LETTERS OF TRANSMITTAL

AUGUST 7, 1951.

" Members of the Joint Committee on the Economic Report: This committee was unanimous a year ago in recommending the doption of a formal pay-as-we-go policy to finance defense expendiures. It recommended economy in Government outlays for nonfense purposes and increased taxes to pay the increased costs of Parmament. This was done because the members of the committee ere convinced that it would be dangerous in the extreme to risk a new paredness deficit while old war debts remained unpaid. These ame considerations prompted the preparation and submission to the Congress this year of the formal annual report on the President's conomic Report. Again the committee was substantially in agreedent on its conclusions and recommendations.

Last year, following the original recommendation of this committee, w taxes were enacted raising new revenues; some nondefense exenditures were cut; and, although defense outlays were increased, the scal year 1951 ended with a budget surplus of $3.5 billion.

As of this date, however, the Congress has not yet completed action n two key subjects: appropriations for fiscal 1952, and an increase in axes to maintain the pay-as-we-go budget. The size of the budget is ill uncertain. Military requests-by far the largest item in the udget-do not include appropriations for the Korean War. The reparedness program, though not moving as rapidly as planned, is www making itself felt on the economy and as it moves into higher gear nd more nearly requires the 20 percent of the whole annual national tput as planned, Congress and the country will be face to face with he necessity of making a decision, either to maintain a formal pay-asgo policy or temporize with a weakened defense program. There can be no doubt that the country is a unit in its determination o resist Communist aggression by organizing the free world to defend self while at the same time seizing every honorable opportunity to revent a third world war. The principle the Nation has been acting n is that world peace can be won only by a rearmament program by rselves and our allies over a series of years on the theory that if the ree world continues to build up its military strength the Soviets will e deterred from starting an all-out war.

The Marshall plan is to be converted from economic to primarily litary assistance. Military expenditures here and in Europe, year fter year, will constitute an economic burden, the magnitude of which and the effect of which are perhaps not as clearly understood as they hould be. It cannot be doubted that Soviet policy is largely dictated oy the conviction that the free world cannot endure such expenditures or a period of years without economic collapse.

Although in recent months inflationary pressures in this country have eased due to the rapid increase in output of consumer goods last

fall and winter before defense demands had created a shortage materials, it is to be expected that rising defense production wi cause a cut-back in consumer supplies while at the same time increasin consumer demands and, as a result, cause inflation both here an abroad to be again a serious danger. The problem of Congress is determine how this danger may be counteracted.

In the belief that the Joint Committee on the Economic Repor will desire to review the economic situation as it now stands, I a transmitting herewith for the information of members of the con mittee and others interested a staff report entitled "National Defens and the Economic Outlook." This report attempts to present th most reliable estimates of the impact of the national defense progra on the economic outlook. It has been objectively prepared. Th basic data were drawn from Government and private publications an from staff conferences with technicians inside and outside the Govern ment. In part it brings up to date the staff study of February 23 1951, entitled "The Economic and Political Hazards of an Inflationar Defense Economy." It is now submitted to members of the com mittee for their consideration and such suggestions as they may wis to make. After committee members have had an opportunity t examine the report, it is my plan to call a committee meeting t discuss it. Copies of the President's Midyear Economic Report and the Second Quarterly Report of the Director of Defense Mobilization are also transmitted.

JOSEPH C. O'MAHONEY,

Chairman, Joint Committee on the Economic Report.

AUGUST 1, 1951.

Hon. JOSEPH C. O'MAHONEY,

Chairman, Joint Committee on the Economic Report,

United States Senate, Washington, D. C.

DEAR SENATOR O'MAHONEY: Last February the Joint Committee on the Economic Report issued a committee print entitled "The Economic and Political Hazards of an Inflationary Defense Economy. That document, prepared by the committee staff, indicated mounting inflationary pressures in the coming fiscal year. An economic model prepared on the basis of stated assumptions showed the likely trends of defense expenditures, production, and private demand. From these computations, estimates were derived of the inflationary pressures likely to be generated by excess consumer money demand and excess business spending. A corresponding quantitative appraisal was made of the effectiveness of various proposed stabilization measures to remove or neutralize such inflationary pressures.

The dangers of inflation during the next year of military build-up still loom large. There is transmitted herewith a revision of the February 1951 economic model for fiscal 1952 based upon recent studies by the committee staff. Unfortunately, official projections by those responsible for economic mobilization still have not been publicly presented in the detail needed for congressional action on major economic policies. To the extent that fragmentary projections have appeared recently from official administration sources, key statements are quoted in appendix B.

We emphasize that the projections set forth herein are on the basis of stated assumptions, and should not be interpreted as forecasts of what will actually happen. The basic assumption is that the defense build-up will proceed as currently scheduled or as the staff is able to interpret that schedule. We have not set forth detailed projections for alternative assumptions, but the economic results of such changed programs are alluded to in the text of this report.

One further word with respect to the use of these data. While it is necessary to use detailed and precise figures to arrive at an economic model which will check internally, we emphasize that the only purpose of a model, once prepared, is to show quantitatively the general order of magnitude of possible major economic developments on the basis of stated assumptions.

The detailed job of projecting the quantitative data was done by James W. Knowles; other members of the staff participated in analyzing the data and in preparing the report. These materials are submitted, therefore, as the composite views of the committee's professional staff. We have had the help and cooperation of technicians in the executive agencies and others outside the Government in the development of these materials.

Respectfully submitted.

GROVER W. ENSLEY,
Staff Director.

NATIONAL DEFENSE AND THE ECONOMIC

OUTLOOK

SUMMARY

This report presents economic data intended to be helpful to the Congress in considering legislation in two major areas in which action is scheduled before the congressional recess: (1) the 1952 appropriation and foreign-aid bills which, allowing for prospective lags in deliveries of military goods, may result in a level of Federal expenditures n fiscal year 1952 of $68.4 billion according to latest estimates of the Bureau of the Budget, and (2) the proposed increase in taxes with the hope of closing the consumer inflationary gap, estimated at $5 billion for the fiscal year 1952, and of balancing the administrative budget which, on the basis of the Bureau of the Budget estimates of expenditures and committee staff estimates of revenues under present tax Laws, shows a deficit of $7 billion for fiscal 1952.

The first half year of the defense economy (beginning July 1950) witnessed inflation at a rate equaled in recent American history only by the period following decontrol in 1946. The cost of living increased by 6.7 percent in 6 months and by 9 percent in 11 months. Wholesale prices increased by 14.5 percent between June 1950 and January 1951 and later reached a peak of 17 percent above June 1950. Prices have temporarily leveled off since March. The June Consumers' Price Index showed a decline of 0.1 percent. The temporary excess of nventories together with wage and price control programs and dislocations as production shifts from civilian to defense goods may result for awhile in price stability and even in further declines in some commodities.

Inflationary pressures of the past year have been largely specuative an anticipation by consumers and business of what might hapPrices are now weakening because the anticipations of consumers and business were excessive.

The economic hazards of the next 2 years are those of an economy in which the pressures for higher prices are not speculative but fondamental; not anticipatory but arise out of increases in basic costs and in demand which the existence of some excess money income permits to be passed on to final buyers in higher prices. There will be this pressure unless conditions warrant a reduction in the military program. But responsible civilian and military leaders have indicated repeatedly that nothing on the international horizon would warrant any let-up in the military program. On the contrary, the President tates in his recent Midyear Economic Report that:

We are reviewing our immediate goals for military strength, and it is quite possible that we shall have to raise them in several important respects (p. 3).

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