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Economic Report of the President 1965

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Economic Report of the President 1965 Together With THE ANNUAL REPORT of the COUNCIL OF ECONOMIC ADVISERS SH-1464 2M 7-70 Economic Report of the President Transmitted to the Congress January 1965 TOGETHER WITH THE ANNUAL REPORT OF THE COUNCIL OF ECONOMIC ADVISERS UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON : 1965 CONTENTS ECONOMIC REPORT OF THE PRESIDENT Page PROGRESS TOWARD OUR ECONOMIC GOALS 3 Full Employment 3 Rapid Growth 4 Price Stability 4 Balance of Payments Equilibrium 4 Consistency of Our Goals 5 THE ROLE OF ECONOMIC POLICY 5 THE UNFINISHED TASKS 7 ECONOMIC PROSPECTS FOR 1965 9 Federal Fiscal Policy 9 Progress Toward Full Employment 10 COMBATING RECESSIONS ,. 10 MONETARY POLICY IN 1965 11 MAINTAINING WAGE-PRICE STABILITY 12 INTERNATIONAL ECONOMIC POLICIES 13 Restoring Balance in Our External Payments 13 Building a Stronger World Order 14 MANPOWER POLICIES FOR A FLEXIBLE ECONOMY 15 U.S. Employment Service 15 Manpower Training 15 Private Pension and Welfare Funds 15 MAINTAINING INCOMES OF THE DISADVANTAGED 16 Social Security 16 Hospital Insurance for the Elderly 16 Unemployment Insurance 16 Fair Labor Standards 17 Poverty 17 IMPROVING URBAN LIFE 17 OTHER ECONOMIC POLICIES FOR 1965 AND BEYOND 18 Natural Resource Development 18 Strengthening the Economic Base of Communities 18 Consumer Information 19 Transportation 19 Industrial Science and Technology 19 Agriculture 20 Education and Health 20 CONCLUSION 20 in ANNUAL REPORT OF THE COUNCIL OF ECONOMIC ADVISERS* Page INTRODUCTION 31 CHAPTER 1. THE SUSTAINED EXPANSION OF 1961-64 35 CHAPTER 2. SUSTAINING PROSPERITY IN 1965 AND BEYOND 80 CHAPTER 3. STRENGTHENING THE EFFICIENCY AND FLEXIBILITY OF THE ECONOMY 120 CHAPTER 4. SOME ECONOMIC TASKS OF THE GREAT SOCIETY. ... 145 APPENDIX A. REPORT TO THE PRESIDENT ON THE ACTIVITIES OF THE COUNCIL OF ECONOMIC ADVISERS DURING 1964 171 APPENDIX B. STATISTICAL TABLES RELATING TO INCOME, EMPLOY- MENT, AND PRODUCTION 183 *For a detailed table of contents of the Council1 s Report, see page 27. IV ECONOMIC REPORT OF THE PRESIDENT To the Congress of the United States: I am pleased to report —that the state of our economy is excellent; —that the rising tide of our prosperity, drawing new strength from the 1964 tax cut, is about to enter its fifth consecutive year; —that, with sound policy measures, we can look forward to unin- terrupted and vigorous expansion in the year ahead. PROGRESS TOWARD OUR ECONOMIC GOALS FULL EMPLOYMENT In the year just ended, we have made notable progress toward the Employment Act's central goal of ". useful employment opportuni- ties, including self-employment, for those able, willing, and seeking to work, and . maximum employment, production, and purchasing power." Employment: l • Additional jobs for \ /2 million persons have been created in the past year, bringing the total of new jobs since January 1961 to 4/2 million. • Unemployment dropped from 5.7 percent in 1963 to 5.2 percent in 1964 and was down to 5.0 percent at year's end. Production: • Gross National Product (GNP) advanced strongly from $584 billion in 1963 to $622 billion in 1964. • Industrial production rose 8 percent in the past twelve months. Purchasing power: • The average weekly wage in manufacturing stands at a record $106.55, a gain of $3.89 from a year ago and of $17.50 from early 1961. • Average personal income after taxes has reached $2,288 a year— up 17J/2 percent in four years. • Corporate profits after taxes have now risen continuously for four straight years—from a rate of $19j/2 billion early in 1961 to nearly $32 billion at the end of 1964. But high levels of employment, production, and purchasing power cannot rest on a sound base if we are plagued by slow growth, inflation, or a lack of confidence in the dollar. Since 1946, therefore, we have come to recognize that the mandate of the Employment Act implies a series of objectives closely related to the goal of full employment: —rapid growth, —price stability, and —equilibrium in our balance of payments. RAPID GROWTH True prosperity means more than the full use of the productive powers available at any given time. It also means the rapid expansion of those powers. In the long run, it is only a growth of over-all pro- ductive capacity that can swell individual incomes and raise living standards. Thus, rapid economic growth is clearly an added goal of economic policy. • Our gain of $132 billion in GNP since the first quarter of 1961 represents an average growth rate (in constant prices) of 5 percent a year. • This contrasts with the average growth rate of 2}4 percent a year between 1953 and 1960. Part of our faster gain in the last four years has narrowed the "gap" that had opened up between our actual output and our potential in the preceding years of slow expansion. But the growth of our potential is also speeding up. Estimated at 3J/2 percent a year during most of the 1950's, it is estimated at 4 percent in the years ahead; and sound policies can and should raise it above that, even while moving our actual performance closer to our potential. PRICE STABILITY I regard the goal of over-all price stability as fully implied in the language of the Employment Act of 1946. We can be proud of our recent record on prices: • Wholesale prices are essentially unchanged from four years ago, and from a year ago. • Consumer prices have inched upward at an average rate of 1.2 percent a year since early 1961, and 1.2 percent in the past 12 months. (Much of this increase probably reflects our in- ability fully to measure improvements in the quality of consumer goods and services.) BALANCE OF PAYMENTS EQUILIBRIUM The Employment Act requires that employment policy be "con- sistent" with "other essential considerations of national policy." Per- sistent balance of payments deficits in the 1950's reached an annual average of nearly $4 billion in 1958-60. Deficits of this size threatened to undermine confidence in the dollar abroad and limited our ability to pursue, simultaneously, our domestic and overseas objectives. As a result, restoring and maintaining equilibrium in the U.S. balance of payments has for some years been recognized as a vital goal of eco- nomic policy. During the past four years • Our over-all balance of payments position has improved, and the outflow of our gold has been greatly reduced. • Our commercial exports have risen more than 25 percent since 1960, bringing our trade surplus to a new postwar record. • The annual dollar outflow arising from our aid and defense com- mitments has been cut $1 billion, without impairing programs. • Our means of financing the deficit have been strengthened, reducing the gold outflow and helping to build confidence in the dollar. CONSISTENCY OF OUR GOALS Thus, the record of our past four years has been one of simultaneous advance toward full employment, rapid growth, price stability, and international balance. We have proved that with proper policies these goals are not mutu- ally inconsistent. They can be mutually reinforcing. THE ROLE OF ECONOMIC POLICY The unparalleled economic achievements of these past four years have been founded on the imagination, prudence, and skill of our busi- nessmen, workers, investors, farmers, and consumers. In our basically private economy, gains can come in no other way. But since 1960 a new factor has emerged to invigorate private efforts. The vital margin of difference has come from Government policies which have sustained a steady, but noninflationary, growth of markets. I believe that 1964 will go down in our economic and political his- tory as the "year of the tax cut." It was not the first time that taxes were cut, of course, nor will it be the last time. But it was the first time our Nation cut taxes for the declared purpose of speeding the advance of the private economy toward "maximum employment, production, and purchasing power." And it was done in a period already prosperous by the standard tests of rising production and incomes. In short, the tax cut was an ex- pression of faith in the American economy: • It expressed confidence that our economy would translate higher after-tax incomes and stronger incentives into increased expenditures in our markets. • It recognized the presence of untapped productive capacity. We cut taxes confident that the economy would respond to in- creased buying by producing more goods at stable prices rather than the same output at higher prices. • It insisted on getting full performance from the American economy. The promise of the tax cut for 1964 was fulfilled. Production, em- ployment, and incomes jumped ahead. Unemployment was whittled down steadily. Since 1960, the balance between budget expenditures and taxes has been boldly adjusted to the needs of economic growth. We have recog- nized as self-defeating the effort to balance our budget too quickly in an economy operating well below its potential. And we have recognized as fallacious the idea that economic stimulation can come only from a rapid expansion of Federal spending. Monetary policy has supported fiscal measures. The supply of credit has been wisely tailored to the legitimate credit needs of a noninfla- tionary expansion, while care has been taken to avoid the leakage of short-term funds in response to higher interest rates abroad. Fiscal and monetary policies to build our prosperity have been buttressed by measures —to improve the education, skills, and mobility of our labor force; —to stimulate investment in new and modern plants and machinery; —to expand exports; —to assist in rebuilding the economic base of communities and areas that have lagged behind; —to strengthen our farm economy and support farm income; —to conserve and develop our natural resources; —to keep a sound flow of credit moving to home-buyers and small businesses; —to redevelop decaying urban areas; —to strengthen our transportation network; and —to offer business and labor a guide for sound and noninflationary price and wage decisions.
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