THE 1972 MIDYEAR REVIEW OF THE ECONOMY

I. INTRODUCTION AND SUMMARY

The wide publicity given to the improvements in economic performance in the last few months should not delude the public into believing that all is well with the economy. For the last three years the economy has experienced a prolonged recession brought on through a deliberate policy of restricting the growth of output and of employment in the vain hope that this would reduce inflation. It is only because output was first allowed to fall $80 billion below its potential and unemployment forced to rise to 6 percent and remain there for 18 long months that the rapid growth of GNP and the small decline in unemployment in the last few months look like good news by comparison.

Unemployment is still far too high and without further policy efforts to reduce it, it will remain far too high throughout this year and next. Many observers are predicting unemployment rates above 5 percent throughout 1973. Some, including Administration officials, appear to accept this prospect with complacency.

We regard this outlook and this attitude of complacency as totally unacceptable. In the body of this report we outline a program for reducing unemployment to 4 percent within the next 18 months. To do so will not be easy. It will require rates of growth of real output seldom matched in our recent history over a period of that length. But the costs of unemployment both to the individuals affected and to the society at large are so enormous that we feel the objective is worth an extraordinary effort.

Nor should we be satisfied with a 4 percent unemployment rate, except as a short-run interim target. Our longer run objective should be an unemployment rate no higher than 3 percent. To achieve this objective and to do so within a context of reasonable price stability will require a sustained effort. There is no reason not to begin now. We We regret that the Administration has not seen fit either to endorse our targets for employment or to put forward alternatives of their

NOTES

Senator Sparkman states: "I am in agreement with much of the general emphasis of this report. However, because of my duties as Chairman of the Committee on Banking, Housing and Urban Affairs, it has been impossible for me to participate fully in the hearings and deliberations underlying this report. I do not believe it would be appropriate for me to take a position on the specific recommendations contained therein."

Representative Bolling could not participate fully in the midyear hearings and the preparation of this report due to the pressure of other responsibilities. He therefore reserves judgment on the recommendations made in this report.

own. We are reluctantly forced to the conclusion that they do not attach the same importance we do to providing jobs for all those able to work and seeking work.

The economic policies advocated by the Administration are unduly influenced by a fear of inflation and by a stubbornly held, but erroneous, belief that the way to control inflation is to restrict the growth of output and employment. We agree that inflation continues to be a most serious problem, but our best hopes for coming to grips with this problem lie in a rapid return to prosperity, accompanied by carefully formulated price and incomes policies.

We regret the silence of the Administration regarding the need for a price and incomes policy for the longer run. The present price and wage controls are a temporary expedient. They should not remain for long in their present form. But some form of continuing price and incomes policy will clearly be needed. In this report we outline the fundamental considerations of equity and effectiveness which should form a basis for this policy.

A summary of our major recommendations follows.

SUMMARY OF RECOMMENDATIONS

Employment

A reduction of unemployment to 4 percent remains an appropriate interim target. Policies should be directed toward achieving this target before the end of 1973. The Administration should either endorse this goal or offer a clear public explanation of why it is inappropriate.

An unemployment rate no higher than 3 percent remains an appropriate long-run target for the United States. If the necessary structural and institutional reforms are undertaken, this lower level of unemployment can be achieved and sustained in combination with reasonable price stability.

The Economic Outlook

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.

The Budget

The composition, as well as the total amount of Federal spending in fiscal 1973 must be such as to foster the needed growth of civilian employment. There should be a major expansion of the public service employment program. Military spending should be reduced below the levels projected by the Administration. With these military spending reductions, important social pro

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grams, such as water pollution control and adequate social security benefits can be financed within a budget total that is not inflationary.

Congress should not commit itself to an arbitrary expenditure limitation unrelated to the need to foster healthy economic growth and reduced unemployment and the need to reallocate expenditures toward high priority social objectives.1

Taxes

Tax increases should not take place while substantial unemployment remains. However, plans should be laid in 1973 to obtain additional revenues in 1974 or 1975, or as soon as the employment situation makes tax increases appropriate. The pretense that additional revenues will not be needed should be abandoned in favor of a constructive discussion of how these revenues can be obtained. A time-table for reducing unemployment below 4 percent should be established and the resultant addition to Federal revenues estimated. The revenue producing potential of tax reform should be evaluated, and reforms should be enacted in 1973 so that these additional revenues can be obtained in subsequent years. Needed revenues should be obtained through reform of the income and inheritance taxes, not through a regressive new tax such as the value added tax.

We urge that the review of the tax law presently being conducted by the Treasury be made available to the Congress at the time the President makes his tax recommendations, and that at the very least this review include detailed examination of the special provisions proposed for first year review in the Mills-Mansfield Tax Policy Review Act. Only if it has complete information can the Congress adequately appraise the President's proposals.

Senator Proxmire states: "I disagree. I favor a ceiling on expenditures. A ceiling below the Administration's $250 billion is feasible. Promptly ending the Vietnam war, cutting an additional 5 percent from other military spending, sharply reducing the space program, eliminating all of the foreign military aid programs, replacing the unilateral foreign aid development programs with multilateral assistance and eliminating waste and duplication from all domestic programs would leave sufficient funds to permit significant improvements in human programs within a ceiling of $240 billion.

"The economy can be expanded by stimulative monetary policy and by shifting resources to public service programs where a recent study by the Bureau of Labor Statistics suggests that for each dollar spent, almost twice as many jobs are created as for each dollar spent on defense purchases.

"Also, a ceiling is an efficient and desirable way to force both the executive and the legislative branch to select their priorities. Failure to impose a ceiling means our elected officials are throwing in the sponge because they lack the courage to say which programs can and must be cut back."

'Senator Proxmire states: "I disagree. See my footnote on budget policy indicating how funds can and should be secured for necessary new programs without a tax increase. There is far too much waste in every phase of the Federal Government to justify tax increases. If the Administration would adopt the same critical attitude towards military and space spending as they have toward spending for domestic social programs, funds would be readily available to meet our future needs."

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Monetary Policy

During the remainder of this year monetary policy should be conducted in such a way as to keep interest rates at or below their present levels and to provide adequate funds to all sectors of the economy, including housing, State and local government and small business.

Price and Incomes Policy

In developing price and incomes policy for the future, the emphasis should be on containing inflation in the concentrated sectors of the economy (big business and strong labor unions) and on mitigating supply shortages of specific commodities and services (such as health care, hides and lumber). This will require policies to make the economy more efficient, such as removal of import restrictions, effective enforcement of anti-trust laws, and reforms of government procurement. It will also require price and income guidelines. Temporary controls may be required at times for some commodities. Restriction of aggregate demand below the full employment level is both an ineffective and an unacceptably costly way to fight inflation.

Future policy must be fair and even-handed. Otherwise, there will not be the cooperation necessary to make policy work. The present policy appears to be controlling wages more firmly than prices. This is not fair, nor with its dampening effect on consumer spending, is it good economics. Certainly the Pay Board wage standard should not be revised downward in the absence of evidence that an equally stringent price standard can also be met.