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at times when economic policy changes were announced ; and to study, as well, the evidence from psychological survey data. But until it is proved otherwise, I cannot believe that the bulk of the public pay that much attention to specific policy changes. People may be (and apparently are) depressed by the general posture of recent and current government economic policy-as I am, although perhaps for different reasons-and this might affect their spending decisions. But I strongly doubt that there is any built-in, self-defeating offset to specific moves which the government might make-and in my opinion should make-to reduce unemployment more rapidly than the forecasts for 1976 and 1977 now project.

Chairman HUMPHREY. Now, let's proceed to Mr. Nathan.



Mr. NATHAN. Thank you very much, Mr. Chairman.

Recognizing that my prepared statement as formally presented will be placed in the record. I would like to summarize.

Chairman HUMPHREY. Yes, at this time, if you please. Mr. NATHAN. First of all, I agree with Gardner Ackley that the figures and the policies don't seem to fit very well and the only way that the growth rates, as modest as I regard them, as set forth in the Economic Report, Mr. Chairman, will be achieved, will be a rise in private plant equipment expenditures and other private outlays which are not in the cards now and which in my judgment are not likely to be achieved because of the cautious fisora policies that are implicit in the picture. So that in many ways I think that, that which is assumed, is made more unlikely by the very policies which are being pursued.

Second, I think the most serious problem of all stems from the continued philosophy of pursuing the forces of inflation through unemployment. On that score I think we should give to Allen Greenspan and to the President and the Budget Bureau a mark of “A” for Leing fairly forthright in this respect, that is, to let unemployment be the answer to inflation. I think it may deserve an “A” in terms of being reaonably explicit; but I think it deserves a "D-minus” in terms of what it does for the country. Because every element in this very, fine tuning that one reads page by page and paragraph by paragraph in the Economic Report keeps saying over and over and over again that we ought to have some recovery but not much. In other words, it should be very slow, because otherwise we are likely to have inflation.

And I believe in looking at the outlook, Mr. Chairman, we ought to take a hard look at this picture. And let me start by saying in my judgment inflation continues to be a very serious problem. And I don't think we ought to put it under the rug and ignore inflation; but I don't think the answer lies in fighting inflation with unemployment.

Now, let me just deal with the policies which in my judgment, Mr. Chairman, and members of the committee will influence what the outlook is in 1976 and 1977. An outlook doesn't mean anything unless there is implicit in that outlook policy assumptions that are spelled out. If we do follow the program that is set forth by the President in the budget and in the Economic Report and in his statement to the Congress it is quite clear that what we are going to have is a very soft and what I regard as a sick economy for some years to come. I believe there is just as much likelihood of worsening inflation, assuming nothing directly is done about inflation, by this kind of a soft economy and soft recovery as there is by a more vigorous, but not excessive, recovery.

Basically, the inflation we have had has not been attributable to excess demand. And if we are going to try to fight inflation by keeping demand constrained or held way down, there is a serious doubt whether we are going to solve the problem of inflation.

As far as the budget itself is concerned, I would like to state that this budget truly has limited fiscal stimulation especially starting in the middle of 1976. If one were to achieve the cut in expenditures that the President is proposing, this would be a very deterring element in terms of future recovery prospects.

On the other hand, the suggestion there would be substantial further tax cuts to match the $28 billion expenditure cut, is greatly exaggerated, because the amount of tax cuts that will continue, if there is no further change, will be sizable. And proposed further cuts will be relatively insignificant. So what the Ford program is to really take an awful lot of the stimulation out of the Federal fiscal picture by pursuing the President's restructive policy on the expenditure side and slight expansionist efforts through further tax cuts which are going to be very, very small.

In other words, the “add-on" in terms of stimulation from the tax side of the picture is going to be quite small starting in the middle of 1976 but the reduction associated with the expenditure side, Mr. Chairman, is going to be very sizable. And this I think would make the last half of 1976 rather dubious in terms of economic outlook but into 1977 it would raise very, very serious doubts in my mind. I say that because I just don't think private investment and private spending will just bounce up unless there is some basic reason for it.

Now, let me just turn to what the policy approaches ought to be. In mv judgment, when you have 8.3 percent unemployment, when the GNP gap in the last quarter of 1975 in current prices was $214 billion, I think that the administration's failure to be deeply concerned about any sizable increase in the gross national product much in excess of normal growth, Mr. Chairman, represents a degree of failure of the economy or of the marketplace that we ought to face up to. And I think this resort to slow growth is a key element in the picture of a wrong attack in inflation.

It is not that we don't have needs: We have desperate needs in the public and private sectors. We have desperate needs in the environmental field and in water supplies, in recreation, certainly in energy, certainly in transit, certainly in our urban problems. And to say we should ignore those needs, Mr. Chairman, in my judgment is a regretable waste of the potentials in this country and of failure to fulfill our objectives of high levels of unemployment and production.

Now, what did the President say in Michigan the other day? He said that we don't want to have the public jobs. Now, I admit a lot of public jobs will not be as productive as private jobs. But the alternative is not now public or private jobs.

As you see in the President's own budget, Mr. Chairman, there will be either some public jobs or no jobs at all for a lot of these people. That is the alternative. And I think that what we must do is move toward private jobs and incentives and stimulate aggregate demands to provide all kinds of jobs.

Now, let me turn to a couple of figures and then deal a moment with inflation. What we have in the present budget and the foreseeable budgets are huge deficits. But these deficits by and large are not expansionist deficits. These deficits by and large are recession deficits. Except for the tax cut last year and the automatic increase and extension of unemployment compensation, Mr. Chairman, by and large the deficits we are suffering are of unprecedented peace time magnitudes and are practically wholly attributable to recessions. I repeat, these are not spending deficits; they are recession deficits. And I think it is important to know this because the over simplistic explanations that come forth that our inflation is all attributable to deficit financing, Mr. Chairman, loses its entire validity when one looks at the figures.

Let me just note, Mr. Chairman, that from 1946 to 1968, for 22 years, our national debt went up $100 billion. From 1969 through this year, we see a rise in Federal debt of $275 billion.

In other words, in 7 years we are going to have $275 billion versus $100 billion in 22 earlier years. Now, I know they are different dollars, but this big increase in the debt has been primarily a result of low economic activity primarily associated with the two recessions. And I am convinced that if we can take aggressive expansionist fiscal ventures now, that will get us back to full employment more promptly and therefore we will have less of a rise in the national debt and less of the huge deficits.

Having said this and having argued for expansion, I want to emphasize, Mr. Chairman and members of the committee, that I am not talking about ignoring the inflation problem. As a matter of fact, I want to say I think inflation is one of the gravest malignant problems that faces this country. What it does to the poor, what it does to the fixed income groups, what it does to industry, what it does in the international sphere, what it does in the state and local governments, what it does to the public utilities, and housing are really tragic and drastic. But the sad part of it is that we are not making great progress toward price stability. Few people realize that in recent months the rate of inflation in this country is the worst in any peace time period of the history in America, except for 1973–74. Had it not been for a softening in farm prices, we wouldn't have gained as much ground on inflation as we have. And I don't see the soft economy as being the only solution. And we ought to move on this. We ought to understand where our marketplace is not functioning effectively. I would urge we set up another Temporary National Economic Committee and find out where the strengths and weaknesses are and find out what we ought to do to have a more vigorous dynamic competitive economy.

I am in favor of getting rid of the recession, which holds up the price level and I am also in favor of pursuing an analysis and understanding as to why prices rise in the face of a very soft demand. I understand that costs have gone up, but people have been able to get away with price increase after price increase when capacity utilization is down 50, 60, or 70 percent. We ought to understand more about that. I think we have to attack inflation directly. This is a long subject. And I am not talking about across-the-board controls or freezes. But when we have the President of the United States not saying one single word of criticism, despite huge increases in prices, then I think we have some real problems. Maybe jawboning alone won't do it and maybe guidelines won't do it alone. But a combination of efforts to make the market function more effective and direct intervention will permit us to move toward price stability without letting the economy go to pot.

Chairman HUMPHREY. I thought the Council of Economic Advisers' report was very negligent and derelict in this matter.

Mr. NATHAN. Totally. . Chairman HUMPHREY. It just sort of referred to the rates inflation and indicated that it was better than it was and that they hoped it would level off. But there is really no substantive discussion of the causes except insofar as deficit financing is concerned. There is a fixation on deficit financing and deficit financing causing inflation.

Senator JAVITS. Well, Mr. Nathan, I would like to add one other dimension to this while you are all speaking. And that is that the productivity—and that is that the fact is that wages and salaries have grown way ahead of the game too. And in a sense they cause even more economic dislocation because it is such a very big factor in consumption. So I hope the liberal economists like yourself will discuss or emphasize the administered price structure instead of the administered labor structure.

Mr. NATHAN. I think you have to look at the administered costs and you have to look at the whole picture to see why it is that we have to resign ourselves to these kinds of levels of unemployment and idle resources. And the reason why, Mr. Chairman, you don't find it in the economic report is because they feel the only way to handle inflation is a soft economy. I have given you a chart, which I passed around, which indicates the nature of the gap of the gross national product. And I just want to say if we pursue the policies here and Then I will finish up-if we pursue the proposed policies by the administration, it will be 1978 before the gap in the GNP is down to where it was at the worst time in the past—and this refers to the last 20 years—the worst time and not the best. In other words, until 1978 we will have a gap-a loss of GNP in actual relative to potential—that will be bigger proportionately than at any time in the depth of any recession in the last 20 years.

If you look at the President's projections and the budget projections—the chart and table—you will find that back in 1958 during that recession, Mr. Chairman, the gap in the gross national product approached nearly 8 percent.

Chairman HUMPHREY. Yes.

Mr. NATHAN. And then in 1960–61, in that recession it was a little over 7 percent. But, it was over 14 percent in the second quarter of 1975. And in the fourth quarter it was about 1212 percent. But we will not get down to 8 percent or below 8 percent until 1979.

Chairman HUMPHREY. I see your point.

Mr. NATHAN. And all I am saying is never in the past quarter of a century in a recession were we as low as 8 percent. Now, we are resigning ourselves to having the worse situations for 3 more years. I just think this reflects a negative, defeatist, mismanagement policy that we can't afford to go on with.

Chairman HUMPHREY. Thank you very much. It is very revealing testimony.

[The chart and table referred to, together with Mr. Nathan's prepared statement follow:]

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(Actual and Potential GNP in 1972 Dollars)

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52 53 54 55 56 57 58 59 60 tl 12 63 64 65 66 67 68 69 70 71


73 74

75 76

77 78


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