ECONOMIC] OF THE PRi Transmitted to the less January 196 Togf tfctfef With THE ANNIJAL REPORT COUNCIL OF ^ONOMIC ADVISERS Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 8H-1464 1M 8-61 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Economic Report of the President Transmitted to the Congress January 1962 TOGETHER WITH THE ANNUAL REPORT OF THE COUNCIL OF ECONOMIC ADVISERS UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON 1962 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis For sale by the Superintendent of Documents, U.S. Government Printing Office Washington 25, D.C. - Price $1.25 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis LETTER OF TRANSMITTAL THE WHITE HOUSE Washington, B.C., January 20,1962 The Honorable the PRESIDENT OF THE SENATE, The Honorable the SPEAKER OF THE HOUSE OF REPRESENTATIVES. SIRS : I am presenting herewith my Economic Report to the Congress, as required under the Employment Act of 1946. In preparing this Report, I have had the advice and assistance of the Council of Economic Advisers, who, in turn, have had the assistance of members of the Cabinet and heads of independent agencies. Together with this Report, I am transmitting the Annual Report of the Council of Economic Advisers, which was prepared in accordance with Section 4(c) (2) of the Employment Act of 1946. Respectfully, III Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis CONTENTS ECONOMIC REPORT OF THE PRESIDENT Page PROGRESS IN 1961 4 GOALS OF ECONOMIC POLICY 7 Our Goal of Full and Sustained Prosperity Without Inflation. 8 Our Goal of Economic Growth 9 Our Goal of Equal Opportunity 9 Our Goal of Basic Balance in International Payments 10 POLICIES FOR 1962 11 Prospects for 1962 11 Budgetary Policy 11 Monetary and Credit Policies 13 Balance of Payments 13 Prices and Wages 16 MEASURES FOR A STRONGER ECONOMY 17 A Program for Sustained Prosperity 17 Strengthening the Financial System 21 Strengthening Our Manpower Base 24 Strengthening Our Tax System 25 ANNUAL REPORT OF THE COUNCIL OF ECONOMIC ADVISERS * Introduction 37 CHAPTER 1. TOWARD FULL RECOVERY 39 PART I: OBJECTIVES, PROGRESS, AND PROSPECTS 39 PART II: POLICIES FOR MAXIMUM EMPLOYMENT AND PRODUC- TION 68 APPENDIX: PROGRAM FOR ECONOMIC RECOVERY AND GROWTH . 97 CHAPTER 2. ECONOMIC GROWTH 108 CHAPTER 3. THE BALANCE OF INTERNATIONAL PAYMENTS 144 CHAPTER 4. PRICE BEHAVIOR IN A FREE AND GROWING ECONOMY. 167 APPENDIX A. REPORT TO THE PRESIDENT ON THE ACTIVITIES OF THE COUNCIL OF ECONOMIC ADVISERS DURING 1961 191 APPENDIX B. STATISTICAL TABLES RELATING TO INCOME, EMPLOY- MENT, AND PRODUCTION 201 *For a detailed table of contents of the Council's Report, see page 33. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ECONOMIC REPORT OF THE PRESIDENT Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis To the Congress of the United States: I report to you under the provisions of the Employment Act of 1946 at a time when —the economy has regained its momentum; —the economy is responding to the Federal Government's efforts, under the Act, "to promote maximum employment, production, and purchasing power;" —the economy is again moving toward the central objective of the Act—to afford "useful employment opportunities, including self-employment, for those able, willing, and seeking to work." My first Economic Report is an appropriate occasion to re-emphasize my dedication to the principles of the Employment Act. As a dec- laration of national purpose and as a recognition of Federal responsi- bility, the Act has few parallels in the Nation's history. In passing the Act by heavy bipartisan majorities, the Congress registered the con- sensus of the American people that this Nation will not countenance the suffering, frustration, and injustice of unemployment, or let the vast potential of the world's leading economy run to waste in idle manpower, silent machinery, and empty plants. The framers of the Employment Act were wise to choose the promo- tion of "maximum employment, production, and purchasing power" as the keystone of national economic policy. They were confident that these objectives can be effectively promoted "in a manner calculated to foster and promote free competitive enterprise and the general welfare." They knew that our pursuit of maximum employment and production would be tempered with compassion, with justice, and with a concern for the future. But they knew also that the other standards we set for our economy are easier to meet when it is operating at capacity. A full employment economy provides opportunities for useful and satisfying work. It rewards enterprise with profit. It generates saving for the future and transforms it into productive investment. It opens doors for the unskilled and underprivileged and closes them against want and frustration. The conquest of unemployment is not the sole end of economic policy, but it is surely an indispensable beginning. The record of the economy since 1946 is a vast improvement over the prolonged mass unemployment of the 1930's. The Employment Act itself deserves no small part of the credit. Under the mandate and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis procedures of the Act, both Congress and the Executive have kept the health of the national economy and the economic policies of the Govern- ment under constant review. And the national commitment to high employment has enabled business firms and consumers to act and to plan without fear of another great depression. Though the postwar record is free of major depression, it is marred by four recessions. In the past fifteen years, the economy has spent a total of seven years regaining previous peaks of industrial production. In two months out of three, 4 percent or more of those able, willing, and seeking to work have been unable to find jobs. We must do better in the 1960's. To combat future recessions—to keep them short and shallow if they occur—I urge adoption of a three-part program for sustained pros- perity, which will (1) provide stand-by power, subject to congressional veto, for temporary income tax reductions, (2) set up a stand-by pro- gram of public capital improvements, and (3) strengthen the unem- ployment insurance system. These three measures will enable the Government to counter swings in business activity more promptly and more powerfully than ever before. They will give new and concrete meaning to the declaration of policy made in the Employment Act. They will constitute the greatest step forward in public policy for economic stability since the Act itself. As the Employment Act prescribes, I shall in this Report review "economic conditions" in the United States in 1961 and "current and foreseeable economic trends in the levels of employment, production, and purchasing power;" set forth "the levels of employment, production, and purchasing power obtaining in the United States and such levels needed to carry out the policy" of the Act; and present my economic program and legislative recommendations for 1962. PROGRESS IN 1961 Last January the economy was in the grip of recession. Nearly 7 percent of the labor force was unemployed. Almost one-fifth of man- ufacturing capacity lay idle. Actual output was running $50 billion (annual rate) short of the economy's great potential. These figures reflected not only the setback of 1960-61 but the incomplete recovery from the recession of 1957-58. The task before us was to recover not from one but from two recessions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis At the same time, gold was leaving the country at a rate of more than $300 million a month. In the three previous years, the Nation had run a total deficit of $10 billion in its basic international accounts. These large and persistent deficits had weakened confidence in the dollar. In my message to the Congress on February 2, I stated that this Administration's "realistic aims for 1961 are to reverse the down- trend in our economy, to narrow the gap of unused potential, to abate the waste and misery of unemployment, and at the same time to main- tain reasonable stability of the price level." In a message on the balance of payments on February 6, I added a fifth aim, to restore confidence in the dollar and to reduce the deficit in international payments. These five aims for 1961 have been achieved: (1) The downtrend was reversed. Gross national product (GNP) grew from $501 billion (annual rate) in the first quarter to a record rate of $542 billion in the last quarter. In July, industrial production regained its previous peak, and by the end of the year it showed a total rise of 13 percent. (2) These gains brought into productive use nearly half the plant capacity which was idle at the beginning of the year. The growth of GNP narrowed the over-all gap of unused potential from an estimated 10 percent to 5 percent. (3) Unemployment dropped from 6.8 to 6.1 percent of the labor force. The number of areas of substantial labor surplus declined from 101 in March to 60 in December. (4) Price stability has been maintained during the recovery. Since February, wholesale prices have fallen slightly, and consumer prices have risen only one-half of 1 percent.