Inflation, Wages & Profits

...And comparisons of inflation in the U.S...

...Workers were hit by rising unemployment, cuts in working hours, and accelerated increases in living costs—a combination of inflation and recession...

...America needs an expanding supply of money and credit —and government efforts to drive down interest rates, so as to stimulate the required expansion of economic activity and reduce price pressures...

...So, the banks evaded the squeeze and in creased their lending...

...It also neglects the social consequences of economic policy decisions...

...So interest rates moved up in the later 1960s, the price level rose, and the cash flow to corporations continued upward...

...In addition, since depreciation writeoffs are listed as cost of doing business, the stepup of these write-offs increased reported costs, with implications for prices...

...The specific causes of soaring pressures on living costs, such as physicians' fees, hospital charges, housing costs, and auto insurance, should be examined, and practical, sensible measures to dampen these pressures should be developed...

...And that includes the effects of a large increase in employment as well as the income gains of individuals...

...It also repeatedly urged the government to plan for a swift and socially useful conversion from military production...

...They fueled the fires of a sharp rise of business investment in plant and equipment during most of 196369, after sales and production rose sufficiently to increase industry's use of productive capacity...

...An indication of this unbalanced development, in the early part of the decade, can be seen in the following trends from 1962, after COMMENTS AND OPINIONS the upturn from the 1960-61 recession, in the period 1962-65...

...For a time, the wage guideline appeared to hold down wage increases—the public pressure of the 3.2 percent guideline was reinforced by continuing high levels of unemployment and the high priority placed by the trade union membership on job security...

...Skyrocketing interest rates raised costs and prices all along the line from the farmer and manufacturer to the wholesaler, retailer, and consumer—adding to inflationary pressures in the name of combatting inflation...

...Although the federal government's economic squeeze was supposed to be socially neutral, the record shows that it was not...

...Unit employment costs in manufacturing declined slightly in the first half of the 1960s, while the wholesale price level of manufactured goods moved up slowly...

...Business loans declined somewhat and interest rates moved down from their heights, as industrial production declined...

...By the mid-1960s, therefore, there was a profit inflation and a one-sector capital-goods boom, which was beginning to generate localized, inflationary demand pressures...

...Because of these inherent difficulties, the theory of the guidepost policy did not work from its very inception...

...Almost immediately, a new economic policy was installed...

...The 1970 Hand book of Labor Statistics, published by the Labor Department, reports that in the 12-year period of 1957-69, real output per man-hour in the private economy rose at a yearly rate of 3.3 percent...

...By early 1970, the economic squeeze began to affect some of the major corporations...

...Neither can the government ignore changes in income distribution and the structure of the economy...

...In their almost frenzied efforts to build huge conglomerate empires and to expand plant and equipment at a very fast pace, some corporations had borrowed heavily from the banks— partly through high-interest commercial paper loans...

...Average increases in wages and fringe benefits were supposed to be limited voluntarily to the trend figure of rising real private output per man-hour (productivity) in the previous five years—a percentage that was soon nailed down to 3.2 percent and with the passage of time developed into a rigid 3.2 percent fixation...

...Moreover, the policy ignored all costs other than workers' wages— such as executive compensation, materials, power, and rent...

...In the private sector of the economy, most unions gained substantial wage increases...

...If the government had pursued selective measures to curtail the specific pressures in the private economy in 1968-70, the severe squeeze, with resultant recession, could have been avoided...

...But neither group pays much attention to social consequences of their recommendations and to the need for pinpointed selective measures to meet such social requirements as housing and urban development, community facilities, education, and health care...

...The AFL–CIO repeatedly urged the government to adopt selective measures to curb the specific causes of inflation, without creating a recession and rising unemployment...

...In addition, social security payments to the aged should be raised to realistic levels, to improve the generally low living standards of those who are too old to work...

...Some corporations—Penn Central, for example—found themselves in a very tight liquidity squeeze, loaded with loans that the bankers were calling up...

...An economic squeeze began in December, when the Federal Reserve tightened its monetary policy, and in January 1969 the Nixon administration took office and reinforced the squeeze...

...Industry was operating at merely COMMENTS AND OPINIONS 84 percent of its productive capacity...

...CAN NO LONGER AFFORD to depend solely on aggregate fiscal and monetary analysis and measures that were originally developed in an earlier and simpler time, before rapid and radical changes in technology, urban growth, and race relations...

...A planned national effort under federal leadership is required to apply as much of the nation's resources as possible to meet vital public needs within a reasonable period of years...

...On this basis, the distribution of income among the factors of production— labor and property—would supposedly remain the same...

...In 1962, for example, the 7 percent tax credit for business investment in equipment was instituted and depreciation write-offs of plant and equipment were accelerated...

...In an economy where about two-thirds of output is composed of consumer goods and services, the end of economic stagnation and the rapid reduction of unemployment cannot be achieved without increases in the purchasing power of workers' earnings...

...Their major point of difference was their call for a revived, voluntary guidepost policy— to press down on workers' wage increases, despite the accelerating rise of living costs...

...But prices moved up at a fast pace, and in the entire period, 1960-69, the increase of real employee compensation lagged considerably behind the rise of productivity, with an even greater lag in the increase of real hourly compensation of nonsupervisory workers in the private economy...

...And a land-use policy is needed, particularly in and near metropolitan areas, to curb land speculation and provide the basis for the rational, planned development of urban areas and recreational facilities...

...Workable solutions are needed, although inflation is surely not America's most crucial social and economic problem —witness the urban crisis of the past decade and the high unemployment among the unskilled, Negroes, and disadvantaged even in relatively good times...

...But the national economy was unbalanced by a one-sector capital-goods boom...

...income is more important in the operation of the economy than monetary aggregates...

...In the absence of any effective guideline for prices, the Administration engaged in occasional, ad hoc actions to prevent or curtail some specific price increases...

...One big one was the banks' use of Euro-dollars...

...Such mandatory controls are equita bly placed on all costs and incomes—including all prices, profits, dividends, rents, and execu tive compensation, as well as employees' wages and salaries...

...Fearing a sharp drop of economic activities, the Federal Reserve increased the money supply rather rapidly, for several months...

...The guidepost policy was set within the conceptual framework of the business executive...

...At the same time, the government-encouraged capital-goods boom continued...

...Despite similarities among industrial countries, the highly productive and continental-sized American economy—with its diverse, decentralized nature and heterogeneous society—is significantly different from much smaller, more centralized and homogeneous nations, such as Japan and those of Western Europe...

...III THE SEVERE SQUEEZE on the economy had very little quick effect on the activities of most big, blue-chip corporations through 1969 and into early 1970—with their huge profits, large depreciation allowances, and lines of credit at the banks...

...The inflation of the 1960s started with a profit inflation and one-sector capital-goods boom—plus a three-year rise of military spending, beginning in late 1965, that was not offset by an equitable tax increase to ease the actual pressures in the private economy...

...Moreover, the capital-goods boom involved —at least in part—such industries as electrical machinery, which are dominated by key priceleading corporations, industries in which there is little effective price competition...

...There would have been no severe tight-money, high-interest-rate squeeze on the economy...

...Such measures would also lift most of the growing burden of welfare payments—frequently inadequate, especially in the southern states—from state and local governments...

...In addition, during 1964 and particularly in 1965, there was an outburst of liberal energy— the adoption of scores of federal programs to modernize and reform American economy and society...

...Interest rates on triple A corporate bonds, for example, soared from 6.18 percent in 1968 to an 8.48 percent peak in June 1970—a shocking increase of 37 percent, pushing up costs and prices, all along the line...

...The big banks doubled their Euro-dollar liabil ities in the first seven months of 1969...

...But the Administration made no major effort for a tax increase until 1967, and even then there were no moves for an overall and equitable mandatory stabilization program...

...In terms of buying power, the gain was only approximately 10 percent...

...So, while the cash flow of nonfinancial corporations rose more slowly in the late 1960s and declined somewhat between mid-1969 and mid-1970, bank profits soared...

...By May and June 1969, the government's squeeze on the economy tightened...

...What was needed was not simply a tax increase in itself—but tax measures to curb the soaring rise of after-tax profits, to remove the 7 percent tax-credit subsidy for investment in equipment, to curtail the sharp increases of dividends and capital gains...

...Unemployment rose, accompanied by rapidly rising living costs...

...It also ignored other incomes such as profits, dividends, capital gains, and the incomes of self-employed professionals...

...These two federal government actions resulted in the annual addition of several billion dollars to the after-tax cash flow to corporations...

...One should recall, here, that the period of the late 1960s saw the biggest wave of business mergers in American history—increasing the concentration of economic power in a narrowing group of large corporations and banks and increasing the price-raising ability of the dominant companies in key industries...

...AFL–CIO estimates indicate an even slower rise in real hourly compensation of nonsupervisory workers in private employment...

...Over the 30-year life of the mortgage, that increase alone would be approximately $5,000—more than the total wages and fringe benefits of the construction workers who built that house...

...This represented congressional recognition of the need for selective, pinpointed measures...

...The 10 percent surtax was applied to all corporations and all individuals alike, except the poor...

...In the real world, social and economic progress can be achieved only by tough-minded analysis—and, in a democratic political system, by the necessary daily chores to convince a majority of the electorate and legislators...

...Federal government restraints on public construction further aggravated such postponements in 1969 and early 1970...

...They dropped sharply through 1969 and through April and May 1970, when the yearly rate of housing starts was down to 1.2 million...

...The federal government, the states, and metropolitan government authorities should develop such inventories of needs in housing, community facilities, and public services as soon as possible and move ahead rapidly, with sufficient funds and resources, to meet the requirements of a rapidly growing urban population...

...What was needed were pinpointed policies and measures to reduce specific pressures...

...And with industry's operating rate falling to about 76 percent of productive capacity by the end of the year—after much of a decade of a capital goods boom—business outlays for plant and equipment leveled off...

...Nor can the nation's eco nomic policy-makers continue the hypocrisy, emanating from academic spokesmen, that pro claims such aggregate analysis and measures to be socially neutral...

...By contrast, the "voluntary guidepost" for prices was a vague theoretical truism, devoid of operational policy implications: the price level would remain stable, if prices of rapidly rising productivity industries would decline while prices of other industries would remain stable or increase, depending on their rates of productivity increase in relation to the national average...

...One need only mention a few—the historic breakthrough of civil rights legislation, federal aid for education, medicare, the modelcities law, and the antipoverty program...

...In the first half of 1969, before the onset of the recession, the after-tax cash flow to corporations was up approximately 91 percent from 1960...

...The postal workers' strike forced the Administration to grant a wage increase for federal employees...

...If the President determines that the situation requires overall stabilization measures—after the establishment of selective credit controls— the AFL–CIO has repeated its offer to cooper ate...

...The Federal Reserve applied a temporary dose of very tight money and high interest rates in 1966—resulting in a temporary money crunch, a temporary slowing of the economy, and a temporary slow-down of the capital-goods boom...

...And the tax increase was combined with a hold-down on federal expenditures...

...Each state and metropolitan area should be encouraged to develop an inventory of needs within its geographical jurisdiction, in addition to the development of a coordinated national inventory, prepared by the federal government...

...In the name of combatting inflation, the government set out to choke off economic expansion...

...Wages were considered as a cost of doing business, which they are...

...If we adjust the statistics to take account of sales of business loans under repurchase of agreements, the rate of increase of business loans made by weekly reporting banks actually rose in 1969...

...So other incomes were free of government re 108 COMMENTS AND OPINIONS straint—including the salary increases of the professors who devised the policy...

...In the United States, such effort requires the effective coalition of economic liberals and the civil rights movement with the AFL–CIO, which is the only major organized force in American society that works day-in and day-out on a broad range of progressive, national, social and economic issues...

...GROSS NATIONAL PRODUCT TOTAL PERSONAL INCOME AFTER FEDERAL TAXES 1965 1962 $684.9 billion $560.3 billion $473.2 billion $385.3 billion +22% +23% CORPORATE BUSINESS AFTER-TAX FIXED CASH-FLOW INVESTMENT 1965 $82.9 billion $71.3 billion 1962 $61.3 billion $51.7 billion +35% +37% By 1965 this lopsided trend was creating localized cost and price pressures in the capitalgoods sector of the economy...

...is certainly not a developing country like Brazil...

...With the steep advance of interest rates, state and local governments were compelled to put off building hospitals, roads, and public buildings...

...Moreover, in February 1966, as military spending was beginning to accelerate, the AFL– CIO Executive Council stated that if the President determined the necessity of an overall COMMENTS AND OPINIONS stabilization effort, the AFL–CIO would cooperate— provided the mandatory controls were even-handed on all costs,.prices, rents, and incomes, including profits, dividends, and executive compensation, as well as the wages and salaries of workers...

...As a result of the capital-goods boom, plants and machines were being installed at a rapid pace and increasing industry's capacity to produce...

...And the effective interest rate on new FHA-insured home mortgages rose from 7.13 percent in 1968 to a peak of 9.29 percent in March 1970—a rise of about 30 percent, which, in combination with the soaring rise of interest rates on builders' loans, clobbered residential construction, boosted housing costs for consumers, and added to a housing shortage...

...Thus income gains shifted away from employees— and particularly from nonsupervisory workers...

...The political system offers the means for achieving the needed improvements...

...Slogans are no solution...

...The rise of the Consumer Price Index accelerated from 4.2 percent in 1968 to 5.4 in 1969 and to 6 percent in 1970...

...Wages and fringe benefits increased only 3-4 percent per year in this period...

...Most of these programs involved federal grants to the states and to local governments, particularly to the cities...

...In addition, the long overdue national healthinsurance system should be established as rapidly as feasible—including improvements in the delivery of health-care services...

...On a 30-year, $20,000 mortgage, that rise in the mortgage rate increased monthly payments on principal and interest by about 10 percent—to be paid every month for 30 years...

...They frequently also contain strong elements of hostility or bias against workers...

...Above all, policies are needed to revitalize the economy—to get America on the road to COMMENTS AND OPINIONS full employment as rapidly as possible...

...The actual operation of the guidepost policy, therefore, reinforced the regressive fiscal measures in shifting the shares of expanding national output to the cash flow to corporations, dividends, capital gains, and investment in plants and machines...

...Soaring interest rates also increased the costs of federal, state, and local governments...

...The mistakes and inequities in economic policy of the 1960s can and should be corrected...

...Monetary policy succeeded only in curbing bus iness lending by the smaller banks...

...These discriminatory consequences of the Administration's policies also brought a recessionary decline in economic activities—urgently needed home-building dropped, consumers cut their purchases of expensive items, and smaller businesses as well as state and local governments postponed projects...

...By the end of 1970, the number of jobless was 5 million—or 6 per cent of the labor force—up 2.3 million from January 1969, when the economic squeeze got underway...

...Organized labor also urged Congress to adopt legislation to require that a portion of such tax-exempt funds as pension, college endowment, and foundation funds—as well as bank reserves—be invested in government-guaranteed mortgages to help meet the goal of 26 million housing units in ten years...

...Most of the liberal economists probably COMMENTS AND OPINIONS would have been more cautious in applying an aggregate tight squeeze on the economy...

...There were no general, widespread shortages of goods and manpower...

...This income shift has gone, in large part, to the benefit of business and bank profits and depreciation allowances, and another part has probably been to the benefit of such selfemployed groups as doctors and lawyers...

...At the same time, the rise of military spending began to taper off, after nearly three years of very sharp increases...

...It would have provided the means for the needed flow of money into housing and community facilities, and would also have provided offsets to declining defense production...

...there was a clear danger that the very rapid addition of new and frequently automated productive capacity would gradually build up a considerable amount of idle plant and equipment, the usual prelude to a recessionary decline...

...But this conventional wisdom of most conservative and liberal economists is much too simplistic and superficial in respect to a huge economy with many different sectors, income groups, product and labor markets...

...In the later part of the decade, America needed selective economic policies to curb specific pressures and to create a better balance among economic groups in the society, as well as emphasis on attempting to meet socially vital needs...

...The Fair Labor Standards Act needs to be updated to provide federal government protection to the millions of workers who are still not covered by this statute and to raise the federal minimum wage above the woefully inadequate $1.60 level...

...In the total private economy, there was a similar trend...

...In fact, a $20,000 mortgage would cost the home-owner a total of $55,362, in payments on principal and interest...

...1I FROM THE VIEWPOINT of economic policy— and with the advantage of hindsight—it is now conventional wisdom to state that a tax increase was needed in early 1966 to offset the rise of military expenditures...

...Attempts to explain the causes of inflation simply by mechanical, mathematical comparisons of changes in unemployment, workers' wages, and the price level tell us little, if anything, about business pricing policies, income distribution, social forces, and changes in the economy's structure...

...While total personal after-tax income rose about in line with the gross national product, the cash-flow to corporations (after tax profits plus depreciation allowances) and business investment in plants and machines rose about 50 percent faster...

...The inevitable results brought additional, inequitable developments, as layoffs and production cutbacks spread...

...This assumption led them in turn to assume that the 3.2 percent rise in average wages and fringe benefits would fully represent 3.2 percent gains in purchasing power, equal to the trend increase in productivity...

...Although the modest easing of monetary re straint after February 1970 halted the stock market decline and the threatened collapse of several overextended corporations, the recession continued...

...Corporate profits shot up sharply in the 1960s, much faster than wages and salaries...

...The search for a single issue that encompasses all problems or for a utopian one-shot panacea leads merely to frustration and a cop-out...

...By 1965—after the 1964 adoption of the additional and major stimulus of a large tax cut on both personal and business incomes to boost demand for goods, services, and employment— economic growth had stepped up and unemployment had declined...

...But there was no operational policy, and there were no ad hoc actions, to reduce prices in industries whose productivity was rising very rapidly...

...The vast outpouring of federal legislation in 1965 set up scores of programs, with small expenditures and built-in increases, as the efforts proved themselves, expanded, and developed experience...

...Price cuts did not offset price increases, and the price level moved up slowly...

...The most immediate and devastating impact of the government's economic squeeze was on residential construction...

...The temporary tax increase that was belatedly adopted by Congress in mid-1968 was hardly progressive, and it was not directed at the economy's pressure spots...

...In December 1969, Congress granted the President broad authority to curb the specific causes of credit inflation, to set up selective credit controls, to impose interest-rate ceilings and to expand credit for needed housing, public facilities, and regular business operations...

...With other unit costs relatively stable or declining, profit margins widened and, with the rise of production and sales, total profits shot up—bolstering the fiscal measures to accelerate the rise of the corporate cash flow and the businessinvestment boom...

...In pursuit of this objective, a thorough investigation by the Congress of the structure of the American economy, along the lines of the TNEC studies of 30 years ago, is long overdue...

...there were slight increases in unit employment costs, while the Consumer Price Index rose slowly, but more than twice as fast as unit employment costs...

...But a major factor in this modest easing of the restrictions on the economy during the course of 1970 was the impact of the recession itself...

...Housing starts, which were at a 1.9 million annual rate in January 1969 began to decline in February...

...Moreover, these peak interest rates built in high costs and prices for years to come—on long-term residential mortgages, for example...

...Governor Robertson went on: "Some banks also made heavy use of commercial paper, mainly that of newly created one-bank holding companies...

...But the Administration chose to choke off economic expansion in early 1969...

...Housing starts and state and local government activities picked up...

...The U.S...

...But a widespread fear of inflation—as it persisted even in the twilight years of the Weimar Republic, despite the depression, mounting unemployment of workers and impoverishment of the middle class—can immobilize economic policy...

...IV THE U.S...

...After accounting for the slow 1-1.5 percent yearly rise of living costs, increases in the buying power of employee compensation were less than the 3.2 percent productivity guideline...

...In November 1970, for example, the weekly after-tax earnings of such a worker with three dependents were $105.88—and after accounting for the rapid rise of living costs, the buying power of his takehome pay was almost 2 percent below the previous year and even less than in 1965...

...While available funds dried up for residential construction, state and local governments, and smaller business, in creased bank loans were extended to the big corporations and the rich—for continuation of the unsustainable capital-goods boom, business mergers, and conglomerate takeovers, gambling casinos, land speculation, investments in foreign subsidiaries, and unnecessary inventory accu mulation...

...As a result, from 1960 to 1965, the rise in purchasing power of employee compensation per man-hour lagged considerably behind the increase of productivity...

...If the government had followed such policies, it would have curbed the amount of credit going to the blue-chip corporations and wealthy people for mergers, conglomerate takeovers, Iand speculation, gambling casinos, and investments in foreign subsidiaries...

...The rise in the government's interest rate on FHA and VA mortgages from 7.5 to 8.5 percent, in January 1970, provides merely one example of the impact of skyrocketing interest rates on living costs...

...Small and medium-sized businesses found it impossible to obtain bank credit or could do so only at extortionate interest rates...

...During 1969 and the first half of 1970, most of the "New Economics" group was relatively uncritical of the Administration's tight economic squeeze...

...One of the many difficulties in economicpolicy decision-making stems from the simplistic emphasis on gross mathematical aggregates that dominates the textbooks and thinking of most university and government economists...

...Over the entire period since 1960—and in almost every year of the decade—the shares of economic progress have been shifted away from employees and have gone to the added gains of other groups in the economy...

...The pace of wage- and fringe-benefit settlements began to step up in 1966-68, though only after many months of the accelerated rise of living costs...

...The federal budget deficit soared, in a period of increasing economic activity, increasing employment and declining unemployment...

...The federal government should develop, coordinate, and maintain a national inventory of public needs, based on present backlogs and future population growth...

...The loophole still exists, and commercial paper liabilities of the banks rose nearly 50 percent in the first quarter of 1970...

...But real compensation per manhour of employees (wages plus fringe benefits) increased at an average annual pace of only 2.6 percent...

...V GOVERNMENT ACTION IS NEEDED to curb the price-raising ability of the dominant corporations and to curtail the greatly increasing concentration of economic power in a narrowing group of huge corporations and banks...

...The nation's money supply hardly increased at all between June 1969 and February 1970...

...Workers, whose buying power was being eroded by the accelerating rise of consumer prices, sought larger wage increases to try to offset the rise in the price level and to gain some improvements in living standards...

...The big banks found ways to step up their lending...

...Through 1969, they continued to fuel the fires of the only inflationary demand sector of the private economy—the capital-goods boom—despite unprecedented interest rates and increasing amounts of idle capacity...

...Unit labor costs rose, following their relative stability in 1960-65...

...These measures to aid the working poor, coupled with an adequate federal family assistance program for those povertystricken people who cannot work, would go a long way toward eliminating the blight of poverty from America...

...Confronted by the President's failure to use this authority, the AFL–CIO urged the Congress to direct the Federal Reserve System to establish selective credit controls, maximum interest rates on specific types of loans, and the allocation of credit to where it will do the most good for America—to direct the flow of available credit, at reasonable interest rates, into housing, public facilities, and the regular operations of business while curtailing the flow of credit for low-priority purposes...

...The search for workable solutions in a rapidly changing and complex American economy requires examination of specific social and economic developments...

...But the other side of the coin—that wages are workers' incomes and the primary income source of most families—was essentially ignored...

...In addition, the rise of business investment in plants and machines was so sharp, in relation to total national production, that it was unsustainable...

...Such effort should be based on a national inventory of needs in the various categories...

...interest rates skyrocketed to the highest peaks since the Civil War: federal construction projects were cut...

...Defense expenditures were leveling off after a sharp rise in the previous three years...

...And there was no guideline at all for profits, dividends, executive compensation, and other forms of income...

...Such a comprehensive inventory of needs should provide the foundation for nationwide programs in each category—based on federal financial and technical assistance to the state and local governments, including federal grants-in-aid and guaranteed loans, as well as direct federal efforts...

...The theory assumed a stable price level but had no operational mechanism to achieve it, while it provided employers with some additional weight to hold down workers' wage increases...

...Simultaneously, in the early 1960s, the government promulgated a so-called wage-price guidepost policy...

...And these two measures also provided corporations with funds for a very sharp increase of investments in foreign subsidiaries...

...Moreover, these developments added further to inflationary pressures, as the recessionary decline of sales and production suppressed the rise of productivity and boosted unit costs and prices...

...COMMENTS AND OPINIONS The profit inflation of 1960-65 continued through much of the second half of the decade, until the economic slump—with the rise of interest rates, lag in productivity, and weak ness in sales and production—brought a de cline in profits of nonfinancial corporations be tween mid-1969 and mid-1970...

...The after-tax weekly earnings of the average non-supervisory worker were up only about 34 percent—three-fifths less than the corporate cash-flow...

...Target dates should be established for achieving specified objectives and the pace should be speeded up or slowed down, depending on changes in the availability of manpower and productive capacity...

...THERE ARE DIFFERENT KINDS and degrees of inflation at different times and in different places...

...Yet there was no classical inflationary condi tion of too many dollars chasing too few goods that could possibly justify putting the American economy through such a tight wringer...

...In the latter part of the decade, particularly in 1969-70, a credit inflation was added and cost-price pressures were aggravated further by skyrocketing interest rates and suppressed productivity increases...

...Instead, we got an aggregate squeeze on the economy, with its socially discriminatory and inequitable impacts and recessionary decline...

...Then, toward the end of 1965, the acceleration of Vietnam expenditures was superimposed on this situation—with further sharp increases in demand in defense-related industries, many of which were also involved in the governmentencouraged capital-goods boom...

...And in the offing was the impact on the federal budget of the delayed-fuse operations of much of the social and economic reform program enacted in 1964 and 1965...

...Their credit rating began to shake, in an economic environment of declining sales and production...

...We tried to plug up some of the loopholes...

...The primary objectives should have been to redress the regressive shift of income distribution and to curb the one-sector capital-goods boom, the only sector of the private economy that was rising sharply...

...However, in the late 1960s and particularly in 1969-70, interest rates rose—increasing costs and prices and producing sharply rising bank profits...

...In reality, the "voluntary guidepost" policy contained a precise percentage guideline for increases in workers' wages and fringe benefits, but no effective guideline for prices...

...with other countries neglect substantial economic and social differences...

...This considerable lag indicates a continuing shift in income distribution during recent years...

...Then the Republicans won the presidential election in November 1968...

...March 1, 1971 THE INFLATION PROBLEM that plagued the country increasingly in 1965-70 had its origins in the early 1960s—in an unsustainable capitalgoods boom, largely based on a sharply rising flow of after-tax cash to corporations, government encouragement, and government subsidies...

...Even President Nixon's Council of Economic Advisers states that the steep rise of interest rates "may well have been unprecedented...

...Selective approaches and measures are needed to get at specific problems—along with general measures...

...In the early 1960s, America needed balanced, expansionary economic policies to boost production and employment after the near-stagnation of most of the 1950s—with an emphasis on meeting social requirements and on improved income distribution...

...But for the first couple of years, the expenditure levels for most of these separate programs were relatively small...

...The nation's housing goal of 26 million new and rehabilitated housing units in ten years was set back drastically...

...Restoration of economic growth and rising employment are essential, to step up the pace of increasing productivity that would ease the pressures on unit costs and move rapidly to full employment which, in itself, is not the endall and be-all...

...Other developments added to some easing of the squeeze on the economy—including the beginning of small tax cuts and the ending of the 7 percent tax-credit subsidy, under the terms of the Revenue Act of 1969...

...The theory of the "New Economics" group, which pushed this program, was that such a regressive shift of income distribution was required to spur economic growth and increased employment after the near-stagnation of most of the 1950s...

...Indeed, had the government engaged in balanced, expansionary measures in the early 1960s, the foundation for some of the later inflationary problems would not have been laid...

...Instead of selective measures to aid the economy, the Federal Reserve and the Administration chose severe economic restraint...

...In February 1970, the Federal Reserve modestly eased its monetary policy...

...ill COMMENTS AND OPINIONS Federal Reserve restraint was not imposed on these operations until the late summer of 1969...

...But the after-tax personal income of all Americans was up only about 76 percent— about one-fifth less than the corporate cash flow...

...From this theoretical formulation, those who devised the guidepost simply leaped over all the realities of price-setting and assumed that the price level would indeed remain stable...

...Had the government adopted selective, pinpointed measures in 1966, much of the inflation problem of 1966-68 would not have occurred...

...While total real private output per man-hour increased at an average yearly rate of about 3.6 percent, the buying power of employee compensation per hour, in the private economy, increased only about 2.9 percent per year...

...America cannot affort to continue to victim ize home-building and aggravate the urban crisis, or to maintain policies that result in continuing layoffs and rising unemployment...

...To facilitate such an effort, a federal urban bank may be required to provide long-term, low-interest loans for moderate and low-income housing construction and community facilities...

...But sales and production in other parts of the economy weak ened...

...On this score, the differences between most of the conservative and liberal economists is not very great...

...Increases in real incomes of workers are needed to provide the basis for some improvements of living conditions...

...These are complex social and economic issues...

...The search for a universally applicable, simplistic and workable solution must therefore prove elusive...

...But the budget deficit continued to rise—applying pressures in the money markets, as a great volume of federal borrowing was floated, while business loans, to finance the capital-goods boom and business mergers, also shot up...

...But without it, the nation can hardly begin to solve most of the social and economic problems that plague us, including the urgent need to bring the Negro population into the mainstream of the society...

...The federal government must also establish a public-service employment program in order to create jobs for the long-term unemployed and seriously underemployed—and to provide badly needed public services—as an integral part of a national manpower policy aimed at upgrading the skills of the labor force and assisting the unemployed to find jobs...

...The policies that were adopted, however, emphasized expansionary tax-reduction measures, combined with regressive trends in the distribution of the gains of economic progress and a one-sector businessinvestment boom...

...they both concentrate on gross aggregates, but on different ones, the liberals on fiscal (federal tax and expenditure) policy and the conservatives on monetary (money supply) policy...

...Attempts to meet high-priority social needs—such as housing and community facilities—were hit first and hardest...

...In the second half of 1968, after the surtax went into effect, the rise of economic activities began to slow somewhat...

...Despite the severe monetary restraint that affected most groups in the economy, Vice Chairman J. L. Robertson of the Federal Reserve's Board of Governors pointed out on May 14, 1970, that "commercial bank lending was not effectively curbed in 1969...

...Nor is it like Sweden, Holland, or Germany...

...The average nonsupervisory worker in private employment who was lucky enough to hold his job saw the buying power of his after-tax weekly earnings decline...

...Governor Robertson declared: Business loans expanded at about the same rapid pace as in the latter part of 1968...

...The lag for nonsupervisory workers was even greater...

...The full funding of federal appropriations for such socially vital requirements as housing, education, health care, community facilities, and hospitals is obviously and urgently required in order to create employment opportunities in meeting social needs...

...Yet the Federal Reserve did use selective measures to reduce margin requirements for purchase of stock to encourage stock-market speculation and to remove the interest-rate ceiling on 30- to 90-day bank deposits of at least $100,000—which aided banks, blue chips, and the wealthy...