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On these two charts, No. 6 and No. 7, we have tried to estimate what the general trends of income will be, assuming an effective stabilization program, including revising tax rates as requested by the President.

Now, naturally, estimates of this kind are not exact. I would not be a bit surprised if every one of these estimated figures is 3 billion or 4 billion dollars off, one way or the other. But I do not think that makes much difference, because you are just trying to get a general impression of the magnitude of the problem, and you have to work with appraisals of the situation when you are talking about policy.

Now, look at chart 6. The estimates of national income assume that industrial prices will be held at approximately current levels. That has in turn an effect upon farm parity, even without getting into discussion of the farm-parity formula. That also has a profound effect upon wages. If industrial prices can be held, and profit margins are to a degree squeezed, you have a more manageable wagestabilization program.

Assuming an effective stabilization program, what you see is that from the first quarter of this year, which is now, until the first quarter of next year, the general estimate is—and I think I mentioned this is a round figure a few minutes ago—that the total of received national incomes-wages and salaries, corporate profits, farming, and other income which is noncorporate business, rents, and so forth—a prospective swelling of national income from the first quarter of this year to the first quarter of next year of somewhere in the range of an annual rate of 30 billion to 40 billion dollars. That assumes an effective stabilization program. The rise in income is mainly, though not entirely, associated with the rise in employment, working hours, and business sales. Some increase in wage rates is allowed for as provided by the wage formula. Likewise some further increase in farm income not entirely associated with rising farm output has been taken into account.

The CHAIRMAN. Where do you include forest products, lumber, and things of that nature--within the farm totals?

Mr. KEYSERLING. Yes; these items are in the farm total.
The CHAIRMAN. I was just wondering.

Mr. KEYSERLING. Income from these sources is included in farm income and, therefore, is in both national-income and personal-income totals.

The CHAIRMAN. That is very important, because those things have gone up materially, while other farm production, such as fruits, vegetables, and things of that kind, have not.

Mr. KEYSERLING. Look at the chart on national income, page 22 of the Economic Indicators, and the chart on personal income, page 24. Both of these include farm proprietors' income. These estimates of farm income are made by the Department of Commerce; they include income from the sales of lumber and other forest products. The estimates by the Department of Agriculture of farmers' cash income, page 28, also include income from these sources. The Department of Agriculture's figures on farm income are not adjusted for estimated changes in the value of inventories. Thus, they differ from the Department of Commerce's figures on farm proprietors' income, which are adjusted for inventory changes.

Now, in this last chart, No. 7, there is shown the so-called inflationary gap. That is the margin of discrepancy between received income

and available consumer supplies—in other words, the gap that is going to have to be closed in one way or another if you do not want to sanction and ratify increasing and roaring inflation.

This first bar in chart 7 is total personal income for the first quarter of this year. Consumer expenditures for this quarter were running at an annual rate of about 206 billion dollars, as shown in the bottom section of the bar. The top section represents existing taxes. The middle section represents personal net savings, which is, obviously, total personal income, less taxes, less expenditures.

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Now you come over to the first quarter of 1952, the second bar in chart 7. In broad outline, here is what you see: Total personal income will go up to around 265 billion to 270 billion dollars, for the various reasons I have given. You see your supply coming up somewhere in the neighborhood of an annual rate of 210-215 billion dollars. These estimates are based on an analysis of all factors, the size of the defense program, the size of the industrial mobilization build-up, etc.. The differential between the personal income that will be flowing to people—the amount which they will have available to spend-and what would have to be done to bring this spending somewhat down near the line on the chart that represents the available supplies is the change in saving

This top section assumes—whether contrary to fact or not is beside the point-prompt enactment of a 10-billion-dollar tax increase program. In other words, if that program were enacted, you would get by the first part of next year an amount equivalent to the size of the top section, which represents the tax take from personal incomes, as against an amount equivalent to the top section of the first bar, representing the tax take in the first quarter of this year. Even if you got that, you would have to multiply the rate of saving by about two in order to bring this consumer demand down to the level of supplies. In other words, with the rise in personal income, even if you get the increased tax program, you would still have to raise the level of personal saving from around 10 or 11 billion dollars, at an annual rate, to about 20–25 billion dollars, at an annual rate, to bring consumer demand down to the level of supply.

Senator Moody. You say two times. That would be roughly double?

Mr. KEYSERLING. That is right, probably a little more than double.

Now, that shows the enormous magnitude of this problem on the basis of, I again repeat, conservitative estimates.

These estimates assume an effective stabilization program for prices and wages. If you do not have an effective stabilization program, or in other words, if your prices and wages are moving upward, the length of this line goes far above where it is now drawn. Without an effective stabilization program, it probably would be impossible to get a sufficiently large tax program and large enough personal savings to bring your spending into line with your supply.

Now, in the second place, you need this enormous savings program, but how in the world are you going to get people to save more if prices and the cost of living are rising? The idea of doubling saving by the first quarter of next year is utterly fantastic and unrealistic unless you stop the price inflation. I think also there is running through the minds of some Members of Congress the thought that they are not going to be too hurried about imposing additional tax burdens on the average family while the cost of living is going up.

Of course, I think I ought to point out, to be perfectly frank with you, that it sounds inconsistent to have said some months ago, as most Members of Congress and nongovernmental economists and others were saying, that it would be literally impossible over a long period of time to stabilize prices and wages unless you raise taxes; and to say now, because the price-and-wage program has not resulted in full stability without raising taxes, that this is no time to raise taxes. That seems

to me to be circular reasoning, and, therefore, I would like to suggest you consider, although it is not expressly in the scope of this committee, that the underpinning for the effective control of inflation will be unsound without a realistic tax program, even after making such economies as the Congress can make in the expenditures of the Government. I recognize that even with those reductions the increased size of the defense program is going to increase the total budget by many billions of dollars, and that unless taxes are raised promptly-at least to the amount needed to put the defense program on a pay-as-you-go basis—it is not going to be feasible to achieve price-wage stabilization. Even if you achieved it you would still have these enormous inflationary pressures unless there were more taxes.

Senator Moody. Would you give us those figures at the top-your estimate of how much your income will be?

Mr. KEYSERLING. The figure for revenues from personal taxes is approximately 251/2 billion dollars, at an annual rate, in the first quarter of 1951.

Total personal income is in the range of an annual rate of 265 to 270 billion dollars in the first quarter of 1952. Currently it is running at a rate of about 240 billion dollars.

Senator DIRKSEN. Now, then, taxes are the first weapon that you suggest in this entire inflationary program?

Mr. KEYSERLING. Yes.

Senator DIRKSEN. I see in your statement, on page 9, "The basic pressures are inflationary and they will augment before many months have passed."

In other words, these pressures are on and they are increasing and they will increase in intensity ?

Mr. KEYSERLING. Yes.

Senator DIRKSEN. Now, then, at the bottom of the page, you say, “I am not predicting more inflation and much higher prices; I am merely predicting more inflationary pressures,” but there is not likely to be a tax bill for the next 6 months, certainly, so that what you are saying in effect, without saying it, is that there will be more inflation.

Mr. KEYSERLING. I am saying that if the program which would seem on analysis to be necessary to hold these pressures is not enacted the pressures will translate themselves into actual inflation.

Senator DIRKSEN. Which is another way of saying that there will be inflation ?

Mr. KEYSERLING. No, Senator Dirksen, because I have no competence in the field of appraisal as to what Congress will do and when.

Senator BENTON. But Senator Dirksen, who has confidence, has just told you there will be no tax bill for 6 months.

Mr. KEYSERLING. The Senator and I are equally competent to add 2 and 2 and get 4. If the necessary tax program is not enacted, there will be greater inflationary pressures.

Senator DIRKSEN (reading): I want to stress most emphatically that I am not predicting more inflation and much higher prices; I am merely predicting more inflationary pressures.

You say there will be more pressure?
Mr. KEYSERLING. Yes.

Senator DIRKSEN. Now, in the absence of the so-called stabilization program, that pressure translates itself into inflation, meaning higher prices.

Mr. KEYSERLING. That is correct.

Senator DIRKSEN. Now, with a tax bill not even out of the Ways and Means Committee in the House of Representatives, which must be translated into action on the House floor, go to the Senate Committee on Finance, come out on the Senate floor, go through conference and finally be decided by the President. You have been in Washington a long, long time, and you know the course of legislative procedure as well as any member of this committee; so, you can judge for yourself when a tax bill will go on the books.

In that interim period, the question then is what do we get?

Mr. KEYSERLING. Well, Senator, I think you have answered the question better than I could. I have maintained throughout that if the tax program does not keep pace with the need, it cannot serve its full purpose. It cannot serve its purposes merely by being talked about.

My statement may be disconcerting, but I do not think it is either inconsistent or strange. I am simply saying that we are going to have increased inflationary pressures, that I believe an effective program can hold them, but if that effective program is laggard, they will not be held.

Senator DIRKSEN. Mr. Keyserling, I think the great need at the moment is for some clarification of the confusion that exists not only in Washington but in the minds of the people everywhere. There are nearly 250 letters in my mail every morning with reference to high prices. People say there is a control program on the books, Why have these prices gone up? Certainly I cannot speak for Mr. DiSalle, but he will say, for instance, there are measures, but you can still look forward to high prices for some months to come.

Why can a clear-cut statement not be made to the American people as to precisely what they may expect in terms that they can understand?

Mr. KEYSERLING. Well, I am trying, along with your assistance, Senator Dirksen to contribute toward that end.

Senator DIRKSEN. But I am not the administration talking, and I am not in authority.

Mr. KEYSERLING. Well, I am not posing as authority, either.

Senator DIRKSEN, But you are at the right hand of the President, and that makes all the difference in the world.

Mr. KEYSERLING. Senator, I think you have made the point very clear that, if taxes lag, inflation will mount.

Senator DIRKSEN. Is it fair to let that go out as it stands?
Mr. KEYSERLING. As your statement?
Senator DIRKSEN. Yes.

Mr. KEYSERLING. I have no reviewing power with respect to your statements.

Senator DIRKSEN. That is true, but we are searching for the truth as best we can so there will be a clear impact of truth upon the thinking of the country so they know what to anticipate. I think we have got to do it.

Mr. KEYSERLING. If you are eliciting a statement from me, Senator Dirksen, I would stand on the statement that over a period of many months, to say the least, prompt and vigorous action has been urged on the tax front. I think that if it has not been taken, and if it is

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