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The 1984 Economic Report of the President Hearings S. HRG. 98-873, Pt. 2 THE 1984 ECONOMIC REPORT OF THE PRESIDENT HEARINGS BEFORE THE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES NINETY-EIGHTH CONGRESS SECOND SESSION PART 2 FEBRUARY 21, 22, AND 28, 1984 Printed for the use of the Joint Economic Committee U.S. GOVERNMENT PRINTING OFFICE 3M-200 0 WASHINGTON 1984 JOINT ECONOMIC COMMITTEE (Created pursuant to sec. 5(a) of Public Law 304, 79th Congress) SENATE HOUSE OF REPRESENTATIVES ROGER W. JEPSEN, Iowa, Chairman LEE H. HAMILTON, Indiana, WILLIAM V. ROTH, JR., Delaware Vice Chairman JAMES ABDNOR, South Dakota GILLIS W. LONG, Louisiana STEVEN D. SYMMS, Idaho PARREN J. MITCHELL, Maryland MACK MATTINGLY, Georgia AUGUSTUS F. HAWKINS, California ALFONSE M. D'AMATO, New York DAVID R. OBEY, Wisconsin LLOYD BENTSEN, Texas JAMES H. SCHEUER, New York WILLIAM PROXMIRE, Wisconsin CHALMERS P. WYLIE, Ohio EDWARD M. KENNEDY, Massachusetts MARJORIE S. HOLT, Maryland PAUL S. SARBANES, Maryland DANIEL E. LUNGREN, California OLYMPIA J. SNOWE, Maine BRUCE R. BARTLETT, Executive Director JAMES K. GALBRAITH, Deputy Director (11) CONTENTS WITNESSES AND STATEMENTS TUESDAY, FEBRUARY 21, 1984 Page Hamilton, Hon. Lee H., vice chairman of the Joint Economic Committee: Opening statement....................................................................................................... 1 Eisner, Robert, William R. Kenan Professor of Economics, Northwestern Uni- versity, Evanston, III ................................................................ 1 Klein, Lawrence R., Benjamin Franklin Professor of Economics, University of Pennsylvania, Philadelphia, Pa .............................................................. 33 WEDNESDAY, FEBRUARY 22, 1984 Hamilton, Hon. Lee H., vice chairman of the Joint Economic Committee: Opening statement....................................................................................................... 61 Keyserling, Leon H., former Chairman of the Council of Economic Advisers under President Truman, and president, Conference on Economic Progress.. 61 Alperovitz, Gar, director of the National Center for Economic Alternatives, Washington, D.C ............................................................... 113 TUESDAY, FEBRUARY 28, 1984 Mitchell, Hon. Parren J., member of the Joint Economic Committee, presid- ing: Opening statement............................................................................................... 137 Chimerine, Lawrence, chairman and chief economist, Chase Econometrics, Bala Cynwyd, Pa .............................................................. 138 Moore, Geoffrey H., director, Center for International Business Cycle Re- search, Columbia University, New York, N.Y ........................................................ 164 Kudlow, Lawrence A., president, Lawrence Kudlow & Associates, Inc., Wash- ington, D.C .............................................................. 180 SUBMISSIONS FOR THE RECORD TUESDAY, FEBRUARY 21, 1984 Eisner, Robert: Prepared statement, together with attachments ........................... 6 Klein, Lawrence R.: Prepared statement.........................................................6.......... 36 WEDNESDAY, FEBRUARY 22, 1984 Hawkins, Hon. Augustus F.: Letter, with an enclosure, from Hon. Alice M. Rivlin, Director, Congressional Budget Office, dated April 22, 1976, respond- ing to questions of Representative Hawkins concerning H.R. 50, the Full Employment and Balanced Growth Act of 1976 .................................................... 129 Keyserling, Leon H.: Prepared statement, together with attached charts ........... 71 TUESDAY, FEBRUARY 28, 1984 American Council of Life Insurance: Statement by .................................................. 216 Chimerine, Lawrence: Prepared statement................................................................ 146 Kudlow, Lawrence A.: Prepared statement................................................................ 185 Moore, Geoffrey H.: Prepared statement, together with an attachment .............. 169 fill) THE 1984 ECONOMIC REPORT OF THE PRESIDENT TUESDAY, FEBRUARY 21, 1984 CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, D.C. The committee met, pursuant to recess, at 10 a.m., in room 2359 Rayburn House Office Building, Hon. Lee H. Hamilton (vice chair- man of the committee) presiding. Present: Representatives Hamilton and Hawkins. Also present: James K. Galbraith, deputy director; and William R. Buechner, Mary E. Eccles, and Robert R. Davis, professional staff members. OPENING STATEMENT OF REPRESENTATIVE HAMILTON, VICE CHAIRMAN Representative HAMILTON. The committee meeting will come to order. I am pleased to welcome two distinguished economists before the Joint Economic Committee this morning to discuss the state of the economy and to evaluate current economic policies. We will hear testimony from Mr. Lawrence Klein, Benjamin Franklin professor of economics at the University of Pennsylvania; and Mr. Robert Eisner, who holds the William R. Kenan chair of economics at Northwestern University. We hope that today's witnesses will offer some suggestions for policies that will improve our chances for a long period of sus- tained prosperity. Gentlemen, we welcome both of you to the committee. We have your statements. Those statements will be entered into the record in full, of course, and we will ask you to summarize them if you can or would so that we can have plenty of time for questions. Mr. Eisner, will you begin, please. STATEMENT OF ROBERT EISNER, WILLIAM R. KENAN PROFES- SOR OF ECONOMICS, NORTHWESTERN UNIVERSITY, EVANS- TON, ILL. Mr. EISNER. Thank you very much, Mr. Vice Chairman. It is a pleasure to be here again. I have a few pieces of previous writings which I have submitted for the record if you are interested, and I will proceed to summarize my statement briefly. I think it is good to look at where we are and where we might be before we get into what we might do, and I would like to take as a (1) 2 quick framework a reminder of where the Full Employment and Balanced Growth Act of 1978, the Humphrey-Hawkins Act, sug- gested we should be. We should have unemployment at 4 percent, inflation at 3 per- cent, and presumably a high rate of investment. In fact, unemployment for 1983 averaged 9.5 percent, down at the end of the year but still well above that target. Inflation did much better, down to about 4 percent. Investment, despite all of the great attention given to it by the current administration and drastic changes in the tax law presumably directed at investment, has done quite badly, down from a figure of about $101 billion of net investment in 1978 to $32 billion in 1982 and recovered all the way to $49 billion in 1983. The unemployment figures, what is more, are predicted in the Economic Report to remain relatively high through the years ahead. The Economic Report suggests 7.8 percent for 1984, 7.6 per- cent for 1985, and 7.3 percent for 1986. Even in 1989, unemploy- ment would still be at 5.7 percent, well above the target for this year in the Humphrey-Hawkins Act. On the inflation front, things are doing very well and that should be clearly recognized, but there are, I would say, ominous clouds on the horizon. They relate in good part, in my view, to the rising surge of protectionism which has the effect of raising real costs in the economy and preventing the forces of international competition from taking their appropriate place in holding price rises in check and of forcing prices down in various industries to balance the price increases that might come elsewhere. There are, of course, serious problems, in a dynamic changing economy, where people get hurt by changes. It is, I think, the proper task of government to protect people against changes with- out giving us an arteriosclerotic economy in which change cannot take place and prices are artificially kept up. The other problem on the horizon with regard to inflation does relate to the huge deficits now and into the future. I would like to suggest briefly though, a perhaps slightly offbeat view with regard to deficits, but one which, I think, is important. I realize that it is a common view and probably good politics to attack deficits on all occasions. In fact, at least in this committee, we should clearly understand that deficits are not always bad, that deficits in a recession tend to help matters, and that it is also im- portant how we measure the deficit and just what kind of deficit we are talking about. If we look at that picture-and I have in the statement a couple of tables that may make the matter quickly clear-in fact, inflation plays some very curious tricks so that while we have had deficits in the great bulk of years from 1946 to the present and including, as a watershed here I might say 1980, these deficits have not added to the real value of the Government debt and it is that real value of government debt with changes in it which are basically relevant in an economic sense to economic behavior. In fact, we find that we had repeated deficits but the figures on what happened to the debt, shown in table 1, indicate that debt de- clined in constant 1972 dollars from $539 billion-the gross public debt-to $496 billion in 1980, and if we take into account the fact 3 that the government itself was acquiring financial assets, and that there were large increases in the value of Treasury gold, we find the net debt actually declined all the more substantially and the net debt per capita actually declined from $3,384 to $1,078, this from 1946 to 1980. Representative
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