tary policy is less clear. The exact mechanisms through which monetary policy works and the exact impact and timing are said to be unclear. The report concludes that it is likely to be unwise to attempt to use monetary policy with the hope of very closely controlling aggregate demand, that monetary policy should be flexible and not tied to any specific rule. We agree with these comments about monetary policy, but we think many of the arguments the council poses against attempts to use monetary policy to "fine-tune" the economy apply to fiscal policy as well. Just as it is unclear how different definitions of money supply affect spending decisions, there is at least some uncertainty about the effects on spending by the private sector of Federal spending as opposed to Federal lending, of Federal spending as opposed to Federal taxes, or direct Federal expenditures as opposed to transfer of payments, or of corporate income taxes as opposed to personal income taxes. The report itself attests to the difficulties of making very precise predictions of the savings behavior of individuals and the determinants of business investment and inventory accumulation. The report reflects the uncertainty in most minds about the exact impact of fiscal or monetary policy on interest rates and thus on savings flows to mortgage lending institutions and thereby to expenditures on

construction.

We are not suggesting that we do not know enough about how monetary and fiscal policy affect the economy to enable us to use these tools to help us meet our economic objectives. However, we do not know enough about the precise effects of either monetary or fiscal policy to try to use them to contain the economy within very precise limits.

ECONOMIC POLICY IN 1969 AND 1970

This difficulty in using either of these policies in very exact ways has substantial implications for economic policy in 1969 and 1970. The major problem facing the United States in the years immediately ahead is to eliminate the inflationary expectations which have been built up over the past 31⁄2 years. The elimination of inflationary expectations requires that we expose our economy to very little risk of excessive demands-that we do not pursue fiscal and monetary policies which might lead to an acceleration of prices before the middle or end of 1970. Given our inability to predict exactly how fiscal and monetary policy work, we must take a fiscal and monetary policy position such that if we are wrong and if consumers and business expenditures as well as Government expenditures move differently than we expect, the economy does not accelerate too rapidly toward the end of 1969. Such a policy necessarily exposes us to some risk that the economy will grow too slowly and that unemployment will temporarily increase. Given our unwillingness to take sufficient action to control the inflation in the past 312 years, however, the price we may now have to pay is this exposure to the risk of a temporary rise in unemployment. To be sure, we must stand ready to minimize the effects of this risk by being prepared to take steps to expand demand should it become clear it is growing more slowly than the return to relative price stability. requires. In addition serious attention should be given to making existing manpower and training programs more effective in order to minimize any temporary rise in unemployment. However, since we are

not able to use monetary and fiscal policies to control exactly the level of the economy and since the eradication of the inflationary expectations is our paramount problem, we must assure ourselves that aggregate demand does not accelerate too rapidly. From our current position, therefore, we must be more willing to bear the risk of a temporary rise in unemployment than to bear the risk of a reescalation of price increases.

The second major economic problem facing the United States is the necessity for improving the productivity and expanding the economic potential of a large fraction of our unemployed and underemployed workers. While a part of the poverty problem is not directly associated with this productivity problem, a very large part is. According to the report, two-thirds of the poor, nonelderly households are headed by able-bodied working-age men. The poverty of these families arises from an inability of these men to find jobs where their productivity enables them to earn a level of income high enough to raise their families above the poverty level. Vigorous efforts must be made to develop in these people the skills and motivation to be more productive and by working with business and labor to expand the job opportunities open to them. The Council of Economic Advisers has provided enlightening documentation of location and demographic factors associated with those families and persons experiencing low levels of income in the United States. It defines the "poverty gap" as the amount by which the income of these families and individuals falls below minimum income standards. In line with the concern for the productivity of many of these people, an alternate definition would be the shortfall of output they and the economy suffer because many of them have such low levels of productivity. Their individual and collective inability to produce efficiently generates serious social and personal problems as do their low incomes. Social action should concentrate attention on improving productivity and output of many of these persons rather than concentrate attention on income supple

ments.

THE OVERALL DESIGN OF GOVERNMENT PROGRAMS TO INFLUENCE THE ECONOMY

There is little doubt but that society collectively, with the Government as its agent, has a substantial responsibility and opportunity to affect the economy. We feel it should be a guiding principle of such action that the Government should enact positive programs which create the environment of competition and efficiency and which make the economy more adaptive and self-reliant rather than design a wide variety of specific programs to alleviate specific problems with little concern for their cumulative impact on the character of economic life. On the basis of this point of view, there are at least two examples of such misplaced emphasis in the report. One is the role suggested for the Wage-Price Cabinet Committee. It is suggested that there exists a number of product and labor markets in which "discretionary" power exists-power which presumably does not exist in competitive markets. To deal with this problem the report suggests that the Cabinet Committee might evaluate the wage or price decisions made in these specific markets, publicize any supposed deficiencies,

and attempt to obtain the cooperation of labor and business in reaching decisions which in the eyes of the Cabinet Committee were more in the public interest. Besides being an invitation to arbitrary and discriminatory practice on the part of such a committee and inviting a kind of collusion among producers and labor unions to "play the system," such a proposal is unlikely to achieve its objectives.

To the extent there exist restrictive practices in labor markets or product markets, the Labor and Justice Departments have the direct responsibility to deal with such illegal practices using their legislative or judicial authority, with due process. To establish a Cabinet committee with no such legislative or judicial authority is only to blunt. the interest and activity of those who have authority to deal with the issues involved.

In another area society's attempts to assure adequate living standards for those living in poverty should concentrate as much as possible on assuring these people the opportunity of becoming productive rather than simply attempting to funnel income to them from the more productive members of society. Social welfare programs clearly require more than attempts to improve productivity. Some people and families will need income beyond what their productivity can earn and society will necessarily choose to provide this income to them. However, the major emphasis of the war on poverty ought to be a positive program directed toward improving productivity and output and the personal and social dignity which comes from being a productive member of society. Throughout this program and other Federal programs, the driving emphasis ought to be on creating mechanisms which have the effect of improving productivity and efficiency, of freeing markets and persons from dependence on Government action and programs, and of making the economy conform as closely as possible to the pressures of competition.

TOWARD INTERNATIONAL EQUILIBRIUM

In its examination of the international economy, the Council's report reviews the progress that has been made in the growth of international trade and capital movements since the end of World War II. We share many of the views expressed in this section. The contribution of the present IMF system, the importance of stable exchange rates, the need for continuing progress on the problems of liquidity, confidence, and adjustment, and the need for freer trade including reduction of nontariff barriers are subjects which we have studied and on which we have taken firm position in recent years. While we share many of the positions expressed in the report on the necessity of restoring equilibrium in the U.S. balance of payments, there are some differences between our veiws that also should be highlighted.

The basic objective of our international trade and financial policy should be to achieve the full benefits of international exchange for ourselves and others by reducing restrictions on international trade and investment. A primary requirement for the effective functioning of the international payments system is that the United States achieve equilibrium in its balance of payments and thereby eliminate a major source of instability which has impaired the effectiveness of that system in recent years.

As we indicated in our most recent policy statement, equilibrium in our international accounts does not require the elimination of the deficit. Rather its size should be reduced to a level compatible with the willingness of the rest of the world to voluntarily maintain or to increase their dollar holdings in line with the need for world liquidity. The reduction in our balance-of-payments deficit by means of restrictions on international trade and capital movements is inconsistent with our objective of securing benefits of greater trade and investment. Despite some improvement in the underlying balance-of-payments position in 1968 compared to 1967, the underlying 1968 deficit (which excludes special transactions which our Government has persuaded other governments to undertake in order to make the recorded result look better) was still on the order of $2.7 billion on a liquidity basis. One encouraging aspect of the 1968 result is the large foreign purchases of U.S. stocks and there is some reason to believe that this trend will continue. However, there was also an unusually large inflow of foreign capital influenced by high interest rates in the United States and by reduction of outstanding foreign loans by U.S. banks. We cannot rely on these factors to provide lasting relief to our balance of payments.

The most disturbing aspect of the 1968 result was the virtual disappearance of our traditionally large merchandise trade surplus from a level of $3.5 billion in 1967. Clearly this reversal is critical. It results in large measure from a surge of imports induced by the inflationary growth of demand to which we have referred earlier. It is interesting to note that the growth rate in exports in 1968 was 9.5 percent, substantially above the rate in 1967.

We do not share the views expressed in the report that restrictions imposed by the United States for balance-of-payments reasons have been helpful. While they may have afforded temporary relief, by now it is evident that the controls have not restored equilibrium in our international accounts. Further, what started as a few, temporary controls have now become a network of apparenly more permanent controls which are wasteful, inefficient, and undermine our avowed objectives of encouraging international trade and investment.

While the report does stress the need for a domestic stabilization program to assist in the achievement of balance-of-payments equilibrium, we believe that this is the critical need. A stabilization program to achieve high employment and stable prices would serve to improve the trade surplus and to insure maintenance of sufficient dollar holdings by foreigners to reduce the need for controls.

The Council report notes a number of proposals which have been advanced for changes in the present exchange rate adjustment mechanism. While a review of the adjustment mechanism may be useful, we share the Council's view that intensive study would be required before serious consideration could be given to the adoption of any of the proposals which have been put forward. Such intensive study should focus on the practical effects on trade and investment flows of any changes from the present system.

COMMUNICATIONS WORKERS OF AMERICA

In both the statements of President Johnson's Council of Economic Advisers and the new Council for President Nixon, there are references to the necessity, under the existing economic circumstances, for qualitative adjustments in fiscal and monetary policies for 1969. In both statements there is a preoccupation with the problem of stifling inflationary pressures in the presence of persistence of some continuing troublesome residue of unemployment. This is expressed in an oftrepeated caution that it may be impossible to have full employment without some inflation. The policy considerations are concerned with the possibility that this problem is increasingly qualitative in nature, and that "doses" of ant-inflationary or anti-deflationary fiscal and monetary policy are not quite suitable as the remedy. The apparent requirement is alternatively expressed as a "fine mix" or "fine tuning."

As has been the case with the development of general fiscal-monetary policy, direction for the more refined problem must be looked for in the behavior of the economy. The lessons simply are a little more difficult to work out. The behavior of the economy in the last 2 years does appear to offer, however, some viable possibilities if they are carefully examined.

A central characteristic of the behavior of the economy over the last 2 years, despite inflationary pressuers and the pressures of the Veitnam war, has been a certain basic balance. Consumer expenditures have been an important expansionary force in the economy for the last 3 years, although slightly less so in 1967. In 1968, consumer expenditures rose by $42 billion, while the increases in the previous 3 years had been in the neighborhood of $32 billion, although only $25 billion in 1967. More importantly, however, as a percentage of disposable income, while consumer expenditures had declined for the preceding 4 years from 92.7 percent to 90.1 percent in 1967, they returned to 90.6 percent in 1968. Savings, on the other hand, which reached an unusual peak of 7.4 percent in 1967-in spite of some inflation-from 6.4 percent in 1966, held to 6.9 percent in 1968. Included in the increase in consumer expenditures was a strong $10 billion increase in durable goods purchases.

By contrast, business investment declined slightly as a proportion of the total national product, and business fixed investment declined by approximately the same amount in contrast to its usual tendency to rise in an expansionary year.

The main point is that investment, which used to be regarded as the prime mover in the economy and has been regarded as a primary target for monetary and fiscal policy, may new be less the volatile lever among economic variables in the economy. It is expected, as a matter of fact, that the first half of 1969 will see a strong resurgence of business fixed investment on the basis of the experience in 1968.

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