Economic Report of the President 1962

Authors Walter W Heller – Advisor to President Kennedy – Promoted tax cuts – “War on Poverty” Kermit Gordon – Budget director in Kennedy Administration James Tobin – Advocated government intervention to stabilize the economy – “Tobin tax”-tax on foreign exchange transactions – Tobin’s Q

Chapter 1 of ERP 1962 Part I: Objectives, Progress, and Prospects – The objective of maximum employment Reasons why involuntary unemployment is a concern: – The human obligation to prevent and to relieve economic stress – The basic principle of a free economy that an individual should be able to choose freely how to use his time, whether to work for pay or not – The economic waste of leaving productive resources idle – Full employment as the objective of stabilization policy Served by the stability of the general price level Attempting zero unemployment would produce high inflation Increase aggregate demand

– Full employment and structural unemployment Reduce frictional and structural unemployment by improving the mobility of labor Displaced worker due to technological progress Increased number of young people in the labor force Full production – Production potential Q1 of 1961-$50 billion gap between actual GNP and output obtainable at full employment High output would come with lower unemployment

$40 billion below potential Potential for 1962 $580 billion Unemployment target rate of 4%

Progress in 1961 – 1961 began far below full employment – Inventory investment declined – Unemployment at 6.8% in February – Automatic stabilizers contributed to stability in personal incomes through transfer payments – By the end of 1961 Prices 7.5% higher GNP increase of $41 billion Personal income grew by $24 billion – Key element: increased spending at all levels of the government

Outlook for 1962 Projected GNP at $570 billion Due to high demand at the end of 1961, record levels expected in production, income, and employment Higher consumption More government purchase of goods and services Increased inventories Increased residential construction

Part II: Policies for Maximum Employment and Production – President’s recommendations: Stand-by capital improvements authority Stand-by tax reduction authority Improvement in the unemployment compensation system – Budget policy National Income Accounts Budget – Record and classification of the major flows of output and income for the entire economy; trust funds,

– Full employment surplus

Federal Fiscal Activity in – Tax refunds expedited – Changes in transfer programs – Unemployment benefits extended – Grants to state and localities for urban renewal – Direct payments to farmers – Large increase in expenditures in areas of defense and space exploration (for reasons of national security, not economic stabilization)

Money and Credit Policies and Economic Stability Federal reserve control of the total volume of bank reserves – Purchases of government securities – Provided banks reserves – Banks expanded their loans and investments Federal credit programs to make credit readily available – Federal lending and Federal insurance guarantee of private lending; FHA, FNMA

Improving the Mobility of Resources Labor market policies – Changes in technology alters demand for labor – Lack of knowledge of job openings Employment exchange – Letting employers know of available workers – Telling workers of available jobs – Improving the US Employment Services Training – On-the-job training – Public service employment and training – Educational opportunities through Youth Conservation Corps Resource use in agriculture – Increased technology reduces demand for farmers