To the Congress of the United States:
For many years the American people have been seeking, through their Government, the road to full employment with stable prices.
In the first half of the 1960's, we did have price stability--but unemployment averaged 5 1/2 percent of the civilian labor force.
In the second half of that decade, we did have relatively full employment--but with sharply rising prices.
After 5 years of sustained unemployment followed by 5 years of sustained inflation, some have concluded that the price of finding work for the unemployed must be the hardship of inflation for all.
I do not agree.
It is true that we have just passed through a decade when the economy spent most of the time far off the course of reasonably full employment and price stability. But if we apply the hard lessons learned from the sixties to the decade ahead, and add a new realism to the management of our economic policies, I believe we can attain the goal of plentiful jobs earning dollars of stable purchasing power.
Those lessons are plain:
1. We have learned that Government itself is often the cause of wide swings in the economy.
2. We have learned that there is a human element in economic affairs--habit, confidence, fear-and that the economy cannot be managed mechanistically and will not suspend its laws to accommodate political wishes.
3. We have learned that 1-year planning leads to almost as much confusion as no planning at all, and that there is a need to increase public awareness of long-range trends and the consequences for future years of decisions taken now.
My 1970 Economic Report reflects these lessons. The current actions we are taking are designed to help the American economy regain its balance; the plans we are making are designed to build on that balance as our free economy grows and responds to the needs of its citizens.
"Stability of economic policy," Theodore Roosevelt pointed out, "must always be the prime economic need of this country. This stability should not be fossilization." Stability is a means to an end. The end we seek is steady growth, predictable Government action in maintaining a sound economic climate, and constant involvement of the people in setting their own priorities.
Accordingly, this Economic Report "opens up the books" as never before.
We are making available the facts and figures that will enable the people to make more intelligent judgments about the future. If we are to improve the quality of life in this Nation, we must first improve the quality of debate about our national priorities. In this Report, and in the Budget Message, long-range projections are made that will enable the people to discuss their choices more effectively in the light of what is possible.
In the real world of economics, there is a place for dreams--dreams that are realizable if we make the hard choices necessary to make them come true.
THE USES OF OUR NATIONAL OUTPUT
We have placed the Nation's larger decisions in the context of a picture of the total resources available and the competing claims upon them. A summary of this analysis is contained in Chapter 3 of the Annual Report of the Council of Economic Advisers; I hope it will be studied carefully and its precedent carried forward in future years.
That analysis is neutral about which options and claims should be chosen. The purpose of the analysis is to help everyone observe the discipline of keeping claims and plans within the limits of our capacity, and to make sure that excessive claims do not prevent us from achieving our most important goals.
Even in our own highly productive and growing economy, resources are limited. There will be competition between private and government uses for our national income, competition among programs within government budgets, and competition among borrowers for the limited national savings.
Our problem, in short, will be to choose wisely what to do with our output and incomes. Large as they are, the claims upon them, what people expect of them, are even larger. If we add the expenditures that consumers will want to make with larger incomes; the investment that businesses must make to assure rising productivity; the housing construction needed to meet the current shortage and the demands of a growing population with rising incomes; the likely expenditures of the State and local governments; the cost of present Federal programs plus the proposals already recommended by this Administration--we find that the total would nearly exhaust the national output until 1975. And that total would not include tens of billions of dollars of new programs that are commonly urged upon the Government.
We shall have to think carefully about how to choose the claims upon the national output that will be met, since we cannot meet them all. This choice is not made exclusively or even mainly by the Federal Government. It is mostly made by the individuals who produce the output, earn the income, and decide how it should be spent. Nevertheless, a Federal Government with a budget of $200 billion has a great influence on how the national output is used. This influence is not confined to the output the Federal Government uses itself. The taxes the Federal Government collects, the grants it makes to State and local governments, its borrowing or repayment of debt, influence the purchase of private citizens and of State and local governments.
Personal freedom will be increased when there is more economy in government and less government in the economy. Economic domination, like any other government domination, is dangerous to a free society, no matter how benevolent its aims. Freedom depends on our recognizing the line between domination and influence, between control and guidance. The quality of life in America depends on how wisely we use the great influence that Government has.
We know that existing programs of Government and probable demands of the private sector could use tip all the output we can produce for several years to come. This does not mean that we cannot do anything new. It does mean that we have to choose. If we decide to do something new, or something more, in one direction we will have to give up something elsewhere. There is no unclaimed pool of real resources from which we shall be able to satisfy new demands without sacrificing or modifying some existing claims.
If we fail to tailor our demands consciously to resources available, the likely consequences would be both misdirection of resources and inflation. We have seen this in the past 5 years. Beginning in mid-1965 the Government imposed on the economy a large increase in nondefense spending and the demands of the Vietnam War effort. It did not, however, face up soon enough to the need to cut back other demands by raising taxes or by following an adequately restrictive monetary policy. Of course, failing to take these steps did not relieve us of the necessity of cutting back. It only meant that the cutback was imposed unfairly by inflation, rather than in a more deliberate and equitable way.
THE PRESENT INFLATION
The inflation unleashed after mid-1965 had gathered powerful momentum by the time this Administration took office a year ago. The expectation of more inflation was widespread, as was skepticism of the determination of Government to control it. Businesses, anticipating rising prices and costs, were eager to invest as early as possible and were willing to incur high interest charges that they would pay later in presumably cheaper dollars. Workers demanded large wage increases to catch up with past increases in the cost of living and to keep up with expected future increases. Prices were being boosted to catch up with past cost increases and to keep up with the future.
Inflation was in full tide.
The inflationary tide could not quickly be turned. At least it could not be turned quickly without a serious recession. Such a recession would itself have brought hardship to millions of people. Moreover, it would have been another episode in the history of stop-go economic policy, when the need was to introduce an era of steadiness in policy that could yield stability in the economy.
Our purpose has been to slow down the rapid expansion of demand firmly and persistently, but not to choke off demand so abruptly as to injure the economy. The greater price stability that all desired could not, given a concern about unemployment, come quickly. This transition would take place in several steps, each of which would require time, and only at the end would increases in the price level slow down.
1969 was a year of progress in the fight against inflation. For the first time since the price spiral began, there was a sustained period of combined fiscal and monetary restraint. During 1969 the rise of Federal expenditures was slowed to an increase of $9 billion, compared with an annual average of $20 billion in the 3 preceding years. Instead of the rising budget deficits of earlier years there was a surplus in 1969. Instead of the money supply expanding by 7 percent, as in 1968, it grew at a 4.4-percent annual rate in the first half of 1969 and at a 0.7-percent rate in the second half.
The growth of total spending, public and private, which was the driving force of the inflation, slowed markedly, from 9.4 percent during 1968 to 6.8 percent during 1969 and an annual rate of 4.4 percent in the fourth quarter of 1969. This decline in the growth of spending was inevitably accompanied by what in October I called "slowing pains." Gains in real production slowed down. Industrial production declined. Profits drifted lower as margins were squeezed. All of these slowing pains were increased, and the inflation prolonged, by the failure of productivity to rise, for the first time in many years.
And in the latter part of the year there were the first faint signs of gain on the price front. Instead of continuing to accelerate, the rate of inflation itself began to level out.
THE OUTLOOK FOR 1970
As we enter 1970 continuation of a low rate of growth of sales, production, and employment for several months seems probable. Thereafter, the performance of the economy will depend on both the continued resolve of the Government and the difficult-to-predict behavior of the private sector.
Government policy must now avoid three possible dangers. One is that after a brief lull the demand for output would begin to rise too rapidly and rekindle the inflationary process, as happened in 1967. This possibility cannot be ignored. The tax bill passed in December reduced revenues for the next fiscal year by close to $3 billion, compared to my original proposals, requiring the Administration to reduce spending plans further in order to retain a surplus. Pressures for increased spending threaten to shift the budget from the surplus position to a deficit by the latter part of calendar 1970 unless the responsible fiscal course urged by the Administration is accepted by the Congress.
A second danger we must consider is that the moderate and necessary slowdown may become more severe. The highly restrictive stance of monetary policy is one reason for considering this possibility. Moreover, there is a question whether the rate of real output can long remain essentially flat without more adverse consequences than we have so far experienced. Until now the unemployment rate has remained low, partly because employers have retained workers despite growing signs of sluggishness in sales. However, they may be unwilling to do this for long with profits shrinking.
A third danger is that although the economy remains on the path of slow rise, and avoids either serious recession or revived inflation, this is achieved with such tight credit conditions as to paralyze the housing industry, preventing needed additions to the supply of homes and apartments. A Federal budget deficit, which would require the Treasury to become again a net borrower in the capital markets, taking funds that would otherwise go to other users, might bring this about. This is one reason why I continue to stress the importance of a strong budget position.
Our objective is to avoid these dangers as we achieve stability. A necessary condition for doing this is to keep the Federal budget in balance in the coming fiscal year.
A prudent fiscal policy, avoiding the risks of returning to budget deficits, and a prudent monetary policy, avoiding the risks of overly long and overly severe restraint, offer the best promise of relieving strains and distortions in financial markets, bringing interest rates down, and encouraging a sustainable and orderly forward movement of the economy.
After some months of slow expansion of sales, output, and employment, which seems likely, a moderately quicker pace later in the year would be consistent with continued progress in reducing the rate of inflation.
The goal of policy should therefore be moderately more rapid economic expansion in the latter part of 1970 than we have recently been experiencing or expect for several months ahead. Keeping the Federal budget in balance, as I have recommended, and a moderate degree of monetary restraint will help achieve this result. This combination of policies would also permit residential construction to revive and begin a rise toward the path of housebuilding required by our growing number of families needing homes and apartments.
As far as can now be foreseen, this pattern of developments through the year could be achieved with a gross national product for 1970 of about $985 billion. This would be 5½ percent above that for 1969. A slowdown in the rate of increase of consumer prices is a reasonable expectation in this economic outlook.
An unfortunate cost of having allowed the inflation to run for so long is that it courts the risk of some rise in unemployment. The policy of firm and persistent disinflation on which we have embarked, however, holds out the best hope of keeping that risk low.
This risk emphasizes the importance of promptly enacting the legislation this Administration has recommended for. manpower training, unemployment compensation, and welfare systems:
The proposed Manpower Training Act would not only bring about better planning and management of training programs; it would also trigger an automatic increase in appropriations for these programs if the national unemployment rate reaches 4.5 percent for 3 consecutive months.
--The unemployment compensation legislation would increase coverage, encourage States to improve benefits, and provide for Federal financing of extended benefits if unemployment of insured workers exceeds 4.5 percent for 3 consecutive months.
--The proposed Family Assistance Program would provide income support for poor families with children, whether headed by a male or a female, while providing strong incentives and assistance for those who can do so to find and accept employment.
Because our expanding and dynamic economy must have strong and innovative financial institutions if our national savings are to be utilized effectively, I shall appoint a commission to study our financial structure and make recommendations to me for needed changes.
In 1970, we are feeling the postponed pinch of the late sixties. If responsible policies had been followed then, the problems of 1970 would be much easier. But we cannot undo the errors of the past. We have no choice now but to correct them, and to avoid repeating them.
STRENGTHENING THE WORLD ECONOMY
The achievement of greater balance and stability in our own economy is also important for international finance and trade. The dollar is not only our currency; it provides the principal vehicle for world trade and payments. We are the world's largest exporter and importer, and instability in the United States--whether it involves inflation or recession--has unsettling effects on the world economy. Inflationary pressures arising in the United States have added to inflationary problems in other countries in recent years. The long inflation has also weakened our trading position. However, with the restraining of excessive demand in 1969, the deterioration in our trade balance has been arrested.
I am particularly gratified to note improvements in the international monetary scene during the past year with the introduction of Special Drawing Rights and with the realignment of several important currencies. In cooperation with other countries, we are actively investigating other ways to make the international monetary system more stable and orderly, and to give more attention to international coordination and synchronization in the management of domestic economic policies.
Although a high and rising level of international trade can add to the prosperity of the United States and other countries, imports from time to time may cause domestic dislocations. Since the gains from international trade are enjoyed by the country as a whole, it is appropriate that the costs of trade-associated dislocations be spread more evenly. The trade bill presented to the Congress in November contains practical adjustment assistance and escape-clause provisions that would soften the impact of import competition in cases where it harms our own workingmen. It also includes the repeal of the American selling price method of tariff evaluation, a step which is important in reducing the nontariff barriers to U.S. exports.
Trade is vital to the progress of the less developed countries of the world. With other industrialized nations, the United States is exploring ways of enabling less developed nations to participate more in the growing volume of international trade.
SEVEN BASIC PRINCIPLES
Since this is my first Economic Report, it is in order for me to set out the basic principles that will continue to guide the management of economic policy in my Administration:
First, the integrity and purchasing power of the dollar must be assured. To recreate confidence in a secure future, we must achieve that reasonable stability of the price level which has been so severely eroded since mid-1965. The unfairness of a steeply rising cost of living must not again be inflicted on this Nation.
Second, our economic policy must continue to emphasize a high utilization of the Nation's productive resources. We must maintain a vigorous and expanding economy to provide jobs for our growing labor force.
Third, we must achieve a steadier and more evenhanded management of our economic policies. Business and labor cannot plan, and consumers and homebuyers cannot effectively manage their affairs, when Government alternates between keeping first the accelerator and then the brake pedal to the floor.
Fourth, Government must say what it means and mean what it says. Economic credibility is the basis for confidence, and confidence in turn is the basis for an ongoing prosperity.
Fifth, we must preserve and sustain the free market economy in order to raise the standard of living of every American. The most basic improvement in our national life during the last three decades has come through the doubling of real purchasing power that our free competitive economy has delivered to the average American family. No Government programs during that period begin to approach this doubling of real income per family as a source of our improving economic well-being. Government now has both the ability and the duty to sustain a general climate for stability and growth, but it must do so in the firm conviction that only a free economy provides maximum scope for the knowledge, innovativeness, and creative powers of each individual.
Sixth, we must involve the American people in setting goals and priorities by providing accurate, credible data on the long-range choices open to them, making possible much better informed public discussion about using the resources we will have in meeting the needs of the future. The 1970 Annual Report of the Council of Economic Advisers is a long first step in that direction.
Finally, the free economy of the future will rest squarely on the foundation of genuinely equal opportunity for all. Some, because of race or national origin, find themselves situated far back of the starting line in our economy. Others by the happenstance of health, accidental injury, education, or economic background are unable to participate fully in our economic life; still others become casualties of obsolete skills. We are deeply committed to make a reality of the promise of an equal opportunity in life, so that the fruits of our economic progress and abundance will become available to all. The national conscience demands it, human dignity requires it, and our free and open economic system cannot be fully effective without it.
February 2, 1970