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nomic growth would at this early stage in recovery—and I underscore the words "early stage of recovery”—would be strongly antiinflationary. By settling for a sluggish recovery we are sacrificing our strongest weapon against inflation.
I know the argument has been made that moving too rapidly on the unemployment matter would "fuel the fires of inflation.” The administration points, with some justifiable pride, to the fact that this past year unemployment has gone down about 1 percent and the GNP has gone up. At the same time that unemployment has gone down and the gross national product has gone up, the rate of inflation has come down. So it appears that as you get the unemployment down, you get the inflation down. If that is the case thus far, I don't see why a more determined effort isn't made to follow the same prescription.
Productivity gains are not the only weapon we are throwing away. Tax policy could be used to fight inflation. We could have tax changes which support workers' real incomes thereby lessening their wage demands. We could have a tax policy which reduces the costs of employment thereby both encouraging employment to grow and prices to hold steady. But does the administration recommend such changes? I suggest it does not. It recommends a social security tax increase, which would eat into the workers take-home pay, and at the same time raise businessmen's costs.
I recognize, Mr. Secretary, additional financing of the social security system is likely to be necessary in the future. But there are ways to get at that besides just increasng the tax. · I am not convinced that additional financing is a necessity in 1977. As in all of these matters, it is a question of when you should do it. If additional financing is necessary this year, then we must find a financing source that is less damaging to the economy.
Let me ask why the surplus in the social security fund has been declining: Is it because benefits are too generous and the program inefficiently designed? Possibly in part. However, the main reasons for the decline in the surplus is the drop in employment. The unemployed don't pay social security taxes.
The payroll tax increase recommended by the administration would raise $4.4 billion on an annual basis. I have a proposal to offer you this morning for increasing social security tax receipts by considerably more than that amount and doing it in a way which wouldn't raise anybody's tax rates. My proposal is this. Let's get back to full employment.
The committee staff has estimated that if we were at 4-percent unemployment in 1977, social security tax receipts would be as much as $11 to $12 billion higher, using existing tax rates, than they will be at the 6.9-percent unemployment rate which the administration projects.
In other words, the proposed tax increase would yield $4.4 billion: Full employment with no tax increase would yield $11 to $12 billion,
Now, I was a little skeptical of that number at first. It sounded too good to me. The staff pointed out though that not only would nearly 3 million more people be working and paying taxes if we were at full employment, but those already at work would be working more hours and earning more income and paying more taxes. Wage and salary income in 1977 would be about $125 billion higher at full employment than the $1,001 billion projected in the President's budget. This higher income would result in higher social security tax collections and higher income tax collections.
Now, Jír. Secretary, I ask you to have your experts at the Treasury look into this and let me know if the JEC's staff estimates are correct. Please let us know for the record of this hearing how much you estimate full employment would contribute to increased social security tax receipts. Even if it was only half of what my staff has estimated, we would come out way ahead as compared with the administration's tax increase proposal.
[The following information was subsequently supplied for the record by Secretary Simon:]
Under conditions of full employment social security receipts would be about $106.6 billion in fiscal year 1977 or nearly $10.4 billion higher than the actual estimated level of $96.2 billion.
Unfortunately it is not a matter of simply willing that people become employed. The higher projected receipts in the Social Security funds assume that people find jobs in the private sector. To bring this about more quickly than under the path the Administration's forecasting means an even greater overall budget deficit and the danger of another recession sometime in the future as is outlined in my testimony. One cannot look only at the benefits of full employment without examining the costs of bringing about such full employment.
Chairman HUMPHREY. So what I am saying is there are lots of ways to raise money. One way we can get money is to increase the price of goods, and that is what businesses have been doing. Another way is to have greater volume and to keep the prices down, which is what they ought to be doing. One way to have tax receipts up for workers is to have people at work earning more money and more people making money rather than to raise the level of the taxation.
So I would point out that there are ways and means other than those that have been proposed. Regrettably the President's budgetand I feel very strongly about this— did nothing to curb inflation and did less than that to curb unemployment. What we have depended on is what we call those intangible forces of the marketplace that are going to work their will in due time to get us out of the economic difficulties we are in. I agree that in due time, if you can live through it, if it doesn't destroy you, you will make it. But the problem is there are a lot of casualties along the way.
When people are at the rate of unemployment we have today, we are paying a terrible price for our adherence to an economic philosophy which once had its day but which is, in my judgment at least, all over. This trickle-down theory just won't work any more. People can't wait that long any more. Furthermore, the costs of these benefits we are paying out is just unbelievable. I just can't understand how the administration has become so convinced that unemployment compensation, food stamps, and welfare are the answer to our economic problems. I thought there was a time when some of us Democrats thought that was the answer in part, but never in full. Now, it is relied upon I think, as I said the other day, just because the computer can print the checks faster than we used to be able to print them out on a typewriter.
Now, those are my prejudices and those are my concerns. You have heard them all before. They are very sincere and very real.
Now, we would like to have you tell us how you feel we are going to overcome this problem of unemployment, this lag in our production. How we are going to strengthen this rather fragile recovery that is now underway? So with that as an opener, why don't you proceed with your statement, Mr. Secretary. STATEMENT OF HON. WILLIAM E. SIMON, SECRETARY OF THE
TREASURY, ACCOMPANIED BY SIDNEY L. JONES, ASSISTANT SECRETARY FOR ECONOMIC POLICY
Secretary Simon. Thank you very much, Mr. Chairman. I will respond to that social security matter you raised. There is no doubt that it is a financial fact that full employment today or increased employment could obviously help as far as the social security fund is concerned and that the declining employment in the past year and one-half has hurt as far as the revenue of the trust fund is concerned.
However, we have been spending more than we have been taking in and running a deficit operation with the trust fund. So full employment today would just postpone the day of reckoning, not cure the fundamental problem of the financial integrity of the social security system. But that is just an aside.
You will be delighted to hear, Mr. Chairman, if you haven't seen it, this prepared statement I have in front of me will not be read in full.
Chairman HUMPHREY. Yes, I have your prepared statement. We will, of course, have it printed in full in the record at the end of your oral statement.
Secretary SIMON. Thank you. It is difficult enough to understand without reading it all. But I would sort of summarize as rapidly as I can, Mr. Chairman, this prepared statement that we put together over the past month of our analysis of the current economic outlook and of the policies needed to provide—and I underline this— permanent prosperity and employment. Hopefully it will contribute to a calm, reasoned, and maybe even dispassionate discussion of these issues.
Now, it is obvious that we also support, Mr. Chairman, the same basic goals of sustaining the current output and employment gains, of further moderating the still unsatisfactory rate of inflation, of reducing the unacceptable rate of unemployment, and of correcting the monetary, trade, and investment problems which have periodically disrupted the international economic system. But there can be disagreement about what tradeoffs will be required to achieve simultaneous progress toward all of these goals, about the best mix and timing of fiscal and monetary actions and about the proper time horizon for planning current policies.
A year ago at this time, we were concerned with an economy in the midst of a serious recession. Fortunately, the turning point in the U.S. economy occurred somewhat earlier than anticipated and the pace of recovery during the transition period has been a little bit stronger than expected. Economic historians will likely identify last April as the low point for the recession. Since then, real final sales have increased at an annual rate of 4.9 percent and industrial output has risen at an annual pace of 12 percent after having de
clined at an annual rate of 10 percent since late 1973. The aggregate pattern of this recovery has matched the pace of earlier cyclical upturns and I believe that expansion will continue throughout 1976 and 1977 if responsible policy decisions are made. Significant progress has also been made in reducing the rate of inflation and as you said in your opening statement in expanding employment opportunities while gradually cutting the overall unemployment rate and in moving ahead on important international monetary and trade reforms. This is an impressive turnaround from the situation at yearend 1974 when construction, personal spending, and business investment were all declining.
Despite the impressive progress of the economy during the second half of 1975 no one can be satisfied with current conditions. An annual rate of inflation of approximately 612 percent or an unemployment rate of 8.3 percent in December are totally unacceptable.
Furthermore, great concern has developed over the impact of Federal fiscal, monetary, and regulatory policies which have increased the impact of Government decisions on the total economy. Therefore, every economic initiative should be more carefully evaluated to determine: (1) Whether the proposed action is consistent with the Nation's overall priorities and resources; and (2) whether the policy recommended contributes to the long-term achievement of basic goals rather than merely providing temporary relief as we have in the past. Using these two guidelines more effectively would help reduce the constant fine tuning of economic policies and would properly shift the Government's attention to longer term requirements rather than concentrating on “crisis” management. If we fail to apply this discipline, governments will continue to promise more than can be delivered and the chronic Federal deficits reported in 16 of the last 17 years—for the period ending with fiscal year 1977—will persist and the continuation of past trends will eventually make the necessary adjustments even more painful.
As we attempt to further our economic growth and to reduce inflation and unemployment in 1976, current economic policies must avoid creating even more difficult problems for subsequent years. The severe recession of 1974-1975 was a harsh reminder that the costs of serious economic distortions are greater than the temporary benefits provided by excessive stimulus used to achieve short-term
the set seriovided
goal.will not read THEREY. What made and Prospect to
I will not read the next section of my testimony.
Chairman HUMPHREY. What page is that now, Mr. Secretary? The section on "Economic Background and Prospects”?
Secretary SIMON. Yes. But it is important to understand this material as a basis for evaluating our policy recommendations. We anticipate continued economic recovery in 1976 with real output gains of about 6 percent. The rate of price increase in 1976 will probably continue at the level recorded in late 1975 although the figures for individual months may swing widely.
Chairman HUMPHREY. May I please interrupt? You say real output gains of about 6 percent. Secretary SIMON. Yes, sir.
Chairman HUMPHREY. Is that on the high side or the low side? That is very important.
Secretary Simon. Well, our estimates in the budget are, I believe, at 6.2 percent for the year. And in looking at the private forecasters, and we look at 20 to 25 of them, they are all in that range. I think the low is 5 and the high is 7 or 8 percent—a couple are at 8 percent but are making different assumptions than in the President's budget.
Now, the rate of price increase for 1976 will probably continue at about the level recorded in there. The GNP deflator increased 8.7 percent. The 1976 figure is expected to be 5.9 percent. That perspective rate of inflation remains a matter of great concern because (1) the personal consumption and business investment decisions are going to be distorted and (2) the overall allocation of resources and general economic stability will be disrupted and (3) the level of inflation continues to ratchet upwards.
Fortunately, the overall unemployment rate has been moving down since the peak of 8.9 percent last spring. Several other encouraging developments in the labor market are occurring: The sharp gain in employment; the turnaround in the average hours worked each week; the gradual improvement in the overtime hours worked; the improvement in the “layoff rate." But, nevertheless, much of our attention is focused on reducing unemployment and continuing to moderate th edisruptive impact for those who have become unemployed.
In general, the economic recovery is moving well into its 11th month of recovery and we believe that our policy recommendations will sustain that healthy recovery without creating unwarranted and unwanted distortions.
Chairman HUMPHREY. What page are you?
Although the prospects for near-term economic performance are favorable, several basic trends require further analysis. Without question, this country has developed the most efficient and creative economic system the world has ever known. It has been particularly responsive in satisfying the consumption demands of our large population and the real standard of living for most Americans has risen sharply during the postwar era.
I then document all of these things which I guess would be, Mr. Chairman, a partial response. I don't mean to be facetious but sometimes we tend to give slogans to our economic policies like "trickle down” and “percolate up” and what have you. And I don't know what the right slogan would be to describe our economy. I just know it is and has been the most efficient system. We have a fundamental disagreement obviously on this,
Chairman HUMPHREY. Right.
Secretary SIMON. A disagreement that these ideals and principles that you say no longer work-well, I just don't buy that.
Chairman HUMPHREY. Well, I don't say they don't work. I say it just depends on how long you last.
Secretary Simon. Well, it is not a matter of lasting long. Why weren't we considering, when we were creating the economic policies for over the last 10 years, that we were going to have results like this? Now we have to pay a price.
Chairman HUMPHREY. Well, we all have different views as to how this all happened. I grew up listening to my father. My father