in 1966, as defense requirements kept rising. In retrospect, there is general agreement that a tax increase would have been desirable at that time.

The economy experienced a welcome slowdown late in 1966 aided by a strong dose of monetary restraint. From late 1966 to the summer of 1967, the trend of prices improved, although it was still pushed up by earlier cost increases. Consumer prices and the overall price index of GNP both rose at annual rates of less than 22 percent in the first half of 1967. Interest rates retreated, reflecting both the change of pace of activity and the shift toward easier monetary policy.

As of mid-1967, when the economy began to emerge from an inventory adjustment, we were moving back onto the track of reasonable price stability, and we were preserving our prosperity. To head off a new upsurge, the President then urged immediate enactment of a 10-percent surcharge on income taxes. If that recommendation had been promptly accepted, the economic history of the past year and a half would have been considerably more favorable.

RECORD OF 1968

Without action on taxes, however, the Federal budget became an engine of inflation. In the first half of 1968, the new boom took hold and prices advanced at a disturbing 4-percent rate. This was accompanied by a jump in imports; nervousness in international financial markets; and pressures on financial markets at home, which could not be appropriately accommodated by monetary policy.

By the time the Revenue and Expenditure Control Act became law in June, private demand was very strong and it had developed great forward momentum. There was a significant slowdown in the second half but not as large or prompt as we had expected and hoped. Late in the year, business investment spending moved strongly upward from its earlier plateau. Housing rebounded in the face of tighter credit conditions. Consumer spending rose sharply in the summer months. But the marked slowdown of consumption in the fourth quarter showed that the tax surcharge had begun to exert a restraining impact. Thus, in some respects, 1968 was too big a year. Yet, the unprecedented 8th consecutive year of expansion brought a 5-percent gain in real output, a 2.1-million rise in nonfarm payrool employment, and a decline in the unemployment rate of 3.6 percent-indeed, to 3.3 percent by yearend.

OUTLOOK FOR 1969

The outlook points to a further appropriate slowing of overall activity in the first half of 1969. Inventory investment is likely to retreat from its recent unusually high rate. Although, the saving rate of the consumer could move downward, the growth of consumer spending is likely to be moderate. Homebuilding will do well to stay near current levels in today's financial markets. And indeed the 15-percent decline in housing starts for December reported today indicates the problems that housing may be beginning to have in these markets.

Federal purchases should change very little. Current evidence suggests that, in the first half-GNP may rise at an annual rate between 5 and 6 percent-slowly enough to achieve a desirable cooling off, but rapidly enough to maintain distinct advances of output and development.

If the tax surcharge were to expire at midyear, a marked fiscal stimulus would be applied to the economy, and a renewed major acceleration of activity would be likely. The only visible alternative to that acceleration in the event of expiration of the surcharge, would be a drastic dose of monetary restraint-a remedy which we should clearly avoid. Monetary restraint could do the job of stopping any incipient boom but it could do so only by pressing unevenly on homebuilding and its credit sensitive sectors of the economy and by disturbing the flows of credit in our financial markets.

In view of this diagnosis, I believe, one can conclude that the whole Nation will benefit if Congress makes clear that a timely and favorable verdict on the extension of the surcharge will be forthcoming. Of course, if peace is achieved, if the expenditure outlook changes markedly for other reasons, or if private demand softens dramatically, the program will require review. In that event, an easing of monetary policy-we well as an adjustment of fiscal policy-could respond to the changing needs.

To meet the possible need for flexibility in fiscal policy, the President has suggested that Congress review its procedures for changing tax rates. He has suggested that, for the immediate future, it might be desirable to give the President discretion to remove the surtax in whole or in part, subject to congressional veto. For the longer run, he suggests that Congress might give the President continuing limited authority to adjust tax rates up or down as needed for stabilization purposes, again subject to congressional veto. Or, alternatively, the Congress could reform its own procedures in such a way as to assure a prompt verdict either way-on a Presidential request for stabilizing tax legislation.

I know this committee has studied these issues long and hard over the years. I think, in light of the experience of the past 2 years, another look at this important issue is in order.

With appropriate fiscal action, we look forward to a healthy but moderate advance in 1969. For the 4th year in a row, the unemployment rate should remain below 4 percent. Real incomes should advance generally, and prosperity should be extended. We should witness a moderation of import demand, a reduction of pressures in financial markets, and gradual moderation in price and wage increases.

We cannot, however, expect rapid or dramatic improvement in the trend of prices. The price-wage spiral simply cannot be halted within a single year.

ROAD TO PRICE STABILITY

Rather, we must look toward a gradual return to reasonable price stability in a prosperous environment. This will require first and foremost, high standards of fiscal and monetary policy. But those policies cannot do the job alone. They will need to be reinforced by measures to enlist voluntary restraint in the price and wage decisions of large corporations and strong unions. They will need to be reinforced by measures to improve the structural efficiency of the economy. In chapter 3 of the Council's report, we spell out a variety of private and public actions that may help to improve the price performance of a prosperous economy. These are an agenda for exploration rather than a program of specific reforms or legislative proposals. We do want to stress that the battle against inflation must be fought on many fronts. It must include steps to improve mobility and efficiency of our labor markets,

to continue on the course of freer world trade, and to strengthen productivity and competition in our industries.

OTHER ISSUES

The Council's report also contains a detailed discussion of the international monetary system and of many proposals for further improvement in its operation. We hope our analysis will contribute to the careful and intensive dialog which must precede the adoption of any reforms.

Our report also analyzes the problem of poverty in our prosperous economy. The number of Americans below the poverty income line has declined from roughly 40 to 22 million between 1960 and 1968. We have a considerable way to go, but our recent progress certainly argues for redoubling our efforts rather than relaxing in the war on poverty. When we are at a position where 1 percent of our gross national product, if handed out individually to all the people who are poor, would be sufficient to bring them up to the poverty line, it seems a shame to have a continuing major blemish of poverty among 11 percent of our citizens.

Finally, let me point to the report of the Cabinet Coordinating Committee on Economic Planning for the End of Hostilities in Vietnam. It summarizes the studies made over the past 2 years to provide some guidance on how the Nation can best make the economic transition to peace. When that welcome day arrives, fiscal and monetary policy will be confronted by demanding challenges, but they should be equal to the task of promoting a reasonably smooth transfer of resources from the uses of war into the service of peace.

Thank you.

Chairman PATMAN. Thank you, sir.

Our next witness is Charles J. Zwick, Director of the Budget. We are glad to have you, sir, and you may proceed in your own way.

STATEMENT OF HON. CHARLES J. ZWICK, DIRECTOR OF THE BUREAU OF THE BUDGET

Mr. ZWICK. Thank you, Mr. Chairman.

First, let me second the comments of my colleagues. I found the exchanges with this committee to be both productive and gracious. I think they were important to policy formulation, and in leaving, we leave with the greatest of respect for this committee.

I have a prepared statement, Mr. Chairman, but in the interest of time I would be happy to paraphase it and submit it for the record, if acceptable.

Chairman PATMAN. Without objection, so ordered.

We will also include Secretary Barr's prepared statement in the record along with the supplementary materials.

Mr. ZwICK. I would like to make a few comments and work from a set of charts that you have labeled the "1970 Budget Charts." You have some charts also from the Treasury there if you can distinguish between them.

Chairman PATMAN. Would you like to have it in the record at this point?

Mr. ZWICK. Yes.

(The "1970 Budget Charts" referred to follow :)