EQUALITY AT THE STARTING LINE

We would like to concentrate here on two main problems-domestic economic stabilization and international economic relations. However, we must also say a few words about another problem which we regard as one of the most critical, perhaps the most critical, now facing us. That is the problem of bringing disadvantaged groups more fully into the mainstream of our economic life. We are unable to say much about this today because we, like others in the administration, are in the early stages of reviewing the efforts that have been initiated in recent years to deal with this problem.

At an early stage of history membership in a family or class was considered to be a proper criterion for access to material affluence. Then came a breakthrough as we insisted that every person should be able to go as far as his inclinations, energy, and ability could carry him, regardless of class or race or sex. Today we are in the midst of another breakthrough as we realize more fully the implications of the fact that people begin life's race unequally positioned around the starting line. Some begin so far back, through early cultural or educational handicaps, that latent ambition and ability never have the opportunity to flower and activate. The expectations of the poor and the conscience of the community as a whole, in short, will not be satisfied only to reap the gains for the poor yielded by continued economic progress and high employment.

We must, of course, always remember that American economic growth has been the most effective engine in history for eliminating poverty, and this continues to be the most basic requirement for progress here. And the maintenance of reasonably full employment will continue to contribute to the reduction of poverty. Especially in the short run, therefore, measures to increase the steadiness and productivity of employment can deal with only part of the problem. As poverty is now commonly measured, over half of the heads of poor households are unable to work, because of age or disability or because they are mothers of small children. In the longer run increasing employment and productivity will reduce the numbers of such people in poverty also. But for the present we must accept the fact that there are millions of poor for whom strong employment conditions generally will not be the answer.

For these people income support or income insurance is necessary. We do have systems for this, including social security and public assistance, through which large sums of money are paid. However, the public assistance, or welfare, system we have today does not measure up to the goals and capabilities of the American society. In many States the amount provided is grossly inadequate, and the terms on which support is given are often demeaning. Also, experiments are underway with procedures for making the determination of eligibility more objective and less objectionable. We look forward to rationalization and improvement of the income support system as a major objective for the Nation.

The ability to transfer money through the budget is not unlimited, of course, for economic as well as political reasons. If we now raise assistance for the poor in our scale of national priorities, as we should, we should be rigorous in trimming those budget flows which serve

purposes now of lower priority. We think that a practical approach to the poverty problem will require great firmness in dealing with other expenditures and with tax reliefs and privileges not related to the antipoverty objective.

We would say one further word on this subject. The problems here are deeper than income alone. It is necessary for everyone to have an opportunity-not a certainty but a chance which individuals can improve by their own efforts to do what is sometimes called making it. There needs to be an opportunity to attain greater independence and status. Our antipoverty efforts have not given sufficient emphasis to this.

THE GOALS: MAXIMUM EMPLOYMENT AND PRICE STABILITY

The Council of Economic Advisers was created by the Employment Act of 1946 to assist in carrying out the mandate of that act which calls the Government to use all of its capabilities to achieve and maintain maximum employment. We, of course, accept that mandate.

But even if there were no Employment Act, anyone who has lived through the past 40 years or knows its history must put maximum employment high on the list of national goals. Although we are a relatively affluent society, we cannot afford the loss of output that would result, and has resulted in the past, from persisting and largescale unemployment. However, the main consequences of unemployment are not to be seen in the statistics of output. They are seen in the psychological injury to those individuals to whom the society seems to say, "We have no use for you."

Of course, we no longer conceive of the possibility of unemployment rates as high as 25 percent-the rate for 1933. It might seem that differences of a percentage point or two in the unemployment rate would not be a matter of major consequence. However, that is not the case. Unemployment is highly concentrated. In 1967, the average unemployment rate was 3.8 percent. During the year, however, 87 percent of the civilian labor force experienced no unemployment while 13 percent, or 11.6 million persons, did experience some unemployment. For most of these the period of unemployment was short. But there were 2.6 million persons, or 2.9 percent of the labor force who were unemployed for 15 weeks or more, of which 1 million persons-1.1 percent of the labor force-were unemployed for more than 26 weeks.

Unemployment is not randomly distributed across the labor force. Everyone does not have an equal risk of being unemployed. The likelihood of being unemployed is much greater for teenagers, for women, for the unskilled and for nonwhites than for the rest of the labor force. The likelihood of being unemployed for a considerable period in any year is especially great for the unskilled, for the nonwhite, and for the aging. The human and social implications of this are obvious.

A recent study by the Bureau of Labor Statistics reveals how important even a relatively small difference in the national average rate of unemployment may be for the disadvantaged. Between the fourth quarter of 1967 and the fourth quarter of 1968, when the seasonally unadjusted national average unemployment rate fell from 3.7 to 3.2 percent, the unemployment rate in urban poverty neighborhoods of

the 100 largest metropolitan areas fell from 6.9 to 5.2 percent; and the unemployment rate of Negroes in these neighborhoods fell from 9 to 6.4 percent. Clearly we must try to reduce this concentration of unemployment. We interpret the mandate of the Employment Act, therefore, as having a qualitative as well as a quantitative dimension.

The Employment Act set other goals for us in addition to maximum employment. The most critical of these today is expressed in the term "maximum . . . purchasing power." This term has been commonly interpreted by the President and by the Joint Economic Committee to embrace price level stability and avoidance of inflation, and we see that if we examine the Economic Report and the Report of the Joint Economic Committee.

Thus, President Truman in his 1948 Economic Report said:

"Our purchasing power objective for 1948 should be to effect the economic adjustments which are necessary to afford adequate protection against inflation."

A decade later in his Economic Report President Eisenhower declared:

"A clear responsibility rests on Government to pursue policies that will help prevent inflation."

And in 1965 President Johnson said:

"I regard the goal of overall price stability as fully implied in the language of the Employment Act of 1946."

There have been 29 annual and midyear Economic Reports of the President. Only three of these failed to express a concern about inflation and to affirm the national goal of price stability. Similarly, only three of the annual reports of the Joint Economic Committee failed to express concern over inflation. Each of the exceptions occurred during

a recession.

Thus the President and the Congress have not only regarded price stability as an important national goal. They have also announced it as a goal and have given the American people every reason to think that it is the policy of the Government to avoid inflation. This is in itself a fact of much importance.

There are three main reasons for the continuing and almost universal concern with inflation. The first is the random, unjustified, and inequitable distribution of gains and losses that it causes. All of us--Government, businesses, and individuals-are constantly making commitments for the future in dollar terms. We agree to work or to hire labor for so many dollars an hour or year. We invest in life insurance or pension funds which entitle us to receive specified numbers of dollars at some time in the future. The Government undertakes to pay social security benefits, veterans pensions, and interest in the future in specified amounts of dollars. The Government sets tax rates whose height depends on income measured in dollars.

The real value and effect of all these commitments depends on the prices prevailing at the future time when the dollar payments are made. Obviously a person who bought a Government savings bond or put money in a savings deposit 3 years ago has lost 10 percent of the real value of his investment through inflation. After paying taxes on interest income, his "real" rate of return has been small, and for some it was negative.

When people enter into these commitments they have some expectation, more or less explicit, about what is going to happen to prices. Even if everyone were now to expect and to anticipate inflation, it would not make the present inflation harmless. People are now living with commitments to pay or to receive money which they had undertaken in the expectation of much less inflation than has recently been occurring. These people are being hurt. If we should now make the recent rate of inflation permanent, their injury would continue for years to come.

Just who gains and who loses from inflation is hard to calculate. The gains and losses are to individuals and tend to offset each other in statistics about groups. Thus measures of impact based on displacements of broad groups-wage earners, older people, farmers-obscure and underestimate the hardships.

There are, however, certain things that can reasonably be said. An inflationary environment creates more problems for the "little fellow" than for the sophisticated investor. It may well pose more intractable problems for the small businessman than the large corporation.

And one thing we can confidently say. Those who have taken at face value the Government's announced policy of avoiding inflation have lost in recent years. It is the Government's responsibility to provide good money-money whose value is predictable. To provide good money the Government must bring its actions about inflation into line with its declarations. Since it is hardly conceivable that the Government would declare a policy of inflation, honest treatment of its citizens requires action to prevent inflation.

A second reason for concern with inflation, in addition to the inequities it works upon individuals, is the distortion it causes in the pattern of production and in business and financial decisions. The calculus of investment and lending decisions tends to become less discriminating as people come to assume that inflation will bail out even poor decisions. Perhaps the most important, and certainly the most visible, of these adverse effects is on housing. In a period of actual and anticipated inflation the demand for credit from all quarters is high. Individuals and businesses are eager to borrow funds, which they expect to repay later in dollars of less value, and savers become less interested in fixeddollar assets. Interest rates, therefore, rise sharply, and flows of funds into institutions particularly important in financing homes are curtailed. We see this today. When the new administration assumed its responsibilities, yield rates on new FHA mortgages had pushed to the 712 percent zone. These high rates were a direct consequence of the inflation that had been allowed to gather momentum.

Because of the inflation a mortgage must now be larger to buy the same house. Because of the impact of inflation on interest rates, the monthly payments on a $20,000, 25-year mortgage must now be over 20 percent larger than three years earlier. Nor could these rates have been relieved by a more expansive Federal Reserve policy. This would have activated a further overheating of the economy, which would then have given another upward thrust to interest rates.

The third main reason for concern with inflation is its effect on the balance of payments and the international position of the dollar. While we shall discuss this in the later section of our statement, we must point out here that the serious deterioration in our trade balance largely

reflects the flood of imports, which usually happens when demand becomes excessive and merchandise from abroad pours in to fill the gap. We are the victims or beneficiaries of the past with respect to the choices that are open to us as we confront this difficult problem of inflation. But our successors will be the victims or beneficiaries of what we do.

We have in this difficult situation three principal alternatives:

1. We could cut back economic expansion severely enough to stop the inflation at once, and keep it at zero until the expectation of no inflation became firmly established. This would probably cause a period of substantial unemployment.

2. We could try to continue the policies of recent years that have produced substantial and accelerating inflation-as measured by the consumer price index, 2.8 percent in 1967, 4.2 percent in 1968, and at a 5 percent rate by the final quarter of 1968. Housing would be severely affected, further serious strains would be imposed on the international economic and financial system, and profound further changes would be apt to occur in the way savers would be willing to make their funds available.

3. Our third alternative would be to embark upon a course of gradually and persistently reducing the rate of inflation and thereby generating the expectation of diminishing rates of inflation in the future. None of these courses is free of costs or risks. We have inherited a difficult situation. There is no point to pretending that we have a way to escape from this history. However, we believe that considering the national interest in high employment, price stability, and vigorous and on-going expansion, the strategy of moving steadily and gradually to reverse the inflationary trend is indicated.

What would this do to unemployment? This is an urgent question for all concerned Americans. So long as anyone wanting work is unable to find a job, we have unfinished business. These are, however, reasons for hope that the impact would not be large. It is significant that during the last 3 years we gained little on the unemployment front for the ground that we lost on the price level. The unemployment rate was the same in 1967 as in 1966 (3.8 percent), and it was 3.6 percent in 1968; thuogh it is true, of course, that by the end of the year it was 3.3 percent. At the same time no one can assure that the distortions from 3 years of economic overheating and price inflation can be corrected with no effect on unemployment.

THE INSTRUMENTS OF ECONOMIC POLICY

The principal way by which the Government can achieve its objectives for the economy is to influence the rate of growth of total spending for goods and services. This is true whether the chosen strategy is the one we have just suggested or some other. If the objective is to slow down the rate of inflation perceptibly but gradually so as to keep unemployment low, we shall need to slow down the rate of growth of total demand gradually as the means of achieving that objective.

From time to time, in the United States and elsewhere, attempts have been made to promote the achievement of expansion and price stability by recourse to "incomes policy." Essentially this means an attempt by education, persuasion, exhortation, threats, or other means