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terrupt this hearing. I thought I had a Senator over there to handle this bill but apparently not. This is an embarrassing moment but I have no choice because legislation comes first. I want to thank you all very much for your testimony and your time. It has put a great burden upon you but you have been very helpful to us in advising us on this.

You know we had I think this morning some of the best testimony we have had. It is regretable that we were unable to more closely examine what your observations are. I know how terribly busy you: are and I really hesitate to ask you to do something more than you have but you can do this as a public service-and I ask it as a public official--because I have so many questions I want to ask you. I think what I will do is to take out of the questions about three basic questions and send them to each of you. If over the next 10 days or so you could give us the benefit of your counsel, we would appreciate it.

I wanted to ask a little on the rate of monetary growth and monetary policy. I surely wanted to ask a little more on the budget policy and on these job creation programs..

I notice that you, Mr. Ackley, were somewhat concerned about public job creation programs. Now, I am too. I don't think they are, you know, as productive as I would like. I feel like Bob Nathan, that is, that we don't have too good alternatives. We have the alternative and I'm speaking now about the immediate situation—we have the alternative of public service jobs that could at least give some contribution to the general well-being or no jobs. There is a real serious problem ahead of us with the ending of the unemployment compensation benefits. If they end, you will have about 1 million: workers who will have exhausted 65 weeks or more of unemployment compensation benefits. Of course the State funds, many of them are totally out. In the Federal Government you are in a real sense federalizing the whole thing with direct appropriations from the Treasury.

So if you don't mind, I will see that you get two or three questions like this. Also on the recovery targets I have some questions on that.

Let me take 1 minute. Do you have anything further you would like to add, Mr. Ackley ?

Mr. ACKLEY. I think I agree with almost everything that has been said at the table today. If I summarize, I would be merely repetitive.

Chairman HUMPHREY. Mr. Nathan.

Mr. NATHAN. Not really. Let me add some things in response to your questions.

Chairman HUMPHREY. Quickly, do you think the Federal Reserve Board is keeping abreast of these developments ?

Mr. NATHAN. I think the Federal Reserve Board's monetary policies are pretty much the same as the fiscal policy; namely, "let's move up but be careful, careful, careful, careful." It is "you know, let's lean on the down side." And I think there are two things wrong with it: one, I think it is an illusion that this is going to bring price stability; second, it is just going to continue a fantastic waste of resources, of unemployment, and a large GNP gap and a much bigger deficit.

Chairman HUMPHREY. Mr. Ackley.

Mr. ACKLEY. I don't think monetary policy is nearly as important as fiscal policy. At the moment, I don't think what the Fed is doing is making very much difference. It could toward the end of the year. As business activity recovers, it might very well require a faster rate of monetary growth than the Fed will be providing; and at that point they should provide it.

Chairman HUMPHREY. Mr. Burress? Mr. BURRESS. Well, I have the opportunity to interview for my column, Mr. Chairman, Federal Reserve officials frequently. And one thing that is very clear: None of us know for sure what is making the money supply behave the way it has.

How GNP could grow in the second half of 1975 nearly eight times as fast as the money supply as interest rates fell is a question that remains unanswered. It bothers all of us.

In other words, there is just a lot of questions here where we don't know the answers. Yet we must give these questions hard and careful thought and I look forward to receiving your letter and questions.

Chairman HUMPHREY, Yes, we will be very specific in our questioning. Mr. Parks.

Mr. Parks. Just one comment. I don't think we are dealing with economics at all. I think we are dealing with ideology. I think we are dealing with the economists who have responsibility for establishing policy and carrying through policy and who are right out of the 19th century: who look at a competitive classical model that does not exist. The case has not been demonstrated at all that the slow growth program or the no growth program, as it might turn out to be, is going to solve the problem of inflation even though the costs are immense.

Chairman HUMPHREY. Just a professional question. Mr. Ackley, you were the former president of the American Economic Association?

Mr. ACKLEY. No I was vice president. Chairman HUMPHREY. Well, you didn't do any better than I did. (Laughter].

Chairman HUMPHREY. You know now when judges are appointed, the President gets some recommendations from the American Bar Association. He is not compelled of course to abide by those. The State governors frequently do this. What would you think about having some sort of professional committee of your economists making some recommendations on economic appointments? Does that make any sense?

Mr. ACKLEY. It makes sense but whether you could persuade them to do it, I don't know. I rather doubt it.

Chairman HUMPHREY. You mean persuade whom to do it?
Mr. ACKLEY. The economists.

Chairman HUMPHREY. You mean they are a rather individualistic bunch?

Mr. ACKLEY. Well, it is worth thinking about. Mr. NATHAN. It is worth thinking about but one of the problems I think that was just raised here by Mr. Parks is very true. It is an ideological problem. And I couldn't imagine Gardner Ackley or

Walter Heller getting along with President Ford or vice versa for more than 24 hours.

Chairman HUMPHREY. Thank you gentlemen. That concludes this morning's session.

[Whereupon, at 12 p.m., the committee recessed, to reconvene at 2:45 p.m., the same day.]

[The following questions and answers were subsequently supplied for the record :]


CHAIRMAN HUMPHREY Question 1. Economic Outlook 1976: The Commerce Department survey of business investment plans indicates a drop in business investment of about 4 percent in real terms. The CEA predicts a 4 to 5 percent increase. I am informed that the Commerce survey has a good "track” record. Why should we expect it to be wrong by as much as 8 or 9 percent this year?

Answer. As I indicated in my testimony, I believe that CEA is predicting an 8% real increase in plant and equipment investment in 1976, even higher than your question indicates. I think that an 8% gain is a somewhat optimistic forecast, although I do expect a solid rise in investment this year. However, I find even less plausible the second successive large increase in real investment which seems to be implied by CEA's forecast for 1977. Perhaps I should say, rather, that I find it implausible given the fiscal policies proposed in the Economic Report and the Budget.

Question 2. Recovery targets: With the unemployment rate at 8.3 percent in December, it would require about 8 percent real output growth to reduce unemployment to 7 percent by the end of this year. Another 7 percent growth. roughly, would be required to bring unemployment to 6 percent by the end of 1977. Do you regard such growth rates as desirable? Attainable? Would growth in the 7 to 8 percent range this year and next be inflationary?

If you do not endorse these targets, what targets would you propose ?
What fiscal and monetary policies are needed to attain these targets?

Answer. I regard the growth rates of 8% in 1976 and 7% in 1977 as highly desirable outcomes. I doubt that any policy changes initiated now could promise the attainment of 8% growth in 1976-although it is not completely outside the range of probability that an 8% real output growth might occur anyway this year. Policies could be still adjusted to aim for 7% or 8% growth in 1977, with roughly equal chances of over-shoot or under-shoot. Such rates of output growth would add very little to whatever inflation would have occurred with a slower growth rate.

Question 3. Budget policy: The cost of maintaining the present level of Federal government services in real terms in fiscal 1977 would be about $420 to $425 billion. We have come to call this the "current services budget." Would you regard this as about the right amount for the Federal Government to be spending in FY 1977? How much would you add or cut? If spending were to be at this level, what tax policy would be needed should the tax cuts presently in effect extended ? Enlarged ?

Answer. Whether a budget for fiscal 1977 or $420 to $425 billion is the right figure depends not so much on fiscal policy objectives as it does on social goals and political preferences, including-an important measure-one's views about what ought to be spent for national defense. Almost any size budget can be compatible with almost any desired fiscal policy, if tax rates are properly adjusted. Although I have not made careful calculations (not having a big econometric model for simulation purposes), I believe that with a budget of the size specified, the tax cuts now in effect should still be extended, although I am not sure whether the proposed enlargement of these cuts (beginning in the second half of this year) would be necessary in order to achieve the real growth targets referred to in question 2.

Question 4. The Administration estimates that the full employment budget will move from a deficit of $16 billion in fiscal 1976 to a surplus of $3 billion in fiscal 1977. If examined on a quarterly basis, the swing would be even more dramatic. Is a budget swing of this magnitude desirable at this early stage of the recovery? What would you recommend with respect to the full-employment budget? Would you allow it to remain in deficit for the time being? Move it slowly toward surplus? What?

Answer. As indicated in my testimony, the sharp shift from a $16 billion full employment deficit in fiscal 1976 to a surplus of $3 billion in fiscal 1977 is not desirable. I would allow the full employment budget to remain in deficit, although planning slowly to reduce it, with the goal of moving into surplus as the unemployment rate approaches 5%. However, such a plan ought to be adjusted in either direction to whatever extent appears necessary to assure neither too slow nor too rapid an approach to the 5% unemployment level.

Question 5. Monetary policy: I am puzzled by the recent behavior of the money supply and interest rates. Interest rates have dropped noticeably in the last few weeks, yet the money supply has not grown at all. Bank loans to business have again begun dropping. What does this tell us about the state of the private economy and the demand for credit? Is the economy weaker than we think?

Are you satisfied with recent Federal Reserve policy? The Fed has failed to meet even the bottom of its 5 to 742 percent money growth range. Now they have lowered the bottom of the range to 41/2 percent. Does that represent the kind of policy stance that will give active support to a possibly faltering recovery?

Would you express your monetary policy recommendations for the coming year in terms of money supply or interest rates? Or both? What would be your specific recommendation?

Answer. The behavior of the money supply and interest rates you have described is indeed puzzling; but I have never believed that the money demand function was highly stable. I do not interpret it as meaning that the economy is weaker than we thought, if that means an unemployment rate higher or a GNP level lower than the current short-term expectation. I have no problem with recent monetary policies so long as interest rates stay where they are, and recovery continues. I don't care whether monetary policy objectives are expressed in terms of money supply growth or interest rates; more fundamentally, they should be expressed in terms of supporting a desirable expansion of output and employment. I do not know-in advance-what money growth is necessary to achieve this (and neither does the Fed). But any appreciable runup in interest rates later this year would surely threaten its achievement.

Question 6. Inflation: The Administration is projecting a 6 percent inflation rate both this year and next. Can't we do better than that? The CEA Report makes no reference to the Council on Wage and Price Stability. It is as if they never heard of them. Yet it was President Ford who created the Council on Wage and Price Stability. Would you comment please on the type of pricewage policy we need in this year of rapidly rising profits and important collective bargaining negotiations?

Answer. My own forecast is for 4% to 8% range of inflation, reflecting my greater uncertainty about our ability to predict price level changes. We could aim for a lower range of price increase, but we have to consider the costs. Certainly, trying to achieve it by extra unemployment would not be worth the cost. A vigorous price-wage policy to lower the expected inflation rate has certain political, and possibly economic, costs; but I think they are small enough to be worth assuming. However, given this Administration's basic political attitudes, it is a waste of time to urge it.

Question 7. Social security tax: Virtually the only new policy proposal contained in the President's budget is a request for an increase in the social security tax rate. Assuming that the social security system needs additional financing (which has yet to be clearly demonstrated) do you feel this can best be achieved through an increase in the tax rate, an increase in the wage base, a transfer from general revenues or how? How serious would the social security tax increase be in terms of adding to inflation (it raises labor costs) and in terms of discouraging growth of employment?

Answer. Some transfer of social security financing to general revenues is long overdue. The Payroll Tax is a miserable tax; its importance in our tax system has already more than doubled in recent years, and should not be allowed to increase further. For the long run, we should plan to integrate the Payroll Tax into the Personal Income Tax.

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AFTERNOON SESSION Representative MOORHEAD. The Joint Economic Committee will please come to order. We have with us today Mr. Earl Butz, Secretary of Agriculture, and Mr. Elliot Richardson newly confirmed Secretary of Commerce. I have just a brief opening statement this afternoon. We had an interesting session this morning with top private economists on the economic outlook. One of the major points that they all stressed was the need for a good harvest this coming crop year if we are to succeed in holding inflation in retail goods prices and consumer prices generally under control. There is every indication from your department's own data, Mr. Butz, that farmers are trying to maximize production.

As of January 1, for example, wheat planting intentions are 5 percent above last year's level. Prospective acreage to be planted in corn is up 4 percent. With fair weather and if these intentions are realized, and I am emphasize that, we have a good chance of holding inflation in retail food prices at 4 or 5 percent this year, which is much better than 14.5 percent in 1973 and 1974, and is below 1975's 8.5 percent.

Last year, we saw similar intentions. Prospective plantings were at record levels, and despite target prices and loan levels well below the level of variable production costs, still we did have record plants. Farmers gambled that they would not need to resort to inadequate price supports. Farmers gambled because reserve levels of carryover stocks were at an 18-year low. Even a bumper harvest, they correctly decided, would not force commodity prices below production costs.

However, it is not the same this year. We largely rebuilt our commodity stocks. Farmers, therefore, have a lot to lose if we have another bumper crop. Mr. Butz, my fear is this, without a loan rate at least equal to production costs and with stocks now rebuilt, well, I am concerned that farmers will not go all out. They will play it safe and not seek to maximize production. If they reduce their plantings or if they do not go all-out, their prices will go through the floor. And it is certainly a good possibility, despite optimistic spring planting intentions, there will be another sharp run-up in retail prices next fall. I will be discussing with you shortly the possibility of increasing these target prices and loan levels, as we tried to do last year about this time.

Mr. Richardson, it is particularly nice to have you here before the Joint Economic Committee. I believe it is for the first time, even though you held many high offices in this Nation. I particularly welcome you today. I remember with great pleasure being with you in England at your just-immediate incarnation before this one. And I welcome you back to the United States. But, I think, well, I am just pleased to see that you have this new assignment, even though I won't be able to go and visit you in England again.

I know that you have just taken over as Secretary of Commerce and it takes time to acclimatize one's self to new situations, but I know that you are an old hand in Government and can give us a good perspective of how the economic policies of the Government can be expected to proceed. I note from your prepared statement that you

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