budget, but I think you can also make a case that with regard to public works, for example, we are a going to have the biggest public works program in the history of this country this year, more than $7 billion. It has never had anything this big.

Some of these programs can be deferred. We are going to have a space program again-we are achieving our objectives in 1969, or close to it, July or August anyway of 1969. Here is an area we can postpone. We don't have to go to Jupiter and Mars. Those places will

be there.

Then in the military area-now, here is an area where there is a whale of a lot of capital investment, and this is a matter of strategy, and so forth, to a considerable extent. But even there, I think there are a lot of deferrable, postponeable expenditures which we may well need 2 or 3 years from now in the event that we have a softer economy. Mr. TURNER. I would agree there are plenty of areas in the budget which could be reduced. And if I had my way, I could find them fairly readily. But I would make them regardless of stabilization considerations. I would reduce them because I think, by my value system, they are fundamentally less important than the private expenditures we are having to give up to finance them.

Senator PROXMIRE. I agree with that to a considerable extent. Where your value systems coincide with fiscal, the economic convenience and stabilization

Mr. TURNER. Let's make those cuts.

Senator PROXMIRE. Congress in its wisdom, it seems to me, must take advantage of it. And you need all the arguments you can summon to get something adopted by this body. So you can use the stabilization argument.

Mr. TURNER. I would hope the Congress is rational enough to reduce expenditures where cuts are needed even when the fiscal signs may suggest that the opposite is appropriate. I would like to see the budget set in terms of our fundamental needs. And when it comes to shortrun fluctuations for economic stabilization purposes, I would think it better to impose that burden of adjustment on the private sector, not on the public sector.

The portion of a cut that is imposed on the public sector is in practice going to be imposed on a very small portion of the total budget, and that portion will include what I would consider to be some very high priority programs, such as programs to solve the Phillips' curve problem we noted awhile ago, programs to increase the productivity of low productivity workers

Senator PROXMIRE. Well, I certainly would hope that the economies wouldn't be there. I agree with you, those programs are absolutely imperative, although I think the amount there is so relatively small compared to our military budget and the other budgets that we just can't make much of an economy in that area.

Dr. Bach, in your statement you indicated that both the administration and the Fed ignored lags, that is, the lag between the action in fiscal policy and monetary policy, and its actual effect on the economy. Do you feel this is a serious blunder on their part?

Mr. BACH. Well, I didn't say that I know they ignore them. I said the evidence suggests they ignore them.

Senator PROXMIRE. Yes.

Mr. BACH. The answer is yes, I think it is a blunder on their part. I think it is a blunder because in order to make wise policy one presumably is concerned primarily with the impact on the real economy. The evidence of the last 3 or 4 years begins to pile up, I think, more and more convincingly, that the Fed, for example, has a very quick impact on money markets and a quite slow impact on real investment, for example. In the same way, the evidence is piling up that the impact of fiscal policy changes is rather slower than we had thought.

Senator PROXMIRE. Of course, here is the trouble. If we recognize the lags, recognize, for example, an increase in taxes is probably not going to have effect for 6 months after we put them into effect, or if we recognize the monetary policy as a lag of maybe less or more than that, our capability of prediction is pretty small.

I noticed that the National Bureau of Economic Research indicated that some of the best economists in the country that they have studied, including the Federal open market committee's economists, are able to detect the down-turns on the average 3 months after they occur. Well now, what does this tell us about the wisdom of any kind of economic policy? If we are going to adopt a policy of restraint now and the economy is going to turn down 3 or 4 months from now and the policy isn't going to have much effect until 6 months from now, it is going to be the wrong policy.

Mr. BACH. I think it tells us mainly that we ought to be very cautious and very gradual about abrupt changes in policy, that it ought to be a very clear case indeed for either the Fed or Congress to take as indication for abrupt change. I think it pushes in the direction of the rule or set of rules that you and Mr. Reuss have been pushing, that by and large a fairly stable growth rate is probably the safest

way.

Senator PROXMIRE. I have been pushing, and Henry has been questioning.

Mr. BACH. Well, I would like to say, since I have the microphone at the moment, on behalf of Mr. Reuss-I'm sorry he isn't here any longer-I think he gets grade A in monetary economics today. I think it is proper that he should lecture us in the academic realm about how important it is to be careful about the definition of money and how easy it is to be misguided by short run fluctuations in this money stock. I do not agree with Mr. Culbertson that we ought to look at it every month. That is too fast. You get these swings

Senator PROXMIRE. We ask them to report every quarter.

Mr. BACH. I know.

Senator PROXMIRE. And, as a matter of fact, they are not disagreeing. They are reporting every quarter.

Mr. BACH. I realize that.

Senator PROXMIRE. So we accomplished what we set out to do.

Mr. BACH. It is very important that this committee, since it is widely recognized as one of the main advocates for a monetary rule, so to speak, gets credit for recognizing it is a much more complex matter than many economists seems to think it is.

Senator PROXMIRE. Then you talk about the inflexibility imposed by the responsibility for a monetary policy with regard to international finance as well as the domestic problem.

Mr. BACH. Yes.

Senator PROXMIRE. How can we improve that flexibility? How can we protect ourselves, insulate ourselves?

Mr. BACH. Well, I think that in the long run this is going to become a worse problem, and the answer to your question in my judgment is that there is no easy way of doing this, that the more we get into a oneworld capital market we are just going to have to face a worldwide effect, not a domestic one.

I would favor somewhat more flexibility in exchange rates. This does not mean that we, so to speak, float the rate, but if we had a wider band on each side of that stable parity, this could ease very greatly the apparent dilemma that you are referring to.

Senator PROXMIRE. Then I would like to ask-Mr. Bronfenbrenner I guess is the man for this did you discuss wage guidelines very briefly? Did you mention them?

Mr. BRONFENBRENNER. I just mentioned them.

Senator PROXMIRE. Well, I think you were the only one who did, and I have to bring it up even though this is a fiscal policy and monetary policy panel, because I think that it does affect how much action you have to have on fiscal and monetary policy, whether you have any other restraining factor on inflation.

On February 19, only a week ago, Arthur Okun, President Johnson's principal economic adviser, spoke at San Francisco and he said the following, and I quote, "I sincerely hope that the recent aerial of the wage-price guideposts by the Nixon Administration will be promptly followed by new approaches to dispel any notion that it is now open session for inflationary private decisions. In many areas of this economy, large firms and large unions have an important degree of discretion over prices and wages, and it is essential that the public interest in their decisions be enunciated forthrightly by the Administration and Congress."

Now, the Administration witnesses indicated we are not going to get much of that. The President is not going to jaw bone. He is not going to step in. He doesn't want to dissipate the power of his office perhaps in that way.

Now, I just wonder how important you gentlemen feel some kind of action by the President of the United States, by the executive branch, to influence the private decisions of these big and very influential economic units, how important that is in combating inflation.

Mr. BRONFENBRENNER. Let me make two points: one will be a less direct answer and the second, I hope, a more direct answer.

The less direct answer is that I think guidelines are a very fine shortrun measure. They buy time. They are extremely useful. The difficulty with the guidelines

Senator PROXMIRE. Those serve educational purposes, don't they? Mr. BRONFENBRENNER. Not only education-guidelines give you time to see what is going on and react to it.

Senator PROXMIRE. Yes.

Mr. BRONFENBRENNER. I think that in 1962-63, if this time had been purchased and then had been followed by a tighter voluntary and/or fiscal policy, the guidelines might have been a good thing. However, they were not used in this way. They were used in practice to avoid making unpopular decisions more or less permanently. And

much of my objection to them is due to the fact that they are not utilized correctly.

Now, my more direct answer to your question is that the administration should take a rather strong view somewhat to this effect: the mix of economic policies which the administration is adopting are intended and are adapted to producing high employment without inflation. If, in fact, decisions are made by unions and/or by employers, if there is collusive rather than collective bargaining, the same policies will result in more unemployment. And if that happens, it will not be the fault of the administration. The finger will be put on the particular industries and unions responsible. The administration will not make fiscal policy easier, and it will not make monetary policy easier just to protect the economy from the errors of particular companies and particular unions.

Senator PROXMIRE. Well, what effectiveness has it, though? After all, if a steel company is able to increase its price regardless of cost, and not reflecting a real justification, or if a union is able to ask for a wage increase far above productivity and not really justified even by the cost of living-and that has happened-if the President doesn't call attention to it, which he can do and only he can do in a national way, and with considerable success as we have found in the pastif he doesn't do that, if he just says it is not my fault, we are still going to get an inflation, which is going to mean that then we get higher prices than you should have in relation to the unemployment level.

Mr. BRONFENBRENNER. Yes, I agree. But remember I said the President or the administration spokesmen will make this particular point. I do not think guidelines should be invoked.

Senator PROXMIRE. I see. I misunderstood you. You say they should make the point.

Mr. BRONFENBRENNER. Yes.

Senator PROXMIRE. They should speak up.

Mr. BRONFENBRENNER. We consider this to be inflationary. We consider that it will produce unemployment somewhere in the economy. Senator PROXMIRE. OK.

Mr. BRONFENBRENNER. We are not going to counteract it.

Now, since you mentioned steel

Senator PROXMIRE. Well, we have an import situation there that might be helpful.

Mr. BRONFENBRENNER. I would argue that this is precisely the wrong time to be talking about protecting the steel industry from the effects of its own excessive wage-and-price policies by putting quotas, either gentlemanly or ungentlemanly, on foreign steel producers. This is precisely the wrong thing to do. I have said in Pittsburgh, where my view is even less popular than it is here, that that is a mistake. When the particular industry which is engaged in price-and-wage gouging happens to be one which is subject to foreign competition, the thing to do is to sic the foreigners on them.

Senator PROXMIRE. Any of you other gentlemen want to comment on this wage-price guideline approach? Mr. Bach?

Mr. BACH. I like what Mr. Bronfenbrenner said, so what I would have said he has already pointed out. I think, however, that it is easy to forget that there is some value in the guidelines, that they

can have some value, even when they, in effect, have gone down with the ship as they did in 1965, 1966, and 1967. Clearly, you couldn't sit there and argue a 3.2-percent increase was going to make much sense. I rather like what the outgoing Council did in 1968. Not to argue that there should be direct intervention on every price increase and every wage increase above some rate, but to suggest that if we are going to edge inflation down gradually, the business people and labor people must bear some of the squeeze.

My memory is the Council in their report suggested that something like a 5-percent rate of wage increase made a lot of sense, not that there was anything unique good about that but that

Senator PROXMIRE. The employer absorb the 1-percent increase in cost without increasing his prices.

Mr. BACH. That's correct. Now, one doesn't have to call that a formal guideline if you like, but we have to somehow face the fact that we can't squeeze the inflation down without having somebody pained a little bit. And public recognition that this has to be in effect has the educational value you people were talking about a moment ago. This education seems to me important, and one can say it without taking a naive view that guidelines are going to do an awful lot about the inflation problem.

Mr. TURNER. I was going to say about the same thing, that wageprice guideposts do perform a valuable function. The first thing they do is rub home the obvious point that real wages for workers as a whole cannot increase more than productivity, and that if real wages are held to productivity increases, there is no necessity for price increases. This is an obvious economic fact that needs to be stated and restated to all participants in the bargaining process. Therefore, I think the wage-price guideposts or some version of them do have a role to play, particularly now when we do have a wage-price spiral started, when wage increases in excess of productivity increases are legitimate because the cost of living has gone up, and increases in prices are legitimate because wages are going up more than productivity.

Once you get a spiral like this started, there is no way to stop it without somebody being the first to take some adverse economic impact. And if we could only impress upon participants in the bargaining process this fact and persuade them to settle for less than they could get, to take some adverse impact, perhaps we can slow down and eventually stop the wage-price spiral.

Senator PROXMIRE. Well, gentlemen, I thank you very, very much. I am afraid I have delayed you, but I have done so because I think it is an excellent panel and the testimony and the comments you have given will be of great help to the committee.

Without objection, I would like to include in the record, as an appendix to today's proceedings, the New York Times article on the Rinfret survey mentioned before, along with a number of other surveys of the economic outlook the staff has collected.

The committee will meet in room 1114, in the New Senate Office Building this building-tomorrow morning at 10 o'clock to hear the Chairman of the Federal Reserve Board, William McChesney Martin. The Joint Economic Committee stands in recess until then.

(Whereupon, at 12:30 p.m., the committee recessed, to reconvene in room 1114, at 10 a.m., Wednesday, February 26, 1969.)