost increases, as a force
behind rising prices. This was not a widely held view at the time, but
it has gained a good many followers since.
Indeed, not so long ago it was not even fashionable to believe in
the necessity of a reasonably steady price level as a basis on which
to achieve sustainable and meaningful economic growth. But views
on these matters have undergone very considerable change. Nowa
days, there is broad agreement that a reasonably stable price level is
the only basis on which a workable economic strategy can be built.
I subscribe fully to this view, though I must confess that the con
version to it lias been more rapid and more widespread than anything
I had expected to witness. But this is good, and I am happy to see
it; all that concerns me is that we do not overlook the fact that once
price level stability has been made the basis of an economic strategy,
one automatically accepts certain other requirements, too.
The most important of these is that, in the most general case, pro
duction costs must not increase by amounts that cannot be fully offset,
in their effect on unit cost of production, by improvements in pro
ductivity. If this requirement is not respected, the result is a sup
pression of profit margins and eventually a suppression of the rate of
economic growth.
There is wide agreement, I believe, that for some years we have,
as a Nation, been failing to respect this requirement. Competitive
conditions, and to some extent governmental pressures? have pretty
much fixed a ceiling on prices; currently, many industrial prices are
being reduced. But we nave been less successful in limiting increases
in costs. One way to put this is to say that price inflation, at least
for the time being, has oeen checked but that cost inflation continues.
I believe that it is this inconsistencey? which reflects itself in nar
rower and narrower profit margins, that is the major factor behind the
lag in our economic growth. Ana I want to state quite clearly that
although I believe we can improve our economic performance through
appropriate monetary and fiscal policies, we must follow appropriate
wage-price-profit policies or we will undo all the good these other
measures can accomplish.
This is obviously what the President and his Council of Economic
Advisers had in mind in setting forth certain wage and price guide
lines in the January 1962 Economic Report.
There is a good deal that can be said pro and con on the idea of
setting guidelines in this fashion, but without going into these argu
ments I must express a reservation about the wage guildeline as cur
rently defined. The principle that labor cost increases should be
equated to productivity improvements does not, in my judgment, suit
our present situation.
W hat we need now is a chance to achieve an improvement in profit
margins and some reductions in prices. I f we keep our economy com
petitive enough, which is a requirement underlying any strategy for
E
POLICIES FOR FULL EMPLOYMENT
299
an enterprise economy, we can be sure that profit improvement will
not go far beyond what is reasonable before it is translated into lower
prices.
But in order to achieve profit margin increases and price reductions,
production cost increases must be kept well within productivity im
provements, not equated to them. The guideline, in my judgment,
should be revised to this effect.
It would be helpful also to have a better understanding as to how
these guidelines are to be enforced. Certainly it is clear that there
is very little to be gained from enforcement procedures of the sort
that were employed in the steel incident. I have four suggestions to
make in this connection.
First, on the application of wage-price guidelines, I suggest that
the executive branch limit its role to (i) annual descriptive and
analytical reviews, presented in the Council’s year-end Economic Re
port, of the major developments affecting wages, prices, and profits;
and (ii) a critical evaluation by the President, m his year-end economic
message, of wage-price-profit developments during the year.
I f it should be the Presidents judgment that developments have
not been consistent with the national interest he could state the respects
in which he believes mistakes have been made and the lines along
which adjustments should be made. There is ample opportunity in
the medium of these two messages for the facts to be set forth and
analyzed for their meaning and significance and for guidance, which
I believe should be couched in general terms, to be given for the year
ahead.
Short of emergency conditions^ and in these connections I would
interpret “emergency” quite restrictively, I believe our economy will
work better if the executive branch avoias direct intervention in spe
cific wage-price decisions. In the meantime^ efforts should be pressed,
as I believe they are by the President’s Special Commission on LaborManagement Relations, to explore ways of improving the balance of
bargaining power in labor markets.
Second, I suggest that conferences such as the one sponsored this
spring by the Secretary of Labor on national economic issues be held
regularly every year. Conferences of this kind are an excellent way to
encourage discourse and to improve understanding among labor, man
agement, and Government on economic policy questions.
Third, it would also be helpful to provide for the expression of
views from the public on wage-price-profit developments. To this
end, the Joint Economic Committee or possibly the Council of Eco
nomic Advisers might plan to have open hearings every January or
February devoted specifically to this range of questions and in par
ticular to the guidelines, if these continue to be set out by the Council
and the President. As far as possible, the effort should be to give an
opportunity to be heard in these hearings to all those who have poten
tially useful contributions to make to the discussion.
This would be a kind of annual economic town meeting. I come
from New England, and I know that it is sometimes not as easy to get
such meetings stopped as it is to get them started, but I think this canbe
managed and, in any case^the open discussion of stated public policy
is alwatft a healthy thing in a democracy. Open discussion is certain
m find our way to an understanding of the kind of wage-price,
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POLICIES FOR FULL EMPLOYMENT
policy, shaped through free collective bargaining and competitive
markets, under which we can achieve the kind of economic perform
ance we all desire.
Fourth, I suggest that this committee make a special point, possibly
through the scheduling of special hearings, of examining into the ways
in which Government itself may be putting direct upward pressure on
costs and prices. I have in mind, particularly, the Government’s pro
curement and contracting activities and the programs under which it
makes minimum wage determinations as authorized by the WalshHealey and Davis-Bacon statutes.
We should be quite sure that these programs are administered in
wavs that are consistent with the kind of wage-price policies which,
under the guidelines procedure, we hope to have followed by all labor
groups ana business units. I would judge, drawing upon my experi
ence in 1956-60 as Chairman of the President’s Council of Economic
Advisers, that there are responsible businessmen who would say that
the programs tend to inflate costs. The problem needs close study.
I have limited myself in this statement to fiscal, monetary, and wageprice policies. There are, of course, other parts of a strategy of eco
nomic policy that also deserve attention. But the three I nave com
mented on are the crucial ones. I f I have overlooked points in which
members of this committee have a particular interest, I shall be happy
to respond to questions on them.
Thank you very much.
Chairman Patsian. Thank you, sir. I would like to ask Mr. Keyserling a question.
This is a question that concerns me, Mr. Keyserling. I f we had
an across-the-board cut in personal taxes, that is, a cut which would
change the income distribution in favor of the top bracket income
receivers, wouldn’t you have a worse fiscal structure after the period
of deficit is over?
In other words, wouldn’t you, in the long run, increase the troubles
which the tax cut is intended to cure?
Mr. Keyserling. That is the way I feel about it very definitely, Mr.
Chairman. ^ I think that the equitable thing to do in taxation is the
thing that is best for the whole economy—wage earners and investors,
high-income groups, middle-income groups, low-income groups. The
thing that is best for the whole economy is to have the economy
operating fairly consistently at maximum levels of employment,
production, and purchasing power.
Certainly, nobody has to worry about the adequacy of profits under
such conditions and certainly nobody has to wony about how well the
high-income groups do under these conditions. I don’t think that
the taxes on them are “ confiscatory.” I get around the country quite
a lot, and certainly most of them, who haven’t inherited great fortunes,
couldn’t live the way they do, and they live that way honorably, it
they were really paying 91-percent taxes on the portion of their in
comes which fall within that tax rate.
The fact of the matter is that our tax policy is much too hard, both
directly and obliquely, on middle and lower income groups, who
haven’t got ways of honorable tax avoidance. Therefore, I think you
are entirely correct that, when one analyzes what has actually t>een
happening to the economy and where the deficiencies have occurred
POLICIES FOB FULL EMPLOYMENT
301
which have hurt everybody, a larger spendable income on the part of
middle and lower income families would do much for the whole
economy than a larger spendable income on the part of the corpora
tions and higher income people, not because I have any objection to
their having these higher incomes, but because they translate more
largely into savings than can be absorbed in investment.
The savings cannot translate fully into investment when there is
inadequate ultimate demand, and, therefore, they become frozen sav
ings, which are merely another expression for unused plant capacity
ana rising unemployment of plant and manpower. So I agree com
pletely with your implication, and I feel very strongly that a mal
adjusted, improper change in the composition of the tax burden which
would be represented by a so-called across-the-board tax cut, would
in many respects leave us worse off than we are now.
Chairman Patman. Thank you, sir.
Would you like to comment on that, Mr. Saulnier ?
Mr. S a u l n i e r . Yes, I would like to comment on that, Mr. Chair
man.
I feel that there are many changes that it would be beneficial to
make in our tax system.
Chairman Patman. We are confining this just to this across-theboard, or the low-income group.
Mr. S a u l n i e r . I will come to that point, Mr. Chairman. As I sa y ,
I feel there are many changes that should be made in our tax system;
to my way of thinking the question is mainly one of priorities we
should place on them. In my judgment, the reason why we are not
achieving the land of economic growth we would like to have is that
we have an inadequate growth of investment expenditures in the pri
vate sector of our economy, and I have suggested two changes in
taxes which would help overcome that.
Now, I would like to see a broad, across-the-board reduction in the
individual income tax, but, Mr. Chairman, I just don’t think we can
afford it at this point. Our Government is providing services of
increasing scope and variety for the whole American population, for
every man in the street, if you will. These services must be paid for
and there just isn’t anybody to pay for them except the whole Ameri
can people.
There is no other place to put the burden of paying for those pro
grams. Of course, a person may persuade himself that the programs
don’t really need to Be paid for, and some people have apparently
managed to persuade themselves of this, but I don’t see how you
are going to run the Government safely unless you do pay for these
services and to do this you must tax everyone. That is wnv, while I
would like to see broad individual income tax reduction, I honestly
cannot say, Mr. CEairman, that I see it as a practical thing to do at
this time.
Chairman Patman. I would like to ask you a couple of questions,
Mr. Saulnier. I wish you would comment on them briefly, if you
please.
Mr. Saulnier. Tes.
Chairman Patman. What specific monetary policy do you feel
should accompany any tax reduction that takes place?
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POLICIES FOR FULL EMPLOYMENT
Mr. Saulnier. Tax reductions, Mr. Chairman, of the character
that I have suggested, accompanied, as I have suggested, by reductions
in spending onlow-priority spending programs and by some, as I have
suggested, asset sales, would require no change in money policy.
Chairman Patman. One other question. To what extent in your
view would there be an increase in investment as a result of reduc
tions in the corporate tax rate ?
Mr. S a u l n i e r . Would you repeat that question so that I may be
sure I understand you correctly?
Chairman Patman. To what extent, in your view, would there be
an increase in investment as a result of reductions in the corporate tax
rate?
Mr. Saulnier. I must answer that question, Mr. Chairman, by say
ing this: There is no one thing that will get our economy moving up
again, not even a cut in the corporate income tax, though that would
be helpful.
What we need is a clear definition of a policy, a policy that goes
across the board, affecting expenditures, taxes, money, et cetera, and
that policy should be clearly defined and projected to our people. I
believe that with an understanding of such a constructive policy we
would enjoy a good rate of economic growth, and within that policy
I would say that the tax changes I have been talking about would be
very stimulative.
Chairman Patman. Y ou won’t make any change—this is in con
nection with the next to the last question I asked you—in the present
interest rate policy, which, of course, I believe you will admit is a
high interest rate policy ?
Mr. Saulnier. Would you mind telling me, Mr. Chairman, what
you mean by an interest rate policy ? Do you mean by that the whole
Federal Reserve policy ?
Chairman Patman. Yes, sir. Of course I believe you will agree that
the Federal Reserve makes the interest rate policy. You and I will
agree on that point ?
Mr. Saulnier. I think I know what you mean. I just want to be
sure, Mr. Chairman, that we are talking about money policy generally
and not the policy with respect to the maximum interest rate that can
be paid on deposits.
Chairman Patman. I am talking about general interest rates that
have been going up and up and up over the years. Would you change
that, or would youlet it go like it is ?
Mr. Saulnier. I can comment, Mr. Chairman, on the current money
and capital market situation and can say whether I think money
policy, in that situation is too restrictive, or not restrictive enough.
It is difficult, however, to comment on money policy more generally.
Chairman Patman. All right, sir. What do you think about it,
Mr. Keyserling? Do you think that monetary policy should be
changed?
Mr*. Keyserling. Yes; I do. I have thought so uniformly, for a
longtime.
Chairman Patman. I believe you stated what the recessions 'we
nave had m the past were. After the recessions in 1948 and 1940 >we
m :1W® “ 4 1954 5 °* cowse, more of it in 195S than in 1954;
1955-66, more of it in 1956 than 1955; and then in 1957 and 1958, more
POLICIES FOR FULL EMPLOYMENT
303
of it in 1958 than 1957; and then in 1960-61. Is that correct about
the recessions we have had in the past ?
Mr. K e y s e r li n g . Yes, generally speaking.
Chairman P a t m a n . Y o u th in k th ey c ou ld h av e been avoid ed b y &
p ro p er m on etary p o lic y ?
Mr. K e y s e r l i n g . I agree
with Dr. Saulnier, and this is one of the
few points that I agree with him on, namely, that you cannot stabilize
or maximize the health of the economy with any one set of policies.
I think we have a broad and variegated economy, and that we need a
complex of reasonably workable monetary policies, price-wage policies,
fiscal policies, and others.
I think we need them all, and I think that usually they should be
based upon one central approach. In other words, if it appears upon
an actual examination of the economy in action that consumption is
tending to outrun investment, which is a typical inflationary situa
tion, then all of these policies should move toward exercising restraint
upon consumption and do everything possible to induce investment.
I f the reverse is true, then these policies should move in the opposite
direction. I don’t see any sense at all in two policies moving m op
posite directions. That would be like walking the floor with one crutch
to walk part of it, and the other to walk the other part, when you need
both crutches. You need all policies working in the same direction.
In more direct answer to your question, subject to above qualifica
tion, I do think that the tight money policy over the years has been a
very pronounced factor in contributing to a seriously low economic
growth rate and the recurrent recessions.
By and large, the rising interest rates, which are at least a conse
quence of a tight-money policy, if not its intent, tend to ration the
national income toward those who lend us back our own money. One
of the greatest economic reforms of the last 30 years, in my view, has
been the movement in the opposite direction, good for everybody. I
remember when I was a boy I would walk by the bank and I would
see a sign on the bank, “6 percent interest on deposits.”
Senator B u s h . That w as a pretty average rate in those days.
Mr. K e y s e r l i n g . Yes, and of course, the real interest rate on homebuilding was 8 or 10 or even 12 percent before you got through. If
we believe in an incentive economy, if we believe m an enterprise econ
omy, we ought to favor the fellow who enterprises and invests and
the consumer who buys, as against the person who lends them back
their own money, ana, after all, they are lending us back our own
money*
Now, we started turning the clock the other way in recent years, and
I think this has been one of the most damaging factors in the whole
picture. I made a study of it where I figured that something like $23
billion had been taken out of the pockets of the average consumer,
and the average homeowner, and the average family, and put into the
pockets of those who are lending back our own money, during the
period 1953-59. I have nothing against these people, but I think it
is unsound policy. This is the first way that tight money and rising
interest rates hurt the economy.
The second way they hurt the economy is that they hit the things
we need before they hit the things that are booming excessively. Mr*
Martin of the Federal Reserve System, a great and sincere protagonist
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of having us pay more to those who lend us our own money, and I am
sure he honestly believes in this policy, in early 1957 before the Senate
Finance Committee, said that we needed to do this because consump
tion was too high and investment was too low and savings were too
low.
Yet in early 1957, we had enormously idle plant capacity. The
financial institutions were stuffed with savings, and we had a tre
mendous deficiency in ultimate demand, just as we have now. So a
little while later, in consequence of this policy, we got into the worst
recession since World War II from which we have never recovered;
and the next year the same gentleman came before the same committee
tand said that the big trouble we had a year earlier was the great
deficiency in consumption and that investment was outrunning con
sumption.
Those who make policy should be more contemporaneous with
events. Their observations should not be matters of hindsight only.
I think we are now in the same kind of situation basically. I agree
with Dr. Saulnier that investment is too low. There is no question
that it is, but why is it too low ? When you move from what I might
call generalization to a specific examination, industry by industry,
company by company, total by total, the break-even point is not too
low. The steel industry has a break-even point below 40 percent.
This does not mean that costs are too high relative to profits per
unit.
I f they are not making enough money, it is because they have been
operating at low capacity for the last 5 years or longer. I hope the
committee will very carefully study these factual examinations I have
made, and I am always glad when economists come forth and on the
basis of a different set of figures show that there is something wrong
with my analysis but there is really no way of matching analyses in
terms of the data against an analysis in terms of generalities.
The fact of the matter is, as I see it, that a crucial characteristic of
American industry is that it generates, at a given level of operations,
a level of profits above what it can enduringly invest as against the
markets which are militated against by too low a level of ultimate
demand.
^This has happened over and over again. It has happened four times
since 1949. And it is happening again now. There is nothing wrong
with first quarter profits, 1962, in any basic industry, with some rare
exceptions, which would disprove the general rule. The only thing
wrong is that business is operating at too low a level of capacity, and
this is relevant in my view to tax policy, and to money policy, and to
other basic policies, and it applies to price-wage policy fundamentally.
Chairman P a t m a n . Thank you, sir.
Senator B u s h . Mr. Chairman, I have another question.
Mr. Keyserling, you and Dr. Saulnier agree about the investment
factor being too low. I mean you do a^ree that that is one of our
problems; is that right ? You just said that ?
Mr. K e y s e r l i n g . Yes, sir.
Senator Bush. D r. Saulnier has developed a thought in here that
nasn t been developed before this afternoon in these hearings this
week which has to do w ith the question o f cost. I am very much
impressed with his argument here about the need fo r a better control
POLICIES FOR FULL EMPLOYMENT
305
of cost and the need for not equating increased costs with productivity
gains, but using productivity gains not only for wage increases, but for
reduced prices, and possibly increased profits; in other words, for the
division of increased gains in productivity rather than using it all up
in increased costs and particularly wage costs.
Our competitive position is constantly under discussion nowadays,
particularly as the Common Market is becoming more and more of an
economic factor in trade, and this administration is greatly concerned
about that as I think we all should be.
However, it seems to me that as I talk with business managers and
people who control the question of expansion of our plants ana the use
of investment funds to expand plant and job making opportunities,
there is sort of an underlying apprehension. It doesn’t come out into
the open very much because I think there is a certain fear in expressing
themselves that no matter how they may try to control costs, they can’t
do it because of the very great preponderance of bargaining power that
lies within the big labor unions.
We have seen lately this year a very substantial increase in the
number of strikes over what we had last year. We have even seen
some very bad strikes in defense industries and our missile plants.
We had a very bad one recently in my State at the Electric Boat
Works, which was not really an argument between management and
labor, but an argument between unions there, which shut that plant
down for a long period of time.
We have the Eastern Air Lines shutdown still because of a dispute
between the unions, and some smaller union of 550 members has been
able to bring that thing to a halt and throw 18,000 people directly out
of work ana greatly interfere with the travel incident to our trade and
commerce in the eastern part of the country. We now see that we are
threatened with a big railroad strike and so on.
It seems to me that this is one of the underlying causes of uneasi
ness and apprehension and hesitation, and I should like you, Dr.
Keyserling, to give your views on that situation.
Mr. K e y s e r l i n g . Let me try to. I think that some of the points
that I would make are embodied more fully in my charted statistical
analyses, which I ran over very quickly. Let me try to clarify at
least what my position is in this way: First, you made the point that
increases in productivity should be taken partly in wage increases and
partly in price decreases.
Senator B u s h . At increased profits.
Mr. K e y s e r l i n g . This I assent to. I think it is desirable. I
haven’t found many great corporations that are pioneers in this effort,
but I agree with you on that.
Second, you come to the even more basic question that, in a free so
ciety, which we both believe in, nationally organized business and
organized labor will contend with each other for the share that they
get of the gross income, and it is only natural that labor unions should
want to increase the labor share and that corporations should want to
increase the profit share, which is income after costs, including wage
costs.
The base economic question, as you so well stated, is, W hat is a
workable division from the viewpoint o f the operations o f the econ
om y? I mean there is no such thing as a fa ir profit or a fa ir wage in
an absolute sens&
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POLICIES FOR FULL EMPLOYMENT
I say that a workable division is a good division. Then I look at
wages, and I look at profits, and prices are a factor in both, because
the price level determines the real buying power of the wage as con
sumption, and the price factor determines the real buying power of
the profit as investment.
First I look at the wage side, and I say wages have two functions.
One of the functions of wages is to play its part in consumption.
Taking that one first, I find a deficiency in consumption relative to
the actual productive capacity in being of the American economy
Therefore, I reach the conclusion that, from the viewpoint of the
consumer side, the wage increases have not been too high. In other
words, they haven’t produced a redundancy of purchasing power.
Then I go over to the profit side. I ask, Have the wages been too
high from the viewpoint of leaving over enough profits after wage
costs, after payment of dividends, after all other costs, to fulfill the
investment function, which gets back to the cost per unit idea? Are
the wage costs per unit and other costs per unit leaving the business
with too small a margin of profits per unit ?
The more I study the figures, and I know I am objective, although
I may be wrong, as any economist may, the more I reach the conclu
sion, which I think is supported by all the data shown on individual
industries and on the overall picture, that in each period of upturn
the profits after taxes, after wage costs, after all other costs, have
been too high per unit and have been too high in the overall to be used
fully, and that is the only workable test of profits.
Oh, these profits have been used for a while, when we have gone up
in one boom or another, but then we have had a tremendous downturn
in investment, which has propitiated the successive recessions. These
downturns haven’t come because of an inadequacy of profits, because
then they could never start. There certainly were plenty of profits
during the upturns. They didn’t come because of too high a wage
cost.
What has happened is that the profits have been so high, after allow
ing for all costs, including wage costs, that they led by way of invest
ment to tremendous excess capacity, and then downturns came. I
think this is the fact of our American economic life. I don’t cite it
as an indictment of business. I wish that business followed a price
policy and a wage policy that kept the economy in better balance.
They would make more profits in the long run and they would invest
more in the long run. But I can’t find, and I have asked various econ
omists—they will talk in a general way. Let me give an illustration.
Senator Bush. Y ou are not worried about the effect of this upon
our competitive position, both at home and abroad?
Mr. K e y s e r l i n g . Well, it is the same problem. I f you say that the
reason that the prices are so high in America is because the costs are
too high, then you say that you have to reduce these costs, including
wage costs, to get a lower price. But if you say, as I say, that the ex
isting price is too high, not because the cost is too high, but because the
profit margin per unit is too high, then you reach my conclusion. I
think this conclusion is supported by the repeated collapse of each sue*
ceesive investment boom and each profit boom. I cannot look at the
profits of any of our key industries during the past years, o r first quar
ter of 1962, and reach the conclusion that their costs are m ilitating
against an adequate level of profit for all investment purposes*
POLICIES FOR FULL EMPLOYMENT
307
Now, our competitive position would be improved if we had more
investment. I admit that.
Senator Bush. You do not think this factor I am discussing with
you is inhibiting the expansion of investment ?
Mr. K e y s e r l i n g . I think what is inhibiting the expansion of in
vestment is unused plant and an inability to sell what they can pro
duce now. Investment is based on a prognosis of markets.
Senator Bush. That does not bear out some of the testimony we
have had here, like that of Mr. Ellis of the Du Pont corporation. I do
not know whether you saw his testimony. He was in here a couple
of days ago.
Mr. Keyserling. I f Mr. Ellis puts before this committee, I do not
mean the same facts, but the kind of analysis that I have tried to put
before the committee, which looks at the factual situation instead of
mere generalities, and if his facts and his analyses are as careful as
mine and lead to different results, I will be perfectly willing to with
draw from my position and ask your committee to take his point of
view. All that I ask is whether Mr. Ellis, in examining this ques
tion of prices, wages, and profits, and what the real inhibiting factors
are, is presenting to you as relevant data, and as carefully related
to the facts, as wnat I am trying to do. All too frequently, I find, in
a lot of these big corporations, as well as in others, ana I am not
criticizing them, a tendency to say that wages are too high, and costs
are too high, and profits are too low, and taxes are too high, all by
way of generalities rather than careful factual analyses.
Senator Bush. But this administration has expressed a strong in
terest itself in a hold-the-line policy, so to speak, Decause of our competitiveposition.
Mr. Keyserling. I am not here as an unthinking devotee of the
economic policies of this administration. I am trying to be nonpoliti
cal about it I do not think this administration has thus far satifactorily met the growth problem nor the unemployment problem, and
neither did the previous administration. I cannot, and I do not mean
to imply that anyone else is trying to treat this on a basis of the fact
that, because I am a Democrat, this administration is right on every
thing. I think that both administrations have swung in a direction
of economic policy which has not worked. I f I had said this only in
1953 at the beginning of the Eisenhower administration, or only in
1961 at the beginning of the Kennedy administration, I might nave
had to await events to test my conclusions. All I am saying now is that
what has happened squares with what I have been saying, and, there
fore, if policies have not worked, there is something wrong with
them.
Senator Bush. M y time is up, Mr. Chairman.
Representative Reuss (presiding). Mr. Saulnier, you have stated
that the economic situation is disappointing, and you have suggested
an economic program. First, you favor the recent increase in depre
ciation allowances. Next, you favor the proposed 7-percent invest
ment credit, though you say you would prefer an even larger increase
in the depreciation allowance. Then, you favor a cut in the corpora
tion income tax by about 6 percentage points, and a cut in the personal
iiuvm a ta x down to the 50-percent level. The proposed personal
iivwma f T
would m
ssattfam ilies w ith incomes o f more than
$82,000 a year, as I understand i t
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POLICIES FOR FULL EMPLOYMENT
Mr. S a u l n i e r . That is right.
Representative R e u s s . The proposed tax revision would cut tax
revenues, you estimate, by $2 to $3 billion.
Mr. S a u l n i e r . Two and a half billion dollars possibly.
Representative R e u s s . Y o u would offset such a reduction in tax
revenues mainly by cuts in Federal expenditures. You would hold
wages down in order to increase corporate profit margins.
Mr. S a u l n i e r . No. May I interrupt.
Representative R e u s s . Yes.
Mr. S a u l n i e r . I would say that the increases in wages should be
kept within, well within, the limits of productivity improvement. _
Representative R e u s s . But before you would validate a wage in
crease, you would make sure that corporate profit margins had ex
panded. That is my understanding of your testimony.
Mr. S a u l n i e r . Again I am not sure that I like your word “ vali
date.” I do not like to cast the Government in the role of validating
or invalidating.
Representative R e u s s . Strike “ validate,” but is it not ycur conten
tion that wages either should not increase at all, or increase only after
the corporate profit margins have been widened ?
Mr. S a u l n i e r . I am afraid I would have to amend that to say con
currently rather than after.
Representative R e tjs s . Concurrently. All right.
Mr. S a u l n i e r . Which is very different.
Representative R e u s s . And further on wage policy, you suggest
that present minimum wage determinations under programs of the
Walsh-Healy and Davis-Bacon type are too liberal, and that they
should be kept down.
Mr. S a u l n i e r . It may well be. I think they deserve study.
Representative R e u s s . Then having stated what I think to be the
ingredients of your program, I must ask how it will improve the
economic situation. Is it vour belief that such a program would in
crease business investment)
Mr. S a u l n i e r . That is correct.
Representative R e u s s . My question is, Who is going to buy the
products that can be made by existing plant and equipment and man
power in our economy under your program, much less the potential
output of additional, more modem facilities ?
Mr. S a u l n i e r . The first thing I would say, Congressman Reuss,
about that is that it would be very helpful, as a preliminary step, to
have a clarification of what our policy is. I f I may say so, I think
there is a good deal of uncertainty through the country at the present
time as to what our economic policy is.
Representative R e u s s . I agree.
Mr. S a u l n i e r . And if I may say so, I think it is almost more im
portant that we have a clarification of what the policy is than that we
take this step or that step or some other step. Let me illustrate what
I mean, Congressman Reuss, by the discussion of emergency tax cuts.
1 read the newspapers pretty regularly, a number of them, and day
after day I read accounts that taxes are going to be cut; no, they are
not going to be cut; we will think about it next week; we are going to
wait until we have the economic figures for July 15 or for August*
And the date comes and then it is not quite dear whether they are
going to be cut or not.
POLICIES FOR FULL EMPLOYMENT
309
Representative R e u s s . I would agree with you there.
Mr. S a u l n i e r . Mind you, Congressman Reuss, I want to speak very
constructively here. I honestly believe that it would be a good thing
for the country if we decided here just what we are going to do. It
seems to me that the facts are clear enough now to tell us what we
should do.
Representative R e u s s . I agree with you.
Mr. S a u l n i e r . I think that clearing the air, in itself, would h a v e
an electric effect through the country.
Representative R e u s s . I think it is highly important that we clear
the air. You, as well as Mr. Keyserling, nave, in a very frank and
sincere spirit? offered a concrete program for clearing tne air. My
specific question is, how will your program, in the cleared air which
would undoubtedly accompany its enactment, generate purchasing
power to take off the market goods we can produce with our present
capacity together with the goods which additional capacity could
produce ?
Mr. S a u l n i e r . I would answer that question, Congressman Reuss,
by saying that if a program were put forward, the business people
of this country, and I say “ business people of this country” advisedly,
because, after all, we are talking about an enterprise economy which
works well if business units work well, and does not work well if they
do not work well----Representative R e u s s . My point, of course, is if business units work
best when there is a good prospect of selling that which they can
produce----Mr. S a u l n i e r . Indeed they do.
Representative R e u s s . I do not see how your program gives us that
market. You would take $2 or $3 billion out of the spending stream
when you cut expenditures by that much. I do not know how much
added capital investment you expect to get. While I would agree with
both you and Mr. Keyserling that the level of private investment
should be raised, the aadition of more capacity will not by itself gen
erate enough consumer purchasing power to absorb the extra output.
Mr. S a u l n i e r . I think I understand the difficulty you have with
the statement I made, and I would like to try to clarify it. I started
to say that if a program were put forward which the business people
and the American people generally accepted as a constructive pro
gram, one that they could understand, one to which they could sub
scribe, I think this would have the effect of improving the confidence
which people feel in their future and of removing the uncertainty
that they feel in the present situation. That result alone would have
an expansive effect on our economy. And within the context of that
program you would be doing things in the tax area that would be
stimulative.
Then, Congressman Reuss, I would like to comment, if I may, on
your observation that Federal expenditure reductions would take
funds out of the stream of expenditures. I am not sure that that
needs to be the case, and I suggest that there is one area of the Fed
eral budget to which one might look for possibilties for expenditure
reduction, where I think a lowering of expenditures would not neces
sarily take money out of the income stream, but would in effect shift
a d m t y fr o m , shall we say, the public to the private sector* That
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is the area of the budget which we call Federal credit programs, and
which is a very substantial part of the budget.
Representative E e u s s . Thank you.
Mr. S a u l n i e r . I do not want to make that suggestion, Congress
man Reuss, quite sincerely. There are many expenditures where Fed
eral Government is spending the money—it is in the Federal budget—
but if the Federal Government were not spending, it very likely would
be spent in the private sector of the economy.
Representati ve R e u s s . Thank you very much.
Congressman Curtis ?
Representative C u r t i s . In listening to these discussions I am im
pressed, particularly in relation to tax cutting, which it is assumed
without offer of proof would stimulate the economy, with the further
unproved assumption that demand may be equated with consumer
purchasing power. It seems to me that therein lies some of the mis
conceptions. To prove my assertion I would relate it to the agricul
ture sector of our economy. As near as I can see, we could increase
consumer purchasing power double, triple, or any amount, and it
would have very little bearing on utilizing our agricultural surpluses.
It seems to me that we have reached a stage in our economy where at
least in some sectors we are dealing with an economy of plenty as
opposed to one of scarcity. That is why I relate it to the agricultural
sector, because that seems quite clear, and what have we done about
that? Because the real consumer demand has not been there, we
have artificially put it in there through Federal expenditures, agricul
tural subsidies, and that is where the purchasing goes on of our agri
cultural produce. In that instance we can continue to improve our
efficiencies of wheat farming, cotton farming, or whatever, and lower
our unit cost in that fashion, but still the difference is made up with
tax dollars where the Federal Government just buys the surolus and
stockpiles it. I wonder if you would comment on that, Dr. Saulnier,
as it relates to this question that we are now talking about, of whether
it is the consumer cleinand area or rather consumer purchasing power
that is the inadequacy.
Mr. S a u l n i e r . Congressman Curtis, I do not diagnose the problem
in that way.
Representative C u r t i s . As consumer demand ?
Mr. S a u l n i e r . I do not say that the American economy is generally
an affluent economy.
Representative C u r t i s . D o you agree with my analysis in the agri
cultural sector?
Mr. S a u l n i e r . In the agricultural sector, I would say we have a
distinct problem of overproduction.
Representative C u r t i s . That is right, which is affluence, and even if
our distribution system were better, and even though we may have some
of these low consumer purchasing power groups that Dr. Keyserling
talks about, even if we project hypothetically the amount that they
could buy in the field of agricultural produce, I think using that model
we find that it would not make much of a dent in the agricultural sur
plus production. I think it is important that we break down these
economic aggregates into components, because I suspect that in other
areas what we are really seeing to a large degree is consumer choice
having a great play, and not only consumer choice as between what
POLICIES FOB FULL EMPLOYMENT
311
the consumer spends the dollar for, but whether the consumer is going
to save the dollar, instead of spend it whether he is going to invest it
or whether he is going to hoard it, if he saves it. I think there is
a difference between investing and hoarding, whether he is going to
invest it, spend it, or hoard it, becomes very important.
Mr. Saulnier. If I may comment just for a minute on that----Representative Cubtis. Yes.
Mr. Saulnier. There is common route by which we get to wrong
conclusions on these matters. I think it is not unfair to say that
theories on these things divide into two major categories. One of these
is that there is an inadequacy of demand, and that somehow or other
it is this inadequacy of demand that keeps our economy from working
at its optimum level. Those who hold that theory typically argue that
the way to correct the situation is to increase consumer demand or
overall demand. Sometimes the proposal is for higher wages. Some
times, and frequently nowadays, it is not that, but to cut taxes. There
has been quite a shift, I would say, in the last 10 or 15 years in the for
mulation of this theory, but it comes in the end to pretty much the
same thing.
Representative Gunns. It is based on that volume.
Mr. Saulnier. It is based on the general premise that there is an
inadequacy of demand and that if you somehow increase purchas
ing power, whether by wage increases or tax cuts, you will get yourself
moving again.
Representative C u b t i s . I wanted to ask one question.
Mr. Saulnier. May I conclude and just add one point.
Representative C u r t i s . Yes. I am sorer.
Mr. Saulnier. I don’t deny the possiblity of there being an in
adequacy of demand in a specific economic situation, but in many eco
nomic situations, and I think in the present economic situation, our
problem is to be found in the relationships within our economy and in
our capacity to make the kind of economic adjustments that must be
made if our economy is to work well.
More specifically, I have mentioned the relationship between costs
and prices. This is a key to a large part of our problem. I would
also like to say to this committee, and I have not mentioned it in
my testimony, that I think we need to do a great deal more in the
area of education, in vocational training, in the area of guidance, to
fit our people better to the employment opportunities which do in
fact exist I think we can make considerable improvements in our
economic performance by these methods. I do not believe that you
can substitute a program of expanding demand for such programs.
Failing a solution of these problems of internal relationships and
capability to perform adjustments, failing a solution of those prob
lems, I think the demand-type formula will produce largely an in
flationary result
Representative Curtis. I want to comment on that m this other
way, too, because there are areas where there is a real demand. I
was very interested in our Federal budget for the National Institutes
of Health, and I was interested in two growth figures. One was the
growth rate of technicians and people that are needed, research people,
by theNIH, and the other was the growth rate of money available to
be spent by NIH. The money available to be spent has a very high
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rate of increase. The increase of technicians available, the man
power situation, people available who were trained, was a much lower
rate of increase. It was just nonsense to be talking in terms of putting
more money in there. We did not have the skills available to fill
the jobs going begging here. It takes time to train people in these
skills. So even in the areas where there is demand, and I submit
there are real areas, treating demand as an aggregate in my judgment
is a gross error.
#
.
I want to ask one question if I may on this growth thing. The
President stated—I do not know whether you saw this, in his press
conference—that the economy had expanded by 10 percent since
he took office, and he seemed to imply that this was a better record
than under the Eisenhower administration. I do not want to get
it into the political aspects, but I mention this because we are com
paring periods and we are trying to relate what is our economic
situation. Inasmuch as you followed it closely under the previous
administration I wonder if you would comment on that.
Mr. S a u l n i e r . I will comment on it. I did notice that statement
by the President. As I recall, his statement was that gross national
product had increased by 10 percent since he took office. Now, it is
true that gross national product in current prices has gone up bv
about 10 percent since the first quarter of 1961, which was the trough
quarter of the 1960-61 recession. However, if you look at GNP in
constant prices, in order to get a measure of the increase in the actual
output o f physical goods and services, you will find that the increase
is only a little better than 7 percent. I was a little surprised that
the President used the current price figures rather than the constant
price figures, but I was even more surprised that he found it re
markable that there had been an increase of even 10 percent during
a period of business cycle recovery. There is nothing remarkable
about that. In fact, I would say the thing that is most noteworthy
about GNP in the 1961-62 recovery is that the increase in it was
less than what it has been in earlier recoveries. Indeed, it is the
tendency of this recovery to lag that accounts for our having hearings
here today, I would assume.
Representative C u r t i s . My time has run out.
Mr. S a u l n i e r . Y o u can judge this recovery by almost any measure,
and find that the increases are less percentagewise than they have been
in previous recoveries.
Representative C u r t i s . Thank y o u .
My time is up.
Representative R e u s s . Senator Proxmire ?
Senator P r o x m ir e . I want to ask both Dr. Saulnier and Dr. Keyser
ling questions. I want to say, Dr. Keyserling, that I thought your
statement that our monetary policy now represents an open declara
tion of war upon the programs the Nation needs was a very accurate
understatement of the situation. I could not agree with you more. Dr.
Saulnier, you seem to agree to some extent on at least the restraining
nature of monetary policy and I was most heartened to see that you
say on the bottom of page 10 and the top of page 11:
I would hope that in considering the position of the economy at this time and
the extent of the more direct measures being taken to help correct our balance of
payments, it will not be necessary to tighten credit conditions over their present
POLICIES FOR FULL EMPLOYMENT
313
position. Actually, some easing would be helpful to the economy, especially in
the long-term section of the market.
I welcome that.
Dr. Saulnier, you discuss your proposal to lower corporation in
come tax rates, and I am chairman ox the Subcommittee on Small Busi
ness in the Senate Banking Committee and am interested in your asser
tion that, quite apart from other effects, these tax changes would be
tremendously helpful to our 4 million small- and medium-sized busi
ness concerns.
I presume that you are proposing a 5 point cut in the basic tax, not
in the surtax, the 30 percent.
Mr. S a u l n i e r . I would reduce the tax from 52 percent to 47 percent.
Senator P r o x m ir e . Right; but this is made up of two parts, the 3 0 percent basic tax and the 22-percent surtax.
Mr. S a u l n i e r . Yes.
Senator P r o x m ir e . I presume you are proposing a cut in the 3 0 percent basic tax by 5 points.
Mr. S a u l n i e r . Yes.
Senator P r o x m ir e . Even this would give very little help as I see it
to small business. In the first place, some 75 percent or more of our
businesses are not incorporated, and these unincorporated firms are
virtually all small. No. 2, of those that are incorporated, about 40 per
cent, 339,000, have no taxable income. These are overwhelmingly
small firms. Of those corporations that do have a taxable income,
most have a taxable income of less than $5,000, and therefore their
maximum benefit from your tax cut would be $250 per firm, so that on
this basis I cannot see that 90 percent or 95 percent of small business
would get very much benefit from the corporation income tax, although
I think it may have merit on other scores.
Mr. S a u l n i e r . I could not cite a figure for you now, Senator
Proxmire, but there are many hundreds of thousands of small busi
nesses in this country, small- and medium-sized businesses, organized
as corporations, paying a coloration income tax.
Senator P r o x m ir e . The figure I have for 1958—I presume there
are more now—was 611,000, of whom 507,000 had an income of under
$25,000, and their income represented only 7 percent of the total
corporate income. There are 85 percent of the corporations with 7
percent of the income that is taxable.
Mr. S a u l n i e r . Yes. I was speaking here with special concern
for the fact that small- and medium-size companies by and large
finance themselves. They grow out of the money they make them
selves, whether they are organized, Senator Proxmire, as a corpora
tion and are retaining corporate income, or whether they are organized
as a partnership or a proprietorship-----Senator P r o x m ir e . On this I agree with you 100 percent.
M r. Saulnier. And are taking their income as individual income.
Senator P r o x m ir e . The Butters and Lintner study at the Harvard
Business School, for example, showed that if firms 40 or 50 years
ago had the kind of corporate income tax rates we have now, none
of the big firms could possibly have grown to the size they have. You
would have no chance to grow through investment, through what
has been the traditional way. I would agree with you on individual
firm growth, but I cannot see that the individual small businessmen,
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or that 95 percent of them, are going to get any real relief from a
reduction in the corporation income tax. I think from the stand
point of growth perhaps you would justify it, not from the standpoint
of helping most of our small businesses.
Mr. S a u l n i e r . I am afraid I cannot agree with you, but for the
moment I would like to pursue the point of agreement that I have
with you, which is that the growth of small- and medium-size busi
nesses is financed mainly out of the income which they make them
selves and retain, and the amount of income which they can retain out
of what they make, whether they are corporations or whether they are
partnerships and taxed as individuals, depends in large part on the
tax rate. A lowering of that rate, including the high rates on in
dividual income, would assist small- and medium-sized concerns in
retaining income which for the most part would be reinvested in the
business.
Now, a large company, a very large company, also depends on
retained income, but at least they always have the option of capital
market financing, which the small company normally does not nave.
Senator P r o x m ir e . You could not be more correct on that, but the
figures do show that 70 percent of the net income of corporations are
those very few firms with incomes over a million dollars a year. They
are going to get the main benefit of this particular tax cut, but you
are absolutely right, there is no other way that a small business firm
can grow by and large except by reinvestment of earnings.
Mr. S a u l n i e r . Precisely.
Senator P r o x m ir e . I would like to pursue the question a little bit
that Congressman Reuss asked because I am puzzled by it, and I think
there is an interesting contradiction and conflict between you and Dr.
Keyserling on this, and that is that you say that business investment
seems to be the principal weakness of our economy and we must
stimulate private business investment to reallv move ahead. At the
same time your prescription for a tax cut would be a tax cut that would
primarily increase business cash flow, and you say that you would
reduce Government spending so that there would at least be no ag
gregate increase in the deficit.
Mr. S a u l n i e r , Low priority Government spending.
Senator P r o x m ir e . Low priority Government spending, and you
would follow a policy of keeping wages in some restraint. At least
you would make sure that they do not exert any upward pressures
on prices. I think it is a very pregnant question, in view of the full
documentation that Dr. Keyserling has given us this afternoon, in
which he has given us data that I think is very hard to refute with
out contrary data. How is this going to enable the economy to move ?
How can you do it ? The fact is, as a number of witnesses have testi
fied here, there has been ample cash flow, plenty of money available,
and many of the biggest firms have so much cash available that it is
almost embarrassing. General Motors is an example of this. Why
should more of the same be the answer under these circumstances!
Mr. S a u l n i e r . For the reason that I think a tax policy that would
have a greater effect in promoting investment expenditures, and which
would permit the funds to be retained out of wnich that expenditure
could be financed, would result in a higher level of investment spend
POLICIES FOR FULL EMPLOYMENT
315
ing and would, as I think we all will agree, have, in agreeable circum
stances, a multiplied effect through the economy. I would say, Sena
tor Proxmire, that I am concerned also about measures being taken
to promote a higher rate of investment expenditure because I have
the distinct feeling that we have been tending to fall behind in recent
years in these matters relative to countries elsewhere in the world.
Senator Proxmire. My time is up, but I had a printing company
in Wisconsin, and we expanded our plant. We dia it for one reason.
We though we had a good market. We thought we could see an
opportunity for us to increase our production by selling more. No
matter how much had been available for us in depreciation reserves,
or even in profits or how good our profit margin was, if we did not
feel we haa the market, I think it would have been a very stupid
decision for us to make.
Mr. S a u l n i e r . I think I understand your thinking on this. Just
let me say that in our country, organized as it is on an enterprise sys
tem basis, on a profit system basis, we have managed somehow, not
really by design, but more or less inadvertently, to develop a tax
system which, if we sat down to work one out that would discourage
risk taking, could not be more artfully designed. But, all the same,
we have it. What I am saying is: Let us strive for a tax system which
is better designed to encourage investment, risk taking, and business
activity generally.
In this connection, while I do not make the point in my statement,
I think we would be well advised to give very careful consideration
to the substitution of some other form of taxation for the profits tax
ation we currently have. And for that other type of taxation I would
suggest a producers value-added tax. Our present tax system, which
puts the accent mainly on profits, not only has the effect of discour
aging risk taking, but it tends to have a braking effect on the economy
when we move toward higher levels of activity. It is excessively
unstable in its revenue-gathering effects, and I would like to see us
develop a tax system with greater stability in it in this respect.
Representative R e u s s . Thank you, Dr. Saulnier.
Representative Cuims. I had one thing I would like to ask Dr.
Keyserling.
Representative R e u s s . Mr. Curtis?
Representative Curtis. Mainly because it was in Dr. Saulnier’s
statement, and I did not see it in yours. I had this excerpt from the
New York Times, an article you wrote which appeared there on
August 5, and one of the things you said in there was this:
An unequivocable Presidential assurance against repetition of the recent
degree of intervention in price decisions, wage making, and industrial disputes,
this would remore a main barrier to confident business investment in new plant
andequipment More investmentwould createmore Jobe.
Do you still adhere to that! You did not mention it in your state
ment That is the reason I was bringing it up.
Mr. K e tse r lin g . I adhere to it I have the same position today
that I had on August 5. I am for more investment, and I am at
all times fo r appropriate risk taking. But when we have 15 or 17
percent of our plant capacity idle, ana have had an average of so much
idleness for a number of years, then there has been too much risk
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taking, and I am not flippant about it. The risks have been very ill
advised, wlien they result in building plants that are not being used.
All I want is to encourage risk taking by getting the plants used, and
to get the plants used you have to have more sales, and then there will
he risk taking on a sound basis. Otherwise, if the other very simple
formula is correct, ■why not reduce the corporate tax rate from 52 per
cent to 22 percent? You would get so much risk taking, and you
would have so many plants built, that pretty soon idle plant and man
power would get entirely out of hand. I am for risk taking in proper
proportions.
Representative Curtis. May I comment on that ?
Senator Proxmire is chairman of the subcommittee of this Com
mittee on Economic Statistics, and we held some recent hearings, and
have a very good report on industrial capacity. One of the things
that has always intrigued me, is the so-called unused capacity. I think
discussion about it needs to be always in context with the limitations
of those statistics. What I want to relate it to is this: A great deal of
the so-called unused capacity that is constantly referred to is obsolete
capacity, and the more rapidly innovation comes, the more obsolete
plant and equipment we have. How do you relate that ?
Mr. Keyserling. Congressman, are the 9 percent of the human
beings available for work, who have not got a chance to work, obsolete ?
Representative Curtis. Yes; their skills are.
Mr. Keyserling. Their skills are obsolete ?
Representative Curtis. Yes, and they need retraining.
Mr. Keyserling. Just a minute. First of all, let me divide this
into two parts. The 9 percent unused labor force that you say is
obsolete-----Representative Curtis. I said their skills were, Doctor.
Mr. Keyserling. All right; that their skills are obsolete. But these
unemployed correlate fairly well with my estimates of idle plant ca
pacity, and, therefore, the plant capacity is not truly obsolete, be
cause to have the labor force fully employed you would be using a
major part of that plant.
Representative Curtis. Could we stop there? I do not follow the
logic there.
Mr. Keyserling. I am saying that if you had full employment of
manpower----Representative Curtis. What would you have them do?
Mr. Keyserling. I will come to that. I want to answer that ques
tion about what you would have them do, but let us take it one at a
time.
Representative Curtis. I could not follow the logic as you were
relating the 9 percent.
Mr. K eyserling. I will try to answer your three questions, because
you have asked me three questions. First, I say that, if you had full
employment of manpower, and still had 15 to 17 percent of your plants
not running, then you could say that the part of the plants that were
not running were obsolete, but when you nave 9 percent unemployed
manpower, you cannot say this, because you cannot say that you do
not want people to be working.
POLICIES FOR FULL EMPLOYMENT
317
Representative Curtis. But obsolescence relates to demand. There
is not the demand for buggy whips any more.
Mr. Keyserling. I am coming to the demand question second.
Representative Curtis. You have this thing all wrapped up so we
can’t follow it.
Mr. Keyserling. Y ou can follow it if you let me answer.
Representative Curtis. All right. I will try.
Mr. Keyserling. If you let me answer it you will follow it very
well, because you have a tremendous capacity for following it.
Representative Curtis. You are very kind.
Mr. Keyserling. It is true. Let me answer it, and you will follow it.
Representative Curtts. All right.
Mr. Keyserling. I am saying that the argument is made, with re
spect to the 15 or 17 percent idle plant capacity, that this is not really
idleness because we should have a reserve supply of plant. Obsoles
cence is a relative term. You call that part of idle plant obsolescent
in the context of the part of the plant that you now think represents
optimum efficiency to have idle.
I say that, if the United States wants to have 15 percent or more of
its plant idle, as reserve supply at full employment, then you can make
some argument for it, because there wouldn’t be people to operate the
unused part anyway. But if you have 15 or more percent of your
plant idle and 9 percent of your manpower unemployed, then some
thing is wrong, because you can’t apply the argument to the 9 percent
manpower that you apply to the plants. You can’t say people are
obsolete. Now, I will come to the matter of training. That is your
second question.
Mr. Curtis. Could I stop on this one first ?
Mr. Keyserling. Surely.
Representative Curtis. You say you like to refer to specifics. Let’s
take this statement, and I think I am about right. Monsanto Chemi
cal Co. says that about 90 percent of their dollar sales today are prod
ucts they had nothing to do with 10 years ago.
Mr. Keyserling. That is the second question. That I was just
ready to answer.
Representative Curtis. You talked about 17 percent of the obsoles
cence being reserve. It isn’t reserve. There is no demand for this.
Mr. Keyserling. I am coming to the demand factor. Let us take
them one at a time. My first point is that, if you had a large amount
of unused plant and full utilization of manpower, you would say that
the unused plan was a desirable reserve; for example, if we got into a
war and had to call more people into the labor force on a super-laborforce basis, and so forth and so on. But when we have 15 percent or
more idle plant and 9 percent idle manpower, which pretty well corre
lates with it for a variety of reasons, then you can’t say that the situ
ation is sound, because you can’t treat human beings like plants and
you can’t say it is perfectly all right if they are idle. You can’t say
that human beings should be a reserve supply.
Now, to the second question. The second question you asked is, How
can you get this idle manpower and this idle plant used if there isn’t
demand ? Let me answer that part of the question.
Representative Curtis. For the specific products.
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POLICIES FOE FULL EMPLOYMENT
Mr. Keyserling. For the specific product.
Representative Cnms. Which that plant manufactures.
Mr. Keyserling. Yes. You gave the agricultural example. It
seems to me that there has been a confusion in the discussion among
actual demand, purchasing power, and real needs. I define actual
demand to mean what people are actually spending out of resources
that they have to spend. I don’t think that anybodv can contest that
actual demand, whether it comes from income, whether it comes from
credit, whatever it comes from, is far below our current productive
capacity of manpower and plant.
This is incontestable in my view. It is far below it, and because it
is far below it^ actual demand has to be lifted.
Now, I come to the next question. Your next question is, would
actual demand be lifted if the people had more purchasing power, or
would they just save it, or, to put it in another way, have they got
enough purchasing power now but are they just not making the actual
demand because they have everything they need or want.
Here is where I think your agricultural example is absolutely fal
lacious, because it is always true in our economy that as to some specific
products there is a saturation point, and this may now be true in agri
culture. This simply means that you have to shift your resources to
some other kind o f production, but it is still true that, in the overall
economy, you can’t say that the potential demand isn’t there, in the
sense of needs being satisfied, when there are such tremendous unmet
wants.
If you think that $4,000 a year or less for one-fifth of our families,
and $6,000 a year or below for two-fifths, is the optimum of what the
American economy can use and consume, assuming the purchasing
power is there, then I would disagree with you.
Representative Curtis. Let’s get back now. You have registered
one point; in the agriculture sector if it is saturated, then you have
obsolescence or unused capacity.
Mr. Keyserung. The only way you can translate those productive
resources into other sectors of the economy, because you can’t plow
people under, you can’t plow families under—you could plow crops
under—is to create enough demand in other parts of the economy to
absorb those underutilized resources.
Representative Curtis. The point I am going to suggest to you is
that they are there. That is why I referred to the NIH. I wiil give
you an area where there is tremendous demand, for private nursing
homes or any nursing homes.
Mr. K eyserling. Then if the demand is there, and this is the root
question, why do we have 9 percent idle manpower ?
Representative Curtis. Because it takes time to train and retrain.
It takes time to retool, to build plants. It takes time to do these things.
It takes time for research and development, and that is why all these
dealings in aggregates that you are doing, in my judgment, ignore
these components wherein lie the differences and difficulties.
Mr. K eyserung. But the problem of retraining and retooling is a
constant problem over the years in the American economy, so you are
saying in another way that a level of 9 percent unemployment is the
POLICIES FOB FULL EMPLOYMENT
319
fractional or proper level of unemployment that we should have, in
view of the time that it takes to retrain and retool.
Representative Curtis. No, I am not. What I am saying is that we
have been ignoring this problem and by not treating it we have
created a situation where it is entirely too high and it should not be
that high. We are losing ourselves in aggregates; we are not paying
attention to these components.
Mr. Keyserling. Roughly speaking; namely? let’s say that unem
ployment was 5 percent in 1953 and 9 percent m 1962, do you think
that this almost doubling of the unemployment rate throughout the
United States is due basically to a deterioration in retraining pro
grams?
Representative Curtis. Yes; or turn it around and put it this way.
The more rapid your innovation in your society, and that is my real
test of economic growth, the more you are going to create obsolescence,
both in skills and in plant. Going into these figures of innovation
I was very interested in these figures, that 25 percent of the goods and
services on the market today were unknown 5 years ago.
Mr. Keyserling. Let’s assume for the moment that most, or a large
part, of the 9 percent of your unemployed are unemployed because
they are inadequately trained. What is the galvanizing force to train
them, and what are you going to train them for, if the jobs aren’t
there?
^
~
’ ire there.
Representative Curtis. Yes. You have to identify them, 900,000
jobs going begging in the one field alone, the health field, hospital
technicians, practical nurses, doctors.
Mr. Keyserling. Y ou are not defining jobs there in the sense of the
jobs being available. You are defining an unmet need.
Representative Curtis. I am talking about jobs where people are
trying to hire people and there aren’t people with the training avail
able, like in the National Institutes of Health.
Mr. Keyserling. Do you think, on a nationwide basis, that the
jobs available for which people are untrained equate in any practical
way with the total volume of unemployment ?
Representative C u r t i s . Yes; not trained now, but could be trained.
Mr* Keyserling. I disagree with you.
Representative Curtis. 1 think we need to study this problem to
gether, but I think this: that iust as our Nation throughout its his
tory has had a shortage of lafcor, it is true that there is a shortage
today. What we need to do is get the dictionary of skills in the De
partment of Labor brought up to date. We need to study what are
the unfulfilled demands for labor, and then we can talk about it, work
up some statistics. We haven’t even touched this area, we have so con
centrated our minds on failure, the unemployed, that we have neglected
success, the jobs going begging*
Mr. Keyserling. Then what you are really saying, if I understand
H, and it is rather an important innovation in economic thinking is,
that after all, the business cycle in its virulent forms, in other words,
quick shifts from high employment to low employment, from full
capacity vm to low capacity use, from prosperity to recession to de
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pression to recovery, is explained mostly by variations in the adequacy
of training as we go along and isn’t due to basic economic forces out
side of the particular problem of training.
Representative Curtis. No; you misunderstand me. I say that
this is becoming the dominant factor in our dynamic economy. It
has always been a factor.
Representative Reuss. Your time has expired.
Senator Proxmire ?
Senator Proxmire. I would just like to say, before I ask Dr.
Saulnier one more question and a couple of questions for Dr. Keyser
ling, that as I remember the Tobin study which was made by the
Council of Economic Advisers a couple of years ago, and the KnowlesKalacheck study that was made for this committee, both stated that
structural unemployment, that is, the fact that people who are un
skilled are heavily unemployed and we don’t have adequately trained
people for many jobs, could not really account for a substantial pro
portion of the unemployment, and I have seen no contrary studies,
although I have heard some contrary assertions from Chairman
Martin and others who contend that our main problem is structural
unemployment.
It is hard to find any documentation to confirm that assertion.
Representative Curtis. I f the Senator would yield just on that,
if von had allowed me to bring in witnesses at the time we held the
hearings I think we would have documented our theory, but unfortu
nately the list of witnesses was compiled without my having an op
portunity to contribute. I would have been glad to nave brought in
witnesses to try to establish this point.
Mr. Keyserling. May I just make one very brief comment?
Senator Proxmire. Yes.
Mr. Keyserltng. Tf the problem is due largely to the falling be
hind of skills, the falling of skills behind technology, if that were the
main problem, then assuredly speeding up technological progress by
swinging more of the economy to investment in plant, which would
speed up the rate of technological progress, would accentuate this
problem, if it is the right explanation.
In any event, you couldn’t fit together the proposition that un
employment was mainly structural and the proposition that you
should try to spark investment at the expense of consumption.
it.
Senator Proxmire. We can get on that shortly. I would like to say
to Dr. Saulnier I went to Harvard Business School and enjoyed it very
much. I recognize that it is, I think, a very responsible school anil
I think quite conservative school, although it is associated with Har
vard. The attitude on the basis of political polls and so forth indicate
it is about 95 percent Republican or at least it was when I was there
and I think still is.
The National Association of Manufacturers, which is not an out
standing liberal association, although I think it is a fine group of
people, financed a study at Harvard Business School of the impact of
taxes on risk taking, a whole series of studies, and I wonder how you
POLICIES FOR FULL EMPLOYMENT
821
would explain the fact that these studies showed no adverse effect on
risk taking as a result of our tax system.
Mr. Saulnier. I am not acquainted with the study. I must say
the result astonishes me.
Senator Proxmire. As you see it, it works both ways.
Mr. Saulnier. Perhaps you would be good enough to give me a
reference on that and I would be glad to comment on it.
Senator Proxmire. Fine. The studies were criticized by the Na
tional Association of Manufacturers, as I understand, after they
were made.
Mr. Saulnier. I may find myself in a critical mood, too, after I
check it. It stands to reason that a high profits tax will tend to sup
press risk taking.
Senator P roxmire. Y ou recognize how it works both ways. If you
have a high profit tax, and (1) a carryback and carryforward loss
provision on your taxes; (2) you have capital gains provisions where
there is every incentive for risk-taking in that sense as compared with
other types of investment; (3) you Have the kind of law we passed
recently for the small business investment companies, where your
losses are treated as ordinary losses and ^our gains as capital gains;
(4) there are all kinds of other provisions in our tax laws to encourage
risk-taking, including oil depletion provisions and mineral depletion
provisions which would encourage people to risk their funds in min
eral investment. So that there are all kinds of ways in which there
are at least counterbalancing forces against the obvious discourage
ment that would come from people having their income reduced
through a profits tax. Most profound of all perhaps is the marginal
utility factor which I think may be very significant. That is, if
people had no income tax on, say, $100,000 worth of earnings, the in
centive for working hard to earn another $10,000 might be quite differ
ent and far less than if they had an income tax and their net income
would be $45,000 or $50,000 after taxes whatever it works out to, be
cause by almost any standard they would be satisfied with $100,000 and
many would not be satisfied with the lesser after-tax figure.
Your friend, Dan Throop Smith, I understand, was the editor of
this—a fine man. He was my finance professor at Harvard.
Mr. Saulnier. Was he the author?
Senator Proxmire. He was the author. I know you have respect
for him.
Mr. Saulnier. I have great respect for him and this increases my
interest in having this citation.
Seantor Proxmire. You may have a different interpretation. Dr.
Keyserling, you are not asking for a auickie compensatory fiscal tax
cut in the sense of balancing fiscal policy to get us out of recession.
You are asking for a fundamental, substantial, permanent tax cut.
Isn’t that correct?
Mr. K eyserling. Yes. The essence of my whole position is that we
should not be engaging in an antirecessionary program now. We
should be engaging in a fundamental correction of the imbalances
which have made themselves more and more manifest in the whole
economy for 9% years.
Incidentally, I think that this is the safest, and surest, and sound
est way to prevent a recession, as a sound, long-range policy. The
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POLICIES FOK FULL EMPLOYMENT
whole essence of my concern is that we are predicating whether or
not we should have a tax cut now on the imperfections of prophesy
as to whether a recession threatens in 3 weeks, 5 weeks, or next year,
which nobody can really answer, whereas we should be predicating ac
tion now—and we confuse the situation by calling it emergency—
upon the fact that we have had a problem for 9y2 years, and it is
emergency only in the sense that we are 2 or 3 or 5 years too late al
ready.
I regard an appropriate tax cut now as a permanent, durable, sound
improvement in the American economic process.
Senator Proxmire. I s this your economic advice? I f the politi
cians decide that the best way they can achieve that, given the atti
tudes in Congress, is to wait until next year, you may deplore the wait,
but you might recognize the political realities that there would be
more chance of getting it then ?
Let me ask you then, in your statement on page 4, you engage in
something that even baffles me from the standpoint of arithmetic.
Frankly, it seems to be bootstrap hoisting.
Take your program of a $10 billion cut. Well, let’s say a $7 billion
tax cut and a $3 billion increase in expenses. You might call it an
initial $10 billion increase in the deficit. You say that this would
result in about the same deficit ultimately as the deficit we are going
to have without it.
In saying that I am baffled because you use a multiplier of 2y> to 3,
and taking your extreme multiplier of 3, this would mean that if you
have a $10 billion drop in revenue and increase in expenditures, net,
then your multiplier would give you a $30 billion increase in gross
national product. I f you apply the one-sixth rule, of revenue increas
ing about one-sixth, with an increase in the gross national product,
you would set back about $5 billion and the result would be that the
deficit would be increased by $5 billion and you would have a $9 to
$12 billion deficit, not a $4 to $7 billion deficit, and a deficit that would
match the biggest we have ever had in peacetime.
Mr. Keyserling. There are several ways in which I think you don’t
correctly understand what I am saying. In the first place, the onesixth figure is not correct for the purposes that I have in mind. In
other words, you derive the one-sixth figure presumably by looking
at the average tax take related to the size of the economy, but this has
nothing to do with the progressive rate at which an increase in gross
national product during an upturn rather than a downturn increases
the tax take under a progressive tax structure.
Senator Proxmire. You are giving the benefits to the lower income
end of the economic scale. The prime benefits would not flow, at least
directly, to corporation income?
Mr. K eyserling. Indeed they would, because the fact that I am
giving the benefits to the lower end of the income scale doesn’t affect
the fact that this is my formula for an overall upward movement of
the whole economy by correcting the imbalances.
In other words, I am not saying, because I give the tax reductions
to the lower end of the income scale^ that this wouldn’t improve the
investment picture and the profit picture. My position is precisely
that it would, because this is what is wrong with the investment ana
the profit picture*
POLICIES FOE FULL EMPLOYMENT
323
My computation works out as follows:
Tne President’s proposal for an approximately balanced Federal
budget in fiscal 1963 seems to be based upon an estimated GNP of about
$585 billion in fiscal 1963. But my estimate now, in line with that of
many other economists, is that the program proposed by the President
would result in a fiscal 1963 GNP of not better than $565 billion, and
perhaps as low as $555 billion or even lower. These figures, respec
tively, would be about $20 to $30 billion lower than the $585 billion
figure estimated to produce a balanced budget. The $20 billion lower
figure would result m an estimated deficit of about $4 billion, and the
$30 billion lower figure would result in an estimated deficit of about
$7 billion. These estimated deficits are based upon the fact that, under
a progressive tax system, and allowing for the relatively greater
impact upon profits of unfavorable economic developments, the re
duction in Federal tax receipts would be much more than one-sixth of
the amount by which GNP is lower than $585 billion, and also the
deficit would increase proportionally as the GNP deficiency grew.
Coming over to my proposal, I estimate that it would result in a fiscal
1963 GNP of close to $600 billion, allowing for the multiplier effect
and the timing factor, contrasted with the $565 or $555 billion figure.
This $600 billion figure would be about $15 billion higher than the $585
billion figure which would yield a balanced budget under the spending
and tax proposals of the President. This $15 bfllion increment would,
because of its composition and because of the progressive tax system,
recoup $3 billion or more of the $10 billion planned deficit which I
ropose, thus resulting in my estimated deficit of $6V> to $7 billion.
his $3 billion or more recoupment is based upon the fact that profit
and other income trends, combined with the progressive tax system,
would yield incremental tax revenues coming to more than one-fifth
of the $15 billion increment in GNP ($600 billion minus $585 billion).
Senator Proxmire. My time is up. I would like to see this arith
metically. I think you would make many converts if you could show
this because this really bothers me. It bothers many, many Senators,
because if you can show that you can reduce taxes and not increase the
deficit, it would be miraculous. In fact it would be an accomplishment
like that of the fabled Baron Mimchausen who found himself sinking
in quicksand and only saved his life by pulling himself out by his
bootstraps.
Mr. K eyserling. Further let us just take as a test case, or take two
test cases—take the $12 billion deficit that we ran in fiscal 1959, and
take the $6.3 billion deficit that we ran in fiscal 1962 just ended. Take
those two deficits. One of the charts that I have shown here illustrates
this matter for the period 1953-62 as a whole.
Then take the size of the GNP during these years with those deficits,
and apply as to the beginning of each of those 2 years, on a judgmental
basis, what the size tax cut and increased spending might have lifted
the actual economic performance during those 2 years to given levels.
Now, economists would have some differences of opinion, but I think
you would find that we wouldn’t have run a bigger deficit in either of
those 2 years if we had adopted the alternative policy. In any event, I
would like to suggest finally that, even if I am wrong, even if the deficit
under my policy were $8 billion higher than under the alternative, I
¥
324
POLICIES FOR FULL EMPLOYMENT
don’t think a $2 billion higher deficit is much to spend for a $30 to $45
billion higher level of national product which gives you the prospect,
in terms of real wealth, of achieving a budget balance at full employ
ment in later years.
Senator Proxmire. I just say it might be $6 or $7 billion higher.
Furthermore as the debt is reduced through increasing Federal rev
enues the multiplier is reversed and far belowbalance.
Representative Reuss. The Senator's time has expired. W e are
very grateful to both of you gentlemen for being with us for almost
I f there are no further questions, we will
stand adjourned until 10 o?clock tomorrow morning in this chamber.
W e stand adjourned.
(Whereupon, at 5 ;25 p.m. the hearing in the above-entitled matter
was recessed until 10 a.m. of the following day.)
Sy2 hours this afternoon.
STATE OF THE ECONOMY AND POLICIES FOR FULL
EMPLOYMENT
FRIDAY, AUGUST 10, 1963
C ongress of the U nited S tates,
J oint E conomic Committee,
Washington,D.C.
The committee met at 10 a.m., pursuant to recess, in room AE-1,
the Capitol, Hon. Wright Patman (chairman) presiding.
Present: Representatives Patman, Reuss, Griffiths, and Thomas B.
Curtis; Senators Douglas and Proxmire.
Also present: William Summers Johnson, executive director; John
R. Start, clerk; Hamilton D. Gewehr, research assistant.
Chairman Patman. The committee will be in order, please.
We continue hearings on the state of the economy and on the policies
for full employment, production, and purchasing power.
This morning we have a panel of economists on fiscal policy recom*
mendations. George C. Hagedorn, director of the Research Depart
ment, National Association of Manufacturers; John K. Langum, con
sulting economist and president of Business Economics, Inc., Chicago;
Joseph A. Livingston, financial editor, Philadelphia Bulletin; Stanley
H. Ruttenberg, director, Department of Research, AFL-CIO.
Gentlemen, we thank you for coming. We are very glad to have
you. Our procedure is to have each witness make an opening statement.
Then the members of the committee put questions to the panel under a
10-minute rule for questioning by er.ch committee member.
Mr. Hagedorn, you may proceed in your own way, sir. I believe
you have a prepared statement.
STATEMENT OF GEORGE G. HAGEDORN, DIRECTOR, RESEARCH
DEPARTMENT, NATIONAL ASSOCIATION OF MANUFACTURERS
Mr. Hagedorn. I would like to read my prepared statement, Mr.
Chairman.
Chairman Patman. You may do so, sir.
Mr. Hagedorn. Differences of opinion as to the proper fiscal pro*
gram to be followed at any given time are usually the product of dif
ferences in basic conceptions of the function of fiscal policy generally.
For that reason it is well to start with a statement of the principles on
which the approach advocated in this paper is based.
They are relatively simple and not at all original. First, spending
should be kept to the minimum needed for performing the necessary
functions of the Federal Government. In that way the Government
does not uat up economic resources which would otherwise be avail-
326
POLICIES FOR FULL EMPLOYMENT
able for supporting the growth of the private economy. Second, the
tax system should be designed to raise revenues necessary to meet
these expenditures, but with a minimum of interference with private
economic activity and expansion.
This sounds lrke a very old-fashioned way of viewing the function
of fiscal policy in our economy, and maybe it is. But I also think it
is the most realistic and appropriate guide for facing the complex set
of economic difficulties in which the Nation presently finds itself. The
bulk of this paper will be devoted to explaining the reasons for that
conclusion.
Since the principles just stated may seem rather general and ab
stract, it had better be explained at the start that there is a practical
way of implementing them. It is through the earmarking, in advance
and by legislation, of the revenue increase which comes from economic
growth to income tax rate reform rather than to increased Federal
spending. Such a program, spread over a series of years, offers the
best hope for a gradual reduction of the burden which excessive tax
rates now place on economic activity and economic expansion. It is
attainable within the framework of a balanced budget.
The approach advocated here may be contrasted with the view that
the Federal budget should be regarded as a positive instrument of na
tional economic policy. According to this latter view, the budget
should be designed to supplement private demand to whatever degree
is necessary at the given moment. Some of the adherents of this view
state that they prefer tax reduction to expenditure increase as a means
of increasing total demand.
However, the basic logic of this approach would lead to the concluclusion that one way of increasing demand is as good as the other.
The net effect of the budget on the economy is to oe assessed by the
size of the deficit or surplus. According to the jargon of this philoso
phy, the greater the deficit, or the smaller the surplus, the more ex
pansionary the budget is in its economic effects.
The case between the two alternative views of the proper objective
of fiscal policy could be argued on general principles. However, for
the present occasion the discussion will be limited to a comparison of
the two approaches in the light of the specific economic situation in
which we now find ourselves.
You have been holding extensive hearings both at this time and
earlier this year, on the state of the economy. So I am not going to
try to give you a comprehensive review of that subject. I just want
to make a few points that I think are relevant to the current issue of
fiscal policy.
No. 1, the problem before us is one of chronic suboptimum economic
performance, rather than of a short-term cyclical downturn which
may or may not be in the offing.
For almost 5 years, ever since the latter part of 1957, unemploy
ment has remained at or above 5 percent of the labor force.
There is one exception, I think February 1960, it got down to 4.8
percent. That is the only month in the period where it got below 5
percent.
The real cause for concern has not been the two recessions which
occurred during that period, neither of which was severe, but the
327
POLICIES FOR FULL EMPLOYMENT
tendency of the subsequent recovery to lose momentum before reason
ably satisfactory levels of economic activity had been reached.
We are not in a situation calling for radical emergency action. But
we should be concerned with discovering and removing the barriers
which prevent us from attaining fuller realization of our economic
potential.
Two, although total economic activity showed a substantial growth
over this period, two important elements did not participate nilly in
that growth—corporate profits and business investment expenditures.
By contrast, consumer incomes and consumer expenditures have kept
pace with the general growth*
The facts are summarized in the following table:
Percent increase, 1951 to 1st half of 1962
Percent
Gross national product------------------------------------------------------------------- -f 24. 0
Corporate profits after tax_________________________________________ + 1 5 .0
Business exjieiulitures for plant and equipment_______________________
—. 2
Disposable personal income________________________________________ 4-23.0
Consumer expenditures____________________________________________ -f 24 . q
Compensation of employees_________________________________________ +25.0
Government expenditures__________________________________________ 4-38.0
I mi^ht say corporate profits have gone up much less. Business
expenditures for plant and equipment have not gone up since 1957.
Actually that figure shown for corporate profits after tax perhaps
doesn’t really adequately describe tne degree to which profits have
been stagnant in tne postwar period generally. In the last decade,
ever since 1950, corporate profits have fluctuated between $20 and
$25 billion, and really have gotten no place in that period. They have
gone up and down in cycles, out there nas been no growth in corporate
profits. While the gross national product, the dollar value of eco
nomic activity in the country has doubled.
These data certainly do not suggest that present economic difficulties
are due to inability or unwillingness to spend on the part of the public
generally. The problem centers rather on the inadequacy of profits
and of business investment.
Three, costs of production have increased because wages have gone
up faster than productivity. In recent years it has been impossible
to recover such increased costs in higher prices. This is an important
cause of the squeeze on profits already noted.
The relationship between the cost of an hour’s work, and the output
achieved by it, is summarized as follows:
Percent change per year
Period
Average
hourly com
pensation
1N 7 -5 3 .........................................................................................................................
6.2
16
4.0
Output
Per
man-hour
2.7
2.3
2.5
N o t e .—T he data a p p ly to a ll employees o fn a n a *rlc n ttu r*I Industries.
T h e n has been a gap between those tw o figures. The cost o f an
hour’s work has gone up faster than the physical yield from each hour’s
328
POLICIES FOR FULL EMPLOYMENT
work. The gap has somewhat narrowed in recent years in the period
since 1957, but there is still a sizable gap between those two figures.
The discrepancy between average hourly pay and output per man-hour
is a measure of the increase in cost per unit of production. This dis
crepancy has been somewhat less since 1957 than in earlier years.
The trouble has been that, since 1957, market conditions have been
such that it is no longer possible to get back the increased cost in higher
prices. Since 1957 the wholesale price index for industrial products
has increased by only 0.3 percent per year on the average. There has
actually been a slight decline in such prices since 1959.
The net result of rising costs and practically steady prices has been a
squeeze on profits. The incentive for business expansion, or even for
the maintenance of current operations, has been curtailed. Marginal
operations which would otherwise be profitable, and provide jobs, are
not worth undertaking.
Four, as a result of past deficits in our international balance of pay
ments, foreign short-term claims against this country now exceed our
gold stock. This necessitates that measures used for promoting eco
nomic expansion at homes shall not depend on low interest rates and
shall not encourage increases in costs of production.
The gold stock has declined to a level only slightly above $16 billion.
Foreign short-term balances—which are potential claims against
gold—have risen to $19 billion.
A situation of this type is not necessarily dangerous or inherently
disastrous. Foreigners are not likely to convert their balances into
gold as long as they can earn reasonably competitive interest on them,
and as long as they are confident that such balances are ultimately
convertible into American goods at internationally competitive prices.
But if they come to believe that we will pursue economic policies which
will make it impossible to preserve such conditions, they might begin
to withdraw gold at a rate which could eventually force us to abandon
the convertibility of the dollar at its present rate.
Fiscal policy to increase demand—the wrong approach. With this
background it seems clear that a fiscal policy designed to raise the level
of demand by increasing the Federal deficit is entirely inappropriate—
for a number of reasons.
First, the economic problem which confronts us is chronic, rather
than intermittent or temporary. An occasional deficit to meet a tem
porary situation might be tolerable. But an indefinite series of
deficits to offset persistent underlying maladjustments is not to be
contemplated.
Second, adoption of such an allegedly expansionary fiscal policy
would encourage and intensify the very forces which have brought
about the present economic difficulty. Uneconomic wage increases
have a restricting effect on economic activity and on employment. I f
we pursue a national policy of using Federal deficits to “bail out” those
who are responsible for such uneconomic cost increases, we are in effect
encouraging them to go ahead and promising to guarantee them
against the consequences of their own actions.
Finally, adoption of this course would diminish foreign confidence
that we nave any real noninflationary solution to our economic prob
lems. They are watching to see whether we intend to underwrite
cost increases by Government deficits, or adopt the alternative policy
POLICIES FOR FULL EMPLOYMENT
320
of promoting growth through the control of costs and the improve
ment of efficiency. The former course could only lead to inflation and
ult imately the devaluation of the American dollar. The consequences
for our own economy and for the free world generally would be very
serious.
The conditions for prosperity and economic growth: A program for
promoting high levels of employment and economic growth with
generally stable prices, of course, involves many elements. As long
as we are to remain predominantly a private enterprise market econ
omy, such a program must center on the incentives for, and the re
sources available to, private economic activity.
As already noted, the two poor performers in our recent economic
history have been profits ana business investment. A program for
growtli and prosperty must certainly provide for a reversal of these
trends.
The growth of labor costs at the expense of profits is a problem that
must be dealt with. The constant upward pressure on labor costs
is due partiv to the power of labor organizations to raise wage rates
and fringe lienefits regardless of market conditions, and partly to a
failure on the part of tlie public to understand that such cost increases
curtail employment opportunities and economic expansion.
Since I have been asked to speak here primarily on fiscal policy,
I will concentrate on that aspect of the problem. There is an im
portant contribution that Federal fiscal policy can make to prosperity
and growth. It is through enactment of a systematic program of
rate reduction applied both to the corporate income tax and to the
personal income tax. Such a program would increase the flow of
capital for modernization and expansion and improve the profitability
of business operations.
Such a program should be carried out within the general framework
of a balanced budget. Otherwise, it would be merely another form
of the delicits-to-increase-demand approach which should i>e rejected
for the reasons given earlier.
The tax rate reform should be permanent and it should be sub
stantial in amount. It should apply to both corporate and personal
income taxes since both affect incentives and both affect the supply
of capital for private investment. The objective should lie, not an
expansion in demand, but an improvement in profitability and an
increase in the flow of savings for investment. Hence, while such a
program should involve reduction of individual rates all along the
line, it should also provide for a substantial compression of the steep
progressivitv of the rate structure.
This is. of course, too big a package to be achieved all at once. But
it is not impossible of achievement if we have enough determination
to adhere to a program of gradual rate reduction spread out over a
series of years, meanwhile preventing any further increase in Federal
spending.
The program just described is designed to meet the longer term
problem o f chronic econom ic sluggishness, rather than the immediate
short-term danger o f a cyclical aownturn. But the lift that early
adoption o f such a program w ould give to the confidence o f business
and the public would have a prom pt and salutary effect on the eco
nom ic trends o f the immediate future. Progress toward a solution o f
330
POLICIES FOR FULL EMPLOYMENT
the long-term problem contributes substantially to improving the
short-term outlook. Unfortunately, the converse is not equally true.
I recommend this approach to your consideration. It is a practical
resolution of the dilemma posed by the barriers to growth involved
in the present tax system, and the inflationary effects of tax-reduction
involving substantial and persistent government deficits.
(Tables acompanying Mr. Hagedom’s statement follow:)
T able A .— Gross national product and related totals
[In billions of dollars]
Gross
national
product
Year
1947......................
1948......................
1949......................
1950......................
1951......................
1952 ....................
1953......................
1954......................
1955......................
1956......................
1957......................
1958.....................
1959.....................
1960.....................
1961......................
1962......................
Business ex
Govern
Disposable Consump Compensa Corporation penditures
ment ex
tion ex
tion of profits after for plant
income
tax
and equip* penditures 1
penditures employees
ment
$234.3
259.4
258.1
284.6
329.0
347.0
365.4
363.1
397.5
419.2
442.8
444.5
482.8
503.4
518.7
> 548.5
$165.4
178.3
181.2
195.0
209.8
219.8
232.6
238.0
256.9
269.9
285.2
293.2
313.5
328.5
338.1
>352.6
$170.1
189.3
189.6
207.7
227.4
238.7
252.5
256.9
274.4
292.9
308.8
317.9
337.1
349.4
363.6
* 378.6
$18.2
20.5
16.0
22.8
19.7
17.2
18.1
16.8
23.0
23.5
22.3
18.8
23.7
22.7
23.3
*25.6
$128.8
141.0
140.8
154.2
180.3
195.0
208.8
207.6
223.9
242.5
255.5
257.1
278.4
293.7
302.2
>318.4
$20.6
22.1
19.3
20.6
25.6
26.5
28.3
26.8
28.7
35.0
37.0
30.5
32.5
35.7
34.4
>36.3
$43.8
51.0
59.5
61.1
79.4
94.7
102.0
96.7
98.6
104.3
115.3
126.6
131.6
136.8
149.3
>158.7
1 Purchases of goods and services, transfers, interest, and subsidies.
* 1st half estimate.
•1st quarter estimate.
Source: U.S. Department of Commerce; Council of Economic Advisers.
T able
A-l. — Various economic magnitudes as a percent of gross national
product
Year
Disposable
income
1947.......................
1948.......................
1949.......................
1950.......................
1951.......................
1952.......................
1953.......................
1954.......................
1955.......................
1956.......................
1957.......................
1958.......................
1959.......................
1960.......................
1961.......................
1962.____________
72.6
73.0
73.6
73.0
69.1
68.8
69.1
70.8
69.0
69.9
69.7
71.fi
69.8
69.4
70.1
>'69.0
Consumption
expenditures
70.6
68.7
70.2
68.5
63.8
63.4
63.7
65.6
64.6
64.3
64.4
66.0
619
65.3
65.2
* 64.3
Compensa
tion of
employees
Corporation
Business
profits after expenditures Government
tax
for plant and expenditures >
equipment
55.0
64.3
54.6
612
618
66.2
67.1
67.2
66.3
67.8
57.7
67.8
67.7
58.3
68.3
>68.0
7.8
7.9
6.2
8.0
6.0
&0
6.0
16
6.8
6.6
6.0
12
19
15
15
*17
8.8
8.5
7.5
7.2
7.8
7.6
7.7
7.4
7.2
8.3
8.4
6.9
6.7
7.1
6.6
J 6.6
18.7
19.7
23.1
21.5
24.1
27.2
27.9
26.6
24.8
24.9
26.0
28.5
27.3
27.2
28.8
>28.9
* Purchases of Roods and services, transfers, interest, and subsidies.
* 1st half estimate.
* 1st quarter estimate.
Source: U.S. Department of Commerce, Council of Economic Advisers.
Chairman Patman. Thank you, sir. Our next witness is M r. John
K . Langum. M r. Langum, you have a prepared statement, I believe.
Y ou may proceed in your own way.
331
POLICIES FOR FULL EMPLOYMENT
STATEMENT OF JOHN H. LANGUM, PRESIDENT, BUSINESS
ECONOMICS, INC., CHICAGO, ILL
Mr. L a x g u m . I would like to go over my prepared statement, and
with that I have prepared a document of 10 pages of tables which I
should like to use along with my prepared statement.
Chairman P atman. Without objection they will be inserted in the
record.
( Document referred to above follows:)
C o rpo rate P r o f it s
and
C a s h F low
John K. Langum, president, Business Economics, Inc., Chicago, 111.
relation to depreciation accruals and capital outlays,
1946S1
Corporate pro/Ut
(Inbillionsofdollars]
Corporate
profits
after Uzee
Year
1944.........................
1947.........................
IMS.........................
1940.........................
I960.........................
1951.........................
1952.........................
1963.........................
1954.......................
1955.........................
1950........................
1957.......................
1958.........................
1990.........................
1900.........................
1961.........................
Depredation
and
amortisation
allowances
$4.2
ft 2
12
7 1
7 8
90
10 4
11 8
13.5
15.7
17.8
19.1
208
21 ft
23.1
318
SIS. 4
18.2
a5
1ft. 0
22.8
19 7
17 2
18.1
1ft 8
23.0
28.8
22.3
18.8
2
2 15
23.0
218
Cash
earnings
Plant and
equipment
outlays
817 6
28.4
36.7
23.1
sao
28.7
27 6
299
SQ.3
88.7
4a 8
41 4
30.1
4ft. 1
4* 1
48.1
Net cash
earnings
$12.5
17 0
18.8
1ft 3
18 9
21 8
22.4
239
22.4
24 2
29 9
32.7
2ft 4
27 7
SO 8
20 ft
$5 1
ft 4
7.9
<L8
13.7
7.1
5.2
10
79
115
10.9
8.7
12.7
18.4
15 3
1&5
Corporate
dividends
$5.8
16
7.2
7.5
9.2
9.0
9 0
9.2
9.8
11 2
12.1
12.8
12.4
18.7
114
15 0
Pro/U margins and rate of return on equity, all manufacturing corporations,
I947S1
Ymr
I9f7
......................................... .............................. .......... ..............
1064.__ . . . . . . . . . . . . —.* — *“ — •*——----- --------------------— ----- -------------
m i
------- --
------------ — ---- -------------------------------------------------------
Profit after
taxes per
dollar of
sales
Annual rate of
profit after
taxes on
stockholders’
equity
CnUt
Percent
ft. 7
70
5.8
7 1
18
15.6
1ft 0
ILft
15.4
11.8
ftS
111
43
13
45
5.4
5.3
10 2
ia 4
9.8
12.3
12 0
48
10 9
18
12
18
14
IS
10.7
8.4
ia s
n
$7
4.8
14
332
POLICIES FOB FULL EMPLOYMENT
Inventory valuation adjustment in relation to corporate profits before taxes,
selected years
Inventory
valuation
adjustment
Year
Billions
-$ 5 .9
- 2 .2
- 5 .0
- 2 .7
- 1 .6
0
1947.........................................
. .........................................-1948
........................................................................................
1950
...................................................................
1956
.......................................................
1957...................................................................................................
1961
........... - .....................................................................
Corporate
profits be
fore taxes
Billions
$29.5
33.0
40.6
44. 7
43.2
45.6
Inventory
valuation
adjustment
as ratio of
corporate
profits be
fore taxes
Percent
-2 0 .0
- 6 .7
-1 2 .3
—6.0
- 3 .5
0
Rate of return on net w orth , leading m anufacturing corporations ( F irs t
N a tio n al C ity B ank d a ta )
[I n p ercen t]
Year
Year
10. 7 1952__
10.8 1953—
9.0 195 4
11.6 195 5
12.8 195 6
1925—
1920__
192 7
192 8
192 9
Average for period________ 11. 0
1947_
1948_
1949_
1950.
1951-
17.0
18.9
13.8
17.1
14.4
12.3
12.5
12.4
15.0
13.7
Average for period________ 13.2
12.8
1957_
1958_
1959_
I9601961.
Average for period________ 16.2
9.8
11.6
10.5
10.1
Average for period________ 11. 0
Corporate profits and oash earnings in relation to corporate sales, 1946-61
[In percent]
Corporate
profits
after taxes/
corporate
sales
Deprecia
tion and
amortization
allowances/
corporate
sales
1946................................ ........... ..............................
1947......... ...................... ...........................................
1948.............................................. .............................
1949............................................................................
1950............................................ .............................
1951_____________________ ________ ___________
4.96
5.24
5.28
4.32
5.27
4.03
1.55
1.50
1.60
1.92
1.81
2.01
6.50
6.73
6.87
6.24
7.08
6.40
1.88
1.84
2.03
1.84
3.17
1.58
Average per period.......................................
4.83
1.77
6.66
2.09
TS”
3.46
3.26
3.84
3.71
2.08
2.25
2.61
2.62
2.74
5.53
5.71
5.87
6.46
6.45
1.04
1.15
1.63
2.42
1.72
1.57
Year
1952............................................................................
1953................................ .............- ..........................
1954............................................................................
1956............................................................................
Cash
earnings/
corporate
sales
Net cash
ear nines/
corporate
sales
Average per period.................. ....................
3.54
2.46
6.00
1957............................................................................
1959.................... .......................................................
3.32
2.85
3.31
3.02
2.98
2.84
3.08
2.92
3.03
3.17
6.16
5.94
6.23
6.06
6.14
1.93
2.40
2.01
2.36
Average per period_______ ___________ _
3.10
3.01
6.11
2.03
—
POLICIES FOR FULL EMPLOYMENT
333
Capital outlay* and corporate dividend* in relation to cath earning», 1946-61
[In percent]
Plant aad
equipment
outlays/cash
earnings
Year
71.02
72.65
70.41
70.66
55.23
75.26
81.16
79.98
73.93
62.53
73.28
78.99
67.52
60.09
65.81
61.54
1946.
1947.
1948.
1949.
1930.
1951.
1952,
1053.
1954.
1955.
1956.
1957.
19581959.
1960.
1961.
Corporate
dividends/
Corporate
corporate
dividends/
profits after cash earnings
taxes
43.28
85.71
35.12
46.88
40.35
45.69
52.33
50.83
58.33
48.70
51.49
56.50
65.96
55.92
62.61
64.38
32.95
27.78
26.97
32.47
30.07
31.36
32.61
30.77
32.34
28.94
29.66
30,43
31.71
29.72
31.24
31.18
Cash flow in relation to sates, aU manufacturing corporations»1961
B Y IN D U S T R Y
Percent of sales
Net profit
after taxes
All manufacturing corporations.__ ___ .» __ _____________ _
Durable goods - . . . . . . . . . _____________________________
Transportation equipment________,__________________
Motor rehktei and equipm ent.._______________ _
Aircraft and parts_________ ____ ____ ___________
Electrical machinery, equipment, and supplies______
Other machinery* . . . . . __ . . . . . . . . . . . . _____ . . . . __ _
Metalworking machinery and equipment________
Other fabricated metal products___________________ _
Primary metal industries...__________ _____ . . . ___ __
Primary iron and steel________________ ____ ____
Primary non ferrous metals
. . . . . . . . . __ . . . . . . . .
Stone, d a y, and glass products____. . . . ________ _____
Furniture and fixtures_________ ____ ________________
Lumber and wood products, except furniture.*___ . . .
Instrument* and related products . . . __
Miscellaneous manufacturing and ordnance___ __ . . . .
Nondurable goods........„........ . . __ . . . . ____ . . . . . . . . __
Food and kindred p ro d u c ts ....___ . . . __ ____ —____ . . . . .
Alcoholic Average#, „, r. - ■■ .-....... ...... . . . . . . . . . . . . . .
Tobacco manufactures......................................... . . . . ___ . . . .
Textile mill p r o d u c t s ,....__ . . . . __ _________________ . . . .
Apparel and other finished product*.____ ______ . . . . . . . . .
Paper and allied products ______ ____ ____ ____ ____ . . .
Printing and publishing, except newspapers.. . . . . . __ _
Chemicals and allied p ro d u c ts ..._______ ________________
Basic chemicals _____ ____. . . . ............................ .
Drugs . . . . . ____ . . . . . . . . . . . . . . . ___ . . . ___ . . ___ . . . . . . .
Petroleum refining and related industries.. . . . . . . . . . . . . . . .
Petroleum refining
.....................................
Rubber and miscellaneous plastics products___ _________
Leather and leather products.. . . . . . . _. . . . . . . __. . . . . . . . . .
4 .3
3 .8
4 .0
5 .3
1 .8
3 4
4 .1
3 -2
2 .4
4 .8
4 .5
5 .3
5 .6
1 .5
1 .8
5 .4
3 .6
4 .6
2 .3
3 .2
5 ,7
2 .0
1 .2
4 .6
2 .8
7 .3
&1
9 .8
1 0.1
10.3
3 .8
1.1
D epreciation
and
depletion1
3 .3
3 .2
2 .7
3 .3
1 .7
2 .3
35
3 .1
2 .6
4 .S
5 .0
4 .4
5 .2
1 .6
4 .7
2 .9
ZO
3 .4
1 .8
2 .0
.8
2 .4
.6
4 .2
2 -1
4 .6
7 .0
2 .2
7 .5
7 .6
3 .1
1 .1
Total
7 .6
7 .1
6 .6
8 .6
3 -5
5 .8
7 .6
6 .4
5 .0
9 .6
9 .4
9 .7
10.8
2 .8
6 .5
8 .3
5 .6
8 .0
4 .0
5 .2
6 .5
4 .6
1 .8
8 .8
4 .9
1 1.9
1 5.2
12.0
17.6
18.0
6 .8
2,2
334
POLICIES FOR FULL EMPLOYMENT
Annual rate of profit after tames on stockholders* equity at end of period, all
manufacturing corporations, 1961
BY INDUSTRY
Percent
AU manufacturing corporations-------------------------------------------------------Durable goods-------------------------------------------------------------------------Transportation equipment---------------------------------------------------Motor vehicles and equipment-----------------------------------------Aircraft and parts--------------------------------------------------------Electrical machinery, equipment, and supplies-------------------------Other machinery___________________________________________
Metalworking machinery and equipment--------------------------Other fabricated metal products--------------------------------------------Primary metal industries-----------------------------------------------------Primary iron and steel--------------------------------------------------Primary nonferrous metals--------------------------------------------Stone, clay, and glass products---------------------------------------------Furniture and fixtures--------------------------------------------------------Lumber and wood products, except furniture--------------------------Miscellaneous manufacturing and ordnance----------------------------Nondurable goods______________________________________________
Food and kindred products_________________________________
Alcoholic beverages------------------------------------------------------Tobacco manufactures---------------------------------------------------------Textile mill products_______________________________________
Apparel and other finished products--------------------------------------Paper and allied products---------------------------------------------------Printing and publishing, except newspapers___________________
Chemicals and allied products______________________________
Basic chemicals________________________________________
Drugs_________________________________________________
Petroleum refining and related industries_____________________
Petroleum refining--------------------------------------------------------Rubber and miscellaneous plastics products___________________
Leather and leather products________________________________
BY SIZE
AU asset sizes-------------------------------------------------------------------------------Under $1,000,000_______________________________________________
$1,000,000 to $5,000,000_________________________________________
$5,000,000 to $10,000,000________________________________________
$10,000,000 to $25,000,000_______________________________________
$25,000,000 to $50,000,000_______________________________________
$50,000,000 to $1,000,000,000_____________________________________
$100,000,000 to $250,000,000______________________________________
$250,000,000 to $1,000,000,000____________________________________
$1,000,000,000 and over---------------------------------------------------------------
8- 7
8.1
10. G
11* 4
9. 8
8. 9
7.8
6.0
5.9
6.4
6.2
7.1
8.8
4.9
10. 5
9. 8
9.6
8.9
7.3
13. 6
5. 0
7.0
7. 8
8.5
11.8
10.6
16. 7
10.3
10.3
9.3
4.4
P ercent
8. 7
5.6
6. 0
6* 8
7.0
7. 6
8.3
8. 4
9.3
10. 8
Mr. Langum. The record since World War II for total profits after
taxes of all corporations is shown in the first column in the table on
page 1 entitled “ Corporate Profits in Relation to Depreciation Accru
als and Capital Outlays.” This record reflects the varied develop
ments which have occurred in the American economy. A marked pat
tern of cyclical fluctuations is evident, even in terms of the more
moderate swings in the business cycle which have been experienced in
the last decade and a half.
On the downside, in recessions from 1948 to 1949, from 1953 to
1954, and from 1957 to 1958, the sharp declines are manifest. As is
the case in most measurements of the level of economic activity, the
effects on corporate profits of the recession of late 1960 and early 1961
are buried in the annual figures.
I n th a t recent recession, how ever, corporate profits a fte r taxes
dro p p e d fro m a seasonally adjusted a n n u a l r a t e o f $ 2 4 .» b illio n in the
POLICIES FOR FULL EMPLOYMENT
335
first quarter of I960 to $2.3 billion in the first quarter of 1961. Simi
larly, in terms of recovery and expansion, there should be noted the
sharp rises from 1946 to 1948, from 1949 to 1950, from 1954 to 1955, and
from 1958 to 1959. The current recovery has carried total corporate
profits after taxes from the $20.3 billion annual rate seasonally ad
justed in the first quarter of 1961, to $26.3 billion in the fourth quarter
of 1961, $25.6 billion in the first quarter of 1962, and about $26 trillion
in the second and third quarters or this year.
The problem of adequate profitability for business enterprise under
present-day circumstances, however, is pointed up by the unsatisfac
tory performance in the second and third year of good times follow
ing recession. Thus, profits declined from 1951 to 1953, from 1955
to 1957, and from 1959 to 1960. Given this pattern, the decline in
corporate profits from the fourth quarter of 1961 to the first quarter
of 1962 was a most disheartening development.
Beyond the cyclical swings, however, something more fundamental
has been occurring in the level of corporate profits. Over the last
decade or so, the total dollar amount of reported earnings in peak
years has moved sideways—$22.8 billion in 1950, $23 billion in 1955,
$23.5 billion in 1956, $22.3 billion in 1957, $23 billion in 1960, $23.3
billion in 1001, with a temporary breakout to $24.5 billion in 1959, on
the basis of revised figures, and the $26 billion figure in recent quar
ters. Meanwhile, cross national product rose from $285 billion in 1950
to almost $519 billion in 1961, corporate sales went up from $432 bil
lion in 1950 to $783 billion in 1961, and invested capital rose in equally
substantial measure. This combination of developments has resulted
necessarily in continued decline in the ratio of corporate profits to
gross national product, marked deterioration in profit margins, sharp
drop in rate of return on stockholders’ equity, and no return at all in
reported earnings to the increment to invested capital during these
years.
Herein lies the profit saueeze—in terms of reported figures with
out interpretation—which nas been so widely discussed. Measures of
the profit squeeze are shown on page 2 in terms of profit margins and
rate of return on equity from 1947 mrough 1961 for all manufacturing
corporations. Profit after taxes per dollar of sales dropped from 6.3
cents an average in 1947-51 to 4.8 cents in 1952-56, ana to 4.5 cents
in 1957-61. Annual rate of profit after taxes on stockholders’ equity
dropped from 14.1 percent on average in the first 5 years of the post
war period to 10.9 percent in 1952-56, and to 9.4 percent in the last
5 years.
Another measure of the profit squeeze is shown on page 332 in terms
of the relationship of corporate profits after taxes to the corporate
sales. This ratio dropped from 4.83 percent in 1947-51 to 3.54 percent
in 1952-56, and to 3.10 percent in 1956-^1.
These developments nave been stated in terms of overall data as re
ported and without analysis of their underlying causes. They are the
basis of deep concern in business circles. They mean to many a grind
ing down o f profits to such low levels as to threaten the successful
operation of our private enterprise economy and to impede attainment
o f adequate perform ance o f the econom y.
Close examination o f the underlying data and analysis o f the casual
factors involved, however, point to a different conclusion. In my
336
POLICIES FOR FULL EMPLOYMENT
judgment we do have a profit squeeze. We do need to give considera
tion to an adequate level of profits. We do need to encourage busi
ness investment through increasing cash flow. But, the historical rec
ord in terms of the overall data as reported greatly exaggerate the
real decline in corporate profitability which has occurred. More than
that, undue concern about the profits situation has in itself caused
weakening of business confidence and hurt the cause of adequate re
covery. Furthermore, erroneous interpretations of the situation re
garding corporate profitability direct attention away from the more
basic matters making for the good health of the economy and with
that the well being of corporate profitability as well.
As I see it, there have been three fundamental factors causing the
decline from the high levels of profit margins and rate of return as re
ported which prevailed in the early postwar years. These are: First,
the unusual circumstances of the early postwar years which led to
record levels of profits never reached before or after. Second, the
tremendous stepup in depreciation charges during the last decade
which has lowered reported earnings but has increased cash flow.
Third, the inadequate growth in the economy generally from 1957
on and particularly the sideways movement of real output in the
private durable sector.
Unusual circumstances of high demand and short supply made
the early postwar years the most profitable period corporate enter
prise has ever experienced. Beyond this, costs, including the cost of
plant consumed, were seriously understated and reported profits were
greatly overstated. In particular, the tremendous burst of demand
m the early postwar years brought about a rapid increase in prices
which gave rise to major inventory profits included in reported corpo
rate profits. The effect on profits of inventory valuation from chang
ing prices has been specifically recognized and measured by the De
partment of Commerce. Some aspects of this are shown in the table
on page 332 entitled “ Inventory Valuation Adjustment in Relation to
Corporate Profits Before Taxes.”
The degree to which inventory valuation raised reported profits is
indicated for selected early postwar years—1947,1948,1950— in con
trast to certain recent years. When prices are rising, as they were
sharply in the early postwar years, higher profits emerge from in
ventory valuations at lower levels of costs. The Department of Com
merce includes corporate profits before taxes in national income only
after adjustment for inventory valuation. Thus the high profit margin
ratios and rate of return figures in the early postwar period were
substantially boosted by inventory profits occurring as a result of
rapid inflation and other understatements of costs and overstatements
of reported profits. Such years hardly offer a reasonable base of com
parison.
As a matter of fact, much of the decline in corporate profitability as
indicated by reported data is simply a return to more usual circum
stances from extremely abnormal situations prevailing after World
War II. This is indicated to some degree by the authoritative data
shown on page 4 concerning rate of return on net worth of leading
manufacturing corporations prepared and published over the years
by the First National City Bank of New York.
POLICIES FOR FULL EMPLOYMENT
337
Rate of return on equity declined from an average 16.2 percent in
1947-51, to 13.2 percent in 1952-56, and to 11 percent in 1957-61.
But that 11 percent during the last 5 years of profit squeeze is exactly
the same as the average of 11 percent in the 5 years from 1925 through
1929, the previous high point of corporate profitability.
Basic emphasis must be given to rising depreciation charges. Data
on this matter are shown on page 331. The dollar amount of depre
ciation and amortization charges, as measured in the Department of
Commerce series on sources and uses of corporate funds, is shown in
the second column. Depreciation charges have risen from $7.8 billion
in 1950 to $19.1 billion in 1957, and $24.8 billion in 1961.
The sideways movement in total corporation profits during much
of the last decade or so has resulted partly from this tremendous rise
in depreciation allowances. This situation in terms of individual
companies as well as the economy, has caused many financial analysts
to devote a great deal of emphasis to the concept of “cash earnings,”
that is, the sum of reported earnings plus depreciation charges. It
will be noted in the table on page 1 that cask earnings of all U.S.
corporations have risen from $30.6 billion in 1950 to $48.1 billion in
196L
The rise in depreciation charges and in so-called cash earnings has
l>een due to two major factors. First, business enterprises have made
substantial and continuing expenditures on plant and equipment.
I might interpolate that while some of those expenditures have been
for increasing capacity, they have also been for modernization and
cost cutting, and have Ibeen the effective medium by which many busi
ness enterprises have been able to achieve a substantial offset to higher
employment costs, and thus hold down and restrain the increase in
cost per unit of output, which otherwise would have occurred on a
much bigger scale.
As the amount of depreciable property has risen, the depreciation
charges related to that property have risen.
Second, accelerated amortization of defense facilities in connection
with the Korean war and liberalized depreciation enacted in the Reve
nue Act of 1954 have increased depreciation charges. Ahead of us,
of course, is the effect of a potential $4.7 billion increase in deprecia
tion, of which $3.6 billion is for corporate businesses, under the new
guidelines set forth by the Treasury Department in its recently an
nounced basic reform in the standards and procedures used for the
determination of depreciation for tax purposes.
The tremendous rise in depreciation charges during the postwar
period is an essential element in appraisal of recent profit develop
ments. Certainly the nature of depreciation accruals as noncash
charges against sales is valid, as is the resultant concept of cash flow
available for dividends on investment in business assets. A cash earn
ings concept may be necessary for comparability, given changes in the
rate of depreciation and amortization allowances.
While depreciation accruals represent noncash costs, they are never
theless true costs. Total costs, as Leonard Spacek has recently empha
sized, are made up of (a) costs spent in prior years but used up to
day, (ft) costs spent today, and (c) costs accrued today to be settled
in future years^ and reality prevents any one of these cost elements
from disappearing. There* are no real profits to a business enterprise
338
POLICIES FOR FULL EMPLOYMENT
until all costs are recovered, including full recovery of investment in
assets in terms of book value, to say nothing of current value after in
flation. Earnings computed after all costs are covered are still the
only true earnings.
Nevertheless, the rise of depreciation accruals and cash earnings in
absolute and relative amount has clearly changed the financial posi
tion of corporate enterprise. The rules of the game for recording
costs have certainly been altered by changed depreciation standards
and procedures of the Internal Revenue Service. The quality of reorted earnings has been substantially strengthened and improved, as
as been the stability and protection of dividend payments, by the ris
ing levels of depreciation accruals and cash flows. Furthermore, the
financing of new plant and equipment outlays is materially eased by
rising cash earnings.
These developments may be observed from consideration of the data
on page 331 concerning cash earnings and plant and equipment outlays.
From some standpoints, a concept of “ net cash earnings” might be
meaningful as an alternative approach. “ Net cash earnings” are
defined as cash earnings less plant and equipment outlays. The table
indicates that the level of “net cash earnings” in 1961 and in 1959
was far higher than in previous years. Year-to-year changes in net
cash earnings are caused, of course, by short-run fluctuations in plant
and equipment outlays as well as in reported earnings.
The data on page 332 relate corporate profits and cash earnings to
corporate sales. The reported figures on corporate profits after taxes
in relation to total corporate sales have declined substantially during
the postwar period as a whole, as previously noted. But attention
must also be given to the matter of rising depreciation and amortiza
tion charges. The ratio of these charges to total corporate sales rose
from 1.77 percent in 1947-51 to 2.46 percent in 1952-56, and to 3.01
percent in 1957-61. The rise in this ratio is equivalent to all
of the decline in the ratio of total corporate profits after taxes to
total corporate sales during the last 10 years. Cash earnings averaged
somewhat higher in relation to corporate sales in the last 5 years, 6.11
percent, than in the previous 5 years, 6 percent. The same is true
of net cash earnings in relation to corporate sales.
Information as to cash flow in relation to sales in 1961 for manu
facturing corporations by industry and by size is presented on page
333. Similarly, data on rate of return for manufacturing corpora
tions by industry and size are presented on page 334.
Another set of basic relationships concerning cash earnings is shown
on page 6. A reasonably close correspondence historically has existed
between business capital outlays and cash earnings. This is shown
in the column at the left on page 6.
Likewise, as shown in the two columns at the right, corporate
dividends have been maintained in reasonably close relationship to
cash earnings, although the payout ratio in terms of reported corpo
rate profits after taxes has risen during the postwar period.
A third key factor accounting for the behavior o f corporate profit
ability during recent years has been the inadequate growth in the
economy generally from 1957 on* Particularly important in this
respect has been the sideways movement of real output in the private
durable sector. As an example, the steel industry needs more busi
E
POLICIES FOR FULL EMPLOYMENT
339
ness, much more than it needs higher prices. Here is where the matter
of achieving a level of corporate profitability which is necessary and
desirable merges with the general public interest in achievement of the
fullest potential of the economy. What is good for the economy will
be good for corporate profits. Adequate expansion and growth m the
American economy is the most important ingredient of high and
rising corporate profits.
My judgment is that much of the historical decline during the post
war period in corporate profitably as reported is not as significant
as is commonly thought in business circles.
But, the hard and oitter struggle that every business is engaged in—
no matter how big or how small—must receive adequate attention as
a key factor in the current economic scene. Every business firm must
make vigorous efforts to keep pace with competition, to develop new
products, to introduce the newest technological improvements, and to
try to keep at least even in the hard and relentless race against higher
costs. These actions by businessmen in response to the profit motive,
in turn, are a most important ingredient of adequate expansion and
growth in the American economy.
Chairman Patman. Thank you, sir. Our next witness is Mr.
Joseph A. Livingston. Mr. Livingston, we are very delighted to have
you and glad to hear from you. You have ft prepared statement, I
believe.
STATEMENT OF JOSEPH A. LIVINGSTON, FINANCIAL EDITOR OF
THE PHILADELPHIA BULLETIN AND NATIONALLY SYNDICATED
COLUMNIST
Mr. Livingston. Yes, sir, I am honored and complimented to have
been invited to appear before this committee. As a newspaperman,
I am accustomed to have Senators and Congressmen talk to me and not
listen to me. I hate to think of myself as a worm, but it is pleasant
to have the worm turn.
I f economics were an exact science, this committee wouldn’t be
holding hearings. And if I or anyone else knew the correct answers
to this Nation's economic problems, again there would be no need
for hearings. We’d simply accept the judgment and policies of this
economic giant.
An economist is a bundle of biases, who isn’t always able to see
history and trends in the making because of his biases and theories.
I offer that generality, because I may be completely wrong in what
I am about to say.
It seems to me that too many economists believe in deficit spending
as a panacea for everything. I f business slacks off a bit, let the Gov
ernment cut its income, either by spending more or taxing less.
I f we have chronic unemployment, let the Government jab some
deficit adrenalin into the system.
I f we don’t grow as rapidly as the Soviet Union or Western Ger
many or Italy or France, well, obviously, it’s the Government’s fault.
It is not doing enough.
W e are trying to treat prosperity in the same way we dealt with
depression.
340
POLICIES FOR FULL EMPLOYMENT
I fear we have been misled by comparisons. We note how rapidly
European nations and Japan have expanded production and employ
ment, and we say: “We’re laggards. We’re not doing as well.” We
forget that the war destroyed the farms, factories, and commercial
organizations of these countries. We also forget that these countries
had lagged far behind the United States even before the war—in in
dustrial techniques.
After the war, as the Good Samaritan, we made available funds to
build plants, technicians to explain our technology to them, and eco
nomic aid of all sorts. It was only natural these countries would grow
more rapidly than the United States. So much more had to be done.
These countries have one other big advantage in the growth race.
They can imitate and emulate. We have to innovate. Thus, after the
war, the French, Italian, West German, Belgian and to a lesser extent
British manufacturers had a whole line of proven consumer products
which they could offer housewives—washing machines, dryers, mixers
of all sorts, freezers—household conveniences which had sold well
here and presumably would excite European housewives too. The
manufacturers and distributors didn’t have to engage in extensive
market research; they didn’t have to invent. All they had to do was
copy. And they’re still doing it—manufacturing and distributing
products which were first widely marketed in this country. Most in
dustrial countries of the world are just finishing the first’lap in post
war development, whereas we are in our second or third. Hence,
the slower pace.
I fear that we, the emulated, are in danger of becoming the emula
tors. We have looked at the rapid development of European nations
in recent years, and said, almost childishly, “Gee, how fast they are
growing. What are they doing that we ought to do?” Instead of
recognizing that in most of these countries they are doing what we
already have done. We note that some of their plants are more mod
em than ours; that their steel mills, having been built from the
ground up, are in excellent competitive shape, and that their govern
ments have offered special incentives to encourage plant development.
Should we not asK ourselves: Are their policies and tax structures
useful here, or were they devised to meet specific and indigenous
postwar conditions ?
Let me cite an example. This administration has favored an invest
ment tax credit. This amounts to a 7 or 8 percent subsidy to manu
facturers of equipment. Undoubtedly lower prices will induce some
firms to buy equipment.
But it seems to me, this can be accomplished more easily and less
deviously by tax reform.
The investment tax credit has been used in Europe, I have been
told by Treasury officials, effectively. But Europe has a scarcity of
labor. Laborsaving devices are especially needed at the present time.
We don’t have a shortage of workers.
Furthermore, Europe has been short of capital and the investment
credit was the European way of encouraging investment. We are not
short, of capital in the United States. Bather, we are long on both
labor and capital.
W hy should the Government encourage investment to m odernise
plant and equipment, or to save labor? M ight it not be better fo r the
341
POLICIES FOR FULL EMPLOYMENT
unemployed and for the economy in general if the Government encour
aged expansionary activity.
The Nation would be far better off if businessmen weighed alterna
tives: Is it more profitable and useful to modernize plant and save
labor, or is it more efficient to maintain and improve or retrain the
present labor force to particular productive purposes?
But the Government offers a tax carrot to businessmen to do what
most
@FedFRASER