THE 1976 ECONOMIC REPORT OF THE PRESIDENT THURSDAY, FEBRUARY 5, 1976 CONGRESS OF THE UNITED STATES, The committee met, pursuant to notice, at 10:15 a.m., in room 318, Russell Senate Office Building, Hon. Hubert H. Humphrey (chairman of the committee) presiding. Present: Senators Humphrey and Javits; and Representatives Moorhead and Heckler. Also present: Loughlin F. McHugh and George R. Tyler professional staff members; Michael J. Runde, administrative assistant; George D. Krumbhaar, Jr., minority counsel; and M. Catherine Miller, minority economist. OPENING STATEMENT OF CHAIRMAN HUMPHREY Chairman HUMPHREY. Gentlemen, you are very patient. You will find that the work of the Congress at this time is a classic example of what we call nonplanned activity. Most of our colleagues find themselves today in the Senate on a piece of legislation or in another committee. We welcome here four distinguished private economists and I think we will save a good deal of time if I just let you get right at it. I will give my opening statement at this point. This morning it is my pleasure to welcome four distinguished private economists who have been invited to discuss the economic outlook with us. Previous sessions in this series of hearings have been limited to official administration spokesmen. Their counsel to us can be summed up in the phrase: "do nothing." They agree that it would be nice to bring unemployment down faster than they project. They agree that it would be nice to have less inflation. Mr. Greenspan spoke, very sincerely and eloquently. Yet neither he, nor any of our administration witnesses, had any suggestions for doing much about it. The administration fears that any strong action to promote faster recovery would touch off a boom which would lead in turn to bust. My own feeling is that the administration is having the wrong nightmare. In the first place, with as much unutilized labor and capital as is presently available, I fail to see why a boom would be such a bad thing. In the second place the possibilities of a boom occurring are, to put it mildly, remote. The dangers of overstimulating the economy seem to me to be quite minimal, indeed, virtually nonexistent Dr. Burns has just lowered his targets for monetary growth. No danger of overstimulus from that quarter. The President has recommended a highly restrictive budget. Congress may enlarge it somewhat, but I see no indication that Congress is leaning toward excessive spending which would overstimulate the economy. Quite the contrary. My own nightmare is a different one. My fear is that the recovery is weak and fragile, weaker than we have recognized or admitted. In my nightmares we allow a sluggish pattern of economic performance to continue, unemployment to remain high, above 8 percent, inflation to persist at 6 or 7 percent. This is the danger against which we must guard, as I see it. Having been advised by the administration to do nothing about anything. I look forward with interest to the statements we will hear this morning. Will the academic and the financial community also advise us to do nothing? Or will you present us with some policy options, which we can consider as alternatives to the present passive stance of the administration? Needless to say, I am hoping that we will hear some alternatives proposed. I do not think my hopes will be disappointed. I have expressed on other occasions my own fear that the recovery, which is much heralded in these days, is weak and fragile. I tend to believe, even though I am a born optimist, that it may be slightly weaker than we have recognized or admitted, particularly when we see a sluggish pattern of economic performance continuing with unemployment remaining high, and inflation persisting at 6 or 7 percent. These obviously are warning signs for us. We are privileged to have four economists with us this morning as our witnesses: Mr. Gardner Ackley, Professor of Economics at the University of Michigan and I need not point out you are the former chairman of the Council of Economic Advisers, and that of course, makes you a special witness. We also have Mr. Glenn Burress, of the University of Texas. We have Robert Nathan, who is appearing here this morning as Chairman of the Council on National Priorities and Resources. Finally, we have Robert Parks, of the Advest Institutional Advisory Service in New York. I ask each of you to proceed alphabetically. So, Mr. Ackley, why don't you start. STATEMENT OF GARDNER ACKLEY, PROFESSOR OF ECONOMICS, UNIVERSITY OF MICHIGAN Mr. ACKLEY. Thank you, Mr. Chairman. It is always an honor and a pleasure too to appear before this distinguished committee particularly so, Mr. Chairman, under your gavel. I understand that this morning's session is to deal with the outlook for the economy Chairman HUMPHREY. Correct. Mr. ACKLEY. In relationship to economic policy, and I am going to confine my discussion pretty largely to that, I do have a prepared statement, which I assume will be put in the record Chairman HUMPHREY. Of course. Your prepared statement as well as any other material you present will be printed in full in the record. Mr. ACKLEY. Fine. thank you. I will read just a few paragraphs of it to save time. For those who have a copy before them, I will summarize several pages, which indicate that, in my view, at least, the Council is basically more optimistic about the outlook for the economy, given the fiscal policies which are recommended in the President's budget, his tax proposals. Chairman HUMPHREY. When you say the Council, you mean the Council of Economic Advisers? Mr. ACKLEY. The Council of Economic Advisers. Chairman HUMPHREY. Yes. Mr. ACKLEY. My own view is that if we accept the fiscal assumptions that are built into the President's economic programs, the rise in gross national product in 1976 would be somewhat lower, the unemployment rate rather higher than the Council has forecast. Now, I don't want to exaggerate the difference, at least as far as 1976 is concerned. Most of the forecasts that are made by economists these days are in the same ballpark as the CEA forecasts. We all foresee a gradual recovery, sufficient slowly to reduce the unemployment rate in 1976 and early 1977. Almost no one sees an incipient boom nor an early slide into a recession. While neither possibility can ever be absolutely excluded, I don't believe that we ought to worry about either one occurring this year. Likewise, the prevailing opinion is clearly that there will be a continued moderation in the inflation rate in 1976 and into 1977; moderation at least by the standards of recent years. The principal problems, Mr. Chairman, that I have with the Council's forecasts are not so much for 1976 as they are for 1977 and beyond. The Economic Report tells us very little about the Council's reasoning concerning 1977. Nevertheless, we can infer from what is said in the report that the relatively optimistic forecast for 1977, with a growth rate of real GNP of 5.7 percent, can only depend on the assumption of a truly spectacular boom in business investment. Chairman HUMPHREY. Now, there isn't much indication that that is going to take place, is there? Mr. ACKLEY. I have some doubts about the Council's forecasts for 1976 in this respect: It seems to me this perhaps is the area in which the Council's forecast is appreciably more optimistic than most others, with an 8 percent growth in business investment in 1976 over 1975. But in order to justify, in order to validate a forecast of 5.7 percent growth in real GNP in 1977, my statement traces out the reasoning by which I have to conclude that this must rest on a further substantial acceleration of business fixed investment in 1977. And I just don't see the basis for that. Indeed, I'm not sure I see the basis for the 8 percent forecast for 1976. The conclusion of all of this is that only a fiscal policy which either would allow some appreciable growth in real Government expenditures or which involved tax rates and transfer payments designed to afford a faster growth of consumer spending could provide reasonable assurance that steady recovery will continue through 1977 at a rate fast enough to keep the unemployment rate headed downward. There is another way to summarize this conclusion. As the official estimates of the budget show, the Federal "full-employment" budget surplus is expected to increase by $19 billion between fiscal years 1976 and 1977. As one tries to interpolate the quarterly or half-year pattern of this surplus, my guess is the decline from early 1976 to 1977 would be considerably sharper than this. The change in the full employment surplus is not a perfect measure of the economic impact of the budget. As we all know though, it is the best simple measurement we have. Some decline in full employment deficit is surely appropriate as the cumulative forces of recovery replace the cumulative forces of recession. And as the economy approaches full employment, we should plan to move into a full employment surplus. But a turnaround as fast and drastic as now proposed, Mr. Chairman, could very well thwart the recovery: Either slow it down to a point that no further employment would occur in the unemployment rate or at some point, Mr. Chairman, trip off a new recession. There was one final point I wanted to make, Mr. Chairman, even though it may not properly be on today's agenda because it deals not with the outlook but the appropriate goals for public policy. My point is simply that even if the Council's forecasts could be counted on as correct, I would personally not find acceptable the state of affairs which it describes. To me, the human, social, and political costs of prolonged unemployment at the rates forecast by the Council are simply intolerable. Even if the President's proposed fiscal policy were sufficiently stimulative to support the recovery forecast it would still be too restrictive a policy. Now the Council and the President say they, too, regret long continued high unemployment, but there is really no choice. They say that any effort to speed the recovery beyond the cautious rate which they forecast would be self-defeating. They say it would merely reignite inflation, and this would so frighten people that real private spending would dry up as fast as government spending or disposable income increased. This is a newly popular doctrine recently defined by Arthur Burns, and now it has been seized upon by the White House to defend its cautious policies. One can imagine that such an outcome might possibly occur. But simply because it can be imagined doesn't make it plausible or probable. As a matter of fact, a statement of this document, as though it were a proven fact or as though there had even been any extensive theoretical or empirical analysis to support it, is in my view simply fraudulent economics. My own view, for what it is worth, is that a somewhat more stimulative fiscal policy and a consequent somewhat faster recovery toward tolerable levels of production and unemployment would involve, over the next year and a half, negligible costs in terms of increased inflation. In my view the effects of a more visible progress toward resolving our dismal economic problems would strengthen rather than weaken business and consumer confidence and willingness to spend. Perhaps I could ask to have put in the record some comments I recently made on this subject at the Michigan outlook conference. Chairman HUMPHREY. Without objection this will be done at the end of your commentary. Mr. ACKLEY. Thank you. Those of us who support a less austere fiscal policy are not proposing any "quick-fix" or "make-work" government jobs. We are proposing a continued public incentive which will support mainly a faster growth in private jobs, for the production of useful goods and services which the private sector, enjoying more rapidly rising real incomes, would purchase either for consumption or investment for planned future increases of production. The administration's view seems to me to be that if we merely assure the availability of enough idle resources which could be used for private investment and provide some extra financial incentives, private investment will automatically expand to fill whatever gap there is. After what business has been through in recent years, I suggest that a somewhat stronger and more sustained growth in markets is necessary to assure that private investment will enjoy the strong and durable recovery which we all want. Chairman HUMPHREY. Mr. Ackley, we appreciate your statement. Your prepared statement and the text of the speech referred to will be included in the hearing record. I know Senator Javits has made some notes, and I have. We will come back and quiz you a bit on a couple of your observations. Thank you. [The prepared statement of Mr. Ackley, together with the speech referred to follow:] PREPARED STATEMENT OF GARDNER ACKLEY I understand that this morning's session of the Hearings is to be devoted primarily to the economic outlook, and its relationship to government economic policies. In this brief initial statement, I shall therefore confine my attention to these matters, with special reference to their discussion in the Economic Report of the President and the accompanying Annual Report of the Council of Economic Advisers. Living as I now do in the distant province of Michigan, I received neither the 1977 Budget nor the 1976 Economic Report in time to have prepared my own full-fledged, independent forecast of GNP and the inflation rate on a basis consistent with the fiscal policies proposed in those documents. For me to have done so would, in any case, have been almost impossible this year because of the extensive revisions concurrently made in our national accounting system and in the data for recent years, the details of which are still not generally available outside of Washington. Thus, while I can and will comment on the Council's forecast, I cannot provide a detailed alternative forecast, constructed "from scratch," and reflecting the President's proposed policies, as the Council's forecast presumably does. Essentially, we can summarize the Council's forecast in terms of three crucial figures: the growth rate of real GNP; the level of unemployment; and the rate of inflation. Between calendar years 1975 and 1976, real GNP is expected to grow by 6.2%, slowing only to 5.7% in 1977. As a consequence, the unemployment rate is seen to decline from 8.5% in 1975, to 7.7% this year, and to 6.9% in 1977. Inflation (as measured by the GNP deflator) is forecast at 5.9% in 1976, rising to 6.2% in 1977. (I have not found the 1977 forecasts in the Economic Report, but they appear on page 25 of the Budget.) My own latest forecast, made last December, saw a growth of real GNP of 6.0% from 1975 to 1976, an unemployment rate of 7.9% for this year, and a 6.4% rise in the GNP deflator. The differences from the Council's forecasts for 1976 are relatively minor, though on all counts, I was slightly less optimistic. Although I do not systematically collect the forecasts of others, my impression is that most other forecasters have also been somewhat less optimistic than the Council. That is certainly the case for the forecasts most recently reported to the American Statistical Association or to Philadelphia columnist J. A. Livingston. This seems to be true as well for the forecasts produced by the large macroeconometric models. For example, the most recent forecast of my colleagues at the University of Michigan, Professors S. Hymans and H. Shapiro, using the Michigan Econometric Model, calls for a 5.9% increase in real GNP in 1976 (compared with the Council's 6.2%), slowing to a 5.0% rate in the first half of 1977. Unemployment in the Michigan forecast falls gradually to 7.2% in the second quarter of 1977, 0.2% above the apparent Council forecast for that quarter. The year-over-year inflation rate for 1976 is forecast by the Michigan Model at 5.9% in the GNP deflator-exactly the same as CEA's-with the Michigan inflation rate falling in 1977 as the CEA's rises slightly. I understand that the still more recent forecast of the Wharton Model is not very different |