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Printed for the use of the Joint Economic Committee

18-593 O


(Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.)
ROGER W. JEPSEN, Iowa, Vice Chairman
HENRY S. REUSS, Wisconsin, Chairman
WILLIAM V. ROTH, J r ., Delaware
JAMES ABDNOR, South Dakota
GILLIS W. LONG, Louisiana
EDWARD M. KENNEDY, Massachusetts
J a m e s K. G a l b r a i t h , Executive D irector

B ruch

II. B a r t l e t t ,


D eputy Director





9, 1982

Jepsen, Hon. Roger W., vice chairman of the Joint Economic Committee:
Opening statement- _____
____ ____________
_____ _______ ___
Reuss, Hon. Henry S., chairman of the Joint Economic Committee: Open­
ing statement------------------------_ --------------------------------Feldstein, Hon. Martin S.. Chairman, Councl of Economic Advisers—

Brown, Hon. Clarence J.



ecem ber

Opening statement(in )

9, 1982



C ongress of t h e U nited S tates ,
J o in t E conomic C omm ittee ,

Washington, D.C.
The committee met, pursuant to notice, at 10 a.m., in room 2128,
Rayburn House Office Building, Hon. Henry S. Reuss (chairman of
the committee) presiding.
Present: Representatives Reuss, Mitchell, Hawkins and Wylie; and
Senators Jepsen and Sarbanes.
Also present: James K. Galbraith, executive director; Bruce R.
Bartlett, deputy director; Louis C. Krauthoff II, assistant director;
Charles H. Bradford, assistant director; and William R. Buechner,
Mary E. Eccles, Paul B. Manchester, Mark R. Policinski, and
Natnaniel Thomas, professional staff members.
Representative R euss. Good morning. The Joint Economic Com­
mittee will be in order. We welcome Mr. Martin Feldstein, Chairman
of the Council of Economic Advisers, to the first of what I know will
be many productive sessions with the Joint Economic Committee.
Mr. Feldstein, you join a goodly company of great Council Chair­
men over the years and it might interest my colleagues if I read their
names to refresh myself: Edwin G. Nourse, Leon H. Keyserling,
Arthur Burns, Raymond Saulnier, Walter Heller, Gardner Ackley,
Arthur Okun, Paul McCracken, Herbert Stein, Alan Greenspan,
Charles Schultze, and Murray Weidenbaum. As I say, splendid com­
pany, and we welcome your joining it and I know that you’re going to
do a fine job.
I have a rather short opening statement but first I would like to
yield to my friend and colleague, Vice Chairman Jepsen.

Senator J epsen . Thank you, Mr. Chairman. It is a pleasure to
welcome Mr. Feldstein to his first appearance before the Joint Eco­
nomic Committee as Chairman of the President’s Council of Economic
Advisers. We have, of course, had you before the committe orf nu­
merous past occasions as a professor of economics at Harvard, and
I look forward to a close working relationship in the future.
I congratulate you on yesterday’s final Senate confirmation of your
appointment and was happy to be able to cast a yes vote. It is un­
fortunate that your scheduling conflicts prevented your appearance
before the committee at an earlier date, and equally unfortunate that
it became a political issue. I am certain that no disrespect was intended
toward the Congress or this committee by your inability to appear

(1 )


In any case, I am glad to see you here today to discuss the important
economic issues facing our country today. Although there are impor­
tant signs that recovery has begun, the unemployment rate continues
to rise. This, in turn, is putting enormous pressure on Congress to en­
act quick-fix programs which, I fear, will end up being counterproduc­
tive m the long run. If you have any ideas on how we can deal with the
unemployment problem without re-igniting inflation or undoing the
progress we have made toward reducing taxes and the size of govern­
ment, I would be very pleased and happy to hear them. I realize this
is a tall order, but I hope you can enlighten us today.
I thank you, Mr. Chairman.
Representative R euss. Thank you, Mr. Vice Chairman. We do face
an unemployment crisis. At this time, I will present my opening state­

On February 18, 1981, President Reagan sent to Congress his pro­
gram for economic recovery. He predicted that under that program,
unemployment would fall from 7.5 percent in 1981 to 7 percent in 1982.
A year later—by early 1982— the unemployment rate had increased,
however, to 8.8 percent. The President’s economic report issued last
February counseled patience, saying, “Output and employment are
expected to increase slightly in the second quarter, and at a brisk pace
through the rest of the year, when growth in output is expected to be
in excess of a 5 percent annual rate.”
Five months later—last July—unemployment had increased to 9.8
percent. Again we were told in the administration’s midsession review
to be patient, and I quote: “During the second half of 1982, the econ­
omy is expected to grow at about a 4-percent inflation adjusted annual
Now unemployment stands at 10.8 percent. It may even be rising
now. Real gross national product did not grow at 5 percent nor at 4
percent in the third quarter. It didn’t grow at all. There are signs that
total output may be falling in the present quarter.
Chairman Feldstein, you have a reputation for forthrightness. You
acknowledged the failure of extreme monetarism and extreme supplyside-ism in your confirmation hearings. I don’t expect to hear from you
the same kind of reassurance that things will get better—while all the
while they continue to get worse—that we have been hearing for a
couple of years. I do expect to hear what changes in the extreme mone­
tarist and extreme supplyside policies presently in effect you may
Congress has before it a program which could begin to address the
unemployment crisis. I expect that Congress will enact that program
this year. I urge the President to sign it into law.
Perhaps you could begin this morning, Chairman Feldstein, by
giving the committee your present assessment of the prospects for real
growth, for unemployment and for interest rates in the year ahead.
Then I would like your comments on some of the economic choices now
facing the Nation.


Before w ask Mr. Feldstein to proceed, I have an opening state­
ment from Congressman Clarence Brown that I will insert into the
record at this point, without objection.
[The opening statement referred to follows:]
O p e n in g

Sta t e m e n t


R e p r e s e n t a t iv e

B rown

Welcome, Mr. Feldstein, to this Joint Economic Committee hearing. You are
continuing the tradition of cooperation between the Joint Economic Committee
and the Council of Economic Advisers.
I feel very fortunate that you are appearing before us today when you will
be appearing before us in the next month or so as part of our Joint Economic
Committee annual hearings. I think that this morning marks the 12th appear­
ance by the Council of Economic Advisers before this committee during this Con­
gress and no committee has enjoyed greater cooperation from the Council of
Economic Advisers.


R euss .

Mr. Feldstein, you may proceed.


Mr. F eldstein . Thank you very much, Mr. Chairman.
I certainly am very pleased to appear before this distinguished
committee this morning. I have great respect for the Joint Economic
Committee and for the work it has done over the years to develop
an understanding of our Nation’s economic problems and to formulate
new approaches to these problems.
As you said, this is my first opportunity to testify since my appoint­
ment as Chairman of the Council of Economic Advisers and my con­
firmation by the Senate. I welcome this opportunity to work with the
members of this committee and look forward to future sessions with
the committee. I’m sorry. Chairman Reuss, that after this session of
Congress you won’t be a member of the committee and we won’t have
the opportunity to meet together again in this format as we have in
the past.
I know that the committee has questions this morning about a wide
range of economic issues but none of these! issues can be more pressing
or of greater immediate concern than the very serious unemployment
problem that our Nation faces.
As you know, the administration is currently reviewing several pro­
posals for policy changes that can reduce the rate of unemployment.
Since no decisions have been made, it would not be appropriate for
me to comment in detail on the specific features of any of these pro­
posals, but I thought it would be helpful if I talked for a few minutes
about the nature of unemployment in the U.S. economy as I see it
and therefore about the opportunities for reducing unemployment.
The key distinction in my analysis of unemployment is the difference
between cyclical unemployment that would be eliminated by an
economic recovery and structural unemployment that would remain
even after the economy had fully recovered.
Between 30 and 40 percent of the current 10.8 percent unemploy­
ment rate is cyclical and the remainder is structural. I will begin by
commenting on the cyclical component of total unemployment.


The last sustained business cycle expansion began in March of 1975
and continued for nearly 5 years to a business cycle peak in January
1980. Since then, the economy has suffered the effect of two back-toback recessions. This double-barreled decline has had the painful effect
of raising the unemployment rate from 6.3 percent then to 10.8 per­
cent now.
There are now about 5 million more people looking for work than
there were in January of 1980. The increase in long-term unemploy­
ment has been particularly severe. In January of 1980, there were
about 550,000 individuals who had been unemployed for 6 months or
longer. Now there are four times as many. No one can contemplate such
numbers without reflecting on the financial hardships that so many
people have suffered.
Moreover, financial losses are only a part of the cost of the pro­
longed economic decline. There is also the extreme anxiety that is
felt by those who have lost their jobs or who fear that they might
lose their jobs in an economy with a shrinking number of employment
opportunities. Only an economic recovery can eliminate the large bulge
of cyclical unemployment and the widespread anxiety that now accom­
panies it. I wish I could tell you that I know for sure that the recovery
has begun and that unemployment will soon be declining. Unfortu­
nately, though, the economy is still in that ambiguous bottoming-out
range of the business cycle.
The economy is still relatively weak, but favorable signs of an up­
coming recovery are getting stronger all the time. These favorable
signs include an upturn in housing starts to a level that is now som
30-percent higher than at this time last year. A 33-percent jump in
housing permits since August indicates that housing is likely to con­
tinue improving. Auto sales are also rising, and retail stores report
good news about major consumer durables.
The preconditions for sound recovery, including lower interest rates
and significant growth of the real money stock, make the current
outlook far better than the outlook was 1 year ago or even 6 months
ago. A sustained recovery will bring with it rising employment and
falling unemployment. The type of moderate and sound recovery that
is consistent with declining inflation can bring the unemployment rate
down to the 6- to 7-percent range within the next 5 or 6 years. A faster
recovery runs the risk of accelerating inflation and therefore of ignit­
ing an expansion that comes to a premature end.
Bringing the unemployment rate down from its current level to
the 6- to 7-percent range means finding employment for about 5 million
people who would otherwise be out of work. Moreover, the natural
growth of the labor force means that more than 10 million additional
jobs must be created to avoid an increase in unemployment. These
numbers will make it clear why I said a moment ago that only a
sustained economic recovery can eliminate the cyclical bulge in unem­
ployment. No series of public employment programs or other govern­
ment activities can begin to create more than 15 million additional
positions during the next half dozen years.
Before turning to the nature of the structural unemployment prob­
lem, I might take a moment to comment on the technical question of
how unemployment is defined and then to look briefly at some of the
characteristics of the unemployed.


As you know, all of our principal unemployment statistics are based
on the monthly Current Population Survey of about 60,000 house­
holds. Hie Labor Department classifies an individual as unemployed
if he or she has not worked during the week before the survey and
has done something during the past 4 weeks to look for work.
There are obviously many facets of unemployment that must be
understood in order to have a complete picture of the problem and
of the possible remedies. This morning I can only call your attention
fc five key facts that I think are particularly important.
First, 40 percent of all the unemployed are now under the age of
25. Nearly half of this group are teenagers. Moreover, when the over­
all unemployment rate is lower than it is at present, young people
account for even larger shares of the total unemployment. In 1979,
when the overall unemployment rate was 5.8 percent, teenagers alone
accounted for 25 percent of total unemployment. Since then, the num­
ber of unemployed teenagers has increased approximately 30 percent,
while total unemployment has increased approximately 90 percent.
In short, unemployment among young people is quantitatively very
important and much less cyclically sensitive than unemployment
among the rest of the population.
Second, less than half of the unemployed have lost their previous
jobs and are looking for new employment elsewhere. In October of
1982, 30 percent of the unemployed were classified as either new en­
trants who were looking for their first job or reentrants who had re­
turned to look for work after a period in which they were neither
working nor looking for work. An additional 7 percent of the unem­
ployed had quit their previous job. And a further 22 percent were
classified as on layoff from their regular job but waiting to be recalled
to that job. Thus, only 42 percent were actually classified as job losers
who were not waiting for recall. In times of lower unemployment,
the relative importance of new entrants, reentrants, and quitters is
greater, and these groups together then comprise the majority of
the unemployed.
Third, most spells of unemployment end quickly. Despite the sever­
ity and duration of the present recession, nearly two-thirds of the
current unemployed have been out of work for less than 15 weeks.
Half of the individuals who became unemployed in July were no
longer unemployed after roughly 6 weeks.
But, fourth, although most spells of unemployment end quickly,
a small fraction of all unemployed individuals accounts for a large
fraction of the total weeks of unemployment. A study of the 1975
recession that was done a few years ago found that although only
about 4 percent of the labor force experienced more than 26 weeks of
unemployment in that year, that small group accounted for over 50
percent of total weeks of unemployment during the year. Thus there
is a concentrated problem of long-term unemployment that is critical
to bringing down the overall unemployment rate.
Finally, although the long-term unemployed in key declining indus­
tries accounts for only a small percentage of total unemployment,
they do represent cases of serious personal economic hardship. More
specifically, there are now about 150,000 individuals who have been
unemployed for more than 6 months and who previously worked in
autos, textiles, rubber, iron, or steel. This group thus represents only





about 0.15 percentage points of the total 10.8 percentage points of un­
employment. Nevertheless, these long-term unemployed individuals in
industries with decreasing employment must be regarded as an im­
portant challenge to economic policy. This is all the more true because
m addition to the 150,000 long-term unemployed in this category,
there are an additional 300,000 individuals from these industries who
have stopped looking for work and are therefore classified as out of the
labor force.
The future path of the unemployment rate will depend on the be­
havior of both cyclical and structural unemployment. A sustained
recovery can reduce the cyclical unemployment rate and return the
total unemployment rate to the inflation threshold level. Additional
policies aimed at structural unemployment can reduce the inflation
threshold level of unemployment below the current 6- to 7-percent
range. A reduction in structural unemployment would not only lower
the ultimate inflation threshold range of unemployment, it would
also permit a more rapid decrease in total unemployment during the
next few years in a way that is consistent with not increasing our rate
of inflation.
Now, what conclusions about appropriate unemployment policies
follow from what I have been saying about the nature of cyclical and
structural unemployment? It is clear that there is no justification for
public employment projects and other activities that are designed
solely to create jobs rather than to provide useful products for serv­
ices. President Reagan and Transportation Secretary Drew Lewis
have been very clear in emphasizing that w favor a major program
of highway and bridge repairs because of the sorry state of many of
our Nation’s highways and bridges and not as a way of increasing
A major part of our structural employment problem is concentrated
in the group aged 16 to 24 years who now make up 40 percent of all
unemployment. The unemployment in this group reflects problems in
the transition from school to work. Moreover, the problem goes beyond
unemployment to the kinds of jobs that young people often obtain.
The frequent job changes that contribute to their high unemployment
rate indicate that many young people are working in dead-end jobs
that fail to provide opportunities for training and advancement. The
challenge to public policy is not only to help more young people find
jobs but to improve the quality of the jobs that young people find and
The administration has already taken some important steps in that
direction. The new Job Training Partnership Act that Congress
passed and the President signed into law will pay for the training
of young people from low-income families. In addition, a special tar­
geted jobs tax credit would pay up to 85 percent of the summertime
wages of teenagers from disadvantaged backgrounds. We are now
examining a variety of new ideas to see which, if any, would be suit­
able for dealing with the special problems of young workers.
A second major aspect of our structural unemployment problem is
represented, as I said a moment ago, by those individuals with very
long spells of unemployment. This group includes both chronically
unemployed adults with low skills and those skilled workers who have
lost their jobs in declining industries and regions. The recent Job

Training Partnership Act has separate provisions for supporting
training of the first group and retraining of the second group. But
the administration is looking again at possible additional ways of
enhancing employment opportunities for both of these groups.
Let me conclude on a more general note. The current recssion has
heightened interest in the problem of unemployment and focused at­
tention on the cyclical aspects of that problem, but it is critical that
we manage economic policy in a way that will reduce both cyclical and
structural unemployment. Our goal should be to reduce unemployment
steadily to a rate that is well below the present 6 to 7 percent inflation
threshold. To do so the administration will be engaged, not just now
but on a continuing basis, in the development of policies to reduce the
inflation threshold rate of unemployment and to expand the oppor­
tunities for providing employment.
Thank you, Mr. Chairman.
Representative R etjss. Thank you, Chairman Feldstein. You gave
an upbeat report, saying on page 9 of your prepared statement at your
confirmation hearing before the Senate Committee on Banking, Hous­
ing, and Urban Affairs on September 22,1982, “The economy now seems
about ready to recover.”
I guess I can’t be quite as happy about that prediction from the
President’s Council of Economic Advisers as I would like to be in
view of the fact that every year, twice a year—in February and in
July—the Council has been announcing that the economy is about
ready to recover and unemployment is going to go down, while instead
the economy sinks deeper into recession and more and more men and
women become unemployed.
What is different about the present situation which causes you to
feel as you do that the economy is now about ready to recover?
Mr. F eldstein . Let me comment first that the forecast you referred
to indicating that Government economists thought that there would
be a recovery earlier last year, a recovery beginning in the late part
of this summer, were forecasts that were very widely shared. That is
a black mark against the forecasting ability of the economic profes­
sion rather than against the administration. Most economists felt that
we were going to have an upturn early in 1982, or if not early in 1982
then by the third quarter, and you see that in virtually all of the pri­
vate forecasts. The administration, I think, was not any different from
private forecasters in its qualitative forecasts in this year. But I do
think the conditions are rather different now and offer much more basis
for hope than they did earlier.
Representative R euss . Why is that ?
Mr. F eldstein . First, there is the actual performance of the econ­
omy in key sectors. Housing has begun behaving differently. I think
that the continuing decline in mortgage interest rates that began in
midsummer, so that mortgage interest rates are 3 or 4 percentage points
lower now than they were earlier this year, and even lower than they
were at the beginning of the year and the end of last year, has had a
very substantial effect. And a 30-percent increase in housing starts
now relative to where they were a year ago, and an even faster growth
of housing permits in recent months.
I think that not only is this indicative of where housing can go but
also of where the consumer durables industry, which is associated with

housing, could go as well. The .recent figures on sales and on the in­
ventory of new unsold housing stock, also are very encouraging for
the future.
The leading indicators which summarize a variety of measures, fi­
nancial and real, employment to production and orders—have picked
up in 6 out of the last 7 months. While no single month’s increase has
been very large, the cumulative effect is very reassuring because those
indicators tend to move up before the rest of the economy turns up.
I think that while the current state of the economy is, as I said, very
weak, there are encouraging signs that the conditions are there for
the economy to begin to recover.
Representative R ettss. I appreciate your detailing for us, and it is
helpful, why you feel encouraged, but I wish you would tell me why
the Council of Economic Advisers—and you were not a member of
it then, I hasten to point out—in each of the three opportunities it
has had so far to tell us what the future would be, predicted recovery
and lower unemployment and got deep recession and increased un­
employment instead. Wherein did they err so grievously ?
Mr. F e ld s te in . A s you said, I was not there and I therefore can’t
really comment on the process. But I would just reiterate that if you
look at any of the surveys of private forecasters or the major econo­
metric forecasting organizations, I think you would find that they, too,
predicted an upturn in the second quarter of 1982. Then when it didn’t
come they predicted that in the months after the tax cut this year
there would be an upturn—beginning in July or August. So, the ad­
ministration was not saying anything very different from what the
majority of private forecasters of all analytic persuasions were saying
at the same time.
Representative R euss. W hat is your best estimate of the growth
rate of real GNP for 1983 ?

Mr. F eldstein . At this point the administration is in the process of
formulating a set of forecasts which we will use as part of the budget
exercise which will be presented to you and Congress when the Eco­
nomic Report comes out in January. At this point we really don’t
have a forecast that we can make public.
Representative R euss. Well, then, let me ask you this. In your testi­
mony before the Senate at your confirmation hearing in September,
you indicated that a growth rate of somewhere in the 3-percent range
was about it. Is that still your formal hunch ?
Mr. F eldstein . What I did in September was to quote a survey of
private forecasts, and I pointed out that half of the forecasts were
then between, I think, 2.9 percent and 3.9 percent for 1983 over 1982.
That was based upon the Blue Chip Survey of 44 private forecasters
that was released early in September.
Now since then, that group has reduced its forecast. I never made
a forecast in September. I thought I went out of my way in Septem­
ber not to make a forecast but just to summarize what private think­
ing was at the time and to say I thought thesei were a bunch of very
serious, competent people who put a lot of effort into it. That same
group of forecasters have reduced their forecasts by an average of
about half a percent.
Representative R euss. S o since their forecast was about 3.5 per­
cent, their composite is now around 3 percent?


Mr. F eldstein . I think that is about right for their consensus.
I might add a little more about that, though. What is critical in think­
ing about any of these forecasts at a time like this, when you are
near a turning point in the economy, is the question of the timing
of when the recovery begins. Most economists believe that when the
recovery begins there will then be a significant—one higher than 3
percent—rate of growth in the months that follow. But there is doubt
about when that recovery is likely to begin.
Any forecast contains a combination of uncertainties about the
timing of when a recovery will begin and a feeling or projection
about the rate of growth. So the critical uncertainty of all this is
the precise timing of the recovery date.
Representative R euss. Sure, assuming that that 3 percent current
honest hunch is right—and I note that in September you felt with
respect to their earlier composite that it didn’t seem unreasonable to
believe that the actual GNP growth would be in that same range,
and I’m quoting you—assuming that it works out at 3 percent growth
for 1983, what rate of unemployment does this imply for December
of 1983, at year end?
Mr. F eldstein . I really can’t give you a precise number on that.
Representative R euss. There is a correlation.
Mr. F eldstein . There is definitely a correlation. I’ll give you a more
qualitative statement about what it implies.
Representative R euss. If you can’t give one off the cuff, would you
supply it for the record ? Because isn’t this just a matter of arithmetic?
Mr. F eldstein . Well, it’s arithmetic only on the hypothetical
assumption that nothing else happens to affect the unemployment
Representative R euss. Exactly.
Mr. F eldstein . But so many tilings can happen to affect the unem­
ployment rate.
Representative R euss. But it would be helpful, assuming no oil
shocks, no trouble with the anchovies off the coast of Peru, et cetera.
What unemployment rate is yielded ? After all, the 3-percent growth
rate is based on all other things being equal, too, and so is everything
in life.
Mr. F eldstein . But one shouldn’t misinterpret that number. I can
certainly give you a simple arithmetic workout of what that would
mean, but one would have to understand that it depends critically on
what happens to productivity, on what happens to these various other
factors, including policy changes that might affect unemployment.
But I will be happy to supply----Representative R euss. Y ou can’t do it off the cuff ?
Mr. F eldstein . N o. All I can say off the cuff is if we move jnto a
recovery and the economy shows that kind of growth year over year,
which, of course, means substantially faster growth once the recovery
has begun, then we would expect the unemployment rate to be falling.
The one thing that I can say, without pencil and paper and doing
more analysis, is that if we have 1983 relative to 1982 up by, say 3
percent, that once the recovery has begun, the economy will be growing
substantially faster than 3 percent, and the unemployment rate will
be coming down significantly as we move toward the end of the year.
Representative R euss. We await with interest your arithmetical

workout. Meanwhile I have one more question, not with respect to
guessing future unemployment but with respect to the actual rate as
it develops. You have testified that the administration has made no
further recommendations about measures to relieve the unemployment
crisis. That is, you think a recovery will occur by itself; is that not so ?
Mr. F eldstein . That isn’t what I testified, no.
Representative R euss. Well, do you have some recommendations as
to combating unemployment?
Mr. F eldstein . The administration is now considering several pos­
sible actions which would help to reduce the unemployment rate.
Representative R euss. But you aren’t prepared to put them on the
table this morning ?
Mr. F eldstein . It’s not for me to do. The President hasn’t made any
decisions in this area so we will have to wait.
Representative R euss . If, in fact, there are no further measures
taken to lessen unemployment, how much future unemployment would
it take to change your view, that is to bring it to the point where you
would believe mat meaningful action of a direct nature must be taken
against unemployment. Suppose, for instance, the current 10.8-percent
level of unemployment persists through next February, 2 months from
now. Would you change your mind ?
Mr. F eldstein . I really have to come back to the question that you
raised before about what the unemployment rate is likely to be in the
future. I’d have to look at the circumstances that were associated
with it.
Representative R euss . Well, at a certain point, though, the present
and the future meld into one ghastly reality and policy must be made.
Suppose we still have 10.8-percent unemployment in March 1983?
Would you change your mind ?
Mr. F eldstein . I think we should continually look at the unemploy­
ment rate, but not just the unemployment rate. If we see that produc­
tion is rising, if we see that employment is rising, if we see that sales
are increasing, we know then that we are in a recovery. Since unem­
ployment begins to decline after a recovery begins, even if the unem­
ployment rate is high, looking at the unemployment rate alone would
not be a good indicator of what kind of policy would be appropriate
at the moment. So I really don’t want to----Representative R euss. I’m not asking you to look at the unemploy­
ment rate alone, and I’m sure you will not, but suppose unemployment
continues at 10.8 percent or worse through April and May and June
and July and August and September and October and November and
December. At what point will you change your mind and agree that
meaningful, forthright, direct action must be taken to diminish the
tragedy of unemployment?
Mr. F eldstein . 1 really can’t say at what point I would make a
recommendation of different kinds of action, but I can say that I would
be very distressed if that happened. I don’t expect that to happen. I
expect that we will be continuing to look at unemployment and other
indicators. And as I said a few minutes ago, given the early indications
that the economy is bottoming out, that housing and consumer durables
are showing improvements, that interest rates are down, and real
money growth is up, I think now the conditions are such that it would
be inappropriate to change course.

Representative R euss. Well, I’m sorry I failed to get you to tell us
how long the present 10.8-percent unemployment rate has to persist
before there could be a change in policy, but I admire the forthright­
ness of your answer.
Senator Jepsen.
Senator J epsen . Thank you, Mr. Chairman.
Mr. Feldstein, if w could for a minute, I’d like to work up a list
of economic indicators. Aren’t there basic economic indicators, sign­
posts, more or less, that economists and others in the financial world
look at when they take the temperature of the economy and talk about
it, and are there less than 10?
Mr. F eldstein . I’m not quite sure what you have in mind, but there
are the so-called leading indicators. There are coincident indicators.
But if we get away from that formal structure, there are a handful
of key things that one would look at in trying to see where the economy
is going.
Senator J epsen . I s the savings rate, the economy of our people,
an important economic indicator?
Mr. F eldstein . Well, the savings rate is very critical for our long­
term health and our ability to accumulate capital.
Senator J epsen . And in the last 20 months, what has happened to
the savings rate in this country ?
Mr. F eldstein . I think the personal savings rate has shown an
increase and recovery over that period.
Senator J epsen . It has nearly doubled. Isn’t that a healthy sign?
Mr. F eldstein . I’m n ot suire what the figure is, but I think that------ Senator J epsen . I can tell you it’s nearly doubled from what it was
about 20 months ago. Now, the interest rates—is that another indica­
tor, economic signpost?
Mr. F eldstein . Yes.
Senator J epsen . What has happened to the interest rates in the
last 20 months?
Mr. F eldstein . Interest rates, as you know, have come down very
substantially, no matter how one measures them. Long-term rates,
short-term rates, prime rates, money-market rates—they are all down
very significantly, and that provides a thrust for all kinds of interestsensitive spending: housing, business plant, and equipment.
Senator J epsen . And the rate of inflation, is that another signpost?
Mr. F eldstein . I think the rate of inflation is a critical measure of
our economic health. Looking back 20 months ago, it was identified
widely as public enemy No. 1.1 think people frankly were frightened
that inflation was out of control in an economy that in the early 1960’s
had been accustomed to virtual price stability, we found ourselves
moving up close to double-digit inflation in the i970’s, and into double­
digits in 1979 and 1980, and I think people frankly were frightened.
That inflation rate has come down from 12 to 13 percent in 1979 and
1980 to less than 5 percent this year whether one measures it by the
CPI or GNP deflator.
Senator J epsen . Do you have, just on the tip of your tongue, the
amount that the decrease in inflation would translate to by way of
purchasing power of an average income person in the country?
Mr. F eldstein . Well, if you take a family with about $20,000 of in­
come—it’s a bit below the median-income family but makes it easier

to do arithmetic in my head— and if their income didn’t rise at all
while inflation dropped from 12 percent to 5 percent, there would be
a 7-percent increase in their real income, or about $1,400.
Senator J epsen . Productivity or its rate of growth, is that an eco­
nomic signpost ?
Mr. F eldstein . It’s a very important thing. Productivity really is
the stuff of which real income growth, a rising standard of living, is
ultimately made.
Senator J epsen . In the last 20 months has that remained static ? Has
it decreased? Has it increased ?
Mr. F eldstein . It finally turned around and started up. We have
had productivity declines for the last 3 years, but in this year produc­
tivity has started up, and I think in the most recent quarter, the third
quarter of this year, productivity rose very sharply, more than 4
Senator Jepsen. D o you recall what it was 20 months ago ?
Mr. F eldstein . I don’t recall. I would say that productivity prob­
ably was declining at that time. If productivity declines then ulti­
mately our standard of living is declining. So turning that around is
a critical change.
Senator J epsen . I have listed the savings rate, interest rates, rate of
inflation, and productivity; what other basic signposts measure the
health of the economy ?
Mr. F eldstein . Well, looking to the short run, the key thing I would
use as kind of a general summary is what’s happening to the leading
indicators which bring together financial variables and other meas­
ures of our economic health and those I would say that they are turn­
ing and heading up.
Senator J epsen . I have just been handed a note saying that produc­
tivity has moved from minus 1 in the first quarter to a plus 4.2, quite
a dramatic change. In the second quarter of 1981, it was zero. Well, of
course, what I’m obviously getting at is whatever gets your attention
is going to get ours. We have had some help in focusing attention on a
very tragic thing which is, of course, unemployment. I can’t think of
anything more tragic than someone who really wants to work in this
great country of ours but is unable to find a job and is unemployed.
Almost all of the basic signposts of economic health in the last 20
months have turned around and are headed in the right direction.
That’s a very general statement, but would you agree with that, except
that one, and that’s unemployment ?
Mr. F eldstein . I think that’s a critical one, obviously, but I believe
that it is on the road to repair, that it is going to be improved over
Senator Jepsen . H ow many people are employed today?

Mr. F eldstein . About 99 million.
Senator J epsen . And how does that compare to whatever the maxi­
mum number of people we have had employed ?
Mr. F eldstein . A little more than 100 million. It’s about 1 million
off from the peak.
Senator J epsen. S o we’re 1 million off o f the record ?

Mr. F eldstein . About 1 percent of the labor force down from where
we were at the peak.


Senator J epsen . This is my last question, Mr. Chairman: If the
economic signposts, as they are now, are plainly heading up, is it rea­
sonable to assume, some time hopefully in the near future, that the un­
employment rate should turn around and head downward? In fact,
with all of the signposts that are in place, one might ask—and every­
body is asking—why isn’t our economy moving? Why is it sort of flat?
And you get right back to all of the knowledgeable people that I have
had a chance to exchange ideas with on this matter, and they say that
it’s the psychology, or the lack of confidence. Would you comment on
this area of lack of confidence as a general term? Is it lack of con­
fidence in Government? Is it lack of confidence in the Federal Reserve
Board ? Is it a lack of confidence in Reaganomics ? Is it a lack of con­
fidence in the bureaucracy or Wall Street? Would you comment on
Mr. F eldstein . Sure. Let me comment first on the part of your
question about unemployment. I think it is true that as the economy
recovers unemployment will come down and I think it is reasonable,
given all the evidence that we see, to conclude that 1983 will have a
higher level of real income. We will be in a period of recovery and,
therefore, the unemployment rate will be falling.
Well, what about the psychology ? I think it’s important to distin­
guish the psychology of the individual consumer from the psychology
of the financial community. Now the individual consumer may be re­
luctant to spend because the unemployment rate remains high, but that
has been a characteristic of this stage of every business cycle.
Spending on things like housing has picked up, as has automobile
sales. That shows that consumers have a growing confidence. Indeed,
figures that were released yesterday by the conference board in their
survey of consumer confidence showed that consumer confidence had
moved up from the month before. So-called buying intentions, ques­
tions asked about whether this is a good time to buy and whether the
consumer is planning to buy, also have shown an increase in the most
recent survey relative to previous months. I think that shows that
consumer psychology is beginning to move in a more expansionary
Financial markets, and the business community, and the industrial
part of our economy, I think, remain quite nervous about long-term
interest rates, long-term inflation, and long-term Government borrow­
ing. I think the continued fear of large deficits in future years puts
a cloud over the current recovery. The fear that those deficits will, at
a minimum, keep real interest rates high and make investment in plant
and equipment unattractive for a long period of time, depressed activ­
ity today, and depresses investment in plant and equipment today.
This not only slows the recovery but also denies our work force of the
plant and equipment that they need for greater productivity in the
In addition, the fear that we will continue to have deficits in the
future, worries many people in the financial community and the busi­
ness community that such deficits will be the source of inflationary
policies in future years. The pressure of large deficits may well lead
to monetary policies different from the kinds of monetary policies we
have now, creating inflation. They are afraid to lend except at quite
high interest rates, and that, too, puts a damper on our current re­

18-5 9 3 0




covery. I think if we could get those long-term deficits clearly in
hand—the outcome of the budget process this year could be a strong
signal that deficits are coming down in the outyears—that would do
a lot to change the expectations, the psychology to help our recovery.
Senator J eopsen. I thank you, Mr. Chairman.
Representative R euss. Thank you, Senator Jepsen.
Representative Mitchell.
Representative M itc h e ll . Mr. Feldstein, I have four or five ques­
tions to which I would like for you to respond as succinctly as possible.
I think we are operating under a time constraint. The idea of put­
ting a tax on unemployment compensation benefits was surfaced by
someone in the administration. Do you embrace this monstrous idea?
Mr. F eldstein . The President has absolutely rejected the idea so it’s
not an idea in current discussion. I do not embrace the idea.
Representative M i t c h e l l . Y ou do not. That is good.

Now someone else of sagacity and wisdom 'has surfaced the idea of
perhaps taxing health benefits, an equally venal and monstrous idea.
What is your position on that?
Mr. F eldstein . There is no administration position on it.
Representative M itc h e ll . What is yours?
^Mr. F eldstein . My thoughts about that I’ll reserve for our internal
Representative M itch ell . The President proposed in his budget for
1983, after cutting summer youth jobs severely in 1982, the complete
elimination of all summer youth jobs. Does it please your fancy to
have the summer youth jobs program eliminated.
Mr. F eldstein . I don’t know what the facts are on that.
Representative M itch ell . Well, I do.
Mr. F eldstein . What I understood to be true is that we now have a
targeted jobs tax credit that’s actually on the books.
Representative M itch ell . The targeted jobs tax credit has been on
the books for quite some time.
Mr. F e ld s te in . N o, a new one.

Representative M itc h e ll . Oh, you have a new one?
Mr. F eldstein . We all have it. I think it’s been legislated. I think
it’s on the books. I think it provides an 85-percent tax credit for the
employer of eligible young people, which in effect says they can hire
young people at 50 cents an hour.
Representative M itc h e ll . I’m aware of the tax credit, but summer
youth jobs are to be eliminated. What is your position on that?
Mr. F eldstein . I don’t know what the program is, but it seems to
me that the targeted jobs tax credit is an open-ended opportunity for
employers to hire young people at virtually no cost, is a summer job
Representative M itch ell . We have had a targeted tax credit for
a long period of time. You’ve some variation of it. It simply hasn’t
Mr. F eldstein . This is a very big variation. It’s an 85-percent tax
Representative M itc h e ll . It was a fairly generous one before, but
given the individual vicissitudes of the economy right now I’m not
at all sure 1985 is going to be much of an incentive either. But you’re

not going to answer the question about the elimination of summer
youth jobs?
Mr. F eldstein . I can’t really answer without knowing more than
I do now.
Representative M itch ell . N ow you and I both recognize that Mt
is a very faulty indicator with reference to the economy but we have
to live with it. It’s my understanding that the Federal Reserve has in­
creased the supply of Mi so if it is annualized it is about 15 percent
which is a rather phenomenal rate of growth. It seem to me that there
are two problems. One, if you continue to let it go up, you fan the
fires of inflation. Two, if the Feds follow their historic policy at some
point they’re going to abruptly reduce the money supply and then, of
course, that would cause more stagnation in the economy. Do you
know which way the Fed might go ?
Mr. F eldstein . I’m not concerned about the Mi growth. I’ll explain
Representative M itch ell . If you will forgive me, that’s why I
pointed out that we both recognize that this is not a very good indica­
tor. But let’s just work with that because we do use it.
Mr. F eldstein . I don’t think the Fed will continue to use Mi as a
significant indicator of policy. I think that the Fed, unless conditions
change in the future, will place much more emphasis on M2 M2 has
grown this year about 9.5 percent, virtually the same growth rate
that it had last year. I think the increase in Mi in the last 6 months
reflects a combination of two kinds of structural changes.
One, the ending of some of the NOW accounts; and
Two, the movement along the demand curve for money associated
with the fall in nominal interest rates which is a natural consequence
of declining inflation.
So I’m not disturbed at all and I doubt that the Fed will be disturbed
at all by the fall in Mtvelocity at a time when M2velocity is remaining
quite stable. Let me be more precise. The M2 growth path has not
changed at all relative to the year before. Moreover, a further reason
for thinking the Fed will not do what you and I would both agree
would be the wrong thing, overreacting to this recent increase in Mi,
is the change that’s coming about December 14.
Representative M itch ell . If it does, it will fly in the face of its his­
tory because in the last 20 or 30 years that’s exactly what the Fed has
The large banks, in my opinion, have acted recklessly in making
international loans and they are beginning to hurt a little bit. There
are huge loans to Mexico and so forth. There is a possibility that these
nations, which are caught in a worldwide recession, might threaten
to default on the repayment of these loans. What would you recom­
mend if that happens? Would you rush in to save the big banks with
some kind of guarantee or would you let them be wheeled onto theguillotine and their heads chopped off ?
Mr. F eldstein . I don’t think there’s much prospect of the Mexicans,
Brazilians, the Argentines, and other countries defaulting in that
way. I think those countries know that they are dependent on credit
for their very ability to import, and export the things they need to sus­
tain their economies. I think it’s critical that- whatever happens the
current depositors who are insured by the FDIC are fully protected in

the outcome. But I really don’t think that the prospect of outright
default is a significant one.
Representative M itch ell . I think there is a big danger of all of
these countries experiencing extreme economic problems. I don’t think
they want to default, but I would be curious as to whether or not you
would be Sir Galahad in the event of a default.
Mr. F eldstein . I think the banks are independently and voluntarily
working with them to try to provide conditions in which they can make
continuing payments on their interest, and roll forward their principal
obligations, and working with some of the smaller banks and others
who are not accustomed to these problems.
Representative M itch ell . If I may, I have just one last question for
this round. I was shocked when you indicated that some improvements
in the retail industry and wholesale industry caused you to be rather
optimistic about the timing of the recovery. When, as a matter of fact,
over the last 5 months in the retail industry, 150,000 people have lost
their jobs, and over the laist 5 months in the wholesale industry, 60,000
people have lost their jobs.
Now based on that, I’m curious as to why you point to these two
categories as being indicative of a recovery right around the corner—
not right around the corner, but approaching recovery.
Mr. F eldstein . I spoke just of retail rather than wholesale and I
was referring to the very recent sales rather than the employment
picture in that industry over the past months. I agree with you that
those industries, like so many other industries, have seen declining
employment over the last several months.
Representative M itch ell . Thank you. You’re sure you don’t want
to answer the question about summer youth jobs at present?
Mr. F eldstein . I believe that----Representative M itch ell . No; you said that you didn’t want to
Mr. F eldstein . I believe the 85-percent tax credit for disadvantaged
youth is a very sound approach, a very generous approach to provid­
ing an opportunity for them to work. The one thing I would hope
that you and others could do would be to help people out there, pro­
spective employers and prospective employee groups, know that it
exists so they take advantage of it.
Representative M itch ell . My answer, Mr. Feldstein, is it obviously
has not worked in the past and it is not going to work this summer.
Mr. F eldstein . It is a different program at 85 percent.
Representative M itch ell . But the mentality hasn’t changed and the
economic situation of many businesses have not changed.
Thank you, Mr. Chairman.
Representative R ettss. Representative Wylie.
Representative W y l ie . Thank you very much, Mr. Chairman, and
may I say welcome, Mr. Feldstein, and congratulations on your
Mr. F eldstein . Thank you.
Representative W y l ie . I was reading an article in Business Week
last night which created a substantial amount of interest and I think
the Chairman of the Federal Reserve might like to read also. It
also generated some questions may I say.

On page 92 of the article, it says, “Martin Feldstein, Chairman of
the Council of Economic Advisers, believes that it will take 5 or 6
years before unemployment declines to 6 or 7 percent from its present
level of 10.4 percent.”
We all hope and pray that unemployment will get below the 6-percent level long before that, maybe by March 1, 1984. Are you saying
that there isn’t anything, that we can do to get unemployment below
7 percent before 5 or 6 years?
Mr. F eldstein . That statement which I also made this morning
in my testimony refers to what will happen to the unemployment rate
if there are no changes in the structural component of unemployment.
I think that the effects of structural policies would be to further reduce
not only the ultimate level of unemployment but also the speed with
which unemployment might decline along the way.
Representative W y lie . Senator Jepsen, by making a list here a
little while ago, indicated there are some bad signs—of course, unem­
ployment being the worst of the bad signs—but there are also some
good signs in our economic situation. The stock market is at a near
record high level, which indicates some optimism. Interest rates are
down. Hours of work in manufacturing are up slightly and this has
been alluded to before but I wanted to get back into it on my own.
In light of these cross currents, is the economy improving fast
enough or should we in Congress try to do more ? You mentioned that
we have drawn up the user fee bill for highway construction, the job
training bill which I supported, and the export trading bill which I
also helped with. Is there anything more that we can do and, as I ask
you that question, let me add that in this article it also says that
“mired in the deep recession, the whole world is waiting for a recovery
in the U.S. economy and that means it is waiting for Volcker to lower
interest rates and to provide business and consumer spending.”
Would you answer vis-a-vis that statement? Also, considering the
fact that we have taken some steps, do we need to take more?
Mr. F eldstein . I think there is a policy in place. As I indicated to
the chairman, interest rates have been declining, are declining. Real
money supply is growing because the inflation rate is going down and
the M2 growth rate has been maintained. We have a tax cut in place
for 1983.
One critical thing that I think Congress can do to help move the
recovery, to help bring down long-term interest rates, is to deal with
the deficits in 1985 and 1986 and beyond, if the budget comes forward,
in a way that is convincing to investors in this country and around
the world that the United States is not going to be in the position of
borrowing vast sums of money to finance the Government deficit in
future years. We will see a healthier recovery and we will see interest
rates coming down faster.
Other than that, though, Congress should not try to do more and
indeed it would be counterproductive if they did try.
Representative W y lie . S o Congress must deal with the deficits in
a way which will be encouraging to investors around the world.
Economists seem to increasingly think that we may be facing a struc­
tural deficit of well over $100 billion a year for the next several years.
If that happens, interest rates are not going to come down. Is that
a fair statement ?

Mr. F eldstein . Real interest rates would not come down. More
precisely, one reason why interest rates are so high now is that there
continue to be expectations of high inflation in the future, and it’s
very hard to know what will move those inflation expectations lower.
Two things are working on them simultaneously. The experience of
low inflation—the kind of experience we’ve had this year, and that
I expect we will go on having next year—will continue to push down
interest rates. But the large deficits, if they’re not brought under con­
trol, will frighten participants in financial markets and will tend to
keep inflation expectations high and therefore interest rates high.
I frankly don’t know how to balance those two. I don’t know wheth­
er the size of the deficit or the inflation experience will be the dominant
factor. I suspect, though, that the financial community is anticipating
that Congress will do things to bring down the deficit. Current interest
rates reflect an expectation of fiscal progress. If that falls through,
if Congress and the administration cannot agree upon a fiscal pro­
gram that brings down the outyear deficits, it will push up the interest
rates that we will have in the future.
Representative W y l ie . S o what you’re saying is that Congress needs
to do more, that we can’t just lay it all on the Chairman of the Fed­
eral Reserve Board and say he’s the----Mr. F eldstein . I think the Chairman of the Federal Reserve Board
and the Federal Reserve Board as a whole is doing a very good job.
I think the critical problem, the single most important problem, the
missing piece in the whole process, is bringing down those outyear
Representative W y l ie . And it is your opinion that there is a way
that the Congress can bring the deficits down below $100 billion over
the next several years ?
Mr. F eldstein . I believe Congress can bring the deficits down.
Representative W y l ie . Thank you. Also in this article it says the
decline in buying by developing countries which normally account for
40 percent of the total U.S. exports is a major reason that trade def­
icits this year will be $40 billion. That deficit in turn is one reason why
the current recession is longer and deeper than had been expected, and
it goes on to say that’s one of the reasons we’re having record high
Do you agree with that?
Mr. F eldstein . Yes. I think that’s true when you say longer and
deeper than had been expected. I think that most economists have given
inadequate attention to the international aspects of the American econ­
omy. The international aspects of our economic performance have
changed over the years. In particular, we have seen in the past few
years a quite different reaction to high interest rates than we had in
the past. Those high interest rates by strengthening the dollar a great
deal, have had the effect of worsening our trade balance.
I think, again, it ultimately comes to what happens to long-term
interest rates and therefore to what happens to the deficit. If the def­
icit in future years is brought under control, then we’ll see loan rates
down; that will allow the competitive position of U.S. exports to im­
prove and we will have a sounder, healthier, more balanced recovery.
Representative W y l ie . Chairman Reuss made an interesting point
that unemployment is 10.8 percent. If unemployment remains at 10.8


percent for another year will you recommend we do something else,
if it remains at 10.8 percent through December, January, February,
and so forth ?
Mr. F eldstein. I think that is so unlikely that I don’t want to guess
what I would recommend under those circumstances.
Representative W ylie . Are we near the peak of unemployment?
Mr. F eldstein . The reason I hesitate to answer is, that depends so
much on what you mean by “near” and “peak.” What we know from
historic experience is that once a recovery begins, it takes a couple
months, maybe 3 months, before the unemployment rate begins to
come down. There’s a very widespread consensus among private fore­
casters, as well as people within the Government, that 1983 will see
a higher level of income than 1982, that there is going to be a recovery.
If you put those two together, then I think it’s fair to say that we are
near the peak in the unemployment rate.
Representative W ylie . Thank you very much. Thank you, Mr.
Representative R euss . Congressman Hawkins.
Representative H a w k in s . Mr. Feldstein, you announced to Rep­
resentative Wylie that Congress can bring the deficits down. You didn’t
indicate how. Would you be a little more specific?
Mr. F eldstein . Well, as you know, this is budget time in the ad­
ministration and the administration will present next month a budget
with very specific suggestions on how to bring it down, but until then
I’m afraid I really can’t provide any more information.
Representative H a w k in s . But you made the statement. I assume
you must have a reason for making that statement.
Mr. F eldstein . Yes.
Representative H a w k in s . On what basis did you make the statement
which goes into the record that Congress can bring the deficits down.
You don’t have any particular basis on which to make the statement,
do you?
Mr. F eldstein . I do. I make it on----Representative H a w k in s . On what basis?
Mr. F eldstein . On the basis of deliberations we’re having within
the administration. This is budget review time and budget planning
Representative H a w k in s . What does that have to do with Congress?
Mr. F eldstein . I thought that Congress legislated and that the
administration would propose a budget, but it’s not up to the adminis­
tration—the administration and Congress together have to enact spe­
cific changes to bring the budget deficit down.
Representative H a w k in s . Let’s go on to something else. You indi­
cated that you haven’t forecast a 3-percent growth rate, but somewhere
in that neighborhood might take place. Do you believe that that is
adequate in order to achieve recovery ?
Mr. F eldstein . Well, I believe that is consistent with our having
recovery, yes.
Representative H a w k in s . I s it adequate to achieve recovery I think
was the question.
Mr. F eldstein . It is adequate to achieve a recovery.


Representative H a w k in s . Even assuming that you’re correct, how
do you intend to achieve this ?
Mr. F eldstein . Why do I think the economy is going to have that
kind of recovery ?
Representative H a w k in s . Well, instead of forecasting it, do you
have any particular plan or program whereby it will be achieved ?
Mr. F eldstein . Yes. I think there is an economic program in place.
The economic program currently has resulted in lower interest rates
than we had before. That has stimulated housing and I think it will
stimulate, with housing, a demand for consumer durables. It will
stimulate the jobs in those industries. That, in turn, will have effects
on other kinds of purchases and from there the economy will be stimu­
lated. I think we have a tax cut which is occurring in July 1983
which will provide additional purchasing power to people in the
economy. That will help. We are seeing more real money growth in the
economy than we have had in the past 2 years. I think that will con­
tribute significantly to the financial conditions which make a recovery
possible. Finally, as I said to Congressman Wylie, I think there’s a
critical problem of bringing down the deficits not in 1983 but in 1985
and 1986 and beyond in a way that provides clear reassurance to finan­
cial markets that we don’t have the prospect of high inflation or high
real interest rates to dampen future demand.
Representative H a w k in s . Well, I’d like to get the name of your
optometrist because apparently your glasses are much clearer than
mine. You see the most favorable things in everything that is unfavor­
able and ignore the things that are unfavorable conveniently. Is it not
true that we also have the highest deficit in history which also has been
the result of the very programs that you say we’ll have in recovery ?
We obviously have the highest unemployment since the 1930’s. The
median income of the average individual has dropped. You don’t see
any of these unfavorable signs on which you would base a prediction
and respond to in terms of a positive program.
Mr. F eldstein . No, I don’t think so, sir. I said in my statement that
the economy is currently weak. I am aware of the things you described.
I am concerned that that is the current state of the economy, but I
also see the things that I have been pointing out as indicators that the
economy will turn up and that’s not because of my fine glasses. That’s
a vision, a view, an opinion, that is shared by. I think, virtually every
private forecaster.
Representative H a w k in s . I think you should be a little more care­
ful in saying it’s shared. I think w have had some able economists
that don’t share that view.
Mr. F eldstein . They said in their professional opinion that GNP
in 1983 will be lower than 1982?
Representative H a w k in s . They have said worse than that. Mr.
Feldstein. I won’t get into that, however, but when you say economists
share your point of view, I think you have to be a little more specific
by saying some economists share that view. There are many economists
who don’t share that view, that the current policies will effect the re­
covery, As a matter of fact, they say it’s impossible if we continue the
current policies. So I think that these broad statements do not serve
at all to attacking the problems at all.

You indicated as I understand in talking about our structural un­
employment that a public employment program is not needed or
probably would not be needed. Is that the current thinking?
Mr. F e ld s te in . I think it would be counterproductive.
Representative H a w k in s. Why ?
Mr. F e ld s te in . It would enlarge our deficits. It would lead to an
expectation that the Congress is not aware of the importance of def­
icits. I think it’s just the wrong way of moving. I think that so many
times in the past Congress, as a recession lingered on, has tried to de­
sign employment programs only to find that they come into play
months, even years later, at a time when the economy is already fully
in recovery, putting pressures on labor markets in inappropriate ways.
I think it’s really just not the right thing to do.
Representative H a w k in s. Would you mention a specific program
that has been put in place that has delayed recovery that has not served
its purpose and has not been cost effective ?
Mr. F e ld s te in . Yes, I could get you a specific citation. I remember
in the 1974-75 recession that Congress legislated a major program
which actually reached its peak spending in about 1976 or 1977 well
after the economy had moved into recovery.
Representative H a w k in s. Which program ?
Mr. F e ld s te in . I ’ll have to get you the specific title. I would be
happy to do that.
Representative H a w k in s. I wish you would submit that specific
program and give us a finding, the evaluation of it by any agency that
evaluated the program, what its results were in terms of placement
and what it achieved or did not achieve, because this broad statement
is constantly being made by the administration-----Mr. F e ld s te in . I ’ll be happy to offer you an example of that.
Representative H a w k in s [continuing]. Without any substantial
reason for making the statement. I think you also said something
about the current highway program that we’re considering in Con­
gress and you supported that. Although you oppose a public employ­
ment program, you support that. You support the method of paying
for it as well ?
Mr. F e ld s te in . I do.
Representative H a w k in s. Y ou support the regressive tax that is
to support it as being productive and job producing?
Mr. F e ld s te in . I think the user tax is a good way of paying for
the road improvement.
Representative H a w k in s. D o you consider it a regressive tax?
Mr. F e ld s te in . I haven’t thought about it in quite those terms.
Representative H a w k in s. N ow , Mr. Feldstein, I ’m sure you must
have thought about it. Do you consider that a regressive tax? Is it or
isn’t it a regressive tax? You’re a noted economist. I know you’re an
able one. I Imow that you know whether it is or it isn’t.
Mr. F e ld s te in . I f I think of it as a benefit tax rather than a redis­
tributive tax, I don’t ask myself that question. I think of it as a user
charge for roads. I don’t ask myself whether the toll on the Holland
Tunnel is regressive or not.
Representative H a w k in s. In connection with youth unemployment,
I think you said 40 percent of the unemployed are under 25.
Mr. F e ld s te in . That’s correct.


Representative H a w k in s. Which is half teenagers. Striking out 20
percent in 40 percent, that would still leave 80 percent nonteenagers
who are unemployed. Actually, I think you would recognize that the
real number of unemployed is not those that are officially counted but
there are many others that are not counted— part-time, discouraged,
and so forth. So isn’t it true that, generally speaking, we recognize
that unemployment is the major problem facing the Nation at this
Mr. F e ld s te in . Well, I think it would be a mistake to say we have
one problem in 1983 and we will work on that problem to the exclu­
sion of all others, and when we have “solved” that we will move on
to the next.
Representative H a w k in s . I would agree with your statement now.
Let me rephrase it. When it was inflation, of course, the President
said inflation was the No. 1 problem so we’ve got to attack that and
said until we solve that we can’t deal with the unemployment. So his
thinking was different from what you concluded in your statement
there, but let’s say it is certainly among the major problems.
Mr. F e l d s t e i n . Absolutely.
Representative H a w k in s. It’s just as major as any other problem?
Mr. F e ld s te in . Absolutely.
Representative H a w k in s. A s the President said, it is a national
tragedy. That is what the President himself said in some foreign
country a few days ago, that it is a national tragedy.
Now if it is a national tragedy, can you detail to us specifically what
you and the administration propose to do about this national tragedy
in terms of specific programs within a reasonable length of time?
Mr. F e ld s te in . A s I said in my statement, this is a problem which
is very serious now, and fortunately it is a problem that can be solved
by a recovery. There is nothing that we can do in the way of specific
little programs to hire some people here or there even if the pro­
gams didn’t have adverse side effects which I think are very impor­
tant. No simple little program can deal with the fact that we need to
create 15 million additional jobs over the next half dozen years to
absorb the currently unemployed and those who are yet to enter the
labor force.
Now what I have been saying is that I think we have a program
in place which can produce a noninflationary economic recovery that
can provide those 15 million jobs over the next 5 or 6 years.
Representative H a w k in s. Well, those programs have been in place
for 2 years now.
Mr. F e ld s t e in . N o.
Representative H a w k in s. Isn’t that true ?
Mr. F e ld s te in . No. I think what is true is that we— 2 years ago we
saw an economy which was suffering from terrible inflation, with peo­
ple frightened about inflation getting out of control; 12 and 13 percent
inflation back-to-back for 2 years. We have now seen that turned
Representative H a w k in s. Seen what turned around? You haven’t
seen the unemployment turned around.
Mr. F e ld s t e in . The inflation turned around and we are now in a
position which is therefore very different from what it was 2 years ago.
Representative H a w k in s. Let’s go back. You have not seen unem­


ployment turn around. You have seen it escalate terribly in the 2 years
the tax reduction has been in place which is one of the programs. You
have seen deregulation take place which is another of the programs
and you have seen unemployment escalate despite the monetary
policies favored by the administration.
Now what program do you have— what specific program do you have
in place to put unemployed people to work ? That’s really the gist of it.
Mr. F e ld s te in . We call that program economic recovery. I don’t
know of any period in history when a sustained accelerating inflation
has been brought under control by any means which did not lead to
a period of increasing unemployment. But I think it’s behind us now.
I think if we sustain the economic policies that the administration
favors, we are now in a position, as we were not 2 years ago, to have
falling unemployment, gradually declining inflation, and an increase
in the rate of investment in the economy.
Representative H a w k in s. It seems to me from what you have said
that we have been involved in a tradeoff policy in this administration,
chat to attack inflation you set out to create unemployment, and you’re
now in the position that you’re afraid to do something about unemploy­
ment for fear it will reignite inflation. So what we are doing, we are
getting back to the discarded, unsuccessful programs that haven’t
worked in the past and aren’t going to work today and that you don’t
have anything specific to offer to the individual who is unemployed
except to say your situation is tragic.
Mr. F e ld s te in . N o, I don’t think that’s true, sir.
Representative H a w k in s. Well, how would you describe the persons
who are unemployed today that you describe as tragic— what would
you, as a representative, if you had to go out as some of us do and face
those people, and tell them what they can do about their condition
today— just what would you say to those people ?
Mr. F e ld s te in . Well, first, let me go back to your statement about
choosing to create unemployment.
Representative H a w k in s. Well, that’s what you’ve done.
Mr. F e ld s te in . I don’t accept the view about the tradeoff you
referred to.
Representative H a w k in s. The Secretary of the Treasury has said
this is the price we pay. Other administration officials have said we’ve
got to make the sacrifice. W e’ve got to suffer some recession. This is the
price you pay. They tell you someone obviously pays the price.
Mr. F e ld s te in . I don’t want to comment on my colleagues’ state­
ments, but let me repeat what I said a moment ago and then comment
o^ its implications.
What I said a moment ago is I know of no historic instance in which
an economy has allowed inflation to get out of hand as we did in this
country in the latter part of the 1970’s and then brought it back under
control, back down to the kind of levels in which people do not have to
worry about it, without a period of unemployment.
Now what’s the prospect? W e could have done that in 1981, in 1982,
with the suffering that has been involved, or we could have waited
until 1985 and 1986 when the inflation rate might have been 19 and 20
percent. Bringing it under control would have involved even more suf­
fering, more unemployment. I think there is no tradeoff. There’s a
question of when, not whether. There’s a question of whether you have


less or more, and I think the administration has had less unemploy­
ment in bringing down inflation than would have occurred if inflation
had been allowed to go on getting out of hand.
Representative H a w k in s . My time has run out. May I just cite to
you periods in which we’ve done both where we could attack inflation
and unemployment simultaneously, and that is the law today, the Full
Employment and Balanced Growth Act, which is a mandate which you
completely ignore. From 1961 to 1965, we brought unemployment down
below 4 percent and we had inflation but an inflation rate at 2.9 percent.
Mr. F e ld s te in . The inflation rate in 1962 was zero. There was no
inflation to be brought down at that point. There had not been a period
of irresponsible inflationary-----Representative H a w k in s . Y o u just made the statement that to bring
inflation down there was a period in which you had to bring unemploy­
ment up. I ’m saying there are periods of time and I just cited one.
I don’t have time to cite others.
Mr. F e ld s te in . Y o u d id not cite a period in w hich inflation came

Representative H a w k in s. Are you denying that from 1961 to 1965
we didn’t bring both inflation and unemployment down ?
Mr. F e l d s t e i n . Absolutely. Inflation rose over that period of time.
Representative H a w k in s . Rose from what to what ?
Mr. F e ld s te in . It rose from a very low level.
Representative H a w k in s. At what rate was it ? What was the high­
est rate?
Mr. F e ld s te in . I don’t remember, but the point is you were not
bringing it down.
Representative H a w k in s. But you make a statement that it did not.
Mr. F e ld s t e in . It was not being brought down.
Representative H a w k in s. It rose after 1965, but was it not true that
from 1961 to 1965 that it was below 4 percent?
Mr. F e ld s te in . I believe that’s probably true. It did not come down
during that period.
Representative H a w k in s . So you didn’t have the trade off.
Mr. F e ld s te in . It did not come down.
Representative H a w k in s . And you didn’t have the theory that you
now employ that in order to protect the inflation or stabilize the dollar
that you’ve got to tolerate this high level of unemployment. That is
the inescapable conclusion it seems to me from what is happening today.
Representative W y l ie . Mr. Chairman, may I interrupt at this point ?
I think Mr. Feldstein is referring to the jobs program in the 1974 reces­
sion. That was published by the OMB study which was published by
the Joint Economic Committee in 1980, that it did not have any im­
pact to speak of until 1976 or early 1977. That was also mentioned in
an article in the W all Street Journal on November 30,1982, that the
public works program was enacted in 1972 to fight recession that had
ended in 1970.1 just thought that ought to be put in for the record.
Mr. F e ld s te in . Thank you, Congressman Wylie.
Representative H a w k in s . May the record also be clarified to state
I did not state the employment program was a means of increasing
the condition merely during a recession. I was stating that an employ­
ment program, an employment policy should be in place before a crisis
developed and it isn’t merely to respond to a crisis, and today we

don’t have one in place at all. W e have repealed or eliminated every
possible program, including a decrease in the Job Corps that would
put some of those unemployed youth to work that Mr. Feldstein said
should be put to work. My point is that we don’t have any.
Representative R euss. Senator Sarbanes.
Senator Sarbanes. Thank you, Mr. Chairman.
Mr. Feldstein, if I understood you correctly, you said in response
to the questions put to you by Chairman Reuss, that you did not think
any action should be taken now to deal with the employment problem.
Is that correct?
Mr. F e ld s te in . Well, I also said, sir, that the administration is con­
sidering a variety of programs which will deal with the long-term or
structural component of unemployment. Obviously, I think those are
very much worth considering and enacting if the administration selects
some of them.
Senator Sarbanes. I want to be very dear. The chairman asked
you repeatedly at what point you would recommend actions to deal
with unemployment and you, in effect, refused to answer. I understood
you to say that you thought unemployment was going to start down
and therefore there was nothing that needed to be done and we should
stay the course. Is that essentially correct?
Mr. F e ld s te in . Not quite. The distinction I failed to make I think
in answering that question was between those things that we should
be doing specifically to deal with the cyclical condition that we find
ourselves in, where I said I wouldn’t do anything now; and those
things which are of a more permanent nature and would deal with
the structural problem where I agree with Representative Hawkins.
Senator Sarbanes. You say we don’t need to do anything to deal
with the cyclical aspects of the problem because it’s your position that
we are recovering in that area; is that correct?
Mr. F e ld s te in . No. It’s my position that we have a variety of
policies in place that will lead to a recovery, monetary and fiscal
policies that will contribute to an upturn, that there’s a very wide-----Senator Sarbanes. D o you think that is at work now?
Mr. F e ld s te in . I do.
Senator Sarbanes. You do. All right. Now in September of this
year, in your confirmation hearing before the Senate Banking Com­
mittee, you said then something roughly comparable. You said the
economy then seemed ready to recover. A t the time you made that
statement the unemployment rate was 9.8 percent. The figure reported
in the first week of October subsequent to your statement on Septem­
ber 22 was 10.1 percent. The figure reported in the first week of
November for unemployment was 10.4 percent. The figure Reported
in the first week of December was 10.8 percent.
Less than 3 months subsequent to your assertion then that the
economy was about to recover, the unemployment rate has gone from
9.8 to 10.8 percent.
Now, in effect, you are telling us the same thing here this morning,
as I understand it.
Let me ask you this question. I f the unemployment rate in the next
3 months moves in the same way that it moved in the 3 months sub­
sequently to vour last assertion that recovery was here and in effect
we didn’t need to do anything, will you continue to hold that position ?


Mr. F e ld s te in . Let me g o back to what you said about my statement
then versus now. O f course, I ’m disappointed that we haven’t seen a
recovery in the last few months.
Senator S a rb an es. I would hope so. When is disappointment going
to translate into action ? When are these assertions on your part and on
the part of the President and leading figures of the administration—
that unemployment is a serious problem, that it causes great distress,
that they’re really upset and sympathetic to what’s happening to the
millions of people out of jobs—when is that going to translate into
action that will do something?
Mr. F e l d s t e i n . I think it would be wrong to try to stimulate the
economy excessively at a time when there is very widespread profes­
sional agreement that a recovery is about to occur. I f I felt that those
conditions had changed, then I would, of course, be asking, myself and
discussing with my colleagues in the administration what ought to be
done. But I think we now are in a situation where widespread, virtu­
ally unanimous professional opinion is that the economy is about to
Senator S arban es. I f the unemployment rate in the next 3 months
were to move as it moved in the three reports subsequent to your state­
ment on the 22d of September, would you say that the premise of the
assertion you have just made would be proven faulty and that action
had to be taken ?
Mr. F e ld s te in . I really can’t answer it and-----Senator S arban es. In other words, what you’re saying is the un­
employment rate could go to 11.8 percent and you would still sit in
front of the committee and say, “stay the course” ?
Mr. F e ld s te in . I would look at all the evidence. I wouldn’t look at a
single number as I said to Congressman Reuss. I f production were ris­
ing in January, employment started up in February, if sales were
higher in December and January, wouldn’t it be wrong to take action
to try to stimulate the economy just because the unemployment rate
had lagged for a month or two ?
Senator Sarban es. Let’s take those indicators you and Senator
Jepsen ran through, a kind of series of indicators there. What about
industrial production? Is that an important indicator of what’s hap­
pening to the economy ?
Mr. F e ld s te in . Industrial production is down.
Senator Sarban es. Is it an important indicator ?
Mr. F e ld s te in . It’s an important indicator of where the business
cycle is.
Senator Sarban es. And what’s happened to industrial production ?
Mr. F e ld s te in . Industrial production has come down significantly
as it always does during recession.
Senator S arban es. S o that’s not turning up, is it ?
Mr. F e ld s te in . Not yet, but it will if experience repeats itself. It
will go up more sharply than GNP as a whole when the recovery
Senator S arban es. What about the leading indicators? Are they
up ? They’re up slightly; is that right ?
Mr, F e ld s te in . They’ve been u p fo r 6 out o f the last 7 months.
Senator S arban es. And to what extent are they up because of the
stock market price component of the leading indicators ?


Mr. F e ld s te in . It’s 1 of the 11 components that currently is figured
into the leading indicators—housing starts-----Senator Sarbanes. Isn’t it the one that is most responsible for the
turnup in the leading indicators ?
Mr. F e ld s te in . I can’t actually tell you the weights on the different
ones, but if you look at the last one, I think that roughly half of them
were positive and half of them were negative.
Senator Sarbanes. Well, Mr. Feldstein, you’re an intelligent econ­
omist and I think the members of this committee are intelligent Mem­
bers of the Congress. Isn’t it correct that of the factors included in
the leading indicators index the increase in stock market prices is the
one that has most contributed to the turnup in the indicators?
Mr. F e ld s te in . I don’t know the details to answer that question. I
know that about half of the indicators were up and about half of them
were not. But on balance, the leading indicators were up. I don’t know
how much weight should be put on the specific components within it.
Senator Sarbanes. On the question of staying the course, in your
confirmation hearing Senator Riegle questioned you at length on your
own personal situation. I think that was relevant to the extent of the
question of sensitivity to the burdens or sacrifices that other people are
experiencing. The American people would understand an economic
policy that called for sacrifice from the top to the bottom, if it was
part of a policy which, when they looked at it, seemed to make sense
m terms of improving the economy. But what sacrifice are the wealthy,
those at the top of the income scale, making under the economic policy
of the Reagan administration? Isn’t it a fact that they’re reaping
significant benefits ?
Mr. F e ld s te in . Well, I think we both recognize two things. One, in
the long run, everybody can gain from a healthy, growing economy.
In the short run, everybody loses from a recession. The unemployed
lose, but also those who depend upon corporate profits lose.
I f you look at what’s happened to income over the past year or two,
I suspect that you’d find that profits have fallen much more sharply
than income as a whole, that wage and salary income in real terms has
declined a bit over the last year but that profits have declined sub­
stantially more.
Senator Sarbanes. But the tax benefits of the Reagan program are
heavily weighted to the upper end of the income scale.
Now the National Journal studv— are you familiar with that study?
Mr. F e ld s te in . I ’m not sure what study you have in mind. I know
the Journal.
Senator Sarbanes. It’s the study that shows that the consequences
of the administration’s policy are to improve the economic situation
of the top fifth of the income scale and to worsen the situation on the
other four-fifths of the Nation.
Mr. F e ld s te in . Let me discuss the tax cut and then more generally
about-----Senator Sarbanes. Well, what about the study.
Mr. F e ld s te in . I don’t know the study particularly.
Senator Sarbanes. I commend it to you.
Mr. F e ld s te in . What we know is that the tax cut that the Congress
enacted was a broad, across-the-board cut. It cut taxes in proportion.

Obviously, those people who don’t pay any tax at all don’t benefit
from a tax cut. So there’s no question that an across-the-board tax cut
only reduces the taxes of those who pay taxes.
But I think it’s really wrong to look at it in terms of moving money
from Peter to Paul. I think the real question is what happens over
time, whether a program that is designed to provide an environment
for investment and growth isn’t the right way to help everybody.
Senator Sa rb an es. How* much in goods and services are we losing
when unemployment is 10.8 percent as opposed to, say, 6 percent?
Mr. F e ld s te in . I don’t have a quantification of that. W e are losing
a substantial amount.
Senator S a rb an es. $250 billion ?
Mr. F e ld s te in . I don’t know what the number is. We are losing a
substantial amount, but the key thing is, as I said to Congressman
Hawkins-----Senator S arban es. I f you don’t start giving us some answers on
these numbers, we may start to wonder about all the plaudits you’ve
been receiving for your talents. That’s not a hard figure. Economists
talk about it all the time.
Mr. F e ld s t e in . Let me say that we are saving money by having a
smaller recession.
Senator S a rb an es. I f we were at 6-percent unemployment, how
much larger would the total of goods and services available to the
Nation be? Does $250 billion strike you as an unreasonable estimate of
that figure?
Mr. F e ld s te in . I hesitate to answer the question because I don’t
want to answer it out of context. I think what you’re suggesting is that
there was a choice, that one could have avoided this and everything
else would have been all right.
Senator S arban es. N o, no. I want you to answer that question.
Then if you want to qualify it, go ahead and do it; but I want to get
some sense of the dimension of the gap of what we’re losing in goods
and services the Nation would have to strengthen it if we were at 6
percent— with unemployment at 10.8 percent as compared to 6 percent.
I f I can’t get you to be sensitive to the tragedy of the individual and
families confronted with unemployment, then perhaps you will be
sensitive to the loss to the Nation resulting from such significant
unemployment, from the fact that capacity utilization of plant and
equipment is now below 70 percent— another indicator incidentally
that has been moving downward— to the social loss to the Nation of
these foregone goods and services.
Mr. F e ld s te in . I am sensitive to both, sir.
Senator S a rb an es. It’s not reflected in the policy recommendations
as I see them.
Let me ask you this question. Is Mr. Kudlow an associate of yours in
the executive branch of the Government?
Mr. F e ld s t e in . He is a member o f the Office o f Management and
Senator S arban es. Well, is he an associate of yours ?
Mr. F e ld s te in . He’s a member o f the administration.
Senator S arban es. Thank you. In a statement yesterday, he indi­
cated the policies that the administration now has in place, if carried
out on a trend line to the end of 1988, even assuming a 6-percent unem­


ployment rate at that time, would still leave us with a deficit of $150
billion. Do you think that’s an accurate projection ?
Mr. F e ld s te in . That kind of a projection is based on the assumption
that Congress enacts no changes in existing programs. That’s not what
the administration plans to do. I haven’t seen Mr. Kudlow’s specific
statement, but I ’m sure that is not the intention of the administration’s
Senator Sarbanes. Before we discuss the changes, is it your under­
standing that that proj ection is accurate ?
Mr. F e ld s te in . I f there were no changes in economic programs, if
the administration proposed no budget changes other than a continua­
tion of last year’s budget, which it will not do, then we would have
deficits on that order of magnitude. But that, as I ’m sure Mr. Kudlow
must have pointed out to his audience, is not where the administration
is going. The administration will seek ways to reduce the deficit in
future years.
Senator Sarbanes. Would you say that a deficit of that magnitude,
at 6-percent unemployment, would not be a good economic policy ?
Mr. F e ld s te in . Absolutely.
Senator Sarbanes. What do you think is the connection between
the deficits and inflation?
Mr. F e ld s te in . The connection is an indirect one.
Senator Sarbanes. I s it a close one ? Is there some real cause and
effect there?
Mr. F e ld s te in . There’s cause and effect only insofar as budget
deficits lead to further policy changes. That is, it is not through the
market itself and through natural forces that large budget deficits lead
to inflation. What I think might be widely feared is that if we have
substantial budget deficits stretching out into the future, there would
be growing pressure on the Federal Reserve to increase the money
supply more rapidly and that, in turn, would lead to higher inflation.
The budget deficits themselves would do substantial harm but that
harm would not come in the form of inflation.
Senator Sarbanes. Do you consider that statement a change in your
position from the statement you made before the American Paper
Institute in October 1981, and I quote, “But the causal link between
deficits and inflation is really very weak” ?
Mr. F e ld s te in . No, not at all. As I said, the link is not a market
link. The link is a link that has to work through the influence of
deficits on monetary policy. That’s what I could imagine people fear­
ing. Indeed, that’s what I could imagine happening if budget deficits
are allowed to persist. They would lead to the temptation to make
them go away by hidden increases in taxation, by inflating the economy,
pushing people into higher tax brackets. This, of course, would require
eliminating the indexing provision which is now in the law to protect
them from that.
Senator Sarbanes. Y ou made the point that you don’t accept these
trend projections. You think something should be done about them.
What is it you think should be done ?
Mr. F e ld s te in . Well, I can’t answer that very specifically because
the administration is currently in the process of formulating its
budget, but I think that the administration will present a budget to


Congress which indicates ways of bringing down the deficit to sub­
stantially lower numbers over time.
Senator Sarban es. In general terms, what a re those ways?
Mr. F e ld s te in . I really don’t think it’s appropriate, Senator, for
me to speak about the budget provisions before the President has
made them.
Senator S arban es. But you’re talking about cuts in spending?
Mr. F e ld s te in . I ’m just not going to answer specific questions
about how the budget should be changed until the President has made
his decisions.
Senator S arban es. I f you increased spending, would that contribute
to improving this situation ?
Mr. F e ld s te in . Increases in spending would not.
Senator S arban es. Would decreases in spending improve the trend
Mr. F e ld s t e in . The deficit is the difference between spending and
taxes. I f you decrease spending or increase taxes, you would reduce
the deficit.
Senator S a rb an es. S o, you’re saying, as I understand it, that if you
want to address this trend line. You either decrease spending or in­
crease taxes; is that correct ?
Mr. F e ld s te in . Or both.
Senator S arban es. N ow as between those two, on what basis does
one make the judgment?
Mr. F e ld s t e in . Well, you look at each spending program and you
say what are its effects on the people that are affected by it and what is
the effect on the economy. You look at each tax, the potential tax reve­
nue, and say what are its impacts on the individuals that are affected,
on the economy as a whole, and in both cases you look at the revenue im­
pact. Then you have to decide.
Senator Sarban es. N ow what’s your view on the extent to which
military spending should be subject to scrutiny ?
Mr. F e ld s t e in . I believe that military spending, like every other
part of the budget, should be carefully examined.
Senator S arban es. And do you think cuts are needed in that area ?
Mr. F e ld s te in . I w on ’t comment on any o f the specific areas o f the
budget, but I d o think that every part o f it should be exam ined very
ca refu lly and I can say to you that I know that every p art is b ein g
exam ined very ca refu lly by the people in OMB and b y the p eople in
the ind ivid u al agencies.
Senator Sarban es. Taking this projected trend line of a $150 bil­

lion gap at the 6-percent unemployment figure in 1988, do you think
that that gap can be closed on the spending side alone or would it also
require actions on the tax side ?
Mr. F e ld s t e in . Well, $150 billion in 1988 would be about 3 percent
of GNP. W e now spend about 24 percent of GNP.
Senator Sa rb an es. Twenty-four percent of GNP is spent by the
Mr. F e ld s te in . The Federal Government. Government expenditures
are about 23 or 24 percent of GNP.
Senator S a rb an es. Isn’t it the case that that figure goes up when
the economy goes into recession if GNP doesn’t grow ?
Mr. F e ld s te in . Yes, and my figure may------


Senator Sarbanes. I f you look back over time, wouldn’t you gen­
erally find that the figure was lower in terms of the Federal share of
the GNP at times when the economy was really moving very vigorously
and the GNP expanding significantly ?
Mr. F e ld s te in . I thought you said Mr. Kudlow’s figure referred to
the size of the deficit at full employment.
Senator S a rran es. Well, at 6 percent.
Mr. F e ld s te in . Six percent.
Senator Sarbanes. I don’t want to engage now in a discussion of
what constitutes the full employment rate.
Mr. F e l d s t e i n . But at 6 percent— the cyclical aspect is not there.
He’s judging from the newspaper accounts that referred to structural
deficits at the time.
Senator Sarbanes. On defense spending again, is it your view that
an appropriate level of defense spending has been set or that it needs
to be examined?
Mr. F e ld s te in . I repeat that I think every part of the budget de­
serves careful examination.
Senator Sarbanes. Murray Weidenbaum, in the first press con­
ference he had after he left office, went out and said that we should
really have taken a closer look at the defense budget. The fact is that
the increases in the defense budget outbalanced the cuts in the domestic
programs, as difficult as many of them were, and have inflicted harm
on many people. You know, it’s regrettable that he feels he can only
give that advice after he’s left office.
Are you starting down the same path on your very first day fol­
lowing confirmation ?
Mr. F e ld s te in . I ’m not sure that I even understand the question. As
I said before, the defense budget is being subjected to careful scrutiny
within the administration. The question of what is an appropriate size
has to bo determined by looking at individual programs, and their im­
pact. and their costs. This has to be done in each of the other areas of
the government as well.
Senator Sarbanes. You’re very strong on capital formation; is that
correct ?
Mr. F e ld s te in . That is correct.
Senator Sarbanes. And I think some emphasis in that area is im­
portant. Do you believe that there’s such a thing as capital formation
by public sector expenditures ?
Mr. F e ld s te in . Absolutely.
Senator Sarbanes. How does that relate to your view on reducing
the share of the GNP spent through the public sector ?
Mr. F e ld s te in . Well, let me give you an example of public sector
capital formation that could not be done by the private sector and that
clearly contributes to our overall economic performance— the highways
and bridges program. Clearly, that’s public sector capital and clearly
it contributes to our overall economic well-being. So I think there is
a role for public sector capital formation. Obviously, most of our pro­
ductive capital stock has to be in the private sector, but I think there’s
clearly a role for public sector capital formation.
Senator Sarbanes. H ow do you address the problem that money
will go into the casinos and won’t go, or isn’t going, to improve our
railroad system or our ports, and so forth ?


Mr. F e ld s t e in . I don’t specifically want to talk about casinos, but
it’s true that the private sector puts its dollars where people want them.
I f people want to buy video games, the manufacturers will build video
games. I f people want to buy clothing, the manufacturers will make
clothing. I think that’s the basic starting point of a market economy.
We believe people should have the choice of how they spend their
money and we shouldn’t interfere with firms that want to provide the
facilities for making those things.
Senator Sarban es. Then how do you get the public sector invest­
ment that you think is important if you don’t interfere with those
choices to some extent if through no other way than through the tax
system ?
Mr. F e ld s te in . Obviously, we have taxes. I ’m not suggesting we
have an economy with no taxes in it. We have about a fifth of our
GNP going in taxes and the administration has just proposed and the
Congress is currently considering, as you know, a program of public
investment in our roads and highways.
Senator S arban es. On that point, in response to Congressman
Hawkins on whether the gasoline tax was regressive, you said, as I
understand it, that it really depended on whether you considered it in
benefit terms or distribution terms. Then you went on to consider it in
benefit terms. I f you consider it in distribution terms, is it regressive?
Mr. F e ld s te in . It’s a tax— I don’t actually know the answer to the
question. What you’re asking me is whether the number we have been
told, $30 a year on average for a typical driver, rises more or less
than proportionately with income. I frankly don’t know the answer to
that because I don’t know enough about the driving habits of the
American public. I suppose low-income people are much less likely
to own a car, let alone two or more cars. They are less likely— not to
say that none of them do— to take long trips than higher income
people. So to that extent, I would think that higher income people are
likely to drive more miles and pay more on gasoline and therefore pay
more tax than lower income people who use public transportation.
From that point of view, if that assumption is correct, it is not a re­
gressive tax. But I would have to check out the details to know the
Senator Sarban es. Mr. Feld-stein, you make a distinction between
benefit and distribution, and then the answer you went on to give was
a reasonable and intelligent response. I find the one you have just
given not falling into the same category.
Isn’t it true that most of your colleagues in the profession, when
asked on the distribution question, would regard the gasoline tax as
regressive ?
Mr. F e ld s te in . I don’t know what the facts are and I don’t know
what my colleagues think about that. I don’t know what the facts
are on who does how much driving and therefore consumes 'how many
gallons of gasoline.
Senator Sarban es. With respect to your reference to the 1979 infla­
tion rate, what part of that was a consequence of the oil shock ?
Mr. F e ld s te in . Economists differ about that. I would say that most
economists say a very small part of that was due to the oil shock per se.
Canada, which is a net oil exporter, actually saw at least as large an
increase in inflation as we did. Germany, which has very little in the


way of oil reserves, didn’t have the kind of inflation increase in 1979
that we did. Japan, which has to import all of its oil, took the 1979
shock much better than we did.
So I don’t think you can parcel out exactly how much of it is due
to oil. But you have to, as a minimum, say oil plus the monetary
policies of accommodation that went with that shock were responsible.
Senator S a r b a n e s . I have exceeded my time, but I want to close
by bringing you back to the point I was making earlier, and that is the
American people are now becoming increasingly traumatized by the
prospect of rising unemployment. For the person or family experienc­
ing it, it’s completely devastating. The person who loses his job has in
effect fallen off the course. There’s no course on which that person
can stay. The increase in business bankruptcies, home mortgage fore­
closures, and farm failures are all indications of people who have been
playing according to the rules and in most instances are simply being
wiped out through no fault of their own.
I don’t think it’s sufficient to simply come before us and say that
people have to stay this course, especially when it is clear that the
economic policies are working to the significant benefit of a small
privileged group at the upper end of the income scale while the
burdens are being placed upon middle income and working people.
I would hope—although I realize it’s probably a vain hope—that
you and the administration would address that problem. You’re going
to be coming back here, I assume, given the close relationship between
the Joint Economic Committee and the Council of Economic Advisers,
repeatedly. W e are very pleased that you are here today and we expect
to pursue these problems from month to month, if not week to week,
fairly soon. Not knowing the facts or not having a position is not going
to be sufficient in responding to the committee, and you’re going to be
held to account.
What most concerns me about holding you to account is the fact
that less than 3 months ago you came before a congressional committee
and said the economy seemed about ready to recover; the unemploy­
ment rate went over the next 2y2 months from 9.8 percent to 10.8
percent, and yet you’re repeating that sad litany again this morning.
Many people are beginning to ask very seriously not when will the
recession end but if it will end, and that’s the fundamental question
that the administration has to confront in its economic policy.
Thank you, Mr. Chairman.
Representative R e u s s . Mr. Feldstein, I have to say that I think what
Senator Sarbanes just said represents not just his individual views
but the views of every single Democratic member of the Joint
Economic Committee and I hope it will be so taken.
Not to be purely negative, however, I do want to express agreement
with some of the points you have made. You testified this morning
that you oppose the taxation of unemployment compensation as a
method of making unemployment less attractive and I agree with
your testimony this morning very heartily.
Second, in November you produced a memorandum and recom­
mendation stating that the net result of the highway reconditioning
program financed by the 5-cent increase in the gasoline tax would
destroy more jobs than it created and thus be a bad bill, and I agree
with your recommendation of last month on that.


Third, I agree with what you said this morning that the Federal
Reserve in the last few months, in abandoning extreme monetarism
and letting the rate of creation of the monetary aggregates be well
above its professed target ranges, deserve bouquets rather than brick­
bats and I heartily agree with that.
On that point of monetary policy and having said what I just said,
I direct your attention to the fact that something awful, unless it’s
stopped, is going to start happening on January 1. The Federal
Reserve, pursuant to the statutory mandate, has currently presented
to the Congress and to the Nation its intention, starting January 1
and throughout 1983, of reducing the growth rate of the monetary
aggregates to much, much less than it has recently been. Specifically,
it would reduce the rate of growth of Ma to something like 4 percent.
That’s the midrange between 2.5 and 5.5 percent.
It is my view that such a new monetary policy starting 3 weeks
from now would be a disaster and that the Federal Reserve should
withdraw that intention and instead indicate that it is going to look
at all factors— monetary aggregates, total credit aggregates, interest
rates and everything else which it has to in order to have a sensible
monetary policy.
Do you agree or disagree?
Mr. F e l d s t e i n . I think that the Fed in setting its monetary targets
should look at— and I believe it does look at— a broad range of
economic information. I do not think that the Fed has abandoned its
basic position. I think that they have recognized structural reasons
why the basic relationship between Mt and the nominal GNP has
changed. Therefore, it is consistent with their basic approach. And I
think it would also be appropriate to consider that in looking at next
year’s targets.
Can I make one other brief comment? That is, you seemed to say
that I said previously that the administration’s highway bill was not a
good bill. I think it is a good bill. I think it is a good bill and I have
never said anything to the contrary. I think it is a bill which deals
with the problem of highways and bridges and, as the Washington
Post said in its editorial yesterday, that’s the way the bill should be
considered and it’s a good bill on that, account.
Representative R euss. Y o u resist the accolade which I retroactively
thrust upon you ?
Mr. F e ld s te in . I didn’t notice it was an accolade.
Representative R euss. Well, it was. I said that your November
memorandum was a masterly piece of forthrightness and insight, I
can’t say enough for it. It’s a tribute to you.
You use the word “structural” about everything nowadays. It’s
structural unemployment. It’s structural deficits. Now it’s structural
monetary policy.
Mr. F eldstein. Did I use that word structural in monetary policy ?
Representative R euss. Structural, smuctural. It really does no
credit. It’s not a tidy, orderly economic term.
Mr. F e ld s t e in . It i s . I think.
Representative R euss. A s a tidy, orderly economist, please don’t
use it before this committee. You didn’t quite answer my question,
though, which is— should the Federal Reserve promptly repudiate,
disavow", and withdraw its announced intention as of January 1,1983.


of reducing the rate of growth of Mi to the midpoint of a 2.5-5.5percent target range ?
Mr. F e ld s te in . I don’t think I, as a member of the administration,
should comment on the appropriate monetary growth rate of the
Representative R euss. You just have this morning. The administra­
tion does all the time and this committee welcomes it. You should
comment on it. So please comment on it.
Mr. F e ld s te in . I think I did comment that I think in the past
they have been doing a good job. My reading of the evidence is that
they have not changed their policy, but I don’t want to be in a position
of telling the Fed the growth rate of the monetary aggregates that
they should be following in the future. I ’m perfectly happy to do
that when I ’m a private citizen again, either before this committee
or in other ways, but I think while I am in a position in the admin­
istration it’s really inappropriate for me to do so.
Representative R euss. But it’s your administration which in its
February 18 economic recovery program set forth on page 68 that
the Federal Reserve should steadily reduce the rate of growth of
the monetary aggregates and thus it is in response to the Reagan
administration’s tight money policies that the Fed issued its announce­
ment of what it’s going to do in 1983. So, you or your administration
having caused the problem, don’t you want to take this last moment
of repentence and tell them to knock it off ?
Mr. F e ld s te in . What I would do without violating a rule I impose
on myself is to say that I concur in the Fed’s judgment as expressed
by Chairman Volcker that the relation between Mj and nominal GNP
has changed for various structural reasons. It’s likely to change further
because of the December 14 deregulation. Therefore purusing the
same monetary policy as they were pursuing before doesn’t mean
sticking to the same M, target that they announced earlier, I think
there’s no question about that.
Representative Reuss. Well, we’re getting a little better now. So
you agree that they should exorcise junk and repudiate their proposed
1983 monetary targets ?
Mr. F e ld s te in . No. I believe that they should in this case, as in
other cases, ask themselves w hat the relationship is lik ely to be between
nom inal GNP and the m onetary aggregates and on the basis o f that
consider whether adjustments should be m ade in the path o f the m one­
tary aggregates.
Representative R euss. Well, yes. I f they ask themselves they may

come up with a wrong answer. What would you say if they asked you
as a standard bearer of the administration’s economic policy, which
includes a mandate on Mt— what would you tell them ?
Mr. F e ld s te in . I would tell them they should examine all that evi­
dence. I really do not think it’s appropriate for me to be telling the
Fed what its policy should be.
Representative Reuss. Well, thanks for very little on that one, Con­
gressman Hawkins.
Representative H a w k in s. I have no further questions.
Representative R euss. Senator Sarbanes.
Senator Sarbanes. Chairman Feldstein, is it your view that the
administration should not indicate a public judgment about the policies
of the Federal Reserve, as to whether they’re appropriate or not ?


Mr. F e ld ste in . I think we should not provide specific targets for
monetary growth.
Senator Sarbanes. That ’s not the question I asked.
Mr. F e ld ste in . Well, the question you asked was should we express
judgments about the Fed.
Senator Sarbanes. Indicate policy judgments about the policies
followed by the Federal Reserve ?
Mr. F e ld s te in . Not in a way that would interfere with the inde­
pendent exercise of their judgment.
Senator Sarbanes. Do you think you can indicate policy judgments
about what they are doing without interfering with the independent
exercise of their judgment?
Mr. F e ld ste in . I would say over the last 2 years the Fed has gen­
erally followed an appropriate course. I think that that doesn’t inter­
fere with the decisions they will make at their next Open Market
Committee. So to that extent, yes. I f I said that I think in the last
3 months they have not allowed M this or M that to do this or that,
and that that’s inappropriate, that would be jawboning the Fed in
what I regard as an inappropriate way for someone in my current
Senator Sarbanes. I didn’t ask about you. I said the administration.
Do you draw a distinction between what you think you can say about
a policy judgment about the Fed and what the administration can say ?
Does the Secretary of the Treasury, for example, have more latitude
to express a policy judgment than you do ?
Mr. F e ld ste in . I ’m telling you the rules that I set for myself about
my own public statements.
Senator Sarbanes. I know, but if you’re going to set rules for your­
self, that may be inappropriate. You set some rules for yourself that
we had to address over the last couple of days leading to this hearing
and I ’m a little concerned about this self-imposed rule. That’s why I ’m
pursuing this questioning.
Mr. F e ld ste in . Well, you have to-----Senator Sarbanes. What about the President ? Let’s start at the top.
What about the President? Can the President express a policy judg­
ment about the policies followed by the Federal Reserve ?
Mr. F e ld ste in . I ’m not going to answer about what the President
can or should do. He obviously can do what he wants to in this regard.
Senator Sarbanes. Do you think the President can do what he
Mr. F e ld s te in . Don’t you ?
Senator Sarbanes. N o ; I think he’s bound by the laws and the
Mr. F e ld ste in . I agree with that.
Senator Sarbanes. And he has to act accordingly.
Mr. F e ld ste in . You’re right.
Senator Sarbanes. You agree with that ?
Mr. F e ld ste in . I do.
Senator Sarbanes. Thank you.
Representative Reuss. Well, Chairman Feldstein, I appreciate you
being here this morning and responding to the questions we asked
you. Senator Jepsen and Senator Sarbanes both mentioned that prior


to your being here this morning there was a little chin bruising going
back and forth between you and me and I ’m delighted you’re here.
Just one little thing I do want to clear up. Some of the press has
had stories in writing about our interchange of the last few days cul­
minating happily in your being here this morning. Some of the press
has mentioned anonymous sources in your office as having said— and I
don’t know if this is so or not— that I set the tentative hearing for
Monday of this week at 2 o’clock with knowledge that there was a
Cabinet meeting that you had to attend. That simply is not so. I f
inquiry among your staff suggests that I had any such knowledge, I
wish you would make it clear in the record. It’s not a big point, but in
the general interest of tidying things up, if I don’t hear from you, I
will assume that my version is correct. Very good. Good luck to you, sir.
Mr. F eld stein . Thank you and I ’m only sorry that you will not be
in the Chair when I have the pleasure of coming here, as I hope I will
soon, and saying that the economy is now in recovery irather than
ready to recover.
Representative Reuss. Thank you very much.
W e now stand in adjournment.
[Whereupon, a t 12:20 p.m., the committee adjourned, subject to
the call of the Chair.]