JOINT ECONOMIC COMMITTEE REPORT ON THE ECONOMIC REPORT OF THE PRESIDENT, JANUARY 1949

MARCH 1 (legislative day, FEBRUARY 21), 1949.-Ordered to be printed with illustrations

Mr. O'MAHONEY, from the Joint Committee on the Economic Report, submitted the following

REPORT

[Pursuant to Public Law 304, 79th Cong.]

The Government of the United States, through an act of Congress known as the Employment Act of 1946, has assumed the responsibility of coordinating its plans, functions, and resources to maintain a highlevel economy of maximum employment, production, and purchasing power. In conformity with this act, the President, at the beginning of each session of Congress in 1947, 1948, and now in 1949 has submitted an Economic Report to the Congress with his recommendations for legislative action. It is the responsibility of this committee, which was created by that law, to review the President's report and to make its own appraisal of his recommendations. This we do in this report. Everything that the President said in his report, everything that the Council of Economic Advisers asserted in its Economic Review, and everything that this committee recommends must be appraised against the background of economic conditions as we find them, both here and abroad.

The people of the United States have accepted the difficult task of attempting to cooperate with the free peoples of the world to escape international chaos, and to create conditions in which permanent peace may be possible. It is unnecessary to review here the various steps which have been taken by our people, through the Government, in pursuit of this objective. It is sufficient for the purposes of this report to review some of the principal facts of our economic status. We are, for example, carrying the greatest national debt that any people at any time ever assumed. This debt, which in 1941 was less than $50,000,000,000, in 1945 had reached the unprecedented pinnacle of more than $270,000,000,000. It was a war debt. It has not yet

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been reduced below $253,000,000,000, an amount which is more than five times greater than the national debt of 1941. Every year the economy of this country must be sufficiently productive to enable the Federal Government to raise, by taxes, at least $5,000,000,000 merely to pay the interest on this debt, and $5,000,000,000 is considerably more than the entire cost of the Federal Government in the years before 1929. The national income which prior to 1940 had never exceeded $100,000,000,000, had risen in 1948 to $224,000,000,000.

It is only by maintaining maximum employment, production, and purchasing power that the national income can be maintained at a level sufficient to produce the Government revenue necessary to service the national debt, and to enable the Government to raise the money necessary to provide national defense and international reconstruction in accordance with the existing plans to which there is no effect ve opposition.

Civilian employment throughout 1948 was the highest on record: a monthly average of more than 59,000,000, as compared with an average of 58,000,000 for 1947. Even though in January 1949 employment figures fell to 57,414,000, it was greater than in January 1948; and unemployment, which in January 1948 was computed as 2,065,000 had risen only to 2,664,000 in January 1949. Meanwhile, the armed forces had expanded from 1,241,000 in January 1948 to 1,468,000 in January 1949. But agricultural employment had fallen from 7,060,000 to 6,763,000.

Meanwhile, prices both to consumers and at wholesale, through 1948 and thus far in 1949, are still substantially above the levels of 1947. Recent declines in consumer prices have not reduced the cost of living appreciably, the index for January 1949 for all items being 170.9, as compared with the monthly average of 171.2 for 1948 and the monthly average of 159.2 for 1947. In other words, the cost of living thus far in 1949 is far above what it was throughout the year 1947, when it had reached its previous all-time peak.

Industrial production in January 1949, with an index of 192, was only one point below that of January 1948. It was the same as the monthly average for 1948, 5 points above the average for 1947, and and 22 points above the average for 1946.

Corporate profits, both before and after taxes, and dividends paid have all reached new high levels, by whatever standard they may be measured.

Prices received by farmers have fallen 33 points from the extraordinarily high peak they reached in July 1948, but prices paid by farmers have fallen only 3 points in that period. The parity ratio for January 1949 and of December 1948 is 108 as compared with 120 last July.

Compensation of employees was higher throughout 1948 than in either 1946 or 1947; proprietor and rental income likewise rose during 1948. So that, despite the price declines which have made recent headlines, employment, purchasing power, and industrial production are still on the top of the wave. These are some of the considerations which the Council of Economic Advisers had before it in telling the President and the Congress that inflationary pressures have not been removed from the economy. These are some of the considerations which the witnesses at the public hearings of the committee had before them when they testified that recent price declines constitute only a leveling-off process.

These, then, are the basic circumstances in which the President, in his Economic Report this year, declares the guides to economic policy to be: (1) prosperity for the whole country, rather than for any special group; (2) the preservation and development of long-range employment and production goals while at the same time resisting the dangers of continued inflation; (3) the establishment of a better balance between production and consumption, income and investment, and prices, profits and wages; (4) a better distribution of purchasing power so that those in the lower-income brackets may not be made the victims of inflation; (5) authorization for Government controls to prevent inflation so long as the country must make extraordinary expenditures for national defense and international policy; (6) a frank recognition that both anti-inflationary and anti-deflationary policies may be essential.

THE ECONOMIC RESPONSIBILITY OF GOVERNMENT

With these general statements of the principles which should guide economic policy, there is substantial agreement. The problem arises in determining particular methods to be employed, the legislative policies to be adopted. It is only to be expected that there should be divergencies of view with respect to the details of any legislative program. This report, therefore, does not purport to examine in legislative detail the recommendations of the President. The recommendations here made are necessarily general in character, with full recognition that the appropriate standing committees of the Congress constitute the forum in which legislation must be worked

out.

It must first be decided, however, whether or not any legislative program at all is to be enacted. It is said by some, "Let us wait and see." But is it safe to "wait and see" when, as all experience teaches, we are dealing with economic elements that are among the most explosive which mankind can handle?

When the Marshall plan succeeds and the contribution we are making to world recovery is lessened by continued progress in the rehabilitation we are seeking to promote, what will take the place of the production, the labor, the investment that is now going into that phase of our national policy?

If the success of the Marshall plan should in turn promote the success of the United Nations, as we all hope, and our expenditures for national defense are thereby lessened, what shall we substitute for the economic effort, the goods and services that now go into our military activities?

The maximum employment, production, and purchasing power which we now have, because a Government peace program has succeeded the Government war program, will eventually, when peace has been attained, have to be succeeded by a civilian economy stabilized at a high living standard. That is the task which confronts us.

Steady jobs for those able and willing to work, profits for those engaged as owners or managers in industry, trade, and commerce, and income for those who produce the agricultural commodities required by all, depend upon the maintenance of a sound economy now and the establishment of a stable, sound economy for the future.

More than that, the attainment of our international objectives. depends upon the maintenance of a sound economy now; and, if we pay heed to this imperative call, it is difficult to see how we can afford to take a chance with a policy of "wait and see."

The Government, which is the only instrumentality that can balance the needs of agriculture, industry, and labor, cannot afford to be without a plan. Industry plans for the years ahead and counts among its executives some of the most efficient planners we have. Labor and agriculture likewise plan for the future. But none of these plans has any assurance of successful accomplishment unless they are geared one with another; and it is only the Government, as the representative of all groups, all classes, all callings, that can provide the framework within which each separate group and class and calling can operate.

Curiously enough, it is only in the economic field that the objection to planning is raised. A few years ago, editorial opinion throughout the country urged the Congress to plan for its more efficient functioning by streamlining its procedures. When the Reorganization Act was passed, the press applauded without dissent.

For more than 20 years the country has been hoping for, and the Congress has been trying to bring about, a reorganization of the executive branch of Government. Three Presidents have sought to streamline the executive branch under authority heretofore granted and now the Hoover Commission is busily engaged in outlining a program for another attempt. This is planning.

The act under which this committee operates was itself an attempt to lay at least the basis for an economic plan so that, if at all possible, a constructive effort could be made to avoid the crash which heretofore has always followed war booms because no plan had been prepared to provide a stable and dynamic peace economy to take the place of the war economy which had disappeared.

The first problem to be met is that of fiscal policy. After years of deficit financing the Government, in 1946, had a meager cash surplus. It was a substantial surplus in 1947 and an even greater surplus in 1948, but new and greater expenditures are projected for 1949.

Who is willing to risk a resumption of deficit financing while we are engaged in the back-breaking task of maintaining our military strength while seeking to rehabilitate the free world?

Thus we begin consideration of the President's specific recommendations.

I. THE PROBLEM OF DEBT MANAGEMENT

The central pillar of our system of private property and individual enterprise is the unassailable sanctity of contractual obligations. Debts, especially when incurred by Government, should be paid in full. Democracies in particular should not go back on the plighted word to their own citizens. To take thought always to be in a position to pay all interest promptly when due and to reduce the principal in periods of prosperity is a sacred responsibility.

The first inescapable principle of successful debt management is successful maintenance of high levels of national income. Up to the outbreak of World War II, during every year of our national existence, the total income of all the people exceeded the total Federal indebted

ness by wide and comfortable margins. (See chart I.) But note the situation since 1942. Even in 1948 the national debt was over $252,000,000,000, while national income was only $224,000,000,000. High-level income, high-level production, high-level employment is indispensable to national solvency.

A second factor more than clinches this categorical imperative; namely, the growing volume of private debt as shown in chart II. In 1940 Government indebtedness was only 23 percent of the total of private and public debt, but in 1948 it was 52 percent. Note that in December of 1948 the aggregate indebtedness of this country was over $485,000,000,000. The servicing and retirement of private indebted

ness likewise will be impossible unless national income remains high. It, too, should be paid off as much as possible in boom years. If with private debt increasing we should fail to reduce the public debt or, unfortunately, should revert again to deficit financing in the Federal fiscal operations, who is wise enough to foretell the outcome? All the witnesses, whether from within Government or outside, agreed not only that 1948 was such a boom year, but that 1949 was likely to come certainly within 10 percent and more likely within 5 percent of equaling 1948 levels. (See, for complete demonstration of this proposition, appendix B of this report, Summary of Testimony, especially that on the current economic outlook.) Even if gross national product should go down as much as 10 percent in dollar volume, it would still amount to over $225,000,000,000 in 1949, which