DENIAL BY KHRUSHCHEV OF THE SOVIET UNION WITHDRAWAL FROM THE RACE TO THE MOON Mr. YARBOROUGH. Mr. President, in the Washington Post of today, November 7, 1963, there appears an article entitled "Khrushchev Denies Quitting Race To Put First Man on Moon."

It is important that the American people have this information brought before them, because they have been told of late that the Russians are quitting the race and that therefore we could cut back our expenditure for this purpose; that the Russians do not think it is advisable to send a man to the moon, and therefore we should not, either.

About the time the Russians announced that they had quit this endeavor, they demonstrated their ability to orbit a space ship which was maneuverable in two directions. Therefore, they are far ahead of us in the maneuverability of space vehicles. I believe that the warning which Premier Nikita Khrushchev gave to U.S. businessmen yesterday, namely, his statement to them that the Soviet Union had not given up plans to put a man on the moon, should be enough to alert the American people to the danger of cutting back the space program.

I am voting for cuts. It is necessary for us to cut somewhere. I am voting for cuts in items which I regard as boondoggling in the foreign aid program. But we hope that such cutting will not become so infectious that Senators will automatically cut everything.

The exploration that is proposed is exploration in space. It is more an exploration in space science than in space itself. Most space exploration is an exploration in space science. What is learned in space will be useful in every day life.

Mr. President, I ask unanimous consent to have printed at this point in the RECORD the Washington Post article, published today, November 7, 1963, entitled "Khrushchev Denies Quitting Race To Put First Man on Moon."

There being no objection, the article was ordered to be printed in the RECORD, as follows:

[From the Washington Post, Nov. 7, 1963] KHRUSHCHEV DENIES QUITTING RACE TO PUT FIRST MAN ON MOON

Moscow, November 6.-Premier Nikita Khrushchev denied today the impression of a U.S. businessman that the Soviet Union had given up plans to put a man on the moon.

Kendrick R. Wilson, Jr., chairman of the board of the Avco Corp., who was one of 20 Americans visiting the Kremlin, asked the Russian leader:

"Why have you given up the idea of going to the moon? Was it for economic reasons?" Khrushchev disclaimed any such thought. "We have never said we are giving up our lunar project," he said. "You're the ones who said that.

"And when we talk about the technical possibilities of doing this, and when we have complete confidence that whoever is sent to the moon can safely be sent back, then it is quite feasible, quite possible. When, I don't know.

"As for the economic difficulties, you keep on expecting us to give up our (moon) program. Well, gentlemen, I say give up such

hopes once and for all and just throw them away.

"The economic situation within our country is excellent today. And in the future it will be still better."

The exchange was a sequel to publication by the Government newspaper Izvestia, October 26, of a statement by Khrushchev that the Soviet Union was not racing to be first to land on the moon.

This was subject to various interpretations in the West, though Khrushchev made it clear Russian scientists were pursuing research for a lunar landing. As quoted by Izvestia, he said:

"At the present time we are not planning Soviet flights of cosmonauts to the moon. *** scientists are working on this problem. I have read reports that the Americans want to land on the moon by 1970. Well, we wish them success. * * * We will study their experience."

The American visitors asked Khrushchev how long it will take the Soviet Union to achieve a rendezvous in space.

"We have no calendar program, no definite date for a rendezvous in space," Khrushchev said.

YOUNG RIVERS

Mr. BYRD of West Virginia. Mr. President, a book of poems entitled "Young Rivers," has been dedicated to the State of West Virginia in honor of her 100th year of statehood. Its talented young author, Rena B. Marshall, was born in Jefferson County, W. Va., was educated in the public schools of her native county, and was graduated from Charles Town High School. A full-time employee of the West Virginia Department of Welfare, she works out of the Jefferson at

County office, located Charles Town. She is married and the mother of two sons. She is a member of the Presbyterian Church at Kearneysville and the Women's Club of Charles Town. The family home is near Shepherdstown. Her poem "First Morning Sky," was a State winner in the 1960 poetry contest sponsored by the General Federation of Women's Clubs and won honorable mention in a national poetry competition.

"Young Rivers" is Mrs. Marshall's first collection of verse. A number of her poems are rooted in West Virginia soil and evoke the beauty of the mountains, hills, and valleys of the Panhandle State. Typical of the poems, which are dedicated by her in this volume of verses to "the fairest of the 50-West Virginia" is the title poem:

YOUNG RIVERS

Some day in this magic land where young rivers are born

And new winds practice to perfect their art Of making leaf-song in the sycamore,

I shall look for answers to so many things. Why do young lions stretch and take such

pride

In long, clean pull of muscle tight on bone? Eagles soar and ride the winds of heaven along,

Live and breed and die?

Kings and kingdoms, men and mountains rise

To fall and go unmarked, unsung, unmourned,

And why am I?

If the mountain and the young rivers know They surely do not speak,

And I may never find the answers that I seek

But glad am I to have found, at least,
The wonder and the question.

The mountain has no voice to give but wind
And young rivers never run so very deep.

Rena Marshall sings of the natural beauties of her native countryside, revealing her deep love of her origins and geographical background, as in:

OPEQUON BRIDGE

Water grumbling over the rocky bed

Spills in tumbling ripples past the bridge. Fading sunlight touches purple mountains. A cooling breeze drifts down Opequon Ridge.

A swallow goes wing-walking on the water; A lonely hawk lights in the old dead tree. Onward flows the water in its sameness,

Ever onward, outward, to the sea.

A reel clicks on the bank beneath the willows;

A shining trout puts up his final fight. The dragonfly, a slender blue-black needle, Stitches the silken day to velvet night.

She writes with swift delicacy and whimsicality many shorter pieces. One of her brief quatrains she calls: THE COURTHOUSE CLOCK

The old town clock, like a pompous judge,
Sits alone in the courthouse tower,
Pronouncing sentence in solemn tone
On the swiftly speeding hour.

"Young Rivers" is a winning and heart-warming book-its author a loving portrayer of the people, the beauties, and the spiritual values of her State.

NEED FOR NEW COTTON
LEGISLATION

Mr. TALMADGE. Mr. President, we all know that one of the principal obstacles standing in the way of new cotton legislation is that cotton interests cannot agree on the best way to solve their problems, and therefore are unable to put up a united and determined front.

The net result is that the cotton situation grows worse, both for the grower and the textile manufacturer, and the unnecessary burden upon the taxpayer increases every year. It will continue to worsen until there is remedial legislation.

In the November issue of the Progressive Farmer, Alexander Nunn has a column calling attention to the many shortcomings of existing cotton laws. He strongly urges that the various factions of the cotton trade put aside their differences and seek a meeting ground for the support and enactment of new cotton legislation.

Mr. President, I ask unanimous consent that Mr. Nunn's column be printed in the RECORD.

There being no objection, the column was ordered to be printed in the RECORD, as follows:

[From the Progressive Farmer,
November 1963]

WHY NEW COTTON LEGISLATION? With so good a cotton year as Alabama and Georgia and north Florida growers have had this year, it is easy to think that all is rosythat any such thing as new legislation is unneeded. In contrast, we'd like for every cotton farmer to consider these facts:

1. Our cotton carryover passed 11 million bales last August 1. It will be more than 12 million on August 1, 1964. This continuing buildup simply cannot be allowed to go on

2. Present law specifies a minimum 16million-acre allotment. While every year will not be as good as 1963, we are certain to continue to pile up carryovers with this allotment unless we do something to increase sales. We make this point to doubly emphasize our belief that we must not let matters reach the stage when this minimum allotment is in danger of being cut. With

such a cut would probably go our release and reapportionment program. Do we need to remind any grower what a calamity that would be?

3. Some growers in other areas continue to clamor for a chance to grow "export acres❞—

world-price acres over and above their regular allotments. With manageable national carryovers, we think they ought to be allowed the chance, within clearly specified limits. Base allotments in our area, properly used, are about all the cotton we'll want to grow for some time. "Export acres" would

require new legislation.

4. Our mills are up against very real problems with foreign textile imports now running up to 700,000 bales raw cotton equivalent per year. This is so, even though mills get some protection through tariffs. The problem is very real for growers, too, for rayons and acetates-which are lower priced than cotton-are being used by a number of mills instead of cotton to meet these lower prices of foreign goods. This situation can be met only with new legislation.

It's high time, we think, that growers, textile folks, and the cotton trade, begin to look for some middle ground on which everybody can stand.

This is no time for "We won't give an inch" and "It's our plan or nothing" philosophy.

TOP ECONOMIST'S SECOND THOUGHTS ON TAX CUT Mr. PROXMIRE. Mr. President, increasing evidence is piling up that the economics profession is far from unanimous in its support of the present tax reduction legislation. I have made no attempt to compile a full bibliography of all the critical comments by individual economists against the tax bill. However, I would like to draw the attention of the Senate to a number of individual statements indicating different reasons for opposition to the bill.

In an article entitled "Cracks in the Tax Wall," which appeared in the New York Times on Monday, November 4, Mr. M. J. Rossant indicated a number of reasons why top economists oppose the present tax bill. I ask unanimous consent that this article be inserted in the RECORD at the conclusion of my remarks.

One of the articles to which Mr. Rossant referred was by the Sterling professor of economics at Yale University, William Fellner. Professor Fellner is one of the outstanding economists in the country at the present time. In his article, which appeared in Challenge magazine in November of 1963, he made a number of points which need more consideration and emphasis in the current tax debate.

First, he has held from the very beginning "that the program was oversized." It "places too much emphasis on a single policy objective at the expense of others" and will "involve a considerable risk of aggravating our balance-ofpayments problems and of stimulating inflationary pressure." As he points out in his article, the tax program was based on the assumption that

Measures of this magnitude are not required in the near future to overcome the present sluggishness of the economy.

This seems a questionable diagnosis, but even if one accepts it, such a program would prove excessively expansionary in subsequent years when it would be very difficult to reverse policy.

Professor Fellner also points out thatPolicymakers should become more concerned with some of the rigidities in the economy.

In particular he refers to the structural unemployment problems and the fact that bottlenecks will undoubtedly arise as aggregate expansion occurs. These bottlenecks in turn could lead to serious inflationary consequences. He documents this position with a substantial review of recent economic developments.

As the economy expands, policymakers must face the problem of overcoming certain rigidities in the economy which either do not respond to or are aggravated by rising aggregate demand. *** This brings us to the problem of structural unemployment which expresses itself not only in the existence of depressed geographic regions but also in the uneven incidence of unemployment on different types of workers.

The uneven impact of unemployment points to the need for policies such as relocation and retraining that will match jobseekers with vacancies. *** But if the fiscal policies were shaped by single-minded policymakers, with a definite overall unemployment figure as the objective, then appreciable inflationary tendencies would develop in a good many sectors as specific kinds of workers became scarce. In order to check the inflation, the policymakers would be tempted to experiment with direct controls.

Another type of criticism comes from Prof. Rendigs Fels, of Vanderbilt University.

Professor Fels has been a

longtime student of cyclical fluctuations in the United States. His criticisms of the tax bill which appeared in the Review of Economic Statistics for August 1963, emphasize the difficulty in forecasting economic developments and the need for holding fire on such measures as tax reduction until "we see the whites of the recession's eyes" as the distinguished senior Senator from Illinois has put it.

In referring to the 1954 period and one of President Eisenhower's economic advisers, Professor Fels states that

Hauge's premature calling of the turn illustrates a besetting sin of economists, failure to make a sharp distinction between what they know for sure and what is simply their best judgment under circumstances of inadequate knowledge.

It seems clear to me that the tax bill was introduced with the anticipation that an economic recession would occur, which has not yet developed. In fact, the tax bill now becomes inappropriate policy in a time of rising economic activity.

Thus Professor Fels concludes that

For Congress and the President to decide in 1963 that further cuts of an amount specified in advance shall go into effect on specific dates in 1964 and 1965, regardless of intervening changes in economic conditions, is to miss the chance to time them when they that one or the other will aggravate a boom will do the most good and to run the risk instead of countering a contraction. Instead of advocating that part of the future cut be reserved to take place at the time the next downturn has been recognized, President Kennedy has urged adoption of his proposal on grounds that it may head off recession. As the failure of the tax reduction of 1948 to prevent the recession of 1949 illustrates, heading off recession requires a delicacy of timing and an accuracy in forecasting turning points that are quite impossible. To repeat the obvious but neglected principle, only at the time a turning point has just taken place is it possible to predict business conditions well enough to base policy decisions on the prediction.

of criticism of the tax bill has come from Still another and very effective type a distinguished economist at Michigan State University, Prof. Charles C. Killingsworth. Professor Killingsworth, who is one of the country's leading auargued that automation and the growthorities on labor economics, has recently

ing outlays for services have changed the demand for labor. the demand for labor. These changes have increased job opportunities for the skilled worker but have reduced opportunities for the uneducated and unskilled. He then points out that a tax cut may increase demand generally but have no effect on the quality of workers. At the same time, any increased expenditures from tax reduction will generally

be felt in the areas that employ the skilled workers. Thus, a tax cut may well have very little effect upon unemployment and at the same time generate inflationary forces.

Killingsworth also provides a substantial amount of information concerning what he refers to as the "invisible unemployed." These are the workers who do not appear in the official statistics because in fact they have given up looking for work. He estimates that there are nearly a million male workers in this

group. Taking into account these persons, he obtains substantially greater unemployment figures. Yet these additional unemployed are also the ones that would probably be least affected by tax reduction. The policy measures required in order to meet this Nation's problem of unemployment are substantially different than the aggregative measures such as tax reduction.

Mr. President, I ask unanimous consent to insert in the RECORD the articles by Professors Fellner and Fels and an article by Bernard D. Nossiter which appeared peared in the Washington Post for Sunday, October 27, 1963.

There being no objection, the material was ordered to be printed in the RECORD, as follows:

CRACKS IN THE TAX WALL-TOP U.S. ECONOMISTS JOIN DISSENTERS IN EXPRESSING DOUBTS ON KENNEDY BID

(By M. J. Rossant)

Cracks are appearing in the allegedly solid front erected by economists in support of the

Kennedy administration's tax reduction program. Most academic economists are in favor of tax cuts as the best means of stimulating, and sustaining, the expansion of business activity. They agree with the administration's view that a reduction in the tax burden would help reduce unemployment and give the monetary authorities greater freedom in their battle to stem the outflow of dollars.

But there are dissenters. A number of liberal economists,who were all for public spending a few years ago, would prefer to combine tax cuts with increases in Government outlays. Forced to choose between the two, some would undoubtedly still favor stepping up spending in the public sector.

Liberals, however, are not the only ones who may have doubts about the administration's tax program. Dr. Raymond J. Saulnier, Chairman of the President's Council of Economic Advisers in the latter days of the Eisenhower administration, was an early and outspoken opponent of both a rise in spending and a big cut in taxes. Prof. George Stigler, of the University of Chicago, has also adopted an iconoclastic attitude toward tax reduction.

They are no longer the only academic voices in the wilderness. Prof. William Fellner, of Yale University, for example, criticizes the administration's tax proposals as "oversized" in the latest issue of Challenge magazine.

Another attack, much more veiled in nature, by Prof. Rendigs Fels, of Vanderbilt University, appeared in a recent issue of the Review of Emonomics and Statistics.

The only common feature in the comments of these academicians is their skepticism about the Kennedy administration's program. Dr. Fellner ponts out that the administration's plans reveal "an inclination to play safe in a single direction-against deflation." He feels the size of the proposed tax cuts, coupled with some spending increases, may "have inflationary consequences."

Dr. Fels is more concerned about the administration's argument that its tax cuts provide recession insurance. He thinks that part of the future cut should "be reserved to take place at the time that the next downturn has been recognized," because "heading off a recession requires a delicacy of timing and accuracy in forecasting turning points that are quite impossible."

Their arguments may lead to fresh desertions in the ranks of the academicians. As yet, they have not been answered by either the administration's economists or those in the universities who have spoken out for tax reduction.

In making his case, Dr. Fellner favors some reduction in tax rates in order "to make it easier for the economy to rise to higher levels of resource utilization." But he insists that reductions must be moderate if the Nation is to avoid "aggravating our balance-of-payments problems and * * stimulating inflationary pressures."

**

The administration, according to Dr. Fellner, has "overestimated the sluggishness of the economy considerably." Business activity is now rising rapidly, so the stimulus of tax cuts and continued deficit spending could lead to excesses and distortions.

Dr. Fellner suggests that the administration either reduce expenditures or reduce the size of the first stage of tax reductions for individuals. He adds that "we should not try to decide now whether in January 1965, further cuts in individual rates may be necessary."

In airing this suggestion, Dr. Fellner arrives at the same conclusion as Dr. Fels. But their reasons differ.

Dr. Fel's major point is that the Kennedy administration has failed to recognize some of the most important economic facts of life in the formulation of its tax program.

He is convinced that the timing of tax reduction can have an important influence on the course of business activity. Bad timing can nullify its impact, or even exacerbate existing conditions. Good timing, as he sees it, can stimulate business or moderate declining tendencies.

Dr. Fels cites the experience of past recessions and recoveries to back up his contention that "at one stage of the business cycle, namely shortly after a turning point, it is possible to predict business conditions well enough to base policy decisions on the prediction."

He goes on to claim that "turns can be identified with certainty 3 to 6 months after they occur," adding that "the economy has a built-in mechanism that keeps it going in the same direction once it has fairly started." INTERVENING CHANGES

If these assumptions are correct, then it is difficult to dispute Dr. Fels' observation that the administration's decision to cut taxes "on specific dates in 1964 and 1965 regardless of intervening changes in economic conditions is to miss the chance to time them when they will do the most good and to run the risk that one or the other will aggravate a boom instead of countering a decline."

In Dr. Fels' estimation, it would be far wiser to wait until a turning point has arrived before deciding on what measures are needed.

He questions whether tax reduction can actually head off or postpone a recession, pointing out that there was a decline in economic activity in 1949 even though taxes had been reduced the previous

year.

There is always a risk that waiting until a recession strikes may result in policies that are both too little and too late. Dr. Fels, though, disagrees.

Since it takes considerable time before the economy returns to full employment, he observes, "there is opportunity to take action to combat a contraction without running too great a risk of contributing to instability."

Thus, Dr. Fellner fears that the administration's king-sized tax package may provoke inflation. Dr. Fels, on the other hand, doubts that it can prevent a recession and wonders what ammunition it will be able to employ if it squanders its tax cuts.

These dissents are not meant to rule out tax reductions. But they make clear that academicians are having second thoughts about the size and shape of the administration's program.

[From Challenge, November 1963] KENNEDY'S FISCAL PROGRAM: TOO MUCH, Too SOON

(By William Fellner)

(While some tax relief is definitely warranted, given the present condition of the U.S. economy, the administration's fiscal program is an overdose of the required medicine. In placing too much emphasis on a single policy objective-generating demand to promote higher employment-it runs the risk of aggravating our balance-of-payments problem and stimulating inflationary pressures. William Fellner is Sterling professor of economics at Yale University.)

About 8 months have elapsed since the Kennedy administration presented its fiscal program to the Congress. It seems clear at this juncture that important changes will be made in the original proposal before it finally emerges from Congress. While the precise nature of the final bill is still uncertain, some plausible guesses can be made on the basis of the Treasury's reactions to the views of influential legislators.

The writer belongs among those who have felt all along that the program was oversized. I feel convinced that, despite our present deficits, we do need additional fiscal stimuli. But I believe that the combination of tax reductions and expenditure increases, as planned by the administration, places too much emphasis on a single policy objective at the expense of others. An attempt to achieve through budget deficits a speedy reduction of unemployment to a level of 4 percent would involve a considerable risk of aggravating our balance-of-payments problems and of stimulating inflationary pressures.

Methods of forecasting which are inevitably crude led the authors of the administration's program to the conclusion that measures of this magnitude were required in the near future to overcome the present sluggishness of the economy. This seems a questionable diagnosis, but even if one accepts it, such a program would prove excessively expansionary in subsequent years when it would be very difficult to reverse policy.

If, on the other hand, tax reductions and expenditure increases of the planned size are not needed to overcome sluggishness in the near future-a more likely assumptionthen the program is oversized for this very reason. It is true that in this event the deficits would be smaller, but the size of the deficit per se is not what really matters. The essence of the problem is to keep one eye on the effectiveness of expansionary monetary and fiscal measures as means of full employment policy and the other on the dangers of generating a monetary demand which is excessive as gaged by policy criteria of a different sort.

We shall presently take a closer look at these other criteria. However, I would like to make it clear from the outset that, in my opinion, these other considerations do not justify maintaining our present tax rates. We do need measures that would make it easier for the economy to rise to higher levels of resource utilization. Yet these measures should be planned in installments which, while they need to be big enough to have a step-by-step effect in the desired direction, must leave time for the required structural adjustments.

Moreover, it is equally important that policymakers should become more concerned with some of the rigidities in the economy which call for all this caution. Otherwise the country could conceivably find itself in a position where all of a sudden it has no choice but to rely on a rather comprehensive system of direct controls to manage the difficulties caused by these rigidities.

In what sense does the record of the recent past demonstrate a need to stimulate the economy through fiscal policy?

In the period preceding the 1957 recession our policies were more concerned with stopping inflation than with averting a minor recession. During the recession which actually followed, the inflationary tendency was weakened significantly. In the 12month period preceding the recession, the Consumer Price Index and the GNP deflator had risen by 4 percent. Since 1958 the typical annual rate of price increase has become very moderate; this more recent rate may be estimated at a figure slightly in excess of 1 percent. During the recession of 1957-58 the average rate of increase of money wage rates went down, and it remained smaller in the subsequent periods of expansion. This no doubt contributed appreciably to the achievement of what may be called reasonable stability of the general price level.

In contrast to many of my professional colleagues, I feel that the 1957 policies had merit. This I cannot say for the policy line

which was adopted in 1960, at a time when the cyclical expansion which started in April 1958 was about 2 years old. At that time, we had moved with great rapidity from the $12 billion deficit in the administrative budget for fiscal 1959 to the $1 billion surplus of fiscal 1960, and we were trying to get up to a surplus of $4 billion by fiscal 1961. Failure to support the 1958-60 upswing by easing up on taxation certainly contributed to the downtown of May 1960 which, incidentally, led to a $4 billion deficit in fiscal 1961 instead of the planned $4 billion surplus.

The recession was very mild and shortan upturn followed in February 1961-but it would be unconvincing to argue that even a short interruption of the expansion which began in 1958 was necessary to eliminate inflationary pressures. Inflationary tendencies, which had been slight since 1958, did not accelerate in the spring of 1960 when, at the peak of the cycle, the unemployment rate was about 5 percent. This trend continued right through the recession of 1960, and it has continued to the present at approximately the same rate And while our balance of payments was temporarily in

better shape near the recession's low point, the 1960 downturn brought no lasting improvement in that respect either. We should thus guard against repetition of this par

ticular experience, which was one of a wholly

wasteful interruption of the expansion proc

ess.

In 1962 it looked as if the present cyclical

expansion would also be prematurely interrupted. This is the expansion which started in February 1961. During a large part of the calendar year 1962, the economy was moving more or less along a plateau. Then it picked up again, and it performed better than had been expected. The fiscal program of January 1963 implied a GNP of $578 billion for the calendar year 1963, but subsequently an estimate of "roughly $585 billion" seemed more realistic. At the present writing, some of the time series perhaps do not behave quite as well as a thoroughgoing optimist might have guesed. Yet the main lesson from all this is that forecasts of this sort are apt to prove inaccurate and that one should try to follow a policy the usefulness of which does not depend too much on how business conditions develop within some reasonable range of expectations.

Considering that recessionary tendencies have now been with us for some time and that our tax rates are high, we should learn from the mistakes of the 1958-60 upswing and not run the risk of letting the growing tax intake also stop the present expansion. Our overall unemployment ratio is still in excess of 5.5 percent. Unemployment of such size should not be allowed to become a characteristic of advanced stages of cyclical expansion. This is true in spite of the fact that the American methods of computing the number of unemployed lead to figures which are not comparable with the European data, and it is true despite the circumstances which will be discussed presently. The idea that we should provide a stimulus by reducing our tax rates rests on a convincing diagnosis. But in shaping such a program we must watch several factors besides overall unemployment and the level of aggregate demand.

As the economy expands, policymakers must face the problem of overcoming certain rigidities in the economy which either do not respond to or are aggravated by rising aggregate demand. We need monetary and fiscal policies which, while providing sufficient ease, do not greatly exceed a reasonable rate of adjustment and thus do not create too much excess demand.

This brings us to the problem of structural unemployment which expresses itself not only in the existence of depressed geo

graphic regions, but also in the uneven incidence of unemployment on different types of workers. Ideally, we should be able to compare the number of unemployed with the number of unfilled vacancies. For this comparison we do not have even the kind of imperfect statistical data which exists in some European countries. But we do know that for nearly one-half of the people counted as unemployed, the duration of continuous unemployment does not exceed 4 weeks. Also, we have reason to assume that in some sections of the labor market there are enough unfilled jobs to make the unemployment figures insignificant, while in others there is a serious unemployment probWe also know that unemployment is particularly high among unskilled workers, teenagers and nonwhites.

uneven impact of unemployment points to the need for policies such as relocation and retraining that will match jobseekers with vacancies. Such measures need

The fiscal program of the administration, as it was presented to the public in January 1963, was based on the assumption that the sluggishness of the economy would cause a fiscal 1963 deficit of nearly $9 billion and would justify planning a deficit of nearly $12 billion for fiscal 1964. This latter deficit was to be the result of the first stage of a threestage tax reduction program and a $4.5 billion increase in Federal expenditures.

The three-stage tax reduction program was to be completed by 1965 and was to reduce the tax intake by the equivalent of $13.6 billion at 1963 income levels. Highly controversial measures of tax reform-mostly to take effect in the latter part of fiscal 1964were to reduce the net revenue loss to the

equivalent of $10.3 billion, as calculated on

the same basis.

Some of these tax reform proposals were correctly presented as natural corollaries of a tax reduction program. Others, however, reflected the highly subjective political judgments of some policy planners, which Con

inflationary tendencies would develop in a good many sectors as specific kinds of

workers became scarce. In order to check the inflation, the policymakers would be

tempted to experiment with direct controls

which in all probability would not be effective and would be highly unwelcome to the

country at large. Reallocations take time; they should be furthered not merely by means of fiscal policy, but also by providing direct incentives for the relocation and retraining of workers. The role of policies bearing on total effective demand-such as fiscal policy-should be to keep no more than one step ahead and to watch the pace at which the necessary adjustments are following the lead.

is one which could be aggravated by rising The problem of our balance of payments aggregate demand and calls for precisely the same kind of watchfulness.

I am one of those who believe that it was a mistake to establish the postwar international monetary system in such a way that the exchange rates of Western currencies are

kept rigid, except when the value of some currency must be changed at a moment's notice. It seems to me that it would have been far better to allow exchange rates to respond within limits to market demand and supply, say, to allow them to move freely been set at some distance from one another. between "gold points" which might have Yet while there hasn't been much constructive policy thinking on the fundamentals of this problem, it must be admitted that it is not easy to change an established system which affects many countries simultaneously.

Given the present arrangements, a sudden domestic monetary expansion could place the dollar under considerable stress. This could well lead to harmful and ineffective measures of exchange control.

I am not suggesting that, under a system of greater exchange rate flexibility, inflationary domestic policies would have been more justifiable. On the contrary, under such a system the need to move gradually and to observe the effect of domestic trends on the behavior of currency markets would have been even more obvious. But there would have been a lesser risk of the kind of speculative capital outflow which is induced by the fear of foreign-exchange restrictions.

In short, when implementing a policy of domestic economic expansion through fiscal measures it is necessary to keep a watchful eye on the international position of the dollar. As things now stand, it is particularly important to do so.

titatively most significant reform proposalthe 5-percent floor on itemized deductionsbelongs in the latter category. It would have severely limited the taxpayer's privilege to deduct such items as his State and local taxes, interest charges, and charitable contributions.

The bulk of the cut was to be reflected in the individual income tax. An appreciable

part of this reduction was to come at the first stage of the cuts, in the beginning of fiscal 1964. By 1965 the corporate income tax also was to be reduced, from 52 to 47 percent. But at the start, the tax intake from this latter source would have risen because of a proposed speedup in the method of collecting the corporate tax-this in spite of the fact that the sluggishness shows mainly in the area of private investment rather than in that of consumption.

Some of us who have been critical of the size of the deficit program feel that the basic argument is unconvincing for two reasons. In the first place, the program took it for granted that the sluggishness, which the administration rightly desires to overcome, is of such size as to require "educating" public opinion to unusually large deficits for the entire period of cyclical expansion which began in 1961. During the first full fiscal year of this expansion we had a deficit of $6 billion, and it was estimated that in

the second year (fiscal 1963), during which no part of the new program would be in effect, the deficit would be almost $9 billion. Then a $12 billion deficit in the first fiscal year of the program was to follow, with further substantial deficits envisaged for subA budgetary balance, acsequent years. cording to the administration, was to be reached only about 1967.

To base longrun plans on such a forecast seemed unduly pessimistic and it disclosed an inclination to play safe in a single direction-against deflation. Indeed, recent data suggest that at the time when the plan was prepared its authors overestimated the sluggishness of the economy considerably. For example, the deficit of the last preprogram fiscal year (fiscal 1963), as it actually turned out, was only slightly more than $6 billion, considerably less than the estimate of $9 billion. Thus without tax cuts the economy expanded faster than expected by the authors of the program.

Secondly, even if one accepts the proposition that tax reductions and expenditure increases of the planned size are necessary to achieve desirable objectives in the next 2 years, it is still extremely doubtful that we could reverse this policy in subsequent years as further large deficits become clearly inflationary.

The administration expressed the intention of getting the budget balanced by about 1967 and the conviction that this objective was not impractical. The argument maintained that while fiscal 1964 would indeed bring a deficit of almost $12 billion, and while further tax cuts were planned for the following year, the tax intake would increase substantially as the economy expanded. So far so good. But the program's authors also implied that expenditure increases would become substantially smaller and stay much smaller after fiscal 1964. The validity of this latter assumption is very doubtful. It seems much more realistic to assume that the administration will find it exceedingly difficult to prevent expenditures from rising in the long run at approximately the same rate as the gross national product. This leads to the conclusion that the $12 billion deficit of fiscal 1964 would have been followed by large deficits for many years to come.

At this writing, it seems that the administration is assuming that the few tax reforms Congress will accept will produce less than $1 billion in revenue, as opposed to the initially contemplated $3.3 billion.

Therefore, the extent of the proposed tax cut will be reduced so that the net revenue loss should not exceed the $10 to $11 billion as originally planned. The first stage of the program will be put into effect later than had initially been contemplated (perhaps in January 1964), and the modified plan might include only one additional stage (perhaps January 1965).

If business conditions should continue to develop more favorably than had been contemplated in the original program, the deficit will, of course, be appreciably lower. But it would be fallacious to argue that in such circumstances we can better afford a combination of large tax reductions and large expenditure increases. While a higher level of business activity means smaller deficits, it also means that tax cuts and additional expenditures are more likely to have inflationary consequences.

In summation, I would like to suggest the following three conclusions:

If the expenditures planned for fiscal 1964 should not be reduced, it would be wise to make the first stage of the cut in individual income taxes somewhat smaller.

We should not try to decide now whether in January 1965 further cuts in individual rates will be necessary. It is quite conceivable that a balanced policy which keeps at least one eye on the objective of minimizing direct administrative controls will at that time want to limit itself to one type of additional measure: reductions in the corporate tax to increase investment incentives.

We should keep a careful eye on the extent to which the economy's structural rigidities respond to monetary and fiscal stimuli and we should consider how some of these structural and institutional rigidities might be reduced.

[From the Review of Economics and Statistics, August 1963]

THE RECOGNITION LAG AND SEMIAUTOMATIC STABILIZERS

(By Rendigs Fels 1)

The main point of this paper is obvious to specialists but not appreciated by others. The Commission on Money and Credit, despite its imposing staff of professional economists, overlooked it completely, as did the the authors of the Kennedy-sponsored bill to extend unemployment benefits during reces

1I am indebted to the Institute of Research in the Social Sciences of Vanderbilt University for financial assistance and to Dennis R. Starleaf for research assistance, particularly in connection with determining the recognition lag. All responsibility, of course, is mine alone.

sions. Similarly, President Kennedy made no use of it in his 1963 proposal for a threestep tax cut.

At one stage of the business cycle; namely, shortly after a turning point, it is possible to predict business conditions well enough to base policy decisions on the prediction. According to a common saying, cyclical predictions are so unreliable that policy decisions must be based on what has already happened, not on expectations of what will happen. The substantial measure of truth in this loosely worded formulation evidently cannot be emphasized too strongly, for in the late spring of 1961 a policy controversy broke out between the present Council of Economic Advisers and one of its former chairmen over whether the cyclical expansion then beginning required fiscal stimulation. The argument hinged on contrasting predictions of how fast the recovery would otherwise be, precisely the kind of question about which predictions are highly unreliable. Nevertheless, saying that policy must be based on the current state of affairs rather than on forecasts can be criticized on two counts. First, some kind of forecast necessarily underlies all policy decisions. To deal with a problem, such as heavy unemployment, only after it has arisen implies a forecast that in the absence of special measures tomorrow will be like today. Because such forecasts actually work pretty well in economics (better than in weather forecasting), it is often wiser to base policy decisions on them than on more sophisticated forecasts. But second and more important, the foreacst that the economy will continue to move in the same direction can be made with virtually complete certainty at the time that the evidence of a recent turning point first becomes conclusive. In particular, once a downturn is known to have occurred, one can be certain that the economy will be depressed for the next 12 months even if an upturn occurs in the meantime. For the downswing will continue for some little while at least it will take a minimum of 6 months for output to return to its previous high, and it will take even longer, on account of the growth of the work force, to achieve full employment.

Much discussion tacitly assumes this principle, and many practical decisions by business men and by the Federal Reserve System are obviously based on it; yet, because it is not explicit, it too often gets left out of account. In section II, I shall criticize three specific policy proposals from this point of view. To appraise with any accuracy what policy decisions can appropriately be made requires knowledge of the lags involved. Section I will investigate the lag between turning points and their recognition.

I. THE RECOGNITION LAG

How long after the peak or trough of the business cycle can it be known with certainty that a turning point has occurred? Table I summarizes an investigation of 1946-61.3

2 Arthur F. Burns, "Examining the New 'Stagnation' Theory," the Morgan Guaranty Survey, May 1961, 1-7; the Council of Economic Advisers, "The Council's View," ibid., August 1961, 1-6; and Burns, "A Second Look at the Council's Economic Theory," ibid., 6-15.

3 The peak and the trough listed by the National Bureau of Economic Research as occurring in 1945 were omitted on grounds that this cyclical "contraction," during a period of suppressed inflation, was an essentially different phenomenon from the usual contractions (such as 1948-49, 195354, 1957-58, 1960-61) and irrelevant to the present discussion. Turning points prior to World War II were disregarded on grounds that statistical data and knowledge of busi

The table shows (1) the peaks and troughs of cycles as determined by the National Bureau of Economic Research, (2) the dates at which a consensus of informed observers recognized the turns, and (3) the length of time between each turn and its recognition. The recognition dates shown are conservative. They represent not the time at which a few acute or lucky observers first announced the turn but the time at which the evidence had become so overwhelming that informed observers were in virtually complete agreement. In short, the recognition dates represent the times at which a prudent President could have taken action without any trace of gambling.

To illustrate, there was a cyclical trough in February 1961. As early as March 28, subscribers to Fortune were reading, "the upturn has now become a hard fact and not just a forecast." In the first half of April, Business Week, U.S. News & World Report, Time, Life, and Newsweek all concurred, followed in the last half of the month by Commerce Secretary Hodges, Treasury Secretary Dillon, and Columnist Sylvia Porter.5 George Shea of the Wall Street Journal, the Morgan Guaranty Survey, and the Christian Science Monitor were more cautious but by mid-May had come to agree with the others. By early May, published statistical evidence of rises in nonagricultural employment, the average workweek, orders for durables, personal income, and the index of industrial production amply confirmed that expansion was underway. The recognition-date can be conservatively established as mid-May, making the recognition-lag 3 months.

The example just reviewed may seem to put undue emphasis on journalistic and political sources with too little attention to professional economists. In the cases of some other turns, a poll of economists happening to hold a meeting at the right time has proven useful in determining the recognition-date, but, journalistic and political sources are adequate for our purposes. They reflect not only, at one remove, what economists think but also what has survived a crucial test, the ability of economists to make their views convincing to others.

ness cycles has improved enough since then so that finding of a longer recognition-lag would be of historical interest only. Actually, an investigation of Federal Reserve policies for 1921-52 suggested a longer recognition-lag before than since World War II (Thomas Mayer, "The Inflexibility of Monetary Policy," this review, XL (Nov. 1958), 359) 4 Fortune, Apr. 1961, 47.

5 Business Week, Apr. 8, 1961, 15; U.S. News & World Report, Apr. 10, 1961, 48; Time, Apr. 14, 1961, 90; Life, Apr. 14, 1961, 34; Newsweek, Apr. 17, 1961, 91; the comments of Commerce Secretary Hodges and Treasury Secretary Dillon were reported in the Wall Street Journal (Apr. 19, 1961, 3 for Secretary Hodges and Apr. 20, 1961, 3 for Secretary Dillon); Sylvia Porter recognized the turn in her column which appeared in the Apr. 24, 1961, edition of the Nashville Ten

nessean.

6 George Shea, "The Outlook," the Wall Street Journal, May 15, 1961, 1; the Morgan Guaranty Survey, Apr. 1961, 1; Christian Science Monitor, May 15, 1961, 10.

7 The Nov. 6, 1957, edition of the Wall Street Journal, 1, reported that the consensus of opinion of business and university economists who had met for the University of Michigan's fifth annual conference on the economic outlook was that "a mild recession * * * [was] definitely underway." Similarly, Time, Oct. 31, 1961, 74, reported that the consensus of opinion among 200 business economists attending the convention of the National Association of Business

Economists in Manhattan was that the United States was then in a mild recession.