355 THE 1967 ECONOMIC REPORT OF THE PRESIDENT HEARINGS BEFORE` THE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES NINETIETH CONGRESS FIRST SESSION FEBRUARY 15, 16, AND 17, 1967 PART 3 Printed for the use of the Joint Economic Committee U.S. GOVERNMENT PRINTING OFFICE 7E-314 WASHINGTON: 1967 For sale by the Superintendent of Documents, U.S. Government Printing Office Washington, D.C. 20402 - Price 55 cents JOINT ECONOMIC COMMITTEE (Created pursuant to sec. 3(a) of Public Law 304, 79th Cong.) WILLIAM PROXMIRE, Wisconsin, Chairman WRIGHT PATMAN, Texas, Vice Chairman SENATE HOUSE OF REPRESiNTATIVE18 JOHN SPARKMAN, Alabama RICHARD BOLLING, Missouri J. W. FULBRIGHT, Arkansas HALE BOGGS, Louisiana HERMAN E. TALMADGE, Georgia HENRY S. REUSS, Wisconsin STUART SYMINGTON, Missouri MARTHA W. GRIFFITHS, Michigan ABRAHAM RIBICOFF, Connecticut WILLIAM S. MOORHEAD, Pennsylvania JACOB K. JAVITS, New York THOMAS B. CURTIS, Missouri JACK MILLER, Iowa WILLIAM B. WIDNALL, New Jersey LEN B. JORDAN, Idaho DONALD RUMSFELD, Illinois CHARLES H. PERCY, Illinois W. E. BROCK 3D, Tennessee JOHN R. STARK, Executive Director JAMES W. KNOWLES, Director of Research ECONOMIsTs WILLIAM H. MOORs GEORGE R. IDEN JOHN B. HENDERSON DANIEL J. EDWARDS DONALD A. WEBSTER (Minority) II * CONTENTS STATEMENTS FEBRUARY 15, 1967 Page Heller, Walter W., professor of economics, University of Minnesota_---- 497 Burns, Arthur F., president, National Bureau of Economic Research____ 542 FEBRUARY 16, 1967 Tobin, James, professor of economics, Yale University------------------ 577 Culbertson, John M., professor of economics, University of California, on leave from the University of Wisconsin-- ______________________ 582 Hansen, Alvin, Littauer professor of political economy, emeritus, Harvard University -------------------------------------------------------- _ 617 McCracken, Paul W., Edmund Ezra Day, university professor of business administration, The University of Michigan-- __________-________ 624 FEBRUARY 17, 1967 Sprinkel, Beryl W., vice president and economist, Harris Trust & Savings Bank, Chicago, Ill------------------------------------------------- 655 Goldfinger, Nathaniel, director, Research Department, AFL-CIO_------- 668 Madden, Carl H., chief economist, Chamber of Commerce of the United States ------- _____________- ---------------------------------- 680 MI THE 1967 ECONOMIC REPORT OF THE PRESIDENT. WEDNESDAY, FEBRUARY 15, 1967 CONGRESS OF THE UNITED STATES, JOINT ECONOMIC CoxlrrmE Washington, D.C. The joint committee met at 10:10 a.m., pursuant to recess, in room 318, Old Senate Office Building, Hon. William Proxmire (chairman of the joint committee) presiding. Present: Senators Proxmire, Symington, Javits, and Percy; and Representatives Patman, Bolling, Reuss, Griffiths, Curtis, Widnall, and Rumsfeld. Also present: John R. Stark, executive director; James W. Knowles, director of research; and Donald A. Webster, minority economist. Chairman PROXmIRE. The committee will come to order. The com- mittee reconvenes its hearings this morning on the President's Eco- nomic Report. We are privileged to have as our witness one of the Nation's leading economists, former Chairman of the President's Council of Economic Advisers under both President Kennedy and President Johnson Dr Walter Heller. Dr. Heller has been a very helpful witness in the past on many occasions, and it is most comforting to have him before us this morn- ing when, as many of us observe, the economy seems to be on the knife edge between inflation and contraction. Let me add a personal note. Dr. Heller has come here at my request in face of a most demanding schedule, and we owe him a vote of thanks for that. Dr. Heller, you may proceed. STATEMENT OF WALTER W. HELLER, PROFESSOR OF ECONOMICS, fllVERSITY OF MflNESOTA Mr. HELLER. Mr. Chairman, it is a pleasure to appear before this committee. I feel very much at home, particularly to appear under your chairmanship. As a fellow Midwesterner, and having my roots in Wisconsin, I take particular pride in your chairmanship of a com- mittee for which I have such great respect, and which has contributed so very much to the advance and understanding of the economic mat- ters of this country. So it is a real pleasure to be here. I will proceed if I may with the reading of my statement. Chairman PROXMTRE. Go ahead. Mr. HELLER. As I once again enjoy the privilege of appearing before your committee, I hope you will indulge me in a moment's reflection on the changing character of our national debate over economic policy. Four years ago, for example, in defending President Kennedy's tax- cut proposal, we found that the very principle and propriety of fiscal 497 498 THE 1967 ECONOMIC REPORT OF THE PRESIDENT stimulus-in the face of existing deficits and a rising economy-were under attack; not so much in this committee, as in the country. Today's policy debates, though often sharp and heated, proceed in the reassuring environment of growing public understanding and bi- partisan recognition-to which as I said a moment ago this committee has contributed so much-growing public understanding, and bipar- tisan recognition: First, that the Federal Government can and should manage its tax, budget, and monetary policies so as to keep total demand pretty much in step with the economy's rising potential-and I suppose I should add that that, after all, isn't much more than the Employment Act of 1946 requires; Second, that, as a result, the economy will operate considerably closer to its potential and be much less prone to recession in the future than in the past; and Third, that this can and will be accomplished without danger to individual freedom of economic choice. I observe that a stock market that rises as the economy softens-and spurts whenever peace threatens to break out-seems to reflect this underlying confidence. But to say that there is growing agreement on basic principles is not to gainsay that the job of applying them is far tougher in today's economy-precariously perched on the knife edge of full employment, a term just used by the chairman-than it was 4 years ago when the $30 billion production gap gave us far wider margins for error. Nor have I noticed any lack of controversial grist for the committee's mill in these hearings. Vexed and vexing questions still abound, for example: (a) Are this year's economic forecasts right as to level and pattern? (b) Can economic policy be made flexible enough to deal with mis- takes and surprises? (c) Are budget forecasts-or even hindcasts-credible or in- credible? (d) Should taxes be raised or budgets be cut? (e) How far can we go in trading easier monetary policy for tough- er fiscal policy in the face of balance-of-payments deficits? (f) When should the temporary suspended investment tax stimu- lants be restored? (g) Where should official wage-price policy go from here? In the following comments, I address myself to several of these ques- tions-and the committee will probably address me to the rest. UNCERTAINTY AND FLEXIBILITY The administration's economic policies for 1967 seem highly respon- sive-both in overall budget impact and in the proposed fiscal-mone- tary mix-to the needs of the economy as they can be discerned at this time. And they are equally responsive to the need for maintaining flexibility-of keeping open our economic policy options as we try to keep the economy on the narrow road of full employment in the face of such crosswinds as- -some slowdown in the advances of the private sector, while those in the public sector continue unabated- -reversal of the downtrend in housing during the year coupled with a slowdown in expansion of plant and equipment; THE 1967 ECONOMIC REPORT OF THE PRESIDENT 499 -a slowdown in the first half of the year as inventory accumulation falls off, coupled with a speedup in the second half as easier money boosts construction and Congress boosts social security benefits. Both the basic pattern of overall budget impact and the specific fiscal-monetary proposals of the administration seem to fit these emerging circumstances very well. In 1966 we moved from a budget surplus of nearly $3 billion-at annual rates-on a national income accounts (basis in the first half of the year-and the administration is to be warmly commended for the primacy it has now given the NIA budget, especially in discus- sions of economic policy-to a growing deficit in the second half of 1966 ($0.2 billion in the third quarter and an estimated $4.5 billion in the fourth quarter), and the budget will move from a $5 billion deficit in the relatively soft first half of 1967 to a rough balance in the first half of 1968, when private demands should again be nearing normal strength. The temporary surtax. Quick and fine tuning of economic policy must be the order of the year in which we expect first an ebb and then a flow in the tides of economic advance, all the while operating near full employment, with continued cost-plus inflation. In this context, the case for the midyear effective date for the proposed 6-percent tem- porary surtax is clear. But it is equally clear that we are loading a heavy burden on the back of economic forecasting -a burden that may be greater than our present forecasting tech- niques should 'be asked to bear; -a burden that con be lightened by increasing the flexibility and responsiveness of economic policy. For 1967, a major part of that flexibility can be provided in the timing and terms of the temporary tax increase: * (a) If a slowdown in the economy is more pronounced or lasts longer than expected, or if monetary easing is halted in midstream, or if social security and other Government program increases are slow in coming, the effective date of the tax increase could be postponed. (b) If the first-half lull unexpectedly persists throughout the year, the tax increase could be dropped for 1967.