NER Washington forum; National economy

I think without a tax increase there is a danger that prices will rise more rapidly than the American people would like to see. The voice you just heard was that of the Honorable Gardner Ackley. Chairman of the president's Council of Economic Advisors. And our guest this week on the n e our Washington forum. This week a general discussion on the state of the nation's economy and the status of President Johnson's proposed tax surcharge bill. I mean they are public affairs director Bill Greenwood. Our guest. Gardner Ackley was first appointed a member of the president's Council of Economic Advisors in 1962. He was named chairman of the important group in 1964. He is perhaps the best qualified individual in the United States to discuss our economic problems. Mr. RACKLEY one of those problems and one you just mentioned is the threat of inflation. Would you elaborate on the danger of inflation. None of us likes to see prices rise.

I think we in discussing this subject need to distinguish between the kind of. Inflationary danger that we have in the United States and the kind of galloping inflation associated with South America or Germany after the war with China. But we are disturbed when prices rise steadily to 3 4 percent a year. And it's that kind of problem. We're talking about. Over the past five six years we've had really a very good record on price level in the United States and even since the beginning of the Vietnam War when. Prices since. Since when prices have been rising more rapidly. Consumer prices are up less than 6 percent since July 19 65 when. The first major commit forces made. That that's not a satisfactory record. But it's it's a lot better than we've done in many previous periods.

Perhaps we can come back to that. In any case there is the danger that without proper kind of action by the Congress and the president in the weeks ahead that this kind of price rise could accelerate and that we might have next year two or three percent price increase but 3 4 5 percent price increase. This I think is the problem that we face and what worries us. How you distinguish between price rises and a galloping inflation you imply then that we dont. Are not in a position of worrying about galloping inflation. No I think we are not a country like Brazil where prices go up 40 percent a year. Not our problem. But we are we are worried about this gradual creep in the price level. Possibly it might speed up a bit. And I think we have to do something. Our incomes are rising consistently with the cost of living at this point.

Yes certainly for the average of all consumers the rise in incomes as greatly exceeded the rising prices and still is the case. The problem is that not everybody gets the same rising incomes and there are a lot of people who are in fixed and when prices rise. They are in trouble. People Social Security you proceed with life insurance policy. Often the poorest of course they're hurt. By rising prices. But over the past year the average income of the average American family has risen something over 3 percent. After taking account the price rise. And that probably will continue to be true. And what is blame for this inflationary trend or is it just a vicious circle.

Well there is an element of vicious circle in any period of inflation. Prices are rising and so people who wage earners try to get larger wage increases to cover the effect of the rise in prices and this increases costs for producers and leads them to advance their prices. So there is this circular element inflation which is one reason why it's harder to stop inflation to keep it from starting in the first place. But the basic situation which bothers us about the year ahead is. That. We threaten to have a situation in which. All members of the economy taken together consumers businesses local government federal government. Trying to buy more goods than our economy is capable of producing. The situation of a limit on the total amount we can produce and people trying to buy more than

capable of being efficiently produced in this bids up prices. This arises because for a large number of reasons but one important reason is that the federal government which a year ago all was taking more. Incomes out of the economy through its taxation than it was putting into it in the economy through expenditures is now in the contrary. It's spending has risen sharply mainly because of the Vietnam war tax rates haven't been increased so the government is a net addition to the demand in the economy of purchasing power. And this threatens to give us too much purchasing power too much by which bids up prices. Seems to me one thing you said in effect was that there is more money floating around than there are things to spend the money for.

Is that a correct assessment that that is the danger that we see in the year ahead. That's obviously not true of every commodity there are lots of things that aren't being produced at the maximum rate. More could be produced. But we face a rapidly rising demand for goods in the year ahead. That's what worries us in the fact that it will rise faster than our total production will be able. And this this rise we talk of is the war in Vietnam had any effect in causing it. Yes obviously it's an important contributor. We're spending somewhere between 22 and 25 26 billion dollars a year in Vietnam. That's fairly small relative to our total output which is getting close to eight hundred billion dollars a year now. But it's a net addition to the other demands on our economy. And in that sense one can say

it's the it's the thing that has contributed to this rising demand even though by itself it's it looks like the straw that breaks the camel's back. You can't really sort out one single element of total demand and say that's the one that makes it too big. But the total appears to be threatens to be too big. That's why we think we have to cut back. Mr. RACKLEY occasionally we'll hear someone say that war is good for business. As chairman of the president's Council of Economic Advisors would you say that the war in Vietnam has been good or bad for the country economically economically has clearly been bad for the country. We. Use of our productive resources to produce goods that are blown up and used to hurt other people. Obviously is pure waste. There is no economic advantage in war it's waste it's cost. We

obviously have to do it. But from the standpoint of the economy we'd be better off if we were using those resources to produce things that people want. Can you make people better off happier. Can you go on the comparisons for us to the current state of the economy as influenced by the Vietnamese war and those factors which influenced our economy say during the Korean or World War Two era sensually similar except that the present situation is one in which military demands are taking a much smaller piece of the total production during World War 2 and the peak defense demands were taking almost half of our total production of goods and services. In the Korean War. I recall. Proportion of our total output for defense purchases got up close to 20 percent.

We're talking here about something about half of that in percentage terms. But in each case what what's happened what happened and what is happening is that defense is taking a larger proportion of total. And that's what puts pressure. On them. In other words the increase in federal spending for the war. Is actually one of the contributing factors among others. Sure when the government tries to buy more of our total output this doesn't automatically cause anybody else to try to buy less. On the contrary when the government buys more it tends to raise people's incomes and they buy more too so that there's a multiplying factor here which means that when government expenditures go up the total expenditures go up tend to go up by more than that. Obviously due to deal with that situation you either can reduce other government

expenditure. Or trying to do that in part or you'll have to reduce private demand on our resources. And that's with taxes. And you say you're trying to reduce government expenditures. What's being done along those lines from scratch. While in the first place the budget that the president submitted last January for the current fiscal year is a lie. Was a tight budget and a lot of people don't believe that. But the president growing up that budget cut back the initial requests of the civilian agencies the armed services by almost 30 billion dollars. Believe me it was a tough job to cut back the requests for what appeared to be legitimate useful programs. Second the president has said. That as soon as the Congress finishes its appropriations job for this year he will make some further reductions. Lol whatever Congress

appropriates and has indicated his intention to take somewhere over two billion dollars off the latest estimate of what expenditures would be if you didn't get them back. And we're talking about cutting in the president's budget request. There seems to be some confusion on the true picture at the end of the year so to speak. We have supplemental appropriations that come up from time to time Congress almost invariably will appropriate projects which have not been requested by the president. And when all of these factors are considered. How realistic is the initial budget cuts. Well the initial budget hasn't been too far off in recent years except for Vietnam expenditures. It was a 10 billion dollar increase in Vietnam expenditures over the budget in the

fiscal year that ended last 30th. This is not unusual in war time. And indeed when the budget was first submitted it was explained that it was a minimum budget and would have to be increased if it looked as though the war were going to last beyond the end of last June. But on the civilian side the budget has not done too badly. Budget estimates have come up too badly. Congress often cuts back specific requests in the present budget add some of its own. And it still remains a useful planning instrument for the government's fiscal affairs. No budget has ever lived up to exactly if you've ever tried to keep one yourself or your family expenditures you know that you can't always estimate exactly what you're going to spend. But I think we do a pretty good job. The federal government.

Gardner Ackley you say that the tax surcharge is a good way to drain money out of the economy. How do your colleagues feel about that is there a great deal of dissension among the economists in this matter or you know on the contrary I would There certainly are some economists who oppose it for various reasons but I would guess that the overwhelming majority of professional economists and. Very firmly behind the proposal for a tax surcharge Incidentally while we're mentioning this tax surcharge at one point I want to make sure that I get. Use of your listeners today. And that is that the proposed 10 percent surcharge is a 10 percent surcharge on taxes not 10 percent of income but 10 percent of present taxes. And since present taxes on the average for individuals are about 10 percent of in. We're talking about is an additional tax which on the average for individuals and families is

1 percent of their tempers. It's amazing how all that misunderstanding persists. Why don't you give us some examples in dollars and cents maybe that will clarify our I don't think that is a good idea. Let's talk about a family a married couple with two dependents. If the family's income is $5000 or less you're. Got Let's take the full year 1968. There would be no surcharge. The present tax is about two hundred ninety dollars a year for such a family and they continue to pay about. Dollars here. But about $5000 for a family of four. The surcharge would apply. A family with four with an income of ten thousand dollars. Would pay an additional one hundred eleven dollars. That's just over 1 percent of it. It's about $2 a week.

For such a family. Now as you go higher up the income scale it gets larger in absolute amount and a little larger as a percentage for example a family of four with $20000 of income. Which presently pays almost thirty five hundred dollars a year. Thirty two hundred dollars a year in taxes would pay an additional three hundred sixteen dollars. Which is about 1 1/2 percent. It's a. $35000 family with an extra seven hundred fifty three dollars $15 a week. Which is about two percent of that. But that's that's those are the magnitudes we're talking about. Nobody would pay 10 percent of his income in additional taxes on average. We can see from your examples Gardner Ackley that the dollars and cents phase of this is relatively small. As you know. Internal Revenue Service through employers deduct.

Tax monies from salary checks each week. And this bill of course has not been passed by Congress so therefore the surcharge has not been deducted. If it passes before the thirty first of December of this year isn't this going to mean that a lot of families are going to have to run to a bank and borrow some money to pay their tax bill. That's the way that depends on how Congress. Writes this thing. If Congress should make the tax retroactive to the 1st of October which was the president's proposal last August it should be effective at the 1st of October then. There might be some slight problem I would guess that if the Congress doesn't get around to passing the tax bill until. November December makes it effective for the first of December in the first of January increased withholding could start almost immediately and there would not be any. Makeup.

Next April because of this. Ours is a possibility this might not affect incomes for this year at all. Well if Congress doesn't get to get down to work on it there's a distinct possibility. Yes I was going to ask you that. If you say the surcharge seems to be a good way to halt inflation and most of your colleagues are in agreement why is there so much real vehement opposition to it. Is it political. Well obviously it is not only and I think nobody likes to pay more taxes in a way that likes to recommend more taxes and nobody wants to vote for it. American public I guess despite our efforts which must have been inadequate doesn't I think fully understand. The nature of the problem and the need for it. And until they understand that they're obviously going to oppose it. I think some of the opposition incidentally does come from the fact that people think this is a 10 percent of income that they're being asked to pay

and rock on. But clearly nobody likes to pay more taxes and they can think of some reason why they shouldn't. I think that reason the whole opposition is not political though is it. No there are some who oppose it on the ground that they don't think the economy will be under excessive pressure. There won't be too much inflationary pressure. Even without a tax increase some people think that the strengthening of the economy that you've observed and we see ahead of us it won't won't occur and we won't need to dampen down private demand in order to avoid inflationary pressures. I think they're wrong and most economists who study the outlook for the economy think they're wrong but some people hold this is a legitimate expectation and if indeed they were right then we

shouldn't have a tax increase that's. Another group who oppose the tax increase. Unless we can do something about tax reform group in the Congress who says that they don't want to vote for more taxes for the ordinary citizen as long as there are some people who escape their fair share of taxation. Say we ought to reform our tax system first and then think about raising taxes. Well one one must have some sympathy with that point of view the only trouble is. First it will take a long time to get Congress to agree on what reforms they want to adopt starting with tax reform for a long slow process. And secondly even if you didn't get agreement on tax reform it wouldn't bring you in any more any money for another year. It's a slow process in terms of its effect on revenue. Doesn't seem to me that we can escape the need for increased taxation by saying. We need

tax reform. We do. That's a separate proposition. And then there are some who oppose the tax increase because they say it's being used to finance the war which they don't approve. Well I recognize a lot of people don't agree with our aims in Vietnam. We're trying to achieve them. But to say that you oppose the Government's policy by refusing to vote increased taxes seems to me to be a very roundabout and inefficient way of expressing opposition to the policy on the war. What. The war has is the increase in expense in spending which requires the tax increases already occurred. What Returning to do is protect the economy from the impact of that and that's that something is in the interest of everyone and certainly in the interest particularly of the people. The low end of the income scale who will be most hurt by

inflation. Let me jump just a moment you say you're going to try to protect the economy in general and I interpret that to mean that the increased revenue to the government will not be used for new spending programs. Well certainly it would be true that if we if we raised taxes and because we raised taxes we increased expenditures by the same amount. It would be known again. The inflationary pressure I think we have to look at it the spending is going to be whatever it's going to be. And if we raise taxes we will have a smaller deficit or if you like reduced private spending because people pay higher taxes will not be offset by increased public where they don't. Have any new plans been made which you might be able to tell us about to try to push harder on the proposal up on Capitol Hill. I noticed Secretary

of the Treasury Fowler recently told a group of business men they could count on a tax hike which suggests some new battle plans are being laid. Well I'm sure that the administration is considering a strategy in this contest with the Congress. But I don't think I would be appropriate for me if the detail of what might that. Emerge From present conversations. What do you foresee in the immediate future. Say During the next year in our nation's economy if the bill is not passed by Congress has already talked about one and we talked about the price is that right. I think there's another very dangerous aspect of the failure to increase taxes. We haven't mentioned and that's what will happen to interest rates and the availability of money to borrowers particularly those people who want to buy or build a home. Interest rates right now are very high. Most interest rates

the highest they've been in 40 years. But if we don't pass the tax bill and restrain the growth of government spending where we can we can certainly expect interest rates to go higher and particularly we can expect it to become more and more difficult to get more money to buy or build a house. That's what happened last year when we had a credit crunch. The money for home building got shut off. Home building industry suffered almost a collapse in mortgage money. No longer was available. We got through that. Now mortgage money is available. It's expensive but one can get a mortgage. If we have another period of tight money and will get the same thing happening again. Houses won't be built will be available people who have existing houses to sell will have getting rid of them because the loan.

That I think would be a serious problem. Straggly of course the treasury of the Federal Reserve Board rather plays a key role in this. Interest rate question has the president's Council of Economic Advisers had any indication from the Federal Reserve Board as to. What they may or may not do if the tax bill does not pass. Well we are in frequent close touch with the members of the Federal Reserve Board. They never indicate to us or to anyone else what they're going to do. It's part of their condition. They feel they have to make their decisions as the problems emerge and without the prior commitments. I think it's very clear that. The Federal Reserve couldn't if it wanted to hold interest rates at their present levels if we don't have a tax bill and if the economy goes as expected. The Federal Reserve so far this year has been following a very easy

monetary policy and in spite of that interest rates have risen. Back up to the highest levels in 14 years. And I think it would be completely unreasonable to expect that. They would maintain even easier monetary policy that would be necessary to stabilize interest rates in the kind of economy likely to happen next year. Indeed. In a situation of inflation rising prices they would interpret I'm sure their responsibility legal responsibility to try to avoid that situation by tightening up on credit. So you would have both an increased demand for credit and the slower growth in the supply of credit and that would lead to the. Pinch on their ability of them. Right. On the subject of price increases can you put any percentage. On what you would anticipate prices to rise during the next year without a tax bill drain the economy. Well I think we have to recognize first that even with

the tax increase prices are going to continue to creep up. Our guess is that with even with the president's tax program the average level of consumer prices might rise two and a half percent in the next 12 months. Without the tax increase it could easily be double that. Or 5 percent. Conceivably more. That's too much. Without the tax bill is there any consideration by the administration or the Council of Economic Advisors toward the imposition of wage and price controls. As far as I'm concerned I am utterly and completely opposed to wage and price controls under the kinds of circumstances that are at all foreseeable in the year I had. Total War. We need to have the kind of situation we face. Certainly there's no reason at all. Consider. Right.

So what you've just said then is even without the tax bill you would not consider this even without the tax bill I find direct controls on thinkable. He would just let the economy go its merry way. Well it would not be a happy situation but we have to choose among the evils of gun control the much greater evil than for 5 percent. Place prices. I wish we had more time to talk about some of the other evils but I time is thinking. That was the honorable Gardner Ackley chairman of the president's Council of Economic Advisors. Our guest this week on the NBER Washington forum. This program was produced for national educational radio by WMU American University Radio in Washington D.C. It's heard abroad over stations of the Armed Forces Radio Network. Many are public affairs director Bill Greenwood inviting you to listen again next week for another edition of the NBER Washington forum a weekly program concerned with the significant

issues before us as a nation. This is the national educational radio network.