To the Congress of the United States:
I report to you under the provisions of the Employment Act of 1946 at a time when
--the economy has regained its momentum;
--the economy is responding to the Federal Government's efforts, under the Act, "to promote maximum employment, production, and purchasing power;"
--the economy is again moving toward the central objective of the Act--to afford "useful employment opportunities, including self-employment, for those able, willing, and seeking to work."
My first Economic Report is an appropriate occasion to re-emphasize my dedication to the principles of the Employment Act. As a declaration of national purpose and as a recognition of Federal responsibility, the Act has few parallels in the Nation's history. In passing the Act by heavy bipartisan majorities, the Congress registered the consensus of the American people that this Nation will not countenance the suffering, frustration, and injustice of unemployment, or let the vast potential of the world's leading economy run to waste in idle manpower, silent machinery, and empty plants.
The framers of the Employment Act were wise to choose the promotion of "maximum employment, production, and purchasing power" as the keystone of national economic policy. They were confident that these objectives can be effectively promoted "in a manner calculated to foster and promote free competitive enterprise and the general welfare." They knew that our pursuit of maximum employment and production would be tempered with compassion, with justice, and with a concern for the future. But they knew also that the other standards we set for our economy are easier to meet when it is operating at capacity. A full employment economy provides opportunities for useful and satisfying work. It rewards enterprise with profit. It generates saving for the future and transforms it into productive investment. It opens doors for the unskilled and underprivileged and closes them against want and frustration. The conquest of unemployment is not the sole end of economic policy, but it is surely an indispensable beginning.
The record of the economy since 1946 is a vast improvement over the prolonged mass unemployment of the 1930's. The Employment Act itself deserves no small part of the credit. Under the mandate and procedures of the Act, both Congress and the Executive have kept the health of the national economy and the economic policies of the Government under constant review. And the national commitment to high employment has enabled business firms and consumers to act and to plan without fear of another great depression.
Though the postwar record is free of major depression, it is marred by four recessions. In the past fifteen years, the economy has spent a total of seven years regaining previous peaks of industrial production. In two months out of three, percent or more of those able, willing, and seeking to work have been unable to find jobs. We must do better in the 1960's.
To combat future recessions--to keep them short and shallow if they occur--I urge adoption of a three-part program for sustained prosperity, which will (1) provide stand-by power, subject to congressional veto, for temporary income tax reductions, (2) set up a stand-by program of public capital improvements, and (3) strengthen the unemployment insurance system.
These three measures will enable the Government to counter swings in business activity more promptly and more powerfully than ever before. They will give new and concrete meaning to the declaration of policy made in the Employment Act. They will constitute the greatest step forward in public policy for economic stability since the Act itself.
As the Employment Act prescribes, I shall in this Report review "economic conditions" in the United States in 1961 and "current and foreseeable economic trends in the levels of employment, production, and purchasing power;" set forth "the levels of employment, production, and purchasing power obtaining in the United States and such levels needed to carry out the policy" of the Act; and present my economic program and legislative recommendations for 1962.
PROGRESS IN 1961
Last January the economy was in the grip of recession. Nearly 7 percent of the labor force was unemployed. Almost one-fifth of manufacturing capacity lay idle. Actual output was running $50 billion (annual rate) short of the economy's great potential. These figures reflected not only the setback of 1960-61 but the incomplete recovery from the recession of 1957-58. The task before us was to recover not from one but from two recessions.
At the same time, gold was leaving the country at a rate of more than $300 million a month. In the three previous years, the Nation had run a total deficit of $10 billion in its basic international accounts. These large and persistent deficits had weakened confidence in the dollar.
In my message to the Congress on February 2, I stated that this Administration's "realistic aims for 1961 are to reverse the downtrend in our economy, to narrow the gap of unused potential, to abate the waste and misery of unemployment, and at the same time to maintain reasonable stability of the price level." In a message on the balance of payments on February 6, I added a fifth aim, to restore confidence in the dollar and to reduce the deficit in international payments.
These five aims for 1961 have been achieved:
(1) The downtrend was reversed. Gross national product (GNP) grew from $501 billion (annual rate) in the first quarter to a record rate of $542 billion in the last quarter. In July, industrial production regained its previous peak, and by the end of the year it showed a total rise of 13 percent.
(2) These gains brought into productive use nearly half the plant capacity which was idle at the beginning of the year. The growth of GNP narrowed the over-all gap of unused potential from an estimated 10 percent to 5 percent.
(3) Unemployment dropped from 6.8 to 6.1 percent of the labor force. The number of areas of substantial labor surplus declined from 101 in March to 60 in December.
(4) Price stability has been maintained during the recovery. Since February, wholesale prices have fallen slightly, and consumer prices have risen only one-half of 1 percent.
(5) Confidence in the dollar has been restored. Our gold losses were cut from $1.7 billion in 1960 to less than $0.9 billion in 1961. The deficit in 1961 in our basic international transactions was about one-third as large as in 1960.
The "Program To Restore Momentum to the American Economy" which I proposed to the Congress on February 2 resulted in prompt legislation to
--extend unemployment insurance benefits on a temporary basis;
--make Federal aid available, through the States, to dependent children of the unemployed;
--liberalize social security benefits;
--promote homebuilding under the Housing Act of 1961;
--raise the minimum wage and extend it to more workers;
--provide Federal aid under the Area Redevelopment Act, to revitalize the economies of areas with large and persistent unemployment.
Prompt executive action was taken to accelerate Federal purchases and procurement, highway fund distributions, tax refunds, and veterans' life insurance dividends. The Administration raised farm price supports, expanded the food distribution program, and established eight pilot food stamp programs.
Monetary and credit policies responded to the dual demands of economic recovery and the balance of payments. On the one hand, the Federal Reserve System maintained general monetary ease; Federal Reserve open market operations, complemented by Treasury management of the public debt and of government investment accounts, assured an ample supply of credit which served to counter upward pressures on long-term interest rates; reduction of FHA ceiling rates, supported by FNMA mortgage purchases, eased mortgage credit and stimulated homebuilding; and the Small Business Administration made its credit more widely available at lower cost. On the other hand, both monetary and debt management policies countered downward pressures on short-term rates, with a view to checking the outflow of funds to money markets abroad.
The Federal Budget played its proper role as a powerful instrument for promoting economic recovery. The measures to relieve distress and restore economic momentum expanded purchasing power early in the year. Subsequently, major increases in expenditure for national security and space programs became necessary. In a fully employed economy, these increases would have required new tax revenues to match. But I did not recommend tax increases at this point because they would have cut into private purchasing power and retarded recovery.
The increase of GNP--$41 billion (annual rate) from the first to the fourth quarter-reflected increased purchases of goods and services by consumers, business, and governments:
--Consumers accounted for nearly half. As household incomes rose, consumer expenditure expanded by $18 billion.
--Residential construction and business expenditures for fixed investment responded promptly to the recovery and to favorable credit conditions. By the end of the year, they had risen by $8 billion.
--Business stopped liquidating inventories and started rebuilding them. This shift, which occurred early in the year and helped get recovery off to a flying start, added $8 billion to the demand for goods and services by the fourth quarter.
--Federal, State, and local government purchases rose by $8 billion.
--Although exports were somewhat higher in the fourth quarter than in the first, the rise in imports in response to recovery lowered net exports by $1 billion.
Labor, business, and farm incomes rose as the economy recovered. Wages and salaries increased by $19 billion (annual rate) from the first quarter to the fourth. Corporate profits after taxes recovered sharply, receiving about 15 percent of the gains in (NP. With the help of new programs, farm operators' net income from farming increased from $12 billion in 1960 to $13 billion in 1961, and net income per farm rose by $350• The after-tax incomes of American consumers increased by $21 billion, or $92 per capita, during the year. Since consumer prices rose by only one-half of 1 percent, these gains in income were almost entirely gains in real purchasing power.
One million jobs were added by nonagricultural establishments during the expansion. But employment did not keep pace with production and income. Productivity rose rapidly as capacity was more fully and efficiently utilized. And more workers on part-time jobs were able to work full time.
The record of 1961 demonstrated again the resiliency of the U.S. economy with well-timed support from government policy. Business responded to the expansion of purchasing power by producing more goods and services, not by raising prices. Indeed, the record of price stability in three quarters of expansion was better than in the three preceding quarters of recession. The rates of advance of production and income compared favorably with the two preceding periods of expansion. Production grew rapidly without straining capacity or encountering bottlenecks.
As 1961 ended, actual output was still $25 to $30 billion short of potential, and unemployment was far too high. But much of the industrial manpower, machinery, and plant that lay idle a year ago had been drawn back into productive use. And the momentum of the 1961 recovery should carry the economy further toward full employment and full production in 1962.
GOALS OF ECONOMIC POLICY
Though we may take satisfaction with our progress to date, we dare not rest content. The unfinished business of economic policy includes (1) the achievement of full employment and sustained prosperity without inflation, (2) the acceleration of economic growth, (3) the extension of equality of opportunity, and (4) the restoration of balance of payments equilibrium. Economic policy thus confronts a demanding assignment, but one which can and will be met within the framework of a free economy.
Our Goal of Full and Sustained Prosperity Without Inflation
Recovery has carried the economy only part of the way to the goal of "maximum Production, employment, and purchasing power." The standing challenge of the Employment Act is not merely to do better, but to do our best--the "maximum." Attainment of that maximum in 1963 would mean a GNP of approximately $600 billion, wages and salaries of over $320 billion, and corporate profits of as much as $60 billion, all in 1961 prices. The material gains are themselves staggering, but they are less important than the new sense of purpose and the new opportunities for improvement of American life that could be realized by "maximum" use of the productive capacity now lying idle and the capacity yet to be created.
Involuntary unemployment is the most dramatic sign and disheartening consequence of under-utilization of productive capacity. It translates into human terms what may otherwise seem merely an abstract statistic. We cannot afford to settle for any prescribed level of unemployment. But for working purposes we view a 4 percent unemployment rate as a temporary target. It can be achieved in 1963, if appropriate fiscal, monetary, and other policies are used. The achievable rate can be lowered still further by effective policies to help the labor force acquire the skills and mobility appropriate to a changing economy. We must also continue the cooperative effort, begun with the Area Redevelopment Act of 1961, to bring industry to depressed areas and jobs to displaced workers. Ultimately, we must reduce unemployment to the minimum compatible with the functioning of a free economy.
We must seek full recovery without endangering the price stability of the last 4 years. The experience of the past year has shown that expansion without inflation is possible. With cooperation from labor and management, I am confident that we can go on to write a record of full employment without inflation.
The task of economic stabilization does not end with the achievement of full recovery. There remains the problem of keeping the economy from straying too far above or below the path of steady high employment. One way lies inflation, and the other way lies recession. Flexible and vigilant fiscal and monetary policies will allow us to hold the narrow middle course.
Our Goal of Economic Growth
While we move toward full and sustained use of today's productive capacity, we must expand our potential for tomorrow. Our postwar economic growth--though a step ahead of our record for the last half-century--has been slowing down. We have not in recent years maintained the 4 to 4 1/2 percent growth rate which characterized the early postwar period. We should not settle for less than the achievement of a long-term growth rate matching the early postwar record. Increasing our growth rate to 41/2 percent a year lies within the range of our capabilities during the 1960's. It will lay the groundwork for meeting both our domestic needs and our world responsibilities.
In November of last year we joined with our 19 fellow members of the Organization for Economic Cooperation and Development in setting a common target for economic growth. Together we pledged ourselves to adopt national and international policies aimed at increasing the combined output of the Atlantic Community by 50 percent between 1960 and 1970. The nations of the West are encouraged and en-livened by America's determination to make its full contribution to this joint effort.
We can do our share. In the mid-1960's, the children born in 1943 and after will be arriving at working age. The resulting rapid growth in our labor force offers us an opportunity, not a burden--provided that we deliver not only the jobs but also the research, the training, and the capital investment to endow our new workers with high and rising productivity as they enter economic life.
Our Goal of Equal Opportunity
Increasingly in our lifetime, American prosperity has been widely shared and it must continue so. The spread of primary, secondary, and higher education, the wider availability of medical services, and the improved postwar performance of our economy have bettered the economic status of the poorest families and individuals.
But prosperity has not wiped out poverty. In 1960, 7 million families and individuals had personal incomes lower than $2,000. In part, our failure to overcome poverty is a consequence of our failure to operate the economy at potential. The incidence of unemployment is always uneven, and increases in unemployment tend to inflict the greatest income loss on those least able to afford it. But there is a claim on our conscience from others, whose poverty is barely touched by cyclical improvements in general economic activity. To an increasing extent, the poorest families in America are those headed by women, the elderly, nonwhites, migratory workers, and the physically or mentally handicapped--people who are shortchanged even in time of prosperity.
Last year's increase in the minimum wage is evidence of our concern for the welfare of our low-income fellow citizens. Other legislative proposals now pending will be particularly effective in improving the lot of the least fortunate. These include (1) health. insurance for the aged, financed through the social security system, (2) Federal aid for training and retraining our unemployed and under-employed workers, (3) the permanent strengthening of our unemployment compensation system, and (4) substantial revision in our public welfare and assistance program, stressing rehabilitation services which help to restore families to independence.
Public education has been the great bulwark of equality of opportunity in our democracy for more than a century. Our schools have been a major means of preventing early handicaps from hardening into permanent ignorance and poverty There can be no better investment in equity and democracy--and no better instrument for economic growth. For this reason, I urge action by the Congress to provide Federal aid for more adequate public school facilities, higher teachers' salaries, and better quality in education. I urge early completion of congressional action on the bill to authorize loans for construction of college academic facilities and to provide scholarships for able students who need help. The talent of our youth is a resource which must not be wasted.
Finally, I shall soon propose to the Congress an intensive program to reduce adult illiteracy, a handicap which too many of our fellow citizens suffer because of inadequate educational opportunities in the past.
Our Goal of Basic Balance in International payments
Persistent international payments deficits and gold outflows have made the balance of payments a critical problem of economic policy. We must attain a balance in our international transactions which permits us to meet heavy obligations abroad for the security and development of the free world, without continued depletion of our gold reserves or excessive accumulation of short-term dollar liabilities to foreigners. Simultaneously, we must continue to reduce barriers to international trade and to increase the flow of resources from developed to developing countries. To increase our exports is a task of highest priority, and one which gives heightened significance to the maintenance of price stability and the rapid increase of productivity at home.
POLICIES FOR 1962
Prospects for 1962
The Nation will make further economic progress in 1962. Broad advances are in prospect for the private economy. The gains already achieved have set the stage for further new records in output, employment, personal income, and profits. Rising household incomes brighten the outlook for further increases in consumer buying, particularly of durable goods. Business firms will need larger inventories to support higher sales, and improved profits and expanded markets will lead to rising capital outlays. The outlays of Federal, State, and local governments will continue to increase as we work for peace and progress.
In the first half of 1962, we may therefore expect vigorous expansion in production and incomes, with GNP increasing to a range of $565-570 billion in the second quarter, employment continuing to rise, and the unemployment rate failing further.
In the second half of 1962, business investment in plant and equipment should pick up speed and help maintain the momentum of progress toward full employment--and toward future economic growth. Rising output should push factory operating rates closer to capacity and raise profits still further above previous records. To these incentives for capital expenditures will be added Treasury liberalization of depreciation guidelines and, if the Congress acts favorably, the 8 percent tax credit for machinery and equipment outlays.
For 1962 as a whole, GNP is expected to rise approximately $50 billion above the $521 billion level of 1961. This would be another giant stride toward a fully employed economy. The record of past recoveries and of the U.S. economy's enormous and growing potential indicates that this is a gain we can achieve. In the perspective of our commitments both to our own expanding population and to the world, it is a gain we need to achieve.
Prosperity shrinks budgetary deficits, as recessions create them. Budget revenues are expected to rise 13 percent between the fiscal years 1962 and 1963; revenues rose 141/2 percent between 1959 and 1960 in the previous upswing. Such sensitivity of budget revenues to business activity is desirable because it moderates swings in private purchasing power.
I have submitted to the Congress a Budget which will balance in fiscal 1963 as prosperity generates sharply rising tax revenues. The Budget is appropriately paced to the expected rate of economic expansion. It will give less stimulus to business activity as private demand for goods and services grows stronger and shoulders more of the responsibility for continued gains. But the shift will be moderate and gradual. We have learned from the disappointing 1959-60 experience that an abrupt and excessively large swing in the Budget can drain the vigor from the private economy and halt its progress, especially if a restrictive monetary policy is followed simultaneously. This will not be repeated. Budget outlays will rise by $31/2 billion from fiscal 1962 to fiscal 1963, whereas they fell by more than that amount from fiscal 1959 to fiscal 1960. The 1963 Budget starts from a much smaller deficit and will move to a moderate surplus as the recovery strengthens.
With support from increased government expenditures and other government policies, the momentum of the recovery is expected to raise GNP to $570 billion for 1962 as a whole. Prompt enactment of the proposed tax credit for investment would give the economy further strength. Economic expansion at the expected pace will yield $93.0 billion in Budget revenues in fiscal 1963 to cover $92.5 billion in Budget expenditures. If private demands for goods and services should prove to be weaker in 1962 than now anticipated, less private purchasing power will flow into taxes, and Budget revenues will fall short of the $93.0 billion figure. If private demands are stronger, tax receipts will rise further and Budget revenues will exceed expectations.
A surplus of $4.4 billion in fiscal 1963 is expected in the national income accounts budget--a budget constructed to measure the direct impact of Federal expenditures and receipts on the flow of total spending. The surplus would be several billion dollars higher if the economy were operating steadily at a level high enough to hold unemployment to 4 percent.
Either surplus--prospective or potential-is both a challenge and an opportunity. A government surplus is a form of saving--an excess of income over expenditure. Like any other form of saving, it releases labor and other productive resources which can be used to create new investment goods--plant, equipment, or houses. If investment demand is not strong enough to use the resources and labor, they will be wasted in unemployment and idle capacity, and the surplus itself will not be realized. But if the necessary investment demand is present, the surplus will make possible the acceleration of economic growth by enlarging the future productive power of the economy. The Government is seeking to help American industry to meet this challenge and seize this opportunity, through such measures as the 8 percent investment tax credit and revisions of depreciation guidelines.
We face 1962 with optimism but not complacency. If private demand shows unexpected strength, public policy must and will act to avert the dangers of rising prices. If demand falls short of current expectations, more expansionary policies will be pursued. In 1962, vigilance and flexibility must be the guardians of economic optimism.
Monetary and Credit Policies
Monetary, credit, and debt management policies can also help to assure that productive outlets exist for the funds that the American people save from prosperity incomes. The balance foreseen in the Budget for fiscal year 1963, and the surplus which would arise at full employment, both indicate that fiscal policy is assuming a large share of the burden of forestalling inflationary excesses of demand. With monetary and related policies relieved of a substantial part of this burden, they can more effectively be used to assure a flow of investment funds which will transform the economy's present capacity to save into future capacity to produce.
At the same time, monetary and debt management policies must continue to protect the balance of international payments against outflows of short-term capital. As in 1961, domestic expansion and the balance of payments confront these policies with a dual task, requiring continued ingenuity in technique and flexibility in emphasis.
Balance of Payments
The program launched last year to reduce our payments deficit and maintain confidence in the dollar will, I am sure, show further results in 1962. I am hopeful that the target of reasonable equilibrium in our international payments can be achieved within the next two years; but this will require a determined effort on the part of all of us--government, business and labor. This effort must proceed on a number of fronts.
Export expansion. An increase in the U.S. trade surplus is of the first importance. If we are to meet our international responsibilities, we must increase exports more rapidly than the increase in imports which accompanies our economic growth.
Our efforts to raise exports urgently require that we negotiate a reduction in the tariff of the European Common Market. I shall shortly transmit to the Congress a special message elaborating the details of the proposed Trade Expansion Act of 1962 and explaining why I believe that a new trade policy initiative is imperative this year.
To encourage American businessmen to become more export-minded, we have inaugurated a new export insurance program under the leadership of the Export-Import Bank, and we have stepped up our export promotion drive by improving the commercial services abroad of the U.S. Government, establishing trade centers abroad, planning trade fairs, improving the trade mission program, and working with business firms on export opportunities through field offices of the Department of Commerce and the Small Business Administration. Foreign travel to the United States, which returns dollars to our shores, is now being promoted through the first Federal agency ever created for this purpose.
Prices and productivity. Our export drive will founder if we cannot keep our prices competitive in world markets. Through our recent price performance has been excellent, the improving economic climate of 1962 will test anew the statesmanship of our business and labor leaders. I believe that they will pass the test; our Nation today possesses a new understanding of the vital link between our level of prices and our balance of payments.
In the long run, the competitive position of U.S. industry depends on a sustained and rapid advance in productivity. In this, the interests of economic recovery, long-run growth, and the strength of the dollar coincide. Modernization and expansion of our industrial plant will accelerate the advance of productivity.
Foreign investment. To place controls over the flow of private American capital abroad would be contrary to our traditions and our economic interests. But neither is there justification for special tax incentives which stimulate the flow of U.S. investment to countries now strong and economically developed, and I again urge the elimination of these special incentives.
The new foreign trade program which I am proposing to the Congress will help to reduce another artificial incentive to U.S. firms to invest abroad. The European Common Market has attracted American capital, partly because American businessmen fear that they will be unable to compete in the growing European market unless they build plants behind the common tariff wall. We must negotiate down the barriers to trade between the two great continental markets, so that the exports of our industry and agriculture can have full opportunity to compete in Europe.
Governmental expenditures abroad. Military expenditures form by far the greater part of our governmental outlays abroad. We are discussing with certain of our European allies the extent to which they can increase their own military procurement from the United States to offset our dollar expenditures there. As a result, the net cost to our balance of payments is expected to be reduced during the coming year, in spite of increased deployment of forces abroad because of the Berlin situation.
To curtail our foreign aid programs in order m strengthen our balance of payments would be to sacrifice more than we gain. But we can cut back on the foreign currency costs of our aid programs, and thus reduce the burden on our balance of payments. A large percentage of our foreign aid is already spent for procurement in the United States; this proportion will rise as our tightened procurement procedures become increasingly effective.
We have sought to induce other advanced countries to undertake a larger share of the foreign aid effort. We will continue our efforts through the Development Assistance Committee of the Organization for Economic Cooperation and Development to obtain a higher level of economic assistance by other industrial nations to the less developed countries.
Short-term capital movements. Outflows of volatile short-term funds added to the pressures on the dollar in 1960. Our policies in 1961 have diminished the dangers of disruptive movements of short-term capital. For the first time in a generation, the Treasury is helping to stabilize the dollar by operations in the international exchange markets. The Federal Reserve and the Treasury, in administering their monetary policy and debt management responsibilities, have sought to meet the needs of domestic recovery in ways which would not lead to outflows of short-term capital.
During the past year, we have consulted periodically with our principal financial partners, both bilaterally and within the framework of the OECD. These consultations have led to close cooperation among fiscal and monetary authorities in a common effort to prevent disruptive currency movements.
Strengthening the international monetary system. The International Monetary Fund is playing an increasingly important role in preserving international monetary stability. The reserve strength behind the dollar includes our drawing rights on the Fund, of which $1.7 billion is automatically available under current practices of the Fund. An additional $4.1 billion could become available under Fund policies, insofar as the Fund has available resources in gold and usable foreign currencies. Recently, the Fund has diversified its use of currencies in meeting drawings by member countries, relying less heavily on dollars and more heavily on the currencies of countries with payments surpluses. However, the Fund's regular holdings of the currencies of some important industrial countries are not adequate to meet potential demands for them.
In a message to the Congress last February, I said: "We must now in cooperation with other lending countries, begin to consider ways in which international monetary institutions--especially the International Monetary Fund--can be strengthened and more effectively utilized, both in furnishing needed increases in reserves, and in providing the flexibility required to support a healthy and growing world economy."
We have now taken an important step in this direction. Agreement has been reached among ten of the major industrial countries to lend to the Fund specified amounts of their currencies when necessary to cope with or forestall pressures which may impair the international monetary system. These stand-by facilities of $6 billion will be a major defense against international monetary speculation and will powerfully reinforce the effectiveness of the Fund. They will provide resources to make our drawing rights in the Fund effective, should we need to use them. Moreover, the U.S. stand-by commitment of $2 billion will augment the resources potentially available through the Fund to other participants in the agreement, when our balance of payments and reserve positions are strong. I shall shortly submit a request to Congress for appropriate enabling legislation.
Prices and Wages
Prices and production need not travel together. A number of foreign countries have experienced both rapid growth and stable prices in recent years. We ourselves, in 1961, enjoyed a stable price level during a brisk economic recovery.
While rising prices will not necessarily accompany the expansion we expect in 1962, neither can we rely on chance to keep our price level stable. Creeping inflation in the years 1955-57 weakened our international competitive position. We cannot afford to allow a repetition of that experience.
We do not foresee in 1962 a level of demand for goods and services which will strain the economy's capacity to produce. Neither is it likely that many industries will find themselves pressing against their capacity ceilings. Inflationary pressures from these sources should not be a problem.
But in those sectors where both companies and unions possess substantial market power, the interplay of price and wage decisions could set off a movement toward a higher price level. If this were to occur, the whole Nation would be the victim.
I do not believe that American business or labor will allow this to happen. All of us have learned a great deal from the economic events of the past 15 years. Among both businessmen and workers, there is growing recognition that the road to higher real profits and higher real wages is the road of increased productivity. When better plant and equipment enable the labor force to produce more in the same number of hours, there is more to share among all the contributors to the productive process--and this can happen with no increase in prices. Gains achieved in this manner endure, while gains achieved in one turn of the price-wage spiral vanish on the next. The Nation must rely on the good sense and public spirit of our business and labor leaders to hold the line on the price level in 1962. If labor leaders in our major industries will accept the productivity benchmark as a guide to wage objectives, and if management in these industries will practice equivalent restraint in their price decisions, the year ahead will be a brilliant chapter in the record of the responsible exercise of freedom.
MEASURES FOR A STRONGER ECONOMY
The final section of my Report is a summary of my recommendations for legislative action (1) to strengthen our defenses against recession, (2) to strengthen our financial system, (3) to strengthen our manpower base, and (4) to strengthen our tax system.
A Program for Sustained Prosperity
Recurrent recessions have thrown the postwar American economy off stride at a time when the economies of other major industrial countries have moved steadily ahead. To improve our future performance I urge the Congress to join with me in erecting a defense-in-depth against future recessions. The basic elements of this defense are (1) Presidential stand-by authority for prompt, temporary income tax reductions, (2) Presidential stand-by authority for capital improvements expenditures, and (3) a permanent strengthening of the unemployment compensation system. These three measures parallel important proposals of the Commission on Money and Credit, whose further recommendations are treated under the next heading.
In our free enterprise economy, fluctuations in business and consumer spending will, of course, always occur. But this need not doom us to an alternation of lean years and fat. The business cycle does not have the inevitability of the calendar. The Government can time its fiscal transactions to offset and to dampen fluctuations in the private economy. Our fiscal system and budget policy already contribute to economic stability, to a much greater degree than before the war. But the time is ripe, and the need apparent, to equip the Government to act more promptly, more flexibly, and more forcefully to stabilize the economy--to carry out more effectively its charge under the Employment Act.
Stand-by tax reduction authority. First, I recommend the enactment of stand-by authority under which the President, subject to veto by the Congress, could make prompt temporary reductions in the rates of the individual income tax to combat recessions, as follows:
(1) Before proposing a temporary tax reduction, the President must make a finding that such action is required to meet the objectives of the Employment Act.
(2) Upon such finding, the President would submit to Congress a proposed temporary uniform reduction in all individual income tax rates. The proposed temporary rates may not be more than 5 percentage points lower than the rates permanently established by the Congress.
(3) This change would take effect 30 days after submission, unless rejected by a joint resolution of the Congress.
(4) It would remain in effect for 6 months, subject to revision or renewal by the same process or extension by a joint resolution of the Congress.
(5) If the Congress were not in session, a Presidentially proposed tax adjustment would automatically take effect but would terminate 30 days after the Congress reconvened. Extension would require a new proposal by the President, which would be subject to congressional veto.
A temporary reduction of individual income tax rates across the board can be a powerful safeguard against recession. It would reduce the annual rate of tax collections by $2 billion per percentage point, or a maximum of $10 billion--$1 billion per point, or a $5-billion maximum, for six months--at present levels of income. These figures should be measured against the costs they are designed to forestall:
--the tens of billions of potential output that run to waste in recession;
--the pain and frustration of the millions whom recessions throw out of work;
--the Budget deficits of $12.4 billion in fiscal 1959 or $7.0 billion this year.
The proposed partial tax suspension would launch a prompt counterattack on the cumulative forces of recession. It would be reflected immediately in lower withholding deductions and higher take-home pay for millions of Americans. Markets for consumer goods and services would promptly feel the stimulative influence of the tax suspension.
It would offer strong support to the economy for a timely interval, while preserving the revenue-raising powers of our tax system in prosperity and the wise traditional procedures of the Congress for making permanent revisions and reforms in the system. I am not asking the Congress to delegate its power to levy taxes, but to authorize a temporary and emergency. suspension of taxes by the President--subject to the checkrein of Congressional veto--in situations where time is of the essence.
Stand-by capital improvements authority. Second, I recommend that the Congress provide stand-by authority to the President to accelerate and initiate up to $2 billion of appropriately timed capital improvements when unemployment is rising, as follows:
(1) The President would be authorized to initiate the program within two months after the seasonally adjusted unemployment rate
(a) had risen in at least three out of four months (or in four out of six months) and
(b) had risen to a level at least one percentage point higher than its level four months (or six months) earlier.
(2) Before invoking this authority, the President must make a finding that current and prospective economic developments require such action to achieve the objectives of the Employment Act.
(3) Upon such finding, the President would be authorized to commit
(a) up to $750 million in the acceleration of direct Federal expenditures previously authorized by the Congress,
(b) up to $750 million for grants-in-aid to State and local governments,
(c) up to $250 million in loans to States and localities which would otherwise be unable to meet their share of project costs, and
(d) up to $250 million additional to be distributed among the above three categories as he might deem appropriate.
(4) The authority to initiate new projects under the capital improvements program would terminate automatically within 12 months unless extended by the Congress-but the program could be terminated at any time by the President.
(5) Grants-in-aid would be made under rules prescribed by the President to assure that assisted projects (a) were of high priority, (b) represented a net addition to existing State and local expenditures, and (c) could be started and completed quickly.
(6) Expenditures on Federal projects previously authorized by the Congress would include resource conservation and various Federal public works, including construction, repair, and modernization of public buildings.
(7) After the program had terminated, the authority would not again be available to the President for six months.
The above criteria would have permitted Presidential authority to be invoked in the early stages of each of the four postwar recessions--within four .months after the decline had begun. Furthermore, no false signals would have been given. Were a false signal to occur--for example, because of a strike--the authority, which is discretionary, need not be invoked.
The first impact of the accelerated orders, contracts, and outlays under the program would be felt within one to two months after the authority was invoked. The major force of the program would be spent well before private demand again pressed hard on the economy's capacity to produce. With the indicated safeguards, this program would make a major contribution to business activity, consumer purchasing power, and employment in a recession by utilizing for sound public investment resources that would otherwise have gone to waste.
Unemployment compensation. Third, I again urge the Congress to strengthen permanently our Federal-State system of unemployment insurance. My specific recommendations include
(1) Extension of the benefit period by as much as 13 weeks for workers with at least three years of experience in covered employment;
(2) Similar extension of the benefit period when unemployment is widespread for workers with less than three years of experience in covered employment. This provision could be put into effect by Presidential proclamation when insured unemployment reaches 5 percent, and the number of benefit exhaustion's over a three-month period reaches 1 percent of covered employment;
(3) Incentives for the States to provide increased benefits, so that the great majority of covered workers will be eligible for weekly benefits equal to at least half of their average weekly wage;
(4) Extension of coverage to more than three million additional workers;
(5) Improved financing of the program by an increase in the wage base for the payroll tax from $3,000 to $4,800;
(6) Reinsurance grants to States experiencing high unemployment insurance costs;
(7) Provisions which permit claimants to attend approved training or retraining courses without adverse effect on eligibility for benefits.
Wider coverage, extended benefit periods, and increased benefit amounts will help society discharge its obligation to individual unemployed workers. And by maintaining more adequately their incomes and purchasing power, these measures will also buttress the economy's built-in defenses against recession. Temporary extensions of unemployment compensation benefits have been voted by the Congress during the last two recessions. It is time now for permanent legislation to bring this well-tested stabilizer more smoothly into operation when economic activity declines.
In combination, these three measures will enable Federal fiscal policy to respond firmly, flexibly, and swiftly to oncoming recessions. Working together on this bold program, the Congress and the Executive can make an unprecedented contribution to economic stability, one that will richly reward us in fuller employment and more sustained growth, and thus, in greater human well-being and greater national strength.
Strengthening the Financial System
Proposals of the Commission on Money and Credit. The Report of the Commission on Money and Credit, published last year, raises important issues of public policy relating to (1) the objectives and machinery of Government for economic stabilization and growth, (2) Federal direct lending and credit guarantee programs, and (3) the structure and regulation of private financial institutions and markets. The Commission's Report represents the results of thorough analysis and deliberation by a private group of leading citizens representative of business, labor, finance, agriculture, and the professions. The Commission's findings and recommendations deserve careful consideration by the Congress, the Executive, and the public--consideration which should result in legislative and executive actions to strengthen government policy under the Employment Act and to improve the financial system of the United States. The subjects covered by the Commission can--for the purposes of discussion and action in the Government--usefully be divided into four categories.
(1) To strengthen the instruments of policy for economic stabilization, the Commission recommends permanent improvement of unemployment compensation, flexibility in government capital expenditures, and flexibility in adjusting the basic Federal individual income tax rate. These key proposals are reflected in the three-part anti-recession program just described.
(2) In its comprehensive new look at existing financial legislation, the Commission concludes that the following financial restrictions no longer serve the purposes originally intended and unnecessarily complicate or obstruct other government policies: the ceiling on the public debt, the ceiling on permissible interest rates on U.S. Treasury bonds, and the required gold reserve against Federal Reserve notes and deposits. I mss sure that the Congress will wish to examine carefully the Commission's recommendations on these points.
(3) The Commission re-examines the structure of the Federal Reserve System and its relationship to other arms of the Federal Government. The desirability of proposed changes in the structure which has evolved over the years can be determined only after extensive consideration by the Congress and by the public.
There are two reforms of clear merit on which there appears to be sufficiently general agreement to proceed at once, and which are of direct concern to the President in the exercise of his responsibility to appoint the members and officers of the Board of Governors of the Federal Reserve System.
The first is to give adequate recognition in the simple matter of salaries to the important responsibilities of the Board of Governors of the Federal Reserve System. The United States is behind other countries in the status accorded, by this concrete symbol, to the leadership of its "central bank," and I urge that the Congress take corrective action.
The second is to revise the terms of the officers and members of the Board so that a new President will be able to nominate a Chairman of his choice for a term of four years coterminous with his own. This change has the concurrence of the present Chairman of the Board of Governors. The current situation--under which the four-year term of the Chairman is not synchronized with the Presidential term--appears to be accidental and inadvertent.
Provision should be made now for smooth transition to new arrangements to take effect in 1965. I suggest that, on the expiration of the present term of the Chairman in April 1963, the next term expire on January 31, 1965. In order that, starting in 1965, the President may have a free choice when he begins his own term, it is also necessary to provide that the terms of members of the Board--which now begin and end on January 31 of even years--begin and end in odd years. This change can be accomplished very easily by extending the terms of present members by one year.
(4) Several of the Commission's recommendations require careful appraisal by the affected agencies in the Executive Branch as a basis for future legislative recommendations:
(a) Banks and other private financial institutions: The Commission proposes significant changes in the scope and nature of government regulations concerning reserves, portfolios, interest rates, and competition. I shall ask an interagency working group in the Executive Branch to examine the complex issues raised by these proposals. This interagency group will keep in dose touch with the relevant committees of the Congress, which will no doubt wish to study these issues simultaneously.
(b) Federal lending and loan guarantee programs: It is clearly time for a thorough review of both their general impact on the economy and their effectiveness for the special purposes for which they were established. Again the Commission's Report has performed a valuable service in illuminating basic problems. One important question is the appropriate role--with account taken of both effectiveness and budgetary cost--of direct Federal lending, loan guarantees, and interest sharing. I shall ask a second interagency group in the Executive Branch to examine these programs.
(c) Corporate pension funds and other private retirement programs: It is time for a reappraisal of legislation governing these programs. They have become, in recent years, a major custodian of individual savings and an important source of funds for capital markets. The amendment to the Welfare and Pension Plans Disclosure Act which I recommend below will be an important step toward insuring fidelity in the administration of these Plans. But there is also need for a review of rules governing the investment policies of these funds and the effects on equity and efficiency of the tax privileges accorded them. I shall ask a third working group of relevant Departments and agencies to recommend needed actions in this field, taking into account the findings of the Commission as well as other studies and proposals.
A revision of silver policy. Silver--a sick metal in the 1930's--is today an important raw material for which industrial demand is expanding steadily. It is uneconomic for the U.S. Government to lock up large quantities of useful silver in the sterile form of currency reserves. Neither is any constructive purpose served by requiring that the Treasury maintain a floor under the price of silver. Silver should eventually be demonetized, except for its use in coins.
(1) As a first step in freeing silver from government control, the Secretary of the Treasury at my direction suspended sales of silver on November 29. This order amounted to the withdrawal of a price ceiling on silver which had been maintained by Treasury sales at a fixed price.
(2) The next step should be the withdrawal of the Treasury's price floor under domestically produced silver. Accordingly, I recommend repeal of the Acts relating to silver of June 19, 1934, July 6, 1939, and July 31, 1946; this step will free the Treasury from any future obligation to support the price of silver.
(3) I also recommend the repeal of the special 50 percent tax on transfers of interest in silver; this step will foster orderly price movements by encouraging the development of a futures market in silver.
(4) Finally, I recommend that the Federal Reserve System be authorized to issue Federal Reserve notes in denominations of $1; this will make possible the gradual withdrawal from circulation of $1 and $2 silver certificates, and the use of the silver thus released for coinage purposes.
Strengthening Our Manpower Base
The labor force of the United States is its most valuable productive resource. Measures which enhance the skills and adaptability of the working population contribute to the over-all productivity of the economy. Several legislative proposals to serve these ends have already been put before the Congress.
(1) I urge speedy passage of the proposed Manpower Development and Training Act. A growing and changing economy demands a labor force whose skills adapt readily to the requirements of new technology. When adaptation is slow and occupational lines rigid, individuals and society alike are the losers. Individuals take their loss in the form of prolonged unemployment or sharply reduced earning power. Society's loss is measured in foregone output. These are losses we need not suffer. A few hundred dollars invested in training or retraining an unemployed or under-employed worker can increase his productivity to society by a multiple of that investment--quite apart from the immeasurable return to the worker in regaining a sense of purpose and hope. Both compassion and dollars-and-cents reasoning speak for this legislation.
(2) For the same reasons, I urge enactment of the Youth Employment Opportunities Act. This bill provides three types of pilot programs to give young people employment opportunities which would enable them to acquire much-needed skills. These programs include training, employment in public service jobs with public and private nonprofit agencies, and the establishment of Youth Corps Conservation Camps. In the current decade, young men and women will be entering the labor force in rapidly growing numbers. They will expect, and they deserve, opportunities to acquire skills and to do useful work. The price of failure is frustration and disillusion among our youth. This price we are resolved not to pay.
(3) I have already made my recommendations for improvement of the Federal-State unemployment compensation system.
(4) I am asking the Congress for more funds to increase the effectiveness of the U.S. Employment Service. This important agency has already strengthened its operations, improving its staff and placement services particularly in the largest urban centers, and concentrating on labor market problems of nationwide significance--especially those connected with technological displacement of adult workers and the employment of youth. But the matching of jobs and workers is especially difficult and especially important in a rapidly changing economy, and more can be done. When unfilled jobs and qualified unemployed workers co-exist but do not make contact because the flow of job information is not sufficiently free--the employer, the worker, and the country lose. I urge the Congress to reduce that loss in the most effective way--by revitalizing further the agency charged with disseminating information about job opportunities and willing workers.
(5) I ask for enactment of the pending proposal to amend the Welfare and Pension Plans Disclosure Act so as (a) to provide adequate penalties for embezzlement and (b) to vest authority in a responsible Federal agency to enforce the statute by issuing binding regulations, prescribing uniform reporting forms, and investigating violations. Almost 90 million people rely on some welfare and pension plan for part or all of present or future income. These plans are a major support of the economic security of the American people. We are derelict if we do not provide adequate administrative and enforcement provisions to protect the tremendous financial interest of participants in these funds.
Strengthening Our Tax System
The tax system of the United States has consequences far beyond the simple raising of revenue. The tax laws are a vital part of the economic environment; their effects may be equitable or inequitable; they create incentives which may help or handicap the national interest. We cannot safely ignore these important effects in the comforting illusion that what already exists is perfect. We must scrutinize our tax system carefully to insure that its provisions contribute to the broad goals of full employment, growth, and equity.
My legislative proposals in the tax field are directly related to these goals and the corollary need for improvement in the balance of payments. In particular, I urge the earliest possible enactment of the tax proposals now before the House Committee on Ways and Means. The centerpiece of these proposals is the 8 percent tax credit against tax for gross investment in depreciable machinery and equipment.' The credit should be retroactive to January 1, 1962. The tax credit increases the profitability of productive investment by reducing the net cost of acquiring new equipment. It will stimulate investment in capacity expansion and modernization, contribute to the growth of our productivity and output, and increase the competitiveness of American exports in world markets.
The tax credit for investment is in part self-financing. The stimulus it provides to new investment will have favorable effects on the level of economic activity during the year, and this will in turn add to Federal revenues. My other proposals for tax reform are designed to improve the equity and efficiency of the tax system and will offset the remaining net revenue loss:
(1) Extension of the withholding principle to dividend and interest income;
(2) Repeal of the $50 dividend exclusion and the 4 percent dividend credit;
(3) Revision of the tax treatment of business deductions for entertainment, gifts, and other expenses, to stop abuses of "expense account living";
(4) Elimination of the special tax preference for capital gains from the sale of depreciable property, real and personal;
(5) Removal of unwarranted preferences (a) to cooperatives, (b) to mutual fire and casualty insurance companies, and (c) to mutual savings banks and savings and loan associations; and
(6) Revision of the tax treatment of foreign income, to remove defects and equities in the law. Removal of the unwarranted incentive to the export of capital will be consistent with the efficient distribution of capital resources in the world and will aid our balance of payments position. Tax deferral privileges should be limited to profits earned in less developed countries, and opportunities for "tax haven" operations should be eliminated.
In addition, I recommend that the corporate income tax and certain excise taxes again be extended at present levels for another year beyond June 30, 1962, except that the structure of taxes and user charges in the transportation field be altered as proposed in my Budget Message.
In considering tax revision in the United States, we must not limit ourselves simply to Federal taxation. Our States, counties, and municipalities collect nearly half as much tax revenue as the Federal Government. There is great potential for equity or inequity, for incentive or disincentive, in their highly diverse tax systems. In addition, the effectiveness of Federal tax policies can be enhanced by harmonious coordination with State and local fiscal systems. There is wide latitude for improvements in the coordination of tax systems and in operations with intergovernmental implications. In this effort, the Advisory Commission on Intergovernmental Relations is performing a valuable service. I urge careful study of its recommendations at all levels of government.
Later this year, I shall present to the Congress a major program of tax reform. This broad program will re-examine tax rates and the definition of the income tax base. It will be aimed at the simplification of our tax structure, the equal treatment of equally situated persons, and the strengthening of incentives for individual effort and for productive investment.
The momentum of our economy has been restored. This momentum must be maintained, if the full potential of our free economy is to be released in the service of the Nation and the world. In this Report: I have proposed a program to sustain our prosperity and accelerate our growth--in short, to realize our economic potential. In this undertaking, I ask the support of the Congress and the American people.
JOHN F. KENNEDY