with the kind of massive escalation of Government expenditures in that period, on top of a relatively full employment economy. And I think economists, by the way, should not indulge in politics one way or the other, but they should state for the public, for the administration, what the consequences are, and not say that we can escalate a war and it is not going to cost us, we can have a great society, and if we raise tax rates we will not have inflation. I do not think any economists have any business suggesting that. There should be much more public rebuke of the administration for suggesting that that was likely.

Representative BROWN. Hear, hear. I agree with you 100 percent. The only thing that has to be said, I think, as a codicil to that is that we operate in a political arena, and I do not mean just the Senator and myself, I am talking about the whole Government. And so I think if there is a tendency to err it is on the side to resist that difficult part of the Keynesian decision, where you take money out of the economy or try to put a lid on the economy, or on the other hand, as has been suggested, I think, by Mr. Butler, there is a tendency to err on the side of overstimulation when a problem develops within the economy because it becomes, not an economic decision in terms of attaining stability, but a political decision in terms of, my God, let us get out of this trough we are in, because we will suffer if we do not; and if we do not do it quickly, the problem, then, becomes at the other end of the scale, How do we get it under control, and balance the situation at the other end?

Let me ask, however, in that regard, if, then, there is maybe some more merit than has been generally given consideration in the idea of stimulating what the consumer might do and here I refer not just to the corporate consumer, but also to the private consumer-I had better say it the other way-the private consumer and the corporate consumer, the business consumer. Are we taking into account or not the possibility of using a flexible tax policy in this regard? You gentlemen have all suggested in one form or other. And I would just like to ask as to whether or not the idea of stimulating corporate spending by a tax reduction is more effective than a general tax reduction for everybody, or whether the social security nonpayment of taxes is more effective than generalized tax reduction. I am a little concernedregardless of the nature of whether the social security tax comes from, who pays it-I am more concerned about the sanctity of the social security program and whether you are taking money-whether you are using that as a fiscal mechanism, I am a little concerned about that. I did not think that is really the kind of policy that I would want to get into. I would like to keep the social security a little more sacred than that.

But what about the fiscal mechanism of tax reduction across the board generally, either a flat rate across the board, or a rate changeable with the needs of the individual and the society, and his project of spending the money if he gets the tax reduction?

I would like to have all of you comment on that.

Mr. EISNER. The tax variation can tend to be less effective because of the transitory nature of tax changes, and not having as large an impact on spending as we would expect from a permanent tax increase. Representative BROWN. Just a minute, Mr. Eisner. Let me pursue that with you. The transitory nature of tax changes, what about the transitory nature of fiscal spending, which is the other side of that problem? Isn't that all tax

Mr. EISNER. I am glad you put it precisely that way. If by spending we mean the Federal Government simply giving someone more money, that again may prove to be transitory. If the Federal Government, or any government, immediately spends the money to buy goods and services to have production undertaken, that production is undertaken. So if the Government were to go out and spend a billion dollars to build a road or to build schools, that road and those schools are being built as the money is being spent, and workers are being employed doing it. If a billion dollars are given to people in the way of tax reduction, they may spend some of it, they may spend all of it, they may spend it promptly, or they may spend it later.

Representative BROWN. In other words, you may curb the savings right up to, 9 or 10 percent

Mr. EISNER. My written article calls attention to what happened in 1968 when the imposition of a surcharge had the effect very largely of changing the saving rate that was measured rather than changing consumption as we wished.

Representative BROWN. Just a minute. Wouldn't that depend on the savings rate that you got when you injected the money? In other words, if your savings rate is, say, down to 5 percent, and you inject money in, you might push that savings rate back up to 6 percent. It might resist going higher. On the other hand, if it is 7 percent, or plus 7 percent, as it is now, which we have identified as aberrational, or I assume that we conclude that it is relatively aberrational, if you inject your money into the economy by a tax reduction, wouldn't the tendency be to think that that money would find its way moving through the economy rather than by increasing savings?

Mr. EISNER. This may depend on several features. I would not refer to it as injecting money into the economy. That is something else again.

Representative BROWN. Not take it out?

Mr. EISNER. Yes. And I think it may make a difference what tax rates are affected. As Mr. Eckstein did point out, there is evidence that lower income people do not have much discretion. And I think if you are to change a tax rate there is an argument there for changing the social security tax, but not increasing the social security base.

Representative BROWN. The social security tax rate that you are suggesting, is not that also affecting industry?

Mr. EISNER. To the extent that it affects industry I think would have less of an effect on spending. For here is the other distinction I would make. Individuals tend to spend. All of our theory and evidences suggest that individuals will spend. One of the prime determinants of their spending will be their income.

Representative BROWN. Excuse me just a minute, but that is exactly the point I was making about the unemployment a minute ago. I concur in that. Go ahead.

Mr. EISNER. But a prime determinant of business spending, if the businesses are rational, is not their income position, but what the spending will do for their profit. Profitability is the correct word, but it means not what you happened to have earned, although that may well influence an individual business in terms of liquidity concerns, and I think small businesses much more than large, because they will have liquidity concerns. But it would be foolish for a large business to go out and spend more to expand its factory, to accumulate inventory, simply because it has the money.

Representative BROWN. Of course, it would. But it is not unknown, I think, that a business may hold off on going out and making such an investment until it gets its liquidity position back in a safe position. Is that correct?

Mr. EISNER. To some extent. But years ago I interviewed a lot of large business executives. I have done a lot of work on empirical data, and econometric estimation. I do not want to discount it completely. There is a substantial myth about this, which does injustice, I think, to the profit system. The myth is that you spend money when you have it. If that is the way we operate we are not doing any better than the Russians with their bureaucratic system, where any time a manager has money he will spend it. Our notion is that they spend to maximize profit and to reduce costs. And it is true of course in this case.

Representative BROWN. Would you apply that to the individual consumers?

Mr. EISNER. The individual consumer is spending to maximize his own welfare. And his major constrant is the income he has. But of course it is not just the income he has this year, it is the income he will spend in the future, it is the wealth he has. And these psychological factors then will operate. If he expects he may be unemployed next year he is likely to spend less out of his current income than if he looks forward to a growing prosperity.

Representative BROWN. Would you suggest that the increase in the savings rate might have something to do with whether or not the consumer anticipates that prices will be radically higher, or just a little higher, or essentially the same?

Mr. EISNER. Yes. Although this operates two ways. You have to keep sight of both. One way is that if he expects prices to be higher next year he may try to spend now rather than wait for higher prices. On the other hand, if he expects his own income is not going to go up as much as prices, he may say, prices are going to be higher, my income will not be higher, and I may not be as well off next year, and I had better not spend so much now, I had better keep more for next year. And both factors have to be kept in mind.

Representative BROWN. The question I would like to go back to again is whether a generalized tax reduction across the board in some way might not be as desirable as the nonpayment of the social security tax increase, or in effect fiscal policy.

Mr. Eckstein.

Mr. ECKSTEIN. We have just reformed depreciation. And this is in effect a $4 billion corporate tax reduction, at least in terms of money. So I feel we have taken a major step to facilitate liquidity and provide some extra incentive to investment, and I think it will have a significant effect at some point.

Now, fiscal policy is really a question of finding opportunities where you can do something. It always turns out that in the spending area they are very limited. Most things take too long, and there are questions of efficiency. On the tax side, it is a major undertaking to change the tax system or to get a tax cut or increase through the Congress. The social security matter is really the great opportunity at the moment. Of course, you

Representative BROWN. You are saying simply because it is there? Mr. ECKSTEIN. It is there, and it is easy, although you certainly would want to consult the actuaries of the Social Security Administra

tion before you accept my judgment on it. It is my impression that the system could stand that year of delay of the tax increase without violating any of the rules which apply to that trust fund.

Representative BROWN. How long did you say, 1 year?

Mr. ECKSTEIN. At least 1 year. I will not say longer than necessary. The system has run a very substantial surplus in recent years, which was not intended. And the recent benefit increase was offset by a tax change which has gone into effect, it is now a question whether the new benefit increases require a coincident tax change. My own arithmetic suggests that by actuarial principles the funds can easily stand it. Representative BROWN. Do you think it is a good habit to get into? Mr. ECKSTEIN. Well, we already last year raised the benefits before the taxes. So we have lost our virginity already.

Representative BROWN. Do you think that is a good precedent to establish?

Mr. ECKSTEIN. Actually it is not a precedent that is new.

Representative BROWN. Let me ask you the impact on consumer spending.

Mr. ECKSTEIN. What it would mean actually is that come July or August, September or October, instead of raising the earnings base and then continuing withholding through those months, you stopped withholding the payroll tax as you do every other year. People are not thinking about that now. But in the ordinary course of events we will find that when we have finished with the auto catch-up and the steel hoarding and maybe have a steel strike when the economy is slowing down again, we will be prolonging withholding of social security taxes.

Representative BROWN. You do not think that somebody in an article in the Reader's Digest or some place like that would start worrying about whether the social security system was actuarially sound if you started fiddling around with it as an operation of the economy?

Mr. ĚCKSTEIN. I think the actuaries of that administration would approve it.

Representative BROWN. I did not ask you that question. I have asked you twice, do you think the consumer is going to worry about somebody fiddling around with the social security system, or if he is going to decide whether, instead of saving 7 percent for his old age he ought to save 10 percent? The reason I ask the question is because a couple of years ago somehow or another there was a lot of talk going around about whether or not the social security system is actuarially sound. And I answered mail until it ran out of my ears trying to explain that the social security system was actuarially sound in terms of the money being there when we got old. And it can happen. My question is whether you think it might. And I think the answer is fairly obvious.

Mr. ECKSTEIN. I think one would have to persuade the constituency of the social security system-I not only mean the aged, but the people who follow it closely-the people who would write those Reader's Digest articles-that the move that was being made was within the principles of the system. I am not advocating a subordination of those principles for the sake of stabilization policy, which I believe would be a mistake. But the point is that even within the rules that have been devised, the tax could be delayed.

Representative BROWN. I would suggest that we assign that responsibility to the same person in the Government, the Government

economist who has been assigned the responsibility of getting that saving down to 7 percent.

Mr. Butler, would you like to comment on my suggestions as to a generalized tax reduction as opposed to a social security or a tax deferral?

Mr. BUTLER. Well, I am all for greater flexibility in the tax system. I think it is one of the very useful things that could be done if it were politically possible. But I think you would have to have flexibility both ways if you were to reduce taxes. You might have to be willing to increase them next year. And I think that is a little harder to do. Representative BROWN. Just like holding down Federal spending increases, a political decision? Do you think that we should consider it as opposed to fiscal policy changes in terms of spending?

Mr. BUTLER. I think if we could get some sort of an agreement on the rate of flexibility perhaps giving the administration greater discretion to change the taxes both ways, I would be in favor of that. I fear that if you put in a temporary tax cut this year that would turn out to be permanent. So you would have a problem later on.

Representative BROWN. Suffice it to say that this is a whole package, then, of policies, is it not? We have got the depreciation allowance, we have got the possibility of an investment tax credit, we have got excise taxes that we can take off or put on or increase or decrease. I am not sure that I am totally sold on excise taxes. I think there is a corporate benefit for the airlines in taking off excise taxes on airplane tickets, but I am not sure that that is going to be the same genre as the generalized tax reduction in terms of stimulating the economy or in terms of the social security stimulating economy. I think fundamentally the generalized tax reduction across the board would be more stimulative than social security-than not adding, in what might be called timely fashion, a security tax increase with respect to the actuary of the social security system. Certainly fiscal policy plays a part and monetary policy plays a part.

And I think the discussion has been invaluable in terms of exercising perhaps our differences of opinion as to which steps ought to be taken at this time, and how rapidly they should be taken. And I am one who found the testimony quite interesting.

I appreciate you gentlemen being with us today. Thank you very much.

Chairman PROXMIRE. I want to thank you, gentlemen, so much for very fine statements and most responsive replies to our quesions. You have certainly contributed very well to our record.

The committee will stand in recess until tomorrow morning at 10 o'clock, when we reconvene to hear Prof. Karl Brunner, Prof. Robert Lekachman, and Mr. George Perry. That will be in G-308. Thank you, gentlemen.

The committee is now adjourned.

(Whereupon, at 1 p.m., the committee adjourned, to reconvene at 10 a.m., Thursday, February 25, 1971.)