, o/ < Union Calendar No. 264 97TH CoNeanSS HOUSE OF REPRESENTATIVES I REPosr 2d Se88ion J No. 97-436 THE 1982 JOINT ECONOMIC REPORT REPORT OF TH JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES . ON THE FEBRUARY 1982 ECONOMIC REPORT OF THE PRESIDENT TOGTLHER WrH ADDITIONAL VIEWS MARcH 1, 1982.-Committed to the Committee of the Whole House on the State of the Union and ordered to be printed U.S. GOVERNMENT PRINTING OFFICE 90-540 WASHINGTON: 1982 JOINT ECONOMIC COMMITTEE (Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.) HOUSE OF REPRESENTATIVES SENATE HENRY S. REUSS, Wisconsin, Chairman ROGER W. JEPSEN, Iowa, Vice Chairman RICHARD BOLLING, Missouri WILLIAM V. ROTH, JR., Delaware LEE H. HAMILTON, Indiana JAMES ABDNOR, South Dakota GILLIS W. LONG, Louisiana STEVEN D. SYMMS, Idaho PARREN J. MITCHELL, Maryland PAULA HAWKINS, Florida FREDERICK W. RICHMOND, New York MACK MATTINGLY, Georgia CLARENCE J. BROWN, Ohio LLOYD BENTSEN, Texas MARGARET M. HECKLER, Massachusetts WILLIAM PROXMIRE, Wisconsin JOHN H. ROUSSELOT, California EDWARD M. KENNEDY, Massachusetts CHALMERS P. WYLIE, Ohio PAUL S. SARBANES, Maryland JAMFs K. GALBRAITH, Executive Director BRUCE R. BARTIETf, Deputy Director (II) LETTER OF TRANSMITTAL CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, D.C., March 1, 1982. Hon. THOMAS P. O'NEILL, Jr., Speaker, House of Representatives, Washington, D.C. DEAR MR. SPEAKER: Pursuant to the requirements of the Employ- ment Act of 1946, as amended, I hereby transmit the Report of the Joint Economic Committee containing its findings and recommen- dations with respect to each of the main recommendations made by the President of the United States in his February 1982 Economic Report. This Report is to serve as a guide to the several committees of Congress dealing with legislation relating to economic issues. Sincerely, HENRY S. REUSS, Chairman. / (III) Union Calendar No. 264 97TH CONGRESS 1 HOUSE OF REPRESENTATIVES f REPORT 2d Session No. 97-436 REPORT ON THE FEBRUARY 1982 ECONOMIC REPORT OF THE PRESIDENT MARCH 1, 1982.-Committed to the Committee of the Whole House on the State of the Union and ordered to be printed Mr. REUSS, from the committee of conference, submitted the following REPORT together with ADDITIONAL VIEWS [Pursuant to sec. 11(b)(3) of Public Law 304 (79th Cong.)] This report is submitted in accordance with the requirement of the Employment Act of 1946 that the Joint Economic Committee file a report each year with the Senate and the House of Repre- sentatives containing is findings and recommendations with respect to each of the main recommendations made by the President in the Economic Report. This report is to serve as a guide to the several committee of Congress dealing with legislation relating to economic issues. 90-546 0 INTRODUCTION By Chairman Henry S. Reuss and Vice Chairman Roger W. Jepsen We are pleased to transmit to the Congress and to the public the 1982 Annual Report of the Joint Economic Committee. In this Report, we continue the practice, begun in last year's Annual Report, of providing separate Views of the Democratic and the Republican Members. This practice reflects the differences of philosophy and of policy between us, and meets in a constructive way the need for a national debate on economic policy issues. We are proud of the close working relationship between Members of both Parties which has prevailed on the Committee in the 97th Congress, and which has made possible this setting forth of our dif- ferent perspectives in this Annual Report. Bipartisan cooperation and constructive debate has been the rule on the Joint Economic Committee in the past year. This Report is the fifth Report of the Committee in this Congress; of these, three have been issued on a bipartisan basis, reflecting important areas of policy on which Members of both parties have come to agree- ment: productivity, high-speed passenger rail service, and the regu- lation of trucking. In addition, the Committee has held over one hundred days of bipartisan hearings, and has continued to serve it vital research role on behalf of the Congress and the public. We expect to continue our cooperation in the future, and look forward to the contribution the Joint Economic Committee will make in the months ahead. (3) Democratic Views on the February 1982 Economic Report of the President (5) CONTENTS Page An Action Program for 1982 ..................... 15 Part I. Review of the Administration's Economic Program... ............................................... 19 A. The Administration's Forecasts ............................................................... 19 B. High Interest Rates and Recession ............................................................... 25 C. The Tax Program and Income Distribution ................................................... 34 D. The Defense Buildup and Inflation .............................................................. 39 E. Social Spending Cuts and the "Social Safety Net ......................................... 48 F. The Effect of the Reagan Program on State and Local Government Finances............................................................................................................. 58 Part II. Recommendations and Analysis .............................................................. 64 A. End the Recession .............................................................. 64 Recommendation No. 1: End the Recession We reject the idea that unemployment is necessary to fight inflation. The Administration's economic strategy is causing vast and unnecessary hard- ship, with a virtual guarantee that huge future deficits will overwhelm any temporary abatement of inflation once economic recovery is permitted to begin. We believe that durable price stability and a balanced budget can be achieved only in the context of economic growth; therefore, an early end to the recession is imperative. Recommendation No. 2: Immediate Relief for the Unemployed Unemployment insurance coverage is inadequate in this recession and must be extended to assure a maximum of 39 weeks of benefits in all 50 States. The effective date of the new provisions regarding Federal loans to State unemployment insurance programs should be delayed by one year, to minimize the need for States to institute cutbacks in benefits in the midst of recession. Congress should also repeal the changes in the Extended Bene- fits Program that require higher State trigger levels and a new method of calculating trigger unemployment rates. Eligibility for the Targeted Jobs Tax Creit should be extended to workers unemployed longer than 15 weeks and to workers whose earnings from pre- vious emplyment were less than $6,500 a year. B. Monetary Policy: Recommendations 3-10 ....................................... 69-97 Recommendation No. 3: Bring Interest Rates Down and Keep Them Down The recession of 1981 was caused by unnecessarily tight money and de- structively high interest rates. It has wrought massive damage on housing, the automobile industry, small business, agriculture, productive capital in- vestment, and other productive uses of credit. The Congress, Administra- tion, and the Federal Reserve should concert all efforts to repair this damage, which can be done only by bringing about a lasting climate of lower and more stable interest rates. Recommendation No. 4: Do Not Tighten Money Monetary policy should return immediately to a path of steady, moderate restraint. consistent with lower inflation and economic recovery in 1982. Current Federal Reserve plans appear to call for a continued tightening of money this year. Such a tightening would not be consistent with economic recovery under realistic inflation assumptions, and would instead produce a rapid return of intolerably high interest rates soon after the recession (7) 8 B. Monetary Policy-Continued abates. A more accommodating monetary policy than currently planned would help bring interest rates down without risking higher inflation. Recommendation No. 5: Low Real Interest Rates Should Be the Immediate Goal Real interest rates in 1981 were kept high by policy as inflation fell. The Federal Reserve, Administration, and the Congress should agree on the im- mediate objective of restoring low real interest rates, defined as bringing long-term interest rates back to their historical relationship with current and expected rate of inflation. If inflation continues to decline, policy should bring long-term interest rates down rapdly, to prevent real interest rates from rising. Recommendation No. 6: Practice Credit Conservation The Administration and the Federal Reserve should encourage the bank- ing system to develop an effective means to deter destabilizing bursts of bank-financed lending for unproductive purposes such as large corporate take-overs and speculation in commodities, collectibles, and land. Such measures will have the effect of conserving scarce credit resources in times of need for the use of small business, farmers, housing, automobile financ- ing, and productive capital investment. Recommendation No. 7: End the Interest Rate Wars In 1981, U.S. high interest rates damaged the world economy and under- mined confidence in the economic leadership of the United States. These severe international repercussions must not be allowed to continue. High interest rate competition should be replaced by much closer international coordination of economic policy. Recommendation No. 8: Improve FederalReserve Accountability and Policy Coordination For the past decade,