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1,078.8

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SPECIAL NOTE ON POTENTIAL GNP The following note has been provided by the Council of Economic Advisers regarding potential GNP.

The idea of potential GNP has had a long history. Its measurement by the Council of Economic Advisers was started in the Economic Report of the Council in 1962. Since that time, it has been used as a standard with which to evaluate the past and future behavior of the economy.

Potential GNP purports to measure what the economy would produce if all of its resources were fully utilized given the technology and institutional arrangements that have existed at the time. “Fully utilized" has never meant the kind of utilization that would prevail, say, under wartime conditions but rather the utilization that could be expected under conditions of reasonable price stability. This has always been less than complete utilization. Under ordinary circumstances, some unemployment is present because some workers are in the process of changing jobs; similarly, some old plants are idle because market conditions do not permit them to operate profitably. In the past, this degree of utilization has been reflected in an overall unemployment rate of 4 percent. The rate of inflation associated with that degree of unemployment has typically not been specified. Furthermore, motions of what constitutes reasonable price stability can vary over time.

Potential GNP is not something ordinarly observable. In practice, the Council in 1962 made the judgment that the economy was operating at 100 percent of jotential in mid-1955. Since that time potential GNP has been estimated to grow at differing annual rates, as follows: 3.5 percent from the first quarter of 1952 to the fourth quarter of 1962, 3.75 percent from the fourth quarter of 1962 to the fourth quarter of 1968, 4 percent from the fourth quarter of 1968 to the fourth quarter of 1975. The Council estimates that from the end of 1968 to that of 1975, the average annual growth rate of potential GNP reflected a rise of 2.15 percent in the potential labor force, a 0.35 percent decline in annual hours of work, and a 2.2 percent rise in output per manhour at potential.

PREPARED STATEMENT OF ROBERT R. NATHAN Mr. Chairman and members of the Joint Economic Committee, my name is Robert R. Nathan and I appear today as Chairman of the Council on National Priorities and Resources. I welcome the opportunity to discuss with you the President's proposed budget and economic policies for fiscal 1977 and the economie implications of these proposals.

The Council on National Priorities and Resources is a non-profit, non-partisan association committed to promoting government action to meet human needs. The participating members of the Council are: Amalgamated Clothing Workers of America, AFL-CIO; Americans for Democratic Action ; American Federation of State, County and Municipal Employees, AFL-CIO; National Education Association; National Farmers Union; Oil, Chemical and Atomic Workers International Union, AFL-CIO; United Auto Workers; United Church Board for Homeland Ministries; United Mine Workers of America; United Presbyterian Church, USA; the U.S. Conference of Mayors; and the National Association of Home Builders.

President Ford's 1977 budget is the latest in a long line of Nixon and Ford programs and policies designed to stem inflation by consciously maintaining high unemployment and recession, The Administration budget does nothing more than extend the policies of the last several years--the very policies which are responsible for the present costly recession, the highest interest rates since the Civil War, the highest unemployment since the Great Depression, and a .continuing high rate of damaging inflation.

Unfortunately, the timid and inadequate budget proposals of the Administration fail to give proper weight to the fact that the economy has still not recovered from the most serious recession since before World War II and that we are now suffering from the highest peacetime inflation rates in our history, with the exception of the runaway inflation rate of 1973–74. Unemployment remains above 8 percent, and rises to nearly 30 percent in some central cities. The GNP gap, the best measure of lost production and idle plants and equipment due to high unemployment, was running at an annual rate of $215 billion in the last quarter of 1975an immense waste of resources. Yet, despite all this slack, inflation remains at 7 percent. Furthermore, long-term interest rates remain at intolerably high levels of 8 to 10 percent.

Ironically, by following Ford's anti-recovery fiscal policies, augmented by tight money restraints, we are ending up with both serious inflation and costly unemployment. According to the Administration's own estimates contained on page 25 of the Budget, unemployment would remain above 7 percent under President Ford's fine-tuning plan until near the end of 1977 and stay above 6 percent until late 1979. The benefits, as measured by progress toward price

stability, under this game plan are projected to be both slow and modest, with consumer prices rising at or above 6 percent well into 1978. That is a far cry from any kind of price stability.

The continuing high unemployment that derives from the Administration's policy decision to curb inflation with a depressed economy has adverse ramifications which extend and reverberate throughout the economy. National output, workers' real income, corporate profits, private plant and equipment outlays, housing construction and economic activity in general are still at depressed levels. Without' vigorous recovery efforts they will continue to remain far below potential for years to come, with wasted manpower, idle industrial capacity and a sense of national frustration and despair over our seeming inability to manage our economy more successfully. Coming at a time when confidence in government is at a low ebb, our economic failures are very serious.

Because of high unemployment, the deficit of the Federal Government and Federal agencies will be well over $50 billion in 1977. The large deficits we have been experiencing are attributable to the depressed economy and not to irresponsible and wasteful spending. When people are out of work, federal spending on unemployment compensation, food stamps, welfare and other income support spirals quickly. Such increases are recession-related. At the same time, and in even larger measure, tax revenues fall. Thus, recessions are a cause of big deficits. If the unemployment rate were at the 3.6 percent level of 1968 we would have a budget surplus of over $9 billion in fiscal 1977, rather than the $54 billion deficit of the Ford budget (including Federal agencies). The President's budget projects that if we had a 4 percent rate of unemployment we would have a $3 billion "full employment" surplus in 1977.

The plain and simple truth is that the Administration is mismanaging the economy. The seven years this nation has spent under Nixon-Ford policies have witnessed substantially higher unemployment, higher inflation and higher deficits that during the previous eight years. From 6.1 percent in 1961 the un-employment rate dropped to 3.6 percent in 1968. It than rose to 8.5 percent in 1975. Consumer prices rose 16 percent from 1961 to 1968. From 1969 to 1976 they increased 47 percent. Still more striking is the dramatic increase in the public debt. In the 22 years from 1946 to 1968, the Federal debt increased by just under $100 billion. In the seven years starting with 1969 it increased by $270 billion and by the end of 1976 the eight-year rise in the gross Federal debt will total about $275 billion.

The reason for the Administration's mismanagement of the economy lies in its “either-or” policy toward inflation and unemployment. The hypothetical tradeoff between inflation rates and unemployment, a theory at the heart of executive policy, places the whole battle against inflation in the wrong context. Yet, the emphasis that the country must place on fighting inflation need not and should not translate into the abandonment of efforts to control unemployment. We do not have to resign ourselves to either evil.

The human catastrophe of high unemployment during this recession has been immense. December 1975 still witnessed an intolerably high 8.3 percent level of unemployment. When one adds this official percentage of unemployment and the unemployment equivalent of those working part-time because of the recession and those who normally work but are not actively seeking a job because of poor job prospects, the rate of total idle time approaches 10 percent of the labor force.

The unemployment problem is compounded and made more immediately critical by the imminent expiration of unemployment benefits for many of the jobless. More than 3.1 percent of the labor force has been unemployed 15 weeks or longer. It is estimated that nearly one million people have been unemployed more than 65 weeks and have exhausted all unemployment benefits.

Unfortunately, the brunt of the continuing high unemployment rates has been borne by blacks and other minorities, with a jobless rate of 13.8% in December of 1975, by women (8.0%), teenagers (19.6%), and blue-collar workers (10.7%)-those least able to cope with unemployment.

The continuation for so many years of high unemployment has disastrous implications not only in terms of fundamental damage to the economy but also for the future earnings and job potential and the social and economic behavioral patterns of those most heavily hit by unemployment-especially teenagers. Teenagers, blacks, women and other groups experiencing unemployment disproportionate to their numbers are losing valuable skills, work experience and other opportunities while unemployed. In fact, given the high unemployment er

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