THE 1967 ECONOMIC REPORT OF THE PRESIDENT THURSDAY, FEBRUARY 2, 1967 CONGRESS OF THE UNITED STATES, The joint committee met at 10:10 a.m., pursuant to call, in room S-228, the Capitol, Hon. William Proxmire (chairman of the joint committee) presiding. Present: Senators Proxmire, Talmadge, Ribicoff, Javits, Jordan of Idaho, and Percy; and Representatives Reuss, Moorhead, Widnall, Rumsfeld, and Brock. Also present: John R. Stark, executive director; James W. Knowles, director of research; and Donald A. Webster, minority economist. Chairman PROXMIRE. The meeting will come to order. This is the first meeting of the Joint Economic Committee of the 90th Congress and I would like first to welcome our new members. I think we are fortunate in getting the quality and caliber as well as the number of new members. The Joint Economic Committee has been expanded from 16 to 20 and we have some of the outstanding Members of the Congress, in many cases recognized as such throughout the country, as new members of this committee. Some of them are not here. I am going to mention their names even though they are not here. Senator Symington had to be in Armed Services Committee this morning. They are holding hearings on the Air Force and, of course, he is the outstanding expert in the Senate in this area. Senator Percy, I believe, will be here later. He has been momentarily delayed. Other new members of the Joint Economic Committee are here: Senator Ribicoff, Congressman Moorhead, Congressman Rumsfeld, and Congressman Brock. I would like to note that the staff of the Joint Economic Committee has prepared under Wright Patman, our eminent vice chairman, a 10year projection of our economy which tries to explore its potential and some of the problems that can be expected over the next decade. It will be officially released tomorrow morning, Friday, February 3. I will not attempt to prerelease it here other than to say the problems set forth in the study do not offer any promise that the Joint Economic Committee's load will be lightened over the course of the future. One other item I would like to call attention to, a "Fact Book" which appears on the desk of each member of the committee. It was compiled and prepared by our Joint Economic Committee staff to provide factual information on the economy and the subject of our current inquiry. It also contains at the end of each section questions which were suggested to the staff in reading the Economic Report of 1 the President and the Annual Report of the Council of Economic Advisers, and in considering the present state of the economy. I believe it would be advisable to insert at this point in the record the press releases announcing these hearings including the witnesses who will appear. CONGRESS OF THE UNITED STATES JOINT ECONOMIC COMMITTEE SENATOR WILLIAM PROXMIRE ANNOUNCES HEARINGS ON THE 1967 ECONOMIC REPORT OF THE PRESIDENT Senator William Proxmire (D., Wis.), Chairman of the Joint Economic Committee, today announced that early in February seven Government officials would testify before the Joint Economic Committee on the President's 1967 Economic Report. The committee is charged by law with the responsibility for reviewing the President's Economic Report and submitting to the Congress its own evaluation of that Report, along with recommendations for maintaining maximum employment and economic growth. The hearings will be held in Room S-228 (Old Supreme Court Chamber) of the Capitol. The witnesses are as follows: Thursday, February 2—10:00 a.m. Council of Economic Advisers: James S. Duesenberry, Member. Friday, February 3-10:00 a.m. The 1968 Budget. Charles L. Schultze, Director, Bureau of the Budget. Monday, February 6--10:00 a.m. Henry H. Fowler, Secretary of the Treasury. Tuesday, February 7-10:00 a.m. Alexander B. Trowbridge, Acting Secretary of Commerce. Tuesday, February 7—2:00 p.m. W. Willard Wirtz, Secretary of Labor. Wednesday, February 8-10:00 a.m. John W. Gardner, Secretary of Health, Education, and Welfare. Thursday, February 9-10:00 a.m. William McChesney Martin, Chairman of the Board of Governors of the Federal Reserve System. Senator Proxmire indicated that several additional days of hearings would be held after the Lincoln Birthday recess to hear the views of other invited witnesses on the subject of the economy and the President's recommendations. These will be announced later. I am also happy not only to welcome our new members but to welcome the extremely competent and able Chairman of the Council of Economic Advisers, recognized not only in economic circles but throughout the country as a man of great ability, and a man who has contributed immeasurably to our economy. We are very grateful to you, Chairman Ackley, for your brief statement. This is the most concise and to the point statement that has been delivered to this committee not only by the Council, but by any other group or single witness in my knowledge. We welcome you. We will have a number of questions to ask and even though all the members of the committee are not here at this time, I know others will be coming in later. I would like now to yield to the senior Republican, Senator Javits, who I understand has a statement. OPENING STATEMENT OF HON. JACOB K. JAVITS, A U.S. SENATOR FROM THE STATE OF NEW YORK, ON BEHALF OF THE MINORITY Senator JAVITS. Thank you very much, Mr. Chairman. I make this statement on behalf of the minority members of the Joint Economic Committee in place of Congressman Curtis, who under our practice is this time the ranking minority member, and who today must necessarily be at the Ways and Means Committee meeting. In the coming year the economy must walk a tightrope to avoid falling into a recession, on the one side, or more serious inflation on the other. This precarious balancing act has been precipitated by the administration's day-to-day policymaking by expediency in 1966. Through fancy fiscal and budgetary footwork, the administration last year made it appear that it was working to slow down the steep climb in consumer prices and restrain the excessive growth in aggregate demand. It speeded up tax collections, rescinded excise tax cuts, sold $3.9 billion of participation certificates, made unusually large profits on seigniorage, suspended the investment tax credit and accelerated depreciation on buildings and promised substantial cuts in spending which have never been documented. All these devices were employed to obscure the Government's inflationary impact on the economy. As if this were not enough, the administration's military spending estimates were based on the untenable assumption that the Vietnam war would end this summer. The result was a $10 billion underestimate in defense spending. With restraint lacking on the fiscal side, either from genuine spending cuts or a modest tax increase early in the year, monetary policy necessarily was drawn in to fill the vacuum. The tight money policy followed by the Federal Reserve was accentuated by the administration's own policy of accelerating tax payments and selling participation certificates. The results of the administration's overall economic policy were predictable. The boom rolled on, prices increased sharply, the economy suffered from the highest interest rates in 40 years, a near financial panic occurred in the late summer, the residential construction industry fell into recession and the trade surplus shrank dramatically. The imbalances that the administration's unbalanced policies built into the economy last year are likely to be more damaging and more general this year. The outlook now is for inflationary pressures from the cost side, a rash of serious labor disputes, a marked slowing, or possibly a downturn, in business activity, the danger of an increase in unemployment, some worsening in the balance of payments, and aggravation of the cost-price squeeze on agriculture. Neither in its budget nor its economic message does the administration demonstrate that it is prepared to meet the challenges arising from its mismanagement of policy last year. Can the administration demonstrate that it has improved its forecasting techniques, or the reliability of its budgetary estimates or the coordination of policy between the Pentagon and the economic policymakers? We are asked to believe that the administration's policy prescriptions for the coming year are designed with precision to save the economy from the Scylla of inflation and the Charybdis of recession. As a matter of fact, it looks as though we may be heading for both at the same time. Yet, the administration's approach to our economic dilemmas is unpromising from the start. Its request for a 6-percent tax surcharge is based on the assumption that economic activity will slow in the first half of the year but resume a strong rise in the second half, with 4 percent real growth for the year as a whole. The opinion of many private economists is that real growth will total much less than 4 percent and that the pattern of the advance will be just the opposite to that predicted by the administration. Many private economists believe that activity will continue its rise in the first half of the year, and then level off in the second half as suspension of the investment tax credit discourages business spending and as defense outlays, hopefully, taper off. Even more to the point, the tax increase seems solely designed to offset the inflationary impact of the large increase in social security benefits requested by the administration. Since some increase in social security benefits is likely to be passed by the Congress, while the fate of the tax surcharge is in doubt, the budget could well be more expansionary than already planned. If fiscal policy is expansionary-even with a tax increase-how does the administration hope to stop inflation? It accepts the likelihood that wage settlements will exceed the guideposts this year, as they did in 1966. In fact, settlements could well exceed the 5 percent pattern of advance recorded last year, in spite of the administration's plea that labor not try to compensate for all of the increase in prices. Business is supposed to provide the first line of defense against inflation by absorbing cost increases and shaving profit margins. But consider the current and prospective pressures on profit margins. With the growth of sales slowing down, there will be little or no increase in pretax profits this year, and profits in the fourth quarter of 1966 already appear somewhat disappointing. Business also has lost the investment tax credit and accelerated depreciation in buildings; it is paying higher payroll taxes for social security this year, and major boosts are in store next year; the President has asked for further accelerated taxpayments on top of a corporate tax increase; and finally there is an 11-percent increase in the minimum wage this year. Is it realistic to hope that business can absorb further cost increases? With business spending for plant and equipment already weakening, too great a squeeze on profits could lead to a capital goods recession that could spread throughout the entire economy. The following other contradictions in the administration's policies should be noted: First, the administration believes that interest rates should be lowered in order to correct the distortions and imbalances which arose from its high interest rate policy of last year. Yet based on conservative estimates, it proposes $9.4 billion in regular Treasury borrowing, net agency borrowing, and participation sales. The result of these Federal activities in the financial markets will make it difficult, if not impossible, to lower interest rates by any meaningful amount. Second, if the administration is successful in reducing interest rates, it is likely to create a further deterioration in our balance of payments this year in the absence of a sounder fiscal policy. The administration's goal to lower interest rates, while desirable on domestic grounds, poses the risk of a massive outflow of funds that could create a balanceof-payments deficit of crisis proportions. I conclude as follows: A complete turnabout in the design and execution of economic policy is mandatory for the coming year to avoid the near-crisis conditions the administration imposed on the economy in 1966. Last year Government policy was the chief source of uncertainty and instability in the economy. Policy should be designed to meet current problems while encouraging a balanced economic future, instead of designed to weather today's problems with no thought of tomorrow's. Policy should be based upon economic, not political, considerations. Finally, policy should be planned with the explicit recognition that we cannot know all the answers. Present forecasting techniques do not allow us to make the decisions having their impact many months in the future. Flexibility is required, not increased "uncontrollable" expenditure commitments or heavy handed revenue measures with uncertain effects. During the hearing on the President's Economic Report, we in the minority hope to obtain the answers to many questions which have created an undeniable sense of uneasiness in the Congress and among the public. After considering the testimony to be presented at these hearings, we will present in more detail our views on the appropriate course of economic policy in 1967 in the minority section of the Joint Economic Committee's annual report. Mr. Chairman, I agree with the sentiments contained in the statement of the minority members of the Joint Economic Committee, but would like to make the following supplementary points: It is clearly evident from the President's Economic Report that all the administration's incantations and all its economic sleight-of-hand were unable to keep some old-fashioned chickens from coming home to roost. The administration has failed to take the fiscal measures needed to bring inflation under control in 1966 and now it is forced to admit that the economy may slow down this year while inflation will remain a serious problem. I am very disturbed by one evidence of this slowdown, the cutback announced in the automobile industry. In my judgment-and this is the critical point we all noted at the moment the administration has failed to present a convincing case for the 6-percent tax surcharge. I will withhold my support until I have the opportunity to consider the testimony of the administration witnesses and other experts during these hearings and also, and very importantly, to gage the state of the economy in the next 60 to 90 days. I urge my colleagues to do the same. I feel, Mr. Chairman, that we should consider the evidence we receive in the next 60 or 90 days before we decide whether a tax surcharge is called for to prevent a recession or whether it is really essential to deal with the deficit and inflation. Just one or two other points. First, I note that last year the President's report made specific reference to the wage-price guideposts of the Council of Economic Advisers, and the President specifically endorsed them, stating that "it is vitally important that labor and industry follow these guideposts." This year, the President's Report makes no mention at all of the guideposts, but instead confines itself to vague generalities, such as: |