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not taken, the Nation will pay the penalty. That is as clear and simple as I can make it.
Senator DIRKSEN. In the absence of a tax program, do you anticipate higher prices steadily in the months ahead as the defense program has a greater impact ?
Mr. KEYSERLING. I do not expect steadily higher prices, because as I have said there may be reasons over a month or two or three for a wavering in the trend. I think it is pretentious to say one knows just what will happen in each month, and I do not pretend to know. You could possibly have in the next few months some light drop in prices, or a level line of prices, or some increases in prices. But I will stand on the proposition that, with the Government deficit grow. ing as it will grow without sufficient tax increases now, with the defense program
expanding as it must if the job is to be done, with personal incomes rising as they will, and with people receiving incomes which in the long run they will try to spend although they may vary from week to week and from month to month—with all these things happening, if the main weapon in the anti-inflationary programnamely, higher taxes--is not brought to bear, we will certainly have very strong uncontained inflationary pressures, and strong uncontained inflationary pressures mean higher prices.
Senator BENTON. How do you double the savings, even assuming you get the tax bill?
Mr. KEYSERLING. The savings figure is not set forth as a prediction; it is set forth as a measurement of how much saving there would have to be to close the inflationary gap, even with the increased taxes.
Senator Moody. Is it not true that you have the same effect, inflationwise, if you increase savings that much more than increase taxes? If you keep it out of the buying stream, if you increase savings three times, that will have the same effect !
Mr. KEYSERLING. In its immediate impact; yes. In the long-range impact, when you start releasing savings again, that might be a different story. But in the short run; yes, it would have the same effect.
Let me make this point to answer the question on the tax issue. I am saying as an individual that I think we need more taxes in this situation, and need them now.
Senator BENTON. And fast?
Mr. KEYSERLING. That is about as clear as I can make it. If there is something else I can add, I would be glad to.
Senator ÕIRKSEN. You assumed three things could happen if other things happened.
Mr. KEYSERLING. That is not what I said. I said that in the very short run, over the next month or two or three, nobody can predict what is going to happen each month, but that in the long run it seems very clear on analysis that the inflationary pressures will be upward, and that prices will rise unless there is an anti-inflationary program of sufficient strength.
Senator DIRKSEN. So instead of a straight line, it will be wavy, undulating inflation?
Mr. KEYSERLING. Oh, I think most of the time a line moves in a waving fashion. I think that is generally true.
Senator BENTON. Were you finished on the middle bar of chart 7?
Mr. KEYSERLING. What I want to say about the middle bar, which represents personal net saving, is this: The assumption of a tax
program of this weight, since I realize as a practical person that it is a bigger assumption than in effect is being achieved, simply high lights how serious the problem is.
Senator SCHOEPPEL. Before you leave the tax picture, Mr. Keyserling, and that chart you have on taxes, is it fair to assume that we cannot reach that increase in savings without some enforced saving program, or inducement by way of higher interest rates?
Mr. KEYSERLING. Let me try to answer that. This figure on saving is not a prediction of how much saving there will be. It is merely a statement to show the magnitude of the problem by indicating how much saving there would have to be to close the inflationary gap even if you had this amount of taxes.
Now, if you ask me whether I think there will be this much saving, I think not.
The problem of getting high saving brings me to the question of price and wage controls.
It seems to me, whatever might be the long-run situation, thinking in terms of years, that a well-managed, well-operated price and wagecontrol program is one of the necessary elements in stabilization at this time. However far short you might fall of getting this amount of saving under an effective stabilization program, clearly you are not going to get it if the cost of living keeps moving upward. In other words, from the point of view of achieving your savings program and from the point of view, I think, of achieving a reasonable tax program, your price and wage-control program is an immediate stabilizing device for a time and is a very essential part of the whole effort. In other words, you cannot rely exclusively on taxes. You cannot rely exclusively on credit, or on savings. You cannot rely exclusively on price and wage controls. I think in the current situation you need them in combination.
The CHAIRMAN. Before going any further, let me make a short statement:
We have been here all day and, unfortunately, I have people from out of town who wish to see me, and I am going to ask to be excused.
I hate to leave, because I am deeply interested in what you have to say, but I will read the record.
As you all know, we are not going to meet tomorrow, because Mr. Dawson is coming down on RFC. We will have a very important meeting on Friday, when we will have Mr. Martin, Chairman of the Federal Reserve Board. That will be Friday morning at 10:30.
Senator DIRKSEN. Mr. Keyserling, may I make one suggestion In this so-called program of essential elements in anti-inflationary programs, you are getting down now to wage and price controls. You have more or less disposed of taxes, but your No. 1 there was cutting out nonessential expenditures. I wonder if you wouldn't touch upon that for a moment!
Mr. KEYSERLING. I would be glad to do that. Could I just finish off this chart 7 and put it aside, sir?
Senator DIRKSEN. I thought for interest of continuity in your statement
Senator BENTON. I wish you would finish the question first on this middle bar, personal net saving.
Mr. KEYSERLING. The question on the middle bar is this: I was making the point that you had to add a heavy and larger level of taxation, and a heavy and larger level of saving to close this horrifying inflationary gap.
I don't see how you can expect anything like this level of saving unless you make some demonstration that you are holding the line on prices.
Now, you have a question of which comes first, the chicken or the egg. Theoretically, if you have savings and taxes, you wouldn't have the pressure on prices. But when you look at it realistically in terms of dynamics of the American economy, you cannot expect people to start saving at a greatly increased rate when every day they see prices going up and think they are going up further. Therefore, as I look at it, whatever might be said about price and wage controls, and certainly I agree with Senator Bricker or any other Senator at this table that they have no place in normal peacetime, I think frankly that they have a place in this particular problem at this particular juncture, because while they are not entirely effective, they do put important brakes upon the upward rise of prices and the cost of living.
You need your savings and tax program, and therefore I say in answer to the question raised by Senator Schoeppel and Senator Benton that the first step toward getting an effective savings program is to get an effective price stabilization program at least for a while, because otherwise it is just pious nonsense to ask people to save more.
Second, the volume of saving depends on the vigor and enthusiasm and administrative skill with which public officials must push the savings program throughout the country.
A third method of inducing saving is in connection with wages. The Council has said in our various published reports that some further ingenuity has to be shown, not just a simple following of what we did in World War II, which in part is relevant but in part irrelevant. We have a new kind of situation now in trying to channel more of wages into savings.
Let me illustrate that. It gets a little into the wage problem.
If you look at it simply from viewpoint of controlling inflation, since you are not going to have an increase in civilian supplies over the next year, two, or three, and since you are going to have increases in total wages through more employment, and through longer hours, and so forth, it would seem, on pure economic analysis, that you shouldn't have any increases in wage rates over the next two or three years. That would be the sheer economics of it.
However, if you realize that there is more than economics to it-or to put it another way, if you realize that incentives on one hand and equity on the other hand are also a part of the economic system, how are you going to be able to get labor to strain for increased productivity over the next two or three years if you say to them that they are not to get that reward for doing a better job (which we have come to accept in our system) in the form of increased rates of pay?
Therefore, you have the problem of trying to reconcile the maintenance of the incentive function and the production function in the wage structure with the problem of preventing inflation.
One of the best answers to that is savings, savings which could best be made at the point of payment. In other words, if you could pay
wage increases, reflecting increased productivity and as incentives, in the form of a saving or a dividend payment rather than in the form of something going immediately into the spending stream, you would partly serve both of your objectives, the objectives of incentive and equity, and of fighting inflation.
One part that public policy has to play in this problem is social security. There are certain types of social-security programs which are definitely anti-inflationary in this situation, because they channel a part of the increased productivity of the economy into deferred spending. In other words, you put it away instead of spending it now. Other
things that might be tried in that connection are at the industry level as distinguished from the government level. I think that those immediately responsible for wage policy and wage stabilization, and we on the Council, would be very well advised to give a good deal' more attention and a good deal more energy to this problem of trying to work out some reconciliation of wage stabilization with incentives for a long, hard pull. We should put a lot of emphasis on exploring how far we can go with these savings programs. I'think that in the kind of long, hard pull that we face, a lot of attention to some of these key problems on an imaginative basis
Senator BENTON. You get a new word for the word “force” Senator Schoeppel used; do the same thing, but get a better word for it.
Mr. KEYSERLING. Well, the savings are "forced" in the sense that there is an element of compulsion. Forced savings are used in our social security system. Conceivably, the Government could enact legislation for forced savings as distinguished from taxation. Senator BENTON. You call them incentive savings. Mr. KEYSERLING. I would not advocate that at this time.
Senator BRICKER. Talking about incentive in production, I think that is a very real thing and should be supported to the limit. Isn't the same factor important in your savings program, that incentive coming from two sources: One of them is the return upon savings, investment opportunities in Government securities. That would be dependent upon two things, upon the return that is given, and upon a general feeling or understanding that there isn't going to be further adulteration of the dollar. That they are not going to get out of those savings less money than they put into them.
The incentive to that is they are going to get some return on the money they put into business.
Mr. KEYSERLING. I think you are absolutely right about that, Senator, and that is why I think we must have a rounded anti-inflationary program. In other words, if you say that the anti-inflationary program should consist entirely of encouraging savings, you get this question of why should we save if the dollar is going to be worth less.
If you want to keep the dollar from being worth less, then you must take other measures, including taxation, to keep your demand in line with your supply. If your demand goes too much above your supply, the value of the dollar is going to deteriorate.
Senator BRICKER. People are not going to put their money into insurance today if they don't think they are going to get back a reasonable portion of that dollar when it comes to the ultimate payment.
Mr. KEYSERLING. Let me go back to a question, Senator, which you raised earlier:
You asked how much control we could stand without going totalitarian. I am just as concerned about that as you are, and I know everybody around this table is.
However, I do not think that you have more danger of totalitarianism by adopting a rounded program, for this reason: If you adopt and affirm a rounded anti-inflationary program, which includes taxation, and credit controls, and savings, and price and wage controls for this particular kind of situation
Senator BENTON. You mean forced savings, or incentive savings, or compulsory savings?
Mr. KEYSERLING. I want to make it clear I am not, at this time, advocating forced private savings.
Senator SCHOEPPEL. Neither am I.
Senator BENTON. What is the significance? You mean the socialsecurity type of savings?
Mr. KEYSERLING. Social security is a forced saving. It is a saving required by law, an action of the Congress. But I am not, at this stage, advocating forced private savings as distinguished from social security. I think there should be voluntary private savings. At the present time, rather than a forced savings program, I would prefer higher taxes.
Senator BENTON. I thought the significance of your suggestion that increases of salary coming through incentives and increased production be paid in the form of deferred payments
Mr. KEYSERLING. I wouldn't want such deferred payments to be forced in the sense of being required by law. I would want them to come through voluntary action and agreement of industry and labor.
Senator BENTON. You would do that only in full agreement with the recipient?
Mr. KEYSERLING. Yes, for the time being.
Mr. KEYSERLING. Something of that kind, or in the form of voluntary fringe benefits which do not enter into the spending stream immediately
Senator BENTON. A larger take through the medium of social security, or a kindred plan which would be forced on and accommodated at the Federal level you would favor?
Mr. KEYSERLING. I would favor those kinds of social security which are anti-inflationary, because they withdraw rather than add money to the spending stream.
Now, I would not see any harm in a wage-stabilization agency interjecting the form of payment of a wage increase as one of the criteria for approving a wage increase as an incentive payment. In other words, I would not see anything wrong in refusing to approve wage increases that would enter into the immediate spending stream, but allowing increases in the form of deferred payments for use when the defense burden shrinks.
Senator DIRKSEN. Two problems arise. First, you have the same impact upon the goods which are produced, whether direct or indirect.
Mr. KEYSERLING. You are absolutely right about that, Senator. In either event the amount of wage increase would have to be subject to the criteria that it didn't break through the price ceiling from the cost side.