rate in urban poverty areas fell by 25 percent and the rate for blacks in these areas fell by nearly 30 percent.

By the fourth quarter of 1969, these changes may have been reversed, indeed will have been according to the kind of forecasts that are being made today. And before inflation is slowed much, unemployment is likely to be considerably higher in these groups. While this may be an inevitable result of a necessary slowdown, the amount of individual cost that has typically been involved in rising unemployment, especially to those in the high unemployment groups, is neither inevitable nor necessary. Anything that can be done to minimize this cost will make the anti-inflation program far more acceptable. This certainly justifies adequate access to programs with additional, longer run payoffs, such as education and training programs, for those unemployed who could benefit from them. In my opinion, it also calls for strengthening programs that openly transfer income to those who lose jobs and who do not get sufficient assistance in other ways-either because existing training or employment programs are inadequate, because they do not qualify for them, or because the existing system of unemployment compensation does not cover them or provides inadequtae coverage. Chairman PATMAN. Thank you, Professor Perry.

Professor Suits, we should be very glad to hear from you, sir. You may proceed in your own way.

STATEMENT OF DANIEL B. SUITS, PROFESSOR OF ECONOMICS, UNIVERSITY OF MICHIGAN

Mr. Surrs. Mr. Chairman, the economic outlook that I shall present today was compiled by the research seminar in quantitative economics at the University of Michigan as part of a research project supported by the National Science Foundation. I wish, in particular, to thank my able colleague Prof. Saul H. Hymans for his contribution to its prep

aration.

BASIC FACTORS IN THE OUTLOOK

The outlook is predicated on the projections of several basic ele

ments.

1. The 10-percent surcharge on personal and corporate income taxes is projected to be renewed and continued in effect.

2. Total Federal Government purchases of goods and services are projected to hold at the level of the last quarter 1968 until the beginning of the fiscal year 1970, when they will rise modestly in response to prospective pay increases.

3. State and local purchases of goods and services are projected to rise at a trend rate of $2.8 billion per quarter.

4. Monetary policy is projected at about the present level of tight

ness.

5. Projections of business fixed investment during the first two quarters are made consistent with investment intentions reported in recent surveys, and only small increases have been allowed for the last two quarters of the year.

6. Exports are projected to rise at a trend rate of $.8 billion per quarter.

ECONOMY TO SLOW DOWN

The resulting economic outlook is presented in the accompanying table. Gross national project is forecast to rise from the $887.4 billion level of the fourth quarter of 1968, to reach $932.2 billion by the end of 1969. This would represent an average of $914.9 billion for the year as a whole compared to $860.7 billion for 1968.

The quarterly pattern of the forecast reveals a very flat first half of the year followed by more rapid growth during the second half. This follows partly from the pattern of taxes. The forecast first half of the year is held down by the increase in social security taxes already in effect, and by the addition to final income tax settlements associated with the tax surcharge, but coupled with the $10 billion inventory accumulation during the last quarter of 1968. The greater buoyancy of the second half is partly the result of the termination of these final settlements, and the addition of the pay increase to Government purchases.

The components of total output do not grow uniformly. Consumer spending is forecast to rise almost 5 percent, but the growth in gross private domestic investment is only 2 percent, partly because of the slower rate of inventory accumulation at the end of the year. Net exports, on the other hand, are forecast to double as imports grow more slowly than the projected rise in exports. Government purchases of goods and services rise 9 percent.

Overall, the forecast represents a substantial reduction in the growth rate of the U.S. economy. In contrast to the gain of almost 10 percent registered during the year just past, the GNP forecast for the end of 1969 is only 5 percent above the fourth quarter of 1968. When adjusted for an expected 3.5-percent increase in prices, this amounts to a gain of less than 2 percent in physical volume of output, compared to 5.5 percent for the corresponding period last year.

RISING UNEMPLOYMENT BUT PRICE INCREASES TO CONTINUE

The forecast growth in gross national product is too slow to absorb the expected new entrants into the labor force and still compensate for rising productivity, and will be accompanied by rising unemployment that we expect to reach 4.5 percent of the labor force by the end of the year.

Despite slower growth and rising unemployment, however, prices will continue to rise at almost the same pace as during 1968. The reason for this is the backlog of undigested costs now in the economy. Producers cannot respond instantly to changed conditions, and there is necessarily a delay between the time a firm finds its costs rising and the time it can make appropriate price adjustments. Moreover, higher output prices of material producing firms represent higher input costs to their customers, and there is further delay before prices rise at the next stage of production. Our calculations indicate that it takes an average of 3 years before an initial increase in unit cost fully emerges in prices of final output, and for this reason any slowdown in the rate of economic growth has its first impact on jobs rather than on nonfarm prices.

UNDERLYING COST PRESSURES REDUCED

Although the rate of price increase will be largely maintained through the year, underlying cost pressures will diminish and less inflationary steam will be generated beneath the surface than has been true in the recent past. Employee compensation per man-hour is forecast to rise only 5.5 percent this year, in contrast to recent rates of increase of almost 7 percent. With normal productivity increases, this implies a rise in unit labor cost of only 3.5 percent, a decline from rates of increase of 4 and 5 percent recently experienced. In other words, although rapid price increases can be expected to continue through this year, we are slowing the buildup of costs on which prices during 1970 and 1971 are going to depend. If slow growth in total output is maintained, the rate of inflation will be substantially abated by that time.

DIRECT MEASURES ARE NEEDED TO CHANGE THE TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT

Although maintaining slow growth through 1970 can bring the rate of price increase back to something like 2 percent per year, our analysis indicates that this slow growth will be accompanied by rising unemployment which will take us back to the rates of joblessness in excess of 5 percent that characteristized the years from 1958 to 1964. During that period, prices as measured by the implicit deflator for the gross national product rose from their 1958 base of 100 to only 108.8, an average annual growth of only 1.4 percent. But this price stability was purchased at the cost of unemployment that never involved fewer than 5 percent of the labor force, and during 2 years averaged over 6 percent.

To put the matter another way, the present rate of price inflation is not the result of special economic "distortions" that can somehow be untangled to yield stable prices without loss of jobs. Rapid price infla

tion and low unemployment are ultimately tied together in our economy. We cannot eliminate one without ultimately losing the other.

This poses a serious policy dilemma that we have so far failed to face up to. Purely global policy measures-whether fiscal or monetary, and in whatever combination-merely buy price stability with high unemployment, or pay for more jobs with higher inflation rates. Either way, somebody gets hurt for the protection of somebody else. Either way the divisive social forces evident today are further irritated. The real policy question is not how to choose among the alternatives offered by the existing trade-off between unemployment and inflation, but how to change the terms of the tradeoff itself. This cannot be done by global action, but only by specific programs designed to increase the education, skill mobility, employment potential, and employment opportunity of the unemployed worker.

Chairman PATMAN. Thank you, Professor Suits.

Professor Williams, we are glad to have you, sir, and you may proceed in your own way.

STATEMENT OF ROBERT M. WILLIAMS, PROFESSOR, GRADUATE SCHOOL OF BUSINESS ADMINISTRATION, UNIVERSITY OF CALIFORNIA AT LOS ANGELES

Mr. WILLIAMS. Thank you, Mr. Chairman.

It is indeed an honor and a pleasure to appear before this committee. I have been asked to focus my testimony on the economic outlook. In carrying out this suggestion I shall present the UCLA business forecast for the Nation in 1969, which was the first presented on December 3, 1968, and recently was revised on the basis of more recent information, particularly data for the fourth quarter of 1968.1

Since 1952, a panel of economists at UCLA Graduate School of Business Administration has prepared an annual forecast of GNP and its components and other national economic series. More recently, when national forecasts became more common, we began to make additional forecasts for California and subregions of the State.

Our forecast presented today does not differ materially from our preliminary forecast for 1969 made last September, which in turn was much like that made in early December. I mention this to point out that we have believed for some time that the American economy would continue to expand through 1969, although at a slower rate than prevailed in 1968. We never subscribed to the concept of "fiscal overkill" feared by some following adoption last June of the Revenue and Expenditure Control Act of 1968.

Before discussing the details of our 1969 forecast, let me state two basic assumptions. First, we expect that war in Vietnam will gradually diminish in intensity. We believe, however, that total manpower commitments in Southeast Asia will not decline significantly this year, and that total defense expenditures will increase somewhat. The second assumption is that the 10-percent tax surcharge on personal and corporate income will be extended at least through 1969. Moreover, speaking

1 See the UCLA Business Forecast for the Nation and California in 1969, Robert M. Williams, editor; contributors include: T. A. Andersen, F. E. Case, D. Eiteman, C. Ervin, W. A. Fogel, M. Granfield, C. Hulzenga, E. C. Miller, F. G. Mittelbach, R. E. Moor, F. E. Norton, S. L. Rabin, D. Ratajczak, J. V. Schmidt, J. P. Shelton, P. L. Smith, J. F. Weston, and R. M. Williams.

for myself, I believe that the surtax should be extended to reduce upward pressures on demand and prices and to reduce or eliminate the Federal budget deficit, thereby making it possible for the Federal Reserve System to conduct a more flexible monetary policy.

A FORECAST OF 13 SELECTED ECONOMIC SERIES

Turning now to the details of our forecast, table 1 shows annual data for the last 5 years and the 1969 forecast for 13 selected economic series.

TABLE 1.-SELECTED ECONOMIC SERIES, 1964-1968 AND THE UCLA FORECAST FOR 1969

The first is "Gross National Product," which is discussed in some detail later. Suffice to say here that, although our forecast of GNP of $921 billion is higher than that of some other private forecasts, it is the same as that presented in the 1969 Economic Report of the President and adopted by Dr. Paul McCracken, Chairman of the present Council of Economic Advisers, in his statement to this committee last week.

"Industrial Production," which includes output of manufacturing, mining, and utilities industries, is expected to increase by 4.7 points in the Federal Reserve Board Index in contrast to 7.2 points in 1968. This reduced rate of growth is about in proportion to that expected in "real" GNP.

"Residential Construction" is expected to continue the expansion which began in 1967, with the number of new private housing starts advancing to 1,600,000 in 1969 from 1,500,000 in 1968. In support of this optimistic forecast, the basic demand for housing in terms of existing vacancies is extremely strong, and we believe that the supply of mortgage credit, building materials, and skilled labor will be adequate to do the job.

"Automobile Production" is forecast to decline somewhat from the high level of 8.8 million reached in 1968 to 8.5 million in 1969.

"Wholesale Prices" are expected to increase by 2.3 index points or 2.1 percent in 1969, or slightly less than the 2.4-percent rise in 1968. "Consumer Prices" are predicted to increase by 4.1 index points or 3.4 percent in 1969, or slightly less than the nearly 4.0-percent rise in 1968.

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