The 1976 joint economic report


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The 1976 joint economic report report of the Joint Economic Committee, Congress of the United States, on the February 1976 economic report of the President together with an international section in which majority and minority concur, and minority, supplemental and additional views, March --, 1976
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Full Text


S ssRn ion. No. 94-000




Printed fr the ue of the Joint Economic Conmittee

S67-480 WASHINGTON : 1976

(Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.)
HUBERT H. HUMPHREY, Minnesota, Chairman
WRIGHT PATMAN, Texas, Vice Chairman
EDWARD M. KENNEDY, Massachusetts GILLIS W. LONG, Louisiana
PAUL J. FANNIN, Arizona JOHN H. ROUSSELOT, Massachusetts
JOHN R. STARK, Executive Director

RICHARD F. KAUFMAN, General Counsel

CHARLES H. BRADFORD (Senior Economist)

*=*~~~~~l Y.% */!%: '



L. Introduction and Summary . . . . 5
Ma in Recommendation 13

II. Economic Situation and Outlook . . . 24
Outlook for 1976 . . . . 26
Will the Recovery Be Sustained? . 28
Energy . . . . . . . 35
Longer-Run Growth Prospects . . 38

III. Fiscal, Monetary and Price-Incomes
Policies . . . . . . . 41
Goals of Economic Policy . . . 41
Fiscal Policy . . . . . . 48
Price-Incomes POlicy . . . . 63
Monetary Policy . . . . . 68
Coordination of Economic Policy . 72

IV. Special Policies to Achieve Full
Employmnt . . . . 78
The High Cost of Extended
Uneplyment . . . . . 78
The Proper Role for Unemploy-
ment Compensation . . . . 82
A Program of Job Creation . . . 87
Economic Planning . . . . . 99

V. Federal Budget Priorities . . . . 102
Expenditures . . . . 102
Income Security . . . . 114
Housing . . . . . . 119
Energy . . . . . . . 124
Agriculture . . . . . 125
Defense Spending . . . . 131
Tax Reform . . . . . . 139
Small Business . . . . . 146



VI. Investment Requirements and
Capital Sufficiency .. . .. . 150
Investment Needs . . .151
Availability of Funds . . . 155
Can Business Finance
Needed Investment? . . . 1.65
Broaden ing the Ownership
of Capital . . . . . 170

VII. Economic Problems of Regions,
States, and Cities . . . . . 174
Operating Budgets . 74
Sustaining State Unemploy-
ment Funds . . . 184
The Municipal Bond Market .. . 185
Chron ica lly Depressed
Regional Economics .. . . 192
The Need fr Reg onat-
Economic Information . . . 199

Vt Il. I nternationa I Economic Issues . . . 201
Monetary Reform . . . . . 201
Coping With Oil Deficits . . . 217
Commitment to Concessional Aid . 220
Consumer-Producer Conference . . 223
International Energy Policy . . 226
Achieving World Food Security . . 228

Supplemental Views of Vice Chairman
Wright Patman . . . . . . . 231
Supplemental Views of Senator
Wil liam Proxmire . . . . . 237
Supplemental Views of Senator
Abraham Ribicoff . . . . . . 240
Supplemental Views of Senator
Lloyd Bentsen . . . . . .. . 241
Supplemental Views of Senator
Edward M. Kennedy . . .. .. .. . 245
Supplemental Views of Representative
William S. Moorhead . . . .. . 264
Supplemental Views of Representative
Gillis Long . . . . . . 266


Minority Views . . . . . . . . 271

1. Introduction. . . . . . . 275
.II. Economic Outlook . . . . 277
III. Monetary Policy . . . . . 281
IV. Fiscal Policy . . . . . . 285
V. Employment. . . . . . . 289
VI. Energy. . . . . . . . 293
VII. Capital Formation . . . . . 297
VIII. State and Local Governments . . 304
Supplemental Views of
Senator Jacob K. Javits. . . . . 314
Additional Views of
Senator Charles H. Percy . . . 334
Additional Views of
Representative Garry Brown . . . . 335
Additional Views of
Representative John H. Rousselot . . 339

Committee Activities .'. . . . . . 345
Ull~ ~~C:~I ~:n ~

"I.xK iJ"~i:

ii i

94th Congress Report
2nd Session SNA No. 94-


March 1976. -- Ordered to be printed
with illustrations

Mr. Humphrey, from the Joint Economic Committee,
submitted the following


together with


(Pursuant to sec. 5(a) of
Public Law 304, 79th Congress)

This report is submitted in accordance with the re-
quirement of the Employment Act of 1946 that the Joint
Economic Committee file a report each year with the
Senate and the House of Representatives containing its
findings and recommendations with respect to each of
the main recommendations made by the President in the
Economic Report. This report is to serve as a guide to
the several committees of Congress dealing with legis-
lation relating to economic issues.


!iiii ;;i ii i^ .x

Digitized by the Internet Archive
in 2013

Report of the

Joint Economic Committee

on the

February 1976

Economic Report of the President



The condition of the United States economy
continues to be a matter of distress to Members of
this Committee. Despite recent signs of improvement,
seven mi llion people remain out of work by official
count. If discouraged and underemployed workers are
included, the figure exceeds 10 million. An esti-
mated 60 to 75 million people in 1975 were members
of families in which someone was unemployed. No one
can be complacent about the recent gains when full
employment is still years away.

To inform itself first hand on the extent of
the economic crisis, the Committee held a series of
hearings on unemployment in cities throughout the
country. It traveled to Chicago, New York, Atlanta,
Los Angeles, Boston and Fall River, Massachusetts to
hear testimony, including statements by unemployed
persons, State and local officials, and others. This
testimony was very useful, an some of the recomm -
dations in this Report were veloped from ideas
presented at these hearings.

The problem of unemployment is especially
acute in the case of young people. In January, 3.7
million persons under the ge of 25 were unemployed.
Indeed, this prolonged recession threatens to spawn
a large disenchanted group f young adults -- out of
the work force, without opportunity for adequate self-
support, and alienated from th society that fails to
accord them a productive role.

The Great Recession1 of 1973-1975, as Chart I/I
starkly shows, dwarfs all previous postwar reces-
sions in deth and duration. Two and one half years
after this recession began, the economy has not yet
returned to its 1973 income levels. Meanwhile, the


Chart 1/I


Index of real GNP
(Previous peak = 100)
4 1960-61 ,,
102- 1957- 58 \6 1969-70

101 -


96 ..l

95 -
_\ / '

94 ,

I* i. I I I I I
Source: Departmentof Commerce *


Nation's economic potential has grown faster since
1973 than during most previous downturns. Lost income
and production since the start of the recession now
totals some $400 billion in constant dollars, and
further losses by 1980 will run in the range of
$600 to $900 billion depending on the speed of
recovery. In either case, this unnecessarily
severe recession continues to involve a monumental
waste of national resources.

It is in this light that the recommendations
of our Report must be viewed. It is true that the
economy has made good strides toward recovery in
recent months. But no one should forget that it
still has very far to go before its resources will
be fully utilized and before inflationary shortages
could recur on any significant scale. Stimulative
economic policies at a time like this create jobs,
productivity and income; not infl ation.

The Prqsident's Economic Report is a blue-
Thl e Prios i ^ 'I.. .. ^ '* "
print for recession-level unemployment and high
inflation for several years ahead.

The President's 1977 budget is so restrictive
that it does not serve as a useful starting point for
budget policy deliberations. His proposals to cut
spending by $25 to $30 billion below the level needed
to maintain current government services would mean a
very sharp shift toward recession .while the economy
remains underutilized and unemployment remains above
7 percent. Compared with this irresponsible pro-
posal, our recommendations may look quite stimulative.
Compared to the projected needs of the economy, however,
our recommendations are moderate.

The President's estimate of the budget deficit
based on his policies, moreover, is so optimistic that
it cannot be taken seriously. After correcting for
this overoptimism, this Committee estimates that the
li~ 1 ^^y- A ^ - ,, , ~ r. ~ ..'8 ,^$"* . . ~ ,i ^ - --- .. .. ,- =* . .... s, .
"* ( ~ ~ |i !.~ ~ 'II, j~ ~ i~A, ^" . t-/" | S! S 5 *

President's deficit would be nearly $60 billion --
not $43 billion, as he states. The Committee's
recommendations, after counting additional tax
revenues from higher income and employment, would
not materially enlarge the deficit, yet more than
1-1/2 million more jobs would be available under
the Committee's program, real output would be 4
percent higher and the inflation rate 2 percentage
points lower.
The long-awaited recovery from recession is
less assured than the President and his economic
advisers would have us believe. Although an impor-
tant element of confidence is returning, capital
investment still is languishing; housing construction
is far below what it should be with a record number
of young people forming new households; and consumer
intentions remain uncertain. We expect improvement
in economic performance in the next several months,
but we are very concerned that the President's
restrictive 1977 budget, if accepted, would remove
the supports from beneath the recovery at a critical
time. Unless economic policies are substantially
more stimulative than the Administration proposes,
the recovery could founder in 1977. It is distress-
ing to realize how long and slow that recovery will.
be even if more stimulative fiscal and monetary
policies are adopted.

The severe recession of the past two and a
half yeas need not have been so drastic. Its
severity is a direct result of economic misunderstand-
ing and mismanagement by the Administration and the
Federal Reserve. The Nation is a victim of mis-
guided policies.

Administration officials would have us believe
that such a recession was the unavoidable consequence
of an inflation which stemmed from profligate
government spending. This myth has been repeated
so often from such high pedestals that many otherwise
well informed people believe it. The truth is
that the inflation of 1973-1974 derived not from


government profligacy but largely from factors
such as grain, oil and dollar devaluations that did
not reflect generalized excess demand.-/ The
recession has been gravely prolonged by failure to
understand this In the Administration and the
Federal Reserve. Eagerness to believe their own
preconceptions has blinded them to reality.

In spite of warnings from many economists
and from this Committee, the Administration and
the Federal Reserve continued in 1974 to apply
restrictive fiscal and monetary policies to an
already collapsing economy. As late as November of
1974, the President and his advisers referred to
inflation as "public enemy number one" without
mention of rising unemployment. In
December, the President still was calling for a
tax increase (surcharge) when a tax cut clearly
was needed to bolster the economy against collapse.
Congress fortunately rejected this request.

The bitter results of overly restrictive
policies are still with us. This is the cause of
today's enormous budget defi cits, occasioned by
recession-induced outlays and revenue shortfalls.
Every percentage point in unemployment costs the U.S.
Treasury an estimated $17 billion -- $12 billion
in lost tax revenues and $5 billion in food stamps,
unemployment insurance, and other support programs.
The recession also is the main cause of the per-
sistent decli ne in real capital format ion.

The Nation has failed consistently to meet
the objectives of the Employment Act of 1946 under
which this Committee was established. After 30
years, it is evident that we must improve our

I/ See Joint Economic Committee, Achieving Price
Stability Through Economi Growt December 1974,
Chapter II.


capacity to manage the economy to achieve full
employment. To attempt less would be an
inexcusable failure to use our ingenuity to build
a more rational and humane society.

This objective will require nothing less than
fundamental reform of the institutions and policies
we employ for making national economic policy.
Among the new initiatives needed to achieve full
employment are the following:

A national commitment to all adult
Americans able, willing, and seeking to work,
to provide opportunities for useful paid
employment at fair rates of compensation;

The establishment of annual economic goals
jointly by the President, the Congress, and
the Federal Reserve to achieve full employment,
production, and purchasing power;

The use of fiscal and monetary policy to
meet the annual economic goals with provisions
to encourage the Federal Reserve to pursue
monetary policies that support these goals
and that achieve full employment as promptly
as possible;

The establishment of a process of long-
range economic planning to analyze developing
trends and economic conditions; to recommend
long-term goals for full employment, produc-
tion, and purchasing power; and to propose
policies and programs to achieve such goals; 2/

The establishment of supplementary employ-
ment policies to close the gap, if one should
exist, between employment levels achieved

2/ See Representative Long's comments, p. 18,

through aggregate monetary and fiscal
policy and the goals adopted to achieve
full employment as promptly as possible.
Suppleetary employment programs should be
des ign to reduce unemployment due to
recessions and to structural barriers within
regions and among particular labor force
groups; and

The establi shment of comprehens i ve anti-
inflation policies that directly moderate
price increases in noncompetitive industries
which threaten to undermine national progress
toward.price stability.

In submitting its recommendations on economic
policy to the Congress, the Joint Economic Committee
must deplore the continual statements of Adminis-
tration officials that purvey ignorance and misinfor-
mation to the public on matters of economic policy.
Despite its deficiences, econom ics has become a
highly developed discipline. Administration
officials often speak as though they had heard
nothing of its progress in the past 40 years. To

In dealing with the large deficits of recent
years, the Administration ignores the fact
that they result directly from recession
and not vice versa. When unemployment mounts,
tax revenues decline and spending on unemploy-
ment compensation, among oer thr ings, rises.
This process is one of the so-called "auto-
matic stabilizers" of the economy. Each
percentage point of unemployment, as noted
above, increases the Federal deficit by about
$17 billion. If unemployment in fiscal year
197 had been at 4 percent instead of its

67 -480 0 76- 2

projected level of about 8 percent, the
deficit would have been very largely
eliminated. Yet the Administration
spreads the erroneous notion that the
deficit is caused by "wasteful spending."

e Another distortion of fact lies in constant
allusions to massive growth in Federal
spending. The Federal Government is not
gobbling up the national pie. As a propor-
tion of gross national product (GNP), in
fact, the Federal budget has maintained a
roughly constant 20-percent share from 1953
to 1973. Federal employment has fallen
steadily over the same period as a share of
the civilian labor force, from 4 percent
to 3 percent.

*Inflationcannot be talked down by castiga-
ting the Congress for its budget decisions.
Congress now has a rigorous process for
regulating the budget. Dealing with infla-
t i on respons i by requires public acti on to
ease supply shortages, to curb excessive
wage and price increases, and to cushion the
domestic effect of world price fluctuations.

*It is time to stop misleading statements
on the significance of the national debt.
The facts are that the debt has dropped
sharply from 82 percent of annual GNP in
.1950 to 26 percent in 1974.

There are other illustrations of poor
economic analysis by the Administration, such as
warnings that Federal borrowing will "crowd" private
investors out of the credit markets at a time when
credit is overly abundant; and such as unnecessary
alarms about social security financing and proposals
to raise social security taxes needlessly while the
economy remains weak.

Constant reiterations of archaic and erroneous
notions mislead the public. They are divisive and
harmful to the formulation of reasoned economic
policy. We call on the Administration to cease
these proclamations and to elevate the discussion
of economic policy to a more informed and pro-
ductive level.

Ma i n Recommendations

For the immediate future, the Committee
recommends a number of essential policy initiatives:

*Current services budget estimates prepared
by the Congressional Budget Office, rather than the
President's budget, should serve as a starting point
for congressional decisions on the 1977 budget.
Congress should make reductions from current services
outlay levels wherever such reductions are consistent
with effici6nt maintenance of necessary government
services. Because of the high unemployment which
wi I st il persist in 1977, a large part of the
savings achieved in this way should temporarily be
invested in programs to deal with unemployment. 3/
Adoption of our recommendations would result in an
estimated outlay total of $412 to $418 billion.4/5/6/

*Action should be taken prior to July I to
provide for continuation at least through the end of
1977 of the personal income tax reduction which has
been in effect during 1975 and the first half of 1976.

3/ Senator Proxmire states: "I object to using the
current services levels -- that is, last year's pro-
grams increased for population and price levels -- as
a starting point. This is a mindless method. It
legitimizes all those programs and expenditures --
good and bad -- now in the budget. I advocate+zero--
based budgeting, strict beneft-cost analyses,

(Footnotes cont inued)

1. .jj|

(Footnote 3/ continued)

determining the economic costs of alternative programs,
and cutting back or ending inefficient and useless
agencies and outlays."

4/ Senator Sparkman states: "It is most disturbing
to see continuing increases in Federal spending. I
believe that the Congress and the Administration must
make greater efforts to limit this spending growth.
For that reason, I would place particular emphasis on
the proposal in the Report that immediate efforts be
made to reduce spending for programs that do not have
high priority. I believe we should do this with even
greater efforts than stated in the Report.

"Also, I would hope that the strength of our
recovery and the wise use of monetary and tax policy
could speed up the recovery and thereby reduce the
def icit. An economic recovery wi ll automatica lly
increase incomes, which in turn leads to higher
revenues. Likewise, it should greatly reduce the
need for spending on such programs as unemployment,
welfare, food stamps and emergency employment. In
this way, there would be a healthy force working to
reduce public spending. It must be remembered that
the recession has been very costly to the Federal
Government as well as to the other sectors of our

5/ Senator Proxmire states: "I strongly oppose such
a high budget outlay. See my supplemental views on
p. 237."

6/ Representative Hamilton states: "Although I
favor a more stimulative program for the economy
than the President has proposed in order to sustain
and quicken the recovery now underway, I am concerned
with the magnitude of the stimulus proposed by this
Report. I am hopeful that the recovery will be
vigorous enough to avoid reaching the spending target
recommended in this Report. For that reason, I will
reserve judgment at this moment on the specific

(Footnotes continued)


(Footnote 6/ continued)

expevditure figure recommended herein.

"The report also recommends the enactment of
a large number of legislative proposals. While I
subscribe to the objectives of these proposals, and
may very well support them when they come before the
Congress for consideration, I do not want my general
approval of the Majority Report be be construed as an
unreserved endorsermnt of each such proposal."

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*The strength of the recovery should be
carefully monitored during the next few months.
Should output growth appear to be dropping below the
7-percent rate needed to bring unemployment down
appreciably, an additional tax cut should be enacted
for 1977. This additional reduction should be of a
type which will act directly to reduce costs and
prices. An income tax credit against some part of
social security taxes paid would meet this require-

*No increase in the social security tax rate
is necessary or desirable in 1977, nor should the
Federal unemployment insurance tax rate be increased
at that time.

*The President should establish and vigor-
ously support a voluntary program designed to ensure
that price increases are held to a necessary minimum
during 1976 and that real wage increases are in line
with productivity gains, taking into account the
expected rate of price increase. The Council on Wage
and Price Stability should be given full Presidential
support in the use of its authority, including its
subpoena authority, to investigate price increases
and to seek compliance with price and income standards.
Tax policy should also be used to contribute to the
achievement of a satisfactory rate of increase in
workers' real disposable incomes. We believe such a
program can succeed in reducing the inflation rate to
5 percent this year and 4 percent by the end of the
next year. This goal can be achieved without resort
to comprehensive price or wage controls, to which we
are opposed.

*During the remainder of 1975, monetary
policy should be conducted so as to avoid any sub-
stantial rise in short-term interest rates and to
lencourage reductions in longer-term rates. Temporary
fluctuations in the rate of growth of the monetary
aggregates should not precipitate monetary policy
changes so long as the pattern of interest rates is

satisf.atory. Over the lorger run, however, growth
of the monetary aggregates must be in line with
potential growth of real output.

.*The costs to the Nation of prolonged unem-
ployment are unacceptable. The goal of economic pol-
icy should be to reduce the unemployment rate to 6
percent by the end of 1977 and eventually to achieve
an unemployment rate no higher than 3 percent of the
adult labor force.

*A comprehensive strategy for dealing with
unemployment is essential to overall economic recov-
ery. An antirecession program should place
primary emphasis on providing jobs -- in the private
sector to the extent possible, but supplemented by
emergency public works jobs and public service jobs
as necessary. Unemployment compensation should be
used to assist workers who are jobless for relatively
short periods of time. Until enough jobs are pro-
vided, however, unemployment comensation or other
income support must be extended. Federal supplemen-
tal unemployment benefits should be phased out with
the implementation of an adequate jobs program.7/

*E rgency job programs should be expanded to
provide additional jobs for the cyclically unemployed
-- those who normally could find jobs when the econ-
omy is operating near capacity. The additional jobs

7/ Senator Proxmire states: "This could become a
very costly program unless done right. I advocate
that the Gover nt become the employer of last
resort by providing useful work at the unemployment
ensation rates of those laid off (plus the cost
of getting to work) and at the minimum wage for
those with no nemployment compensation eligibility
who are entering the labor force. In this way use-
ful work can be performed for the society at
little added cost."


created by this program expansion should be in
special projects lasting from one to two years and
having a useful and identifiable output. -The jobs
should be clearly temporary and should make use of
skil s which the participants already have. This
emergehcy program should be in addition to the exist-
ing CETA job training and public service employment
programs. Appropriations should be provided to
create a total of one million jobs during 1977,
including the 600,000 jobs which would be provided
under legislation recently passed by the House of
Representatives extending and enlarging Title VI of

*Congress should quickly reenact and the
President should sign legislation providing for

(a) countercyclical aid to State and local
governments, and

(b) an emergency public works program
designed to fund high-priority local work projects.

*Nearly one-half f the total unemployed are
persons under 25 years of age. Extended idleness for
young people with little past work experience will
result in severe social and economic costs. Congress
should give high priority to developing a comprehen-
sive program targeted specifically at the unemploy-
ment needs of young people.

*Congress should enact legislation establish-
ing Federal planning procedures to develop long-range
policies for balanced economic growthand full
employment. These procedures should provide roles
for Congress and the Executive Branch as equal part-
ners in the planning process and should provide for
full participation by the private sector and by State
and local governments. The goals of full employment


and price stability should be high priorities in any
syste of economic planning8/

The Social Security Trust fund is in basically
sound condition. The single most important thing that
ca be do to ensure the continued soundness of the
sociajl iurance system is to restore health to the
overall conomy. Even so, some changes will be
necessary to avert problems in 1980 or after, but
Congress has time to give careful consideration to
the full ram ifications of these changes.

Congress should enact policies designed to
increase the rate of housing starts to levels that
are consistent with a national goal of 2.3 million
units annually. This level of production is sufficient
to meet the demand created by net new household forma-
tion and replacement of the exist i ng housing stock.
Top priority should be given to programs designed to
make new and existing housing affordable to more
families. As a first step toward implementing this
recommendation, the $2 billion available for use in
the Gover t ational Mortgage Association tandem
plan sould be released immediately.

Congress should give energy conservation
higher priority, moving promptly to consider economic
incentives and assistance to realize energy effi-
ncy in residential and commercial buildings,
industrial processes, transportation, and electric
powr gneration. While pursuing promising technol-
ogy development based on nuclear and fossil fuels
and the development and production of synthetic fuels

8/ Representative Long, La., states: "I believe that
the thrust of this recommendation is to coordinate the
activities of the Federal Government so that the pri-
vate sector will have a better idea of exactly what
Federa poIy is nd what the intentions of the
Federal Government are."

from nonpetroleum feedstocks, Congress should provide
adequate funding for research and development on
energy conservation and the use of renewable energy
sources. 9/

To gain contrpl of the tax expenditure budget
and to ensure that each provision serves a useful
purpose equitably and effectively, Congress should
direct its tax-writing committees to report on all
tax expenditures within five years. After critical
examination, each item should either be reauthorized
with or without modification for a period not to
exceed f i ve years, or else el iminated. A regular
five-year review cycle should be established.

*Tax reform should be given high priority on
the legislative agenda in 1976. Actions should be
carefully considered which would provide a more
effective and equitable tax system. Any revenue-
raising changes should be offset by general tax

*Congress shou ld review the Federal laws,
agencies, and regulations affecting smalI business.
This review should develop a National Small Business
Policy that will foster a dynamic small business

Small firms, which need high retained earn-
ings to finance operations, pay far more of their
earnings in taxes than big businesses. The Treasury
Department, Federal Trade Commission, and Securities
and Exchange Commission together should review the
reasons for this phenomenon and make recommendations
for tax code revisions to make the effective rates
more equitable.

9/iRepresentative Moorhead, Pa., states: "To pro-
vide for added emphasis to conservation R&D is good
as far as it goes, but much of the answer to the
Nation's energy needs rests with commercialization
of already existing synthetic fuels technology. See
my supplemental views on p. 264."


Business investment may need to be propor-
tionately greater in the next several years than in
the past decade. The most serious obstacle to the
achievement of needed investment is the underutiliza-
tion of existing capacity and the lack of promising
markets for the output of new factories. A shift in
demand growth from basic materials toward less capi-
tal-intensive sectors could reduce total capital
needs significantly.

e Private saving augmented by shifts in inter-
national capital flows should remain adequate to fund
desired investments at reasonable interest rates at
least well into the year 1977, given proper monetary
policy. If congestion appears in credit markets
later in the recovery, new savings incentives or an
adjustment of the Federal budget toward surplus would
become desirable.

Effectively designed proposals to stimulate
capital formation should be given careful considera-
tion. There are a number of tax preferences in
today's corporate tax code, however, that are poorly
designed or outmoded and do not serve this purpose
effectively. In view of the redistribution of the
tax brden that already has occurred from corpora-
tios to individuals, the revenue loss from any new
corporate tax incentive should be offset by closing
these ineffective loopholes. Any corporate tax
reduction should emphasize reductions at the small-
business end of the spectrum.10/

10/ Senator Proxmire states: "The corporate income
tax il not a progressive tax. Its incidence fal Is-
on consumers and employees far more than on stock-
holders. It inhibits investment. It should be
reduced as the President has requested. I would
favor an even greater reduction."

K ~I.~~.I~~' ,

To provide a realistic opportunity fr more
U.S. citizens to become owners of capital, and to
provide an expanded source of equity financing for
corporations, it should be made national policy to
pursue the goal of broadened capital ownership.
Congress also should request from the Administration
a quadrennial report on the ownership of wealth in
this country which would assist in evaluating how
successfully the base of wealth was being broadened
over time.

*As long as the economy operates significantly
below capacity, the real value of Federal assistance
to State and local governments should not be allowed
to decline. Congress should reject changes in
Federal policies that significantly increase the
costs and responsibilities of State and local

The countercyclical grant-in-aid program
should be reenacted by Congress and signed by the
President. It should remain in effect as long as
the national unemployment rate remains above 5-1/2

*The General Revenue Sharing Program should
be extended for three years so that State and local
governments are assured of receiving this source of
Federal assistance to meet current services needs
without substantially increasing taxes. II/

State and local governments should be
offered the option of issuing taxable securities
accompanied by a Federal subsidy of about 40 per-
cent of the interest payment. The option of issuing
a taxable bond with an interest subsidy should be

I I/ Senator Proxmire states: "I disagree. Revenue
sharing should be ended forthwith and Federal tax
sources should be shifted to the States instead.
Revenue sharing severs the ability and the advantage
of spending from the discipline and pain of raising
the taxes."

available to all general purpose units of government
but should not affect existing provisions of law
that permit these governments to issue tax-exempt

As an initial effort to encourage the devel-
opnt of private sector job opportunities in chron-
ically epressed ares, Congress should consider
establishment of a regional economic development
bank. The bank should be designed to make low-
interest loans to businesses and State and local
governmnts for the purpose of encouraging investment
in chronically despressed regions or areas.

TheCongress should enact promptly in 1976
the legislation required to amend the IMF Articles
so as to permit early full' implementation of the
agreement on monetary reform announced in Kingston,
dJa icaon January 8. This legislation should
include provisions requiring congressional approval
of any proposal to dispose of the remaining 100
million ounces of Fund gold or of a proposed return
to a per value for the dollar., It should also
include instructions to the Secretary of the Treasury
indicating that any intervention in exchange markets
conducted by or cooperatively participated in by U.S.
montar authorities should be short term, for the
clusi vepurpose of combating disorderly conditions
in hange markets, and should under no circumstances
attem to alter the trend of exchange rates.
l, C : ^ *y'Tev'T **i ~ *I.

~~~''" ~ 9bAr (~a~ s"i: ~:1,

~ I ll' "ll"lliU;;;l;;;/;/~ ~..../ ;I,.~ ~ ~;~ ~/l~~~[i ij~ 1~il.. ... .1..;111;;1 11~1,1.. s11:. .11I~II1I:I/ Ill;ir;,.. Il.;l~.lj .II I 9: ..:


In the second half of 1975, the United States
economy began a recovery from the worst recession in
the postwar period. Federal tax reductions and spend-
ing increases set in motion during 1975 will sustain
that recovery throughout 1976, although its pace could
slow in the second half. The support which these
fiscal measures provided to real income will I boost
consumer spending and, combined with greater avail-
ability of credit, should help to maintain the modest
recovery in housing which began at the end of 1975.
These improved prospects, aided by returning confi-
dence, may provide the impetus for business investment
increases later in 1976. The budget policy decisions
that must be made in 1976 will determine whether the
recovery will maintain its momentum in 1977 or whether
growth will slow, causing inflation and unemployment
to persist at high rates.

The 1973-75 recession was not only the most
severe in the postwar period, but the economy's
rebound from this sharp decline could leave some pro-
ductive labor and capital idle for the rest of this
decade. In the final quarter of 1975, real output
was still below the levels which prevailed in late
1973. This is the only postwar recovery in which the
economy did not reach its prerecession levels within
the first nine months of recovery. As Table II11/1 indi
cates, output dropped twice as far in the 1973-75 re-
cession as in any other postwar decline. In the early
stages of the four previous postwar recoveries,
furthermore, the economy's growth rate was twice or
three times as high as the rate of decline in the
recession. In 1975, this has not been true.

The loss in gross national product (GNP) from
underemployed capacity from the start of the recession
to the end of 1975 sums to nearly $400 billion --
a monumental total of wasted opportunity. Even if
the economy experiences a sustained recovery, another
$600 billion to $900 billion in output could be
lost be 1980, depending on the speed of recovery.
(1 i)


In judging the present situation and policies
to deal with it, one must be fully aware of how far
the economy remains from the limits of its capacity.

Table 11/1

Changes in Real Gross National Product in
Pos wr Recessions and Recoveriesi

Recovery in
Period Recession Decline First Nine Months

1953-54 -3.3 5.9
1957-58 -3.2 5.8
1960-61 -1.2 3.7
1969-70 -1.1 3.7
1973-75 -6.6 5.1
Source: Department of Commerce.
a/ See Chart 1/1, p. 6.

f The unemployment which accompanied the 1973-
1975 declines in output was more severe'than at any
time si|nce the Great Depression. The official unemploy-
'ent rate rose to a peak of 8.9 percent in May and
declined to just under 8.0 percent at the beginning of
1976. However, when one includes discouraged workers
who have dropped out of the labor force and part-time
workers who want full-time jobs, the unemployment rate
climbed to nearly 12 percent and sti ll remains in early
1976 over 9-1/2 percent. Recent mprovements in the
overall unemployment rate, moreover, mask the hardship
suffered by several labor force groups: in January,
the unemployment ate for blacks was over 13 percent;
for teenagers it ws almost 20 percent; for black
teenaers, it was 35 percent; among construction
workers~as still above 15 percent. As pointed
ut in the Committee's recent regional hearings, un-
employment rates in cities and in certain regions
of the country are sharply higher harpy h r tan the


national average. The Committee's program to acceler-
ate the return to full employment is outlined in
ChapterI Il and rV.

The Outlook in 1976

S n our judgment, real output may be expected
to grow by about 6 percent in 1976, if the Adminis-
tration's proposed policies are followed. Other
forecasts of real output growth range from 5 to 7
percent, with the average a bit more pessimistic
than our own. Those predicting growth rates
approaching 7 percent generally assume a somewhat
more expansive policy course than the Administration
has recommended.

During the first half of this year, economic
events will be determined largely by decisions which
already have been taken. Important tax decisions yet
to be taken could affect the economy beginning in the
third quarter, and by the fourth quarter decisions
relating to the fiscal 1977 budget will begin to have
their effect. A sharp shift toward a restrictive
budget policy such as the Administration recommends
could materially weaken the prospects for continued
economic recovery late this year and in 1977. By con-
trast, the supportive budget policy and other recom-
mendations contained in this report would, we believe,
raise the output growth rate for 1976 as a whole to
about 7 percent and would provide for the continuation
of a strong recovery in 1977.

Consumer spending in real terms is expected to
rise by 5 to 6 percent this year, led by a strong
increase in purchases of durable goods. Extension of
the 1975 income tax reduction plus an historically high
savings rate and the deferral of many major purchases
during the past two years are factors contributing to
a rebound in consumer spending. While the consumer
sector should provide the bulk of the real growth in
the economy this year, a renewal of inflationary expec-
tations would weaken the still fragile improvement in
consumer confidence.

The outlook for private investment -- which
includes plant and equipment spending, residential
construction, and nvntory investment -- is less
certain. A modest rise in housing starts to a level
aboe 1.5 million by the end of 1976 will contribute
to higher invest ment. This recovery will be hastened
if the Federal Reserve pursues monetary policies which
lower long-term rates throughout the year. The
rebui ding of inventories also will contribute to GNP
growth during the year. At the present time, however,
business plans for investment in plant and equipment
r in weak. The latest C o rce Department survey of
spending plans indicates a decline of 4 percent in real
investient in 1976. While these plans may be revised
upward as the year progresses, investment in plant and
equipment cannot be expected to make any significant
onibuti to the growth in real output during the
first half of 1976.

Alth;ouh the sharp d in unemployment to
7.8 percent in January was welcome, it was so large
that there may be a tendency in succeeding months for
the rate to remain at this level or even to rise
slightly. It is not uncommon for the unemployment rate
in ste-lke fashion; that is, to drop sharply
and then remain on a plateau for several months. It
is oible that the drop in unemployment during Jan-
uary will be the major improvement that we will see

A recovery path which increases output by only
5 trct in 197 I unikely to reduce the
unemploy t rate below 7.5 percent by year's end. In
1975 unemployment averaged 8.5 percent. Normally,
a 4-percent growth in output s required to maintain
the current unemployment rate; and for every additional
three percentage points of real GNP-growth, the unem-
JI by, "

1976 would reduce the unemployment rate by about two-

thirds of one percentage point from last year's
average, or toan avera of about 7.8 percent in 1976.

67-48 0 76 -


Will The Recovery Be Sustained?

The continuation of a strong recovery into 1977
is in doubt at this time. According to the majority of
forecasters, the adptionof a 1977 budget that cuts
the level of real government services, such as the
budget proposed by the President, will reduce the 1977
growth rate in real GNP to well below the 5 to 6-per-
cent rate projected by the Administration. If the
President's budget of $395 bi Iion is adopted a growth
rate of only 3 to 4 percent in 1977 appears probable.
Those forecasters who predict 1977 growth rates close
to the Administration's 5 to 6-percent projection
uniformly assume that more stimulative budget policies
tlI be adopted.

A growth rate of 3 to 4 percent would lead to
an increase in the gap between actual and potential
GNP and to a continuation of an unemployment rate well
above 7 percent -- and probably above 7-1/2 percent --
throughout 1977 .

Several of the sectors that are expected to
lead the increase in GNP during 1976 will not be as
strong in 1977. The rebuilding of business inventor-
ies in the early stages of recovery will be largely
complete by the end of this year. The strong rate of
increase in residential construction expected in 1976
is unlikely to be maintained in 1977 both because this
year's spurt in homebuilding can hardly be repeated
and because the high price of housing seriously limits
demand. Real outlays at the Federal level and grants
to State and local governments would be sharply
reduced under the Administration's budget. Thus the
government sector would be a source of weakness in
1977 if this budget were adopted.

This would leave consumer spending and bus-
iness investment to lead any growth of output. But
the strong stimulus given by the 1975 tax cuts and
rebates to 1976 consumer spending will not be repeated
in 1977. The income tax cuts recommended by the


IAdminstration for 1977 would be substantially offset
by recoended increases in socia security taxes.
The reduction in transfer programs implied by a $395-
billion budget would further reduce the gains in con-
sumer income. If inflation continues at the 6-percent
rate expected by the Administration, this too would
cut real incomes and also would mean that the personal
savings rate,which is expected to decline somewhat in
1976 from its present very high level, would be
unlikely #o decline further in 1977. The combination
of high inflation and the threat of unemployment,
which has buffeted American families for the last
three years, is likely to preclude a swift return to
personal savings rates in the prerecession range of
6 percent of disposable personal income unless strong
evidence emerges that both inflation and unemployment
are being permanently reduced. All these restraining
factors suggest a decline in the growth rate of con-
sumer purchases to the 3 to 4-percent range in 1977
from the 5-percent growth we anticipate in 1976.

The outlook for investment in plant and equip-
ment In 1977 remains relatively strong. Sharp in-
creases in corporate profits during this year will
provide the impetus for' gains in business spending.
Because of the time lags involved in actually execut-
ing increased investments, theI nfluence of higher
profits will be realized primarily in 1977. However,
even an assumption of 10-percent growth in business
investment, given the expected slowdown of the other
majo sectors, wod be insufficient to raise the
overall growth rate in real P above 3 to 4 percent.

Although it does not appear probable at this
time, thereis a possibility,which should not be ex-
cluded, that a restrictive budget policy combined with
tigM~hter monetary policy could halt the growth in
output in 1977.

In sum, the continuation of a satisfactory pace
of recovery in 1977 equires a set of economic policies
which both provide supprt to the economy and instill
confidence in consumers and businessmen that neither

inflation nor recession threatens again. We remmnd
such a set of policies in this report. We wnt to
stress that policies operate with a time-g g. tion
in 1976 is needed to support continued reovery 1in
Prices. Prices at both wholesale and retail
levels rose considerably more slowly in 1975 than
in 1974. Consumer prices rose by 7 percent, com-
pared to 12.2 percent in 1974. Wholesale prices
rose only 4.2 percent, down from 20.9 percent in

As Table 11/2 shows, the components of the con-
sumer price index rose at similar rates in 1975. The
6.5 percent rise in food prices during the year was
primarily due to sharply higher prices for meats,
while other food items generally rose by less. The
other two items causing the largest increases in
consumers' budgets were fuels and medical care, which
rose 11 percent and 10 percent, respectively.

In spite of the overall improvement in wholesale
price behavior, there were increases among individual
sectors that are cause for concern. As Table 11/3
shows, the wholesale prices indexes for industrial
commodities accelerated from the second quarter of
1975 to the end of te endhe year. Price increases were
greatest in lumber products (10.7 percent during the
year), machinery and equipment (7.7 percent), mineral
products (8.3 percent), and fuels (12.7 percent). The
acceleration in many wholesale prices during this
period of slack demand and low capacity utilization
suggests strong market power on the part of a number
of basic materials industries. A major factor con-
tributing to the improved performance of wholesale
prices was the modest increase in farm product prices
and the 3.8-percent decline in processed food and
feed prices during the year.

The Administration's forecast of 6 percent in-
flation in 1976 and 1977 is plausible if one assumes
sluggish growth and the complete absence of any anti-
inflation policy. Several factors will contribute to

Table 11/2

''Percent Change In Price Measures, 1973-1975

kYear N 1975, by Quarters-L
o73 74 75 I II 11I V

Consumer Price Index

All items 8.8 12.2 7.0 6.6 7.0 7.4 7.3

Food 20.1 12.2 6.5 0.5 9.7 8.0 8.3

Energy (gasoline, motor 16.8 21.6 11.6 1.4 17.0 23.6 6.0
oil, fuel oil and coal,
gas and electricity)

All items less food 5.6 12.2 7.1 7.1 7.2 7.6 6.7

All items less food 4.7 11.3 6.7 9.4 5.1 5.8 7.1
and energy

Wholesale Price Index

All commodities 15.4 20.9 4.2 -6.3 7.2 11.1 5.6
Farm products, 26.7 11.0 -0.3 -27.6 17.0 26.8 -7.9
processed foods
and feeds
Industrial commodities 10.7 25.6 6.0 4.2 2.6 7.3 10.1
Fuels, related 24.3 51.2 12.7 0.3 16.0 25.5 10.2
products and power

a/ Quarterly changes at seasonally adjusted annual rates.

Table 11/3

Percent Change in Wholesale Industrial Prices
(seasonally adjusted annual rates)
1974 1975
2nd half Ist half 2nd half
All industrials . . . . . . . . . . 19.5 3.4 8.7
By stage of processing:
Crude materials, excluding foods and feeds . .. 6.7 1.5 7.6
Intermediate materials, excluding foods and feeds . 21.5 2.2 8.8
Producer finished goods . . . . . . . . 24.5 8.4 7.9
Consumer nonfood finished goods . .. . . . 15.6 3.9 9.6
Textile products and apparel . . . . . . . 3.2 5.0 13.9
Fuels, related products and power . . . . . . 23.5 7.9 17.6
Chemicals and allied products . . . . . . 50.9 6.8 4.0
Lumber and wood products . . . . . . .. -18.9 9.4 12.0
Pulp, paper and alied products . . . . .. . 31.4 0.8 6.2
Metals and metal Products .. . . . . . . 16.3 -3.3 6.2
Machinery and equipment . . . . . . 26.5 8.7 6.6
Motor vehicles and equipment . . . . . . . 21.4 6.0 8.7
Other Industrial products a . . .. . ... . 15.1 5.4 5.2

a/ Not seasonally adjusted; includes hides, skins, leather, rubber and plastic
products, nonmetallic mineral products, furniture and household durables
and miscellaneous products.
Source: Department of Labor, Bureau of Labor Statistics.

slightly better price perfomance this year than last.
Food prices are not expected to rise more than 4 to 5
percent according to the latest Department of Agri-
culture forecast, although the current drought in the
'g in belt or other unfavorable weather developments
could change this outlook substantially. Average
crude oil prices should not rise and may decline
somewhat as a result of the domestic price rollback.
Te gains fin productivity which usually accompany the
early stages of recovery should hold down unit costs
of output In most sectors.

Private forecasters and several witnesses before
this Committee have emphasized the possibility of
reducing the inflation rate below the Administration's
" percent forecast.j Stronger GNP growth in the second
half of 1976 and early 1977 would hold down unit costs
through greater increases in productivity. A stronger
government o'le in restraining prices in concentrated
Industries, where prices rose even at the bottom of
the recession, could hold price increases to 5 percent
this year and improve the possibIlity for an inflation
rae in the 4-percent range by the end of 1977.

Waes. Wage sett l ts over the life of
union contracts rose by 7.8 percent in 1975 com-
pared to 7.3 percent in 1974. These increases in
wages and in wages combined with benefits were
more modest, however, than one woul d Wave expected
considering the declines in real income which
workers have suffered. Real hourly earnings --
that is, earnings adjusted for Inflation --
declined 1.1 percent in 1973 and 3.4 percent in
1974. A igh unemployment rate combined with
falIing corporate profits in 1975 limited the size
of settlements during the year. As Table 11/4
shows, ncreases in overall compensation for the
entire economy in 1975 averaged 9 percent compared
o 9.7 percent in 197 4.

This year the collective bargaining calendar is
especially heavy with 4.4 million workers affected by
conract ex, d to 2.5 million in 1975.
Major industries facin ntract neotiations include

Table 11/4
Annual Rates of Change in Comp ensation, 1973 1975
( percent)
Measure of Compensation 1973 1974 1975

1. Wages (1,000 workers
or more)
First year adjustment 5.8 9.8 10.2
Average over life of '
contract 51 7.3 7.8'

II. Wages & Benefits Combined
First year adjustment 7.1 10.7 It.2
Average over life of
contract 6.1I 7.8 8.0

I II. Aggregate Compensation
Total compensation per
hour, all employees,
private nonfarm
economy 7.9 9.7 9.0
Average hourly earnings,
production or nonsuper-
visory workers, private
nonfarm economy 7.0 8.3 7.0
Real adjusted hourly
earnings -1.1 -3.4 2.2

Source: Bureau of Labor Statistics.


automobiles, trucking, construction, electrical ma-
chinery, meat packing, rubber, farming, and con-
struction mahinery. Rising corporate profits and an
attmpt to c h up with past price increases, es-
pecially by unions without cost-of-living escalators
in their existing contracts, will put strong upward
prssure wage settlements. Continued high levels
of unemploment will exert some pressure in the
posite direction, but the factor which could have
the greatest effect in encouraging moderatioinin wage
settlements would be confidence that the rate of in-
crease in consumer prices will continue to decline. A
price-incomes policy designed to provide that assurance
is discussed in Chapter III.


The 1975 Joint Economic Committee Report focused
on the potential economic impact of the oil pricing
propo s .nnouncet by the President in January 1975.
These included heavy new tariffs and excise taxes on
oil nd removal of price controls from oil and gas.
The Administraton claimed that these teps would re-
Soil imports by one milltn barrels per day by the
end of 1975 and by two million barrels per day by Jan-
uary 1977.

The Committee pointed out the arbitrary nature of
the proposed oil import reductions. To this day no
justification of these objectives has been presented.
It also emphasized the damaging economic effects of
adopting the Administration's energy program. It was
calculated that the President's package would have
added between 3 and 4 percent to the inflation rate in
1975 and would have diverted up to $55 billion in
purchasing power annual ly from the consumption spend-
ing stream to the Government and sellers of oil.
Given the depth of the recession one year ago and the
persiste ~nce pof unacceptably high inflation, enactment
of the President's energy program would have dealt a
catastrophic blow to the economy.

A congressional energy program provided an
alternative to the President's proposals and laid out

the framework for the Energy Policy and Conseraton
Act that was passed in Dcber.t/ A number of impor-
tant provisions, may of them recommended in the
Committee's annual report, were incorporated in the
final version of this Act. These included atomotve
fuel efficiency standards, requiring doubted fuel
efficiency by 1985; mandatory energy efficiency I-ab
ing for major home appliances; energy efficiency
targets for the 10 energy-intensive industries; con-
servation standards for Federal agencies; standby .
presidential authority for natinal emergencies; pro-
visions to expand coal production and its use in
electric power generation; and authorization for a
strategic petroleum reserve. Despite persistent Ad-
ministration opposition to the oil pricing provisions
during most of the year, the President's reluctant
decision to sign this measure enacted legislation that
shields the economy from unwise energy price increases
and also sets in place essential pieces of a
balanced and comprehensive long-term energy strategy. 2

I/ The Congressional Program of Economic Recovery and
Energy Sufficiency, first published in February 1975,
SRepresentative Glls Long states "While I
generally agree with this analysis, I am concerned
with several aspects of the oil price mechanism,
and I was very disappointed when the President
signed the bill. For one thing, the $7.55 compo-
site price does not provide enough incentive for
increased domestic production, especially for the
independent producers who found 94 percent of all
new domestic oil fields in 1974. When the House
of Representatives passed its version of the Energy
Policy and Conservation Act, I was able to pass an
amendment that would have encouraged increased
domestic production so that we would be less depend-
ent on foreign oil, which is so expensive and
unreliable. Unfortunately, the final bill did not
contain the necessary provisions to achieve these
goals, and I could not support the bill."

The Senate and House next must resolve differ-
ences over te prices of ntur gas in both inter-
state and intrastate markets. It is inappropriate for
this oittee to su.ggesf the components of an accept--
able compromise prior to action by the Senate-House
Conference Committe. At a miimum, however, the
average price approved for natural gas should not
excee the average price per Btu for oil under the
compromise pgreed to in the Energy Policy and Con-
servationAct. The natural gas pricing provision
should cover both intrastate and interstate gas. Pro-
tection against exorbitant price increases, combined ..
with fair incentives for producers to expand supply,
should continue to be the objective. 3/

Despite settlement of some of the contentious
enrgy policy ssues of the past two years, much
remains to be accmplshed. There is no presently
pparent.way~at any reasonable cost to reduce U.S.
dependece on Arab oi greatly by 1985.4/ We may be
doing well to hold imports to a constant fraction of ........
consumption. Many of the energy production options
that were viewed with 'nthusiasm in the .initial re-__
sponse to higher energy prices -- especially the tech-
nol development projects for synthetic fuels, shale
oil, and nuclear power -- now are seen to involve much
more time and far higher costs ha were anticipated. 5/

i eTve Gil Is Long states: "I strongly
upport the Pearson-Bentsen and Krueger bills, which
would deregulate natural gas over a 5-year period.
I believe that deregulation of natural gas will ulti-
mately result in assuring the American people a
steady supply of natural gas at reasonable prices."

4/Representative Giis Long states: "I believe
sgnificant gains can be made to reduce U.S.
dependence on foreign oil by increasing domestic
production, as I indicaed in a previus note."
5/ Representative Moorhead Pa., states: "I believe
significant advantages can be gained through the com-
mercialization of existing synthetic fuels technology,
involving much less time and expense than pr~wedicted,
as noted in my supplemental views on p. 264."

Creation of a stragic petroleum reserve, authorized
by the Energy Policy and Conservation Act, will pro-
vide more prompt and economical insurance against
threats of supply interruptions than an array of crash
programs to develop advanced technologies. While
these options should be pursued, their cost effective-
ness should now be reassessed against that of more
prosaic but eventually high-payoff possibilities such
as conservation, coal, and solar heating and cooling.
Given the present production-oriented Federal energy
policy, we believe that some shift in the emphasis,
which will be described more fully in Chapter V, is

Longer-Run Growth Prospects

One of the fundamental questions for economic
policy is whether the economy can and should continue
in the longer term to grow at the rates of the past
two decades. The desirability and the possibility of
continuing rapid growth has been questioned in recent
years far more than in the past. Most people until
recently supported rapid growth while only a few ana-
lyzed its costs. Now, however, these questions have
become very widespread. Recognizing the need for a
fair distribution of employment and income, many
people have begun to doubt that continuing growth
brings overall increases in the quality of life. In
addition to the ultimate physical limits imposed by
nature, moral, social, and cultural Imits to growth
are coming to the forefront of the argument.

For the medium term, trends in economic activi-
ty are determined largely by the development of the
Nation's maximum productive potential based on the
growth of the labor force, the number of hours worked,
and labor productivity, which reflects the rate of
investment and the development of technology. Since
the end of 1968, potential output has been growing
at about 4 percent per year. As we move toward the
1980s, however, the growth of this potential is ex-
pected to decline, primarily because the large number
of people born in the decade after World War II will
have entered the labor force, and the flow of new
manpower will then drop off. In the 1980-85 period,

erefore growth of ptential otput should decline to
to 3 to I;:3/2 perc t. _/

The potential growth rate also could be affect-
ed eum tr by ot factors: (I) ILower
rates of investment, foreseen by some, and correspond-
ingly lower productivity advances; (2) a possible de-
c~ine in dramatic tehnological innovations; (3) sat-
uration of mkets for certain products, particularly
consumer durables; (4) a potentially limited capacity
of service industries-to employ an ever larger share
of the labor frce; and (5) hi r prices of raw
materials, lar ly from less developed countries.

In the long run, limits to growth in the world
at large may be posed by the availability of raw
mateials and energy, by the limits to environmental
tolernceof pllution, orby the rise of a conser-
vation ethic replacing the traditional growth ethic.
Whether ornot this will occur depends on a large
number of unforeseeable variables, primary among which
are the course of future technological progress and
thability of poicymakers to foresee and adopt to
the evo lution of circumstances.

At the very least, a basic consensus, stated at
a recent Committee hearing by Louis Lundborg, retired
Chairman of the Bank of America, seems to be emerging.
Mr. Lundborg testified that "Our present exponential
rate of industrial growth, based on nonrenewable
Intural resources, simply cannot be sustained." This
view was supported by other witnesses at the hearing.

Although recogni z ng that serious impediments
to maintaining recent growth rates may be on the
horizon, the Committee still believes, as reflected
throughout this Report, that healthy U.S. economic
growth is necessary over the medium-term future. This

6/ More detailed projections are to be published in
The Monthly Labor Review in the spring of 1976. These
projections will update a similar study pubi-shed in
the same Review in December 1973.

statement does not imply, hoever, that future growth
patterns should be the same as growth patterns of the
past. Rather, the Committee supports the idea that
the qualitative dimension of economicg rowth -- the
way we grow -- must become an integral part of eco-
nomic analysis and policymaking.

If an adjustment must be made to a slower grow-
ing economy or to a different kind of growth, this
adjustment may be one of the most profound since the
industrial revolution began. In this case, the
question of the timespanr over which such an adjust-
ment must happen and what forms it may take becomes
one of the most important for scientists and social
thinkers to address.

In this spirit, the Committee has launched an
extensive study series entitled U.S. Economic Growth,
1975-1985: Prospects, Problems, and Patterns. This
series will present the research results of more than
50 authors from diverse discipli nes in both the
social and physical sciences. Many issues will be
examined from both traditional and new perspectives.
These papers will be published by the Committee be-
ginning in the spring of 1976.

"' ~~~~~~ ~ ~ 'I ' '" '. -


in 1976 and 1977 the opportunity will be
present to make significant progress toward both
lower unemployment and less inflation. This desir-
able progression of events will not occur spontane-
ousy, however. Federa poli c ies must be con-
sciously directed toward specific targets for out-
put, employment, and prices. This chapter describes
the targets which we believe to be appropriate for
1976 and 1977'as well as the fiscal,-monetary, and
price-incomes policies needed to achieve those tar-
gets. -Subsequent chapters describe the direct labor
market poicies and other supplemental policies
which are also necessary for achieving the recom-
mended goals. -
The Goals of Economic Policy

The 1975 Annual Report of the Joint Economic
Coittee recommended that policy in 1975 be directed
toward an output target for the fourth quarter of
1975 which wo Id be consistent with an unemployment
rate of 7.8 to 8.1 percent. Actual output in the
fourth quarter of last year was very.close to the
recommended target, and the unemployment rate,
although it remained above target in the fourth
quarter, has susequently fallen to 7.8 percent in
January. This time lag between output changes and
changes n the unemployment rate is to be expected
in the early stages of an economic recovery.

Targets for 1976. Last year we also recom-

output growth of 8 to 9 percent from the fourth
quarter of 1975 to the fourth quarter of 1976. We
continue to believe that such rapid growth of utput
would bedesirable. It ould pose no threat of
"Fl :~ iRIs l I


accelerating inflation.l/ Indeed, the productivity
gains associated with rapid growth would help reduce
the rate of price increase.

It does not presently appear, however, that
8 to 9 percent output growth is at all likely in
1976. It would be a disservice to advocate short-
term policy targets which have such slim hope of
realization. The maximum output growth which it
seems reasonable to expect during 1976 is about 7
percent. We recommend this as an appropriate policy
goal for this year.

Employment Targets. Achievement of thi s
output target would still imply an unemployment rate of
7.2 to 7.3 percent at the end of this year. This we
do not regard as satisfactory. Our short-run goal
should be to bring the unemployment rate below 7
percent by the end of this year. To do so will
require supplementing monetary and fiscal policy
with special emergency job programs. These programs
are discussed in Chapter IV.

Price Targets. Measured by the deflator
for gross national product, prices rose 6.5 percent
from the fourth quarter of 1974 to the fourth quarter
of 1975. The Administration projects further price
increases of 5.9 percent in 1976 and 6.3 percent in
1977; in other words, no further dimunition of in-
flation either this year or next.

We believe that both tax policy and price-
incomes policy can be utilized in ways which will
significantly increase prospects for regaining price
stabilitv. The setting of specific price targets is

1/ Representative Gillis Long states: "Generally,
I support increased output as an essential element of
economic recovery; however, I am concerned about a
resurgence of inflation which could possibly result
from this. I would not go so far as to say.that
increased output poses no threat of accelerating
inflation, but I recognize fully the need for
increasing output." ,

necessary to pvide the gdce which busiess and
I ar needn order to join in a cooperative voluntary
effort to fuher reduce inflation With proper
policies, the'rate of inflation should not exceed
.5-1/2 percent for 1976 as a whole. By the fourth
quarter the inflation rate should be no higher than
5 percent.
In recomending specific price targets, we
wish to stress, however, that some causes of inflation
I iessntially outsi the control of economic policy.
Our recommended targets assume an adequate harvest
and the absence of new external price shocks. Should
someajorund event, such as the rld oil
price increases of 1973-74, occur i 197 these
pr ta ts requre amendment.

Goals for 1977. JPolicies dopted now will
have mor influence in 1977 than in 1976. As dis-
"cussd in the previus t te present outlook
is for output growth to slow significant4y in 1977
andr unemploymen essetiallyto remin stuck at'
a rate above 7 percent. Obviously, this is not a
satisfactory outlook, PoLicy actions are needed now
to support a stronger economy in 1977.

Policies should be directed toward continuation
.of a 7 p.eret rat of growth of real outpjut in 1977.
Policy should also aim to reduce the rate of unemploy-
ment to 6 percent or less by the fourth quarter of
1977. As. in 1976 this will require augmentation of
fiscal and monetary policy with a temporary program
of direct jb crea tio.

SNeither labor norcapital resources can be
expected to approach full utilization in 1977. Hence
continued rapid output growth poses no danger of
worsened inflation. Rather rpi growth coupled with
appropriate tax policy and voluntary price-incomes
poiicy can reduce the inflation rate to no more than
4 percentiby the end of 1977 Again, this inflation
goal assumes adequate harvests and the ab*sence of
major external price shocks.

67-480 0 76-4

Tab e I I/1 summarizes our suggested policy
goals for 1976 and 1977. These targets are ambitious,
but they are not unattainable. With unemployment
sti ll well above the levels of past recessions and
with prices still rising at a rate which prior to the
1970s would have been regarded as intolerable, there
is no room for complacency about the economy. To
aim at targets which represent anything less than
the maximum progress which can be achieved would be
to turn our backs on the Employment Act mandate to
promote "maximum employment, production and purchas-
ing power."

The benefits of achieving these targets are
well worth the effort. By the end of 1977, more
than 1-1/2 mi llion more jobs would be available tan
would be the case if the Administration's policies
are followed. The unemployment rate would be 1.7
percentage points lower, real output 4 percent higher,
and the rate of price increase 2 percentage points
lower. The Administration's program would keep
unemployment stuck very close to its present 7.8
percent rate. Our proposals would bring unemployment
down steadily and fairly rapidly.

Returning to Potential Output: Goals for 1980.
Chart III/1 compares potential output through 1982
with expected actual output under two different
assumptions. The output path labeled "desired recov-
ery path" assumes that our recommended output targets
for 1976 and 1977 are achieved. From 1978 through
1982, it is assumed that the rate of growth of real
output is gradually reduced from the 7 percent of
1977 toward the 3-1/2 percent which will approximate
the growth of potential in the early 1980s.2/ In

2/ The potential growth rate is defined'as The raTe
of real output growth necessary to keep the economy
operating at a constant level of resource utilization.
It is determined by growth of the labor force, changes
in average hours worked, and growth of output per hour
(productivity). The potential growth rate is presently
about 4 percent per year but, because of slower growth
of the working age population, it is expected to drop
gradually to about 3-1/2 percent by 1980.

Output, Employment, and Price Targets, 1976-1977
SlFourth Quarter
-1 975 1976 1977
(actual) (targQet) (target)

Potential GNP (billions of 1972 dollars) $1388.8 $1444.4 $1498.6

Projected GNP (billions of 1972 dollars) 1215.9 1300.0 1390.0

Percent Change in projected real GNP 2.5% 7.0% 7.0%

GNP Gap b/ 12.4% 10.0% 7.2%

Unemployment rate 8, % 7.0% 6.0%

Inflation rate c/ 6.8% 5.0% 4.0%

Projected GNP (billions of current dollars) $1572.5 $1768.0 $1970.0

a/ From fourth quarter to fourth quarter,
b/ Difference between actual and potential GNP as a percent of potential.
c/ GNP deflator, percent change during quarter, seasonally adjusted annual rate.
Sources: Department of Commerce, Council of Economic Advisers, and Joint Economic

Chart II1-I


Billions of 1972 Dollars


1,600 _

1,500 < o


1,300 0


1,150 0
1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982
Sources: Council of Economic Advisers, Joint Economic Committe


this waythe economy enters its potential zone grow-
ing at a rate suff icntly moderate that sudden
demands are not imposed on scarce resources. With
a growh pattern o this type, inflationary bttle-
necks can be avoided, and continuing operation of the
economy within the zone of its potential should be
compatib4le with reaso ble price stability.

I- The output path labeled "unstable recovery"
does no bring .the ecnomy to its potential zone
until 1981. Furthermore, potential would be reached
in a way which wold both increase the cumulative
oss of output tprior to 1980 and greatly enlarge
inflationary risks. This path assumes that output
r h wi rop below 4 percent in 1977, a pattern
ich in our judgnent must be expected if Adminis-
tration policies are adopted. It is then assumed
thatbeginnin in 1978, the economy grows steadily
t 6.5 pcent per yer until the zone of potential
output is reached. This is the type of path which
is assumed for planning purposes in the Administra-
ion'sfive-year budget projections. Judging from
historical experience, such a pattern is extremely
unlikely to be achieved. If it were to occur, it
d cause otput tc up against its potential
while still growing rapidly, creating infl ationary
pressures which would prevent the maintenance of a
stable full employmet growth pattern.

Even-based on the path labeled "desired,"
the cumulative loss of output resulting from the
recentrecession will approah $ trillion through
1980 (measured in 1975 prices). This enormous
loss is all the more tragic ecause mruch of it could
ave been avoided if wiser and more fresighted
policieshad been adopte in tim to ead ff or
minimize the recession. If the alternative path
abeled "unstabe recovery" is followed, the cumula-
ive loss of output would be increased a further


Fiscal Policy

will still be above 7 percent at year-end, and prices
still rising at about a 6-percent rate. Policy
changes adopted at this time cannot achieve dramatic
departures from this path within the remaining nine
months of this year. As discussed in the previous
section, however, proper policies can raise the
growth of real output to about 7 percent while at
the same time gradually setting in motion further
reductions in the inflation rate. Even more important
policies adopted at this time can lay the foundation
for continued rapid growth and greater price stability
in 1977.

The Fiscal 1976 Budget. The Second Concurrent
Resolution on the 1976 Budget embodies congressional
decisions on the proper levels of outlays and receipts
These decisions are appropriate to the needs of the
economy. Tax and spending decisions made by Congress
during the past year, sometimes in the face of
determined opposition by the Administration, have
served to halt the worst recession in 40 years and
initiate a recovery.

Two vital pieces of legislation remain
necessary to achieve the budget policy established
in the Second Resolution. The first of these is
the extension and expansion of the Emergency Publi c
Jobs Program. Legislation providing for this has
now passed the House and is pending in the Senate.
The second legislative need is for the provision
of special antirecession aid to State and local
governments. Legislation containing provision for
such aid was recently passed by Congress but was
vetoed by the President. As discussed more fully
in Chapter IV, this assistance to State and local
governments is a vital part of an overall strategy
for economic recovery. We urge the Congress to
again enact and the President to sign leqislation
providing for this program.


Provision for fiscal 1976 outlays for both
hese programs was contained in the Budget Reso-
lution. Thus enactment will represent a carrying
out of previously determined policy, not a new
addition to planned outlays. It will also repre-
sent adoption of essential components of a program
to reach our recommended goals for economic per-
formance this year.

The Fiscal 1977 Budget. As discussed above,
present expectations are that the economy will
weaken in 1977. If Administration policies are
adpted, output growth can be expected to drop to
4 percent or less. To achieve instead the 7-percent
growth which we recommend will require supportive
policies. Much can be accomplished through a
monetary policy which accommodates private invest-
ment and through a price-incomes policy which reduces
inflationary expectations. Fiscal policy too must
Sply a supportive role.
Administration Recowiendations. The
Administration has proposed a highly restrictive budget
for 1977. Examination of the recommended quarterly
pttern of outlays and receipts is istruct iv. As
can be determined from Table 111/2, the Administration
recommends that expenditures rise only 4 percent from
the first half of 1976 to the first half of 1977.
With prices expected to rise about 6 percent under
Administration policy, this implies an actual decline
of about 2 percent in the real level of government
srvices. Such a decline, coming at the very time
when he economy most needs support in order to add
vi r to the recovery, represents extremely poor
tiing of fiscal policy.

It is also helpful to look at the budget
as it would be at "full employment," that is as
it would be ifthe unemployment ate could be kept
constantly at 4 percent. The estimate shown in
le II1/2, which have been repared by the

Table 111/2

Federal Receipts and Expenditures, Actual and Full Employment,
Assuming Administration Budget
(NIA basis, billions of dollars, seasonally adjusted annual rates)

Actual Full Employment

Expendi- Surplus (+) Expendi- Surplus (+)
Calendar Years Receipts tures Deficit (-) Recepts tures Deficit (-)

1976: I 311.1 384.6 -73.5 365.5 375.4 9.9
SI 322.3 391.4 -69.1 375.2 382.4 7.2
Sl 328.9 391.8 -62.9 379.6 383.3 3.7
IV 342.5 394.5 -52.0 390.3 386.6 + 3.7

1977: 1 359.4 401.5 -42. 403.3 393.7 + 9.6
II 372.4 406.3 -33.9 414.7 398.8 415.9
I l 388.9 415.1 -26.2 426.5 407.8 +18.7
IV n.a. n.a. n.a. n.a. n.a. n.a.

Sources: Office of Management and Budget, Joint Economic Committee,
* ii

Committ s ta, indicate a swing of almost $30
billion in the full employment surplus over the
seven quarters swn in the table. 3/ The most recent
past xerience of a large swing in the full employ-
ment budgt is fnd in 1972-1974, when the full
employment surplus rose by over $40 billion during
the six-quarter period from the fourth quarter of
1972 to thsecond quarter of 1974, helping to
precipitate the severe recession of 1974-75. The
tragic experience of this recent recession provides
persuasive evidence that sudden swings in fiscal
policy ca have devastating economic effects and
must be avoided.

The Admnstration's budget rcomendations

expenditur levels and with respect to the compo-
sition of speding. TheBudget contains individual
recommendations which deserve serious consideration,
but taken as a whole it does not constitute a helpful
ide to the Congress in sett hing budget policy.

The Current Services Budget. Congress has
available this year two estimates of the Current
Servces Budget, one prepared by the Congressional
Budget Office (CBO) and the other by the Office of
Management and Budget (OMB) under the provisions
of the Congressonal Budget Act of 1974. These
ide estimates of the cost of maintaining the
t real of government services, making
lowance for expected changes in economic conditions
d for case-load changes under entitlement programs.
The two estim s dffer slightly in concept. Of
the wo, the CO estimates are somewhat more satis-

/ Estimates suppld by the Council of Economic
dvisers t~imy an even larger swing in the Full Employ-
Budget during 1976. The Council has suppli ed the
following estimatesof the full employment surplus(+)
l r defi-cit(-) bry quarter (in billions of dollars):
96 -1 16.5; 1976-11, -12:.9; 1976-1Hi ,, -7.7; and

1976- ', +3.2. No estimates were supplied for 1977.
~"1 iE~'~;g- rt

factory for use as a baseline budget since they
have been recently updated and since they make
consistent inflation adjustment for all progra,
rather than limiting the adjustment, as OMB did,
to those programs where such adjustment is required
by law.

Current services budget estimates prepared by
the Congressional Budget Office, rather than
the President's budget, should serve as
a starti ng point for congressional decisions
on the 1977 budget.4 Congress should make
reductions from current services outlay
levels wherever such reductions are consist-
ent with efficient maintenance of necessary
government services. Because of the hi g
unemployment which will sti persist in
1977, a large part of the savings achieve
in this way shou d temporar Ily be invested
in programs to deal with unemployment. These
programs should include:

Antirecession grants to State and local
governments, 5/ and

4/ Senator Proxmire states: "I object to using the
current services levels, that is, last year's programs
increased for population and price levels, as a start-
ing point. This is a mindless method. It legitimizes
all those programs and expenditures -- good and bad --
now in the budget. I advocate zero-based budgeting,
strict benefit-cost analyses, determining the economic
costs of alternative programs, and cutting back or end
ing inefficient and useless agencies and outlays."
5/ Senator Proxmire states: "The States and local-.
ities now get $6 billion in revenue sharing funds and
$3 billion in community development funds. Nine bi -
lion is enough. The proposed ant irecession grants ,
would violate the sound fiscal principle that those whi
spend money should be required to raise the money.


I An emergency jobs program designed to pro-
vide about one million temporary jobs in 1977.

As recently estimated by the CBO, the spending
evel nieeded to maint ain current services in fiscal
977 would be ..about $425 billion, We believe program
cuts of at least $4 billion and possibly as much as
;10 billion from this total are possible. Examples of
uts whjih would tota&~l t about $4 b llion are described
C er~~ V.i It is important to note that these
program reductions, if enacted promptly, could
lead to budget savings of as much as $25 billion
by 1981. The examples we cite are by no means an
exhaustive list of possible program reductions. We
nticipa te that scrutiny by the Budget Committees
and others will lead to identification of many
other needed reforms and reductuons, as well as
e areas where increases are needed. A net
reduction in permanent programs of at least $4 to $10
billion below current services levels appears to
e a dsirb le and appropri te objective.

,, In addition to the savings which can be made
in ~1977 though program reductions, the lower infla-
t rate which wud rsut from our recommended
poicies would reduce budget outlays by $7 to $8

SSenator Proxmire states: am against a job pro-
is size which is accomplished through public
Swwork hi i wasteful and too slow, or through
ublic ser vice jobs where there is a big substitution
ffect ifitgets too large. Instead, I believe we
should provide for jobs through a shallow housing
ubsidy where one job can be created for about $500,
a of $80 r public service job, and as high
S$25,000 for a public works job. "

At expected levels of unemployment, continu-
ation of antirecession aid to State and local
governments will cost about $1 billion in fiscal
1977. An emergency jobs program for close to 1
million persons would have a gross cost of $8 to
$9 billion. Some allowance for these temporary
antirecession programs is already contained in the
current services budget. Our recommendation for
an expanded program would add about $6 billion to
the amount already assumed. As shown in Table 111/3
below, the net result of the outlay changes which we
suggest wpu-ld be a soending total of about $418
bill ion. 8___

Tax Policy. The personal income tax rates
presently in effect expire on July 1 and without
new legislative action, taxes will revert at that
time to the higher rates which prevailed in 1974.
77 SenaTfor 'Sarkman states: "It is most disturbing
to see continuing increases in Federal spending. I
believe that the Congress and the Administration must
make greater efforts to limit this spending growth.
For that reason, I would place particular emphasis on
the proposal in the Report that immediate efforts be
made to reduce spending for programs that do not have
high priority. I blieve we should do this with even
greater efforts than stated in the Report.
"Also, I would hope that the strength of our
recovery and the wise use of monetary and tax policy
could speed up the recovery and thereby reduce the
deficit. An economic recovery will automatically
increase incomes, which in turn leads to higher
revenues. Likewise, it should greatly reduce the
need for spending on such programs as unemployment,
welfare, food stamps and emergency employment. In
this way, there would be a healthy force working to
reduce public spending. It must be remembered that
the recession has been very costly to the Federal
Government as well as to the other sectors of our
8/ Senator Proxmire states: "I strongly oppose such
a high budget outlay. See my supplemental view on
page 237 ."


Table s1 /3

Derivation of Joint Economic Committee
Outlay Recommendationr for Fiscal 1977
(billions of dollars)

CBO Current Services $425.0
estimate (Path B):

Savings through irogram -4.0 to -10.0

Savings due to less -7.5
i nflation

Svings due to lower -1.5
unemp toyment:

Additional cost of jobs +6.0
Sprograms: ___

JEC recmded outlay level: $412 to $418

Sources: Congressional Budget Office, and the
Joint Economic Committee.

Ir-~ :~3 ~~, .~ ur ~

jv F A
33~:~ ~~ AVK ~ .l -(. 11~~1.y rj~~.

3l;iIii~l li; qlII/ ljl~ j ~~l~: lIIj :ljllll /II $II i 1111 .: i IIII.:~~l~ 1111~1:~ ~.'; ; 11111:1 I I I 1 111 :1 1 1:111~1 (II

~ "ili; ~;;;;I"I!I'1ii l~l 1 ll:i~l: 111 sl~~~~l~ ~ii:11~' lc' ;~~.. ..,;ll~ 3.1


Action should be taken prior to July I
to provide for continuation at least through
the end of 1977 of the personal income tax
reductions which have been in effect during
1975 and the first half of 1976.
*-------- --^--.----

The strength of the recovery should be
carefully monitored during the next few
months. Should output growth appear to be
dropping below the 7 percent rate needed
to bring unemployment down appreciably,
an additional tax cut should be enacted for
1977. This additional reduction should be
of a type which will act directly to reduce
costs and prices. An income tax credit
against some part of social security taxes
paid would meet this requirement.

*No increase in the social security tax
rate is necessary or desirable in 1977,
nor should the Federal unemployment
insurance tax rate be increased at that

The above tax actions are needed both to
provide support to the economic recovery and to
help in achieving further progress toward price
stability. Care must be taken that restrictive
fiscal actions do not weaken or interrupt the
moderately strong recovery now underway. Failure
to extend the tax reductions presently in effect
would be very damaging to the recovery. We urge
prompt action to extend present tax rates at
least through the end of 1977.

When taken in conjunction with an outlay level
of $418 billion, an additional tax cut of approximate
ly $10 billion will be necessary in 1977 simply to
prevent fiscal policy from moving in a restrictive
direction. Should outlays be held to $412 billion, a
correspondingly larger tax cut would be required to
sustain a neutral fiscal policy. The precise state o
the economy in 1977 is impossible to predict at this
time. It may be that the recovery will gather such

strength that a modest move toward restrict ion will be

past growth of output at he 7percent rate we feel
is needed has been only rarely maintained over a
period as long as 2-1/2 years.

Should output growth appear to be dropping
below the 7-percent target rate, an additional tax
cut should be enacted in order to keep fiscal policy
on a neutral path which will not exert a drag on
the private economy. Any such tax cut should be
of a type which contributes to greater price stabi i-
ty as well as to stronger growth. Discussion of
possib e further tax reduction for 1977 should
begin now so that Congress will be prepared to act
uickly when and if the need for such action becomes
clear. In the past, fiscal policy has often re-
sponded fartoslowly to changing circumstances
ith the new congressional budget process now in
lace, continuous monitoring of the economy and
r ompt response to changing policy needs should be
noo *"rea y ". "
more readily achievable.
Anti- nflationary Impact of Tax Reduc tion
The-tmulative effect of tax reductions is well
nderstood. Tax reductions result in more after-
tax incoe available to individuals. Most of this
ncrease in disposable income is spent on additional
urchases of goods and services. This in turn leads
o increases in production and employment.

The use of tax reductions as an anti-inflation-
.ry tool is less well understood. ndeed, con-
ventional economic theory has maintained that
inflation can be controll ed through tax increases
which, by reducing consumer spending, eose demand
fds and services in inadequate supply. This
traditional theory is not applicable, however, to
a situation in which inflation is primarily due to

obvious ufficiency of demand. Tax reductions
can be designed to make an important contribution
ice stability. Similarly, poorly designed
ax incrases can worsen inflation.


In considering changes in tax policy, the
effect on the real level of economic activity is
normally thoroughly-discussed. So too are the
distributional effects and the potential effects
on business incentives. Except at times when ata
tax increase is thought to be needed to restrict
excess demand, as in 1968, the impact of a tax
change on changes in price levels seldom receives
the same attention.

There are at least two major ways in which
tax reductions could be used as part of n a anti-
inflation policy. First, some taxes -- such as
sales taxes and payroll taxes -- enter directly
into costs and pricing decisions. Reductions in -
these taxes have direct and important effects on
prices. Second, reductions in taxes imposed on
workers -- either income or payroll taxes -- would
have the effect of raising after-tax income and
thereby reducing the need for money wage increases
to sustain real disposable incomes. No serious
recent effort has been made in the United States
to use tax policy as an integral component of price-
incomes policy. However, a number of imaginative
suggestions have been made. These suggestions de-
serve serious study and exploration during consider-
ation of possible tax reductions for next year.

Among the possib lities which deserve consid-,
eration is the use of an income tax credit against
social security taxes. We have discussed this
possibility in several past reports. The economic
impact of this type of tax reduction would be
identical to that of a reduction in the social
security tax itself. However, use of the income
tax credit avoids any reduction in Social Security
Trust Fund receipts. Maximum anti-inflation impact
of this type of tax change would be achieved if it
were made an integral part of a voluntary price-
incomes policy which also established wage and
price standards designed to preserve real after-tax
income gains consistent with productivity trends.
. i . ; <. ;* !" ; * 'l1' I

An imaginative variant of the income tax
credit against social security taxes has recently
been suggested. This proposal would make eligibility
for the credit dependent on the Individual firm's
success in adhering to agreed upon price and wage
targets. Participation in the plan would be volun-
tary, but the economic incentive to participate
would make it attractive to both labor and manage-
ment. This proposal deserves serious consideration
and discussion.

The Social Security Tax. The Administration's
request for a social security tax increase in 1977
is an example of a tax change which could only worsen
inflation. The employer share of the social
security tax i a cost of production. Increasing
this cost would both force prices up and discourage
growth of employment.
Additional financing of the social security
ystem may well become necessary in the future. No
evidence has been presented, however, that this
eed i so urgent as to justify economically
damaging tax increases in 1977. The current imbalance
between trust fund receipts and outlays is a direct
result of recnt high unemployment and high inflation.
The Secretary of the Treasury has informed the
Committee that under conditions of full employment
socal security trust fund receipts in fiscal 1977
would be nearly $10.4 billion higher than the actual
timated level of $96.2 billion. This is sub-
t~ntially more than the $4.4 billion per year which
he proposed tax ncrease would produce. Surely
th most desirable way to increase the surplus in
the trust funds is through higher employment and
reduced inflation.

Chapter V (pages i4 to 18 ) discusses
the status of the social security trust funds in-
grter detail. As shown in that chapter, It was
ly with the high un employent of fiscal 1976 that
rust fund outlays exceeded receipts so that the
lance began to decline instead of rise. A return

67-400 -76-5


to full employment would have a dramatic impact on
future trust fund receipts.

Simil ar arguments apply to the proposed
increase in the unemployment insurance tax. It,
too, would raise labor costs and thus both worsen
inflation and discourage increased employment. As
discussed in more detail in Chapter IV, there is
no compelling reason why this tax must be increased
at this time.

Budget Totals. Table 111/4 compares the Joint
Economic Committee's economic assumptions and :
estimated budget totals with the official Administra-
tion recommendations and with our own estimate of
the results of following the Administration's
recommended policies.

The Administration has projected a deficit
of $43 billion. As we have discussed elsewhere in
this report, however, the Administration's unemploy-
ment assumption for 1977 is optimistic relative to
the restrictive policies which are proposed. Our
own estimate is that if Administration policies
are followed, unemployment will average 7.8 percent
in 1976 and 7.9 percent in 1977. This would reduce
receipts and increase outlays for unemployment
compensation. In addition, the President's budget
assumes receipts of $6 billion from off-shore oil
rents and royalties, whereas the CBO projection on
which our estimates are based assumes only $1.9 bil-
lion. Off-shore oil receipts defy accurate estima'
tion To facilitate accurate comparison of different
budget policies, however, columns 2 and 3 of Table
111/4 assume $1.9 billion of off-shore oil receipts.
When this adjustment and the adjustment for what we
consider more reasonable economic assumptions are
made in the Administration's budget, the deficit
rises from the $43 billion shown in the budget docu--
ment to almost $60 billion.

The estimated defict which results if the JEC's
proposed targets for economic performance are achieved
is also in the neighborhood of $60 billion. Outlays
are substantially higher than the Administration has

Tabi e 111/4

JEC Estimate
Official Impact of
Economic Assumptions Administration Administration JEC
(Calendar years) Estimate Policies Policies

Average unemployment rate:
1976 7.7% 7.8% 7.5%
1977 6.9% 7.9% 6.4%

Percent change in GNP H
1976 5.9% 5.9% 5.3%
1977 6.3% 6.3% 4.3

Unified Budget totals (FY 1977)
(billions of dollars)
Receipts $351.3 $341.2 $352.0 to $357.0
Outlays 394.2 400.8 412.0 to 418.0
Deficit -43,0 -59.6 -60.0 to -61.0

Sources: Office of Management and Budget, Congressional Budget Office, Joint
Economic Committee.
^ ^ :' ^-^Esltffete'-',: J' :. .'; Pd_ I c e ** >J

"i Econnomic Comm ittee *I r IIu.

proposed, but so too are the receipts produced by
a more prosperous economy. The estimates presented
in Table I11/4 assumes an outlay range of $412 to
$418 billion. The receipt estimates assume a tax
cut of $10 billi on (annual rate ) if outlays are
assumed to be $418 billion and a correspondingly
larger tax cut if outlays are lower. Should the
private economy develop more strongly than is assumed
in the table, a tax cut of this size would not be
needed and the deficit would be smaller.

The projected deficit is about $15 billion
less than the $75 billion deficit expected for fiscal
1976. Ironically, a major reason the defict does
not drop further is the slower growth of receipts
due to a falling rate of inflation.

The virtually identical deficit which result
from the Administration's poli ies and from our
proposals is instructive. The immediate choice.
facing the Nation is not the size of the deficit but
the degree of progress which can be made toward full
employment and price stability. That choice not
only has far reaching consequences for the personal
well being of individuals and families but important
future consequences for the Federal budget. With a
healthy, growing economy the deficit will diminish -
rapidly in future years. With the high unemployment
and near stagnation which would result from
Administration policies, the deficit could be
expected to remain extremely large indefinitely.

Estimated as it would be at full employment,
the budget which results from our policy assumptions
moves from a deficit of $7-1/2 billion In the first
half of calendar 1976 to an approximate balance in the
second half of calendar 1977. However the fiscal re-
striction which this swing would norally imply is
largely offset by the recommended expansion of emer-
gency job creation programs (which do not enter into
the full employment budget estimate, because they
automatically phase out as unemployment is reduced).
Thus, the policies we are recommending satisfy the nee
need for supportive fiscal policy at this time but do
so in a way which does not jeopardize progress toward


a balanced budget as the economy moves toward full

Price-Incomes Pol icy

Continuing studies of inflation which this
Committe has conducted over several years have
provided convincing evidence that inflation has
a multiplicity of causes. Anti-inflation policy
ust take into account the particular causes of
inflation at any particular time. When inflation
tems from an excess of consumer demand relative
to the immediately available supply of goods and
services, policy must be directed toward restricting
emand until supply can be adequately expanded. When
inflation is coming from such special factors as
oor harvests or sudden increases in world prices
f other important commodities, the options for
deaing with it may be quite limited.

At the present time, inflation is not result-
ng from any excess of consumer demand. Nor is it
eriving from excessive government spending. Nor
are special supply problems in particular markets
reating unusual inflationary pressure.

Nor can inflation presently be explained in
erms of rapidly rising unit labor costs, Unit
'abor costs In the private nonfarm economy rose
at a rate f less than 2 percent during the last
ree uarersf 1975, dramatically illustrating
he point that recovery brings productivity gains
hich hold costs under cntrol and make greater

price stability possible. The puzzling and
disturbing factor in the experience of this recovery
to date is that, while productivity and unit labor
costs have responded as expected, the rate of increase
of many industrial prices accelerated late in 1975.

It is difficult to find an explanation for
this price behavior. It may result from widespread
expectations of future inflation. It may result
from anticipation of possible future price controls.
It may stem from a desire to boost profits or
recover past cost increases. Certainly it
appears doubtful that prices in recent months have
been rising at a rate which has a good economic
justification. This in itself indicates that an
active but voluntary price-incomes policy would be
of great benefit at this particular time. Such
a policy should have two elements -- first, an
Investigation of the extent to which price and
compensation increases are justifiable, and second,
a program for voluntary cooperation in holding such
increases to the necessary minimum.

Two additional factors strengthen the case
for such a policy. First, profits are expected
to rise rapidly this year. The Council of Economic
Advisers expects at least a 25-percent increase in
operating profits. Second, a large number of
workers will be involved in major union contract
negotiations this year. Stronger profit positions
will both weaken employer incentives to resist union
wage demands and increase union incentives to seek
generous contract settlements. Yet neither labor
nor business will benefit if both prices and wages
continue to rise rapidly.

Important progress toward price stability
is possible this year and next if proper policies
are adopted. The proper policy is not, however,
restriction of aggregate demand. Demand is not


excessive and is not about to become so. Restrictive
policies can only do more harm than good.

The proper approach to reducing inflation
at this particular time lies in the enunciation of
specific targets for wage and price adjustments,
followed by vigorous efforts to achieve voluntary
compliance with these standards. It is clearly in
the interest of all major elements in the economy
that the rate of inflation be further reduced.
Statesmanlike leadership by the President could
achieve a high degree of compliance with a voluntary
price-incomes policy.

Comprehensive price or wage controls are
neither necessary nor desirable. We oppose both.
However, should voluntary compliance with reasonable
price and wage standards prove impossible to achieve,
the provision of selective authority to delay price
increases in i nstances of signal importance to
the economy would be preferable to the indefinite
toleration of inflation at rates of 6 percent or
greater. The Chairman of the Federal Reserve Board
of Governors expressed his support for such a policy
in recent testimony before this Committee, stating:

. .a policy that would permit modest delay
in key wage or price increases, thus creating
opportunity for quiet governmental intervention
or for public hearings and the mobilization
of public opinion, may yet be of significant
benefit in reducing abuses of private economic
power and moving our Nation towards the goal
of full employment and a stable price level.

Typical forecasts assume an increase in average
hourly compensation of about 8 percent this year.
However, this expectation is reasonable only if the
rate of price Increase declines. Given an expected
.rate of productivity gain of more than 3 percent,


if wage increases average arnd 8 percent in 1975,
there would appear to be justifiable reason for
the average rate of price increase to exceed 5 per-
cent Put another way, if the rate of price
increase can be held to 5 percent this year, both
real wage gains in line with productivity trends
and important progress toward price stabiity can
be achieved. As discussed earlier, tax policy can
also be used to further contribute to the maintenance
of workers' real disposable incomes.

During the second half of 1975 price develop-
ment did not accord with expectations as to a
reasonable rate of price increase. As shown in the
Tables in Chapter II (pages 31 32), consumer
prices rose at a rate in excess of 7 percent in
the second half of last year, and the rate of
increase for wholesale industrial prices rose to
10 percent in the fourth quarter. The January
price data were more encouraging, with the consumer
and wholesale industrial price indexes each rising
only 0.4 percent (or at an annual rate of about 5
percent). Only limited significance can be attached
to any one months's data. Our analysis of the
underlying causes of inflation leads us to conclude,
however, that the chances of holding the inflation
rate to about 5 percent this year are quite good,
provided an effective price-incomes policy is

The President should establish and vigorously
support a voluntary program designed to insure
that price increases are held to a necessary
minimum during 1976 and that real wage increases
are in line with productivity gains, taking
into account the expected rate of price increase.
The Council on Wage and Price Stability should
be given full Presidential support in the use
of its authority, including its subpoena
authority, to investigate price increases and
to seek comp.i ance,,with .price,,and.. income ..
standards, 'As discussed i n the prev ous'section,

Spic ho also be used to contribute
to the achievement of a satisfactory rate of
increase in workers' real ditposable incomes.
We beli,4Vsuch a rogram can succeed in reducin
the inflation rate to 5 percent this year and
4 percent by the end of next year. This goal
can be achieved without resort to comprehensive
price or wage controls, to which we areopposed.

The Council oI Wage and Price Stability has
conducted several useful i rvestigat ions and published
some thorough and critical studies of industry
pricing practices. It could be much more effective,
however, in estab lishng a comprehensive price-incomes
oli cy and chieving cooperation with such a policy
if it had the firm and unequivocal backing of the
resident and other high government officials, and
if adequte staffing and resources were placed at
its disposal.

Given the avowed concern of this Adminis-
ration with the problem of inflation and given
he major contribution which we believe an active
price-incomespolicy can make, it is both a surprise
d a disapointment that neither the President's
conomic Report nor the accompanying Report of the
Counc of Economic Advisers contains any dis-
ussion whatsoever of price-incomes policy. Several
nary actions and proposals by the Adminis-
tration are aso puzzling. The proposal for payroll
tax increases next year and the recent veto of
egislation which would have facilitated reasonable
wage settlements in the construction industry are

The complacency exhibited by the Adminis-
tration with regard to its own forecast that the
inflation rate will remaiat approximately 6 percent
the coming tw years is remarkable. It
coms very close to repres entig an open invitation
o business and labor to engage in competitive


escalation of prices and wages. Nothing could be
more damaging to the economy at this time. The
Adm i n i stration s correct in its contention that
high inflation rates pose a threat to the contin-
uation of economic recovery. Yet the Administration
is content to leave untested the policy which in
our judgment represents the most promising approach
to bringing inflation down.

Monetary Policy

The crucial importance of monetary policy
in sustaining a strong economic recovery can
scarcely be overstated. The Federal budget can
provide extra temporary support in a time of
recession, but steady and continuing growth of
output and employment must rest with a strong
private sector and especially with the business
Investment sector. This is all the more true now
that we have entered a period in which State and
local governments can no longer be looked to as a
strong growth sector.

The single policy tool of greatest importance
in encourag ing private investment is monetary policy.
Tax chmges can also affect investment, but their
importance is dwarfed by the far greater importance
of an adequate supply of money and credit, A
monetary policy which accommodates investment demands
will be of key importance not only this year but
through the remainder of this decade.

Recent Financial Development. The behavior
of the credit markets in recent months has surprised
most observers. During the second half of 1975,
bank loans to business grew scarcely at all, interest
rates were virtually unchanged, and the money supply
grew at a less than 3-percent rate. In January both
the money supply and business loans actually fell
and, as shown in Table 111/5, short-term rates

Table III/ 5

Mone Supply Bank Lending, and Interest Rates

Percent Change Dec.1974- June-
.* / ^' -1 i.
(Seasonally adjusted June Dec. -Selected .*: June Dec. Jan.
annual rate) 1975 nterest es. 1975 1975 1976
Money Supply (MI) 5.7% 2.8% 3-month treasruy 5.2% 5.5% 5.0%

Money Supply plus net b/ 10.0% 6.6% Prime bank rate 7.0% 7.25% 6.75%
time deposits (CM2) -

Business Loans -6.8% 1.6% Aaa Corp. bonds,d/ 8.8% 8.8% 8.6%

Home Mortgage '
Yields e/ 9.2% 9.4% 9.3%

a/ Currency plus demand deposits
/ Currency, demand deposits, and time deposits at commercial banks other than large
c/ Commercial and industrial loans by commercial banks
d/ Moody's
e/ FHA, new homes
Sources: Federal Reserve Board of Governors, Treasury Department, Moody's Investor's
Service, Department of Housing and Urban Development.


dropped noticeably. While this combination of
developments might be expected at the trough of
a recession, it Is a puzzling development six months
into a recovery.

Several special factors offer a partial
explanation of these events: bank lending policies
have been unusually selective, business financing
has undergone a shift toward longer term instruments,
changes in Federal Reserve regulations have produced
shifts from demand deposits to savings deposits.
Even after taking these special factors into account,
however, loan demand still appears surprisingly weak
for a recovery period. This weakness underscores
the need for a monetary policy which encourages
private investment.

Of particular concern is the fact that the
money supply, however measured, grew only very
sluggishly in the second half of last year, and
not at all in December and January. This does not
necessarily represent a tightening of monetary
policy, but more probably the surprising weakness
in the demand for credit.

Monetary Policy for 1976. The unusual behavior
of the money supply poses a dilemma for monetary
policy during the remainder of this year. Output
cannot continue indefinitely to grow at a rapid
pace while the money supply grows so slowly. If
the recovery continues at the desired pace, the
demand for money will increase, perhaps quite
suddenly. If so, this demand should be accommodated,
and accommodated at short-term interest rates little
if any higher than at present. Long-term interest
rates should be permitted and encouraged to decline.
If accommodative monetary policy causes the money
supply to grow for a time at a rate exceeding the
Federal Reserve's targets, this should not be a
cause of concern. As shown in Table 111/6, the

& Table 1 /6
Monetary Aggregates: Federal Reserve Targets and Actual Performance

Percent Changes in tMonetary Agregates

Date Target Actual Performance to Date
Announced Base Period Target Ranges (seasonally adjusted annual rate)
MI M2 M3 M M2 M3

May, 1975 March 1975 -
March 1976 5 7 1/2 8 1/2 10 10- 12 4.8 8.9 11.9

July, 1975 2nd Quarter 1975 to
2nd Quarter 1976 5 7 1/2 8 1/2 10 10 12 4.9 8.3 11.7

November, 1975 3rd Quarter 1975 to
3rd Quarter 1976 5 7 1/2 7 1/2-10 1/2 9- 12 2.5 6.2 9.5

February, 1976 4th Quarter 1975 to
4th quarter 1976 4 1/2-7 1/2 7 1/2-10 1/2 9 12 n.a n.a n.a

Definitions: MI: Currency plus demand deposits
M2: Mj plus time deposits at commercial banks other than large CD's
M3: M2 plus deposits at nonbank thrift institutions

Source: IFederal Reserve Board of Governors


Federal Reserve has recently demonstrated its
willingness to revise its targets downward when
money supply growth fell below expectations. The
same flexibility should be available with respect
to the upper end of the range.

At times during 1976, money supply growth
may be both rapid and erratic. This should not
be a cause for concern so long as interest rates
conform to a pattern which encourages the credit
flows necessary to economic recovery. This is not
to say, however, that we have no concern about
the rate of growth of the monetary aggregates.
As the economy returns toward full employment, money
supply growth must be brought into line with the
economy's growth of potential.

During the remainder of 1976, monetary
policy should be conducted so as to avoid
any substantial rise in short-term interest
rates and to encourage reductions in
longer term rates. Temporary fluctuations
in the rate of growth of the monetary aggre-
gates should not precipitate monetary policy
changes so long as the pattern of interest
rates is satisfactory. Over the longer run,
however, growth of the monetary aggregates
must be in line with potential growth of
real output.

Coordination of Economic Policy

Careful coordination of the three basic
elements of aggregate economic policy -- fiscal,
monetary, and price-incomes policy -- is essential
If the difficult and delicate task of restoring
and maintaining full employment with reasonable
price stability is to be accomplished. In the
past, the absence of systematic procedures for
coordination has sometimes permitted monetary policy
established by the independent Federal Reserve Board


to work atcrs purposes with the fiscal policies
established by the President and Congress.

Last year Congress acted to require Federal
Reserve authorities to appear periodically before
the Banking Committees to discuss their monetary
growth targets for the year ahead. These appearances
have been very useful in Informing the Congress of
the intentions of the Federal Reserve and providing
opportunity for discussion. The question of what
further action to take if the Federal Reserve's
proposed policies conflict with congressionally
determined' fiscal policy remains unresolved, however,
we repeat here the recommendations we made in our
5 Midyar Report last October.

The following steps should be taken to help
establi the proper degree of congress ional
control over monetary policy:

SConress should adopt systematic procedures
for establishing output, _emp loyment, and

*The Administration should be required to
present specific monetary policy recom-
mendations to the Congress. 9/

91 Senator Proxmire states;: "I object. Under
Artfcle I, Section 8, of the Constitution, Congress,
not the Executive, has the power to coin money and
regulate the value thereof, It has established the
Federal Reserve Board as its creature to carry that
out This is a congressional responsibility, not
t of teExecutive. The Federal Reserve Board
tuon."e the Cqs

The Federal Reserve should be required
to present targets for the monetary Sqre-
gates which are consistent wi th con' esional ly
determined output, employment, and purchasin
power targets. 10/

Proper congressional supervision of economic
policy must begin with a clear enunciation of
specific short-run targets for the economy. The
Employment Act of 1946 requires the President to
recommend policies necessary to "promote maximum
employment, production, and purchasing power" and
the Joint Economic Committee to report to the
Congress on the adequacy of these recommendations.
In its Annual Reports, the Joint Economic Committee
has typically presented the output and employment
targets which it concludes to be realistic and
desirable. The Employment Act does not require
Congress to take any specific formal action on the
Joint Economic Committee's Annual Report. Hence,
these output and employment targets while they may
have the support of many individual Members of
Congress, do not have the formal endorsement of the
Congress as a whole.

The fiscal policy adopted by Congress in the
First Concurrent Resolution on the Budget in May
1975 was estimated by the Budget Committees at the
time to imply an unemployment rate of about 7-1/2
percent at the end of 1976, and this might be re--
garded as at least an indirect endorsement by the
Congress of an employment target. It could surely
be argued, however, that it would be preferable to

10/ Senator Proxmire states: "This recommendation,
T-T practice,is meaningless. The range of monetary
aggregates 'consistent with' any output targets is
so great as to be meaning less."


agree upon the output, employment, and purchasing
power targets f irst and then to adopt a budget
policy -and-also monetary and price.incomes
policies V deslgned to reach the agreed objectives,
Establishment of these basic economic policy targets
could be achieved through congressional debate on
the adoption of the Joint Economic Committee's
Annual Report, through a planning process such as
that provided for in S,2794, The Balanced Growth
and Economic Planning Act of 1975, or through other
mechanis ms.

Another obstacle to proper coordination of
policy is the veil of silence maintained by the
Administration regardilng monetary policy. The
original intention of the Employment Act was that
the President would incorporate monetary policy
recommendations Into.his annual Economic Report. In
practice, these recommendations have been either
extre y vague or missing entirely, This is again
the case in this year's Economic Report. In
carrying out its oversight responsibility for
monetary policy, Congress should have the benefit
of a detailed presentation of the Administration's
analysis and conclusions in this area. The
Presidents Economic Report should contain recom-
mendations on monetary policy, and these should be
couched in terms of specific rates of growth of the
monetary aggregates, specific interest rate targets,
and/or such other specific dimensions of policy as
the Administration judges to be appropriate,

The responsibility for the detailed des.ign
and execution of monetary policy has wisely been
entrusted to the Federal Reserve. The Committee
would oppose any effort by the Congress to legislate
or otherwise impose specific targets for growth of
the money supply or any other monetary variable,
ongress should insist, however, that the Federal
Reserve periodically present a "plan of action"
which is consistent with congressionally enunciated
targets for output, employment, and purchasing power,

67-480 0 76 6

6 I
These action plans should be accompan ied by
documentation based on the best available informatio
demonstrating why and how these monetary policies
will contribute to the basic objectives sought by
Congress. At present Congress is considerably handi-
capped in evaluating monetary policy by the refusal
of the Federal Reserve Board to make staff economic
forecasts and other similar material available to
Congress. The Federal Reserve has declined to
make staff forecasts available on the grounds that
they are continually subject to revision. However,
the Congress regularly receives Administration and
private forecasts of which this is equally true.
It is difficult for the Congress to evaluate
testimony when that testimony is not supported by
any detailed evidence or analysis.

Changes in Federal Reserve Structure. Coordi-
nation of economic policy would also be improved if
Federal Reserve procedures were revised to make
cont i nuing consultation with Congress and the Execu-
tive Branch an Integral part of the process of
determining monetary policy. In addition, the
membership of the Federal Reserve Board of Governors
should be more broadly representative of the major
elements in the economy,

Changes in the structure of the Federal
Reserve System are needed in order to
achieve closer coordination of monetary
policy with other aspects of overall
economic policy, Legislation is needed
which'wo uld provftd for- the fot lowing:

inclusion of the Secretary of the
Treasury and the Chairman of the Council
of Economic Advisers in the membership
of the Federal Open Market Committee;

reduction in the term of office of Members
of the Federal Reserve Board from the present
14 years 7 years;


the Fderal Rleserve Boad to better reflect
the vi ews of various sectors of the econmy,
includlng labor, small business' cbOnsumers,
and agriculture, and

S submission of the Federal Reserve budget
to the regular congressional appropriation
process and periodic congressional audit of
the Federal Reserve. I1/ 12/

II/Senator Sparkman states: "It is my opinion that
he Federal Reserve and its Board Members have,
since the system was put into operation in 1914,
served this country well because it has been
independent and not subject to political pressures,
I am not opposed to the tenure of the Federal Reserve
Bard's members being reduced from 14 years to 7
years; however, I would like for a provision to be
mde that members could serve a second term. As
to he Secretary of the Treasury and the Chairman
f the Council of Economic Advisers being made
mmbers of the Open Market Committee, I am not sure
at this would serve any more meaningful purpose
han under the present operation of this committee.
Sobjection to the provision of the Federal Reserve
coming to Congress for its appropriations and being
subject to periodic audit is again my fear of the
ederal Reserve being unable to work independently
nd perhaps being subjected to more political
pressures, especially to the pressures of the
Admnistration (be it Republican or Democrat) that
may be in office."
SRepresentative Long, La., states: "I think these
recomended changes in the Federal Reserve system will
rer the independence and integrity o the Board

input into this extremely important agency. Better
coordination of policy, coupled with increased
accountability to Congress and the American people,
ill mke our Federal Reserve system more responsive
Sour Nation's monetary needs and more in keeping
ith our democratic principles."


As Chart IV/1 shows, the official unem-
ployment rate reported by the Bureau of Labor
Statistics reached a peak of 8.9 percent in May
1975 and has declined since then to 7.8 percent in
January. The comprehensive unemployment rate,
including allowance for discouraged workers and
persons limited to part-time work by poor economic
conditions, reached nearly 12 percent. If the
President's proposals for a more restrictive fiscal
policy in 1977 are adopted, however, we can expect
little, if any, further decline in unemployment
this year or next. The human and economic costs
of continuing high unemployment need not and should
not be accepted. Not only would such unemployment
seriously threaten the welfare of mill ions of
American famil es -- and leave in want hundreds of
thousands who wi ll exhaust their unemployment _
compensation in 1976 -- it also would do major long-
run damage to the economy as productive capacity
stands unused, national needs go unmet, and pro-
longed idleness erodes workers' skills.

The policies described in this Chapter,
together with the fiscal, monetary, and price-
incomes policies described in Chapter III, should
succeed in reducing unemployment steadily, bringing
the jobless rate down to 6 percent or less by the
end of 1977. Equally important, these policies can
lay the foundation for continued progress toward
full employment and price stability during the
remainder of this decade.

The High Cost of Extended Unemployment

A critical and often ignored effect of the
1973-75 recession is the sharp rie in the duration
of unemployment during the past year. In January
1976, almost 2.8 million (36 percent) of the 7.3
million jobless had been idle for 15 weeks or more.


Chart IV/1





1967 1968 1969 1970 1971 1972 1973 1974 1975 1976
Selected Quarteriy Unemployment Rates
* 1. Fifteen weeks or longer as pericent of civilian labor force.
2 /Unemployed as percent of civilian labor force as reported monthly by BLS.
3 / Full-time job seekers plus one-half part-time job-seekers plus half of those working part-time for economic reasons plus discouraged workers.
Source: Bureau of Labor Statistics
4-i"3~ ~
3 -

0~ -
197 168 16 97 91 19217 197 917
telcte Qurel nmpomn ae
1 ifen ek o one a ecetofcviinlao fre
?~~ /~ Unmloe as pecn of ciila labo foc srpotdmnhl BS


By contrast, in January 1975, only 21 percent of
the unemployed were idle 15 weeks or more, and
during the 1967-70 period, the long-term unemployed
averaged only 15 percent of the total.

The number unemployed for six months or
longer has increased even more sharply. In
January 1975, 8.5 percent of the jobless had been
out of work for six months or more; in January
1976, it was 21.5 percent. The actual number un-
employed six months or more was 1.6 million in
January 1976, almost triple the number a year ago.

The persistence of long-term unemployment
creates a serious danger that much of what now is
considered cyclical unemployment will become
"structural," and the difficulties of solving the
unemployment problem will increase sharply._/
Eliminating cyclical unemployment requires recovery
of the economy. Dealing with structural unemploy-
ment requires not only adequate overall job oppor-
tunities, it also means providing workers with
remedial education, job training or retraining,
psychological assistance, motivation, and placement
assistance to help them to compete in the job
market. In the longer run, the President's go-slow
policies, which reduce unemployment only gradually,
will be more costly to the country than would an
emergency job creation program which provided
immediate work for many of the unemployed.

I_ Cyclical, unemployment refers to a situation in
which workers are laid off or cannot find jobs
because of a general economic recession and an over-
all shortage of jobs. Structural unemployment refers
to a situation in which certain groups of workers.
cannot compete successfully in the labor market be-
cause of a deficiency of skills or education, a
depressed regional economy, or discriminatory hiring
practices. Such workers have difficulty finding
satisfactory jobs even during periods of high overall

1 81

There are several ways in which cyclical
unemployment can become a more serious and lasting
unemployment problem. For instance, during a
protracted per'od of tdleness, experienced workers
lose job skills. In addition, the psychological
impact of enforced joblessness and dependence is
demoraltztng and affects attitudes toward work.
The experience affects workers' fitness for work
and creates problems for some in getting and keep-
Ing regular jobs.

Second, many young workers entering the
labor force for the first time will not obtain
needed work skills and experience. Often, the first
three or four years of full-time employment are
sed to experiment with different kinds of jobs and
to become accustomed to the demands of full-time
work. Because of the high unemployment rates
expected for the next several years, many young
people may reach age 25 without ever holding a
full-time job.

Third, although most firms can endure short
eriods of underutilization without impairment of
their abilty to recover, a longer partod-of-poor
business may prove fatal to firms in tenuous
financial condition. If such firms employ special-
ized skilled workers or are located in cities or
towns with few alternative employers, workers may
then need retraining, placement, and relocation
assistance to regain productive jobs.

The costs to the Nation of prolonged un-
employment are unacceptable. The goal of
economic policyshould b'e to reduce the
unemployment rate to 6 percent by the end
of 1977 and eventually to achieve an unem-
ployment rate no higher than 3 percent of
the adult labor force.
a~~enO~ 5i ~ ~ .:UI ~.- ~~s ::$e


The_ Proper Role for
Unei ploypent Compes

Until recently, the Administratton's policy,
toward htgh unemployment has been CI) to extend
unemployment benefits to cushion financial hard-
ship while waiting for the private sector to begp
rehiring, and C2) to acceRt reluctantly a modest
program of publtc job creation through emergency
funding and diversion of funds from training and
other programs intended to deal with structural
unemp I oyment.

The regular State unemployment insurance
programs pay up to 26 weeks in benefits, plus an
additional 13 weeks during periods of high unemploy-
ment. The severity of the 1973-1975 recession,
however, made extending unemployment compensation

Early in 1975, Special Unemployment Assis-
tance was enacted to provide Federally funded
compensation to some 12 milli on workers not covered
by State programs -- mainly local government, farm,
and household workers. In addition, the maximum
duration of benefits for persons covered by State
programs was extended from 39 to 65 weeks throuigh
the Federal Supplemental Benefits Program. Both
of these programs will expire in March 1977, unless
they are extended by Congress.

More than 24.5 million workers received
unemployment benefits at some time during 1975. The
average weekly number receiving benefits rose from
less than 1.8 million in 1973 to almost 5.9 million
at the March 1975 peak, and it still exceeds 4
million. During 1975, however, almost I million
workers exhausted their 65 weeks of unemployment
compensation provided under the Federal Supplemental
Benefits Program.

In December,1974, Congress provided some
300,000 public service jobs under Title VI of the

Comprehensive Employment and Training Act, a new
title added by Congress, in the Emergency Jobs and
Unemployment Assistance Act.

tn hts 1977 budget, however, the President
proposes to cut both publitc jobs and unemployment
benefts at a time wen both are still badly needed.
The Report of the President's economic advisers
states that "unemployment wtll almost surely remain
dstressingly hsgh this year" and that "the social
hardships and economic waste associated with the
current level of unemployment should not be under-
estimated.i2/ But the budget seems designed to
prolongthe unemployment and to exacerbate the

The President proposes cutting almost every
program assisting the unemployed. Some 260,000
public service jobs out of a current total of
310,000 jobs would cut by September 1977. The
Federal contribution to the wages for these jobs
would be slashed from $10,000 to $7,000 per year.
In addition, federally funded summer jobs for youths
would be cut by 100,000 in 1976 and by 70,000 more
in 1977. Finally, the President recently vetoed
the $6.1 billion Local Public Works Capital and
,evelopment Act, designed to create several hundred
thousand new jobs and to use unemployed resources
to improve public facilities.

Unemployment compensation also would be cut.
he emergency, federally funded benefits described
bove would be llowed to expire. This would make
ome 450000 jobless persons ineligible for further

We cannot accept this callous approach to the
ieeds of the unemployed. While the Committee be-
lieves strongly that primary reliance in treating
iunemployment should be shifted from benefit payments

Economic Report of the President, 1976, p. 19.


to job creation, as will be outlined in the next
section of this chapter, it believes that unemploy-
ment benefits must continue to be provided until an
adequate jobs program is in place. It believes,
moreover, that some reforms in the unemployment
insurance system are needed to raise the ceiling on
benefits and to create more uniformity in payments
among States.
The amount of benefits paid under current
law is 50 percent of the worker's average weekly
earnings, up to a maximum that varies by State.
Because of the maximum, over 40 percent of all
claimants in fiscal year 1975 received less than
50 percent of the average earnings from their pre-
vious employment. In previous years this figure
has been higher (52 percent in 1970 and 1971).

A greater number of workers should be receiv-
ing 50 percent of their average weekly wage. To
achieve this goal, the States should be required
by Federal law to raise the maximum weekly benefit
to two-thirds of the statewide average weekly wage
in each State. The Federal Government should
provide interim financing for two years to give
States time to change their laws. The cost of such
a program would be approximately $1 billion in
fiscal 1977.

After a period of widespread use of unemploy-
ment claims, however, it also is time for a basic
review of the standards and operations of these
programs to assure that eligibility requirements'
are appropriate and well enforced and to assess the
future financial soundness of the unemployment
insurance system.

The maximum weekly unemployment benefit should
be increased to two-thirds of the statewide
wage in each State. Individuals should receive
at least 50 percent of their previous weekly
wage up to the maximum. After this extended
period of high unemployment it is time for an


-" c f nemloyent insurance
programs, *ncludtnq e Igqibilitty requtre-

The tmmittee bel eves, however, thtat a
oltcy based on extending unemployment tnsurance
s totall nadequate as a primary response to a
ep, prologed period of high unemployment such
as.t.e re.sent one. n this situation,
jbsare needed. It is indefensible tob pay- peop e
or such a extended period and to keep thiem Tfde.

First, unemployment compensation is a very
expensive way to deal with long-term unemployment.
Its cost .wit be over $18 bi lion in fiscal year
976, or $14 bilFion more than at ful- employment.
Ie cost including food stamps, aid for dependent
lctdren, and other income maintenance programs
ffected by the economic slump w Ill be over $19
illion more than at full employment.3/ The
resident's go-slow policies would guarantee
ntinuing high outlays for these purposes for
the rest of this decade.

Second, society receives no useful product
from those on unemployment insurance. Reliance
this form of relief a the primary response to
long-term unemployment constitutes a terrible waste
f manpower resources in view of the Nation's many
nmet needs. The 300,000 jobs provided under the
Ergency Jobs and Unemployment Assistance Act are
agreat improvement over unemployment compensation,
ut this is a small program relative to the size of
e problem and leaves more than 7 million Americans
still unemployed.

Moreover, the diversion into countercyclical
ublic service jobs of funds intended for job train-
ing and work experience under Titles I and II of
the Comprehensive Employment and Training Act (CETA)

/ Congressional udget Office.

thwarts the intent of that le9gislation, which was
to provide jobs and traInng to persons handcppd
by poor education or other deficiencies. Although
the CETA legislation contains safeguards against
such diversion of funds, data on program particl-
pants clearly indicate that Title jI funds, which
were specifically allocated to train disadvantaged
workers for regular public empoyment, have go~n
recently to employ persons not in this category.
This policy reduces the funds available to help
structurally .disadvantaged workers become self-

A comprehensive strategy for dealing with
unemployment is essential to overall eco-
nomic recovery. An antirecession program,
however, should place primary emphasis on
providing jobs -- in the private sector to
the extent possible, but supplemented by
emergency public works jobs and public
service Jobs as necessary. Unemployment
compensation should be used to assist work-
ers who are Jobless for relatively short
periods of time. Until enough Jobs are
provided, however, unemployment compensa-
tion or other income support must be
extended. Federal supplemental unemploy-
ment benefits should be phased out with
the implementation of an adequate jobs
program .4/

4/ Senator Proxmire states: "This could become a
very costly program unless done right. I advocate
that the Government become the employer of lst
resort by providing useful work at the unemployment
compensation rates of those laid off (plus the cost
of getting to work) and at the minimum wage for
those with no unemployment compensation eligibility
who are entering the labor force. In this way use-
ful work can be performed for the society at
little added cost."

I A Proram of Job Creation

r The pessimistitcunemployment projections for
e rest of this decade make job creation the vital
ssue facig Congress this year. Right now, there
are over 7 mtilion Americans unemployed. In
pddittonabout 2-1/2 milion more. orkers can be
,expected to enter the laborforce this year. In
ight of this,'we believe that it is important for
economic policy to aim to expand employment by
bout 3-1/2 million obs during 1976. Almost as
large a growth of e lployment will again be needed
n 1977~ f u nemployment is to continue rapidly
ecl ining.

In addition tothe fiscal and monetary
es described in Chapter III, achievement of
his jogoal will require an enlargement of
government job creatton programs to about one million
obs in 1977. Such programs should be accompanied
w incentives t step up privae sector hiring.

SPublic Job Creation. Di rect public ob
reat ccording toa number of studies including
one recently issued by the Congressional Budget
ffice,/ is the quickest and surest form of job
tmulus the Federal Government can undertake. An
antirecession jobs program, according to these
studies, reduces unemployment more sharply than any
other spending measure.

Currently, some 300,000 public service jobs
Sbeing funded under Title Vi of the Comprehensive
ployment and Training Act. If pending legislation

through fiscal 1977 will be $5.9 billion, or enough
t enlarge the public service employment to 600,000
bs. Provision for fiscal 1976 outlays under this
rogram was included in the Second Concurrent

Temporar Measures to Stimulate Employment,
n ressional Budget Office, September 2, 1975.

Resoluton on the 1976 Bu n fiscal 1977 we
believe that it should be ncreased to about one
million jobs.

Two objections often are raised against
temporary government job creation programs. One is
that, although described as temporary, they may
be allowed to continue after the need for them has
passed. For this reason, we recommend again, as we
have in the past, that countercyclical programs
be tied explicitly to the unemployment rate. Then
the spending authority for these programs will
expire automatically when unemployment returns to
more satisfactory levels.

As a formula to provide this link, we have
suggested in past reports that a temporary jobs
program be funded to create 250,000 jobs for each
1/2 percentage point by which the unemployment rate
exceeds 5 percent in the absence of the program.
With the unemployment rate now expected to average
close to 7.0 percent in fiscal 1977, this formula
suggests a need for one million emergency jobs.
With such a program and with an overall economic
policy which supports recovery, the unemployment
rate can be reduced to 6 percent or less by the end
of calendar year 1977.

A second objection to emergency jobs pro-,
grams is that these programs create public rather
than private jobs. We share this concern and have
no desire to create public jobs at the expense of
private jobs. Both monetary and fiscal policy shoulk
be designed to encourage the maximum feasible growth
of private employment this year and next. At the
same time, we must face the fact that, even with the
strongest growth of private employment that is
reasonable to anticipate, unemployment will remain
much too high through the end of 1977. Temporary
work opportunities in the public sector are far
preferable to continued reliance on income support
for idle workers.
8i,.,.* *

A thir objection which has recently been
ed aganst a pubic jobs program s that Its
'nt ibu n t new job creation is small, be-
ause mot ofte jobs paid by the program existed
nyway. For i tance, substitution of Federally
nded emplo e for regular State and locat govern-
personnel has been a problem in some places in
Spast. However, the contention of the Council
.Economic Advisers that only one job may be
d for every ten jobs funded. is grossly exag-
gerat. the extent that funding substitution
s been a problem, it can be greatly reduced by
ad on of antirecession grants to State and
Ia governents ato avert the need for layoffs
I te use o the locally initiated work-projects
r h to t rar job creation, which is

To assert, s the Council of Economic
dvsers has done, that it is impossible to design
effective emergency jobs program is a counsel
f dpat. Te fact that unemployment is going
Srain ua eptably igh this year and next must
f Effctive programs must be adopted to
vide rary employment opportunities until
n adequate numbr of jobs become available in

Nonetheless, to accommodate criticisms
escribed above, the structure of the emergency
Sp ram should be modified as it is expanded.
imply increasing the funding for CETA's Title VI
itht moifying the program has several dis-

First, a further large expansion of the
rogrm, which is administered by the State and
Sgovernments, would strain the capacity of
any of these governments by confronting them
th a large influx of temporary workers. To some
tent, this has already happened. According to one

44 e


study prepared for this Commitee,6/ te nee to
establish public servi j quickly under CETAs
Title VI early in 1975 led ocal goverments
to develop make-work jobs for newly available
employees. Most Ioc t governments made good use
of these funds, but any make-work job creation
resulting from a further expansion of the ram
could discredit a good method of creating jobs
during a recession.

Second, the existing program tends to crte
expectations of pe annt government employrent
among persons hired for countercyclical purpos.
Since some CETA jobs -- those under Title II --
are intended to lead to regular government employ-
ment, and since many emloyees paid under CETA's
Title VI are placed in jobs of a permanent na re
involving continuing governmental functions, both
employer and employee come to expect that these
arrangements may continue indefinitely.

A detailed description of program modific
tions to avoid these problems and to minimize
funding substitution was presented in the Committ
Midyear Report Briefly, ocal or State vern
ments, nonprofit organizations, Federal agencies,
and even private businesses could propose proje
and apply to specially constituted regional admin-
istrative boards for project funds. Private
business would be expected to undertake nonprofit
projects. The work projects would have to be
activities which would not otherwise be undertaken
which could be completed in one to two years, and
which would provide socially valuable goods or
services to the community. Such projects might
include rehabilitation of housing occupied by

6/ Thomas A. Barocci, "The Canadian Job Cre ati
Model and Its Applicability to the United States,,"
Joint Economic Committee, 1976.


low-income persons, construction of bycle parts,
care of parklands and public spaces, construction
of rereational facilities, and provision of care
or the chronically ill.

The distribufTon of funds should be base--
on local unemployment rates, as is currently the
case nder CETA. Once a project is bgun, however,
its funding should not be interrupted if the local
unemoyment rate falls. There should be a clear
understanding from the beginning that employment
wirV end with the completion of the project. No
individual should be employed under this program
for more than two years. Financial incentives
should be provided to encourage individuals to find
regular private or public employment whenever jobs
become available. Employees under this program
hould be eligible for regular unemployment benefits
ion completion of a project.

Clearly, not everyone currently seeking work
could be employed under this program. It therefore
should be directedprimarily at those who have been
nempoyed for some time and who lack alternative
imeans of support.

During the past year, the Joint Economic
Committee has conducted regional hearings in six
cities (Chicago, New York, Atlanta, Los Angeles,
Fall River, and Boston). In the course .of these
hearings, much was learned about the operation of
'Federal training and employment programs in dif-
ferent areas. The following conclusions emerged:

SThe need for a continued and expanded
emergency jobs program is keenly felt in all areas

The existing CETA Title VI program is
workig reasonably well in most places. It is
eding in providingjobs for persons who would
otherwisebe unemployed. In most cases, these
persons are performing highly useful work.

S7-480 0 76 7

SThe program can be iproved ad made
more successful. The program design described
above stems in part from the evidence gathered at
regional hearings and from studies commissioned by
the Committee during the past year.

We are pleased to note that legislation
which has recently passed thoe House and is curent
pending in the Senate would continue the Title VI
emergency jobs program and would expand it by pro-
viding for locally initiated work projects of the
kind we have suggested. Enactment of this legisla-
tion should receive high priority.

Emergency Job programs should be expanded
to provide additional Jobs for the cceq
cally unemployed -- those who normally could
find jobs when the economy is operating near
capacity. The additional Jobs created by
this program expansion should. be In special
proJects lasting from one to two years and
having a useful and identifiable output.
The jobs should be clearly temporary and
should make use of skills which the partic- .
ipants already have. This emergency program
should be in addition to the existing CETA
Job training and public service employmint
programs. A propriations should be provided
td create a total of one million Jobs during
1977. including the 600,000 Jobs which would
be provided under legislation recently passed
by the House of Representatives extending and
enlarging Title VI of CETA. 7/

7/ Senator Proxmtre states: "I am agaTnst a Job
program of this size which is accomplised through
public works, which are wasteful and too: slow, or
through public service jobs where there is a big
substitution effect if It gets too large. Instead,
I believe we should provide for jobs through a
shallow housing subsidy where one job can be
created for about $500 instead of $8,000 per public
service job and as high as $25,000 for a public
works job."

While no public jobs program can be entirely
free from criticism, the approach outlined above
would overcome many of the defects Inherent in the
existing program, Without a substantial and inno-
vative program similar to the one described, the
United States will continue to suffer high unemploy-
ment through the end of this decade. The resulting
loss in income and human dignity is unconscionable,
as is the erosion in the productive capacity of the
labor force.

The emergency one million job program recom-
mended above is only one element of an overall
strategy to reduce unemployment rapidly. Counter-
cyclical aid to State and local governments and an
accelerated public works program are two other
equally essential ingredients. Provision for both
of these programs was included in the Second Con-
current Resolution on the fiscal 1976 budget, and
bothprograms would have been authorized by a bill
which Congress passed and sent to the President in
January. The President's veto of this bill has
torn a gaping hole in the comprehensive recovery
program that Congress had developed.

The proposed emergency public works program
has been criticized on the grounds that the projects
would get underway too slowly to be of real benefit
in dealing with recession-induced unemployment. If
the 1974-75 recession had been as mild as other
recessions experienced in the postwar period, this
criticism might be valid. However, the recent
recession has left an aftermath of high unemployment
which will remain throughout the remainder of this
decade. Unemployment in the construction industry
Is especially severe and appears likely to remain
o for quite some time. A program of high-priority
local work projects which can be initiated quickly
and completed during the present period of high
unemployment is thoroughly justifed and bad ly

Congress should quickly reenact and the
President should sign legislation provid-
.ing for:. '

countercyclical aid to State and lo
_governments, and

San emergency publc works proram
designed to fund hirh-priority lcal work

Providing Jobs for Young Pe6ple. Teenagers
and young adults have always experienced higher
unemployment rates than adults. While the unemploy-
ment rate among adults 25 years old and older was
5.4 percent in January 1976, that among persons 20
to 24 years old was 12.7 percent, and among teen-
agers of 16 to 19 it was 19.9 percent. For black
teenagers, the unemployment situation was much worse.
In January, 34.6 percent of 16 to 19-year-old blacks
could not find a job; in many inner-city ghettoes,
the unemployment rate for teenagers exceeded 50..

The total number of teenagers and young
adults who were jobless in January- 1976 was 3.7
million -- almost half the total number of Americans
unemployed. In addition, there are about 400 ,000
youths who would be looking for work if it were
available -- discouraged workers -- who are not
counted in the unemployment statistics. One of the
most tragic consequences of the 1975 recession and
the severe unemployment projected through 1980 is
the economic, social,and psychological Impact it
wil I have on many young peop e.

First, as noted above, many young people
will lose the opportunity to develop job skills and
work experience, to experiment with different kinds
of jobs, and to adjust to the demands of the labor
market -- a healthy process which normally precedes
entry into a career job.