AMERICAN FARM BUREAU FEDERATION

We appreciate the opportunity to comment on the Economic Report of the President for 1969.

Farm Bureau members are interested in the Economic Report because it deals with matters which determine the economic climate in which farmers must try to make a living.

Our members also have an interest, as taxpayers, in the many sections of the Economic Report which call for continued, or increased, Government expenditures.

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At the present time the economic climate is dominated by strong inflationary pressures. This is recognized at several places in the Economic Report. For example, on page 331 the Council of Economic Advisers notes that "The pressures of excessive demand pushed up the price level at the unacceptable rate of nearly 4 percent" (in 1968). This apparently refers to the Consumer Price Index.

As an industry that suffers from overproduction-some of which has been induced by Government programs-agriculture is seriously hurt by inflation because farm costs rise faster than farm prices. This is well illustrated by the chart on page 48 which shows that farm prices have consistently lagged behind other wholesale prices since 1963 except for a brief period in 1966 when farm prices were boosted by an unwarranted hysteria over the world food situation.

From December 1962 to December 1968 the Wholesale Price Index for all commodities, including farm products, rose 9.4 percent, but the wholesale price of farm products rose only 6.2 percent.

We certainly agree with former President Johnson's statement (p. 9) that, "The immediate task in 1969 is to make a decisive step toward price stability."

We strongly urge the Congress to pursue inflation control with greater vigor in 1969. In achieving this, major emphasis should be on cutting Federal expenditures in order to obtain a balanced budget for fiscal 1970. Reductions in expenditures should have priority over continuation of the surtax for an additional year.

We are well aware of the argument that reducing Government expenditures might increase unemployment. We do not, however, believe that inflationary policies are a sound approach to the desirable objective of maintaining a high level of employment. The unemployment problem is concentrated in groups that have very little to offer the job market. The major impact of inflation on employment is to increase the demand for-and consequently the money income of the better qualified workers who already find it relatively easy to obtain employment.

The problem of finding employment for the disadvantaged can best be approached through efforts to upgrade their skills in order to

1 Economic Report of the President, transmitted to the Congress, January 1969, together with the Annual Report of the Council of Economic Advisers: U.S. Government Printing Office, Washington, D.C.

qualify them for the type of work that is available in a technologically advanced society. In some cases such efforts could be materially assisted by exemptions from the minimum wage law for handicapped and beginning workers.

While the Council of Economic Advisers indicates that a price level rise of 4 percent per year is "unacceptable," we do not think the Council has placed sufficient emphasis on the long-run dangers of inflationary policies. There is real danger that efforts to increase employment by inflating the economy may lead to an economic bust which would increase rather than reduce unemployment.

It has often been argued in the past that an easy money policy is necessary to hold down interest rates in order to stimulate the housing industry. Recent experience suggests that an inflationary expansion of the money supply leads to high, not low, interest rates. If lenders are convinced that they will be repaid in cheaper dollars it is only natural that they should demand higher interest rates to offset the potential loss in the purchasing power of loan funds. If prices are advancing at a rate of 4 percent per year, interest rates must exceed 4 percent if lenders are to receive any real return for the use of their money.

We agree with former President Johnson's statement (page 10) that, "the vital guiding mechanism of a free economy is lost when the Government fixes prices and wages." We do not, however, agree with the Council of Economic Adviser's statement (page 59) that, "business and labor should undertake a pattern of voluntary restraint" based on Government-suggested guidelines.

Government guidelines are an interference with the operation of the market system that is only a step removed from price and wage controls. The proper role of the Government in inflation control is to create an economic climate that is conducive to a stable price levelnot to inflate the economy and then ask business and labor to refrain from responding to inflationary pressures.

We do not agree with former President Johnson's suggestion that Congress "give the President discretionary authority to initiate limited changes in tax rates, subject to congressional veto" (page 13). The record indicates that the Congress can act quickly on tax changes when a majority of its Members are convinced that proposed changes are required by the national interest.

Enactment of the present surtax was delayed because many Members of Congress-reflecting the views of their constituents-felt that an increase in taxes should be accompanied by a reduction in Government expenditures. We do not think it would be wise for the Congress to surrender its right to originate changes in tax rates, to decide the amount of such changes, and to decide whether increases should be accompanied by cuts in expenditures.

AGRICULTURE

We agree with former President Johnson's statement (page 16) that, "Agriculture has been the stepchild of trade negotiations, and deserves prompt and proper attention.”

The most notable agricultural result of the Kennedy round was an International Grains Arrangement which has resulted in an inverse subsidy, or export tax, on U.S. wheat exports. We do not see how anyone could expect to expand wheat exports by taxing them. It is not surprising that wheat exports have declined since the International

Grains Arrangement went into effect, although we recognize that other factors may have contributed to this decline.

The United States should seek to have the wheat provisions of the International Grains Arrangement suspended or materially modified at the earliest possible date.

The new administration should give a high priority to efforts to increase farm exports. Our immediate goal should be to increase farm exports from $6.3 billion in fiscal 1968 to $10 billion per year. This would improve our balance of payments as well as strengthen our farm economy.

In order to achieve this goal, it will be necessary to resist the current pressures for new restrictions on imports. It will also be necessary to eliminate the direct payment features of domestic farm programs. Direct payments to farmers on commodities which are produced for export are a disguised form of export subsidy, and are recognized as such by other countries. We cannot expect to persuade other countries to reduce trade barriers such as the Common Market's variable fees as long as we are subsidizing exports through direct payments.

We appreciate the Economic Council's recognition (page 116) of the need for "a restructuring of farm programs"; however, we do not agree with the Council's inference that direct payments should be continued.

New farm legislation should be enacted during 1969 so that farmers will have time to prepare for the changes that should be made in existing farm programs. Further delay in coming to a decision on this issue would only make the problem of adjustment more difficult for farmers.

In developing new farm legislation it should be recognized that the problems of agriculture can be divided generally into two categories: First, the problems of commercial farmers and second, the problems of other farmers.

Farm Bureau supports a transitional program to deal with the problems of noncommercial farmers. This could take the form of whole farm cropland retirement, permanent retirement of allotments, adjustment and retraining assistance, or other means.

For the commercial farmer we recommend a program which would move as rapidly as possible to the market system by phasing out acreage bases, acreage allotments, marketing quotas, and compensatory payments with no limitations on payments to individuals during the phaseout.

The objective should be to create conditions which will make it possible for farmers to get their income in the marketplace rather than being dependent on congressional appropriations. A few farmers should not be penalized because they are larger than others.

The phaseout of acreage controls should be accompanied by an expansion of the voluntary cropland adjustment program (authorized by the Food and Agriculture Act of 1965) with emphasis on whole farms. We are pleased to note that the Economic Report favors an expansion of this program (page 116). As a first step toward getting agriculture on to a sounder footing, funds for new cropland adjustment contracts should be included in the Agricultural Appropriation Act for 1970. This would enable the Secretary of Agriculture to begin to move in the direction of the adjustments that are needed by offering farmers new cropland adjustment contracts in the fall of 1969, a year before the act of 1965 is scheduled to expire.

AMERICAN LIFE CONVENTION
and the

LIFE INSURANCE ASSOCIATION OF AMERICA

This statement is submitted on behalf of the American Life Convention and the Life Insurance Association of America, two trade associations with a combined membership of 360 life insurance companies which account for 92 percent of the legal reserve life insurance in force in the United States. The total assets of the life insurance business today aggregate more than $187 billion, which represents the savings that have been entrusted to us by millions of policyholders. The protection of the economic value of these savings is of vital concern to our business. We appreciate the invitation of the Joint Economic Committee to express our views on the materials and recommendations contained in the "Economic Report of the President Together with the Annual Report of the Council of Economic Advisers" and we hope that these comments will prove helpful to the committee.

PROSPECTS FOR THE ECONOMY IN 1969

In our view, the No. 1 problem facing our domestic economy in 1969 is the threat of continuing strong inflation and the deepening of the inflationary psychology that has spread widely through the economy in recent months. During 1968, the inflationary forces that were permitted to develop led to a 4.8-percent increase in the consumer price level and a 3.9-percent rise in the GNP price deflator for the entire economy. Inflation was no longer merely a threat-it became a reality. The inflationary trends of 1968 have already exacted a toll from the American public in terms of higher prices for everyday living expenses, rising costs of housing, and decreased value of their savings and fixed incomes. But another difficulty with a major inflationary surge is the change in public attitudes that it carries with it. Once the public becomes convinced that prices are going up further, there is a natural urge to anticipate price increases by purchasing in advance of needs, even if it means borrowing to do so. In such circumstances, rising interest costs become a minor deterrent to borrowing when compared with the rising prices that are projected in an inflationary climate. Thus an inflationary psychology can seriously distort the spending and borrowing decisions of consumers and businesses alike. As living costs advance, pressures for higher wages also build up and persist in later labor negotiations. Moreover, inflation carries with it a forward momentum that can be checked only by appropriate economic policies applied with determination and persistence.

It is our opinion that the primary objective of economic policy measures in 1969 must be the reduction of the rate of inflation. In its Annual Report, the Council of Economic Advisers projects that gross

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national product will rise in 1969 by about $60 billion to a total of around $921 billion for the year, and this estimate is in accord with that of many private forecasters. An increase of about 6 percent is foreseen between the final quarter of 1968 and the fourth quarter of 1969, with a projected rise of less than 3 percent in real output and an increase of a little more than 3 percent in overall prices. This estimate implies a diminution in the rate of inflation during the coming year as compared with the price advance of recent quarters. While we would regard this degree of reduction in the inflation rate as a desirable objective, we also believe that this goal may prove difficult to attain unless gradual but persistent restraint is applied through checks on Federal spending, extension of the 10-percent income tax surcharge, continued restraint in monetary policy, and programs to improve productivity.

POLICY FOR RESTRAINT OF INFLATION

Effective action to break the grip of inflation and counter the threat from a deepening inflationary psychology requires a policy of simultaneous restraint in four major areas, as outlined below.

1. Federal spending should be kept in check to avoid greater pressures on aggregate demand and to permit a balance or surplus in the Federal budget. The ability of the Congress and the executive branch to curb the growth of spending programs has been demonstrated by the Revenue and Expenditure Control Act of 1968. It is clear that the pressure of inflation during the present fiscal year would have been even greater in the absence of this measure, but the need for continued holdbacks in Federal expenditures is no less pressing today than a year ago.

In our view, the $3.4 billion Federal budgetary surplus that is projected for fiscal year 1970 in the Economic Report and in the Budget Message operates in the proper direction of fiscal restraint. But this planned surplus could be easily jeopardized or even reversed if the Congress relaxes its careful scrutiny of spending programs in both the civilian and military areas. Previous budget analyses have demonstrated how sizable are the budget outlays which are "relatively uncontrollable" as a result of commitments under Federal programs adopted in earlier years or enlarged by previous legislation. Accordingly, the need for close review of new proposals or expanded programs is heightened by the narrowing of congressional discretion over current spending.

2. Extension of the 10 percent tax surcharge is essential in the present budgetary situation to achieve the budget surplus needed to maintain fiscal restraint in an inflationary economy. The life insurance business urged the imposition of an income tax surcharge on both individuals and corporations in August 1967, and we now favor extension of the 10 percent surcharge for the fiscal year ending July 1, 1969, as proposed in the Budget Message and the Economic Report. Failure to renew the surcharge beyond its June 30 expiration would lead to a Federal deficit in fiscal 1970 of about $52 billion-a fiscal position which would be wholly inappropriate to the present economic outlook of excessive demand and continuing inflation.