is possible that the more important effect of the Program on investment may have been qualitative rather than quantitative. While investment spending during the early part of the Program was very strong, the capacity constraints that were emerging towards the end of the Stabilization Program came in such basic industries as refining, machinery and equipment, and the pulp and paper industries. Investment in such industries requires stable, long-term planning horizon such that the large costs of increasing capacity in these areas may be examined and reasonably accurate profit projections made. In an unstable economic environment with considerable uncertainty, corporations tend to invest in projects in which the payback period is considerably shorter. This behavior, in many ways, reflects the "permanent income hypothesis" of investment theory whereby a firm must be assured of a stable and permanent increase in demand for a product before it will proceed with fixed investment. In cases where capital commitments are proportionately more substantial, one may assume that the period of time needed to assure a permanent increase in demand must be proportionately longer. While perhaps initially signalling such stability, the Program particularly in the latter phases-probably contributed to uncertainty and thus, perhaps to shifts away from investment in basic industries. However, further research at the micro level would be necessary to substantiate this latter hypothesis.

One important open question with respect to the Stabilization Program is whether or not stronger measures should have been taken to stimulate investment spending directly, particularly during Phases III and IV. The capacity shortage problems during 1973 and 1974 were not anticipated by either the Economic Stabilization Program or any other group of economists. In addition, data on plant capacity are sparse and difficult to interpret. However, in some areas, stronger action by the Cost of Living Council or some other Federal agency, would appear to have been useful, particularly in such sectors as the petroleum or paper industries. The latter was operating at 94 percent of capacity by the first quarter of 1972 and was not planning a major expansion at that time. Similarly, in mid-1972, the petroleum industry was not planning a major expansion in refinery capacity. Indeed, while the exact nature of such prodding is uncertain, it may be argued that had the Cost of Living Council encouraged investments in such basic industries as paper, chemicals, fertilizer, and petroleum refining beginning in mid-1972, the industrial inflation experienced in 1974 might have been moderated substantially. In retrospect, then, it would appear that greater efforts in this area might have proved useful, although the proper mechanism or forum

through which to influence such investment decisions, would require further consideration.

Footnotes

1 See the Economic Report of the President, January, 1972, "Where We Stood on August 15", pp. 65-67. See also the paper on Policy Planning in this collection. Executive Office of the President, Office of Emergency Preparedness, Stemming Inflation: The Office of Emergency Preparedness and the 90-Day Freeze, Washington, D.C., 1972, pp. 17-18.

3

Congress did not enact the Job Development Credit in the 10 percent-5 percent form, but incorporated a permanent 7 percent tax credit in the Revenue Act of 1971.

4

The policy on long-term interest rates was subsequently liberalized in September, 1972, such that interest on long term debt could also be used as an allowable cost.

5

The Cost of Living Council Economic Stabilization Program Quarterly Report Covering the Period January 1 Through March 31, 1972, p. 93.

See the various Economic Stabilization Program Quarterly Reports during this period which catalog these actions.

7

Reprinted in Cost of Living Council, Economic Stabilization Program Quarterly Report, Covering the Period October 1, 1972, Through January 10, 1973, p. 64.

Economic Report of the President, January, 1973, pp. 69-70. See also p. 68 of "Distortions and Interferences with Production and Distribution." Economic Report of the President, January, 1973, p. 83.

10 The Cost of Living Council, Economic Stabilization Program Quarterly Report, Covering the Period January 11, 1973, Through March 31, 1973, p. 23.

"These anticipations were based upon the regular Commerce Department survey taken in November and December of 1972, which had projected a 1973 rise of 13 percent. The Commerce survey results were supported by a similar survey of investment anticipations conducted by McGraw-Hill in late October. 12 See "Supply Actions" in Cost of Living Council, Economic Stabilization Quarterly Report, Covering the Period July 1, 1973, Through September 30, 1973, pp. 42-44.

13 The Cost of Living Council, Economic Stabilization Program Quarterly Report, Covering the Period October 1, 1973, Through December 31, 1973, p. 17. "For the development of this policy the reader is referred to the Paper on Selective Decontrol in this collection.

15 Dr. John T. Dunlop, Statement before the Subcommittee on Production and Stabilization of the Senate Committee on Banking and Urban Affairs, February 6, 1974, p. 43.

16

Eisner, R. and Strotz, R. H. “Determinants of Business Investment” in Commission on Money and Credit, Impacts of Monetary Policy. Prentice Hall: Englewood Cliffs, N. J., 1963.

17

Evans, M. K. Macroeconomic Activity, Theory, Forecasting and Control: An Econometric Approach, Harper & Row, Publisher, New York, 1969.

18

Jorgenson, D. W. “Econometric Studies of Investment Behavior: A Survey," Journal of Economic Literature, Dec. 1971, Vol IX (4), pp. 1111-1147. 19 Clark, J. M., "Business Acceleration and the Law of Demand: A Technical Factor in Economic Cycles," Journal of Political Economy, March, 1917, Vol. 25(1), pp. 217-235.

Goodwin, R. M., "The Non-linear Accelerator and The Persistence of Business Cycles," Econometrica, Jan., 1951, Vol. 20(1), pp. 1–17.

Chenery, H. B., "Overcapacity and the Acceleration Principle," Econometrica, Jan., 1952, Vol. 20(1), pp. 1-28.

Koyck, L. M., Distributed Logs and Investment Analysis, North-Holland, Amsterdam, 1954.

Eisner, R. "Investment: Fact and Fancy," American Economic Review, May, 1963, Vol. 53(2), pp. 237-46.

"Meyer, J. and Kuh, E., The Investment Decision, Harvard University Press, Cambridge, Mass. 1957.

Meyer, J. and Glauber R., Investment Decisions, Economic Forecasting, and Public Policy, Division of Research, Graduate School of Business Administration, Harvard University, Boston, 1964.

Anderson, W. H. L., Corporate Finance, and Fixed Investment, An Econometric Study, Division of Research, Graduate School of Business Administration, Harvard University, Boston, 1964.

Kuh, E., Capital Stock Growth: A Macro Econometric Approach, NorthHolland, Amsterdam, 1963.

"Jorgenson, D. W., "Capital Theory and Investment Behavior," American Economic Review, May, 1963, Vol. 53(2), pp. 247–259.

Hall, R. E. and Jorgenson, D. W., "Tax Policy and Investment Behavior" American Economic Review, June, 1967, Vol. 57(3), pp. 391-414.

Jorgenson, D. W. and Siebert, C. D., "A Comparison of Alternate Theories of Corporate Investment Behavior", American Economic Review, Sept., 1968, Vol. 58(4), pp. 681-712.

Jorgenson, D. W., "Optional Capital Accumulation and Corporate Investment Behavior", Journal of Political Economy, Nov-Dec., 1968, Vol. 78(6), pp. 11231151.

For a derivation of Jorgenson's model see Jorgenson, D. W., The Theory of Investment Behavior", in Ferber, R., ed., Determinants of Investment Behavior, National Buerau of Economic Research, Columbia University Press, New York, 1967.

"Koyck, L. M., Distributed Lags and Investment Analysis, North-Holland Amsterdam. 1954.

See Johnston, J., Econometric Methods, 2nd Edition, McGraw-Hill Book Company, New York, 1972.

ADVISORY

COMMITTEES

By: James A. Wilkinson
Edward Stevens Atkinson, Jr.

Assisted by:

Matthew Kamens

This paper describes the activities and use of advisory committees in the Economic Stabilization Program. After a brief introduction outlining the general functions of such groups, the paper discusses compliance with the Federal Advisory Committee Act and explores some of the strengths and weaknesses of the specifications of this statute. In an appendix, the paper describes the workings and activities of the various advisory committees that participated in the policy development and operations of the Program.

Mr. Wilkinson was Deputy Executive Secretary of the Cost of Living Council. He received his B.A. degree in economics from Georgetown University and is currently attending law school at Duquesne University and is employed by the United States Steel Corporation as a Staff Assistant for labor relations.

Mr. Atkinson was a program analyst in the Office of the Executive Secretary, Cost of Living Council. He received his B.A. in international relations, from Michigan State University in 1971 and is a member of Phi Beta Kappa. Currently, he is a Research Assistant at the National Center for Prosecutorial Management, and is completing his law degree at Georgetown University Law Center.

Mr. Kamens received his A.B. cum laude, in economics from Franklin and Marshall College in 1973, where he was a member of Phi Beta Kappa. He presently is a second year law student at Columbia University.