THE 1969 ECONOMIC REPORT OF THE PRESIDENT WEDNESDAY, MARCH 5, 1969 CONGRESS OF THE UNITED STATES, The Joint Economic Committee met, pursuant to recess, at 11 a.m., in room 1114, New Senate Office Building, Hon. Wright Patman (chairman of the joint committee) presiding. Present: Representatives Patman, Bolling, Reuss, Moorhead, Rumsfeld, and Brock; and, Senators Proxmire, Miller, and Percy. Also present: John R. Starks, executive director; and James W. Knowles, director of research. Chairman PATMAN. The committee will please come to order. We continue our hearings on the state of the economy today. We are privileged to hear from one of the outstanding labor leaders of our time, Mr. George Meany. Mr. Meany, it is no secret that over the year, I have found you and your organization to be a most positive and constructive force in our national economy. You and your representatives have always been very happy to present us with your views of economic problems. We have been pleased to hear them testify on many occasions. At the present time, we are at a crossing over point in administration. It is most important that we have clearheaded statements on matters of basic economic policy. I think that it renders our hearing this year even more important than ever and we are pleased to have your views. You may proceed, sir, in your own way, after which we will take up questioning under the 10-minute rule. You have prepared statement, I notice. You may follow it if you desire or you may put it in the record and speak extemporaneously, whatever you do will be satisfactory to us. STATEMENT OF GEORGE MEANY, PRESIDENT, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS, ACCOMPANIED BY NATHANIEL GOLDFINGER, DIRECTOR OF RESEARCH, AFL-CIO; AND ANDREW J. BIEMILLER, DIRECTOR, DEPARTMENT OF LEGISLATION, AFL-CIO Mr. MEANY. Mr. Chairman, and members, I appear here today on behalf of the American Federation of Labor and Congress of Industrial Organizations. As we in the AFL-CIO see it, the economic outlook for 1969 is clouded. It is difficult to make judgments when one is uncertain about the degree of slowdown during the course of the year and the policies that the new administration will pursue. The pace of economic expansion is already slowing down-particularly retail sales-and the Government's brake on economic growth may be going too far. Moreover, the recent emphasis of Government policy on slowing residential construction, while maintaining special tax subsidies for business investment, is misguided. Interest rates have soared to unprecedented heights. There is danger of rising unemploy ment. Some slower economic pace was to be expected this year, after the 5 percent real expansion of 1968, the seventh consecutive year of economic growth. By the beginning of 1969, several dampening developments were already in effect. The temporary surtax, adopted in 1968, was withdrawing about $11 billion a year from consumers and business, to pay for part of the increase in military spending. The holddown on Government expenditures, ordered by Congress last year, had placed a lid on the amount of additional funds the Government can put into the economy's spending stream. The increase in social security taxes, effective January 1, was withdrawing about $12 billion a year from employees and a similar amount from business, to pay for improved social security benefits. In addition, the buying power of the average worker's weekly take-home pay increased only slightly last year, after accounting for taxes and the 4.2 percent rise in living costs. On top of these dampening developments, new restrictive Government measures were imposed in the early weeks of 1969-the commercial banks raised the prime interest rate to an unprecedented 7 percent-an effective prime rate of over 8 percent, because of the banks' requirement that such borrowers maintain an interest-free deposit. This boost in the prime rate is raising interest rates all along the line--to medium-sized and small businesses, to home buyers, farmers, consumers and the Government. Some new Federal securities have been floated, in recent weeks, at the highest interest rates in over 100 years. These high costs for borrowed money are being built into the price structure, from manufacturer to retailer and consumer-to the profit of the banks and other lenders. In addition, these high interest rates, accompanied by the Federal Reserve's squeeze on bank credit, threaten a sharp slowdown of economic activities. The Government increased the interest rates on FHA and VA mortgages from the high 634-percent rate of early January to 71⁄2 percent an effective rate of 8 percent, when insurance is included. This peak rate on Government-backed mortgages, on top of the excessive rates for builders' loans, is boosting the cost of homes, which the home buyer is required to pay for the entire term of the mortgage. These costs are narrowing the home-buying market. A slowdown of residential construction is threatened, instead of the vast homebuilding expansion that is needed. Past experience teaches that high interest rates and tight money hit homebuilding fastest and hardest-the tight money high interest rate policy of 1966 threw residential construction into a deep recession. The unprecedented interest rates of early 1969 are being built into the prices of almost everything we buy, as businessmen pass on these cost increases to the consumer. In addition, they are being built into the payments that consumers will make on installment and mortgage loans for years to come. For example, if you buy a house now and get a 25-year mortgage at the very high rate of 72 percent, you will have to pay that 72-percent interest rate, every month for 25 years, even if interest rates decline-unless you are fortunate enough to refinance the mortgage at some point when interest rates are lower. These developments and Government measures are dampening the rise of economic activities. They present the danger of a sharp economic slowdown and rising unemployment. Moreover, there have been statements by some officials of the new administration-as well as by business spokesmen-that a rise of unemployment may be required to achieve greater price stability, although President Nixon has indicated a distinctly different viewpoint. On February 19, President Nixon, in a letter of greeting to the AFL-CIO Executive Council, made his position clear when he said: We must find ways to curb inflation, which robs working men and women and their families of hard-earned gains. And we must do this without asking the wage-earners to pay for the cost of stability with their jobs. The AFL-CIO welcomes President Nixon's viewpoint on this issue. It is timely and to the point. The notion that there is an inevitable, mechanical trade off between inflation and unemployment is economically false and loaded with social dynamite. Advocates of this Neanderthal view have never explained how a million additional unemployed can possibly reduce such price pressures as physicians' fees, hospital charges, auto and property insurance rates, which have risen sharply in the past decade or how a million additional unemployed can halt the sharp increases of land costs, with their impact on rents and the price of homes. Yet a rise in unemployment would hit the most vulnerable workers hardest-the most recently hired, the least skilled, particularly Negroes, other minorities and young workers. Working people generally-and the most vulnerable workers, in particular-would be forced to pay the price in unemployment and substantial losses of family incomes for such a policy. Furthermore, relative price stability can-and must-be achieved without a growing army of unemployed. Expanded manpower training programs, an effective nationwide, public employment service and reduction of bottlenecks can help. But most essential to achievement of relative price stability is lower profit margins and reduced profit rates of return on investment. A study by the staff of the outgoing Cabinet Committee on Price Stability, published last January, reported: if the primary goal is a reduction of the rate of inflation, this can be done by increasing the unemployment rate, decreasing the profit rate, or both. Similarly, a low unemployment rate could be maintained with a smaller rate of inflation if profits were to fall. A depression or deep recession could probably curb increases in the prices of many consumer goods at the price of human misery for hundreds of thousands of families. Or a continuing, substantial rise of unemployment and economic stagnation over a period of years could possibly achieve similar results at a similar price. However, the Cabinet Committee's staff study clearly indicates that there are other alternatives "a low unemployment rate could be maintained with a smaller rate of inflation if profits were to fall." Indeed, the inflation of recent years has been largely a profit inflation. Profits skyrocketed between 1960 and 1966, and after a dip in 1967, they moved up again last year. Business Week, February 8, reports: In 1968, U.S. corporations earned more money than they ever did before in a single year-thanks in good part to sharply rising prices. Business profits moved up sharply after the early months of 1961, as the economy turned up from the recession of 1960-61. Profit margins on sales and profit rates of return on investment continued up sharply in the years that immediately followed. However, the usual pattern of economic recession about every 4 years with a drop in profits did not occur in the 1960's. Profits continued to shoot up through 1966, as economic activities surged forward. The profit decline in 1967 was small, and in 1968 profits moved up again. This sharp rise of profits during almost all of the past 8 years of sustained economic expansion has been shifting the Nation's income to profits. Business profits have soared, far out of line with other major types of income. Between 1960 and 1968: -After-tax profits skyrocketed 91 percent. -Dividend payments to shockholders soared 84 percent. -But the total after-tax personal income of all people in the country rose only 68 percent-reflecting increased employment, as well as the income-gains of individuals. -And the weekly, after-tax take-home pay of the average nonsupervisory worker, approximately 47 million wage and salary earners in private industry, increased only 31 percent and, in terms of buying power, merely 11 percent. Thus, during the 1960's, after-tax profits rose one-third faster than the total after-tax personal income of all Americans and almost 200 percent faster than the weekly take-home pay of the average nonsupervisory worker. A key cause of the price increases of recent years, therefore, is business profits-surely the record clearly indicates that profits have been the major beneficiary, by far, of these price increases. For manufacturing corporations, after-tax profits rose from a 9.2 percent rate of return on investment in 1960 to an 11.8 percent rate of return on a much-greater investment in the first three quarters of 1968. At that rate of return-and with the addition of depreciation allowances that are almost as great as after-tax profits-manufacturing corporations can recoup the value of their investments in less than 5 years. Indeed, at the high rates of return and large depreciation allowances of the past 5 years, many manufacturing corporations, by 1968, had actually recovered the value of their 1963 investments. As for the banks, in one year between 1966 and 1967, the after-tax profits of all member banks of the Federal Reserve System rose over 18 percent. Complete reports for 1968 are not yet available. However, the Commercial and Financial Chronicle of January 16 reports that: "the past year was a good one with respect to bank earnings." Its 1968 profit report on a group of banks states that "the average increase for the group was 13.5 percent." These trends are creating economic and social imbalances. An increased share of the Nation's income has been shifted to profits. Moreover, with their great profits and large depreciation allowances, most big corporations have created shelters for themselves against the early and full effects of tight money and unprecedented interest rates. In addition, the 7 percent tax credit on investment in new equipment and fast depreciation of new buildings offset part of the additional cost of high interest rates for these corporations. Despite tight money and historic interest rates, the profit-laden corporations are continuing substantial increases in their investments in new and improved plants, machines and equipment-after a 100percent rise between 1960 and 1963-although industry's operating rate is only about 84 percent of existing productive capacity. This situation, which has been contributing to inflationary demand pressures in recent years, threatens to create a future gap between the economy's rapidly growing capacity to produce and demand for goods and services. It isn't necessary and it can and should-be avoided. We in the AFL-CIO have some suggestions along that line-suggestions unanimously adopted late last month by the AFL-CIO Executive Council. We suggest the following policies and measures: 1. Full employment must be the Nation's primary economic goal. The Government's tax, expenditure, and monetary policies for an adequate rate of economic growth should be supplemented by manpower training measures and a Federal program, along the lines of the bill introduced by Representative James O'Hara, of Michigan, to create jobs for the remaining hard-core unemployed and seriously underemployed in providing needed public services. 2. Residential construction must be sheltered from the ravages of the credit squeeze and unprecedented interest rates. The 7 percent investment tax credit should be repealed-to curb the flow of available funds into business investment and provide additional funds for homebuilding. The provision of double depreciation should be repealed on all new construction, except low and moderate rental housing. The Secretary of the Department of Housing and Urban Development should direct FNMA (Fannie Mae) to assist low- and moderateincome housing, at the lowest possible interest rate. The development of the new form of Government security, authorized by the Housing Act of 1968-Government backed mortgage bonds should be speeded up, to attract new investment funds into housing. 3. The Government's monetary policy should be eased at the first signs of a general economic softening and rising trend of unemployment. Moreover, a thorough congressional review of monetary policy and the Government's monetary machinery is needed-for the development of a policy that is in the best interest of the Nation and the American people, rather than the banks and other lenders. |