energy independence which the Council cites in connection with its discussion of capital requirements seem to be less ambitious than earlier Administration statements on this issue and apparently fall short of the targets recommended in our 1974 statement. We continue to believe that the proposals we made in 1974 were sound, and that the need for a major national commitment to reach the goals we outlined is even stronger today than it was two years ago. INTERNATIONAL ECONOMIC COOPERATION The international chapter of the Council's Report presents a very clear account of the important advances in international economic cooperation that were achieved during 1975 and in early 1976, especially in connection with the meeting of the heads of six major industrial nations in Rambouillet and with the monetary agreement concluded by the IMF Interim Committee in Jamaica. In view of the wide divergencies in national views that had impeded the progress of international negotiations in the past, the pragmatic monetary accords reached in Jamaica constitute a considerable achievement, It is a particular source of satisfaction to our Committee that the general approach underlying these accords is very closely in line with the basic recommendations that we made in our 1973 policy statement, "Strengthening the World Monetary System." Thus, the agreements formally recognize the need for a high degree of exchange rate flexibility over the foreseeable future. At the same time, they essentially leave open the question of the relative extent to which the exchange rate system in the more distant future should rely on floats and on adjustable parities. While the agreements do not formally call for the "clear set of internationally-agreed upon rules" governing the exchange rate system that had been proposed in our earlier statement, they do provide for a significant strengthening of consultative arrangements among the governments and central banks of major countries (including exchange of daily information among central banks with respect to any market interventions) that should help to counter disorderly conditions or excessively erratic fluctuations in the exchange markets. The agreements also call for a reduction in the role of gold in the international monetary system, most importantly through the termination of the use of gold as a medium of settlement in IMF transactions. Finally, substantial additional liquidity resources are to be made available to the less developed countries through increases in IMF quotas, liberalization of the IMF's compensatory financing facility, and the establishment of a trust fund to assist poorer LDC countries. The trust fund, in turn, is to be financed by auction sales of th of the IMF's gold holdings, a procedure that should further contribute to the desirable objective of shifting gold out of the monetary system. In our 1975 policy statement, "International Consequences of HighPriced Energy," we had called for consideration of such a procedure to finance interest-subsidies provided by the IMF oil facility to the poorer developing countries. Implementation of the Jamaica agreements should do much to strengthen confidence in the stability of the international monetary system and the willingness of the financial authorities of the world's major countries to resolve policy conflicts in a cooperative fashion. The agreements should also make a major contribution toward alleviating the severe external financial strains that are already affecting many of the non-oil producing LDCs. A failure to reduce such strains, in turn, could have highly adverse effects on the international financial system as a whole as well as on our domestic banking and financial situation. For all these reasons, it appears highly desirable that the Jamaica accords be ratified as promptly as possible. At the same time, the United States will need to be on guard against possible future efforts to modify the agreement in ways not conducive to the most desirable and efficient longer-term functioning of the world monetary system. Thus, central bank cooperation in the exchange markets should not be allowed to lead to the reintroduction of an overly managed exchange rate system. Moreover, strong efforts are required to assure that the agreement among the ten largest industrial countries which bars any action to peg the price of gold and places a ceiling on the total gold stock held by the Fund and cooperating monetary authorities will in fact be renewed after its expiration date two years from now. In addition, it is highly important to preserve the basic character of the International Monetary Fund as an organization primarily concerned with providing liquidity rather than unconditional long term aid resources. We agree with the Council that, pending ratification of the scheduled quota increases, a temporary increase in drawing rights in all credit tranches appears justified. We also concur, however, that there should be strict adherence to the provision of the agreement that the special 45 percent increase in IMF drawing rights be terminated as soon as the higher quotas have been put into effect. This is particularly essential with respect to the first credit tranchei.e. the tranche on which member countries can essentially draw without being subject to any conditions. Another welcome outcome of the recent international economic consultations was the agreement at Rambouillet to accelerate the time schedule on the Geneva trade negotiations. As was stressed in our statement on "International Consequences of High-Priced Energy" such negotiations should not only concentrate on improving access to markets through reduction or elimination of import restrictions. They should also pay major attention to developing procedures and rules for assuring access to supplies, particularly by limiting the possibilities for the unilateral imposition of export restraints. A particularly difficult area for future international economic negotiations involves the manifold relationships between the industrial countries of the OECD and the developing nations. Our Committee plans to explore these problems in depth in a new study that is just getting under way. We are encouraged by the open-minded and constructive approach which the Council's Report takes toward possible solutions, including international earnings stabilization schemes and commodity agreements. At the same time, we fully share the Council's strong opposition to "indexation" proposals that would automatically link changes in commodity prices to changes in the prices of manufactured goods. Such a procedure would introduce major new distortions and serve as a continuous engine of inflation for the entire international economic system. CONFERENCE ON ECONOMIC PROGRESS (By Leon H. Keyserling*) PART I. THE REPORTS OF THE PRESIDENT AND THE CEA 1. Shortcomings in 1976 Economic Report of the President The 1976 Economic Report of the President, and the accompanying 1976 Annual Report of the Council of Economic Advisers, are the latest evidence of a long-term deterioration in the quality of these documents under the Employment Act of 1946. In the current Reports, there is too much satisfaction, and not enough concern. There are serious errors in economic analysis. Forecasts are made, but there is a categorical denial of the feasibility of specific goals, which is in violation of a specific mandate of the Employment Act of 1946, and neglectful of the first requirement for a sound and comprehensive national economic policy. And the policies actually set forth are treated in a fragmentary manner lacking in vigor and adequacy, and are far too limited to encompass the wide range of policies essential to a satisfactory rate of economic restoration and responsible attention to national priority needs. EXCESSIVE COMPLACENCY As to the excessive complacency, or even unwarranted optimism: The President's Report refers on page 3 to the "notable progress during the year reviewed, and to "appreciable advance in reducing the rate of inflation." But the recovery movement thus far has been more inadequate in real terms and more fraught with uncertainties than the recovery movements within a similar number of months during the four previous upturns since the end of World War II. And allowing for the disappearance of the special and unexpected factors which accounted for a large part of the 12 percent consumer price inflation from December 1973 to December 1974, the 7 percent rate of consumer price inflation from December 1974 to December 1975 was intolerably high, and totally without meaningful explanation in the President's Report or the CEA Report. WHERE IS THE "OVER-STIMULATION ?” On page 4, the President states that "it has taken many years of excessive stimulation . . . to create the economic difficulties of 1974 and 1975." This statement is another repetition of the Administration's unreasoned efforts to attribute troubles, resulting largely from its own policies during seven long years, to the alleged mistakes of earlier * Chairman. Council of Economic Advisers to President Truman. President, Conference on Economic Progress. Administrations a long time ago. This allegation of "excessive stimulation" is preposterous, considering that the real rate of economic growth averaged annually only 1.6 percent during 1969-75 (when two absolute recessions occurred, with the second of unparalleled severity since the Great Depression), and in view of a rate of real economic growth of only 1.8 percent from fourth quarter 1974 to fourth quarter 1975. Correspondingly, it is incredible to attribute the extraordinary rates of inflation during 1974 and 1975 to "excessive stimulation." And inconsistent with the assertion, there is belated recognition on page 4 of the President's Report that "inflation and unemployment are not opposites but related symptoms of an unhealthy economy." Further, the President's belated recognition that "trade-off" does not work is paying only lip service to the revealed truth. For the President, in the face of the seriously inadequate recovery movement to date, and the still-appalling idleness of workers and other productive resources, continues on page 5 to warn against "overly rapid growth." In consequence of this misguided position, the President's program is wrong in what it proposes to do, and neglectful of much of what should be proposed but is entirely neglected. HOLDING FEDERAL OUTLAYS TOO LOW In this connection, the President urges on page 5 that "we must also slow down the growth of Federal spending in the years immediately ahead. . ." This defies the predominant judgment of informed and objective analysts that a much more rapid growth in Federal spending than the President proposes is a sine qua non for an acceptable rate of real economic growth. And this is without reference to the essential role of allocating sufficient portions of the total national product to urgent and neglected priorities of our domestic needs. MISINTERPRETATION OF THE "CAPITAL SHORTAGE” A basic reason advanced by the President for his proposal that the growth in Federal spending be slowed down is his assertion, on page 5, that this is required in order that "mounting claims by the Federal Government [reflected in Federal borrowing] will not prevent an adequate flow of savings into capital investments." This position, accompanied by a plea on the same page 5 for predominant reliance upon private enterprise in the process of economic restoration, goes far beyond legitimate major emphasis upon expansion of the private sector. It substitutes a biased and overweaning preoccupation with that area of the economy, while slighting the requisites for restoration and maintenance of equilibrium or balance at full resource use. The President's theory as to why enough funds are not flowing into private capital investment is mainly erroneous. The current inadequacy of this flow is not due to insufficient saving; an economist would be hard put to develop a viable model for full economic restoration based upon enlargement of the rate of saving (7.9 percent in fourth quarter 1975, or higher than in any year save one since 1947). Second and more important, the inadequacy of capital investment. is not now due to deficient prices received nor deficient profits per unit, 75-983-70-pt. 4 nor is it due to the inability of the most important and massive investors to obtain the credit they need on terms they can support. In fact, since World War II, these investors have financed an increasing portion of their investment requirements through retained earnings, rather than through borrowed funds. The insufficiency of capital investment today, related to the requirements for full economic restoration, is attributable, not to a shortage of capital availability, but rather to 25 percent or more idle plant facilities, and the gross inadequacy of sales volume. It follows ineluctably that the proper road to the stimulation of capital investment is the vigorous use of a wide range of national policies to accelerate the growth of ultimate demand. in the form of consumer incomes and expenditures plus properly enlarged Federal outlays for essential priority purposes. Third and most important of all, even if a shortage of capital were to be conceded, the President ignores the basic cause and the proper remedy. A shortage of capital, unlike any shortage of manpower or skills, oil or food, or mass transportation, is a product of monetary policy, and can be corrected by changes in monetary policy. During World War II, there was an unprecedented expansion of need for private and public capital combined, and to a lesser but great extent this need expanded during the Korean war. But those in charge of national policies did not throw up their hands, nor take the wrong approaches. The Federal Reserve Board, with an appropriate degree of influence exerted by the President and others in the Executive Branch who were planning the wartime efforts, provided the amounts and kinds of capital needed to float the economic ship at full use of resources. The Federal Reserve, in recent years and now, is not doing this. The Fed now alleges, with support from the President and the CEA, that the demands of fiscal policy, inadequate though these are, are preventing adequate capital flow to the private sector. This is merely another way of saying that the central bank is resisting the fiscal policy of the Government instead of supporting it fully, and instead of going beyond that to help compensate for the excessively restrained fiscal policy. The recent and current action by the Federal Reserve is economically indefensible, and is arrogating excessive powers to itself. There is no excuse in the United States for a "shortage of capital" for any substantial period of time. THE MISTAKEN APPROACH TO TAX REDUCTION The grave deficiencies in analysis in the President's Economic Report are accompanied by serious errors in his policy proposals. He recommends on page 5 that "budget savings be refunded to the American taxpayer by means of tax cuts." He proposes "an annual tax cut of $28 billion from the 1974 levels, effective July 1, 1976," and he offers the beguiling prospect that "another major tax cut will be feasible by 1979." I have recurrently, in my testimony before the Joint Economic Committee, in my annual Invited Comments, and many other ways, warned against the veritable orgy of tax-cutting since 1964, accompanied by egregious neglect of other equally important national eco |