Address Before the 19th Washington Conference of the Advertising Council.

Ladies and gentlemen, Mr. Secretary, Mr. Martin, Mr. McNamara:

I want to express my appreciation to you for your many services in the public interest during the past months. The Advertising Council has been of inestimable value to us in attempting to advance the public interest on projects, savings bonds, particularly the Peace Corps, and a number of other projects.

I have been particularly appreciative to your efforts, that of your Executive Secretary of the Advertising Council for his very constant assistance to us in the early days, and also your support for it represents a very admirable facet of American life. Your service also represents a very strong indication of your devotion to your country and we are very grateful to you, and I want you to know that.

I unfortunately picked as a topic to discuss one that you have heard talked about by experts, so I move into this mine field with some degree of hesitancy.

The only reason I want to say just a very few words about our economy is that in spite of the strong feeling of many that the Federal Government should mind its own business, whatever that may be, and stay out of business' business, the fact is that when things go bad the chicken comes to roost on the President's house. Mr. Herbert Hoover was, we know in legend, responsible for all the difficulties of 1929. President Truman bore responsibility for the '49 recession. President Eisenhower was blamed for the recessions in '54, '58, and '60. When the stock market had its difficulties last spring, I got a good many letters.

I receive no mail thanking me and expressing admiration for my economic wisdom when the market goes up, but when it goes down we all know who is wrong. Therefore, that being true, recognizing that the President of the United States and the Government will be responsible if we have economic difficulties, it seems to me that we have some right to present proposals which may lessen those economic difficulties.

We have some right, really, to be listened to. We are attempting to avoid those hazards which will inevitably be blamed upon us when they finally come, and people do look to Washington in all kinds of ways when difficulty comes across the country. It is also true of business and economic difficulties. So the matters we are now discussing, and the proposals we have made in regard to the budget, Federal expenditures, and the tax cut, are all representing our efforts to avoid the difficulties which, if they come, will inevitably be blamed upon the President of the United States.

The first 2 months of the 88th Congress have been dominated by discussions of fiscal and economic policy and the next several months will be dominated by the same facts. I think that is very wise. We are attempting to do something new, and that is to talk about a tax cut at a time when we have a deficit, and at a time when we have relatively good times even though a disturbingly high rate of unemployment. So we are talking about, in a sense, something new, and it is appropriate that we talk about it in detail; and it is necessary that we get some understanding across the country of what we are trying to do because it is important and it does represent a change in previous policies enunciated by the United States Government.

The fact is, of course, these questions are all highly technical. To explain the difference between a family budget and the United States budget, to explain why we believe it difficult, if not impossible, and certainly unwise, to attempt to secure a balanced budget this year, which we believe would put us into a recession, which we believe would unbalance the budget, these are all highly sophisticated questions, far more sophisticated than those economic questions which occupied our attention during the 19th century of free silver and trade and all the rest. Now, balance of payments and the cyclical problems and debt management are all far more complicated and every solution raises new questions.

Three familiar questions of fiscal policy must be decided by the Congress:

First, the limit on the national debt.

The size of the Federal budget.

And three, the desirability and extent of Federal tax reduction.

All three of these questions have faced legislative and executive branches before, and we have an obligation to learn the lessons of history if we do not wish to relive it.

In front of the Archives building there is a statue and under it, it says "The past is prologue." Not necessarily, and it is because we do not wish to relive the past, because we do not wish to regard the past as necessarily a prologue in the 1960's that we have attempted to put forward our proposals.

Economic history, specifically the history of 1957-1960 which produced two recessions from which the whole economy has never fully recovered, clearly warns us now that the wrong answers to each of these three questions would spell downturn for the American economy as a whole.

I do not speak as a partisan. The errors of a Republican administration and a Democratic Congress during these crucial years nave been acknowledged by members of both parties. I do not review them now to gain political advantage in hindsight, but to gain a greater degree of foresight on the same problems that face our country at this time. I do not intend to assess the blame for the past. There is enough to go around for everyone. But we shall all be deserving of blame, we shall all be deserving of blame if we do not learn its lessons for the future.

The Federal Government, and I shall speak here not of any one party or branch of Government, but the Government as a whole, decided in 1957 to keep the debt limit unrealistically low, to cut back and stretch out budget expenditures, to tighten monetary policy, and to reject all efforts at tax reduction. The harsh results of those decisions are still with us.

1. In the decade previous to July 1957, unemployment had rarely exceeded 4 percent. In the 64 months since those decisions, it has remained above 5 percent.

In the earlier decade, business fixed investment averaged nearly 11 percent of total output. It has since that time fallen steadily to roughly 9 percent today.

In the previous decade, our total output of goods and services, measured in constant prices, had increased at the rate of nearly 4 percent a year. Since mid-1957 the rate of increase has been limited to 3 percent.

All three of these decisions were taken in the name of fiscal responsibility. But if that high-sounding label is intended to refer to budget and balance of payment surpluses, it was a name taken in vain.

The preceding 11 fiscal years had produced seven cash surpluses in the Federal budget, for a net cash surplus of $20 billion. The 6 succeeding fiscal years produced one surplus and five deficits, including the greatest peacetime deficit of all in fiscal 1959, for a net cash deficit of $30 billion. Had the economy been operating at full employment, there would have been no deficit.

The balance of payments problem became a problem only after mid-1957, with a total deficit of $11.2 billion during the next 3 calendar years and a gold loss of more than $5 billion during the same period. The fact that short-term interest rates had been increased 40 percent in 1955 and 1957 did not help to stem this balance of payments tide. As the OECD said last December:

"Confidence in the dollar depends in good part on a strong domestic economy; it is unlikely to be fostered for any length of time by policies that keep the level of activity low."

Unfortunately, the size of the deficits in our Federal budget and our international accounts led the Government in 1959 to adopt even more restrictive fiscal and monetary policies. The Federal cash budget during the first quarter of 1959 was operating at the level of a $17 billion deficit at annual rates. By the third quarter, this had become a $2 billion deficit, and by the second quarter of the next year, 1960, a surplus of $7 billion. These figures are from Arthur Burns, who served my predecessor as Chairman of the Council of Economic Advisers, and who calls this, and I quote, "one of the very sharpest shifts of Federal finance in our Nation's history."

At the same time, Dr. Burns pointed out, economic expansion was curbed by a tightening of both short-term and long-term credit. Long-term rates, in fact, "advanced faster," and I quote him, "than during a comparable stage of any business cycle during the past hundred years."

The result was another recession, more unemployment, more unused capacity, and another incomplete recovery. Today's output is $30 to $40 billion below our productive capacity. The rate of unemployment has risen to 6.1 percent of those actively seeking work. Corporate investment last year was--for the first time in any nonrecession year since the war below the level of gross retained earnings. And business spending on new plant and equipment was at a lower level than it was in 1957.

Now, in 1963, the Government once again is faced with these same decisions. I hope we will bear in mind the lessons of history. I hope we will remember the editorial in Business Week magazine, June 28, 1958, which pointed out the effects of an unrealistic debt ceiling and a harmful slash in expenditures, and I quote them:

"In the second half of 1957, the debt ceiling forced the administration to cut back programs needed for long-term national security. And," they said and I quote, "the resulting slash in defense expenditures was an important contributing cause of the recession."

An unrealistic debt ceiling or budget cut today would also cause a slowdown in contracts, a stretch-out in payments, a cash drain on business, and ultimately another recession. Instead of balancing the budget, it would produce a budget deficit far greater than the temporary addition to the deficit that will come from a tax reduction. Let us remember that the $12.4 billion deficit of fiscal year 1959 was the result of a recession which wiped out what had originally been conceived of as a budget surplus of that year of $500 million.

This administration is not asking for an unlimited debt ceiling, but a realistic one which will still keep the actual debt burden as measured by a percentage of our gross national product steadily declining. As you know, it has declined from 120 percent of our gross national product, 17 or 18 years ago, to 54 percent today, and will continue to decline both as a percentage of our population per capita and as a percentage of our gross national product.

We are not asking for uncontrolled budget increases, but for a prudent budget which, contrary to all trends in Government, both local and State, actually reduces civilian expenditures below their level of last year, a feat which has occurred only four times in the last 15 years, a hard defense budget which, interestingly enough, was increased by half a billion dollars yesterday in the House of Representatives. And we are not asking for an unprecedented tax cut because, while the total amount of the tax cut in calendar months beginning in July would take place over a period of 18 months for the fiscal year, it will result in a $2.7 billion loss in this fiscal year.

Certainly it's clear that if we slide into another recession, the deficit without a tax cut will be far larger than the projected deficit we face with a tax cut. It seems to me that the logic of our problem and the past is so clearly before us that I sometimes find it difficult to understand why so many members of the business community who live with these problems day by day, who have lived through the last 20 years, are so reluctant to accept what are obviously the facts of life in our economy.

In addition, as you know, we have pouring into the labor market every year, at the very time when automation is becoming most sophisticated, millions of people who are looking for work. In 1960, 2.6 million Americans reached 18. In 1965 it will be 3.8 million reaching 18, which is this tremendous increase, as a result of the war baby boom, of people looking for work in the 1960's.

So we have all of these things coming to a climax in 1960, automation, an increase in those in the labor market, and number 3, a slow growth in our economy. That's what we are faced with in these years. So I'm hopeful that the lessons of history will be learned by us all, in and out of Washington, by those of us in the administration, and the Congress, and by all of you.

"The great advantage of Americans," wrote de Tocqueville in 1835, "The great advantage of Americans consists in their being able to commit faults which they may afterwards repair." To this I would add the fact that the great advantage of hindsight consists of our applying its lessons by way of foresight. If this Nation can apply the lessons and repair the faults of the last 5 years, if we can stick to the facts and cast out those things which really don't apply to the situation, then surely this country can reach its goals, and upon reaching its goals depends the security of the free world.

Thank you.