650 1967 '68 '69 '70 '71 '72 '73 '74 '75 '76 '77 '78 '79 1980 of the outlook or, more probably, do not share our conviction that unemployment can and should be reduced to 4 percent within the next 18 months. The indications are that several important sectors of the private economy, including residential construction and business investment, may show less vigorous growth in the second half of the year than they have in the first. As shown in Table 2, housing starts and residential building permits were fewer in the second quarter than the first, pointing to a leveling off or even a decline in residential construction activity in future quarters. The latest available Commerce Department survey indicates that businessmen anticipate a leveling off of plant and equipment expenditures in the second half. Revised data show that the ratio of manufacturing and trade inventories to sales is higher than previously believed, suggesting that inventory accumulation in the second half may be less than many analysts previously expected. TABLE 2.-HOUSING STARTS AND BUILDING PERMITS Consumer spending is always difficult to predict. Increased social security benefits will be a stimulus to consumer spending. On the other hand, the increase in real compensation per man hour for workers in the private nonfarm economy was very small in the second quarter, apparently indicating that the Phase II controls are more effective on wages than on prices. If this hold-down of real wages persists, it will have a dampening effect on consumer spending. Consumer spending advanced rapidly in the first half. There seems little reason to expect that it could advance even more rapidly in the second so as to offset the expected slower growth of residential construction and business invest ment. On balance then, growth of the private economy will probably be somewhat slower in the second half than it was in the first. What about the government sector? Federal purchases, which increased very rapidly in the first half, will grow much less, if at all, in the second. State and local government purchases will continue and perhaps accelerate their growth, but the severe budget constraint faced by most of these governments places a limit on how fast these expenditures can increase. In sum, a satisfactory rate of real output growth in the months ahead is by no means assured. At the end of this year, unemployment will still be far too high and the economy will still be operating far below its potential. The first task of economic policy is to sustain steady and rapid progress toward genuinely full employment. The recovery must not be choked off by premature moves toward monetary and fiscal restraint. 82-233 0-723 III. POLICIES FOR FULL EMPLOYMENT WITHOUT INFLATION As discussed in the previous chapter, a reduction in the unemployment rate to 4 percent within the next 18 months is both possible and desirable. This objective can be achieved only through a carefully designed program of fiscal and monetary stimulus coupled with an effective set of policies to control inflation. The longer-term objective of further reducing unemployment to 3 percent or less will also require a carefully co-ordinated and sustained policy effort. This chapter outlines the policies we judge to be appropriate during the next year to 18 months. THE FISCAL 1973 BUDGET The 1973 fiscal year began last July 1 with unemployment still at 52 percent. The Federal budget for fiscal 1973 should be designed to foster a rapid reduction in this unemployment. An appropriately stimulative budget will not be inflationary at a time when millions of workers remain unemployed and when manufacturing plant capacity utilization is still only 76 percent. It must be stressed that the composition as well as the total amount. of spending vitally influences the job creating impact of Federal expenditures. Data supplied by the Bureau of Labor Statistics show, for example, that on the average a billion dollars spent on defense purchases creates less than 60 thousand jobs, whereas a billion dollars of State and local expenditure on education creates over 100,000 jobs. These estimates refer to average rather than incremental spending. Further studies of the job-creating impact of various categories of additional expenditure are urgently needed. Nonetheless, these available data dramatically illustrate that how Federal money is spent does make a major difference in the number of jobs created. Furthermore, some expenditures are more inflationary than others. Defense spending may create jobs and add to personal incomes and consumer demand. However, such spending contributes nothing to the production of civilian goods to satisfy this increased demand. Expenditure on public service employment, on the other hand, can put idle labor resources into productive use meeting civilian needs. Expenditures on education and training have throughout our history contributed in a major way to increased productivity. Such expenditures, therefore, make an important long-run contribution to our ability to sustain full employment without inflation. The composition, as well as the total amount, of Federal Public Service Employment The existing public service employment program, initiated by Congress over Administration objections, was providing employment for 168,000 persons at the end of fiscal 1972. The present authorization provides $1.25 billion for fiscal 1973, which will continue to finance these jobs for an additional year, but will not allow for any expansion. Given the continued high level of unemployment, this is far too modest a program. The machinery for administering public service employment is already in existence and a major expansion should be possible without undue loss of administrative efficiency. A program to create a total of 500,000 jobs would certainly not be excessive. If, as we hope, unemployment can be reduced to about 4 percent by late next year, the level of public service employment expenditure can be cut back as more jobs become available in the private sector. To the maximum extent possible emergency public service jobs should provide experience and skill training which will enable individuals to find permanent employment. Defense Spending The Administration's fiscal 1973 budget originally requested $83.4 billion in spending authority for military and military assistance programs, an increase of $6 billion over the previous year. Subsequent requests for supplemental spending authority brought this total to $85.9 billion. Congressional authorizing actions to date have reduced this total by $2.4 billion. Appropriations decisions are yet to be made, but it seems probable that appropriations will also be cut significantly below the Administration request. Even so, there will, in our judgment, be room for additional saving through Presidential restraint in the expenditure of appropriated funds. We find it strange that the Administration's professed concern over increases in Federal spending, a concern which has led them to urge Congress to enact a flat ceiling on 1973 expenditures, is not reflected in any Administration effort to hold down defense spending. Not only has there been the large increase in requested future spending authority, but current outlays, as shown in the Government sector of the national income accounts have been rising extremely rapidly. Defense purchases increased at a 19 percent rate between the second half of calendar 1971 and the first half of 1972. If the Administration seriously wishes to restrict expenditures, defense spending is the place to start. The President has recently urged Congress to enact a ceiling of $250 billion on Federal expenditures in fiscal 1973. This Committee would welcome a properly arrived at limitation on expenditures, and indeed, we have repeatedly urged that Congressional procedures for establishing such a limitation be established. At present, however, Congress 1 Atomic energy and other defense related activities brought the total original request for defense spending authority to $85.4 billion. This figure includes about $970 million in authorization requests for military activity in Southeast Asia which were received too late for inclusion in the regular authorization bill and may be reconsidered later. Senator Proxmire states: "I disagree with this section. See my footnote on budget policy on p. 3." lacks such procedures, and procedural reforms, no matter how promptly undertaken, could scarcely be made to apply to this year's budget. An arbitrary expenditure ceiling dictated by the President is no substitute for an orderly deliberative process which would establish both the level and the composition of Federal spending appropriate for meeting the highest priority public needs in a manner consistent with meeting employment and price stability goals. The President's request for an arbitrary expenditure ceiling of $250 billion should be rejected both because this is not an expenditure total designed to promote rapid reduction of unemployment and because all the indications are that, within this total, important civilian programs would be sacrificed in favor of what we consider excessive military expenditures. The President has justified his request for a ceiling on the grounds that higher Federal spending would be inflationary. Deficit spending at a time when the economy is already at full employment can indeed be inflationary. But the economy will not approach full employment during the current fiscal year. One of the most effective anti-inflationary actions available is to hasten the return to full employment, thus putting more of our citizens productively to work. Administration officials failed to respond to our requests for an analysis of the employment impact of the requested expenditure ceiling. Private witnesses who testified at our mid-year hearings stated that expenditures in excess of the proposed ceiling-perhaps by as much as $10 billion— would hasten the return to full employment without generating additional inflation, provided these expenditures were directed toward domestic social objectives. The "full employment" budget is a useful analytic device for measuring the stimulus contained in the budget. The Administration is to be commended for publishing full employment budget estimates. No arbitrary rule such as "full employment balance" will suffice, however, to determine the expenditure level best designed to reduce unemployment. It should be noted also that, were the economy at the 3 percent unemployment level which this Committee regards as a more appropriate long-range target, fiscal 1973 receipts might be as much as $257 to $260 billion, which is approximately the expenditure level our private witnesses judged appropriate. Equally as disturbing as its failure to justify the recommended expenditure total is the Administration's failure to be specific as to the composition of spending. The Administration urges Congress to spend less, but refuses to specify where cuts can be made. Undoubtedly the Federal budget is riddled with wasteful expenditures, civilian as well as military, but the Administration is unwilling to take the politically unpopular step of stating what should be eliminated. Congress cannot make a well informed decision on an expenditure ceiling unless it is known what programs will have to be eliminated, or cut back. Congress should not commit itself to an arbitrary expendi- |