Mr. Houser, Dean David, gentlemen:
I welcome very much this opportunity to participate in the activities of your 20th anniversary meeting. I was particularly anxious to come to this meeting and to come to a luncheon of this organization because I have been impressed through a good many years in public life--in the House, the Senate, and most recently in the Presidency-in the very firm commitment to the public interest which this organization has displayed.
Because your concern for the public interest has been so consistent and obvious, it seems to me that perhaps more attention is paid to the deliberations of the CED than almost any other organization dealing with national problems. This is an enviable reputation, one which you continue to guard and, therefore, it has, it seems to me, been rewarded by the response which this organization receives from the public and from public officials.
Many organizations seem to feel that Government can only help in the economy by reducing its influence and its participation. The CED has long recognized Government's inescapable obligation and contribution, and that Federal monetary and fiscal policies can and must supplement the decisions of the marketplace in determining the course of the economy; that interest rates must be adjusted up and down; budgets into deficits and surpluses to fit the needs of the time.
This organization has not hesitated to express its belief in the desirability of a certain amount of intelligent Federal planning-the usefulness of Federal deficits in years of unemployment; the contribution which increased Federal expenditures can make to a subnormal market demand; the stabilizing role of the Federal budget; and today the reduction of Federal taxes on consumption as well as on investment.
Your programs and publications have helped bring about a fundamental change in the economic understanding of the Nation in general, and of its business community in particular, and I believe that all Americans owe you a vote of thanks for your leadership.
I do not say, of course, that we fully agree on what should be done in every area and in every program. In fact, your own policy statements contain enough footnotes of dissent and reservation to make it clear that you do not fully agree with each other, but while I am not trying to enlist the prestige of the CED in support of all of my fiscal proposals, I am convinced that our agreement on fundamentals far outweighs our disagreements.
Less than a year ago I stressed at Yale the importance of discussing the technical questions involved in keeping a great economic machine moving ahead. I have always, in fact--I was discussing today at lunch the difference, really, between the acceptance of the role which Government policy must play, and the effect of its actions on the market, the difference between the understanding of that role and its implications in the American business community compared to the British business community.
The Chancellor's budget recently submitted provided for a tax cut more substantial than the one we have suggested. It provided for a deficit more substantial percentage wise than the one that we have suggested, and the British balance of payments problem is more serious than the one facing the United States, and yet with hardly a ripple, with no opposition from the business community and with only some concern expressed as to whether the British Government had gone far enough, the Chancellor's budget proceeded to be enacted.
Ours is more complicated and difficult. And I think it is only--it seems to me, by the discussion of the last 12 months that we have all come in one degree or another to accept the fact that the Federal Government has a major role to play and we are now involved in a technical discussion of what that role should be and what mix of fiscal and monetary weapons should be developed to maintain our economy without too frequent downturns of the kind that characterized the end of the fifties and have marked, to some degree, our problem in the sixties.
The focus of Congress and the country today on economic matters suggests five questions which I most frequently hear, and I would like to respond to them in the hope that they will stimulate more questions. The first question frequently asked these days is: Can this Nation afford a deficit of nearly $12 billion and a national debt higher than it is today?
The answer is that this Nation can afford to do whatever must be done to strengthen its economy, step up its growth, create sufficient job opportunities, and fulfill our domestic and worldwide responsibilities. The Federal Government has a commitment made explicit in the Employment Act of 1946, for which the CED deserves considerable credit, to use all its means, and I quote, "to assure maximum employment, maximum production, maximum purchasing power." At a time when private demands are insufficient to use our resources fully, this injunction calls for the Federal Government to play its role in the maintenance of adequate demand.
We can do this in either or both of two ways: We can enlarge our Federal spending or we can reduce taxes in order to enlarge private spending. If a Federal deficit resuits from this policy, or if an existing deficit is increased by it, that deficit is not some new additional factor; it is simply the reflection, although not the purpose, of our revenue and expenditure policies.
The popular fear of deficits arises from the fact that what is sound policy at one time can be unsound policy at another. When there are more empty jobs than people seeking them, when industrial capacity is fully utilized, then it would be not only unsound but dangerous for the Federal Government to raise its expenditures without raising taxes, or to cut taxes without an equal cut in expenditures. The American people have learned that lesson, as have the governments of other nations, and some of them are learning it the hard way today.
But because a government can be fiscally irresponsible by running a deficit under one set of conditions does not make it fiscally responsible to avoid all deficits under wholly different conditions. In fact, had our economy been operating at only 4 percent unemployment during the last 5 years, the Federal budget would have shown a substantial surplus, not a deficit. But instead, unemployment has averaged 6 percent, and not failing below 5 percent for the past 5 years, the avoidance of deficits has been neither possible nor desirable, and it is clear now that only a reduction in wartime tax rates will bring us the higher income and larger revenues required both to balance our economy and the budget.
The projected deficit with a tax cut will no more damage the economy than did a larger deficit without a tax cut in fiscal '59. In fact, a budget deficit in fiscal '64, as large in proportion to our gross national product as that of fiscal '59 would be some $4 billion higher than we expect, even with a tax reduction. And if we ever slide into another recession, then the deficit without a tax cut would be far larger than the deficit now projected as a result of the tax cut.
The previous administration did not incur five deficits in 8 years and add $23 billion to the national debt because of fiscal irresponsibility or excessive expenditure programs, nor are the programs of this administration fiscally irresponsible, even though we, too, are adding to the debt at the same time that our gross national product is moving ahead much faster. While we are concerned by the amount of money which must be paid in interest, it represents a smaller proportion of our budget than it did in 1946, although interest rates today are considerably higher. While we are concerned about the burden of the debt, measured in terms of proportion of gross national product, that burden is steadily declining. The debt, itself, in terms of both dollars and percentage increased in both the last year and the last decade at a considerably slower pace than the indebtedness of our Nation's consumers, private business, and, particularly, State and local governments.
Secondly the question arises: Why can't we cut expenditures? The answer is that we can and have. Agency and service requests were cut by some $19 billion before the 1964 budget was submitted, and I have cut an additional $615 million from my budget recommendations since first submitting them. Civilian expenditures, excluding defense, space, and interest, are being reduced below the level of last year, contrary to all trends in Federal, State, and local governments. Once the equal of State and local expenditures, our Federal civilian expenditures are now less than half as great, and their ratio to our gross national product has also declined over the years.
We have reduced the postal deficit, we have reduced the cost of surplus food grain storage, we have reduced waste, duplication, and obsolescence in the Pentagon, and we have reduced the number of Federal employees serving every 1,000 people in the country. The CED said in January 1962, "We believe that Federal expenditures should be made only when they are clearly more valuable than equal expenditures that could be made by individuals and business if equivalent income were left in their hands, or by State and local governments." I accept this standard and I am prepared to defend the expenditures proposed in my budget on this basis. In fact, the proportionate decline in Federal nondefense expenditures which I have described may well have been too rapid in view of our pressing need for more and better education, better mental and physical health, better programs to meet the needs of our cities, our unemployed workers, our youth, and all the other services which the Federal Government renders to the needs of the Nation.
Moreover, as the CED has recognized, the level of total Federal expenditures affects the economy just as does the level of Federal taxes. To advocate simultaneously a $10 billion tax cut to stimulate demand, and $10 billion of expenditure cuts, fails to recognize that both sides of the budget have an impact on the economy. I believe that the proposed combination of budget expenditures and tax cut is of the correct magnitude to help bring the economy close to full employment within the next 2 years. Some may feel larger expenditures or larger tax cuts are necessary, but surely we cannot risk severely reducing demand by a sharp reduction in expenditures.
The experience of 1957 indicates what happens. The annual rate of Federal expenditures which had been increasing at a rate of $2 billion or more per quarter for a year suddenly declined by nearly a half a billion dollars between the second and third quarter of that year, helping to make more serious the downturn which was already being shown in the private economy.
Third, the question arises: Will our fiscal policies bring on inflation? My answer to that is no, providing that private restraint accompanies public vigilance. Today's large volume of unused resources indicates that the effects of increased demand can be met through expanded production and employment, and that prices and costs need not rise. Of course, any expansion of total demand, whether it is created by a boom in private investment, new export outlets, Federal fiscal policy, or any other force, produces an environment which makes it easier for workers to demand wage increases in excess of productivity increases and for businesses to raise prices despite stable or declining costs.
It is not the source of an increase in demand that determines whether it will have inflationary consequences, but, rather, the extent to which it can be met without a reduction in efficiency, and the extent to which competition keeps prices in line with costs. Today producers in many industries are only waiting for expanded markets to encourage them to install new cost-cutting machinery and equipment which will raise productive efficiency. Today, competition is keen not only domestically, but internationally. Today, raw material supplies are abundantly available and producers both here and around the world are desperately seeking ways to minimize a decline in raw material prices. Today, an expansion of employment opportunities will ease growing pressures for featherbedding work rules, reduce resistance to automation, and stimulate employers to seek new markets, instead of concentrating on the artificial protection of old ones. In short, this program need not generate inflation, but inasmuch as some industries and unions, even at a time of slack and unemployment, have the demonstrated power to raise prices and wages unnecessarily and unreasonably, inflation could still occur.
This administration is not interested in dictating the appropriate price or profit levels of any particular industry, or the appropriate wage level of any particular union. We are interested in the general price stability of the American economy. To the extent that our general guideposts for noninflationary wage and price behavior are honored, it must be through the force of an informed public opinion and responsible labor and management. Thus far, although selective price increases recently seem to be getting more attention in the press, a careful check shows that such selective increases have been occurring with almost the same frequency throughout the last 2 years. We have had and are still having selective price decreases, and the overall indexes have continued to be very stable.
A fourth and related question is: Will a tax cut and increased deficits worsen our balance of payments position? The best answer to this question is contained in the excellent statement issued by the CED last December.1 You pointed out at that time that tax reductions "would directly and indirectly, by stimulating improvements of productivity, help American producers to compete in the world market." To this I would add that confidence in the dollar ultimately rests on confidence in the American economy, and many of our friends abroad will applaud steps taken by the United States to expand our economy and thereby improve the position of the dollar. Confidence in the dollar, said a recent OECD report,2 depends in good part on a strong domestic economy. It is unlikely to be fostered for any length of time by policies which keep the level of activity low.
1 "Reducing Tax Rates for Production and Growth" (Committee for Economic Development, Dec. 1962, 56 pp).
2 "Economic Surveys by the OECD--United States" (Organization for Economic Cooperation and Development, Nov. 1962, 43 pp.).
Fifth and finally, the question now arises: Can we ever balance the budget? We can. I share the goal stated by this organization of a Federal budget in balance at high or full employment. This is one of the objectives of this year's proposed tax reduction. As a matter of fact, had the economy been operating at the CED target of 96-percent employment during the last 2 years, each of the three budgets that I submitted would have shown a surplus. During that time, it is true our total expenditures have increased, but nearly three-quarters of that increase has been required by defense, space, and interest. Remaining expenditures increased less in terms of dollars as well as percentages than they did in the last three budgets of my predecessor.
For these reasons, I am certain that we can and will have budgetary surpluses in the years ahead, so long as we follow policies that will promote dynamic economic growth. The American economy finds itself today between the period of postwar readjustment, which was prolonged by the Korean conflict, and the potentially great boom of the late sixties and seventies, when a new flood of family formation will demand new housing, consumer goods, and other installations. If we merely sit by and wait for tomorrow's prosperity, it may never come. But if we do what we need to do today, we will reap tomorrow the benefits of growing production and income, and revenues in the Federal budget.
On all of these questions we must neither seek nor expect unanimity. Disagreement and dissent are fundamental to a free society. But we can expect reliable and responsible debate, and this organization has made a notable contribution to such a debate.
I know we can continue to work together in this vein, determined to find solutions to some of our most vexing economic problems. The course I have attempted to chart is, I believe, a responsible one. We have balanced the risks of doing too much against those of doing too little. We have balanced our domestic goals and our international obligations. We have balanced the demands of national defense against our civilian needs. We have balanced the private desires of our citizens against our public requirements.
With your help and the help of all of those in business, labor, and other professions, who share your concern for the future, we shall build a future from which all Americans can take pride as well as sustenance.
[A question and answer period followed.]
[1.] Q. Mr. President, I am interested in the impact on the economy that the investor owned utility industry in America can have at this time, and would like to ask one question about it for your comment.
The investor-owned electric utility industry has the largest investment in plant and equipment of any industry in America. Each year it makes the largest annual investment in plant and equipment of any industry in America, and it is the largest taxpayer of any industry in America.
I know around this country of a number of projects involving hundreds of millions of dollars of new capital expenditure which would be carried out immediately if it was not for the position of the administration, which I am quite convinced is adverse to the electric utility industry in America. I am wondering if you believe that a more favorable attitude towards that industry might not be a stimulant to the economy, which would be highly desirable at this time in our national situation.
THE PRESIDENT. Well, to make it more precise, what is it in the attitude of this administration which has had this adverse effect?
Q. The point I have in mind is that there are certain very major projects in this country which cannot go forward either because of the desire of the United States to try and build a Federal project with taxpayers' money, or because of the opposition of the United States to the building of certain projects in this country.
THE PRESIDENT. Well, let's pursue it just a few steps further. Which projects?
Q. The one in which we have a personal interest would be the High Mountain Sheep project on the Snake River in Idaho, which is just below the famous Hells Canyon project.
THE PRESIDENT. I am glad to see that all sense of private initiative has not been lost in the public interest which you gentlemen so vigorously pursue. Let me just say that the standard which I have always followed was that if a private company--that the burden of proof should be on the Federal Government; that if a private company can develop a site and provide a service more satisfactorily than the Federal Government, then the private company should go ahead. Indeed, as I said, I would put the burden of proof upon the Federal Government to prove either that the site will not be adequately developed, that the service would not be satisfactory, and that only the Federal Government can do it before I would support the project.
Now, the fact of the matter is that the electric industry did very well last year in the tax bill which passed the United States Congress. It is not only large but also prosperous. Its investments, as you pointed out, are substantial. And it may be that on some sites, such as Hells Canyon, which I recall in the fifties, or other sites in the sixties, there will be disagreement about who should develop the site. But I will be glad to look at that again.
But my judgment, the standard I will use is the one I have described. I think even with that standard there will be occasions when we will disagree. But I think if you look back over the last 30 years, that the public development in power really has not adversely affected the private power industry; that the last 30 years have been years of great investment, substantial profits, substantial return, and that there has been a place for each, and I assume there will be in the future. But I will be glad to look at this particular project with your special interest in mind.
[2.] Q. Mr. President, the present rate of unemployment is the most disturbing problem to us and to you. Do you have any suggestion in the tax reform area which is intended to provide a direct--and I emphasize "direct"--incentive intended to encourage taxpayers to employ more individuals, either for business or personal reasons?
THE PRESIDENT. I think that our general thesis has been perhaps more indirect than your question suggests. Our feeling is that the economy, if sufficiently stimulated, that we could reduce unemployment to the figure of 4 percent. Now there will be some hard-core structural unemployment in eastern Kentucky and West Virginia, particularly the coal and steel centers, which will not be substantially aided by the tax bill or even by the general rise in the economy. I do think, however, that if we could reduce unemployment to 4 percent, then those programs which are specifically directed towards these centers of chronic unemployment, where it is unlikely private businesses will go--I am thinking of some of the older coal mining areas which are not particularly attractive from the point of view of markets, communication, or any of the rest of the things which cause a business to move--it may be possible for us to then be of more assistance in retraining, perhaps in trying to steer defense contracts, if we have high unemployment, although that is increasingly hazardous, and by one thing and another we may be able to make a further dent.
But I would say that generally the tax bill is directed towards aiding the economy as a whole, which we feel will ease the burden of unemployment, but may not finally get at these long-range, hard-core problems which are going to be with us, I am afraid, for some time.
[3.] Q. Mr. President, in your statement you mentioned stimulation of investment and consumption, and you have just briefly commented on getting the overall economy moving, or getting stimulation to total activity. Would you please elaborate briefly in terms of the composition of the tax cut, perhaps the problem of reconciling incentives to investment on the one hand and incentives to consumption on the other in terms of stimulating the total economic activity?
THE PRESIDENT. Yes, I know a lot of people feel we have overweighed it in favor of consumption, and that what we really need is additional funds for investment, using the argument that the rate of investment really is only now approaching what it was in '56, and that this has been a serious problem.
On the other hand, we do point out that the depreciation guidelines last year, plus the tax bill, were of assistance to the business community, and that we have also provided a substantial reduction in corporate taxes over a period of 18 months, and have also provided reduction in the higher income level.
It is a balance which in some sense is a compromise. It may be that we don't have enough in there for consumer stimulation. I am glad that this organization--in fact, it is almost unique in the business community-has recognized that there really isn't any sense in having a tax reduction which just stimulates investment; that what will finally stimulate investment will be what has always stimulated investment in our history, which is demand. It may be that it is weighted too far one way or the other, but my judgment is that this represents a reasonable approach to our economy and also represents the kind of a tax bill which the Congress might enact.
[4.] Q. Mr. President, I happen to represent a segment of the steel industry which has not raised its prices--as a matter of fact, where prices have been constantly going down. My question is this: We are paying something over $4 an hour average wage. I have just come back from Europe where they are paying about $1.60. What, in your economic program, will permit us to compete successfully with very well operated mills abroad who are now shipping and selling in this market at 30 percent under domestic prices?
THE PRESIDENT. Well, it depends, of course, on which particular product we are talking about. We have attempted to protect the domestic steel industry from dumping, although as you know it is a complicated case to prove, and it has not been proven with success this week. But we will continue to take every step we can to prevent any steel being sold in this country at a lower price than it is being sold in the domestic market.
Secondly, while it is true there is a wage differential, this is true of a good many other commodities. We have many other advantages in this country which we have been able to--which have enabled us to more than make up for the disadvantage, at least productively speaking, of higher wages, raw materials, techniques, and all the rest. One of our problems, of course, has been that they are operating at full blast. They have a good deal, in some cases, more modern equipment than we have. We are operating at a rather large overhead because of unused equipment.
I think that if we can get the demand for steel up, and with the combination of the tax bill of last year and the tax bill of this year, so that additional investment will be put by the steel industry into new plants, I think we will be able to protect ourselves.
Now, I know that steel has taken a sharp drop as far as its exports, and we have had a sharp increase. It still is a relatively small percentage of the domestic market, however, and we will continue to watch that, and it will continue to be a matter which will be before us in the next 12 months when we begin the trade negotiations with the Common Market.
We hope that the efficiency of our domestic industry will protect us. It is a fact that we have enjoyed a general trade surplus over the last years, not in steel, but nevertheless generally. Now, I can't guarantee complete protection for steel. We can't just sell abroad. We sell a good deal abroad, more than we import. And it may be that there is going to be certain types of steel that will come into this country and we will find it very difficult to compete with them. I would think that the percentage, however, of imports to the total domestic production will still remain, over the next months and immediate years ahead, relatively small.
[5.] Q. Mr. President, in your statement you touched on a matter which was of some concern to us in the CED when we were trying to draft our policy statement, and that was the relationship between loss of revenue in the short run through a tax cut, and the expenditure side of the budget during that same period. I believe you said that to have a $10 billion cut in taxes to stimulate demand and then to have a $5 billion reduction in expenditures at the same time didn't make much sense.
THE PRESIDENT. Yes, I used, I think, the equal figure, $10 billion and $10 billion.
Q. Yes. Now, in the CED report, we said let's keep expenditures at the '63 level, fiscal '63 level. We are not talking about cutting back from the '63 level. We are talking about cutting back from a projected level.
If you argue that we cannot keep this from rising, and that it is wrong to keep the Federal expenditure level at the point which it is reaching in this fiscal year, it seems to me that logic leads you to making the 4 1/2, 10, or 15 to make sure that the offset doesn't lead us to bad results. What is wrong with keeping the spending at the level it will achieve in this year? Why will that affect a net reduction in employment's?
THE PRESIDENT. We are talking about the '64 budget?
Q. Fiscal year '64 budget.
THE PRESIDENT. Yes, fiscal '64--the coming budget--which was about $4 1/2 billion higher than the '63 budget.
Q. Four and a half up.
THE PRESIDENT. As you know, and you know almost better than anyone, the fact-I would say two facts: first, that our defense expenditures went up, and they went up by necessity. We provided in that budget of 4 1/2 billion increase, a billion and a half was a pay raise which was essential. There were, in addition, other expenditures for the defense, because we have increased the number of available divisions from 11 to 16.
We have increased the standby forces. We have increased the number of Polaris, and all the rest, so that it was just physically impossible for the Secretary of Defense, even though, as you know, he cut $13 billion from the service requests, to cut it any lower. As it is, we are going to have to postpone some very badly needed housing and the pay increase which will finally pass the Congress I am afraid will be less than our services need and less than the civilian increases of the last 5 years.
I think it would have been impossible to have cut our defense expenditures very much below the level we set them up. In addition, there were expenditures for space. Now, this is the target of opportunity for the budget cutters this year. And I think it would be a very great mistake for us to make such a nationwide commitment. The program which we are embarked on, which isn't really just putting a man on the moon but mastering space, had almost unanimous support last year.
There wasn't almost any opposition in either party or in the country. Now suddenly because there is a dropping of public interest, we want to decide to postpone our program and move it ahead at a much slower gear. I think it would be a mistake. I am confident the Soviet Union is going to make additional spectacular efforts in the coming months which will cause a tremendous onrush of public feeling that our program is too slow.
Already we have dropped behind in Gemini, as you know--there was a story in the paper this morning--almost a year. To maintain our original program would have required a supplemental appropriation of a half billion dollars which we did not ask for. You have to make up your minds that if you cut this program in space by a billion or $2 billion, you are making a definite judgment that the United States will continue through the sixties to be second in the field of space.
I think we can afford to make the effort we are making. The third item that was increased was interest on the debt, which, as you know, was refunding obligations which were coming due, which had paid a lower rate of interest because they were incurred in the forties. Now those were the increases. The rest of the budget was the same figure as last year, and that is very difficult.
This country is increasing around 3 million people to 4 million a year. That means you are going to have a million and a half, for example, more postal deliveries every year, you have a good many people on old age assistance, you have a lot more children who need assistance, and all the rest. I think that to hold it even is really very difficult, and you can't certainly do it another year, because it just puts the burden on the State. You can take any State in the Union.
The State of Virginia, which is fiscally prudent, if you take the number of employees, its debts and its expenditures over the last 15 years have risen percentage wise much faster than has the Federal Government.
So, Doctor,1 you should know, as I say, better than anyone how easy it is for people to say to cut the budget without realizing and going into detail, without realizing that the budget as a percentage of population and the budget as a percentage of gross national product is quite constant for 10 years.
1 Dr. Gabriel Hauge, Special Assistant to the President for Economic Affairs during President Eisenhower's administration.
It is in the 16.2 or 16.3 percent for a year period. So I don't regard this as an excessive budget. I don't think you can do what you suggest, unless you are determined to cut space and defense by the 4 or 5 billion. Now, I don't think that we should have done that even from an economic point of view, let alone from a program point of view.
Nearly every business economist as well as academic economist in the summer of 1962 said the chances favored--and most businessmen--the chances favored a recession in the fall of '62 or in the winter of '63. We did not get one. But to have cut the level of Government expenditures by 5 or 6 or 7 billion, or even 10 as some suggest, in my opinion would have been a serious mistake at a time when the rate of investment was still submarginal, and which was really the reason why we did not reach the gross national product figures that the Council had predicted some months ago. It was because in '62 there wasn't the rate of investment. So I think that until we are surer that we are not going to move in this pattern that we moved in '58 and '60, of very frequent recessions, I want to be sure that we don't .have the Federal Government deflate and, therefore, have an adverse effect on an economy which may be hanging in the balance. So to answer your question, I really think from the program point of view and from the expenditure level, that our figure was just about right this year.