QUESTIONS BY SENATOR MILLER

Question. In your testimony, you criticized former Treasury Secretary Humphrey for his "obsession with a balanced budget," which resulted in unbalancing the economy to the extent of a $12 billion deficit for 1959.

Does this statement mean that you fail to recognize that it was the Democratically controlled Congress which had the power to pass the revenue, appropriations, and other laws needed to prevent an unbalanced economy?

Answer. I was attempting to make an economic rather than a political point: namely, that misguided attempts to achieve balance in the budget can unbalance the economy with the result that the actual budget deficit can be vastly greater than the deficit sought to be avoided or reduced. It is pertinent to note, however, that under our system of government the leadership in budget-making is in the hands of the Executive and that Congress tends to follow that lead fairly closely regardless of whether the majority of its members are from the same Party as the President or from a different Party.

Question. Do you believe it is more fair for the Federal Government to take purchasing power away from the people by increased income taxes than by inflation?

Answer. Inflation is inequitable in its impact, disadvantaging some and benefiting others. In general, the disadvantages tend to fall most heavily on those least able to bear them, while the advantages tend to accrue to those who least need them. (This point is documented by some of the data in my prepared statement.) Unlike inflation, taxes on incomes based upon ability to pay can promote rather than impede equity and social justice.

Question. I invite your attention to the close relationship between deficits of the Federal Government and inflation. It has now reached the point that for every $1 billion of deficit under the Administrative Budget, there will be an accompanying inflation of $2 billion or more. Would you not therefore favor reduction, if not elimination, of these budget deficits—and, if so, what specific action by Congress should be taken to do so? (E.g., specific taxes to be increased or Federal expenditures to be reduced.)

Answer. As my prepared statement shows, there is no general excess of demand which needs to be soaked up either through tax increases or reduced government spending in order to avoid inflation. There is a substantial unused margin of idle human and physical resources which a budget deficit can help to employ productively. Such inflationary pressures as exist are selective and sectoral and should be combated by selective measures rather than by the blunt instrument of an overall fiscal policy aimed at reducing demand at a time when the objectives of the Emplyoment Act call for increased demand.

Question. What is your definition of "living in poverty" in the context of your statement that 32.5 million Americans continue to live in poverty?

Answer. The definitions are those developed by the Social Security Administration after careful and detailed study. A household is classified as poor if its total money income falls below $1,570 for an unrelated individual, $2,030 for a couple, $3,200 for a family of four, and comparable figures for families of other sizes. In 1965, there were 32.7 million persons in households having incomes below those levels. They certainly fit within any reasonable definition of poverty since, in the words of the Council of Economic Advisers, their incomes clearly are "inadequate to provide even the basic essentials of a decent life in our society."

Question. Of the 800,000 members of the U.A.W., how many are covered by escalation clauses covering increases in the cost of living?

Answer. There are currently approximately 1,400,000 employed members of the UAW. Of these, we estimate that 85 to 90 percent are covered by cost-ofliving escalator clauses. The 800,000 figure refers, in round numbers, to those who will be involved in negotiations with major automotive, agricultural implement, and parts supplier corporations this year.

Question. Of those covered, how much have these clauses meant in increased wages during each of the last five years?

Answer. While there are some variations, most UAW escalator clauses are the same as or closely similar to those in our contracts with the major automotive

corporations. Under these contracts, increases in the cost-of-living allowance during each of the last 5 years have been as follows:

Year:

1962.

1963

1964.

Cents per hour 3

3

3

4

11

1965.

1966..

It is important to keep in mind that the above adjustments in the cost-ofliving allowance (a) came in response to prior increases in the price level, and (b) did not increase the buying power of the workers' wages but merely helped to protect their families' living standards against erosion by higher prices.

Question. In connection with wage-price guidelines, should there not be some account given in wage increase patterns between plants having different increases in productivity? For example, if Plant A has increased productivity of 1% in a given year, should the workers be given an increase of 3%?

Answer. Since advances in productivity are socially generated, all members of society should share equitably in their fruits. Moreover, to relate wage increases directly to the rate of productivity advance in individual industries would have highly undesirable consequences. It would tend to make secondclass citizens, suffering relatively depressed living standards, of those workers unfortunate enough to be employed in industries whose productivity increased slowly. It would also distort the national wage structure in an economically unworkable direction by confining skilled workers in slowly advancing industries to wages lower than those paid to unskilled workers in industries whose productivity rises rapidly. In general, the basic philosophical approach of the guideposts to this problem is sound. Under that philosophy, price increases required in slowly advancing industries to pay for wage increases related to national productivity gains should be offset by price decreases in industries with above-average productivity progress, thus preserving the stability of the general price level. In practice, the price decreases have not been forthcoming. Corporations with rapid productivity increases have tended instead to monopolize the resultant gains for the exclusive benefit of their stockholders and managers rather than to share them with consumers in price reductions. That failure to pass on cost savings in lower prices generates excessive profits. Workers employed by such corporations will inevitably insist on wage and fringe benefit gains commensurate with the profits. After all, as the Council has noted:

"... there is no justification, on either economic or equity grounds, for distributing above-average gains in productivity exclusively through the profits channel."

Question. I have long favored a stepped-up program of federally assisted trade and technical schools to give underprivileged young people a skill with a future. Would you comment on this proposal?

Answer. The UAW has been an active supported of legislative and private programs aimed at providing the disadvantaged with skills that would enable them to compete more effectively in the labor market. We initiated and are operating a number of training programs with government financial assistance. Among them are on-the-job training programs and a program to enable members of minority groups to meet the requirements for entrance into formal appenticeship in the skilled trades. In addition, we have pressed and continue to press the corporations with which we bargain to improve their training programs.

QUESTIONS BY SENATOR PROXMIRE

Question. In your statement you criticized the guidelines as inadequate and unfair and you recommend instead an incomes policy, pointing out that all European countries have moved to that approach. However, isn't it true that Britain, when faced with emergency conditions, reverted again to wage limitations. Isn't this indicative of weakness in incomes policy when the chips are down?

Answer. As noted in the question, Britain acted in response to emergency conditions. The emergency may reasonably be attributed, in part, to failure to adopt an incomes policy earlier. Because of the seriousness of the situation that Britain faced last summer, the government was unable to rely on the voluntary incomes policy that it had previously contemplated and that is still intended for the long run. As of July 20, 1966, a “prices and incomes standstill” was imposed which took the form of a "freeze" until the end of 1966, followed by the current 6-month "period of severe restraint". The standstill, however, is not confined to wage limitations, as the question suggests. It is far broader in its application to incomes than the U.S. guideposts which cover only wages fixed through collective bargaining. The approach taken, in fact, is that of an incomes policy. The White Paper on the "freeze" (Cmnd. 3073), for example, deals not only with wages and prices but also with rents for both housing and business premises, "scales of charges and fees for self-employed persons, including all sorts of professional fees", salaries and other forms of remuneration not fixed by collective bargaining "including that of company directors and executives", and "all company distributions, including dividends paid by companies". In addition, the White Paper notes, "The Government have already pledged themselves to use their fiscal powers or other means to prevent any excessive growth in aggregate profits."

Question. The incomes policy that you favor concentrates, as I understand it, on the relative shares of real income that go to labor and the other factors of production. Elsewhere in your statement you indicated that labor and capital should be free to bargain over the shares of income that each shall receive. Aren't these contradictory? Doesn't an income policy tend to stabilize the share of income going to labor? We would be interested in hearing how you reconcile these two.

Answer. Perhaps the best way to answer this question is to quote from the British White Paper on "Prices and Incomes Policy" issued in April 1965 (Cmnd. 2639). (This White Paper later was attached to the Prices and Incomes Act adopted in August 1966 as a "schedule" setting forth the considerations to be taken into account in the administration of that Act.) The pertinent paragraph says: "The requirement that total money incomes should rise in line with the growth of real national output does not mean that all forms of income should increase at the same rate. It is necessary not only to create the condi tions in which essential structural readjustments can be carried out smoothly but also to promote social justice. The general review of money incomes of all kinds to be carried out by the National Economic Development Council will involve not only the assembly of the facts about the movement of the main categories of income-wages, salaries, income from self-employment, profits (distributed and undistributed) and rent-but also an appraisal of the way the distribution of the national income is developing under the impact of the prices and incomes policy. The Government have pledged themselves to use their fiscal powers or other appropriate means to correct any excessive growth in aggregate profits as compared with the growth of total wages and salaries, after allowing for short-term fluctuations." [Italic added.]

One of the problems with the guideposts is that the Council, in applying them, has tended to forget its own statement that:

"... there is nothing immutable in fact or in justice about the distribution of the total product between labor and nonlabor incomes."

The Council, in practice, has attempted to apply its wage guidepost in a manner that would freeze the labor income share in the unlikely event of an absolutely stable price level and that reduces the labor share when prices increase.

There are important economic considerations, as well as equity and social justice considerations, for not freezing the shares going to labor and nonlabor incomes. The increasing productivity of capital, noted in my prepared statement, calls for a long-term increase in the labor share. Other factors that should be taken into account have been summarized by Professor Neil Chamberlain of Yale University as follows:

"... the distribution of income affects the balance between consumption and investment. Under changing circumstances this balance too may have to change if the economy is to make full use of its assets. The balance may have to swing more toward savings and away from consumption when more private investment is needed to satisfy rising household demand; more toward private

consumer expenditure when investment goods become more productive and less saving is required to keep pace with wants; more toward public expenditure with higher tax rates when private demand is still strong but needs balancing with more 'infrastructure'; and more toward public expenditure with lower tax rates when private demand is weak and social investment can lay the basis for future expansion. An ‘incomes policy' becomes a significant element in economic planning by helping to steer GNP into the channels appropriate to the given circumstances."

An incomes policy is therefore thoroughly consistent with changing income shares. It can help to assure that the changes that do take place are in the direction of equity, social justice, and the requirements of the economy as a whole. Collective bargaining over income shares has a vital role to play in that process.

QUESTIONS BY REPRESENTATIVE WIDNALL

Question. Do you foresee an increase in unemployment this year? Answer. The many signs of weakness already apparent in the economy suggest at least a strong possibility that unemployment will increase this year. My prepared statement mentions some of the reasons for concern. The discussion under the subhead "Signs of Weakness" is particularly pertinent. Question. How do you stand on pushing forward with the development of a new statistical series on job vacancies? Would such a series help in the placement of the unemployed and in tailoring our training programs for actual job openings? Why has organized labor opposed this in the past?

Answer. A complete answer to this question would require much more space than I can reasonably take. Permit me to note, however, that comprehensive quantitative and qualitative data on job vacancies would be available if a measure long urged by the UAW were now in effect. We have proposed repeatedly that employers be required to list job vacancies to be filled by new hires with the public Employment Service as a condition for eligibility for so-called "experience rating" reductions in their unemployment compensation contributions. Comprehensive listing of job vacancies with the Employment Service would provide direct help in the placement of the unemployed, whereas purely statistical surveys of vacancies would have, at best, only a remote relationship to placement. Many employers, including some of the largest in the country, presently refuse to list their vacancies with the Employment Service.

If there were a financial penalty on such refusal, the Employment Service would have a far more complete listing of and far more detailed information on the nature of actual job vacancies (information usable not only for placement but also for statistical, analytical, administrative and policy purposes) than could possibly be obtained by the kind of job vacancy surveys that have been proposed.

While some who propose such surveys do so in good faith, others who advocate them are obviously hoping to develop propaganda rather than factual information. It is evident from expressions by the latter group that they seek global figures on job vacancies to set alongside the unemployment figures in order to minimize the seriousness of the unemployment problem. They would obviously like to buttress their callous charges-proved baseless every time demand rose high enough to provide work opportunities for the jobless-that "the unemployed do not want to work." To blame unemployment on the unemployed is both easy on the conscience and a useful argument against effective government action to reduce unemployment.

Job vacancy data can properly be matched up with unemployment data only if there is enough detailed information on the vacancies to compare with similarly detailed information on the characteristics and geographical location of the unemployed. A statistical survey of job vacancies based upon a sample sufficiently large to provide the detailed information required for that purpose would be impossibly expensive. Moreover, employers would be unwilling to accept the burden of the clerical work that would be involved.

Among those who urge job vacancy surveys in good faith, there is confusion as to the purpose which they should be designed to serve. Vacancy surveys have been proposed, among other reasons, in order to provide information (a) for placement, (b) for training, (c) to serve as an overall economic indicator, and (d) to make labor market supply-demand comparisons either on an overall

basis or by occupation, by area, or both. Each of these purposes would require a different survey design and sample size.

All of the purposes could be served, and served better, on the basis of the data the Employment Service would be able to generate if employers were induced to list their job vacancies with it.

Question. What is your position on Federal revenue sharing with the states and localities?

Answer. My position on this matter is spelled out in my prepared statement under the heading "Tax Sharing and Social Responsibility."

(The prepared statement of Mr. Reuther, submitted to the Joint Economic Committee in advance of his appearance, follows:)

PREPARED STATEMENT OF WALTER P. REUTHER

The fundamental question to which our nation has not as yet found a satisfactor or acceptable answer is: What is the purpose of a free society and how does it intend to harness the full potential of the Twentieth Century Technological Revolution and commit this potential to the advancement of human and democratic values.

Our nation is more richly blessed than any other nation in the world. We possess tremendous economic resources, a highly developed technology, a skilled and industrious work force. Yet, despite all these advantages, we are still failing to satisfy many urgent and basic human needs. Thirty-two and a half million Americans continue to live in poverty in a land of plenty. Our urban centers are blighted by decay and spreading slums. Our education and medical facilities are inadequate; we are polluting our air and our water; we are strangled in traffic congestion; we are destroying the beauty which was our great national heritage and are creating a living environment unworthy of citizens in a free society.

We have the resources and we have the technical know-how to overcome all these problems. We have lacked the will, however, to match these resources and this know-how to our needs.

We must make up our mind as to what we feel is important within the framework of our value system, declare a list of national priorities, and commit ourselves and our resources to the achievement of those national priorities.

Achieving and maintaining full employment and the maximum utilization of our human resources must continue to be at the top of our list of national priorities. The Employment Act of 1946 committed our nation to the achievement of maximum employment, production, and purchasing power. Twenty years after the enactment of this legislation we are still short of achieving these objectives. Since 1960 we have made steady and meaningful progress in reducing unemployment, moving from 5.6 percent to 3.9 percent. Presidents Kennedy and Johnson deserve enormous credit for pursuing policies and programs that made this progress possible. Nevertheless, as a nation we cannot escape the fact that the United States still has the highest rate of unemployment of any democratic. industrialized nation in the world.

During the Eisenhower Administration, the obsession with balancing the budget unbalanced both the economy and the budget. In recent years we have also been unduly alarmed by exaggerated fears of the balance of payments deficit and of inflation, and have permitted our concern over these two problems to prevent fulfillment of the mandate of the Employment Act of 1946, to which our nation is and must be committed.

Today I would like to discuss steps which can be taken to further reduce unemployment and ameliorate the hardships and economic losses that flow from it, and to discuss ways and means to contain inflation.

In that connection, I will discuss such subjects as:

the mandate of the Employment Act;

the balance of payments:

the guideposts and the manner in which they have fostered inequities at the expense of workers:

cost-of-living wage escalator provisions;

bargaining over income shares, with particular reference to the automobile industry;

the need for a comprehensive incomes policy applying equitably to all forms of income;